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

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1999
                           Commission File No. 0-26728

                                  TALK.COM 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. [X]

     As of March 20, 2000,  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 20, 2000 of $14.78 per share as reported on
the Nasdaq  National  Market,  was  approximately  $967,913,861  (calculated  by
excluding solely for purposes of this form outstanding shares owned by directors
and executive officers).

     As of March 20, 2000, the registrant had issued and outstanding  65,789,152
shares of its Common Stock, par value $.01 per share.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive proxy statement for the 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.


<PAGE>


                                  TALK.COM INC.

                               INDEX TO FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

ITEM NO.                                                                PAGE NO.

                                     PART I
 1.  Business                                                                  1
 2.  Properties                                                                8
 3.  Legal Proceedings                                                         8
 4.  Submission of Matters to a Vote of Security Holders                       8

                                     PART II
 5.  Market for Registrant's Common Equity and Related Stockholders Matters   10
 6.  Selected Consolidated Financial Data                                     11
 7.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations                                               12
 8.  Financial Statements and Supplementary Data                              17
 9.  Changes in and Disagreements with Accountants and Financial Disclosure   38

                                    PART III
10.  Directors and Executive Officers of the Registrant                       38
11.  Executive Compensation                                                   38
12.  Security Ownership of Certain Beneficial Owners and Management           38
13.  Certain Relationships and Related Transactions                           38

                                     PART IV
14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K          38

                                        i


<PAGE>


                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     Talk.com  Inc.  through its  subsidiaries,  (the  "Company" or  "Talk.com")
provides  telecommunications  services to  residential  and  business  customers
throughout the United States,  primarily to  residential  consumers  through its
e-commerce  platform.  The Company  believes  that it currently  has the largest
share of the  e-commerce  market for  traditional  long distance  services.  The
Company's  e-commerce platform is built around the Company's advanced online and
web-enabled customer care, billing and information systems.

     The Company's  telecommunication  services  offerings include long distance
outbound service,  inbound toll-free service and dedicated private line services
for data.  The Company has stated that it will  continue to seek to leverage its
e-commerce  business  platform to expand its customer base through  existing and
new  marketing  arrangements  with new business  partners and to build a diverse
products and services portfolio, including  non-telecommunications  products and
services.  The  Company  markets  its  telecommunications  services  through its
marketing  agreements  with various  partners  including  America  Online,  Inc.
("AOL"),  Prodigy Communications  Corporation,  Direct Merchants Bank, First USA
Bank  and  CompuServe  and on the  Internet  through  its web  site  located  at
www.talk.com. The Company also sells its services on a wholesale basis.

     Talk.com  carries a majority of its customers'  calls over its own network.
The Company's network includes  Company-owned  Lucent 5ESS-2000 switches located
in selected areas throughout the United States. The network is further supported
by agreements with major  interexchange  carriers that provide  interconnections
among the  Company's  switches and local  carriers'  switches,  origination  and
termination of calls,  overflow  capacity,  international long distance services
and other services that the Company  provides to its customers.  The Company has
also developed and integrated  into its network  sophisticated  information  and
billing systems that allow the Company to manage its network  efficiently and to
provide its customers with high quality customer care and billing systems.

     Talk.com   Holding  Corp.   (formerly,   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.com"  refer to
Talk.com Inc. and its subsidiaries.

SALES AND MARKETING

     The Company conducts its sales and marketing  efforts both online,  through
its various partners and the Company's own web site located at www.talk.com,  as
well as  through  traditional  channels,  such as  direct  mail,  telemarketing,
independent resellers and partition arrangements.

     In  1999,  the  Company's  sales  and  marketing  efforts  focused  both on
continuing   the   recruiting   of  AOL   subscribers   as   customers   of  its
telecommunications  services under its 1997 marketing  agreement with AOL and on
establishing  marketing  agreements  with new business  partners such as Prodigy
Communications   Corporation,   Wired  Digital,   Direct  Sales   International,
Schoolcash.com,  E*Trade, Direct Merchants Bank and First USA Bank. During 1998,
the Company  invested  substantial sums for marketing under the AOL agreement to
establish  quickly its subscriber base of AOL customers as part of the Company's
developing e-commerce strategy. Of the Company's  approximately 1.5 million long
distance online customers at the end of 1999, approximately 1.4 million were AOL
subscribers  and the others were  customers  obtained  through the Company's own
direct  marketing  or with  its  other  marketing  partners.  At the end of 1998
virtually all of the Company's online customers were AOL subscribers.


                                       1
<PAGE>


     During 1999,  the  Company's  marketing  efforts were carried out primarily
through online  marketing  initiatives and through a variety of direct marketing
programs  targeting the customers of its marketing  partners as subscribers.  In
addition, for those customers that have not subscribed to the Company's services
online or through direct mail, the Company has a program with AOL and certain of
its other  marketing  partners for the  referral of  customers by such  partners
directly to the Company's telephone service centers.

     The Company  maintains its own web site at www.talk.com as well as sites on
the AOL online network 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 e-commerce customers:

     o    Detailed rate schedules and product and service related information.

     o    Online sign-up for the Company's telecommunications services.

     o    Credit card billing.

     o    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  telecommunications  and other  products or
services  while online on AOL's  network or through the  Company's own web site.
The Company employs its own proprietary billing systems to enable online billing
and credit card  payment,  eliminating  the need for costly paper  billing.  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  minutes  after a customer  completes a call.  The Company
believes that its online billing systems provide it with a competitive advantage
in the online market for telecommunications services.

     The    Company's    rights   to   market   long   distance   and   wireless
telecommunications  services  on AOL on an  exclusive  basis  expire on June 30,
2003. However,  AOL may elect after June 30, 2000 to allow others to market long
distance and wireless telecommunications services on AOL if AOL elects to forego
the fixed annual payments from the Company under the AOL agreement (at least $60
million in the 12 months ending June 30, 2001).  Under the agreement the Company
is entitled to continue  marketing its products and services on AOL through June
2003.  Among  the  marketing  rights  available  to the  Company  under  the AOL
agreement  throughout  the  term  of the  agreement  until  June  2003  are  the
following:

     o    AOL welcome screen  advertisements,  pop-up  advertisements  and other
          on-screen promotions and advertisements.

     o    Direct mail to advertise  the Company's  products to AOL  subscribers,
          other than  subscribers who have elected not to receive  telemarketing
          calls or other promotional materials through AOL.

     o    A  program  for  promoting   the   Company's   products  to  specified
          percentages  of  AOL  subscribers  who  call  AOL's  customer  inquiry
          centers.

     o    The right  (either  exclusive  or  non-exclusive)  to market  and sell
          wireless,  local (if the  Company  begins  marketing  it under the AOL
          agreement before the end of the long distance  exclusivity period) and
          long  distance and other  products  and  services  over the AOL online
          network.

     Because of  significant  marketing  rights that would  continue even were a
termination  of the  exclusivity  period under the AOL  agreement to occur,  the
Company is unable to determine at this date whether the early termination of the
exclusivity period and the release of the Company's obligation to make the fixed
payments to AOL will be beneficial or detrimental to the Company's business. The
Company  believes  that the  exclusivity  opportunity  under  the AOL  agreement
already has given the Company a valuable  lead in  marketing  telecommunications
services to AOL  subscribers.  However,  the  Company is unable to predict:  (1)
whether potential


                                       2
<PAGE>


competitors of the Company will be willing to pay the substantial  sums that the
Company  believes  would be required to  compensate  AOL for foregoing the fixed
payments to be paid by the Company during the long distance  exclusivity period;
or (2) whether potential competitors would be required, or otherwise be willing,
to invest the  substantial  sums that the Company  believes would be required to
acquire a base of AOL customers for  telecommunications  services  comparable to
the Company's existing base of AOL subscribers.

     The Company  continues to seek new marketing  partners and  arrangements to
expand its  opportunities  to attract  other  customers  to its services and the
products and services  that it offers to its expanding  customer  base. In 1999,
the Company  entered into several new marketing  arrangements,  including  those
with Prodigy  Communications  Corporation,  First USA Bank and Direct  Merchants
Bank,  under which the  Company  will offer its  telecommunications  services to
their subscribers and customers.  Also in 1999, as part of its efforts to expand
the  bundle  of  services  available  to its  Internet  customers,  the  Company
introduced   two   new   web   based   enhancements   of  the   Company's   core
telecommunications services - access to on-line white and yellow pages through a
private label relationship with InfoSpace.com, Inc. and a single click procedure
for "reverse" look up of phone numbers that enables  on-line  customers to track
and  verify  their  billing  information  by  identifying  the name and  address
associated with the phone number called.

     In addition,  the Company has gained approval from Internet Corporation for
Assigned Names and Numbers (ICANN) and the necessary  certification from Network
Solutions,  Inc.  thereby enabling the Company to assign web domain names ending
in .com,  .net,  and  .org to its  customers.  The  Company  plans to waive  the
underlying fees required for domain name  registration for customers who use the
Company's  telecommunications  services. Customers who prefer domain names on an
unbundled basis will be charged market rates.

     Late in 1999, the Company  announced  that it would commence  leasing local
lines for resale,  specifically  targeting  small and  medium-sized  businesses,
which would  represent the first major  expansion of the Company's  portfolio of
telecommunication  services.  In  addition,  the Company  expects to offer local
calling to consumers in 2000.  The Company  expects that it initially will offer
the local service to customers reached through its various marketing agreements,
bundling the local service with its existing  long  distance  telecommunications
service offerings.

     Talk.com  also   provides,   as  a  declining   portion  of  its  business,
telecommunications  services through independent  resellers,  primarily to small
and medium-sized businesses. Although the Company still serves many customers in
this manner,  such  partitions  no longer  comprise a majority of the  Company's
business as they once did.

THE COMPANY'S NETWORK

     To provide its long distance  telecommunications services to customers, the
Company predominantly uses its own telecommunications network, One Better Net or
"OBN". The Company  generally uses OBN to provide  services  directly to its end
users and partitions.  As of December 31, 1999, the Company provisioned over OBN
more than 90% of the lines using its services.

     Controlling its own network  provides the Company with advantages  compared
to when the Company  operated  strictly as a reseller of the  telecommunications
services of other  carriers,  including  lower costs of providing  long distance
services to its  customers  and greater  control over those costs.  This control
allows the Company to manage its growth as a telecommunications service provider
and to  target  its  marketing  efforts  according  to  the  overhead  costs  of
delivering its services.

Structure of the Network

     The  Company's  network is comprised of equipment  and  facilities  that is
either   owned  or  leased   by  the   Company   and   contracts   for   certain
telecommunications  services that the Company  maintains 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.


                                       3
<PAGE>


     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 OBN
switches to switches owned by various local telecommunications 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 OBN. 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 will occur.  In any event,  savings from any such decreases
may be offset by universal service contributions imposed on carriers,  including
the Company. See "Competition" and "Regulation".

     In addition,  the Company  maintains  contracts  with other  carriers  that
provide it with a variety of other services.  See "Service Agreements with Other
Carriers."  These contracts  include services for assisting with the overflow of
telecommunications  traffic over OBN, 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.

     The fact that the Company operates its own switches subjects the Company to
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 OBN
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.

     The Company has  continued to expand the capacity of OBN to meet  increased
demand and believes  that such  capacity may be further  expanded at  reasonable
cost to meet the Company's needs in the foreseeable future,  including expansion
resulting from the Company's growth of its business partnerships and its own web
site.

Service Agreements with Other Carriers

     The Company  historically  obtained  services  from AT&T  through  multiple
contract  tariffs.  With the deployment of OBN, the Company  requires fewer such
services from that carrier to sell its services.  Instead of relying exclusively
on AT&T, the Company has entered into contracts with various other long distance
and local carriers of telecommunications services for both its OBN and reselling
operations. These services enable the Company to:

     o    Connect the Company's OBN switches to each other

     o    Connect   the   Company's   switches   to  the   switches   of   local
          telecommunications service carriers

     o    Carry overflow traffic during peak calling times

     o    Connect international calls

     o    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.

                                       4
<PAGE>


     In February 1999, the Company  entered into a new Master Carrier  Agreement
with  AT&T.  The  agreement,  which has since  been  amended  from time to time,
provides  the  Company  with  a  variety  of  services,  including  transmission
facilities  to connect the OBN  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 does
not anticipate any difficulty in satisfying these minimum requirements.

Information and Billing Services

     In connection  with its online  billing area under its agreement  with AOL,
the Company developed advanced online billing and information  systems. In March
1999,  the Company began  providing its non-AOL  customers with online access to
billing information through its website (www.talk.com),  which enables customers
to view their billing information and call detail within minutes of completing a
call.  The  Company  believes  this online  service  provides  the most  current
information to customers offered by any telecommunications  company. The Company
also acquires  billing and customer care services from other  carriers and third
party vendors.

     The Company provides to each partition computerized management systems that
control order processing, accounts receivable, billing and status information in
a streamlined fashion.  Furthermore, when applicable, the systems interface with
third  party  billing  systems  for  order  processing  and  billing   services.
Enhancements and additional features are provided as needed.

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

COMPETITION

     Competition  is intense in the long distance  industry,  even as the market
continues to expand. Based on published FCC estimates,  toll service revenues of
U.S.  long  distance  carriers  have grown  from $38.8  billion in 1984 to $88.6
billion  in 1997.  Although  the  Company  believes  that it has the  human  and
technical  resources to compete  effectively,  the Company's success will depend
upon its  continued  ability to  profitably  provide  high  quality,  high value
services at prices  generally  competitive  with,  or lower  than,  those of its
competitors.

