**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549


**_____________________**


**FORM
      10-K/A**


**(AMENDMENT
      NO. 1)**





ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For
      the
      fiscal year ended December 31, 2005


Commission
      File No. 000-26728





**TALK
      AMERICA HOLDINGS, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **23-2827736**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                Number)**6805
                Route 202**
            **18938****New
                Hope, PA**
            (zip
                code)(Address
                of principal executive offices)


**(215)
      862-1500**


(Registrant’s
      telephone number, including area code)





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


**Title
                of each class**
            **Name
                of each exchange on which registered**None
            Not
                applicable





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


**Common
      Stock, Par Value $.01 Per Share**


**Rights
      to Purchase Series A Junior Participating Preferred Stock**


(Title
      of class)








Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
      [ ]
      No [ X]





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      section 13 or Section 15(d) of the Act.


Yes
      [ ]
      No [ X]





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
      accelerated filer [ ]   Accelerated
      filer [ X ]   Non-accelerated
      filer [ ]




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes
      [ ]
      No [ X]





As
      of
      June 30, 2005, the aggregate market value of the voting stock held by
      non-affiliates of the registrant, based on the average of the high and low
      prices of the common stock on June 30, 2005 of $10.04 per share as reported
      on
      the Nasdaq National Market, was approximately $277,788,698 (calculated by
      excluding solely for purposes of this form outstanding shares owned by directors
      and executive officers).





As
      of
      March 1, 2006, the registrant had issued and outstanding 30,396,192 shares
      of common stock, par value $.01 per share.




**DOCUMENTS
      INCORPORATED BY REFERENCE**





None.








**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**INDEX
      TO FORM 10-K**


**FOR
      THE YEAR ENDED DECEMBER 31, 2005**








**ITEM**
              **NO.**
            **PAGE**
              **NO.****PART
                II**6.   
                Selected Financial Data
            27.   
                Management's Discussion and Analysis of Financial Condition and Results
                of
                Operations
            37A.
                Quantitative and Qualitative Disclosure About Market Risk
            128.    
                Financial Statements and Supplementary Data
            139A.
                Controls and Procedures**PART
                III**10.  
                Directors and Executive Officers of the Registrant
            4011.  
                Executive Compensation
            4212.  
                Security Ownership of Certain Beneficial Owners and Management
            4613.  
                Certain Relationships and Related Transactions
            4914.  
                Principal Accounting Fees and Services
            49**PART
                IV**15.  
                Exhibits, Financial Statement Schedules
            50








Unless
      the context otherwise requires, references to "us," "we," and "our" or to "Talk
      America" refer to Talk America Holdings, Inc. and its subsidiaries.


1


**PART
      II**








**ITEM
      6.  SELECTED FINANCIAL
      DATA.**





The
      selected consolidated unaudited 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 our Consolidated
      Financial Statements included elsewhere in this Form 10-K Annual Report and
      our
      Form 10-K Annual Reports previously filed.





**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001****(In
                Thousands, Except For Per Share Amounts)****C Consolidated
                Statements of Operations Data:**Revenue
            
            $
            462,740
            
            $
            471,012
            
            $
            383,693
            
            $
            317,507
            
            $
            488,158Costs
                and expenses:Network
                and line costs
            
            
            243,925
            
            
            225,244
            
            
            173,349
            
            
            146,911
            
            
            218,964General
                and administrative expenses
            
            
            82,127
            
            
            72,020
            
            
            63,104
            
            
            62,166
            
            
            98,391Provision
                for doubtful accounts
            
            
            19,114
            
            
            21,313
            
            
            11,599
            
            
            9,365
            
            
            92,778Sales
                and marketing expenses
            
            
            29,863
            
            
            70,202
            
            
            51,008
            
            
            27,148
            
            
            73,973Depreciation
                and amortization
            
            
            44,937
            
            
            22,904
            
            
            18,345
            
            
            17,318
            
            
            34,390Impairment
                and restructuring charges
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            170,571Total
                costs and expenses
            
            
            419,966
            
            
            411,683
            
            
            317,405
            
            
            262,908
            
            
            689,067Operating
                income (loss)
            
            
            42,774
            
            
            59,329
            
            
            66,288
            
            
            54,599
            
            
            (200,909
            )Other
                income (expense):Interest
                income
            
            
            1,007
            
            
            290
            
            
            388
            
            
            802
            
            
            1,220Interest
                expense
            
            
            (350
            )
            
            (733
            )
            
            (7,353
            )
            
            (9,087
            )
            
            (6,091
            )Other
                income (expense), net
            
            
            974
            
            
            1,895
            
            
            2,470
            
            
            28,448
            
            
            17,950Income
                (loss) before provision (benefit) for income
              taxes
            
            
            44,405
            
            
            60,781
            
            
            61,793
            
            
            74,762
            
            
            (187,830
            )Provision
                (benefit) for income taxes
            
            
            18,244
            
            
            23,969
            
            
            (20,024
            )
            
            (22,300
            )
            
            --Income
                (loss) before cumulative effect of an
              accounting change
            
            
            26,161
            
            
            36,812
            
            
            81,817
            
            
            97,062
            
            
            (187,830
            )Cumulative
                effect of an accounting change
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (36,837
            )Net
                income (loss)
            
            $
            26,161
            
            $
            36,812
            
            $
            81,817
            
            $
            97,062
            
            $
            (224,667
            )Income
                (loss) per share - Basic:Income
                (loss) before cumulative effect of an accounting change per share
            
            $
            0.91
            
            $
            1.37
            
            $
            3.10
            
            $
            3.56
            
            $
            (7.11
            )Cumulative
                effect of an accounting change per share
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (1.40
            )Net
                income (loss) per share
            
            $
            0.91
            
            $
            1.37
            
            $
            3.10
            
            $
            3.56
            
            $
            (8.51
            )Weighted
                average common shares outstanding
            
            
            28,675
            
            
            26,847
            
            
            26,376
            
            
            27,253
            
            
            26,414Income
                (loss) per share - Diluted:Income
                (loss) before cumulative effect of an accounting change per
                share
            
            $
            0.89
            
            $
            1.32
            
            $
            2.94
            
            $
            3.15
            
            $
            (7.11
            )Cumulative
                effect of an accounting change per share
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (1.40
            )Net
                income (loss) per share
            
            $
            0.89
            
            $
            1.32
            
            $
            2.94
            
            $
            3.15
            
            $
            (8.51
            )Weighted
                average common and common equivalent shares outstanding
            
            
            29,296
            
            
            27,854
            
            
            27,806
            
            
            30,798
            
            
            26,414





2





**At
                December 31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001****(In
                Thousands)****Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            46,288
            
            $
            47,492
            
            $
            35,242
            
            $
            33,588
            
            $
            22,100Total
                current assets
            
            
            118,281
            
            
            138,068
            
            
            105,595
            
            
            82,825
            
            
            51,214Goodwill
                and intangibles, net
            
            
            41,413
            
            
            14,979
            
            
            17,769
            
            
            26,882
            
            
            29,672Total
                assets
            
            
            288,689
            
            
            241,728
            
            
            247,178
            
            
            189,075
            
            
            165,737Current
                portion of long-term debt
            
            
            3,988
            
            
            2,529
            
            
            16,806
            
            
            61
            
            
            14,454Total
                current liabilities
            
            
            88,739
            
            
            84,584
            
            
            93,235
            
            
            64,754
            
            
            87,789Long-term
                debt
            
            
            1,289
            
            
            1,717
            
            
            31,791
            
            
            100,855
            
            
            152,370Stockholders'
                equity (deficit)
            
            $
            191,787
            
            $
            141,521
            
            $
            103,143
            
            $
            23,466
            
            $
            (74,422
            )





See
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” for a discussion of items affecting the results of 2003, 2004 and
      2005.








**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 Annual
      Report.





**Cautionary
      Note Concerning Forward-Looking Statements**




Certain
      of
      the statements contained herein may be considered "forward-looking statements"
      for purposes of the securities laws. From time to time, oral or written
      forward-looking statements may also be included in other materials released
      to
      the public. These forward-looking statements are intended to provide our
      management’s current expectations or plans for our future operating and
      financial performance, based on our current expectations and assumptions
      currently believed to be valid. For these statements, we claim protection of
      the
      safe harbor for forward-looking statements provided by the Private Securities
      Litigation Reform Act of 1995. These forward-looking statements can be
      identified by the use of forward-looking words or phrases, including, but not
      limited to, "believes," "estimates," "expects," "expected," "anticipates,"
      "anticipated," "plans," "strategy," "target," "prospects" and other words of
      similar meaning in connection with a discussion of future operating or financial
      performance. Although we believe 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.




All
      forward-looking statements involve risks and uncertainties that may cause our
      actual results to differ materially from those expressed or implied in the
      forward-looking statements. In addition to those factors discussed in this
      Form
      10-K Annual Report, you should see our other reports on Forms 10-K, 10-Q and
      8-K
      subsequently filed with the Securities and Exchange Commission from time to
      time
      for information identifying factors that may cause actual results to differ
      materially from those expressed or implied in the forward-looking
      statements.





**OVERVIEW**





Talk
      America Holdings, Inc., through its subsidiaries, is a leading competitive
      communications services provider offering voice and data services to commercial
      (primarily small and medium-sized business) and residential customers. We are
      focused on markets where we have our own networking assets, which we began
      deploying in Michigan in late 2003. Today, we are collocated in 313 end offices
      in Michigan, Ohio, Kentucky, Tennessee, North Carolina, Louisiana, Mississippi,
      Alabama, Florida and Georgia. As of December 31, 2005, we had approximately
      595,000 local voice and data equivalent lines, of which approximately 341,000
      were on our own network. Voice equivalent lines include individual telephone
      lines and T-1 equivalent lines based on circuit bandwidth. Data equivalent
      lines
      include DSL, dial-up and T-1 equivalent lines based on circuit
      bandwidth.





