The  following  items  were  the
                                             subject  of  a  Form 12b-25 and are
                                             included  herein:  Item  1, Item 6,
                                             Item  7, Item 8, Item 14- Financial
                                             Statements.  In  addition,  certain
                                             additional  Exhibits  have  been
                                             included (Exhibit Nos. 10.69-10.74,
                                             23.1  and  23.2).

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ______________
                                    FORM 10-KA

                                 AMENDMENT NO. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                                      1934
                   For the fiscal year ended December 31, 2001
                           Commission File No. 0-26728

                           TALK AMERICA HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)
              DELAWARE                              23-2827736
              --------                              ----------
    (State or other jurisdiction of             (I.R.S. Employer
     incorporation or organization)           Identification Number)

   12020 SUNRISE VALLEY DRIVE, SUITE 250             20191
           RESTON, VIRGINIA                        (zip code)
 (Address of principal executive offices)

                                 (703) 391-7500
              (Registrant's telephone number, including area code)

SECURITIES  REGISTERED  PURSUANT  TO  SECTION  12(B)  OF  THE  ACT:

        TITLE OF EACH CLASS     NAME OF EACH EXCHANGE ON WHICH REGISTERED
        -------------------     -----------------------------------------
                None                       Not applicable

SECURITIES  REGISTERED  PURSUANT  TO  SECTION  12(G)  OF  THE  ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
        RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
                                (Title of class)
                                ----------------

     Indicate  by  check mark whether the registrant (1) has filed all documents
and  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 of this
Form  10-K.  [  ]

     As  of  March  29, 2002, the aggregate market value of voting stock held by
non-affiliates  of  the  registrant,  based  on  the average of the high and low
prices  of  the Common Stock on March 29, 2002 of $0.43 per share as reported on
the  Nasdaq  National  Market,  was  approximately $34,740,238.36 (calculated by
excluding solely for purposes of this form outstanding shares owned by directors
and  executive  officers).

     As  of March 29, 2002, the registrant had issued and outstanding 81,652,721
shares  of  its  Common  Stock,  par  value  $.01  per  share.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

<PAGE>


                           TALK AMERICA HOLDINGS, INC.

                               INDEX TO FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2001

<TABLE>
<CAPTION>

ITEM                                                                      PAGE
NO.                                                                        NO.
---                                                                        ---

<S>                                                                         <C>
                            PART I
 1. Business                                                                1
 2. Properties                                                              12
 3. Legal Proceedings                                                       12
 4. Submission of Matters to a Vote of Security Holders                     12

                           PART II
 5. Market for Registrant's Common Equity and Related Stockholder  Matters  13
 6. Selected  Consolidated  Financial  Data                                 14
 7. Management's  Discussion  and  Analysis  of Financial  Condition
    and  Results  of  Operations                                            15
 7A. Quantitative and Qualitative Disclosure About Market Risk              30
 8.  Financial  Statements  and  Supplementary  Data                        31
 9. Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure                                                61

                           PART III
10. Directors and Executive Officers of the Registrant                      61
11. Executive Compensation                                                  64
12. Security Ownership of Certain Beneficial Owners and Management          67
13. Certain Relationships and Related Transactions                          68

                           PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K         68

</TABLE>
                                        i
<PAGE>

                                     PART I

ITEM  1.  BUSINESS

OVERVIEW

     Talk  America  Holdings,  Inc.,  through  its subsidiaries (the "Company"),
provides  local  and long distance telecommunication services to residential and
small  business  customers  throughout  the  United  States.  The  Company  has
developed  integrated  order  processing,  provisioning,  billing,  payment,
collection,  customer service and information systems that enable the Company to
offer  and deliver high-quality, competitively priced telecommunication services
to  customers.

     The  Company's  telecommunication  services offerings primarily include the
bundled  service  offering  of local and long distance voice services, which are
billed to customers in one combined invoice.  Local phone services include local
dial  tone  and unlimited local calling with a variety of features such as voice
mail and call waiting.  Long distance phone services include traditional 1+ long
distance,  international  and  calling  cards.  The  Company  uses the unbundled
network  platform  ("UNE-P") incumbent local exchange carriers ("ILECs") network
to  provide  local services and the Company's nationwide network to provide long
distance  services.  The Company attracts new customers through direct marketing
channels,  advertising,  agent  and referral programs and marketing arrangements
with  business  partners.

     Talk  America  Inc.  (formerly, Talk.com Holding Corp. and Tel-Save, Inc.),
the  Company's  predecessor  and  now  its  principal  operating subsidiary, was
incorporated  in  Pennsylvania in May 1989. The Company was incorporated in June
1995.  The address of the Company's principal current executive offices is 12020
Sunrise  Valley  Drive,  Suite  250,  Reston,  Virginia 20190, and its telephone
number  is  (703)  391-7500.  The Company's web address is www.talk.com.  Unless
the  context  otherwise  requires,  references  to  the  "Company"  or to  "Talk
America"  refer  to  Talk  America  Holdings,  Inc.  and  its  subsidiaries.

COMPANY  STRATEGY

     By  the  end  of  1999, the Company decided to expand beyond its historical
long  distance  business  and  utilize  UNE-P  to  pursue  the  large  local
telecommunications  market  and  diversify  its  product  portfolio  through the
bundling  of  local  service  with its core long distance service offerings.  In
connection  therewith,  the  Company  acquired  Access  One Communications Corp.
("Access  One")  in  August  2000.  Access  One  was  a  private,  local
telecommunication  services  provider  to nine states in the southeastern United
States.  The  Company  encountered  a  number  of  operational  and  business
difficulties  during  the  rollout  of  the  Company's bundled service offering.
During  2001,  the  Company  worked  to  address  the operational issues that it
encountered  and  focused  on  improving  the  overall efficiency of the bundled
business  model.

     The  Company  has been managing its business to generate free cash flow and
to  build  a highly scaleable nationwide platform to provision, bill and service
bundled  customers.  The  Company has lowered product pricing for both local and
long distance services and is focusing on delivering better service and value to
customers.  In  conjunction with this pricing change and although the Company is
now  operational  with  respect  to its local service offering in 25 states, the
Company has limited the active marketing of its bundled services to those states
where  the  Company  believes  it  can  currently offer services to customers at
competitive prices -- Pennsylvania, Michigan, Ohio, Texas, Georgia, Kentucky and
Louisiana.  The  Company  will  actively  market  to  additional  states  as the
Company's  pricing  and  cost  structure  permit  it  to offer services in those
states.

     Currently,  the  Company's  top  operating priorities are to lower bad debt
expense,  reduce  customer  turnover,  or  "churn,"  and  lower  its  customer
acquisition  costs.  The Company has improved the credit quality of its existing
customer  base  through credit scoring.  The Company has slowed its growth until
it  believes  it  has  achieved  operational  improvements.

FINANCIAL  RESTRUCTURING

     Beginning  in  the  third  quarter  of  2001,  the  Company embarked upon a
comprehensive  restructuring  of  its  financial  obligations  with  (i) America
Online,  Inc. ("AOL"), (ii) MCG Capital Corporation, the Company's senior lender
("MCG"),  and (iii) the holders of the Company's convertible subordinated notes.

                                        1
<PAGE>

     AOL  RESTRUCTURING

     In September, 2001, the Company restructured its financial obligations with
AOL  that  arose under the 1999 Investment Agreement between the Company and AOL
and  ended its marketing relationship with AOL effective September 30, 2001. The
Company  began  marketing  and  providing  telecommunication  services  to  AOL
subscribers  under  the Company's and AOL's brand in 1997. In January, 1999, AOL
made  a  $55  million investment in the Company at $19 per share and the Company
provided  AOL  with  the  ability  to protect the value of that investment for a
period  of time, permitting AOL, at its election, to require the Company to make
certain  "make  whole"  payments  to  AOL  on or before September 30, 2001. As a
result  of the September 2001 restructuring and the termination of the marketing
agreement,  the  Company issued to AOL $34 million of its 8% Secured Convertible
Notes due September 2011 ("2011 Convertible Notes") in exchange for a release of
the Company's reimbursement obligations under the 1999 Investment Agreement. The
Company  also issued 3,078,628 additional shares of its common stock in exchange
for  warrants  to  purchase  the  Company's  common  stock  held  by AOL and the
Company's  related obligations under the 1999 Investment Agreement to repurchase
those  warrants,  bringing  the  total  number of shares of the Company's common
stock  held  by  AOL  to  7,200,000.

     SECURED  CREDIT  FACILITY  RESTRUCTURING

     By  amendments  on  February  12,  2002,  and  April  3,  2002, the Company
restructured  certain  portions  of  its Credit Facility Agreement with MCG, the
Consulting  Agreement,  and  other  loan  documents  between  the  parties. This
restructuring  amended  the  financial  covenants  for  2002  through 2005 to be
consistent  with  the Company's internal projections. As of and after January 1,
2002, the interest rate payable on the loans under the Credit Facility Agreement
was  raised  to  LIBOR  plus  7.0% for portions of the loan accruing interest at
LIBOR  and  the Prime Rate plus 6.0% for portions of the loans accruing interest
at  the Prime Rate. The restructuring also added mandatory prepayment provisions
if  the  Company  used  a  total of $10 million or more of cash to repurchase or
otherwise  prepay  its  other debt obligations, including the existing notes and
the 2011 Convertible Notes, and a provision effectively requiring the Company to
elect  to  pay in kind, rather than cash, interest on its 2011 Convertible Notes
and  its new 12% Notes to the fullest extent it is permitted to do so under such
notes.  In  addition,  the Company issued 200,000 shares of its stock to MCG and
agreed  to  register  such  shares in the future. The Credit Facility Agreement,
which is guaranteed by the Company, is senior debt and is secured by a pledge of
the  Company's  subsidiaries'  assets.

     CONVERTIBLE SUBORDINATED NOTES RESTRUCTURING

     As  of  December  31,  2001,  the  Company had an aggregate amount of $61.8
million  in 4 1/2% Convertible Subordinated Notes due in September 2002 ("4 1/2%
Notes")  and $18.1 million in 5% Convertible Subordinated Notes due in 2004 ("5%
Notes").  The  Company  decided to offer to exchange the 4 1/2% Notes and the 5%
Notes  ("Existing  Notes") for new notes principally to extend the time that the
Company  has  to  pay  the  Existing  Notes  as part of the Company's efforts to
restructure  its  debt  obligations, and maintain sufficient cash to conduct its
operations.  On  February  22, 2002, the Company initiated an Exchange Offer and
Consent  Solicitation  ("the  Exchange  Offers")  for  all  of  the  Company's
outstanding  4  1/2% Notes and 5% Notes. On April 4, 2002, the Company completed
the  exchange  for  $57.9  million  principal amount, or 94% of the total amount
outstanding, of its 4 1/2% Notes that were tendered for exchange in the Exchange
Offers and the approximately $17.4 million principal amount, or 95% of the total
amount  outstanding,  of  its  5%  Notes  that were tendered for exchange in the
Exchange Offers. The Company issued $53.2 million in principal amount of its new
12%  Senior  Subordinated  PIK  Notes due 2007 ("12% Notes") and $2.8 million in
principal  amount  of  its new 8% Convertible Senior Subordinated Notes due 2007
("8%  Notes")  (convertible  into  common  stock  at  $5.00 per share), and paid
approximately  $0.5  million in cash, in exchange for the tendered 4 1/2% Notes.
Interest  on  the new 12% Notes is payable in cash, except that the Company may,
at its election, pay up to one-third of the interest due on any interest payment
date  through  and  including the August 15, 2004 interest payment in additional
12%  Notes. The Company also issued $17.4 million in principal amount of its 12%
Notes  in  exchange for the tendered 5% Notes. In addition, the holders of the 4
1/2% Notes and 5% Notes consented to amend the respective indentures under which
the  Existing  Notes  were  issued to eliminate from the indentures the right to
require  the  Company to repurchase such notes should the Company's common stock
cease  to  be  approved for trading on an established automated over-the-counter
trading  market  in  the United States. After completion of the Exchange Offers,
there  were  outstanding  approximately  $70.65  million principal amount of the
Company's 12% Senior Subordinated PIK Notes due 2007, approximately $2.8 million
principal  amount  of the Company's 8% Convertible Senior Subordinated Notes due
2007,  approximately  $3.9  million  principal  amount  of  the 4 1/2% Notes due
September  2002  and approximately $0.7 million principal amount of the 5% Notes
due  2004.


                                        2
<PAGE>

LOCAL  AND  LONG  DISTANCE  TELECOMMUNICATION  SERVICES

     The  Company offers both local and long distance telecommunication services
to residential and small business customers. The Company is focused on providing
competitively  priced,  high quality and reliable voice services to high quality
customers.  The  Company  offers local service utilizing the UNE-P of the ILECs,
and  long distance service principally carried over its own network. The Company
believes  that  it offers and provides consumer value through competitive rates,
features  and  customer  service.  The Company's bundled local service generally
includes:  unlimited  local  usage, free member-to-member calling, long distance
service  and  calling  cards, one convenient invoice available both in paper and
electronically,  and  choices  among  the  following  features:

          900  Call  Blocking                  Calling  Name  Display
          976  Call  Restriction               Custom  Toll  Restriction
          Anonymous  Call  Reject              Distinctive  Ring
          Auto  Redial                         Priority  Call
          Automatic  Callback                  Priority  Ringing
          Call  Forwarding                     Privacy  Manager
          Call  Block                          Remote  Call  Forwarding
          Call  Block  Denial                  Repeat  Dialing
          Call  Hold                           Return  Call  (  *69  )
          Call  Return                         Return  Call  Block
          Call  Trace                          Ringmaster
          Call  Trace  Denial                  Speed Calling / Speed Dialing
          Call  Waiting                        Three  Way  Calling
          Caller  ID                           Touch  Tone  Service
                                               Voice  Mail


     LOCAL

     The  Company  uses the  unbundled network element platform, or UNE-P, from,
and,  to  a  lesser  extent,  resale agreements with, the ILECs to provide local
telephone  services  to  its  customers  in 25 states. The Company uses UNE-P to
provide  local  telecommunication  services  primarily  to residential and small
business  customers,  and  the  Company expects that its experience in providing
local  telephone  service  will  facilitate  nationwide delivery of this product
where  the  Company believes it can offer value to customers through services at
competitive  prices.

     The  provision  of  local  telephone service through use of UNE-P generally
provides  the  Company  with  certain  advantages, including: (i) offering local
telephone  service  to  customers  located  virtually anywhere without deploying
costly  local switching facilities; (ii) minimizing current capital expenditures
and  at the same time maintaining network and service design flexibility for the
next generation of telecommunication technology; (iii) providing practically the
same  services  as  the  ILECs;  (iv)  the  potential  for  higher  margins than
comparable  service  offered  through resale agreements; and (v) eliminating the
requirement  to  pay  certain  local  network access fees while collecting local
network  access  fees  for  calls  delivered  to  the  Company's local telephone
customers.  In  some  instances,  however,  such  as customers having high usage
volumes,  resale  may  provide the Company with more attractive pricing than the
use  of  UNE-P.

     UNE-P  became  available  to  the Company and other carriers on November 5,
1999,  when  the  Federal  Communications  Commission  ("FCC") released an order
reconfirming  that  ILECs nationwide must offer to competitors, in an individual
or combined form, a series of unbundled network elements, or UNEs, that comprise
the  most  important  facilities,  features,  functions  and  capabilities of an
incumbent local carrier's network.  The price at which such elements are offered
must  correspond  to  the forward-looking cost of providing these elements. When
offered in the combination known as UNE-P, these components include the loop and
switching  elements  needed  to  provide  local telephone service to a customer.
Although  ILECs  have  a  general obligation to provide UNE-P, the obligation is
limited in the central business districts of the top 50 metropolitan statistical
areas  of the nation. In such markets, the obligation to provide UNE-P currently
is  limited  to  carriers serving customers with less than four telephone lines.
Because  the  Company's  current  focus  is  on  residential  and small business
markets, the restriction on UNE-P availability in the central business districts
of  the top 50 metropolitan statistical areas has not been a major impediment to
its  operations  to  date.  The  FCC is currently reviewing whether to expand or
further  restrict the availability of UNE-P and the availability of combinations
of  network  elements,  including UNE-P, is being challenged in the courts.  See
"Regulation."

                                        3
<PAGE>

     The  Company's  UNE-P  strategy  presents several risks. In providing local
telephone  service  using  UNE-P,  the  Company must rely on the availability of
network  elements  in  combined form from ILECs, the Company's main competitors.
The  continued ability to obtain those network elements depends on FCC and state
regulatory  rulings  that require ILECs to make UNE-P available to carriers.  If
those rules were modified or eliminated, the ability to provide local service to
customers  using UNE-P could be materially adversely affected.  The FCC has been
asked by several incumbent telephone companies to reconsider its order directing
them  to  provide  UNE-P. In addition, ILECs have appealed the FCC's requirement
that they provide UNE-P to a federal appeals court, asking the court to overturn
the  FCC's  decision.  See  "Regulation."

     Changes  in the cost of the network elements that comprise UNE-P also could
materially  adversely  affect  the  viability  of  using  UNE-P to provide local
service.  Last  year,  a  U.S.  Court  of  Appeals partially set aside FCC rules
prescribing how ILECs must set rates for network elements, including UNE-P. That
decision,  which  is  on appeal to the U.S. Supreme Court, could ultimately lead
ILECs  to  increase the prices of network elements, which would adversely impact
the  Company.  Indeed,  before the U.S. Supreme Court, ILECs are asking that the
FCC's  requirement  that  network  element  prices  be established using forward
looking  costs be reversed entirely.  If successful, such an appeal likely would
lead  to a substantial increase in network element prices.  If the court rejects
the FCC's pricing methodology and that methodology ultimately is replaced with a
methodology  that  imposes  higher  rates  for  network  elements,  the economic
efficiency  of  UNE-P  would  suffer.  See,  "Regulation."  Similarly,  state
commissions  have  the  authority  to  review  and  modify  the  prices paid for
unbundled network elements, and a state commission decision to change the prices
of  the  local loop and switching elements could materially affect the Company's
ability  to  use  UNE-P to provide local service. In addition, state commissions
currently  are implementing FCC rules that require incumbent telephone companies
to  file  rates  for UNE-Ps that are deaveraged by geographic density zone. Such
geographic  rate deaveraging could result in rates for services using UNE-P that
are  unattractive  or  uneconomic  in  less  dense  geographic  areas.

     The Company believes that UNE-P currently provides it with a cost-effective
means  of  adding local service to its existing long distance product offerings.
The Company believes that its operational systems are scalable and will allow it
to  continue  to  expand  its  service  offerings in the local telecommunication
market.

     LONG  DISTANCE

     The  Company  provides  1+  long  distance  telecommunication services on a
stand-alone  basis and bundled with the Company's local services.  The Company's
long  distance  voice services include intrastate, interstate, international and
calling  cards,  at rates that are competitive within the industry.  The Company
generally  uses  its  own  nationwide  long distance network to provide services
directly  to  its  customers.  As  of December 31, 2001, the Company provisioned
over  its  network  approximately  95%  of  the  lines  using  its long distance
services.

     The  Company's  network  is  comprised of equipment and facilities that are
either  owned  or  leased  by  the  Company.  The  Company contracts for certain
telecommunication  services with a variety of other carriers.  The Company owns,
operates  and  maintains  five  Lucent 5ESS-2000 switches in its network.  These
switches  are  generally  considered  extremely reliable and feature the Digital
Networking  Unit--SONET  technology.  The Digital Networking Unit is a switching
interface  that  is designed to increase the reliability of the 5ESS-2000 and to
provide  much  greater  capacity  in  a  significantly  smaller  footprint.

     The  switches  are  connected to each other by connection lines and digital
cross-connect  equipment  that  the  Company  owns  or  leases.  See  "Service
Agreements with Other Carriers." The Company also has installed lines to connect
its  long distance switches to switches owned by various local telecommunication
service carriers. The Company is responsible for maintaining these lines and has
entered  into  a contract with GTE with respect to the monitoring, servicing and
maintenance  of  this  equipment.

     The  access  charges  that  the  Company pays to local exchange carriers to
connect  customers  to  the Company's network represent a substantial portion of
the total cost of providing long distance services over its network. As a result
of  regulatory  changes  and the increasing competitiveness of the local service
market,  it  is  expected  that  access  charges  will decrease, but there is no
assurance  that  this  decrease will occur.  Additionally, savings from any such
decreases  may be offset by universal service contributions imposed on carriers,
including  the

                                        4
<PAGE>

Company,  and  further  offset  by  a  reduction  in the access charges that the
Company  receives  from  carriers.  See  "Competition"  and  "Regulation."

     In  addition,  the  Company  maintains  contracts  with other carriers that
provide  the  Company with a variety of other services.  See "Service Agreements
with  Other  Carriers."  These contracts include services for assisting with the
overflow  of  telecommunication  traffic  over  its  network, for carrying calls
internationally  and  for  providing  directory  assistance  and  other operator
assisted calls. The combination of these contracts permits the Company to obtain
a  particular  type  of  service  from more than one carrier at a given time and
gives  the  Company  the  flexibility  to  seek  the  best rates available for a
particular  service  at  a  given  time.

     Since  the  Company operates its own switches, it is subject to the risk of
significant  interruption.  Fires or natural disasters, for example, could cause
damage  to  the  Company's  switching  equipment  or  to transmission facilities
connecting  its  switches.  Any  interruption in the Company's services over its
network  caused  by  such  damage  could  have  a material adverse impact on the
Company's  financial condition and results of operations. In such circumstances,
the  Company  could  attempt  to  minimize  the  interruption  of its service by
carrying  traffic  through  its  overflow  and  resale  arrangements  with other
carriers.

     SERVICE  AGREEMENTS  WITH  OTHER  CARRIERS

     The  Company  historically  obtained  services  from  AT&T through multiple
contract tariffs. With the deployment of its network, the Company requires fewer
such  services  from  AT&T  to  sell its services.  The Company has entered into
contracts  with  various  other  long  distance  and  local  carriers  of
telecommunication  services  for the provision of both its network and reselling
operations  further  reducing  its  reliance  on AT&T. These services enable the
Company  to  connect the Company's switches to each other, connect the Company's
switches  to  the  switches  of  local telecommunication service carriers, carry
overflow  traffic  during  peak  calling  times, connect international calls and
provide  directory  assistance  and  other  operator  assisted  services.

     With  respect to connections to local carriers, overflow, international and
operator  assisted  services, the Company maintains contracts with more than one
carrier  for  each of these services.  The Company believes that it is no longer
dependent  upon  any  single  carrier for these services.  Currently, many price
differences  exist  in  the  market  for  purchasing these services in bulk. For
example,  one  carrier  may  offer the lowest international rates to one country
while another offers the lowest rates to a different country. Under the terms of
the Company's contracts with its various carriers, the Company is able to choose
which  services  and  in what volume (with some minimum commitments) the Company
wishes  to  obtain the services from each carrier.  This flexibility enables the
Company  to  minimize  its  costs for such services by purchasing those services
that  offer  the  Company  the  best  rates  at  a  given  time.

     In  May  2001, the Company entered into a new Master Carrier Agreement with
AT&T.  The  agreement provides the Company with a variety of services, including
transmission  facilities  to  connect  the Company's network switches as well as
services  for  international  calls, local traffic, international calling cards,
overflow  traffic  and  operator  assisted calls.  Consistent with the Company's
desire  to  expand  the  sources  of  its  network  services,  the  new contract
eliminated  a  requirement  for  the  Company  to  purchase  the majority of its
requirements for these services from AT&T and replaced it with a requirement for
the  Company to purchase minimum dollar amounts of services from AT&T during the
term  of  the  agreement.  The  Company  anticipates  that  it can satisfy these
minimum  requirements.

     Many  of  the companies in the telecommunication sector have been adversely
affected  by  recent  business  trends  and  some  have  filed  for  bankruptcy
protection.  To  the  extent  that  the  credit  quality  of  these  carriers
deteriorates  or  they  seek bankruptcy protection, the Company may have service
disruptions  and  the  transition  of  the Company's customers to its network or
another  carrier's  network  may  cause  potential  disruptions for the affected
customers'  services.


INTEGRATED  INFORMATION  SYSTEMS

     The  Company  has  developed  integrated  order  processing,  provisioning,
billing,  payment,  collection,  customer  service  and information systems that
enable  the  Company  to  offer  and  deliver high-quality, competitively priced
telecommunication  services  to  customers.  Through  dedicated  electronic
connections  with  its  long  distance

                                        5
<PAGE>

network  and  the  ILECs  from  which  the Company purchases local services, the
Company  has designed its systems to process information on a "real time" basis.
In  addition,  the  Company  processes  millions  of  call  records  each  day.

     In  2001,  the Company, in an effort to improve upon the overall efficiency
of  the  bundled business model and increase customer satisfaction, launched the
following  initiatives  with  respect  to  its  operational  support  systems:

          -    The Company developed and implemented a new proprietary automated
               order processing system ("OPS"). Since the implementation of OPS,
               the  Company  has  shortened the customer provisioning time cycle
               and  reduced  associated  costs.  Prior to submitting an order to
               provision  a  customer  to  the  Company's service, OPS instantly
               processes the customer's credit history, and, once the customer's
               credit  is  approved, the customer's service record detailing the
               customer's  existing  phone  service, is immediately verified. In
               addition,  OPS  has enabled the Company to significantly increase
               its  customer provisioning rate for qualified and verified orders
               while  reducing  the  number  of  orders that are rejected by the
               ILEC,  reducing  manual  work  requirements.

          -    The Company developed and implemented a new proprietary automated
               collections management system ("CMS") that is integrated with the
               Company's  billing  and  customer relationship management system.
               CMS increases the efficiency of the Company's collection process,
               accelerates  the  recovery  of accounts receivable and assists in
               the  retention  of  valuable  customers.

          -    The  Company  developed  a leads database system that the Company
               uses  in  the  marketing  of  its telecommunication services. The
               leads  database system enables the Company to alter telemarketing
               campaigns  to  track  areas where mass advertisements are airing,
               manage  the  bundled sales price by customer, zone and state, and
               maintain  customer  credit  information.

          -    The  Company  developed  and  implemented  improvements  to  its
               automated  service  provisioning  system,  which  enhances  the
               Company's  ability  to  add  customer  lines  to  the  Company's
               telecommunication  service  and to create and modify the features
               associated  with that particular customer's service. These system
               improvements  have cut the Company's reject rate for these orders
               in  half,  thereby  reducing  manual  work  requirements.

          -    The Company developed and implemented improvements to its billing
               system,  which enable the Company to preview and run a bill cycle
               each  day  of  the month for the many different, tailored service
               packages,  increasing  customer  satisfaction  while  minimizing
               revenue  leakage  inherent  in  the  provision  of  local
               telecommunication  service  via  UNE-P.

          -    The  Company  developed  and  implemented  improvements  to  its
               customer relationship manager system, which enables the Company's
               customer  service  representatives to access data in a real-time,
               organized  manner,  while the representative is speaking with the
               customer,  reducing  the  length  of  customer  service calls and
               improving  the  customer  experience.

     In  addition,  the  Company  maintains its own web site at www.talk.com  to
provide  for  customer  sign-up and to provide customers and potential customers
with  information  about  the Company's products and services as well as billing
information  and  customer  service.  The  Company  provides  these services and
features using the Company's web-enabled technologies that allow it to offer its
customers:

          -    Detailed  rate  schedules  and  product  and  service  related
               information.
          -    Online  sign-up  for  the  Company's  telecommunication services.
          -    Credit  card  billing.
          -    Real-time  and  24  x  7 billing services and online information,
               providing  customers  with  up  to  the hour billing information.

     With the development of the Company's advanced sign-up and billing systems,
customers  can  purchase  the  Company's telecommunication and other products or
services  while  online through the Company's own web site.  The Company employs
its  own  proprietary  provisioning  and  billing  systems  to  enable efficient
provisioning  of  a  customer,  online  billing  and  credit  card  payment. The
Company's  billing  system  enables a customer to view his or her bill online or
over  the  Internet  on a real-time basis with the call detail and cost for most
calls posted within

                                        6
<PAGE>

minutes after a customer completes a call. The Company also acquires billing and
customer  care  services  from  other  carriers  and  third  party  vendors.

     The  information functions of the Company's systems are designed to provide
easy  access to all information about a customer, including volumes and patterns
of use. This information can be used to identify emerging customer trends and to
respond  with services to meet customers' changing needs.  This information also
allows  the  Company  to  identify  unusual  or  declining  use by an individual
customer,  which  may indicate fraud or that a customer is switching its service
to  a  competitor.  FCC  rules, however, may limit the Company's use of customer
proprietary  network  information.  See  "Regulation."


SALES  AND  MARKETING

     In  2001,  the  Company's  sales  and  marketing  efforts  focused  both on
marketing  long  distance  services  and  marketing  a  bundle of local and long
distance  telecommunication  services directly to customers under its own brand.
The  Company  offers  a  bundle  of  local  and  long distance telecommunication
services  to residential and small business customers in twenty-five states, and
is  actively  marketing the bundle of local and long distance telecommunications
services  in  the  seven  states through the Company's direct marketing channels
where  the  Company  believes  that  it  is  currently able to offer services at
competitive  prices.  The  termination  of  the Company's marketing relationship
with  AOL significantly reduced the Company's marketing costs.  During 2001, the
Company  continued  the diversification of its sales and marketing by pursuing a
variety  of  marketing  channels and focusing its marketing efforts on acquiring
new customers within its targeted markets.  In addition, the Company has lowered
product  pricing  for  both  local and long distance services and is focusing on
delivering  better  service  and  value to customers.  Additional states will be
added as the Company's pricing and cost structure permit it to offer services at
competitive  prices.  The  Company ended 2001 with approximately 203,000 bundled
lines  (local  and  long distance services).  Beginning in 2002, the Company has
modified  the methodology used to calculate customer lines, excluding lines that
are  either  in,  or  expected  to be in, a disconnect cycle from the total line
count.  On  a  pro forma basis, reflecting this revised methodology, the Company
ended  2001  with  approximately  176,000  bundled  lines for December 2001.  In
addition,  the  Company  ended the year with approximately 806,000 long distance
subscribers.  The  Company  continues  to  seek  new  marketing  partners  and
arrangements  to expand both its opportunities to attract other customers to its
services  and  the  products  and  services that it offers to its customer base.

     The  Company's  marketing  efforts are now carried out through a variety of
scalable,  direct  marketing  programs,  including  inbound  and  outbound
telemarketing,  agent sales and customer referral sales, as well as advertising,
online  marketing  initiatives and through the Company's own web site located at
www.talk.com.  The  Company  also  continues  to  evaluate  marketing  channels,
including  direct  television  advertising,  that  it  believes  will enable the
Company  to  lower  its  customer  acquisition  costs.

     The  Company  also  provides,  as  a  small  and  declining  portion of its
business,  telecommunication  services  primarily  to  small  and  medium-sized
businesses  through  independent  resellers  known  as  partitions.


COMPETITION

     The   telecommunication   industry   is   highly   competitive.   Major
participants  in  the  industry  regularly  introduce new services and marketing
activities. Competition in the telecommunication industry is based upon pricing,
customer  service, billing services and perceived quality.  The Company competes
against  numerous  telecommunication  companies  that offer essentially the same
services  as those of the Company.  Many of the Company's competitors, including
the  ILECs,  are  substantially larger and have greater financial, technical and
marketing  resources  than  those  of  the  Company.  The Company's success will
depend  upon  its continued ability to provide high quality, high value services
at  prices  generally  competitive  with,  or  lower  than, those charged by the
Company's  competitors.

     The major carriers, including AT&T, Sprint Corporation, Worldcom, Inc., and
the  ILECs  have  targeted  price plans at residential customers - the Company's
primary  target  market  under  its various direct marketing channels, marketing
agreements  with  its  partners  and  its Internet offering - with significantly
simplified  rate  structures  and  with  bundles  of  local  services  with long
distance, which may lower overall local and long distance prices. Competition is
also  fierce  for  the  small  to  medium-sized businesses that the Company also
serves.  Additional  pricing pressure may also come from the introduction of new
technologies,  such  as  Internet  telephony,

                                        7
<PAGE>

which  seek  to provide voice communications at a cost below that of traditional
circuit-switched  long  distance  service.  In  addition, wireless carriers have
marketed  their services as an alternative to traditional long distance service,
further increasing competition in the long distance sector. Reductions in prices
charged  by  competitors  may  have a material adverse effect on the Company. In
addition,  the  ability of competitors to develop online billing and information
systems that are comparable to the Company's systems may have a material adverse
effect  on  the  Company.

     Consolidation  and alliances across geographic regions and in the local and
long distance market and across industry segments may also intensify competition
from  significantly  larger,  well-capitalized  carriers.

     The  entry  of the ILECs into the long distance market may further heighten
competition.  Under  the Telecommunications Act of 1996 (the "Telecommunications
Act"),  the  ILECs  were  authorized  to  provide  long  distance  service  that
originates  outside  their traditional services areas, and may gain authority to
provide  long  distance  service  that  originates  within  their  region  after
satisfying  certain  market opening conditions. While currently only Verizon and
SBC  Communications,  Inc.  have  entered  the long distance market, a number of
others  have  made  proposals  to  offer such services. ILEC entry into the long
distance  market  means  new  competition  from  well-capitalized,  well-known
companies  that  have the capacity to "bundle" other services, such as local and
wireless  telephone  services,  Internet  access and cable television, with long
distance  telephone  services. While the Telecommunications Act includes certain
safeguards  against  anti-competitive  conduct by the ILECs, it is impossible to
predict  whether  such  safeguards  will be adequate or what effect such conduct
would  have  on  the  Company.  Because  of the ILECs' name recognition in their
existing  markets,  the  established  relationships  that  they  have with their
existing  local  service customers, and their ability to take advantage of those
relationships,  as  well  as  the  possibility  of  interpretations  of  the
Telecommunications  Act  favorable  to  the  ILECs, it may be more difficult for
other  providers  of long distance and local telecommunication services, such as
the  Company,  to  compete.

     In  addition,  access  to  ILEC  UNEs  at rates competitive with the ILEC's
retail  service  offerings  is  critical to the Company's business. The ILEC UNE
rates  are  ordered  by  individual  state commissions, which have only recently
begun  lowering  the  ILEC UNE rates to a level that the Company may offer rates
competitive  with  the ILEC for similar services. Failure of the remaining state
commissions  to  lower  ILEC  UNE  rates will have a significant impact upon the
Company's  ability  to  offer  services at rates competitive with the ILECs. See
"Regulation."