     The  Company  has  numerous  competitors,  many of which are  substantially
larger and have greater  financial,  technical and marketing  resources than the
Company.  Three  large  carriers,   AT&T,  MCI  WorldCom  and  Sprint,  generate
approximately  80% of  aggregate  revenue in the U.S.  long  distance  industry.
Approximately  140 other carriers account for the remainder of the long distance
market.  The  aggregate  market share (based on operating  revenues) of all long
distance  carriers  other than AT&T, MCI WorldCom and Sprint has grown from 2.6%
in 1984 to 19.8% in 1997.  During  the same  period,  the  market  share of AT&T
declined from 90.1% to 44.5%.

     The long distance market is subject to pricing pressure. The major carriers
have targeted price plans at residential customers (the Company's primary target
market under its various  marketing  agreements and its internet  offering) with
significantly  simplified rate structures and with bundles of wireless  services
and local  services  with long  distance,  which may lower overall long distance
prices.  Competition is fierce for the small to medium-sized businesses that the
Company also serves.  Additional pricing pressure may come from the introduction
of new technologies,  such as an internet telephony, which seek to provide voice
communications  at a  cost  below  that  of  traditional  circuit-switched  long
distance  service.  Reductions  in  prices  charged  by  competitors  may have a
material adverse effect on the Company.


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<PAGE>


     The Company also  competes on the basis of the quality of customer  service
that it  provides  to end  users.  The  Company  believes  that its  online  and
web-enabled  billing and  information  systems have been an important  factor in
attracting  customers and will be an important factor in determining the success
of  its  overall  e-commerce  initiatives.   There  can  be  no  assurance  that
competitors  will not develop  online billing and  information  systems that are
comparable to the Company's systems.

     The entry of the Bell operating  companies  ("BOCs") into the long distance
market may further heighten  competition.  Under the  Telecommunications  Act of
1996, the BOCs 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. The Federal Communications Commission, the Department
of Justice and state  regulators  have been working with the BOCs to ensure they
satisfy the  conditions.  As of late 1999,  certain  BOCs' have entered the long
distance market in some states,  including Bell Atlantic in New York State.  BOC
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  BOCs,  it  is
impossible to predict  whether such  safeguards  will be adequate or what effect
such conduct would have on the Company. Because of the BOCs' 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 BOCs, it may be more difficult for other
providers of long distance services, such as the Company, to compete.

     Consolidation   and  alliances  across   geographic   regions  (e.g.,  Bell
Atlantic/Nynex/GTE and SBC/Pacific Telesis Group/SNET/Ameritech) and in the long
distance market (e.g., MCI/WorldCom/Sprint domestically and AT&T/British Telecom
internationally)  and across industry  segments (e.g.,  AT&T/TCI/Media  One) may
also intensify competition from significantly larger, well-capitalized carriers.
Such consolidation and alliances are providing some of the Company's competitors
with the  capacity  to offer a  "bundle"  of  services,  including  local,  long
distance and wireless  telephone  service,  as well as Internet access and cable
television service.

     The competitive  telecommunications marketplace is marked by a high rate of
customer  attrition.  The Company's  competitors engage in national  advertising
campaigns  and  telemarketing   programs  and  offer  cash  payments  and  other
incentives  to the  Company's  end users,  who are not obligated to purchase any
minimum usage amount and can discontinue service,  without penalty, at any time.
There can be no assurance that the Company will be able to continue to replenish
its end user base, and failure to do so would have a material  adverse effect on
the Company.

     The Company's online marketing and provision of telecommunications services
has been widely  imitated by competitors on the Internet,  and through their own
web site offerings,  numerous  competitors  now offer,  over the Internet and on
their own web sites,  or through  links from other web sites sign-up and billing
and  automatic  payment  through a credit card.  The Company  believes  that its
real-time,  online  billing  system is unique in the  marketplace  and currently
gives  the  Company  a  competitive  advantage  in  the  e-commerce  market  for
telecommunications services. There can be no assurance,  however, that potential
competitors will not develop comparable billing and information systems. Any new
telecommunications services, such as wireless and local services, offered by the
Company  would face the same  competitive  pressures  that affect the  Company's
existing  services.  The Company faces competition not only from other providers
of presubscribed long distance service,  but also from dial-around long distance
service and prepaid long distance calling cards.

     One of the Company's principal competitors,  AT&T, is also a major supplier
of services to the Company.  The Company links some of its  switching  equipment
with  transmission  facilities  and  services  purchased or leased from AT&T and
resells  services  obtained from AT&T. The Company also utilizes AT&T and AT&T's
College and University Systems to provide certain billing services.


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<PAGE>


REGULATION

     The Company's provision of communications services is subject to government
regulation.  The Federal  Communications  Commission  regulates  interstate  and
international  telecommunications,  while the states 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  telecommunications  services over the Internet,
directly or with its current marketing partners, the Company's other current and
past  direct  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  telecommunications  services.  The FCC and some states
have rules that prohibit  switching a customer from one long distance 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
carefully  designed and enforced,  such rules can have the incidental  effect of
entrenching incumbent carriers and hindering the growth of new competitors, such
as the Company.

     Restrictions on the marketing of  telecommunications  services are becoming
stricter in the wake of widespread consumer  complaints  throughout the industry
about  "slamming"  (the  unauthorized  conversion  of a  customer's  preselected
telecommunications  carrier)  and  "cramming"  (the  unauthorized  provision  of
additional  telecommunications  services).  The  Telecommunications  Act of 1996
strengthened  penalties against  slamming,  and the FCC issued and updated rules
tightening   federal   requirements   for  the   verification   of  orders   for
telecommunications  services and establishing additional financial penalties for
slamming.  The FCC continues to review its rules and determine  whether sales of
telecommunications services made over the Internet must also be verified through
a telephone call or other off-line  method.  In addition,  many states have been
active in restricting marketing through new legislation and regulation,  as well
as through enhanced enforcement activities. The constraints of federal and state
regulation, as well as increased FCC, FTC and state enforcement attention, could
limit the scope and the success of the Company's and its  partitions'  marketing
efforts and subject them to enforcement action.

     The FCC has granted  interstate  long  distance  service  authority to Bell
Atlantic under Section 271 of the  Telecommunications Act of 1996 from the State
of New York.  Other  Regional  Bell  operating  companies  shall  seek to obtain
similar  authority  on  a  state-by-state  basis.  These  actions  may  increase
competition within the affected states.

     Allegedly to combat slamming,  many local exchange  carriers have initiated
"PIC freeze"  programs that,  once selected by the customer,  require a customer
seeking to change long distance  carriers to contact the local carrier  directly
instead of having the long  distance  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 made it
difficult for customers to switch to the Company's long distance service.

     Statutes and regulations designed to protect consumer privacy also may have
the  incidental  effect of  hindering  the  growth  of newer  telecommunications
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  telecommunications
services (such as local and  wireless),  as well as other services and products,
to its existing customers, if and when the Company begins to offer such services
and products.

     The FCC  requires  the Company and other  providers  of  telecommunications
services to contribute to the universal  service fund,  which helps to subsidize
the  provision  of local  telecommunications  services  and  other  services  to
low-income consumers,  schools,  libraries, health care providers, and rural and
insular areas that are costly to serve. The Company's mandatory contributions to
the universal  service fund could  increase over time, and some of the Company's
potential  competitors  (such  as  providers  of  internet  telephony)  are  not
currently, and in the future may not be, required to contribute to the universal
service fund.

     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 must file tariffs  listing the rates,
terms and  conditions  of the


                                       7
<PAGE>


Company's  service,  but the FCC has  proposed  to abolish  some  tariff  filing
requirements  and  instead  mandate the  posting of similar  information  on the
Internet.  Although  the  Company's  tariffs,  and the  rates and  charges  they
specify,  are  subject to FCC  review,  they are  presumed to be lawful and have
never been  contested.  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 intrastate  telecommunications 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  telecommunications  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  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  telecommunications
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.  Actions taken by partitions may also expose the Company
to  investigations  or  enforcement  actions by government  authorities.  To the
extent that the Company makes additional  telecommunications  service offerings,
the Company may encounter additional regulatory constraints.

EMPLOYEES

     As of December 31,  1999,  the Company  employed  861 persons.  The Company
considers relations with its employees to be good.

ITEM 2. PROPERTIES

     The Company leases an  approximately  5,000 square foot facility in Reston,
Virginia,  that serves as the Company's  headquarters and is where a majority 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 finance, legal and programming personnel are located. The Company also
leases  properties in the cities in which switches for its OBN network have been
installed.

     With respect to the Company's customer service operations, the Company owns
a 32,000 square foot facility located in Clearwater, Florida.

ITEM 3. 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  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. At this point,  no classes have been  certified.  A motion to dismiss was
granted as to certain  officers  of the  Company  and denied as to the  Company.
There are currently no officers of the Company who are parties to these actions.
The Company  believes the  allegations  in the  complaints are without merit and
intends to defend the  litigations  vigorously.  The Company  also is a party to
certain legal actions 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.

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

     Information  required  by  Item 4 of this  Form  10-K  is  incorporated  by
reference to the Company's  report on Form 10-Q for the quarter ended  September
30, 1999.


                                       8
<PAGE>


EXECUTIVE OFFICERS

     The executive officers of the Company as of March 20, 2000 were as follows:

<TABLE>
<CAPTION>
                 NAME                        AGE                                 POSITION
----------------------------------------    -------    ----------------------------------------------------------------
<S>                                           <C>      <C>
Gabriel Battista                              55       Chairman of the Board, Chief Executive Officer, President
                                                       and Director
Michael Ferzacca                              42       Executive Vice President - Sales
Janet C. Kirschner                            46       Controller
Aloysius T. Lawn, IV                          41       Executive Vice President - General Counsel and Secretary
Edward B. Meyercord, III                      34       Executive Vice President - Chief Financial Officer and Treasurer
Vincent W. Talbert                            32       Executive Vice President - Marketing
George Vinall                                 44       Executive Vice President - Business Development
</TABLE>


GABRIEL BATTISTA. Mr. Battista joined the Company as its President, Chairman and
Chief Executive  Officer in January of 1999.  Prior to joining the Company,  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 telecommunications  provider. His career also included
management  positions at US Sprint, GTE Telenet and General Electric Information
Services. Mr. Battista serves as a director of Axent Technologies, Inc., Capitol
College,  Systems & Computer  Technology  Corporation (SCT), Online Technologies
Group, Inc. (OTG) and VIA Net.works.

MICHAEL  FERZACCA.  Mr.  Ferzacca  joined the Company in January of 1999. He was
formerly  Executive  Vice  President,  Sales and Marketing  for Pacific  Gateway
Exchange (a  telecommunications  company)  before joining the Company.  Prior to
that,  Mr.  Ferzacca  served  in  various  roles  at  Cable &  Wireless  USA,  a
telecommunications  provider,  including  manager  of the  Alternative  Channels
Division and Co-Chief Operating Officer.

JANET C. KIRSCHNER. Mrs. Kirschner joined the Company in November 1999. Prior to
joining the company,  Mrs. Kirschner spent 16 years in corporate accounting with
Bell Atlantic as a director in senior level positions,  including corporate tax,
internal  auditing,  financial  systems  implementation  and business  controls.
Before  her tenure  with Bell  Atlantic,  she served six years as a manager  and
senior accountant for  PriceWaterhouseCoopers,  formerly Coopers & Lybrand. Mrs.
Kirschner is a Certified Public Accountant.

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  Talk.com,  from 1985 through 1995,  Mr. Lawn was an attorney in private
practice.

EDWARD B. MEYERCORD,  III. Mr. Meyercord  currently serves as the Executive Vice
President - Chief Financial Officer and Treasurer of the Company.  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.

VINCENT W. TALBERT. Mr. Talbert joined the Company in the spring of 1999. Before
joining the Company, Mr. Talbert was Senior Vice President of Internet marketing
for  First  USA  Bank  where he was both the  co-founder  and  co-leader  of the
Internet Marketing Group. Prior to First USA, Mr. Talbert worked for Citibank in
its Credit Card Division.

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  telecommunications
provider.


                                       9
<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>
1998
First Quarter                                         30                    19 1/4
Second Quarter                                        24 5/16               13 9/16
Third Quarter                                         19 3/8                 9 1/16
Fourth Quarter                                        19 3/8                 4 23/32

1999
First Quarter                                         19 5/8                 8 1/16
Second Quarter                                        14 1/4                 9 7/8
Third Quarter                                         12 29/32               8 11/16
Fourth Quarter                                        18 15/16              11 1/8

2000
First Quarter (through March 20, 2000)                20 1/8                14 1/16
</TABLE>

     As of March 17, 2000, there were approximately 379 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.


