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 Year Ended December 31, 1998

                           Commission File No. 0-26728

                               TEL-SAVE.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)

                                 6805 ROUTE 202
                          NEW HOPE, PENNSYLVANIA 18938
                                 (215) 862-1500
                  (Address, including zip code, and telephone
                  number, including area code, of registrant's
                          principal executive offices)

           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

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  the  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]


<PAGE>


The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant  as of March 26,  1999 was  approximately  $556,725,623  based on the
average  of the high and low  prices of the  Common  Stock on March 26,  1999 of
$10.1875 per share as reported on the Nasdaq National Market.

As of March 26,  1999,  the  Registrant  had issued and  outstanding  60,100,182
shares of its Common Stock, par value $.01 per share.

                                       2


<PAGE>




                               TEL-SAVE.COM, INC.

                               INDEX TO FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                     PART I

<TABLE>
<CAPTION>
<S>     <C>    

1.    BUSINESS.....................................................................................................

2.    PROPERTIES...................................................................................................

3.    LEGAL PROCEEDINGS............................................................................................

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

                                     PART II

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

6.    SELECTED CONSOLIDATED FINANCIAL DATA.........................................................................

7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

      AND RESULTS OF OPERATIONS....................................................................................
8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................................

9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL

      RELATED TRANSACTIONS.........................................................................................

                                    PART III

10.   DIRECTORS AND EXECUTIVE OFICERS OF THE REGISTRANT............................................................

11.   EXECUTIVE COMPENSATION.......................................................................................

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

13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................................

                                     PART IV

14.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................................

                                       3


</TABLE>

<PAGE>



                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

         Tel-Save.com,  Inc.  (together with its subsidiaries,  the "Company" or
"Tel-Save.com") provides telecommunications services to business and residential
customers  throughout  the  United  States,  primarily  through  its  e-commerce
platform.  The Company  believes  that it currently has the largest share of the
e-commerce market for long distance telephone 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 has announced that it will
seek in the future to utilize  its  e-commerce  business  platform to market and
sell new products and services, including the sale of advertising.

         The Company's telecommunication service offerings include long distance
outbound service,  inbound toll-free service and dedicated private line services
for data.  The  Company  markets  its  telecommunications  services  through its
exclusive  telecommunications  marketing  agreement with AOL and on the internet
through its web site  located at  www.tel-save.com.  The Company  also sells its
services on a wholesale basis.

         Tel-Save.com  operates  a  network  that  carries  a  majority  of  its
customers' calls. The Company's network includes  Company-owned Lucent 5ESS-2000
switches located in selected areas throughout the United States.  These switches
are  widely   considered   among  the   highest   quality   and  most   reliable
telecommunications  switches  available  in the  market  today.  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.

         In early 1997, the Company  acquired from AOL rights to market and sell
the Company's telecommunications services to AOL subscribers. The agreement with
AOL has become an important part of the Company's current business  strategy.  A
majority of the Company's  customers come from AOL's rapidly growing  subscriber
base. As a result of the AOL agreement,  the Company believes that it has one of
the largest bases of online customers making repetitive purchases of products or
services through online billing and automatic credit card payments.


<PAGE>





         Under the AOL marketing  agreement,  the Company maintains 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
the Company to offer e-commerce customers:

o        Detailed rate schedules and product and service related information.

o        Fast and  easy  online  sign-up  for the  Company's  telecommunications
         services.

o        Credit card billing, avoiding costly and cumbersome paper billing.

o        Real-time billing services and online information,  providing customers
         with up-to-date billing information 24 hours a day, 7 days a week.

         Since the  beginning  of its  relationship  with AOL,  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 services to AOL
subscribers.  Substantial  amendments  negotiated  with AOL  during  the  fourth
quarter of 1998 were completed on January 5, 1999. These amendments accomplished
the following changes to the Company's relationship with AOL:

o        Eliminated the Company's  obligation to make  profit-sharing and bounty
         payments to AOL and  introduced  fixed  quarterly  payments  during the
         exclusivity period of the agreement.

o        Altered  the terms of the online  and  offline  marketing  arrangements
         between the Company and AOL. The Company maintains  valuable  marketing
         rights which continue under the agreement through June 2003.

o        Extended the term of the AOL agreement, including the long distance and
         wireless  exclusivity periods, up until June 2003 while eliminating any
         exclusive  rights  for  marketing  local  telecommunications  services,
         subject to payment of  certain  amounts to the  Company.  AOL can allow
         others to market long distance  telephone and wireless  services to the
         AOL  membership  after  June  2000 by  foregoing  the  fixed  quarterly
         payments described above.

o        Eliminated  AOL's rights to receive further common stock warrants.  AOL
         reported beneficial ownership (including the warrants) of approximately
         11% of the Company's Outstanding common stock.

o        Established the rights of the Company to offer additional  services and
         products to AOL subscribers.

                                       5




<PAGE>

         In connection  with the  amendments to the AOL  agreements,  AOL made a
significant  equity  investment in Tel-Save.com,  acquiring  4,121,372 shares of
common  stock for $55 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.
AOL retained existing  warrants to acquire up to an additional  2,721,984 shares
of the  Company's  common stock.  For a discussion  of certain  rights of AOL to
require the Company to reimburse AOL for certain losses on the sale of shares by
AOL,  see  "Management's  Discussion  and Analysis of  Financial  Condition  and
Results of Operations - Liquidity and Capital Resources".

         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 6805  Route 202,  New Hope,  Pennsylvania  18938,  and its
telephone  number  is (215)  862-1500.  The  Company's  web site is  located  at
www.tel-save.com.  The Company  recently entered into a lease for a 3,700 square
foot  facility in Reston,  Virginia,  which will serve as the  Company's  future
headquarters for the majority of its executive officers and marketing personnel.
Unless  the  context  otherwise  requires,  references  to the  "Company"  or to
"Tel-Save.com" refer to Tel-Save.com, Inc. and its subsidiaries.

SALES AND MARKETING

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

         In 1998,  the Company's  sales and  marketing  efforts  focused  almost
exclusively on recruiting AOL subscribers as customers of its telecommunications
services and establishing a substantial base of online customers.  The Company's
marketing efforts were carried out through online marketing initiatives over the
AOL network and through a variety of direct  marketing  programs  targeting  AOL
subscribers.  For those AOL customers  that have not subscribed to the Company's
services  online,  the  Company has a program  with AOL for the  referral of AOL
customers by AOL directly to the Company's  telephone  service  centers.  During
1998, the Company invested  substantial sums to establish quickly its subscriber
base of AOL customers as part of the Company's e-commerce strategy.

         The  Company's own web site is located at  www.tel-save.com  and is the
platform  for  marketing  the  Company's  telecommunications  services  and  for
enabling customers to sign up for the Company's services through the internet.

         With the  development  of the  Company's  advanced  sign up and billing
systems, customers can purchase the Company's  telecommunications 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.

                                       6

<PAGE>


         The   Company's   rights  to  market   long   distance   and   wireless
telecommunications  services  on AOL on an  exclusive  basis  expire on June 30,
2003.  AOL may elect after June 30, 2000 to allow others to market long distance
and wireless  telecommunications  services over the AOL network if AOL elects to
forego  annual  payments  from the  Company  under the  agreement  (at least $60
million in the 12 months ending June 30, 2001).  Absent a termination of the AOL
agreement  upon a breach of the  agreement,  the Company is entitled to continue
marketing  its products and services on the AOL network  through June 2003.  The
minimum  marketing  rights  available  to the  Company  under the AOL  agreement
throughout the term of the agreement  until June 2003 include  varying ranges of
the following rights and benefits:

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

o        Telemarketing  and 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        Specified  relationship marketing rights, which extend beyond 2003 .

o        The right  (either  exclusive  or  non-exclusive)  to  market  and sell
         wireless,  long  distance and other  products and services over the AOL
         online network.

         Because of  significant  marketing  rights that  continue  even after a
termination of the  exclusivity  period under the AOL agreement,  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 feature of the AOL agreement has given the
Company  a  valuable  lead  in  marketing  telecommunications  services  to  AOL
subscribers.  However,  the Company is unable to predict:  (1) whether potential
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.

         Tel-Save.com  also  provides,  as a declining  portion of its business,
telecommunications   services  to  small  and  medium-sized  businesses  through
independent resellers.  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  telecommunications  services to customers,  the Company
predominantly uses its  telecommunications  network, One Better Net ("OBN"). The
Company  generally  uses OBN to provide  services  directly to its end users and
partitions.  As of December 31, 1998, the Company  provisioned  more than 80% of
the lines using its services over OBN.

         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.  With the deployment of OBN, the
Company  has  lowered  its costs of  providing  long  distance  services  to its
customers and has  established  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 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  the most reliable in the  telecommunications
industry and feature the Digital Networking Unit--SONET technology.  The Digital
Networking  Unit is a switching  interface  that is  designed  to  increase  the
reliability  of  the  5ESS-2000  and  to  provide  much  greater  capacity  in a
significantly smaller footprint.

         The  switches  are  connected  to each  other by  connection  lines and
digital cross-connect equipment that the Company 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.


                                       7


<PAGE>


         The access  charges  that the Company pays to connect its switches to a
local  carrier's  switch  represent a  substantial  portion of the total cost of
providing long distance services over OBN. As a result of the Telecommunications
Act of 1996 and the ongoing regulatory and judicial interpretations  thereunder,
it is generally  expected that the entry over time of competitors into the local
service  market will  result in the  lowering  of access  fees,  but there is no
assurance  that this will occur.  To the extent it does occur,  the Company will
receive  the  benefit  of any future  reduction  in such  access  fees for calls
serviced  over OBN.  See  "Regulation"  for a discussion  of  universal  service
contributions  imposed on carriers,  which may offset some or all of the savings
from lower access charges.

         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 its
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  relationship with AOL and the launch of
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 on  exclusively  on
AT&T, the Company has entered into and is currently  negotiating  contracts with
various long  distance  and local  carriers of  telecommunications  services (of
which one  contract  is with  AT&T) for both its OBN and  reselling  operations.
These services enable the Company to:

o        Connect the Company's OBN switches to each other

                                       8

<PAGE>


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

o        Carry overflow traffic during peak call 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.

