**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549


**_____________________**


**FORM
      10-Q**





**(Mark
      One)**





**[X]**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the quarterly period ended September 30, 2006**





**OR**





**[
                ]**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the transition period from** **** **to _____**





**Commission
      file number 000 - 26728**





**Talk
      America Holdings, Inc.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
              (State
                of incorporation)
            **23-2827736**
              (I.R.S.
                Employer Identification No.)





**6805
                Route 202, New Hope, Pennsylvania**
              (Address
                of principal executive offices)
            **18938**
              (Zip
                Code)





**(215)
      862-1500**


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes X No____





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
      accelerated filer [ ]  Accelerated
      filer [ X ]  Non-accelerated
      filer [ ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes [ ] No [ X]





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





30,777,186
      shares of Common Stock, par value of $0.01 per share, were issued and
      outstanding as of November 8, 2006.















**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**





**Index**





******Page**PART
                I - FINANCIAL INFORMATIONItem
                1. Financial Statements
            1Condensed
                Consolidated Statements of Operations - Three and Nine Months Ended
                September 30, 2006 and 2005 (unaudited)
            1Condensed
                Consolidated Balance Sheets - September 30, 2006 and December 31,
                2005
                (unaudited)
            2Condensed
                Consolidated Statements of Cash Flows - Nine Months Ended September
                30,
                2006 and 2005 (unaudited)
            3Notes
                to Condensed Consolidated Financial Statements (unaudited)
            4Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
              
              Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            11
              
              19Item
                4. Controls and Procedures
            20PART
                II - OTHER INFORMATION
            21Item
                1. Legal Proceedings
            21Item
                1.A Risk Factors
            23Item
                4. Submission of Matters to a Vote of Security Holders
            24Item
                6. Exhibits
            25

















**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**CONDENSED**  **CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands, except for per share data)**


**(Unaudited)**








**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Revenue
            
            $
            106,353
            
            $
            120,645
            
            $
            340,921
            
            $
            348,149Costs
                and expenses:Network
                and line costs, excluding depreciation and amortization (see
                below)
            
            
            54,542
            
            
            64,413
            
            
            178,629
            
            
            181,090General
                and administrative expenses
            
            
            21,684
            
            
            23,496
            
            
            74,160
            
            
            59,946Provision
                for doubtful accounts
            
            
            4,359
            
            
            4,515
            
            
            12,610
            
            
            14,909Sales
                and marketing expenses
            
            
            11,958
            
            
            7,294
            
            
            35,900
            
            
            21,335Depreciation
                and amortization
            
            
            11,084
            
            
            11,618
            
            
            34,235
            
            
            30,734Total
                costs and expenses
            
            
            103,627
            
            
            111,336
            
            
            335,534
            
            
            308,014Operating
                income
            
            
            2,726
            
            
            9,309
            
            
            5,387
            
            
            40,135Other
                income (expense):Interest
                income
            
            
            254
            
            
            199
            
            
            768
            
            
            873Interest
                expense
            
            
            (185
            )
            
            (114
            )
            
            (616
            )
            
            (164
            )Other
                income (expense), net
            
            
            (11
            )
            
            (5
            )
            
            42
            
            
            (361
            )Income
                before provision for income taxes
            
            
            2,784
            
            
            9,389
            
            
            5,581
            
            
            40,483Provision
                for income taxes
            
            
            1,613
            
            
            4,172
            
            
            3,296
            
            
            16,428Net
                income
            
            $
            1,171
            
            $
            5,217
            
            $
            2,285
            
            $
            24,055Income
                per share - Basic:Net
                income per share
            
            $
            0.04
            
            $
            0.18
            
            $
            0.08
            
            $
            0.86Weighted
                average common shares outstanding
            
            
            30,494
            
            
            29,808
            
            
            30,444
            
            
            28,122Income
                per share - Diluted:Net
                income per share
            
            $
            0.04
            
            $
            0.17
            
            $
            0.07
            
            $
            0.84Weighted
                average common and common equivalent shares outstanding
            
            
            30,673
            
            
            30,357
            
            
            30,624
            
            
            28,796








See
      accompanying notes to consolidated financial statements.


1


**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**CONDENSED** **CONSOLIDATED BALANCE SHEETS**


**(In
      thousands, except for share and per share data)**


**(Unaudited)**








**September
                30,**
              **2006**
            
            **December
                31,**
              **2005****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            35,594
            
            $
            46,288Restricted
                cash
            
            
            1,920
            
            
            --Accounts
                receivable, trade (net of allowance for uncollectible accounts of
                $14,740
                and $13,838 at September 30, 2006 and December 31, 2005, respectively)
            
            
            36,602
            
            
            43,600Deferred
                income taxes
            
            
            11,158
            
            
            18,096Prepaid
                expenses and other current assets
            
            
            12,091
            
            
            10,297Total
                current assets
            
            
            97,365
            
            
            118,281Property
                and equipment, net
            
            
            92,160
            
            
            98,492Goodwill
            
            
            36,479
            
            
            36,479Intangibles,
                net
            
            
            3,160
            
            
            4,934Deferred
                income taxes
            
            
            36,606
            
            
            21,033Capitalized
                software and other assets
            
            
            11,448
            
            
            9,470Total assets
            
            $
            277,218
            
            $
            288,689**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            32,823
            
            $
            40,025Sales,
                use and excise taxes
            
            
            8,298
            
            
            7,316Deferred
                revenue
            
            
            13,440
            
            
            13,824Current
                portion of long-term debt
            
            
            2,554
            
            
            3,988Accrued
                compensation
            
            
            5,057
            
            
            9,405Other
                current liabilities
            
            
            8,482
            
            
            12,933Total
                current liabilities
            
            
            70,654
            
            
            87,491Long-term
                debt
            
            
            1,837
            
            
            1,289Deferred
                income taxes
            
            
            83
            
            
            4,853Other
                liabilities
            
            
            5,515
            
            
            3,269Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock - $.01 par value, 5,000,000 shares authorized; no shares outstanding
            
            
            --
            
            
            --Common
                stock - $.01 par value, 100,000,000 shares authorized; 31,842,321
                and
                31,684,056 shares issued and 30,508,638 and 30,368,267 shares outstanding
                at September 30, 2006 andDecember
                31, 2005, respectively
            
            
            318
            
            
            317Additional
                paid-in capital
            
            
            385,639
            
            
            380,481Accumulated
                deficit
            
            
            (181,726
            )
            
            (184,011
            )Treasury
                stock - at cost, 1,333,683 and 1,315,789 shares at September 30,
                2006 and
                December 31, 2005, respectively
            
            
            (5,102
            )
            
            (5,000
            )Total
                stockholders' equity
            
            
            199,129
            
            
            191,787Total
                liabilities and stockholders’ equity
            
            $
            277,218
            
            $
            288,689





See
      accompanying notes to consolidated financial statements.


2


**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**





**Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**Cash
                flows from operating activities:Net
                income
            
            $
            2,285
            
            $
            24,055Adjustments to reconcile net income to net cash provided by operating
                activities:Provision
                for doubtful accounts
            
            
            12,610
            
            
            14,909Depreciation
                and amortization
            
            
            34,235
            
            
            30,734Deferred
                income taxes
            
            
            1,047
            
            
            13,341Stock-based
                compensation
            
            
            4,172
            
            
            --Other
                non-cash charges
            
            
            456
            
            
            359Changes
                in assets and liabilities, net of effect of acquisition:Accounts
                receivable, trade
            
            
            (1,169
            )
            
            726Prepaid
                expenses and other current assets
            
            
            1,340
            
            
            1,745Other
                assets
            
            
            49
            
            
            80Accounts
                payable and accrued expenses
            
            
            (11,278
            )
            
            (19,835
            )Sales,
                use and excise taxes
            
            
            22
            
            
            (4,553
            )Deferred
                revenue
            
            
            (2,405
            )
            
            (3,156
            )Accrued
                compensation
            
            
            (9,008
            )
            
            (1,563
            )Other
                liabilities
            
            
            (6,194
            )
            
            (162
            )Net
                cash provided by operating activities
            
            
            26,162
            
            
            56,680Cash
                flows from investing activities:Proceeds
                from sale of fixed assets
            
            
            675
            
            
            63Acquisitions,
                net of cash acquired (See note 5)
            
            
            (16,485
            )
            
            (26,850
            )Capital
                expenditures
            
            
            (15,377
            )
            
            (35,220
            )Capitalized
                software development costs
            
            
            (4,172
            )
            
            (2,946
            )Decreases
                in restricted cash
            
            
            1,375
            
            
            --Net
                cash used in investing activities
            
            
            (33,984
            )
            
            (64,953
            )Cash
                flows from financing activities:Tax
                benefit of stock based compensation
            
            
            430
            
            
            --Payments
                of capital lease obligations
            
            
            (3,667
            )
            
            (1,586
            )Proceeds
                from exercise of options and warrants
            
            
            365
            
            
            4,685Net
                cash provided by (used in) financing activities
            
            
            (2,872
            )
            
            3,099Net
                change in cash and cash equivalents
            
            
            (10,694
            )
            
            (5,174
            )Cash
                and cash equivalents, beginning of period
            
            
            46,288
            
            
            47,492Cash
                and cash equivalents, end of period
            
            $
            35,594
            
            $
            42,318





See
      accompanying notes to consolidated financial statements.


