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, 1997

                          Commission File No. 0 - 26728

                             TEL-SAVE HOLDINGS, INC.
             (Exact name of registrant as specified an 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:

<TABLE>
<CAPTION>
<S>                                              <C>
     Title of each class                         Name of each exchange on which registered
     -------------------                         -----------------------------------------
           None                                               Not applicable
</TABLE>

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]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant  as of March 30,  1998 was  approximately  $895,030,756  based on the
average  of the high and low  prices of the  Common  Stock on March 30,  1998 of
$22.59 per share as reported on the Nasdaq National Market.

As of March 30, 1998, the Registrant had  outstanding  64,585,012  shares of its
Common Stock, par value $.01 per share.


<PAGE>

                             TEL-SAVE HOLDINGS, INC.

                               INDEX TO FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ITEM                                                                                                         PAGE
 NO.                                                                                                          NO.
----                                                                                                         ----
                                                  PART I
<S> <C>                                                                                                       <C>
1.  BUSINESS.................................................................................................. 1
2.  PROPERTIES............................................................................................... 16
3.  LEGAL PROCEEDINGS........................................................................................ 16
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................... 17


                                            PART II

5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................... 19
6.  SELECTED CONSOLIDATED FINANCIAL DATA..................................................................... 20
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 21
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................. 26
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE................................... 42


                                            PART III

10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................... 42
11  EXECUTIVE COMPENSATION................................................................................... 42
12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................... 42
13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................... 42


                                            PART IV

14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................... 43

</TABLE>

                                       i

<PAGE>

                                     PART I

ITEM 1.    BUSINESS

         For the  definition  of  certain  terms  used in this  Form  10-K,  see
"Glossary."

OVERVIEW

         Tel-Save Holdings, Inc. (the "Company") provides long distance services
throughout  the  United  States to small  and  medium-sized  businesses,  and to
increasing numbers of residential  customers as a result of the Company's recent
online marketing efforts.  The Company's long distance service offerings include
outbound  service,  inbound  toll-free 800 service,  and dedicated  private line
services for data.

         Until  1997,   the  Company   operated   primarily  as  a   switchless,
nonfacilities-based  reseller  of AT&T  long  distance  services  to  small  and
medium-sized businesses. By purchasing large usage volumes from AT&T pursuant to
contract  tariffs,  the  Company  has been and  continues  to be able to procure
substantial discounts and offer low cost, high quality long distance services to
its customers at rates  generally more favorable than those offered  directly by
AT&T.

         In order to reduce its dependence on AT&T contract tariffs and increase
its  growth   opportunities,   the  Company  has  deployed  its  own  nationwide
telecommunications   network,   One  Better  Net  ("OBN").   OBN  features  five
Company-owned,  AT&T  (now  Lucent  Technologies,  Inc.,  hereinafter  "Lucent")
manufactured   5ESS-2000  switches  connected  with  AT&T  digital  transmission
facilities.  OBN's  reduced  cost  structure  allows the  Company to offer rates
competitive  with those of non-AT&T  resellers  while  continuing to provide the
quality  of  AT&T  (now  Lucent)   manufactured   switches   and   AT&T-provided
transmission  facilities and billing services.  OBN allows the Company to pursue
the non-AT&T based  switchless  resale market,  which represents the majority of
the switchless resale long distance market.

        In  February  1997,  as part of its  efforts to expand its  business  by
taking advantage of online marketing,  billing and customer service, the Company
entered into a Telecommunications Marketing Agreement (the "AOL Agreement") with
America Online,  Inc.  ("AOL"),  under which the Company  provides long distance
telecommunications  services  marketed by AOL to the subscribers to AOL's online
network.  The  Company's  services  were  launched on the AOL online  network on
October  9, 1997 on a limited  basis and the  general  public  promotion  of the
service began at the end of 1997. The AOL Agreement has an initial term of three
years and can be extended by AOL on an annual basis thereafter.

        The  Company's  strategy for expanding  its business is  principally  to
target new retail  customers  through the Company's online  marketing,  expanded
services to be offered to the Company's  online customer base, local service and
dial around long  distance  service.  The  Company  also  intends to attract new
partitions and support  existing  partitions,  to grow through  acquisitions and
strategic partnerships and to expand into the college and university market. The
Company will  approach  online  customers  through the AOL Agreement and similar
opportunities,  such  as  the  Company's  recently  announced  arrangement  with
CompuServe  Interactive,  Inc. ("CompuServe") pursuant to which the Company will
provide long distance  telecommunications  services to be marketed by CompuServe
to its online network subscribers. The Company intends to attract new partitions
and support existing  partitions by, among other things,  continuing its current
practice of offering advances to new partitions to enable such partitions to pay
outstanding  balances due to their existing long distance providers in order for
such  partitions to transfer  their end users to the Company's  service,  and to
existing  partitions to support their marketing  efforts.  The Company regularly
evaluates potential acquisition candidates and strategic partners with which the
Company  could  achieve  its  expansion  goals.  The  Company,  with the  recent
completion of the acquisition of Compco,  Inc.  ("Compco"),  intends to leverage
the  relationships  that  Compco  has as a leading  provider  of  communications
software  in  the  college  and  university   marketplace  by  offering  bundled
communications  services to the college and university  market.  The Company has
also  recently  gained  certification  in many  states to sell  local  services,
although it does not yet offer such  services.  Although the Company  expects to
expand  its  business  through  these  and other  opportunities,  in view of the
intense  competition in this industry and other  contingencies,  there can be no
assurance that the Company will be able to expand its business.

        Tel-Save,  Inc., the Company's predecessor  ("Predecessor  Corporation")
and now its principal operating subsidiary,  was incorporated in Pennsylvania in
May 1989. The Company was  incorporated in Delaware in June 1995. The address of
the  Company's  principal  executive  offices  is  6805  Route  202,  New  Hope,
Pennsylvania 18938, and its telephone number is (215)

                                        1

<PAGE>
862-1500.  Unless the context  otherwise  requires,  the "Company" or "Tel-Save"
includes the Predecessor Corporation and the Company's other subsidiaries.

DEVELOPMENT OF THE COMPANY

         The Company  was formed to  capitalize  on the  Federal  Communications
Commission  ("FCC")  mandate  allowing the resale of AT&T services.  The Company
initially marketed AT&T's multi-location  calling plan ("MLCP"),  which provided
incremental  discounts  earned by  inclusion  of the usage volume of diverse end
user  locations  under a single  service  plan.  The Company was  successful  in
marketing  MLCP,  but realized  that there were  significant  barriers to growth
associated with the product,  primarily the lack of reporting from AT&T, product
inflexibility and the lack of control over end user accounts.

         In late 1989,  the Company  successfully  obtained an  additional  AT&T
service plan developed by AT&T and marketed as Software  Defined Network Service
("SDN"),  an AT&T product designed for larger business  customers.  SDN provided
the Company with higher margins,  network  controls,  advanced  features and the
ability to rebill its end users through AT&T and AT&T's  College and  University
Systems  ("ACUS"),  thus  enabling the Company to have more control over the end
user  account.  As a result of SDN,  the  Company  began to offer  services on a
wholesale basis through partitions. The Company thereby outsourced its marketing
and end user service  expenses to  partitions,  allowing it to focus on managing
the AT&T  relationship  and to  further  develop  its  billing  and  information
systems.

         In  December  1992,  the Company  obtained  the first  contract  tariff
created by AT&T  specifically for the Company.  The contract tariff provided the
Company with significant additional price advantages at stabilized rates and the
ability to absorb the traffic of  competitors'  plans into the contract  tariff.
The Company  subsequently  obtained other contract  tariffs,  which also provide
AT&T inbound 800 services and AT&T private line services,  in order to diversify
its service  offerings.  This in turn enabled the Company to increase the number
of its partitions and end users.

         Prior  to 1997,  the  Company  operated  primarily  as a  "switchless,"
nonfacilities-based  reseller  of  AT&T  long  distance  services.  The  Company
offered,  and continues to offer, its partitions and end users nationwide access
to AT&T long distance  network  services  through  contract  tariffs,  including
outbound  long  distance,  800 service and private line  service.  Outbound long
distance service accommodates voice, data and video transmissions. The Company's
800 service is currently  provided by reselling  AT&T's 800 Service  (Readyline,
Megacom 800, etc.),  which is AT&T's inbound,  toll-free  (recipient of the call
pays the charges) long distance  service.  The Company's private line service is
currently  provided by  reselling  AT&T  Private Line  Service,  which  includes
dedicated transmission lines connecting pairs of sites.

         The Company  successfully  established  its  position  as a  switchless
reseller of AT&T long distance  services as a result of its ability to negotiate
with and obtain  favorable  contract  tariffs from AT&T,  manage and  distribute
data,  bill   accurately  and  provide   partition   support.   Contract  tariff
subscriptions do not impose restrictions on the rates the Company may charge its
partitions and end users.  By purchasing  large usage volumes from AT&T pursuant
to such  contract  tariffs,  the Company is able to procure  substantial  volume
discounts and offer long distance  services to its  partitions  and end users at
rates  generally more favorable  than those offered  directly by AT&T.  With its
information  systems, the Company is able to manage and distribute to partitions
information such as data about end user usage and payment history.

         In order to reduce its  dependence  on the AT&T  contract  tariffs  and
increase its growth  opportunities,  the Company developed its own network, OBN.
Since 1996, the Company has deployed five 5ESS-2000 switches in Chicago, Dallas,
Jacksonville,  New York and San Francisco. As of March 30, 1998, the Company has
provisioned  approximately one million lines (representing  approximately 71% of
the total lines then using the  Company's  services) of the Company's end users)
to OBN and most of the Company's new outbound lines are now being provisioned to
OBN.  OBN  enables  the  Company  to offer  its end users  and  partitions  more
competitive rates than in the past and to improve customer provisioning, as well
as to improve reporting to existing and new partitions.

RECENT DEVELOPMENTS

         The Company  believes that eventually it must either be, or become part
of, a larger organization in order to succeed in the long term. To that end, the
Company has been exploring the  possibility of being acquired by larger entities
that  have  expressed  interest  in the  Company.  The  Company  has  previously
disclosed  that it has had  discussions  with  potential  suitors  and  that the
Company has retained  Salomon Smith Barney to advise the Company on any proposed
acquisition of the Company.

                                       2

<PAGE>
There can be no assurance that any transaction will take place and no prediction
can be made as to the price at which an acquisition of the Company,  if any, may
be consummated or whether any such transaction  would be for cash or securities.
Moreover,  the Company has not made any  determination  to be acquired,  and may
remain  independent.  The  Company  does  not plan to make  any  further  public
statements  regarding  the  possible  acquisition  of the  Company  until it has
reached a definitive  agreement regarding such a transaction,  or has determined
not to continue to pursue such possibility.

         At the same time, the Company continues to seek and consider  potential
acquisitions  and  strategic  partnerships.  On  February  3, 1998,  the Company
completed the acquisition of Symetrics Industries, Inc. ("Symetrics"), a Florida
corporation,  for approximately  $25 million in cash, plus assumed  liabilities.
Symetrics  designs,   develops  and  manufactures   electronic  systems,  system
components   and  related   software  for   defense-related   products  and  for
telecommunications  applications. In the telecommunications field, Symetrics has
developed  hardware and software to make telephone  switching more efficient for
small telephone  networks,  such as in college  dormitories and apartments.  The
equipment routes  room-to-room  calls itself and sends only billing  information
back to the service  provider's  switch,  freeing  space on the system to handle
more  calls.  The Company  intends to dispose of  Symetrics'  assets  related to
non-telecommunications  businesses,  although there can be no assurance that any
such transaction will be consummated.

         The Company has announced  that its Board has authorized the repurchase
from time to time of up to eight  million  shares  of its  Common  Stock.  It is
anticipated  that the  repurchased  shares will be held in treasury for issuance
upon exercise of outstanding  options and warrants and upon conversion,  if any,
of convertible  notes, and for other general corporate  purposes.  In connection
with the AOL  Agreement,  the  Company  issued two  warrants  to AOL to purchase
shares of the Company's Common Stock,  including a warrant to purchase 5 million
shares at an exercise  price of $15.50 per share,  which  warrant  became  fully
vested on February  22,  1998.  AOL is  exercising  this warrant as to 1 million
shares of  Company  Common  Stock on a net  issuance  basis and the  Company  is
repurchasing  from AOL all of the 380,624  shares  issued upon such net issuance
exercise for $23 1/4 per share. In connection  with such  purchases,  AOL agreed
not to dispose of any shares of the Company's Common Stock acquired by AOL under
any of these warrants until March 30, 1999.

SALES AND MARKETING

Online

         The  Company  launched a major new  initiative  for the  marketing  and
provisioning of its telecommunication services online when, in February 1997, it
entered into the AOL Agreement,  under which the Company  provides long distance
telecommunications services that are marketed by AOL to the subscribers of AOL's
online network.  The AOL Agreement has an initial term of three years and can be
extended by AOL on an annual  basis  thereafter.  Under the AOL  Agreement,  the
Company  also has certain  rights to offer,  on a  comparable  basis,  local and
wireless telecommunications services when available.

         The Company's  services,  which include  provision for online  sign-up,
call detail and reports and credit card payment, were launched on the AOL online
network on October 9, 1997 on a limited basis,  and general public  promotion of
the  services  began at the end of 1997.  AOL  subscribers  who  sign-up for the
telecommunications  services  are  customers  of the  Company,  as  the  carrier
providing such services.

         Under the AOL Agreement,  AOL provides, each month over the term of the
Agreement,  certain minimum  amounts of online  advertising and promotion of the
services and provides all of its subscribers with access to a dedicated  Company
service area  online.  Effective  January 25, 1998,  the Company and AOL entered
into an amendment (the "AOL  Amendment") to the AOL Agreement to provide for the
acceleration of some of AOL's online advertising and promotion obligations under
the AOL Agreement into a special  promotional  period (the "Special  Promotional
Period")  during the  latter  part of the first  quarter of 1998,  as well as to
provide  for offline  marketing  through  other  media,  such as  directed  mail
promotions  and print and radio  promotions of the services,  the costs of which
would be borne by the Company.

         The  Company  made an  initial  payment  of $100  million to AOL at the
signing of the AOL  Agreement  and agreed to provide  marketing  payments to AOL
based on a percentage  of the Company's  profits from the services  (between 50%
and 70% depending on the level of revenues from the services). The AOL Agreement
provides that $43 million of the initial $100 million payment will be offset and
recoverable  by the Company  through  reduction of such  profit-based  marketing
payments  during the initial term of the AOL  Agreement  or,  subject to certain
monthly  reductions of the amount thereof,  directly by AOL upon certain earlier
terminations  of the AOL  Agreement.  The $57  million  balance  of the  initial
payment  is  solely   recoverable   by  offset  against  a  percentage  of  such
profit-based  marketing  payments  made  after the first  five  years of the AOL
Agreement  (when  extended  beyond  the  initial  term) and by offset  against a
percentage of AOL's share of the profits from the services after  termination or
expiration of the AOL  Agreement.  Any portion of the $43 million not previously
repaid or  reduced  in  amount  would be added to the $57  million  and would be
recoverable similarly.

        Also under the AOL  Agreement,  the Company issued to AOL at signing two
warrants to purchase  shares of the Company  Common  Stock at a premium over the
market  value of such stock on the issuance  date.  One warrant is for 5 million
shares,  at an  exercise  price of $15.50 per share,  one-half  of which  shares
vested on October 9, 1997 when the  Company's  service  was  launched on the AOL
online  network in  accordance  with the AOL  Agreement and the balance of which
vested on February  22, 1998,  the first  anniversary  of issuance.  See "RECENT
DEVELOPMENTS."  The other  warrant (the  "Supplemental  Warrant") is for up to 7
million shares, at an exercise price of $14.00 per share, which vest, commencing
December 31, 1997,  based on the number of subscribers to the services and would
vest fully if there are at least 3.5 million such  subscribers  at any one time.
The  Company  also  agreed to issue to AOL an  additional  warrant to purchase 1
million  shares of the  Company  Common  Stock,  at market  value at the time of
issuance, upon each of the first two annual

                                       3
<PAGE>
extensions  by AOL of the term of the AOL  Agreement,  which  warrants also will
vest based on the number of subscribers to the services.