     Allegedly  to  combat  "slamming,"  or  the  unauthorized  conversion  of a
customer's  preselected  telecommunication carrier, many local exchange carriers
have  initiated  "PIC  freeze"  programs  that,  once  selected by the customer,
require  a customer seeking to change long distance or local carriers to contact
the  local carrier directly instead of having the long distance or local carrier
contact  the  local  carrier on the customer's behalf.  Many local carriers have
imposed  burdensome  requirements  on  customers seeking to lift PIC freezes and
change  carriers,  and  thereby make it difficult for customers to switch to the
Company's  telecommunication  services.  Such  activities  could have an adverse
effect  on  the  Company.


REGULATION

     GENERAL

     The  Company's  provision  of  telecommunication  services  is  subject  to
government  regulation.   The  FCC  regulates  interstate  and  international
telecommunications, while the state commissions regulate telecommunications that
originate  and terminate within the same state.  Changes in existing regulations
could  have  a  material  adverse  effect  on  the  Company.

     The  Company's  marketing  of telecommunication services directly, with its
current  marketing  partners, over the Internet, the Company's other current and
past  direct  and  partner  marketing  efforts, and the marketing efforts of the
Company's  partitions  all  require  compliance  with relevant federal and state
regulations that govern the sale of telecommunication services. The FCC and some
states have rules that prohibit switching a customer from one carrier to another
without  the  customer's  express  consent  and specify how that consent must be
obtained  and  verified.  Most  states  also  have consumer protection laws that
further  define  the  framework  within which the Company's marketing activities
must be conducted. While directed at curbing abusive marketing practices, unless
these  rules  are  carefully designed and enforced, they can have the incidental
effect  of  entrenching  incumbent  carriers  and  hindering  the  growth of new
competitors,  such  as  the  Company.

                                        8
<PAGE>

     The Company's marketing efforts are carried out through a variety of direct
marketing  programs,  including  inbound  and outbound telemarketing, television
advertisements  and  agent  sales,  as  well  as  online  marketing initiatives.
Restrictions  on  the  marketing  of  telecommunication  services  are  becoming
stricter  in  the wake of widespread consumer complaints throughout the industry
about  slamming  and  "cramming"  (the  unauthorized  provision  of  additional
telecommunication  services).  The Telecommunications Act strengthened penalties
against  slamming,  and  the  FCC  issued  and  updated rules tightening federal
requirements  for  the verification of orders for   telecommunication   services
and   establishing  additional  financial  penalties  for slamming. In addition,
many  states  have  been active in restricting marketing through new legislation
and  regulation,  as  well  as  through  enhanced  enforcement  activities.  The
Company's  marketing  activities have subjected the Company to investigations or
enforcement  actions  by government authorities.  The constraints of federal and
state  regulation,  as well as increased FCC, Federal Trade Commission and state
enforcement  attention,  could  limit the scope and the success of the Company's
marketing  efforts  and  subject  them  to enforcement action, which may have an
adverse  effect  on  the  Company.

     Statutes and regulations designed to protect consumer privacy also may have
the  incidental  effect  of  hindering  the  growth  of  newer telecommunication
carriers  such as the Company.  For example, the FCC rules that restrict the use
of  "customer  proprietary  network  information"  (information  that  a carrier
obtains  about  its  customers  through their use of the carrier's services) may
make  it  more  difficult for the Company to market additional telecommunication
services  (such  as local and wireless), as well as other services and products,
to  its  existing  customers.

     The  FCC  requires  the  Company  and  other providers of telecommunication
services  to  contribute to the universal service fund, which helps to subsidize
the  provision  of  local  telecommunication  services  and  other  services  to
low-income  consumers,  schools, libraries, health care providers, and rural and
insular  areas that are costly to serve.     The Telecommunications Act requires
every  telecommunication  carrier  that  provides  interstate  telecommunication
services  to  contribute,  on  an  equitable and nondiscriminatory basis, to the
specific,  predictable,  and  sufficient  mechanisms  established  by the FCC to
preserve  and advance universal service.  At present, contributions to the FCC's
universal  service  funds  are assessed on telecommunication providers' combined
interstate and international end user telecommunication revenues, as reported in
FCC Forms 499A and 499Q, using a quarterly contribution factor calculated by the
FCC.  The  current  contribution  factor  for the first quarter of 2002 is 6.8%.
Accordingly,  at  present,  carriers  pay  nearly  seven  percent  (7%) of their
combined interstate and international end user telecommunication revenues to the
federal USF.  If the FCC substantially increases the current contribution factor
for the USF, the Company's costs of providing telecommunication services will be
increased  and  the  Company might not be able to be reimbursed by its customers
for  all  of  those  costs,  which would have a negative impact on the Company's
gross  margins.  Further,  it  is  unclear  at  this  point  whether the current
methodology  of basing carrier contributions on interstate and international end
user  telecommunication  revenues  will  remain in place.  Recently, the FCC has
proposed  changing  this  current methodology to assess carrier contributions to
the  USF  based on the number and capacity of connections provided to customers.
Moreover,  the  FCC  also  recently  proposed limiting the flexibility currently
afforded  carriers in the recovery of their universal service contributions from
end user customers by requiring carriers to recover contributions either through
their  rates  or  through  a  line  item  surcharge, called a "Federal Universal
Service  Charge,"  that  corresponds  precisely  to  the prescribed contribution
factor  percentage,  per  line  or per account assessment established by the FCC
each quarter.  An order implementing the FCC's decisions regarding both of these
matters  should  be  released  in  2002.

     The  FCC imposes additional reporting, accounting, record keeping and other
regulatory  obligations  on  the  Company.  The  Company  must  offer interstate
services  under  rates,  terms  and conditions that are just, reasonable and not
unreasonably  discriminatory.  The  Company  currently must file tariffs listing
the  rates,  terms  and  conditions  of the Company's service on the Internet or
elsewhere.  Although  the  Company's FCC tariffs, and the rates and charges they
specify,  are  subject  to review, they are presumed to be lawful and have never
been  formally  contested  by  customers or other consumers.  The Company may be
subject  to  forfeitures  and  other  penalties  if it violates the FCC's rules.

     The  vast  majority  of  the  states  require  the  Company  to  apply  for
certification  to provide local and intrastate telecommunication services, or at
least  to  register  or  to  be  found exempt from regulation, before commencing
intrastate service. The vast majority of states also require the Company to file
and  maintain  detailed  tariffs  listing its rates for intrastate service. Many
states  also impose various reporting requirements and/or require prior approval
for  transfers  of  control  of  certified  carriers, corporate reorganizations,
acquisitions  of  telecommunication  operations,  assignments of carrier assets,
including  subscriber  bases, carrier stock offerings and incurrence by carriers
of  significant  debt  obligations.  Certificates  of authority can generally be
conditioned,  modified,  canceled,  terminated

                                        9
<PAGE>

or  revoked by state regulatory authorities for failure to comply with state law
and  the  rules,  regulations  and policies of the state regulatory authorities.
Fines  and  other  penalties,  including  the  return of all monies received for
intrastate  traffic  from  residents  of  a  state,  may  be  imposed  for  such
violations.  State regulatory authorities may also place burdensome requirements
on telecommunication companies seeking transfers of control for licenses and the
like.

     The  Company's  partitions  are  also subject to the same federal and state
regulations  as  the  Company,  and  any  change  in  those  regulations, or any
enforcement  action,  could adversely affect the partitions and their demand for
the Company's services. Generally, partitions purchase services from the Company
and  resell these services under non-exclusive agreements with the Company. Such
partitions  comprise  a  small  and declining portion of the Company's business.
Provisions  in  the  Company's  agreements with these partitions require them to
comply  with  federal  and  state  statutes  and  regulations,  including  those
regulating telemarketing.  Because they are independent partitions, however, the
Company  cannot  control  their activities.  The Company also cannot predict the
extent  of  their  compliance  with  applicable  regulations.  Federal and state
regulatory  authorities  have, in the past, tried to hold the Company liable for
activities of these partitions.  There can be no assurance that the use of these
partitions will not subject the Company to future liabilities.  Similarly, there
can  be  no  assurance  that  the  use  of  direct marketing channels, including
telemarketing, will not subject the Company to future liabilities. Actions taken
by  partitions  have  subjected  the  Company  to  investigations or enforcement
actions  by  government  authorities.  To  the  extent  that  the  Company makes
additional  telecommunication  service  offerings,  the  Company  may  encounter
additional  regulatory  review  and  constraints.

     The  Telecommunications  Act provides for a significant deregulation of the
domestic  telecommunication  industry, including the long distance industry. The
Telecommunications  Act  remains  subject  to judicial review and additional FCC
rulemaking, and thus it is difficult to predict what effect the legislation will
have  on  the  Company  and its operations.  There are currently many regulatory
actions  underway  and  being  contemplated  by  federal  and  state authorities
regarding  interconnection  pricing  and  other  issues  that  could  result  in
significant  changes  to  the  business  conditions  in  the  telecommunication
industry.  In  addition,  there has been discussion in Congress of modifying the
Telecommunications  Act  in  ways  that  could prove detrimental to the Company.

     Notably, the Telecommunications Act set up a framework by which ILECs could
begin  providing  long  distance services to their customers in areas where they
provide local telecommunications services.  Acting under this authority, the FCC
already  has  granted  interstate long distance service authority to Verizon for
the  Commonwealth  of  Pennsylvania  and  the States of New York, Massachusetts,
Rhode Island and Connecticut, and to SBC Communications for the States of Texas,
Kansas,  Oklahoma,  Arkansas  and  Missouri.  The Company anticipates that other
ILECs  shall  seek to obtain similar authority on a state-by-state basis.  These
actions  are  likely  to  increase  competition  within  the  affected  states.

     Access  to  ILEC  UNEs  at  cost-based  rates  is critical to the Company's
business.  The  Company's  local telecommunications services are provided almost
exclusively  through  the  use  of  ILEC  UNEs,  and  it  is the availability of
cost-based  UNE  rates  that  enables  the  Company  to  price  its  local
telecommunications  services competitively.  However, the obligation of ILECs to
provide  UNEs at such cost-based rates is the subject of on-going litigation and
could  soon  be  substantially  reduced  or  eliminated  altogether.

     PENDING  MATTERS  AFFECTING  THE  INDUSTRY

     The  current  UNE pricing rules were established in 1996 in the FCC's Local
Competition  Order,  wherein  the  FCC  concluded  that the rates charged to new
entrants  must  be  based  on  the  forward-looking  costs  of  providing  the
interconnection  or  UNEs  ordered.  The  FCC  rejected the use of historical or
embedded costs in setting rates that new entrants pay.  The FCC further required
a specific methodology, "total element long-run incremental cost" ("TELRIC"), to
calculate  an  ILEC's  forward-looking  costs.  The  FCC required that TELRIC be
measured  based  on  the use of the most efficient telecommunications technology
currently  available  and  the  lowest  cost  network  configuration,  given the
existing  location  of  ILEC  wire  centers.

     On  remand from the U.S. Supreme Court in AT&T v. Iowa Utilities Board, the
Eighth  Circuit  Court  of  Appeals  concluded  that the FCC's UNE pricing rules
violated  the terms of the Telecommunications Act. The Eighth Circuit determined
that  the FCC's TELRIC methodology incorrectly based costs on the most efficient
technology  and  configuration  available,  rather  than  the actual cost of the
particular  facilities and equipment deployed by ILECs. The Eighth Circuit ruled
that  the  FCC  cannot  require  that  UNE prices be calculated at the cost of a
hypothetical  network,  as opposed to the costs actually incurred, by the ILECs.
The  Eighth  Circuit,  however,  did

                                       10
<PAGE>

not  vacate  the  FCC's  decision to use a forward-looking cost methodology. The
Court  determined that requiring that forward-looking costs be used to establish
UNE  rates  is  a  matter  within  the  FCC's  discretion.

     The FCC, ILECs and CLECs (competitive local exchange carriers) all appealed
the  Eighth  Circuit  decision  to  the  U.S.  Supreme Court.  The Supreme Court
granted  certiorari  in  these  cases, styled Verizon Communications v. FCC, and
agreed to consider both: (i) whether the Eighth Circuit erred in ruling that the
FCC  cannot require that UNE rates be based on the cost of efficient replacement
technology;  and  (ii)  whether  the  Eighth  Circuit erred in approving FCC UNE
pricing rules that do not permit ILECs' historical costs to be included in their
UNE  rates.

     The  Supreme  Court heard oral argument in Verizon Communications v. FCC on
October  10, 2001, and the Company anticipates a decision in the Spring of 2002.
If  the  Supreme  Court  rules  that  UNE  rates  cannot be based on the cost of
efficient  replacement  technology,  or,  worse,  that  UNE rates must allow for
recovery  of  all  ILEC  historical costs, the result could compel a substantial
increase  in  the  prices  that the Company pays for ILEC UNEs.  The possibility
also  exists that the FCC will revise its UNE pricing rules in a similar fashion
even if the Supreme Court does not require such revisions.  In either case, such
a  spike  in  UNE  rates  could  make it unaffordable for the Company to provide
UNE-based  local  telecommunication  services.

     Access  to  ILEC  UNEs in a fashion in which they are combined by the ILECs
themselves  also  is  critical  to  the Company's business.  The Company's local
telecommunications services are provided through the use of UNE-P, in which UNEs
necessary  to  provide  service  to end users are combined by the ILECs and then
leased  to  new entrants.  Both the U.S. Supreme Court and the FCC currently are
considering  whether  ILECs  will  continue  to  be required to provide such UNE
combinations  to  competitors.

     The  U.S.  Supreme Court review arises in the Verizon v. FCC case discussed
above.  The  FCC  established  its rule 51.315(b) in 1996, which prohibits ILECs
from  separating  already combined network elements.  This rule has already been
approved  by the Supreme Court.  However, the FCC also established its so-called
"additional combinations rules" in 1996, i.e. rules 51.315(c)-(f), which require
ILECs  to  combine  network  elements  in  any  technically feasible manner upon
request.  The  Eighth  Circuit later vacated the "additional combinations rules"
based  on  the  reasoning  that  the  Telecommunications  Act  requires that new
entrants,  not  ILECs,  must  do  any  necessary recombining.  The Supreme Court
granted  certiorari,  and has agreed to decide whether the FCC may require ILECs
to  combine certain previously uncombined network elements upon request by a new
entrant.  If  the  Supreme  Court upholds the Eighth Circuit, it would adversely
affect  the  Company's  ability  to  add  new  lines  for  existing customers or
introduce  customized  service  offerings.

     In  addition,  the FCC itself currently is considering whether the discrete
elements  comprising  a  UNE-P  "platform" must continue to be made available by
ILECs.  The  existing  set  of  UNEs  were  established  by the FCC in its Local
Interconnection  Order  in  1996, and updated in a proceeding on remand from the
Supreme  Court's  Iowa  Utilities Board case in 1999.  The current rules require
ILECs  to  provide  a  host of UNEs upon request -- including local loops, local
switching  and  interoffice  transport  --  which  together  comprise  the UNE-P
combination  used  by  the Company to provide local telecommunications services.

     On  December 12, 2001, the FCC initiated its so-called UNE Triennial Review
rulemaking  in  which  it intends to review all UNEs and determine whether ILECs
should  continue  to  be  required  to provide them to competitors.  Among other
things,  the  FCC  has  indicated  that  it  will  consider whether ILECs should
continue  to  be  required  to  provide  the "local switching" UNE, an essential
component  of  the  UNE-P combination.  The FCC will determine whether the local
switching UNE is necessary for new entrants to provide services, and whether the
unavailability of a local switching UNE would impair the ability of new entrants
to offer competitive offerings.  The FCC could eliminate the local switching UNE
entirely,  or  could  further  limit  its  availability  by  geography, customer
density,  customer  size,  service  type,  customer  type,  or  the  like.  Any
curtailment  by  the  FCC  in  the availability of the local switching UNE would
materially  impair our ability to provide local telecommunications services, and
could  eliminate  our  capability  to  provide local telecommunications services
entirely.  The  Company  expects  the  FCC  to decide the issue later this year.


EMPLOYEES

     As  of December 31, 2001, the Company employed approximately 1,178 persons.
The  Company  considers  relations  with  its  employees  to  be  good.

                                       11
<PAGE>

ITEM  2.  PROPERTIES

     The  Company  leases an approximately 8,000 square foot facility in Reston,
Virginia, that serves as the Company's headquarters and is where a number of the
Company's  executives  and  marketing personnel are located. The Company owns an
approximately  24,000  square  foot facility in New Hope, Pennsylvania where the
Company's  executives, finance, legal and programming personnel are located. The
Company  also  leases properties in the cities in which switches for its network
have  been  installed.

     With  respect  to  the  Company's  sales, provisioning and customer service
operations,  the  Company  owns  a  32,000  square  foot  facility  located  in
Clearwater, Florida. The Company also leases the following facilities for sales,
provisioning  and  customer  service  operations: an approximately 29,000 square
foot  facility in Orlando, Florida, an approximately 13,000 square foot facility
in  Greenville, South Carolina, and an approximately 12,000 square foot facility
in  Fort  Myers,  Florida.


ITEM  3.  LEGAL  PROCEEDINGS

     The  Company  is  party  to  a  number  of  legal  actions and proceedings,
including  purported  class  actions,  arising  from the Company's provision and
marketing  of  telecommunications services, as well as certain legal actions and
regulatory  investigations  and  enforcement proceedings arising in the ordinary
course  of  business.  The  Company  believes  that  the ultimate outcome of the
foregoing  actions  will  not  result  in  liability  that would have a material
adverse  effect  on  the Company's financial condition or results of operations.
However,  it  is  possible  that,  because of fluctuations in the Company's cash
position,  the  timing of developments with respect to such matters that require
cash  payments  by  the  Company,  while  such  payments  are not expected to be
material  to  the  Company's  financial  condition,  could  impair the Company's
ability  in  future  interim  or  annual  periods  to  continue to implement its
business  plan, which could affect the Company's results of operations in future
interim  or  annual  periods.


ITEM  4.  SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS

         None.

                                       12
<PAGE>

                                     PART II

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


     The  Company's  Common Stock, $.01 par value per share ("Common Stock"), is
traded  on  the  Nasdaq  National  Market under the symbol "TALK".  High and low
quotations  listed below are actual closing sales prices as quoted on the Nasdaq
National  Market:

<TABLE>
<CAPTION>

 COMMON STOCK                      PRICE RANGE OF COMMON STOCK
 ------------                     ----------------------------
                                         HIGH     LOW
                                       -------   ------
<S>                                     <C>      <C>
2000
First Quarter                          $ 20.63 $ 13.44
Second Quarter                           16.50    5.63
Third Quarter                             8.06    4.25
Fourth Quarter                            4.81    0.56
2001
First Quarter                             2.53    1.28
Second Quarter                            2.51    0.91
Third Quarter                             1.06    0.33
Fourth Quarter                            0.52    0.34
2002
First Quarter (through March 29, 2002)    0.64    0.37

</TABLE>

     As  of  March  29,  2002, there were approximately 1,063 record holders of
Common  Stock.

     The  Company  has  never declared or paid any cash dividends on its capital
stock.  The  Company  currently  intends  generally to retain future earnings to
finance  the  growth  and  development  of its business and, therefore, does not
anticipate  paying  cash  dividends  in the foreseeable future. In addition, the
Company's  debt instruments, including the credit facility agreement and related
guarantee  to  MCG  Finance Corporation and the 2011 Convertible Notes, prohibit
the  Company  from  paying  any  dividends  on  its  capital  stock.

     The  Company has received notification from NASDAQ that it did not meet the
minimum  bid  price requirement of the NASDAQ's National Marketplace Rules.  The
Company  has  90 calendar days, or until May 15, 2002, to regain compliance with
these  standards.  If  at  any  time  before  May 15, 2002, the bid price of the
Company's  stock is at least $3.00 for a minimum of 10 consecutive trading days,
NASDAQ  staff  will  provide  written notification that the Company has achieved
compliance  with  the  rules. If the Company is unable to demonstrate compliance
with  the rules on or before May 15, 2002, the Company would file an application
to  list  its  securities  on  The  Nasdaq SmallCap Market, and if accepted, the
Company  would  have  another  90 days, or until August 13, 2002, to comply with
Nasdaq's  SmallCap  listing  rules,  which  only  require a minimum bid price of
$1.00.

                                       13
<PAGE>

ITEM  6.  SELECTED  CONSOLIDATED  FINANCIAL  DATA

     The  selected  consolidated  financial  data  should be read in conjunction
with,  and  are  qualified  in  their  entirety by, "Management's Discussion and
Analysis  of  Financial  Condition  and Results of Operations" and the Company's
Consolidated  Financial  Statements  included  elsewhere  in  this  Form  10-K.

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                    -----------------------------------------------------------
                                                         2001        2000        1999        1998        1997
                                                         ----        ----        ----        ----        ----
<S>                                                      <C>          <C>         <C>         <C>         <C>
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Sales                                                  $495,470    $544,548    $516,548    $448,600    $304,768
Costs and expenses:
   Network and line costs                               235,153     292,931     289,029     321,215     285,145
   General and administrative expenses                   82,202      65,360      39,954      39,393      29,221
   Provision for doubtful accounts                       92,778      53,772      28,250      37,789       9,339
   Sales and marketing expenses                          81,285     170,864      96,264     210,552      60,685
   Depreciation and amortization                         34,390      19,257       6,214       5,499       5,429
   Impairment and restructuring charges                 170,571          --          --          --          --
   Significant other charges (income)                        --          --      (2,718)     91,025          --
                                                       --------    --------    --------    --------    --------
      Total costs and expenses                          696,379     602,184     456,993     705,473     389,819
                                                       --------    --------     -------    --------    --------
Operating income (loss)                                (200,909)    (57,636)     59,555    (256,873)   (85,051)
Other Income (expenses):
   Interest income                                        1,220       4,859       3,875      38,876      25,293
   Interest expense                                      (6,091)     (5,297)     (4,616)    (29,184)    (6,212)
   Other expense, net                                    (2,698)     (3,822)     (1,115)    (20,867)     31,634
                                                       --------    --------     -------    --------    --------
Income (loss) before provision for income
    taxes                                              (208,478)    (61,896)     57,699    (268,048)   (34,336)
Provision for income taxes (1)                               --          --          --      40,388    (13,391)
                                                       --------    --------     -------    --------    --------
Income (loss) before extraordinary gains and
    cumulative effect of an accounting change          (208,478)    (61,896)     57,699    (308,436)   (20,945)
Extraordinary gains from extinguishments of
    debt                                                 20,648          --      21,230      87,110          --
Cumulative effect of an accounting change               (36,837)         --          --          --          --
                                                       --------    --------     -------    --------    --------
Net income (loss)                                     $(224,667)   $(61,896)    $78,929   $(221,326)  $(20,945)
                                                       ========    ========     =======    ========    ========

Income (loss) per share - Basic:
   Income (loss) before extraordinary gains
     and cumulative effect of an accounting
     change per share                                    $(2.63)     $(0.88)      $0.94      $(5.20)    $(0.33)
   Extraordinary gains per share                           0.26          --        0.35        1.47          --
   Cumulative effect of an accounting change
     per share                                            (0.47)         --          --          --          --
                                                       --------    --------     -------    --------    --------
   Net income (loss) per share                           $(2.84)     $(0.88)      $1.29      $(3.73)    $(0.33)
                                                       ========    ========     =======    ========    ========
   Weighted average common shares
     outstanding                                         79,242      70,527      61,187      59,283      64,168
                                                       ========    ========     =======    ========    ========
Income (loss) per share - Diluted:
   Income (loss) before extraordinary gains
     and cumulative effect of an accounting
     change per share                                    $(2.63)     $(0.88)      $0.90      $(5.20)    $(0.33)
   Extraordinary gains per share                           0.26          --        0.33        1.47         --
   Cumulative effect of an accounting change
     per share                                            (0.47)         --          --          --         --
                                                       --------    --------     -------    --------    --------
   Net income (loss) per share                           $(2.84)     $(0.88)      $1.23      $(3.73)    $(0.33)
                                                       ========    ========     =======    ========    ========
   Weighted average common and common
     equivalent shares outstanding                       79,242      70,527      64,415      59,283      64,168
                                                       ========    ========     =======    ========    ========
</TABLE>
                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                AT DECEMBER 31,
                                            -------------------------------------------------------
                                               2001        2000        1999        1998        1997
                                               ----        ----        ----        ----        ----
<S>                                            <C>          <C>         <C>         <C>         <C>
                                                                (IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
   Cash and cash equivalents                 $ 22,100    $ 40,604   $ 78,937     $ 3,063  $ 316,730
   Total current assets                        50,698      97,203    150,893     149,769    691,051
   Goodwill and intangibles, net               29,672     218,639      1,068       1,150     10,590
   Total assets                               165,221     407,749    215,008     272,560    814,891
   Current portion of long-term debt (3)       14,454       2,822         --      49,621         --
   Total current liabilities                   87,273     100,271     71,168     136,708     56,263
   Contingent obligations                          --     114,630    114,630          --         --
   Long-term debt (2)(3)                      152,370     103,695     84,985     242,387    500,000
   Stockholders' equity (deficit)             (74,422)     82,700    (69,375)   (136,785)   222,828
</TABLE>
--------------------
(1)  The provision for income taxes in 1998 represents a valuation allowance for
     deferred tax assets recorded in prior periods and current tax benefits that
     may  result  from  the  1998  loss.  The  Company  provided  the  valuation
     allowances  in  view  of  the  loss  incurred  in  1998,  the uncertainties
     resulting  from  intense  competition in the telecommunication industry and
     the  lack  of any assurance that the Company will realize any tax benefits.
     The  Company  has  continued  to  provide a valuation allowance against its
     deferred  tax  assets  at  December  31,  2000  and  December  31,  1999.

(2)  Long-term  debt  includes  $31.0  million  of  future  accrued  interest in
     connection  with the 2011 Convertible Notes in accordance with SFAS No. 15,
     "Accounting  by  debtors  and  Creditors  for Troubled Debt Restructuring."

(3)  The  Company  restructured a substantial portion of the 4 1/2% and 5% Notes
     in  April  2002;  accordingly,  $57.9  million  of  the  4  1/2%  Notes are
     classified  as  long-term  debt.


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

     The  following  discussion  should  be  read  in  conjunction  with  the
Consolidated  Financial Statements included elsewhere in this Form 10-K. Certain
of the statements contained herein may be considered forward-looking statements.
Such  statements  are identified by the use of forward-looking words or phrases,
including,  but  not  limited  to,  "estimates,"  "expects,"  "expected,"
"anticipates,"  and "anticipated." These forward-looking statements are based on
the  Company's  current  expectations.  Although  the  Company believes that the
expectations  reflected in such forward-looking statements are reasonable, there
can  be  no  assurance  that  such expectations will prove to have been correct.

     Forward-looking  statements  involve  risks  and  uncertainties  and  the
Company's  actual  results  could  differ  materially  from  the  Company's
expectations.  In  addition to those factors discussed in this Form 10-K and the
Company's  other  filings with the Securities and Exchange Commission, important
factors that could cause such actual results to differ materially include, among
others,  increased  price  competition  for  long  distance  and local services,
failure  of  the marketing of the bundle of local and long distance services and
long  distance services under its agreements with its various marketing partners
and  its  direct  marketing  channels,  failure  to manage the nonpayment of the
Company's  bills  to  its  customers  for  bundled  and  long distance services,
attrition  in  the  number  of end-users, difficulties in managing the Company's
operations,  including  attracting and retaining qualified personnel, failure of
the  Company  to be able to expand its active offering of local bundled services
in  a  greater  number of states, failure to provide timely and accurate billing
information  to  customers,  failure  of  the  Company  to manage its collection
management  systems  and  credit  controls  for  customers,  interruption in the
Company's  network  and  information  systems, failure of the Company to provide
adequate  customer  service,  and  changes  in government policy, regulation and
enforcement and/or adverse judicial interpretations and rulings relating to such
regulations  and  enforcement.  Except as otherwise required by law, the Company
undertakes  no  obligation  to  update  its  forward-looking  statements.

                                       15
<PAGE>

RESULTS  OF  OPERATIONS

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

<TABLE>
<CAPTION>

                                                  YEAR ENDED DECEMBER 31,
                                               -----------------------------
                                                2001        2000        1999
                                               -------     -------     ------
<S>                                              <C>         <C>         <C>
Sales                                           100.0%      100.0%     100.0%
Costs and expenses:
   Network and line costs                        47.5        53.8       56.0
   General and administrative expenses           16.6        12.0        7.7
   Provision for doubtful accounts               18.7         9.9        5.5
   Sales and marketing expenses                  16.4        31.4       18.6
   Depreciation and amortization                  6.9         3.5        1.2
   Impairment and restructuring charges          34.4          --         --
   Significant other charges (income)              --          --      (0.5)
                                              -------     -------    -------
   Total costs and expenses                     140.5       110.6       88.5
                                              -------     -------    -------
Operating income (loss)                         (40.5)      (10.6)      11.5
Other Income (expense):
   Interest income                                0.2         0.9        0.8
   Interest expense                              (1.2)       (1.0)     (0.9)
   Other expense, net                            (0.6)       (0.7)     (0.2)
                                              -------     -------    -------
Income (loss) before income taxes               (42.1)      (11.4)      11.2
Provision for income taxes                         --          --         --
                                              -------     -------    -------
Income (loss) before extraordinary gains and
   cumulative effect of an accounting change    (42.1)      (11.4)      11.2
Extraordinary gains                               4.2          --        4.1
Cumulative effect of an accounting change        (7.4)         --         --
                                              -------     -------    -------
Net income (loss)                               (45.3)%     (11.4)%     15.3%
                                              =======     =======    =======
</TABLE>


Year  Ended  December  31,  2001  Compared  To  Year  Ended  December  31,  2000

     Sales.  Sales  decreased  by  9.0%  to  $495.5  million in 2001 from $544.5
million  in 2000.  The decrease in sales reflects lower long distance sales as a
result  of  (i) the Company's decision in 2000 to focus its efforts in the local
telecommunication  services  market by offering local telecommunication services
bundled  with  long  distance  services  and  significantly  reducing  sales and
marketing  related to the long distance product; (ii) the termination of the AOL
marketing  agreement  as  of September 30, 2001; (iii) the Company's election to
exit  the  international  wholesale  business in the second quarter of 2000; and
(iv)  a  decrease  in Company's other sales.  The decline in long distance sales
was  partially  offset  by  an  increase  in  bundled  sales.

     The  Company's long distance sales decreased to $293.7 million for the year
ended  December  31,  2001  from  $494.6 million for the year ended December 31,
2000.  Included  in long distance revenues for 2000 were international wholesale
sales of $29.7 million.  The Company elected to exit the international wholesale
business  in  the second quarter of 2000 because of the low gross profit margins
associated  therewith;  consequently,  the Company had no international sales in
2001.  A significant percentage of the Company's revenues were derived from long
distance  telecommunication  services  provided  to  customers who were obtained
under  the  AOL  marketing agreement. Effective June 30, 2001, AOL exercised its
right  to  terminate the Company's long distance exclusivity under the marketing
agreement  and  continue  on  a  non-exclusive  basis,  which contributed to the
decline  in long-distance customers and revenues. The AOL marketing relationship
was  discontinued  effective  September  30,  2001.  See  "Liquidity and Capital
Resources."  Long  distance  revenues  also  decreased  in  2001 due to customer
attrition  and  are  expected  to  continue  to  decline  so long as the Company
continues  to focus its marketing efforts on the bundled product.  Long distance
revenues  for  the  year  ended  2002  are  expected to be between $135 and $145
million.

     The  Company's  bundled  sales  for  the  year ended December 31, 2001 were
$201.8  million  compared  with  $50.0 million for year ended December 31, 2000.
Bundled  sales  decreased, however, during the fourth quarter of 2001 after five
consecutive  quarters  of increases. The decrease in bundled sales in the fourth
quarter  reflects  the

                                       16
<PAGE>

Company's decision to slow growth in bundled sales while the Company pursued its
plans  to  improve  efficiencies  of  the  Company's  bundled business model and
improved  customer  collections.  Bundled  revenues  for the year ended 2002 are
expected  to  be  between  $140  and  $150  million.

     Network and Line Costs. Network and line costs decreased by 19.7% to $235.2
million in 2001 from $292.9 million in 2000. The decrease in costs was primarily
due  to  a  decrease  in  network costs as a result of exiting the international
wholesale  business,  a  lower number of long distance customers, a reduction in
access  and  usage  charges  and  a  reduction  in primary interexchange carrier
charges  ("PICC").  This  decrease in network costs was offset by an increase in
costs  paid  to  incumbent local telephone companies related to the provision of
local  telecommunications  services  in  connection  with  the Company's bundled
service.

     As  a  percentage  of  sales, network and line costs decreased to 47.5% for
2001 as compared to 53.8% for 2000.  The decrease in network and line costs as a
percentage  of  sales  was primarily due to lower network, partition and billing
costs,  offset  by  increased  cost associated with the local telecommunications
business.

     Gross  profit,  defined  as sales less network and line costs, increased by
3.5% in 2001 to $260.3 million from $251.6 million in 2000, and, as a percentage
of  sales,  increased  to  52.5%  as  compared  to  46.2%  for 2000.  Due to the
Company's decision to lower its pricing for both local and long distance service
and  its  focus  on  delivering  better  service and value to its customers, the
growth  of  local  bundled  service  as  a  percentage  of total revenue and the
intensification  of  price  competition  for the Company's products, the Company
expects  to  experience  a  downward  trend in gross profits, as a percentage of
sales,  in  the  future.

     General  and  Administrative  Expenses. General and administrative expenses
increased  by 25.7% to $82.2 million in 2001 from $65.4 million in 2000, and, as
a  percentage  of  sales,  increased to 16.6% as compared to 12.0% for 2000. The
increase  in  general and administrative expenses was due primarily to increased
personnel  costs  associated  with  supporting the Company's growth in the local
services  business,  including  customer  service,  provisioning and collections
personnel.  This  overall  increase  in  general and administrative expenses was
offset,  in  part,  by  significant  workforce reductions and other cost cutting
efforts  by  the  Company  during  the  third  and fourth quarters of 2001 as it
pursued improvements in operating efficiencies of the Company's bundled business
model.

     Provision  for Doubtful Accounts. Provision for doubtful accounts increased
by  72.5%  to  $92.8  million  in  2001  from  $53.8  million in 2000, and, as a
percentage  of  sales,  increased  to  18.7%  as  compared  to 9.9% for 2000.  A
significant  portion  of  the  bad  debt expense was incurred in connection with
bundled  service  customers  acquired  through marketing programs that have been
discontinued.  The  Company  has taken several steps to reduce bad debt expense,
improve  the  overall  credit  quality  of  its  customer  base and increase its
collections  of  past due amounts, including the following: (a) adoption of more
stringent  credit  controls  through the implementation of credit scoring of the
existing  customer  base  and  pre-screening  of new customers based on specific
levels  and  criteria; (b) implementation of a new collections management system
in  the  third  quarter  of 2001 that is integrated with the billing and payment
applications;  (c) improved in-house and third party collection efforts; and (d)
enhanced  credit  card  and  paper  invoicing  processes.