3


**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**NOTE
      1. ACCOUNTING POLICIES**





**(a)
      Basis of Financial Statements Presentation**





The
      consolidated financial statements include the accounts of Talk America Holdings,
      Inc. and its wholly-owned subsidiaries (collectively, "Talk America," "we,"
      "our" and "us"). All intercompany balances and transactions have been
      eliminated.





The
      consolidated financial statements and related notes thereto as of September
      30,
      2006 and for the three and nine months ended September 30, 2006 and September
      30, 2005 are unaudited, but in the opinion of management include all adjustments
      necessary for a fair statement of the results for the periods presented. The
      consolidated balance sheet information for December 31, 2005 was derived from
      the audited financial statements included in our Annual Report on Form 10-K
      for
      the year ended December 31, 2005 filed March 16, 2006, as amended by our Form
      10-K/A filed March 28, 2006 (as so amended, our "2005 Form 10-K”). These interim
      financial statements should be read in conjunction with our 2005 Form 10-K.
      The
      interim results are not necessarily indicative of the results for any future
      periods.





**(b)
      Risks and Uncertainties**





Future
      results of operations involve a number of risks and uncertainties. Factors
      that
      could affect
      future operating results and cash flows and
      cause
      actual results to vary materially from historical results include, but are
      not
      limited to:





·
            Increased
                price and product competition in commercial and residential voice
                and data
                services, and overall competition within the telecommunications
                industry


·
            Our
                ability to successfully integrate businesses that we acquire, including
                but not limited to Network Telephone
                Corporation


·
            Dependence
                on the availability and functionality of the networks of the incumbent
                local exchange carriers





On
      September 22, 2006 our board of directors approved a merger agreement providing
      for our acquisition by Cavalier Telephone Corporation that is discussed in
      paragraph (d) below. In addition to other factors and matters listed above,
      we
      believe the following factors could affect future operating results and cash
      flows:





·
            the
                risk that the merger may not be consummated in a timely manner if
                at
                all;


·
            the
                occurrence of any event, change or other circumstance that could
                give rise
                to the termination of the merger
                agreement;


·
            the
                outcome of the various legal proceedings against us that have been,
                and
                others that may be, instituted following announcement of the merger
                agreement;


·
            risks
                related to diverting management’s attention from ongoing business
                operations;


·
            our
                dependence on key personnel;


·
            risks
                regarding employee retention;


·
            changes
                in regulatory requirements;


·
            the
                absence of certainty regarding the receipt of required regulatory
                approvals or the timing or terms of such regulatory
                approvals








**(c)
      Recent Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").  FIN 48
      prescribes a "more likely than not" threshold for financial statement
      recognition and measurement of a tax position taken or expected to taken in
      a
      tax return.  This Interpretation also provides guidance on other topics
      related to accounting for income tax assets and liabilities, interest and
      penalties associated with tax positions and income taxes in interim periods
      as
      well as income tax disclosures.  This interpretation is effective as of
      January 1, 2007.  We are currently evaluating FIN 48 and the related impact
      on our financial position and results of operations.





4


On
      September 15, 2006, the FASB issued FAS No. 157, " *Fair
      Value Measurements* ,"
      which
      provides guidance for using fair value to measure assets and liabilities. The
      standard also responds to investors' requests for more information about: (1)
      the extent to which companies measure assets and liabilities at fair value;
      (2)
      the information used to measure fair value; and (3) the effect that fair value
      measurements have on earnings. SFAS No. 157 will apply whenever another standard
      requires (or permits) assets or liabilities to be measured at fair value. The
      standard does not expand the use of fair value to any new circumstances. SFAS
      No. 157 is effective for the Company as of January 1, 2008. The Company is
      currently evaluating SFAS No. 157 and its effect on the Company's financial
      position, results of operations or cash flows.





**(d)
      Proposed Merger**





On
      September 22, 2006, the Company, Cavalier Telephone Corporation and Cavalier
      Acquisition Corp., an indirectly wholly owned subsidiary of Cavalier, entered
      into an Agreement and Plan of Merger. The merger agreement provides that, upon
      its terms and subject to its conditions, the Cavalier subsidiary will merge
      with
      and into us, and that, at the effective time and as a result of this Cavalier
      merger, (i) we will become an indirectly wholly owned subsidiary of Cavalier
      and
      (ii) each share of our common stock that is outstanding at the effective time
      of
      the merger will be converted into the right to receive $8.10 in cash and each
      outstanding option or warrant to purchase our common stock with a per share
      exercise price lower than $8.10 will be converted into the right to receive
      a
      cash amount equal to $8.10 less the exercise price for such option or warrant,
      as the case may be, net of any applicable taxes.




Consummation
      of the Cavalier merger is subject to a number of conditions, including (i)
      approval by the Company's stockholders, (ii) receipt of applicable consents
      from
      the Federal Communications Commission, (iii) receipt of applicable approvals
      from state public service or utilities commissions (or similar state regulatory
      agencies) that regulate our business, (iv) expiration or termination of the
      applicable Hart-Scott-Rodino waiting period, (v) absence of any law or order
      prohibiting the consummation of the Merger, (vi) the Company’s meeting of a
      minimum financial performance measure for the quarter ending September 30,
      2006
      and (vii) subject to certain specified exceptions, the absence of any material
      adverse effect with respect to our business. Subject to the satisfaction of
      the
      applicable conditions, we anticipate that the Cavalier merger will be
      consummated before December 31, 2006. On October 6, 2006, the Company filed
      its
      Hart-Scott-Rodino Notification and Report Form with the Antitrust Division
      and
      the Federal Trade Commission and w e
      received notice that the waiting period had been terminated on October 16,
      2006. The condition of meeting a minimum financial
      performance measure for the quarter ending September 30, 2006 has also been
      satisfied.





**NOTE
      2. COMMITMENTS AND CONTINGENCIES**





The
      Cavalier merger agreement contains provisions addressing the circumstances
      under
      which Cavalier or Talk America may terminate the merger agreement. In addition,
      the merger agreement provides that, in several circumstances, Talk America
      may
      be required to pay Cavalier a termination fee of $6.25 million and up to $1.25
      million for reimbursable expenses. During the three months ended September
      30,
      2006, we have incurred $0.8 million in merger-related costs, consisting of
      financial advisory fees, legal and other fees and costs associated with the
      Cavalier merger. As specified in the merger agreement, when and if the Cavalier
      merger is consummated, we are obligated to pay our financial advisor, The
      Blackstone Group, L.P. ("Blackstone") approximately $2.4 million against which
      certain prior payments will be credited.




We
      are aware of certain asserted class actions related to the proposed Cavalier
      merger, which are against our individual directors and us, among others. Each
      alleges, among other things, that our directors have breached their fiduciary
      duty by accepting the Cavalier merger and generally seeks various forms of
      relief, including injunctive relief, including against the consummation of
      the
      merger, unspecified money damages and plaintiff’s attorney fees and expenses. We
      believe that these law suits are without merit and plan to defend them
      vigorously. Additional lawsuits relating to the proposed merger could be filed
      in the future.





We
      are
      party to a number of legal actions and proceedings arising from our provision
      and marketing of telecommunications services (including matters involving do
      not
      call and billing regulations), as well as certain legal actions and regulatory
      matters arising in the ordinary course of business. We believe that the ultimate
      outcome of the foregoing actions will not result in a liability that would
      have
      a material adverse effect on our financial condition or results of operations.




5


We
      are
      party to various network service agreements, which contain certain minimum
      usage
      commitments. In December 2003, we entered into a four-year master carrier
      agreement with AT&T. The agreement provides us with a variety of services,
      including transmission facilities to connect our network switches as well as
      services for international calls, local traffic, international calling cards,
      overflow traffic and operator assisted calls. The agreement also provides that,
      subject to certain terms and conditions, we will purchase these services
      exclusively from AT&T during the term of the agreement, provided, however,
      that we are not obligated to purchase exclusively in certain cases, including
      if
      such purchases would result in a breach of any contract with another carrier
      that was in place when we entered into the AT&T agreement or if vendor
      diversity is required. Our AT&T agreement establishes pricing and provides
      for annual minimum commitments based upon usage as follows: 2006 - $32 million
      and 2007 - $32 million and obligates us to pay 65 percent of the revenue
      shortfall, if any. In February 2006, we amended the AT&T agreement to
      provide that certain services that we purchase or may purchase from AT&T
      (and its affiliates) will now count toward the minimum commitment. Despite
      the
      reduction in our local residential bundled customer base, we anticipate that
      we
      will not be required to make any shortfall payments under this contract. In
      addition to the AT&T commitment, we have other commitments with various
      other vendors for telecommunication services as follows: 2006 - $3.2 million,
      2007 - $3.5 million and 2008 and thereafter - $2.2 million.