         Under the AOL Amendment, the Company agreed to pay to AOL an additional
bonus fee for each new subscriber (up to an aggregate of 1,000,000  subscribers)
to the Company's  services  under the AOL Agreement  who  subscribed  during the
Special Promotional Period or after this Period in response to AOL telemarketing
efforts and to direct mail solicitations to AOL subscribers and who continued as
a customer of the Company  services  for at least 30 days.  Such bonus  payments
also would  continue as to additional  qualifying  subscribers  who subscribe in
response to certain AOL  telemarketing  efforts.  Under the AOL  Amendment,  the
Company guaranteed,  with respect to these bonus payments,  that it would pay to
AOL, as of April 3, 1998, an amount (the "Excess  Amount")  equal to $10 million
reduced  by the  amount  of bonus  fees paid to AOL  before  such date and by an
amount  based on the number of shares of Company  Common Stock that vested under
the  Supplemental  Warrant  during the Special  Promotional  Period.  Any Excess
Amount would be credited  against,  and solely  recoverable from, any bonus fees
subsequently payable to AOL.

         The Company also entered into a Telecommunications Marketing Agreement,
dated as of February 6, 1998 (the "CompuServe  Agreement"),  with CompuServe,  a
wholly  owned  subsidiary  of AOL,  under which the Company  will  provide  long
distance  telecommunications services to be marketed by CompuServe to all of the
subscribers of CompuServe's  online network in substantially  the same manner as
under the AOL Agreement.  The CompuServe  Agreement has an initial term of three
years that can be extended by  CompuServe on an annual basis  thereafter  and is
also subject to earlier  termination  by CompuServe  if the AOL Agreement  shall
have  terminated  upon  payment of $10 million to the  Company.  As with the AOL
Agreement, the Company also has certain rights under the CompuServe Agreement to
offer, on a comparable  basis,  local and wireless  telecommunications  services
when  available.  The  Company  anticipates  that the  services  will be offered
generally to CompuServe subscribers in the third quarter of 1998.

         Under the CompuServe Agreement,  which is similar to the AOL Agreement,
the Company services will include provision for online sign-up,  call detail and
reports and credit card payment.  CompuServe  will provide,  each month over the
term of the CompuServe Agreement,  certain minimum amounts of online and offline
advertising  and  promotion  of the  Company  services  and  provide  all of its
subscribers with access to a dedicated  Company service area online.  CompuServe
subscribers who sign up for the telecommunications services will be customers of
the Company,  as the carrier  providing such services.  The Company will provide
marketing  payments to CompuServe based on a percentage of the Company's profits
from the services under the CompuServe  Agreement (between 50% and 70% depending
on the level of revenues from such services).

        Under the CompuServe  Agreement,  the Company made an initial payment of
$3,500,000  as  an  advance  against  profit-sharing  payments  to  be  made  to
CompuServe;  the  Comapny  will make an  additional,  non-refundable  payment of
$3,500,000  (the "Base  Payment") on the date that the Company's  services first
are made generally available to substantially all of the CompuServe  subscribers
(but, generally, not later than November 1, 1998); and, 18 months after the date
such services are first made generally available and if the CompuServe Agreement
has not earlier terminated the Company will make a further advance (the "Midterm
Advance")  of an  amount  up to  $7,000,000  and  based  on the then  number  of
subscribers to the CompuServe  service.  The CompuServe  Agreement provides that
the initial  $3.5  million  advance and the Midterm  Advance  will be offset and
recoverable  by the Company  through  reduction  of the  profit-based  marketing
payments  to be made to  CompuServe  during the initial  term of the  CompuServe
Agreement  or,  subject to certain  monthly  reductions  of the amount  thereof,
directly by  CompuServe  upon certain  earlier  terminations  of the  CompuServe
Agreement.  The Base Payment is generally not recoverable by the Company.  Under
the CompuServe Agreement, the Company also agreed to pay to CompuServe a $10 fee
for each new subscriber to the Company's services under the CompuServe Agreement
who  subscribes  within the first six months  after the date that the  Company's
services  first  are  made  generally  available  to  substantially  all  of the
CompuServe  subscribers  and who continues as a subscriber for at least 60 days,
which fees also are not  recoverable by the Company.  Under the terms of the AOL
Amendment,  subscribers to the Company  services under the CompuServe  Agreement
will  be  counted  as  subscribers   for  purposes  of  vesting  under  the  AOL
Supplemental Warrant.

         In  connection  with the AOL  Agreement,  the  Company  and AOL jointly
developed the online  marketing and advertising for the services and the Company
and  CompuServe  will jointly  develop the marketing and  advertising  under the
CompuServe  Agreement.  The Company  provides online customer service as well as
inbound calling  customer  service to the AOL member base in connection with the
services  and  will do so for  the  Compuserve  member  base.  Customer  service
representatives  for these  services  are located in the  Company's  Clearwater,
Florida  facility.  The Company  anticipates that it will incur expenses for the
promotion  of the  services  under the AOL  Agreement  and for the  start-up and
development of the services  contemplated in the CompuServe  Agreement primarily
during the first half of 1998, including expenses for the continued expansion of
the Clearwater operation, for software programming and for software and hardware
additions to the Company's network, OBN, to expand its capacity for the traffic.

         The profitability of the AOL and CompuServe  Agreements for the Company
depends on the  Company's  ability to continue to develop  (and,  in the case of
CompuServe,  to develop) and to maintain online ordering,  call detail,  billing
and customer  services for the AOL and CompuServe  members,  which will require,
among other  things,  the ability to identify  and employ  sufficient  personnel
qualified to provide the necessary  programming;  the ability of the Company and
AOL and CompuServe to work together effectively to
                                       4
<PAGE>
develop jointly the marketing contemplated by the AOL and CompuServe Agreements;
a rapid  response  rate to online  promotions to AOL's and  CompuServe's  online
subscribers,  most of whom are  expected to be potential  residential  customers
rather than business customers to which Tel-Save has marketed historically;  and
the Company's  ability to expand OBN to accommodate  increased  traffic  levels;
and, in the case of CompuServe,  CompuServe's ability to maintain its subscriber
base in light of its  recently  completed  acquisition  by AOL.  Since  the $100
million  initial  payment under the AOL Agreement and up to $10.5 million of the
payments  that may be made by the Company  under the  CompuServe  Agreement  are
recoverable  only  through the profits from the  services  under the  respective
Agreements,  to the extent that the respective  Agreement is unsuccessful,  such
respective amounts are subject to potential  non-recovery or limited recovery by
the Company.  The Company  currently  estimates  that between 2% and 6% of AOL's
customers will need to sign up for the Company's long distance  service in order
for the Company to break even on its investment in the AOL Agreement.

Partitions

         Prior to 1997, the Company primarily marketed its services to small and
medium-sized business end users (i.e.,  generally businesses with fewer than 200
employees)  throughout the United States through  independent  long distance and
marketing companies known as "partitions." While the Company explored the use of
direct  marketing in 1997, it has determined (as described below) to continue to
market its  services  to small and medium  sized  business  end users  primarily
through  partitions.  Partitions  resell  and  market  the  Company's  products,
allowing the Company to minimize its marketing and end user overhead. Partitions
offer end users a variety of  services  and  rates.  As  compensation  for their
services,  partitions  generally  receive  the  difference  between  the  amount
received  from end users and the amount  charged by the Company to the partition
for providing such services.  The Company offers customer  service to end users,
including end users of certain partitions.  Customer service representatives are
located  in the  Company's  facilities  in  Clearwater,  Florida  and New  Hope,
Pennsylvania.

         A  substantial  number  of  the  Company's   partitions  have  executed
partition  agreements  with the Company  pursuant to which the Company agrees to
provide  services  utilizing the AT&T network  service or OBN and to arrange for
end user  billing  services  at agreed  upon  prices or  discounts.  The Company
requires that the partitions adhere to certain Company established guidelines in
marketing the Company's  services and comply with federal and state regulations.
These requirements include certain  representations by each organization that it
is  acting  as an  independent  contractor  with  regard  to the  resale  of the
Company's services, and not as a joint venture partner, agent or employee of the
Company,  along with  provisions  for the proper  completion  of forms and other
sales procedures.  In addition,  payments for long distance services made by end
users are either paid directly into a lock-box  controlled by the Company or are
made to the end-user's  local exchage carrier  ("LEC"),  which payments are then
forwarded  by a  third-party  billing  company  to the  Company.  The  Company's
partition  agreements  typically  run for  three  years  or for the  term of the
applicable tariffs,  whichever is less. The partitions generally make no minimum
use or revenue commitments to the Company under these agreements with respect to
the resale of services. The agreements also are generally non-exclusive.  If the
Company were to lose access to services on the AT&T network or billing  services
or experience  difficulties  with OBN, the Company's  agreements with partitions
could be adversely affected.

         The  Company  intends  to  continue  to  promote  increased   marketing
activities  of certain of its  partitions  through  advances  collateralized  by
assets of such partitions.  In return for providing such marketing advances, the
Company seeks long-term arrangements with such partitions.  In 1997, the Company
entered into long term  arrangements  with several  existing and new partitions.
One partition, Group Long Distance, Inc., accounted for approximately 13% of the
Company's sales in 1997; however, the Company does not expect that any partition
will account for 10% or more of the  Company's  sales in 1998. In the event that
any of the partitions,  and particularly the partition specifically noted above,
were to cease doing  business  with the  Company,  the  financial  condition  or
results of operations of the Company could be materially adversely affected.

         The Company  believes that the discounts it offers  partitions  and end
users  using OBN,  together  with the  functionality  and quality of OBN and the
accuracy of the  billing  services  used,  will enable it to continue to attract
current and future  partitions  to OBN. The Company will  continue its policy of
advancing  funds  to  most  partitions  to  support  their  marketing   efforts.
Historically,  partitions  of the Company have  continued  to do business  under
their partition agreements following changes in the Company's service offerings.

         Current marketing practices, including the methods and means to convert
a customer's long distance  telephone service from one carrier to another,  have
recently  been  subject to increased  regulatory  review at both the federal and
state levels.  See "REGULATION".  This increased  regulatory review could affect
the current  business  of existing  partitions  and also could  affect  possible
future  acquisitions  of new business from new  partitions  or other  resellers.
Provisions  in the  Company's  partition  agreements  mandate  compliance by the
partitions with applicable state and federal regulations.  A partition's failure
to comply with applicable  state and federal  regulations  could have an adverse
effect on the Company. Such a failure could result in state and


                                       5
<PAGE>
federal  authorities  imposing sanctions on a partition (such as restrictions on
the partition's business practices,  loss of its right to do business,  or fines
or  forfeitures)  that  would  hinder  the  partition's  ability  to resell  the
Company's  services  or raise its costs of doing so. Such  sanctions  also could
make it difficult for the Company to engage in an asset sale,  merger,  or other
transaction  with the  partition,  and might impair any loans that the partition
has  outstanding  from the  Company.  State or  federal  authorities  also might
attempt to hold the Company responsible for the partition's misconduct.  Because
the Company's partitions are independent  carriers and marketing companies,  the
Company is unable to control such  partitions'  activities.  The Company is also
unable to  predict  the extent of its  partitions'  compliance  with  applicable
regulations or the effect of such increased regulatory review.

         The Company's  partitions  that resell AT&T long  distance  service are
under a contractual  obligation to the Company to comply with AT&T's  guidelines
on the use of the AT&T name and logo in  connection  with  their  resale of AT&T
long distance service.  AT&T recently announced that it intends to enforce those
guidelines  with  renewed  vigor.  A  partition's  failure to comply with AT&T's
guidelines  could have an adverse  effect not only on the  partition but also on
the Company,  which might be sued by AT&T,  be subject to  increased  rates from
AT&T or loss of service from AT&T.

Colleges and Universities

         In late November,  1997, the Company acquired Compco,  Inc., a provider
of communications software for the college and university  marketplace,  for $15
million in cash and stock. Compco primarily licenses proprietary  communications
software to colleges and universities.  This software assists the institution in
its  management  of  the  billing,   services  and  facilities  related  to  its
telecommunications  network.  In addition to the licensing of its telemanagement
software,  Compco also offers and provides billing services and training to such
institutions. Compco's customers include approximately 100 academic institutions
in the country.  The Company  intends to leverage the  relationships  Compco has
with these  institutions  by  offering  bundled  communications  services to the
college and university market.

Direct Telemarketing

         In  1996,  Tel-Save  began to  telemarket  its  long  distance  service
directly to small and  medium-sized  businesses and, in December 1996,  acquired
substantially all of the assets,  and hired  substantially all of the employees,
of American  Business  Alliance,  Inc.  ("ABA"),  a switchless  reseller of long
distance services and a partition of Tel-Save,  which acquisition  significantly
increased Tel-Save's direct telemarketing capabilities. In the second quarter of
1997,  Tel-Save  determined to change its business practice and de-emphasize the
use of direct  telemarketing  to solicit  customers for Tel-Save as the carrier,
and, in October 1997, Tel-Save decided to discontinue its internal telemarketing
operations,  which were primarily conducted through the ABA business that it had
acquired.  Both federal and state  officials are tightening the rules  governing
the telemarketing of telecommunications services and the requirements imposed on
carriers  acquiring  customers  in  that  manner.  See  "REGULATION".   Customer
complaints of  unauthorized  conversion or "slamming" are widespread in the long
distance  industry and are beginning to occur with respect to newly  competitive
local services.  While Tel-Save's  discontinuance of its internal  telemarketing
operations  should  reduce its  exposure to customer  complaints  and federal or
state enforcement actions with respect to telemarketing practices, certain state
officials  have made  inquiries  with  respect to the  marketing  of  Tel-Save's
services  and there is the risk of  enforcement  actions by virtue of its prior,
telemarketing efforts and its ongoing support of its  customer/partitions.  Some
direct  telemarketing  is being used in connection  with the AOL and  Compuserve
Agreements.

INFORMATION AND BILLING SERVICES

         The Company has  developed  and will seek to continue to develop and to
improve  systems  for  customer  care and  billing  services,  including  online
sign-up,  call detail and billing reports and credit card payments.  The Company
is  currently  implementing  these  technologies  in  connection  with  the  AOL
Agreement.  Any delay or difficulties  in developing  these systems or in hiring
personnel  could adversely  affect the success of this service  offering and the
offering to AOL subscribers.

         The Company  also  utilizes  the billing  services of AT&T and ACUS,  a
wholly owned strategic business unit of AT&T, as well as the billing services of
the LECs. Detailed call information on the usage of each end user is produced by
AT&T (in the case of the switchless  resale business) and by the Company (in the
case  of OBN  business).  In each  case,  AT&T or the  LEC  then  processes  the
information  and provides  billing  information to the Company and bills the end
users.  In addition,  the Company has developed its own  information  systems in
order to have its own billing  capacity,  although  the Company has not provided
such direct billing  services to end users in the past except in connection with
the online billing area under the AOL Agreement.

         The Company provides to each partition computerized  management systems
that  control  order  processing,   accounts  receivable,   billing  and  status
information  in a streamlined  fashion  between the Company and its  partitions.
Furthermore,  when applicable,  the systems interface with the AT&T Provisioning
System and ACUS for order processing and billing services,



                                       6
<PAGE>

respectively.  Enhancements  and  additional  features  are  provided as needed.
Electronic  processing  and feature  activation  are  designed  to maintain  the
Company's goal of minimizing overhead.

         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  value-added  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."

ONE BETTER NET ("OBN")

         In order to reduce  its  dependence  on AT&T  contract  tariffs  and to
increase   its   growth   opportunities,   the   Company   developed   its   own
telecommunications  network,  OBN, which utilizes AT&T (now Lucent) manufactured
switches  owned by the  Company  in  conjunction  with  AT&T-provided  lines and
digital   cross-connect   equipment   (herein   referred  to  as   "transmission
facilities") and AT&T-provided billing systems that the Company uses pursuant to
agreements  with AT&T and ACUS.  OBN includes  five AT&T (now Lucent)  5ESS-2000
switches,  which are  generally  considered  the most  reliable  switches in the
telecommunications industry. The Company was one of the first installation sites
for AT&T's 5ESS-2000  switching  equipment  featuring the new Digital Networking
Unit--SONET   technology,   a  switching  interface  designed  to  increase  the
reliability  of  the  5ESS-2000  and  to  provide  much  greater  capacity  in a
significantly smaller footprint.

