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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
     (Mark One)
         (X)      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended December 31, 1996

         (  )     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                  For the Transition Period from ___________ to ____________

                          Commission File No.: 0-23394

                              XPEDITE SYSTEMS, INC.
             (Exact Name of Registrant as Specified in its Charter)

             Delaware                                 22-2903158
------------------------------------        -------------------------------
  (State or Other Jurisdiction of                  (I.R.S. Employer
  Incorporation or Organization)                 Identification Number)

          446 Highway 35
       Eatontown, New Jersey                             07724
------------------------------------        -------------------------------
   (Address of Principal Executive                     (Zip Code)
              Offices)
                                                     (908) 389-3900
                                            -------------------------------
                                            (Registrant's Telephone Number,
                                                  Including Area Code)


        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                                 TITLE OF CLASS
                          COMMON STOCK, $.01 PAR VALUE

     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 if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )

     The aggregate market value of the shares of Registrant's  Common Stock held
by  non-affiliates  of Registrant as of March 19, 1997 was  $127,670,987,  based
upon the last  reported  bid price of $21.125 per share of Common Stock on March
19, 1997, as reported in the NASDAQ National Market.

     The number of shares  outstanding of Registrant's  Common Stock as of March
19, 1997 was 8,958,033.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the  Securities  Exchange Act of 1934, as amended,
in connection  with the Annual  Meeting of  Stockholders  of the  Registrant are
incorporated by reference into Part III of this report.



<PAGE>



                                     PART I

ITEM 1. BUSINESS.


     Xpedite Systems, Inc. ("Xpedite" or the "Company") provides a wide range of
computer and fax- based  services  focused  primarily on high volume  electronic
document  distribution.  Based in  Eatontown,  New  Jersey,  the  Company is the
leading  independent  worldwide provider of enhanced fax services ("Enhanced Fax
Services"),   and  now  also  offers   discounted   international  fax  services
("Discounted International Fax Services") via a worldwide network with points of
presence in over 70 cities in over 35 countries  and over 10,000 fax lines.  The
Company also provides telex, internet, e-mail and mailgram services.

     In 1988, the Company was formed and began marketing  Enhanced Fax Services.
From its inception,  the Company's focus was on the provision of value-added fax
services to the United States market. The Company's growth plan was comprised of
three elements:  to (1) identify new applications for the Company's fax services
and offer messaging capabilities beyond fax (e.g., telex and e-mail); (2) export
the Company's  service  business  internationally  by operating  service bureaus
overseas;  and (3) as the  Enhanced  Fax Services  business  grew and  justified
domestic  and  international  networks,  add new services to the product mix and
leverage the Company's sales and marketing  distribution  network.  The tactical
execution of this strategy  involved the  continuous  expansion of the Company's
sales organization,  acquisitions where feasible,  continuous development of the
enhanced  messaging  service  platform and the selection of the Company's second
major product offering: international point-to-point fax service.

     By expanding its sales organization and developing new applications for its
services,  the Company has become the largest United States provider of Enhanced
Fax Services and now offers these services throughout Europe,  North America and
the Pacific Rim. In many cases,  applications that are well proven in the United
States are only in the early  stages of  adoption  overseas.  In  addition,  the
Company's United States sales and marketing  organization  continues to identify
new applications and expand upon those already  established.  The  international
network justified by establishing these services overseas is also being utilized
to  support  the  Company's   launch  and   development  of  its   international
point-to-point fax services.

     The Company's current strategy is to expand from being primarily a provider
of Enhanced Fax Services in North  America to become a provider of both Enhanced
and Discounted International Fax Services on a worldwide basis. The key elements
of the Company's strategic plan are to (1) leverage its proven experience in the
Enhanced Fax Services market by continuing to develop new  applications  for its
Enhanced Fax Services and by  establishing a leadership  position in new markets
through  "exporting"  proven Enhanced Fax Services to geographic  areas in which
the Company has not  historically  offered such services;  (2) capitalize on the
multi-billion  dollar  market  for  Discounted  International  Fax  Services  by
aggressively  marketing  both its "store and forward" and  "real-time"  services
through its direct sales force,  sales agents,  resellers and Nodal Partners (as
defined below), and by installing the  infrastructure  required for the delivery
of such  services on a worldwide  basis;  (3) continue to expand and develop its
"solution-oriented"  direct sales force which the Company believes is one of the
key elements of its success;  (4) expand the Xpedite  Network (as defined below)
by adding new Nodes (as defined  below) and leased  telecommunications  lines in
order to continue  to lower its fax  delivery  costs;  and (5)  increase  market
share,  expand geographic  coverage,  leverage the Xpedite Network,  and achieve
economies of scale and operating  efficiencies  through strategic  acquisitions,
alliances and other business relationships.



<PAGE>



PRODUCTS AND SERVICES

     The Company's  services provide  customers with a lower cost, more reliable
and more time  efficient  information  delivery  method than most other document
distribution alternatives. The Company's Enhanced Fax Services consist primarily
of its "fax  broadcast"  and "gateway  messaging"  services.  The fax  broadcast
services  enable a customer to rapidly  distribute the same document to multiple
recipients by sending a single  transmission  through the Company's  system to a
list  of  fax  addresses.  The  appeal  of  the  fax  broadcast  service  is the
significant cost and time savings as compared to internally printing and mailing
documents or managing the fax process.  Examples of the types of  communications
delivered  via fax  broadcast  services  include the  dissemination  of research
reports by financial  services  organizations  and the  transmission of campaign
information  by political  groups.  In addition,  a portion of the Company's fax
broadcast  revenues  are  attributable  to  customers  utilizing  the  Company's
proprietary  "PC  Xpedite"  software,  which  enables  a  customer  to input the
document to be  broadcast  and  transmit it to the  Company,  and  supports  the
customer's capability to maintain lists of fax addresses. Gateway messaging, the
Company's  other  primary  Enhanced  Fax  Service,  enables a  customer  to send
information  from the  customer's  computer  through the  Company's  system to a
recipient's  fax or telex  machine,  or to a recipient via the Internet or X.400
electronic  mail  networks or other  electronic  media.  The  Company's  gateway
messaging  service  typically  involves  the  processing  of a large  volume  of
individual communications (i.e., a single document to a single recipient),  each
of which is in the same format but contains different  information.  Examples of
the types of communications delivered via gateway messaging services include the
delivery  of  confirmations  of  reservations  by hotels  and  airlines  and the
delivery of invoices,  purchase orders and shipping  documents by  manufacturing
and shipping companies.

     In connection  with its Enhanced Fax Services,  the Company offers a number
of  applications   which  increase  the   attractiveness  of  its  products  and
differentiates  the Company in the marketplace.  Examples of these  applications
include:  (1) "Fax on Demand" which allows callers to select information through
a touch tone phone which is sent  directly to their fax machine;  (2)  "Enhanced
Fax Merging"  which  permits  senders to  personalize  information  which can be
inserted into original text at any point in a standard  multi-address  document;
and (3)  "Toll-Free Fax Response"  which allows senders to receive  responses by
fax to a toll-free 800 number.

     The Company's Discounted International Fax Service allows a customer to use
an automatic dialing device attached to the customer's fax machine (at a cost of
less  than  $100)  to  direct  international  faxes  to the  Company's  document
distribution   network  for   delivery  to  the   recipient  at  a  discount  of
approximately  15% to 25% to standard  international  toll calls.  The Company's
initial Discounted  International Fax Service was a "store and forward" service,
in which the fax is  transmitted  by the sender to and  stored in the  Company's
system  for  subsequent  delivery.  In  response  to demand in the  market for a
discounted  international  fax service  which would  enable the sender to obtain
immediate confirmation that the fax had been delivered, the Company launched its
"real-time"  service in the second half of 1996.  With  real-time  service,  the
customer  uses the same  automatic  dialing  device  as is used in the store and
forward  service,  but rather than store the fax for  subsequent  delivery,  the
Company  connects  the  sender's  fax machine  directly to the  recipient's  fax
machine, thereby delivering the fax immediately.

CUSTOMER BASE

     The  Company  has  achieved   significant  growth  in  its  customer  base.
Applications  for the  Company's  fax  services are utilized by a broad array of
customers  including  those in the  publishing,  public  relations  and investor
relations,  commercial banking,  manufacturing,  travel, electronics,  legal and
pharmaceutical  industries.  The Company's customer base is broadly diversified,
with no single  domestic  industry  group  accounting  for  greater  than 15% of
revenues.  The  Company  believes  that this  diversification  provides  it with
assurance that its revenues will not be greatly  affected by the  cyclicality of
any particular industry or a general business

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downturn in any  particular  sector.  The  Company's  international  network and
capabilities  have also attracted  customers from additional  industries such as
the global freight industry.

THE XPEDITE NETWORK

     In order to offer high quality  Enhanced and Discounted  International  Fax
Services cost  effectively,  the Company has  established  a worldwide  document
distribution  network (the "Xpedite  Network").  The Xpedite Network consists of
the Company's  document  distribution  system,  the systems of the SVC Companies
which are connected to the Company's system,  the Company's "Nodal Partners" and
the leased  telecommunications  lines which connect all of these systems. "Nodal
Partners" are certain  independent  entities  which have purchased an electronic
document  distribution  system  from  the  Company  and  which  sell  Discounted
International  Fax  Services.  A "Node" is an  element  of the  Xpedite  Network
located at a geographically  distinct "point of presence" which allows access to
or egress from the Xpedite  Network via a local  telephone  call.  The Company's
Nodes allow it to deliver a larger number of faxes using inexpensive local calls
rather than higher priced long distance or  international  fax calls and provide
customers with significant  discounts and cost savings on its  international fax
traffic. The Company's leased telecommunications lines, which connect the Nodes,
provide   secure,   high   quality   connections   and   minimize    third-party
telecommunications    expenses.    In    addition,    the    Company's    leased
telecommunications lines provide the reliable, continuous, high-speed throughput
required  for  delivery of  real-time  services.  The Company  currently  leases
telecommunications lines from a variety of the major telecommunications carriers
both in the U.S.  and  overseas.  These  lines are leased on a one- to  two-year
basis with an option to upgrade to higher speed lines and are  generally  billed
on a monthly basis.

     The Company has experienced  significant  growth in fax traffic since 1993,
with average daily fax minutes increasing from approximately 0.3 million in 1993
to 1.4 million (1.0  million  excluding  acquisitions)  in 1996;  this  increase
represents a compound annual growth rate of approximately 67%.

     The  Company  charges for its fax  services  both on a per minute and a per
page  basis,  with the bulk of its sales  occurring  on a per  minute  basis.  A
substantial  portion of the Company's fax traffic terminates in cities where the
Company or its affiliates have Nodes. The Company  estimates that  approximately
40% of its domestic fax deliveries in 1996 were routed over the Xpedite Network.
The Company purchases long- services from MCI  Communications  Corp.,  Cable and
Wireless  Communications,  Inc.,  LDDS (WorldCom) and a number of national post,
telephone and telegraph  companies  ("PTTs") around the world,  among others, to
carry fax traffic that is routed to destinations where the Company does not have
Nodes. In the future, the Company expects its total telecommunications costs per
minute of fax traffic to decrease as an  increasing  amount of traffic is routed
over the Xpedite Network.

SALES AND MARKETING

     The markets for the Company's  services are large and growing.  The Company
believes  that the market for  Enhanced  Fax  Services is annually at least $300
million in North America and $800 million  worldwide.  The target market for the
Company's  Discounted  International Fax Services is the global fax transmission
market,  which the Company believes is annually in excess of $3 billion in North
America and $10 billion  worldwide.  The Company  believes that its markets will
continue to grow,  fueled by growth in international  trade and continued growth
in the utilization of fax machines and computer fax devices.

     The Company's  business has grown as a result of, among other  things,  the
development of a highly-  trained sales  organization.  The Company's  full-time
direct sales force has increased from 41 people at the end of 1992 to 236 people
at year-end 1996.  These full-time  sales personnel are deployed  throughout the
Company's  48  sales  offices  in 14  countries  today  with  approximately  150
operating in North America.  The Company also utilizes a significant  network of
third party distributors (sales agents and resellers) both in countries where it
has a direct sales  presence and in locations  where it does not currently  have
such a

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presence.  These third party distributors accounted for approximately 20% of the
Company's net revenues in 1996.

STRATEGIC RELATIONSHIPS AND ACQUISITIONS

     To  complement  its organic  sales growth and expand  internationally,  the
Company has completed six acquisitions since 1993. In February 1993, the Company
acquired  certain  enhanced  fax and  messaging  services  assets  from  TRT/FTC
Communications,  Inc.  In  November  1995,  the Company  acquired  Swift  Global
Communications,  Inc.  ("Swift"),  ViTel  International  Holding  Company,  Inc.
("ViTel") and Comwave  Communications AG ("Comwave," and collectively with Swift
and ViTel,  the "SVC  Companies")  which  together  had points of presence in 35
countries and a 45 person  direct sales force.  This  acquisition  significantly
expanded the Company's North American and  international  businesses and allowed
the Company to accelerate its entry into the  international fax market. On a pro
forma basis,  the  acquisition of the SVC Companies,  which had revenues of over
$55 million in 1995,  approximately  doubled the  Company's net revenues for the
year ended December 31, 1995. More recently, the Company continued its expansion
in the Pacific Rim through the  acquisition in September 1996 of the fax service
business of PosData Company Ltd., the Company's Nodal Partner in Korea,  and the
acquisition  in December  1996 of the enhanced  fax service  business of Pacific
Star, known as Fax 2000, an Australian fax service provider.

     In  connection  with its  international  expansion,  the  Company  has also
entered into relationships in Europe with Xpedite Systems, GmbH ("XSG"), Xpedite
Systems,  S.A. ("XSSA") and Xpedite Systems,  Ltd. ("XSL," and collectively with
XSG and XSSA,  the "European  Affiliates").  At the time of formation of each of
these entities, XSI entered into a Systems and Marketing Agreement and a Put and
Call  Option  Agreement  (collectively,  the  "Put/Call  Agreements")  with each
European Affiliate and, in the case of the Put/Call Agreements, each affiliate's
shareholders.  These  agreements  provide  for the sale by the  Company  to each
European Affiliate of the Company's document  distribution  system, along with a
license to the  software  used to operate  such system  (for which the  European
Affiliate pays royalties) joint marketing  efforts,  and "put" and "call" rights
which, upon the achievement of specified levels of financial  performance by the
relevant European  Affiliate and fulfillment of certain other conditions,  would
enable or require the Company to purchase  interests  in the  relevant  European
Affiliate.  The Company  currently owns 18.8% of XSSA and 19% of XSG, and has an
option to purchase an additional 17.5% of XSG held by a significant  shareholder
of XSG. The Company has no current ownership stake in XSL.

     The  Company  believes  that  XSL  will  achieve  the  (pound)1.5   million
annualized  net profit,  and that XSG may achieve the DM 1.7 million net profit,
required for the relevant calculation period for the respective "put" and "call"
rights regarding XSL and XSG, respectively,  to be exercised at or after the end
of 1997.  The Company does not believe that XSSA will achieve the 6.0 million FF
required for the  relevant  calculation  period for the "put" and "call"  rights
regarding  XSSA to be  exercised  at the end of 1997.  See  "Item  8.  Financial
Statements and  Supplementary  Data" for additional  discussion of the "put" and
"call" arrangements.

COMPETITION

     The Company competes based on a number of factors, such as customer service
and support,  service features and price. Of these factors, the Company believes
that service and support are the most important for Enhanced Fax Services, while
price is the critical  competitive  component with respect to Basic Fax Services
in developed  countries with high quality long distance  networks.  In a service
industry in which a broad range of optional features are offered,  the Company's
competitive  strategy emphasizes a sales and support network that is well-versed
in the capabilities of the services  offered to customers.  The Company believes
that,  while it continues to expand its  development  activity in order to add a
broad  range of  features  to its  services,  it is the  focus of its  sales and
support  organizations  on customers'  needs that enables the Company to compete
effectively.

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     AT&T, MCI and Sprint,  as well as other long distance carriers and national
PTTs, provide certain enhanced fax  communications  services in competition with
the  Company.   The  Company  believes  it  can  compete  effectively  with  its
competitors  because of its focus on the  enhanced fax  communications  services
market,  its broad array of service  features and its  cost-effective  worldwide
Xpedite Network.  The Company believes that, while AT&T and Sprint have begun to
expand  the  number  of  international  Nodes  employed  by them,  they have not
committed to the direct  deployment of targeted sales  personnel to focus on the
international  fax  markets,  and that AT&T and  Sprint  currently  are  relying
primarily on  worldwide  partners  and agents in  marketing  their  enhanced fax
services outside of the United States.