         In  February  1999,  the  Company  terminated  its old  Master  Carrier
Agreement and its IRU Agreements with AT&T and entered into a new Master Carrier
Agreement  with AT&T.  The  agreement  provides  the  Company  with a variety of
services,  including transmission facilities to connect the OBN switches as well
as services for  international  calls,  overflow  traffic and operator  assisted
calls. 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 the AOL agreement, the
Company developed advanced online billing and information  systems in connection
with its online  initiative with AOL. In March 1999, the Company began providing
its non-AOL  customers  with online  access to billing  information  through its
website  (www.tel-save.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  billing  information to
customers offered by any  telecommunications  company. The Company also acquires
billing  and  customer  care  services  from  other  carriers  and  third  party
intermediaries.

         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.

                                       9

<PAGE>


         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 will help the Company and partitions identify other valuable services
that might be well  suited for that end user.  The Company  also  expects to use
such information to identify  emerging end user trends and 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. Recently released FCC rules, however, may limit the Company's use of
such customer proprietary network information. See "Regulation."

                                       10

<PAGE>





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 provide  profitably  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 the AOL Agreement and its internet  offering)  with
significantly simplified rate structures,  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 a 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.

         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  from the AOL  subscriber  base  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 impending 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.  No BOC has yet been
certified  as having  met all of the  conditions.  The FCC,  the  Department  of
Justice and state regulators, however, have been working with the BOCs to ensure
they satisfy the  conditions,  and some analysts are  predicting the BOCs' entry
into the long distance market could begin in some states by the end of 1999. BOC
entry into the long distance market means new competition from well-capitalized,
well-known  companies.   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.

                                       11

<PAGE>


         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  domestically  and France  Telecom/Deutsche
Telekom/Sprint  and AT&T/British  Telecom  internationally)  and across industry
segments (e.g., MCI WorldCom/MFS/UUNet and AT&T/Teleport/TCI) 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,  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.

         Although the Company  currently enjoys exclusive  marketing rights with
AOL, 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.  The
Company from time to time considers providing telecommunications services it has
not previously provided,  such as wireless services,  and which new services, if
offered,  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
ACUS to provide certain billing services.

REGULATION

         The  Company's  provision  of  communications  services  is  subject to
government regulation.  The Federal Communications  Commission ("FCC") 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.

                                       12

<PAGE>



         The  Company's  marketing  of its AOL  based  services,  the  Company's
marketing  over the  internet,  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  consent and specify how that consent can be obtained and must be
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 incidenta
l 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 recently issued
rules  tightening  federal  requirements  on  the  verification  of  orders  for
telecommunications  services and establishing additional financial penalties for
slamming. The FCC is also considering new rules that would require that sales of
telecommunications  services  made  over the  internet  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 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.

         Allegedly  to  combat  slamming,  many  local  exchange  carriers  have
initiated  "PIC freeze"  programs  that,  once  selected by the  customer,  then
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.  The FCC has released rules that severely restrict
the  use of  "customer  proprietary  network  information"  (information  that a
carrier  obtains  about  its  customers  through  their  use  of  the  carrier's
services).  These  rules 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  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.

                                       13

<PAGE>



         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  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 for violating 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.

         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.  To the  extent  that  the  Company  makes  additional
telecommunications  service  offerings,  the  Company may  encounter  additional
regulatory constraints.

EMPLOYEES

         As of December 31, 1998, the Company employed 525 persons.  The Company
considers relations with its employees to be good.

ITEM 2.  PROPERTIES

         The Company leases an approximately  19,200 square foot facility in New
Hope,  Pennsylvania  that  currently  serves as the Company's  headquarters.  On
January 20,  1999,  the  Company  entered  into a lease for a 3,700  square foot
facility  in  Reston,  Virginia,  which  will  serve  as  the  Company's  future
headquarters for a majority of the Company's executives and marketing personnel.
The Company also leases properties in the cities in which OBN switches have been
installed.

                                       14

<PAGE>


With respect to the Company's customer service operations in connection with its
agreement  with AOL, 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.  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

(a)      The Company's  Annual Meeting of Stockholders  was held on December 30,
         1998 ("Annual Meeting");

(b)      Not applicable.

(c) At the Annual  Meeting,  the  stockholders  of the  Company  considered  and
approved the following proposals:

         (i)      Election of Directors.  The following  sets forth the nominees
                  who  were  elected  directors  of the  Company  for  the  term
                  expiring in the year  indicated as well as the number of votes
                  cast for, against or withheld:


<TABLE>
<CAPTION>

                                      VOTES

Term (year expires)     Name                  For                  Against               Withheld

<S>                 <C>                      <C>                  <C>                   <C>   
2001                    Daniel Borislow*      32,947,114           0                     23,088
2001                    Ronald R. Thoma       32,947,114           0                     23,088


* Effective January 5, 1999, Mr. Borislow resigned as Director and Chairman of the Board of Directors of the Company.


</TABLE>

                                       15

<PAGE>



(ii)              At the Annual Meeting, the stockholders approved a proposal to
                  approve the Company's 1998  Long-Term  Incentive  Plan,  which
                  provides  for the  issuance of up to  5,000,000  shares of the
                  Company's  Common  Stock to  employees  and  directors  of the
                  Company selected at the discretion of a committee  (initially,
                  the  Compensation  Committee) of the Board of Directors of the
                  Company.  The  proposal  received  26,750,198  votes in favor,
                  6,218,455  votes in opposition and 1,529 votes  abstained from
                  such matter.

(iii)             At  the   Annual  Meeting   the   stockholders   approved  the
                  appointment  of  BDO  Seidman  LLP  as  independent  certified
                  public  accountants of  the Company.  The appointment received
                  32,967,942  votes  in favor, 2,111 votes in opposition and 129
                  votes abstained from such matter.


                                       16


<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 sales prices as quoted in the Nasdaq National Market and
as reported by Tradeline:

Common Stock                                         Price Range of Common Stock
------------                                         ---------------------------

                                                  High                Low
                                                  ----                ---

1997

First Quarter                                     20  5/8             12  1/4
Second Quarter                                    17  1/2             13  1/4
Third Quarter                                     24  3/16            13  3/4
Fourth Quarter                                    26  1/16            16  5/16

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 (through March 30, 1999             22  1/2             7  1/2

As of March 24,  1999,  there were  approximately  366 record  holders of Common
Stock.

The Company has never  declared or paid any cash dividends on its capital stock.
The  Company  currently  intends to retain any future  earnings  to finance  the
growth and  development  of its business  and,  therefore,  does not  anticipate
paying any cash dividends in the foreseeable future.

         RECENT SALES OF UNREGISTERED SECURITIES

On or about  December  30, 1998,  the Company  issued  500,000  shares of Common
Stock,  in the  aggregate,  to  Menachem  Goldstone  and Avrohom  Oustatcher  in
connection with a settlement among Mssrs. Goldstone, Oustatcher and the Company.
Messrs.  Goldstone and Outstatcher  are former  employees and consultants of the
Company.

On or about December 16, 1998, the Company issued 130,000 shares of Common Stock
to Michael Ferezacca in connection with his execution of an employment agreement
with the Company.

On or about  December  30, 1998,  the Company  issued  758,359  shares of Common
Stock, in the aggregate,  to the entities described below in connection with the
conversions of certain  convertible notes that had been issued by the Company to
such as entities,  as follows:  150,922  shares of Common  Stock to  Kennilworth
Partners LP II, 236,900  shares to Taft  Securities,  L.L.C.,  194,380 shares to
Aragon  Investments,  Ltd. and 176,157  shares to Olympus  Securities,  Ltd. The
Company has been advised that Citadel Limited Partnership is the trading manager
of each  of Taft  Securities,  L.L.C.,  Aragon  Investments,  Ltd.  and  Olympus
Securities,  Ltd. and consequently has voting control and investment  discretion
over  securities  held by those  entities.  Citadel  Limited  Partnership,  Taft
Securities,  L.L.C., Aragon Investments,  Ltd. and Olympus Securities, Ltd. each
disclaims beneficial ownership of the securities held by the other entities.

Each of the above issuances were made by the Company in reliance in Section 4(2)
of the Securities Act of 1933.

                                       17

<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,
                                  --------------------------------------------------------------------------------------------------
                                                      1998           1997            1996            1995             1994
                                                      ----           ----            ----            ----             ----
                                                                       (In thousands, except per share amounts)

Consolidated Statements of Income Data:

<S>                                                 <C>            <C>              <C>             <C>              <C>    
  Sales                                             $448,600       $304,768         $232,424        $180,102         $82,835
  Cost of sales                                      361,957        294,484          200,597         156,121          70,104
  Gross profit                                        86,643         10,284           31,827          23,981          12,731
   General and administrative expenses                41,939         34,650           10,039          6,280            3,442
  Promotional, marketing and advertising -                                                                                     
     primarily AOL                                   210,552         60,685               --              --              --
  Significant other charges                           91,025             --               --              --              --
  Operating income (loss)                           (256,873)       (85,051)           21,788         17,701           9,289

  Investment and other income (expense),                     
  net                                                (11,175)        50,715            10,585             331             66
  Income (loss) before income taxes                 (268,048)       (34,336)           32,373         18,032           9,355
  Provision (benefit)  for income taxes (1)(2)        40,388        (13,391)           12,205          7,213           3,742
  Income (loss) before extraordinary gain (1)       (308,436)       (20,945)           20,168         10,819           5,613
  Extraordinary gain                                  87,110             --               --              --              --
  Net income (loss) (1)                            $(221,326)      $(20,945)       $   20,168       $ 10,819         $ 5,613
  Income (loss) before extraordinary gain                           $               $               $                          
     per share - Basic (1)                          $  (5.20)         (0.33)            0.38            0.34         $  0.20
  Extraordinary gain per share - Basic                  1.47             --               --              --              --
  Net income (loss) per share - Basic (1)            $ (3.73)       $ (0.33)        $   0.38        $   0.34         $  0.20
  Weighted average common shares outstanding                                                                                   
     - Basic                                          59,283         64,168           52,650          31,422          28,650
  Income (loss) before extraordinary gain           $  (5.20)       $               $               $                $  0.18
     per share - Diluted (1)                                          (0.33)            0.35            0.32
  Extraordinary gain per share - Diluted                1.47             --               --              --              --
  Net income (loss) per share - Diluted(1)           $ (3.73)       $ (0.33)        $   0.35        $   0.32         $  0.18
  Weighted average common and common                                                                                           
     equivalent shares outstanding -Diluted           59,283         64,168           57,002          33,605          30,663


                                                                              AT DECEMBER 31,
                                        --------------------------------------------------------------------------------------------
                                          1998(3)           1998            1997             1996            1995           1994
                                          -------           ----            ----             ----            ----           ----
                                         Pro Forma                                    (In thousands)

Consolidated Balance Sheets Data:
Working capital                          $ 12,658        $   13,061       $634,788          $175,597        $38,171        $12,265
Total assets                              215,749           272,560        814,891           257,008         71,388         21,435
Convertible debt                          114,762           242,387        500,000                --             --             --
Total stockholders' equity                (65,971)         (136,785)       222,828           230,720         41,314         14,042
(deficit)


</TABLE>

         (1)      For the year and period ended  December 31, 1994 and September
                  19, 1995, the 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  which 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.