                                       10
<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,
                                                                                    -----------------------
                                                                   1999         1998         1997          1996        1995
                                                                   ----         ----         ----          ----        ----
                                                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                              <C>          <C>          <C>          <C>         <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
    Sales                                                        $ 516,548    $ 448,600    $ 304,768    $ 232,424   $ 180,102
    Cost of sales                                                  320,751      361,957      294,484      200,597     156,121
    Gross profit                                                   195,797       86,643       10,284       31,827      23,981
    General and administrative expenses                             42,696       41,939       34,650       10,039       6,280
    Promotional, marketing and advertising                          96,264      210,552       60,685           --          --
    Significant other charges (income)                              (2,718)      91,025           --           --          --
    Operating income (loss)                                         59,555     (256,873)     (85,051)      21,788      17,701
    Investment and other income (expense), net                      (1,856)     (11,175)      50,715       10,585         331
    Income (loss) before provision (benefit) for income             57,699     (268,048)     (34,336)      32,373      18,032
    Provision (benefit) for income taxes (1)(2)                         --       40,388      (13,391)      12,205       7,213
    Income (loss) before extraordinary gain (1)                     57,699     (308,436)     (20,945)      20,168      10,819
    Extraordinary gain (from extinguishments of debt)               21,230       87,110           --           --          --
    Net income (loss)(1)                                         $  78,929    $(221,326)   $ (20,945)   $  20,168   $  10,819
    Income (loss) before extraordinary gain per share -
      Basic (1)                                                  $    0.94    $   (5.20)   $   (0.33)   $    0.38   $    0.34
    Extraordinary gain per share - Basic                         $    0.35    $    1.47           --           --          --

    Net income (loss) per share - Basic (1)                      $    1.29    $   (3.73)   $   (0.33)   $    0.38   $    0.34
    Weighted average common shares outstanding - Basic              61,187       59,283       64,168       52,650      31,422
    Income (loss) before extraordinary gain
      per share - Diluted (1)                                    $    0.90    $   (5.20)   $   (0.33)   $    0.35   $    0.32
    Extraordinary gain per share - Diluted                       $    0.33    $    1.47           --           --          --

    Net income (loss) per share - Diluted (1)                    $    1.23    $   (3.73)   $   (0.33)   $    0.35   $    0.32
    Weighted average common and common equivalent shares
      outstanding - Diluted                                         64,415       59,283       64,168       57,002      33,605

<CAPTION>
                                                                                   AT DECEMBER 31,
                                                                   1999         1998         1997          1996        1995
                                                                   ----         ----         ----          ----        ----
                                                                                   (IN THOUSANDS)
<S>                                                              <C>          <C>          <C>          <C>         <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital                                                  $  87,125    $  13,061    $ 634,788    $ 175,597   $  38,171
Total assets                                                       215,008      272,560      814,891      257,008      71,388
Convertible debt                                                    84,985      242,387      500,000           --          --
Total stockholders' equity (deficit)                                40,103     (136,785)     222,828      230,720      41,314
</TABLE>
----------

(1)  For the period  ended  September  19, 1995,  Talk.com  Holding  Corp.,  the
     predecessor corporation to the Company ("Predecessor  Corporation") elected
     to report as an S  corporation  for federal and state income tax  purposes.
     Accordingly,  the  Predecessor  Corporation's  stockholders  included their
     respective  shares of the  Company's  taxable  income  in their  individual
     income tax returns. The pro forma income taxes reflect the taxes that would
     have been accrued if the Company had elected to report as a C corporation.

(2)  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  telecommunications  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, 1999.


                                       11
<PAGE>
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.

RESULTS OF OPERATIONS

     The following table sets forth for the periods  indicated certain financial
data as a percentage of sales:
<TABLE>
<CAPTION>
                                                                  1999               1998               1997
                                                                  ----               ----               ----
<S>                                                              <C>                <C>                <C>
Sales                                                            100.0%             100.0%             100.0%
Cost of sales                                                     62.1               80.7               96.6
                                                                 -----              -----              -----
Gross profit                                                      37.9               19.3                3.4
General and administrative expenses                                8.3                9.3               11.4
Promotional, marketing and advertising expenses                   18.6               46.9               19.9
Significant other charges (income)                                (0.5)              20.3                 --
                                                                 -----              -----              -----
Operating income (loss)                                           11.5              (57.2)             (27.9)
Investment and other income (expense), net                        (0.4)              (2.5)              16.6
                                                                 -----              -----              -----
Income (loss) before income taxes                                 11.1              (59.7)             (11.3)
Provision (benefit) for income taxes                                --                9.0               (4.4)
                                                                 -----              -----              -----
Income (loss) before extraordinary gain                           11.1              (68.7)              (6.9)
Extraordinary gain                                                 4.1               19.4                 --
                                                                 -----              -----              -----
Net income (loss)                                                 15.2%             (49.3)%             (6.9)%
                                                                 =====              =====              =====
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

     Sales.  Sales  increased  by 15.1% to $516.5  million  in 1999 from  $448.6
million in 1998.  The increase in sales  primarily  reflected an increase in the
number of online customers. The increase in online sales was partially offset by
a decrease in the Company's other sales. The Company has increased the number of
agreements it has with marketing partners, which have significantly  contributed
to the rate of growth in the online  business.  Online  sales  could be affected
adversely by the intense  competition  in this industry and have continued to be
affected  adversely  by the  PIC  freezes  implemented  by the  local  telephone
companies.  There can be no assurance that the Company will continue to increase
sales on a quarter-to-quarter or year-to-year basis.

     A significant  percentage  of the Company's  revenues in 1999 and 1998 were
derived from long distance telecommunications services provided to customers who
were obtained  under the AOL  agreement.  While the  Company's  rights to market
exclusively  under the AOL agreement do not expire until June 30, 2003,  AOL has
the right to elect to permit others to market long  distance  telecommunications
services after June 30, 2000 to AOL's subscribers and forego its rights to fixed
annual payments from the Company,  which would be at least $60 million in the 12
months  ending  June  30,  2001.  Notwithstanding  any such  AOL  election,  the
Company's  rights to continue to market its  services  to AOL  subscribers  on a
non-exclusive basis, but with significant marketing rights, would continue until
June 30, 2003. The Company is unable to predict what the  consequences of such a
termination of its exclusive  rights,  with the  corresponding  release from the
fixed  payments,  would  be.  The  Company  believes  that  it  could  retain  a
substantial  portion of its existing  base and continue to attract new customers
by continuing  to be  competitive  on service and price.  The Company also would
continue to market its  services  to the AOL  subscribers  and to  continue  its
efforts to expand its non-AOL base of online customers.  However,  a significant
decline  in its  AOL  subscribers  that  is not  offset  by  growth  in  non-AOL
subscribers  could  have a  significant  effect  on  the  Company's  results  of
operations and cash flow.

     Cost of Sales.  Cost of sales  decreased by 11.4% to $320.8 million in 1999
from $362.0  million in 1998.  This  decrease was primarily due to lower network
usage costs for services on the  Company's OBN network on a per minute basis and
lower partition costs due to the decrease in other sales, as noted above.

     Gross Margin.  Gross margin  increased to 37.9% in 1999 from 19.3% in 1998.
The increase in gross margin was  primarily due to lower network usage costs for
OBN services on a per minute basis, lower partition costs due to the decrease in
other sales, as noted above, and lower bad debt expense.

                                       12
<PAGE>
     General and Administrative  Expenses.  General and administrative  expenses
increased  by 1.8% to $42.7  million  in 1999 from $41.9  million  in 1998,  but
decreased as a percentage of sales.  The increase in general and  administrative
expenses was due primarily to increased costs associated with hiring  additional
personnel  to support the  Company's  continuing  growth,  offset in part by the
elimination of general and  administrative  expenses of TSFL Holdings,  Inc. (as
discussed below) and decreased fees for professional services.

     Promotional,  Marketing, and Advertising Expenses. During 1999, the Company
incurred  $96.3 million of  promotional,  marketing and  advertising  expense to
expand its online  customer  base.  During  1998,  the Company  incurred  $210.6
million of  promotional,  marketing and  advertising  expense,  including  $49.7
million related to the AOL Agreement, $22.0 million for the performance warrants
issued to AOL during 1998,  and $138.9  million of  promotional,  marketing  and
advertising expense to expand its online customer base.

     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).  During  1998,  the Company  allocated  $21.0  million of the
acquisition  cost of TSFL Holdings,  Inc. to purchased  research and development
expense, which was included in significant other charges (income).

     Investment  and Other Income  (Expense),  Net.  Investment and other income
(expense),  net was $(1.9) million in 1999 versus $(11.2) in 1998.  During 1999,
investment and other income (expense), net consists primarily of interest income
offset by interest expense related to the Company's convertible debt.

     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.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

     Sales.  Sales  increased  by 47.2% to $448.6  million  in 1998 from  $304.8
million in 1997.  The increase in sales  resulted  primarily  from the Company's
marketing campaign directed at generating new customers under the AOL agreement.
This  AOL-related  sales  increase  offset a decrease in the  Company's  non-AOL
sales, and reflected, to a lesser extent, the Company's focus on marketing under
the AOL agreement.

     Cost of Sales.  Cost of sales  increased by 22.9% to $362.0 million in 1998
from $294.5  million in 1997 as a result of  increased  sales  offset by certain
charges in 1997, totaling $41.5 million, discussed below.

     Gross Margin. Gross margin increased to 19.3% in 1998 from 17.0%, excluding
certain  charges  totaling  $41.5  million  (as  described  below) in 1997.  The
increase in gross margin was  primarily due to lower network usage costs for OBN
services and lower local and international access charges, in each case on a per
call basis.

     General and Administrative  Expenses.  General and administrative  expenses
increased  by 21.0% to $41.9  million  in 1998 from $34.7  million in 1997.  The
increase in general and  administrative  expenses was due primarily to the costs
associated with hiring additional  personnel to support the Company's continuing
growth,  the  general  and  administrative  expense  incurred as a result of the
acquisitions  of Compco,  Inc. and ADS  Holdings,  Inc.  which were  acquired in
November  1997  and  January  1998,   respectively,   and  increased   fees  for
professional services.

     Promotional,  Marketing and  Advertising  Expense -- Primarily AOL.  During
1998 the  Company  incurred  $210.6  million  of  expenses  to expand its online
customer  base.  These expenses  included  $49.7 million for online  advertising
under the AOL  Agreement,  $22.0 million for the value of  performance  warrants
granted to AOL for net customer gains and $138.9 for offline advertising. During
1997,  the Company  incurred  $60.7 million that  consisted of $35.9 million for
exclusivity   under  the  AOL   Agreement,   $13.2  million  for  production  of
advertising, $7.9 million for online advertising for the fourth quarter of 1997,
$1.2 million  representing the value of performance warrants paid to AOL for net
customer gains and $2.5 million for other advertising.

     Significant  Other  Charges.  Significant  other  charges  consist of $91.0
million of expenses incurred in the fourth quarter of 1998 related to changes in
the Company's basic business operations.

     In January 1999, the Company negotiated  substantial  amendments to the AOL
and CompuServe agreements that, among other things, reduced the amount of online
advertising  to which the Company was entitled to over the remaining term of the
agreement and  eliminated  payments and issuance of warrants to AOL for customer

                                       13
<PAGE>


gains and profit sharing  payments to AOL. The Company agreed to fixed quarterly
payments  ranging from $10 - $15 million  during the  exclusivity  period of the
agreement  and AOL agreed to  contribute  up to $4.0  million  per  quarter  for
offline marketing.  As a result of the amendment,  the Company wrote off prepaid
AOL, CompuServe and other marketing-related expenses of $37.6 million.

     In connection  with hiring a new Chairman and Chief  Executive  Officer and
several other key executive  personnel and severance  payments  relating to this
change in  management,  the Company  incurred  $12.7  million of  incentive  and
severance expense.

     The Company  acquired ADS Holdings,  Inc.  (formerly  Symetrics,  Inc.),  a
manufacturer of digital telephone switching equipment, in January 1998 for $18.6
million.  The Company  planned to complete  development  of a digital  switch to
provide  state of the art  features  for use in the  Company's  operations  as a
competitive  local exchange  carrier.  The Company  allocated $21 million of the
acquisition  cost to  purchased  research and  development  expense in the first
quarter of 1998 and continued to invest in additional  research and  development
throughout 1998. In November 1997, the Company acquired Compco,  Inc, a provider
of communications  software in the college and university  marketplace for $13.7
million which exceeded the net assets  acquired by $10.6 million.  In the fourth
quarter of 1998,  the Company  decided to sell the assets of ADS Holdings,  Inc.
and to delay entry into the college and university marketplace. As a result, the
assets of ADS  Holdings,  Inc.  and Compco,  Inc.  were written down to expected
realizable value. The Company recorded $15 million relating to the impairment of
these assets and  reclassified  the $22.2  million of research  and  development
expense to significant other charges.

     In  the   fourth   quarter   of  1998,   the   Company   reconfigured   its
telecommunications  network,  OBN, to provide for fiber optic  connections among
its switches and incurred $3.5 million of expense.

     Investment  and Other Income  (Expense),  Net.  Investment and other income
(expense),  net was $(11.2) million in 1998 versus $50.7 million in 1997. During
1998,  investment  and  other  income  (expense),   net  consists  primarily  of
investment income and trading losses of $11.0 million offset by interest expense
related to the Company's Convertible Notes of $22.2 million.

     Provision  for Income  Taxes.  The Company had  recorded  net  deferred tax
assets  at  December  31,  1997 and March  31,1998  primarily  representing  net
operating  loss  carry-forwards  and other  temporary  differences  because  the
Company  believed that no valuation  allowance was required for these assets due
to future  reversals of existing taxable  temporary  differences and expectation
that the Company will generate taxable income in future years. In June 1998, the
Company decided to make  substantial  marketing and advertising  expenditures to
establish a broad base of online customers from AOL's  membership.  As discussed
above,  these  expenditures led to a significant loss for 1998. In view of these
losses,   the   uncertainties   resulting   from  intense   competition  in  the
telecommunications  industry and the lack of any assurance that the Company will
realize any of the tax benefits,  the Company  decided in June 1998 to provide a
100% valuation  allowance for the previously  recorded deferred tax benefits and
to provide a 100%  valuation  allowance  for the current and future tax benefits
resulting  from the 1998 loss.  Valuation  allowances  of  approximately  $115.0
million were included in provision for income taxes, for the year ended December
31, 1998.