     In addition to the long distance  carriers and PTTs,  the Company  competes
with a number of service  bureaus  based on the factors  described  above.  Many
service bureaus face considerable obstacles in developing a business competitive
with the Company's.  While it may be easy to begin service with a small personal
computer-based system, considerable system development expenditures are required
to enable such a system to grow to support the volumes and features needed to be
an effective  competitor in the  marketplace.  Further,  a small service  bureau
typically  will not have a sufficient  volume of traffic to develop the economic
leverage necessary to obtain telecommunications services at rates enabling it to
compete cost-effectively with the Company. In addition,  considerable investment
in a sales and  marketing  organization  is  required  to develop a  substantial
business  base.  As a  result  of the  Company's  investment  in its  sales  and
marketing  organization,  the Company  believes that the size of its sales force
significantly  exceeds that of any service bureau in the United States,  and the
Company knows of no other service bureau with as many sales  personnel and Nodes
in as many countries as the Company.

     Immediately prior to the acquisition of the SVC Companies,  the Company had
approximately 5,000 telecommunication lines dedicated to fax transmission, which
the Company  believes was more than twice as many dedicated lines as its nearest
competitor.  Since such acquisition,  the Company has added  approximately 5,000
lines as a result  of  acquisitions  and  through  internal  expansion,  and the
Company  intends  to  continue  to add  dedicated  lines  as its  volume  of fax
transmissions makes the installation of such lines cost effective to support the
growth of the Company's business.

     The  Company   believes  that  its  major   advantages  in  addressing  the
international market is that it is offering both basic and Enhanced Fax Services
and already has  operating  centers and full time sales  personnel  in the major
telecommunications  centers  around  the  world,  and that its  network of Nodal
Partners  extends  this  presence  beyond  such  major  centers.  Another  major
advantage is that the Company's  basic Fax Services  include both  Real-Time and
Store and Forward options, while the Company's competitors may only offer one of
such options.

     Another  alternative  to using the  Company's  services  is for a potential
customer to fulfill  its own needs for fax  communications  services.  The "home
grown"  solution may simply be an individual at a fax machine or may involve the
customer  acquiring its own computerized fax  communications  system  (sometimes
known as "customer premise  equipment" or "CPE").  The Company believes that the
CPE solution is suitable in some applications, but is generally not feasible for
the Company's customers, who require the capacity to effect a significant volume
of  electronic  document  deliveries  in a short  period  of time.  The  Company
believes that the CPE solution for a fax broadcast application would require the
customer to obtain and maintain a large number of telephone  transmission  lines
which  would  remain  idle  for  significant  periods  of  time.  Further,   for
international fax traffic,  the customer would be required to set up a worldwide
nodal  network;  the  Company  believes  that this is only  practical  for large
multinational  firms and even these firms would be unlikely to develop a network
which  would  reach  as  many  countries  as  the  Xpedite  Network.  As  a  fax
communications  services  provider with many  customers,  the Company is able to
spread the costs of operating the Xpedite  Network over a large number of users.
In addition to being concerned with the irregular  nature of demand,  a customer
selecting a CPE solution  must  consider  the total cost of system  acquisition,
ongoing  technical   support,   reliability,   technological   obsolescence  and
accountability.  Based on the foregoing, the Company believes that a substantial
percentage of customers in the market for fax communications services will elect

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a service provider rather than CPE. In fact, as the Company's prices have fallen
over time in the United States, a number of customers who tried to implement CPE
solutions have returned as service customers.

     Similarly,  delivery of electronic information via the Internet provides an
alternative to the Company's fax services.  However,  Internet delivery does not
offer prompt  confirmation  of receipt of information in "real time" and has the
additional  risks  of  limited  security  and   confidentiality  of  information
delivered over a worldwide  network easily  accessed by third parties.  Finally,
while  a fax  transmission  alerts  the  recipient  that  information  has  been
delivered,  information  delivered  via  e-mail  often  relies on the  recipient
inquiring  whether  information  has been  delivered.  Delivery by the  Internet
cannot be an alternative  if a sender or recipient of information  does not have
access to the  Internet.  While the  Company  currently  has the  capability  to
deliver  information  using the Internet,  for the foregoing reasons the Company
does not utilize the Internet as an element of its document  delivery system. In
the event the issues identified above relating to use of the Internet as part of
a document  delivery system are resolved,  the Company may expand its use of the
Internet as part of its document delivery system.

ADDITIONAL INFORMATION

     EMPLOYEES.  The Company considers its relationship with its employees to be
satisfactory.  The  Company  employed  610  persons  as of  December  31,  1996,
substantially all of whom were full-time employees, and none of whom was covered
by a collective bargaining arrangement.  Of these employees, 281 were engaged in
sales and marketing;  228 in operations and customer support; 48 in research and
development; and 53 in general and administrative activities.  Approximately 30%
of the Company's  employees are located in the Company's  Eatontown,  New Jersey
headquarters;  none of the Company's  remaining offices employs more than 10% of
the Company's employees.

     PATENTS AND  PROPRIETARY  INFORMATION.  The Company  regards certain of its
computer  software as proprietary and seeks to protect such software with common
law  copyrights,  trade secret laws and internal  nondisclosure  agreements  and
safeguards. The Company currently holds no United States or foreign patents, but
has several  United States  patent  applications  pending.  The Company does not
believe that patent  protection of any of its intellectual  property is material
to its business.

     On July 31, 1996,  the Company  received a letter from counsel for AudioFAX
IP LLC  ("AudioFAX"),  which  informed the Company that AudioFAX is the owner of
certain  United  States  and  Canadian  patents in the fax  processing  business
entitled "Facsimile  Telecommunications Systems and Method" (the "Patents"), and
inquired as to the Company's interest in obtaining a license of the Patents. The
Company has reviewed the Patents and has determined  that it is not necessary to
obtain a license of the Patents.  The Company  cannot predict  whether  AudioFAX
will continue to pursue the licensing of the Patents to the Company.

     INSURANCE.  The  Company  has  insurance  covering  risks  incurred  in the
ordinary course of business,  including general liability,  special and business
property coverage  (including  coverage of electronic data processing  equipment
and media),  and  business  interruption  insurance.  The Company  believes  its
insurance coverage is adequate.

RECENT DEVELOPMENTS

     SHAREHOLDERS AGREEMENT.

     On January 31, 1997, the Company entered into a shareholders agreement (the
"Shareholders  Agreement")  with  certain  shareholders  of the  Company  owning
approximately  34% of the issued and outstanding  Common Stock. The Shareholders
Agreement provides, among other things, that in connection with any sale of more
than 25% of the issued and outstanding shares of Common Stock by certain of the

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larger  shareholders  of the Company,  all  shareholders  of the Company must be
given an opportunity to participate in such sale.

     EXPLORATION OF STRATEGIC ALTERNATIVES.

     In February 1997, the Company retained Merrill,  Lynch & Co. ("Merrill") to
assist the Board of  Directors of the Company (the  "Board") in  evaluating  the
strategic  direction  of the  Company,  including  the  evaluation  of  possible
business  combinations,  a  leveraged  recapitalization  or  other  methods  for
enhancing  stockholder  value.  The Board also  appointed  a special  committee,
consisting of Philip A. Campbell and Robert  Chefitz,  to evaluate the strategic
alternatives that may be available to the Company to enhance  stockholder value.
The special committee, with the assistance of Merrill, is continuing to evaluate
the Company's strategic alternatives.

     In a related  development,  on February 7, 1997, the Company also announced
that it had received a proposal (the "Proposal") from a group which included UBS
Capital  Partners (an affiliate of Union Bank of  Switzerland),  Fenway Partners
and  members of the  Company's  senior  management  to acquire  the Company in a
transaction in which the Company's  shareholders  would receive $22.50 per share
in cash for their  shares of Common  Stock.  The  Proposal  was  subject  to the
satisfaction of a variety of material  conditions,  including the negotiation of
satisfactory  arrangements  with XSG and XSL. The  Proposal  expired on March 7,
1997.

     In connection with the Proposal,  a purported  shareholder class action was
filed  against  the  Company,  its  directors  and its  officers in the State of
Delaware.  The complaint seeks  injunctive  relief and  unspecified  damages and
alleges, among other things, that the directors and officers of the Company have
breached their fiduciary  duties in connection  with the Proposal.  See "Item 3.
Legal Proceedings."

     ASSET ACQUISITIONS.

     In September  1996,  the Company  purchased  the assets of one of its Nodal
Partners in Korea,  Posdata, for a purchase price of approximately $2.5 million.
Further,  in December  1996, a subsidiary of the Company  purchased from Pacific
Star Services Pty.  Limited,  a subsidiary of New Zealand's  national  telephone
company, PacStar, the assets of PacStar's "Fax 2000" enhanced facsimile services
business  carried on in Australia.  The purchase price for the Fax 2000 business
was approximately $1.3 million.

ITEM 2. PROPERTIES.

     The  Company's   headquarters   facility,   which  includes  its  principal
administrative,  sales,  marketing,  management  information systems and product
development  offices  and its  operations  center,  is located in  approximately
30,000 square feet of leased space in Eatontown,  New Jersey.  The lease on this
facility  terminates on September 30, 1998 (excluding a five-year renewal option
exercisable by the Company).  The Company also maintains a development facility,
located in approximately  9,000 square feet of leased space, in Ft.  Lauderdale,
Florida.  The lease on this facility expires December 31, 2001. The Company owns
an office building located in London,  consisting of approximately  4,000 square
feet of office space.

     The Company also maintains approximately 20,000 square feet of leased space
for the principal  administrative,  sales,  and management  information  systems
offices and operations  center of its  international  division in Glen Head, New
York. The lease covering approximately 75% of this space expires on December 30,
1999, and the lease covering the remaining  space expires on September 30, 2001,
subject,   in  each  case,  to  extension  or  earlier  termination  in  certain
circumstances.

     Since 1994, the Company has leased approximately 4,900 square feet of space
in a  Piscataway,  New Jersey  facility,  where the Company has  established  an
additional  operations  center  which is  substantially  identical,  in terms of
capability,  to its current  operations center at its headquarters in Eatontown,
New Jersey.

                                        7

<PAGE>


This  facility  provides  the Company with another  level of  protection  in its
operational  systems,  and is expected  to enable the  Company to  continue  its
operations  in the event of a  disaster  at either  facility.  The lease on this
facility  terminates  February 28, 2001. The additional  facility is designed to
enable the Company to more easily  expand its systems,  will provide  additional
processing  and  transmission  capacity  and will be linked  with the  Company's
facilities  at its  headquarters.  As of  December  31,  1996,  the  Company has
invested approximately $0.9 million acquiring and equipping this facility.

     As of December  31, 1996,  the Company  leased an  additional  31 sales and
support offices across the United States and Canada, consisting of approximately
36,000 square feet in the aggregate, pursuant to the terms of various short-term
lease agreements.  The Company also leased 17 sales and support offices in other
countries around the world,  consisting of  approximately  30,000 square feet in
the aggregate, pursuant to the terms of various short-term lease agreements. The
Company  believes  that its  existing  facilities  are  adequate to meet current
requirements  and that  suitable  additional  space in  close  proximity  to its
existing  headquarters will be available as needed to accommodate  growth of its
operations  and additional  sales and support  offices  through the  foreseeable
future.

     For the year ended  December 31, 1996, the Company  incurred  approximately
$3.3 million for facilities rental expense.


ITEM 3. LEGAL PROCEEDINGS.

     On February 20, 1997, a purported  class  action,  EPHRIAIM  RODRIGUEZ  AND
JEROME SYKES V. ROY B. ANDERSEN, JR., ET AL., was filed against the Company, its
directors and its officers, in the Court of Chancery of the State of Delaware in
and for New Castle  County.  The suit was  purportedly  brought on behalf of the
shareholders of the Company. The complaint alleges, among other things, that the
directors and officers of the Company have breached  their  fiduciary  duties in
connection with the Proposal (as defined above). The complaint  requests,  among
other things,  that the Court enjoin the Proposal and award unspecified  amounts
of compensatory  damages,  attorneys' fees and costs.  The Company  believes the
allegations  set forth in the  complaint  to be  without  merit and  intends  to
vigorously contest this lawsuit.  In light of the fact that the Proposal expired
on March 7, 1997,  attorneys for the  plaintiffs  have agreed to extend the time
for which the defendants must answer the complaint.

     The Company is a party to certain license  agreements  dated August 1, 1986
(the  "Licenses")  with  certain  related  limited  partnerships  which  are not
affiliated with the Company (collectively,  the "Licensors") relating to certain
technology which enables the exchange of documents or data between  incompatible
work processors or computers (the "Technology").  The Licenses,  which expire in
July  1998,  entitle  the  Licensors  to 4.0% of the  Company's  gross  revenues
generated  from  the  Company  from  the  use of the  Technology.  While  at its
inception the Company intended to use certain of the Technology in its business,
the Company's business strategy changed and the Company made only minimal use of
the  Technology.  The Company ceased all use of the Technology in June 1991, and
paid the  Licensors  an aggregate of  approximately  $3,000 under the  Licenses.
Attorneys for  variously  limited  partners in the  Licensors  have informed the
Company  in writing  that they have been asked to bring a claim for  unspecified
amounts against the Company pursuant to certain purported agreements under which
trade secrets were allegedly  improperly  disclosed by individuals who were in a
fiduciary  relationship  with the Licensors  and later became  involved with the
Company.  Similar  claims have been made in the past by  representatives  of the
Licensors.  No lawsuit has ever been  commenced by any party with respect to any
such claims. The Company believes that the present claim is without merit.

     The  Company  is  involved  from  time  to time in  routine  legal  matters
incidental to its  business.  Management  believes  that the  resolution of such
matters  will not have a  material  adverse  effect on the  Company's  financial
position or results of operations.

                                        8

<PAGE>



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.

     During the fourth  quarter  ended  December 31, 1996,  the Company held the
Annual Meeting of the  Stockholders  of the Company for the following  purposes:
(1) to elect two Class 3  Directors,  (2) to ratify and  approve  the  Officers'
Contingent  Stock  Option  Plan,  (3) to ratify  and  approve  the  Non-Employee
Directors' Warrant Plan, and (4) to ratify and approve the Company's independent
public accountants for fiscal 1996.


     On October 1, 1996, at the Annual Meeting of Stockholders, the stockholders
of the Company approved the following:

     1.  Election of nominee  John C. Baker as Class 3 Director of the  Company:
6,604,058 votes for, 0 votes against,  9,848 abstentions and 11,525 broker votes
for.

     2.  Election of nominee  David  Epstein as Class 3 Director of the Company:
6,604,058 votes for, 0 votes against,  9,848 abstentions and 11,525 broker votes
for.

     3.  Ratification  and approval of Officers'  Contingent  Stock Option Plan:
5,596,522  votes for,  526,433 votes against,  6,238  abstentions and 925 broker
votes for.

     4.  Ratification  and approval of  Non-Employee  Directors'  Warrant  Plan:
5,652,486  votes for,  468,119 votes against,  7,488  abstentions and 925 broker
votes for.

     5.  Ratification  and approval of Ernst & Young LLP as  independent  public
accountants for fiscal 1996:  6,565,226  votes for, 45,930 votes against,  1,650
abstentions and 11,525 broker votes for.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.


MARKET PRICES

The Company's  Common Stock was included in the Nasdaq Stock  Market's  National
Market, and commenced trading,  beginning on February 14, 1994, under the symbol
"XPED".  The number of  stockholders  of record at March 19, 1997 was 179, which
number  includes  certain  registered  holders  who  hold  Common  Stock  for an
undetermined number of beneficial owners.

High and low stock prices for the most recent eight quarters were:


          QUARTER ENDED                           HIGH                 LOW
          -------------                           ----                 ---
          December 31, 1996                  $   23-1/4          $   16-1/4
          September 30, 1996                     27-3/4               17
          June 30, 1996                          28-1/4              16-1/4
          March 31, 1996                         18-1/4              14-1/4

          December 31, 1995                  $   17-7/8          $   12-1/2
          September 30, 1995                     18-3/4              13-1/2
          June 30, 1995                          23-1/2              13-1/4
          March 31, 1995                         20-3/4              16-1/4

                                        9

<PAGE>



The Company has never declared or paid cash  dividends on its Common Stock.  The
Company intends to retain earnings for use in the operation and expansion of its
business. The Company's term loan prohibits the payment of dividends.

The transfer  agent and registrar  for the Common Stock is First Union  National
Bank of North Carolina.


                                       10

<PAGE>



ITEM 6. SELECTED FINANCIAL DATA.


The selected Statement of Operations Data and Balance Sheet Data set forth below
are derived from the audited  Consolidated  Financial  Statements of the Company
and the related notes thereto. The information set forth below should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and the Consolidated  Financial  Statements and Notes
to Consolidated Financial Statements included elsewhere in this Annual Report.