         (3)      The pro forma  financial  data as of  December  31, 1998 gives
                  effect to the January 5, 1999  investment  of $55.0 million by
                  America  Online,  Inc. and the January 5, 1999  repurchase  of
                  $127,625,000  face  amount  of  convertible  debt  for  $109.1
                  million  from  trusts for the  benefit of the  children of the
                  former Chairman and Chief Executive  Officer,  consisting of a
                  cash  payment of $55.4  million and the  transfer of the $53.7
                  million   principle   amount  of  the  note   receivable  from
                  WorldxChange.


                                       18

<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>


                                                                      1998                1997                1996
                                                                      ----                ----                ----
<S>                                                                   <C>                 <C>                 <C>   
Sales                                                                 100.0%              100.0%              100.0%
Cost of sales                                                          80.7                96.6                86.3
                                                                     ------              ------              ------

Gross profit                                                           19.3                 3.4                13.7
General and administrative expenses                                     9.3                11.4                 4.3
Promotional, marketing and advertising expenses - primarily
   AOL                                                                 46.9                19.9                  --
Significant other charges                                              20.3                 --                   --
                                                                     ------              ------              ------

Operating income (loss)                                               (57.2)              (27.9)                9.4
Investment and other income (expense), net                             (2.5)               16.6                 4.5
                                                                     ------              ------              ------

Income (loss) before income taxes                                     (59.7)              (11.3)               13.9
Provision (benefit) for income taxes                                    9.0                (4.4)                5.2
                                                                     ------              ------              ------

Income (loss) before extraordinary gain                               (68.7)               (6.9)                8.7
Extraordinary gain                                                     19.4                  --                 --
                                                                     ------              ------              ------

Net income (loss)                                                     (49.3)%              (6.9)%               8.7%
                                                                   =========            ========            =======



</TABLE>


                                       19

<PAGE>



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.

         Since entering into the AOL Agreement in February 1997, the Company and
AOL have had  frequent  discussions,  and have  negotiated  a number of  changes
including a substantial  amendment in January  1999,  regarding the marketing of
services under the AOL Agreement and  expenditures  by the Company in connection
with such  marketing,  particularly  off-line  marketing  programs.  While these
marketing  agreements,  principally  those related to off-line  marketing,  have
significantly  contributed  to the rate of growth in the  Company's  AOL-related
business,   AOL-related  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. Accordingly, there can
be  no  assurance  that  the  Company  will  continue  to  increase  sales  on a
quarter-to-quarter or year-to-year basis.

         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.  The Company  anticipates  that gross  margins will  continue to
increase;  however,  price competition  continues to intensify for the Company's
products and this trend can be expected to continue to put downward  pressure on
gross margins.

         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 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.

         As discussed above the Company negotiated substantial amendments to the
AOL and  CompuServe  agreements  which among other things  reduced the amount of
online  advertising  that the Company was entitled to over the remaining term of
the  agreement  and  eliminated  payments  and  issuance  of warrants to AOL for
subscriber 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 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.  This 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


                                       20

<PAGE>


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 costs.

         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,  1997and  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  $78.4
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.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

         Sales.  Sales  increased by 31.1% to $304.8 million in 1997 from $232.4
million in 1996. The increase in sales resulted  primarily from the marketing of
the Company's OBN services and the addition of new  partitions.  One  partition,
Group Long Distance Inc., accounted for approximately 13% of the Company's sales
in 1997.

         Cost of Sales.  Cost of sales  increased by 46.8% to $294.5  million in
1997 from $200.6  million in 1996 as a result of increased  sales and charges of
$11.5 million  primarily as a result of the Company's  change in its  accounting
for customer  acquisition  costs,  and $30.0  million  primarily  related to the
restructuring of its sales and marketing efforts (Note 3).

         Gross  Margin.  Gross  margin  decreased  to 3.4% in 1997 from 13.7% in
1996.  The decrease in gross margin was primarily  due to the charges  discussed
above. Absent these charges,  gross margin increased to 17.0% in 1997 from 13.7%
in 1996,  due to lower network costs for OBN services  which were lower on a per
call basis when compared to the costs of purchasing these services.

         General  and  administrative   expenses.   General  and  administrative
expenses  increased  by 245.2% to $34.7  million in 1997 from  $10.0  million in
1996. The increase in general and  administrative  expenses was due primarily to
compensation  expenses related to the issuance of options to and the purchase of
shares  of  Company  common  stock  by  executive  officers  of the  Company  in
connection with the commencement of their employment with the Company, the costs
associated with hiring additional  personnel to support the Company's continuing
growth,  the  development  costs  associated  with  AOL and  increased  fees for
professional services.


                                       21

<PAGE>


         Other  Income.  Other  income was $50.7  million in 1997  versus  $10.6
million in 1996.  Other income in 1997  consists  primarily of fees for customer
service  and support  for the  marketing  operations  of the  Company's  carrier
partitions in 1997 of $8.1 million and investment  income earned by the Company.
In 1997,  other  income  also  includes  $32.1  million,  net of related  costs,
associated with the break-up of a proposed merger between the Company and STF.

         Provision for income taxes. The Company's  effective tax rate increased
to 39.0% in 1997 from the effective  tax rate of 37.7% in 1996  primarily due to
an anticipated higher effective state tax rate in 1997.


LIQUIDITY AND CAPITAL RESOURCES

         The Company's  working  capital was $13.1 million and $634.8 million at
December 31, 1998 and 1997,  respectively.  The significant  decrease in working
capital at December 31, 1998, when compared to historical  amounts, is primarily
a result of the  repurchase of the Company's  securities,  the loss for the year
which was primarily  attributble to the advertising  and marketing  expenditures
incurred in connection with the AOL Agreement and significant other charges, the
advance to WXC described below, and the increase in accounts payable,  primarily
reflecting recent rapid growth in the Company's AOL business.

         The Company  expended an aggregate of $429.9 million and $125.4 million
of cash,  Company  common stock and other  consideration  for the  repurchase of
outstanding  securities  during  1998  and  1999,  respectively.  Under  various
authorizations  from the Board of Directors 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
Company  common  stock and $9.0  million in other  consideration).  In the first
quarter of 1999, the Company (a) purchased from Mr.  Borislow and two trusts for
the benefit of Mr. Borislow's children $76,557,000 aggregate principal amount of
the  Company's  Convertible  Notes for $65.4  million in cash (b)  exchanged the
$53.7 million  remaining on the WXC Notes (as defined  below) 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 $6.3 million in Company  common
stock. To date, with these most recent acquisitions, the Company had reduced the
principal  amount  outstanding of its Convertible  Notes to $94.3 million ($66.9
million  of 4 1/2% notes and $27.4  million of 5% notes) of which  approximately
$52.4 million continues to be held by one of such trusts.

         The Company invested $16.9 million in capital equipment during 1998.

         In connection  with the Company  entering  into the  Telecommunications
Service Agreement ("TSA") with Communication  Telesystems  International  d/b/a/
WorldxChange  Communication  ("WXC"),  the Company advanced $56.2 million to WXC
which was due and payable on November  30, 2000 ("WXC  Notes").  Interest on the
WXC Notes is payable quarterly  commencing  November 25, 1998 at a rate of 12.5%
per annum. The Company  purchases  international  termination  telecommunication
services  pursuant to the TSA. The note which had a remaining  principal balance
of $53.7 million was exchanged for $62,545,000 face amount of Convertible  Notes
on January 5, 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
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.  Assuming
AOL  were  to  sell  all of its  shares  subject  to the  Company  reimbursement
obligation at the closing  price of the  Company's  common stock as of March 26,
1999, the reimbursement  amount would be approximately  $35.5 million.  AOL also
has the right on termination of long distance exclusively to require the Company
to repurchase 2,721,984 warrants to purchase common stock of the Company held by
AOL for a minimum  price of $36.3  million.  The  Company  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 not advised the  Company  that it intends to sell any shares  during the
relevant  period.  Mr. Borislow has agreed to guarantee up to $20,000,000 of the
Company's reimbursement obligations under the Investment Agreement with AOL.



                                       22

<PAGE>


         The  Company  is subject  to  certain  restrictions  under the terms of
certain  registration  rights agreements that could affect the Company's ability
to raise capital.  Under these  agreements,  entered into by the Company for the
benefit of Mr.  Borislow  and two trusts for the  benefit of his  children  (the
"Trusts"),  the Company has agreed that so long as Mr. Borislow continues to own
at least 2% of the Company's  outstanding  common stock, the Company will use up
to 40% of the proceeds  from the sale of any public or private debt  securities,
excluding  borrowings  from a  commercial  bank  or  financial  institution,  to
repurchase the Company's  Convertible  Notes held by Mr.  Borislow or the Trusts
and that until June 2000,  the Company will not sell any shares of captial stock
of the Company  without the consent of Mr.  Borislow (other than sales of common
stock on  exercise  of  options  on rights so long as the  proceeds  are used to
repurchase common stock of the Company held by Mr. Borislow or the Trusts).