         OBN allows the Company to offer long distance  services directly to its
end users and partitions  throughout the continental United States at rates that
are  competitive  with  or  below  those  offered  by the  major  long  distance
providers.  OBN also  allows the  Company to  control  provisioning  of end user
accounts.

         The  Company's  current  contract  tariffs  under which it resells AT&T
services require the Company to pay one  all-inclusive  "bundled" charge to AT&T
for the delivery of services,  including switching and transmission services and
the  payment of LEC  access  fees.  As a result of the  deployment  of OBN,  for
customers provisioned on OBN, the Company pays "unbundled" charges consisting of
charges paid  directly to the LECs for access  charges and,  under AT&T contract
tariffs,  charges paid to AT&T for use of its network  transmission  facilities.
The Company pays AT&T "bundled" charges for use of its international  facilities
to handle the international portion of a call on OBN. The total cost per call to
the Company for the LEC access fees, the charges for use of AT&T's  transmission
facilities  and the overhead  cost for calls using OBN is less than the per call
cost incurred by the Company as a switchless  reseller paying "bundled"  charges
to AT&T.  LEC access fees  represent a substantial  portion of the total cost of
providing long distance services. As a result of the Telecommunications  Act, it
is generally  expected that the entry over time of competitors  into LEC markets
will result in lowering of access fees, but there is no assurance that this will
occur. To the extent it does occur, the Company,  by using OBN, will receive the
benefit  of any  future  reduction  in LEC  access  fees,  which  it  would  not
automatically  receive under contract tariffs. 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 October 1996, the Company  subscribed to a new AT&T contract tariff,
which was amended in December 1996 and May 1997 and which permits the Company to
continue to resell through mid-1998 AT&T long distance services,  including AT&T
SDN service and other services,  at rates that are more favorable to the Company
than prior tariffs.  As a result,  the Company decided only to provision new end
users on OBN and to leave  existing  end  users on AT&T  service.  The 1996 AT&T
contract has enabled the Company to earn higher margins on existing  traffic and
minimize  possible  attrition  that might result from moving  existing end users
from the AT&T network to OBN. This has permitted a more gradual  introduction of
OBN, which has reduced the expense of providing the capacity  required in a more
rapid  phase-in of OBN and  lessened  the impact of any  technical  difficulties
during the phase-in of OBN. See "AT&T CONTRACT TARIFFS."

         While the Company  expects to continue to offer private line service as
a reseller,  in 1998 the Company  also will begin to offer  private line service
using OBN to new and existing customers.

         In order for the Company to provide  service  over OBN, the Company has
installed and  operates,  and is  responsible  for the  maintenance  of, its own
switching  equipment.  The Company also has  installed  lines to connect its OBN
switches to LEC



                                       7
<PAGE>
switches and is responsible  for  maintaining  these lines.  The Company entered
into a  contract  with  GTE  with  respect  to  the  monitoring,  servicing  and
maintenance  of the  switching  equipment  purchased  from  AT&T  (now  Lucent).
Additional  management personnel and information systems are required to support
OBN,  the  costs of which  have  increased  the  Company's  overhead.  Moreover,
operation as a switch-based provider subjects the Company to risk of significant
interruption  in the  provision of services on OBN in the event of damage to the
Company's  facilities  (switching  equipment or connections to AT&T transmission
facilities)  such  as  could  be  caused  by  fire  or  natural  disaster.  Such
interruption  could have a material  adverse  impact on the Company's  financial
condition and results of operations.

         The  Company  began  testing new  customer  calls over OBN in the third
quarter of 1996. In the fourth quarter of 1996,  the Company began  provisioning
on a test basis new customer orders on OBN. In early 1997, the Company  deployed
OBN. Of the over 1.4 million lines using the Company's  services,  OBN currently
provides  services to approximately  one million lines and most of the Company's
new outbound lines are now being provisioned to OBN.

         The Company  has  continued  to expand the  capacity of OBN to meet its
increased  demands and believes  that such  capacity may be further  expanded at
reasonable cost to meet the Company's needs in the foreseeable future, including
under the AOL and CompuServe  Agreements.  Separately,  the Company is operating
under an interim agreement with AT&T to purchase its Carrier Solutions  Platform
("CSP")  service,  subject to either party's right to terminate such  agreement.
The Company is negotiating a long term agreement with AT&T for such service. The
CSP service  provides OBN with significant  additional  capacity and enables the
Company to accommodate large numbers of additional  customers on OBN by handling
their peak load or overflow traffic.


AT&T CONTRACT TARIFFS

         The  Company  historically  has  obtained  services  from AT&T  through
contract  tariffs and has been able to obtain the services it seeks and to do so
at increasingly favorable contract tariff rates. The deployment of OBN decreases
the Company's dependence on AT&T contract tariffs or other service arrangements.
To the  extent the  Company  will need  future  service  from AT&T,  there is no
guarantee the Company will be able to obtain favorable contract tariffs or other
service  arrangements,  although the Company has been  successful in the past in
obtaining such arrangements.

         In October 1996, the Company  subscribed to a new AT&T contract  tariff
("Contract  Tariff No.  5776"),  which was amended in December 1996 and May 1997
and which permits the Company to continue to resell AT&T long distance services,
including  AT&T-SDN  service,  through mid-1998 and also includes,  through late
2000,  other AT&T services (such as  international  long  distance,  inbound and
outbound  services) that will be used in the Company's  network,  OBN. The rates
that the Company pays under  Contract  Tariff No. 5776 are more favorable to the
Company than under previous tariffs.  During its term,  Contract Tariff No. 5776
enables the Company to minimize possible attrition that might result from moving
existing end users from the AT&T network to OBN.  Contract  Tariff No. 5776 also
permitted a more gradual  introduction  of OBN, which has reduced the expense of
providing the capacity required in a more rapid phase-in of OBN and lessened the
impact of any technical difficulties during the phase-in of OBN. Contract Tariff
No. 5776 commits the Company to purchase  $285 million of service from AT&T over
its 4 year  term,  including  at least $1  million  per  month of  international
service. The Company can terminate Contract Tariff No. 5776 without liability to
AT&T effective April 30, 1998 if the Company has generated at least $105 million
in usage charges, including at least $15 million in international usage charges;
the Company had exceeded  these  thresholds by the end of 1997. If minimum usage
requirements are not met, the Company is obligated to pay shortfall fees to AT&T
based on a percentage of the difference between the minimum  requirement and the
actual  billed  usage.  In  addition,  if the  contract  tariffs  with  AT&T are
terminated  prior to the end of the contract tariff term,  either by the Company
or by AT&T for  non-payment,  the  Company may be liable for  "termination  with
liability" or "termination charges" and subject to material monetary



                                       8
<PAGE>
penalties.  The Company also may  discontinue  Contract  Tariff No. 5776 without
liability  if,  prior to April 30,  1998,  the Company and AT&T enter into a new
contract tariff or another  contract with a revenue  commitment of at least $7.5
million  per month and a term of at least the  difference  between 18 months and
the  number  of months  that the  Company  subscribed  to the  contract  tariff,
provided  that the  Company  must  purchase or pay for AT&T  services  under the
contract  tariff of at least $6.7 million per month for the months prior to such
termination, including $1 million per month of international usage.

         The Company is considering  terminating  Contract Tariff No. 5776 as of
April 30, 1998,  since,  based on its traffic  growth to date, the Company has a
one-time  opportunity  to do so without  termination  liability  and the Company
believes  that  it  will be able to  replace  the  services  thereunder  on more
favorable terms.  Such termination would free the Company from the minimum usage
and other  financial  obligations to AT&T under that contract  tariff.  It also,
however, would require the Company to make other arrangements to obtain critical
services for the  Company's  operation and provision of service to its customers
with AT&T or with another  carrier,  either  another  large  customer of AT&T or
another facilities-based carrier. The Company is in the process of negotiating a
new Master  Carrier  Agreement  (MCA) with AT&T which  would  replace all of the
Company's  existing  tariffs  with AT&T  (including  the interim  agreement  for
provision of CSP  services)  and is expected to include  certain  minimum  usage
commitments.  The Company has also engaged in discussions with other carriers to
explore  alternative  arrangements.  There can be no assurance  that the Company
will be successful in these negotiations with AT&T or other carriers. Should the
Company  terminate  Contract  Tariff No. 5776 and not reach a new agreement with
AT&T by such  termination,  the  Company  could be forced to move its traffic to
other AT&T  tariffs at rates  significantly  higher  than the  Company is paying
today.  If the Company  concludes an agreement with another  carrier,  the rates
could be higher or lower than the Company is paying today.  If the other carrier
provides these services to the Company over its own network,  end-user customers
of the Company who want to keep their service on an AT&T network-based  carrier,
and partitions who want to remain on an AT&T network-based  carrier,  may choose
to terminate their service with the Company.  In that circumstance,  the Company
may  also  be  obliged   to  notify   customers   of  a  change  in   underlying
facilities-based  carrier and the Company's  billing  arrangements with AT&T and
ACUS would have to be replaced.

         As a nondominant  carrier,  AT&T is subject to the same  regulations as
other long distance service  providers.  AT&T remains subject to Title II of the
Communications  Act (47 U.S.C.  Section  151,  et seq.) and is required to offer
service under rates,  terms and  conditions  that are just,  reasonable  and not
unreasonably discriminatory. AT&T is also subject to the FCC's complaint process
and is  required  to file  tariffs,  though  under  streamlined  procedures.  In
addition,  AT&T  is also  required  to give  notice  to the FCC and to  affected
customers prior to discontinuing, reducing, or impairing any services.

COMPETITION

         The long distance telecommunications industry is highly competitive and
affected by the  introduction of new services by, and the market  activities of,
major industry participants.  Competition in the long distance business is based
upon pricing,  customer  service,  billing services and perceived  quality.  The
Company competes  against various  national and regional long distance  carriers
composed of both  facilities-based  providers and switchless  resellers offering
essentially  the  same  services  as  the  Company.  Several  of  the  Company's
competitors are substantially  larger and have greater financial,  technical and
marketing  resources.  Although  the  Company  believes  it has  the  human  and
technical  resources  to pursue its  strategy  and compete  effectively  in this
competitive  environment,  its success will depend upon its continued ability to
provide  profitably  high  quality,  high  value  services  at prices  generally
competitive with, or lower than, those charged by its competitors.

         End users are not  obligated to purchase  any minimum  usage amount and
can discontinue service, without penalty, at any time. There can be no assurance
that end users  will  continue  to buy their  long  distance  telephone  service
through  the  Company or  through  partitions  that  purchase  service  from the
Company.  In the event that a  significant  portion of the  Company's  end users
decides to purchase  long distance  service from another long  distance  service
provider, there can be no assurance that the Company will be able to replace its
end user base from other sources.

         A high level of  attrition is inherent in the long  distance  industry,
and the  Company's  revenues  are  affected  by  such  attrition.  Attrition  is
attributable to a variety of factors,  including termination of customers by the
Company for  non-payment  and the initiatives of existing and new competitors as
they  engage  in,   among  other   things,   national   advertising   campaigns,
telemarketing programs and cash payments and other incentives.

         AT&T and  other  carriers  have  announced  new  price  plans  aimed at
residential  customers  (the  Company's  primary  target  audience under the AOL
Agreement) with  significantly  simplified rate  structures,  which may have the
impact of lowering overall long distance prices.  There can be no assurance that
AT&T or other carriers will not make similar offerings available to



                                       9
<PAGE>

the small to medium-sized businesses that the Company serves. Additional pricing
pressure may come from a new technology,  Internet telephony,  which uses packet
switching to transmit voice communications at a cost today apparently below that
of traditional  circuit-switched long distance service. While Internet telephony
is not yet available in all areas,  requires the dialing of  additional  digits,
and produces sound quality  inferior to traditional  long distance  service,  it
could  eventually  be perceived as a substitute  for  traditional  long distance
service,  and put additional  downward  pricing pressure on long distance rates.
Although  OBN makes the Company  more price  competitive,  a  reduction  in long
distance  prices  still may have a  material  adverse  impact  on the  Company's
profitability.

         One of the  Company's  principal  competitors,  AT&T,  is  also a major
supplier of services to the Company.  The Company links 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  services.  There  can be no  assurance  that  either  AT&T or ACUS will
continue to offer services to the Company at competitive  rates or on attractive
terms.

         The Telecommunications Act of 1996 (the  "Telecommunications  Act") was
intended to introduce more competition to U.S.  telecommunications  markets. The
legislation  opens  the  local  services  market  by  requiring  LECs to  permit
interconnection  to their  networks and  establishing,  among other things,  LEC
obligations with respect to access, resale, number portability,  dialing parity,
access to rights-of-way,  and mutual compensation. The legislation also codifies
the LECs' equal  access and  nondiscrimination  obligations  and  preempts  most
inconsistent  state regulation.  The Company in the future may take advantage of
the opportunities  provided by the Telecommunications Act for competition in the
local services market by reselling local services.

         The Telecommunications Act also was intended to increase competition in
the market for long distance  services by  overturning  the  prohibition  in the
Consent Decree on RBOC provision of interLATA  interexchange  telecommunications
services. See "INDUSTRY BACKGROUND." Under Section 271 of the Telecommunications
Act,  RBOCs  may  provide  certain  interLATA  services  immediately,  and other
interLATA  services  after state and federal  regulators  certify that the RBOCs
have satisfied certain conditions.  No RBOC has yet been certified by both state
and federal  regulators as having  satisfied the conditions for provision of all
interLATA  services.  However,  the FCC recently has indicated that it will work
more  cooperatively  with the RBOCs in helping  them to satisfy  the  conditions
necessary for  certification.  Several  members of Congress also have  expressed
dissatisfaction  over the slow pace of  certification,  and legislation is being
considered  to speed up RBOC entry into the long distance  market.  In addition,
one federal  district court has found that the restrictions on RBOC provision of
interLATA services are an unconstitutional bill of attainder,  but this decision
has been stayed and is under appeal.

         RBOC entry into the long  distance  market  means that the Company will
face  new  competition  from   well-capitalized,   well-known   companies.   The
Telecommunications  Act  includes  certain  safeguards  against  anticompetitive
conduct by the RBOCs in the  provision  of  interLATA  service.  Anticompetitive
conduct  could  result,  among  other  things,  from  a  RBOC's  access  to  all
subscribers  on its  existing  network as well as its  potentially  lower  costs
related to the termination and origination of calls within its territory.  It is
impossible  to predict  whether  such  safeguards  will be  adequate  to protect
against   anticompetitive   conduct  by  the  RBOCs  and  the  impact  that  any
anticompetitive  conduct  would have on the  Company's  business and  prospects.
Because of the name  recognition  that the RBOCs have in their existing  markets
and 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 RBOCs,  it may be more  difficult  for other  providers of long
distance  services,  such as the Company,  to compete to provide  long  distance
services   to  RBOC   customers.   At  the  same  time,   as  a  result  of  the
Telecommunications  Act, RBOCs have become potential customers for the Company's
long distance services.

         Consolidation  and alliances  across  geographic  regions  (e.g.,  Bell
Atlantic/Nynex  and SBC  Communications  Inc./Pacific  Telesis Group) and in the
interexchange    market   (e.g.,    WorldCom/MCI    domestically    and   France
Telecom/Deutsche  Telekom/Sprint  internationally)  and across industry segments
(e.g.,  WorldCom/MFS/UUNet  and AT&T/Teleport) may also intensify competition in
the  telecommunications  market  from  significantly  larger,   well-capitalized
carriers and  materially  adversely  affect the  position of the  Company.  Such
consolidation and alliances are providing some of the Company's competitors with
the capacity to offer a wide range of services,  including local, long distance,
and wireless telephone service,  as well as Internet access. The Company,  which
currently  offers  only  long  distance   service,   may  be  at  a  competitive
disadvantage because of its inability to offer so-called "one stop shopping."

         The Company's  online  marketing of long  distance  service is spawning
imitators  that are  attempting  to copy its major  features,  including  online
sign-up and billing and  automatic  payment  through a credit card.  The Company
cannot predict what effect these  competitors  will have on its online marketing
of long distance service.