     Sales  and  Marketing  Expenses.  During  2001,  the Company incurred $81.3
million of sales and marketing expenses as compared to $170.9 million in 2000, a
52.4%  decrease,  and, as a percentage of sales, a decrease to 16.4% as compared
to  31.4%  for  2000. The decrease is primarily attributable to the reduction in
marketing  fees  paid  to  AOL.  Several  events  occurred  during  2001  in the
relationship  between  the  Company  and  AOL, including (i) a change in the AOL
marketing  agreement from an exclusive to a non-exclusive basis on July 1, 2001,
(ii)  the cessation of the AOL rewards points program in the second half of 2000
and  (iii)  the  termination  of  the  marketing relationship with AOL effective
September  30,  2001.  The  decline  is  also  attributable  to decreased direct
promotional  and  advertising  campaigns, partially offset by expanded sales and
marketing efforts for the Company's bundled customer base.   Sales and marketing
expenses  declined  further  in  the  second  half of 2001 as the Company slowed
growth  as  it pursued its plan to improve efficiencies of the Company's bundled
business  model.  The  Company  intends  to  increase  its  sales  and marketing
expenditures  in  the first quarter of 2002 as compared to the fourth quarter of
2001.

     Depreciation  and  Amortization. Depreciation and amortization for 2001 was
$34.4  million, an increase of $15.1 million compared to $19.3 million for 2000,
and, as a percentage of sales, an increase to 6.9% as compared to 3.5% for 2000.
This  increase  is due primarily to a full year of depreciation and amortization
of  the  goodwill, intangibles and property from the Access One acquisition that
occurred  in  August 2000, as well as additional property and equipment that was
acquired  by the Company in 2001 and 2000. The excess of the purchase price over

                                       17
<PAGE>

the  fair  value  of  the  net assets acquired in the Access One acquisition was
approximately $225.9 million and was recorded as goodwill and intangible assets.
Intangibles  consist primarily of a service mark and purchased customer accounts
and  workforce.  The  Company's amortization expense will decrease significantly
for  2002  due  to the impairment charge of goodwill and intangibles incurred in
connection  with  the  write-off  of  goodwill associated with Access One in the
third  quarter  of  2001.  Additionally,  the  implementation  of  Statement  of
Financial  Accounting  Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which establishes the impairment approach rather than amortization
for  goodwill,  will  result  in  reduced  amortization  in  2002.  See  "Recent
Accounting  Pronouncements."

     Impairment  and  Restructuring Charges. The Company incurred impairment and
restructuring charges of $170.6 million in 2001. Included in the amount for 2001
was  an  impairment charge of $168.7 million primarily related to the write-down
of  goodwill  associated with the acquisition of Access One, as discussed above.
In  September  2001,  the  Company  approved  a  plan  to  close the call center
operation  in  Sunrise,  Florida.  The Company incurred expenses of $1.9 million
during  2001 to reflect the elimination of approximately 225 positions and lease
exit  costs in connection with the call center closure. There were no impairment
or  restructuring  charges  in  2000.  See  Note 4 to the Consolidated Financial
Statements.

     Interest  Income.  Interest  income  was  $1.2  million in 2001 versus $4.9
million  in  2000.  Interest income in 2001 was lower due to the Company's lower
average  cash  balances  during  2001  as  compared  with  2000.

     Interest  Expense.  Interest  expense  was $6.1 million in 2001 versus $5.3
million  in  2000.  The  increase  is  due  to interest on debt assumed with the
acquisition  of  Access One and interest on additional borrowings by the Company
in  the  second  half  of  2000.  As  a  result  of the  exchange offers and MCG
restructuring,  the Company's interest expense will be higher in future periods.

     Other  Expense, Net. Net other expense was $2.7 million in 2001 compared to
$3.8  million  in  2000. The amount for 2001 primarily represents a $2.4 million
unrealized  loss on the increase in fair value of the AOL contingent redemptions
in  accordance  with the fair value accounting treatment under EITF Abstract No.
00-19. This amount will not be recurring, as the AOL contingent redemptions have
been  restructured  effective  September  2001.  The  amount  for 2000 primarily
reflects  a  $2.5  million  increase in the reserve on a note receivable and AOL
investment  fees  of  $1.3  million.

     Provision  for  income taxes.   The Company has not recorded any income tax
expense  or  benefit  in 2001 or 2000 because the Company incurred losses during
these  periods.  No  taxable income was available in prior periods against which
the Company could carryback losses.  Also, at December 31, 2001 and 2000, a full
valuation allowance has been provided against the Company's net operating losses
and  other  deferred  tax assets.  Since the amounts and extent of the Company's
future  earnings are not determinable with a sufficient degree of probability to
recognize  the  deferred  tax  assets  in  accordance  with  the requirements of
Statement  of  Financial  Accounting  Standards  No. 109, "Accounting for Income
Taxes",  the Company recorded a full valuation allowance on the net deferred tax
assets  for  2001  and  2000.

     Extraordinary  Gains.  The  Company incurred extraordinary gains in 2001 of
$20.6  million,  of  which $16.9 million represents the gain on restructuring of
the  AOL  contingent  redemptions in accordance with SFAS No. 15, "Accounting by
Debtors  and Creditors for Troubled Debt Restructurings," as discussed in Note 2
of  the  Consolidated  Financial Statements. In addition, the Company reacquired
$5.0  million  of  the  4.5%  Convertible  Subordinated Notes due 2002 at a $3.8
million  discount  from the face amount, which was reflected as an extraordinary
gain  in  the  fourth  quarter  of  2001.

     Cumulative  Effect  of  an  Accounting Change. The Company adopted Emerging
Issues  Task  Force  (EITF)  Abstract  No.  00-19,  "Accounting  for  Derivative
Financial  Instruments  Indexed  to, and Potentially Settled in, a Company's Own
Stock,"  in  the  quarter  ended  June  30,  2001.  The cumulative effect of the
adoption of this change in accounting principle resulted in a non-cash charge to
operations  of  $36.8  million  in  the second quarter of 2001, representing the
change  in  fair  value of contingent redemption features of warrants and Common
Stock  held  by AOL from issuance on January 5, 1999 through June 30, 2001.  The
requirements  under  EITF 00-19 will not apply to future changes in the value of
these  instruments,  as  the  AOL  contingent redemptions have been restructured
effective  September  2001.

                                       18
<PAGE>

Year  Ended  December  31,  2000  Compared  To  Year  Ended  December  31,  1999

     Sales.  Sales  increased  by  5.4%  to  $544.5  million in 2000 from $516.5
million  in  1999. The increase in sales primarily reflected the Company's entry
into  the  local  telecommunication  market  by offering local telecommunication
services bundled with long distance services and the resulting increase in sales
from  new bundled customers and the revenues of Access One since the date of its
acquisition  by  the Company. The increase in local sales was offset during 2000
by  the  Company's  election  to  exit  the  international wholesale business, a
decline in the number of long distance customers and a decrease in the Company's
other  sales.  The  Company elected to exit the international wholesale business
because  of the low gross profit margins associated therewith. During the second
quarter  of  2000,  there  was  also  a  significant  reduction in the principal
marketing  opportunity  provided  to  the  Company  by  AOL, which resulted in a
decline  in  gross  additions  of  new long distance customers. In addition, the
Company instituted new collection procedures in the first quarter of 2000, which
the  Company  believes  contributed  to  customer  terminations  during  the
introduction  period  of the new procedures at a rate greater than the Company's
historical  churn  experience.

     A  significant  percentage  of  the Company's revenues in 2000 and 1999 was
derived  from long distance telecommunication services provided to customers who
were  obtained  under  the  AOL  agreement.

     Network  and Line Costs. Network and line costs increased by 1.4% to $292.9
million in 2000 from $289.0 million in 1999. The increases were primarily due to
additional  service  costs  relating to the growth of the local business and the
service  costs  of  Access One since the date of its acquisition by the Company.
The  increase  in  service  costs was offset by a decrease in network costs as a
result  of  exiting the international wholesale business, a lower number of long
distance  customers,  a  reduction  in  local access charges, and a reduction in
primary interexchange carrier charges ("PICC"). In addition, partition costs and
billing  costs  were  lower.

     Gross  profit,  defined  as sales less network and line costs, increased by
10.6%  in 2000 to $251.6 million from $227.5 million in 1999. As a percentage of
sales,  gross  profit  increased in 2000 to 46.2% as compared to 44.0% for 1999.
The  increase  in  gross  profit  percentage was primarily due to lower network,
partition  and  billing  costs,  offset  by  increased  cost associated with the
growing  local  business,  as  discussed  above.

     General  and  Administrative  Expenses. General and administrative expenses
increased  by  63.5%  to  $65.4 million in 2000 from $40.0 million in 1999. As a
percentage  of  sales,  general and administrative expenses increased in 2000 to
12.0%  as  compared to 7.7% for 1999. The increase in general and administrative
expenses  was due primarily to increased costs associated with hiring additional
personnel to support the Company's growth in the local services business and the
additional  sales,  provisioning  and  customer  service  support  for the local
customers.  The  general  and  administrative  expenses  of  Access One are also
included  since  the  date  of  its  acquisition  by  the  Company.

     Provision  for Doubtful Accounts. Provision for doubtful accounts increased
by 90.1% to $53.8 million in 2000 from $28.3 million in 1999. As a percentage of
sales,  provision for doubtful accounts increased in 2000 to 9.9% as compared to
5.5%  for  1999.  The increase in provision for doubtful accounts was due to the
provision  for  certain  aged receivables that were deemed not collectible and a
change  in  reserve  estimates  regarding  the  Company's  non-AOL long distance
marketing  partners.

     Sales  and  Marketing  Expenses.  During  2000, the Company incurred $170.9
million  of  sales and marketing expense as compared to $96.3 million in 1999, a
77.5%  increase.  As  a  percentage  of  sales,  sales  and  marketing  expenses
increased  in 2000 to 31.4% as compared to 18.6% for 1999. This increase relates
to  the Company's efforts to expand its long distance and local bundled customer
base  as  well as higher promotional costs, an increase in fixed payments to AOL
and the addition of Access One marketing and promotional expenses since the date
of  its  acquisition  by  the  Company. Fixed payments to AOL in 2000 were $59.0
million  compared  to  $40.0  million  in  1999.

     Depreciation  and  Amortization. Depreciation and amortization for 2000 was
$19.3 million, an increase of $13.1 million compared to $6.2 million in 1999. As
a  percentage  of sales, depreciation and amortization increased in 2000 to 3.5%
as compared to 1.2% for 1999. This increase is due primarily to the amortization
of  the  goodwill  recorded  upon  the  Access  One acquisition ($9.4 million of
amortization for 2000), and also reflects the continued purchase of property and
equipment  to support the Company's ongoing growth, particularly with investment
in  a  state-of-the-art  billing,  provisioning  and  customer  service  system
platform,  along  with  additional property, equipment and intangibles that were
acquired  by  the  Company  in  the acquisition of Access One. The excess of the

                                       19
<PAGE>

purchase  price over the fair value of the net assets acquired in the Access One
acquisition  was  approximately $225.9 million and has been recorded as goodwill
and  intangible  assets,  which  was  being  amortized on a straight-line basis.
Intangibles  consist  of  a  service  mark  and  purchased customer accounts and
workforce.

     Significant  Other  Charges  (Income).  During  1999,  the Company sold the
business  units  of  TSFL  Holdings, Inc. (formerly Symetrics Industries, Inc.),
resulting  in  a  gain  of $2.7 million, which was included in significant other
charges  (income).

     Interest  Income.  Interest  income  was  $4.9  million in 2000 versus $3.9
million  in  1999.  During  2000,  the  interest  income increase related to the
Company's  average  cash  balance,  which  was  higher  during  2000.

     Interest  Expense.  Interest  expense  was $5.3 million in 2000 versus $4.6
million  in  1999.  The  increase  is  due  to interest on debt assumed with the
acquisition  of  Access One and interest on additional borrowings by the Company
in  2000.

     Extraordinary Gain. During 1999, the Company recorded an extraordinary gain
of  $21.2  million  from  the acquisition of the Company's convertible debt at a
discount  from  its  aggregate  principal  amount.

                                       20
<PAGE>

LIQUIDITY  AND  CAPITAL  RESOURCES

     The  Company's  cash  requirements  arise  primarily from the subsidiaries'
operational  needs,  the  subsidiaries'  capital  expenditures, the debt service
obligations  of  Talk America Inc. and of Talk America Holdings, Inc. Since Talk
America  Holdings,  Inc. conducts all of it operations through its subsidiaries,
primarily  Talk  America  Inc.,  it relies on dividends, distributions and other
payments  from its subsidiaries to fund its obligations. The MCG Credit Facility
and  related  agreements contain certain covenants, including covenants that may
restrict  such  payments  by  the  subsidiaries  to  Talk America Holdings, Inc.

     Contractual obligations of the Company as of December 31, 2001, as adjusted
to  reflect  the exchange offers for the Company's 4 1/2% and 5% Notes as though
the  exchanges  had  occurred  on  such  date,  are  summarized  as  follows (in
thousands):

<TABLE>
<CAPTION>

                                                        1 year or    2 - 3     4 - 5
Contractual Obligations                        Total       less      Years     Years   Thereafter
------------------------------------------   ---------  ---------  ---------  --------  ---------
<S>                                            <C>         <C>         <C>      <C>        <C>

Talk America Holdings, Inc.:
----------------------------
   4 1/2% Notes due 2002 (2)                  $ 3,910    $ 3,910      $ --      $ --         $ --
   5% Notes due 2004 (2)                          670         --       670        --           --
   8% Convertible Notes due 2011 (1)           66,386      2,631     2,981     3,228       57,546
   12% Notes due 2007 (2)                      70,653         --        --        --       70,653
   8% Notes due 2007 (2)(3)                     4,234         --        --        --        4,234

Talk America Inc. and other subsidiaries:
-----------------------------------------
   Senior Credit Facility                      17,500      5,000    10,000     2,500           --
   Capital Lease Obligations                    1,123      1,035        88        --           --
   Other Long-Term Obligations                  1,878      1,878        --        --           --
                                            ---------  ---------  ---------  --------   ---------
                                              166,354     14,454    13,739     5,728      132,433
                                            ---------  ---------  ---------  --------   ---------
   Operating Leases                             6,546      1,815     3,043     1,355          333
                                            ---------  ---------  ---------  --------   ---------
Total Contractual Obligations                $172,900    $16,269   $16,782    $7,083     $132,766
                                            =========  =========  =========  =========  =========
</TABLE>
---------------

     (1)  The  2011  Convertible  Notes  include  $34.0 million of principal and
          $32.4  million  of  future  accrued  interest  (see  Note  7  of  the
          Consolidated  Financial  Statements).  The  2011 Convertible Notes are
          subject  to  mandatory  redemption,  at  the  option of the holder, in
          September  2006  and  September  2008  at  par  plus accrued interest.

     (2)  Effective  April  4, 2002, the Company completed the exchange of $57.9
          million  of  the  $61.8  million  principal  amount  of  its  4  1/2%
          Convertible  Subordinated  Notes due September 2002 into $53.2 million
          of new 12% Senior Subordinated PIK Notes due August 2007 ("12% Notes")
          and  $2.8  million of new 8% Convertible Senior Subordinated Notes due
          August  2007  ("8% Notes") and cash paid of $0.5 million. In addition,
          the  Company  exchanged  $17.4  million of the $18.1 million principal
          amount of its 5% Convertible Subordinated Notes due December 2004 into
          $17.4  million  of  the  new  12%  Notes.

     (3)  The  8%  Notes  include  $2.8 million of principal and $1.4 million of
          future  accrued  interest  (see  Note 16 of the Consolidated Financial
          Statements).

     The  Company  is  also  party  to  various network service agreements which
contain  certain  minimum  usage  commitments.  The largest contract establishes
pricing  and  provides  for  annual  minimum  payments as follows:  2002 - $22.2
million, 2003 - $22.8 million and 2004 - $27.9 million. A separate contract with
a  different vendor establishes pricing and provides for annual minimum payments
as  follows:  2002  - $3.0 million, 2003 - $6.0 million and 2004 - $3.0 million.

     The  Company  relies  on  internally  generated  funds  and  cash  and cash
equivalents on hand to fund its capital and financing requirements.  The Company
had  $22.1  million  of  cash  and cash equivalents as of December 31, 2001, and
$40.6  million  as  of  December  31,  2000.

     Net  cash used in operating activities was $5.6 million in 2001 compared to
$14.9  million  in 2000. In 2001, the major contributors to the net cash used in
operating  activities  were  the  net  loss  of  $224.7  million, an increase in

                                       21
<PAGE>

accounts  receivable  of $65.8 million, a decrease in accounts payable and other
liabilities  of $22.3 million and non-cash extraordinary gains of $20.6 million.
These  amounts  were  offset  by  non-cash  charges  of $335.3 million primarily
consisting of provision for doubtful accounts of $92.8 million, depreciation and
amortization  of  $34.4  million, impairment and restructuring charges of $168.7
million  and  the  cumulative  effect  of  an  accounting  change for contingent
redemptions  of  $36.8  million.  For  2000,  the  net  cash  used  in operating
activities was mainly generated by the net loss of $61.9 million, an increase in
accounts  receivable  of $43.4 million, offset by a decrease in prepaid expenses
and  other  current  assets of $8.1 million, an increase of accounts payable and
other  liabilities  of  $8.6  million and adjustments to net income for non-cash
items  of  $76.3  million.

     Net  cash  used in investing activities of $4.5 million during 2001 related
primarily to the purchase of property, equipment and intangibles.  For 2000, the
net  cash  used  in  investing  activities  related primarily to the purchase of
property,  equipment  and  intangibles  of  $35.4  million  and net cash paid in
connection  with  the  Access  One  acquisition  of  $3.6  million.   For  2002,
investment  in  property  and  equipment  is  expected  to  be between $4 and $6
million.

     Net  cash  used  in  financing  activities  for  2001  of  $8.4 million was
primarily  attributable  to  payment  of  borrowings  under the Company's credit
facility of $2.5 million, repurchase of convertible bonds of the Company of $1.3
million  and payments in connection with the restructuring of the AOL contingent
redemptions  of  $3.5 million. The net cash provided by financing activities for
2000  of $15.6 million reflects proceeds from a credit facility of $20.0 million
and  the  proceeds from exercise of options and warrants and common stock rights
of  $13.6  million  offset  by  repayments  of  debt  assumed  in the Access One
acquisition  of  $18.0  million.

     The  Company  generally does not have a significant concentration of credit
risk  with  respect to net trade accounts receivable, due to the large number of
end-users  comprising  the  Company's  customer base and their dispersion across
different  geographic  regions.  The increase in provision for doubtful accounts
was  due  to the provision for customers acquired through discontinued marketing
programs.

Convertible  Subordinated  Notes  and  Exchange  Offers

     In  September  1997,  the  Company  sold  $300 million of 4 1/2% Notes that
mature  on  September  15, 2002. Interest on the 4 1/2% Notes is due and payable
semiannually on March 15 and September 15 of each year. During 2001, the Company
reacquired  $5.0  million  principal amount of the 4 1/2% Notes; no amounts were
reacquired  during 2000. At December 31, 2001, $61.8 million principal amount of
the  4  1/2%  Notes  remained  outstanding.

     In  December 1997, the Company sold $200 million of 5% Notes that mature on
December  15,  2004. Interest on the 5% Notes is due and payable semiannually on
June 15 and December 15 of each year. No amounts of the 5% Notes were reacquired
2001  or  2000.  At  December 31, 2001, $18.1 million principal amount of the 5%
Notes  remained  outstanding.

     The  4  1/2%  and  5%  Notes also contained a repurchase requirement upon a
termination  of  trading  of the Company's common stock on a national securities
exchange  or  an  established  automated  over-the-counter  trading market.  The
Company received notice of delisting from the Nasdaq National Market in February
2002 for not meeting the minimum bid price requirement and has 90 days to regain
compliance.  This  requirement  to repurchase the 4 1/2% and 5% Notes should the
Company's  common  stock cease to be traded on a national securities exchange or
an  established  automated  over-the-counter  trading  market  was eliminated in
connection  with  the  exchange  offers  described  below.

     The  Company  was  required  to  repay $61.8 million of its 4 1/2% Notes in
September  2002.  As of December 31, 2001, the Company did not have cash nor did
it  believe  it  had  access to new financing sufficient to make such a payment.
The  Company commenced exchange offers in February 2002 for the 4 1/2% Notes and
5%  Notes  primarily  to  extend  the  maturity of the obligations and to obtain
consents  to  eliminate  the requirement to offer to repurchase the notes should
there  be  a  termination of trading of the Company's common stock on a national
securities exchange or an established automated over-the-counter trading market.

     Under  the exchange offers, which expired at midnight on April 1, 2002, the
Company  offered  to  exchange  its  new  notes for up to the full amount of its
currently  outstanding  4  1/2%  Notes  and  for  up  to  the full amount of its
currently  outstanding  5%  Notes.  Under the terms of the 4 1/2% Notes exchange
offer,  the  Company  offered  two  exchange  options:

                                       22
<PAGE>

     --$1,000  in  principal amount of new 12% Senior Subordinated PIK Notes due
     2007  for each $1,000 in principal amount of the existing 4 1/2% Notes that
     are  tendered.

     --$600  in principal amount of new 8% Convertible Senior Subordinated Notes
     due  2007  , convertible into common stock, at $5.00 per share, and $100 in
     cash,  in  exchange  for  each $1,000 in principal amount of the existing 4
     1/2%  Notes  that  are  tendered.

Under  the  terms  of  the  5%  Notes  exchange  offer,  the  Company  offered:

     --$1,000  in  principal  amount  of  the  new  12% Notes for each $1,000 in
     principal  amount  of  the  existing  5%  Notes.

     The Company completed the exchanges for its 4 1/2% and 5% Notes on April 4,
2002, and issued a total of $70.65 million principal amount of its new 12% Notes
and  $2.8  million  principal  amount  of its new 8% Notes and paid cash of $0.5
million  in  exchange  for  a  total  of  $57.9  million principal amount of the
outstanding  4  1/2% Notes and $17.4 million principal amount of the outstanding
5%  Notes.  $3.9  million  principal amount of the 4 1/2% Notes and $0.7 million
principal  amount  of  the  5% Notes were not exchanged and remained outstanding
after  the exchanges.  The Company paid accrued interest of $0.4 million in cash
on  the  exchanged  old  notes  upon  the  exchanges.

     The  new  12%  Notes  accrue  interest  at  a  rate  of 12% per year on the
principal  amount,  payable  two times a year on each February 15 and August 15,
beginning  on  August  15,  2002.  Interest  is payable in cash, except that the
Company  may,  at  its  option,  pay  up to one-third of the interest due on any
interest payment date through and including the August 15, 2004 interest payment
date  in  additional 12% Notes. The new 8% Notes accrue interest at a rate of 8%
per  year  on the principal amount, payable two times a year on each February 15
and  August  15, beginning on August 15, 2002 and are convertible, at the option
of  the  holder,  into  common  stock  at  $5.00  per  share.

     As  part of the restructuring, the Company amended the indentures governing
the  4  1/2%  and  5%  Notes  that  were  not  exchanged to remove the Company's
obligation  to  repurchase  the  notes  on  any  termination  of  trading of the
Company's  common  stock  on  a  national  securities exchange or an established
automated  over-the-counter  trading  market.

     In  accordance  with  SFAS  No. 15 "Accounting by Debtors and Creditors for
Troubled  Debt Restructuring," the exchange of $61.8 million of the 4 1/2% Notes
into  $53.2  million  of  the  12%  Notes  and  $2.8  million of the 8% Notes is
accounted  for  as  a troubled debt restructuring.  Since the total liability of
$57.4  million  ($57.9  million  of principal as of the exchange date, less cash
payments  of  $0.5  million) is less than the future cash flows to holders of 8%
Notes  and  12%  Notes  of  $91.5  million  (representing  the  $56.0 million of
principal  and $35.5 million of future interest expense), the liability remained
on  the balance sheet at $57.4 million. The difference between principal and the
carrying  amount  of  $1.4 million will be recognized as a reduction of interest
expense  over  the  life  of  the  notes.

AOL  Agreements

     On January 5, 1999, pursuant to an Investment Agreement between AOL and the
Company,  AOL  purchased  a  total  of  4,121,372  shares of common stock of the
Company  for  $55.0  million  in  cash  and  the surrender of rights to purchase
5,076,016  shares  of  common  stock of the Company pursuant to various warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant  and retained vested warrants exercisable for 2,721,984 shares of common
stock.  Under  the  terms of the AOL Investment Agreement, the Company agreed to
reimburse  AOL  for  losses  AOL  may  incur on the sale of any of the 4,121,372
shares of the Company's common stock held by AOL through September 30, 2001. The
maximum  amount  payable to AOL as reimbursement on the sale of AOL's shares was
approximately  $54.0  million  plus  AOL's  reasonable  expenses  incurred  in
connection with such sale. In addition, AOL had the right, commencing on July 1,
2001,  to  require  the  Company  to repurchase warrants held by AOL to purchase
2,721,984  shares  of Company's common stock for $36.3 million, which could have
been  paid in common stock or cash (provided that some portion of the repurchase
price could be paid in a quarterly amortization, two-year promissory note of the
Company  if  the  repurchase  price  exceeded  the then current valuation of the
warrants  being  purchased). In addition, upon the occurrence of certain events,
including  material  defaults  by  the  Company  under  its AOL agreements and a
"change  of  control"  of  the  Company,  the  Company may have been required to
repurchase  for  cash  all  of the shares held by AOL for $78.3 million ($19 per
share),  and  the  warrants  for  $36.3  million.

                                       23
<PAGE>

     On  September  19, 2001, the Company restructured its financial obligations
with  AOL  that  arose  under  the  1999 Investment Agreement and also ended its
marketing  relationship  with AOL effective September 30, 2001 (collectively the
"AOL  Restructuring"). In connection with the AOL Restructuring, the Company and
AOL  entered into a Restructuring and Note Agreement ("Restructuring Agreement")
pursuant  to  which  the Company issued to AOL $54.0 million principal amount of
its  8%  secured convertible notes due September 2011 ("2011 Convertible Notes")
and 3,078,628 additional shares of the Company's common stock. See Note 2 of the
Consolidated  Financial  Statements  included  in  this  Report.

     The  2011  Convertible  Notes  were issued in exchange for a release of the
Company's  reimbursement  obligations  under  the Investment Agreement. The 2011
Convertible  Notes  are convertible into shares of the Company's common stock at
the  rate of $5.00 per share, may be redeemed by the Company at any time without
premium  and  are subject to mandatory redemption at the option of the holder on
the  fifth  and  seventh  anniversaries  of its issue date. The 2011 Convertible
Notes  accrue  interest  at  the  rate  of  8% per year on the principal amount,
payable  two  times  a year on each January 1 and July 1; interest is payable in
cash,  except  that  the Company may elect to pay up to 50% (100% in the case of
the  first  interest  payment)  of  the interest due on any payment date in kind
rather  than  in  cash.

     Pursuant  to  the  Restructuring  Agreement,  in  exchange  for  and  in
cancellation  of  the  Company's warrants to purchase 2,721,984 shares of common
stock  and  the  Company's related obligations under the Investment Agreement to
repurchase  such  warrants  from  AOL,  the  Company issued 3,078,628 additional
shares  of  its  common  stock to AOL, after which AOL held a total of 7,200,000
shares  of  common  stock.  The  Company  agreed to provide certain registration
rights  to AOL in connection with the shares of common stock issued to it by the
Company.

     The  Restructuring  Agreement  provided  that the Investment Agreement, the
Security  Agreement  securing  the  Company's  obligations  under the Investment
Agreement  and  the  existing  Registration  Rights  Agreement  with  AOL  were
terminated  in  their  entirety  and  the parties were released from any further
obligation  under  these agreements. In addition, AOL, as the holder of the 2011
Convertible Notes, entered into an intercreditor agreement with the lender under
the  Company's  existing  secured  credit  facility.

     In  addition  to  the  restructuring of the financial obligations discussed
above,  the  Company  and  AOL agreed, in a further amendment to their marketing
agreement  dated  as  of  September  19,  2001,  to discontinue, effective as of
September  30, 2001, their marketing relationship under the marketing agreement.
In  connection with this discontinuance, the Company paid AOL $6.0 million under
the marketing agreement, payable in two installments - $2.5 million on September
20,  2001 and the remaining $3.5 million on October 4, 2001. AOL, in lieu of any
other  payment  for the early discontinuance of the marketing relationship, paid
the Company $20 million by surrender and cancellation of $20.0 million principal
amount  of  the  2011  Convertible  Notes  delivered  to AOL as discussed above,
thereby  reducing the outstanding principal amount of the 2011 Convertible Notes
to  $34.0 million. The amendment also provided for the payment by the Company of
certain  expenses related to marketing services until the discontinuance and for
the  continued  servicing  and  transition  of  telecommunications  customer
relationships  after  the  discontinuance  of  marketing.

     On  February  21,  2002,  by  letter agreement, AOL agreed to waive certain
rights  that  it  had  under  the  Restructuring  Agreement  with respect to the
Company's  restructuring  of  its  existing 4 1/2% and 5% Notes and the exchange
offers therefore. As conditions to the waiver of such rights with respect to the
exchange  offers,  the  Company  agreed  to (i) provide that the new notes to be
exchanged  for  the existing notes have a maturity date after September 19, 2006
and, if convertible, have a conversion price of not less than $5.00, (ii) make a
prepayment on the 2011 Convertible Notes equal to forty percent of the amount of
cash  (excluding  accrued  interest  paid on existing notes which are exchanged)
that  the  Company  pays  to  the  holders of the existing notes in the exchange
offers  and (iii) limit the aggregate amount of cash that the Company pays under
the  exchange offers and to AOL under the letter agreement to $10 million. Under
the  letter  agreement,  the  Company  also  prepaid  approximately $1.2 million
principal  amount  of  the 2011 Convertible Notes, approximately $0.7 million of
which  would  be  credited  against  amounts,  if any, owed AOL under the letter
agreement  for  cash payments in the exchange offers. After giving effect to the
prepayment,  and taking into account the interest that had been paid on the 2011
Convertible  Notes in additional principal amount of the 2011 Convertible Notes,
there  was  outstanding  as  of  March  31,  2002, an aggregate of $33.6 million
principal  amount  of the 2011 Convertible Notes and the Company did not owe AOL
any  additional  payments  related  to  the  exchange  offers.

                                       24
<PAGE>

Secured  Credit  Facility

     At  the time of the Company's acquisition of Access One, Access One and its
subsidiaries  had  approximately  $15.0  million  of  loans outstanding under an
existing  credit  facility with MCG Finance Corporation ("MCG"). The loans under
the  credit facility were secured by a pledge of all of the assets of Access One
and  its  subsidiaries.  In  addition, the Company guaranteed the obligations of
Access  One  and  its  subsidiaries under the credit facility. The $15.0 million
loan  was  repaid  on  October 20, 2000 when certain subsidiaries of the Company
entered  into  a  Credit  Facility  Agreement  with  MCG.

     The  Credit  Facility  Agreement  with  MCG provides for a term loan to the
Company's  subsidiaries  of  up  to  $20.0 million and a line of credit facility
permitting  such subsidiaries to borrow up to an additional  $30.0 million.  The
availability  of  the line of credit facility is subject, among other things, to
the  successful  syndication  of that facility.  Loans under the Credit Facility
Agreement  bear  interest  at  a  rate  equal  to  either (a) the Prime Rate, as
published by the Board of Governors of the Federal Reserve System, or (b) LIBOR,
plus,  in  each case, the applicable margin. The applicable margin was initially
2.5%  for  borrowings  accruing interest at the Prime Rate and 4% for borrowings
accruing  interest at LIBOR; during 2000, the applicable margin was based on the
ratio of funded debt to trailing twelve-month operating cash flow, determined on
a  consolidated  basis,  and  varied  from  2.0% to 2.5% for borrowings accruing
interest  at  the  Prime  Rate  and  from  3.5%  to 4.0% for borrowings accruing
interest  at  LIBOR.  The Credit Facility Agreement subjects the Company and its
subsidiaries  to  certain  restrictions  and  covenants  related to, among other
things,  liquidity,  per-subscriber-type  revenue, subscriber acquisition costs,
and  leverage  ratio  and  interest  coverage  ratio  requirements.  The  credit
facilities  under  the  Credit  Facility Agreement were extended by amendment to
June  30,  2005  for the term loan facility and to June 30, 2003 for the line of
credit  facility.  The  principal  of  the term loan is required to be repaid in
quarterly  installments of $1.25 million on the last calendar day of each fiscal
quarter,  commencing  on September 30, 2001. The loans under the Credit Facility
Agreement  are  secured  by a pledge of all of the assets of the subsidiaries of
the  Company  that  are parties to that agreement.  In addition, the Company has
guaranteed  the  obligations  of  those  subsidiaries  under the Credit Facility
Agreement and related documents; the Company's guarantee subjects the Company to
certain  restrictions and covenants, including a prohibition against the payment
of dividends in respect of the Company's equity securities, except under certain
limited  circumstances.  In  connection  with the AOL Restructuring, MCG entered
into  an  Intercreditor  Agreement with AOL.  The Company borrowed $20.0 million
under  the  term  loan facility  (approximately  $15.0 million was used to repay
indebtedness  of  Access  One).  At  December  31, 2001, $17.5 million principal
balance  remained  outstanding  under the term loan facility and no amounts were
outstanding  or  available  under  the  line  of  credit  facility.

     Upon  its  execution  of  the  Credit  Facility Agreement, the Company also
issued  warrants  to  purchase  300,000  shares of its common stock at $4.36 per
share,  150,000  of  which  vested on December 31, 2000 and the balance of which
would  have vested if the Company failed to exceed certain EBITDA thresholds for
the  fiscal  quarter  ended  March  31,  2001.  The  Company exceeded the EBITDA
threshold  for  the quarter ended March 31, 2001 and consequently the balance of
the  warrants  did not vest.  However, in connection with the waiver from MCG in
the  second  quarter  of  2001  and  certain  other  amendments under the Credit
Facility  Agreement,  the  Company issued warrants to purchase 150,000 shares of
its  common  stock  at  $0.68  per  share  to  such  lenders.