     Extraordinary Gain. During 1998, the Company recorded an extraordinary gain
of $87.1 million in connection with the acquisition of the Company's convertible
debt at a discount.


LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  working  capital  was $87.1  million  and $13.1  million at
December 31, 1999 and 1998,  respectively.  This increase in working  capital is
primarily a result of the cash generated  from the Company's  operations and the
exercise of stock  options.  In addition the Company  received  $11.1 million in
2000 in connection with the exercise of outstanding Common Stock rights prior to
their expiration in February 2000.


                                       14
<PAGE>
     The Company  expended an aggregate of $132.9  million and $429.9 million of
cash,  Common  Stock and other  consideration  for the  repurchased  outstanding
securities  during  1999  and  1998   respectively.   During  1999  the  Company
repurchased  an  aggregate  principal  amount of $157.4  million of  Convertible
Notes.  The Company (a) purchased  from Daniel  Borislow,  the Company's  former
Chairman  and Chief  Executive  Officer,  and two trusts for the  benefit of Mr.
Borislow's  children  $85,857,000  aggregate  principal  amount of the Company's
Convertible  Notes for $72.3  million in cash;  (b)  exchanged the $53.7 million
remaining on certain  WorldxChange Notes payable to the Company with a trust for
the benefit of Mr.  Borislow's  children  for  $62,545,000  aggregate  principal
amount of the Company's Convertible Notes and (c) purchased $9,000,000 aggregate
principal amount of the Company's  Convertible  Notes for $6.9 million in Common
Stock.  As of December 31, 1999,  the Company had reduced the  principal  amount
outstanding of its  Convertible  Notes to $85.0 million ($66.9 million of 4 1/2%
notes and $18.1  million of 5% notes).  During 1999 the Company  also  purchased
from Mr. Borislow approximately 639,000 shares of Common Stock for approximately
$7.7  million  with  proceeds  from the  exercise of stock  options  pursuant to
agreements with Mr. Borislow. During 1998, the Company repurchased approximately
18.8 million shares for an aggregate of $265.1 million  ($239.9 million cash and
$25.2  million in other  consideration)  and  repurchased  approximately  $257.6
million  principal amount of the Company's  Convertible  Notes for approximately
$164.8 million  ($86.3  million in cash,  $69.5 million in Common Stock and $9.0
million in other consideration).

     The Company invested $6.5 million in capital equipment during 1999.

     On January 5, 1999, pursuant to an Investment Agreement between AOL and the
Company,  AOL made a significant  equity  investment  in the Company,  acquiring
4,121,372  shares of Common Stock for $55.0 million in cash and the surrender of
rights to acquire up to  5,076,016  shares of Common  Stock  pursuant to various
warrants held by AOL. Under the terms of the Investment  Agreement with AOL, the
Company has agreed to reimburse  AOL for losses AOL may incur on the sale of any
of the 4,121,372  shares  during the period from June 1, 1999 through  September
30, 2000. The reimbursement amount would be determined by multiplying the number
of shares, if any, that AOL sells 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 sells the shares for,  if less than $19 per share.  The
reimbursement  amount may not 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  would  be  approximately  $54.0
million plus AOL's reasonable expenses incurred in connection with the sale. The
Company has 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.  Assuming  AOL were to sell all of its  shares  subject  to the
Company  reimbursement  obligation  at the closing  price of Common  Stock as of
March 20, 2000, the reimbursement  amount would be approximately  $20.3 million.
AOL  also  has  the  right,  on  termination  of  the  Company's  long  distance
exclusivity  under its  marketing  agreement  with AOL to require the Company to
repurchase  warrants held by AOL to purchase  2,721,984  shares Common Stock for
$36.3 million,  which  repurchase  price can be paid in Common Stock,  cash or a
quarterly  amortizing,  two-year promissory note of the Company. The Company has
pledged the stock of its  subsidiaries  and has agreed to fund an escrow account
of up to $35 million from 50% of the proceeds of any debt financing,  other than
a bank,  receivable  or other asset based  financing  of up to $50  million,  to
secure its obligations under the Investment Agreement with AOL. Mr. Borislow has
agreed to guarantee up to $20,000,000 of the Company's reimbursement obligations
under the Investment Agreement with AOL.

     As  previously  reported,  the Company was subject to certain  restrictions
under a registration  rights agreement between the Company and Mr. Borislow that
could have affected the  Company's  ability to raise capital and engage in other
types of financing  transactions.  As of December 31, 1999, Mr. Borislow and the
two trusts for the benefit of Mr. Borislow's children, which have the ability to
distribute  Common Stock to Mr. Borislow,  held in the aggregate less than 2% of
the  outstanding  Common  Stock.  Accordingly,  the  Company  believes  that the
restrictions no longer apply to the Company.

     The Company  generally does not have a significant  concentration of credit
risk with  respect to accounts  receivable  due to the large number of end users
comprising the Company's  customer base and their  dispersion  across  different
geographic  regions.  The Company maintains reserves for potential credit losses
and, to date, such losses have been within the Company's expectations.

     The  Company  does  not,  and has not  historically,  required  significant
amounts of working capital for its day-to-day  operations.  The Company believes
that its current cash position and the cash flow  expected to be generated  from
operations will be sufficient to fund its capital expenditures,  working capital
and other cash  requirements  for at least the next twelve  months.  The Company
also believes that,  assuming the current market

                                       15
<PAGE>


price of its Common Stock,  its cash flow from  operations will be sufficient to
fund any reimbursement amount in the event that AOL elects to sell its shares of
Common Stock at a price below $19 per share and that, alternatively,  it has the
ability to obtain the necessary  financing to fund its obligations under the AOL
Investment Agreement. Should the Company seek to raise additional capital, there
can be no assurance that, given current market conditions,  the Company would be
able to raise such additional capital on terms acceptable to the Company.

     YEAR 2000

     The "Year 2000 issue" refers to the potential  harm from computer  programs
that fail due to  misidentification  of dates after January 1, 2000. The Company
did not encounter any  disruptions  in service or operations as a result of Year
2000  computer  programming.  The  Company  did not  separately  identify  costs
incurred in connection with its Year 2000 compliance activities. The Company did
not  believe  such costs to be  significant  because  they  generally  have been
incurred in the normal course of internally modifying and updating the Company's
software  programs.  Future  expenditures are not expected to be significant and
will be funded out of operating cash flows.


                                    * * * * *

     Certain   of  the   statements   contained   herein   may   be   considered
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933  and  Section  21E of the  Securities  Exchange  Act of  1934.  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.
Important  factors  that could  cause such actual  results to differ  materially
include,  among others,  adverse developments in the Company's relationship with
AOL,  increased  price  competition for long distance  services,  failure of the
marketing  of long  distance  services  under  its  agreement  with its  various
marketing  partners,  attrition  in the  number of end  users,  and  changes  in
government  policy,  regulation  and  enforcement.  The  Company  undertakes  no
obligation to update its forward-looking statements.


                                       16
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                         TALK.COM INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

Report of Independent  Certified Public Accountants                          18
Consolidated balance sheets as of December 31, 1999 and 1998                 19
Consolidated statements of operations for the years ended December
   31, 1999, 1998 and 1997                                                   20
Consolidated statements of stockholders' equity (deficit) for the years
   ended December 31, 1999, 1998 and 1997                                    21
Consolidated statements of cash flows for the years ended December
   31, 1999, 1998 and 1997                                                   22
 Notes to consolidated financial statements                                23-37






                                       17
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
and Stockholders of Talk.com Inc.

     We have audited the  accompanying  consolidated  balance sheets of Talk.com
Inc.  and  subsidiaries  as of  December  31,  1999 and  1998,  and the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for each of the three years in the period ended  December 31, 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 audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Talk.com
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.

BDO Seidman, LLP

New York, New York
February 7, 2000


                                       18
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT FOR SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                             ----------------------------
                                                                                1999                1998
                                                                                ----                ----
                                  Assets
<S>                                                                          <C>                <C>
Current:
   Cash and cash equivalents                                                 $  78,937          $   3,063
   Marketable securities                                                            --             89,649
   Accounts receivable, trade, net of allowance for uncollectible               59,501             46,587
   Advances to partitions and notes receivable                                   3,600              1,870
   Prepaid expenses and other current assets                                     8,855              8,600
---------------------------------------------------------------------------- ---------          ---------
       Total current assets                                                    150,893            149,769
Property and equipment, net                                                     57,335             56,703
Intangibles, net                                                                 1,068              1,150
Other assets                                                                     5,712             64,938
---------------------------------------------------------------------------- ---------          ---------
       Total assets                                                          $ 215,008          $ 272,560
---------------------------------------------------------------------------- ---------          ---------
Liabilities, Contingent Redemption Value of Common Stock and
  Stockholders' Equity (Deficit)
Current:
   Margin account indebtedness                                               $      --          $  49,621
   Accounts payable and accrued expenses:
      Trade                                                                     47,965             64,794
      Partitions                                                                 1,676              4,380
      Taxes and other                                                           14,127             17,913
---------------------------------------------------------------------------- ---------          ---------
       Total current liabilities                                                63,768            136,708
Convertible debt                                                                84,985            242,387
Deferred revenue                                                                21,000             28,400
Other liabilities                                                                   --              1,850
---------------------------------------------------------------------------- ---------          ---------
       Total liabilities                                                       169,753            409,345
---------------------------------------------------------------------------- ---------          ---------
Commitments and Contingencies

Contingent redemption value of common stock                                      5,152                 --
---------------------------------------------------------------------------- ---------          ---------
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;                   670                669
   Additional paid-in capital                                                  208,453            265,325
   Deficit                                                                    (139,300)          (218,229)
   Treasury stock                                                              (29,720)          (184,550)
---------------------------------------------------------------------------- ---------          ---------
       Total stockholders' equity (deficit)                                     40,103           (136,785)
---------------------------------------------------------------------------- ---------          ---------
       Total liabilities, contingent redemption value of common stock and
         stockholders' equity (deficit)                                      $ 215,008          $ 272,560
---------------------------------------------------------------------------- ---------          ---------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       19
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                     -----------------------------------------------
                                                                        1999               1998               1997
                                                                        ----               ----               ----
<S>                                                                  <C>                <C>                <C>
Sales                                                                $ 516,548          $ 448,600          $ 304,768
Cost of sales                                                          320,751            361,957            294,484
                                                                     ---------          ---------          ---------
Gross profit                                                           195,797             86,643             10,284
General and administrative expenses                                     42,696             41,939             34,650
Promotional, marketing and advertising expenses                         96,264            210,552             60,685
Significant other charges (income)                                      (2,718)            91,025                 --
                                                                     ---------          ---------          ---------
Operating income (loss)                                                 59,555           (256,873)           (85,051)
Investment and other income (expense), net                              (1,856)           (11,175)            50,715
                                                                     ---------          ---------          ---------
Income (loss) before provision (benefit) for income taxes               57,699           (268,048)           (34,336)
Provision (benefit) for income taxes                                        --             40,388            (13,391)
                                                                     ---------          ---------          ---------
Income (loss) before extraordinary gain                                 57,699           (308,436)           (20,945)
Extraordinary gain from extinguishment of debt                          21,230             87,110                 --
                                                                     ---------          ---------          ---------
Net income (loss)                                                    $  78,929          $(221,326)         $ (20,945)
                                                                     =========          =========          =========
Income (loss) before extraordinary gain per share - Basic            $    0.94          $   (5.20)         $   (0.33)
Extraordinary gain per share - Basic                                      0.35               1.47                 --
                                                                     ---------          ---------          ---------
Net income (loss) per share - Basic                                  $    1.29          $   (3.73)         $   (0.33)
                                                                     =========          =========          =========
Weighted average common shares
     outstanding - Basic                                                61,187             59,283             64,168
                                                                     =========          =========          =========
Income (loss) before extraordinary gain per share - Diluted          $    0.90          $   (5.20)         $   (0.33)
Extraordinary gain per share - Diluted                                    0.33               1.47                 --
                                                                     ---------          ---------          ---------
Net income (loss) per share - Diluted                                $    1.23          $   (3.73)         $   (0.33)
                                                                     =========          =========          =========
Weighted average common and common equivalent shares
     outstanding - Diluted                                              64,415             59,283             64,168
                                                                     =========          =========          =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       20
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                            COMMON STOCK         ADDITIONAL                    TREASURY STOCK
                                      ----------------------      PAID-IN    ACCUMULATED  -----------------------
                                        SHARES       AMOUNT       CAPITAL      DEFICIT      SHARES       AMOUNT        TOTAL
                                      ---------    ---------    -----------  -----------  -----------  ----------   -----------
<S>                                      <C>       <C>          <C>          <C>               <C>     <C>          <C>
Balance, January 1, 1997                 62,238    $     622    $ 210,616    $  24,042         (428)   $  (4,560)   $ 230,720
  Net loss                                   --           --           --      (20,945)          --           --      (20,945)
  Issuance of warrants to AOL                --           --       21,200           --           --           --       21,200
  Issuance of common stock for
     acquired businesses                    141            1        2,217           --           --           --        2,218
  Exercise of common stock warrants       2,662           27       11,977           --           --           --       12,004
  Exercise of common stock options        2,209           22        9,318           --           --           --        9,340
  Purchase of common stock warrants          --           --       (4,400)          --           --           --       (4,400)
  Issuance of common stock options
     for compensation                        --           --       13,372           --           --           --       13,372
  Acquisition of treasury stock              --           --           --           --       (3,520)     (71,959)     (71,959)
  Issuance of treasury stock for
     acquired businesses                     --           --        1,999           --          340        3,626        5,625
  Income tax benefit related to
     exercise of common stock
     options and warrants                    --           --       25,653           --           --           --       25,653
                                      ---------    ---------    ---------    ---------    ---------    ---------    ---------