                                       10
<PAGE>

INDUSTRY BACKGROUND

         The $82  billion  U.S.  long  distance  industry  is  dominated  by the
nation's four largest long distance  providers,  AT&T, MCI, Sprint and WorldCom,
which together generated approximately 83% of the aggregate revenues of all U.S.
long distance  interexchange  carriers in 1996.  Other long distance  companies,
some with  national  capabilities,  accounted  for the  remainder of the market.
Based on published FCC  estimates,  toll service  revenues of U.S. long distance
interexchange  carriers  have grown from $38.8 billion in 1984 to $82 billion in
1996. The aggregate market share of all interexchange  carriers other than AT&T,
MCI and  Sprint  has grown  from 2.6% in 1984 to 22.5% in 1996.  During the same
period, the market share of AT&T declined from 90.1% to 47.9%.

         Prior   to   the    Telecommunications    Act,   the   long    distance
telecommunications  industry  had  been  principally  shaped  by a court  decree
between  AT&T  and  the  United  States  Department  of  Justice,  known  as the
Modification of Final Judgment (the "Consent  Decree") that in 1984 required the
divestiture by AT&T of its 22 Bell  operating  companies and divided the country
into some 200 Local  Access and  Transport  Areas  ("LATAs").  The 22  operating
companies,  which were combined into the RBOCs,  were given the right to provide
local  telephone  service,  local access  service to long distance  carriers and
intraLATA  toll  service  (service  within  LATAs),  but  were  prohibited  from
providing  interLATA  service  (service  between  LATAs).  The right to  provide
interLATA service was maintained by AT&T and other carriers.

         To  encourage  the  development  of  competition  in the long  distance
market,  the  Consent  Decree  and the FCC  required  most LECs to  provide  all
carriers with access to local exchange services that is "equal in type,  quality
and price" to that provided to AT&T and with the  opportunity  to be selected by
customers as their  preferred  long distance  carrier.  These  so-called  "equal
access" and related provisions are intended to prevent preferential treatment of
AT&T.  Further market  opening,  access and  non-discrimination  provisions were
built into the Telecommunications Act.

         Regulatory, legislative, judicial and technological factors have helped
to create  the  foundation  for  smaller  companies  to  emerge  as  competitive
alternatives  to AT&T,  MCI,  and  Sprint  for long  distance  telecommunication
services.  The FCC requires  that AT&T not restrict the resale of its  services,
and the Consent Decree, the  Telecommunications  Act and regulatory  proceedings
have ensured  that access to LEC  networks  is, in most cases,  available to all
long distance carriers.

         Long distance companies that have their own transmission facilities and
switches,   such  as  AT&T,  are  referred  to  as  facilities-based   carriers.
Facilities-based  carriers are switch-based carriers,  meaning that they have at
least one switch to direct  their  long  distance  traffic.  Nonfacilities-based
carriers  either (i) depend upon  facilities-based  carriers for  switching  and
transmission  facilities  ("switchless  resellers")  or (ii) install and operate
their own switches  but depend on  facilities-based  carriers  for  transmission
facilities ("switch-based resellers").

         The relationship between resellers and the major long distance carriers
is  predicated  primarily  upon the fact that the  pricing  strategies  and cost
structures of the major long distance  carriers  have resulted  historically  in
their charging higher rates to the small to medium business  customer.  Small to
medium business customers  typically are not able to make the volume commitments
necessary  to  negotiate  reduced  rates  under  individualized   contracts.  By
committing to large volumes of traffic,  the reseller is guaranteeing traffic to
the major long distance  carrier but the major long distance carrier is relieved
of the administrative burden of qualifying and servicing large numbers of medium
to small accounts.  The successful reseller has lower overhead costs and is able
to market efficiently the long distance product,  process orders,  verify credit
and provide customer service to large numbers of accounts.

REGULATION

         The  Company's  provision  of  communications  services  is  subject to
government  regulation.  Federal  law  regulates  interstate  and  international
telecommunications,  while states have jurisdiction over telecommunications that
originate and terminate within the same state.  Changes in existing  policies or
regulations in any state or by the federal government could


                                       11
<PAGE>
materially  adversely  affect the  Company's  financial  condition or results of
operations,  particularly  if  those  policies  make it more  difficult  for the
Company  to  obtain  service  from  AT&T or other  long  distance  companies  at
competitive  rates,  make it more difficult for customers to change  carriers or
otherwise  increase the cost and  regulatory  burdens of marketing and providing
service.  There can be no assurance  that the  regulatory  authorities in one or
more  states or the FCC will not take  action  having an  adverse  effect on the
business  or  financial  condition  or results  of  operations  of the  Company.
Regulatory  action by the FCC or the  states  also  could  adversely  affect the
partitions, or otherwise increase the partitions' cost and regulatory burdens of
marketing and providing long distance services.

         The Company is classified by the FCC as a  nondominant  carrier.  After
the recent reclassification of AT&T as nondominant, only the LECs are classified
as  dominant  carriers  among  domestic  carriers.  As a  consequence,  the  FCC
regulates  many of the rates,  charges,  and  services  of the LECs to a greater
degree than the  Company's.  Because AT&T is no longer  classified as a dominant
carrier,  certain pricing  restrictions  that formerly applied to AT&T have been
eliminated,  which could make it easier for AT&T to compete with the Company for
low volume long distance subscribers.

         The FCC generally does not exercise  direct  oversight over charges for
service of nondominant  carriers,  although it has the statutory power to do so.
Nondominant  carriers are required by statute to offer interstate services under
rates,  terms,  and conditions  that are just,  reasonable and not  unreasonably
discriminatory.  The FCC has the  jurisdiction to act upon  complaints  filed by
third parties,  or brought on the FCC's own motion,  against any common carrier,
including  nondominant  carriers,  for  failure  to  comply  with its  statutory
obligations. Nondominant carriers have been required to file tariffs listing the
rates, terms and conditions of service, which were filed pursuant to streamlined
tariffing  procedures.  The FCC also has the authority to impose more  stringent
regulatory requirements on the Company and change its regulatory  classification
from nondominant to dominant. In the current regulatory atmosphere,  the Company
believes, however, that the FCC is unlikely to do so.

         The FCC imposes only minimal  reporting,  accounting and record-keeping
obligations.  International  nondominant  carriers,  including the Company, must
maintain international tariffs on file with the FCC. The FCC has issued an order
requiring  non-dominant  carriers to withdraw their domestic tariffs,  but as of
the date hereof, a court has stayed the FCC's order.  The Company  currently has
two tariffs on file with the FCC. Although the tariffs of nondominant  carriers,
and the rates and charges  they  specify,  are  subject to FCC review,  they are
presumed to be lawful and are seldom contested. The Company is permitted to make
tariff  filings on a single  day's  notice and without  cost  support to justify
specific rates. IXCs are also subject to a variety of miscellaneous  regulations
that, for instance,  govern the  documentation  and  verifications  necessary to
change a subscriber's  long distance  carrier,  limit the use of 800 numbers for
pay-per-call  services,  require  disclosure of certain  information if operator
assisted services are provided and govern interlocking directors and management.
The  Telecommunications  Act grants  explicit  authority to the FCC to "forbear"
from  regulating  any  telecommunications  services  provider  in  response to a
petition and if the agency  determines  that  enforcement is unnecessary and the
public interest will be served.

         At present,  the FCC  exercises its  regulatory  authority to set rates
primarily  with  respect  to  the  rates  of  dominant  carriers,   and  it  has
increasingly  relaxed its control in this area. Even when AT&T was classified as
a dominant carrier,  the FCC most recently employed a "price cap" system,  which
essentially  exempted most of AT&T's  services,  including  virtually all of its
commercial and 800 services,  from traditional rate of return regulation because
the FCC  believes  that these  services  were  subject to adequate  competition.
Similarly,  the FCC is in the process of changing the  regulation and pricing of
access charges including the local transport  component of access charges (i.e.,
the fee for use of the LEC transmission  facilities connecting the LECs' central
offices and the IXC's access points). In addition, the LECs have been afforded a
degree of  pricing  flexibility  in  setting  interstate  access  charges  where
adequate   competition   exists.  The  impact  of  such  repricing  and  pricing
flexibility on IXCs, such as the Company, cannot be determined at this time.

         The Company is subject to varying levels of regulation in the states in
which  it is  currently  authorized  to  provide  intrastate  telecommunications
services.  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.  In certain  states,
prior regulatory approval may be required for acquisitions of telecommunications
operations.  Currently,  the  Company is  certificated  and  tariffed to provide
intrastate   interLATA   service  in   substantially   all  states   where  such
authorization can be obtained.
<PAGE>

         The Company's prior direct marketing efforts,  the Company's  marketing
of its AOL  and  CompuServe-based  services  and the  marketing  efforts  of the
Company's   partitions  require  compliance  with  relevant  federal  and  state
regulations that govern

                                       12
<PAGE>

direct sales of  telecommunications  services.  FCC rules  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.   The
constraints  of federal and state  restrictions  could impact the success of the
Company's direct marketing efforts.

         Federal and state  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). Section 258
of the Telecommunications Act of 1996 authorized  strengthened penalties against
slamming,  and the FCC is expected shortly to issue rules  implementing  Section
258  and   overhauling   federal  rules  on  the   verification  of  orders  for
telecommunications services. Congress is considering additional legislation that
would further increase penalties for slamming and cramming.  Several states also
have  been  active  in  combating  abusive   marketing   practices  through  new
legislation and regulation,  as well as through enhanced enforcement activities.
In addition,  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 in lieu of having the long distance  carrier  contact the local carrier
on behalf  of the  customer.  While the  Company  vigorously  supports  curbs on
abusive marketing practices,  such measures, unless carefully designed, can have
the  incidental  effect of  entrenching  incumbent  carriers and  hindering  the
emergence of new competitors, such as the Company.

         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 recently  released  rules to implement
Section 222 of the Telecommunications Act of 1996 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  services
(such as local and  wireless) to its existing  customers if and when the Company
begins to offer such services.

         The  FCC  has  announced   rules   implementing   Section  254  of  the
Telecommunications  Act of 1996 that require 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  required
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.

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

EMPLOYEES

         As of December 31, 1997,  the Company  employed 235 persons,  of whom 5
were engaged in marketing and sales,  179 were engaged in partition and end user
support, and 51 were engaged in systems development, finance, administration and
management.  None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.




                                       13
<PAGE>


                                    GLOSSARY

ACUS: AT&T College and University  Systems,  a wholly owned  strategic  business
unit of AT&T Corp.

AIN:  Advanced Intelligent Network.

Consent  Decree:  A 1984 U.S.  Department  of Justice  decree that,  among other
things,   ordered  AT&T  to  divest  its   wholly-owned   local  Bell  operating
subsidiaries.

End users: Customers that utilize long distance telephone services.

Equal  Access:  Connection  provided  by a  LEC  permitting  a  customer  to  be
automatically  connected to the IXC of the  customer's  choice when the customer
dials "1."

Facilities-based  provider: Long distance service providers who own transmission
facilities.

5ESS-2000:  The switching equipment manufactured by AT&T (now Lucent), which the
Company acquired from AT&T (now Lucent).

FCC: Federal Communications Commission.

Inbound "800" Service:  A service that bills long distance  telephone charges to
the called party.

IXC:  Interexchange  carrier, a long distance carrier providing services between
local exchanges.

LATA: Local Access and Transport Areas, the  approximately  200 geographic areas
defined  pursuant to the Consent  Decree  between  which the RBOCs are generally
prohibited from providing long distance service.

LEC: Local Exchange Carrier, a company providing local telephone services.

MEGACOM:  An outbound  long  distance  service  offering  by AT&T that  requires
dedicated access.

MEGACOM  800:  An inbound 800 service  offering  provided by AT&T that  requires
dedicated access.

MCI: MCI Communications Corporation.

MLCP: AT&T's multi-location calling plan (a discounted long distance program).

Network:  An integrated system composed of switching  equipment and transmission
facilities  designed to provide for the  direction,  transport  and recording of
telecommunications traffic.

Nonfacilities-based  provider:  Long distance service  providers that do not own
transmission facilities.

OBN: One Better Net, the Company's nationwide long distance network.

Partition:  An  independent  long distance and marketing  company that contracts
with the Company to purchase or otherwise provide to end users the long distance
services provided by the Company.

Private Line: A full-time leased line directly connecting two points.

Provisioning: The process of initiating a carrier's service to an end user.

PUC: A state  regulatory  body  empowered  to  establish  and enforce  rules and
regulations  governing public utility companies and others,  such as the Company
in many of its state jurisdictions.

RBOC:  Regional  Bell  Operating  Company -- Any of seven  regional Bell holding
companies that the Consent Decree  established to serve as parent  companies for
the Bell operating companies.



                                       14
<PAGE>

Readyline: An Inbound 800 service offering provided by AT&T.

SDN: The AT&T Software Defined Network.

Sprint: Sprint Corporation.

Switching  Equipment:  A  computer  that  directs  telecommunication  traffic in
accordance with programmed instructions.

Tariff:  The  schedule of rates and  regulations  set by  communications  common
carriers and filed with the appropriate  Federal and state regulatory  agencies;
the published official list of charges, terms and conditions governing provision
of a specific  communication service or facility,  which functions in lieu of or
with a contract between the user and the supplier or carrier.


                                       15
<PAGE>


ITEM 2.    PROPERTIES

         The  Company  owns  the  24,000  square  foot  facility  in  New  Hope,
Pennsylvania  which serves as the  Company's  headquarters.  The Company  leases
properties in the cities in which OBN switches have been installed.

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

         With  respect  to  the  Company's  Symetrics   operations,   Symetrics'
corporate office and primary engineering and manufacturing  facility is a 40,000
square foot building,  which it owns, on approximately  five acres in Melbourne,
Florida.  Symetrics  uses 40% of this  facility  for its own business and leases
and/or  offers for lease the balance of the building for terms  typically of one
to five years.  Rental rates charged by Symetrics are consistent  with rates for
similar type buildings in the area. The Company also owns the adjoining property
to the east which  consists of a 50,000 square foot building on a five-acre lot.
The Company  leases a 14,500 square foot building for $6,360 per month,  with 27
months  remaining on the term  thereof,  for the Symetrics  commercial  contract
manufacturing  operations.  Symetrics'  subsidiary  leases a 14,428  square foot
building for  approximately  $7,500 per month,  with 47 months  remaining on the
lease.

ITEM 3.    LEGAL PROCEEDINGS

         The Company is a party to certain legal actions arising in the ordinary
course of business.  The Company  believes  that the  ultimate  outcome of these
actions  will not result in any  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 1, 1997 ("Annual Meeting");

         (b)      Not applicable;

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

                  (i)      At the Annual Meeting,  the  stockholders  approved a
                           proposal  to  amend  the  Company's   Certificate  of
                           Incorporation  to  increase  the  number of shares of
                           Common  Stock that may be issued by the Company  from
                           100,000,000 to  300,000,000.  This proposal  received
                           51,571,254  votes in favor,  4,483,173  votes opposed
                           such  proposal and 27,485 votes  abstained  from such
                           matter.

                  (ii)     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>            <C>
                     2000                        Gary W. McCulla           55,981,895            0              100,017
                     2000                        George P. Farley          55,981,952            0               99,960
                     1999                        Harold First              55,981,952            0               99,960

</TABLE>
                  (iii)    At the Annual Meeting the  stockholders  approved the
                           appointment   of  BDO  Seidman  LLP  as   independent
                           certified   public  accounts  of  the  Company.   The
                           appointment received 56,047,874 votes in favor, 6,180
                           votes in opposition  and 27,858 votes  abstained from
                           such matter.

                                       16

<PAGE>

                  (iv)     At the Annual  Meeting  the  stockholders  approved a
                           proposal  to  approve  the  grant  of  an  option  to
                           purchase 800,000 shares of the Company's Common Stock
                           to Edward B. Meyercord,  III. This proposal  received
                           55,776,343   votes  in   favor,   273,819   votes  in
                           opposition  and  31,750  votes  abstained  from  such
                           matter.