         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  positions 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
believes that, at its current market price,  its cash flow from  operations will
be  sufficient  to fund any  reimbursement  amount in the event  that AOL elects
after May 31, 1999 to sell its shares of the  Company's  common stock at a price
below $19 per share and that , alternatively,  it also has the ability to obtain
the  necessary  financing  to find  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  identify  dates by the last two digits of the year  rather  than
using the full four digits. Such programs could fail due to misidentification of
dates  on or after  January  1,  2000.  If such a  failure  were to occur to the
Company's  internal  computer-based  systems  or to the  crucial  computer-based
systems  operated by third  parties,  the Company could be unable to continue to
provide  telecommunications  services,  to  sign  up new  customers  or to  bill
existing customers for services.  Such failures, if they occurred,  would have a
material  adverse  effect on the Company's  business,  results of operations and
financial  condition.  However,  because of the  complexity  of the issues,  the
number of parties  involved and the fact that many of the issues are outside the
Company's  control,  the Company  cannot  reasonably  predict with certainty the
nature or likelihood of such effects.

         The Company,  using its internal staff,  has conducted a review of most
of its  internal  computer-based  systems.  Most of the  Company's  systems  are
relatively  new.  Much of the  software  used by the Company has been  developed
internally  and  is  regularly   modified  and  updated  to  meet  the  changing
requirements  of its business.  The Company  expects that its critical  internal
systems  will be able to  process  relevant  date  information  in the future to
permit the  Company to  continue to provide  its  services  without  significant
interruption or material  adverse effect on its business,  results of operations
and financial  condition.  However,  there can be no assurances that the Company
will not  experience  unanticipated  negative  consequence  caused by undetected
errors or defects in the technology used in its internal systems.

         Notwithstanding the Company's  expectation that its own systems will be
able to process  Year 2000 date  information,  the  Company's  business  depends
significantly  on  receiving   uninterrupted  services  by  other  parties.  The
principal   service   suppliers  to  the  Company  include  other   switch-based
lonf-distance  providers, the local exchange carriers throughout the country and
AOL.  Other parties whose ability to deal with year 2000 issues could affect the
Company include the Company's  partitions and the credit card companies  through
which most of the  Company's  AOL  customers  are  billed.  The Company has made
inquiries  of some  of  these  parties  regarding  their  respective  levels  of
preparedness  for Year 2000 issues as they may affect the  Company.  The Company
will continue to make such inquiriesand  will monitor the public  disclosures of
such companies  regarding their Year 2000 status. So, far, the responses to such
inquiries have been generally  non-committal regarding levels of preparedness or
willingness  to provide  assurances  to the  Company.  In almost all cases,  the
Company is not in a position to require either  affirmative action or assurances
by these  parties  regarding  continued  provision of services in the Year 2000.
Accordingly,  while  the  Company  has not been  advised  by any of these  other
companies  on which it depends that they do not expect to be ready for Year 2000
issues,  the  Company  does not  believe  it is in a  position  to  project  the
likelihood of such parties' abilities to provide  uninterrupted  services to the
Company.  The Company has considered  possible  contingency  plans should one of
these significant  suppliers fail,  including  entering into multiple  contracts
with other  long-distance  service  providers  OBN network.  However,  given the
nature of the Company's  relationships with most of these significant suppliers,
it may be impracticable for the Company to replace them should they be unable to
continue to provide  these  services.  The failure of any of these  companies to
provide  uninterrupted  service  to the  Company  would  likely  have a material
adverse  effect on the  Company's  business  and its results of  operations  and
financial condition.


                                       23

<PAGE>


         The Company does not  separately  identify costs incurred in connection
with Year 2000 compliance  activities.  To date,  however,  the Company does 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 the AOL  Agreement,  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.

                                       24

<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       TEL-SAVE.COM, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

Report of Independent Certified Public Accountants......................      26
Consolidated balance sheets as of December 31, 1998 and 1997............      27
Consolidated statements of operations for the years ended 
December 31, 1998, 1997, and 1996.......................................      28
Consolidated statements of stockholders' equity for the years
ended December 31, 1998, 1997 and 1996..................................      28
Consolidated statements of cash flows for the years ended 
December 31, 1998, 1997 and 1996........................................      29
Notes to consolidated financial statements..............................      30



                                       25


<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
and Stockholders of Tel-Save.com, Inc.

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Tel-Save.com,  Inc. and  subsidiaries  as of December 31, 1998 and 1997, 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,
1998.  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
Tel-Save.com,  Inc. and  subsidiaries  as of December 31, 1998 and 1997, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1998,  in  conformity  with  generally  accepted
accounting principles.

BDO Seidman, LLP

New York, New York
February 22, 1999, except for Note 8, which is as
of March 26, 1999





                                       26
<PAGE>






                        TEL-SAVE.COM, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>

                                                                             PRO FORMA
                                                                          DECEMBER 31, 1998                   DECEMBER 31,
                                                                       ------------------------    --------------------------------
                                                                         UNAUDITED-NOTE 1(C))           1998                1997
                                                                                                        ----                ----
                             ASSETS

CURRENT:

<S>                                                                             <C>                 <C>                   <C>     
   Cash and cash equivalents                                                    $2,660              $    3,063            $316,730
   Marketable securities                                                        89,649                  89,649             212,269
   Accounts receivable, trade net of allowance for uncollectible                                                                   
     accounts of $1,669, $1,669 and $2,419, respectively                        46,587                  46,587              44,587
   Advances to partitions and notes receivable                                   1,870                   1,870              26,110
   Due from broker                                                                  --                      --              21,087
   Prepaid AOL marketing costs - current                                            --                      --              30,857
   Deferred taxes - current                                                         --                      --              30,916
   Prepaid expenses and other current assets                                     8,600                   8,600               8,495
                                                                              --------               ---------           ---------
       Total current assets                                                    149,366                 149,769             691,051
                                                                               -------                 -------            --------
Property and equipment, net                                                     56,703                  56,703              55,835
Intangibles, net                                                                 1,150                   1,150              10,590
Prepaid AOL marketing costs                                                         --                      --              32,722
Other assets                                                                     8,530                  64,938              24,693
                                                                               -------               ---------           ---------

       Total assets                                                           $215,749                $272,560            $814,891
                                                                              ========                ========            ========

              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:

   Margin account indebtedness                                                $ 49,621               $  49,621         $         --
   Accounts payable and accrued expenses:
      Trade and other                                                           64,794                  64,794              16,858
      Partitions                                                                 4,380                   4,380               7,740
      Interest and other                                                        17,913                  17,913              10,578
   Securities sold short                                                            --                       --             21,087
                                                                           -----------             ------------         ----------
       Total current liabilities                                               136,708                 136,708              56,263
Convertible debt                                                               114,762                 242,387             500,000
Deferred revenue                                                                28,400                  28,400              35,800
Other liabilities                                                                1,850                   1,850                   --
                                                                              --------              ----------         ------------
       Total liabilities                                                       281,720                 409,345             592,063
                                                                               -------               ---------           ---------

Commitments and Contingencies
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;                                                                  
     66,934,635, 66,934,635 and 67,249,635 issued, respectively                    669                     669                 672
   Additional paid-in capital                                                  262,131                 265,325             291,952
   Retained earnings (accumulated deficit)                                    (202,415)               (218,229)              3,097
   Treasury stock                                                             (126,356)               (184,550)            (72,893)
                                                                              ---------             -----------          ----------

       Total stockholders' equity (deficit)                                    (65,971)               (136,785)            222,828
                                                                              ---------              ----------           --------

       Total liabilities and stockholders' equity (deficit)                   $215,749                $272,560            $814,891
                                                                              ========                ========            ========


                    See accompanying notes to consolidated financial statements.

</TABLE>




                                       27
<PAGE>



                               TEL-SAVE.COM, INC.
                                AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                    --------------------------------------------
                                                                    1998                1997                1996
                                                                    ----                ----                ----
<S>                                                                <C>                 <C>                 <C>     
Sales                                                              $448,600            $304,768            $232,424
Cost of sales                                                       361,957             294,484             200,597
                                                                   ---------          ----------           ---------

Gross profit                                                         86,643              10,284              31,827

General and administrative expenses                                  41,939              34,650              10,039
Promotional, marketing and advertising expenses -                                                                      
   primarily AOL                                                    210,552              60,685                  --
Significant other charges                                            91,025                  --                  --
                                                                 ----------        ------------        -------------

Operating income (loss)                                            (256,873)             (85,051)             21,788

Investment and other income (expense), net                          (11,175)              50,715              10,585
                                                                  ----------           ---------          ----------

Income (loss) before provision for income taxes                    (268,048)             (34,336)             32,373

Provision (benefit) for income taxes                                 40,388              (13,391)             12,205
                                                                 ----------            ----------          ---------
 
Income (loss) before extraordinary gain                            (308,436)             (20,945)             20,168

Extraordinary gain                                                   87,110                  --                  --
                                                                 ----------        ------------        ------------

Net income (loss)                                                 $(221,326)           $(20,945)           $ 20,168
                                                                  ==========           =========           ========



Income (loss) before extraordinary gain per share - Basic          $   (5.20)          $   (.33)           $   .38
Extraordinary gain per share - Basic                                    1.47                --                  --
                                                                   ----------        ------------        ------------

Net income (loss) per share - Basic                                $   (3.73)          $   (.33)           $   .38
                                                                   ===========         ===========         ==========

Weighted average common shares outstanding - Basic                    59,283             64,168              52,650
                                                                   =========           =========           =========

Income (loss) before extraordinary gain per share -                $   (5.20)         $    (.33)         $      .35
Diluted

Extraordinary gain per share - Diluted                                  1.47                 --                  --
                                                                   ----------        ------------        -------------

Net income (loss) per share - Diluted                              $   (3.73)         $    (.33)         $      .35
                                                                   ===========         ===========         ==========

Weighted average common and common equivalent shares                            
   outstanding - Diluted                                              59,283             64,168             57,002
                                                                   =========           =========           ========
</TABLE>


                    See accompanying notes to consolidated financial statements.