Balance, December 31, 1997               67,250          672      291,952        3,097       (3,608)     (72,893)     222,828
    Net loss                                 --           --           --     (221,326)          --           --     (221,326)
    Issuance of warrants to AOL              --           --       33,086           --           --           --       33,086
    Exercise of common stock
      warrants                               --           --       (3,620)          --          250        5,052        1,432
    Exercise of common stock options         --           --      (41,493)          --        2,853       55,550       14,057
    Exercise of AOL warrants                 --           --       (7,693)          --          381        7,693           --
    Retirement of common stock             (315)          (3)      (1,467)          --           --           --       (1,470)
    Acquisition of treasury stock            --           --           --           --      (18,809)    (265,054)    (265,054)
    Issuance of common stock and
      options for compenstion                --           --       (3,123)          --          895       13,224       10,101
    Issuance of common stock for
      convertible debt                       --           --       (2,317)          --        5,089       71,878       69,561
                                      ---------    ---------    ---------    ---------    ---------    ---------    ---------

Balance, December 31, 1998               66,935          669      265,325     (218,229)     (12,949)    (184,550)    (136,785)
    Net income                               --           --           --       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                           --           --       (5,152)          --           --           --       (5,152)
                                       --------    ---------    ---------    ---------    ---------    ---------    ---------

Balance, December 31, 1999               66,973    $     670    $ 208,453    $(139,300)      (2,120)   $ (29,720)   $  40,103
                                      =========    =========    =========    =========    =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       21
<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED DECEMBER 31,
                                                                               ---------------------------------------------
                                                                                   1999            1998            1997
                                                                               -------------    -----------    -------------
<S>                                                                             <C>              <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                                            $  78,929        $(221,326)     $ (20,945)
   Adjustment to reconcile net income (loss) to net cash provided by
     (used in) operating activities:
   Unrealized loss on securities                                                       --               --          1,865
   Provision for bad debts                                                          3,480             (235)         1,579
   Depreciation and amortization                                                    5,956            5,499          5,429
   Vested AOL warrants and amortization of prepaid AOL marketing costs                 --           71,665         58,185
   Charge for customer acquisition costs                                               --               --         11,550
   Significant other charges                                                           --           55,034             --
   Write-off of intangibles                                                            --               --         23,032
   Realization of deferred revenue                                                 (7,400)          (7,400)            --
   Compensation charges                                                                --            8,402         13,372
   Income tax benefit related to exercise of options and warrants                      --               --         25,653
   Valuation allowance for deferred tax assets                                         --           40,388             --
   Extraordinary gain from extinguishment of debt                                 (21,230)         (87,110)            --
   Increase (decrease) in:
     Accounts receivable, trade                                                   (16,256)          (1,250)       (26,048)
     Advances to partitions and notes receivable                                   (1,730)          24,241        (12,700)
     Prepaid AOL marketing costs                                                       --               --       (100,564)
     Prepaid expenses and other current assets                                       (254)         (23,712)       (38,259)
     Other assets                                                                   2,215          (49,127)       (20,769)
   Increase (decrease) in:
     Accounts payable and accrued expenses                                        (23,457)          56,419          9,608
     Deferred revenue                                                                  --               --         35,800
     Other liabilities                                                             (1,850)          (1,302)            --
---------------------------------------------------------------------------     ---------        ---------      ---------
       Net cash provided by (used in) operating activities                         18,403         (129,814)       (33,212)
---------------------------------------------------------------------------     ---------        ---------      ---------
Cash flows from investing activities:
   Acquisition of intangibles                                                          --             (285)        (9,293)
   Acquisition of Symetrics Industries, Inc.                                           --          (26,707)            --
   Capital expenditures, net                                                       (6,506)         (16,928)       (28,876)
   Securities sold short                                                               --          (21,087)        17,700
   Due from broker                                                                     --           21,087        (20,220)
   Sale (purchase) of marketable securities, net                                   89,649          122,620        (62,377)
---------------------------------------------------------------------------     ---------        ---------      ---------
       Net cash provided by (used in) investing activities                         83,143           78,700       (103,066)
---------------------------------------------------------------------------     ---------        ---------      ---------
Cash flows from financing activities:
   Repayment of margin account indebtedness                                       (49,621)              --             --
   Proceeds from margin account indebtedness                                           --           49,621             --
   Proceeds from sale of convertible debt                                              --               --        500,000
   Acquisition of convertible debt                                                (72,304)         (86,301)            --
   Proceeds from exercise of options and warrants                                  48,287           15,489         21,344
   Purchase of common stock warrants                                                   --               --         (4,400)
   AOL investment                                                                  55,000               --             --
   Retirement of common stock                                                          --           (1,470)            --
   Proceeds from exercise of common stock rights                                      652               --             --
   Acquisition of treasury stock                                                   (7,686)        (239,892)       (71,959)
---------------------------------------------------------------------------     ---------        ---------      ---------
       Net cash (used in) provided by financing activities                        (25,672)        (262,553)       444,985
---------------------------------------------------------------------------     ---------        ---------      ---------
Net increase (decrease) in cash and cash equivalents                               75,874         (313,667)       308,707
Cash and cash equivalents, beginning of year                                        3,063          316,730          8,023
---------------------------------------------------------------------------     ---------        ---------      ---------
Cash and cash equivalents, end of year                                          $  78,937        $   3,063      $ 316,730
---------------------------------------------------------------------------     ---------        ---------      ---------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       22
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES

     (a)  Business

     Talk.com  Inc.,  a Delaware  corporation,  together  with its  consolidated
subsidiaries (the "Company"),  provides telecommunications  services,  primarily
long distance, throughout the United States to increasing numbers of residential
customers and to small and medium-sized businesses.  The Company's long distance
service offerings  include outbound  service,  inbound toll-free 800 service and
dedicated  private line  services  for data.  The Company  sells these  services
through its  relationships  with  marketing  partners,  its web site  located at
www.talk.com,  as well as through  partitions,  which are independent  marketing
companies.

     (b)  Basis of financial statements presentation

     The consolidated financial statements include the accounts of Talk.com 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.

     In preparing  financial  statements in conformity  with generally  accepted
accounting principles,  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.

     Certain amounts  relating to 1997 have been  reclassified to conform to the
current year presentation.

     (c)  Recognition of revenue

     The Company  recognizes  revenue upon  completion of telephone calls by end
users. Allowances are provided for estimated uncollectible usage.

     (d)  Cash and cash equivalents

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

     (e)  Marketable securities

     Securities  bought and held  principally for the purpose of selling them in
the near term are classified as "trading  securities" and are carried at market.
Unrealized holding gains and losses  (determined by specific  identification) on
investments classified as "trading securities" are included in earnings.

     (f)  Advances to partitions and notes receivable

     The  Company  made  advances  to  partitions  to  support  their  marketing
activities.  The advances are secured by partition assets,  including  contracts
with end users and collections thereon.

     (g)  Property and equipment and depreciation

     Property and equipment are recorded at cost.  Depreciation and amortization
is calculated using the straight-line  method over the estimated useful lives of
the assets, as follows:

     Buildings and building improvements                           39 years
     Switching equipment                                           15 years
     Equipment and other                                           5-7 years


                                       23
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     (h)  Intangibles and amortization

     Intangibles  of  $1,068,000  and  $1,150,000 at December 31, 1999 and 1998,
respectively,   represent   goodwill   arising  from  a  business   acquisition.
Amortization is computed on a straight-line basis over the estimated useful life
of the intangible, which is 15 years.

     (i)  Deferred revenue

     Deferred  revenue is recorded for a non-refundable  prepayment  received in
1997 in connection with an amended  telecommunications  services  agreement with
Shared Technologies Fairchild,  Inc. and is amortized over the five-year term of
the  agreement.  This  agreement  is  terminable  by either party on thirty days
notice. Termination by either party would accelerate recognition of the deferred
revenue.

     (j)  Long-lived assets

     The Company adopted 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" as of  January 1,  1996.  Certain  of the  Company's
long-lived assets were considered  impaired at December 31, 1998 (Note 3). There
was no additional impairment as of December 31, 1999.

     (k)  Income taxes

     Since  1998,  the  Company  has  provided a full  valuation  allowance  for
deferred  tax assets  and  liabilities  for the  estimated  future  tax  effects
attributable  to  temporary   differences   between  the  basis  of  assets  and
liabilities for financial and tax reporting purposes (Note 10).

     (l)  Net income (loss) per share

     Basic  earnings per share  includes no dilution and 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  reflect,  in
periods  in which  they have a  dilutive  effect,  the  effect of common  shares
issuable upon exercise of stock options and conversion of convertible debt.

     The  computation  of basic net  income  per share is based on the  weighted
average number of common shares  outstanding during the period. In 1999, diluted
earnings per share also includes the effect of 3,195,076 common shares, issuable
upon exercise of common stock options and warrants.

     All  references in the  consolidated  financial  statements  with regard to
average  number  of  Common  Stock  and  related  per  share  amounts  have been
calculated giving retroactive effect to stock splits.

     (m)  Financial instruments and risk concentration

     Financial   instruments   that   potentially   subject   the   Company   to
concentrations  of  credit  risk are cash  investments  for  which  the  Company
believes no  significant  concentration  of credit  risk exists with  respect to
these cash investments and marketable securities.

     The carrying  values of accounts  receivable,  advances to  partitions  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 (Note 6). At December 31, 1999
the market value of the convertible debt was approximately 83% of face amount.


                                       24
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     (n)  Stock-based compensation

     The Company  accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25,  "Accounting for Stock Issued to Employees." Under the intrinsic value based
method,  compensation  cost is the excess, if 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" (Note 10).

     (o)  Comprehensive income

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

     (p)  New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging  Activities," which requires
entities to recognize all  derivatives  as either assets or  liabilities  in the
balance  sheet and measure  those  instruments  at fair value.  SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal years  beginning after June
15, 2000. The Company  anticipates  that the new standard will have no effect on
its financial statements.

NOTE 2 -- AOL AGREEMENTS

     In conjunction with the initial Telecommunications Marketing Agreement (the
"AOL  Agreement")  with AOL,  the Company  paid AOL a total of $100  million and
issued two warrants to purchase shares of the Company's stock. The first warrant
(the "First Warrant") provided for the purchase,  at an exercise price of $15.50
per share, of up to 5,000,000 shares.  The second warrant (the "Second Warrant")
provided for the purchase,  at an exercise  price of $14.00 per share,  of up to
7,000,000  shares,  which was to vest, based on the number of subscribers to the
Company's service. With the Second Warrant, as vesting occurred,  the fair value
of the  incremental  vested portion of the warrant was charged to expense in the
consolidated  statement of operations.  In 1998, the Company issued a warrant to
purchase  1,000,000 shares (the "Further  Warrant") to AOL in exchange for a one
year extension of the AOL Agreement.  As of December 31, 1997 the Second Warrant
was vested as to  approximately  120,000  shares and  $1,200,000  was charged to
expense in the 1997 consolidated statement of operations.

     The $100 million cash payment, the $20.0 million value of the First Warrant
and $0.6 million of agreement  related costs was  accounted for as follows:  (i)
$35.9 million was charged to expense ratably over the period from the signing of
the  initial  AOL  agreement  to  December  31,  1997,  as payment  for  certain
exclusivity rights for that period; (ii) $13.2 million was treated as production
of  advertising  costs and was charged to expense on October 9, 1997,  which was
the Commercial  Launch Date;  and (iii) $71.5  million,  the balance of the cash
payment and the value of the First Warrant and the initial AOL agreement related
costs,  represents  the combined value of advertising  and  exclusivities  which
extend over the term of the AOL Agreement and was  recognized  ratably after the
Commercial Launch Date as advertising services were received. For the year ended
December 31, 1997, the Company  recognized $57.0 million of expense,  related to
items  discussed  above,  which  is  included  in  promotional,   marketing  and
advertising expenses.

     The Company has  negotiated a number of amendments to its  agreements  with
AOL based on the  experience  gained by the Company in the marketing and sale of
telecommunications  services  to AOL  subscribers  since  the  inception  of the
agreements.  A  substantial  amendment  to the AOL  agreement in January 1999 in
which the Company  agreed to fixed  quarterly  payments  ranging from $10 to $15
million during the long distance  exclusivity  period of the agreement  resulted
in:  the   elimination   of  the   Company's   obligation  to  make  bounty  and
profit-sharing  payments to AOL; altering of the terms of the online and offline
marketing arrangements between the Company and AOL; extension of the term of the
AOL agreement,  including the exclusivity period,  until June 2003, although AOL
can end the Company's long distance  exclusivity period on or after June 2000 by
foregoing the fixed


                                       25
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

quarterly  payments  described  above;  elimination  of AOL's  rights to receive
further  warrants to purchase Common Stock based upon customers  gained from the
AOL subscriber  base;  AOL's  contribution of up to $4.0 million per quarter for
offline  marketing;  and establishment of the framework for the Company to offer
additional services and products to AOL subscribers. In 1998, as a result of the
January  1999  amendment,  the Company  wrote off $37.6  million of prepaid AOL,
CompuServe and other marketing-related  expenses,  included in significant other
charges (Note 3).