We
      expanded into the commercial business market with the acquisition in July 2005
      of LDMI Telecommunications, Inc. (“LDMI”), a privately held facilities-based
      competitive local exchange provider serving business and residential customers
      primarily in Michigan and Ohio. Our results include the results of LDMI since
      the date of acquisition. In addition, we have significantly expanded our network
      and commercial business through the acquisition in January 2006 of Network
      Telephone Corporation (“NTC”), a privately held facilities-based competitive
      local exchange provider serving commercial customers in the Southeast. As of
      December 31, 2005, NTC had approximately 150,000 local voice and data equivalent
      lines, of which approximately 125,000 were on their network. During 2005, we
      also completed the construction of our network in Michigan, integrated this
      network with LDMI’s network assets and migrated over 200,000 lines from the
      incumbent local exchange company wholesale platform to our network. Our
      off-network customers represent a large, profitable base of bundled phone
      service customers utilizing the wholesale operating platforms of the incumbent
      local exchange companies.





3


Our
      business strategy is to continue to expand our network and grow our on-net
      customer and revenue base through (i) organic growth in our core markets serving
      both commercial and residential customers; (ii) additional acquisitions that
      either supplement our existing markets or offer expansion into new markets;
      and
      (iii) enhancement of our product portfolio. Growth in our on-net business,
      both
      commercial and residential, will permit us to leverage our investment in our
      network facilities due to the complementary telecommunication traffic or usage
      patterns of these customer bases.





**RESULTS
      OF OPERATIONS**





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





**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**Revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Network
                and line costs
            
            
            52.7
            
            
            47.8
            
            
            45.2General
                and administrative expenses
            
            
            17.7
            
            
            15.3
            
            
            16.4Provision
                for doubtful accounts
            
            
            4.1
            
            
            4.5
            
            
            3.0Sales
                and marketing expenses
            
            
            6.5
            
            
            14.9
            
            
            13.3Depreciation
                and amortization
            
            
            9.7
            
            
            4.9
            
            
            4.8Total
                costs and expenses
            
            
            90.8
            
            
            87.4
            
            
            82.7Operating
                income
            
            
            9.2
            
            
            12.6
            
            
            17.3Other
                income (expense):Interest
                income
            
            
            0.2
            
            
            0.1
            
            
            0.1Interest
                expense
            
            
            (0.1
            )
            
            (0.2
            )
            
            (1.9
            )Other,
                net
            
            
            0.2
            
            
            0.4
            
            
            0.6Income
                before income taxes
            
            
            9.6
            
            
            12.9
            
            
            16.1Provision
                (benefit) for income taxes
            
            
            3.9
            
            
            5.1
            
            
            (5.2
            )Net
                income
            
            
            5.7
            %
            
            7.8
            %
            
            21.3
            %





The
      following table sets forth for certain items of our financial data for each
      year
      the percentage increase or (decrease) in such item from the preceding fiscal
      year:





**Year
                Ended December 31,****2005**
            
            
            **2004**Revenue
            
            
            (1.8
            %)
            
            22.8
            %Costs
                and expenses:Network
                and line costs
            
            
            8.3
            %
            
            29.9
            %General
                and administrative expenses
            
            
            14.0
            %
            
            14.1
            %Provision
                for doubtful accounts
            
            
            (10.3
            %)
            
            83.7
            %Sales
                and marketing expenses
            
            
            (57.5
            %)
            
            37.6
            %Depreciation
                and amortization
            
            
            96.2
            %
            
            24.9
            %Total
                costs and expenses
            
            
            2.0
            %
            
            29.7
            %Operating
                income
            
            
            (27.9
            %)
            
            (10.5
            %)Other
                income (expense):Interest
                income
            
            
            247.2
            %
            
            (25.3
            %)Interest
                expense
            
            
            (52.3
            %)
            
            (90.0
            %)Other,
                net
            
            
            (48.6
            %)
            
            (23.3
            %)Income
                before income taxes
            
            
            (26.9
            %)
            
            (1.6
            %)Provision
                for income taxes
            
            
            (23.9
            %)
            
            219.7
            %Net
                income
            
            
            (28.9
            %)
            
            (55.0
            %)








4


*Revenue.* Total
      revenue decreased in 2005 from 2004. As
      a
      result of significant changes to FCC rules, beginning in March 2005, we were
      no
      longer able to provide service to new customers using the incumbent local
      exchange companies’ unbundled network platform. In addition, the cost of
      providing service under replacement wholesale agreements has increased
      substantially. These cost increases have and will continue to lead us to
      increase our product pricing, which limits our ability to add new customers
      and
      to retain existing customers. Therefore, beginning in March 2005, we ceased
      our
      efforts to increase subscriber growth in markets other than those areas where
      we
      currently have or plan to deploy network facilities. We began deploying our
      own
      networking assets in Michigan in late 2003. These actions have caused a
      significant decrease in the number of customer lines and revenue during
      2005. This
      decline in customer lines and revenue was partially mitigated by the acquisition
      of LDMI in the third quarter 2005 and the inclusion of its results from that
      date. The increase in revenue in 2004 from 2003 was due to an increase in local
      customer revenue, partially offset by a decline in long distance revenue. During
      2004 and 2005, we increased certain fees and rates related to our long distance
      and local products and such changes in rates have adversely impacted customer
      turnover. Additional increases in fees and rates related to our long distance
      and local products will adversely affect customer turnover.





The
      increase in revenue from customers that are served by our own networking
      facilities, or on-net, to $75.2 million for 2005 from $3.4 million for 2004
      was
      due to greater average lines in 2005 as compared to 2004 primarily as a result
      of the migration of customer lines to our own network and, to a lesser degree,
      the acquisition of LDMI. As of December 31, 2005, our voice and data equivalent
      lines on-net had increased to 341,000 from 25,000 as of December 31, 2004 and
      zero as of December 31, 2003.





The
      decrease in revenue from customers that are not served by our own networking
      facilities, or off-net, to $331.2 million for 2005 from $404.3 million for
      2004
      was due to fewer average lines in 2005 as compared to 2004, partially offset
      by
      an increase in average monthly revenue per customer. Our off-net voice and
      data
      equivalent lines declined during this period due both to the migration of
      off-net lines to our own network and, in areas where we were not building
      network, the attrition of customers leaving our services for those of other
      carriers. This decline was partially offset by increased off net lines as a
      result of the acquisition of LDMI. As of December 31, 2005, our off-net voice
      and data equivalent lines had decreased to 254,000 from 668,000 as of December
      31, 2004. A significant increase in the costs we pay for network services from
      the incumbent local telephone carriers has caused us to cease marketing to
      new
      customers in markets where we do not currently have network facilities and,
      as a
      result of this, together with continued migrations to our network, we expect
      the
      decline in off-net revenues to continue in the future. The increase in off-net
      revenue to $404.3 million in 2004 from $282.3 million in 2003 was due to higher
      average bundled lines in 2004 as compared to 2003.





Long
      distance only and other revenue decreased for 2005 to $56.3 million from $63.3
      million for 2004 and from $101.4 million in 2003. The acquisition of LDMI
      partially offset a decline in revenues from our existing long distance base
      in
      2005. Our decision in 2000 to invest in building a bundled customer base,
      together with customer turnover, contributed to the decline in long distance
      customers and revenue, although the effect on revenue of the decline in
      customers was offset partially by an increase in average monthly revenue per
      customer due to price increases. We expect long distance customers and revenues
      to decline in the future.




5


*Network
      and Line Costs* .
      Network
      and line costs as a percentage of revenue increased in 2005 from 2004 due to
      the
      advanced build out of our Michigan network facilities, the under-utilization
      of
      our Ohio network facilities, line migration costs, additional network personnel
      costs, and increased unbundled network element platform costs. These cost
      increases more than offset the impact that fewer average bundled lines and
      long
      distance customers had on network and line costs and, together with the
      acquisition of LDMI, resulted in an increase in network and line costs for
      2005
      from 2004. To date, we have been able to increase our prices to offset per
      line
      increases in network and line cost, but these price increases will increase
      customer turnover. The increase of network and line costs in 2004 from 2003
      was
      primarily due to the increase in bundled customers, partially offset by the
      decrease in long distance customers. Network and line costs as a percentage
      of
      revenue increased slightly in 2004 from 2003. Network and line costs exclude
      depreciation and amortization of $26.8  million for 2005, $6.2 million for
      2004 and $3.4 million for 2003.





We
      accrue
      expenses for network costs that we believe we have incurred pursuant to our
      interconnection or commercial agreements with a particular supplier or tariffs
      but for which we have not yet been billed. This primarily occurs due to errors
      and omissions in billing on the part of our principal suppliers, the incumbent
      local exchange companies. Accrued expenses are eliminated upon the earlier
      of
      actual billing (including billing for charges appropriately recorded in prior
      periods but not invoiced, or “backbilling”) by the incumbent local exchange
      companies or the expiration of the time period for which we are liable for
      the
      charges. In addition, we accrue for network expense in a jurisdiction if there
      is expected to be regulatory or other legal changes in the jurisdiction that
      would retroactively increase the rates we have been charged. In Georgia, an
      appeals court overturned a rate reduction by the state public utility commission
      and ordered the commission to recalculate the rates charged to us. This issue
      is
      currently being considered by the state commission on remand from the court.
      The
      state commission has issued an order that will result in increased rates charged
      to us. We believe that the rates ultimately charged to us will be in excess
      of
      those previously allowed by the commission and have accrued
      accordingly.