                                       28

<PAGE>


<TABLE>
<CAPTION>
                                                      TEL-SAVE.COM, INC.
                                                       AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                            (IN THOUSANDS)
                                                                              RETAINED
                                                              ADDITIONAL      EARNINGS
                                   COMMON STOCK                 PAID-IN       (ACCUMU-      TREASURY STOCK
                                   SHARES          AMOUNT     CAPITAL        LATED DEFICIT)     SHARES         AMOUNT    TOTAL
                                   ----------    ---------  -------------   ----------------  -----------     --------  ------
<S>                                                                            <C>                                          <C>   
                                                                            
Balance, January 1, 1996             50,619         $506         $36,934     $  3,874             --          $  --        $41,314
   Net income                            --           --              --       20,168             --             --         20,168
     partitions                          --           --           1,077           --             --             --          1,077
   Sale of common stock               8,534           85         138,984           --             --             --        139,069
     options                          1,079           11           4,927           --             --             --          4,938
   Exercise of warrants               2,006           20           7,383           --             --             --          7,403
   Income tax benefit related to                                                                                      
     exercise of common stock
     options and warrants                --           --          21,311           --             --             --         21,311
   Acquisition of treasury stock         --           --              --           --            (428)       (4,560)        (4,560)
                                   ------------  -----------  ------------- ---------------  -----------    ----------    --------

Balance, December 31, 1996           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 business                  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 compensation            --           --         (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)
                                   ============  ===========  ============= ===============  ===========    ==========  ==========
</TABLE>

                    See accompanying notes to consolidated financial statements.




                                       29
<PAGE>



<TABLE>
<CAPTION>


                                                  TEL-SAVE.COM, INC.
                                                   AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (IN THOUSANDS)




                                                                                      YEAR ENDED DECEMBER 31,
                                                                           ------------------------------------------
                                                                           1998               1997               1996
                                                                           ----               ----               ----
Cash flows from operating activities:
<S>                                                                    <C>               <C>                   <C>     
   Net income (loss)                                                   $(221,326)        $ (20,945)            $ 20,168
   Adjustment to reconcile net income to net cash provided by                                                              
     operating activities:                                                                                                 
   Unrealized loss on securities                                              --             1,865                  179
   Provision for bad debts                                                  (235)            1,579                   38
   Depreciation and amortization                                           5,499             5,429                2,462
   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                   --
   Deferred revenue                                                       (7,400)               --                   --
   Deferred credits                                                           --                --                 (280)
   Compensation charges                                                    8,402            13,372                   --
   Income tax benefit related to exercise of options and                                    25,653                         
     warrants                                                                 --                                 21,311
   Valuation allowance for deferred tax assets                            40,388                --                   --
   Extraordinary gain                                                    (87,110)               --                   --
   (Increase) decrease in:
     Accounts receivable, trade                                           (1,250)          (26,048)              (1,065)
     Advances to partitions and notes receivable                          24,241           (12,700)             (20,797)
     Prepaid AOL marketing costs                                              --          (100,564)
     Prepaid expenses and other current assets                           (23,712)          (38,259)             (10,183)
     Other assets                                                        (49,127)          (20,769)              (3,924)
   Increase (decrease) in:
     Accounts and partition payables and accrued expenses                 56,419             9,608                7,978
     Deferred revenue                                                         --            35,800                   --
     Other liabilities                                                    (1,302)               --               (5,184)
                                                                       --------------    ---------------    ---------------
       Net cash (used in) provided by operating activities              (129,814)          (33,212)              10,703
                                                                       --------------    ---------------    ---------------
Cash flows from investing activities:
   Acquisition of intangibles                                               (285)           (9,293)              (9,800)
   Acquisition of Symetrics Industries, Inc.                             (26,707)               --                   --
   Capital expenditures, net                                             (16,928)          (28,876)             (27,679)
   Securities sold short                                                 (21,087)           17,700                 (411)
   Due from broker                                                        21,087           (20,220)                 233
   Loans to stockholder                                                       --                --               (3,034)
   Repayment of stockholder loans                                             --                --                5,109
   Sale (purchase) of marketable securities, net                         122,620           (62,377)            (149,238)
                                                                       --------------    ---------------    ---------------
       Net cash provided by (used in) investing activities                78,700          (103,066)            (184,820)
                                                                       --------------    ---------------    ---------------
Cash flows from financing activities:
   Proceeds from margin account indebtedness                              49,621                --                   --
   Proceeds from sale of convertible debt                                     --           500,000                   --
   Acquisition of convertible debt                                       (86,301)               --                   --
   Payment of note payable to stockholder                                     --                --               (5,921)
   Proceeds from sale of common stock                                         --                --              139,069
   Proceeds from exercise of options and warrants                         15,489            21,344               12,341
   Purchase of common stock warrants                                          --            (4,400)                  --
   Retirement of common stock                                             (1,470)               --                   --
   Acquisition of treasury stock                                        (239,892)          (71,959)              (4,560)
                                                                       --------------    ---------------    ---------------
       Net cash (used in) provided by financing activities              (262,553)          444,985              140,929
                                                                       --------------    ---------------    ---------------
Net (decrease) increase in cash and cash equivalents                    (313,667)          308,707              (33,188)
Cash and cash equivalents, at beginning of year                          316,730             8,023               41,211
                                                                       --------------    ---------------    ---------------
Cash and cash equivalents, at end of year                              $   3,063          $316,730            $   8,023
                                                                       ==============    ===============    ===============
                                                            
                    See accompanying notes to consolidated financial statements.
</TABLE>





                                       30
<PAGE>




                       TEL-SAVE.COM, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES

         (a) Business

         Tel-Save.com,   Inc.,  a  Delaware   corporation,   together  with  its
consolidated  subsidiaries  (the  "Company"),  provides long  distance  services
throughout the United States to increasing numbers of residential customers as a
result  of the  Company's  recent  online  marketing  efforts  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  exclusive
relationship  with AOL and through its  recently  launched  web site  located at
www.Tel-Save.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
Tel-Save.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)      Pro forma balance sheet

         The pro forma balance sheet as of December 31, 1998 gives effect to the
January 5, 1999  investment of $55.0  million by America  Online,  Inc.  ("AOL")
(Note 2) and the  January 5, 1999  repurchase  of  $127,625,000  face  amount of
convertible  debt for $109.1  million  from two  trusts  for the  benefit of the
children of the former Chairman and Chief Executive Officer of the Company for a
cash payment of $55.4  million and the transfer of the $53.7  million  principal
amount of the 12.5% note receivable from WorldxChange.

         (d) Recognition of revenue

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

         (e) Cash and cash equivalents

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

         (f) Marketable securities

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

         (g) 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.




                                       31
<PAGE>




         (h) 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 improvement......................    39 years
           Switching equipment.....................................    15 years
           Equipment, vehicles and other...........................    5-7 years

         (i) Intangibles and amortization

         Intangibles  of  $1,150,000  and  $10,590,000  at December 31, 1998 and
1997,  respectively,  respesent  goodwill  arising from  business  acquisitions.
Amortization  is computed on a  straight-line  basis over the  estimated  useful
lives of the intangibles which is 15 years.

         (j) Deferred revenue

         Deferred revenue is recorded for a non-refundable  prepayment  received
in connection with an amended telecommunications  services agreement with Shared
Technologies Fairchild, Inc. ("STF") 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.

         (k) Long-lived assets

         The Company  adopted 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  long-lived  assets were  considered  impaired at
December 31, 1998 (Note 3).

         (l) Income taxes

         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).

         (m) 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 1996, diluted
earnings per share also includes the effect of 4,352,000 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.



                                       32
<PAGE>




         (n) Financial instruments and risk concentration

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations  of credit risk are cash  investments and marketable  securities.
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
note  receivables,  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, 1998 the market value of the convertible debt was  approximately 85% of face
amount.

         (o) Securities sold short/financial  investments with off-balance sheet
risk

         At December  31,  1997,  securities  sold short by the  Company,  which
consist of equity  securities  valued at market,  resulted in an  obligation  to
purchase such  securities at a future date.  Securities sold short may give rise
to  off-balance  sheet market  risk.  The Company may incur a loss if the market
value of these securities subsequently increases.

         (p) 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  Statement  of Financial
Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation."

         (q) New Accounting Pronouncements

         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
Income," which establishes  standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity  except those  resulting  from  investments  by
owners and distributions to owners.  Among other disclosures,  SFAS 130 requires
that all items that are  required  to be  recognized  under  current  accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The Company adopted SFAS in 1998;  however, as of December 31, 1998
there were no components of  comprehensive  income for disclosure for any of the
periods presented.

         In June 1997, the Financial  Accounting Standards Board issued SFAS No.
131. Disclosures about Segments of an Enterprise and Related Information,  (SFAS
131) which  supercedes  SFAS No.  14,  Financial  Reporting  for  Segments  of a
Business  Enterprise.  SFAS 131  establishes  standards  for the way that public
companies  report  information  about  operating  segments  in annual  financial
statements  and  requires  reporting  of selected  information  about  operating
segments  in  interim  financial  statements  issued  to  the  public.  It  also
establishes  standards for  customers.  SFAS 131 defines  operating  segments as
components of a company about which separate financial  information is available
that is evaluated  regularly by the chief  operating  decision maker in deciding
how to allocate resources and in assessing performance. The Company adopted SFAS
131 in 1998;  however,  there are no operating segments or selected  information
about such segments required to be disclosed for any of the periods presented.

         In June 1998, the Financial  Accounting Standard Board Issued Statement
of  Financial   Accounting   Standards  No.  133,   "Accounting  for  Derivative
Instruments and Hedging  Activities," ("SFAS No. 133"), which requires companies
to recognize all  derivatives  as either assets or liabilities in the assessment
of financial  position and measure those instruments at fair value. SFAS No. 133
is effective for fiscal years  beginning  after June 15, 1999.  The Company does
not  presently  enter  into  any  transactions  involving  derivative  financial
instruments and accordingly,  does not anticipate the new standard will have any
effect on its financial statements.