<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                             ----------------------------------------------------------------------
                                               1992          1993 (1)        1994        1995 (2)        1996
                                             ----------------------------------------------------------------------
                                                            (in thousands, except per share data)
<S>                                            <C>           <C>           <C>           <C>          <C>     
Statement of Operations Data:

 Net revenues:
   Service revenues                            $9,400        $28,341       $39,523       $51,840      $122,426
   System sales and other                         629            731         1,906         3,844         7,422
                                                  ---            ---         -----         -----         -----
     Total net revenues                        10,029         29,072        41,429        55,684       129,848


 Costs and expenses:
   Cost of sales                                4,731         14,000        16,992        21,602        59,977
   Selling and marketing                        3,284          7,680        11,180        15,059        28,579
   General and administrative                     982          1,942         2,746         3,964         8,332
   Research and development                       569          1,695         2,834         3,415         4,888
   Depreciation and amortizati                    428            975         1,432         2,723         7,619
   Write off of in-process research                       
     and development costs (3)                      -              -             -        53,000             -
                                             --------        -------       -------       -------       -------

 Operating income (loss)                          35           2,780         6,245       (44,079)       20,453
 Interest income (expense)                      (523)           (373)          433           233        (3,155)
 Other income                                      -               -             -            23           254


 Income tax expense                                 -            712         1,950         2,741         7,119
                                             --------        -------       -------       -------       -------

 Net income (loss)                             $(488)         $1,695        $4,728      $(46,564)      $10,433
                                               =====          ======        ======      ========       =======

 Net income (loss) per common share (5)            -               -         $0.71        $(6.67)        $1.20
 Pro forma net income (loss) per common
     share (5)                                $(0.17)          $0.34             -             -             -
 Weighted average shares outstanding           2,826           4,599         6,600         6,982         8,716

OTHER DATA:
 Earnings  before interest, taxes,
 depreciation and amortization, and
 non-recurring charge ("EBITDA") (4)            $467          $3,967        $7,919       $12,030       $29,145

</TABLE>
                                       11

<PAGE>



<TABLE>
<CAPTION>
                                                                         December 31,

                                              ----------------------------------------------------------------
                                                  1992         1993         1994       1995 (2)      1996
                                                                                                     ----

                                                                        (IN THOUSANDS)
<S>                                             <C>         <C>         <C>          <C>          <C>     
Balance Sheet Data:

Cash , cash equivalents and short term
   investments................................  $ 1,906     $    472    $  16,139    $  9,076     $  6,680
Total assets..................................    5,019       13,962       34,352      72,883       88,391
Long-term debt, excluding current
   maturities.................................    4,201        3,098           13      36,323       27,473
Preferred Stock...............................    6,663        7,262            -           -            -
Stockholders' equity (deficit)................   (7,502)      (6,599)      27,085      (1,116)      25,137

</TABLE>


--------------------

(1)  The Company  acquired  certain assets from TRT  Communications,  Inc. as of
     February 1, 1993.

(2)  On November 20, 1995, the Company  acquired Swift,  ViTel and Comwave.  See
     Note 2 of Notes to Consolidated Financial Statements.

(3)  In  connection  with the  acquisitions  of Swift,  ViTel and  Comwave,  the
     Company  wrote off $53.0  million of  in-process  research and  development
     costs.

(4)  EBITDA consists of operating income plus depreciation and amortization. For
     1995, EBITDA was computed excluding the non-recurring charge resulting from
     the write-off of in-process research and development.  EBITDA is a commonly
     used measure of financial performance in the  telecommunications  industry,
     but it is not intended to be a substitute  for or  replacement of operating
     income or reported net income.

(5)  Net income per share in 1994,  and  pro-forma net income per share in 1993,
     were  calculated  after giving effect to dividends  payable on  outstanding
     Preferred Stock, in the amounts $74,476, and $149,337, respectively.


                                       12

<PAGE>



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS.


     The  following is a discussion  of the  financial  condition and results of
operations of the Company for the three years ended December 31, 1994,  1995 and
1996. It should be read in conjunction with the Selected Financial and Operating
Data and the  Company's  Consolidated  Financial  Statements,  the related notes
thereto, and the other financial information included elsewhere herein.

     OVERVIEW

     The Company  derives the large  majority of its  revenues  from charges for
providing fax  communications  services.  Customers are charged based  primarily
upon  the  telephone  connection  time  used  to  make  the  delivery  of a  fax
communication  to each  recipient.  Although the Company does not have long-term
contractual service agreements with its customers,  the Company's customers tend
to continue to use the  Company's  fax  communications  services  once they have
begun to use such services,  and as a result,  the Company's  operating  results
benefit from the  recurring  monthly  revenue  stream from such  customers.  The
Company also receives  revenues from the provision of other messaging  services,
such as telex and, to a lesser extent,  electronic mail and Internet delivery of
electronic mail.

     In addition to revenues from electronic document distribution services, the
Company generates system sales, royalty and other revenues by selling electronic
document  distribution  systems  and  components  and  licensing  the  Company's
software to other enhanced fax communications  services providers.  System sales
generally have been structured to generate royalty income from the purchasers of
systems, based on the revenues received by the purchaser from such systems.

     On November 20, 1995, the Company purchased (the "SVC  Acquisition") all of
the outstanding  capital stock of Swift Global  Communications,  Inc. ("Swift"),
ViTel International Holding Company,  Inc. ("ViTel") and Comwave  Communications
AG ("Comwave" and collectively with Swift and ViTel, the "SVC  Companies").  The
SVC Companies provide Enhanced Fax services,  including  international store and
forward fax,  gateway  messaging,  telex,  and  electronic  mail  services via a
worldwide  network of Nodes  connected by  telecommunications  lines leased from
common carriers.

     Subsequent  to the SVC  Acquisitions,  the  Company  has  made  significant
development  efforts to  integrate  the  systems of the SVC  Companies  into the
networking plans and architecture the Company deploys. In addition,  the Company
intends to integrate  certain  development  efforts of the SVC  Companies  which
address feature sets  complementary  to the Company's system and are intended to
minimize the need to have several systems.


                                       13

<PAGE>



     RESULTS OF OPERATIONS

     The following table sets forth for the periods  indicated certain operating
data as a percent of net revenues:

                                                 YEARS ENDED DECEMBER 31,

                                               1996         1995          1994
                                               ----         ----          ----

     Net revenues:

    Service revenues........................     94.3%        93.1%        95.4%
    System sales and other..................      5.7          6.9          4.6
                                               ------       ------       ------

       Total net revenues...................    100.0        100.0        100.0

     Costs and expenses:
    Cost of sales...........................     46.2         38.8         41.0
    Selling and marketing...................     22.0         27.0         27.0
    General and administrative..............      6.4          7.1          6.6
    Research and development................      3.8          6.2          6.8
    Depreciation and amortization...........      5.9          4.9          3.5
    Write off of in-process research
         and development costs..............      -.          95.2           -.
                                               -------     -------       ------

Operating income (loss).....................     15.7%       (79.2)%       15.1%
                                               ======      ========     =======





     YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Net  revenues  increased  by 133% to $129.8  million  in 1996,  from  $55.7
million in 1995. Net service  revenues for 1996 were $122.4 million  compared to
$51.8 million in 1995, an increase of 136%.  Net service  revenues  increased by
$70.6  million;  of this amount the SVC  Companies  contributed  net revenues of
$58.3 million. The remaining increase resulted primarily from the efforts of the
Company's  expanded  direct  sales  force both in  penetrating  new  markets and
exploring expanded applications in existing markets. The increase in net service
revenues was  partially  offset by a reduction  in the average  price per minute
charged by the Company for fax deliveries in response to competition.

     System sales and other net revenues were $7.4 million in 1996,  compared to
$3.8 million in 1995, an increase of $3.6  million.  The increase was the result
of an increased volume of sales of system upgrades and expansion equipment,  and
related royalty revenue.

     The Company's gross margins were 53.8% in 1996,  compared to 61.2% in 1995.
Service margins declined  primarily as a result of the SVC  acquisitions,  which
had  historically  lower gross  margins due to  operating  predominantly  in the
international  market,  as  compared  with the  Company's  traditional  domestic
business.  The Company has successfully  negotiated lower rates with its primary
telecommunications  service  providers  in the  past,  and  continues  to pursue
further  negotiations to improve its service margins. The Company also continues
its program to expand its network and utilize  least cost  routing to reduce its
telecommunications  costs, including direct interconnections with local exchange
carriers. The Company's expansion of its world wide network will further enhance
it least cost routing capabilities. The benefits realized from such negotiations
have enabled the Company to respond to  competition  by  providing  preferential
pricing,  including volume discounts, to its high volume customers.  The Company
expects that  successful  future  negotiations  with  telecommunication  service
providers will mitigate the impact on gross margins of declining

                                       14

<PAGE>


prices.  Margins on system sales and other revenues  decreased slightly to 62.0%
in 1996, compared to 62.1% in 1995, primarily as a result of product mix.

     Selling and marketing expenses increased by 89.8% to $28.6 million in 1996,
from $15.1 million in 1995.  Selling and  marketing  expenses as a percentage of
net  revenues  decreased  to 22.0% in 1996 from  27.0% in 1995,  primarily  as a
result of the SVC Acquisitions.  The SVC Companies, which operated predominantly
in the  international  market,  have  historically  higher  ratios of revenue to
selling  expenses  than those  typically  experienced  by the  Company's  in its
traditional  domestic market.  The Company has continued to expand its sales and
marketing organization, increasing its sales force by 71 salespersons to a total
of 236 at December 31, 1996;  156 of such  salespersons  were operating in North
America and 80 internationally. The Company has also expanded its customer care,
sales support,  marketing,  and product  management  functions to a total of 120
employees  at  December  31,  1996,  in support of the  significant  increase in
revenues.

     General and administrative  expenses increased by 110.1% to $8.3 million in
1996,   from  $4.0  million  in  1995,  both  as  a  result  of  the  additional
administrative  overhead costs related to the Company's domestic growth, as well
as the SVC Companies. General and administrative expenses as a percentage of net
revenues  decreased  to  6.4%  in  1996  from  7.1%  in  1995,  as a  result  of
consolidation of administrative and financial functions.

     Research  and  development  expenses  increased by 43.1% to $4.9 million in
1996,  from $3.4 million in 1995.  This  increase was primarily due to costs for
developing  enhancements and new services and features on the Company's systems.
Research and development  expenses as a percentage of net revenues  decreased to
3.8% in 1996 from 6.2% in 1995,  primarily  due to the  increased  revenue  base
resulting from the SVC Acquisitions.

     EBITDA  increased by 142.3% to $29.1 million in 1996,  from $12.0  million,
excluding the write off of in-process  research and development  costs, in 1995.
EBITDA as a percentage of net revenues increased slightly to 22.4% in 1996, from
21.6%,  excluding the write off of in-process research and development costs, in
1995.  EBITDA  is a  commonly  used  measure  of  financial  performance  in the
telecommunications  industry,  but is not  intended  to be a  substitute  for or
replacement of operating income or reported net income.

     Depreciation and amortization  increased to $7.6 million in 1996, from $2.7
million in 1995, as a result of the SVC  Acquisitions in November 1995, and as a
result of additional capital equipment purchased during 1996 and 1995 to support
the growth in revenue.

     The Company had operating  income of $20.5 million in 1996, or 15.7% of net
revenues,  as compared to an operating loss of $44.1 million in 1995.  Operating
income in 1995 exclusive of the write-off of in-process research and development
was $8.9 million, or 16.0% of net revenue.

     Interest  expense,  net of  interest  income,  was  $3.2  million  in 1996,
compared to net interest  income of $0.2  million in 1995,  related to bank debt
obtained, and subordinated notes issued, to finance the SVC Acquisitions.

     Income  tax  expense  in 1996 was $7.1  million  or 40.6% of income  before
income taxes,  compared to $2.7 million, or 6.3% of the loss before income taxes
in  1995.  The  effective  rate  in  1995,  exclusive  of the  write  off of the
in-process   research  and   development   costs  in  connection  with  the  SVC
Acquisitions (a  non-deductible  item) was 30%. For  information  concerning the
provision for income taxes as well as information  regarding differences between
effective  tax  rates  and  statutory  rates,  see  Note 6 of the  Notes  to the
Consolidated Financial Statements.

     As a result of the factors  discussed  above,  the Company's net income for
1996 was $10.4 million, as compared with net loss of $46.6 million in 1995.

                                       15

<PAGE>



     YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     Net revenues increased by 34.4% to $55.7 million in 1995 from $41.4 million
in 1994.  Net service  revenues  for 1995 were $51.8  million  compared to $39.5
million in 1994, an increase of 31.2%. Of this increase in net service revenues,
the SVC Companies  contributed  net service  revenues of $6.1 million during the
period from November 20, 1995 through December 31, 1995. The remaining  increase
resulted primarily from the efforts of the Company's expanded direct sales force
both in penetrating new markets and exploring expanded  applications in existing
markets.  Fax broadcast pages  distributed by the Company  increased by 40.3% to
150.8 million pages in 1995,  from 107.5 million pages in 1994.  The increase in
net  service  revenues  and pages was  partially  offset by a  reduction  in the
average price charged by the Company to deliver a fax broadcast page.

     System sales and other net revenues were $3.8 million in 1995,  compared to
$1.9 million in 1994, an increase of $1.9  million.  The increase was the result
of an increased volume of sales of system upgrades and expansion equipment,  and
related royalty revenue.

     The Company's gross margins were 61.2% in 1995,  compared to 59.0% in 1994.
Service  margin  rates  increased  to 61.1% in 1995  compared  to 59.5% in 1994.
Service margins were positively  impacted by lower long distance rates resulting
from  favorable  negotiations  with  the  Company's  primary  telecommunications
service  providers,  and completion of additional direct  interconnections  with
local exchange  carriers.  The positive  impact of lower  transmission  costs on
service margins was partially offset by a reduction of approximately  14% in the
average price charged to customers to deliver a fax broadcast  page, in response
to competition.  System sales and other revenues margin rates increased to 62.1%
in 1995  compared  to 49.3% in 1994,  primarily  as a result of an  increase  in
royalty revenue of approximately $700,000.

     Selling and marketing  expenses increased by 34.7% to $15.1 million in 1995
from $11.2 million in 1994.  Selling and  marketing  expenses as a percentage of
net revenues  remained at 27.0% in 1995 and 1994.  The Company has  continued to
expand its sales and marketing  organization,  increasing  its sales force by 67
salespersons to total 165 at December 31, 1995,  including 47 employees added as
a result of the SVC  Acquisitions.  The Company also expanded its customer care,
sales support,  marketing, and product management functions by 26 employees to a
total of 70 at December  31,  1995,  in support of the  significant  increase in
revenues, with the SVC Companies accounting for 13 of these additions.

     General and  administrative  expenses increased by 44.4% to $4.0 million in
1995  from  $2.7  million  in  1994,  primarily  as a result  of the  additional
administrative  overhead  costs  related to the  increased  number of  personnel
employed by the Company.  General and administrative expenses as a percentage of
net revenues increased to 7.1% in 1995 from 6.6% in 1994.

     Research  and  development  expenses  increased by 20.5% to $3.4 million in
1995 from $2.8 million in 1994.  This  increase was  primarily  due to costs for
developing  enhancements  to and new  services  and  features  on the  Company's
systems.  Research  and  development  expenses as a  percentage  of net revenues
decreased to 6.1% in 1995 from 6.8% in 1994.

     EBITDA,  excluding  the write off of  in-process  research and  development
costs in 1995,  increased by 51.6% to $12.0 million in 1995 from $7.9 million in
1994.  EBITDA,  excluding the write off of in-process  research and  development
costs, as a percentage of net revenues  increased to 21.6% in 1995 from 19.1% in
1994.  EBITDA  is a  commonly  used  measure  of  financial  performance  in the
telecommunications  industry,  but is not  intended  to be a  substitute  for or
replacement  of operating  income or reported net income.  These  increases were
primarily  attributable  to increased  gross margins  resulting  from  decreased
telecommunications line charges and improved operating efficiencies.

                                       16

<PAGE>



     Depreciation and  amortization  increased to $2.7 million in 1995 from $1.4
million in 1994, as a result of additional  capital  equipment  purchased during
1995 and 1994 to support the growth in revenue.

     In connection with the  acquisitions  of ViTel,  Swift and Comwave in 1995,
the Company wrote off $53.0 million of in-process research and development costs
since the technological  feasibility of these costs had not yet been established
and the technology had no alternative future use at the SVC acquisition date.

     The  Company  incurred  an  operating  loss of $44.1  million  in 1995,  as
compared to operating  income of $6.2 million in 1994,  as a result of the write
off of $53.0 million of in-process research and development costs.

     Interest  income,  net of  interest  expense,  was  $0.2  million  in 1995,
compared to net interest  income of $0.4 million in 1994.  Interest  expense was
$0.5  million in 1995,  related to bank debt and  subordinated  notes  issued to
finance the acquisitions.

     Income tax  expense in 1995 was $2.7  million or 6% of loss  before  income
taxes compared to 29% in 1994. The effective rate in 1995 exclusive of the write
off of the  in-process  research and  development  costs in connection  with the
acquisitions (a  non-deductible  item) was 30%. For  information  concerning the
provision for income taxes as well as information  regarding differences between
effective  tax  rates  and  statutory  rates,  see  Note 6 of the  Notes  to the
Consolidated Financial Statements.