     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. (Notes 9 and 10).

NOTE 3 -- SIGNIFICANT OTHER CHARGES (INCOME)

     Significant  other  income in 1999  includes a gain of $2.7  million on the
sale of  certain  business  units of TSFL  Holdings,  Inc.  (formerly  Symetrics
Industries, Inc.).

     Significant  other  charges in 1998  includes  $91.0  million  of  expenses
incurred in the fourth quarter of 1998 related to changes in the Company's basic
business operations.

     As discussed in Note 2 above, the Company negotiated substantial amendments
to its  agreements  with AOL which,  among other  things,  reduced the amount of
online  advertising to which the Company was entitled to over the remaining term
of the  agreement  and  eliminated  payments and issuance of warrants to AOL for
customer gains and profit  sharing  payments to AOL. The Company agreed to fixed
quarterly  payments  ranging  from $10 - $15  million  per  quarter  during  the
exclusivity  period of the  agreement  and AOL agreed to  contribute  up to $4.0
million per quarter for offline  marketing.  As a result of the amendments,  the
Company wrote off prepaid AOL, CompuServe and other  marketing-related  expenses
of $37.6 million.

     In connection  with hiring a new Chairman and Chief  Executive  Officer and
several other key executive  personnel and severance  payments  relating to this
change in  management,  the Company  incurred  $12.7  million of  incentive  and
severance expense.

     The Company  acquired ADS Holdings,  Inc.  (formerly  Symetrics,  Inc.),  a
manufacturer of digital telephone switching equipment, in January 1998 for $18.6
million.  The Company  planned to complete  development of the digital switch to
provide  state of the art  features  for use in the  Company's  operations  as a
competitive  local exchange  carrier.  The Company  allocated $21 million of the
acquisition  cost to  purchased  research and  development  expense in the first
quarter of 1998 and continued to invest in additional  research and  development
throughout 1998. In November 1997, the Company acquired Compco,  Inc, a provider
of communications  software in the college and university  marketplace for $13.7
million,  which exceeded the net assets acquired by $10.6 million. In the fourth
quarter of 1998,  the Company  decided to sell the assets of ADS Holdings,  Inc.
and to delay entry into the college and university marketplace. As a result, the
assets of ADS  Holdings,  Inc.  and Compco,  Inc.  were written down to expected
realizable value. The Company recorded $15 million relating to the impairment of
these assets and reclassified $22.2 million of research and development  expense
to significant other charges.

     In  the   fourth   quarter   of  1998,   the   Company   reconfigured   its
telecommunications  network,  OBN, to provide for fiber optic  connections among
its switches and incurred $3.5 million of expense.

     The Company  determined in the second quarter of 1997 to  de-emphasize  the
use of direct  marketing to solicit  customers  for the Company and to focus the
majority of its existing  direct  marketing  resources  on customer  service and
support for the marketing operations of its carrier partitions,  on a fee basis.
The Company  recognized  fees of $8.1  million for the year ended  December  31,
1997,  included in other income, from the services net of related costs of $14.6
million for the year ended December 31, 1997.


                                       26
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     The Company recorded a one-time charge of $11.5 million as cost of sales in
the quarter ended June 30, 1997,  primarily as a result of the Company  changing
its  accounting  for  customer  acquisition  costs to expense them in the period
incurred  versus  the  Company's   prior  treatment  of  capitalizing   customer
acquisition costs and amortizing them over a six month period.

     In  October  1997,  the  Company   decided  to  discontinue   its  internal
telemarketing   operations  which  were  primarily  conducted  through  American
Business  Alliance (which was acquired by the Company in December 1996), as part
of its restructuring of its sales and marketing efforts, and wrote-off,  as cost
of sales, approximately $23.0 million of intangible assets.

NOTE 4 -- MAJOR PARTITIONS

     During 1997, one Partition accounted for approximately 13% of the Company's
total sales.  There were no Partitions  that  accounted for more than 10% of the
Company's total sales in 1999 or 1998.

NOTE 5 -- PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                              ---------------------------------
                                                                 1999                  1998
                                                              ---------------------------------
                                                                       (IN THOUSANDS)

<S>                                                           <C>                  <C>
         Land                                                 $      80            $       80
         Buildings and building improvements                      2,801                 2,639
         Switching equipment                                     53,101                50,481
         Equipment and other                                     14,791                11,067
                                                               --------              --------
                                                                 70,773                64,267
         Less: Accumulated depreciation                         (13,438)               (7,564)
                                                               ---------             ---------
                                                                $57,335               $56,703
                                                                =======               =======
</TABLE>

NOTE 6 -- CONVERTIBLE DEBT

     In September  1997,  the Company  sold $300  million of 4 1/2%  Convertible
Subordinated  Notes that mature on  September  15,  2002 (the "2002  Convertible
Notes").  Interest on the 2002 Convertible Notes is due and payable semiannually
on March 15 and  September  15 of each  year.  The 2002  Convertible  Notes  are
convertible,  at the option of the holder thereof, at any time after December 9,
1997 and prior to  maturity,  unless  previously  redeemed,  into  shares of the
Company's  Common Stock at a conversion price of $24.5409 per share, as adjusted
for the  dilutive  effect of the  exercise of rights  pursuant to the  Company's
rights offering (Note 9). The 2002 Convertible 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
1999  and  1998,   the  Company   reacquired   $80,650,000   and   $152,458,000,
respectively,  principal  amount of the 2002  Convertible  Notes and $66,892,000
principal amount remained outstanding at December 31, 1999.

     In  December  1997,  the  Company  sold  $200  million  of  5%  Convertible
Subordinated  Notes that  mature on  December  15,  2004 (the "2004  Convertible
Notes").  Interest on the 2004 Convertible Notes is due and payable semiannually
on  June 15 and  December  15 of each  year.  The  2004  Convertible  Notes  are
convertible,  at the option of the holder  thereof,  at any time after  March 5,
1998 and prior to  maturity,  unless  previously  redeemed,  into  shares of the
Company's  Common Stock at a conversion price of $25.3835 per share, as adjusted
for the  dilutive  effect of the  exercise of rights  pursuant to the  Company's
rights offering (Note 9). The 2004 Convertible 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.  During
1999  and  1998,   the  Company   reacquired   $76,752,000   and   $105,155,000,
respectively,  face  amount  of  the  2004  Convertible  Notes  and  $18,093,000
principal amount remained outstanding at December 31, 1999.

     The 2002 Convertible  Notes and 2004 Convertible Notes that were reacquired
by the Company in 1998 were  reacquired at an $87.1  million  discount from face
amount.  This amount is reported as an  extraordinary  gain in the  consolidated
statement of operations.

     During 1999, the Company (a) purchased from Mr. Daniel Borislow,  a founder
of the Company and its Chairman of the Board and Chief  Executive  Officer until
he resigned on January 5, 1999, and two trusts for the


                                       27
<PAGE>
                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

benefit of Mr. Borislow's  children,  $85,857,000  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, which were included
in other  assets  at  December  31,  1998,  to a trust  for the  benefit  of Mr.
Borislow's children for $62,545,000  aggregate principal amount of the Company's
Convertible Notes and (c) purchased $9,000,000 aggregate principal amount of the
Company's Convertible Notes for $6.9 million in Common Stock.

     The 2002 Convertible  Notes and 2004 Convertible Notes that were reacquired
by the Company 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.

NOTE 7 -- RELATED PARTY TRANSACTIONS

     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.  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.

     The Company paid $1.0 million to Mr. Borislow, assigned certain automobiles
to him, and  continued  certain of his health and medical  benefits and director
and officer  insurance.  The Company also agreed that,  so long as Mr.  Borislow
owns  beneficially  at least two  percent  (2%) of the Common  Stock (on a fully
diluted basis), Mr. Borislow and trusts for the benefit of his children would be
entitled to:  registration  rights with respect to their shares of Common Stock,
the right to require the Company to use a portion of proceeds from any public or
private sale of debt securities,  excluding borrowings from a commercial bank or
other financial institution, by the Company to repurchase debt securities of the
Company owned by Mr.  Borislow or the trusts for the benefit of his children and
the right to require the Company to use the proceeds  from the exercise of stock
options or rights to repurchase Common Stock owned by Mr. Borislow or the trusts
for the benefit of his  children.  The Company also agreed that,  so long as Mr.
Borislow had such beneficial ownership, the Company would not, without the prior
written consent of Mr. Borislow and subject to certain exceptions: (a) engage in
certain significant corporate transactions, including the sale or encumbrance of
substantially all of its assets, mergers and consolidations and certain material
acquisitions,  or, (b) for a period of 18 months from the agreement date,  offer
or sell any of its Common  Stock  unless and until Mr.  Borislow  and the trusts
have sold or otherwise disposed of all of the shares of Common Stock held by him
on the agreement date. In turn, Mr. Borislow  terminated his employment with the
Company and agreed not to compete  with the  Company for at least one year.  Mr.
Borislow  also  agreed  to  guarantee  up to  $20.0  million  of  the  Company's
obligations in connection with the AOL investment noted above.

     Effective  December  31,  1998,  the  Company,  in exchange  for a total of
783,706 shares of Common Stock,  (i) sold to Jimlew Capital,  L.L.C.,  a company
owned by Mr. Borislow, (a) all of the capital stock of Emergency  Transportation
Corporation  (a wholly owned  subsidiary  of the Company,  the primary  asset of
which was an interest in a jet airplane),  valued at approximately $8.7 million,
and (b) all of the real property  constituting  the Company's  facilities in New
Hope, Pennsylvania,  valued at approximately $2.0 million, and (ii) released Mr.
Borislow from an obligation  for  approximately  $4.7 million  borrowed from the
Company.  Mr.  Borislow  agreed  to  lease  to  the  Company  a  portion  of the
headquarters  property  at a base  monthly  rent of  $12,500.  The  Company  had
previously  determined that it would be desirable to dispose of these assets and
accordingly believed that the ownership of these assets was not required for the
continued operation of the Company's business. The subsidiary stock and the real
property  were  valued  based on the  book  value of  these  assets,  which  the
management of the Company  believes  approximated the fair market value of these
assets on the date of exchange.  The Common Stock  exchanged  for the assets was
valued at its market value on the date of the exchanges. On January 6, 2000, the
Company repurchased the real property  constituting the Company's  facilities in
New Hope, Pennsylvania for $2.5 million.

     Effective  December  31,  1998,  the  Company,  in exchange  for a total of
498,435 shares of Common Stock and $10,007,000 aggregate principal amount of the
Company's Convertible Notes, released certain officers,  directors and employees
from obligations for approximately $9.8 million and $9.0 million,  respectively,
borrowed from the Company.

     Also during 1999, in addition to the  transactions  between the Company and
Mr.  Borislow  or the  trusts  for his  children  involving  the  2002  and 2004
Convertible  Notes,  which  transactions are described in Note 6 and

                                       28
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

included in this Note by this reference, 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  pursuant to the
agreements with Mr. Borislow as described above.

     At December 31,  1998,  executive  officers of the Company had  outstanding
loans from the Company of $4,237,000  which were repaid during the first quarter
of 1999.

NOTE 8 -- 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  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. At this point,  no classes have been  certified.  A motion to dismiss was
recently  granted as to certain  officers  of the  Company  and denied as to the
Company. There are currently no officers of the Company who are a party to these
actions.  The Company  believes the  allegations  in the  complaints are without
merit and intends to defend the  litigations  vigorously.  The Company also is a
party to certain legal actions 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.

NOTE 9 -- STOCKHOLDERS' EQUITY

     (a)  Stock Splits

     On January 3, 1997, the Company's Board of Directors approved a two-for-one
split of the Common Stock in the form of a 100% stock  dividend.  The additional
shares  resulting  from the stock split were  distributed on January 31, 1997 to
all  stockholders  of record at the close of business on January 17, 1997.  This
stock  split has been  reflected  in the  financial  statements  for all periods
presented.

     (b)  Authorized Shares

     During 1997, the Board of Directors and stockholders  approved the increase
in the number of authorized shares of the Common Stock to 300,000,000 shares.

     (c)  Contingent Redemption Value of Common Stock

     On January 5, 1999, pursuant to an Investment Agreement between AOL and the
Company, AOL acquired 4,121,372 shares of Common Stock for $55.0 million in cash
and the  surrender of rights to acquire up to  5,076,016  shares of Common Stock
pursuant  to various  warrants  held by AOL.  Under the terms of the  Investment
Agreement  with AOL, the Company has agreed to reimburse  AOL for losses AOL may
incur on the sale of any of the 4,121,372  shares during the period from June 1,
1999 through September 30, 2000. The Company has 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 would be determined by multiplying the number of shares, if
any, that AOL sells 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 sells the shares  for,  if less than $19 per share.  The  reimbursement
amount may not 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 would be  approximately  $54.0 million
plus AOL's reasonable expenses incurred in connection with the sale. The Company
has 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.  Assuming  AOL were to sell all of its shares  subject to the  Company's
reimbursement obligation at the closing price of Common Stock as of December 31,
1999, the reimbursement  amount would be approximately $5.2 million. At December
31, 1999, the Company recorded $5.2 million for the contingent  redemption value
of this  Common  Stock with a  corresponding  reduction  in  additional  paid-in
capital.  AOL also has the right on  termination  of long  distance  exclusivity
under the AOL  marketing


                                       29
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

agreements  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 can be paid in Common Stock, cash
or a quarterly  amortization,  two-year promissory note of the Company.  AOL can
end the Company's long distance  exclusivity period on or after June 30, 2000 by
foregoing certain fixed quarterly payments. The Company has pledged the stock of
its  subsidiaries  and has agreed to fund an escrow account of up to $35 million
from 50% of the proceeds of any debt financing, other than a bank, receivable or
other asset based  financing  of up to $50  million,  to secure its  obligations
under the Investment Agreement with AOL. AOL has agreed that it will subordinate
its security interests to permit the securitization of certain future financings
by the Company.  Mr.  Borislow has agreed to guarantee up to  $20,000,000 of the
Company's reimbursement obligations under the Investment Agreement with AOL.