                                       33
<PAGE>






NOTE 2 -- AOL AGREEMENTS

         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 telecom services to AOL subscribers  during 1998. 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  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  exclusivity  period on or after June 2000 by
foregoing the fixed quarterly  payments  described  above;  elimination of AOL's
rights to receive further common stock warrants based upon customers gained from
the AOL subscriber  base;  AOL's  contributing 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.  As a result of the
January  1999  amendment,  the Company  wrote off $37.6  million of  unamortized
prepaid AOL marketing as part of the restructuring 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 warrants exercisable for 2,721,984 shares of Company common
stock. (Notes 8 and 9).

         In conjunction with the initial Telecommunications  Marketing Agreement
(the "AOL Agreement") with America Online, Inc. ("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 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,  the
Commercial Launch Date; and (iii) $71.5 million, the balance of the cash payment
and the value of the First Warrant and AOL Agreement  related costs,  represents
the combined value of advertising and  exclusivities  which extend over the term
of the AOL Agreement and will be recognized  ratably after the Commercial Launch
Date as advertising services are received. For the year ended December 31, 1997,
the Company  recognized  $57.0  million of expense,  related to items  discussed
above.




                                       34
<PAGE>




NOTE 3 -- SIGNIFICANT OTHER CHARGES

         Significant other charges include $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 the AOL and CompuServe agreements which among other things reduced
the amount of online  advertising  that 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 to  reimburse  AOL for  offline
marketing  expenses in excess of $4 million per quarter  during.  As a result of
the amendment the Company wrote off prepaid AOL,  CompuServe and other marketing
expenses of $37.6 million.

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

         The Company acquired ADS Holdings,  Inc. ("ADS")  (formerly  Symetrics,
Inc.), a manufacturer of digital telephone switching equipment,  in January 1998
for $18.6 million.  This 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.

         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

         The number of Partitions who provided end user  accounts,  which in the
aggregate account for more than 10% of sales, are as follows:


<TABLE>
<CAPTION>

                                                                 Number of               Total Percentage
                                                                 Partitions                  Of Sales
                                                                 ----------                  --------

    <S>                                                        <C>                         <C>         
         Year ended December 31, 1998                                -                           -
         Year ended December 31, 1997                                1                          13%
         Year ended December 31, 1996                                1                          11%


</TABLE>




                                       35
<PAGE>




NOTE 5 -- PROPERTY AND EQUIPMENT


<TABLE>
<CAPTION>

                                                                 DECEMBER 31,
                                                                 ------------
                                                       1998                      1997
                                                --------------------     ----------------------
                                                                (In thousands)

<S>                                            <C>                       <C>      
         Land                                             80                 $     220
         Buildings and building improvements           2,639                     4,259
         Switching equipment                          50,481                    41,915
         Equipment, vehicles and other                11,067                    13,078
                                                    --------                  --------
                                                      64,267                    59,472
         Less: Accumulated depreciation               (7,564)                   (3,637)
                                                    ---------                 ---------
                                                     $56,703                   $55,835
                                                     =======                   =======
</TABLE>



NOTE 6 -- CONVERTIBLE DEBT

         In September 1997, the Company sold $300 million of 4 1/2%  Convertible
Subordinated  Notes which  mature on September  15, 2002 (the "2002  Convertible
Notes"). Interest on the 2002 Convertible Notes are 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 $24.260 per share,  adjusted for
the  dilutive  effect  of 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  1998,  the Company  reacquired
$152,458,000  face amount of the 2002 Convertible  Notes and  $147,542,000  were
outstanding at December 31, 1998.

         In December  1997,  the  Company  sold $200  million of 5%  Convertible
Subordinated  Notes  which  mature on December  15, 2004 (the "2004  Convertible
Notes"). Interest on the 2004 Convertible Notes are 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 $25.067 per share,  adjusted for
the  dilutive  effect  of 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  1998,  the Company  reacquired
$105,155,000  face amount of the 2004  Convertible  Notes and  $94,845,000  were
outstanding at December 31, 1998.

         The 2002  Convertible  Notes and 2004  Convertible  Subordinated  Notes
which 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.




                                       36
<PAGE>




         On January  5,  1999,  the  Company  purchased  from two trusts for the
benefit of Mr. Borislow's  children  $127,625,000  aggregate principal amount of
the Company's 2002  Convertible  Notes and 2004  Convertible  Notes owned by the
trust for $55.4 million in cash and the transfer of the $53.7 million  principal
amount of the 12.5% note receivable from WorldxChange for $62,545,000  aggregate
principal amount of the Company's convertible debt. With these acquisitions, the
Company  had  reduced  the  principal  amount  outstanding  of its  subordinated
convertible notes to $114,582,000  ($71,712,000 of 4 1/2% notes;  $42,870,000 of
5% notes).

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 has 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 America Online, Inc.
("AOL") investment noted above.

         Effective  December 31, 1998,  the Company,  in exchange for a total of
783,706 shares of Company 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  is  an  interest  in  a  jet  airplane),   valued  at
approximately  $8.7 million,  and (b) all of the real property  constituting the
Company's headquarters 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  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
Company common stock  exchanged for the assets was valued at its market value on
the date of the exchanges.  The Company had previously  determined that it would
be  desirable  to dispose  of these  assets and  accordingly  believes  that the
ownership of these assets is not  required  for the  continued  operation of the
Company's business.

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



                                       37
<PAGE>




         On January 5, 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  Communication   TeleSystems   International   d/b/a
WorldxChange  Communications,  in exchange for $62,545,000  aggregate  principal
amount of the Company's 2002 Convertible  Notes and 2004 Convertible Notes owned
by the trust. The exchange rate was determined based on the Company's assessment
of the fair values of the  WorldxChange  Notes and of the Company's  Convertible
Notes given in exchange,  which  assessment  was  supported by the opinion of an
independent  investment  banking  firm as to the  fairness to the Company of the
consideration received.

         On January 5, 1999, the Company, in open market transactions, purchased
from two trusts for the benefit of Mr. Borislow's children $65,080,000 aggregate
principal  amount of the Company's 2002  Convertible  Notes and 2004 Convertible
Notes owned by the trusts for $55.4 million in cash.

         At December 31, 1997, executive officers of the Company had outstanding
loans from the Company of $4,237,000  which were repaid during the first quarter
of 1998.

NOTE 8 -- STOCKHOLDERS' EQUITY

         (a) 1996 Public Offering

         The  Company  consummated  a public  offering of  18,568,000  shares of
common  stock  (adjusted  to reflect the most recent  stock  split,  Note 9(b)),
including  the  underwriter's  over-allotment,  at a price of $8.75 per share in
April and May 1996. Of the 18,568,000  shares  offered,  17,068,000 were sold by
the Company and 1,500,000 were sold by the majority stockholder. Proceeds of the
1996  Offering to the Company,  less  underwriting  discounts  of  approximately
$9,302,000,  were  approximately  $140,043,000.  Expenses for the offering  were
approximately $974,000 resulting in net proceeds to the Company of approximately
$139,069,000.  The majority  stockholder used a portion of his proceeds to repay
his outstanding indebtedness, including interest, to the Company.

         (b) 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.
On February 16, 1996, the Company's Board of Directors  approved a three-for-two
split of the common stock in the form of a 50% stock  dividend.  The  additional
shares resulting from the stock split were distributed on March 15, 1996, to all
stockholders  of record at the close of  business on February  29,  1996.  These
stock splits have been  reflected  in the  financial  statement  for all periods
present and all references in the consolidated  financial  statements to average
number of shares outstanding and related prices, per share amounts,  warrant and
stock  option  data have been  restated  for all  periods to  reflect  the stock
splits.

         (c) Authorized Shares

         During  1997,  the Board of  Directors  and  stockholders  approved the
increase in the number of  authorized  shares of the  Company's  $0.01 par value
common stock to 300,000,000 shares.

         (d) Reimbursement Obligations

         On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company, AOL made a significant equity investment in the Company,  acquiring
approximately 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




                                       38
<PAGE>




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 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.
Assuming AOL were to sell all of its shares subject to the Company reimbursement
obligation at the closing  price of the  Company's  common stock as of March 26,
1999, the reimbursement  amount would be approximately  $35.5 million.  AOL also
has the right on termination of long distance exclusively to require the Company
to repurchase 2,721,984 warrants to purchase common stock of the Company held by
AOL for a minimum  price of $36.3  million.  The  Company  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 not advised the  Company  that it intends to sell any shares  during the
relevant  period.  Mr. Borislow has agreed to guarantee up to $20,000,000 of the
Company's reimbursement obligations under the Investment Agreement with AOL.

         (e) Restriction on Future Sales of Common Stock

         The  Company  is subject  to  certain  restrictions  under the terms of
certain  registration  rights agreements that could effect the Company's ability
to raise capital.  Under these  agreements,  entered into by the Company for the
benefit of Mr.  Borislow  and two trusts for the  benefit of his  children  (the
"Trusts"),  the Company has agreed that so long as Mr. Borislow continues to own
at least 2% of the Company's  outstanding  common stock, the Company will use up
to 40% of the proceeds from the sale of any debt  securities  to repurchase  the
Company's  Convertible  Notes held by Mr.  Borislow or the Trusts and that until
June 2000,  the Company  will not sell any shares of Common stock of the Company
without  the  consent  of Mr.  Borislow  (other  than  sales of common  stock on
exercise  of options or rights so long as the  proceeds  are used to  repurchase
common stock of the Company held by Mr.  Borislow or the Trusts).  Mr.  Borislow
has agreed to subordinate his rights for repurchase of the Company's convertible
debt until the AOL escrow is fully funded.