We
      seek
      to structure and price our products in order to maintain network and line costs
      as a percentage of revenue at certain targeted levels. While the control of
      the
      structure and pricing of our products assists us in mitigating risks of
      increases in network and line costs, the telecommunications industry is highly
      competitive and there can be no assurances that we will be able to effectively
      market these higher priced products (see "Liquidity and Capital Resources -
      Other Matters," below).





*General
      and Administrative Expenses* .
      General
      and administrative expenses increased in 2005 from 2004. This increase was
      primarily attributable to the LDMI acquisition and to an increase in the number
      of information technology and network employees needed to support our local
      networking initiatives, partially offset by a reduction in the number of
      employees that support our base of off-net customers. As a result, general
      and
      administrative expense as a percentage of revenue increased in 2005 from 2004.
      General and administrative expenses also increased in 2004 from 2003. The
      increases were primarily due to the year-to-year increases in the number of
      employees for customer service and information technology to support our
      expanding base of bundled customers and our deployment of our local facilities.
      In addition, in 2004, the increase was partially attributable to a new operating
      lease for information technology equipment. General and administrative expense
      as a percentage of revenue decreased in 2004 from 2003. This decrease resulted
      from the efficiencies of a growing base of revenues relative to certain fixed
      operating expenses. Beginning in the first quarter of 2006, general and
      administrative expense will include expenses associated with the issuance of
      stock options pursuant to SFAS 123 R (see “Critical Accounting Estimates - New
      Accounting Pronouncements,” below).





6


*Provision
      for Doubtful Accounts* .
      The
      provision for doubtful accounts decreased in 2005 from 2004. The decrease was
      primarily due to a decrease in the average number of customers and a decrease
      in
      bad debt expense as a percentage of revenues.  The
      provision for doubtful accounts increased in 2004 from 2003. The increase was
      due to an increase in the number of customers and revenue as well an increase
      in
      bad debt expense as a percentage of revenues. The increase in bad debt as a
      percentage of revenue in 2004 was primarily due to reduced employee collection
      hours as a result of several hurricanes near our Florida customer service
      centers, an increase in market share outside of Michigan into states where
      we
      have experienced generally higher levels of bad debt and the consequences of
      our
      experiment, in an effort to expand our addressable market during 2004, with
      a
      new credit screening vendor and methodology to supplement our existing credit
      screening process. The change was meant to provide a credit score for potential
      customers for whom no score was available under our primary scoring methodology.
      Management believed that, in building the parameters for this new method, the
      bad debt would have been consistent with that of our primary method. In
      actuality, however, customers accepted through this new methodology had higher
      bad debt than customers accepted through our primary credit screening method.
      Thus, the influx of customers through the new methodology during the third
      quarter 2004 resulted in increased bad debt for the third and fourth quarters
      2004. Based on these actual results, we ceased utilizing this supplemental
      screening methodology.





*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses decreased significantly in 2005 from 2004. The decreases
      are attributable to the decrease of sales and marketing activity related to
      our
      bundled product, including decreased headcount and reduced direct mail and
      media
      expenses due to our reduced efforts to increase subscriber growth in markets
      where we do not have, or plan to deploy network facilities. Included in sales
      and marketing expenses are advertising expenses of $3.8 million for 2005, $10.5
      million for 2004 and $7.5 million for 2003. We expect sales and marketing
      expenses to increase in 2006 as we expand our marketing efforts commensurate
      with the growth of our networking footprint. Sales and marketing expense
      increased in 2004 from 2003 primarily due to our increased efforts to attract
      new bundled customers during 2004.





*Interest
      Expense* .
      The
      decreases in interest expense for 2005 from 2004 and for 2004 from 2003 are
      primarily attributable to the decreases in outstanding debt balances.





*Depreciation
      and Amortization.* Depreciation and amortization increased in 2005 from 2004 primarily due to
      increased depreciation related to the reduction in the remaining useful lives
      of
      our long distance switches and capital expenditures incurred in 2004 and 2005
      related to our deployment of networking assets (our local switching and
      collocation equipment) in Michigan and depreciation and amortization related
      to
      the LDMI acquisition. In December 2004, in connection with a review of our
      fixed
      assets, the estimated remaining useful lives of our five long distance switches
      were shortened from an average of 8 years to 1.6 years. This change had the
      effect of increasing depreciation in 2005 and 2004 by $15.1 million and $1.4
      million, respectively. Depreciation increased in 2004 over 2003 due to the
      increased depreciation related to the reduction in the remaining useful lives
      of
      our long distance switches.




*Other
      Income, Net* .
      Other
      income for 2005 and 2004 consists of income recorded as a result of the
      statutory expiration of the liability for certain sales and use taxes reserves.
      Other income for 2003 consists of gains from our repurchase of a portion of
      our
      12% Senior Subordinated Notes at a discount to par.





7


**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      assess
      our liquidity in terms of our ability to generate cash to fund our operations,
      our capital expenditures and our debt service obligations. For 2005 and 2004,
      our operating activities provided net cash flow of $72.0 million and $74.6
      million, respectively. In 2005, all of the net cash flow from operating
      activities was used to fund capital expenditures and capitalized software
      development costs and the acquisition of LDMI. In 2004, the net cash flow from
      operating activities was used primarily to reduce our outstanding debt
      obligations. As of December 31, 2005, we had $46.3 million in cash and cash
      equivalents and long-term debt and capital lease obligations (including current
      maturities) of $5.3 million, compared to $47.5 million and $4.2 million,
      respectively, at December 31, 2004.





Our
      contractual obligations as of December 31, 2005 are summarized by years to
      maturity as follows (in thousands):





Contractual
                Obligations
            
            
            Total
            
            
            Less
                than
              1
                year
            
            
            1
                - 3
              Years
            
            
            3
                - 5
              Years
            
            
            More
                than
              5
                YearsVendor
                financing agreement (1)
            
            $
            1,220
            
            $
            1,220
            
            $
            --
            
            $
            --
            
            $
            --Capital
                lease obligations
            
            
            4,057
            
            
            2,768
            
            
            1,289
            
            
            --
            
            
            --Vendor
                financed maintenance (1)
            
            
            561
            
            
            561
            
            
            --
            
            
            --
            
            
            --Operating
                leases (2)
            
            
            21,509
            
            
            5,175
            
            
            5,813
            
            
            4,777
            
            
            5,744Purchase
                commitments (3)
            
            
            588
            
            
            588
            
            
            --
            
            
            --
            
            
            --Invoice
                printing commitment (4)
            
            
            3,730
            
            
            1,213
            
            
            2,517
            
            
            --
            
            
            --Carrier
                commitments (5)
            
            
            73,296
            
            
            37,637
            
            
            35,586
            
            
            48
            
            
            25Total
                Contractual Obligations
            
            $
            104,961
            
            $
            49,162
            
            $
            45,205
            
            $
            4,825
            
            $
            5,769





(1)  In
      May
      2004, in connection with the purchase of software, we entered into a loan
      agreement with the software supplier for $3.1 million payable over 36 months
      at
      a 2.9% annual interest rate. The agreement includes $2.5 million of software
      and
      an annual maintenance contract of $0.6 million. In addition, we agreed to renew
      the maintenance agreement for an additional two years at the cost of $0.6
      million per year, which is funded on the anniversary dates. As of December
      31,
      2005, there was approximately $1.2 million outstanding under this loan. In
      addition, capital lease obligations also have associated interest expense of
      $0.4 million.





(2)  As
      of
      December 31, 2005, our contractual obligations under operating leases are
      primarily for leased facility space.





(3)  At
      December 31, 2005, we had outstanding purchase orders for capital expenditures
      of $0.6 million.





(4)  We
      have a
      contract with our invoice printing company that establishes pricing and provides
      for annual minimum payments.





(5)  In
      December 2003, we entered into a four-year master carrier agreement with
      AT&T. The agreement provides us with a variety of services, including
      transmission facilities to connect our network switches as well as services
      for
      international calls, local traffic, international calling cards, overflow
      traffic and operator assisted calls. The agreement also provides that, subject
      to certain terms and conditions, we will purchase these services exclusively
      from AT&T during the term of the agreement, provided, however, that we are
      not obligated to purchase exclusively in certain cases, including if such
      purchases would result in a breach of any contract with another carrier that
      was
      in place when we entered into the AT&T agreement, or if vendor diversity is
      required. Our AT&T agreement establishes pricing and provides for annual
      minimum commitments based upon usage as follows: 2006 - $32 million and 2007
      -
      $32 million and obligates us to pay 65 percent of the revenue shortfall, if
      any.
      In February 2006, we amended the AT&T agreement to provide that certain
      services that we purchase or may purchase from AT&T (and its affiliates)
      will now count toward the minimum commitment. With this amendment we anticipate
      that we will not be required to make any shortfall payments under this contract.
      In addition to the AT&T commitment, we have other commitments with various
      other vendors for telecommunication services.