                                       17
<PAGE>

                        EXECUTIVE OFFICERS OF THE COMPANY

         The executive officers of the Company are as follows:

<TABLE>
<CAPTION>

              NAME                       AGE                                    POSITION
---------------------------------        ---          --------------------------------------------------------------
<S>                                       <C>         <C>
Daniel Borislow                           36          Chairman of the Board, Chief Executive Officer and Director
Gary W. McCulla                           38          President and Director of Sales and Marketing and Director
Emanuel J. DeMaio                         38          Chief Operations Officer and Director
George P. Farley                          59          Chief Financial Officer, Treasurer and Director
Edward B. Meyercord, III                  32          Executive Vice President, Marketing and Corporate Development
Mary Kennon                               38          Director of Customer Care and Human Resources
Aloysius T. Lawn, IV                      39          General Counsel and Secretary
Kevin R. Kelly                            33          Controller

</TABLE>

         DANIEL  BORISLOW.  Mr. Borislow founded the Company and has served as a
director and as Chief  Executive  Officer of the Company  since its inception in
1989.  Prior to founding the Company,  Mr.  Borislow  formed and managed a cable
construction company.

         GARY W. MCCULLA. Mr. McCulla currently serves as President and Director
of Sales and Marketing.  In 1991, Mr. McCulla founded GNC and was its President.
Until March 1994, GNC was a privately-held independent marketing company and one
of the Company's  partitions.  At that time, the Company acquired certain assets
of GNC.

         EMANUEL J. DEMAIO.  Mr.  DeMaio joined the Company in February 1992 and
currently serves as Chief Operations Officer. Prior to joining the Company, from
1981 through 1992, Mr. DeMaio held various  technical and  managerial  positions
with AT&T.

         GEORGE P.  FARLEY.  Mr.  Farley  became  Chief  Financial  Officer  and
Treasurer of Tel-Save  effective  October 29, 1997. Mr. Farley is formerly Group
Vice President of Finance/Chief  Financial Officer of Twin County Grocers,  Inc.
("Twin County"),  a food distribution  company.  Prior to joining Twin County in
September  1995,  Mr.  Farley was a partner of BDO  Seidman,  LLP,  where he had
served as a partner since 1974.

         EDWARD B. MEYERCORD, III. Mr. Meyercord joined the Company in September
1996 and currently  serves as Executive Vice President,  Marketing and Corporate
Development.  From 1993 until joining the Company,  Mr.  Meyercord worked in the
corporate  finance  department  of  Salomon  Brothers,  where  he  held  various
positions, the most recent of which was Vice President. Prior to joining Salomon
Brothers,  Mr.  Meyercord  worked in the corporate  finance  department at Paine
Webber Incorporated.

         MARY  KENNON.  Ms.  Kennon  joined  the  Company  in  October  1994 and
currently  serves as  Director of Customer  Care and Human  Resources.  Prior to
joining the Company,  from 1984 through 1994, Ms. Kennon held various managerial
positions with AT&T.

         ALOYSIUS T. LAWN,  IV. Mr. Lawn joined the Company in January  1996 and
currently  serves as General  Counsel and  Secretary  of the  Company.  Prior to
joining the Company, from 1985 through 1995, Mr. Lawn was an attorney in private
practice.

         KEVIN R.  KELLY.  Mr.  Kelly  joined  the  Company  in  April  1994 and
currently  serves as  Controller.  From 1987 to 1994,  Mr.  Kelly  held  various
managerial  positions  with a major  public  accounting  firm.  Mr.  Kelly  is a
certified public accountant.




                                       18
<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,  and high and low  quotations  listed
below are actual sales prices as quoted in the Nasdaq  National Market under the
symbol  "TALK." The price per share in the  following  table sets forth the high
and low  price in the  Nasdaq  National  Market  for the  quarter  indicated  as
reported by Bloomberg L.P.:

<TABLE>
<CAPTION>
                                                                                Price Range of Common Stock

                                                                                  High                Low
                                                                                  ----                ---
<S>                                                                            <C>                 <C>  
1995
   First Quarter (from September 20, 1995)                                     $  5 21/64          $  4 27/64

1996
   First Quarter                                                                   8 7/16             4 5/64
    Second Quarter                                                                11 7/8              8 1/4
   Third Quarter                                                                  14 3/4              9 5/8
   Fourth Quarter                                                                 14 1/2              10 3/8

1997
   First Quarter                                                                   20 1/2             12 5/8
   Second Quarter                                                                  17 1/4             13 9/16
   Third Quarter                                                                   24 1/16            14 1/4
   Fourth Quarter                                                                  26 1/16            16 5/16

1998
   First Quarter (through March 30, 1998)                                          30                 19 1/4

</TABLE>

         As of March,  1998,  there were  approximately  299  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 November  26,  1997,  the Company  acquired  all of the  outstanding
shares of Compco for $15,000,000,  comprised of a cash payment of $7,500,000 and
the issuance to Compco's  stockholders of 339,982 shares of the Company's Common
Stock. The Company believes that such sale of stock was exempt from registration
under Section 4(2) under the Securities Act.

         On December 10, 1997, the Company sold $200,000,000 aggregate principal
amount of 5% Convertible  Subordinated  Notes due 2004 (the "5% Notes") to Smith
Barney Inc.,  Deutsche Morgan Grenfell Inc. and UBS Securities LLC, who acted as
Initial  Purchasers  in an offering  relying on the exemption in ss. 4(2) of the
Securities Act of 1933, as amended.  Proceeds to the Company were  $195,000,000.
The 5% Notes are convertible,  at the option of the holder thereof,  at any time
after 90 days following the date of issuance thereof and prior to maturity, into
shares of Common Stock at a conversion price of $25.47, subject to adjustment in
certain events.




                                       19
<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,
                                                -----------------------------------------------------------------------------
                                                   1997            1996            1995            1994             1993
                                                   ----            ----            ----            ----             ----
                                                                  (In thousands, except per share amounts)
<S>                                              <C>             <C>            <C>               <C>              <C>
Consolidated Statements of Income Data:
Sales                                            $304,768        $232,424       $180,102          $82,835          $31,940
Cost of sales                                     355,169         200,597        156,121           70,104           26,715
Gross profit (loss)                               (50,401)         31,827         23,981           12,731            5,225
Selling, general and administrative
   expenses                                        34,650          10,039          6,280            3,442            2,060

Operating income (loss)                           (85,051)         21,788         17,701            9,289            3,165
Investment and other income, net                   50,715          10,585            331               66              108

Income (loss) before income taxes                 (34,336)         32,373         18,032            9,355            3,273
Provision (benefit)  for income taxes(1)          (13,391)         12,205          7,213            3,742            1,309

Net income (loss) (1)                            $(20,945)       $ 20,168      $  10,819         $  5,613         $  1,964

Net income (loss) per share - Basic (1)          $  (0.33)       $   0.38      $    0.34         $   0.20         $   0.07

Weighted average common shares
outstandin- Basic                                  64,168          52,650         31,422           28,650           28,650

Net income (loss) per share - Diluted(1)         $  (0.33)       $   0.35      $    0.32         $   0.18         $   0.07

Weighted average common and common
   equivalent shares outstanding -Diluted          64,168          57,002         33,605           30,663           29,452

<CAPTION>
                                                                             AT DECEMBER 31,
                                               ----------------------------------------------------------------------------
                                                   1997            1996             1995            1994           1993
                                                   ----            ----             ----            ----           ----
                                                                             (In thousands)
<S>                                              <C>              <C>               <C>            <C>            <C>
Consolidated Balance Sheets Data:
Working capital                                  $634,788         $175,597          $38,171        $12,265        $4,502
Total assets                                      814,891          257,008           71,388         21,435         6,694
Convertible debt                                  500,000               --               --             --            --
Total stockholders' equity                        222,828          230,720           41,314         14,042         4,687

</TABLE>

----------
(1)   For the years and period ended  December 31, 1993,  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.  See Note 12 to the
      Consolidated Financial Statements.



                                       20
<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.

OVERVIEW

         In 1997,  the Company raised  approximately  $500 million in connection
with two private  placements of convertible  notes. In addition,  as part of its
efforts to expand its business into the online market,  the Company entered into
the  AOL   Agreement,   under  which  the   Company   provides   long   distance
telecommunications  services  to be marketed by AOL.  The  Company's  results of
operations  for 1997 were  negatively  impacted by the pre-tax  charges of $60.7
million primarily related to the AOL Agreement,  $30.0 million primarily related
to the  restructuring  of its  sales and  marketing  efforts  and $11.5  million
primarily  as a result  of the  Company's  change  in  accounting  for  customer
acquisition  costs. These charges were offset by $32 .1 million of other income,
net of related costs,  associated with the break-up of a proposed merger between
the Company and Shared Technologies Fairchild, Inc. ("STF").

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                      1997                1996               1995
                                                                      ----                ----               ----
<S>                                                                  <C>                  <C>                <C> 
Sales                                                                100.0%              100.0%             100.0%
Cost of sales                                                        116.5                86.3               86.7
                                                                     -----               -----              -----
Gross profit (loss)                                                  (16.5)               13.7               13.3
Selling, general and administrative expenses                          11.4                 4.3                3.5
                                                                     -----               -----              -----
Operating income (loss)                                              (27.9)                9.4                9.8
Investment and other income, net                                      16.6                 4.5                0.2
                                                                     -----               -----              -----
Income (loss) before income taxes                                    (11.3)               13.9               10.0
Provision (benefit) for income taxes                                  (4.4)                5.2                4.0(A)
                                                                     -----               -----              -----
Net income (loss)                                                     (6.9)%               8.7%               6.0%
                                                                     =====               =====              =====
</TABLE>


----------
(A)   Pro forma tax provisions have been calculated as if the Company's  results
      of operations were taxable as a C corporation  (the Company's  current tax
      status) for the year ended December 31, 1995. Prior to September 20, 1995,
      the Company was an S Corporation  with all earnings  taxed directly to its
      shareholders.




                                       21
<PAGE>
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.

         Although  the  Company  expects  sales to increase by virtue of the AOL
Agreement and,  based on its expertise to date, to have attracted  approximately
1,000,000  lines to its  service by June 30,  1998 as a result of its  marketing
campaign  under the AOL  Agreement  in view of the intense  competition  in this
industry,  there can be no assurance  that the Company will increase  sales on a
quarter-to-quarter or year-to-year basis.

         Cost of Sales. The Company's cost of sales increased by 77.1% to $355.2
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 (Note 3), $60.7  million  primarily
related to the AOL Agreement (Note 4) and $30.0 million primarily related to the
restructuring of its sales and marketing efforts (Note 3).

         Prior to 1997,  network  usage  costs  consisted  solely  of  "bundled"
charges from AT&T.  Beginning in 1997,  the Company  also  incurred  "unbundled"
charges, including local access fees, associated with the operation of OBN. Both
"bundled"  and  "unbundled"  charges are  directly  related to calls made by the
Company's end users.

         During 1997, the Company  acquired most of the services  purchased from
AT&T for resale or use in OBN under AT&T  Contract  Tariff No.  5776,  which was
entered into in late 1996 and provides  rates that are more favorable than under
previous tariffs.  The Company has the opportunity to terminate this AT&T tariff
without  termination  liability  effective  as of April 30,  1998 and  currently
expects it will do so since it believes  that it can replace  these  services at
more favorable  rates.  While the Company is currently  negotiating a new master
services  contract with AT&T, which would replace all of the Company's  existing
AT&T tariffs with what the Company  expects would be lower rate  tariffs,  there
can be no  assurance  that  such  agreement  can  be  reached.  If  the  Company
terminates  Contract  Tariff No.  5776 and is  unsuccessful  in  reaching a more
favorable  agreement with AT&T, it would be required to pay more to obtain these
services  from AT&T or  negotiate  an agreement  with  another  carrier,  either
another large customer of AT&T or another facilities based carrier, which may be
at rates higher or lower than the Company is paying today.

         OBN and the  operation of the  Company's own switches and network have
to date and  will in the  future  require  the  Company  to  incur  systems  and
equipment maintenance,  lease and network personnel expenses significantly above
the levels  historically  experienced by the Company as a switchless reseller of
AT&T services.  However,  these per call costs, in combination  with "unbundled"
charges paid to LECs and AT&T, were, in 1997, and are expected in the future, to
be less than the per call cost currently incurred by the Company as a switchless
reseller paying "bundled"  charges to AT&T. 

         The  Company  made an  initial  payment  of $100  million to AOL at the
signing  of the AOL  Agreement  and  issued to AOL at signing  two  warrants  to
purchase shares of the Company's Common Stock at a premium over the market value
of such stock on the  issuance  date (See Note 4). Of the prepaid AOL  marketing
costs, approximately $57.0 million was charged to expense in 1997. The remaining
portion of the prepaid  AOL  marketing  costs  (approximately  $63.6  million at
December  31, 1997) will be  recognized  ratably over the balance of the term of
the AOL  Agreement,  the  initial  term of which  expires on June 30,  2000,  as
advertising  services are received.  The AOL warrant for up to 7 million  shares
will be valued and charged to expense as and when  subscribers  to the Company's
services under the AOL Agreement sign-up and the shares under such warrant vest.
The amount of such  charges,  which could be  significant,  will be based on the
extent to which such AOL warrants  vest and the market  prices of the  Company's
Common Stock at the time of vesting and therefore such charges are not currently
determinable.  Generally,  the higher the market price of the  Company's  Common
Stock at the time of  vesting,  the larger the amount of the charge will be. The
Company also  anticipates that it may incur up to $100 million in additional AOL
marketing  expenses in 1998 for such  marketing  efforts as direct  mail,  media
campaigns and special pricing and other promotions.

                                       22
<PAGE>
         The  Company  has  traditionally  operated  primarily  as  a  wholesale
reseller of long distance services.  With the introduction of the AOL Agreement,
the  Company  has begun to focus on a more  retail-oriented  business  plan.  As
discussed  above,  the Company has  incurred,  and expects to continue to incur,
significant upfront expenses for marketing under the AOL Agreement, the revenues
from which may not be realized  for some period of time after the  expenditures.
In addition,  approximately  15-20% of the orders under the AOL  Agreement  have
required special  attention by the Company because of PIC freezes imposed by the
regional Bell operating companies. See "ITEM  1--BUSINESS--REGULATIONS."  As the
Company  focuses more on the retail market in 1998,  continuing  its  activities
under   the  AOL  and   CompuServe   Agreements   and   venturing   into   other
telecommunications  services such as  dial-around  and local  service,  with the
increased  development  and  promotional  expenses,  such as special pricing and
other  promotion and  retention  devices,  entailed in retail  marketing and the
greater time period between  expenditures  and resulting  revenues,  the Company
anticipates that its 1998 revenues and income could be adversely affected.

         Gross Margin.  Gross margin  decreased to (16.5)% 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 those paid to AT&T. 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.

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative  expenses increased by 245.2% to $34.7 million in 1997 from $10.0
million in 1996. The increase in selling,  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.

         The Company expects  selling,  general and  administrative  expenses to
continue to increase as it operates and  maintains OBN and as it markets the AOL
service offering.  The additional selling,  general and administrative  expenses
may be offset by the increased  sales and gross profit gained as a result of the
implementation of the components of the Company's  strategic plan, but increased
costs may have an adverse  impact on results of  operations  and there can be no
assurances of such increased sales and profits.

         The  Company  granted  options to  purchase  810,000  shares of Company
Common Stock at an exercise  price of $17.50 per share to an  executive  officer
and two outside  directors.  The options  granted are subject to the approval of
the  stockholders  and  are  being  submitted  for  approval  at  the  Company's
stockholder meeting scheduled in May of 1998. Approval of the option grants will
result in  compensation  expense  equal to the  difference  between the exercise
price  and the  market  value of the  Company  Common  Stock on the date of such
approval.

         Other  Income.  Other  income was $50.7  million in 1997  versus  $10.6
million in 1996.  Other income 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 due to an
anticipated higher effective state tax rate in 1997.

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

         Sales.  Sales  increased by 29.1% to $232.4 million in 1996 from $180.1
million in 1995.  The  increase  in sales  related  primarily  to the  continued
expansion  of the  Company's  distribution  network  of  partitions,  as well as
increases  in  the  number  of  orders  submitted  by  the  Company's   existing
partitions.  One partition,  The Furst Group, Inc.,  accounted for approximately
11% of the Company's sales in 1996 versus zero in 1995. In addition, significant
partition  marketing efforts focused on inbound 800 service resulted in sales of
$75.3 million for the year ended  December 31, 1996 versus $55.6 million for the
year ended December 31, 1995.