NOTE 9 -- STOCK OPTIONS, WARRANTS AND RIGHTS

         (a) Stock Options

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

         In 1996,  1997 and 1998,  the Company  granted  certain  employees  and
non-employee  directors  of the  Company  6,736,000,  2,801,000  and  5,535,000,
respectively,  non-qualified  options to purchase shares of the Company's 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 or the  purchase  of the
Company's  stock at prices  below the  quoted  market  price at date of grant or
purchase date. In 1998, the Company recognized $_______ of compensation expenses
relating to the grant of 650,000  options and the issuance of 135,000  shares of
the  Company's  stock at prices  below the quoted  market  price at the dates of
grant or issuance.

         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  1996,   1997  and  1998,
respectively:  no dividends paid for all years;  expected volatility of 40.4% in
1996, 55.8% in 1997 and 65% in 1998;  weighted average risk-free  interest rates
of 5.7%, 5.49% and 4.59%, respectively; and expected lives of 1 to 10 years.




                                       39
<PAGE>


                       TEL-SAVE.COM INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                             ---------------------------------------------
                                                             1998                1997                 1996
                                                             ----                ----                 ----
                                                                (In thousands, except for per share data)
<S>                                                        <C>                  <C>                 <C>    
         NET INCOME:
             As reported                                   $(221,326)           $(20,945)           $20,168
             Pro forma                                      (244,487)            (30,942)           $16,521
         BASIC EARNINGS PER SHARE:
             As reported                                   $   (3.73)           $   (.33)           $   .38
             Pro forma                                     $   (4.12)           $   (.48)           $   .31
                                                        
         DILUTED EARNINGS PER SHARE:
             As reported                                  $   (3.73)            $   (.33)           $   .35 
             Pro forma                                    $   (4.12)            $   (.48)           $   .29 
</TABLE>

         The  following  tables  contain  information  on stock  options for the
three-year period ended December 31, 1998:

<TABLE>
<CAPTION>
                                                                                       EXERCISE            WEIGHTED
                                                                    OPTION            PRICE RANGE           AVERAGE
                                                                     SHARES            PER SHARE        EXERCISE PRICE
                                                                     ------            ---------        --------------
<S>                                                                <C>               <C>                      <C>  
Outstanding, December 31, 1995                                     4,405,800         $ .32-$ 4.58             $2.30
Granted                                                            6,736,000         $4.09-$12.00             $7.96
Exercised                                                         (2,158,000)        $ .32-$ 5.67             $2.28
                                                                  -----------        ------------            -----

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
                                                                  ==========         ============            =======

</TABLE>

<TABLE>
<CAPTION>

                                                                                      EXERCISE           WEIGHTED
                                                                    OPTION           PRICE RANGE          AVERAGE
EXERCISABLE AT YEAR ENDED DECEMBER 31,                              SHARES            PER SHARE        EXERCISE PRICE
--------------------------------------                              ------            ---------        --------------
<S>                                                              <C>                <C>                    <C>
1996                                                              2,649,800          $ .32-$ 4.58            $2.82
1997                                                              3,866,987          $ .32-$14.50            $7.24
1998                                                              4,571,475          $4.08-$12.78            $7.39

</TABLE>

<TABLE>
<CAPTION>
                                                                 WEIGHTED-AVERAGE
OPTIONS GRANTED IN                                                  FAIR VALUE
------------------                                                  ----------
<S>                                                                    <C>  
1996                                                                   $2.39
1997                                                                   $6.99
1998                                                                   $4.83



</TABLE>



                                       40
<PAGE>



                       TEL-SAVE.COM INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1998:


<TABLE>
<CAPTION>

                                                  $4.08-$7.00      $7.01-$10.00       $10.01-$14.00
                                                  -----------      ------------       -------------
OUTSTANDING OPTIONS:
<S>                                              <C>                <C>                 <C> 
Number outstanding at                                                                                
    December 31, 1998                               5,436,810           3,649,000          1,145,000
Weighted-Average remaining                                                                           
    contractual life (Years)                             2.83                3.51               8.74
Weighted-average exercise price                         $5.66               $8.80             $10.69
EXERCISABLE OPTIONS:
Number outstanding at                                                                                
   December 31, 1998                                1,712,642           2,733,833            125,000
Weighted-average exercise price                         $5.39               $8.43             $12.16

</TABLE>

         (b) AOL Warrants

         On January 5, 1999, after the purchase of 5,076,016  Warrants from AOL,
2,721,984 AOL Warrants were outstanding and currently  exercisable with exercise
prices from $14.00 to $22.00 and a weighted  average  exercise  price of $17.03.
AOL has the right  commencing on  termination of the  exclusivity  under the AOL
Agreement up until January 5, 2003 to require the Company to  repurchase  all or
any portion of the AOL 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 the Company's  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
their warrants at any time the market price of the Company's 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 their warrants

         (c) Other Warrants

         At December 31, 1996, the Company had warrant  agreements  with certain
partitions and the underwriter for its IPO (Note 9(b)). 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 are 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 (Note 9(b)) that were  outstanding  at
December 31, 1997 were exercised in 1998.

         (d)  Rights

         The Board of  Directors  has  approved an  offering of up to  3,523,285
shares of its Common Stock,  $.01 par value, to holder 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 are being 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,  will receive
one Right for every 20 shares of Common Stock or underlying  options or warrants
held on the Record Date, as applicable.




                                       41
<PAGE>

NOTE 10 -- INCOME TAXES

         Provision for Income Taxes.  The Company  reports the effects of income
taxes under FASB Statement No. 109,  Accounting of Income Taxes, (SFAS 109). 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 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.

         The Company had net deferred tax assets of approximately  $____ million
at December 31, 1997.  Those deferred tax assets  primarily  represented the tax
consequences of benefits  attributable to net operating loss  carry-forwards and
$36.3  million  related to  deductions  from the  exercise  of  executive  stock
options.  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 income  statement  charge to  establish  the  valuation  allowance  includes
approximately  $26 million of the  previously  recognized  tax benefits from the
exercise of executive  stock options which had been reported in fiscal 1997 as a
direct addition to paid-in capital.

     The provision  (benefit) for income taxes for the years ended  December 31,
1998, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                 -----------------------------------------------------
                                                                      1998               1997                1996
                                                                      ----               ----                ----
                                                                                     (In thousands)
<S>                                                                                  <C>                    <C>    

         Current:
             Federal                                               $       --        $         --           $10,995
             State and local                                               --                  --             1,817
                                                                 ------------         ------------          --------
                  Total current                                            --                  --            12,812
                                                                 ------------         ------------          --------

         Deferred:
             Federal                                                   34,140            (11,111)              (607)
             State and local                                            6,248             (2,280)                --
                                                                 ------------         ------------          --------
                  Total deferred                                       40,388            (13,391)              (607)
                                                                 ------------         ------------          --------
                                                                   $   40,388           $(13,391)           $12,205
                                                                 ============           =========           =======

</TABLE>




                                       42
<PAGE>




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


<TABLE>
<CAPTION>

                                                                            YEAR ENDED DECEMBER 31,
                                                 -------------------------------------------------------------------------------
                                                          1998                         1997                        1996
                                                 ------------------------    --------------------------    ---------------------
                                                                                 (In thousands)
<S>                                                <C>          <C>          <C>                <C>        <C>            <C>  

Federal income taxes computed at the statutory                                                                                  
     rate                                          $(93,817)    (35.0)%      $(12,018)          (35.0)%    $11,331        35.0%
Increase (decrease):
State income taxes less Federal benefit             (11,526)     (4.3)%        (1,482)           (4.3)       1,199         3.7
Write-off of deferred tax assest                     40,388      15.10%
Increase in valuation allowance                     150,000      39.2%
Other                                                   219        .1%            109              .3         (325)       (1.0)
                                                  ----------  ----------     -----------      ---------    ---------    --------
Total provision (benefit) for income taxes           40,368     (15.1)%      $(13,391)          (39.0)%    $12,205        37.7%
                                                  ==========  ==========     ===========      =========    =========    ========


         Deferred tax (assets)  liabilities at December 31, 1998,  1997 and 1996
are comprised of the following elements:
</TABLE>


<TABLE>
<CAPTION>

                                                                                     YEAR ENDED DECEMBER 31,
                                                                          -------------------------------------------
                                                                            1998             1997              1996
                                                                            ----             ----              ----
                                                                                         (In thousands)
<S>                                                                       <C>             <C>                       
Taxable loss carry-forwards                                               $ (66,007)     $(21,548)           $(3,705)
Deferred revenue taxable currently                                          (11,076)      (13,897)                --
Stock based compensation                                                    (14,409)       (4,951)                --
Allowance for uncollectible accounts                                         (7,377)       (2,198)                --
Federal and state taxes resulting from cash to accrual basis for tax                                                    
   reporting                                                                     --         1,337              2,342
Amortization of certain intangibles                                         (13,513)           --                (85)
Other                                                                         1,692           869                (55)
                                                                          -----------   ---------------    -------------
                                                                          -----------   ---------------    -------------
Deferred tax (assets) liabilities                                         $(110,789)     $(40,388)           $(1,503)
Less valuation allowance                                                    110,789            --                 --
                                                                          -----------   ---------------    -------------
Deferred tax (assets) liabilities, net                                    $      --      $(40,388)           $(1,503)
                                                                          ===========   ===============    =============
</TABLE>


         Long-term  deferred  tax assets of  $9,472,000  are  included  in other
assets in the  consolidated  balance  sheet at December  31,  1997.  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,  The tax net
operating loss carryforward of approximately $169 million, if not utilized, will
begin to expire in 2017.  Internal  Revenue  Code  Section 382  provides for the
limitation on the use of not operating loss  carryforward in years subsequent to
significant change sin ownership,  which limitations could significantly  impact
the  Company's  ability to utilize its net  operating  loss  carryforward.  As a
result of certain  transactions,  changes in ownership  may have  secured  which
might result in limitation on the use of net operating loss  carryforwards.  The
Company has not determined whether a change in ownership has occurred.  However,
preliminary  calculations  indicate  that  the  utilization  of  operating  loss
carryforwards could be limited to between $25 million and $30 million per year.