Cash
      provided by (used for):





Percent
                Change2005
            2004
            2003
            2005
                vs. 2004
            2004
                vs. 2003Operating
                activities
            $
                72,012
            $
                74,595
            $
                73,171
            (3.5%)
            1.9%Investing
                activities
            (76,003)
            (16,497)
            (14,715)
            (360.7%)
            (12.1%)Financing
                activities
            2,787
            (45,848)
            (56,802)
            106.1%
            19.3%







8


*Cash
      Provided By Operating Activities.* Cash
      generated by operations decreased by $2.6 million in 2005 from 2004 and
      increased by $1.4 million in 2004 from 2003. Although cash generated from
      operations has been relatively flat for 2005, 2004 and 2003, the composition
      of
      the cash flow has changed considerably. During 2005, we experienced
      significantly lower sales and marketing expense, which offset decreased revenue
      and increased network cost and general and administrative expense. We expect
      that our cash flow from operations will decline in 2006 as we experience higher
      sales and marketing expense as a result of our efforts to expand growth in
      areas
      where we have networking assets. The
      application of net operating loss carryforwards, or NOLs, in 2005, 2004 and
      2003
      has limited our current payment of income taxes to cash taxes for alternative
      minimum taxes and certain state income taxes, but we expect that Talk America’s
      NOLs will be substantially utilized during 2006. The use of NOLs acquired in
      the
      LDMI acquisition will be limited, with the benefit spread through
      2018.





*Net
      Cash Used in Investing Activities.*  Capital
      expenditures increased by $32.3 million during 2005 as compared to 2004 and
      capitalized software development costs increased by $0.5 million. In 2005,
      approximately $40.0 million of our $45.2 million in capital expenditures
      consisted of costs related to our deployment of networking assets (local switch
      and collocation equipment) in Michigan. In 2004,
      approximately 37% of our $13.0 million in capital expenditures consisted of
      costs related to our deployment of networking assets (local switch and
      collocation equipment) in Michigan, up from 66% of our $5.5 million in 2003.
      Also in 2003, to support our customer growth, we opened a new customer service
      call center. The remaining 2003 capital expenditures consisted primarily of
      upgrades to our information technology capabilities to support our customer
      growth. In addition, during 2004 we entered into a vendor financing agreement
      for new database software valued at $2.5 million and during 2003, we entered
      into a capital lease valued at $3.4 million for upgrades to our customer data
      storage equipment.





We
      expect
      to spend between $25.0 and $30.0 million in capital expenditures and capitalized
      software in 2006, primarily for the build out of the Atlanta networking
      facilities and expansion of our Michigan network facilities.





The
      acquisition of LDMI on July 13, 2005, required the payment of $21.3 million
      in
      cash ($24.0 million less cash acquired of $2.7 million) and the issuance of
      1.8
      million shares of our common stock for the purchase of all of the equity of
      LDMI
      and the repayment of $4.7 million in debt. The acquisition of NTC on January
      3,
      2006, required the payment of $18.0 million in cash for the purchase of all
      of
      the equity of NTC. To the extent that we are successful in identifying and
      completing additional acquisitions of customers, networking assets or
      businesses, net cash used in investing activities may increase.





*Net
      Cash Used in Financing Activities.*  Net
      cash
      provided by financing activities during 2005 was $2.8 million, primarily
      attributable to proceeds from the exercise of stock options and warrants. Net
      cash used in financing activities during 2004 was $45.8 million, primarily
      attributable to the repayment of outstanding debt. During
      2004, we redeemed $40.7 million of our 12% Senior Subordinated Notes, $2.8
      million of our 8% Convertible Senior Subordinated Notes and $0.7 million of
      our
      5% Convertible Subordinated Notes, representing the respective entire principal
      amounts outstanding as of December 31, 2003. On
      June
      1, 2004, we announced that our Board of Directors had authorized a share buyback
      program for us to purchase up to $50 million of our outstanding shares. The
      shares may be purchased from time to time, in the open market and/or private
      transactions. Through December 31, 2005, we had not purchased any shares under
      this program.





In
      recent
      years we have been meeting our ongoing cash requirements (including for the
      conduct of our operations, acquisitions and capital expenditures) from our
      cash
      on-hand and from cash generated from operations. However, our continued growth,
      including additional acquisitions, may require that we seek alternative sources
      of funding. While we believe that we would have access to new capital in the
      public or private markets, there can be no assurance as to the timing, amounts,
      terms or conditions of any such new capital or whether it could be obtained
      on
      terms acceptable to us. Based on our current projections for operations, we
      believe that our cash on-hand and our cash flow from operations will be
      sufficient to fund our currently contemplated capital expenditures, our debt
      service obligations and the expenses of conducting our operations for at least
      the next twelve months. However, there can be no assurance that we will be
      able
      to realize our projected cash flows from operations, which is subject to the
      risks and uncertainties discussed in this report, or that we will not be
      required to consider capital expenditures in excess of those currently
      contemplated, as discussed in this Form 10-K Annual Report.





9


**CRITICAL
      ACCOUNTING ESTIMATES**





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





**Network
      and Line Costs**





We
      accrue
      expenses for network costs that we believe we have incurred pursuant to our
      interconnection agreements with a particular supplier or tariffs but for which
      we have not yet been billed. This primarily occurs due to errors and omissions
      in billing on the part of our principal suppliers, the incumbent local exchange
      companies. In addition, we accrue for network expense in a jurisdiction if
      there
      is expected to be regulatory or other legal changes in the jurisdiction which
      would retroactively increase the rates we have been charged. For example, in
      Georgia an appeals court overturned a recent rate reduction by the state public
      utility commission and ordered the commission to re-calculate our rates. This
      issue is currently being considered by the state commission and we expect that
      the issue will be resolved by the middle of 2006. We believe that these rates
      will be in excess of those previously allowed and have accrued
      accordingly.





Accrued
      expenses are eliminated upon the earlier of actual billing (including billing
      for charges appropriately recorded in prior periods but not invoiced, or
“backbilling”) by the incumbent local exchange companies or the expiration of
      the time period for which we are liable for the charges. The time period is
      governed by interconnection agreements or, in the absence of a specific
      agreement, by the statute of limitations operative in a given state. As the
      expiration of the statute of limitations occurred, we have reduced, and will
      reduce in the future, our liability for this exposure as there is no further
      legal recourse the supplier can take in collecting these amounts.





**Allowance
      for Uncollectible Accounts**





Allowances
      for doubtful accounts are maintained for estimated losses resulting from the
      failure of customers to make required payments on their accounts. We review
      accounts receivable aging trends, historical bad debt trends, and customer
      credit-worthiness through customer credit scores, current economic trends and
      changes in customer payment history when evaluating the adequacy of the
      allowance for doubtful accounts. In addition, we review the financial condition
      of the carriers that pay us access charges to assess their ability to make
      payments.





**Valuation
      of Long-Lived Assets and Intangible Assets with a Definite
      Life**





We
      review
      the recoverability of the carrying value of long-lived assets, including
      intangibles with a definite life, for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of such assets may not be
      recoverable. When such events occur, we compare the carrying amount of the
      assets to the undiscounted expected future cash flows from them. Factors we
      consider important that could trigger an impairment review include the
      following:





·
            Significant
                underperformance relative to historical or projected future operating
                results


·
            Significant
                changes in the manner of our use of the acquired assets or expected
                useful
                lives of the assets or the strategy for our overall business


·
            Significant
                negative regulatory, industry or economic trends


·
            Significant
                decline in our stock price for a sustained period and market
                capitalization relative to net book value





Long-lived
      assets are grouped with other assets and liabilities at the lowest level for
      which identifiable cash flows are largely independent of the cash flows of
      other
      assets and liabilities. Since we provide integrated telecommunications services
      with our asset groups not being independent of each other, our assets are viewed
      as being of a single asset group and impairment testing is conducted at the
      entity level. Estimates of future cash flows used to test recoverability are
      made for the remaining useful life of the primary asset of the asset group.
      Cash
      flows are estimated using management’s current view of the operating and
      financial prospects of the asset group. If this comparison indicates there
      is
      impairment, the amount of the impairment loss to be recorded is calculated
      by
      the excess of the net assets’ carrying value over its fair value and is
      typically calculated using discounted expected future cash flows.





10


**Goodwill
      and Intangible Assets with Indeterminate Lives**





Goodwill
      represents the cost in excess of the fair value of the net assets of acquired
      companies. Effective January 1, 2002, with the adoption of SFAS No. 142,
      goodwill (comprised of goodwill acquired in the Access One acquisition in August
      2000) will not be amortized, but rather will be tested for impairment annually,
      and will be tested for impairment between annual tests if an event occurs or
      circumstances change that would indicate the carrying amount may be impaired.
      Impairment testing for goodwill is performed at a reporting unit level; we
      determined that we have one reporting unit under the guidance of SFAS No. 142.
      An impairment loss would generally be recognized when the carrying amount of
      the
      reporting unit’s net assets exceeds the estimated fair value of the reporting
      unit. Fair value for the reporting unit is based on a discounted cash flow
      analysis and consideration of the current market value of our common stock.
      Cash
      flows are estimated using management’s current view of the operating and
      financial prospects of the business. A discount rate of 18% was used in the
      discounted cash flow analysis.





**Income
      Taxes**





Income
      taxes are accounted for under the asset and liability method. During 2005 and
      2004, we recorded income taxes at a rate equal to our combined federal and
      state
      effective rates. Deferred tax assets and liabilities are recognized for the
      estimated future tax consequences attributable to the differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax bases and operating loss and tax credit carryforwards.
      Deferred tax assets and liabilities are measured using enacted tax rates in
      effect for the year in which those temporary differences are expected to be
      recovered or settled.