     By  amendments  on  February  12,  2002  and  April  3,  2002,  the Company
restructured  certain  portions of the Credit Facility Agreement and the related
consulting  agreement  and  other loan documents. This restructuring amended the
financial  covenants  for  2002 through 2005 to be consistent with the Company's
internal  projections  and,  among  other  provisions,  effectively  require the
Company  to  elect  to  pay  in  kind,  rather  than  cash, interest on its 2011
Convertible Notes and its new 12% Notes to the fullest extent it is permitted to
do  so  under such notes. As of and after January 1, 2002, the applicable margin
will  be  7.0% for borrowings accruing interest at LIBOR and 6.0% for borrowings
accruing  interest  at  the  Prime  Rate. The restructuring also added mandatory
prepayment  provisions  if  the Company used a total of $10.0 million or more of
cash to repurchase or otherwise prepay our other debt obligations, including the
4 1/2% and 5% Notes, the 2011 Convertible Notes and the new 12% and 8% Notes. In
addition,  the Company issued 200,000 shares of common stock to MCG with a value
of  $84,000  upon  issuance  and  agreed  to register such shares in the future.

     As  of December 31, 2001, the Company would have been in default of several
of its covenants under the Credit Facility Agreement, but received a waiver from
MCG  in  connection  with  the  MCG restructuring described above.  Accordingly,
$12.5  million  of  the  loan balance remained in long-term debt at December 31,
2001.

                                       25
<PAGE>

Other  Matters

     The  Company's  provision  of  telecommunication  services  is  subject  to
government  regulation.  Changes  in  existing regulations could have a material
adverse  effect  on the Company including the following: (i) the Company's local
telecommunications  service  are  provided almost exclusively through the use of
ILEC  UNEs,  and  it is primarily the availability of costs-based UNE rates that
enables  the  Company  to  price  its  local  telecommunications  services
competitively.  The  possibility  exists  that  the  courts  or  the  FCC  could
discontinue  use  of  "total  element  long-run incremental cost" ("TELRIC") for
pricing  UNEs  based  on  an  ILEC's forward-looking costs, which could compel a
substantial increase in the prices that the Company pays for ILEC UNEs and could
make  it  unaffordable  for  the  Company  to  provide  UNE-based  local
telecommunications  services.  On  December  12,  2001,  the  FCC  initiated its
so-called UNE Triennial Review rulemaking in which it intends to review all UNEs
and  determine  whether  ILECs should continue to be required to provide them to
competitors.  Among  other  things,  the FCC has indicated that it will consider
whether  ILECs  should  continue to be required to provide the "local switching"
UNE, an essential component of the UNE-P combination. Any curtailment by the FCC
in  the  availability  of  the  local  switching UNE would materially impair the
Company's  ability  to  provide  local  telecommunications  services,  and could
eliminate  the Company's capability to provide local telecommunications services
entirely.  The FCC requires the Company and other providers of telecommunication
services  to  contribute to the universal service fund, which helps to subsidize
the  provision  of  local  telecommunication  services  and  other  services  to
low-income  consumers,  schools, libraries, health care providers, and rural and
insular  areas  that are costly to serve. If the FCC substantially increases the
current  contribution  factor  for  the  USF,  the  Company's costs of providing
telecommunication  services  will be increased and the Company might not be able
to  be  reimbursed  by  its customers for all of those costs, which would have a
negative  impact  on  the  Company's  gross  margins.  See  Item  1  Business
"Regulation."

     At  December  31,  2001,  the  Company  had  net  operating  loss  (NOL)
carryforwards  for  federal  income  tax  purposes of $262.8 million. Due to the
"change  of  ownership" provisions of the Internal Revenue Code Section 382, the
availability of the Company's net operating loss and credit carryforwards may be
subject  to  an  annual limitation against taxable income in future periods if a
change  of ownership of more than 50% of the value of the company's stock should
occur  within a three-year testing period. Many of the changes that affect these
percentage  change  determinations,  such  as  changes  in  the  Company's stock
ownership,  are outside the Company's control. A more than 50% cumulative change
in ownership for purposes of these Section 382 limitation occurred on August 31,
1998 and October 26, 1999. As a result of such changes, certain of the Company's
carryforwards  are limited. As of December 31, 2001, approximately $64.0 million
are  not available to offset income. In addition, as of December 31, 2001, based
on information currently available to the Company, the Company believes that the
change  of  ownership  percentage  was  approximately  45%  for  the  applicable
three-year testing period. If, during the current three-year testing period, the
Company  experiences  an additional more-than-50% ownership change under Section
382,  the  amount  of  the  NOL  carryforward available to offset future taxable
income  may  be  further  and substantially reduced. To the extent the Company's
ability  to use these net operating loss carryforwards against any future income
is  limited,  our  cash  flow available for operations and debt service would be
reduced.  There can be no assurance that the Company will realize the benefit of
any  carryforwards.

     On November 12, 2001, the Company received an award of arbitrators awarding
Traffix,  Inc.  approximately  $6.2  million  in  an  arbitration concerning the
termination of a marketing agreement between the Company and Traffix, payable to
Traffix  in  two  installments  -  $3.7  million  paid  in November 2001 and the
remaining  $2.5  million  paid  on  April  1,  2002.

     The  Company  also is a party to a number of legal actions and proceedings,
arising  from  the  Company's  provision  and  marketing  of  telecommunications
services,  as  well  as  certain legal actions and regulatory investigations and
enforcement  proceedings  arising  in  the  ordinary  course  of  business.

     The  Company  believes  that  the ultimate outcome of the foregoing actions
will  not  result  in liability that would have a material adverse effect on the
Company's  financial condition or results of operations. However, it is possible
that,  because  of  fluctuations  in  the Company's cash position, the timing of
developments  with  respect  to  such  matters that require cash payments by the
Company,  while  such  payments are not expected to be material to the Company's
financial  condition,  could  impair  the Company's ability in future interim or
annual  periods  to  continue to implement its business plan, which could affect
its  results  of  operations  in  future  interim  or  annual  periods.

     While  the  Company  believes  that  it  has access, albeit limited, to new
capital  in the public or private markets to fund its ongoing cash requirements,
there  can  be  no  assurance  as  to  the  timing,  amounts,  terms  or

                                       26
<PAGE>

conditions  of  any  such  new  capital or whether it could be obtained on terms
acceptable  to  the  Company. Accordingly, the Company anticipates that its cash
requirements generally must be met from the Company's cash-on-hand and from cash
generated  from  operations. Based on its current projections for operations and
having  restructured  the  MCG  facility and most of its outstanding convertible
notes  indebtedness  through  the exchange offers, the Company believes that its
cash-on-hand  and  its  cash flow from operations will be sufficient to fund its
capital  expenditures,  its  debt  service  obligations, including the increased
interest expense of its outstanding indebtedness, and the expenses of conducting
its  operations  for  at  least the next twelve months. However, there can be no
assurance that the Company will be able to realize its projected cash flows from
operations,  which  is  subject  to the risks and uncertainties discussed above.

CRITICAL  ACCOUNTING  POLICIIES

     The  Company's  discussion  and  analysis  of  its  financial condition and
results  of  operations  are  based  upon  the  Company's consolidated financial
statements,  which  have  been prepared in accordance with accounting principles
generally  accepted  in  the  United  States. The preparation of these financial
statements  requires the Company to make estimates and judgments that affect the
reported  amounts  of  assets,  liabilities,  revenues and expenses, and related
disclosure  of  contingent  assets  and  liabilities.  On an on-going basis, the
Company  evaluates  its estimates, including those related to bad debt, goodwill
and  intangible  assets, income taxes, contingencies and litigation. The Company
bases  its estimates and judgments on historical experience and on various other
assumptions  that  are  believed  to  be reasonable under the circumstances, the
results  of  which form the basis for making judgments about the carrying values
of  assets  and  liabilities  that  are not readily apparent from other sources.
Actual  results  may  differ from these estimates under different assumptions or
conditions.

     Recognition  of  Revenue.  The  Company derives its revenues from local and
long  distance  phone  services,  primarily  local  services  bundled  with long
distance  services,  long  distance  services,  inbound  toll-free  service  and
dedicated  private  line  services for data transmission. The Company recognizes
revenue  from  voice,  data and other telecommunications related services in the
period  in  which  subscriber uses the related service.  Allowances for doubtful
accounts are maintained for estimated losses resulting from the inability of its
customers  to  make  required  payments  and  for  uncollectible  usage.

     Deferred revenue represents the unearned portion of local telecommunication
services  and  features  that  are billed one month in advance.  In addition, it
includes  the  amortization  of  a non-refundable prepayment received in 1997 in
connection  with  an  amended  telecommunications services agreement with Shared
Technologies  Fairchild,  Inc.  The payment is amortized over the five-year term
of the agreement which expires October 2002.  The amount included in revenue was
$7.4  million  in  each  of  2001,  2000 and 1999.  The remaining amount of $6.2
million  will  be  included  in revenue in 2002. This agreement is terminable by
either  party  on  thirty  days  notice.  Termination  by  either  party  would
accelerate  recognition  of  the  deferred  revenue.

     Allowance  for Doubtful Accounts.  The Company reviews accounts receivable,
historical  bad debt, customer credit-worthiness through customer credit scores,
current  economic  trends, changes in customer payment history and acceptance of
the  Company's  calling  plans  and  fees  when  evaluating  the adequacy of the
allowance  for  doubtful  accounts.  If the financial condition of the Company's
customers  were  to  deteriorate, resulting in an impairment of their ability to
make  payments,  additional  allowances  may be required. The Company's accounts
receivable  balance was $26.6 million, net of allowance for doubtful accounts of
$46.4  million,  as  of  December  31,  2001.

     Long-lived  Assets  and  Goodwill  and  Intangible  Assets.  The  Company
continually  reviews  the  recoverability  of  the  carrying value of long-lived
assets,  including goodwill and intangibles, using the methodology prescribed in
Statement  of  Financial  Accounting Standards ("SFAS") No. 121, "Accounting for
the  Impairment  of  Long-Lived  Assets and for Long-Lived Assets to Be Disposed
Of." Long-lived assets are reviewed for impairment whenever events or changes in
circumstances  indicate  that  the  carrying  amount  of  such assets may not be
recoverable.  When  such  events occur, the Company compares the carrying amount
of  the  assets  to  the  undiscounted  expected future cash flows.  Factors the
Company  considers important that could trigger an impairment review include the
following:

     -    Significant  underperformance  relative  to  expected  historical  or
          projected  future  operating  results
     -    Significant changes in the manner of the Company's use of the acquired
          assets  or  the  strategy  for  the  Company's  overall  business
     -    Significant  negative  industry  or  economic  trends

                                       27
<PAGE>

     -    Significant  decline  in  the  Company's  stock  price for a sustained
          period  and  market  capitalization  relative  to  net  book  value

     If  this  comparison  indicates  there  is  impairment,  the  amount of the
impairment  is typically calculated using discounted expected future cash flows.
Certain  of  the Company's long-lived assets were considered impaired during the
year  ended  December  31,  2001,  resulting  in  an impairment charge of $168.7
million  in  2001.

     The  write-down of goodwill and intangibles of $168.7 million was primarily
related to the goodwill associated with the acquisition of Access One, which was
created  by  purchase accounting treatment of the merger transaction that closed
in  August  2000.  Management  determined  that goodwill should be evaluated for
impairment  in  accordance  with the provisions of SFAS 121 due to the increased
bad debt rate and increased customer churn as well as the AOL Restructuring that
occurred  in  the  quarter  ended  September 30, 2001. The Company has addressed
these  operational issues by improving credit quality through credit scoring the
existing and future customer base, slowing down growth of new expected customers
through  decreased  marketing,  and  lowering  product  pricing. These and other
actions  taken  by  the  Company  resulted in lower current and future projected
growth of bundled revenues and cash flows than those originally projected at the
time  of  the  Access  One  merger.  The  write-down of goodwill was based on an
analysis  of projected discounted cash flows using a discount rate of 18%, which
results  determined  that  the fair value of the goodwill was substantially less
than  the  carrying  value.

     Internal  Use  Computer Software.  Direct development costs associated with
internal-use  computer  software  are  accounted for under Statement of Position
98-1  "Accounting  for  the Costs of Computer Software Developed or Obtained for
Internal  Use"  and  are capitalized including external direct costs of material
and  services  and  payroll  costs  for  employees devoting time to the software
projects.  Costs  incurred  during the preliminary project stage, as well as for
maintenance and training, are expensed as incurred.  Amortization is provided on
a  straight-line  basis over the shorter of 3 years or the estimated useful life
of  the  software.

     Income Taxes.  Income taxes are accounted for under the asset and liability
method.  Deferred  tax  assets  and liabilities are recognized for the estimated
future  tax  consequences  attributable to the differences between the financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective  tax bases and operating loss and tax credit carryforwards.  Deferred
tax  assets  and  liabilities are measured using enacted tax rates in effect for
the  year  in  which those temporary differences are expected to be recovered or
settled.

     The Company records a valuation allowance to reduce its deferred tax assets
to  the  amount  that  is  more  likely than not to be realized. The Company has
provided  a  full  valuation  allowance  for the net deferred tax assets for the
estimated  future  tax effects attributable to temporary differences between the
basis of assets and liabilities for financial and tax reporting purposes.  While
the  Company  has  considered  future  taxable  income  and  ongoing prudent and
feasible  tax  planning  strategies  in  assessing  the  need  for the valuation
allowance,  in  the event the Company were to determine that it would be able to
realize  its  deferred  tax  assets  in the future in excess of its net recorded
amount,  an  adjustment  to  the deferred tax asset would increase income in the
period  such  determination  was  made.

     Legal  Proceedings. The Company is a party to a number of legal actions and
proceedings  arising  from  the  Company's  provision  and  marketing  of
telecommunications  services,  as  well  as certain legal actions and regulatory
investigations  and  enforcement  proceedings  arising in the ordinary course of
business.  Management's  current estimated range of liability related to some of
the  pending litigation is based on claims for which management can estimate the
amount  and  range of loss. The Company recorded the minimum estimated liability
related  to  those  claims,  where  there  is  a  range  of loss. Because of the
uncertainties  related  to  both  the  amount and range of loss on the remaining
pending  litigation,  management  is unable to make a reasonable estimate of the
liability  that  could  result  from  an  unfavorable  outcome.  As  additional
information  becomes  available, the Company will assess the potential liability
related  to  the  Company's  pending  litigation  and revise its estimates. Such
revisions in the Company's estimates of the potential liability could materially
affect  its  results  of  operations  and  financial  position.


NEW  ACCOUNTING  PRONOUNCEMENTS

     Effective  January  1,  2001, the Company adopted SFAS No. 133, "Accounting
for  Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting  for  Derivatives Instruments and Hedging Activities-Deferral of the
Effective  Date  of  FASB  Statement No. 133," and SFAS No. 138, "Accounting for
Certain

                                       28
<PAGE>

Derivatives  Instruments  and Certain Hedging Activities." The standards require
an  entity to recognize all derivatives as either assets or liabilities measured
at  fair  value.  The  accounting  for the changes in fair value of a derivative
depends  on  the  use of the derivative. The cumulative effect of adopting these
new accounting standards did not have a material effect on the Company's results
of  operations  or  its  financial  position  for  the  periods presented in the
financial  statements  included  herein.

     The  Financial  Accounting  Standards  Board  ("FASB") Emerging Issues Task
Force  ("EITF")  has  issued  Abstract  No.  00-19,  "Accounting  for Derivative
Financial  Instruments  Indexed  to, and Potentially Settled in, a Company's Own
Stock,"  which addresses how such contracts should be classified and measured by
the  Company. Under this issue, contracts that require net-cash settlement would
be  initially  classified as assets or liabilities, then measured at fair value,
with  changes  in fair value reported in earnings and disclosed in the financial
statements  as long as the contracts remain classified as assets or liabilities.
If  contracts  classified  as  assets  or  liabilities are ultimately settled in
shares,  any  previous  gains  or losses on those contracts would continue to be
included in earnings. This abstract is effective for all contracts that remained
outstanding  at June 30, 2001, and presented on that date as a cumulative effect
of  a  change  in accounting principle. The cumulative effect of the adoption of
this  change in accounting principle resulted in a non-cash charge to operations
of  $36.8 million in the year ending December 31, 2001.  See Note 2 to the Notes
to  Consolidated  Financial  Statements.

     In  July  of  2001,  the  FASB  issued  Statements  No.  141,  "Business
Combinations,"  and  No.  142,  "Goodwill  and  Other Intangible Assets" , which
eliminate  the pooling of interests method of accounting, establish new criteria
for  identification  of  separate  intangibles  acquired,  and  establish  the
impairment approach rather than amortization for goodwill. The Company has $18.0
million  of net goodwill and $11.7 million of net identifiable intangible assets
as  of  December 31, 2001 (after an impairment charge of $168.7 million taken in
the  third  quarter  of  2001)  and  has  recorded $20.8 million of amortization
expense  in  the  year  ended  December 31, 2001. Effective January 1, 2002, the
Company  will  no longer be required to record amortization expense on goodwill,
but  will  instead be required to evaluate these assets for potential impairment
on  a quarterly basis and to record a charge for any such impairment. Management
believes the adoption of the impairment evaluation requirements of SFAS 142 will
not  have  a  material  effect on the Company's future results of operations and
financial  position.  See  Note  4  to  the  Notes  to  Consolidated  Financial
Statements.

     In  August  2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated  with  the  Retirement  of  Long-Lived  Assets." SFAS 143 establishes
accounting  standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides accounting
guidance  for  legal  obligations  associated  with  the  retirement of tangible
long-lived  assets.  SFAS  143 is effective in fiscal years beginning after June
15, 2002, with early adoption permitted. The Company expects that the provisions
of  SFAS  143  will  not  have  a  material impact on its results operations and
financial  position  upon  adoption.

     In  October  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting for the
Impairment  or  Disposal  of  Long-Lived Assets."  SFAS 144 establishes a single
accounting  model for the impairment or disposal of long-lived assets, including
discontinued  operations.  SFAS 144 superseded SFAS 121, and APB Opinion No. 30,
"Reporting  the  Results  of Operations - Reporting the Effects of Disposal of a
Segment  of  a  Business,  and Extraordinary, Unusual and Infrequently Occurring
Events  and  Transactions."  The  provisions of SFAS 144 are effective in fiscal
years  beginning  after December 15, 2001, with early adoption permitted, and in
general  are  to  be  applied prospectively. The Company plans to adopt SFAS 144
effective  January  1,  2002  and  does not expect that the adoption will have a
material  impact  on  its  results  of  operations  and  financial  position.

     In  November  2001,  the Financial Accounting Standards Board Emerging Task
Force  reached  a  consensus  on EITF Issue 01-09, "Accounting for Consideration
Given  by  a Vendor to a Customer or a Reseller of the Vendor's Products," which
is  a  codification  of  EITF  00-14,  00-22 and 00-25. This issue presumes that
consideration  from  a vendor to a customer or reseller of the vendor's products
to be a reduction of the selling prices of the vendor's products and, therefore,
should  be  characterized  as  a  reduction  of  revenue  when recognized in the
vendor's  income  statement  and  could  lead  to negative revenue under certain
circumstances.  Revenue  reduction is required unless consideration relates to a
separate  identifiable  benefit and the benefit's fair value can be established.
This  issue  should  be  applied  no  later  than in annual or interim financial
statements for periods beginning after December 15, 2001, which is the Company's
first  quarter  ended  March  31, 2002. Upon adoption the Company is required to
reclassify  all  prior  period  amounts  to  conform  to  the  current  period
presentation.  The Company has not yet evaluated the effects of these changes on
our  consolidated  financial  statements.

                                       29
<PAGE>

ITEM  7A.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURE  ABOUT  MARKET  RISK.

     In  the normal course of business, the financial position of the Company is
subject  to  a  variety  of  risks,  such  as the collectibility of its accounts
receivable and the receivability of the carrying values of its long-term assets.
The  Company's  long-term  obligations  consist  primarily  of its own notes and
credit  facility.  The  Company  does  not presently enter into any transactions
involving derivative financial instruments for risk management or other purposes
due  to  the  stability in interest rates in recent times and because management
does  not  consider  the  potential  impact  of  changes in interest rates to be
material.

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

                                       30
<PAGE>

ITEM  8.   FINANCIAL  STATEMENTS  AND  SUPPLEMENTARY  DATA

                  TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                   PAGE

Reports of Independent Accountants                                  32
Consolidated balance sheets as of December 31, 2001 and 2000        34
Consolidated  statements  of  operations  for the years
   ended December 31, 2001, 2000 and 1999                           35
Consolidated  statements  of  stockholders' equity (deficit)
   for the years ended December 31, 2001, 2000 and 1999             36
Consolidated  statements  of  cash  flows for the years
   ended December 31, 2001, 2000 and 1999                           37
Notes to consolidated financial statements                          38

                                       31
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To  the  Board  of  Directors  and
Shareholders  of  Talk  America  Holdings,  Inc.:

     In  our  opinion, the consolidated financial statements listed in the index
appearing  under  Item 14 (a) (1) on page 68 of this Annual Report on Form 10-KA
for  the year ended December 31, 2001, present fairly, in all material respects,
the  financial  position  of  Talk  America  Holdings,  Inc. and subsidiaries at
December 31, 2001 and December 31, 2000, and the results of their operations and
their  cash  flows  for  the  years  then  ended  in  conformity with accounting
principles  generally  accepted in the United States of America. In addition, in
our  opinion,  the  financial  statement  schedule listed in the index appearing
under  Item 14 (a) (2) on page 68, present fairly, in all material respects, the
information  set  forth  therein  when  read  in  conjunction  with  the related
consolidated  financial statements. These financial statements and the financial
statement  schedule  are  the  responsibility  of  the Company's management; our
responsibility  is  to  express an opinion on these financial statements and the
financial  statement  schedule  based  on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United  States  of  America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating  the  overall  financial  statement presentation. We believe that our
audits  provide  a  reasonable  basis  for  our  opinion.

PricewaterhouseCoopers  LLP
February  12,  2002,  except  for
Note  16, as to  which  the  date  is
April  4,  2002

                                       32
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To  the  Board  of  Directors
And  Stockholders  of  Talk  America  Holdings,  Inc.

We  have  audited  the  accompanying  consolidated  statements  of  operations,
stockholders'  equity  (deficit)  and cash flows of Talk America Holdings, Inc.,
(formerly  Talk.com Inc.) and subsidiaries for the year ended December 31, 1999.
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  audit.

We  conducted our audit in accordance with auditing standards generally accepted
in  the  United  States  of  America.  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  amount 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  audit  provides  a
reasonable  basis  for  our  opinion.

In  our opinion, the consolidated financial statements referred to above present
fairly,  in  all  material respects, the results of operations and cash flows of
Talk  America  Holdings,  Inc.  and subsidiaries for the year ended December 31,
1999,  in conformity with accounting principles generally accepted in the United
States  of  America.

BDO  Seidman,  LLP

New  York,  New  York
February  7,  2000

                                       33
<PAGE>

<TABLE>
<CAPTION>
                                   TALK  AMERICA  HOLDINGS,  INC.
                                    CONSOLIDATED BALANCE SHEETS
                               (IN THOUSANDS, EXCEPT FOR SHARE DATA)

                                                                                        DECEMBER 31,    DECEMBER 31,
                                                                                           2001            2000
                                                                                      --------------  --------------
<S>                                                                                       <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                          $      22,100   $      40,604
   Accounts receivable, trade (net of allowance for uncollectible
     accounts of $46,404 in 2001 and $29,459 in 2000)                                        26,647          53,637
   Prepaid expenses and other current assets                                                  1,951           2,962
                                                                                      --------------  --------------
        Total current assets                                                                 50,698          97,203

Property and equipment, net                                                                  77,285          83,656
Goodwill and intangibles, net                                                                29,672         218,639
Other assets                                                                                  7,566           8,251
                                                                                      --------------  --------------
                                                                                      $     165,221   $     407,749
                                                                                      ==============  ==============

LIABILITIES, CONTINGENT OBLIGATIONS AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable                                                                   $      43,098   $      70,794
   Sales, use and excise taxes                                                                8,339           7,935
   Deferred revenue                                                                          10,193          12,997
   Current portion of long-term debt                                                         10,544           2,822
   Convertible subordinated notes due 2002 (see Notes 7 and 16)                               3,910              --
   Other current liabilities                                                                 11,189           5,723
                                                                                      --------------  --------------
        Total current liabilities                                                            87,273         100,271
                                                                                      --------------  --------------

Long-term debt:
   Convertible notes due 2011 (principal of $32,773 and future accrued  interest of
     $30,982)                                                                                63,755              --
   Convertible subordinated notes due 2002 (see Notes 7 and 16)                              57,934          66,852
   Convertible subordinated notes due 2004                                                   18,093          18,093
   Senior credit facility and other long-term debt                                           12,588          18,750
                                                                                      --------------  --------------
      Total long-term debt                                                                  152,370         103,695
                                                                                      --------------  --------------

Deferred revenue                                                                                 --           6,200
Other liabilities                                                                                --             253

Commitments and contingencies

Contingent obligations:
   Contingent redemption value of warrants                                                       --          36,324
   Contingent redemption value of common stock                                                   --          78,306
                                                                                      --------------  --------------
      Total contingent obligations                                                               --         114,630

Stockholders' equity (deficit):
   Preferred stock - $.01 par value, 5,000,000 shares authorized; no shares
      outstanding                                                                                --              --
   Common stock - $.01 par value, 300,000,000 shares authorized;
      81,452,721 and 78,445,134 shares issued in 2001 and 2000                                  815             784
   Additional paid-in capital                                                               350,626         286,963
   Accumulated deficit                                                                     (425,863)       (201,196)
   Treasury stock, 274,497 shares at December 31, 2000, at cost                                  --          (3,851)
                                                                                      --------------  --------------
      Total stockholders' equity (deficit)                                                  (74,422)         82,700
                                                                                      --------------  --------------
                                                                                      $     165,221   $     407,749
                                                                                      ==============  ==============
                   See accompanying notes to consolidated financial statements.
</TABLE>

                                       34
<PAGE>

<TABLE>
<CAPTION>


                               TALK  AMERICA  HOLDINGS,  INC.
                         CONSOLIDATED  STATEMENTS  OF  OPERATIONS
                      (IN  THOUSANDS,  EXCEPT  FOR  PER  SHARE  DATA)

                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                  2001       2000       1999
                                                              ----------   ---------  ---------
<S>                                                                <C>         <C>        <C>
Sales                                                           $495,470   $544,548   $516,548
Costs and expenses:
   Network and line costs                                        235,153    292,931    289,029
   General and administrative expenses                            82,202     65,360     39,954
   Provision for doubtful accounts                                92,778     53,772     28,250
   Sales and marketing expenses                                   81,285    170,864     96,264
   Depreciation and amortization                                  34,390     19,257      6,214
   Impairment and restructuring charges                          170,571         --         --
   Significant other charges (income)                                 --         --     (2,718)
                                                               ----------  ---------  ---------
      Total costs and expenses                                   696,379    602,184    456,993
                                                               ----------  ---------  ---------
Operating income (loss)                                         (200,909)   (57,636)    59,555
Other Income (expense):
   Interest income                                                 1,220      4,859      3,875
   Interest expense                                               (6,091)    (5,297)    (4,616)
   Other expense, net                                             (2,698)    (3,822)    (1,115)
                                                               ----------  ---------  ---------
Income (loss) before provision for income taxes                 (208,478)   (61,896)    57,699
Provision for income taxes                                            --         --         --
                                                               ----------  ---------  ---------
Income (loss) before extraordinary gains and cumulative
   effect of an accounting change                               (208,478)   (61,896)    57,699
Extraordinary gains from extinguishments of debt                  20,648         --     21,230
Cumulative effect of an accounting change                        (36,837)        --         --
                                                               ----------  ---------  ---------
Net income (loss)                                              $(224,667)  $(61,896)  $ 78,929
                                                               ==========  =========  =========

Income (loss) per share - Basic:
   Income (loss) before extraordinary gains and cumulative
     effect of an accounting change per share                  $   (2.63)  $  (0.88)  $   0.94
   Extraordinary gains per share                                    0.26         --       0.35
   Cumulative effect of an accounting change per share             (0.47)        --         --
                                                               ----------  ---------  ---------
   Net income (loss) per share                                 $   (2.84)  $  (0.88)  $   1.29
                                                               ==========  =========  =========
   Weighted average common shares outstanding                     79,242     70,527     61,187
                                                               ==========  =========  =========
Income (loss) per share - Diluted:
   Income (loss) before extraordinary gains and cumulative
     effect of an accounting change per share                  $   (2.63)  $  (0.88)  $   0.90
   Extraordinary gains per share                                    0.26         --       0.33
   Cumulative effect of an accounting change per share             (0.47)        --         --
                                                               ----------  ---------  ---------
   Net income (loss) per share                                 $   (2.84)  $  (0.88)  $   1.23
                                                               ==========  =========  =========
   Weighted average common and common equivalent
     shares outstanding                                           79,242     70,527     64,415
                                                               ==========  =========  =========

                    See accompanying notes to consolidated financial statements.
</TABLE>

                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                 TALK AMERICA HOLDINGS, INC.
                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                      (IN THOUSANDS)

                                                               ADDITIONAL
                                           COMMON STOCK         PAID-IN        ACCUMULATED     TREASURY STOCK
                                        ------------------                                    -----------------
                                        SHARES      AMOUNT       CAPITAL         DEFICIT      SHARES     AMOUNT      TOTAL
                                     ------------  -------     -----------     ----------    -------    - ------    --------
<S>                                <C>            <C>      <C>            <C>               <C>       <C>         <C>

Balance, December 31, 1998              66,935      $ 669      $  265,325     $  (218,229)    (12,949)  $(184,550)  $(136,785)

Net income (loss)                           --         --              --          78,929          --          --      78,929
AOL investment                              --         --          (3,730)             --       4,121      58,730      55,000
Exercise of common stock options            --         --         (47,313)             --       6,773      95,600      48,287
Exercise of common stock rights             38          1             651              --          --          --         652
Acquisition of treasury stock               --         --              --              --        (639)     (7,686)    (7,686)
Issuance of common stock for
   convertible debt                         --         --          (1,328)             --         574       8,186       6,858
Contingent redemption value
   of common stock and
   warrants                                 --         --        (114,630)             --          --          --    (114,630)
                                     -----------   -------     -----------     ----------      -------     -------   --------
Balance, December 31, 1999              66,973        670          98,975        (139,300)     (2,120)    (29,720)    (69,375)

Net income  (loss)                          --         --              --         (61,896)         --          --     (61,896)
Exercise of common stock options            --         --          (2,274)             --         342       4,802       2,528
Exercise of common stock rights             --         --           1,940              --         653       9,154      11,094
Issued in connection with
   acquisition                          11,472        114         187,926              --         699       9,796     197,836
Warrants issued for consulting              --         --           2,175              --          --          --       2,175
Issuance of common stock for
   convertible debt                         --         --              17              --           3          23          40
Issuance of common stock for
   compensation                             --         --          (1,796)             --         149       2,094         298
                                     -----------   -------     -----------     ----------      -------     -------   --------
Balance, December 31, 2000              78,445        784         286,963        (201,196)       (274)     (3,851)     82,700

Net income (loss)                           --         --              --        (224,667)         --          --    (224,667)
Issuance of common stock for
   compensation                             --         --          (2,451)             --          204       2,858        407
Cumulative effect of an
   accounting change                        --         --          65,617              --           --          --     65,617
Issuance of common stock in
   connection with AOL
   restructuring                         3,008         31             420              --           71         993      1,444
Acquisition of treasury stock               --         --              --              --           (1)         --         --
Issuance of warrants for
   services                                 --         --              77              --           --          --         77
                                     -----------   -------     -----------     ----------      -------     -------   --------
Balance, December 31, 2001              81,453       $815        $350,626       $(425,863)          --       $  --  $ (74,422)
                                     ===========   =======     ===========     ===========     ========    =======   ========

                              See accompanying notes to consolidated financial statements.

</TABLE>

                                       36
<PAGE>

<TABLE>
<CAPTION>

                                        TALK AMERICA HOLDINGS, INC.
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (IN THOUSANDS)

                                                                                      YEAR ENDED DECEMBER 31,
                                                                               -------------------------------------
                                                                                  2001           2000           1999
                                                                               ----------     ----------     ----------
<S>                                                                           <C>                        <C>        <C>
Cash flows from operating activities:
Net income (loss)                                                              $(224,667)     $(61,896)       $ 78,929
Adjustments to reconcile of net income (loss) to net cash provided by
   (used in) operating activities:
   Provision for doubtful accounts                                                92,778        53,772          28,250
   Depreciation and amortization                                                  34,390        19,257           6,214
   Non-cash compensation                                                              --           706              --
   Provision for uncollectible note                                                   77         2,500              --
   Loss on retirement of assets                                                      116            68              --
   Impairment of goodwill and intangibles                                        168,684            --              --
   Cumulative effect of accounting change of contingent redemptions               36,837            --              --
   Extraordinary gain from restructuring of contingent redemptions               (16,867)           --              --
   Extraordinary gain from extinguishment of debt                                 (3,781)           --         (21,230)
   Unrealized loss on increase in fair value of contingent redemptions             2,372            --              --
   Changes in assets and liabilities, net of acquisitions of businesses:
      Accounts receivable, trade                                                 (65,788)      (43,390)        (41,026)
      Prepaid expenses and other current assets                                      808         8,066          (1,984)
      Other assets                                                                   322        (1,252)          1,957
      Accounts payable                                                           (27,696)       12,763         (23,457)
      Deferred revenue                                                            (9,004)       (1,433)         (7,400)
      Sales, use and excise taxes                                                    404            84             972
      Accrued expenses and other liabilities                                       5,418        (4,181)         (2,822)
                                                                               ----------     ----------     ----------
         Net cash provided by (used in) operating activities                      (5,597)      (14,936)         18,403
                                                                               ----------     ----------     ----------

Cash flows from investing activities:
   Acquisition of intangibles                                                       (154)         (515)             --
   Acquisition of Access One, net of cash acquired                                    --        (3,617)             --
   Capital expenditures                                                           (4,355)      (34,862)         (6,506)
   Sale of marketable securities, net                                                 --            --          89,649
                                                                               ----------     ----------     ----------
      Net cash provided by (used in) investing activities                         (4,509)      (38,994)         83,143
                                                                               ----------     ----------     ----------

Cash flows from financing activities:
   Proceeds from borrowings                                                            --        20,000             --
   Payments of borrowings                                                          (2,624)      (18,025)            --
   Payments of capital lease obligations                                           (1,022)           --             --
   Repayment of margin account indebtedness                                            --            --        (49,621)
   Acquisition of convertible debt                                                 (1,227)           --        (72,304)
   Proceeds from exercise of options and warrants                                      --         2,528         48,287
   AOL investment                                                                      --            --         55,000
   Payments in connection with restructuring contingent redemptions                (3,525)           --             --
   Proceeds from exercise of common stock rights                                       --        11,094            652
   Acquisition of treasury stock                                                       --            --         (7,686)
                                                                               ----------     ----------     ----------
   Net cash provided by (used in) financing activities                             (8,398)       15,597        (25,672)
                                                                               ----------     ----------     ----------

Net increase (decrease) in cash and cash equivalents                              (18,504)      (38,333)        75,874
Cash and cash equivalents, beginning of year                                       40,604        78,937          3,063
                                                                               ----------     ----------     ----------
Cash and cash equivalents, end of year                                           $ 22,100      $ 40,604       $ 78,937
                                                                               ==========     ==========     ==========

                              See accompanying notes to consolidated financial statements.