NOTE 11 -- STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                              YEAR ENDED DECEMBER 31,
                                                                                              -----------------------


                                                                                         1998             1997              1996
                                                                                         ----             ----              ----
                                                                                                     (In thousands)
<S>                                                                                      <C>              <C>             <C>    

Supplemental disclosure of cash flow information: 
Cash paid for:
   Interest                                                                              $28,695          $915            $    47
   Income taxes                                                                       $       --        $   --             $1,090

</TABLE>

         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 Company
common stock with a value of $5,625,000.




                                       43
<PAGE>




         In connection  with the  acquisition  of the assets of ABA in 1996, the
Company  released  ABA  of  its  outstanding   obligations  to  the  Company  of
$10,949,000.  During 1996,  the Company  recorded an intangible of $1,077,000 in
connection with the issuance of warrants to certain partitions (Note 11(b)).

NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

                                                                    FIRST           SECOND           THIRD            FOURTH
                                                                   QUARTER          QUARTER         QUARTER           QUARTER
                                                                   -------          -------         -------           -------
                                                                            (In thousands, except for per share data)
1998

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

1997

   Sales                                                           $71,160          $75,032          $80,314          $78,262
   Gross profit (loss)                                              12,966            1,511(1)        12,872          (17,065)(1)
   Operating income (loss)                                           6,082          (13,924)          (3,243)         (73,966)
   Net income (loss)                                                 5,430           (5,865)             721          (21,231)
   Net income (loss) per share - Diluted                              0.08            (0.09)            0.01            (0.32)
                                                                     



(1) See Note 3.
</TABLE>




                                       44
<PAGE>





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

          Not applicable.

                                    PART III

           ITEMS 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 1999 Annual Meeting of  Stockholder,  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.




                                       45
<PAGE>




                                     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.





                                       46
<PAGE>




TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE

                                                                            PAGE

Report of Independent Certified Public Accountants...........................48
Schedule II -- Valuation & Qualifying Accounts...............................49




                                       47
<PAGE>




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
and Stockholders of Tel-Save.com, Inc.

         The audits  referred to in our report dated  February 22, 1999 relating
to the consolidated financial statements of Tel-Save.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, 1998.  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 22, 1999, except for Note 8, which is
         as of March 26, 1999




                                       48
<PAGE>


<TABLE>
<CAPTION>


                                                     TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

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

                                   BALANCE AT       CHARGED TO                        BALANCE AT END
          DESCRIPTION             BEGINNING OF       COSTS AND                              OF
          DEDUCTIONS                 PERIOD          EXPENSES      OTHER CHANGES        DEDUCTIONS
          ----------                 ------          --------      -------------        ----------
<S>                                 <C>             <C>           <C>                  <C>
Year ended  December  31,  1998:
Reserve  and  allowances  deducted
from asset accounts:
Allowance for uncollectible         $2,419           $(1,265)         $515                 $1,669
accounts                            ======           =======          ====                 ======

Year ended December 31, 1997:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts                              $987            $1,285          $147(a)              $2,419
                                      ====            ======          =======              ======

Year ended  December  31,  1996:
Reserves and  allowances  deducted
from asset accounts:
Allowance for uncollected             
accounts                              $804               $38          $145(a)               $987
                                      ====               ===          =======               ====

(a) Amount represents portion of change in allowance for uncollectible  accounts
applied against Accounts Payable Partitions.

</TABLE>




                                       49
<PAGE>




(3) EXHIBITS:

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

2.1      Plan of  Reorganization  between and among Tel-Save  Holdings,  Inc., a
         Delaware  corporation,  Tel-Save,  Inc.,  a  Pennsylvania  corporation,
         Daniel Borislow and Paul Rosenberg,  and Exhibits Thereto (incorporated
         by reference to Exhibit 2.1 to the Company's  registration statement on
         Form S-1 (File No. 33-94940)).

3.1      Amended and Restated  Certificate of Incorporation  of the Company,  as
         amended  (incorporated  by  reference  to Exhibit 3.1 to the  Company's
         registration statement on Form S-4 (File No. 333-38943)).

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 Ownership and Merger  Merging  Tel-Save.com,  Inc. into
         Tel-Save   Holdings,   Inc.  (Changing  the  name  of  the  Registrant)
         (incorporated  by reference to Exhibit  3(i) to the  Company's  Current
         Report on Form 8-K dated January 20, 1999).

10.1     Employment  Agreement  between  the  Company  and  Emmanuel  J.  DeMaio
         (incorporated   by  reference   to  Exhibit   10.2  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).*

10.2     Employment   Agreement   between  the  Company  and  George  P.  Farley
         (incorporated  by  reference to Exhibit 10 to the  Company's  report on
         Form 10-Q for the quarter ended September 30, 1997).*

10.3     Employment  Agreement  between  the Company  and  Aloysius T. Lawn,  IV
         dated October 13, 1998.

10.4     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).*

10.5     Indemnification  Agreement  between  the  Company  and Daniel  Borislow
         (incorporated   by  reference   to  Exhibit   10.4  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).

10.6     Indemnification  Agreement  between  the  Company and Emanuel J. DeMaio
         (incorporated   by  reference   to  Exhibit   10.5  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).



                                       50
<PAGE>



10.7     Indemnification  Agreement  between  the  Company  and Gary W.  McCulla
         (incorporated   by  reference   to  Exhibit   10.6  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).

10.9     Indemnification  Agreement  between the  Company and Peter K.  Morrison
         (incorporated   by  reference   to  Exhibit   10.8  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).

10.10    Indemnification  Agreement  between  the  Company  and  Kevin R.  Kelly
         (incorporated   by  reference   to  Exhibit   10.9  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).

10.11    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).

10.12    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).

10.14    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)).*

10.15    Tel-Save Holdings,  Inc. Employee Bonus Plan (incorporated by reference
         to page 13 of the Company's  Proxy  Statement  for the  Company's  1996
         Annual Meeting of Stockholders dated April 3, 1996).*



                                       51
<PAGE>



10.19    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).+

10.20    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). +

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

10.22    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). ++
 
10.23    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)).

10.24    Registration  Agreement  dated as of  September  3,  1997  between  the
         Company and Salomon Brothers Inc,  Deutsche Morgan Grenfell Inc., Bear,
         Stearns & Co. Inc., Smith Barney Inc., Robertson Stephens & Company LLC
         (incorporated by reference to the Company's  registration  statement on
         Form S-3 (File No. 333-39787)).

10.25    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).

10.26    Registration  Agreement  dated as of  December  10,  1997  between  the
         Company and Smith  Barney Inc.  (incorporated  by  reference to Exhibit
         10.35 to the  Company's  Annual  Report on Form 10-K for the year ended
         December 31, 1997).

10.27    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).*



                                       52

<PAGE>


10.28    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).

10.29    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).*

10.30    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).*

10.31    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).*

10.32    Purchase  Agreement  regarding  the stock of  Emergency  Transportation
         Corporation,  dated as of January  5, 1999,  between  the  Company  and
         Jimlew Capital,  L.L.C.  (incorporated  by reference to Exhibit 10.6 to
         the Company's Current Report on Form 8-K dated January 20, 1999).

10.33    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).

10.34    Modification of the Exchange Agreement, dated ___________, 1999, by and
         among the Company, Tel-Save, Inc. and Mark Pavol.

10.35    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).

10.36    Amendment of Registration  Rights Agreement dated as of March 18, 1999,
         by and among the Company, Daniel M. Borislow, and Seth Tobias.

10.37    Amendment of Registration  Rights Agreement dated as of March 18, 1999,
         by and among the Company and Mark Pavol.

10.38    Agreement of Purchase and Sale of Real Property, dated as of January 5,
         1999, between Tel-Save, Inc. and Jimlew Capital,  L.L.C.  (incorporated
         by reference to Exhibit 10.9 to the  Company's  Current  Report on Form
         8-K dated January 20, 1999).



                                       53
<PAGE>

10.39    Lease, dated as of January 5, 1999,  between Tel-Save,  Inc. and Jimlew
         Capital,  L.L.C.  (incorporated  by reference  to Exhibit  10.10 to the
         Company's Current Report on Form 8-K dated January 20, 1999).

10.40    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).*

10.41    Investment  Agreement,  dated  as  of  December  31,  1998,  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.

10.42    Registration Rights Agreement, dated as of January 5, 1999, between the
         Company and America Online, Inc.

10.43    Sublease Agreement,  dated January ___, 1997, by and between Gemini Air
         Cargo, LLC and RMS International, Inc.

10.44    Sublease  Agreement, dated  as of January  20,  1999,  by  and  between
         RMS International and Tel-Save, Inc.

10.45    Lease by and between Aetna Life Insurance Company and Potomac Financial
         Group, L.L.C.

10.46    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.

10.48    Letter  Agreement  between the Company  and  Emmauel  DeMaio  regarding
         Employment Agreement dated October 13, 1998.

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.

++       Confidential treatment has been requested for portions of this exhibit.

(b)      Reports on Form 8-K.

         The  following  Current  Reports on Form 8-K were filed by the  Company
during the three months ended December 31, 1999:



         1. Current Report on Form 8-K dated October 29, 1998.





                                       58
<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 30, 1999                        TEL-SAVE.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 of Directors                  March 30, 1999
-----------------------------       Chief Executive Officer and Director
Gabriel Battista                    (Principal Executive Officer)

/s/ Emanuel J. DeMaio               Chief Operations Officer                           March 30, 1999
-----------------------------       and Director
Emanuel J. DeMaio

/s/ George P. Farley                Chief Financial Officer and Director                March 30, 1999
-----------------------------       (Principal Financial Officer)
George P. Farley

/s/ Kevin R. Kelly                  Controller (Principal Accounting                    March 30, 1999
-----------------------------       Officer)
Kevin R. Kelly

/s/ Harold First                    Director                                            March 30, 1999
-----------------------------
Harold First

/s/ Gary W. McCulla                 Director                                            March 30, 1999
-----------------------------
Gary W. McCulla

/s/ Ronald R. Thoma                 Director                                            March 30, 1999
-----------------------------
Ronald R. Thoma

</TABLE>



                                       55