In
      addition, at September 30, 2006, we had outstanding purchase orders for capital
      expenditures of $1.4 million. We have a contract with our invoice printing
      company that establishes pricing and provides for annual minimum payments as
      follows: 2006 - $1.2 million, 2007 - $1.2 million, and 2008 - $1.3 million.
      During 2006, we renewed maintenance agreements that provide for payments as
      follows: 2006 - $0.5 million, 2007 - $0.8 million, 2008 - $0.5 million and
      2009
      - $0.1 million.








**NOTE
      3. STOCK-BASED COMPENSATION**








**(a)**
            **Compensation
                Expense**





Effective
      January 1, 2006, we adopted the provisions of Statement of Financial
      Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based
      Payment,” which establishes accounting for equity instruments exchanged for
      employee services. SFAS 123R revised SFAS No. 123 "Accounting for Stock-Based
      Compensation" (SFAS 123) and superseded Accounting Principles Board Opinion
      No.
      25 ("APB25"), "Accounting for Stock Issued to Employees," and related
      interpretations. Under the provisions of SFAS No. 123R, share-based
      compensation cost is measured at the grant date, based on the calculated fair
      value of the award, and is recognized as an expense over the employee’s
      requisite service period (generally the vesting period of the equity grant).
      We
      elected to adopt the modified prospective application transition method as
      provided by SFAS No. 123R and, accordingly, financial statement
      amounts for the prior periods presented in this Form 10-Q have not been
      restated to reflect the fair value method of expensing share-based compensation.
      The stock-based compensation expense included in our consolidated statements
      of
      operations for the three months and nine months ended September 30, 2006 is
      $1.0
      and $4.2 million, respectively. The full amount of this expense is reflected
      in
“General and administrative expenses,” where substantially all of the related
      payroll costs are classified. The related tax benefit recognized during the
      three and nine months ended September 30, 2006 was $0.4 and $1.9 million. The
      total compensation cost capitalized during the three and nine months ended
      September 30, 2006 was *de
      minimus* .




6




The
      application of SFAS 123(R) had the following effect on reported amounts for
      the
      three months ended and nine months ended September 30, 2006, relative to amounts
      that would have been reported using the intrinsic value method under previous
      accounting (in millions, except per share amounts):




Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30, 2006
              
              September
                  30, 2006Using
                  Previous Accounting
              
              
              SFAS
                  123(R) Adjustments
              
              
              As
                  Reported
              
              
              Using
                Previous
                  Accounting
              
              
              SFAS
                  123(R) Adjustments
              
              
              As
                  ReportedOperating
                  income
              
              $
              3.7
              
              $
              (1.0
              )
              $
              2.7
              
              $
              9.6
              
              $
              (4.2
              )
              $
              5.4Income
                  before income taxes
              
              $
              3.8
              
              $
              (1.0
              )
              $
              2.8
              
              $
              9.8
              
              $
              (4.2
              )
              $
              5.6Provision
                  (benefit) for income taxes
              
              $
              2.0
              
              $
              (0.4
              )
              $
              1.6
              
              $
              5.2
              
              $
              (1.9
              )
              $
              3.3Net
                  income (loss)
              
              $
              1.8
              
              $
              (0.6
              )
              $
              1.2
              
              $
              4.6
              
              $
              (2.3
              )
              $
              2.3Income
                  (loss) per share- basic:
              
              $
              0.06
              
              $
              (0.02
              )
              $
              0.04
              
              $
              0.16
              
              $
              (0.08
              )
              $
              0.08Income
                  (loss) per share- diluted:
              
              $
              0.06
              
              $
              (0.02
              )
              $
              0.04
              
              $
              0.15
              
              $
              (0.08
              )
              $
              0.07Cash
                  flow from operating activities
              
              
              
              
              
              
              
              
              
              
              $
              26.6
              
              $
              (0.4
              )
              $
              26.2Cash
                  flow from financing activities
              
              
              
              
              
              
              
              
              
              
              $
              (3.3
              )
              $
              0.4
              
              $
              (2.9
              )


Prior
      to
      January 1, 2006, we accounted for share-based compensation to employees in
      accordance with APB 25. We also followed the disclosure requirements of
      SFAS No. 123. The following table illustrates the effects on net
      income and earnings per share for the three months and nine months ended
      September 30, 2005 as if we had applied the fair value recognition provisions
      of
      SFAS 123 to share-based employee awards (in thousands, except per share
      data):





**Three
                  Months Ended**
                **September
                  30, 2005**
              
              **Nine
                  Months**
                **Ended**
                **September****30,**
                **2005****Net
                  income as reported**
              
              $
              5,217
              
              $
              24,055**Add:**Stock-based
                  employee compensation expense included in reported net income,
                  net of tax
                  effect
              
              
              3
              
              
              3**Deduct:**Total
                  stock-based employee compensation expense determined under fair
                  value
                  based method for all options, net of tax effect
              
              
              1,019
              
              
              2,085**Pro
                  forma net income**
              
              $
              4,201
              
              $
              21,973**Basic
                  earnings per share:**As reported
              
              $
              0.18
              
              $
              0.86Pro forma
              
              $
              0.14
              
              $
              0.78**Diluted
                  earnings per share:**As reported
              
              $
              0.17
              
              $
              0.84Pro forma
              
              $
              0.14
              
              $
              0.76





For
      purposes of pro forma disclosures under SFAS 123, the estimated fair value
      of
      the options is assumed to be amortized to expense over the options' vesting
      period. The fair value of the options granted has been estimated at the various
      dates of the grants using the Black-Scholes option-pricing model with the
      following assumptions:





·  Fair
      market value based on our closing common stock price on the date the option
      is
      granted;


·  Expected
      option term of 5 years;


·  Volatility
      based on the historical stock price over a period consistent with the expected
      term;


·Risk-free
      interest
      rate based on weighted averaged U.S. Treasury note strip rates for periods
      equal
      to the expected option term;


·  No
      expected dividend yield based on future dividend payment plans.








The
      fair
      value of the options granted subsequent to the adoption of SFAS 123R has been
      estimated at the various dates of the grants using the Black-Scholes
      option-pricing model with the same assumptions, except that an expected option
      term of six years has been assumed, which has been determined using the
      simplified method.





7








**(b)**  **Stock-Based
      Compensation Plans**





Incentive
      stock options, non-qualified stock options and other stock based awards may
      be
      granted by us to employees, directors and consultants under the 2005 Incentive
      Plan (“2005 Plan”), 2003 Long Term Incentive Plan (“2003 Plan”), 2000 Long Term
      Incentive Plan ("2000 Plan"), 1998 Long Term Incentive Plan ("1998 Plan") and
      otherwise in connection with employment and to employees under the 2001
      Non-Officer Long Term Incentive Plan ("2001 Plan"). Generally, the options
      vest
      over a three-year period and expire ten years from the date of grant. At
      September 30, 2006: 562,500, 360,000, 404,543, 541 and 19,222 shares of common
      stock were available under the 2005 Plan, 2003 Plan, 2001 Plan, 2000 Plan,
      and
      1998 Plan, respectively, for possible future issuances.




Stock
      options granted in 2005 and 2006 have contractual terms of 10 years. The options
      granted to employees have an exercise price equal to the fair market value
      of
      the stock on the grant date. The vast majority of options granted in 2005 and
      2006 vest one-third each year, beginning on the first anniversary of the date
      of
      grant.





Information
      with respect to options under our plans is as follows:





**Options**
                **Shares**
              
              **Exercise**
                **Price
                  Range**
                **Per
                  Share**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**Outstanding,
                  December 31, 2003
              
              5,437,107
              
              $0.99-$47.64
              
              $8.35Granted
              
              220,833
              
              $5.14-$10.87
              
              $6.83Exercised
              
              (374,144)
              
              $1.05-$6.81
              
              $1.75Cancelled
              
              (401,952)
              
              $1.32-$29.63
              
              $12.86Outstanding,
                  December 31, 2004
              
              4,881,844
              
              $0.99-$47.64
              
              $8.41Granted
              
              1,670,000
              
              $6.22-$9.57
              
              $8.52Exercised
              
              (1,240,706)
              
              $0.99
                  - $10.49
              
              $2.43Cancelled
              
              (310,334)
              
              $1.11-$30.38
              
              $10.28Outstanding,
                  December 31, 2005
              
              5,000,804
              
              $1.20-$47.64
              
              $9.82Granted
              
              317,500
              
              $6.02-$9.04
              
              $8.72Exercised
              
              (108,265)
              
              $1.53-$7.88
              
              $3.26Cancelled
              
              (229,870)
              
              $3.70-$30.38
              
              $9.48Outstanding,
                  September 30, 2006
              
              4,980,169
              
              $1.20-$47.64
              
              $9.91





The
      following table summarizes the status of stock options outstanding at September
      30, 2006:





**Range
                of Exercise Prices**
            
            **Number
                Outstanding at September 30, 2006**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Number
                Exercisable at September 30, 2006**
            