</TABLE>

                                       37
<PAGE>

NOTE  1.  SUMMARY  OF  ACCOUNTING  POLICIES


(A)  BUSINESS

     Talk America Holdings Inc. a Delaware corporation, through its consolidated
subsidiaries,  primarily  Talk America, Inc. (the "Company"), provides local and
long  distance  telecommunication  services  to  residential  and small business
customers throughout the United States. The Company's telecommunication services
offerings  include  local  and  long  distance  phone  services, primarily local
services  bundled  with  long  distance services, long distance service, inbound
toll-free service and dedicated private line services for data transmission. The
Company  seeks to expand its customer base through direct marketing channels and
marketing  arrangements  with  business  partners.

(B)  BASIS  OF  FINANCIAL  STATEMENTS  PRESENTATION

     The  consolidated financial statements include the accounts of Talk America
Holdings,  Inc.  and  its wholly owned subsidiaries and have been prepared as if
the  entities had operated as a single consolidated group since their respective
dates  of  incorporation.  All  intercompany balances and transactions have been
eliminated.

(C)  USE  OF  ESTIMATES

     In  preparing  financial  statements  in conformity with generally accepted
accounting  principles  in  the  United  States,  management is required to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and the disclosure of contingent assets and liabilities at the date
of  the  financial  statements  and  revenues  and expenses during the reporting
period.  Actual  results  could  differ  from  those  estimates.

(D)  RECLASSIFICATIONS

     Certain  amounts for 2000 and 1999 have been reclassified to conform to the
current  year  presentation.

(E)  RISKS  AND  UNCERTAINTIES

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

     -    The Company's business strategy with respect to bundled local and long
          distance  services  may  not  succeed
     -    Failure  to manage, or difficulties in managing, the Company's growth,
          operations  or  restructurings  including  attracting  and  retaining
          qualified  personnel  and  opening up new territories for its services
          with  favorable  gross  margins
     -    Dependence  on  the  availability  or functionality of incumbent local
          telephone companies' networks, as they relate to the unbundled network
          element  platform  or  the  resale  of  such  services
     -    Increased  price  competition  in  local  and  long  distance services
     -    Failure  or  interruption  in  the  Company's  network and information
          systems
     -    Changes  in  government  policy,  regulation  and  enforcement
     -    Adverse  developments in the Company's relationship with its marketing
          partners
     -    Failure of the marketing of the bundle of the Company's local and long
          distance  services  under  its direct marketing channels and under its
          agreements  with  its  various  marketing  partners  or  failure  to
          successfully  add  new  marketing  partners
     -    Failure  of  the  Company's  collection  management  system and credit
          controls  efforts  for  customers
     -    Inability  to  adapt  to  technological  change
     -    Competition  in  the  telecommunications  industry
     -    Inability  to  manage  customer  attrition, bad debt expense and lower
          customer  acquisition  costs
     -    Adverse  change  in  Company's  relationship with third party carriers
     -    Failure  or  bankruptcy of other telecommunications companies whom the
          Company  relies  upon  for  services  and  revenues

                                       38
<PAGE>

     -    The  Company  received  a notice of delisting from the Nasdaq National
          Market; delisting from the Nasdaq National Market may adversely impact
          the  market  price  and  liquidity  of  the  Company's  common  stock
     -    Ability to realize the benefit of any net operating loss carryforwards
          on  future  taxable  income  generated  by  the  Company

     Negative  developments  in  these areas could have a material effect on the
Company's  business,  financial  condition  and  results  of  operations.

(F)  CONCENTRATION  OF  CREDIT  RISK

     The  Company  maintains  its  cash  and  cash  equivalents  in bank deposit
accounts,  which  at  times  may  exceed  federally  insured limits. The Company
generally  does not have a significant concentration of credit risk with respect
to  net  trade  accounts  receivable,  due  to  the  large  number  of end users
comprising  the  Company's  customer  base and their dispersion across different
geographic  regions.

(G)  RECOGNITION  OF  REVENUE

     The  Company  recognizes  revenue  from  voice,  data  and  other
telecommunications  related  services in the period in which subscriber uses the
related  service.  Allowances  are  provided  for estimated uncollectible usage.

     Deferred  revenue  represents  the  unearned  portion  of local service and
features  that  are  billed  a  month  in advance. In addition, deferred revenue
includes  a  non-refundable  prepayment  received  in 1997 in connection with an
amended  telecommunications  services  agreement  with  Shared  Technologies
Fairchild,  Inc.  The  prepayment  is  amortized  over the five-year term of the
agreement,  which  expires October 2002. The amount included in revenue was $7.4
million  in  each  of  2001, 2000 and 1999. The remaining amount of $6.2 million
will  be  included  in  revenue  in 2002. This agreement is terminable by either
party  on  thirty  days  notice.  Termination  by  either party would accelerate
recognition  of  the  deferred  revenue.

     The  Securities  and  Exchange  Commission  ("SEC") issued Staff Accounting
Bulletin  No. 101 "Revenue Recognition in Financial Statements" ("SAB 101") that
became  effective  for the Company in the fourth quarter of 2000 and was adopted
retroactively  to  January  1,  2000.  SAB  101  addresses  revenue  recognition
policies  and  practices  of  companies  that  report  to  the SEC.  The Company
believes  its  revenue  recognition policies and procedures comply with SAB 101.

(H)  CASH  AND  CASH  EQUIVALENTS

     The  Company  considers  all  temporary  cash  investments purchased with a
maturity  of  three  months  or  less  to  be  cash  equivalents.

(I)  PROPERTY  AND  EQUIPMENT  AND  DEPRECIATION

     Property  and  equipment  are recorded at historical cost. Depreciation and
amortization  are  calculated  using the straight-line method over the estimated
useful  lives  of  the  assets  from  3  to 39 years. Leasehold improvements are
depreciated  over  the  life  of  the  related  lease  or  asset,  if  shorter.
Amortization of assets acquired under capital leases is included in depreciation
and  amortization  expense  (see  Note  6).

(J)  INTERNAL  USE  COMPUTER  SOFTWARE

     Direct development costs associated with internal-use computer software are
accounted  for  under  Statement  of  Position 98-1 "Accounting for the Costs of
Computer  Software  Developed  or Obtained for Internal Use" and are capitalized
including  external  direct costs of material and services and payroll costs for
employees  devoting  time  to  the software projects.  Costs incurred during the
preliminary  project stage, as well as for maintenance and training are expensed
as incurred.  Amortization is provided on a straight-line basis over the shorter
of  3  years  or  the  estimated  useful  life  of  the  software  (see Note 6).

                                       39
<PAGE>

(K)  GOODWILL  AND  INTANGIBLES

     Goodwill  and  intangibles  were  approximately  $29.7  million  and $218.6
million  at  December  31, 2001 and 2000, respectively.  Goodwill represents the
cost  in  excess  of  net  assets  of  acquired  companies and is amortized on a
straight-line  basis over periods of 10 and 15 years.   Intangibles consist of a
service  mark and purchased customer accounts and workforce and are amortized on
a  straight-line  basis  over  periods  ranging from 3 to 15 years.  Accumulated
amortization  at  December  31, 2001 and 2000 was $4.9 million (which reflects a
$26.9  million  decrease in accumulated amortization attributed to an impairment
charge  in  2001) and $11.4 million, respectively.  Amortization of goodwill and
intangibles  was $20.8 million, $9.7 million and $82,000 in 2001, 2000 and 1999,
respectively.    The  Company incurred an impairment charge of $168.7 million in
2001  primarily  related  to  the  write-down  of  goodwill  associated with the
acquisition  of  Access  One  (see  Notes  3  and  4).

(L)  VALUATION  OF  LONG-LIVED  ASSETS

     The  Company  continually  reviews the recoverability of the carrying value
long-lived  assets,  including  goodwill  and  intangibles using the methodology
prescribed  in  the  Statement  of  Financial  Accounting  Standards  No.  121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  of." Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not  be  recoverable.  When such events occur, the Company compares the carrying
amount  of  the  assets  to the undiscounted expected future cash flows. If this
comparison  indicates  there  is  impairment,  the  amount  of the impairment is
typically calculated using discounted expected future cash flows. Certain of the
Company's  long-lived  assets  were  considered  impaired  during the year ended
December  31,  2001  (see  Note  4).

(M)  INCOME  TAXES

     Income  taxes  are  accounted  for  under  the  asset and liability method.
Deferred  tax assets and liabilities are recognized for the estimated future tax
consequences  attributable  to  the  differences between the financial statement
carrying  amounts  of  existing  assets and liabilities and their respective tax
bases  and operating loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those  temporary  differences  are  expected  to  be  recovered  or  settled.

     Since 1998, the Company has provided a full valuation allowance for the net
deferred  tax  assets  for  the  estimated  future  tax  effects attributable to
temporary  differences between the basis of assets and liabilities for financial
and  tax  reporting  purposes  (see  Note  11).

(N)  NET  INCOME  (LOSS)  PER  SHARE

     Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period.  Diluted  earnings per share reflects, in periods in which net income is
reported,  the  effect of common shares issuable upon exercise of stock options,
warrants  and  conversion  of  convertible  debt,  when  such  effect  is  not
antidilutive  (see  Note  15).

(O)  FINANCIAL  INSTRUMENTS

     The  carrying  values  of  accounts  receivable, prepaid expenses and other
current  assets  and  notes  receivable,  accounts  payable and accrued expenses
approximate  fair  values.  Convertible debt is recorded at face amount but such
debt  has traded in the open market at substantial discounts to face amount (see
Note  7).  The market value of the 4 1/2% and 5% Notes was approximately 25% and
61%  of  face  amount  at  December  31,  2001  and  2000,  respectively.

(P)  STOCK-BASED  COMPENSATION

     The  Company accounts for its stock option awards under the intrinsic value
based  method  of  accounting  prescribed by APB Opinion No. 25, "Accounting for
Stock  Issued  to  Employees,"  and  related  interpretations  including  FASB
Interpretation  No.  44  "Accounting  for  Certain  Transactions Including Stock
Compensation,"  an  interpretation  of  APB Opinion No. 25.  Under the intrinsic
value  based  method,  compensation  cost  is  the excess, if

                                       40
<PAGE>

any,  of the quoted market price of the stock at grant date or other measurement
date  over  the  amount  an  employee must pay to acquire the stock. The Company
makes  pro forma disclosures of net income and earnings per share as if the fair
value  based  method of accounting had been applied as required by SFAS No. 123,
"Accounting  for  Stock-Based  Compensation"  (see  Note  10).

(Q)  COMPREHENSIVE  INCOME

     The  Company has no items of comprehensive income or expense.  Accordingly,
the  Company's  comprehensive  income (loss) and net income (loss) are equal for
all  periods  presented.

(R)  NEW  ACCOUNTING  PRONOUNCEMENTS

     Effective  January  1,  2001, the Company adopted SFAS No. 133, "Accounting
for  Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting  for  Derivatives Instruments and Hedging Activities-Deferral of the
Effective  Date  of  FASB  Statement No. 133," and SFAS No. 138, "Accounting for
Certain  Derivatives  Instruments and Certain Hedging Activities." The standards
require  an  entity to recognize all derivatives as either assets or liabilities
measured  at  fair  value.  The  accounting  for  the changes in fair value of a
derivative  depends  on  the  use  of  the  derivative. The cumulative effect of
adopting  these  new  accounting standards did not have a material effect on the
Company's  results  of  operations  or  its  financial  position for the periods
presented  in  the  financial  statements  included  herein.

     The  Financial  Accounting  Standards  Board Emerging Issues Task Force has
issued  Abstract  No.  00-19,  "Accounting  for Derivative Financial Instruments
Indexed  to, and Potentially Settled in, a Company's Own Stock," which addresses
how  such contracts should be classified and measured by the Company. Under this
issue,  contracts that require net-cash settlement would be initially classified
as  assets  or  liabilities,  then  measured at fair value, with changes in fair
value  reported in earnings and disclosed in the financial statements as long as
the  contracts  remain  classified  as  assets  or  liabilities.  If  contracts
classified  as  assets  or  liabilities  are  ultimately  settled in shares, any
previous  gains  or  losses  on those contracts would continue to be included in
earnings. This abstract is effective for all contracts that remained outstanding
at  June 30, 2001, and presented on that date as a cumulative effect of a change
in accounting principle. The cumulative effect of the adoption of this change in
accounting  principle  resulted  in  a  non-cash  charge  to operations of $36.8
million  in  the  year  ending  December  31,  2001  (see  Note  2).

     In  July  2001, the FASB issued Statements No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets," which eliminate the pooling
of  interests method of accounting, establish new criteria for identification of
separate intangibles acquired, and establish the impairment approach rather than
amortization for goodwill. Effective January 1, 2002, the Company will no longer
be  required  to  record  amortization  expense on goodwill, but will instead be
required  to  evaluate these assets for potential impairment on a periodic basis
and to record a charge for any such impairment. Management believes the adoption
of  the  impairment evaluation requirements of SFAS 142 will not have a material
effect  on the Company's future results of operations or financial position (see
Note  4).

     In August 2001, the FASB issued Statement of Financial Accounting Standards
No.  143,  "Accounting  for  Obligations  Associated  with  the  Retirement  of
Long-Lived  Assets."  SFAS  143  establishes  accounting  standards  for  the
recognition and measurement of an asset retirement obligation and its associated
asset  retirement  cost.  It  also  provides  accounting  guidance  for  legal
obligations  associated  with the retirement of tangible long-lived assets. SFAS
143  is  effective  in  fiscal  years  beginning after June 15, 2002, with early
adoption permitted. The Company expects that the provisions of SFAS 143 will not
have  a  material effect on its results of operations or financial position upon
adoption.

     In  October  2001,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No.  144,  "Accounting  for  the Impairment or Disposal of Long-Lived
Assets."  SFAS  144  establishes a single accounting model for the impairment or
disposal  of  long-lived  assets,  including  discontinued  operations. SFAS 144
superseded  Statement of Financial Accounting Standards No. 121, "Accounting for
the  Impairment  of  Long-Lived  Assets and for Long-Lived Assets to Be Disposed
Of,"  and  APB  Opinion No. 30, "Reporting the Results of Operations - Reporting
the  Effects  of Disposal of a Segment of a Business, and Extraordinary, Unusual
and  Infrequently Occurring Events and Transactions." The provisions of SFAS 144
are  effective  in  fiscal  years

                                       41
<PAGE>

beginning after December 15, 2001, with early adoption permitted, and in general
are  to  be applied prospectively. The Company plans to adopt SFAS 144 effective
January  1,  2002  and  does  not  expect that the adoption will have a material
effect  on  its  results  of  operations  or  financial  position.

     In  November  2001,  the Financial Accounting Standards Board Emerging Task
Force  reached  a  consensus  on EITF Issue 01-09, "Accounting for Consideration
Given  by  a Vendor to a Customer or a Reseller of the Vendor's Products," which
is  a  codification  of  EITF  00-14,  00-22 and 00-25. This issue presumes that
consideration  from  a vendor to a customer or reseller of the vendor's products
is  a  reduction  of the selling prices of the vendor's products and, therefore,
should  be  characterized  as  a  reduction  of  revenue  when recognized in the
vendor's  income  statement  and  could  lead  to negative revenue under certain
circumstances. Revenue reduction is required unless the consideration relates to
a  separate,  identifiable  benefit  and  the  benefit's  fair  value  can  be
established.  This  issue  should  be applied no later than in annual or interim
financial statements for periods beginning after December 15, 2001, which is the
Company's  first  quarter  ended  March  31, 2002. Upon adoption, the Company is
required to reclassify all prior period amounts to conform to the current period
presentation.  The Company has not yet evaluated the effects of these changes on
its  consolidated  financial  statements.

(S)  SEGMENT  DISCLOSURE

     The  Company  manages  its  business  as  one reportable operating segment.

NOTE  2.  AOL  AGREEMENTS

AOL  RESTRUCTURING  -  SEPTEMBER  2001

     On  September  19, 2001, the Company restructured its financial obligations
with  America  Online,  Inc.  ("AOL")  that arose under the Investment Agreement
entered  into  on January 5, 1999 and also ended its marketing relationship with
AOL  effective  September  30,  2001  (collectively the "AOL Restructuring"). In
connection  with  the  AOL  Restructuring,  the  Company  and AOL entered into a
Restructuring  and  Note Agreement ("Restructuring Agreement") pursuant to which
the  Company  issued  to  AOL  $54.0  million principal amount of its 8% secured
convertible  notes  due  September 2011 ("2011 Convertible Notes") and 3,078,628
additional  shares  of  the  Company's  common  stock  (see  Notes 7 and 16).

     Pursuant  to  the  Restructuring  Agreement,  in  exchange  for  and  in
cancellation  of  the  Company's  warrants  to  purchase 2,721,984 shares of the
common  stock  and  the  Company's  related  obligations  under  the  Investment
Agreement  to  repurchase  such  warrants from AOL, the Company issued 3,078,628
additional  shares  of its common stock to AOL, after which AOL holds a total of
7,200,000  shares  of  common  stock.  The  Company  agreed  to  provide certain
registration  rights to AOL in connection with the shares of common stock issued
to  it  by  the  Company.

     The  Restructuring  Agreement  provided  that the Investment Agreement, the
Security  Agreement  securing  the  Company's  obligations  under the Investment
Agreement  and  the  existing  Registration  Rights  Agreement  with  AOL  were
terminated  in  their  entirety  and  the parties were released from any further
obligation  under  these agreements. In addition, AOL, as the holder of the 2011
Convertible  Note, entered into an intercreditor agreement with the lender under
the  Company's  existing  secured  credit  facility.

     In  addition  to  the  restructuring of the financial obligations discussed
above,  the  Company  and  AOL agreed, in a further amendment to their marketing
agreement,  dated  as  of  September  19,  2001, to discontinue, effective as of
September  30, 2001, their marketing relationship under the marketing agreement.
In  connection with this discontinuance, the Company paid AOL $6.0 million under
the marketing agreement, payable in two installments - $2.5 million on September
20,  2001 and the remaining $3.5 million on October 4, 2001. AOL, in lieu of any
other  payment  for the early discontinuance of the marketing relationship, paid
the  Company  $20 million by surrender and cancellation of $20 million principal
amount  of  the  2011  Convertible  Notes  delivered  to AOL as discussed above,
thereby  reducing the outstanding principal amount of the 2011 Convertible Notes
to  $34  million.  The amendment also provided for the payment by the Company of
certain  expenses related to marketing services until the discontinuance and for
the  continued  servicing  and  transition  of  telecommunications  customer
relationships  after  the  discontinuance  of  marketing.

                                       42
<PAGE>

     In  accordance  with  SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled  Debt  Restructurings," the AOL Restructuring transaction was accounted
for  as  a troubled debt restructuring. The Company combined all liabilities due
AOL  at  the  time  of  the  Restructuring  Agreement,  including the contingent
redemption  feature  of  the  warrants  with  a  value  of $34.2 million and the
contingent redemption feature of the common stock with a value of $54.0 million.
The  total  liability  of  $88.2  million  was  reduced by the fair value of the
3,078,628  incremental  shares  provided to AOL of $1.4 million and cash paid in
connection with the AOL Restructuring of $3.5 million. Since the remaining value
of  $83.3 million was greater than the future cash flows to AOL of $66.4 million
(representing  the $34.0 million of convertible debt and $32.4 million of future
interest  expense),  the  liability  was written down to the value of the future
cash  flows  due to AOL and an extraordinary gain of $16.9 million was recorded.
As  a  result  of this accounting treatment, the Company will record no interest
expense  associated  with  these  convertible  notes  in  future  periods in the
Company's  statement  of  operations.

AOL  Historical  Agreements  -  1997  through  September  2001

     Since  1997,  the  Company had a number of agreements and amendments to its
agreements with AOL for the marketing and sale of telecommunications services to
AOL  subscribers.  A  substantial amendment to the AOL agreement in January 1999
provided  for:  (a)  quarterly  payments  by  the Company to AOL during the long
distance  exclusivity  period  of  the  agreement, with fixed quarterly payments
ranging from $10.0 to $15.0 million ($19.0 million after July 1, 2000 if AOL had
elected  to  provide certain additional marketing and promotions to the Company)
until  June  30,  2001  and  quarterly  payments thereafter at a fixed 5% of the
Company's  marginable long distance revenues from AOL subscribers in the quarter
under  the  agreement;  (b)  quarterly  payments  by  the  Company to AOL, after
termination of the long distance exclusivity period and so long as AOL continued
to  provide  certain levels of marketing and promotions to the Company under the
agreement,  at  an annual declining fixed percentage of the Company's marginable
long  distance revenues from AOL subscribers under the agreement, starting at 5%
and  declining  by  one percentage point each year to 1%; (c) the elimination of
the  Company's  obligation to make bounty and current profit-sharing payments to
AOL;  (d)  alteration  of  the  terms  of  the  online  and  offline  marketing
arrangements  between  the Company and AOL; (e) extension of the term of the AOL
agreement,  including  the exclusivity period, until June 30, 2003, although AOL
had  the  right, in each year beginning in 2000, to elect, on or before May 1 of
such  year,  to end the Company's long distance exclusivity period as of June 30
of  such  year;  (f)  elimination of AOL's rights to receive further warrants to
purchase  common stock based upon customers gained from the AOL subscriber base;
(g)  AOL's contribution of up to $4.0 million (up to $6.0 million if the Company
pays  $19.0 million as noted above) per quarter until June 30, 2001, for offline
marketing;  and  (h)  establishment  of  the  framework for the Company to offer
additional services and products to AOL subscribers. By an amendment dated as of
June  30,  2000, AOL agreed to give the Company a $1.0 million credit in each of
the  second  and third quarters of 2000 against amounts otherwise payable by the
Company  under  the  AOL agreement. By a further amendment dated as of August 1,
2000,  in  consideration  of  AOL's  agreement  to  provide  certain  additional
marketing in the last five months of 2000, the Company agreed to make additional
payments  to  AOL of $3.0 million in August 2000 and $1.0 million in each of the
months  in the fourth quarter of 2000, which amounts were to be credited against
the  Company's  payment  obligations  in  any  quarter for which the Company was
required  to  pay  at  the  quarterly  rate  of  $19.0  million.

     AOL  elected  to  exercise  its  right  to  terminate  the  long  distance
exclusivity  as of June 30, 2001 and thereafter the Company had the right, prior
to  the  AOL  Restructuring,  to offer long distance services on a non-exclusive
basis  until  June  30,  2003.

     On January 5, 1999, pursuant to an Investment Agreement between AOL and the
Company,  AOL  purchased  a  total  of  4,121,372  shares of common stock of the
Company  for  $55.0  million  in  cash  and  the surrender of rights to purchase
5,076,016  shares  of  common  stock of the Company pursuant to various warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant  and retained vested warrants exercisable for 2,721,984 shares of common
stock.  Under  the  terms of the Investment Agreement entered into with AOL, the
Company  agreed  to reimburse AOL for losses AOL may incur on the sale of any of
the 4,121,372 shares of the Company's common stock held by AOL through September
30,  2001.  The  maximum  amount  payable to AOL as reimbursement on the sale of
AOL's  shares  was  approximately  $54.0  million plus AOL's reasonable expenses
incurred  in  connection  with  such  sale. In addition, AOL also had the right,
commencing  on  July 1, 2001, to require the Company to repurchase warrants held
by AOL to purchase 2,721,984 shares of Company's common stock for $36.3 million,
which  could  have been paid in common stock or cash (provided that some portion
of  the  repurchase  price  could  have  been  paid in a quarterly amortization,
two-year  promissory  note  of  the Company if the repurchase

                                       43
<PAGE>

price  exceeded  the then current valuation of the warrants being purchased). In
addition,  upon the occurrence of certain events, including material defaults by
the  Company  under its AOL agreements and a "change of control" of the Company,
the  Company  could  have been required to repurchase for cash all of the shares
held  by  AOL  for  $78.3  million  ($19  per share), and the warrants for $36.3
million.

     The  Company had originally recorded the contingent redemption value of the
common  stock  and  warrants  at  $78.3  and $36.3 million, respectively, with a
corresponding  reduction  in  additional paid-in capital. In connection with the
implementation  of  EITF  00-19, the contingent redemption feature of the common
stock  and  warrants  were recorded as a liability at their fair values of $53.5
and  $32.3  million, respectively, as of June 30, 2001. The increase in the fair
value  of  these  contingent  redemption instruments from issuance on January 5,
1999  to  June  30,  2001  was  $36.8  million,  which  has  been presented as a
cumulative  effect  of  a  change  in  accounting  principle in the statement of
operations.  For  the  quarter ended September 30, 2001, the Company recorded an
unrealized  loss  of  $2.4  million  on  the  increase  in the fair value of the
contingent  redemption  instruments,  which has been reflected in other (income)
expense  on  the  statement  of operations. As discussed above, these contingent
redemption  instruments  were  satisfied  through  the  Restructuring  Agreement
entered  into  with  AOL  on  September  19,  2001.

NOTE  3.  ACQUISITIONS

     On August 9, 2000, a wholly owned subsidiary of the Company merged with and
into Access One Communications Corp., ("Access One").  Access One was a private,
local  telecommunications  service  provider  to nine states in the southeastern
United  States.  As  a  result  of such merger, Access One became a wholly owned
subsidiary  of  the Company and Access One stockholders received an aggregate of
approximately 12.2 million shares of the Company's common stock, and outstanding
options  and warrants to purchase shares of Access One common stock converted to
options  and  warrants  to  purchase  an  aggregate of 2.1 million shares of the
Company's  common  stock.  The  total  purchase  price  was approximately $201.6
million and the merger was accounted for under the purchase method of accounting
for  business  combinations.  Accordingly, the consolidated financial statements
include  the  results  of  operations  of  Access One from the merger date.  The
merger  resulted  in  the  recording of intangible assets of approximately $15.9
million  and  goodwill  of  $210.0  million,  which  were  being  amortized on a
straight-line  basis  over  their  expected  benefit  period  (see Note 4).  The
Company  acquired  $19.6  million of notes payable as part of the acquisition of
Access  One.

     The  following  unaudited  pro  forma information presents a summary of the
consolidated  results  of  operations of the Company as if the Access One merger
had  taken  place  at  the  beginning  of  the  periods  presented.

<TABLE>
<CAPTION>
                                                           (In thousands, except share data)
                                                                Year Ended December 31,
                                                       ---------------------------------------
                                                              2000                  1999
                                                         ---------------       ---------------
<S>                                                           <C>                    <C>
Sales                                                        $575,754             $546,122

Income (loss) before extraordinary gain                      $(86,424)            $21,805
Extraordinary gain                                                 --             $21,230
                                                         ---------------       ---------------
Net income (loss)                                            $(86,424)            $43,035
                                                         ===============       ===============

Basic earnings (loss) per common share:
   Income (loss) before extraordinary gain                     $(1.08)              $0.30
   Net income (loss)                                           $(1.08)              $0.59
Diluted earnings (loss) per common share:
   Income (loss) before extraordinary gain                     $(1.08)              $0.28
   Net income (loss)                                           $(1.08)              $0.55
</TABLE>

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

                                       44
<PAGE>

NOTE  4.  IMPAIRMENT  AND  RESTRUCTURING  CHARGES  AND SIGNIFICANT OTHER CHARGES
          (INCOME)

     In  2001,  the  Company  recorded  an  impairment  charge of $168.7 million
primarily  related to the write-down of goodwill associated with the acquisition
of  Access One, which was created by purchase accounting treatment of the merger
transaction  that  closed  in August 2000 (see Note 3). SFAS 121 "Accounting for
the  Impairment  of  Long-Lived  Assets and for Long-Lived Assets to be Disposed
of," requires the evaluation of impairment of long-lived assets and identifiable
intangibles  whenever  events  or  changes  in  circumstances  indicate that the
carrying  amount  of an asset may not be recoverable. Management determined that
goodwill should be evaluated for impairment in accordance with the provisions of
SFAS  121  due  to  the increased bad debt rate and increased customer churn, as
well  as  the AOL Restructuring that occurred in the quarter ended September 30,
2001. The Company addressed these operational issues by improving credit quality
through  credit  scoring  the  existing  and  future customer base, slowing down
growth  of  new  expected  customers  through  decreased marketing, and lowering
product  pricing. These and other actions taken by the Company resulted in lower
current  and  future  projected  growth  of bundled revenues and cash flows than
those  originally projected at the time of the Access One merger. The write-down
of  goodwill was based on an analysis of projected discounted cash flows using a
discount  rate  of  18%,  which  results  determined  that the fair value of the
goodwill  was  substantially  less  than  the  carrying  value.

     In  September  2001,  the  Company approved a plan to close the call center
operation  in Sunrise, Florida. The Company recorded a charge of $2.5 million in
the quarter ended September 30, 2001 to reflect the elimination of approximately
225  positions  amounting to $1.0 million and lease exit costs amounting to $1.5
million  in connection with the call center closure. The employees identified in
the plan were notified in September 2001 and terminated in October 2001.  Actual
restructuring  costs  were  $1.9  million, comprised of $1.2 million of employee
severance  costs  and  $0.7  million  of lease termination and other call center
closure  costs.

     During 1999, the Company sold certain business units of TSFL Holdings, Inc.
(formerly  Symetrics  Industries,  Inc.),  resulting  in a gain of $2.7 million,
which  was  included  in  significant  other  charges(income)  in  the statement
operations.

NOTE  5.  COMMITMENTS  AND  CONTINGENCIES

(A)  LEASE  AGREEMENTS

     The  Company  leases  office  space  and  equipment  under  operating lease
agreements.  Certain  leases  contain  renewal options and purchase options, and
generally  provide  that  the  Company  shall  pay  for  insurance,  taxes  and
maintenance.   The  Company  also  leases  certain other equipment under capital
leases.  Total  rent  expense  for  all

                                       45
<PAGE>

operating  leases for the years ended December 31, 2001, 2000 and 1999 was $2.5,
$1.37, and $1.0 million, respectively.  As of December 31, 2001, the Company had
future  minimum  annual  lease  obligations  under  noncancellable operating and
capital  leases  with  terms  in  excess  of one year as follows (in thousands):

<TABLE>
<CAPTION>

YEAR                                             OPERATING         CAPITAL
                                                   LEASES          LEASES
                                              --------------    -------------
<S>                                                  <C>         <C>
2002                                               $1,815          $1,098
2003                                                1,680              65
2004                                                1,363              27
2005                                                  939              --
2006                                                  416              --
Thereafter                                            333              --
                                              --------------    -------------
Total minimum lease payments                       $6,546          $1,190
                                              ==============
Less: amounts representing interest                                    67
                                                                -------------
Present value of minimum capital lease payments                    $1,123
Less: current portion                                               1,035
                                                                -------------
                                                                      $88
                                                                =============
</TABLE>

(B)  LEGAL  PROCEEDINGS

     On  June  16,  1998,  a purported shareholder class action was filed in the
United  States  District  Court  for  the  Eastern District of Pennsylvania (the
"Court")  against  the Company and certain of its officers alleging violation of
the  securities  laws in connection with certain disclosures made by the Company
in  its  public  filings and seeking unspecified damages. Thereafter, additional
lawsuits  making  substantially  the  same  allegations  were  filed  by  other
plaintiffs  in  the  same  court.  A motion to dismiss was granted as to certain
officers  of the Company and denied as to the Company. On July 19, 2000, a class
was  certified.  On  July  20,  2001, the Company entered into a Stipulation and
Agreement  of  Settlement,  which  received  final  approval  from  the Court on
November  9,  2001.  The settlement amount of $5.8 million plus accrued interest
since  June  2001  was  paid  by  the  Company's  insurance  carrier.

     On November 12, 2001, the Company received an award of arbitrators awarding
Traffix,  Inc.  approximately  $6.2  million  in  an  arbitration concerning the
termination of a marketing agreement between the Company and Traffix, payable to
Traffix  in  two  installments  -  $3.7  million  paid  in November 2001 and the
remaining  $2.5  million  paid  on  April  1,  2002.

     The  Company  also is a party to a number of legal actions and proceedings,
arising  from  the  Company's  provision  and  marketing  of  telecommunications
services,  as  well  as  certain legal actions and regulatory investigations and
enforcement  proceedings  arising  in  the  ordinary  course  of  business.

     The  Company  believes  that  the ultimate outcome of the foregoing actions
will  not  result  in liability that would have a material adverse effect on the
Company's  financial condition or results of operations. However, it is possible
that,  because  of  fluctuations  in  the Company's cash position, the timing of
developments  with  respect  to  such  matters that require cash payments by the
Company,  while  such  payments are not expected to be material to the Company's
financial  condition,  could  impair  the Company's ability in future interim or
annual  periods  to  continue to implement its business plan, which could affect
its  results  of  operations  in  future  interim  or  annual  periods.

(C)  OTHER  COMMITMENTS

     The  Company  is  also  party  to various network service agreements, which
contain  certain  minimum  usage  commitments.  The largest contract establishes
pricing  and  provides  for  annual  minimum  payments as follows:  2002 - $22.2
million, 2003 - $22.8 million and 2004 - $27.9 million. A separate contract with
a  different vendor establishes pricing and provides for annual minimum payments
as  follows:  2002  - $3.0 million, 2003 - $6.0 million and 2004 - $3.0 million.