         Cost of Sales.  The Company's  cost of sales,  consisting  primarily of
network  usage charges for AT&T long  distance  services,  increased by 28.5% to
$200.6  million in 1996 from $156.1  million in 1995 and is directly  related to
the 29.1% increase in sales.

         Gross Margin.  Gross margin, the gross profit as a percentage of sales,
increased to 13.7% for the year ended  December 31, 1996 from 13.3% for the year
ended  December  31,  1995.  The  increase  in gross  margin  was due to greater
discounts  obtained  from  AT&T on  network  usage  partially  offset  by direct
marketing expenses and higher volume discounts granted to certain partitions.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased by 59.9% to $10.0  million in 1996 from $6.3
million in 1995. The increase in selling,  general and  administrative  expenses
was due  primarily to the costs  associated  with hiring  additional  management
personnel to support the  Company's  continuing  growth and  increased  fees for
professional services.

         Other Income. Other income was $10.6 million in 1996 versus $331,000 in
1995.   Other  income  for  the  year  ended  December  31,  1996  includes  two
nonrecurring  gains:  a $1.4 million gain on the sale of  securities  of another
long distance

                                       23
<PAGE>
company  and a $1.5  million  gain  on the  sale of  short  term  U.S.  Treasury
securities.  The  remainder of other  income  consists  primarily of  investment
income  earned on the  Company's  cash  balances  resulting  primarily  from the
unapplied  proceeds of the Company's  public  offering in April and May 1996 and
excess cash from operations.

         Provision for income taxes.  The Company's  effective tax rate declined
to 37.7% in 1996 from the pro forma  effective  tax rate of 40.0% in 1995 due to
the lower effective state tax rate in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has since September 1995 raised capital  primarily  through
public and  private  distributions  of its  securities.  In fall 1995 and spring
1996, the Company consummated public offerings of shares of the Company's Common
Stock  and  received  net  proceeds  of  $42.8   million  and  $139.1   million,
respectively.

         In September  1997,  the Company  privately 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 is due and payable
semiannually  on March 15 and  September 15 of each year.  The 2002  Convertible
Notes are  convertible,  at the option of the holder thereof,  at any time after
December 9, 1997 and prior to maturity,  unless previously redeemed, into shares
of the Company's  Common Stock at a conversion price of $24.61875 per share. 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.

         In  December  1997,  the  Company  privately  sold $200  million  of 5%
Convertible  Subordinated  Notes which  mature on  December  15, 2004 (the "2004
Convertible  Notes").  Interest on the 2004 Convertible Notes is due and payable
semiannually on June 15 and December 15 of each year. The 2004 Convertible Notes
are convertible, at the option of the holder thereof, at any time after March 5,
1998 and prior to  maturity,  unless  previously  redeemed,  into  shares of the
Company's  Common  Stock at a  conversion  price of $25.47 per  share.  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 1996,  certain  options and  warrants to purchase  shares of the
Company's Common Stock were exercised and the Company repurchased  approximately
428,000 shares,  which are held as treasury shares,  yielding to the Company net
proceeds of $7.8 million.  During 1997, certain options and warrants to purchase
shares of the Company's Common Stock were exercised and the Company  repurchased
certain  Common  Stock  Warrants,  yielding to the Company net proceeds of $16.9
million.  In addition,  during 1997 the Company  repurchased  approximately  3.5
million shares of the Company's Common Stock, which are held as treasury shares,
for approximately  $72.0 million.  The tax benefit realized from the options and
warrants was  approximately  $21.3 million in 1996 and $25.7 million in 1997 and
is reflected as an adjustment to additional paid-in capital.

         The Company's  working capital was $634.8 million and $175.6 million at
December 31, 1997 and December 31, 1996, respectively.  The significant increase
in  working  capital  is  primarily  a  result  of the sale of the 2002 and 2004
Convertibles  Notes,  discussed above. In the first quarter of 1998, the Company
invested $300 million in a tax exempt bond fund, $245 million in government bond
funds and incurred  $155 million of margin  account  indebtedness  in connection
with these investments.

         While the Investment  Company Act of 1940, as amended (the  "Investment
Company  Act"),   principally  regulates  vehicles  for  pooled  investments  in
securities,  such as mutual  funds,  it also may be deemed to be  applicable  to
companies  that are not  organized  for the purpose of  investing  or trading in
securities but nonetheless have more than a specified percentage of their assets
in  investment  securities.  The  Company is  engaged in the  telecommunications
business, and the availability of cash and liquid securities is important to the
Company's   ability  to  take  advantage  of   opportunities  to  acquire  other
telecommunications  businesses,  assets and technologies  from time to time. The
Company believes, therefore, that its activities do not and will not subject the
Company to regulation under the Investment Company Act. However,  if the Company
were  to be  deemed  to be an  investment  company  within  the  meaning  of the
Investment Company Act, the Company would become subject to certain restrictions
relating  to  the  Company's   activities,   including,   but  not  limited  to,
restrictions on the conduct of its business, the nature of its investments,  the
issuance  of  securities  and  transactions  with  affiliates.   Therefore,  the
characterization  of the Company as an investment  company would have a material
adverse effect on the Company.  In the Indenture  governing the 2002 Convertible
Notes, the Company has covenanted that it will not become an investment  company
within the meaning of the Investment  Company Act and that it will take all such
actions as are  necessary  in order to continue  not to be deemed an  investment
company.

         In light of the Company's cash position, the Company recently notified
its bank of its intention to terminate its line of credit.

         The Company invested $28.9 million in capital equipment during 1997, of
which  $17.1  million  was used for the  acquisition  of capital  equipment  and
installation  costs relating to the deployment of OBN and the remainder of which
was  primarily  used for the  acquisition  of  computer  equipment  utilized  in
connection with the offering of the Company's  services on AOL. To date, through
December 31, 1997, the Company has invested $41.9 million for the acquisition of
capital equipment and installation costs relating to the deployment of OBN.

         The Company  generally  does not have a  significant  concentration  of
credit  risk with  respect to  accounts  receivable  due to the large  number of
partitions  and 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 has announced  that its Board has authorized the repurchase
up to eight  million  shares of its Common  Stock.  It is  anticipated  that the
repurchased  shares  will be held in  treasury  for  issuance  upon  exercise of
outstanding  options and warrants and upon  conversion,  if any, of  convertible
notes, and for other general  corporate  purposes.  As noted above in connection
with the AOL  Agreement,  the  Company  issued two  warrants  to AOL to purchase
shares of the Company's Common Stock,  including a warrant to purchase 5 million
shares at an exercise price of $15.50 per share.  AOL is exercising this warrant
as to 1 million  shares of Company  Common Stock on a net issuance basis and the
Company is repurchasing  from AOL all of the 380,624 shares issued upon such net
issuance exercise for $23 1/4 per share. In connection with such purchases,  AOL
agreed not to dispose of any shares of the  Company's  Common Stock  acquired by
AOL under any of these warrants until March 30, 1999.

                                       24
<PAGE>
         The  Company  believes  that  its  current  cash  position,  marketable
securities 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.

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.  As such,  dates  after  January  1, 2000  could be
misidentified,  and such  programs  could fail.  The Company  has  examined  its
computer-based  systems and believes that the "Year 2000" problem is not present
in such  systems.  However,  the  Company is  dependent  upon  computer  systems
operated by third parties,  such as LECs,  AT&T, AOL and other vendors. If those
systems  were to  malfunction  due to the "Year  2000"  problem,  the  Company's
services could fail, as well. Such failures could have a material adverse effect
upon the Company's business, results of operations and financial  condition. The
Company is inquiring of such third parties to determine  the effect,  if any, of
the "Year 2000" problem on the systems upon which the Company is dependent,  and
to obtain appropriate assurances that no such problem exists.

                                    * * * * *

         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
AT&T or 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.




                                       25
<PAGE>


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

<S>                                                                                                       <C>
Report of Independent Certified Public Accountants                                                        27

Consolidated balance sheets as of December 31, 1997 and 1996                                              28

Consolidated statements of operations for the years ended December 31, 1997, 1996, and 1995               29

Consolidated statements of stockholders' equity for the years ended December 31, 1997, 1996 and 1995      30

Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995                31

Notes to consolidated financial statements                                                                32

</TABLE>



                                       26
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Tel-Save  Holdings,  Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 1997.  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
Holdings,  Inc.  and  subsidiaries  as of December  31,  1997 and 1996,  and the
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1997 in  conformity  with  generally  accepted
accounting principles.

BDO Seidman, LLP

New York, New York
February 5, 1998



                                       27
<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                        -------------------------------------------
                                                                               1997                    1996
                                                                               ----                    ----
                              ASSETS
<S>                                                                         <C>                     <C>
CURRENT:
   Cash and cash equivalents                                                $316,730                $  8,023
   Marketable securities                                                     212,269                 149,237
   Accounts receivable, trade net of allowance for uncollectible
     accounts of $2,419 and $987, respectively                                44,587                  19,971
   Advances to partitions and note receivables                                26,110                  13,410
   Due from broker                                                            21,087                     867
   Prepaid AOL marketing costs - current                                      30,857                     --
   Deferred taxes - current                                                   30,916                     --
   Prepaid expenses and other current assets                                   8,495                  10,377
                                                                            --------                --------
       Total current assets                                                  691,051                 201,885
Property and equipment, net                                                   55,835                  30,097
Intangibles, net                                                              10,590                  21,102
Prepaid AOL marketing costs                                                   32,722                      --
Other assets                                                                  24,693                   3,924
                                                                            --------                --------
       Total assets                                                         $814,891                $257,008
                                                                            ========                ========
               LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
   Accounts payable and accrued expenses:
      Trade and other                                                       $  16,858               $  19,404
      Partitions                                                                7,740                   4,398
      Interest and other                                                       10,578                   1,619
   Securities sold short                                                       21,087                     867
                                                                            ---------               ---------
       Total current liabilities                                               56,263                  26,288
Convertible debt                                                              500,000                      --
Deferred revenue                                                               35,800                      --
----------------                                                            ---------               ---------
       Total liabilities                                                      592,063                  26,288
                                                                            ---------               ---------
Commitments and Contingencies
Stockholders' equity
   Preferred stock, $.01 par value, 5,000,000 shares authorized;
     no shares outstanding                                                         --                      --
   Common stock - $.01 par value, 300,000,000 shares authorized;
     67,249,635 and 62,237,998 issued, respectively                               672                     622
   Additional paid-in capital                                                 291,952                 210,616
   Retained earnings                                                            3,097                  24,042
   Treasury stock                                                             (72,893)                 (4,560)
                                                                             --------                --------
       Total stockholders' equity                                             222,828                 230,720
                                                                             --------                --------
       Total liabilities and stockholders' equity                            $814,891                $257,008
                                                                             ========                ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       28
<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                   1997                1996                1995
                                                                   ----                ----                ----
<S>                                                               <C>                 <C>                  <C>    
Sales                                                            $304,768            $232,424             $180,102
Cost of sales                                                     355,169             200,597              156,121
                                                                 --------            --------             --------
Gross profit (loss)                                               (50,401)             31,827               23,981
Selling, general and administrative expenses                       34,650              10,039                6,280
                                                                 --------            --------             --------
Operating income (loss)                                           (85,051)             21,788               17,701
Investment and other income, net                                   50,715              10,585                  331
                                                                 --------            --------             --------
Income (loss) before provision for income taxes                   (34,336)             32,373               18,032
Provision (benefit) for income taxes                              (13,391)             12,205                8,997
                                                                 --------            --------             --------
Net income (loss)                                                $(20,945)           $ 20,168             $  9,035
                                                                 ========            ========             ========
Net income (loss) per share - Basic                              $   (.33)           $    .38
                                                                 ========            ========
Weighted average common shares outstanding - Basic                 64,168              52,650
                                                                 ========            ========
Net income (loss) per share - Diluted                            $   (.33)           $    .35
                                                                 ========            ========
Weighted average common and common equivalent shares               64,168              57,002
                                                                 =========           ========
   outstanding - Diluted

Pro forma:
Income before provision for income taxes                                                                  $ 18,032
Pro forma provision for income taxes                                                                         7,213
                                                                                                          --------
Pro forma net income                                                                                      $ 10,819
                                                                                                          ========
Pro forma net income per share - Basic                                                                    $    .34
                                                                                                          ========
Weighted average common share outstanding - Basic                                                           31,422
                                                                                                          ========
Pro forma net income per share - Diluted                                                                  $    .32
                                                                                                          ========
Weighted average common and common equivalent shares                                                        33,605
                                                                                                          ========
   outstanding - Diluted

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




                                       29
<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                     COMMON STOCK             ADDITIONAL                         TREASURY STOCK
                              --------------------------      PAID-IN         RETAINED     --------------------------
                                SHARES         AMOUNT         CAPITAL         EARNINGS       SHARES          AMOUNT          TOTAL
                              -----------    -----------    -------------    -----------   -----------    ------------    ---------
<S>                               <C>           <C>          <C>            <C>             <C>           <C>            <C>
Balance, January 1, 1995          9,550         $  95        $      --      $  13,947         --          $     --       $  14,042
   Net income                        --            --               --          9,035         --                --           9,035
   Cash distributions                --            --               --        (13,200)        --                --         (13,200)
   Stock redemption                  --            --               --        (11,400)        --                --         (11,400)
   Reclassification of S      
   Corporation deficit               --            --           (5,492)         5,492         --                --              --
   Sale of common stock           3,450             35          42,802             --         --                --          42,837
   Three-for-two stock        
   split                          6,500             65             (65)            --         --                                --
                              ---------         ------       ---------       --------      -----          --------       ---------
 Balance, December 31,        
1995                             19,500            195          37,245          3,874         --                --          41,314
   Net income                        --             --              --         20,168         --                --          20,168
   Issuance of warrants       
   to partitions .                   --             --           1,077             --         --                --           1,077
   Sale of common stock           8,534             85         138,984             --         --                --         139,069
   Exercise of common         
   stock 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             --              --          21,311             --         --                --          21,311
     stock options and        
     warrants                 
   Acquisition of             
   treasury stock                   --              --              --             --       (428)           (4,560)         (4,560)
   Two-for-one stock          
   split                        31,119             311            (311)            --         --                --              --
                              --------       ---------      ----------       --------      -----          --------        --------
Balance, December 31,           62,238             622         210,616         24,042       (428)           (4,560)        230,720
1996                          
  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                    --              --              --             --    (3,520)            (71,959)        (71,959)
  treasury stock              
  Issuance of treasury        
  stock for acquired business       --              --           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
                              ========       =========       =========       ========    =======           =========       =========

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       30

<PAGE>
                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                 1997               1996              1995
                                                                 ----               ----              ----
<S>                                                           <C>                <C>                 <C>
Cash flows from operating activities:
   Net income (loss)                                          $ (20,945)         $ 20,168            $  9,035
   Adjustment to reconcile net income to net cash
     provided by operating activities:
   Unrealized loss on securities                                  1,865               179                 234
   Provision for bad debts                                        1,579                38                 (28)
   Depreciation and amortization                                  5,429             2,462               1,287
   Charge for customer acquisition costs                         11,550                --                  --
   Write-off of intangibles                                      23,032                --                  --
   Compensation charges                                          13,372                --                  --
   AOL marketing costs                                           58,185                --                  --
   Deferred credits                                                  --              (280)                 --
   Income tax benefit related to exercise of options
     and   warrants                                              25,653            21,311                  --
   (Increase) decrease in:
     Accounts receivable, trade                                 (26,048)          (1,065)              (2,996)
     Advances to partitions and note receivables                (12,700)         (20,797)              (1,700)
     Prepaid AOL marketing costs                               (100,564)
     Prepaid expenses and other current assets                  (38,259)         (10,183)               1,400
     Other assets                                               (20,769)          (3,924)                  --
   Increase (decrease) in:
     Accounts and partition payables and accrued
       expenses                                                   9,608            7,978               12,047
     Deferred revenue                                            35,800               --                   --
     Income taxes payable                                            --           (5,184)               5,184
                                                              ---------          -------             --------
        Net cash (used in) provided by operating
       activities                                               (33,212)          10,703               24,463
                                                              ---------          -------             --------
Cash flows from investing activities:
   Acquisition of intangibles                                    (9,293)          (9,800)              (1,057)
   Capital expenditures, net                                    (28,876)         (27,679)              (2,330)
   Securities sold short                                         17,700             (411)                 866
   Due from broker                                              (20,220)             233               (1,100)
   Loans to stockholder                                              --           (3,034)              (2,075)
   Repayment of stockholder loans                                    --            5,109                   --
   Purchase of marketable securities                            (62,377)        (149,238)                  --
                                                              ---------         --------             --------
       Net cash used in investing activities                   (103,066)        (184,820)              (5,696)
                                                              ---------         --------             --------
Cash flows from financing activities:
   Proceeds from sale of convertible subordinated notes         500,000               --                   --
   Payments to related parties                                       --               --               (1,725)
   Payment of note payable to stockholder                            --           (5,921)                (979)
   Proceeds from sale of common stock                                --          139,069               42,837
   Proceeds from exercise of options and warrants                21,344           12,341                   --
   Purchase of common stock warrants                             (4,400)              --                   --
   Acquisition of treasury stock                                (71,959)          (4,560)                  --
   Distributions to stockholders                                     --               --              (13,200)
   Stock redemption                                                  --               --               (4,500)
                                                              ---------        ---------             --------
       Net cash provided by financing activities                444,985          140,929               22,433
                                                              ---------        ---------             --------
Net increase (decrease) in cash and cash equivalents            308,707          (33,188)              41,200
Cash and cash equivalents, at beginning of period                 8,023            41,211                  11
                                                              ---------        ----------            --------
Cash and cash equivalents, at end of period                    $316,730         $   8,023            $ 41,211
                                                              =========        ==========            ========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       31
<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES

         (a) Business

         Tel-Save  Holdings,  Inc. (the  "Company"),  which is  incorporated  in
Delaware,  provides long distance services to small and medium-sized  businesses
located  throughout  the United  States.  The Company's  long  distance  service
offerings include outbound service,  inbound toll-free 800 service and dedicated
private line services for data.