     As a result of the factors discussed above, the Company's net loss for 1995
was $46.6 million, as compared with net income of $4.7 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

     The Company  entered into a credit  facility  with a  commercial  bank (the
"Credit Facility") in November 20, 1995, consisting of a $40.0 million term loan
and a $5.0 million  revolving  loan. As of December 31, 1996, the Company had no
outstanding balance on its revolving loan. The term loan is payable in quarterly
installments  of $1.25 million  increasing  periodically to $2.25 million with a
final payment in August 2001.  During the twelve months ended December 31, 1996,
the Company made principal payments on the term loan amounting to $8.25 million,
which included  prepayments of $3.25 million. In connection with the acquisition
of ViTel,  subordinated notes in the aggregate  principal amount of $5.1 million
were issued to the sellers of ViTel.  On June 14, 1996, the Company  prepaid the
notes with 351,000 shares of the Company's  Common Stock.  The Company has notes
payable  to banks  and to a former  owner of ViTel  totaling  $34.9  million  at
December 31, 1996 and, in connection with the acquisition of certain assets from
PosData in  September  1996,  the Company  obtained a $2.2 million loan from the
Korean branch of a U.S. bank, which was  collateralized by a cash deposit of the
same amount in the domestic branch.

     In August  1996,  the Company  completed  an offering of 720,000  shares of
Common Stock sold by the Company and certain  shareholders of the Company,  at a
price of $18.75 per share, less underwriting  discounts and commissions.  Of the
total shares sold, the Company issued 632,500 shares of Common Stock  (including
over-allotment  shares). After deducting underwriting fees, the Company received
net proceeds from the offering of $11,207,900.

     At  December  31,  1996,  the  Company  had $6.7  million  in cash and cash
equivalents,  and working  capital of $4.5 million.  Operations  generated $12.1
million in cash in 1996,  compared to $6.3  million and $5.0 million in 1995 and
1994, respectively.

     The Company performs ongoing credit evaluations of customers.  Reserves are
maintained for potential  credit losses and  allowances  issued to customers for
pricing discrepancies.  Such losses and allowances have been within management's
expectations. Provisions for allowances and doubtful accounts as a percentage of
net  service  revenue  were  2.8%,  2.9%,  and 3.3% in  1996,  1995,  and  1994,
respectively.

                                       17

<PAGE>




     Included in the net deferred tax assets recorded at December 31, 1996, is a
deferred  tax asset of $1.6  million  reflecting  the benefit of $4.4 million in
loss carryforwards,  which expire in varying amounts between 2004 and 2007. As a
result of certain  transactions  involving  the  Company's  stock,  an ownership
change,  as defined in Section 382 of the  Internal  Revenue  Code,  occurred in
1992.  Consequently,  future  utilization of the Company's federal net operating
loss  carryforwards  are  subject  to  an  annual  limitation  of  approximately
$640,000.

     Net cash used in investing  activities was $18.0 million in 1996,  compared
to $45.9  million and $11.7 million in 1995 and 1994,  respectively.  During the
years  ended  December  31,  1996,  1995,  and 1994,  the Company  made  capital
expenditures of $9.0 million, $3.6 million, and $4.3 million,  respectively. The
Company's  primary capital  expenditures are investments in computer systems and
equipment,  and  telecommunications  systems. The Company estimates that capital
expenditures  will be  approximately  $8.5  million in 1997.  The  Company  made
additional  loans to Xpedite Systems,  GmbH ("Xpedite  Germany") in 1996 of $0.8
million,  for total loans to Xpedite  Germany of $3.5  million at  December  31,
1996. The Company  invested  approximately  $1.6 million for an additional 16.1%
equity interest in Xpedite  Systems,  S.A.  ("Xpedite  France"),  increasing the
Company's total equity ownership in Xpedite France to 18.8%.

     The Company has "put" and "call"  arrangements  relating to the outstanding
shares of each of Xpedite  Systems,  Ltd.  ("Xpedite  UK"),  Xpedite Germany and
Xpedite Systems,  S.A.  ("Xpedite  France" and collectively  with Xpedite UK and
Xpedite  Germany,  "the  European  Affiliates").  The purchase  price payable in
connection  with the exercise of such "put" or "call" options is based on, among
other things,  the achievement of certain  financial results as set forth in the
put and call agreements.

     Because (i) Xpedite UK is likely to produce  operating results in excess of
the minimum  earnings  required  in order to enable the  exercise of the put and
call option in the Xpedite UK agreement,  and (ii) Xpedite  Germany has recently
produced  operating  results  indicating  that  Xpedite  Germany  may attain the
minimum  earnings  required in order to enable the  exercise of the put and call
option in the Xpedite  Germany  agreement,  and if the financial  performance of
Xpedite UK and  Xpedite  Germany  continues,  it is  reasonably  likely that the
Company  could  exercise or be subject to the exercise of these options in early
1998 with respect to Xpedite UK and Xpedite Germany.

     Assuming that Xpedite  Germany  achieves the minimum  amount of earnings of
$1.1 million (at current  exchange  rates)  contemplated  by the Xpedite Germany
agreement and utilizing the Company's  stock price and earnings at and as of the
twelve months ended  December 31, 1996, the purchase price payable in connection
with the  exercise  of 100% of the put option  with  respect to Xpedite  Germany
would be  approximately  $8.3  million,  after  exercise  of a "special  option"
granted to the Company to purchase approximately 17.5% of the outstanding shares
of  Xpedite  Germany  from a  current  shareholder  at a cost  of  approximately
$33,000.  The actual  amount of the purchase  price will more than likely differ
from this amount due to the  variable  factors  used to  determine  the purchase
price.

     Assuming  that  Xpedite  UK  continues  its  current  earnings  trend,  and
utilizing the Company's  stock price and earnings at and as of the twelve months
ended  December 31, 1996,  the purchase  price  payable in  connection  with the
exercise  of 100% of the  put  option  with  respect  to  Xpedite  UK  would  be
approximately  $89.0 million.  The actual amount of the purchase price will more
than  likely  differ  from  this  amount  due to the  variable  factors  used to
determine the purchase price.

     Xpedite France has not met the minimum amount of earnings necessary for the
put or call option to be exercisable, and therefore, due to the uncertainties as
to the ability of Xpedite  France to achieve the required  financial  results in
the future,  and the uncertainty of future events, the Company does not consider
the exercise of these options to be probable  during the next  eighteen  months.
However, assuming that Xpedite France achieves the minimum amount of earnings of
$1.1 million (at current  exchange  rates)  contemplated  by the Xpedite  France
agreement and utilizing the Company's  stock price and earnings at and as of the
twelve

                                       18

<PAGE>



months ended December 31, 1996,  the purchase  price payable in connection  with
the exercise of 100% of the put option would be approximately $11.3 million. The
actual  amount of the  purchase  price will more than  likely  differ  from this
amount due to the variable factors used to determine the purchase price.

     If exercised,  the purchase price payable in connection  with the "put" and
"call"  options with respect to either  Xpedite UK or Xpedite  France is payable
80% in the Company's Common Stock and 20% in cash or negotiable securities.  The
purchase  price  payable in  connection  with the "put" and "call"  options with
respect to Xpedite  Germany is payable in any  combination  of cash,  negotiable
securities  or Common Stock of the Company.  In addition to the  foregoing,  the
Company  may  purchase  one or  more  of the  European  Affiliates  pursuant  to
negotiations  with the  stockholders  thereof  (a  "Negotiated  Purchase").  The
Company has had  preliminary  discussions  with each of the European  Affiliates
regarding a Negotiated  Purchase.  The Company cannot predict the purchase price
payable in  connection  with any such  Negotiated  Purchase  or whether any such
Negotiated Purchase will occur.

     In conjunction  with its analysis of its strategic  alternatives to enhance
stockholder value, the Company is considering effecting a recapitalization which
could  entail  a  substantial   increase  in  the  Company's  leverage  and  the
distribution to the Company's  stockholders of a special  dividend.  The Company
believes  that  such  a  leveraged  recapitalization  would  provide  meaningful
liquidity to its  stockholders  and also would have a significant  impact on the
Company's stock price. Accordingly,  because one element of the formula utilized
to calculate the purchase  price payable  pursuant to any "put" or "call" option
is the  Company's  stock  price,  the  Company  believes  that such a  leveraged
recapitalization  would result in a  substantial  reduction in the price paid in
connection  with any  exercise  of a "put" or  "call"  option.  There  can be no
assurance that the Company will effect any such leveraged recapitalization.

     The Company  believes  that its sources of  capital,  including  internally
generated  funds,  and cash  available  pursuant to its Credit  Facility will be
adequate to satisfy its debt requirements and anticipated  capital needs for the
next twelve months. However, the Company may elect to finance its future capital
requirements  through  additional  equity  or debt  financing.  Further,  if the
Company  exercises or is subject to the exercise of the options described above,
or  purchases  one or more of the European  Affiliates  pursuant to a Negotiated
Purchase,  and if the Company  elects to finance such exercise or purchase using
cash,  then the  Company may be  required  to obtain  additional  equity or debt
financing.  The Company cannot predict whether or not the purchase of all or any
portion of one or more of the European Affiliates will have a dilutive effect on
the Company's  earnings,  as such effect will be dependent  upon purchase  price
paid, the manner in which the purchase is financed and other variable factors.

HEDGING TRANSACTIONS

     The Company has purchased forward contracts for 2.3 million German marks to
hedge  the  loans to an  affiliate  and  amounts  due from its  subsidiaries  at
December 31, 1996, reducing its risk to fluctuation in foreign exchange rates.

     Contracts  for German marks have  maturity  dates ranging from 1997 through
1999. The fair value of such contracts at December 31, 1996,  based upon current
market quotes for contracts with similar terms,  approximated the carrying value
of such contracts.

     In the event of non-performance of contract terms by the banks, the Company
would be required to sell German marks at the prevailing exchange rates.

                                       19

<PAGE>



EFFECT OF INFLATION

     Inflation is not a material  factor  affecting the Company's  business.  In
recent years, telecommunications costs have declined significantly as volumes of
traffic carried by the Company have grown.  However,  general operating expenses
such as salaries,  employee  benefits and occupancy  costs are subject to normal
inflationary pressures.


SEASONALITY

     Generally, the Company's results are not significantly affected by seasonal
factors.

                                       20

<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

          REPORT OF INDEPENDENT AUDITORS



To the Stockholders of Xpedite Systems, Inc.


We have audited the accompanying consolidated balance sheets of Xpedite Systems,
Inc. as of December 31, 1996 and 1995, and the related  consolidated  statements
of  operations,  stockholders'  equity  (deficit) and cash flows for each of the
three years in the period ended December 31, 1996.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of Xpedite Systems,
Inc.  at  December  31,  1996 and  1995,  and the  consolidated  results  of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1996, in conformity with generally accepted accounting principles.



                                                               Ernst & Young LLP


MetroPark, New Jersey
February 27, 1997

                                       21

<PAGE>

                              XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS


                                                                                              DECEMBER 31,
                                                                                      -----------------------------
                                                                                        1996               1995
                                                                                      ---------          ---------          

<S>                                                                                  <C>                <C>        
Current assets:
Cash and cash equivalents........................................................     $6,679,970         $9,076,250
     Accounts receivable, net of reserve for allowances and doubtful
       accounts of $1,851,000 and $993,000 for 1996 and 1995,
       respectively .............................................................     25,749,334         16,567,118
     Deferred income taxes.......................................................      1,903,694          2,406,663
     Other current assets........................................................      1,489,318          2,324,129
                                                                                       ---------
     Total current assets........................................................     35,822,316         30,374,160

Property, plant and equipment, net...............................................     20,500,426         16,235,393
Customer lists, net of accumulated amortization of $2,004,000
  and $897,000 for 1996 and 1995, respectively...................................      8,232,144          6,935,206
Purchased software, net of accumulated amortization of $2,027,000 and
  $886,000 for 1996 and 1995, respectively.......................................      3,156,044          3,591,852
Costs in excess of fair value of net assets acquired, net of accumulated
  amortization of $1,180,000 and $78,000 for 1996 and 1995,
  respectively                                                                        10,609,687          8,226,593
Investments in affiliates, at cost...............................................      2,168,248            510,390
Loans to affiliate...............................................................      3,452,580          2,525,102
Deferred income taxes............................................................      1,879,917          1,815,237
Other assets.....................................................................      2,569,510          2,668,838
                                                                                       ---------          ---------
            Total   .............................................................    $88,390,872        $72,882,771
                                                                                     ===========        ===========

</TABLE>






                             See accompanying notes.

                                       22

<PAGE>



                              XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>

                           CONSOLIDATED BALANCE SHEETS
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                              DECEMBER 31,
                                                                                      -----------------------------
                                                                                        1996               1995
                                                                                      ---------          --------- 

<S>                                                                                  <C>                <C>        
Current liabilities:
Accounts payable.................................................................    $10,067,510        $10,712,562
Accrued expenses.................................................................      5,921,085          7,127,162
Income taxes payable.............................................................      7,131,347          3,254,114
Other current liabilities........................................................        223,818            588,115
Current portion of long-term debt.................................................     7,763,459         10,652,747
Current portion of capital lease obligations.....................................        241,995            307,232
                                                                                         -------            -------
       Total current liabilities.................................................     31,349,214         32,641,932

Long-term debt...................................................................     27,146,147         35,763,421
Long-term portion of capital lease obligations...................................        326,686            559,257
Deferred income taxes............................................................      3,692,134          4,786,300
Other liabilities................................................................        739,492            247,809
Commitments and contingencies....................................................              -                  -

Stockholders' equity (deficit):
     Preferred Stock, $.01 par value, authorized 1,000,000 shares;
        none issued and outstanding in 1996 and 1995.............................              -                  -
     Common Stock, $.01 par value, authorized 15,000,000;
        issued and outstanding 8,903,240 and 7,773,399 shares,
        for 1996 and 1995, respectively..........................................         89,032             77,734
     Additional paid-in capital..................................................     64,782,539         48,921,115
     Accumulated deficit.........................................................   (39,518,372)       (49,898,797)
     Less: Treasury stock; 72,000 shares at 1996
        and 1995; at cost  ......................................................      (216,000)          (216,000)
                                                                                       --------           --------
            Total stockholders' equity (deficit).................................     25,137,199        (1,115,948)
                                                                                      ----------        ----------
            Total................................................................    $88,390,872        $72,882,771
                                                                                     ===========        ===========

</TABLE>









                             See accompanying notes.

                                       23

<PAGE>



                              XPEDITE SYSTEMS, INC.

<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                               YEARS ENDED DECEMBER 31,

                                                         1996               1995              1994
                                                     -------------      -------------     --------

<S>                                                     <C>                <C>              <C>        
Net revenues:
     Service revenues................................   $122,425,726       $51,840,379      $39,523,569
     System sales and other..........................      7,421,925         3,843,583        1,905,766
                                                           ---------       -----------      -----------
          Total net revenues.........................    129,847,651        55,683,962       41,429,335

Cost of sales:
          Operations, line charges and
              support engineering   .................     57,155,734        20,144,082       16,025,855
     Cost of sales of systems........................      2,821,095         1,458,238          965,746
                                                           ---------        ----------       ----------
          Total cost of sales........................     59,976,829        21,602,320       16,991,601
                                                          ----------        ----------       ----------
Gross margin.........................................     69,870,822        34,081,642       24,437,734
     Operating expenses:
     Selling and marketing...........................     28,578,884        15,059,118       11,180,076
     General and administrative......................      8,332,255         3,964,401        2,746,325
     Research and development........................      4,887,563         3,414,577        2,834,681
     Depreciation and amortization...................      7,619,330         2,722,930        1,432,079
     Write off of in-process research and                                                              
          development costs..........................              -        53,000,000                -
                                                      --------------        ----------       ----------
          Total operating expenses...................     49,418,032        78,161,026       18,193,161
                                                          ----------        ----------       ----------
Operating income (loss)..............................     20,452,790       (44,079,384)       6,244,573

Interest income......................................        507,362           769,341          516,948
Interest expense.....................................    (3,662,118)          (535,889)         (83,563)
Other income.........................................        254,599            22,878                -
                                                         -----------      ------------    -------------
Income (loss) before income taxes....................     17,552,633       (43,823,054)       6,677,958
Income tax expense...................................      7,119,171         2,740,890        1,950,400
                                                        ------------     -------------      -----------
Net income (loss)....................................    $10,433,462      $(46,563,944)      $4,727,558
                                                         ===========      ============       ==========

Net income (loss) per Common Share...................    $      1.20      $      (6.67)            0.71
                                                         ===========      ============       ==========
Weighted average shares outstanding..................      8,716,300         6,982,200        6,600,000
                                                         ===========      ============       ==========


</TABLE>


                             See accompanying notes.

                                       24

<PAGE>



                                          XPEDITE SYSTEMS, INC.