                                       46
<PAGE>

NOTE  6.  PROPERTY  AND  EQUIPMENT

     The  following  is  a  summary  of  property  and  equipment, at cost, less
accumulated  depreciation  (in  thousands):

<TABLE>
<CAPTION>

                                                         DECEMBER 31,
                                                     ---------------------
                                       LIVES           2001         2000
                                      --------       --------    ---------
<S>                                  <C>         <C>             <C>
Land                                                 $     330   $    340
Buildings and building improvements    39 years          6,588      6,005
Leasehold improvements               3-10 years            464        345
Switching equipment                    15 years         57,991     57,861
Software                                3 years          6,036      3,386
Equipment and other                  3-10 years         43,963     40,808
                                                     --------    ---------
                                                       115,372    108,745
Less: Accumulated depreciation                         (38,087)   (25,089)
                                                     ----------  ---------
                                                     $  77,285   $ 83,656
                                                     ==========  =========
</TABLE>

     For  the years ended December 31, 2001, 2000 and 1999, depreciation expense
amounted  to  $13.6  million,  $9.6  million  and  $5.9  million,  respectively.

     Included  in  the  December 31, 2001 balance of software is $1.4 million of
internally  developed computer software costs for internal use that are still in
progress.  No amortization expense was recognized during the year ended December
31,  2001,  with  respect  to  this  software.

     Included  in the December 31, 2001 balances of equipment and other are $2.1
million  of  assets  acquired  under  lease.  Accumulated amortization for these
assets  was  $183,000  at  December  31,  2001.

NOTE  7.  DEBT

(A)  CONVERTIBLE  SUBORDINATED  NOTES  DUE  2002  AND  2004

     In  September  1997, Talk America Holdings, Inc. sold $300 million of its 4
1/2%  Notes that mature on September 15, 2002 .  Interest on the 4 1/2% Notes is
due  and  payable semiannually on March 15 and September 15 of each year.  The 4
1/2%  Notes  are  convertible,  at  the option of the holder, into shares of the
Company's  Common  Stock  at a conversion price of $24.54 per share, as adjusted
for  the  dilutive  effect  of  the exercise of rights pursuant to the Company's
rights  offering  (see Note 10). The 4 1/2% Notes are redeemable, in whole or in
part,  at  the  Company's  option, at any time on or after September 15, 2000 at
101.80% of par prior to September 14, 2001 and 100.90% of par thereafter. During
2001,  Talk  America  Holdings, Inc. reacquired $5.0 million principal amount of
the 4 1/2% Notes; no amounts were reacquired during 2000.  At December 31, 2001,
$61.8  million  principal  amount  remained  outstanding  of  the  4 1/2% Notes.

     In  December  1997, Talk America Holdings, Inc. sold $200 million of the 5%
Notes  that  mature  on  December 15, 2004.  Interest on the 5% Notes is due and
payable  semiannually on June 15 and December 15 of each year.  The 5% Notes are
convertible,  at  the  option of the holder, at a conversion price of $25.38 per
share, as adjusted for the dilutive effect of the exercise of rights pursuant to
the  Company's  rights offering  (see Note 10).  The 5% Notes are redeemable, in
whole  or  in part at the Company's option, at any time on or after December 15,
2002 at 101.43% of par prior to December 14, 2003 and 100.71% of par thereafter.
At December 31, 2001, $18.1 million principal amount remained outstanding of the
5%  Notes.

     The  4  1/2%  Notes  that were reacquired by Talk America Holdings, Inc. in
2001  were  reacquired at a $3.8 million discount from face amount.  This amount
is  reported  as  an  extraordinary  gain  in  the  consolidated  statement  of
operations.

                                       47
<PAGE>

     The 4 1/2% and 5% Notes that were reacquired by Talk America Holdings, Inc.
during  1999 were reacquired at a $21.2 million discount from face amount.  This
amount  is  reported  as  an extraordinary gain in the consolidated statement of
operations.

     The  4  1/2%  and  5%  Notes  contained  a  repurchase  requirement  upon a
designated  event,  including change of control or termination of trading of the
Company's  common  stock  on  a  national  securities exchange or an established
automated  over-the-counter  trading  market.  The  Company  received  notice of
delisting  from  the Nasdaq National Market in February 2002 for not meeting the
minimum  bid  price  requirements  and  has  90  days to regain compliance.  The
requirement to repurchase the 4 1/2% and 5% Notes upon termination of trading of
the  Company's  common stock on a national securities exchange or an established
automated  over-the-counter trading market was eliminated in connection with the
restructuring  of  the  4  1/2%  and  5%  Notes  (see  Note  16).

     The  debt  service  of  the 4 1/2% and 5% Notes are the obligations of Talk
America  Holdings,  Inc.  Since  Talk  America Holdings, Inc conducts all of its
operations  through  its subsidiaries, primarily Talk America Inc., it relies on
dividends,  distributions  and  other payments from its subsidiaries to fund its
obligations.  Certain  of  Talk  America  Inc.'s  financing agreements limit the
ability  of Talk America Inc. to pay dividends and make payments to Talk America
Holdings,  Inc.

     The  Company  restructured a substantial portion of the 4 1/2% and 5% Notes
in  April 2002; accordingly, $57.9 million of the 4 1/2% Notes are classified as
long-term  debt  (see  Note  16).

(B)  SENIOR  CREDIT  FACILITY

     On  October  20, 2000, certain subsidiaries of Talk America Holdings, Inc.,
including  Talk America  Inc., entered into a Credit Facility Agreement with MCG
Finance  Corporation  providing for a term loan to the Company's subsidiaries of
up  to  $20.0 million and a line of credit facility permitting such subsidiaries
to  borrow  up to an additional  $30.0 million.  The availability of the line of
credit facility is subject, among other things, to the successful syndication of
that  facility.  Loans  under  the  Credit Facility Agreement bear interest at a
rate  equal to either (a) the Prime Rate, as published by the Board of Governors
of  the Federal Reserve System, or (b) LIBOR, plus, in each case, the applicable
margin.  The  applicable  margin  was  initially  2.5%  for  borrowings accruing
interest  at  the  Prime  Rate and 4% for borrowings accruing interest at LIBOR;
during  2000,  the  applicable  margin  was based on the ratio of funded debt to
trailing  twelve-month  operating cash flow, determined on a consolidated basis,
and  varied from 2.0% to 2.5% for borrowings accruing interest at the Prime Rate
and  from  3.5%  to  4.0%  for  borrowings  accruing  interest  at  LIBOR.

     The  Credit Facility Agreement subjects the Company and its subsidiaries to
certain  restrictions  and  covenants related to, among other things, liquidity,
per-subscriber-type  revenue,  subscriber  acquisition costs, and leverage ratio
and interest coverage ratio requirements. The credit facilities under the Credit
Facility Agreement were extended by amendment to June 30, 2005 for the term loan
facility  and to June 30, 2003 for the line of credit facility. The principal of
the  term  loan  is  required  to  be  repaid in quarterly installments of $1.25
million on the last calendar day of each fiscal quarter, commencing on September
30,  2001. The loans under the Credit Facility Agreement are secured by a pledge
of all of the assets of the subsidiaries of the Company that are parties to that
agreement.  In  addition,  the  Company  has guaranteed the obligations of those
subsidiaries  under  the  Credit  Facility  Agreement and related documents; the
Company's  guarantee subjects the Company to certain restrictions and covenants,
including  a  prohibition  against  the  payment  of dividends in respect of the
Company's  equity  securities,  except  under  certain limited circumstances. In
connection  with  the  AOL  Restructuring,  MCG  entered  into  an Intercreditor
Agreement  with  AOL.  The  Company  borrowed  $20.0 million under the term loan
facility  (approximately  $15.0 million was used to repay indebtedness of Access
One). At December 31, 2001, $17.5 million principal balance remained outstanding
under  the term loan facility and no amounts were outstanding or available under
the  line  of  credit  facility.

     By  amendments  on  February  12,  2002  and  April  3,  2002,  the Company
restructured  certain  portions of the Credit Facility Agreement and the related
consulting  agreement  and  other loan documents. This restructuring amended the
financial  covenants  for  2002 through 2005 to be consistent with the Company's
internal  projections. As of and after January 1, 2002, the applicable margin
will  be  7.0% for borrowings accruing interest at LIBOR and 6.0% for borrowings
accruing  interest  at  the  Prime  Rate. The restructuring also added mandatory
prepayment  provisions  if  the Company used a total of $10.0 million or more of
cash  to  repurchase  or  otherwise  prepay  our  other

                                       48
<PAGE>

debt  obligations, including the 4 1/2% and 5% Notes, the 2011 Convertible Notes
and  the  new 8% and 12% Notes and, effectively requires the Company to elect to
pay  in  kind,  rather than cash, interest on its 2011 Convertible Notes and its
new  12% Notes to the fullest extent it is permitted to do so under such notes.
In  addition,  the  Company  issued 200,000 shares of common stock to MCG with a
value of $84,000 upon issuance and agreed to register such shares in the future.

     As  of December 31, 2001, the Company would have been in default of several
of its covenants under the Credit Facility Agreement, but received a waiver from
MCG  in  connection  with  the  MCG restructuring described above.  Accordingly,
$12.5  million  of  the  loan balance remained in long-term debt at December 31,
2001.

(C)  CONVERTIBLE  NOTES  DUE  2011

     In  connection  with the AOL Restructuring discussed in Note 2, the Company
and  AOL  entered  into  a Restructuring Agreement pursuant to which the Company
issued to AOL $54.0 million principal amount of its 8% secured convertible notes
due  September  2011.  The  2011 Convertible Notes were issued in exchange for a
release  of  the  Company's  reimbursement  obligations  under  the  Investment
Agreement. AOL, in lieu of any other payment for the early discontinuance of the
marketing  relationship,  paid  the  Company  $20.0  million  by  surrender  and
cancellation  of  $20.0  million  principal amount of the 2011 Convertible Notes
delivered  to AOL, thereby reducing the outstanding principal amount of the 2011
Convertible  Notes  to $34.0 million. The 2011 Convertible Notes are convertible
into shares of the Company's common stock at the rate of $5.00 per share, may be
redeemed  by the Company at any time without premium and is subject to mandatory
redemption  at  the option of the holder on September 15, 2006 and September 15,
2008.  The  2011 Convertible Notes accrue interest at the rate of 8% per year on
the  principal  amount,  payable  two  times  a  year each January 1 and July 1;
interest  is payable in cash, except that the Company may elect to pay up to 50%
(100%  in  the  case  of  the first interest payment) of the interest due on any
payment  date  in  kind  rather  than  in  cash.  The 2011 Convertible Notes are
guaranteed  by the Company's principal operating subsidiaries and are secured by
a  pledge  of  the  Company's and the subsidiaries' assets (see Notes 2 and 16).

(D)  MINIMUM  ANNUAL  PAYMENTS

     As of December 31, 2001, the required minimum annual principal reduction of
convertible  and  long-term  debt obligations (as adjusted to reflect the 4 1/2%
and  5%  Notes  exchanged  for 8% and 12% Notes pursuant to the exchange offer),
including  capital  leases, for each of the next five fiscal years is as follows
(in  thousands):

         Year  Ended  December  31,
         2002                                                      $14,454
         2003                                                        6,522
         2004                                                        7,217
         2005                                                        4,082
         2006                                                        1,646
         Thereafter                                                132,903
                                                                 ------------
                                                                  $166,824
                                                                 ============

NOTE  8.  RELATED  PARTY  TRANSACTIONS

     The  Company  has  a  note receivable with an officer of the Company with a
balance  of  $1.0  million  as  of December 31, 2001.  The note receivable bears
interest  at  8.25%  and  the  principal  balance  together  with unpaid accrued
interest  is  payable  to  the  Company  in  November  2004.

     On  January  5, 1999, Mr. Daniel Borislow, a founder of the Company and its
Chairman  of  the  Board and Chief Executive Officer, resigned as a director and
officer  of  the  Company  and in connection therewith, the Company entered into
various  agreements  and  engaged  in various transactions with Mr. Borislow and
certain  entities  in  which  he  or  his  family  had  an  interest.

     In  addition, during 1999, the Company (a) purchased from Mr. Borislow, and
two  trusts  for the benefit of Mr. Borislow's children, $85.9 million aggregate
principal  amount  of the Company's Convertible Notes for $72.3 million in cash;
(b) exchanged the remaining $53.7 million principal amount of subordinated notes
of  Communication TeleSystems International d/b/a WorldxChange Communications to
a  trust  for the benefit of Mr.

                                       49
<PAGE>

Borislow's  children  for  $62.5  million  aggregate  principal  amount  of  the
Company's  Convertible  Notes and (c) purchased $9.0 million aggregate principal
amount of the Company's Convertible Notes for $6.9 million in Common Stock. Also
during 1999, pursuant to the agreements with Mr. Borislow as described above the
Company purchased from Mr. Borislow approximately 639,000 shares of Common Stock
for  approximately $7.7 million with proceeds from the exercise of stock options
by  other  employees.

     On  January  6,  2000,  the  Company repurchased from Mr. Borislow for $2.5
million real property previously sold to Mr. Borislow constituting the Company's
facilities  in  New  Hope,  Pennsylvania.

NOTE  9.  STOCKHOLDERS'  EQUITY  (DEFICIT)

(A)  AUTHORIZED  SHARES

     The  number of authorized shares of the Common Stock is 300,000,000 shares.

(B)  CONTINGENT  REDEMPTION  VALUE  OF  WARRANTS

     Under  the  terms of the marketing agreements with AOL and the Company, AOL
had  the right, commencing on July 1, 2001, to require the Company to repurchase
the warrants to purchase 2,721,984 shares of Common Stock of the Company held by
AOL  for  an aggregate price of $36.3 million, which repurchase price could have
been paid in Common Stock, cash or a quarterly amortization, two-year promissory
note  of the Company.  Upon the occurrence of certain events, including material
defaults  by  the Company in its AOL agreements and a "change of control" of the
Company,  the  Company may have been required to purchase the warrants for cash.
In  connection  with  the  AOL  Restructuring,  the  Company  restructured  the
contingent  redemption  feature  of  the  warrants  (see  Note  2).

(C)  CONTINGENT  REDEMPTION  VALUE  OF  COMMON  STOCK

     Under  the  terms  of  the  Investment  Agreement with AOL, the Company had
agreed  to  reimburse AOL for losses AOL may have incurred on the sale of any of
the  4,121,372  shares during the period from June 1, 1999 through September 30,
2001.  The  Company  had the first right to purchase any of the 4,121,372 shares
of  Common Stock at the market value on the day that AOL notifies the Company of
its  intent  to  sell  any  of  the  shares plus an amount, if any, equal to the
Company's  reimbursement  obligation  described below.  The reimbursement amount
was determined by multiplying the number of shares, if any, that AOL sold during
the  applicable  period  by  the difference between the purchase price per share
paid  by AOL, or $19 per share, and the price per share that AOL sold the shares
for, if less than $19 per share.  The reimbursement amount was not to exceed $14
per  share  for  2,894,737  shares  or  $11  per  share  for  1,226,635  shares.
Accordingly,  the  maximum amount payable to AOL as reimbursement on the sale of
AOL's  shares  was  approximately  $54.0  million plus AOL's reasonable expenses
incurred  in  connection with the sale.  The Company had the option of issuing a
six-month  10%  note payable to AOL to satisfy the reimbursement amount or other
amounts  payable  on  exercise  of  its  first  refusal  rights.

     Upon  the  occurrence of certain events, including material defaults by the
Company  under  its AOL agreements and a "change of control" of the Company, the
Company also could have been required to repurchase all of the shares at $19 per
share.  Accordingly,  the  Company  had initially recorded $78.3 million for the
contingent  redemption value of this Common Stock with a corresponding reduction
in  additional  paid-in  capital.  In connection with the AOL Restructuring, the
Company  restructured the contingent redemption feature of the common stock (see
Note  2).

(D)  STOCKHOLDERS  RIGHTS  PLAN

     On August 19, 1999, the Company adopted a Stockholders Rights Plan designed
to  deter coercive takeover tactics and prevent an acquirer from gaining control
of  the  Company  without  offering  a  fair  price  to  all  of  the  Company's
stockholders.

     Under  the  terms  of  the  plan,  preferred  stock  purchase  rights  were
distributed  as  a  dividend  at  the rate of one right for each share of Common
Stock of the Company held as of the close of business on August 30, 1999.  Until
the rights become exercisable, Common Stock issued by the Company will also have
one  right attached.  Each right

                                       50
<PAGE>

will  entitle  holders  to buy one three-hundredth of a share of Series A Junior
Participating  Preferred  Stock of the Company at an exercise price of $55. Each
right  will  thereafter entitle the holder to receive upon exercise Common Stock
(or,  in  certain  circumstances,  cash,  property  or  other  securities of the
Company)  having  a  value  equal  to two times the exercise price of the right.

     The  rights  will  be  exercisable  only  if  a  person  or  group acquires
beneficial  ownership  of  20%  or more of Common Stock or announces a tender or
exchange  offer which would result in such person or group owning 20% or more of
Common  Stock,  or  if  the  Board  of  Directors  declares  that  a 15% or more
stockholder  has  become  an  "adverse  person"  as  defined  in  the  plan.

     The  Company,  except  as otherwise provided in the plan, will generally be
able  to  redeem  the  rights  at  $0.001 per right at any time during a ten-day
period following public announcement that a 20% position in the Company has been
acquired  or  after the Company's Board of Directors declares that a 15% or more
stockholder  has  become  an  "adverse  person."  The rights are not exercisable
until the expiration of the redemption period.  The rights will expire on August
19,  2009,  subject  to  extension  by  the  Board  of  Directors.

NOTE  10.  STOCK  OPTIONS,  WARRANTS  AND  RIGHTS

(A)  STOCK  BASED  COMPENSATION  PLAN

     Incentive  stock options, non-qualified stock options and other stock based
awards may be granted by a committee of the Board of Directors of the Company to
employees,  directors  and  consultants  under  the  2001  Non-Officer Long Term
Incentive  Plan  ("2001 Plan"), 2000 Long Term Incentive Plan ("2000 Plan"), and
1998 Talk.com Long Term Incentive Plan ("1998 Plan") and otherwise in connection
with employment. Generally, the options vest over a three-year period and expire
five  to  ten  years  from  the  date of grant. At December 31, 2001, 5,000,000,
2,431,625,  and  1,788,300  shares of common stock were available under the 2001
Plan,  2000  Plan  and  1998  Plan, respectively, for possible future issuances,
including  pursuant  to  the options to acquire approximately 5.5 million shares
required  to  be granted pursuant to the voluntary stock option exchange program
discussed  below.  The exercise price of the options is 100% of the market value
of  the  common  stock  on  the  grant  date.

     Stock options granted in 2001 generally have contractual terms of 10 years.
The options granted to employees have an exercise price equal to the fair market
value  of the stock at grant date.  The vast majority of options granted in 2001
vest  one-third  each  year,  beginning  on the first anniversary of the date of
grant.

     On August 29, 2001, the Company commenced a voluntary stock option exchange
program  to  certain  eligible  employees  of  the  Company.  Under the program,
eligible employees were given the option to cancel each outstanding stock option
previously  granted  to them at an exercise price greater than or equal to $5.50
per  share,  in  exchange for a new option to buy shares of the Company's common
stock  to  be  granted  on April 5, 2002, six months and one day from October 4,
2001,  the  date the old options were cancelled. The exercise price of these new
options  was equal to the fair market value of the Company's common stock on the
date  of  grant.  In total, 5.8 million stock options were tendered for exchange
and  cancelled  as  a result of this program. As of December 31, 2001, 5,664,633
shares  were  eligible  for  exchange  on  April  5,  2002, which are treated as
cancelled  in  the  options  shares  table  below.  The  exchange program is not
expected  to  result  in  any additional compensation charges or variable option
plan  accounting.

                                       51
<PAGE>

     Information  with  respect  to  options  under  the  Company's  plans is as
follows:

<TABLE>
<CAPTION>
                                                    EXERCISE          WEIGHTED
                                    OPTIONS       PRICE RANGE         AVERAGE
                                    SHARES         PER SHARE       EXERCISE PRICE
                                   -----------    ------------     --------------
<S>                                   <C>             <C>           <C>
Outstanding, December 31, 1998    10,230,810      $4.08-$14.00         $   7.34
Granted                            3,549,500      $8.75-$17.25         $  11.63
Exercised                         (6,773,378)     $4.08-$12.78         $   7.13
Cancelled                           (158,000)     $5.75-$11.69         $   9.67
                                   -----------    ------------     --------------

Outstanding, December 31, 1999     6,848,932      $4.58-$17.25        $    9.72
Granted                            9,678,809      $1.13-$16.18        $    7.98
Exercised                           (342,337)     $4.58-$11.94        $    7.39
Cancelled                         (1,116,085)     $2.63-$15.88        $    9.03
                                   -----------    ------------     --------------

Outstanding, December 31, 2000    15,069,319      $0.88-$17.25        $    8.60
Granted                            1,097,200       $0.33-$1.98        $    0.86
Exercised                                 --                --               --
Cancelled                         (8,737,860)     $1.34-$17.25        $   11.34
                                   -----------    ------------     --------------

Outstanding, December 31, 2001     7,428,659      $0.33-$15.88        $    4.24
                                   ===========    ============     ==============

</TABLE>

The  Company  issued  5.6  million  stock options on April 5, 2002, at $0.51 per
share,  market  value  on  the date of issue, in satisfaction of the obligations
under  the  Company's  exchange  offer.

The  following  table  summarizes options exercisable at December 31, 2001, 2000
and  1999:

<TABLE>
<CAPTION>

                               EXERCISE PRICE RANGE         WEIGHTED AVERAGE
           OPTION SHARES            PER SHARE                EXERCISE PRICE
           -------------       --------------------         ----------------
<S>          <C>                      <C>                         <C>
1999        2,541,095             $4.58-$14.00                   $ 7.67
2000        5,597,573             $0.88-$17.25                   $ 7.31
2001        3,856,525             $0.88-$15.88                   $ 5.58
</TABLE>


The  following  table  summarizes  the  status  of  stock options outstanding at
December  31,  2001:

<TABLE>
<CAPTION>

                                                      WEIGHTED
                      NUMBER                           AVERAGE         NUMBER
                   OUTSTANDING AT     WEIGHTED        REMAINING     EXERCISABLE AT     WEIGHTED
   RANGE OF         DECEMBER 31,       AVERAGE       CONTRACTUAL     DECEMBER 31,       AVERAGE
EXERCISE PRICES        2001         EXERCISE PRICE   LIFE (YEARS)       2001         EXERCISE PRICE
----------------  ---------------   --------------   ------------   --------------   ---------------
<S>               <C>             <C>              <C>           <C>             <C>
$0.33 to $3.50         3,423,242         $   1.59         8.5         1,238,779          $  1.91
$3.51 to $7.00         2,854,578         $   5.05         8.3         1,520,239          $  5.34
$7.01 to $10.00          427,671         $   9.36         7.2           427,671          $  9.36
$10.01 to $11.00         529,001         $  10.11         7.3           528,335          $ 10.11
$11.01 to$15.88          194,167         $  11.77         7.8           141,501          $ 11.92
</TABLE>

     The  Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and the related interpretations in accounting for
its  stock  option  plans,  and  disclosure  only  provisions  of  SFAS No. 123,
"Accounting  for Stock Based Compensation".  Had compensation cost for the plans
been  determined

                                       52
<PAGE>

based  upon  the  fair  value  of the options as prescribed by SFAS No. 123, the
Company's  net  income  (loss)  and earnings (loss) per share would have been as
follows:

<TABLE>
<CAPTION>

                                                 YEAR ENDED DECEMBER 31,
                                          --------------------------------------
                                              2001          2000          1999
                                          -----------    ----------   ----------
<S>                                           <C>           <C>              <C>
NET INCOME (LOSS):
   As reported                            $(224,667)      $(61,896)      $78,929
   Pro forma                              $(226,047)      $(99,420)      $68,851
BASIC EARNINGS (LOSS) PER SHARE:
   As reported                               $(2.84)        $(0.88)        $1.29
   Pro forma                                 $(2.85)        $(1.41)        $1.13
DILUTED EARNINGS (LOSS) PER SHARE:
   As reported                               $(2.84)        $(0.88)        $1.23
   Pro forma                                 $(2.85)        $(1.41)        $1.07
</TABLE>

     The  weighted  average  estimated  fair values of the stock options granted
during  the  years  ended  December  31  2001,  2000  and  1999  based  on  the
Black-Scholes  option  pricing  model were $0.57, $6.56 and $9.71, respectively.
The  fair value of stock options used to compute pro forma net income (loss) and
basic  and  diluted  earnings (loss) per share disclosures is the estimated fair
value  at  grant  date  using  the  Black-Scholes  option-pricing model with the
following  assumptions:

<TABLE>
<CAPTION>

          ASSUMPTION            2001          2000            1999
     -----------------------  --------      --------        ---------
<S>                             <C>           <C>               <C>
     Expected Term             5 years      5 years      1 to 10 years
     Expected Volatility        78.95%       87.46%            108%
     Expected Dividend Yield     0.00%        0.00%           0.00%
     Risk-Free Interest Rate     5.92%        6.27%      5.38% / 5.85%
</TABLE>

(B)  AOL  WARRANTS

     On  January  5, 1999, after the repurchase from AOL of warrants to purchase
5,076,016  shares  of  Common  Stock,  warrants  to purchase 2,721,984 shares of
Common  Stock  were  held by AOL and were outstanding, with exercise prices from
$14.00  to  $22.25 and a weighted average exercise price of $17.03.  AOL had the
right,  commencing  on July 1, 2001, to require the Company to repurchase all or
any  portion  of these warrants at prices (the "Put Prices") ranging from $10.45
to  $16.82  per  warrant  ($36.3  million  aggregate  amount).  In the event AOL
required repurchase of the warrants, the Company at its election could have paid
AOL  in cash or in shares of Common Stock based on the then current market price
for  such  stock.  The  Company  also could have elected to issue a 10% two-year
note  for  a  defined  portion  of  the repurchase price. The Company could have
required  AOL  to  exercise  its warrants at any time the market price of Common
Stock  equaled or exceeded two times the then call amount for such warrants. The
call  amount  of  a  warrant  was  the  Put Price for the warrant increased at a
semi-annually  compounded  rate  of  5% on January 5, 1999 and on each six month
anniversary  thereafter.  In  addition,  upon  the occurrence of certain events,
including  material  defaults by the Company in its AOL agreements and a "change
of  control"  of the Company, the Company may have been required to purchase the
warrants  for cash. The warrants and the related put rights were extinguished in
connection  with  the  AOL  Restructuring  on  September  19, 2001 (see Note 2).

(C)  OTHER  WARRANTS

     Pursuant  to  the  terms  of  the Agreement and Plan of Merger, dated as of
March 24, 2000, between a wholly owned subsidiary of the Company and Access One,
the  Company  assumed  certain warrants to purchase shares of Access One, which,
upon  consummation of the Merger, converted to warrants to purchase an aggregate
of 871,429 shares of the Company common stock at an exercise price of $2.02.  In
connection  with  certain consulting services that MCG Credit Corporation was to
provide  to the Company, the Company issued a warrant to MCG to purchase 300,000
shares  of  its

                                       53
<PAGE>

common  stock,  which  become  exercisable  at  $4.73. Upon its execution of the
Credit  Facility  Agreement  with  MCG  Finance Corporation in October 2000, the
Company  issued  warrants  for  300,000 shares of its common stock, which become
exercisable  at  $4.36  per  share,  150,000 of which are already vested and the
balance  will  vest if the Company fails to exceed certain EBITDA thresholds for
the  fiscal  quarter  ended  March  31,  2001.  The  Company exceeded the EBITDA
threshold  for  the quarter ended March 31, 2001 and consequently the balance of
the  warrants did not vest. In connection with the waiver from MCG in the second
quarter  of  2001  and  certain  other  amendments  under  the  Credit  Facility
Agreement,  the Company issued warrants with a value of $77,000 upon issuance to
purchase  150,000  shares  of its common stock at an exercise price of $0.68 per
share  to  such  lenders.

(D)  RIGHTS

     The  Board  of Directors had approved an offering of up to 3,523,285 shares
of  its  Common  Stock, $.01 par value, to holders of record of Common Stock and
holders  of  record of options or warrants to purchase Common Stock at the close
of  business  on  December  31,  1998.  The  shares  were  offered  pursuant  to
nontransferable rights to subscribe for and purchase shares of Common Stock at a
price of $17.00 per share. Holders of record on the record date were eligible to
receive  one  such  nontransferable right for every 20 shares of Common Stock or
underlying  options  or  warrants held on the record date, as applicable.  As of
December  31,  1999, 38,325 rights totaling $652,000 were exercised, and 652,547
rights  totaling  $11.1 million were exercised in 2000.  These rights expired on
February  12,  2000.

NOTE  11.  INCOME  TAXES

     The  Company  reports  the  effects  of  income  taxes  under SFAS No. 109,
"Accounting  for  Income  Taxes".  The  objective  of income tax reporting is to
recognize (a) the amount of taxes payable or refundable for the current year and
(b)  deferred  tax  liabilities  and  assets  for the future tax consequences of
events  that  have  been  recognized in the financial statements or tax returns.
Under  SFAS  No.  109,  the  measurement  of  deferred tax assets is reduced, if
necessary,  by the amount of any tax benefits that, based on available evidence,
are  not  expected  to  be  realized.  Realization  of  deferred  tax  assets is
determined  on  a  more-likely-than-not  basis.

     The  Company  considers all available evidence, both positive and negative,
to  determine  whether,  based  on  the  weight  of  that  evidence, a valuation
allowance  is  needed  for  some  portion  or  all  of a net deferred tax asset.
Judgment  is  used  in  considering the relative impact of negative and positive
evidence.  In  arriving  at  these  judgments, the weight given to the potential
effect  of  negative  and  positive  evidence is commensurate with the extent to
which  it  can  be  objectively  verified.

     At December 31, 2001 and 2000, a full valuation allowance has been provided
against  the  net  deferred tax assets since management cannot predict, based on
the  weight  of  available  evidence,  that it is more likely than not that such
assets  will  be  ultimately  realized.

     There  were  no  current or deferred provisions for income taxes for any of
the  years  ended  December  31,  2001,  2000  and  1999.

                                       54
<PAGE>

     A  reconciliation  of the Federal statutory rate to the provision (benefit)
for  income  taxes  is  as  follows:

<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                                          2001               2000                  1999
                                                   -----------------    -----------------    ------------------
<S>                                                  <C>          <C>       <C>        <C>      <C>        <C>
Federal income taxes computed at
   the statutory rate                            $ (78,633)  (35.0)%    $(21,664)  (35.0)%    $ 27,625    35.0%
Increase (decrease) in income taxes
resulting from:
   State income taxes less Federal
     Benefit                                            --      0.0       (2,338)    (3.8)       3,157     4.0
   Goodwill impairment                              59,039     26.3           --       --           --      --
   Goodwill amortization                             7,137      3.2        3,310      5.3           --      --
   Cumulative effect of accounting
     change                                         12,893      5.7           --       --          --       --
   Valuation allowance changes
     affecting the provision for income
     taxes                                            (648)    (0.3)       20,561     33.6     (31,000)  (39.3)
   Other                                               212      0.1           131      0.1         218     0.3
                                                  ---------   -------     --------   ------   ---------  ------
Total provision (benefit) for income
taxes                                                $  --       --         $  --       --       $  --      --
                                                  =========   =======      =======   ======    ========  ======
</TABLE>


     Deferred  tax  (assets)  liabilities  at  December  31,  2001  and 2000 are
comprised  of  the  following  elements:
<TABLE>
<CAPTION>


                                                               YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------
                                                               2001                2000
                                                          --------------      ---------------
<S>                                                  <C>                           <C>
Net operating loss carryforwards                           $  (103,000)          $(102,000)
Deferred revenue not taxable currently                          (2,000)             (5,000)
Compensation for options granted below market price             (1,000)             (1,000)
Allowance for uncollectible accounts                           (17,000)            (14,000)
Warrants issued for compensation                                (1,000)                 --
Depreciation and amortization                                   16,000              13,000
Accruals not currently deductible                               (1,000)             (1,000)
Net capital loss carryforwards                                  (9,000)             (9,000)
                                                          --------------      ---------------
Deferred tax (assets) liabilities, net                        (118,000)           (119,000)
Less valuation allowance                                       118,000             119,000
                                                          --------------      ---------------
Net deferred tax                                           $        --           $      --
                                                          ==============      ===============
</TABLE>

     The  Company  has  net operating loss carryforwards for income tax purposes
and  other  deferred  tax  benefits  that are available to offset future taxable
income.  Only a portion of the net operating loss carryforwards are attributable
to  operating activities.  The remainder of the net operating loss carryforwards
are  attributable  to  tax  deductions related to the exercise of stock options.

     In  accounting  for  income  taxes, the Company recognizes the tax benefits
from  current  stock  option  deductions after utilization of net operating loss
carryforwards from operations (i.e., net operating loss carryforwards determined
without  deductions  for  exercised stock options) to reduce income tax expense.
Because  stock  option deductions are not recognized as an expense for financial
reporting  purposes, the tax benefit of stock option deductions must be credited
to  additional  paid-in  capital.  Such benefit has not been recorded because of
the  Company's  full  valuation  allowances.

                                       55
<PAGE>

     At  December  31,  2001,  the  Company  had  net  operating  loss  (NOL)
carryforwards  for  federal  income  tax purposes of $262.8 million.  Due to the
"change  of  ownership" provisions of the Internal Revenue Code Section 382, the
availability of the Company's net operating loss and credit carryforwards may be
subject  to  an  annual limitation against taxable income in future periods if a
change  of ownership of more than 50% of the value of the Company's stock should
occur within a three-year testing period.  Many of the changes that affect these
percentage  change  determinations,  such  as  changes  in  the  Company's stock
ownership, are outside the Company's control.  A more-than-50% cumulative change
in  ownership  occurred on August 31, 1998 and October 26, 1999.  As a result of
such changes, certain of the Company's carryforwards are limited, as of December
31,  2001;  approximately  $64  million  are not available to offset income.  In
addition,  as  of December 31, 2001, based on information currently available to
the  Company,  the  change of ownership percentage was approximately 45% for the
applicable three-year testing period.  If, during the current three-year testing
period,  the  Company  experiences  an additional more-than-50% ownership change
under Section 382, the amount of the NOL carryforward available to offset future
taxable income may be substantially reduced.  There can be no assurance that the
Company  will  realize  the  benefit  of  any  carryforwards.

NOTE  12.  SUPPLEMENTAL  CASH  FLOW  INFORMATION

<TABLE>
<CAPTION>

                                                            2001    2000    1999
                                                           ------  ------  ------
<S>                                                        <C>     <C>     <C>
       Supplemental disclosure of cash flow information:
        Cash paid for interest                             $5,620  $4,864  $4,218
                                                           ======  ======  ======

</TABLE>

(A)  NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,
     2001  ARE  AS  FOLLOWS:

     In  November  2001,  the  Company  acquired the  assets and assumed certain
liabilities  of  two  teleservices centers located in Fremont, Nebraska and Fort
Myers,  Florida  from  Furst  Group, Inc. for $1.  The fair values of the assets
acquired  were  $835,000  and  liabilities  assumed  were  $889,000.