            **Weighted
                Average Exercise Price**$1.20-$10.31
            
            2,750,180
            
            $7.07
            
            7.2
            
            1,413,535
            
            $5.7510.32-14.35
            
            1,935,965
            
            11.62
            
            6.2
            
            1,933,740
            
            11.6214.36-21.00
            
            132,583
            
            20.22
            
            2.4
            
            132,583
            
            20.2221.01-30.00
            
            66,666
            
            26.65
            
            2.4
            
            66,666
            
            26.6530.01-47.64
            
            94,775
            
            30.95
            
            2.7
            
            94,775
            
            30.95$1.20-$47.64
            
            4,980,169
            
            $9.91
            
            6.5
            
            3,641,299
            
            $10.43





The
      weighted
      average estimated fair values of the stock options granted during the nine
      months ended September 30, 2006 and for the years ended December 31, 2005 and
      2004 based on the Black-Scholes option pricing model were $6.49, $6.20, and
      $4.99, respectively. The fair value of stock options used to compute pro forma
      net income (loss) and basic and diluted earnings (loss) per share disclosures
      is
      the estimated fair value at grant date using the Black-Scholes option-pricing
      model with the following assumptions:





**Assumption**
            
            **2006**
            
            **2005**
            **2004**Expected
                Term
            
            6
                years
            
            5
                years
            5
                yearsExpected
                Volatility
            
            85.83%
            
            92.16%
            93.82%Expected
                Dividend Yield
            
            --%
            
            --%
            --%Risk-Free
                Interest Rate
            
            4.46%
            
            4.10%
            3.49%











The
      aggregate
      intrinsic value of outstanding options as of September 30, 2006 was
      $6.7 million, of which $5.3 million were vested. The weighted average
      remaining contractual term of vested options is 5.7 years. The intrinsic value
      of options exercised during the nine months ended September 30, 2006 was $0.4
      million. For the nine months ended September 30, 2006, the cash received from
      options and warrants exercised and the related tax benefit realized from income
      tax deductions was $0.4 million and $0.4 million, respectively.




The
      following
      table summarizes the status of the Company’s nonvested shares since January 1,
      2006:






Number of
              Shares
            
            
            Weighted
              Average Fair ValueNonvested
              at January 1, 2006
            
            
            1,763,572
            
            $
            6.14Granted
            
            
            317,500
            
            
            6.49Vested
            
            
            (578,463
            )
            
            6.16Forfeited
            
            
            (163,739
            )
            
            6.28Nonvested
              at September 30, 2006
            
            
            1,338,870
            
            $
            6.20








As
      of
      September 30, 2006, there was $4.1million of total unrecognized compensation
      cost related to nonvested share-based compensation arrangements granted under
      the Company’s stock plans. That cost is expected to be recognized over a
      weighted-average period of 1.7 years. However, upon consummation of the Cavalier
      merger, the acceleration of unvested options would cause us to immediately
      recognize the remaining balance of unrecognized compensation cost at that time.





8





**NOTE
      4. PER SHARE DATA**





Basic
      earnings per common share for a fiscal period is calculated by dividing net
      income by the weighted average number of common shares outstanding during the
      fiscal period. Diluted earnings per common share is calculated by adjusting
      the
      weighted average number of common shares outstanding and the net income during
      the fiscal period for the assumed conversion of all potentially dilutive stock
      options and warrants (and assuming that the proceeds hypothetically received
      from the exercise of dilutive stock options and warrants are used to repurchase
      our common stock at the average share price during the fiscal period). Income
      per share is computed as follows (in thousands except per share
      data):





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Net
                income used to compute basic and fully diluted earnings per
                share
            
            $
            1,171
            
            $
            5,217
            
            $
            2,285
            
            $
            24,055Average
                shares of common stock outstanding used to compute basic earnings
                per
                share
            
            
            30,494
            
            
            29,808
            
            
            30,444
            
            
            28,122Additional
                common shares to be issued assuming exercise of stock options and
                warrants
                (net of shares assumed reacquired)*
            
            
            179
            
            
            549
            
            
            180
            
            
            674Average
                shares of common and common equivalent stock outstanding used to
                compute
                diluted earnings per share
            
            
            30,673
            
            
            30,357
            
            
            30,624
            
            
            28,796Income
                per share - Basic:Net
                income per share
            
            $
            0.04
            
            $
            0.18
            
            $
            0.08
            
            $
            0.86Weighted
                average common shares outstanding
            
            
            30,494
            
            
            29,808
            
            
            30,444
            
            
            28,122Income
                per share - Diluted:Net
                income per share
            
            $
            0.04
            
            $
            0.17
            
            $
            0.07
            
            $
            0.84Weighted
                average common and common equivalent shares outstanding
            
            
            30,673
            
            
            30,357
            
            
            30,624
            
            
            28,796





*
      The
      diluted share basis for the three months ended September 30, 2006 and 2005
      excludes 4,293 and 2,572 shares, respectively, and for the nine months ended
      September 30, 2006 and 2005 excludes 4,478 and 2,556 shares, respectively,
      associated with the options and warrants due to their antidilutive
      effect.





9


**NOTE** **5** **.
      ACQUISITIONS**





On
      October 18, 2005, we and one of our subsidiaries entered into an Agreement
      and
      Plan of Merger (the “NTC Acquisition Agreement”) with Network Telephone
      Corporation (“NTC”), providing for our acquisition of NTC. NTC was privately
      held and is a facilities-based competitive local exchange carrier serving
      business customers primarily in Southeast United States. Under the terms of
      the
      NTC Acquisition Agreement, NTC became our indirect wholly owned subsidiary
      on
      January 3, 2006, and, in exchange for all of the stock of NTC, we paid $16.5
      million in cash ($18.4 million less cash acquired of $1.9 million), of which
      approximately $1.8 million has been deposited in escrow to be held as security
      for certain indemnification obligations to us under the NTC Acquisition
      Agreement. The acquisition extended our networking footprint to the southeastern
      United States and added significantly to our commercial services capabilities.





In
      connection with the acquisition of NTC, we acquired $3.3 million of restricted
      cash. This balance was comprised of certificates of deposit that were pledged
      as
      collateral in connection with service agreements between NTC and several
      vendors. Since the date of the acquisition, $1.4 million of this balance has
      been released.





On
      May
      23, 2005, we entered into an Agreement and Plan of Merger (the “LDMI Acquisition
      Agreement”) with LDMI Telecommunications, Inc., providing for our acquisition of
      LDMI. LDMI is a facilities-based competitive local exchange carrier serving
      business and residential customers primarily in Michigan and Ohio. Under the
      terms of the LDMI Acquisition Agreement, LDMI became a wholly owned subsidiary
      on July 13, 2005, and, in exchange for all of the stock of LDMI, we paid $21.3
      million in cash ($24 million less cash acquired of $2.7 million) and issued
      1.8
      million shares of our common stock. The acquisition of LDMI significantly
      accelerated our entry into the medium-sized business market with its
      established sales force and product portfolio. The aggregate purchase price
      was
      $42.8 million, including the 1.8 million shares of our common stock with a
      market value of $16.0 million, $0.8 million payment of transaction costs and
      a
      $4.7 million repayment of LDMI debt.





The
      following unaudited pro forma information presents a summary of the consolidated
      results of our operations as if the NTC and LDMI acquisitions had occurred
      on
      January 1, 2005:





**For
                The Three Months Ended**
              **September
                30,**
            
            **For
                The Nine Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Revenues
            
            $
            106,353
            
            $
            141,802
            
            $
            340,921
            
            $
            461,873Net
                Income
            
            $
            1,171
            
            $
            5,064
            
            $
            2,285
            
            $
            22,382Earnings
                per share:Basic
            
            $
            0.04
            
            $
            0.17
            
            $
            0.08
            
            $
            0.76Diluted
            
            $
            0.04
            
            $
            0.17
            
            $
            0.07
            
            $
            0.74Weighted
                Average Shares:Basic
            
            
            30,494
            
            
            30,062
            
            
            30,444
            
            
            29,401Diluted
            
            
            30,673
            
            
            30,612
            
            
            30,624
            
            
            30,075





The
      pro
      forma consolidated results of operations include adjustments to give effect
      to
      amortization of intangibles, depreciation of equipment, interest expense and
      income, income taxes, transaction fees and shares of common stock issued. These
      unaudited pro forma results have been prepared for comparative purposes only
      and
      do not purport to be indicative of the results of operations that actually
      would
      have occurred had the acquisition been made at the beginning of the periods
      presented or the future results of the combined operations.








10







**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





You
      should read the following discussion in conjunction with our Consolidated
      Financial Statements included elsewhere in this Form 10-Q and in our 2005 Form
      10-K and any subsequent filings.


.