     (d)  Restriction on Future Sales of Common Stock

     As  previously  reported,  the Company was subject to certain  restrictions
under a registration  rights agreement between the Company and Mr. Borislow that
could have affected the  Company's  ability to raise capital and engage in other
types of financing  transactions.  As of December 31, 1999, Mr. Borislow and the
two trusts for the benefit of Mr. Borislow's children, which have the ability to
distribute  Common Stock to Mr.  Borislow,  held less than an aggregate of 2% of
the  outstanding  Common  Stock.  Accordingly,  the  Company  believes  that the
restrictions no longer apply to the Company.

     (e)  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 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.


                                       30
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 10 -- STOCK OPTIONS, WARRANTS AND RIGHTS

     (a)  Stock Options

     The Company has non-qualified  stock option agreements with most of its key
employees.

     In  1997,  1998  and  1999,  the  Company  granted  certain  employees  and
non-employee  directors  of the  Company  2,801,000,  5,535,000  and  3,549,500,
respectively,  non-qualified  options to purchase shares of Common Stock.  These
options  generally  become  exercisable from one to three years from the date of
the grant. In 1997, the Company recognized  $13,371,785 of compensation expenses
related to the grant of options  and the  purchase  by an  executive  officer of
shares of Common Stock of the Company's  stock at prices below the quoted market
price at date of grant and purchase  date,  respectively.  In 1998,  the Company
recognized  $3.3  million  of  compensation  expenses  relating  to the grant of
650,000 options to purchase shares of the Company's Common Stock at prices below
the quoted  market  price at the dates of grant or issuance  and the issuance of
135,000 shares of the Company's stock.

     SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  requires  the
Company to provide pro forma  information  regarding net income and earnings per
share  as if  compensation  cost  for  the  Company's  stock  options  had  been
determined in accordance with the fair value-based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the grant date
by  using   the   Black-Scholes   option-pricing   model   with  the   following
weighted-average   assumptions   used  for  grants  in  1997,   1998  and  1999,
respectively:  no dividends paid for all years;  expected volatility of 55.8% in
1997, 65% in 1998 and 108% in 1999; weighted average risk-free interest rates of
5.49% for 1997,  4.59% for  1998,  5.38% for the first six  months of 1999,  and
5.85% for the latter six months of 1999; and expected lives of 1 to 10 years.

     Under the  accounting  provisions of SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been reduced  (increased) to the
pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                                  DECEMBER 31, 1999
                                                      (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                                    1999               1998                1997
<S>                                             <C>               <C>                  <C>
NET INCOME (LOSS):
    As reported                                    $78,929          $(221,326)           $(20,945)
    Pro forma                                      $68,851          $(244,487)           $(30,942)

BASIC EARNINGS (LOSS) PER SHARE:
    As reported                                    $  1.29          $   (3.73)           $  (0.33)
    Pro forma                                      $  1.13          $   (4.12)           $  (0.48)

DILUTED EARNINGS (LOSS) PER SHARE:
    As reported                                    $  1.23          $   (3.73)           $  (0.33)
    Pro forma                                      $  1.07          $   (4.12)           $  (0.48)
</TABLE>


                                       31
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     The  following  tables  contain   information  on  stock  options  for  the
three-year period ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                               EXERCISE            WEIGHTED
                                                            OPTIONS          PRICE RANGE            AVERAGE
                                                            SHARES            PER SHARE          EXERCISE PRICE
                                                        ----------------    ---------------     -------------------
<S>                                                         <C>               <C>                   <C>
Outstanding, December 31, 1996                              8,983,800         $ .32-$12.00           $ 6.54
Granted                                                     2,801,000         $5.67-$22.06           $16.02
Exercised                                                  (2,208,812)        $ .32-$12.78           $ 4.25
Cancelled                                                    (690,000)        $5.67-13.25            $11.98
                                                            ---------         ------------           ------

Outstanding, December 31, 1997                              8,885,988         $ .32-$22.06           $ 9.26
Granted                                                     5,535,000         $5.75-$10.44           $ 7.18
Exercised                                                  (2,853,178)        $ .32-13.63            $ 4.93
Cancelled                                                  (1,337,000)        $5.75-17.50            $13.01
                                                            ---------         ------------           ------

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
                                                            =========         ============           ======
<CAPTION>
                                                                               EXERCISE              WEIGHTED
                                                            OPTIONS          PRICE RANGE             AVERAGE
        EXERCISABLE AT:                                     SHARES            PER SHARE           EXERCISE PRICE
                                                        ----------------    ---------------     -------------------
<S>                                                         <C>               <C>                   <C>
        1997                                                3,866,987         $ .32-$14.50            $7.24
        1998                                                4,571,475         $4.08-$12.78            $7.39
        1999                                                2,541,095         $4.58-$14.00            $7.67
<CAPTION>
                                                                                                     WEIGHTED
                                                                                                     AVERAGE
        OPTIONS GRANTED:                                                                            FAIR VALUE
                                                                                                -------------------
<S>                                                                                                    <C>
        1997                                                                                           $6.99
        1998                                                                                           $4.83
        1999                                                                                           $9.71
</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                                 $4.58-$7.00      $7.01-$10.00         $10.01-$13.00      $13.01-$17.25
                                                -------------    --------------       ---------------    ---------------
<S>                                             <C>               <C>                 <C>                   <C>
OUTSTANDING OPTIONS:
Number outstanding at December 31, 1999             1,767,617         1,595,315           2,543,000             943,000
Weighted-average remaining
  Contractual life (years)                               3.68              8.33                6.53                9.86
Weighted-average exercise price                 $        6.17     $        9.03       $       10.51       $       15.38
EXERCISABLE OPTIONS:
Number outstanding at December 31, 1999             1,483,450           604,312             433,333              20,000
Weighted-average exercise price                 $        6.25     $        9.00       $       10.37       $       14.00
</TABLE>


                                       32
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     (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  and currently  exercisable,
with exercise prices from $14.00 to $22.25 and a weighted average exercise price
of $17.03.  AOL has the right,  commencing on  termination  of the long distance
exclusivity  under the AOL  marketing  agreement  up until  January 5, 2003,  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  ($36,324,002
aggregate  amount).  In the event AOL requires  repurchase of the warrants,  the
Company at its  election  may pay AOL in cash or in shares of Common Stock based
on the then current  market price for such stock.  The Company may also elect to
issue a 10% two-year note for a defined  portion of the  repurchase  price.  The
Company can require AOL to exercise its warrants at any time the market price of
Common Stock equals or exceeds two times the then call amount for such warrants.
The call  amount of a warrant is 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. The Company has certain reimbursement obligations in the
event that it requires AOL to exercise its warrants.

     (c)  Other Warrants

     At December  31,  1996,  the Company had warrant  agreements  with  certain
partitions  and the  underwriter  for its IPO.  All  warrants  were  issued with
exercise  prices equal to or above the market price of the  underlying  stock at
the date of the grant.  These  warrants  are  accounted  for based on their fair
value. At December 31, 1996,  3,712,000  warrants were outstanding with exercise
prices  ranging from $4.67 to $5.73 and an average  weighted  exercise  price of
$5.00 and 600,000 which were currently  exercisable at a weighted exercise price
of $5.73. The remaining  warrants were exercisable over a one to two year period
beginning in January  1997.  In January  1997,  800,000 of these  warrants  were
purchased  by the Company and  recorded as a  reduction  in  additional  paid-in
capital and 2,662,000  warrants were exercised.  The 250,000  warrants issued to
the underwriter for the Company's IPO that were outstanding at December 31, 1997
were exercised in 1998.

     (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  $651,525 were exercised,  and 652,547
rights  totaling  $11,093,299  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.


                                       33
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     The Company had net deferred tax assets of  approximately  $40.4 million at
December 31,  1997.  The Company  determined  that no  valuation  allowance  was
necessary at December 31, 1997 because,  among other factors,  income,  which it
believed would be indicative of future operations,  had been generated in recent
years,  with the  exception  of 1997.  The loss  incurred in 1997 was  primarily
attributable to amortization of the AOL marketing agreement.

     During  1998,  the  Company  continued  to incur  significant  promotional,
marketing and advertising  expenses  attributable to its efforts to increase the
customer  base.  Moreover,  competitive  factors  intensified  during the period
making  gains  in  subscriber   base  more  costly  and  more  time   consuming.
Accordingly, the Company provided a valuation allowance against its deferred tax
assets at December 31, 1998.  The valuation  allowance  also  eliminated the net
deferred tax asset that had been recognized in previous  periods.  The valuation
allowance  increased the net loss for the period by approximately $40.4 million.
The Company has continued to provide a valuation  allowance against its deferred
tax assets at December 31, 1999.

     The provision  (benefit) for income taxes for the years ended  December 31,
1999, 1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                  -------------------------------------------------------
                                                                       1999                1998               1997
                                                                       ----                ----               ----
                                                                                      (IN THOUSANDS)
<S>                                                                 <C>                  <C>               <C>
Current:
     Federal                                                        $     --             $     --          $     --
     State and local                                                      --                   --                --
                                                                    --------             --------          --------

Total current:                                                            --                   --                --

Deferred:
     Federal                                                              --               34,140           (11,111)
     State and local                                                      --                6,248            (2,280)
                                                                    --------             --------          --------

Total deferred                                                            --               40,388           (13,391)
                                                                    --------             --------          --------
                                                                    $     --             $ 40,388          $(13,391)
                                                                    ========             ========          ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                ----------------------------------------------------------------------------------
                                                          1999                        1998                        1997
                                                -------------------------    -----------------------    --------------------------
                                                                                 (IN THOUSANDS)
<S>                                             <C>                 <C>      <C>              <C>       <C>              <C>
Federal income taxes computed at the
   statutory rate                               $ 27,625            35.0%    $(63,328)       (35.0)%    $(12,018)       (35.0)%
Increase (decrease):
State income taxes less Federal benefit            3,157             4.0       (7,780)        (4.3)       (1,482)        (4.3)
Valuation  allowance for deferred tax assets
   existing at beginning of year                      --              --       40,388         22.3            --           --
Valuation  allowance  changes  affecting the
   provision for income taxes                    (31,000)          (39.3)      68,612         37.9            --           --
Other                                                218              .3        2,496          1.4           109           .3
                                                --------            ----     --------         ----      --------         ----

Total provision (benefit) for income taxes      $     --              --     $ 40,388         22.3%     $(13,391)       (39.0)%
                                                ========            ====     ========         ====      ========         ====
</TABLE>


                                       34
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     Deferred tax (assets)  liabilities at December 31, 1999,  1998 and 1997 are
comprised of the following elements:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                           1999                   1998
                                                                       -----------            ------------
                                                                                 (IN THOUSANDS)
<S>                                                                    <C>                    <C>
         Net operating loss carryforwards                              $ (71,000)             $ (65,000)
         Deferred revenue taxable currently                               (8,000)               (11,000)
         Compensation for options granted below market price              (1,000)                (6,000)
         Allowance for uncollectible accounts                             (3,000)                (7,000)
         Federal and state taxes resulting from
             cash to accrual basis for tax reporting                          --                     --
         Warrants issued for compensation                                 (9,000)               (18,000)
         Depreciation and amortization                                     8,000                  5,000
         Accruals not currently deductible                                (2,000)                (5,000)
         Unrealized loss on investments                                       --                 (3,000)
         Net capital loss carryforwards                                   (8,000)                (5,000)
                                                                       ---------              ---------

         Deferred tax (assets) liabilities, net                          (94,000)              (115,000)
         Less valuation allowance                                         94,000                115,000
                                                                       ---------              ---------
         Net deferred tax                                              $      --              $      --
                                                                       =========              =========
</TABLE>


     The Company has net operating loss carryforwards for 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 with an offsetting income tax expense recorded in
the statement of operations.

     The Company's  deferred tax asset related to  operations,  net capital loss
carryforwards  and  exercised  stock  options  amounted to $70.0  million,  $8.0
million and $16.0 million, respectively at December 31, 1999.

     At December 31, 1999, a valuation  allowance has been provided  against the
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.

     Internal Revenue Code Section 382 provides for the limitation on the use of
net  operating  loss  carryforwards  in  years  subsequent  to a more  than  50%
cumulative  change in ownership.  A more than 50% cumulative change in ownership
occurred on August 31, 1998,  resulting in annual  limitations of  approximately
$42.0 million on the utilization of net operating loss carry forwards as of that
date. Of the Company's net operating  loss  carryforwards  of $183.1  million at
December  31,  1999,  $68.6  million  are  subject  to  this  annual  limitation
subsequent to 1999.  The remaining net operating  loss  carryforwards  of $114.5
million are not subject to this limitation.