<TABLE>
<CAPTION>
                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                                          ADDITIONAL
                                     COMMON STOCK          PAID-IN     ACCUMULATED       TREASURY STOCK
                                  -----------------                                    ------------------  
                                  SHARES      AMOUNT        CAPITAL       DEFICIT      SHARES       AMOUNT       TOTAL
                                 --------    --------      ---------     ---------    --------     --------     --------

<S>                              <C>        <C>          <C>           <C>             <C>        <C>        <C>           
BALANCE, JANUARY 1, 1994         4,160,690  $  41,607    $  1,608,382  $ (8,024,149)   (75,000)   $(225,000) $  (6,599,160)

Exercise of stock options and
   warrants....................    191,272      1,912         133,273             -          -            -       135,185
8% Redeemable Preferred Stock
   dividends...................          -          -         (74,476)            -          -            -       (74,476)
Accretion of 8% Redeemable
   Preferred Stock.............          -          -        (288,791)            -          -            -      (288,791)
Conversion of 8% Redeemable
   Preferred Stock.............    478,600      4,786       7,174,214             -          -            -     7,179,000
Issuance of Common Stock.......  1,650,000     16,500      21,989,195             -          -            -    22,005,695
Net income.....................          -          -               -     4,727,558          -            -     4,727,558
                                ---------- ----------    ------------  ------------  ---------    ---------  ------------
BALANCE, DECEMBER 31, 1994       6,480,562     64,805      30,541,797    (3,296,591)   (75,000)    (225,000)   27,085,011

Exercise of stock options and
   warrants....................     44,072        441          94,549             -          -            -        94,990
Issuance of Common Stock ......  1,249,000     12,490      18,254,135             -          -            -    18,266,625
Cumulative translation
   adjustment..................          -          -               -       (33,445)         -            -       (33,445)
Treasury stock reissued........          -          -          30,750             -      3,000        9,000        39,750
Treasury stock acquired........          -          -               -             -       (235)      (4,935)       (4,935)
Retirement of treasury stock...       (235)        (2)           (116)       (4,817)       235        4,935             -
Net loss.......................          -          -               -   (46,563,944)         -            -   (46,563,944)
                                ---------- ----------    ------------  ------------  ---------    ---------  ------------
BALANCE, DECEMBER 31, 1995       7,773,399     77,734      48,921,115   (49,898,797)   (72,000)    (216,000)   (1,115,948)

Exercise of stock options......    146,341      1,463         271,895            -          -            -        273,358
Issuance of Common Stock.......    632,500      6,325      10,305,823            -          -            -     10,312,148
Issuance of performance stock
      options..................         -          -        2,036,474            -          -            -      2,036,474
Deferred compensation cost.....         -          -       (1,942,405)           -          -            -     (1,942,405)
Conversion of Notes into
Common    Stock................    351,000      3,510       5,189,637            -          -            -      5,193,147
Cumulative translation
adjustment.....................          -          -               -       (53,037)        -            -        (53,037)
Net income.....................          -          -               -    10,433,462         -            -     10,433,462
                                ---------- ----------    ------------  ------------  --------    ---------   ------------
BALANCE, DECEMBER 31, 1996       8,903,240    $89,032    $ 64,782,539  $(39,518,372)  (72,000)   $(216,000)  $ 25,137,199
                                ========== ==========    ============  ============  ========    =========   ============
                                                                                                

</TABLE>



                             See accompanying notes.

                                       25

<PAGE>



                                          XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                       1996             1995             1994
                                                                   -------------    -------------    --------
OPERATING ACTIVITIES

<S>                                                                <C>             <C>                <C>       
Net income (loss)..............................................    $10,433,462     $(46,563,944)      $4,727,558
Adjustments to reconcile net (loss) income to net cash
  provided by operating activities:
 Depreciation and amortization  ...............................      8,437,697        3,060,801        1,674,189
 Write-off of in-process research and development..............              -       53,000,000                -
 Accretion on subordinated debt  ..............................        175,925                -                -
 Deferred income taxes.........................................       (656,400)      (2,012,700)         157,000

 Change in operating assets and liabilities:
  Accounts receivable..........................................     (9,182,216)        (839,721)        (477,246)
  Other current assets.........................................        934,139          355,833         (461,046)
  Other assets.................................................       (131,453)               -           41,783
  Accounts payable.............................................       (645,052)      (3,128,006)        1,147,423
  Accrued expenses.............................................    (1,206,077)          631,373      (1,926,770)
  Deferred revenue.............................................              -                -         (13,000)
  Other liabilities............................................        127,386          176,021                -
  Income taxes payable.........................................      3,855,874        1,665,745          121,306
                                                                     ---------
Net cash provided by operating activities......................     12,143,285        6,345,402        4,991,197

INVESTING ACTIVITIES
Acquisition of property, plant and equipment...................     (8,964,368)      (3,650,251)      (4,280,337)
Acquisition of businesses......................................              -      (46,199,458)               -
Acquisition of intangibles......................................    (6,193,052)               -                -
Purchase of computer software..................................      (272,417)        (252,327)        (365,028)
Purchase of held-to-maturity securities........................              -     (11,692,002)      (5,818,012)
Sale of held-to-maturity securities............................              -       17,510,014                -
Investments in affiliates......................................    (1,693,893)          (4,599)        (339,700)
Loans to affiliate.............................................      (842,594)      (1,622,513)        (902,589)
                                                                     --------       ----------       ----------
Net cash used in investing activities..........................   (17,966,324)     (45,911,136)     (11,705,666)

FINANCING ACTIVITIES
Payments of acquisition liability..............................              -                -        (600,000)
Proceeds from notes payable....................................      2,915,516       40,000,000        1,495,701
Payment of debt issuance costs.................................              -      (1,402,500)                -
Repayments of other loans and notes payable....................    (9,766,158)        (292,892)      (2,599,486)
Repayments of related party loans and notes payable..............            -                -      (3,618,102)
Repayments of capital lease obligations........................      (289,924)         (79,917)         (39,502)
Net proceeds from issuance of Common Stock.....................     10,585,506          129,805       22,371,206
Redemption of Preferred Stock shares...........................              -                -         (372,000)
Payment of Preferred Stock dividends...........................              -                -          (74,476)
                                                                  ------------    -------------        ---------
Net cash provided by financing activities......................      3,444,940       38,354,496       16,563,341

Effect of exchange rate changes on cash........................        (18,181)         (33,445)                -
                                                                      --------        ---------        ----------

(Decrease) increase in cash and cash equivalents...............     (2,396,280)      (1,244,683)       9,848,872
Cash and cash equivalents at beginning of year.................      9,076,250       10,320,933          472,061
                                                                     ---------       ----------        ---------
Cash and cash equivalents at end of year.......................     $6,679,970       $9,076,250      $10,320,933
                                                                    ==========       ==========      ===========

</TABLE>

                             See accompanying notes.

                                       26

<PAGE>



                              XPEDITE SYSTEMS, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


   SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE

   The Company entered into capital lease agreements for equipment in the amount
of $161,200 in 1995.

   The Company  made  interest  payments of  $4,008,087,  $31,011,  and $104,973
during 1996, 1995 and 1994,  respectively.  The Company made income tax payments
of  $5,149,000,   $3,103,000  and  $1,663,000   during  1996,   1995  and  1994,
respectively.

   The Company declared Preferred Stock dividends of $74,476 in 1994. No amounts
were payable in additional  shares of Preferred Stock and $74,476 was payable in
cash. The carrying value of the Preferred Stock was increased by $288,791 during
1994,  which  represents  the accretion of the  difference  between the carrying
value and the mandatory redemption value at the date of issue using the interest
method.

   During 1995,  the Company issued 3,000  treasury  shares of Common Stock,  as
part of a legal settlement with a former investor.

   During 1994, 7,179 shares of Preferred Stock were converted into Common Stock
at a conversion price of $15.00 per share of Common Stock.

   The purchase  price for the  businesses  acquired in 1995 is allocated to the
assets  acquired and  liabilities  assumed based on their  estimated fair market
values as follows:

Fair Value of Assets Acquired:
   Current assets excluding cash...........         $11,466,998
   Property, plant and equipment...........           7,956,162
   In-process research and development.....          53,000,000
   Customer lists..........................           5,600,000
   Purchased software......................           2,700,000
   Cost in excess of fair value of
        net assets acquired ...............           8,304,201
   Other assets............................           1,561,401
Less Liabilities Assumed:
   Current liabilities.....................         (16,173,973)
   Other liabilities.......................          (5,040,388)
Common stock issued to sellers.............         (18,266,625)
Subordinated debt issued to sellers........          (4,908,318)
                                                    -----------
Net Cash Paid..............................         $46,199,458
                                                    ===========




                             See accompanying notes.

                                       27

<PAGE>



                              XPEDITE SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996


1.   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


     ORGANIZATION AND BUSINESS

     Xpedite Systems,  Inc. (the "Company") was incorporated in Delaware in July
1988. The Company develops and markets fax communication services worldwide. The
Company  generates  revenues from the following:  (i) usage fees charged for the
Company's fax broadcast  service ("Fax  Broadcast"),  gateway  messaging service
("Gateway  Messaging") and international  point-to-point fax service ("Point-to-
Point") to customers in diverse  industries;  (ii) sales of fax message handling
systems, including equipment; and (iii) royalties with respect to the use of the
Company's software.  Revenues from the sales of systems are recognized when risk
of ownership  and title passes to the  customer.  The Company  performs  ongoing
credit  evaluations  of customers  and does not  generally  require  collateral.
Reserves are maintained  for potential  credit losses and  allowances,  and such
losses and allowances have been within management's expectations.


     PRINCIPLES OF CONSOLIDATION

     The accompanying  financial statements have been prepared on a consolidated
basis to include the accounts of the Company and its wholly-owned  subsidiaries.
All significant intercompany amounts have been eliminated in consolidation.


     FOREIGN CURRENCY TRANSLATION

     The Company and each of its  subsidiaries use their local currency as their
functional  currency.  Gains and losses from foreign  currency  transactions are
included in the determination of net income. Cumulative translation adjustments,
which  result  from  the  process  of  translating  the  consolidated  financial
statements from the functional  currencies of each subsidiary into the reporting
currency, are included as a component of stockholders' equity.


     FOREIGN EXCHANGE FORWARD CONTRACTS

     Foreign exchange forward contracts are legal agreements between two parties
to purchase and sell a foreign  currency,  for a price specified at the contract
date,  with  delivery  and  settlement  in the  future.  The  Company  uses such
contracts to hedge risk of changes in foreign currency exchange rates associated
with certain  obligations  denominated in foreign  currency.  Such contracts are
designated as hedges;  therefore,  gains and losses are deferred until contracts
are settled and are included in interest income (expense) when the contracts are
settled.

     The  Company  held   contracts   for  German  marks  and  Japanese  yen  of
approximately   $3.4  million  at  December  31,  1995,   and  German  marks  of
approximately  $2.3 million at December 31, 1996,  associated  with the loans to
affiliates (see Note 10) and intercompany balances with subsidiaries.  Contracts
for German marks have maturity dates ranging from 1997 through 1999.

                                       28

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


1.   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


     FOREIGN EXCHANGE FORWARD CONTRACTS (CONTINUED)

     The fair value of such  contracts at December 31, 1996,  based upon current
market quotes for contracts with similar terms,  approximated the carrying value
of such  contracts.  In the event of  non-performance  of contract  terms by the
banks,  the Company  would be required  to sell German  marks at the  prevailing
exchange rates.


     USE OF ESTIMATES

     The  preparation of the financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  amounts  reported  in the  financial  statements  and
accompanying notes. Actual results could differ from those estimates.


     CASH AND CASH EQUIVALENTS

     The Company  considers  all  highly-liquid  investments  with a maturity of
three months or less when  purchased to be cash  equivalents.  The fair value of
these investments approximates cost.


     PROPERTY, PLANT, AND EQUIPMENT

     Property,  plant and equipment is stated at cost.  Depreciation is provided
using the straight-line  method over the following estimated useful lives of the
assets:

                                                    YEARS
                                                    -----
              Buildings                               25
              Equipment                                5
              Furniture and fixtures                   7


     Leasehold  improvements are amortized using the  straight-line  method over
the lesser of the term of the lease or the estimated  useful life of the related
improvement.


     PURCHASED SOFTWARE AND CUSTOMER LISTS

     Purchased  software is being  amortized  on a straight  line basis over the
estimated useful life of three to five years.  Such amortization is greater than
the amount  computed using the ratio that current gross revenues  related to the
purchased  software  bear to the total of current and  anticipated  future gross
revenues related to the purchased  software.  Amortization of purchased software
amounted to  $1,141,097,  $337,871  and  $242,110  during  1996,  1995 and 1994,
respectively.

                                       29

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


1.   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Customer  lists are  being  amortized  on a  straight-line  basis  over the
estimated useful life of eight years. In the opinion of management, the customer
list  assets  will be  recovered  over a period of eight  years  based  upon the
anticipated  future revenue stream  generated from the customer base existing on
the acquisition dates.


     COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED

     Costs  in  excess  of  the  fair  value  of the  tangible  net  assets  and
identifiable  intangible  assets  of  businesses  acquired  are  amortized  on a
straight-line basis over estimated useful life ranging from ten to twenty years.
The Company assesses the  recoverability of costs in excess of the fair value of
the net assets  acquired  by  determining  whether the  carrying  value of these
assets can be recovered through  undiscounted  forecasted future cash flows over
their remaining lives.


     IMPAIRMENT OF LONG-LIVED ASSETS

     In March 1995, the Financial  Accounting  Standards Board issued  Statement
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of",  which requires  impairment  losses to be recorded on
long-lived  assets used in operations  when indicators of impairment are present
and the  undiscounted  cash flows  estimated to be generated by those assets are
less  than the  assets'  carrying  amounts.  Statement  121 also  addresses  the
accounting  for  long-lived  assets that are  expected  to be  disposed  of. The
Company  adopted  Statement  121 as of  January  1,  1995,  which did not have a
material effect on the Company's  consolidated  financial position or results of
operations.


     INCOME TAXES

     Deferred tax assets and liabilities are determined based on the differences
between  financial  reporting  and tax basis of assets and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.


     STOCK BASED COMPENSATION

     As  permitted  by FASB  Statement  No.  123,  "Accounting  for  Stock-Based
Compensation"   (FASB  123),  the  Company  has  elected  to  follow  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related  interpretations  in  accounting  for its employee  stock option
plans.  Under APB 25,  compensation  expense is calculated at the time of option
grant based upon the difference between the exercise price of the option and the
fair market value of the Company's common stock at the date of grant, recognized
over the vesting period.

                                       30

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


1.   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RESEARCH AND DEVELOPMENT

     The Company  expenses  research and  development  costs related to existing
software and systems as incurred.


     NET INCOME (LOSS) PER COMMON SHARE

     The net income  (loss) per Common Share for the three years ended  December
31, 1996,  is computed  using the weighted  average  number of common shares and
dilutive common share  equivalents  outstanding.  The amount of dilution,  where
appropriate, is computed by application of the treasury stock method.


2.   ACQUISITIONS

     In September  1996,  the Company  purchased  the assets of one of its Nodal
Partners in Korea, Posdata Company,  Ltd.  ("Posdata"),  for a purchase price of
approximately  $2.5  million.  Further,  in December  1996, a subsidiary  of the
Company  purchased  from Pacific Star Services Pty Limited,  a subsidiary of New
Zealand's  national  telephone  company,   Pacific  Star  Communications,   Ltd.
("PacStar"),  the assets of PacStar's  "Fax 2000"  enhanced  facsimile  services
business  carried on in Australia.  The purchase price for the Fax 2000 business
was approximately $1.3 million.  The Company also purchased a customer list from
Xpedite Systems Limited (Note 10) for $1.3 million in March 1996.

     The   aforementioned   acquisitions   were   accounted  for  as  purchases.
Accordingly,  the acquired assets (primarily  customer lists) have been recorded
at their estimated fair market values at the date of acquisition.

     On November 20, 1995, the Company purchased all of the outstanding  capital
stock  of Swift  Global  Communications,  Inc.  ("Swift"),  ViTel  International
Holding Company, Inc. ("ViTel") and Comwave  Communications AG ("Comwave").  The
purchase  prices  for  the  acquisitions,   including  transaction  costs,  were
approximately  $23,195,000,  $41,540,000 and  $11,340,000,  respectively,  which
includes  a total  of  $2,000,000  held in  escrow  for  settlement  of  certain
representations  and  warrantees.  A portion of the  purchase  prices  were paid
through the issuance of 1,249,000 shares of the Company's Common Stock valued at
$18,267,000,  and  subordinated  notes  payable  to the  sellers of ViTel with a
carrying value of approximately  $4,908,000 (see Note 5). The acquisitions  were
accounted for as purchases.  Accordingly,  the acquired  assets and  liabilities
assumed  through  these  purchases  have been recorded at their  estimated  fair
market  values  at the  date  of  acquisition.  Identifiable  intangible  assets
acquired  included  $53,000,000 of in-process  research and  development  costs,
customer lists of $5,600,000,  and purchased  software of $2,700,000.  Since the
technological  feasibility of the in-process  research and development costs had
not yet been established and the technology had no alternative future use at the
acquisition date, the in-process research and development costs were immediately
written-off and included in the results of operations as a non-recurring  charge
for the year ended December 31, 1995.



                                       31

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


2.   ACQUISITIONS (CONTINUED)

     A  stockholder  of the  Company  received  $348,000  of fees  for  services
provided in connection with the November 1995 transactions.