We
      consider all available evidence, both positive and negative, to determine
      whether, based on the weight of that evidence, a valuation allowance is needed
      for some portion or all of a net deferred tax asset. Judgment is used in
      considering the relative impact of negative and positive evidence. In arriving
      at these judgments, the weight given to the potential effect of negative and
      positive evidence is commensurate with the extent to which it can be objectively
      verified. We record a valuation allowance to reduce our deferred tax assets
      and
      review the amount of such allowance annually. If we determine deferred tax
      assets will more likely than not be utilized, we will reduce our valuation
      allowance accordingly.





**New
      Accounting Pronouncements**




In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(SFAS 123R). SFAS 123R requires that compensation cost related to share-based
      payment transactions, including the issuance of stock options, be recognized
      in
      the financial statements. Currently, we account for our share-based payment
      transactions under the provisions of APB 25, which does not necessarily require
      the recognition of compensation cost in the consolidated statement of income
      in
      the financial statements.




In
      response to the accounting standard referenced above, the Compensation Committee
      of our Board of Directors, which consists entirely of independent directors,
      as
      well as the full Board of Directors, unanimously approved accelerating on
      December 28, 2005, the vesting of certain out-of-the-money, unvested stock
      options held by current employees, including our executive officers and
      directors. The acceleration applied only to those options with an exercise
      price
      of $10.49 per share, and granted on December 22, 2003. The closing market price
      of our common stock on December 27, 2005 was $9.02 per share. The following
      table summarizes the options subject to acceleration:





11





**Aggregate Number of**
              **Common Stock Shares Issuable**
              **Under Accelerated Stock Options**
            
            **Weighted Average**
              **Exercise
                Price**
              **Per
                Share**Total
                Non-Employee Directors
            
            11,666
            
            $10.49Total
                Named Executive Officers (1)
            
            159,998
            
            $10.49Total
                Directors and Named Executive Officers
            
            171,664
            
            $10.49Total
                All Other Employees
            
            176,185
            
            $10.49Total
                (2)
            
            347,849
            
            $10.49





(1)  Named
      executive officers consist of the officers listed in The Summary Compensation
      Table in Part III, Item 11. Executive Compensation of this Form 10-K Annual
      Report.


(2)  The
      accelerated options represent approximately 7.0% of total outstanding
      options.





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





In
      the
      normal course of business, our financial position is subject to a variety of
      risks, such as the collectibility of our accounts receivable and the
      recoverability of the carrying values of our long-term assets. Our long-term
      obligations consist primarily of long-term debt with fixed interest rates.
      We do
      not presently enter into any transactions involving derivative financial
      instruments for risk management or other purposes.





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











12


**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.**





**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**PAGE**Report
                of Independent Registered Public Accounting Firm
            
            14Consolidated
                statements of operations for the years ended December 31, 2005, 2004
                and
                2003
            
            15Consolidated
                balance sheets as of December 31, 2005 and 2004
            
            16Consolidated
                statements of cash flows for the years ended December 31, 2005, 2004
                and
                2003
            
            17Consolidated
                statements of stockholders' equity for the years ended December 31,
                2005,
                2004 and 2003
            
            18Notes
                to consolidated financial statements
            
            19








13





**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and


Shareholders
      of Talk America Holdings, Inc.:





We
      have
      completed integrated audits of Talk America Holdings, Inc. ’s
      2005  and
      2004
      consolidated financial statements and of its internal control over financial reporting as
      of
      December 31, 2005, and an audit of its 2003 consolidated financial statements
      in
      accordance with the standards of the Public Company Accounting Oversight Board
      (United States). Our opinions, based on our audits, are presented
      below.





Consolidated
      financial statements and financial statement schedule





In
      our
      opinion, the consolidated financial statements listed in the index appearing
      under Item 15(a)(1) present fairly, in all material respects, the financial
      position of Talk America Holdings, Inc. and its subsidiaries (the “Company”) at
      December 31, 2005 and 2004, and the results of their operations and their cash
      flows for each of the three years in the period ended December 31, 2005 in
      conformity with accounting principles generally accepted in the United States
      of
      America. In addition, in our opinion, the financial statement schedule listed
      in
      the index appearing under Item 15 (a)(2) presents
      fairly, in all material respects, the information set forth therein when read
      in
      conjunction with the related consolidated **** financial
      statements. These
      financial statements and financial statements schedule are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      financial statements and financial statement schedule based on our audits.
      We
      conducted our audits of these statements in accordance with the standards of
      the
      Public Company Accounting Oversight Board (United States). 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
      of
      financial statements includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the financial statements, assessing the
      accounting principles used and significant estimates made by management, and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





Internal
      control over financial reporting





Also,
      in
      our opinion, management’s assessment, included in Management’s Report on
      Internal Control over Financial Reporting appearing under Item 9A, that the
      Company maintained effective internal control over financial reporting as of
      2005  based
      on
      criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      is fairly stated, in all material respects, based on those criteria.
      Furthermore, in our opinion, the Company maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2005,
      based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the COSO. The Company’s management is responsible for maintaining effective
      internal control over  financial
      reporting and for its assessment of the effectiveness of internal control over
      financial reporting. Our responsibility is to express opinions on management’s
      assessment and on the effectiveness of the Company’s internal control over
      financial reporting based on our audit. We conducted our audit of internal
      control over financial reporting in accordance with the standards of the Public
      Company Accounting Oversight Board (United States). Those standards require
      that
      we plan and perform the audit to obtain reasonable assurance about whether
      effective internal control over financial reporting was maintained in all
      material respects. An audit of internal control over financial reporting
      includes obtaining an understanding of internal control over financial
      reporting, evaluating management’s assessment, testing and evaluating the design
      and operating effectiveness of internal control, and performing such other
      procedures as we consider necessary in the circumstances. We believe that our
      audit provides a reasonable basis for our opinions.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (i) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company;
      (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (iii) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s assets that could have a material effect on the
      financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





As
      described in Management’s Report on Internal Control over Financial Reporting,
      management has excluded  LDMI
      Telecommunications, Inc. ("LDMI") from its assessment of internal control over
      financial reporting as of December 31, 2005 because it was acquired by the
      Company in a purchase business combination during 2005. LDMI is a wholly-owned
      subsidiary of the Company that represented approximately 24% and 10% of
      the Company's total assets and total revenue, respectively, as of
      and for the year ended December 31, 2005 .








**PricewaterhouseCoopers
      LLP**


Philadelphia,
      Pennsylvania


March
      27,
      2006





14











**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands, except for per share data)**





**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**Revenue
            
            $
            462,740
            
            $
            471,012
            
            $
            383,693Costs
                and expenses:Network
                and line costs (excluding depreciation
              shown below)
            
            
            243,925
            
            
            225,244
            
            
            173,349General
                and administrative expenses
            
            
            82,127
            
            
            72,020
            
            
            63,104Provision
                for doubtful accounts
            
            
            19,114
            
            
            21,313
            
            
            11,599Sales
                and marketing expenses
            
            
            29,863
            
            
            70,202
            
            
            51,008Depreciation
                and amortization
            
            
            44,937
            
            
            22,904
            
            
            18,345Total
                costs and expenses
            
            
            419,966
            
            
            411,683
            
            
            317,405Operating
                income
            
            
            42,774
            
            
            59,329
            
            
            66,288Other
                income (expense):Interest
                income
            
            
            1,007
            
            
            290
            
            
            388Interest
                expense
            
            
            (350
            )
            
            (733
            )
            
            (7,353
            )Other
                income, net
            
            
            974
            
            
            1,895
            
            
            2,470Income
                before provision (benefit) for income taxes
            
            
            44,405
            
            
            60,781
            
            
            61,793Provision
                (benefit) for income taxes
            
            
            18,244
            
            
            23,969
            
            
            (20,024
            )Net
                income
            
            $
            26,161
            
            $
            36,812
            
            $
            81,817Income
                per share - Basic:Net
                income per share
            
            $
            0.91
            
            $
            1.37
            
            $
            3.10Weighted
                average common shares outstanding
            
            
            28,675
            
            
            26,847
            
            
            26,376Income
                per share - Diluted:Net
                income per share
            
            $
            0.89
            
            $
            1.32
            
            $
            2.94Weighted
                average common and common equivalent
              shares outstanding
            
            
            29,296
            
            
            27,854
            
            
            27,806





See
      accompanying notes to consolidated financial statements.


15


**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      thousands, except for share and per share data)**





**December
                31,**
              **2005**
            
            **December
                31,**
              **2004****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            46,288
            
            $
            47,492Accounts
                receivable, trade (net of allowance for uncollectible accounts of
                $13,838
                and $17,508 at December 31, 2005 and 2004, respectively)
            
            
            43,600
            
            
            48,873Deferred
                income taxes
            
            
            18,096
            
            
            34,815Prepaid
                expenses and other current assets
            
            
            10,297
            
            
            6,888Total
                current assets
            
            
            118,281
            
            
            138,068Property
                and equipment, net
            
            
            98,492
            
            
            65,823Goodwill
            
            
            36,479
            
            
            13,013Intangible
                assets, net
            
            
            4,934
            
            
            1,966Deferred
                income taxes
            
            
            21,033
            
            
            14,291Capitalized
                software cost and other assets
            
            
            9,470
            
            
            8,567$
            288,689
            
            $
            241,728**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            40,025
            
            $
            38,843Sales,
                use and excise taxes
            
            
            7,316
            
            
            11,179Deferred
                revenue
            
            
            13,824
            
            
            15,321Current
                portion of long-term debt and capitalized lease
                obligations
            
            
            3,988
            
            
            2,529Accrued
                compensation
            
            
            9,405
            
            
            6,690Other
                current liabilities
            
            
            14,181
            
            
            10,022Total
                current liabilities
            
            $
            88,739
            
            $
            84,584Long-term
                debt and capitalized lease obligations
            
            
            1,289
            
            
            1,717Deferred
                income taxes
            
            
            4,853
            
            
            13,906Asset
                retirement obligation
            
            
            2,021
            
            
            --Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock - $.01 par value, 5,000,000 shares authorized; no shares outstanding
            
            
            --
            
            
            --Common
                stock - $.01 par value, 100,000,000 shares authorized; 30,368,267
                and
                27,037,096 shares issued and outstanding at December 31, 2005 and
                2004,
                respectively
            
            
            317
            
            
            284Additional
                paid-in capital
            
            
            380,481
            
            
            356,409Accumulated
                deficit
            
            
            (184,011
            )
            
            (210,172
            )Treasury
                stock - at cost, 1,315,789 shares at December 31, 2005 and
                2004
            
            
            (5,000
            )
            
            (5,000
            )Total
                stockholders' equity
            
            
            191,787
            
            
            141,521$
            288,689
            
            $
            241,728





See
      accompanying notes to consolidated financial statements.