                                       35
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 12 -- STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                              ------------------------------------------------------
                                                                   1999               1998                1997
                                                              ---------------    ----------------    ---------------
                                                                                 (IN THOUSANDS)
<S>                                                                 <C>               <C>                  <C>
Supplemental disclosure of cash flow information:
Cash paid for interest                                              $4,218            $28,695              $915
</TABLE>

     During 1999, the Company issued 574,482 shares of Common Stock with a value
of approximately $6.9 million (Note 6), 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 $53,700,000  principal amount of
subordinated   notes   of   Communications   TeleSystems   International   d/b/a
WorldXChange  Communications,  in exchange for $62,545,000  aggregate  principal
amount of the Company's Convertible Notes (Note 6).

     In  addition,   the  Company  recorded  $5.2  million  for  the  contingent
redemption value of the AOL warrant with a corresponding reduction in additional
paid in capital.

     During  1998,  the Company,  in exchange  for a total of 783,706  shares of
Common Stock, sold certain assets to Mr. Borislow and released Mr. Borislow from
an obligation  borrowed from the Company (Note 7). The Company also, in exchange
for a total  of  498,435  shares  of  Common  Stock  and  $10,007,000  aggregate
principal amount of the Company's  Convertible Notes, released certain officers,
directors and employees from obligations  borrowed from the Company (Note 7). In
connection with the repurchase of the Company's  Convertible  Notes, the Company
issued  5,084,483  shares of Common  Stock with a value of  approximately  $69.5
million.

     During 1997,  the Company  recorded an asset of  $20,000,000  in connection
with  the  issuance  of  warrants  to AOL  (Note  2).  In  connection  with  the
acquisition of Compco in 1997, the Company issued 339,982 shares of Common Stock
with a value of $5,625,000.

NOTE 13 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                            FIRST          SECOND           THIRD          FOURTH
                                                           QUARTER         QUARTER         QUARTER         QUARTER
                                                         ------------    ------------    -------------   ------------
                                                                  (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                                                      <C>              <C>              <C>              <C>
                        1999

Sales                                                     $110,572         $117,139         $140,027         $148,811
Gross profit                                                35,874           43,721           54,551           61,652
Operating income                                            12,355           14,979           15,579           16,642
Income before extraordinary gain                            12,334           14,038           14,646           16,682
Net income                                                  31,331           14,038           16,879           16,682
Income before extraordinary gain per share -
   Diluted                                                    0.20             0.22             0.23             0.25
Net income per share - Diluted                                0.50             0.22             0.27             0.25

                        1998

Sales                                                     $ 91,146         $111,098         $122,525         $123,831
Gross profit                                                14,566           18,040           22,736           31,301
Operating loss                                             (63,702)         (30,049)         (96,047)         (67,075)
Loss before extraordinary gain                             (41,795)         (96,154)         (92,296)         (78,191)
Net loss                                                   (41,795)         (96,154)         (41,734)         (41,643)
Loss before extraordinary gain per share - Diluted
                                                             (0.65)           (1.49)           (1.58)           (1.56)
Net loss per share - Diluted                                 (0.65)           (1.49)           (0.71)           (0.83)
</TABLE>


                                       36
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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 6% of their  compensation  (subject to
Internal Revenue Code limitations).  The Plan allows employees to choose among a
variety of investment alternatives. The Company does not contribute to the Plan.
No administration costs were incurred during 1999.






                                       37
<PAGE>





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

     Not applicable.


                                    PART III

ITEM 10 THROUGH 13

     Information required by Part III (Items 10 through 13) of this Form 10-K is
incorporated  by reference to the Company's  definitive  proxy statement for the
Annual  Meeting of  Stockholders  to be held on May 18, 2000 which will be filed
with the  Securities  and Exchange  Commission not later than 120 days after the
end of the fiscal year to which this Form 10-K relates.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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.


                                       38
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

                              INDEX TO S-X SCHEDULE

                                                                            PAGE
                                                                            ----
Report of Independent Certified Public Accountants ..........                 40
Schedule II -- Valuation & Qualifying Accounts ..............                 41








                                       39
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
and Stockholders of Talk.com Inc.

     The audits  referred to in our report dated  February 7, 2000,  relating to
the consolidated  financial statements of Talk.com Inc. and subsidiaries,  which
is contained in Item 8 of this Form 10-K,  included the audits of the  financial
statement  schedule listed in the accompanying index for each of the three years
in the period 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 audits.

     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


                                       40
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                               BALANCE AT             ADDITIONS
                                              BEGINNING OF        CHARGED TO COSTS      DEDUCTIONS FOR       BALANCE AT END
       DESCRIPTION DEDUCTIONS                    PERIOD             AND EXPENSES          WRITE-OFFS           OF PERIOD
----------------------------------------    -----------------    -------------------    ----------------    -----------------
<S>                                             <C>                   <C>                  <C>                   <C>
YEAR ENDED DECEMBER 31, 1999:
Reserve and allowances deducted from
   asset accounts:
Allowance for uncollectible accounts            $ 1,669               $25,538               $(22,196)              $ 5,011
                                                =======               ========              ========               =======

YEAR ENDED DECEMBER 31, 1998:
Reserve and allowances deducted
   from asset accounts:
Allowance for uncollectible accounts            $ 2,419               $20,593               $(21,343)              $ 1,669
                                                =======               =======               ========               =======

YEAR ENDED DECEMBER 31, 1997:
Reserve and allowances deducted
   from asset accounts:
Allowance for uncollectible accounts            $   987               $ 9,784               $ (8,352)             $ 2,419
                                                =======               =======               ========              =======
</TABLE>




                                       41
<PAGE>



(3) EXHIBITS:

EXHIBIT
NUMBER                                 DESCRIPTION

3.1      Composite form of Amended and Restated  Certificate of Incorporation of
         the  Company,  as  amended  through  April 26,  1999  (incorporated  by
         reference to Exhibit 3.1 to the  Company's  report on Form 10-Q for the
         quarter ended March 31, 1999).

3.2      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)).

3.3      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)).

10.1     Employment Agreement between the Company and Aloysius T. Lawn, IV dated
         October 13, 1998  (incorporated  by  reference  to Exhibit  10.3 to the
         Company's  Annual  Report on Form 10-K for the year ended  December 31,
         1998).*

10.2     Employment  Agreement between the Company and Edward B. Meyercord,  III
         (incorporated  by  reference to Exhibit  10.6 to the  Company's  Annual
         Report on Form 10-K for the year ended December 31, 1996).*

10.3     Indemnification  Agreement between the Company and Aloysius T. Lawn, IV
         (incorporated  by reference to Exhibit  10.12 to the  Company's  Annual
         Report on Form 10-K for the fiscal year ended December 31, 1995).

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)).*

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).+


                                       42
<PAGE>


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    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).

10.11    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)).

10.12    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).

10.13    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).*

10.14    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).

10.15    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).*

10.16    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).*

10.17    Severance Agreement, dated as of December 31, 1998, between the Company
         and Daniel Borislow  (incorporated  by reference to Exhibit 10.5 to the
         Company's Current Report on Form 8-K dated January 20, 1999).*

10.18    Exchange  Agreement,  dated as of December 31, 1998, among the Company,
         Tel-Save,  Inc. and Mark Pavol,  as Trustee of that certain D&K Grantor
         Retained  Annuity Trust dated June 15, 1998  (incorporated by reference
         to  Exhibit  10.7 to the  Company's  Current  Report  on Form 8-K dated
         January 20, 1999).

10.19    Modification of the Exchange Agreement, dated ___________, 1999, by and
         among the  Company,  Tel-Save,  Inc.  and Mark Pavol  (incorporated  by
         reference to Exhibit 10.34 to the Company's  Annual Report on Form 10-K
         for the year ended December 31, 1998).

10.20    Registration Rights Agreement, dated as of December 31, 1998, among the
         Company,  Daniel  Borislow,  Mark Pavol, as Trustee of that certain D&K
         Grantor Retained Annuity Trust,  dated June 15, 1998 and the Trustee of
         that certain D&K Grantor  Retained  Annuity Trust II  (incorporated  by
         reference to Exhibit 10.8 to the Company's  Current  Report on Form 8-K
         dated January 20, 1999).

10.21    Amendment of Registration  Rights Agreement dated as of March 18, 1999,
         by  and  among  the  Company,  Daniel  M.  Borislow,  and  Seth  Tobias
         (incorporated  by reference to Exhibit  10.36 to the  Company's  Annual
         Report on Form 10-K for the year ended December 31, 1998).

10.22    Amendment of Registration  Rights Agreement dated as of March 18, 1999,
         by and among the Company and Mark Pavol  (incorporated  by reference to
         Exhibit 10.37 to the Company's  Annual Report on Form 10-K for the year
         ended December 31, 1998).


                                       43
<PAGE>


10.23    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).*

10.24    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.).

10.25    Registration Rights Agreement, dated as of January 5, 1999, between the
         Company and America Online, Inc.  (incorporated by reference to Exhibit
         10.42 to the  Company's  Annual  Report on Form 10-K for the year ended
         December 31, 1998).

10.26    Sublease Agreement,  dated January ___, 1997, by and between Gemini Air
         Cargo, LLC and RMS  International,  Inc.  (incorporated by reference to
         Exhibit 10.43 to the Company's  Annual Report on Form 10-K for the year
         ended December 31, 1998).

10.27    Sublease  Agreement,  dated as of January 20, 1999,  by and between RMS
         International and Tel-Save,  Inc. (incorporated by reference to Exhibit
         10.44 to the  Company's  Annual  Report on Form 10-K for the year ended
         December 31, 1998).

10.28    Lease by and between Aetna Life Insurance Company and Potomac Financial
         Group,  L.L.C.  (incorporated  by  reference  to  Exhibit  10.45 to the
         Company's  Annual  Report on Form 10-K for the year ended  December 31,
         1998).

10.29    Agreement, effective as of February 28, 1999, by and among the Company,
         Communication    Telesystems    International,    d.b.a.   WorldxChange
         Communications,  Tel-Save,  Inc.,  Mark  Pavol,  Roger  B.  Abbott  and
         Rosalind Abbott, and Edward Soren (incorporated by reference to Exhibit
         10.46 to the  Company's  Annual  Report on Form 10-K for the year ended
         December 31, 1998).

10.30    Form of  Indemnification  Agreement,  dated as of January 5, 1999,  for
         each of  George  Vinall,  Michael  Ferzacca  and  Norris M.  Hall,  III
         (incorporated  by reference to Exhibit  10.50 to the  Company's  Annual
         Report on Form 10-K for the year ended December 31, 1998).

10.31    Form of Non-Qualified Stock Option Agreement,  dated as of December 16,
         1998, for each of George Vinall,  Michael  Ferzacca and Norris M. Hall,
         III (incorporated by reference to Exhibit 10.51 to the Company's Annual
         Report on Form 10-K for the year ended December 31, 1998).*

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

10.33    Employment  Agreement,  dated as of  December  16,  1998,  between  the
         Company and Norris M. Hall, III  (incorporated  by reference to Exhibit
         10.61 to the  Company's  Annual  Report on Form 10-K for the year ended
         December 31, 1998).*

10.34    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).*

10.35    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)).

10.36    Employment  Agreement by and among Vincent W. Talbert,  the Company and
         Talk.com  Holding  Corp.  dated  as of June 8,  1999  (incorporated  by
         reference to Exhibit 10.1 to the Company's  report on Form 10-Q for the
         quarter ended June 30, 1999).*


                                       44
<PAGE>


10.37    Indemnification  Agreement  by and between  Vincent W.  Talbert and the
         Company dated as of June 8, 1999  (incorporated by reference to Exhibit
         10.2 to the  Company's  report on Form 10-Q for the quarter  ended June
         30, 1999).

10.38    Non-Qualified  Stock Option Agreement by and between Vincent W. Talbert
         and the Company dated as of June 8, 1999  (incorporated by reference to
         Exhibit 10.3 to the Company's report on Form 10-Q for the quarter ended
         June 30, 1999).*

10.39    Employment  Agreement by and between Janet C. Kirschner and the Company
         dated as of October 14, 1999.*

10.40    Indemnification  Agreement by and between  Janet C.  Kirschner  and the
         Company dated as of October 14, 1999.

10.41    Non-Qualified  Stock Option Agreement by and between Janet C. Kirschner
         and the Company dated as of October 14, 1999.*

11.1     Net Income Per Share Calculation.

21.1     Subsidiaries of the Company.

23.1     Consent of BDO Seidman, LLP.

27       Financial Data Schedule.
---------
*    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, 1999.


                                       45
<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: March 22, 2000

                                          TALK.COM INC.

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

<TABLE>
<CAPTION>
         SIGNATURE                                            TITLE                                      DATE


<S>                                                  <C>                                            <C>
/s/ Gabriel Battista                                 Chairman of the Board                          March 22, 2000
------------------------------------                 of Directors, Chief Executive Officer and
Gabriel Battista                                     Director (Principal Executive Officer)


/s/ Edward B. Meyercord, III                         Chief Financial Officer                        March 22, 2000
------------------------------------                 (Principal Financial Officer)
Edward B. Meyercord, III


/s/ Janet C. Kirschner                               Controller (Principal Accounting Officer)      March 22, 2000
------------------------------------
Janet C. Kirschner


/s/ Mark S. Fowler                                   Director                                       March 22, 2000
------------------------------------
Mark S. Fowler


/s/ Arthur J. Marks                                  Director                                       March 22, 2000
------------------------------------
Arthur J. Marks


/s/ Ronald R. Thoma                                  Director                                       March 22, 2000
------------------------------------
Ronald R. Thoma
</TABLE>


                                       46