     The results of operations of the 1995 purchased  businesses are included in
the  accompanying  consolidated  statements  of  operations  from  the  date  of
acquisition.  Unaudited  proforma results as if the acquisitions had occurred on
January  1, 1995 and  1994,  which  includes  the  $53,000,000  write off of in-
process research and development costs, are as follows:

                                         1995                     1994
                                   -----------------         ---------------

Net revenues....................   $     107,099,000         $    88,164,000
Net loss........................   $     (50,797,000)        $   (53,272,000)
Net loss per Common Share.......           $   (6.28)               $  (6.79)



     The  proforma  results  are not  necessarily  indicative  of the results of
operations  that would have  occurred  had the  acquisitions  taken place at the
beginning of the periods  presented  nor are they  intended to be  indicative of
results that may occur in the future.


3.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following:

                                                    DECEMBER 31,
                                        -----------------------------------

                                              1996               1995
                                        ----------------   ----------------

Land....................................     $    75,753       $     75,753
Building................................         103,977            103,977
Equipment...............................      26,135,687         17,880,624
Furniture and fixtures..................       3,537,759          1,681,859
Leasehold improvements..................       1,559,932            884,940
                                            ------------       ------------
                                              31,413,108         20,627,153
Less accumulated depreciation
   and amortization.....................      10,912,682          4,391,760
                                             -----------       ------------
                                             $20,500,426        $16,235,393
                                             ===========       ============

                                       32

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996

4.   ACCRUED EXPENSES

     Accrued expenses consist of the following:


                                                  DECEMBER 31,
                                     --------------------------------------
                                            1996                1995
                                     ------------------   -----------------

Communication line charges    .......      $  1,851,242        $  1,434,367
Salaries and related benefits .......         3,281,096           3,213,181
Accrued interest    .................            64,410             467,671
Other................................           724,337           2,011,943
                                           ------------
                                           $  5,921,085        $  7,127,162
                                           ============        ============



5.   LONG-TERM DEBT

     Long-term debt consists of the following:

                                                1996              1995
                                         -----------------  ----------------
Term loan............................     $    31,750,000       $ 40,000,000
Subordinated notes
  to former owners...................                  -           4,957,450
Notes payable to banks...............          2,951,057             989,930
Notes payable to
  former owners of ViTel.............            208,549             468,788
                                          ----------------   ----------------
                                              34,909,606          46,416,168
Less current maturities..............         (7,763,459)        (10,652,747)
                                          ----------------   ----------------

                                          $   27,146,147      $    35,763,421
                                          ================   ================



     The Company  entered into a credit  agreement with a commercial  bank which
provided a $40,000,000 term loan to finance the acquisition of Swift, ViTel, and
Comwave in  November  1995 (see Note 2).  The term loan is payable in  quarterly
installments  of $1,250,000  increasing  periodically to $2,250,000 with a final
payment in August 2001.  During 1996, the Company made  prepayments of principal
on the term loan amounting to $3,250,000. The credit agreement also provides for
a $5,000,000 revolving loan limited to 80% of eligible accounts  receivable,  as
defined.  The credit  agreement  expires in August  2001.  A  commitment  fee is
payable at a rate of 0.5% per annum of the unused portion of the revolving loan.
There were no amounts  outstanding under the revolving loan at December 31, 1996
or 1995.

     At the Company's option,  the term loan and revolving loan bear interest at
either (a) the  Bank's  Base  Rate,  defined  as the  higher of (i) 0.5%  ("Base
Margin") in excess of the Federal  Funds rate or (ii) the bank's prime rate plus
1.5%;  or (b) at a rate equal to the LIBOR rate plus 2.75%.  The Base Margin was
adjusted in November 1996, and will be adjusted thereafter, until maturity based
on the Company's outstanding indebtedness and results of operations. The Company
has elected to be charged  interest at LIBOR  (5.7%) plus 2.75% at December  31,
1996.  Substantially all of the assets of the Company collateralize the term and
revolving loans.



                                       33

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


5.   LONG-TERM DEBT (CONTINUED)

     The credit  agreement  contains certain  financial  covenants which include
minimum levels of net worth,  current ratio,  earnings before  interest,  taxes,
depreciation and amortization ("EBITDA") and indebtedness as compared to EBITDA.

     The principal  amounts of the subordinated  notes issued in connection with
the acquisition of ViTel were approximately $5,133,000. The notes did not accrue
interest until May 20, 1996. Accordingly,  the notes were recorded at their fair
value of $4,908,000 at the date of  acquisition.  The notes were prepaid in June
1996, with 351,000 shares of the Company's common stock.

     The notes payable to banks consists of the following: (a) four notes in the
amount of $487,000 in the aggregate  payable to Japanese banks bearing  interest
at rates ranging from 2.4% to 3.8%. Principal and interest is payable monthly or
quarterly  through  September  1998,  and (b) two  notes in the  amount  of $2.1
million in the  aggregate  payable to a Korean  bank  bearing  interest at rates
ranging  from  14% to  15%,  which  were  repaid  in  January  1997,  and  (c) a
non-interest  bearing note in the amount of  approximately  $300,000  payable to
PacStar in connection  with the PacStar  acquisition,  which is payable in April
1997.

     The note  payable  to a former  owner  of  ViTel is  non-interest  bearing.
Principal is payable semi-monthly through April 2000.

     Aggregate  maturities  of  long-term  debt  for the  next  five  years  and
thereafter are as follows: 1997- $7,763,459; 1998- $6,146,147; 1999- $7,000,000;
2000- $8,000,000; 2001- $6,000,000; thereafter- $0.

     The  carrying  amount of the  Company's  borrowings  approximates  the fair
value.

     Costs incurred in connection  with  obtaining the term and revolving  loans
totaled  $1,419,000  and  are  included  in  Other  Assets  in the  accompanying
consolidated  balance sheet.  These costs are amortized on a straight line basis
over  the  life  of  the  credit  agreement,  which  is six  years.  Accumulated
amortization  totaled  $260,000  and  $26,000  at  December  31,  1996 and 1995,
respectively.

                                       34

<PAGE>



     XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


6.   INCOME TAXES

     The components of income tax expense (benefit) for the years ended December
31, 1996, 1995 and 1994 are:

                             1996              1995                1994
                        --------------     --------------     --------------
Federal:                
     Current..........  $    6,616,571     $    3,971,390     $    1,493,000
     Deferred.........        (582,493)        (2,050,400)           122,000
                        
State and local:        
     Current..........       1,159,000            782,200            300,400
     Deferred.........         (73,907)            37,700             35,000
                        --------------     --------------     --------------
                        $    7,119,171     $    2,740,890     $    1,950,400
                        ==============     ==============     ==============
                      


     Included in the December 31, 1996 federal  current and deferred  income tax
expense is approximately $1.4 million of foreign income tax expense.

     The  reconciliation of income taxes computed at the U.S.  statutory federal
tax rate to income tax expense for the years ended  December 31, 1996,  1995 and
1994 are:


<TABLE>
<CAPTION>

                                                  1996                      1995                      1994
                                        ------------------------   -----------------------   ----------------------
                                            Amount      Percent       Amount       Percent      Amount     Percent
                                        --------------  --------   -------------   -------   ------------  --------
<S>                                     <C>               <C>      <C>              <C>      <C>              <C>
Tax expense (benefit) at U.S.                                                     
statutory rate .................        $    6,143,421    35%      $(14,900,000)    (34%)    $  2,270,400     34%
Write-off of in process research        
and development ................                                      18,020,000     41
State income taxes, net of        
federal income tax benefit .....               753,023     4             541,000      1           221,000     3
Reduction in valuation                  
allowance ......................              (192,700)   (1)         (2,279,000)    (5)         (336,000)   (5)
Other items ....................               415,427      2          1,358,890      3          (205,000)   (3)
                                        --------------  --------   -------------   -------   ------------  --------
Income tax expense .............        $    7,119,171    40%      $   2,740,890     6%      $  1,950,400    29%
                                        ==============  ========   =============   =======   ============  ========
                                      
</TABLE>

                                       35

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


6.   INCOME TAXES (CONTINUED)

     Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1995 are as follows:

                                                  1996             1995
                                              ------------      -----------
Reserve for allowances for doubtful                                 
  accounts .................................  $    944,000      $   760,200
Accruals and reserves.......................     1,286,000        1,278,400
Future tax benefits of net operating
  loss carryforwards........................     1,554,000        2,376,000
                                              ------------      -----------

Gross deferred tax asset....................     3,784,000        4,414,600
                                              ------------      -----------

Deferred tax liabilities:
  Fixed assets................................   1,019,000        1,423,800
  Intangibles.................................   2,614,000        3,320,000
  Other liabilities...........................      59,000           42,500
                                              ------------      -----------
Gross deferred tax liability..................   3,692,000        4,786,300
                                              ------------      -----------

Net deferred tax asset (liability)............      92,000         (371,700)
Valuation allowance for deferred
  tax assets..................................           -         (192,700)
                                              ------------      -----------
Net deferred tax assets (liability).........  $     92,000      $  (564,400)
                                              ============      ===========


     The Company has recorded a deferred tax asset of $1,554,000 at December 31,
1996 reflecting the benefit of $4,441,000 in loss carryforwards, which expire in
varying  amounts  between 2004 and 2007.  Realization is dependent on generating
sufficient  taxable  income  prior  to  expiration  of the  loss  carryforwards.
Although realization is not assured,  management believes it is more likely than
not that all of the deferred tax asset will be realized.

     As a result of certain  transactions  involving  the  Company's  stock,  an
ownership  change,  as defined  in Section  382 of the  Internal  Revenue  Code,
occurred in 1992. Consequently,  future utilization of the Company's federal net
operating   loss   carryforwards   are  subject  to  an  annual   limitation  of
approximately $640,000.

     The Company has unremitted foreign earning of approximately $4.6 million at
December 31, 1996. It is the Company's  intention to permanently  reinvest those
earnings in its foreign operations.  Accordingly, no federal deferred taxes have
been provided on those  earnings.  If such  earnings were to be remitted,  it is
possible there would be withholding taxes (although not readily determinable) on
such remittances.


                                       36

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


7.   COMMITMENTS AND CONTINGENCIES

     The Company leases office space and office  equipment under long-term lease
agreements.  The obligations related to the leasing of equipment, are classified
as capital leases. Equipment under capital leases totaled $610,000 and $835,526,
net of accumulated depreciation, at December 31, 1996 and 1995, respectively.

     The leases of real property are  classified as operating  leases and expire
through  2001.  These  leases are subject to  increases  in  property  taxes and
maintenance costs.

     The following is a schedule of future  minimum  lease  payments for capital
and operating leases as of December 31, 1996:

                                          CAPITAL          OPERATING
                                           LEASES            LEASES
                                        ------------      ------------

          1997                          $    283,636      $  1,775,602
          1998                               211,285         1,339,672
          1999                               123,270           808,419
          2000                                 9,776           562,154
          2001                                     -           322,948
          Thereafter                               -            15,700
                                        ------------      ------------
Total minimum lease payments                 627,967      $  4,824,495
                                                          ============
Less amount representing interest             59,286
                                        ------------
Present value of minimum lease
 payments                                    568,681
Less current portion                         241,995
                                        ------------
                                        $    326,686
                                        ============

     Rent expense totaled $3,257,102, $1,201,632 and $895,730 for 1996, 1995 and
1994, respectively.

     The Company is involved in  litigation,  as a defendant,  incidental to the
conduct of its business.  It is the opinion of  management,  after  consultation
with  counsel,  that the  outcome  of such  litigation  will not have a material
adverse effect on the accompanying financial statements.


8.   BENEFIT PLANS AND EQUITY AWARDS

     In January 1996, the Company established an incentive stock option plan for
its officers  and  employees  (the "1996  Plan").  A total of 750,000  shares of
Common Stock were  reserved for issuance  pursuant to options  granted under the
1996 Plan.

     In November  1993, the Company  established an incentive  stock option plan
for its officers and employees  (the "1993 Plan").  A total of 450,000 shares of
Common Stock were  reserved for issuance  pursuant to options  granted under the
1993 Plan.

                                       37

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


8.   BENEFIT PLANS AND EQUITY AWARDS (CONTINUED)

     The 1992 Incentive  Stock Option Plan (the "1992 Plan") was approved by the
Board of Directors in 1992 and authorized the issuance of up to 715,696 options.

     Additionally,  in April 1996, the Company reserved 200,000 shares of Common
Stock for issuance pursuant to options which may be awarded to certain executive
officers of the Company  under the Officers'  Contingent  Stock Option Plan (the
"Plan"),  upon  achievement of certain  performance  targets.  In July 1996, the
Company granted 92,500 of such options,  at a purchase price of $0.00 per share.
Compensation  expense  related to these  grants,  calculated  at the fair market
value of the Company's  Common Stock at the date of grant, to be recognized over
the  vesting  period of 48  months,  will  total  $2,036,474.  The  Company  has
recognized  compensation  expense in 1996 of $94,069.  These  options  expire on
April 21, 2006. In January 1997,  the Company's  Board of Directors  resolved to
replace the unawarded "second tranche" of 100,000  performance options under the
Plan with a combination of Incentive  Stock Options and cash bonus awards.  Such
amendment to the Plan and the details thereof have not been finalized as yet.

     During 1993,  the Company  issued 7,000 stock  warrants to a consultant  to
purchase  shares of Common Stock at a purchase  price of $0.50 per share.  These
warrants  expire  December 31, 1999.  Also during 1993, the Company issued 5,000
stock  warrants to a  stockholder  of the  Company to purchase  shares of Common
Stock at a purchase price of $7.00 per share. These warrants expire November 16,
2003.

     In February 1994, the Company granted warrants to purchase 10,000 shares of
Common  Stock at a purchase  price of $15.00  per share,  to a new member of the
Board of Directors.  During 1995,  3,334 of these warrants were  exercised.  The
remaining 6,666 warrants were canceled during 1995.

     In April  1996,  the  Company  issued  warrants  to members of the Board of
Directors  to purchase  125,000  shares of Common  Stock at a purchase  price of
$17.50  per  share.  Subsequently,  8,334  warrants  were  forfeited  due to the
resignation  of  a  Board  member.  The  remaining  116,666  warrants  were  all
outstanding at December 31, 1996.

     FASB 123 requires pro forma  information  regarding net income and earnings
per share as if the Company has  accounted  for its employee  stock  options and
warrants  ("equity  awards")  under the fair value  method of FAS 123.  The fair
value  of these  equity  awards  was  estimated  at the  date of  grant  using a
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions for 1995 and 1996, respectively: risk-free interest rates of between
6.07% and 6.17%;  expected  volatility  of 0.55;  expected  option  life of five
years, and an expected dividend yield of 0.0%.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
equity  awards is  amortized  to expense over the options  vesting  period.  The
Company's pro forma information is as follows:



                                                1996              1995
                                           --------------    ---------------

    Pro forma net income...............   $    9,548,461    $   (47,151,498)
    Pro forma net income per share
       of common stock.................   $         1.11    $         (6.77)



                                       38

<PAGE>



                              XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


     Stock option plans' activity is summarized as follows:

                                        1996                     1995                    1994
                              ------------------------   ---------------------  -----------------------
                                            WEIGHTED                 WEIGHTED                 WEIGHTED
                                             AVERAGE                 AVERAGE                  AVERAGE
                                            EXERCISE                 EXERCISE                 EXERCISE
                                OPTIONS       PRICE      OPTIONS      PRICE      OPTIONS       PRICE
                              -----------  -----------   --------   ----------  ----------   ----------

<S>                             <C>        <C>            <C>       <C>            <C>       <C>       
Outstanding at beginning of year  803,963  $      8.10    675,420   $     6.23     604,450   $     0.57
Canceled......................     33,476  $     16.04     (6,319)  $    13.46     (12,608)  $     3.96
Granted.......................    383,100  $     12.62    170,600   $    14.18     266,350   $    15.10
Exercised.....................    146,340  $      1.87    (35,738)  $     0.78    (182,772)  $     0.58
Outstanding at end of year  ..  1,007,245  $     10.46    803,963   $     8.10     675,420   $     6.23
                              ===========  ===========   ========   ==========  ==========   ==========

Exercisable at end of year        501,018                 397,943                  210,993
                              ===========                ========               ==========
Weighted average fair value of                                      
options granted during the year            $     13.35              $    10.24               $    11.48
                                           ===========              ==========               ==========

</TABLE>


     Stock options outstanding at December 31, 1996 are summarized as follows:



                            OUTSTANDING      WEIGHTED AVERAGE
  RANGE OF EXERCISE         OPTIONS AT           REMAINING      WEIGHTED AVERAGE
        PRICES           DECEMBER 31, 1996   CONTRACTUAL LIFE     EXERCISE PRICE
---------------------   -------------------  ----------------   ---------------

        $ 0.00                  92,500               8.3              $  0.00
        $ 0.50                 237,628               5.7              $  0.50
   $ 3.00 - $ 3.42               3,270               6.6              $  3.00
        $ 7.00                   1,189               6.8              $  7.00
   $ 13.75 - $17.50            672,658               8.4              $ 15.47



     The  Company has a defined  contribution  401(k)  plan (the  "Plan")  which
allows  all  eligible  employees  to defer a  portion  of their  income  through
contributions to the Plan. Under the terms of the Plan, the Company  contributes
an amount  equal to 50% of the  employee's  elective  deferrals  up to 5% of the
total annual  compensation paid to the Plan  participant.  The Company's expense
under the Plan for 1996,  1995 and 1994 was  $629,054,  $228,294  and  $174,090,
respectively.