16





**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**




**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**Cash
                flows from operating activities:Net income
            
            $
            26,161
            
            $
            36,812
            
            $
            81,817Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for doubtful accounts
            
            
            19,114
            
            
            21,313
            
            
            11,599Depreciation
                and amortization
            
            
            44,937
            
            
            22,904
            
            
            18,345Other
                non-cash charges
            
            
            378
            
            
            13
            
            
            22Non-cash
                interest
            
            
            96
            
            
            (956
            )
            
            (260
            )Gain
                from extinguishment of debt
            
            
            --
            
            
            --
            
            
            (2,476
            )Deferred
                income taxes
            
            
            14,928
            
            
            19,588
            
            
            (23,411
            )Changes
                in assets and liabilities:Accounts
                receivable, trade
            
            
            (2,490
            )
            
            (29,865
            )
            
            (24,077
            )Prepaid
                expenses and other current assets
            
            
            3,405
            
            
            (900
            )
            
            (1,533
            )Other
                assets
            
            
            (15
            )
            
            60
            
            
            1,410Accounts
                payable
            
            
            (19,937
            )
            
            5,189
            
            
            3,799Deferred
                revenue
            
            
            (4,626
            )
            
            4,448
            
            
            4,393Sales,
                use and excise taxes
            
            
            (8,414
            )
            
            (2,342
            )
            
            2,082Accrued
                compensation
            
            
            (274
            )
            
            (3,198
            )
            
            4,279Other
                current liabilities
            
            
            (1,251
            )
            
            1,529
            
            
            (2,818
            )Net
                cash provided by operating activities
            
            
            72,012
            
            
            74,595
            
            
            73,171Cash
                flows from investing activities:Proceeds
                from sale of fixed assets
            
            
            70
            
            
            --
            
            
            --Acquisition
                of LDMI, net of cash acquired
            
            
            (26,850
            )
            
            --
            
            
            --Acquisition
                of intangibles
            
            
            --
            
            
            --
            
            
            (133
            )Capital
                expenditures
            
            
            (45,234
            )
            
            (12,963
            )
            
            (11,844
            )Capitalized
                software development costs
            
            
            (3,989
            )
            
            (3,534
            )
            
            (2,738
            )Net
                cash used in investing activities
            
            
            (76,003
            )
            
            (16,497
            )
            
            (14,715
            )Cash
                flows from financing activities:Payments
                on borrowings
            
            
            --
            
            
            (45,273
            )
            
            (52,918
            )Payments
                of capital lease obligations
            
            
            (2,230
            )
            
            (1,228
            )
            
            (61
            )Proceeds
                from exercise of options and warrants
            
            
            5,017
            
            
            653
            
            
            1,177Purchase
                of treasury stock
            
            
            --
            
            
            --
            
            
            (5,000
            )Net
                cash provided by (used in) financing activities
            
            
            2,787
            
            
            (45,848
            )
            
            (56,802
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,204
            )
            
            12,250
            
            
            1,654Cash
                and cash equivalents, beginning of year
            
            
            47,492
            
            
            35,242
            
            
            33,588Cash
                and cash equivalents, end of year
            
            $
            46,288
            
            $
            47,492
            
            $
            35,242








See
      accompanying notes to consolidated financial statements.







17




**TALK
        AMERICA HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**
 **(In
        thousands)**
 AdditionalCommon
                    Stock
                
                
                Paid
                    In
                
                
                Accumulated
                
                
                Treasury
                    StockShares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                Shares
                
                
                Amount
                
                
                TotalBalance,
                    December 31, 2002
                
                
                27,470
                
                $
                275
                
                $
                351,992
                
                $
                (328,801
                )
                
                --
                
                $
                --
                
                $
                23,466Net
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                81,817
                
                
                --
                
                
                --
                
                
                81,817Acquisition
                    of treasury stock
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                1,316
                
                
                (5,000
                )
                
                (5,000
                )Exercise
                    of common stock options
                
                
                509
                
                
                5
                
                
                1,172
                
                
                --
                
                
                --
                
                
                --
                
                
                1,177Income
                    tax benefit related to exercise of common stock options
                
                
                --
                
                
                --
                
                
                1,683
                
                
                --
                
                
                --
                
                
                --
                
                
                1,683Balance,
                    December 31, 2003
                
                
                27,979
                
                
                280
                
                
                354,847
                
                
                (246,984
                )
                
                1,316
                
                
                (5,000
                )
                
                103,143Net
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                36,812
                
                
                --
                
                
                --
                
                
                36,812Exercise
                    of common stock options
                
                
                374
                
                
                4
                
                
                658
                
                
                --
                
                
                --
                
                
                --
                
                
                662Income
                    tax benefit related to exercise of common stock options
                
                
                --
                
                
                --
                
                
                904
                
                
                --
                
                
                --
                
                
                --
                
                
                904Balance,
                    December 31, 2004
                
                
                28,353
                
                
                284
                
                
                356,409
                
                
                (210,172
                )
                
                1,316
                
                
                (5,000
                )
                
                141,521Net
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                26,161
                
                
                --
                
                
                --
                
                
                26,161Exercise
                    of common stock options
                
                
                1,531
                
                
                15
                
                
                5,002
                
                
                --
                
                
                --
                
                
                --
                
                
                5,017Income
                    tax benefit related to exercise of common stock options
                
                
                --
                
                
                --
                
                
                3,126
                
                
                --
                
                
                --
                
                
                --
                
                
                3,126Common
                    stock issued in connection with acquisition of LDMI
                
                
                1,800
                
                
                18
                
                
                15,944
                
                
                --
                
                
                --
                
                
                --
                
                
                15,962Balance,
                    December 31, 2005
                
                
                31,684
                
                $
                317
                
                $
                380,481
                
                $
                (184,011
                )
                
                1,316
                
                $
                (5,000
                )
                $
                191,787
 See accompanying notes to
      consolidated financial statements.  18


**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**





**(a)** **Business**





Talk
      America Holdings, Inc., through its subsidiaries, offers voice and data services
      to residential and small business customers in the United States. We offer
      these
      services to customers in our markets by one of the following methods: through
      the use of our own network facilities and the unbundled network element loops
      or
      T-1 circuits of the incumbent local exchange carriers or through wholesale
      agreements with other carriers. We have developed integrated order processing,
      provisioning, billing, payment, collection, customer service and information
      systems that enable us to offer and deliver high-quality service, savings
      through competitively priced telecommunication products, and simplicity through
      consolidated billing and responsive customer service. We operate our own sales
      and customer service centers. We manage our business as one reportable operating
      segment.





**(b)**  **Basis
      of Financial Statements Presentation**





The
      consolidated financial statements include the accounts of Talk America Holdings,
      Inc. and its wholly owned subsidiaries. All intercompany balances and
      transactions have been eliminated.





**(c)**  **Use
      of Estimates**





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





**(d)**  **Reclassifications**





Certain
      amounts for 2004 and 2003 have been reclassified to conform to the current
      year
      presentation.





**(e)**  **Risks
      and Uncertainties**





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





·
            Our
                ability to successfully integrate business that we acquire, including
                but
                not limited to LDMI and NTC


·
            Dependence
                on the availability and functionality of the networks of the incumbent
                local exchange carriers


·
            Increased
                price and product competition in commercial and residential voice
                and data
                services, and overall competition within the telecommunications
                industry





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





19


**(f)**  **Concentration
      of Credit Risk**





We
      maintain our cash and cash equivalents in bank deposit accounts, which at times
      may exceed federally insured limits. We generally do not have a significant
      concentration of credit risk with respect to net trade accounts receivable,
      due
      to the large number of end users comprising our customer base.




**(g)**  **Recognition
      of Revenue**





We
      derive
      our revenues primarily from voice and data services. We recognize revenue from
      voice, data and other telecommunications-related services in the period in
      which
      subscribers use the related service. Deferred revenue represents the unearned
      portion of voice and data services and features that are billed a month in
      advance.





We
      also
      derive access revenue from long-distance companies for access to our network
      in
      connection with the completion of long-distance telephone calls. We recognize
      access revenue based on minutes of traffic captured in a given period. Access
      revenue represented less than five percent of total revenue for 2005, 2004
      and
      2003.