**Cautionary
      Note Concerning Forward-Looking Statements**





The
      Private
      Securities Litigation Reform Act of 1995 provides a "safe harbor" for
      forward-looking statements. Certain information contained herein or in any
      other
      written or oral statements made by, or on behalf of the Company, is or may
      be
      viewed as forward-looking. The words "expect," "believe," "anticipate" or
      similar expressions identify forward-looking statements. Although the Company
      has used appropriate care in developing any such forward-looking information,
      forward-looking information involves risks and uncertainties that could
      significantly impact actual results. These risks and uncertainties include,
      but
      are not limited to, the following: the failure to obtain Company stockholder
      approval of the Cavalier merger or the failure to obtain regulatory approvals
      or
      satisfy the other conditions to the Cavalier merger, including the third quarter
      2006 performance measure; the termination of the Cavalier merger agreement
      prior
      to the closing; the Cavalier merger may not close in the expected time-frame;
      changes in general economic conditions, including the performance of financial
      markets and interest rates; competitive, regulatory, or tax changes that affect
      the cost of or demand for the Company's products; and adverse litigation
      results. The Company undertakes no obligation to publicly update or revise
      any
      forward-looking statements, whether as a result of new information, future
      developments, or otherwise.




All
      forward-looking statements involve risks and uncertainties that may cause our
      actual results to differ materially from those expressed or implied in the
      forward-looking statements. In addition to those factors discussed in this
      Form
      10-Q, you should see our other reports on Forms 10-K, 10-Q, 8-K, and 14A
      subsequently filed with the Securities and Exchange Commission from time to
      time
      for information identifying factors that may cause actual results to differ
      materially from those expressed or implied in the forward-looking statements.
      For a more detailed discussion of these factors, see the Risk Factors discussion
      in Item 1A of our 2005 Form 10-K. The forward-looking statements included in
      this Form 10-Q are made only as of the date of this report, and we undertake
      no
      obligation to update the forward-looking statements to reflect subsequent events
      or circumstances.





**OVERVIEW**





On
      September 22, 2006, the Company, Cavalier Telephone Corporation and Cavalier
      Acquisition Corp., an indirectly wholly owned subsidiary of Cavalier, entered
      into an Agreement and Plan of Merger. The merger agreement provides that, upon
      its terms and subject to its conditions, the Cavalier subsidiary will merge
      with
      and into us, and that, at the effective time and as a result of this Cavalier
      merger, (i) we will become an indirectly wholly owned subsidiary of Cavalier
      and
      (ii) each share of our common stock that is outstanding at the effective time
      of
      the merger will be converted into the right to receive $8.10 in cash and each
      outstanding option or warrant to purchase our common stock with a per share
      exercise price lower than $8.10 will be converted into the right to receive
      a
      cash amount equal to $8.10 less the exercise price for such option or warrant,
      as the case may be, net of any applicable taxes.





Consummation
      of the Cavalier merger is subject to a number of conditions, including (i)
      approval by the Company's stockholders, (ii) receipt of applicable consents
      from
      the Federal Communications Commission, (iii) receipt of applicable approvals
      from state public service or utilities commissions (or similar state regulatory
      agencies) that regulate our business, (iv) expiration or termination of the
      applicable Hart-Scott-Rodino waiting period, (v) absence of any law or order
      prohibiting the consummation of the Merger, (vi) the Company’s meeting of a
      minimum financial performance measure for the quarter ending September 30,
      2006
      and (vii) subject to certain specified exceptions, the absence of any material
      adverse effect with respect to our business. Subject to the satisfaction of
      the
      applicable conditions, we anticipate that the Cavalier merger will be
      consummated before December 31, 2006. On October 6, 2006, the Company filed
      its
      Hart-Scott-Rodino Notification and Report Form with the Antitrust Division
      and
      the Federal Trade Commission and w e
      received notice that the waiting period had been terminated on October 16,
      2006. The condition of meeting a minimum financial
      performance measure for the quarter ending September 30, 2006 has also been
      satisfied.








11








Talk
      America Holdings, Inc., through its subsidiaries, is a leading competitive
      communications services provider offering voice and data services to commercial
      (primarily small and medium-sized business) and residential customers. We are
      focused on markets where we have our own networking assets, which we began
      deploying in Michigan in late 2003. Currently, we are collocated in 316 end
      offices in Michigan, Ohio, Kentucky, Tennessee, North Carolina, Louisiana,
      Mississippi, Alabama, Florida and Georgia. As of September 30, 2006, we had
      approximately 613,700 local voice and data equivalent lines, of which
      approximately 475,600 were on our own network. Voice equivalent lines include
      individual telephone lines and T-1 equivalent lines based on circuit bandwidth.
      Data equivalent lines include DSL, dial-up and T-1 equivalent lines based on
      circuit bandwidth. Our off-network customers represent a profitable base of
      bundled phone service customers utilizing the wholesale operating platforms
      of
      the incumbent local exchange companies.





We
      expanded into the commercial business market with the acquisition in July 2005
      of LDMI Telecommunications, Inc. (“LDMI”) and the acquisition in January 2006 of
      Network Telephone Corporation (“NTC”), privately held facilities-based
      competitive local exchange providers serving business and residential customers
      primarily in Michigan and Ohio and in the Southeast, respectively.





Recently,
      we decided to shift our marketing efforts to a bundle of broadband and voice
      services for residential customers from our historic offerings of voice bundles.
      This shift was in response to changes in market conditions in Michigan,
      primarily increased price competition for bundles of broadband and voice
      services from AT&T and Comcast, our principal competitors in Michigan. We
      believe that the broadband bundle delivers value to residential customers
      through high bandwidth capability and competitive pricing compared to current
      offers from these companies.





12


**RESULTS
      OF OPERATIONS**





The
      following table sets forth for the periods indicated certain of our financial
      data as a percentage of revenue:





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Network
                and line costs
            
            
            51.3
            
            
            53.4
            
            
            52.4
            
            
            52.0General
                and administrative expenses
            
            
            20.4
            
            
            19.5
            
            
            21.8
            
            
            17.2Provision
                for doubtful accounts
            
            
            4.1
            
            
            3.7
            
            
            3.7
            
            
            4.3Sales
                and marketing expenses
            
            
            11.2
            
            
            6.0
            
            
            10.5
            
            
            6.1Depreciation
                and amortization
            
            
            10.4
            
            
            9.7
            
            
            10.0
            
            
            8.9Total
                costs and expenses
            
            
            97.4
            
            
            92.3
            
            
            98.4
            
            
            88.5Operating
                income
            
            
            2.6
            
            
            7.7
            
            
            1.6
            
            
            11.5Other
                income (expense):Interest
                income
            
            
            0.2
            
            
            0.2
            
            
            0.2
            
            
            0.2Interest
                expense
            
            
            (0.2
            )
            
            (0.1
            )
            
            (0.2
            )
            
            --Other,
                net
            
            
            --
            
            
            --
            
            
            --
            
            
            (0.1
            )Income
                before income taxes
            
            
            2.6
            
            
            7.8
            
            
            1.6
            
            
            11.6Provision
                for income taxes
            
            
            1.5
            
            
            3.5
            
            
            0.9
            
            
            4.7Net
                income
            
            
            1.1
            %
            
            4.3
            %
            
            0.7
            %
            
            6.9
            %








The
      following table sets forth for certain items of our financial data for the
      periods indicated the percentage increase or (decrease) in such item from the
      prior year comparable fiscal period:





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Revenue
            
            
            (11.9
            )%
            
            (0.2
            )%
            
            (2.1
            )%
            
            0.7
            %Costs
                and expenses:Network
                and line costs
            
            
            (15.3
            )
            
            10.6
            
            
            (1.4
            )
            
            10.1General
                and administrative expenses
            
            
            (7.7
            )
            
            31.1
            
            
            23.7
            
            
            14.1Provision
                for doubtful accounts
            
            
            (3.5
            )
            
            (21.2
            )
            
            (15.4
            )
            
            6.1Sales
                and marketing expenses
            
            
            63.9
            
            
            (62.2
            )
            
            68.3
            
            
            (61.8
            )Depreciation
                and amortization
            
            
            (4.6
            )
            
            158.7
            
            
            11.4
            
            
            138.6Total
                costs and expenses
            
            
            (6.9
            )
            
            4.4
            
            
            8.9
            
            
            1.7Operating
                income
            
            
            (70.7
            )
            
            (34.7
            )
            
            (86.6
            )
            
            (6.6
            )Other
                income (expense):Interest
                income
            
            
            27.6
            
            
            226.2
            
            
            (12.0
            )
            
            327.9Interest
                expense
            
            
            62.3
            
            
            (120.3
            )
            
            275.6
            
            
            (76.5
            )Other,
                net
            
            
            120.0
            
            
            100.0
            
            
            (111.6
            )
            
            100.0Income
                before income taxes
            
            
            (70.4
            )
            
            (36.9
            )
            
            (86.2
            )
            
            (4.7
            )Provision
                for income taxes
            
            
            (61.3
            )
            
            (28.9
            )
            
            (79.9
            )
            
            (1.9
            )Net
                income
            
            
            (77.6
            )%
            
            (42.1
            )%
            
            (90.5
            )%
            
            (16.1
            )%








13


**THIRD
      QUARTER 2006 COMPARED TO THIRD QUARTER 2005**





*Revenue.* Revenue
      for the third quarter 2006 declined from the third quarter 2005 as the
      acquisition of NTC in the first quarter 2006 was not sufficient to offset the
      decline in our revenues from our customer base where we do not currently have
      networking facilities. Since 2004 we have increased and will continue to
      increase certain fees and rates related to our long distance and bundled
      products and such changes in rates will adversely impact customer turnover.
      Customer turnover remains above targeted levels which has had an adverse effect
      on our revenues and if such customer turnover remains at these levels it will
      continue to have an adverse impact on future revenues.