                                       39

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996

9.   PUBLIC OFFERINGS

     In February 1994, the Company issued 1,650,000 shares of Common Stock in an
initial public  offering.  The Company used a portion of the net proceeds of the
offering to repay all outstanding  indebtedness  (except indebtedness related to
capital lease  obligations)  and to redeem 227 shares of Preferred Stock. At the
closing of the offering,  7,179 shares of Preferred  Stock were  converted  into
Common Stock at a conversion  price equal to the initial  public  offering price
($15.00 per share of Common Stock).

     In August 1996, the Company  completed an offering of 720,000 shares of its
common stock, at a price of $18.75 per share,  less  underwriting  discounts and
commissions.  Of the total shares sold,  the Company  issued  550,000 shares and
certain  stockholders  of the  Company  ("Selling  Stockholders")  sold  170,000
shares.  In September  1996, the  underwriters  exercised  their  over-allotment
option,  resulting in the issuance by the Company of an additional 82,500 shares
of common  stock,  and the sale of an  additional  25,500  shares by the Selling
Stockholders.  Proceeds of this offering,  net of underwriting fees, amounted to
$11.2 million, of which $3.4 million was used to repay debt, and the balance was
used for other expenses related to the offering,  working  capital,  and general
and corporate purposes.


10.  SYSTEM AND MARKETING AGREEMENTS

     In connection  with its  international  expansion,  the Company has entered
into  relationships  in Europe  with  Xpedite  Systems,  GmbH  ("XSG"),  Xpedite
Systems,  S.A. ("XSSA") and Xpedite Systems,  Ltd. ("XSL," and collectively with
XSG and XSSA,  the "European  Affiliates").  At the time of formation of each of
these entities, the Company entered into a Systems and Marketing Agreement and a
Put and Call Option Agreement  (collectively,  the "Put/Call  Agreements")  with
each  European  Affiliate  and,  in the case of the  Put/Call  Agreements,  each
affiliate's  shareholders.  These agreements provide for the sale by the Company
to each European Affiliate of the Company's document  distribution system, along
with a license to the  software  used to operate such  system,  joint  marketing
efforts,  and "put" and "call" rights which,  upon the  achievement of specified
levels  of  financial   performance  by  the  relevant  European  Affiliate  and
fulfillment of certain other conditions,  would enable or require the Company to
purchase  interests in the relevant  European  Affiliate.  The Company currently
owns 18.8% of XSSA and 19% of XSG,  and has an option to purchase an  additional
17% of XSG held by a significant  shareholder of XSG. The Company has no current
ownership stake in XSL. Loans to the  aforementioned  European  Affiliates total
approximately  $3.5  million  and $2.5  million at  December  31, 1996 and 1995,
respectively, and reflected in the Company's consolidated balance sheets.

     Because (i) Xpedite UK is likely to produce  operating results in excess of
the minimum  earnings  required  in order to enable the  exercise of the put and
call option in the Xpedite UK Put/Call  Agreement,  and (ii) Xpedite Germany has
recently produced  operating results  indicating  Xpedite Germany may attain the
minimum  earnings  required in order to enable the  exercise of the put and call
option  in  the  Xpedite  Germany  Put/Call  Agreement,  and  if  the  financial
performance of Xpedite UK and Xpedite Germany continues, it is reasonably likely
that the Company  could  exercise or be subject to the exercise of these options
in early 1998 with respect to Xpedite UK and Xpedite Germany.


                                       40

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


10.  SYSTEM AND MARKETING AGREEMENTS (CONTINUED)


     Assuming that Xpedite  Germany  achieves the minimum  amount of earnings of
$1.1 million (at current  exchange  rates)  contemplated  by the Xpedite Germany
Put/Call  Agreement and utilizing the Company's  stock price and earnings at and
as of the twelve months ended  December 31, 1996,  the purchase price payable in
connection  with the  exercise of 100% of the put option with respect to Xpedite
Germany  would be  approximately  $8.3 million,  after  exercise of the "special
option"  granted  to  the  Company  to  purchase   approximately  17.5%  of  the
outstanding share of Xpedite Germany from a current shareholder for $33,000. The
actual  amount of the  purchase  price will more than  likely  differ  from this
amount due to the variable factors used to determine the purchase price.

     Assuming  that  Xpedite  UK  continues  its  current  earnings  trend,  and
utilizing the Company's  stock price and earnings at and as of the twelve months
ended  December 31, 1996,  the purchase  price  payable in  connection  with the
exercise  of 100% of the  put  option  with  respect  to  Xpedite  UK  would  be
approximately  $89.0 million.  The actual amount of the purchase price will more
than  likely  differ  from  this  amount  due to the  variable  factors  used to
determine the purchase price.

     Xpedite France has not met the minimum amount of earnings necessary for the
put or call option to be exercisable, and therefore, due to the uncertainties as
to the ability of Xpedite  France to achieve the required  financial  results in
the future,  and the uncertainty of future events, the Company does not consider
the exercise of these options to be probable  during the next  eighteen  months.
However, assuming that Xpedite France achieves the minimum amount of earnings of
$1.1 million (at current  exchange  rates)  contemplated  by the Xpedite  France
Put/Call  Agreement and utilizing the Company's  stock price and earnings at and
as of the twelve months ended  December 31, 1996,  the purchase price payable in
connection  with the exercise of 100% of the put option  would be  approximately
$11.3  million.  The actual  amount of the purchase  price will more than likely
differ  from this  amount due to the  variable  factors  used to  determine  the
purchase price.

     If exercised,  the purchase price payable in connection  with the "put" and
"call" options is payable 20% in cash or negotiable securities and 80% in common
stock of the  Company  (in the case of  Xpedite  UK and  Xpedite  France),  or a
combination of cash, common stock of the Company, or any negotiable security, at
the  Company's  option,  in the case of  Xpedite  Germany.  In  addition  to the
foregoing,  the  Company may  purchase  one or more of the  European  Affiliates
pursuant  to  negotiations   with  the   stockholders   thereof  (a  "Negotiated
Purchase").  The  Company  has  had  preliminary  discussions  with  each of the
European Affiliates regarding a Negotiated Purchase.  The Company cannot predict
the purchase price payable in connection  with any such  Negotiated  Purchase or
whether any such Negotiated Purchase will occur.

     In conjunction  with its analysis of its strategic  alternatives to enhance
stockholder value, the Company is considering effecting a recapitalization which
could  entail  a  substantial   increase  in  the  Company's  leverage  and  the
distribution to the Company's  stockholders of a special  dividend.  The Company
believes  that  such  a  leveraged  recapitalization  would  provide  meaningful
liquidity to its  stockholders  and also would have a significant  impact on the
Company's stock price. Accordingly,  because one element of the formula utilized
to calculate the purchase  price payable  pursuant to any "put" or "call" option
is the Company's stock price, the Company believes that such a leveraged


                                       41

<PAGE>



                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996


10.  SYSTEM AND MARKETING AGREEMENTS (CONTINUED)


recapitalization  would result in a  substantial  reduction in the price paid in
connection  with any  exercise  of a "put" or  "call"  option.  There  can be no
assurance that the Company will effect any such leveraged recapitalization.  See
Note 12 for  additional  discussion of the  Company's  analysis of its strategic
alternatives.

     The Company  believes  that its sources of  capital,  including  internally
generated  funds,  and cash  available  pursuant to its Credit  Facility will be
adequate to satisfy its debt requirements and anticipated  capital needs for the
next twelve months. However, the Company may elect to finance its future capital
requirements  through  additional  equity  or debt  financing.  Further,  if the
Company  exercises or is subject to the exercise of the options described above,
or  purchases  one or more of the European  Affiliates  pursuant to a Negotiated
Purchase,  and if the Company  elects to finance such exercise or purchase using
cash,  then the  Company may be  required  to obtain  additional  equity or debt
financing.  The Company cannot predict whether or not the purchase of all or any
portion of one or more of the European Affiliates will have a dilutive effect on
the Company's  earnings,  as such effect will be dependent  upon purchase  price
paid, the manner in which the purchase is financed and other variable factors.

     If and when the put and call  options are  exercised,  the  investments  in
Xpedite  Germany,  Xpedite UK and Xpedite France will be accounted for either on
the  equity  method of  accounting  or will be  consolidated,  depending  on the
Company's percentage of ownership.


11.  SEGMENT DATA AND GEOGRAPHIC INFORMATION

     The Company operates in one industry segment.  The following table presents
financial  information based on the Company's  geographic segments for the years
ended December 31, 1996 and December 31, 1995:



                           NET              OPERATING           IDENTIFIABLE
       1996              REVENUES             INCOME               ASSETS
-------------------   --------------     ----------------    ------------------

North America......   $   91,387,431     $     17,242,174    $       66,282,306

Far East...........       25,505,348              435,326            14,401,049

Europe.............       12,954,872            2,775,290             7,707,517
                      --------------     ----------------    ------------------

Total..............   $  129,847,651     $     20,452,790    $       88,390,872
                      ==============     ================    ==================

                                       42

<PAGE>




                              XPEDITE SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1996



11.  SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)



                            NET              OPERATING         IDENTIFIABLE
       1995              REVENUES          (LOSS) INCOME         ASSETS
-------------------   --------------     ---------------     ---------------
                      
North America.......  $   52,022,430     $   (44,020,454)    $    49,650,056
Far East............       2,198,893            (102,167)         11,994,268
Europe..............       1,462,639              43,237          11,238,447
                      --------------     ---------------     ---------------
 Total..............  $  55,683,962      $   (44,079,384)    $    72,882,771
                      ==============     ===============     ===============
                    

12.  SUBSEQUENT EVENTS (UNAUDITED)

     In February 1997, the Company retained Merrill,  Lynch & Co. ("Merrill") to
assist the Board of  Directors of the Company (the  "Board") in  evaluating  the
strategic  direction  of the  Company,  including  the  evaluation  of  possible
business  combinations,  a  leveraged  recapitalization  or  other  methods  for
enhancing  stockholder  value.  The Board also  appointed  a special  committee,
consisting of Philip A. Campbell and Robert  Chefitz,  to evaluate the strategic
alternatives that may be available to the Company to enhance  stockholder value.
The special committee, with the assistance of Merrill, is continuing to evaluate
the Company's strategic alternatives.

     In a related  development,  on February 7, 1997, the Company announced that
it had  received a proposal  (the  "Proposal")  from a group which  included UBS
Capital  Partners (an affiliate of Union Bank of  Switzerland),  Fenway Partners
and  members of the  Company's  senior  management  to acquire  the Company in a
transaction in which the Company's  shareholders  would receive $22.50 per share
in cash for their  shares of Common  Stock.  The  Proposal  was  subject  to the
satisfaction of a variety of material  conditions,  including the negotiation of
satisfactory  arrangements  with Xpedite's  affiliates in the United Kingdom and
Germany. The Proposal expired on March 7, 1997.


                                       43

<PAGE>



ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
               AND FINANCIAL DISCLOSURE.

     Not applicable.

                                    PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11.       EXECUTIVE COMPENSATION.

ITEM 12.       SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information  called for by Items 10, 11, 12 and 13 will be contained in
the Company's  Proxy  Statement to be filed  pursuant to  Regulation  14A of the
Securities  Exchange  Act of 1934,  as amended,  in  connection  with the Annual
Meeting of Stockholders of the Company and is incorporated herein by reference.

                                       44

<PAGE>



                                     PART IV


ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
               FORM 8-K.

     (a)  List of documents filed as part of this report.

          (1)  FINANCIAL STATEMENTS

               Consolidated  balance  sheets  of  Xpedite  Systems,  Inc.  as of
          December 31, 1996 and 1995, and the related consolidated statements of
          operations,  stockholders' equity (deficit) and cash flows for each of
          the three years in the period ended December 31, 1996.

          (2)  FINANCIAL STATEMENT SCHEDULES

               Schedule II:  Valuation and Qualifying Accounts.

          Schedules  other than the  schedule  listed  above  have been  omitted
          because  they are not  applicable  or not  required,  or  because  the
          information is shown in the Consolidated  Financial  Statements or the
          Notes thereto.

          (3)  EXHIBITS.


     EXHIBIT
       NO.                          DESCRIPTION OF EXHIBIT
    ---------                       ----------------------

       2.1    Agreement and Plan of Merger, dated as of November 20, 1995, among
              the Registrant, SGC Acquisition Corp., a Delaware corporation, and
              Swift Global Communications Inc., a Delaware corporation.(*)

       2.2    Stock Purchase Agreement, dated as of November 20, 1995, among the
              Registrant,  ViTel International Holding Company, Inc., a Delaware
              corporation  ("ViTel"),  and the  stockholders of ViTel identified
              therein.(*)

       2.3    Stock Purchase Agreement, dated as of November 20, 1995, among the
              Registrant,   Comwave   Communications  AG,  a  Swiss  corporation
              ("Comwave"),  and  Computainer  Systems  (Global)  Inc., a British
              Virgin  Islands  corporation  which  was the sole  shareholder  of
              Comwave.(*)

       3.1    Amended  and  Restated   Certificate  of   Incorporation   of  the
              Registrant.(****)

       3.2    Amended and Restated By-laws of the Registrant.(**)

       4.1    Specimen Certificate for Common Stock.(**)

       10.1   Lease Agreement,  dated August 3, 1988, between the Registrant and
              Mid-Atlantic Industrial Co.(**)

                                       45

<PAGE>


     EXHIBIT
       NO.                          DESCRIPTION OF EXHIBIT
    ---------                       ----------------------

       10.2   Lease  Agreement,  dated June __,  1990,  as modified on August 3,
              1990, between the Registrant and Mid-Atlantic Industrial Co.(**)

       10.3   Form of Lease  Extension  Agreement  between  the  Registrant  and
              Mid-Atlantic Industrial Co.(**)

       10.4   Agreement  of  Lease,  dated as of June 25,  1986,  between  Swift
              Global Communications Inc. and 997 Partners.(****)

       10.5   Sublease  Agreement,  dated  as of March 1,  1991,  between  Swift
              Global Communications Inc. and Essilor of America, Inc.(****)

       10.6   Office  Building Lease,  dated as of March 2, 1987,  between ViTel
              International,   Ltd.  and   Shoreline   Office   Center   Limited
              Partnership  ("Shoreline"),  together  with (i)  Lease  Amendment,
              dated as of November 1, 1990,  between ViTel  International,  Inc.
              and Shoreline, and (ii) Second Amendment,  dated as of December 2,
              1993, between ViTel International, Inc. and Shoreline.(****)

       10.7   Employment   Agreement,   dated  October  1,  1988,   between  the
              Registrant and Roy B. Andersen, Jr.(**)

       10.8   Employment   Agreement,   dated  October  1,  1988,   between  the
              Registrant and Dennis Schmaltz.(**)

       10.9   Employment  Agreement,  dated May 1, 1990,  between the Registrant
              and Max Slifer.(**)

       10.10  Employment Agreement,  dated June 27, 1996, between the Registrant
              and Robert S. Vaters.(*****)

       10.11  Employment  Agreement,  dated as of November 20, 1995, between the
              Registrant and George Abi Zeid.(****)

       10.12  1992 Incentive Stock Option Plan.(**)

       10.13  1993 Incentive Stock Option Plan.(**)

       10.14  1996 Incentive Stock Option Plan.(****)

       10.15  Stock  Purchase  Agreement,  dated as of June 12, 1992,  among the
              Registrant,  Robert A. Epstein, Stuart Epstein, David Epstein, APA
              Excelsior III, L.P.,  Coutts & Co. (Jersey),  Ltd.,  Custodian for
              APA Excelsior  III/Offshore,  L.P., CIN Venture Nominees, Ltd. and
              APA/Fostin Pennsylvania Venture Capital Fund.(**)

                                       46

<PAGE>


     EXHIBIT
       NO.                          DESCRIPTION OF EXHIBIT
    ---------                       ----------------------

       10.16  Shareholders  Agreement,  dated as of November 20, 1995, among the
              Registrant,  David Epstein,  Stuart Epstein,  Robert Epstein,  APA
              Excelsior III, L.P., a Delaware limited partnership,  Coutts & Co.
              (Jersey),  Custodian  for  APA  Excelsior  III/Offshore,  L.P.,  a
              Channel Islands corporation,  CIN Venture Nominees, Ltd., a United
              Kingdom corporation, APA/Fostin Pennsylvania Venture Capital Fund,
              L.P.,  a New York limited  partnership,  11313 Yukon Ltd., a Yukon
              corporation,  George Abi Zeid, Fortune Partner Investments Ltd., a
              British Virgin Islands  corporation,  Gold Chalet Overseas Ltd., a
              British Virgin Islands corporation,  Barclay Holdings Corporation,
              a British Virgin Islands corporation, Zeev Remez, Ian Wilder, Paul
              Leslie  Hammond,  Roy B.  Andersen,  Jr.,  Stuart S. Levy,  Max A.
              Slifer and Dennis Schmaltz.(*)