     In  connection  with  the  implementation  of  EITF  00-19,  the contingent
redemption  features  of  the  common  stock and warrants were adjusted by $28.8
million  to  reflect  the  liability at their fair values of $85.8 million as of
June  30,  2001,  with a corresponding increase in additional paid-in capital of
$65.6  million  and  a  cumulative  effect  of  a change in accounting principle
reflected  in  the  statement  of  operations  of  $36.8  million.

     For  the  quarter  ended  September  30,  2001,  the  Company  recorded  an
unrealized  loss  of  $2.4  million  on  the  increase  in the fair value of the
contingent  redemption  instruments,  which has been reflected in other (income)
expense  on  the  statement  of  operations.

     In  September  2001,  the  Company  restructured  the contingent redemption
feature  of the warrants and common stock of $88.2 million, which was reduced by
the  fair  value  of  the  3,078,628  incremental shares provided to AOL of $1.4
million  and cash paid in connection with the AOL Restructuring of $3.5 million.
Since  the  remaining  value  of  $83.3 million was greater than the future cash
flows  to  AOL  of  $66.4 million (representing the $34.0 million of convertible
debt  and  $32.4  million of future interest expense), the liability was written
down  to the value of the future cash flows due to AOL and an extraordinary gain
of  $16.9  million  was  recorded.

     Computer  equipment  of  $2.1  million was acquired in 2001 through capital
leases.

     Also,  during 2001, the Company issued 150,000 warrants to MCG with a value
of  approximately  $77,000.

(B)  NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,
     2000  ARE  AS  FOLLOWS:

     In  August  2000, the Company completed the acquisition of Access One.  The
Company issued 11,472,174 shares and 698,382 shares of Common Stock and Treasury
Stock,  respectively,  with  a  value  of  approximately

                                       56
<PAGE>

$170.4 million in connection with the acquisition.  A summary of the transaction
is  as  follows  (in  thousands):

             Fair value of assets acquired                  $   21,718
             Goodwill                                       $  209,978
             Fair value of stock issued                     $  170,388
             Fair value of options/warrants issued          $   27,448
             Liabilities assumed                            $   30,243
             Cash Paid, net of cash acquired                $  (3,617)

     Also,  during 2000, the Company issued 300,000 warrants to MCG with a value
of  approximately  $2.2  million.

     The Company also declared a stock bonus with a value of $706,000 in 2000 to
be  paid  using Treasury Stock.  At the election of certain employees, the bonus
payment  could  be  deferred  until 2001.  Therefore, 149,300 shares and 203,750
shares  were  issued  out  of  Treasury  Stock  in  2000 and 2001, respectively.

(C)  NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,
     1999  ARE  AS  FOLLOWS:

     During 1999, the Company issued 574,482 shares of Common Stock with a value
of  approximately  $6.9  million,  in  connection  with  the  repurchase  of the
Company's  Convertible  Notes.

     Also,  during  1999, the Company assigned to a trust for the benefit of Mr.
Borislow's  children the Company's interest in $53.7 million principal amount of
subordinated  notes  of  Communications  TeleSystems  International  d/b/a
WorldXChange  Communications,  in exchange for $62.5 million aggregate principal
amount  of  the  Company's  Convertible  Notes.

     In  addition,  the  Company  recorded  $114.6  million  for  the contingent
redemption  value  of  the  AOL  warrant  and  common stock with a corresponding
reduction  in  additional  paid  in  capital.

                                       57
<PAGE>

NOTE  13.  QUARTERLY  FINANCIAL  DATA  (UNAUDITED)

<TABLE>
<CAPTION>

(In thousands, except per share data)           FIRST QUARTER    SECOND QUARTER    THIRD QUARTER    FOURTH QUARTER
                                               ---------------  ----------------  ---------------  ----------------
<S>                                            <C>              <C>               <C>              <C>
                   2001
                   ----
Sales                                              $  137,831        $  133,706       $  126,335         $  97,598
Operating income (loss)                                (8,735)          (24,888)        (175,404)            8,118
Income (loss) before extraordinary gains and
  cumulative effect of an accounting change           (10,148)          (25,850)        (179,166)            6,686
Extraordinary gains                                        --                --           16,867             3,781
Cumulative effect of an accounting change                  --           (36,837)              --
Net income (loss)                                     (10,148)          (62,687)        (162,299)           10,467
Net income (loss) per share - Basic                     (0.13)            (0.80)           (2.06)             0.13
Weighted average common shares outstanding -
  Basic                                                78,372            78,374           78,742            81,453
Net income (loss) per share - Diluted                   (0.13)            (0.80)           (2.06)             0.13
Weighted average common and common
  equivalent shares outstanding - Diluted              78,372            78,374           78,742            81,466

                   2000
                   ----
Sales                                              $  156,043        $  135,737       $  121,233        $  131,535
Operating income (loss)                                13,666              (959)         (33,625)          (36,718)
Net income (loss)                                      13,380              (891)         (34,770)          (39,615)
Net income per share - Basic                             0.20             (0.01)           (0.48)            (0.51)
Weighted average common shares outstanding -
  Basic                                                65,302            65,822           72,839            78,037
Net income per share - Diluted                           0.20             (0.01)           (0.48)            (0.51)
Weighted average common and common
  equivalent shares outstanding - Diluted              68,401            65,822           72,839            78,037

</TABLE>

NOTE  14.  EMPLOYEE  BENEFIT  PLANS

     During  1999, the Company established an Employee Savings Plan that permits
eligible  employees  to contribute funds on a pre-tax basis.  The Plan qualifies
as  a  deferred  salary arrangement under Section 401(k) of the Internal Revenue
Code.  Eligible  employees  may  contribute  up  to  15%  of  their compensation
(subject  to  Internal  Revenue Code limitations).  The Plan allows employees to
choose  among a variety of investment alternatives.  The Company is not required
to  contribute  to the Plan.  During the years ended December 31, 2001 and 2000,
the  Company  elected  to  contribute  $108,000  and  $85,000  to  the  Plan,
respectively.  No  significant administration costs were incurred during 2001 or
2000.

                                       58
<PAGE>

NOTE  15.   PER  SHARE  DATA

     Basic earnings per common share is calculated by dividing net income by the
average  number  of common shares outstanding during the year.  Diluted earnings
per  common  share  is  calculated  by  adjusting  outstanding  shares, assuming
conversion  of  all potentially dilutive stock options, warrants and convertible
bonds.  Earnings  per  share  are  computed  as  follows  (in  thousands):

<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31,
                                                               ----------------------------------------
                                                                    2001           2000          1999
                                                               ------------   ------------   -----------
<S>                                                       <C>                        <C>        <C>
Income (loss) before extraordinary gains and cumulative
  effect of an accounting change                                $ (208,478)     $(61,896)     $  57,699
Extraordinary gains                                                 20,648            --         21,230
Cumulative effect of an accounting change                          (36,837)           --             --
                                                               ------------   ------------   -----------
Net income (loss)                                               $ (224,667)     $(61,896)     $  78,929
                                                               ============   ============   ===========

Average shares of common stock outstanding used to
  compute basic earnings per common share                           79,242        70,527         61,187
Additional common shares to be issued assuming exercise of
  stock options and warrants, net of shares assumed
  reacquired and conversion of convertible bonds *                      --            --          3,228
                                                               ------------   ------------   -----------
Shares used to compute dilative effect of stock options             79,242        70,527         64,415
                                                               ============   ============   ===========


Income (loss) per share - Basic:
   Income (loss) before extraordinary gains and cumulative
     effect of an accounting change per share                      $ (2.63)     $  (0.88)       $  0.94
   Extraordinary gains per share                                      0.26            --           0.35
   Cumulative effect of an accounting change per share               (0.47)           --             --
                                                               ------------   ------------   -----------
   Net income (loss) per share                                     $ (2.84)     $  (0.88)       $  1.29
                                                               ============   ============   ===========
   Weighted average common shares outstanding                       79,242        70,527         61,187
                                                               ============   ============   ===========

Income (loss) per share - Diluted:
   Income (loss) before extraordinary gains and cumulative
     effect of an accounting change per share                      $ (2.63)     $  (0.88)       $  0.90
   Extraordinary gains per share                                      0.26            --           0.33
   Cumulative effect of an accounting change per share               (0.47)           --             --
                                                               ------------   ------------   -----------
   Net income (loss) per share                                     $ (2.84)     $  (0.88)       $  1.23
                                                               ============   ============   ===========
   Weighted average common and common equivalent
     shares outstanding                                             79,242        70,527         64,415
                                                               ============   ============   ===========
</TABLE>
---------------
*  The  diluted  share  basis  for  the  years  ended December 31, 2001 and 2000
excludes  options  and  warrants  to  purchase  8,900,088 and 16,390,748 shares,
respectively  and  convertible  bonds  that  are  convertible into 3,232,824 and
3,436,891  shares  of common stock, respectively.  These shares are excluded due
to  their  antidilutive  effect  as  a  result  of  the  Company's net loss from
continuing  operations.


NOTE  16.  SUBSEQUENT  EVENTS

(a)  AOL  Amendment

     On  February  21,  2002,  by  letter agreement, AOL agreed to waive certain
rights  that  it  had  under  the  Restructuring  Agreement  with respect to the
Company's  restructuring  of  its existing 4 1/2% and 5% Notes. As conditions to
the  waiver  of  such rights with respect to the restructuring its 4 1/2% and 5%
Notes,  the Company

                                       59
<PAGE>

agreed to (i) provide that the new notes to be exchanged for the existing 4 1/2%
and  5% Notes have a maturity date after September 19, 2006 and, if convertible,
have  a  conversion  price of not less than $5.00, (ii) make a prepayment on the
2011  Convertible  Notes equal to forty percent of the amount of cash (excluding
accrued  interest  paid  on existing notes which are exchanged) that the Company
pays to the holders of the existing notes in the exchange offers and (iii) limit
the aggregate amount of cash that the Company pays under the exchange offers and
to AOL under the letter agreement to $10 million. Under the letter agreement the
Company  also  paid  AOL  approximately $1.2 million as a prepayment on the 2011
Convertible  Note,  approximately $0.7 million of which will be credited against
monies  the Company owes AOL under the letter agreement for cash payments in the
exchange  offers and the Company did not owe AOL any additional payments related
to  the  exchange  offers.

(b)  Secured  Credit  Facility

     By  amendments  on  February  12,  2002  and  April  3,  2002,  the Company
restructured  certain  portions of the Credit Facility Agreement and the related
consulting  agreement  and  other loan documents. This restructuring amended the
financial  covenants  for  2002 through 2005 to be consistent with the Company's
internal  projections.  As  of  and after January 1, 2002, the applicable margin
will  be  7.0% for borrowings accruing interest at LIBOR and 6.0% for borrowings
accruing  interest  at  the  Prime  Rate. The restructuring also added mandatory
prepayment  provisions  if  the Company used a total of $10.0 million or more of
cash to repurchase or otherwise prepay our other debt obligations, including the
4  1/2%  and  5%  Notes, the 2011 Convertible Notes and the new 8% and 12% Notes
and, effectively requires the Company to elect to pay in kind, rather than cash,
interest  on  its  2011  Convertible  Notes and its new 12% Notes to the fullest
extent  it  is  permitted  to  do  so under such notes. In addition, the Company
issued  200,000  shares  of  common  stock  to  MCG with a value of $84,000 upon
issuance  and  agreed  to  register  such  shares  in  the  future.

(c)  Convertible  Debt  Exchange  Offers

     The  Company  was  required  to  repay $61.8 million of its 4 1/2% Notes in
September  2002.  As of December 31, 2001, the Company did not have cash nor did
it believe it had access to new financing sufficient to make such a payment. The
Company commenced exchange offers for the 4 1/2% Notes and 5% Notes primarily to
extend  the  maturity of the obligations and to obtain consents to eliminate the
requirement  to  offer to repay the 4 1/2% Notes and 5% Notes upon a termination
of  trading  of  the Company's common stock on a national securities exchange or
established  automated  over-the-counter  trading  market.

     Under  the exchange offers, which expired at midnight on April 1, 2002, the
Company  offered  to  exchange  its  new  notes for up to the full amount of its
currently  outstanding  4  1/2%  Notes  and  for  up  to  the full amount of its
currently  outstanding  5%  Notes.  Under the terms of the 4 1/2% Notes exchange
offer,  the  Company  offered  two  exchange  options:

     --$1,000  in  principal  amount  of  the  new  12% Notes for each $1,000 in
     principal  amount  of  the  existing  4  1/2%  Notes  that  are  tendered.

     --  $600  in  principal amount of the new 8% Notes, convertible into common
     stock, at $5.00 per share, and $100 in cash, in exchange for each $1,000 in
     principal  amount  of  the  existing  4  1/2%  Notes  that  are  tendered.

Under  the  terms  of  the  5%  Notes  exchange  offer,  the  Company  offered:

     --$1,000  in  principal  amount  of  the  new  12% Notes for each $1,000 in
     principal  amount  of  the  existing  5%  Notes.

     The  Company completed the exchange for its 4 1/2% and 5% Notes on April 4,
2002, and issued a total of $70.65 million principal amount of its new 12% Notes
and  $2.8  million  principal  amount  of its new 8% Notes and paid cash of $0.5
million  in  exchange  for  a  total  of  $57.9  million principal amount of the
outstanding  4  1/2% Notes and $17.4 million principal amount of the outstanding
5%  Notes.  $3.9  million  principal amount of the 4 1/2% Notes and $0.7 million
principal  amount  of  the  5% Notes were not exchanged and remained outstanding
after  the  exchanges. The Company paid accrued interest of $0.4 million in cash
on  the  exchanged  old  notes  upon  the  exchanges.

     The  new  12%  Notes  accrue  interest  at  a  rate  of 12% per year on the
principal  amount,  payable  two times a year on each February 15 and August 15,
beginning  on  August  15,  2002.  Interest  is payable in cash, except that the
Company  may,  at  its  option,  pay  up to one-third of the interest due on any
interest payment date through and including the August 15, 2004 interest payment
date  in  additional 12% Notes. The new 8% Notes accrue interest at a rate of 8%
per  year  on the principal amount, payable two times a year on each February 15
and  August  15, beginning on August 15, 2002 and are convertible, at the option
of  the  holder,  into  common  stock  at  $5.00  per  share.

     As  part of the restructuring, the Company amended the indentures governing
the  4  1/2%  and  5%  Notes  that  were  not  exchanged to remove the Company's
obligation  to  repurchase  the  notes  on  the  termination  of  trading of the
Company's  common  stock  on  a  national  securities  exchange  or  established
automated  over-the-counter  trading  market.

     In  accordance  with  SFAS  No. 15 "Accounting by Debtors and Creditors for
Troubled  Debt Restructuring," the exchange of $61.8 million of the 4 1/2% Notes
into  $53.2  million  of the 12% Notes $2.8 million of the 8% Notes

                                       60
<PAGE>

is  accounted for as a troubled debt restructuring. Since the total liability of
$57.4  million  ($57.9  million  of principal as of the exchange date, less cash
payments  of  $0.5  million) is less than the future cash flows to holders of 8%
Notes  and  12%  Notes  of  $91.5  million  (representing  the  $56.0 million of
principal  and $35.5 million of future interest expense), the liability remained
on  the balance sheet at $57.4 million. The difference between principal and the
carrying  amount  of  $1.4 million will be recognized as a reduction of interest
expense  over  the  life  of  the  notes.

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

DIRECTORS  AND  EXECUTIVE  OFFICERS

     The  directors  and  executive officers of the Company as of March 29, 2002
were  as  follows:

<TABLE>
<CAPTION>

      NAME                   AGE                  POSITION
      ----                   ---                  --------
<S>                           <C>  <C>
Gabriel Battista (3)          57    Chairman of the Board of Directors, Chief Executive
                                    Officer and Director
Warren Brasselle              44    Senior Vice President, Operations
Jeffrey Earhart               40    Senior Vice President, Customer Operations
Mark S. Fowler (1)            59    Director
Kevin D. Griffo               41    Executive Vice President - Sales and Marketing
Aloysius T. Lawn, IV          43    Executive Vice President - General Counsel and
                                    Secretary
Arthur J. Marks (2)           57    Director
Edward B. Meyercord, III (2)  36    President, Treasurer and Director
Ronald R. Thoma (3)           67    Director
George Vinall                 46    Executive Vice President - Business Development
Thomas Walsh                  42    Senior Vice President - Finance
David G. Zahka                42    Chief Financial Officer
</TABLE>

(1)     Director  whose  term  expires  in  2002.
(2)     Director  whose  term  expires  in  2003.
(3)     Director  whose  term  expires  in  2004.

All  officers  are  elected  annually  by the Board of Directors and hold office
until  their  successors  are  elected  and  qualified.

GABRIEL  BATTISTA.  Mr. Battista currently serves the Company as its Chairman of
the Board of Directors and Chief Executive Officer. Prior to joining the Company
in  January  of  1999  as  a  Director and Chief Executive Officer, Mr. Battista
served  as Chief Executive Officer of Network Solutions Inc., an Internet domain
name  registration  company.  Prior  to  joining Network Solutions, Mr. Battista
served  both  as  CEO  and  as  President and Chief Operating Officer of Cable &
Wireless,  Inc.,  a  telecommunication  provider.  His  career  also  included
management positions at US Sprint, GTE Telenet and The General Electric Company.
Mr.  Battista  serves  as  a  director  of  Capitol  College, Systems & Computer
Technology  Corporation  (SCTC),  Online Technologies Group, Inc. (OTG), and VIA
Net.works  (VNWI).

WARREN  BRASSELLE.  Since  April  2000,  Mr. Brasselle has served as Senior Vice
President  of  Operations  for  the  Company.  Prior to joining the Company, Mr.
Brasselle  was Vice President of Operations for Cable and Wireless

                                       61
<PAGE>

North  America  since  1996,  where  he  was broadly responsible for the design,
provisioning,  and maintenance of Cable & Wireless' voice, data, and IP network.
Mr.  Brasselle  also  held  a  variety  of operational positions at MCI, now MCI
WorldCom  Inc.  and  Williams  Telecommunications.

JEFFREY EARHART. Mr. Earhart currently serves as Senior Vice President, Customer
Operations  of the Company. Between 1997 and 2000, he served the Company as Vice
President, Operations. Mr. Earhart originally joined the Company as its Director
of  Retail  Sales and Provisioning in 1990, a position he held until 1992. Prior
to  rejoining the Company in 1997, Mr. Earhart served as President of Collective
Communications  Services, an independent long distance reseller of long distance
services  of  the  Company.

MARK  S.  FOWLER.  Mr. Fowler has been a director of the Company since September
1999.  From  1981  to  1987, he was the Chairman of the FCC.  From 1987 to 1994,
Mr.  Fowler  was  Senior Communications Counsel at Latham & Watkins, a law firm,
and  of  counsel  from  1994  to  2000.  From  1991 to 1994, he was the founder,
Chairman  and  Chief  Executive  Officer  of  PowerFone  Holdings  Inc.,  a
telecommunications  company.  From 1994 to 2000 he was a founder and chairman of
UniSite,  Inc.,  a  developer  of  antenna  sites  for  use by multiple wireless
operators.  From  1999  to  date Mr. Fowler has served as a director of Pac-West
Telecomm,  Inc.,  a  competitive local exchange carrier.  From 1999 to date, Mr.
Fowler has served as a director of Beasley Broadcast Group, a radio broadcasting
company.  Mr.  Fowler  is  also a founder and serves as Chairman of the Board of
Directors  of AssureSat, Inc., a provider of telecommunications satellite backup
services.

KEVIN  D.  GRIFFO.  Mr.  Griffo  has  served  as  the  Company's  Executive Vice
President  - Sales and Marketing since March 2000. Prior to joining the Company,
Mr.  Griffo  was  the  President and Chief Operating Officer of Access One.  Mr.
Griffo  was  also  employed by AMNEX from January 1995 to December 1997, holding
various  positions,  including  Chief Operating Officer and President of AMNEX's
Telecommunications  Division.

ALOYSIUS  T. LAWN, IV. Mr. Lawn joined the Company in January 1996 and currently
serves  as  Executive  Vice  President - General Counsel and Secretary. Prior to
joining the Company, from 1985 through 1995, Mr. Lawn was an attorney in private
practice.  Mr. Lawn is a director of Stonepath Group, Inc., a global, integrated
logistics  services  organization.

ARTHUR J. MARKS. Mr. Marks has been a director of the Company since August 1999.
He  is  currently a general partner of Valhalla Partners, a private equity fund.
From  1984  through  2001,  Mr.  Marks  was  a General Partner of New Enterprise
Associates,  a  private  equity  fund  that  invests in early stage companies in
information  technology  and  medical  and  life sciences. Mr. Marks serves as a
director  of  two  publicly traded software companies, Mobius Management Systems
and  Progress  Software  Corp.,  as  well  as one publicly traded communications
equipment company, Advanced Switching Communications. He is also a director of a
number  of  privately  held  companies.

EDWARD  B.  MEYERCORD,  III.  Mr.  Meyercord  currently serves as the President,
Treasurer and Director of the Company. Mr. Meyercord was elected to the Board of
Directors and President of the Company in May 2001. He served as Chief Financial
Officer of the Company between August 1999 and December 2001 and Chief Operating
Officer  of the Company between January 2000 and May 2001. He joined the Company
in  September  of  1996 as the Executive Vice President, Marketing and Corporate
Development.  Prior  to  joining  the  Company,  Mr.  Meyercord  served  as Vice
President  in  the  Global Telecommunications Corporate Finance Group at Salomon
Brothers, Inc., based in New York and prior to Salomon Brothers he worked in the
corporate  finance  department  at  Paine  Webber  Incorporated.

RONALD  R.  THOMA.  Mr. Thoma is currently a business consultant, having retired
in  early  2000  as  an Executive Vice President of Crown Cork and Seal Company,
Inc.,  a  manufacturer  of  packaging products, where he had been employed since
1955.  Mr.  Thoma  has  served  as  a  director  of  the  Company  since  1995.

GEORGE  VINALL.  Mr.  Vinall  joined the Company in January of 1999 as Executive
Vice  President - Business Development.  Prior to joining the Company, he served
as  President  of  International  Protocol  LLC,  a telecommunication consulting
business,  as  General  Manager  of  Cable  &  Wireless  Internet  Exchange,  an
international  Internet  service  provider,  and as Vice President, Regulatory &
Government  Affairs  of  Cable  and  Wireless North America, a telecommunication
provider.

                                       62
<PAGE>

THOMAS  M.  WALSH.  Mr.  Walsh joined the Company in September of 2000 as Senior
Vice  President  - Finance.  Before joining the Company, he served as a director
at  Comcast  Cellular Communications, a telecommunications company, from 1996 to
1999,  and  Regional  Controller  of  Southwestern  Mobil  Systems,  a successor
corporation,  from  1999  to  2000.  Prior to Comcast Cellular Communications he
worked  for  Call Technology Corporation, a telecommunications company, where he
was  responsible  for  all  finance  and accounting functions as Chief Financial
Officer.  Prior to his tenure with Call Technology Corporation, Mr. Walsh served
as Audit Manager for Ernst & Young.  Mr. Walsh is a Certified Public Accountant.

DAVID  G.  ZAHKA.  Mr.  Zahka  joined  the  Company in December of 2001 as Chief
Financial Officer.  Before joining the Company, he spent more than 15 years with
PaineWebber  Incorporated,  and  its successor UBS Warburg, where he served most
recently as Executive Director of the Financial Sponsors Group.  At PaineWebber,
Mr. Zahka also served as Senior Vice President of Debt Capital Markets and First
Vice  President  of  the  Utility  Finance  Group.


COMPLIANCE  WITH  SECTION  16(A)  OF  THE  EXCHANGE  ACT

     Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
Company's  directors  and  certain  officers  and persons who are the beneficial
owners  of  more than 10 percent of the Common Stock of the Company are required
to  report  their  ownership  of  the  Common Stock, options and certain related
securities  and any changes in that ownership to the SEC. Specific due dates for
these  reports  have been established, and the Company is required to report any
failure  to  file  by  such  dates in 2001. The Company believes that all of the
required  filings  have been made in a timely manner, except that, due solely to
an  administrative  error  by the Company, one transaction by Mr. Fowler was not
reported  timely.  In making this statement, the Company has relied on copies of
the  reporting  forms  received  by  it.

                                       63
<PAGE>

ITEM  11.  EXECUTIVE  COMPENSATION.

     The  following  table  sets  forth  information  for the fiscal years ended
December  31,  2001,  2000 and 1999 as to the compensation for services rendered
paid  by  the  Company to the Chief Executive Officer and to the four other most
highly  compensated  executive  officers  of the Company whose annual salary and
bonus  exceeded  $100,000.

Summary  Compensation  Table

<TABLE>
<CAPTION>
                                               ANNUAL  COMPENSATION             LONG  TERM
                                                                               COMPENSATION
                                               --------------------            ------------

                                                                                 SECURITIES
                                                                                 UNDERLYING
NAME AND PRINCIPAL POSITION                 YEAR   SALARY (1)    BONUS (1)      OPTIONS/SARS
------------------------------------------  ----  -----------  ----------    ------------------
<S>                                         <C>   <C>            <C>         <C>

Gabriel Battista, Chairman of the Board     2001          --(2)          --                 --
of Directors,  Chief Executive Officer      2000          --(2)  $   50,000          500,000(3)
and Director                                1999  $1,500,000(2)  $  750,000                 --

Edward B. Meyercord, III, President,        2001  $    300,000           --                 --
Director and Treasurer                      2000  $    298,000   $   30,000          350,000(3)
                                            1999  $    225,385   $  150,000       450,000(4)(9)

Aloysius T. Lawn, IV, Executive Vice        2001  $    275,000           --                 --
President - General Counsel and             2000  $    260,500   $   27,500          312,500(3)
Secretary                                   1999  $    233,269   $  150,000       210,000(4)(9)

Kevin Griffo, Executive Vice President -    2001  $    250,000   $   16,667(7)              --
Sales and Marketing                         2000  $  247,345(5)  $   41,667(7)     1,563,114(3)
                                                                                         (8)(9)
                                            1999  $  131,885(6)          --          57,143 (6)

George Vinall, Executive Vice President -   2001  $    250,000           --                 --
Business  Development                       2000  $    248,000   $   25,000          245,000(3)
                                            1999  $    200,000   $  150,000                 --
</TABLE>

(1)     The  costs  of  certain  benefits  not properly categorized as salary or
benefits  are  not  included  because  they  did  not exceed, in the case of any
executive  officer named in the table, the lesser of $50,000 or 10% of the total
annual  salary  and  bonus  reported  in  the  above  table.

(2)     Under  his  employment  agreement  with  the  Company,  Mr.  Battista is
entitled  to  a  minimum annual salary of $500,000.  Mr. Battista's salary shown
for  1999  includes,  in  addition  to the $500,000 annual base salary for 1999,
$1,000,000 representing a prepayment of $500,000 in salary for each of the years
2000  and  2001  as  provided  in  Mr.  Battista's employment agreement with the
Company.  Therefore,  no  salary  was  paid  to  Mr.  Battista  in  2001.

(3)  Options  to  purchase  the  Company's  common stock. The options granted to
Messrs.  Battista,  Meyercord,  Lawn,  Griffo  and Vinall were granted under the
Company's  2000  Long Term Incentive Plan. In 2000, Mr. Battista was granted (i)
options  to purchase 250,000 shares of the Company's common stock at an exercise
price  of  $2.00  per share that vest in five years and (ii) options to purchase
250,000  shares  of the Company's common stock at an exercise price of $4.75 per
share that vest over three years. In 2000, Mr. Meyercord was granted (i) options
to purchase 150,000 shares of the Company's common stock at an exercise price of
$2.00  per  share  that  vest in five years and (ii) options to purchase 200,000
shares  of  the  Company's  common stock at an exercise price of $4.75 per share
that  vest  over  three  years.  In  2000,  Mr.  Lawn was granted (i) options to
purchase  137,500  shares  of the Company's common stock at an exercise price of
$2.00  per share that vest in five years, (ii) options to purchase 50,000 shares
of the Company's common stock at an exercise price of $2.31 half of which vested
upon  grant  and  the  remainder of which vested six months thereafter and (iii)
options  to purchase 125,000 shares of the Company's common stock at an exercise
price  of  $4.75  per  share that vest over three years. In 2000, Mr. Griffo was
granted  (i) options to purchase 125,000 shares of the Company's common stock at
an exercise price of $2.00 per share that vest

                                       64
<PAGE>

in  five  years  and  (ii)  options  to purchase 105,000 shares of the Company's
common stock at an exercise price of $4.75 per share that vest over three years.
In  2000,  Mr.  Vinall was granted (i) options to purchase 125,000 shares of the
Company's common stock at an exercise price of $2.00 per share that vest in five
years  and  (ii) options to purchase 120,00 shares of the Company's common stock
at  an  exercise  price  of  $4.75 per share that vested upon grant. Each of the
employment  agreements  for Messrs. Battista, Meyercord, Lawn, Griffo and Vinall
provide  for  immediate vesting of options in event of a "change of control" (as
defined  in  such  agreements).

(4)  Options  to  purchase  the  Company's  common stock. The options granted to
Messrs.  Meyercord  and  Lawn  were  granted  under the Company's 1998 Long Term
Incentive  Plan. In 1999, Mr. Meyercord was granted options that vest over three
years  to  purchase  450,000 shares of the Company's common stock at an exercise
price  of $15.94 per share. In 1999, Mr. Lawn was granted options that vest over
three  years  to  purchase  210,000  shares  of the Company's common stock at an
exercise  price  of  $9.88  per  share.

(5)     Mr.  Griffo  commenced  his  employment with the Company in March, 2000.
Prior  to  that time he was President and Chief Operating Officer of Access One.
On  August 9, 2000 a wholly owned subsidiary of the Company merged with and into
Access  One.  The amount includes amounts paid to Mr. Griffo by Access One prior
to  his  commencement  of  employment  with  the  Company.

(6)     These  amounts  were  paid  to  Mr.  Griffo  by  Access One where he was
President  and  Chief  Operating  Officer.

(7)  A  portion  of  this  bonus  was  paid  in  shares of Access One (which was
subsequently  converted  into shares of the Company common stock pursuant to the
merger  of  Access One and a wholly owned subsidiary of the Company), which vest
over  three  years  and were valued at the then fair market value at the time of
grant.

(8)  Options  to  purchase  the  Company's  common stock. In connection with his
hiring by the Company in 2000, Mr. Griffo was granted options that vest over two
years  to purchase 1,300,000 shares of the Company's common stock at an exercise
price  of  $13.69  per  share.  Mr.  Griffo was also granted options to purchase
33,114  shares of the Company's common stock in 2000 that were granted under the
1997  and  1999  Access  One Stock Option Plans, which plans were assumed by the
Company  pursuant  to  the  terms  of  Access  One's acquisition by the Company.

(9)  Messrs.  Meyercord,  Lawn,  and  Griffo  offered  the  following options to
purchase  the  Company's  common  stock  for  exchange pursuant to the Company's
Options  Exchange Offer (described in "STOCK OPTIONS GRANT" below, which options
are  expected  to  be  reissued on or after April 5, 2002: 450,000, 210,000, and
1,300,000,  respectively.

STOCK  OPTION  GRANTS

     On August 29, 2002, the Company commenced a voluntary stock option exchange
program  (the  "Options  Exchange  Offer")  to certain eligible employees of the
Company, which included the executive officers named in the Summary Compensation
Table  above.  Under  the  program,  eligible employees were given the option to
cancel  each  outstanding stock option previously granted to them at an exercise
price  greater than or equal to $5.50 per share, in exchange for a new option to
buy  shares  of  the  Company's  common stock to be granted on or after April 5,
2002, six months and one day from October 4, 2001, the date the old options were
cancelled.  The  exercise  price  of these new options will be equal to the fair
market  value  of the Company's common stock on the date of grant. In total, 5.8
million  stock  options  were  initially  cancelled as a result of this program.

     Other  than  as discussed above, the Company granted no options to purchase
common  stock  of  the Company during the fiscal year ended December 31, 2001 to
the  executive officers named in the Summary Compensation Table, above. Further,
none  of  the  executive  officers named in the Summary Compensation Table above
acquired  any  shares  of  the  Company upon the exercise of options in 2001. On
December  31, 2001, the exercise prices of all of the vested options to purchase
shares  of  the  Company  held  by  each  of the executive officers named in the
Summary  Compensation  Table  were above the then market price for the Company's
shares.

                                       65
<PAGE>

EMPLOYMENT  CONTRACTS

     Gabriel  Battista  is  party  to  an employment agreement with the Company,
dated  as  of  November  13, 1998, that was amended as of March 28, 2001 and now
expires  on December 31, 2004. Under the terms of the agreement, as amended, Mr.
Battista  received  a  signing  bonus  of $3,000,000 at the time of the original
agreement  and  is  entitled to a minimum annual base salary of $500,000, plus a
discretionary  bonus.  The  initial  three  years  of  salary under the original
agreement  were paid in advance. Mr. Battista is also entitled to other benefits
and  perquisites. In addition, upon execution of the original agreement in 1998,
Mr.  Battista  was  granted  options  that  vested  over three years to purchase
1,000,000  shares of the Company common stock at an exercise price of $10.44 per
share,  and  options  that vested immediately upon execution of the agreement to
purchase  an  additional 650,000 shares at an exercise price of $7.00 per share.

     In  the  event  of  certain  transactions  (including an acquisition of the
Company's  assets, a merger into another entity or a transaction that results in
the  Company  common  stock  no longer being required to be registered under the
Securities  Exchange Act of 1934), Mr. Battista will receive an additional bonus
of  $1,000,000  if  the  price  per  share  for the Company common stock in such
transaction  was  less  than  or equal to $20.00 per share, or $3,000,000 if the
consideration  is  greater  than  $20.00  per  share.

     Edward  B.  Meyercord,  III  entered into a three-year employment agreement
with  the  Company effective as of March 26, 2001. Commencing in 2002, under the
contract,  Mr. Meyercord is entitled to a minimum annual base salary of $350,000
and  certain  other  perquisites  made generally available by the Company to its
senior  executive  officers.

     Aloysius  T.  Lawn,  IV entered into a three-year employment agreement with
the  Company  effective  as  of  March 26, 2001. Under the contract, Mr. Lawn is
entitled  to  a  minimum  annual  base  salary  of  $275,000  and  certain other
perquisites  made  generally  available  by  the Company to its senior executive
officers.