The
      increase in revenue from customers that are served by our own networking
      facilities, or on-net, to $63.5 million for the third quarter 2006 from $23.9
      million for the third quarter 2005 was due to greater average lines in 2006
      as
      compared to 2005 primarily as a result of the migration of customer lines to
      our
      own network and, to a lesser degree, the acquisition of NTC. As of September
      30,
      2006, our voice and data equivalent lines on-net had increased to 476,000 from
      235,000 as of September 30, 2005.




The
      decrease in revenue from customers that are not served by our own networking
      facilities, or off-net, to $30.8 million for the third quarter 2006 from $79.9
      million for the third quarter 2005 was due to fewer average lines in 2006 as
      compared to 2005, partially offset by an increase in average monthly revenue
      per
      customer. Our off-net voice and data equivalent lines declined during this
      period due both to the migration of off-net lines to our own network and, in
      areas where we were not building network, the attrition of customers leaving
      our
      services for those of other carriers. This decline was partially offset by
      increased off-net lines as a result of the acquisitions of NTC. As of September
      30, 2006, our off-net voice and data equivalent lines had decreased to 138,000
      from 410,000 as of September 30, 2005. A significant increase in the costs
      we
      pay for network services from the incumbent local telephone carriers has caused
      us to cease marketing to new customers in markets where we do not currently
      have
      network facilities and, as a result of this, together with continued migrations
      to our network, we expect the decline in off-net revenues to continue in the
      future.





Long
      distance only and other revenue decreased for the third quarter 2006 to $12.0
      million from $16.9 million for the third quarter 2005. Customer price increases
      for long distance customers were not sufficient to offset a decline in revenues
      from our existing long distance base since we no longer actively market long
      distance only services. We expect long distance customers and revenues to
      decline in the future.




While
      our
      on-net revenues grew from the second to the third quarter 2006 and we expect
      that our on-net revenues will grow from 2006 to 2007, the growth, however,
      will
      not be sufficient to offset the decline in our off-net revenue. As a result,
      we
      expect that our full year revenues will decline from 2006 to 2007.





14


*Network
      and Line Costs.* Network
      and line costs declined in the third quarter 2006 from the third quarter 2005
      primarily due to fewer average customer lines. Network and line costs as a
      percentage of revenue decreased in the third quarter 2006 from the third quarter
      2005, as customer price increases more than offset additional network personnel
      costs and increased unbundled network element platform costs. In addition,
      in
      the third quarter 2006, we recorded a reduction to network cost of  $0.9
      million related to the resolution of the Georgia rate case. This reduction
      was
      offset by $0.4 million of network costs incurred by NTC in the second quarter,
      which was recorded during the third quarter. To date, we have been able to
      increase our prices to offset per line increases in network and line cost,
      but
      these price increases will increase customer turnover. Network and line costs
      exclude depreciation and amortization of $6.9 million for the third quarter
      2006
      and $6.3 million for the third quarter 2005.





While
      we
      do not expect that network and line costs as a percentage of revenue from 2006
      to 2007 to increase as a result of the revenue decline noted above, if our
      usage
      of services under our master carrier agreement with AT&T, which usage is
      generally a reflection of our total on-net and off-net lines serviced, should
      fall below the minimum annual requirements under the agreement for any year,
      our
      costs of purchasing these services could increase in such year and we may be
      unable to increase our prices to offset this increase.





We
      seek
      to structure and price our products in order to maintain network and line costs
      as a percentage of revenue at certain targeted levels. While the control of
      the
      structure and pricing of our products assists us in mitigating risks of
      increases in network and line costs, the telecommunications industry is highly
      competitive and there can be no assurances that we will be able to effectively
      market our products at these higher prices.





*General
      and Administrative Expenses* .
      General
      and administrative expenses decreased in the third quarter 2006 from the third
      quarter 2005. This decrease was primarily due to a reduction in general and
      administrative headcount partially offset by the general and administrative
      expenses attributable to the NTC acquisition. In addition, the third quarter
      2006 included expenses related to the Cavalier merger of $0.8 million and
      stock-based compensation expenses associated with the issuance of stock options
      pursuant to SFAS 123R of $1.0 million (see “Critical Accounting Estimates - New
      Accounting Pronouncements,” below). The decline in general and administrative
      expense, however, was not in proportion to the decline in revenue primarily
      because of the stock-based compensation expense in the third quarter of 2006
      and, as a result, general and administrative expense as a percentage of revenue
      increased in the third quarters 2006 from the third quarter 2005.





*Provision
      for Doubtful Accounts* .
      The
      provision for doubtful accounts increased as a percentage of revenue in the
      third quarter 2006 from the third quarter 2005. The increase was primarily
      due
      to the impact of customer price increases and a decline in the credit quality
      of
      our residential customer base.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses increased for the third quarter 2006 from the third
      quarter 2005. This increase is attributable to the increase in sales and
      marketing activity corresponding to the expansion of our networking footprint
      and through the acquisitions of NTC in 2006. Our sales and marketing efforts
      focus on increasing subscriber growth only in those areas where we currently
      have or plan to deploy network facilities. Included in sales and marketing
      expenses are advertising expenses of $ 0.9 million for the third quarter 2006
      and $ 0.8 million for the third quarter 2005. We expect that our sales and
      marketing expense will increase from 2006 to 2007 as a result of our continuing
      efforts to grow our on-net business, including the roll-out of our bundle of
      broadband and voice services.








15





**YEAR
      TO DATE 2006 COMPARED TO YEAR TO DATE 2005**





*Revenue.* Revenue
      for the year to date 2006 decreased from the year to date 2005 as the
      acquisitions of LDMI in the third quarter 2005 and NTC in the first quarter
      2006
      were not sufficient to offset the decline in our revenues from our customer
      base
      located in markets where we do not currently have networking facilities.





The
      increase in revenue from on-net customers to $186.3 million for the year to
      date
      2006 from $35.0 million for the year to date 2005 was due to greater average
      lines in 2006 as compared to 2005 primarily as a result of the migration of
      customer lines to our own network and, to a lesser degree, the acquisitions
      of
      LDMI and NTC.




The
      decrease in revenue from off-net customers to $114.9 million for the year to
      date 2006 from $272.9 million for the year to date 2005 was due to fewer average
      lines in 2006 as compared to 2005, partially offset by an increase in average
      monthly revenue per customer. Our off-net voice and data equivalent lines
      declined during this period due both to the migration of off-net lines to our
      own network and, in areas where we were not building network, the attrition
      of
      customers leaving our services for those of other carriers. This decline was
      partially offset by increased off-net lines as a result of the acquisitions
      of
      LDMI and NTC.





Long
      distance only and other revenue decreased for the year to date 2006 to $39.7
      million from $40.2 million for the year to date 2005. The acquisition of LDMI
      and customer price increases partially offset a decline in revenues from our
      existing long distance base.




*Network
      and Line Costs* .
      Network
      and line costs as a percentage of revenue increased in the year to date 2006
      from the year to date 2005, primarily due to additional network personnel costs
      and increased unbundled network element platform costs. In addition, for the
      year to date 2006, we recorded a reduction to network cost of $3.1 million
      related to the resolution of the Georgia rate case. To date, we have been able
      to increase our prices to offset per line increases in network and line cost,
      but these price increases will increase customer turnover. Network and line
      costs exclude depreciation and amortization of $19.9 million for the year to
      date 2006 and $17.2 million for the year to date 2005.





We
      seek
      to structure and price our products in order to maintain network and line costs
      as a percentage of revenue at certain targeted levels. While the control of
      the
      structure and pricing of our products assists us in mitigating risks of
      increases in network and line costs, the telecommunications industry is highly
      competitive and there can be no assurances that we will be able to effectively
      market our products at these higher prices.





16


*General
      and Administrative Expenses* .
      General
      and administrative expenses increased in the year to date 2006 from the year
      to
      date 2005. This increase was primarily due to the general and administrative
      expenses attributable to the LDMI and NTC acquisitions, partially offset by
      a
      reduction in overall headcount and a reduction in accrued bonus compensation.
      In
      addition, the year to date 2006 included expenses related to the Cavalier merger
      of $0.8 million and stock-based compensation expenses associated with the
      issuance of stock options pursuant to SFAS 123R of $4.2 million (see “Critical
      Accounting Policies - Stock-Based Compensation Expense,” below). As a result,
      general and administrative expense as a percentage of revenue increased in
      the
      year to date 2006 from the year to date 2005.