         (b) Reorganization

         On  September  21, 1995,  the Company  consummated  its initial  public
offering  ("IPO") (Note  10(b)).  The shares of Tel-Save,  Inc., a  Pennsylvania
corporation  (the  "Predecessor   Corporation"),   owned  by  the  two  founding
stockholders  were  contributed  to the  Company as of the date of the IPO.  The
majority stockholder exchanged all of his shares of the Predecessor  Corporation
for  21,060,000  shares of the common  stock of the Company  plus loans of up to
$5,000,000.  The  majority  stockholder  repaid  his  outstanding  indebtedness,
including  interest,  using a portion of his proceeds from the sale of 1,500,000
shares of common stock in connection with the Company's public offering in April
1996 (Note 10(a)).

         The minority  stockholder  exchanged all his shares of the  Predecessor
Corporation for 7,590,000 shares of the common stock of the Company,  $4,500,000
in cash plus a note (the "Cash Flow Note") in the original  principal  amount of
$6,900,000  bearing  interest  at 10% per  annum  which  was  guaranteed  by the
majority stockholder.  The payment and the issuance of the Cash Flow Note to the
minority  stockholder are accounted for as a distribution of capital. In January
1996,  the Company paid the remaining  balance of $5,921,000  due under the Cash
Flow Note. The transactions  described above are collectively referred to as the
"Reorganization."

         (c) Basis of financial statements presentation

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

         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.

         (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

         The Company buys and holds  securities  principally  for the purpose of
selling  them in the near term and  therefore,  they are  classified  as trading
securities  and  carried  at  market.   Unrealized   holding  gains  and  losses
(determined by specific  identification)  on  investments  classified as trading
securities are included in earnings.

         (g) Advances to partitions and note receivables

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

         (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


                                       32
<PAGE>

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         (i) Intangibles and amortization

         Intangibles  include  the costs to acquire  billing  bases of  customer
accounts, long-distance service contract pricing plans and 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 prepayment  for  telecommunications
services under an 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 and its  implementation  did not have a material effect on the consolidated
financial statements.

         (l) Income taxes

         Deferred tax assets and  liabilities  are  recorded  for the  estimated
future tax effects  attributable to temporary  differences  between the basis of
assets and liabilities  recorded for financial and tax reporting  purposes (Note
12).

         (m) Net income per share

        During 1997, the Financial  Accounting  Standards Board issued Statement
of  Financial  Accounting  Standards  No. 128 ("SFAS No.  128").  "Earnings  per
Share," which provides for the calculation of "basic" and "diluted" earnings per
share.  This Statement is effective for financial  statements issued for periods
ending after  December 15, 1997.  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.  As required by
this  Statement,  all periods  presented  have been  restated to comply with the
provisions of SFAS No. 128.

         The  computation of basic net income per share is based on the weighted
average number of common shares outstanding during the period. In 1996 and 1995,
diluted  earnings per share also  includes the effect of 4,352,000 and 2,183,000
common shares, respectively,  issuable upon exercise of common stock options and
warrants.  Net income per share for the year ended December 31, 1995 is based on
pro forma net income.

         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  the  exchange  of  shares  in  the
Reorganization and the stock splits.

         (n) Financial instruments and risk concentration

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations of credit risk are cash investments and marketable securities. At
December  31, 1997,  a large  majority of the  Company's  cash  investments  and
marketable  securities were invested in money market funds and commercial paper.
The carrying amount of these cash investments approximates the fair value due to
their short  maturity.  The Company  believes no  significant  concentration  of
credit  risk  exists  with  respect to these  cash  investments  and  marketable
securities.

         In the first  quarter of 1998,  the Company  invested $300 million in a
tax exempt bond fund,  $245 million in  government  bond funds and incurred $155
million of margin account indebtedness in connection with these investments.

         (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  accummulated  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  rocognized  under  current
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominance  as  other
financial statements.

        SFAS 130 is effective for  financial  statements  for periods  beginning
after December 25, 1997 and requires  comparative  information for earlier years
to be restated. Because of the recent issuance of this standard,  management has
been unable to fully  evaluate  the impact,  if any,  the  standard  may have on
future  financial  statement  disclosures.  Results of operations  and financial
position, however, will be unaffected by implementation of this standard.

         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 is assessing performance.

     SFAS 131 is effective for financial  statements for periods beginning after
December 15, 1997 and requires  comparative  information for earlier years to be
restated. Because of the relatively recent issuance of this standard, management
has been  unable to fully  evaluate  the  impact,  if any, it may have on future
financial statement  disclosures.  Results of operations and financial position,
however, will be unaffected by implementation of this standard.
                                       33
<PAGE>
                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 -- MAJOR PARTITIONS

         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, 1997                               1                         13%
         Year ended December 31, 1996                               1                         11%
         Year ended December 31, 1995                              --                         --

</TABLE>

NOTE 3 -- CUSTOMER ACQUISITION

         The Company  determined in the second  quarter of 1997 to  de-emphasize
the use of direct marketing to solicit  customers for the Company as the carrier
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 in the quarter
ended  June 30,  1997,  primarily  as a result of the  Company  as cost of sales
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 -- AOL AGREEMENT

         In conjunction  with the  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,  one warrant (the "First  Warrant") to purchase,  at an exercise price of
$15.50 per share, up to 5,000,000 shares, which vested as to 2,500,000 shares on
October 9, 1997  ("Commercial  Launch  Date"),  when the  Company's  service was
launched on the AOL online network,  and as to 2,500,000  shares on February 22,
1998, and one warrant (the "Second  Warrant") to purchase,  at an exercise price
of $14.00 per  share,  up to  7,000,000  shares,  which  will  vest,  commencing
December 31, 1997,  based on the number of subscribers to the Company's  service
and would vest fully if there are at least 3.5 million such  subscribers  at any
one  time.  As of  December  31,  1997  the  second  warrant  was  vested  as to
approximately 120,000 shares. The initial term of the AOL Agreement runs to June
30, 2000,  and the AOL  Agreement  provides for annual  extensions by AOL of its
term thereafter.

         The $100 million cash  payment,  the $20.0  million  value of the First
Warrant and $0.6 million of agreement related costs is 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.

         The AOL Agreement also provides for marketing  payments to AOL based on
the "pre-tax  profit" (as defined in the AOL Agreement) in each calendar quarter
from the telecommunications services provided by the Company. AOL's share of the
pre-tax  profit will vary from 50% to 70%,  depending upon the level of revenues
from such  services.  The Company will  withhold a portion of AOL's share of the
pre-tax  profit as a recovery of the initial  $100  million  cash  payment.  The
Company is  permitted  to withhold up to $4.3 million in each of the 10 quarters
ending after December 31, 1997 and to withhold 33% of AOL's share of the pre-tax
profits  for every  quarter  ending  after June 30,  2002 until the entire  $100
million  cash  payment has been  recovered.  AOL's  share of pre-tax  profits in
excess of the $4.3 million and 33% will be distributed as earned.

         The AOL  Agreement  also  provides  for the grant to AOL of  additional
warrants to purchase up to an aggregate  of 2 million  shares if AOL extends its
obligations  under the AOL Agreement beyond June 30, 2000. The fair value of any
such  additional  warrants  that may be  granted  to AOL will be  charged  as an
expense in the statement of operations.


                                       34
<PAGE>

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 5 -- PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                             -----------------------------------------------
                                                                     1997                     1996
                                                             ---------------------    ----------------------
                                                                              (In thousands)
<S>                                                                 <C>                      <C>
         Land                                                       $     220                $     220
         Buildings and building improvements                            4,259                    3,398
         Switching equipment                                           41,915                       --
         Switching equipment under construction                            --                   24,861
         Equipment, vehicles and other                                 13,078                    2,117
                                                                     --------                ---------
                                                                       59,472                   30,596
         Less: Accumulated depreciation                                (3,637)                    (499)
                                                                     --------                ---------
                                                                     $ 55,835                  $30,097
                                                                     ========                =========
</TABLE>


NOTE 6 -- INTANGIBLES

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------------
                                                                     1997                     1996
                                                             ---------------------    ----------------------
                                                                             (In thousands)
<S>                                                                   <C>                      <C>    
         Goodwill                                                     $10,590                  $18,356
         Other                                                             --                    6,533
                                                                      -------                  -------
                                                                       10,590                   24,889
         Less: Accumulated depreciation                                    --                    3,787
                                                                      -------                  -------
                                                                      $10,590                  $21,102
                                                                      =======                  =======

</TABLE>

NOTE 7 -- ACQUISITIONS

         In  November  1997 the  Company  acquired  Compco,  Inc.  ("Compco")  a
provider of communications  software in the college and university  marketplace,
for a total  purchase  price of  $13,125,000,  comprised  of a cash  payment  of
$7,500,000  and 339,982  shares of Company common stock.  This  transaction  was
accounted  for  as a  purchase  with  the  results  of  Compco  included  in the
consolidated  financial  statements from acquisition date. The cost in excess of
the net asset acquired (goodwill) was approximately $10,590,000.

         In February  1998, the Company  completed the  acquisition of Symetrics
Industries,  Inc.  ("Symetrics"),  a Florida  corporation for  approximately $25
million in cash,  plus  assumed  liabilities.  Symetrics  designs,  develops and
manufactures  electronic  systems,  system  components and related  software for
defense-related   products   and  for   telecommunication   applications.   This
transaction  will be accounted for as a purchase.  The Company is in the process
of allocating the purchase price among the assets of Symetrics.



                                       35
<PAGE>

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 8 -- 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 $24.61875 per share.  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.

         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 $25.47 per  share.  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.

NOTE 9 -- RELATED PARTY TRANSACTIONS

         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.

         In connection  with the  Reorganization  (Note 1(b)),  the Company made
distributions of the Company's 1995 taxable income through September 19, 1995 of
approximately $13,200,000 in 1995 to its two founding stockholders.

NOTE 10 -- STOCKHOLDERS' EQUITY

         (a) 1996 Public Offering

         The Company  consummated  a public  offering  (the "1996  Offering") of
18,568,000  shares of common  stock  (adjusted  to reflect the most recent stock
split,  Note 10(c)), 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 1996 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) Initial Public Offering

         In September  and October,  1995,  the Company  consummated  its IPO of
10,350,000  shares of common  stock  (adjusted  to reflect  stock  splits,  Note
10(c)),  including the underwriter's  overallotment  option, at a price of $4.59
per share. Proceeds of the offering less underwriting discounts of approximately
$3,151,000  were  $44,287,000.   Expenses  for  the  IPO  totaled  approximately
$1,450,000,   resulting  in  net  proceeds  to  the  Company  of   approximately
$42,837,000.

         In  connection  with the IPO, the Company  issued  warrants to purchase
900,000  shares of common stock to the  underwriter.  The exercise  price of the
warrants  is $5.73  per  share of  common  stock  and such  warrants  expire  on
September 21, 2000.

         (c) 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.
The  consolidated  balance  sheet as of December  31, 1996 and the  consolidated
statement of  stockholders'  equity for the year ended December 31, 1996 reflect
the recording of the stock split as if it had occurred on December 31, 1996.




                                       36
<PAGE>

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         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.  The  consolidated   balance  sheet  as  of  December  31,  1995  and  the
consolidated  statement of stockholders'  equity for the year ended December 31,
1995 reflect the  recording of the stock split as if it had occurred on December
31, 1995.

         Further,  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.

         (d) 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.

NOTE 11 -- STOCK OPTIONS AND WARRANTS

         (a) Stock Options

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

         Prior to the Company's Initial Public Offering in September,  1995, the
Company  granted ten key employees  options to purchase  shares of the Company's
common stock.  The exercise  price of the options,  was based on the fair market
value of the Company at the date of grant.  The options  vest 22 months from the
date of issuance and expire five years from the date of grant.  All options were
vested as of December 31, 1996.

         In 1995, 1996 and 1997, the Company granted options to purchase a total
of 100,000  shares of common stock to each of the two  nonemployee  directors of
the Company.

         In September  1995, the Company's  Board of Directors and  stockholders
adopted the Company's  1995 Employee Stock Option Plan (the "Option Plan") which
provided for the granting of up to 1,950,00 shares of common stock. An amendment
to the Option Plan was approved by the Board of Directors  and  stockholders  in
April 1996  increasing  the  authorized  number of options  which can be granted
under the Option Plan to 5,000,000  shares of common  stock.  As of December 31,
1997, 4,985,000 options had been granted under the Option Plan.

         In 1996 and 1997 the Company  granted certain  employees  3,561,000 and
2,741,000,  respectively,  non-qualified  options  to  purchase  shares  of  the
Company's common stock. These options become exercisable from one to three years
from the date of the grant.  During 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.

         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  1995,   1996  and  1997,
respectively:  no dividends paid for all years;  expected volatility of 40.4% in
1995 and 1996 and 55.8% in 1997;  weighted average  risk-free  interest rates of
5.8%, 5.7%, and 5.49%, respectively; and expected lives of 1 to 5 years.