**(h)**  **Accounts
      Receivable and Allowance for Uncollectible Accounts**





Trade
      accounts receivable are recorded at the invoice amount. The allowance for
      doubtful accounts is our best estimate of the amount of probable credit losses
      in our existing accounts receivable. We determine the allowance based on
      historical write-off experience. We review our allowance for doubtful accounts
      monthly. Account balances are charged off against the allowance when we feel
      it
      is probable the receivable will not be recovered. We do not have any off balance
      sheet credit exposure related to our customers.





Receivables
      consist of trade accounts receivables of $57.4 million and $66.4 million at
      December 31, 2005 and 2004, respectively. Following are the changes in the
      allowance for doubtful accounts during the years ended December 31, 2005, 2004
      and 2003 (in thousands):





**Year
                Ended December 31,**
            
            **Balance
                at Beginning of Year**
            
            **Acquired**
              **Balances**
            
            **Provision**
            
            **Write-offs
                Net of Recoveries**
            
            **Balance
                at End of Year**2005
            
            $
            17,508
            
            $
            1,589
            
            
            19,114
            
            
            (24,373
            )
            $
            13,8382004
            
            $
            9,414
            
            
            --
            
            
            21,313
            
            
            (13,219
            )
            $
            17,5082003
            
            $
            7,821
            
            
            --
            
            
            11,599
            
            
            (10,006
            )
            $
            9,414





**(i)**  **Cash
      and Cash Equivalents**





We
      consider all temporary cash investments purchased with an initial maturity
      of
      three months or less to be cash equivalents.





20


**(j)**  **Property
      and Equipment and Depreciation**





Property
      and equipment are recorded at historical cost. Depreciation and amortization
      are
      calculated using the straight-line method over the estimated useful lives of
      the
      assets from 1 to 39 years. Leasehold improvements are depreciated over the
      life
      of the related lease or asset, whichever is shorter. Capital leases are included
      in property and equipment with corresponding amortization included in
      accumulated depreciation. Capital lease assets are amortized over the useful
      life of the respective assets, or the lease term, whichever is shorter.





Repair
      and maintenance costs are expensed as incurred. Significant improvements
      extending the useful life of property are capitalized. When property is retired
      or otherwise disposed of, the cost of the property and the related accumulated
      depreciation are removed from the accounts, and any resulting gains or losses
      are reflected in the consolidated statement of operations.





**(k)**  **Computer
      Software Development Costs**





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





Development
      costs for internally used computer software included in capitalized software
      and
      other assets at December 31, 2005 and 2004 were $6.4 million and $5.7 million,
      respectively, net of accumulated amortization of $7.8 million and $4.5 million,
      respectively, at December 31, 2005 and 2004. Amortization expense was $3.3
      million and $2.4 million, respectively, for the years ended December 31, 2005
      and 2004.





**(l)**  **Goodwill
      and Intangible Assets**





Effective
      January 1, 2002, we adopted Statement of Financial Accounting Standards No.
      142,
      "Goodwill and Other Intangible Assets," which establishes the impairment
      approach rather than amortization for goodwill and intangible assets with
      indeterminate lives. We do not record amortization expense on goodwill, but
      instead are required to evaluate these assets for potential impairment at least
      annually and test for impairment between annual tests, which we conduct in
      the
      second quarter, if an event occurs or circumstances change that would indicate
      the carrying amount may be impaired.





We
      conducted our annual goodwill impairment test in the second quarter of 2005
      and
      determined that it was not impaired.





Intangible
      assets at December 31, 2005 are comprised of items that have been acquired
      as a
      result of the acquisition of LDMI and consist primarily of purchased customer
      accounts and trademarks. The customer list is being amortized over a 3 year
      period using expected customer turnover rates. The trademark is being amortized
      on a straight line basis over a 2 year period.





Amortization
      expense on intangible assets with a definite life was $3.1 million for December
      31, 2005, $2.7 million for December 31, 2004 and $2.8 million for December
      31,
      2003. Intangible assets with a definite life amounted to $4.6 million at
      December 31, 2005, net of accumulated amortization of $1.5 million. Amortization
      expense on intangible assets with a definite life is expected to be $2.8
      million, $1.4 million, and $0.4 million for the years ended December 31, 2006,
      2007 and 2008, respectively.




21


**(m)**  **Valuation
      of Long-Lived Assets**





We
      review
      the recoverability of the carrying value of long-lived assets, including
      intangible assets with a definite life, for impairment using the methodology
      prescribed in SFAS 144 whenever events or changes in circumstances indicate
      that
      the carrying amount of such assets may not be recoverable. Based on regulatory
      changes and the shortening of the remaining useful lives of our long distance
      switches in the fourth quarter of 2004, we tested for impairment of our long
      lived assets and determined that they were not impaired.




**(n)**  **Income
      Taxes**





Income
      taxes are accounted for under the asset and liability method. Accordingly,
      deferred tax assets and liabilities are recognized currently for the future
      tax
      consequences attributable to the temporary differences between the financial
      statement carrying amounts of assets and liabilities and their respective tax
      basis. Deferred tax assets and liabilities are measured using enacted tax rates
      in effect for the year in which those temporary differences are expected to
      be
      recovered or settled. A valuation allowance is recorded to reduce the carrying
      amounts of deferred tax assets if it is more likely than not that such assets
      will not be realized.





**(o)**  **Net
      Income Per Share**





Basic
      earnings per share for a period computed by dividing income available to common
      shareholders by the weighted average number of common shares outstanding during
      the period. Diluted earnings per share reflects the effect of common shares
      issuable upon exercise of stock options, warrants and conversion of convertible
      debt, when such effect is not antidilutive.





**(p)**  **Financial
      Instruments**





The
      carrying values of accounts receivable, prepaid expenses and other current
      assets, accounts payable and accrued expenses approximate their fair values.





22


**(q)**  **Stock-Based
      Compensation**





We
      account for our stock option awards under the intrinsic value based method
      of
      accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
      Employees," and related interpretations, including FASB Interpretation No.
      44
      "Accounting for Certain Transactions Including Stock Compensation," an
      interpretation of APB Opinion No. 25. Under the intrinsic value based method,
      compensation cost is the excess, if 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. We make pro forma disclosures of net income and earnings
      per
      share as if the fair value based method of accounting had been applied as
      required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS
      148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an
      amendment of SFAS 123”. The following disclosure complies with the adoption of
      this statement and includes pro forma net income as if the fair value based
      method of accounting had been applied:





**Year
                Ended December 31,**
              **(In
                thousands)****2005**
            
            
            **2004**
            
            
            **2003**Net
                income as reported
            
            $
            26,161
            
            $
            36,812
            
            $
            81,817Add:
                Stock-based employee compensation expense included in reported net
                income,
                net of taxes
            
            
            3
            
            
            5
            
            
            --Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all options, net of taxes
            
            
            (3,491
            )
            
            (5,308
            )
            
            (1,348
            )Pro
                forma net income
            
            $
            22,673
            
            $
            31,509
            
            $
            80,469





**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003****Basic
                earnings per share:**As
                reported
            
            $
            0.91
            
            $
            1.37
            
            $
            3.10Pro
                forma
            
            $
            0.79
            
            $
            1.17
            
            $
            3.05**Diluted
                earnings per share:**As
                reported
            
            $
            0.89
            
            $
            1.32
            
            $
            2.94Pro
                forma
            
            $
            0.77
            
            $
            1.15
            
            $
            2.94




For
      purposes of pro forma disclosures under SFAS 123, the estimated fair value
      of
      the options is assumed to be amortized to expense over the options' vesting
      period. The fair value of the options granted has been estimated at the various
      dates of the grants using the Black-Scholes option-pricing model with the
      following assumptions:





·  Fair
      market value based on our closing common stock price on the date the option
      is
      granted;


·  Risk-free
      interest rate based on the weighted averaged 5 year U.S. treasury note strip
      rates;


·  Volatility
      based on the historical stock price over the expected term (5
      years);


·  No
      expected dividend yield based on future dividend payment plans.





23


In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments”
(SFAS 123R) which replaces SFAS 123 and supersedes APB 25. Under the new
      standard, companies will no longer be allowed to account for stock-based
      compensation transactions using the intrinsic value method in accordance with
      APB 25. Instead, companies will be required to account for such transactions
      using a fair value method and to recognize the expense in the statements of
      operations. The adoption of SFAS 123R will require additional accounting related
      to the income tax effects of share-based payment arrangements and additional
      disclosure of their cash flow impacts. SFAS 123R also allows, but does not
      require, companies to restate prior periods. We will adopt the provisions of
      SFAS 123R beginning January 1, 2006, using the modified prospective transition
      method. Under the modified prospective method, non-cash compensation expense
      will be recognized for the portion of outstanding stock option awards granted
      prior to the adoption of SFAS 123R for which service has not been rendered,
      and
      for future stock option grants. We currently estimate the related compensation
      expense for 2006 will be approximately $5 million.





In
      response to the issuance of SFAS 123R, on December 22, 2005, our Board of
      Directors approved the acceleration of vesting of 347,849 out-of-the-money
      stock
      options with an exercise price of $10.49 and held by current employees including
      executive officers and Board members. As a result, the 2005 pro forma
      stock-based employee compensation expense disclosed above includes $891,000
      ($525,000 after tax) of compensation expense that will now not be recognized
      in
      future statements of operations subsequent to the adoption of SFAS
      123R.





**(r)**  **Comprehensive
      Income**





We
      have
      no items of comprehensive income or expense. Accordingly, our comprehensive
      income and net income are equal for all periods presented.





**(s)**  **Advertising**





We
      expense advertising costs as they are incurred. Advertising expenses totaled
      approximately $3.8 million, $10.5 million, and $7.5 million for the years ended
      December 31, 2005, 2004 and 2003, respectively.