       10.17  System  Agreement,  dated May 2,  1992,  between  the  Registrant,
              Eurofax and David Epstein.(**)

       10.18  Put and Call  Option  Agreement,  dated as of December  15,  1993,
              among the  Registrant,  APAX,  Olivier de  Puymorin  and  Xpedite,
              S.A.(**)

       10.19  System and  Marketing  Agreement,  dated as of January  29,  1993,
              between  the  Registrant  and  Xpedite  Systems,   Ltd.  ("Xpedite
              UK").(**)

       10.20  Put and Call  Option  Agreement,  dated  as of  January  29,  1993
              ("Xpedite  UK  Option  Agreement"),  among  the  Registrant,  APAX
              Partners  &  Co.   Ventures   Limited   ("APAX"),   David  Proctor
              ("Proctor") and Xpedite UK.(**)

       10.21  Amendment  to  Xpedite  UK Option  Agreement,  dated as of July 6,
              1995, among the Registrant, APAX, Proctor and Xpedite UK.(****)

       10.22  Letter  Agreement,  dated as of March 1, 1996,  between Xpedite UK
              and the Registrant.(****)

       10.23  Form of  Indemnification  Agreement between the Registrant and its
              Directors and Officers.(**)

       10.24  System and Marketing Agreement, dated as of June 24, 1994, between
              the Registrant and Xpedite Systems GmbH ("Xpedite Germany").(***)

       10.25  Shareholder Agreement,  dated June 24, 1994, among the Registrant,
              APA  Expert  Beteiligungsgesellschaft  GmbH  ("APA  Expert"),  Dr.
              Norbert Posch, Rudolph Achhammer, Horst Waltemathe, Nigel Hall and
              Xpedite Vertriebs GmbH (to be renamed Xpedite Systems, GmbH).(***)

       10.26  Option  Agreement,  dated June 24, 1994  ("Xpedite  Germany Option
              Agreement"), among the Registrant, APA Expert, APA German European
              Ventures L.P., Dr. Norbert Posch,  Xpedite Vertriebs GmbH, Rudolph
              Achhammer, Horst Waltemathe, and Nigel Hall.(***)


                                       47

<PAGE>

     EXHIBIT
       NO.                          DESCRIPTION OF EXHIBIT
    ---------                       ----------------------

       10.27  Amendment to Option Agreement,  dated November 16, 1995, among the
              Registrant,  APA Expert,  APA German  European  Ventures L.P., Dr.
              Norbert  Posch,   Xpedite   Germany,   Rudolf   Achhammer,   Horst
              Waltemathe, Nigel Hall, Hermann J. Karbaum, Holger Martens, Dieter
              Naudert and Heinz Schon.(****)

       10.28  Settlement Agreement, Release and Sixth Amendment to System Supply
              Agreement,  dated as of July 13, 1994,  between the Registrant and
              Cable &  Wireless,  Inc.  (formerly  known  as  Cable  &  Wireless
              Communications, Inc.). (***)

       10.29  Credit  Agreement,  dated  as of  November  20,  1995,  among  the
              Registrant,  Banque Indosuez, New York Branch ("Indosuez") and the
              other  lending  institutions  listed  in  Exhibit I  thereto,  and
              Indosuez, as Agent.(****)

       10.30  Form of Officers' Contingent Stock Option Plan.

       10.31  Form of Non-Employee Directors' Warrant Plan.

       10.32  Shareholders   Agreement,   dated  January  31,  1997,  among  the
              Registrant  and  certain   shareholders   of  the  Company  owning
              approximately  34% of the issued and  outstanding  common stock of
              the Company.

       21.1   Subsidiaries of the Registrant.

       23.1   Consent of Ernst & Young LLP.

       23.2   Report of Ernst & Young LLP.

       27     Financial Data Schedule

-------------------------
(*)       Incorporated by reference to the  Registrant's  Current Report on Form
          8-K, dated as of November 20, 1995, as amended.

(**)      Incorporated by reference to the Registrant's  Registration  Statement
          on Form S-1,  Registration  No.  33-73258,  originally  filed with the
          Securities   and  Exchange   Commission   on  December  22,  1993,  as
          subsequently amended, and declared effective on February 11, 1994.

(***)     Incorporated  by reference to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 1994.

(****)    Incorporated  by reference to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 1995.

(*****)   Incorporated by reference to the Registrant's  Registration  Statement
          on Form S-3,  Registration  No.  333-08265,  originally filed with the
          Securities and Exchange  Commission on July 17, 1996, as  subsequently
          amended, and declared effective on August 15, 1996.


     (b)  REPORTS ON FORM 8-K

     No Reports on Form 8-K have been filed during the fourth quarter of 1996.

                                       48

<PAGE>


                                   SIGNATURES

          Pursuant to the  requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on March
28, 1997.


                                     XPEDITE SYSTEMS, INC.


                                     By: /S/ ROY B. ANDERSEN, JR.
                                              Roy B. Andersen, Jr.
                                              President, Chief Executive Officer
                                              and Director


     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

             SIGNATURE               TITLE                            DATE
             ----------              ------                          -------

     /S/ ROY B. ANDERSEN, JR.      President, Chief               March 28, 1997
-------------------------------    Executive Officer and
       Roy B. Andersen, Jr.        Director (Principle
                                   Executive Officer)

       /S/ ROBERT S. VATERS        Executive Vice President,      March 28, 1997
-------------------------------    Finance, Chief Financial
         Robert S. Vaters          Officer and Secretary
                                   (Principal Accounting and
                                   Financial Officer)
                                   
         /S/ JOHN C. BAKER         Director                       March 28, 1997
-------------------------------
           John C. Baker

         /S/ DAVID EPSTEIN         Director                       March 28, 1997
-------------------------------
           David Epstein

        /S/ ROBERT CHEFITZ         Director                       March 28, 1997
-------------------------------
          Robert Chefitz

      /S/ PHILIP A. CAMPBELL       Director                       March 28, 1997
-------------------------------
        Philip A. Campbell



<PAGE>



                     INDEX TO FINANCIAL STATEMENT SCHEDULES


SUPPLEMENTAL SCHEDULES


II.  Valuation and  qualifying  accounts for the years ended  December 31, 1994,
     1995 and 1996.


---------------------------

Schedules  other than the schedule  listed above have been omitted  because they
are not applicable or not required,  or because the  information is shown in the
Consolidated Financial Statements or the Notes thereto.

                                       S-1

<PAGE>


<TABLE>
<CAPTION>
                                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                                    BALANCE AT     CHARGED TO        
                                                    BEGINNING      COSTS AND                      BALANCE AT 
              DESCRIPTION                           OF PERIOD      EXPENSES      DEDUCTIONS(1)  END OF PERIOD
              ------------                         -----------  --------------   ------------   -------------
<S>                                                <C>          <C>              <C>            <C>           
YEAR ENDED DECEMBER 31, 1996:
Reserve for Allowances and Doubtful Accounts       $  (993,374) $   (3,434,032)  $  2,576,834   $  (1,850,572)
                                                   ===========  ==============   ============   =============

YEAR ENDED DECEMBER 31, 1995:
Reserve for Allowances and Doubtful Accounts       $  (548,593) $   (1,605,752)  $  1,160,971   $    (993,374)
                                                   ===========  ==============   ============   =============

YEAR ENDED DECEMBER 31, 1994:
Reserve for Allowances and Doubtful Accounts       $  (401,657) $   (1,377,314)  $  1,230,378   $    (548,593)
                                                   ===========  ==============   ============   =============
</TABLE>



---------------------------

(1) These  deductions  relate to the write-off of accounts and credits issued to
customers.

                                       S-2

<PAGE>



                                  EXHIBIT INDEX


EXHIBIT                                                          
  NO.                  DESCRIPTION OF EXHIBIT                    
--------               ---------------------                    



2.1  Agreement and Plan of Merger,  dated as of November 20,
     1995,  among the Registrant,  SGC Acquisition  Corp., a
     Delaware  corporation,  and Swift Global Communications
     Inc., a Delaware corporation.(*)

2.2  Stock  Purchase  Agreement,  dated as of  November  20,
     1995, among the Registrant, ViTel International Holding
     Company,  Inc., a Delaware corporation  ("ViTel"),  and
     the stockholders of ViTel identified therein.(*)

2.3  Stock  Purchase  Agreement,  dated as of  November  20,
     1995, among the Registrant,  Comwave Communications AG,
     a  Swiss  corporation   ("Comwave"),   and  Computainer
     Systems   (Global)   Inc.,  a  British  Virgin  Islands
     corporation   which   was  the  sole   shareholder   of
     Comwave.(*)

3.1  Amended and Restated  Certificate of  Incorporation  of
     the Registrant.

3.2  Amended and Restated By-laws of the Registrant.(**)

4.1  Specimen Certificate for Common Stock.(**)

10.1 Lease  Agreement,  dated  August 3, 1988,  between  the
     Registrant and Mid-Atlantic Industrial Co.(**)

10.2 Lease  Agreement,  dated June __, 1990,  as modified on
     August 3, 1990, between the Registrant and Mid-Atlantic
     Industrial Co.(**)

10.3 Form  of  Lease   Extension   Agreement   between   the
     Registrant and Mid-Atlantic Industrial Co.(**)

10.4 Agreement of Lease,  dated as of June 25, 1986, between
     Swift    Global    Communications    Inc.    and    997
     Partners.(****)

10.5 Sublease Agreement,  dated as of March 1, 1991, between
     Swift  Global   Communications   Inc.  and  Essilor  of
     America, Inc.(****)

10.6 Office  Building  Lease,  dated as of  March  2,  1987,
     between ViTel International,  Ltd. and Shoreline Office
     Center Limited Partnership ("Shoreline"), together with
     (i) Lease  Amendment,  dated as of  November  1,  1990,
     between ViTel  International,  Inc. and Shoreline,  and
     (ii)  Second  Amendment,  dated as of December 2, 1993,
     between ViTel International, Inc. and Shoreline.(****)

10.7 Employment  Agreement,  dated October 1, 1988,  between
     the Registrant and Roy B. Andersen, Jr.(**)

10.8 Employment  Agreement,  dated October 1, 1988,  between
     the Registrant and Dennis Schmaltz.(**)

10.9 Employment  Agreement,  dated May 1, 1990,  between the
     Registrant and Max Slifer.(**)


                             E-1

<PAGE>



EXHIBIT                                                          
  NO.                  DESCRIPTION OF EXHIBIT                    
--------               ---------------------                    

10.10  Employment  Agreement,  dated June 27, 1996,  between
       the Registrant and Robert S. Vaters.(*****)

10.11  Employment Agreement,  dated as of November 20, 1995,
       between the Registrant and George Abi Zeid.(****)

10.12  1992 Incentive Stock Option Plan.(**)

10.13  1993 Incentive Stock Option Plan.(**)

10.14  1996 Incentive Stock Option Plan.(****)

10.15  Stock Purchase Agreement,  dated as of June 12, 1992,
       among  the  Registrant,  Robert  A.  Epstein,  Stuart
       Epstein,  David  Epstein,  APA Excelsior  III,  L.P.,
       Coutts  &  Co.  (Jersey),  Ltd.,  Custodian  for  APA
       Excelsior  III/Offshore,  L.P., CIN Venture Nominees,
       Ltd.  and  APA/Fostin  Pennsylvania  Venture  Capital
       Fund.(**)

10.16  Shareholders  Agreement,  dated  as of  November  20,
       1995,  among the  Registrant,  David Epstein,  Stuart
       Epstein,  Robert Epstein,  APA Excelsior III, L.P., a
       Delaware limited partnership,  Coutts & Co. (Jersey),
       Custodian  for APA  Excelsior  III/Offshore,  L.P., a
       Channel Islands  corporation,  CIN Venture  Nominees,
       Ltd.,  a  United  Kingdom   corporation,   APA/Fostin
       Pennsylvania  Venture Capital Fund,  L.P., a New York
       limited  partnership,   11313  Yukon  Ltd.,  a  Yukon
       corporation,   George  Abi  Zeid,   Fortune   Partner
       Investments    Ltd.,   a   British   Virgin   Islands
       corporation,  Gold Chalet  Overseas  Ltd.,  a British
       Virgin   Islands   corporation,    Barclay   Holdings
       Corporation,  a British Virgin  Islands  corporation,
       Zeev Remez, Ian Wilder,  Paul Leslie Hammond,  Roy B.
       Andersen,  Jr.,  Stuart S.  Levy,  Max A.  Slifer and
       Dennis Schmaltz.(*)

10.17  System  Agreement,  dated May 2,  1992,  between  the
       Registrant, Eurofax and David Epstein.(**)

10.18  Put and Call Option  Agreement,  dated as of December
       15,  1993,  among the  Registrant,  APAX,  Olivier de
       Puymorin and Xpedite, S.A.(**)

10.19  System and Marketing  Agreement,  dated as of January
       29, 1993, between the Registrant and Xpedite Systems,
       Ltd. ("Xpedite UK").(**)

10.20  Put and Call  Option  Agreement,  dated as of January
       29, 1993 ("Xpedite UK Option  Agreement"),  among the
       Registrant,  APAX  Partners  & Co.  Ventures  Limited
       ("APAX"),   David  Proctor  ("Proctor")  and  Xpedite
       UK.(**)

10.21  Amendment to Xpedite UK Option Agreement, dated as of
       July 6, 1995, among the Registrant, APAX, Proctor and
       Xpedite UK.(****)

10.22  Letter Agreement,  dated as of March 1, 1996, between
       Xpedite UK and the Registrant.(****)

10.23  Form  of   Indemnification   Agreement   between  the
       Registrant and its Directors and Officers.(**)

10.24  System and Marketing Agreement,  dated as of June 24,
       1994, between the Registrant and Xpedite Systems GmbH
       ("Xpedite Germany").(***)


                             E-2

<PAGE>


EXHIBIT                                                         
  NO.                  DESCRIPTION OF EXHIBIT                   
--------               ---------------------                    

10.25  Shareholder Agreement, dated June 24, 1994, among the
       Registrant, APA Expert  Beteiligungsgesellschaft GmbH
       ("APA Expert"), Dr. Norbert Posch, Rudolph Achhammer,
       Horst  Waltemathe,  Nigel Hall and Xpedite  Vertriebs
       GmbH (to be renamed Xpedite Systems, GmbH).(***)

10.26  Option  Agreement,  dated  June  24,  1994  ("Xpedite
       Germany Option Agreement"), among the Registrant, APA
       Expert,   APA  German  European  Ventures  L.P.,  Dr.
       Norbert  Posch,   Xpedite  Vertriebs  GmbH,   Rudolph
       Achhammer, Horst Waltemathe, and Nigel Hall. (***)

10.27  Amendment  to Option  Agreement,  dated  November 16,
       1995,  among the Registrant,  APA Expert,  APA German
       European  Ventures L.P.,  Dr. Norbert Posch,  Xpedite
       Germany,  Rudolf Achhammer,  Horst Waltemathe,  Nigel
       Hall,  Hermann J.  Karbaum,  Holger  Martens,  Dieter
       Naudert and Heinz Schon.(****)

10.28  Settlement Agreement,  Release and Sixth Amendment to
       System Supply  Agreement,  dated as of July 13, 1994,
       between the  Registrant  and Cable &  Wireless,  Inc.
       (formerly  known as Cable & Wireless  Communications,
       Inc.). (***)

10.29  Credit  Agreement,  dated as of  November  20,  1995,
       among  the  Registrant,  Banque  Indosuez,  New  York
       Branch    ("Indosuez")    and   the   other   lending
       institutions   listed  in  Exhibit  I  thereto,   and
       Indosuez, as Agent.(****)

10.30  Form of Officer's Contingent Stock Option Plan.

10.31  Form of Non-Employee Directors' Warrant Plan.

10.32  Shareholders Agreement, dated January 31, 1997, among
       the  Registrant  and  certain   shareholders  of  the
       Company  owning  approximately  34% of the issued and
       outstanding common stock of the Company.

21.1   Subsidiaries of the Registrant.

23.1   Consent of Ernst & Young LLP.

23.2   Report of Ernst & Young LLP.

27     Financial Data Schedule

-------------------------

(*)       Incorporated by reference to the  Registrant's  Current Report on Form
          8-K, dated as of November 20, 1995, as amended.

(**)      Incorporated by reference to the Registrant's  Registration  Statement
          on Form S-1,  Registration  No.  33-73258,  originally  filed with the
          Securities   and  Exchange   Commission   on  December  22,  1993,  as
          subsequently amended, and declared effective on February 11, 1994.

(***)     Incorporated  by reference to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 1994.

(****)    Incorporated  by reference to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 1995.

(*****)   Incorporated by reference to the Registrant's  Registration  Statement
          on Form S-3,  Registration  No.  333-08265,  originally filed with the
          Securities and Exchange  Commission on July 17, 1996, as  subsequently
          amended, and declared effective on August 15, 1996.

                                       E-3