     George Vinall is party to an employment agreement with the Company that was
amended  as  of March 28, 2001 and now expires on December 28, 2004.   Under the
contract,  as amended, Mr. Vinall is entitled to a minimum annual base salary of
$250,000  and  certain  other  perquisites  made available by the Company to its
senior  executive  officers.  In  connection  with  the  original agreement, Mr.
Vinall  was  granted  an option to purchase 240,000 shares of the Company common
stock  at  an  exercise  price  of  $8.56  per  share.

     Kevin  Griffo  entered  into  a  three-year  employment  agreement with the
Company  effective  as  of March 24, 2000 that was amended as of March 28, 2001.
Under  the  contract,  Mr. Griffo is entitled to a minimum annual base salary of
$250,000  and  certain  other  perquisites  made available by the Company to its
senior  executive  officers.  In  addition, upon execution of the agreement, Mr.
Griffo  was  granted  options  that  vest over three years to purchase 1,300,000
shares  of  the  Company  common  stock at an exercise price of $13.69 per share

     Each  of  the  employment agreements for Messrs. Battista, Meyercord, Lawn,
Vinall and Griffo provide for immediate vesting of options in event of a "change
of  control"  (as  defined  in  the  agreements)  of the Company and provide for
severance  benefits in the event employment is terminated by the Company without
cause  prior  to  the end of the term and for a certain period beyond the end of
the  term  in  the  event  of a "change of control."  The severance benefits are
generally  the  payment  of  an  amount equal to two years' base salary plus the
average  annual  incentive  bonus  earned by the executive in the preceding four
years,  as  well as the continuation of various employee benefits for two years.

     Each  of  the above-described agreements requires the executive to maintain
the  confidentiality  of  Company  information  and assign any inventions to the
Company. In addition, each of the executive officers has agreed that he will not
compete  with  the  Company  by engaging in any capacity in any business that is
competitive  with  the business of the Company during the term of his respective
agreement  and  thereafter  for  specified  periods.

                                       66
<PAGE>

COMPENSATION  COMMITTEE  INTERLOCKS  AND  INSIDER  PARTICIPATION

None.

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

     The  following  table  sets  forth certain information known to the Company
with respect to beneficial ownership of the Company common stock as of March 29,
2002  (except  as  otherwise  noted) by (i) each stockholder who is known by the
Company  to  own  beneficially  more than five percent of the outstanding common
stock,  (ii)  each  of  the Company's directors and nominees for director, (iii)
each  of  the  executive officers named below and (iv) all current directors and
executive  officers  of  the  Company  as a group. Except as otherwise indicated
below,  the  Company  believes  that  the  beneficial owners of the common stock
listed  below have sole investment and voting power with respect to such shares.


<TABLE>
<CAPTION>
NAME  OF  BENEFICIAL  OWNER  OR        NUMBER OF SHARES             PERCENT OF SHARES
      IDENTITY  OF  GROUP            BENEFICIALLY OWNED (1)         BENEFICIALLY OWNED
---------------------------         ----------------------          ------------------
<S>                                               <C>            <C>
Legg Mason, Inc.
100 Light Street
P. O. Box 1476
Baltimore, MD 21203
                                         5,631,545 (3)                    6.9%
AOL Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
                                         7,200,000 (2)                    8.8%
Paul Rosenberg
650 N. E. 5th Avenue
Boca Raton, Fl 33432
                                         5,759,985 (4)                    7.1%

Gabriel Battista                         1,833,334 (5)                    2.2%
Mark S. Fowler                             216,023 (5)                      *
Arthur J. Marks                            154,999 (5)                      *
Edward B. Meyercord, III                   497,797 (5)                      *
Ronald R. Thoma                             87,934 (5)                      *
Kevin Griffo                             2,063,828 (5)                    2.5%
Aloysius T. Lawn, IV                       390,317 (5)                      *
George Vinall                              360,000 (5)                      *

All directors and executive
officers as a group (12 persons)         6,020,538 (5)                    6.9%
</TABLE>

*     Less  than  1%

                                       67
<PAGE>

(1)     The  securities  "beneficially  owned"  by  a  person  are determined in
accordance  with  the  definition  of  "beneficial  ownership"  set forth in the
regulations of the SEC and, accordingly, may include securities owned by or for,
among  others,  the  spouse, children or certain other relatives of such person.
The  same  shares  may be beneficially owned by more than one person. Beneficial
ownership  may  be  disclaimed  as  to  certain  of  the  securities.

(2)     The  foregoing information is derived from the Schedule 13G filed by AOL
Time  Warner  Inc.  on  February  13,  2002.

(3)     Includes 5,574,200 shares of the Company common stock beneficially owned
by  LMM,  LLC,  and  57,345 shares beneficially owned by Legg Mason Wood Walker,
Inc.,  according  to  a  Schedule  13G  filed by Legg Mason Wood Walker, Inc. on
February  14,  2002.

(4)     The  foregoing  information  is derived from the Schedule 13D/A filed by
Paul  Rosenberg, the Rosenberg Family Limited Partnership, PBR, Inc. and the New
Millennium  Charitable  Foundation  on  February  12,  1999.

(5)  Includes  shares  of  the  Company common stock that could be acquired upon
exercise  of  options  exercisable  within 60 days after March 29, 2002 and that
have  been  tendered for exchange and cancelled pursuant to the Company's Option
Exchange  Offer  on  the  assumption  that  the  new  options  will be exchanged
therefore.  Includes  shares of Company common stock that could be acquired upon
exercise  of  options exercisable within sixty (60) days after March 29, 2002 as
follows:  Gabriel  Battista-1,733,334; Edward B. Meyercord III-366,667; Aloysius
T.  Lawn  IV-301,667;  Kevin  Griffo-1,882,400;  and  George  Vinall-360,000.

ITEM  13.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS.

Not  applicable


ITEM  14.   EXHIBITS AND  REPORTS  ON  FORM  8-K

     (a)     The  following documents are filed as part of this Annual Report on
Form  10-K.

          1.     Consolidated  Financial  Statements:

     The  Consolidated  Financial Statements filed as part of this Form 10-K are
listed  in  the  "Index  to  Consolidated  Financial  Statements"  in  Item  8.

          2.     Consolidated  Financial  Statement  Schedule:

     The  Consolidated  Financial  Statement  Schedule  filed  as  part  of this
report  is  listed  in  the  "Index  to  S-X  Schedule."

     Schedules  other  than  those  listed  in  the  accompanying  Index  to S-X
Schedule  are  omitted  for  the  reason  that they are either not required, not
applicable or the required information  is  included  in  the       Consolidated
Financial  Statements  or  notes  thereto.

                                       68
<PAGE>

                    TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES

                              INDEX TO S-X SCHEDULE

                                                                          PAGE
                                                                          ----

Report of Independent Accountants on Financial Statement Schedule          70
Schedule II -- Valuation & Qualifying Accounts                             71

                                       69
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To  the  Board  of  Directors
And  Stockholders  of  Talk  America  Holdings,  Inc.:

The  audit  referred  to  in  our report dated February 7, 2000, relating to the
consolidated  financial  statements  of  Talk  America  Holdings, Inc. (formerly
Talk.com Inc.) and subsidiaries, which is contained in Item 8 of this Form 10-k,
included  the  audit  of  the  financial  statement  schedule  listed  in  the
accompanying  index  for  the  year  ended  December  31,  1999.  This financial
statement  schedule  is the responsibility of management.  Our responsibility is
to  express  an  opinion  on  this  schedule  based  on  our  audit.

In  our  opinion, the financial statement Schedule II - Valuation and Qualifying
Accounts,  presents  fairly, in all material respects, the information set forth
therein.

BDO  Seidman,  LLP

New  York,  New  York
February  7,  2000

                                       70
<PAGE>
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                               ADDITIONS
                                  BALANCE AT   CHARGED TO    DEDUCTIONS    BALANCE
                                  BEGINNING    COSTS AND     FOR WRITE-   AT END OF
DESCRIPTION DEDUCTIONS            OF PERIOD     EXPENSES        OFFS        PERIOD
-------------------------------  -----------  -----------   ------------  ----------
<S>                              <C>          <C>          <C>           <C>

YEAR ENDED DECEMBER 31, 2001:
Reserve and allowances deducted
  from asset accounts:
Allowance for uncollectible
  accounts                       $    29,429  $    92,778  $   (75,803)  $   46,404
                                 ===========  ===========  ============  ==========

YEAR ENDED DECEMBER 31, 2000:
Reserve and allowances deducted
  from asset accounts:
Allowance for uncollectible
  accounts                       $     5,021  $    53,772  $   (29,334)  $   29,459
                                 ===========  ===========  ============  ==========

YEAR ENDED DECEMBER 31, 1999:
Reserve and allowances deducted
  from asset accounts:
Allowance for uncollectible
  accounts                       $     1,669  $    28,250  $   (24,898)  $    5,021
                                 ===========  ===========  ============  ==========
</TABLE>

                                       71
<PAGE>

(3)  EXHIBITS:

EXHIBIT
NUMBER                           DESCRIPTION
------                           -----------


3.1  Bylaws  of  the  Company  (incorporated  by reference to Exhibit 3.2 to the
     Company's  registration  statement  on  Form  S-1  (File  No.  33-94940)).

3.2  Certificate of Designation of Series A Junior Participating Preferred Stock
     of Company dated August 27, 1999 (incorporated by reference to Exhibit A to
     Exhibit  1  to  the  Company's registration statement on Form 8-A (File No.
     000-26728)).

3.3  Composite  form of Amended and Restated Certificate of Incorporation of the
     Company,  as  amended  through  April 6, 2001 (incorporated by reference to
     Exhibit  3.1  to the Company's quarterly report on Form 10-Q, dated May 14,
     2001).

4.1  Specimen  of  Talk.com  Inc.  common  stock  certificate  (incorporated  by
     reference  to  Exhibit  4.1 to the Company's Registration Statement on Form
     S-4  (File  No.  333-40980)).

4.2  Form  of  Warrant  Agreement  for Elec Communications, Kenneth Baritz, Joel
     Dupre,  Keith  Minella,  Rafael Scolari, and William Rogers dated August 9,
     2000  (incorporated  by  reference  to  Exhibit 4.2 to the Company's Annual
     Report  on  Form  10-K  for  the  year  ended  December  31,  2000).

4.3  Form  of  Warrant Agreement for MCG Credit Corporation dated August 9, 2000
     (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on
     Form  10-K  for  the  year  ended  December  31,  2000).

4.4  Form of Warrant Agreement for MCG Credit Corporation dated October 20, 2000
     (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on
     Form  10-K  for  the  year  ended  December  31,  2000).

4.5  Form  of  Warrant  Agreement  for MCG Finance Corporation dated October 20,
     2000  (incorporated  by  reference  to  Exhibit 4.5 to the Company's Annual
     Report  on  Form  10-K  for  the  year  ended  December  31,  2000).

10.1 Employment  Agreement  between  the  Company and Aloysius T. Lawn, IV dated
     March  28, 2001 (incorporated by reference to Exhibit 10.1 to the Company's
     Annual  Report  on  Form  10-K  for  the  year  ended  December 31, 2000).*

10.2 Employment Agreement between the Company and Edward B. Meyercord, III dated
     March  28, 2001 (incorporated by reference to Exhibit 10.2 to the Company's
     Annual  Report  on  Form  10-K  for  the  year  ended  December 31, 2000).*

10.3 Indemnification  Agreement  between  the  Company  and Aloysius T. Lawn, IV
     dated  March  28,  2001(incorporated  by  reference  to Exhibit 10.3 to the
     Company's Annual Report on Form 10-K for the year ended December 31, 2000).
     *

10.4 Indemnification  Agreement between the Company and Edward B. Meyercord, III
     (incorporated  by reference to Exhibit 10.14 to the Company's Annual Report
     on  Form  10-K  for  the  fiscal  year  ended  December  31,  1996).  *

10.5 Tel-Save  Holdings,  Inc.  1995 Employee Stock Option Plan (incorporated by
     reference  to Exhibit 10.15 to the Company's registration statement on Form
     S-1  (File  No.  33-94940)).*

                                       72
<PAGE>

10.6 Telecommunications  Marketing Agreement by and among the Company, Tel-Save,
     Inc.  and  America  Online,  Inc., dated February 22, 1997 (incorporated by
     reference  to  Exhibit  10.32 to the Company's Form 10-K for the year ended
     December  31,  1996).+

10.7 Amendment  No.  1,  dated as of January 25, 1998, to the Telecommunications
     Marketing Agreement dated as of February 22, 1997 by and among the Company,
     Tel-Save,  Inc.  and  America  Online,  Inc.  (incorporated by reference to
     Exhibit  10.31  to  the Company's Form 10-K for the year ended December 31,
     1997).+

10.8 Amendment  No. 2, dated May 14, 1998, among the Company, Tel-Save, Inc. and
     America  Online,  Inc.,  which  amends  that  certain  Telecommunications
     Marketing  Agreement,  dated  as  of  February  22,  1997, as corrected and
     amended by letter, dated April 23, 1997, and amended by an Amendment No. 1,
     dated  January  25,  1998 (incorporated by reference to Exhibit 10.1 to the
     Company's  quarterly  report  on  Form  10-Q,  dated  August  14,  1998).+

10.9 Amendment  No.  3,  effective  as  of  October  1, 1998, among the Company,
     Tel-Save,  Inc.  and  America  Online,  Inc.,  which  amends  that  certain
     Telecommunications  Marketing  Agreement, dated as of February 22, 1997, as
     corrected  and  amended  by letter, dated April 23, 1997, and amended by an
     Amendment  No. 1, dated January 25, 1998, and an Amendment No. 2, dated May
     14,  1998  (incorporated  by  reference  to  Exhibit 10.22 to the Company's
     Annual  Report  on  Form  10-K  for  the  year  ended  December 31, 1998).+

10.10  Amendment  No.  4,  effective  as  of  June  30, 2000, among the Company,
     Talk.com  Holding Corp. and America Online, Inc., which amends that certain
     Telecommunications  Marketing  Agreement, dated as of February 22, 1997, as
     corrected  and  amended  by letter, dated April 23, 1997, and amended by an
     Amendment  No. 1, dated January 25, 1998, an Amendment No. 2, dated May 14,
     1998,  and  an  Amendment No. 3, effective October 1, 1998 (incorporated by
     reference to Exhibit 10.1 to Talk.com's Quarterly Report on Form 10-Q dated
     August  14,  2000).+

10.11  Amendment  No.  5,  effective  as  of  August 1, 2000, among the Company,
     Talk.com  Holding Corp. and America Online, Inc., which amends that certain
     Telecommunications  Marketing  Agreement, dated as of February 22, 1997, as
     corrected  and  amended  by letter, dated April 23, 1997, and amended by an
     Amendment  No. 1, dated January 25, 1998, an Amendment No. 2, dated May 14,
     1998,  an  Amendment No. 3, effective October 1, 1998, and an Amendment No.
     4,  effective  June  30, 2000 (incorporated by reference to Exhibit 10.3 to
     Talk.com's  Quarterly  Report  on  Form  10-Q  dated  August  14,  2000).+

10.12  Amendment  No.  6, effective as of September 19, 2001, among Talk America
     Inc.,  the  Company  and  America  Online,  Inc.  which amends that certain
     Telecommunications  Marketing  Agreement, dated as of February 22, 1997, as
     corrected  and  amended  by letter, dated April 23, 1997, and amended by an
     Amendment  No. 1, dated January 25, 1998, an Amendment No. 2, dated May 14,
     1998,  an  Amendment  No. 3, effective October 1, 1998, an Amendment No. 4,
     effective  June  30, 2000, and an Amendment No. 5, effective August 1, 2000
     (incorporated  by reference to Exhibit 10.6 to the Company's Current Report
     on  Form  8-K  filed  on  September  24,  2001).

10.13  Letter  dated  August  25,  1999 from America Online, Inc. to the Company
     (incorporated  by reference to Exhibit 99.2 to the Company's Current Report
     on  Form  8-K  dated  August  27,  1999).

10.14  Indenture  dated  as  of  September 9, 1997 between the Company and First
     Trust  of  New  York, N.A. (incorporated by reference to Exhibit 4.3 to the
     Company's  registration  statement  on  Form  S-3  (File  No.  333-39787)).

10.15  Indenture  dated  as  of  December 10, 1997 between the Company and First
     Trust  of New York, N.A. (incorporated by reference to Exhibit 10.34 to the
     Company's Annual Report on Form 10-K for the year ended December 31, 1997).

10.16  Employment  Agreement, dated as of November 13, 1998, between the Company
     and  Gabriel  Battista  (incorporated  by  reference to Exhibit 10.1 to the
     Company's  Current  Report  on  Form  8-K  dated  January  20,  1999).*

                                       73
<PAGE>

10.17  Amendment  to  Employment  Agreement,  dated  March 28, 2001, between the
     Company and Gabriel Battista (incorporated by reference to Exhibit 10.16 to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2000).*

10.18  Indemnification  Agreement,  dated  as  of December 28, 1998, between the
     Company  and Gabriel Battista (incorporated by reference to Exhibit 10.2 to
     the  Company's  Current  Report  on  Form  8-K  dated  January 20, 1999). *

10.19 Stock Option Agreement, dated as of November 13, 1998, between the Company
     and  Gabriel  Battista  (incorporated  by  reference to Exhibit 10.3 to the
     Company's  Current  Report  on  Form  8-K  dated  January  20,  1999).*

10.20 Stock Option Agreement, dated as of November 13, 1998, between the Company
     and  Gabriel  Battista  (incorporated  by  reference to Exhibit 10.4 to the
     Company's  Current  Report  on  Form  8-K  dated  January  20,  1999).*

10.21 1998 Long-Term Incentive Plan of the Company (incorporated by reference to
     Exhibit 10.14 to the Company's Current Report on Form 8-K dated January 20,
     1999).*

10.22  Investment  Agreement,  dated  as  of  December  31,  1998, as amended on
     February 22, 1999, among the Company, America Online, Inc., and, solely for
     purposes  of  Sections  4.5,  4.6  and 7.3(g) thereof, Daniel Borislow, and
     solely  for  purposes  of  Section 4.12 thereof, Tel-Save, Inc. and the D&K
     Retained  Annuity  Trust  dated  June  15,  1998  by  Mark  Pavol,  Trustee
     (incorporated  by reference to Exhibit 10.41 to the Company's Annual Report
     on  Form  10-K  for  the  year  ended  December  31,  1998).

10.23  Employment Agreement between the Company and Kevin Griffo dated March 24,
     2000  (incorporated  by  reference  to  Exhibit  10.7  to  the  Company's
     Registration  Statement  in  Form  S-4  (File  No.  333-40980)).*

10.24 Form of Indemnification Agreement, dated as of January 5, 1999, for George
     Vinall  (incorporated by reference to Exhibit 10.50 to the Company's Annual
     Report  on  Form  10-K  for  the  year  ended  December  31,  1998).  *

10.25  Form  of  Non-Qualified  Stock Option Agreement, dated as of December 16,
     1998, for George Vinall, (incorporated by reference to Exhibit 10.51 to the
     Company's  Annual  Report  on  Form  10-K  for  the year ended December 31,
     1998).*

10.26  2000 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.31
     to  the  Company's  Registration  Statement on Form S-4 (No. 333-40980)). *

10.27 Form of Non-Qualified Stock Option Agreement, dated December 12, 2000, for
     each  of  Gabriel  Battista,  Kevin  Griffo, Aloysius T. Lawn IV, Edward B.
     Meyercord,  III,  and  George  Vinall (incorporated by reference to Exhibit
     10.40  to  the  Company's  Annual  Report  on  Form 10-K for the year ended
     December  31,  2000).*

10.28  Employment  Agreement, dated as of December 16, 1998, between the Company
     and  George  Vinall  (incorporated  by  reference  to  Exhibit 10.62 to the
     Company's  Annual  Report  on  Form  10-K  for  the year ended December 31,
     1998).*

10.29  Rights  Agreement  dated as of August 19, 1999 by and between the Company
     and First City Transfer Company, as Rights Agent (incorporated by reference
     to  Exhibit 1 to the Company's registration statement on Form 8-A (File No.
     000-26728)).

10.30  Interconnect  Agreement  between  BellSouth  and  The Other Phone Company
     (incorporated  by  reference to Exhibit 10.47 to the Company's Registration
     Statement  in  Form  S-4  (File  No.  333-40980)).

10.31 Agreement between Talk.com Holding Corp. and BellSouth Telecommunications,
     Inc., dated May 22, 2000 (incorporated by reference to Exhibit 10.46 to the
     Company's Annual Report on Form 10-K for the year ended December 31, 2000).

                                       74
<PAGE>

10.32  Amendment to Interconnection Agreement between Talk.com Holding Corp. and
     BellSouth  Telecommunications,  Inc., dated December 26, 2000 (incorporated
     by  reference  to Exhibit 10.47 to the Company's Annual Report on Form 10-K
     for  the  year  ended  December  31,  2000).

10.33  Credit  Facility  Agreement,  among  Talk.com  Holding  Corp., Access One
     Communications  Corp. and certain of their direct and indirect subsidiaries
     and  MCG  Finance Corporation dated as of October 20, 2000 (incorporated by
     reference to Exhibit 10.4 to Talk.com's Quarterly Report of Form 10-Q dated
     November  14,  2000).

10.34  Guaranty  between  the  Company  and MCG Finance Corporation, dated as of
     October  20,  2000 (incorporated by reference to Exhibit 10.5 to Talk.com's
     Quarterly  Report  of  Form  10-Q  dated  November  14,  2000).

10.35  Consulting  Agreement  dated  as  of  July  5,  2000  between  MCG Credit
     Corporation  and Access One Communications Corp. (incorporated by reference
     to  Exhibit 10.55 to the Company's Registration Statement in Form S-4 (File
     No.  333-40980)).

10.36  Employment Agreement by and between Thomas M. Walsh and the Company dated
     as  of  August  7,  2000  (incorporated by reference to Exhibit 10.1 to the
     Company's  Quarterly  Report  on  Form  10-Q  dated  November  14,  2000).*

10.37  Indemnification  Agreement by and between Thomas M. Walsh and the Company
     dated  as  of  August 7, 2000 (incorporated by reference to Exhibit 10.2 to
     the  Company's  Quarterly  Report  on  Form 10-Q dated November 14, 2000).*

10.38  Non-Qualified  Stock  Option  Agreement  by  and  Thomas M. Walsh and the
     Company  dated  as  of August 7, 2000 (incorporated by reference to Exhibit
     10.3  to  the  Company's  Quarterly  Report on Form 10-Q dated November 14,
     2000).*

10.39 Lease by and between Talk.com Holding Corp. and University Science Center,
     Inc.  dated  April  10, 2000 (incorporated by reference to Exhibit 10.54 to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2000).

10.40  Lease  by  and  between  The  Other  Phone  Company,  dba  Access  One
     Communications  and  University Science Center, Inc. dated December 8, 1999
     (incorporated  by reference to Exhibit 10.55 to the Company's Annual Report
     on  Form  10-K  for  the  year  ended  December  31,  2000).

10.41  Letter  dated  August  2,  2000  from America Online, Inc. to the Company
     (incorporated  by reference to Exhibit 99.2 to the Company's Current Report
     on  Form  8-K  dated  August  3,  2000).

10.42  Restated  Access  One  Communications  Corp.  1997  Stock  Option  Plan
     (incorporated  by  reference  to  Exhibit 4.2 to the Company's registration
     statement  on  Form  S-8  (File  No.  333-52166).*

10.43  Restated  Access  One  Communications  Corp.  1999  Stock  Option  Plan
     (incorporated  by  reference  to  Exhibit 4.3 to the Company's registration
     statement  on  Form  S-8  (File  No.  333-52166).*

10.44  Amendment  to  Employment Agreement for Kevin Griffo dated March 28, 2001
     (incorporated  by reference to Exhibit 10.60 to the Company's Annual Report
     on  Form  10-K  for  the  year  ended  December  31,  2000).*

10.45  Amendment  to Employment Agreement for George Vinall dated March 28, 2001
     (incorporated  by reference to Exhibit 10.61 to the Company's Annual Report
     on  Form  10-K  for  the  year  ended  December  31,  2000.*

10.46  Second  Amendment  to  Investment  Agreement  dated  as of August 2, 2000
     between  the Company and America Online, Inc. (incorporated by reference to
     Exhibit  99.1  to  the Company's Current Report on Form 8-K dated August 3,
     2000).

10.47 Employment Agreement between the Company and Jeffrey Earhart dated October
     2,  2001  (incorporated  by  reference  to  Exhibit  10.1  to the Company's
     Quarterly  Report  on  Form  10-Q  dated  November  14,  2001).*

                                       75
<PAGE>

10.48  Employment Agreement between the Company and Warren Brasselle dated March
     8, 2000 (incorporated by reference to Exhibit 10.48 to the Company's Annual
     Report  on  Form  10-K  for  the  year  ended  December  31,  2001).*

10.49  Form of Non-Qualified Stock Option Agreement, dated as of March 24, 2000,
     for  Kevin  Griffo  (incorporated  by  reference  to  Exhibit  10.49 to the
     Company's  Annual  Report  on  Form  10-K  for  the year ended December 31,
     2001).*

10.50  Restructuring and Note Agreement, dated as of September 19, 2001, between
     the  Company and America Online, Inc. (incorporated by reference to Exhibit
     10.1  to  the  Company's  Current Report on Form 8-K filed on September 24,
     2001).

10.51 Registration Rights Agreement, dated as of September 19, 2001, between the
     Company and America Online, Inc. (incorporated by reference to Exhibit 10.2
     to  the  Company's Current Report on Form 8-K filed on September 24, 2001).

10.52  Security  and Pledge Agreement, dated as of September 19, 2001, among the
     Company  as  Grantor,  and  State  Street  Bank and Trust Company, N.A., as
     collateral agent on behalf of America Online, Inc. and America Online, Inc.
     (incorporated  by reference to Exhibit 10.3 to the Company's Current Report
     on  Form  8-K  filed  on  September  24,  2001).

10.53  Master Subsidiary Guarantee, Security Agreement Collateral Assignment and
     Equity  Pledge,  dated as of September 19, 2001, among certain subsidiaries
     of  the  Company as Grantors, State Street Bank and Trust Company, N.A., as
     Collateral  Agent  on  behalf  of America Online, Inc., and America Online,
     Inc.  (incorporated  by  reference to Exhibit 10.4 to the Company's Current
     Report  on  Form  8-K  filed  on  September  24,  2001).

10.54  Intercreditor  Agreement,  dated  as  of  September 19, 2001, between MCG
     Finance  Corporation,  as  collateral  agent  for  certain  MCG Lenders (as
     defined  therein)  and  State  Street  Bank  and  Trust  Company,  N.A., as
     collateral  agent  (incorporated  by  reference  to  Exhibit  10.5  to  the
     Company's  Current  Report  on  Form  8-K  filed  on  September  24, 2001).

10.55  Consent  and Amendment to Talk.com Loan Documents, dated as of August 10,
     2001  by  and among Talk America Inc., Access One Communications Corp., the
     Company,  MCG Finance Corporation and MCG Capital Corporation (incorporated
     by  reference  to  Exhibit 10.7 to the Company's Current Report on Form 8-K
     filed  on  September  24,  2001).

10.56  Consent  and  Amendment to Talk.com Loan Documents, dated as of September
     19,  2001  by and among Talk America Inc., Access One Communications Corp.,
     the  Company,  MCG  Finance  Corporation  and  MCG  Capital  Corporation
     (incorporated  by reference to Exhibit 10.8 to the Company's Current Report
     on  Form  8-K  filed  on  September  24,  2001).

10.57  First  Amendment, dated as of September 19, 2001, to the Rights Agreement
     dated as of August 19, 1999, by and between Talk America Holdings, Inc. and
     First  City Transfer Company, as Rights Agent (incorporated by reference to
     Exhibit 10.9 to the Company's Current Report on Form 8-K filed on September
     24,  2001).

10.58  Letter  Agreement  between  America  Online,  Inc.  and the Company dated
     February  21,  2002  (incorporated  by  reference  to  Exhibit  10.1 to the
     Company's  Current  Report  on  Form  8-K  filed  on  February  21,  2002).

10.59  Amendment  Number  Three to Talk.com Loan Documents, dated as of February
     12,  2002,  among the Company, Talk America Inc., Access One Communications
     Corporation,  each  other  Borrower  under  and  as  defined  in the Credit
     Agreement  (referenced  therein), Lenders that are parties thereto, and MCG
     Capital  Corporation  (incorporated  by  reference  to  Exhibit 10.2 to the
     Company's  Current  Report  on  Form  8-K  filed  on  February  21,  2002).

10.60  Amended and Restated Consulting Agreement, dated as of February 12, 2002,
     among the Company and MCG Capital Corporation (incorporated by reference to
     Exhibit  10.3 to the Company's Current Report on Form 8-K filed on February
     21,  2002).

                                       76
<PAGE>

10.61  2001 Non-Officer Long Term Incentive Plan of the Company (incorporated by
     reference  to  Exhibit  4.1 to the Company's registration statement on Form
     S-8  (File  No.  333-74820).*

10.62  Interconnection  Agreement  under  Sections  251  and  252  of  the
     Telecommunications  Act  of  1996  dated  as  of  July  13,  2000,  between
     Southwestern Bell Telephone Company, Nevada Bell Telephone Company, Pacific
     Bell  Telephone  Company,  Southern  New  England  Telephone, Ameritech and
     Talk.com  Holding  Corp. (incorporated by reference to Exhibit 10.62 to the
     Company's Annual Report on Form 10-K for the year ended December 31, 2001).

10.63  Mi2A  Amendment to the Interconnection Agreement under Section 271 of the
     Telecommunications  Act of 1996 dated as of May 15, 2001, between Ameritech
     Michigan  and  Talk.com Holding Corp. (incorporated by reference to Exhibit
     10.63  to  the  Company's  Annual  Report  on  Form 10-K for the year ended
     December  31,  2001).

10.64  Indenture  of Lease by and between Woodruff Properties and Omnicall, Inc.
     dated  August  1,  1998  (incorporated by reference to Exhibit 10.64 to the
     Company's Annual Report on Form 10-K for the year ended December 31, 2001).

10.65  Amendment dated February 9, 2001 to the Indenture of Lease by and between
     Woodruff  Properties  and Omnicall, Inc. dated August 1, 1998 (incorporated
     by  reference  to Exhibit 10.65 to the Company's Annual Report on Form 10-K
     for  the  year  ended  December  31,  2001).

10.66  Lease  Agreement  by  and  between Bridge Plaza Partnership and The Furst
     Group,  Inc.  dates  as  of November 4, 1998 ((incorporated by reference to
     Exhibit  10.66  to  the  Company's  Annual Report on Form 10-K for the year
     ended  December  31,  2001).

10.67  Option  dated  July  __, 2001 to Renew the Lease Agreement by and between
     Bridge  Plaza Partnership and The Furst Group, Inc. dates as of November 4,
     1998  (incorporated  by  reference to Exhibit 10.67 to the Company's Annual
     Report  on  Form  10-K  for  the  year  ended  December  31,  2001).

10.68  Office Lease by and between Reston Plaza I and II, LLC and Talk.com, Inc.
     dated  as  of April 28, 2000 (incorporated by reference to Exhibit 10.68 to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2001).

10.69  Indenture dated as of April 2, 2002, between Talk America Holdings, Inc.
     and  Wilmington  Trust  Company  (filed  herewith).

10.70  Supplemental  Indenture  No.  1  dated  as of April 2, 2002, between Talk
     America Holdings, Inc. and Wilmington Trust Company, to the Indenture dated
     as  of  April  2,  2002, between Talk America Holdings, Inc. and Wilmington
     Trust  Company  (filed  herewith).

10.71  Supplemental  Indenture  No.  2  dated  as of April 2, 2002, between Talk
     America Holdings, Inc. and Wilmington Trust Company, to the Indenture dated
     as  of  April  2,  2002  (filed  herewith).

10.72  First  Supplemental  Indenture  dated  as  of April 2, 2002, between Talk
     America  Holdings,  Inc.  and  U.S. Bank Trust National Association, to the
     Indenture  dated  as  of  September  9,  1997  (filed  herewith).

10.73  First  Supplemental  Indenture  dated  as  of April 2, 2002, between Talk
     America  Holdings,  Inc.  and  U.S. Bank Trust National Association, to the
     Indenture  dated  as  of  December 10,  1997  (filed  herewith).

10.74  Amendment  Number  Four  to  Talk.com Loan Documents dated as of April 3,
     2002,  between  the  Company,  Talk America Inc., Access One Communications
     Corporation,  each  other  Borrower  under  and  as  defined  in the Credit
     Agreement  (referenced  therein), Lenders that are parties thereto, and MCG
     Capital  Corporation

21.1 Subsidiaries  of the Company (incorporated by reference to Exhibit 10.49 to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2001).

23.1     Consent  of  Pricewaterhouse  Coopers  LLP.

23.2     Consent  of  BDO  Seidman.

_________

*     Management  contract  or  compensatory  plan  or  arrangement.
+     Confidential  treatment  previously has been granted for a portion of this
exhibit.

(b)     Reports  on  Form  8-K.

No Current Reports on Form 8-K were filed by the Company during the three months
ended  December  31,  2001.


                                       77
<PAGE>

                                   SIGNATURES

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

Date:  April 12,  2002

                                       TALK  AMERICA  HOLDINGS,  INC.



                                       By:  Gabriel  Battista     /s/
                                           ---------------------------
                                          Gabriel  Battista
                                          Chairman of the Board of Directors,
                                          Chief Executive Officer and Director

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


SIGNATURE                            TITLE                            DATE



  Gabriel  Battista  /s/       Chairman of the Board           April  12,  2002
---------------------------    of Directors, Chief Executive
Gabriel  Battista              Officer and Director
                               (Principal  Executive  Officer)

  David  G.  Zahka  /s/        Chief  Financial  Officer       April  12,  2002
---------------------------    (Principal Financial Officer)
David  G.  Zahka

  Thomas  M.  Walsh  /s/        Vice President - Finance       April  12,  2002
---------------------------    (Principal Accounting Officer)
Thomas  M.  Walsh

  Edward B. Meyercord III /s/   President, Director and        April  12,  2002
---------------------------     Treasurer
Edward  B.  Meyercord,  III

  Mark S. Fowler /s/            Director                       April  12,  2002
---------------------------
Mark  S.  Fowler

  Arthur  J.  Marks  /s/        Director                       April  12,  2002
---------------------------
Arthur  J.  Marks

  Ronald  R.  Thoma  /s/        Director                       April  12,  2002
---------------------------
Ronald  R.  Thoma


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<PAGE>