*Provision
      for Doubtful Accounts* .
      The
      provision for doubtful accounts decreased both in dollars and as a percentage
      of
      revenue in the year to date 2006 from the year to date 2005. The decrease was
      primarily due to an increase in the percentage of revenue derived from
      commercial accounts that have lower bad debt experience as compared to
      residential customers.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses increased for the year to date 2006 from the year to
      date
      2005. This increase is attributable to the increase in sales and marketing
      activity corresponding to the expansion of our networking footprint and through
      the acquisitions of LDMI in 2005 and NTC in 2006. Our sales and marketing
      efforts focus on increasing subscriber growth only in those areas where we
      currently have or plan to deploy network facilities. Included in sales and
      marketing expenses are advertising expenses of $3.7 million for the year to
      date
      2006 and $3.2 million for the year to date 2005.





** *Depreciation
      and Amortization.* Depreciation and amortization increased in the year to date 2006 from the year
      to date 2005 primarily due to increased depreciation related to capital
      expenditures incurred in 2005 related to our deployment of networking assets
      (our local switching and collocation equipment) in Michigan and depreciation
      and
      amortization related to the LDMI and NTC acquisitions.





17


**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      management assesses our liquidity in terms of our ability to generate cash
      to
      fund our operations, our capital expenditures and our debt service obligations.
      For the year to dates 2006 and 2005, our operating activities provided net
      cash
      flow of $26.2 million and $56.7 million, respectively. In the year to date
      2006,
      cash from operations together with cash on hand was used to fund capital
      expenditures and capitalized software development costs as well as the
      acquisition of NTC. As of September 30, 2006, we had $37.5 million in cash
      and
      cash equivalents, (including $1.9 million in restricted cash) and long-term
      debt
      and capital lease obligations (including current maturities) of $4.4 million,
      compared to $46.3 million and $5.3 million, respectively, at December 31,
      2005.





Net
      cash
      provided by (used for):




**Year
                to date**
              **(in
                thousands)**
            
            **Percent
                Change****2006**
            
            
            **2005**
            
            
            **2006
                vs. 2005**Operating
                activities
            
            $
            26,162
            
            $
            56,680
            
            
            (53.8
            )%Investing
                activities
            
            $
            (33,984
            )
            $
            (64,953
            )
            
            (47.7
            )%Financing
                activities
            
            $
            (2,872
            )
            $
            3,099
            
            
            (192.7
            )%








*Cash
      Provided By Operating Activities.*  Cash
      generated by operations decreased by $30.5 million from the year to date 2005
      to
      the year to date 2006. The decrease was driven by lower cash flow before changes
      in working capital and by higher investment in working capital primarily due
      to
      the payment related to the Georgia rate case as discussed below. The decrease
      in
      cash flow before changes in working capital was primarily driven by increases
      in
      general and administrative expense and sales and marketing expense. The
      application of net operating loss carryforwards, or NOLs, has limited our
      current payment of income taxes to cash taxes for alternative minimum taxes
      and
      certain state income taxes, but we expect that Talk America’s NOLs will be
      substantially utilized during 2006. The use of NOLs acquired in the LDMI and
      NTC
      acquisitions will be limited, with the benefit spread through 2018.





In
      Georgia, an appeals court overturned a rate reduction by the state public
      utility commission and ordered the commission to recalculate the rates charged
      to us. The state commission has issued an order that results in increased rates
      charged to us. The rates charged to us are in excess of those previously allowed
      by the commission and we have accrued accordingly. In
      the
      third quarter 2006, we made a payment relating to the Georgia rate case of
      $3.6
      million, for which we had previously accrued.





*Net
      Cash Used in Investing Activities.*  Capital
      expenditures and capitalized software development costs were lower in the year
      to date 2006 as compared to the year to date 2005. In the year to date 2006,
      approximately $12.5 million of our $15.4 million in capital expenditures
      consisted of costs related to our deployment of networking assets (local switch
      and collocation equipment).  In
      the
      year to date 2005, approximately $31.9 million of our $35.2 million in capital
      expenditures consisted of costs related to our deployment of networking
      assets.





We
      expect
      to spend between $25.0 and $30.0 million in capital expenditures and capitalized
      software in 2006, primarily for the build out of the Atlanta networking
      facilities, the expansion of our Michigan network facilities and the purchase
      of
      customer premise capital equipment.





The
      acquisition of NTC on January 3, 2006, required the payment of $16.5 million,
      net of cash acquired, for the purchase of all of the equity of NTC.





18


*Net
      Cash Provided by (Used in) Financing Activities.* Net cash
      used in financing activities during the year to date 2006 was $2.9 million
      and
      net cash provided by financing activities during the year to date 2005 was
      $3.1
      million. Net cash used in 2006 was attributable to the payment of outstanding
      capital lease obligations. In October 2006, we received approximately $2 million
      from the exercise of stock options.




In
      recent
      years we have been meeting our ongoing cash requirements (including for the
      conduct of our operations, acquisitions and capital expenditures) from our
      cash
      on-hand and from cash generated from operations. However, our continued growth
      may require that we seek alternative sources of funding. While we believe that
      we would have access to new capital in the public or private markets, there
      can
      be no assurance as to the timing, amounts, terms or conditions of any such
      new
      capital or whether it could be obtained on terms acceptable to us. Based on
      our
      current projections for operations, we believe that our cash on-hand and our
      cash flow from operations will be sufficient to fund our currently contemplated
      capital expenditures, our debt service obligations and the expenses of
      conducting our operations for at least the next twelve months. However, there
      can be no assurance that we will be able to realize our projected cash flows
      from operations, which is subject to the risks and uncertainties discussed
      in
      this report, or that we will not be required to consider capital expenditures
      in
      excess of those currently contemplated, as discussed in this
      report.








**CRITICAL
      ACCOUNTING POLICIES**





**Stock-Based
      Compensation Expense**




As
      of
      January 1, 2006, we account for employee stock-based compensation costs in
      accordance with Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS 123R”). We utilize the Black-Scholes option pricing
      model to estimate the fair value of employee stock based compensation at the
      date of grant, which requires the input of highly subjective assumptions,
      including expected volatility and expected life. Further, as required under
      SFAS
      123R, we now estimate forfeitures for options that have been granted but are
      not
      expected to vest. Changes in these inputs and assumptions can materially affect
      the measure of estimated fair value of our share-based
      compensation.





**Item
      3.**   **Quantitative
      and Qualitative Disclosure About Market Risk.**





In
      the
      normal course of business, our financial position is subject to a variety of
      risks, such as the collectibility of our accounts receivable and the
      recoverability of the carrying values of our long-term assets. Our long-term
      obligations consist primarily of long term debt with fixed interest rates.
      We do
      not presently enter into any transactions involving derivative financial
      instruments for risk management or other purposes.





Our
      available cash balances are invested on a short-term basis (generally overnight)
      and, accordingly, are not subject to significant risks associated with changes
      in interest rates. Substantially all of our cash flows are derived from our
      operations within the United States and we are not subject to market risk
      associated with changes in foreign exchange rates.




19








**Item
      4.**   **Controls
      and Procedures.**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Securities
      Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission's rules and forms, and that such information is accumulated
      and communicated to management, including our principal executive officer and
      chief financial officer, as appropriate, to allow timely decisions regarding
      required disclosure. In connection with the preparation of this Quarterly Report
      on Form 10-Q, we carried out an evaluation under the supervision and with the
      participation of our management, including our principal executive officer
      and
      chief financial officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      under the Exchange Act) as of March 31, 2006. Based upon this evaluation, our
      principal executive officer and chief financial officer concluded that our
      disclosure controls and procedures were effective as of September 30,
      2006.





There
      were no changes in internal control over financial reporting during our most
      recent fiscal quarter ended September 30, 2006, that have materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.








20





**PART
      II - OTHER INFORMATION**


**Item
      1. Legal Proceedings**





We
      are
      aware of five asserted class actions related to the proposed Cavalier merger
      filed against us.





Two
      separate, substantially identical lawsuits, *Daniel
      Tyler, individually and on behalf of a class of persons similarly situated
      v.
      Edward Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald
      Thoma, Talk America Holdings, Inc. and Cavalier Telephone
      Corporation* ,
      Case
      No. 0609065, and *Michael
      Kaiser, individually and on behalf of a class of persons similarly situated
      v.
      Edward Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald
      Thoma, Talk America Holdings, Inc. and Cavalier Telephone
      Corporation* ,
      Case
      No. 0609067, each was filed on September 29, 2006 in the Court of Common Pleas
      of Bucks County, Pennsylvania, Civil Division - Equity. Each
      complaint:





·
            purports
                to be brought on behalf of all Talk America’s stockholders (excluding the
                defendants and their affiliates);


·
            alleges,
                among other things, that the individual defendants (the Company’s
                directors) breached their fiduciary obligations to the Company’s
                stockholders in proposing to acquire [sic] the public shares of Talk
                America at $8.10;


·
            alleges
                that Cavalier has aided and abetted Talk America and its directors’
                alleged wrongdoing;


·
            alleges
                that the merger consideration is unfair to the public stockholder
                of Talk
                America since (i) there is a higher bona fide offer for $9.00 per
                share
                (apparently referring to the conditional Sun Capital proposal); (ii)
                the
                $8.10 proposed acquisition price fails to reflect and is far below
                the
                true valuation of Talk America; and (iii) the merger agreement does
                not
                contain a “go-shop” provision during which period only a substantially
                reduced break-up fee would be payable if a higher bid were to emerge;


·
            alleges
                that, as a result of defendants’ failure to take such steps as their
                fiduciary obligations require, plaintiff and other class members
                have been
                and will be damaged in that they have not and will not receive their
                proportionate share of the value of the Company assets and business,
                and
                have been and will be prevented from obtaining a fair price for their
                common stock; and


·
            seeks
                various forms of relief, including certification of the purported
                class,
                an injunction against the consummation of the merger unless and until
                a
                fair price is paid, unspecified money damages plus interest thereon
                and
                attorneys’ fees and expenses incurred in connection with the respective
                lawsuit.