                                       37

<PAGE>

                    TEL-SAVE HOLDINGS, 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>
                                                 1997              1996             1995
                                                 ----              ----             ----
                                                (In thousands, except for per share data)
<S>                                            <C>               <C>              <C>
         NET INCOME:
             As reported                       $ (20,945)        $20,168          $10,819
             Pro forma                           (30,942)        $16,521          $10,436
         BASIC EARNINGS PER SHARE:
             As reported                       $    (.33)        $   .38          $   .34
             Pro forma                         $    (.48)        $   .31          $   .31
         DILUTED EARNINGS PER SHARE:
             As reported                       $    (.33)        $   .35          $   .32
             Pro forma                         $    (.48)        $   .29          $   .31

</TABLE>

The following  tables  contain  information  on stock options for the three year
period ended December 31, 1997:

<TABLE>
<CAPTION>
                                                                      EXERCISE            WEIGHTED
                                                   OPTION            PRICE RANGE           AVERAGE
                                                    SHARES            PER SHARE        EXERCISE PRICE
                                               ----------------    ----------------    ----------------
<S>                  <C>                           <C>              <C>                        <C>
Outstanding, December 31, 1994                     2,455,800        $   .32-$1.57              $  .48
Granted                                            1,950,000        $  4.58                    $ 4.58
                                               ----------------    ----------------    ----------------
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
                      === ====                 ================    ================    ================


<CAPTION>
                                                                      EXERCISE            WEIGHTED
                                                   OPTION            PRICE RANGE           AVERAGE
EXERCISABLE AT YEAR ENDED DECEMBER 31,              SHARES            PER SHARE        EXERCISE PRICE
-------------------------------------------    ----------------    ----------------    ----------------
<S>                                               <C>               <C>                      <C>
1995                                              1,515,600         $        .32             $  .32
1996                                              2,649,800         $  .32-$4.58             $ 2.82
1997                                              3,866,987         $  .32-$14.50            $ 7.24
<CAPTION>
                                                                                            WEIGHTED-AVERAGE
OPTIONS GRANTED IN                                                                             FAIR VALUE
------------------                                                                             ----------
1995                                                                                             $1.14
1996                                                                                             $2.39
1997                                                                                             $6.99
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                                                  RANGE OF EXERCISE PRICE
                                   ---------------------------------------------------------------------------------------
                                    $.32-$5.00      $5.01-$10.00      $10.01-$15.00       $15.00-$22.06       $.32-$22.06
                                   -------------    -------------    ----------------    ---------------    --------------
<S>                                  <C>              <C>                  <C>               <C>                <C>     
OUTSTANDING OPTIONS:
Number outstanding at
    December 31, 1997                2,776,988        2,382,000          1,989,500           1,742,500         8,885,988
Weighted-Average remaining
    contractual life (Years)              1.94             1.69               2.11                3.12              2.18
Weighted-average exercise price     $     3.48      $      8.52        $     11.47        $      17.57       $      9.26
EXERCISABLE OPTIONS:
Number outstanding at
   December 31, 1997                 1,596,988          779,000          1,490,999                   -         3,866,987
Weighted-average exercise price     $     2.68      $      8.66              11.37                   -       $      7.23

</TABLE>
         (b)  Warrants

                                       38
<PAGE>

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         At December 31, 1996, the Company had warrant  agreements  with certain
partitions  and the  underwriter  for its IPO (Note  10(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.  At December 31, 1997,
warrants to purchase 12,250,000 shares were outstanding;  these consisted of the
12,000,000  AOL  warrants  (Note 4) and  250,000 of the  warrants  issued to the
underwriter for the Company's IPO (Note 10(b)).

NOTE 12 -- INCOME TAXES

         On June 1, 1991,  the  Company,  with the consent of its  stockholders,
elected  to be  taxed as an S  Corporation.  As a result  of the  election,  all
earnings of the Predecessor Corporation were taxed directly to the stockholders.
Accordingly,  the  statements of operations  prior to September 20, 1995 did not
include  provisions for income taxes.  In connection  with the Company's IPO, as
described in Note 10(b),  on September 19, 1995,  the Company  terminated  its S
Corporation  status.  Pro forma tax  provisions  have been  calculated as if the
Company's  results  of  operations  were  taxable as a C  Corporation  under the
Internal Revenue Code for the year ended December 31, 1995.

         The following summarizes the provision for pro forma income taxes:

                                                         YEAR ENDED
                                                        DECEMBER 31,
                                                       ---------------
                                                           1995       
                                                           ----       
                                                        (In thousands)
         Current:
             Federal                                        $5,574    
             State and local                                 1,639    
                                                           -------    
         Pro forma provision for income taxes               $7,213    
                                                           =======    



                                       39
<PAGE>
                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The provision for pro forma income taxes on adjusted  historical income
for the year ended  December  31,  1995  differs  from the  amounts  computed by
applying the applicable Federal statutory rates due to the following:

                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                                ----------------
                                                                       1995     
                                                                       ----     
                                                                  (In thousands)
    Provision for Federal income taxes at the statutory rate           $6,311   
    State and local income taxes, net of Federal benefit                1,082   
    Other                                                                (180)  
                                                                      -------   
    Pro forma provision for income taxes                               $7,213   
                                                                      ========  

         As a result of the termination, the Company was required to provide for
taxes on income for the period  subsequent  to  September  19,  1995 and for the
previously  earned and  untaxed S  Corporation  income  which has been  deferred
primarily as a result of reporting on a cash basis. The provision  (benefit) for
income taxes for the years ended  December 31, 1997,  1996 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                   DECEMBER 31,
                                                        --------------------------------
                                                           1997      1996         1995
                                                           ----      ----         ----
                                                                 (In thousands)
<S>                                                      <C>         <C>           <C>
         Current:
             Federal                                    $      -     $10,995       $4,379
             State and local                                   -       1,817        1,809
                                                         -------     -------       ------
                  Total current                                -      12,812        6,188
                                                         =======     =======       ======
         Deferred:
             Federal                                     (11,111)       (607)       2,201
             State and local                              (2,280)          -          608
                                                         -------     -------       ------
                   Total deferred                        (13,391)       (607)       2,809
                                                         -------     -------       ------
                                                        $(13,391)    $12,205       $8,997
                                                         =======     =======       ======
</TABLE>
         A  reconciliation  of the  Federal  statutory  rate  to  the  provision
(benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                 --------------------------------------------------------------
                                                         1997                          1996                          1995
                                                 -----------------------    ---------------------------    -------------------------
                                                                                 (In thousands)
<S>                                              <C>           <C>           <C>              <C>           <C>              <C>
Federal income taxes computed at the
statutory rate                                    $(12.018)    (35.0)%       $11,331          35.0%          $6,311          35.0%
Increase (decrease):
Federal income taxes at the statutory rate
from January 1, 1995 to September 19, 1995              -          -               -             -           (4,086)        (22.7)
Federal and state taxes resulting from cash
to Accrual basis for tax reporting                      -          -               -             -            6,399          35.5
State income taxes less Federal benefit            (1.482)      (4.3)          1,199           3.7              373           2.1
Other                                                 109         .3            (325)         (1.0)              -              -
                                                  ---------   --------       --------         ------        --------        ------
Total provision (benefit) for income taxes        $(13,391)    (39.0)%        $12,205            37.7%         $8,997          49.9%
                                                  =======      =====         =======            ====          ======          ==== 
</TABLE>



                                       40
<PAGE>
                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         Deferred tax (assets)  liabilities at December 31, 1997,  1996 and 1995
are comprised of the following elements:
<TABLE>
<CAPTION>
                                                                                 YEAR ENDED
                                                                                 DECEMBER 31,
                                                                 -------------------------------------------
                                                                     1997          1996          1995
                                                                     ----          ----          ----
                                                                             (In thousands)
<S>                                                               <C>            <C>             <C>
         Taxable loss carryforwards                               $ (21,548)     $  (3,705)      $    --
         Deferred revenue taxable currently                         (13,897)            --            --
         Stock based compensation                                    (4,951)            --            --
         Allowance for uncollectible accounts                        (2,198)            --            --
         Federal and state taxes resulting from cash to accrual                
         basis for tax reporting                                      1,337          2,342         3,130
         Amortization of certain intangibles                              -            (85)         (227)
         Other                                                          869            (55)          (94)
                                                                 ------------    ------------    ----------
         Deferred tax (assets) liabilities                        $ (40,388)     $  (1,503)      $ 2,809
                                                                 ============    ============    ==========
</TABLE>

         The Company has  recorded  net deferred tax assets as December 31, 1997
and 1996  primarily  representing  net operating  loss  carryforwards  and other
temporary  differences.  Management  believes  that no  valuation  allowance  is
required for these assets due to future reversals of existing taxable  temporary
differences  and the exception that the Company will generate  taxable income in
future years.

NOTE 13 -- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                        -------------------------------------------------
                                                            1997             1996              1995
                                                            ----             ----              ----
                                                                         (In thousands)
<S>                                                          <C>            <C>                 <C>
Supplemental disclosure of cash flow information:
   Cash paid for:
   Interest                                                  $915           $     47            $    24
   Income taxes                                              $ --           $  1,090            $ 3,813
</TABLE>

         During 1997, the Company recorded an asset of $20,000,000 in connection
with  the  issuance  of  warrants  to AOL  (Note  4).  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 (Note 7).

         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)).

         During  1995,  the  Company  issued the Cash Flow Note in the amount of
$6,900,000  to the  minority  stockholder  of  the  Predecessor  Corporation  in
connection with the IPO and Reorganization (Note 1(b)).

NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                 FIRST           SECOND           THIRD           FOURTH
                                                QUARTER          QUARTER         QUARTER          QUARTER(2)
                                                -------          -------         -------          -------
                                                        (In thousands, except for per share data)
<S>                                              <C>              <C>             <C>              <C>    
1997
   Sales                                         $71,160          $75,032         $80,314          $78,262
   Gross profit (loss)                             9,375           (9,264)(1)       2,097          (52,609)(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 - Basic              0.09            (0.09)           0.01            (0.32)
   Net income (loss) per share - Diluted            0.08            (0.09)           0.01            (0.32)

1996
   Sales                                         $51,065          $57,015          $60,079         $64,265
   Gross profit                                    6,832            7,387            8,323           9,285
   Operating income                                4,546            4,882            5,871           6,489
   Net income                                      3,377            4,058            7,032           5,701
   Net income per share - Basic                     0.09             0.08             0.12            0.10
   Net income per share - Diluted                   0.08             0.07             0.11            0.09
</TABLE>

(1) See Note 3.
(2) Includes $321.1 million (pre-tax) of other income associated with the break-
    up of a proposed merger between the Company and STF.



                                       41
<PAGE>

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

Not applicable.

                                    PART III

ITEM 10  THROUGH 13

         Information  required  by Part III (Items 10  through  13) of this Form
10-K is  incorporated by reference to the Company's  definitive  proxy statement
for the Annual Meeting of  Stockholders  to be held in May, 1998,  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.




                                       42
<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.




                                       43
<PAGE>


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

                                                                           PAGE
                                                                           ----
Report of Independent Certified Public Accountants                          55
Schedule II -- Valuation & Qualifying Accounts                              56




                                       44
<PAGE>

 [LOGO]




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

         The audits referred to in our report dated February 5, 1998 relating to
the  consolidated   financial   statements  of  Tel-Save   Holdings,   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, 1997.  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 5, 1998




                                       45
<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>



                                                     BALANCE AT     CHARGED TO                               BALANCE AT
                                                    BEGINNING OF     COSTS AND    OTHER                        END OF
                  DESCRIPTION                          PERIOD        EXPENSES    CHANGES      DEDUCTIONS       PERIOD
                  -----------                          ------        --------    -------      ----------       ------
<S>                                                   <C>           <C>         <C>             <C>            <C>
Year ended December 31, 1997:
   Reserves and allowances deducted from as-
      set accounts:
   Allowance for uncollectible accounts               $987          $1,285      $  147 (a)      $--            $2,419
                                                      ====          ======      ==========      ===            ======

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

Year ended December 31, 1995:
   Reserves and allowances deducted from as-
      set accounts:
   Allowance for uncollectible accounts               $987         $    (13)    $(170)(a)       $--            $  804
                                                      ====         =========    =========       ===            ======

</TABLE>

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




                                       46
<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)).
9.1      Voting Trust  Agreement  between  Daniel  Borislow  and Paul  Rosenberg
         (included as part of Exhibit 2.1).
10.1*    Employment   Agreement  between  the  Company and Daniel  Borislow  and
         related  Agreement  (incorporated  by  reference to Exhibit 10.1 to the
         Company's registration statement on Form S-1 (File No. 33-94940)).
10.2 *   Employment   Agreement  between  the  Company  and  Emanuel  J.  DeMaio
         (incorporated   by  reference   to  Exhibit   10.2  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.3 *   Employment   Agreement   between  the  Company  and  Gary  W.   McCulla
         (incorporated   by  reference   to  Exhibit   10.3  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.4 *   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).
10.5 *   Employment  Agreement  between  the Company  and  Aloysius T. Lawn,  IV
         (incorporated   by  reference   to  Exhibit   10.5  to  the   Company's
         registration statement on Form S-1 (File No. 333-2738)).
10.6 *   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).
10.7     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)).
10.8     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)).
10.9     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)).
10.10    Indemnification  Agreement  between  the  Company  and Joseph M. Morena
         (incorporated   by  reference   to  Exhibit   10.7  to  the   Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.11    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)).
10.12    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)).
10.13    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).
10.14    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).
10.15    Agreement  dated as of March 15,  1994  between  the Company and Global
         Network  Communications  (incorporated by reference to Exhibit 10.10 to
         the Company's registration statement on Form S-1 (File No. 33-94940)).
10.16    AT&T  Contract  Tariff No. 516  (incorporated  by  reference to Exhibit
         10.11 to the  Company's  registration  statement  on Form S-1 (File No.
         33-94940)).
10.17    AT&T  Contract  Tariff No. 1715  (incorporated  by reference to Exhibit
         10.15 to the  Company's  registration  statement  on Form S-1 (File No.
         333-2738)).
10.18    AT&T  Contract  Tariff No. 2039  (incorporated  by reference to Exhibit
         10.16 to the  Company's  registration  statement  on Form S-1 (File No.
         333-2738)).
10.19    AT&T  Contract  Tariff No. 2432  (incorporated  by reference to Exhibit
         10.17 to the  Company's  registration  statement  on Form S-1 (File No.
         333-2738)).
10.20    AT&T  Contract  Tariff No. 3628  (incorporated  by reference to Exhibit
         10.18 to the  Company's  registration  statement  on Form S-1 (File No.
         333-2738)).
10.21    AT&T  Contract  Tariff No. 5776  (incorporated  by reference to Exhibit
         10.21 to the  Company's  Annual  Report on Form 10-K for the year ended
         December 31, 1996).




                                       47
<PAGE>


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

10.22    General Agreement between Tel-Save,  Inc. and AT&T Corp. dated June 26,
         1995  (incorporated  by  reference  to Exhibit  10.14 to the  Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.23*   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)).
10.24*   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).
10.25*   Non-Qualified  Stock  Option  Agreement  between the Company and Daniel
         Borislow  (incorporated  by reference to Exhibit 10.17 to the Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.26*   Non-Qualified Stock Option Agreement between the Company and Emanuel J.
         DeMaio  (incorporated  by reference to Exhibit  10.18 to the  Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.27*   Non-Qualified  Stock  Option  Agreement  between  the  Company and Mary
         Kennon  (incorporated  by reference to Exhibit  10.19 to the  Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.28*   Non-Qualified  Stock Option  Agreement  between the Company and Gary W.
         McCulla  (incorporated  by reference to Exhibit  10.20 to the Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.29*   Non-Qualified  Stock Option Agreement  between the Company and Peter K.
         Morrison  (incorporated  by reference to Exhibit 10.22 to the Company's
         registration statement on Form S-1 (File No. 33-94940)).
10.30+   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).
10.31++  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.
10.32    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)).
10.33    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)).
10.34    Indenture  dated as of December  10, 1997 between the Company and First
         Trust  of New  York,  N.A.
10.35    Registration   Agreement  dated  as of  December  10, 1997  between the
         Company and Smith Barney Inc.
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, 1997:

     1.   Current Report on Form 8-K dated December 5, 1997.

     2.   Current Report on Form 8-K dated November 25, 1997.

     3.   Current Report on Form 8-K dated November 20, 1997.

     4.   Current Report on Form 8-K dated October 29, 1997.

     5.   Current Report on Form 8-K dated October 26, 1997.




                                       48
<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:                                           TEL-SAVE HOLDINGS, INC.

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

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

<TABLE>
<CAPTION>
         SIGNATURE                          TITLE                                     DATE
<S>                                <C>                 
/s/ Daniel Borislow                      Chairman of the Board
-----------------------------     of Directors, Chief Executive Officer and
    Daniel Borislow               Director (Principal Executive Officer)


/s/ Gary W. McCulla               President, Director of Sales and
-----------------------------     Marketing and Director
     Gary W. McCulla


/s/ Emanuel J. DeMaio             Chief Operations Officer and Director
-----------------------------
     Emanuel J. DeMaio


/s/ George P. Farley              Chief Financial Officer and Director
-----------------------------     (Principal Financial Officer)
     George P. Farley


/s/ Kevin R. Kelly                Controller (Principal Accounting Officer)
-----------------------------
     Kevin R. Kelly


/s/ Harold First                  Director
-----------------------------
     Harold First


/s/ Ronald R. Thoma               Director
-----------------------------
     Ronald R. Thoma

</TABLE>




                                       49