We
      believe that these lawsuits are without merit and plan to defend them
      vigorously.





21


*Fred
      Tobin, on behalf of himself and all others similarly situated v. Talk America
      Holdings, Inc., Edward B. Meyercord, III, Gabriel A. Battista, Mark S. Fowler,
      Ronald R. Thoma and Robert J. Korzeniewski* ,
      Case
      No. 0609143, was filed on October 2, 2006 in the Court of Common Pleas of Bucks
      County, Pennsylvania, Civil Division-Law.  The complaint purports to be
      brought on behalf of all of Talk America's stockholders (excluding the
      defendants and their affiliates) asserting claims based on alleged self-dealing
      and breaches of fiduciary duty by the Company’s directors in connection with the
      agreement to be acquired by Cavalier.  The complaint alleges that the
      Company's directors breached their fiduciary duties of loyalty, due care,
      independence, good faith and fair dealing by failing to obtain the highest
      price
      reasonably available for the Company by structuring the merger agreement to
      provide for a $6.25 million termination fee and up to $1.25 million in expenses,
      and by utilizing a process allegedly designed to ensure the sale of Talk America
      to Cavalier on terms preferential to Cavalier and Meyercord.  The complaint
      seeks various forms of relief, including: declaration of a proper class action;
      declaration that the merger agreement is unlawful and unenforceable; injunction
      prohibiting the defendants from consummating the acquisition until the Company
      adopts a procedure that obtains the highest possible price for shareholders;
      injunction directing the individual defendants to exercise their fiduciary
      duties to obtain a transaction which is in the best interest of the
      shareholders; rescission of the merger agreement; imposition of a constructive
      trust; and an award of attorneys' fees, expert fees and costs.  We believe
      that this lawsuit is without merit and intend to to defend it
      vigorously.





*Edward
      Katz,, individually, and on behalf of all others similarly situated v. Edward
      B.
      Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald Thoma,
      and Talk America Holdings, Inc.* ,
      C.A.
      No. 2461-N, was filed on October 10, 2006 in the Court of Chancery of the State
      of Delaware, New Castle County. The complaint purports to be brought on behalf
      of all Talk America’s stockholders (excluding the defendants and their
      affiliates) asserting claims based on breaches of the board’s fiduciary duties
      in connection with the agreement to be acquired by Cavalier and in responding
      to
      the bid by Sun Capital. The complaint alleges that the Company’s directors are
      not complying with their fiduciary duties by failing duly to pursue and obtain
      the best value reasonably available on a sale of the Company and the directors
      are passively allowing the forced vote provision of the merger agreement to
      push
      an uninformed decision on the stockholders. The complaint further alleges that
      the Company’s directors have breached and/or aided and abetted breaches of
      fiduciary duties owed to Talk America and its stockholders. The complaint seeks
      various forms of relief, including declaration of a proper class action,
      ordering the individual defendants to affirmatively fulfill their fiduciary
      duties by acting to undertake an appropriate evaluation of alternatives to
      maximize value for Talk America’s public stockholders prior to any vote on the
      merger agreement, ordering defendants to account for all damages suffered by
      the
      plaintiff and other class members as a result of the alleged wrongs, and
      awarding the plaintiff the costs and disbursements of this lawsuit. We believe
      that this lawsuit is without merit and plan to defend it
      vigorously.





22


*Bruce
      Murphy, individually and on behalf of all others similarly situated v. Edward
      B.
      Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald Thoma,
      and Talk America Holdings, Inc.* ,
      C.A.
      No. 2493-N, was filed on October 23, 2006 in the Court of Chancery of the State
      of Delaware, New Castle County. The complaint purports to be brought on behalf
      of all Talk America’s stockholders (excluding the defendants and their
      affiliates). The complaint alleges that the Company’s directors have acted and
      are acting contrary to their fiduciary duty to maximize value on a change in
      control of Talk America. In that connection, the complaint alleges that (i)
      the
      merger is inadequate and unfair to plaintiff and other class members because
      it
      is at a substantially lower price than the offer by Sun Capital; (ii) the merger
      will deny the plaintiff and other class members the opportunity either to
      benefit by the higher offer or to share proportionately in the future success
      of
      Talk America and its valuable assets; and (iii) the merger benefits Meyercord
      but is detrimental to the plaintiff and the class. The complaint seeks various
      forms of relief, including an injunction against the consummation of the merger,
      unspecified rescissory damages in the event the merger is consummated,
      unspecified money damages plus interest thereon against the defendants, and
      plaintiff’s attorneys’ fees and expenses. We believe that this lawsuit is
      without merit and plan to defend it vigorously.





Additional
      lawsuits pertaining to the proposed merger could be filed in the
      future.





**Item
      1A. Risk Factors**





In
      addition to the risk factors disclosed under Item 1A of our 2005 Form
      10-K:





**There
      are risks arising from our merger agreement with
      Cavalier.**





As
      of
      September 22, 2006, we entered into a merger agreement with Cavalier that
      provides for our acquisition by Cavalier. In addition to the risk that such
      acquisition transaction does not take place and our shareholders do not receive
      the consideration provided for therein, the merger agreement provisions subject
      us to certain restrictions on the conduct of our business prior to completion
      of
      the transaction that could delay or prevent us from undertaking business
      opportunities that may arise pending completion of the transaction or that
      could
      discourage competing proposals to acquire us or lower the price that a competing
      bidder might be willing to pay for us. Further, if the merger agreement is
      terminated under certain circumstances, we could be obligated to pay Cavalier
      fees and reimbursed expenses aggregating up to $7.5 million. We
      are
      also subject to potential liabilities under lawsuits filed and that may be
      filed
      against us arising from the proposed acquisition transaction.In
      addition, compliance with the merger agreement and the prospect of the
      acquisition transaction contemplated thereby may result in detrimental diversion
      of management’s attention from our ongoing business operations and in
      difficulties in retaining our employees.








23








**Item
      4. Submission of Matters to a Vote of Security Holders**





(a)  Our
      Annual Meeting of Stockholders was held on August 9, 2006.  Three proposals
      were voted upon at the meeting: (1) the election of one director, (2) the
      ratification of the appointment of PricewaterhouseCoopers LLP as the independent
      certified public accountants for 2006, and (3) the ratification and approval
      of
      the Talk America Employee Stock Purchase Plan.





(b)  The
      votes
      in respect of the director were as follows:





For
      the
      election of Edward B. Meyercord, III as director, there were 21,291,463 votes
      cast for, 0 votes cast against and 5,414,087 abstentions and broker non-votes.




The
      terms
      of office of the following directors continued after the meeting: Gabriel
      Battista, Mark Fowler, Robert Korzeniewski, and Ronald Thoma




(c)  The
      votes
      in respect of the other matters voted upon at the meeting were as
      follows:





For
      the
      ratification of PricewaterhouseCoopers LLP as independent auditors, there were
      26,622,434 votes cast for, 61,513 votes cast against and 21,602 abstentions
      and
      broker non-votes.





For
      the
      ratification and approval of the Talk America Employee Stock Purchase Plan,
      there were 16,833,600 votes cast for, 759,191 votes cast against and 9,088,143
      abstentions and broker non-votes.





24


**Item
      6.**  **Exhibits**





31.1
            Rule
                13a-14(a) Certifications of Edward B. Meyercord, III (filed
                herewith).





31.2
            Rule
                13a-14(a) Certifications of David G. Zahka (filed
                herewith).





32.1
            Certification
                of Edward B. Meyercord, III Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
                to
                the Commission herewith).





32.2
            Certification
                of David G. Zahka Pursuant to 18 U.S.C. Section 1350, as Adopted
                Pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished to the
                Commission herewith).








25





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





**TALK
      AMERICA HOLDINGS, INC.**








Date:
                November 9, 2006
            By:
                /s/ Edward B. Meyercord, III
              Edward
                B. Meyercord, III
              Chief
                Executive OfficerDate:
                November 9, 2006
            By:
                /s/ Gavid G. Zahka
              David
                G. Zahka
              Chief
                Financial Officer (Principal Financial
                Officer)