**(t)**  **Asset
      Retirement Obligation (ARO)**





We
      recognize ARO in accordance with SFAS 143 “Accounting for Asset Retirement
      Obligations.” SFAS 143 provides accounting and reporting standards for costs
      associated with the retirement of long-lived assets and requires entities to
      record the fair value of a liability for an asset retirement obligation in
      the
      period in which it is incurred. When the liability is initially recorded, the
      entity capitalizes the cost by increasing the carrying amount of the related
      long-lived asset. Over time, the liability is accreted to its present value,
      and
      the capitalized cost is depreciated over the estimated useful life of the
      related asset. Upon settlement of the liability, an entity either settles the
      obligations for its recorded amount or incurs a gain or loss





Our
      ARO
      primarily relates to restoration of leased facilities that house our networking
      equipment. During 2005, we expanded our networking footprint to support our
      transformation into a network-based telecommunications provider. This expansion
      resulted in an increase in our ARO due to the significant build out of our
      network, the acquisition of LDMI (See Note 13), and changes in cost of
      restoration estimates based on increased experience as a network-based provider.
      Changes in ARO were as follows (in thousands):


2005Balance
                at January 1,
            
            $
            --Acquisitions
                (See Note 14)
            
            
            1,249Additions
            
            
            613Revisions
            
            
            1,004Accretion
            
            
            96Retirement
            
            
            (42
            )Balance
                at December 31,
            
            $
            2,920





No
      assets
      are legally restricted for the purposes of settling our ARO.








24


**NOTE
      2. COMMITMENTS AND CONTINGENCIES**





**(a)**  **Lease
      Agreements**





We
      lease
      facility space and equipment under operating and capital lease agreements.
      Certain leases contain renewal options and purchase options, and generally
      provide that we shall pay for insurance, taxes and maintenance. Total rent
      expense for all operating leases for the years ended December 31, 2005, 2004
      and
      2003 was $6.1 million, $3.2 million, and $1.9 million, respectively. As of
      December 31, 2005, we had future minimum annual lease obligations under
      noncancellable leases with terms in excess of one year as follows (in
      thousands):





**Year
                Ended December 31,**
            
            **Operating
                Leases**
            
            **Capital
                Leases**
            
            **Total**2006
            
            $
            5,175
            
            $
            3,059
            
            $
            8,2342007
            
            
            3,135
            
            
            1,056
            
            
            4,1912008
            
            
            2,678
            
            
            346
            
            
            3,0242009
            
            
            2,657
            
            
            --
            
            
            2,6572010
            
            
            2,120
            
            
            --
            
            
            2,120Thereafter
            
            
            5,744
            
            
            --
            
            
            5,744Total
                minimum lease payments
            
            
            21,509
            
            
            4,461
            
            
            25,970Less:
                interest
            
            
            
            
            
            404Present
                value of minimum lease payments
            
            
            
            
            
            4,057Less:
                current installments
            
            
            
            
            
            2,768Long-term
                obligations
            
            
            
            
            
            1,289








**(b)**  **Legal
      Proceedings**





We
      are
      party to a number of legal actions and proceedings arising from our provision
      and marketing of telecommunications services (including matters involving do
      not
      call and billing regulations), as well as certain legal actions and regulatory
      matters arising in the ordinary course of business. We believe that the ultimate
      outcome of the foregoing actions will not result in a liability that would
      have
      a material adverse effect on our financial condition or results of operations.





**(c)**  **Commitments**





We
      are
      party to various network service agreements, which contain certain minimum
      usage
      commitments. In December 2003, we entered into a four-year master carrier
      agreement with AT&T. The agreement provides us with a variety of services,
      including transmission facilities to connect our network switches as well as
      services for international calls, local traffic, international calling cards,
      overflow traffic and operator assisted calls. The agreement also provides that,
      subject to certain terms and conditions, we will purchase these services
      exclusively from AT&T during the term of the agreement, provided, however,
      that we are not obligated to purchase exclusively in certain cases, including
      if
      such purchases would result in a breach of any contract with another carrier
      that was in place when we entered into the AT&T agreement or if vendor
      diversity is required. Certain of our network service agreements, including
      the
      AT&T agreement contain certain minimum usage commitments. Our AT&T
      agreement establishes pricing and provides for annual minimum commitments based
      upon usage as follows: 2006 - $32 million and 2007 - $32 million and obligates
      us to pay 65 percent of the revenue shortfall, if any. In February 2006, we
      amended the AT&T agreement to provide that certain services that we purchase
      or may purchase from AT&T (and its affiliates) will now count toward the
      minimum commitment. With this amendment we anticipate that we will not be
      required to make any shortfall payments under this contract. In addition to
      the
      AT&T commitment, we have other commitments with various other vendors for
      telecommunication services.





In
      addition, at December 31, 2005, we had outstanding purchase orders for capital
      expenditures of $0.6 million. We have a contract with our invoice printing
      company that establishes pricing and provides for annual minimum payments as
      follows: 2006 - $1.2 million, 2007 - $1.2 million, and 2008 - $1.3 million.
      We
      also agreed to renew the maintenance agreement associated with a vendor
      financing agreement we entered into in May 2004 with a software supplier for
      an
      additional two years at a cost of $0.6 million per year, which is funded on
      the
      anniversary dates.




25


**NOTE
      3. PROPERTY AND EQUIPMENT**





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





**December
                31,****Lives**
            
            
            **2005**
            
            
            **2004**Land
            
            
            
            
            $
            330
            
            $
            330Buildings
                and building improvements
            
            
            39
                years
            
            
            7,077
            
            
            7,004Leasehold
                improvements
            
            
            3-10
                years
            
            
            3,713
            
            
            2,146Switching
                equipment
            
            
            1-10
                years
            
            
            121,033
            
            
            68,444Purchased
                software
            
            
            3
                years
            
            
            18,483
            
            
            11,812Equipment
                and other
            
            
            3-10
                years
            
            
            57,892
            
            
            49,152208,528
            
            
            138,888Less:
                Accumulated depreciation
            
            
            
            
            
            (110,036
            )
            
            (73,065
            )$
            98,492
            
            $
            65,823





The
      following is a summary of property and equipment recorded under capital leases
      included above (in thousands):





**December
                31,****Lives**
            
            **2005**
            
            **2004**Equipment
                and other
            3
                years
            
            $
                6,968
            
            $
                3,627Less:
                Accumulated depreciation
            
            
            (2,544)
            
            (1,
                457)$
                4,424
            
            $
                2,170





For
      the
      years ended December 31, 2005, 2004 and 2003, depreciation expense amounted
      to
      $38.5 million, $17.8 million and $14.1 million, respectively, this includes
      depreciation expense excluded from network and line cost of $26.8 million,
      $6.2
      million and $3.4 million, respectively. During 2004, we reduced our estimate
      of
      useful lives of certain switching equipment to reflect technological changes.
      This change had the effect of increasing depreciation for 2005 by $15.1 million
      and 2004 by $1.4 million.





**NOTE
      4. DEBT AND CAPITAL LEASE OBLIGATIONS**





The
      following is a summary of our debt and capital lease obligations (in
      thousands):





**December
                31,****2005**
            
            
            **2004**Vendor
                financing agreement
            
            $
            1,220
            
            $
            2,057Capital
                lease obligations
            
            
            4,057
            
            
            2,189Total
                long-term debt and capital lease obligations
            
            
            5,277
            
            
            4,246Less:
                current maturities
            
            
            3,988
            
            
            2,529Total
                long-term debt and capital lease obligations, excluding current
                maturities
            
            $
            1,289
            
            $
            1,717








26


**(a)**  **Vendor
      Financing Agreement**





During
      May 2004, we entered into a vendor financing agreement with a software supplier
      for $3.1 million payable over 36 months at 2.9% annual interest rate. This
      agreement included $2.5 million of software and $0.6 million for an annual
      maintenance contract. In addition, we agreed to renew the maintenance agreement
      for an additional two years at the cost of $0.6 million per year, which is
      funded on the anniversary dates.





**(b)**  **Capital
      Leases**





Our
      capital leases are primarily related to computer and office equipment.





**(c)**  **Minimum
      Annual Payments**





As
      of
      December 31, 2005, the required minimum annual principal payments of long-term
      debt obligations, including capital leases, for each of the next five fiscal
      years is as follows (in thousands):





**Year
                Ended December 31,**2006
            
            $3,9882007
            
            9542008
            
            335$5,277








**NOTE
      5. STOCKHOLDERS' EQUITY**





**(a)**  **Stockholders
      Rights Plan**





On
      August
      19, 1999, we adopted a Stockholders Rights Plan designed to deter coercive
      takeover tactics and prevent an acquirer from gaining control of us without
      offering a fair price to all of our stockholders. Under the terms of the plan,
      preferred stock purchase rights were distributed as a dividend at the rate
      of
      one right for each of our shares of Common Stock held as of the close of
      business on August 30, 1999. Until the rights become exercisable, Common Stock
      issued by us will also have one right attached. Each right will entitle holders
      to buy one three-hundredth of a share of our Series A Junior Participating
      Preferred Stock at an exercise price of $165. Each right will thereafter entitle
      the holder to receive upon exercise Common Stock (or, in certain circumstances,
      cash, property or other securities of us) having a value equal to two times
      the
      exercise price of the right. The rights will be exercisable only if a person
      or
      group acquires beneficial ownership of 20% or more of Common Stock or announces
      a tender or exchange offer which would result in such person or group owning
      20%
      or more of Common Stock, or if the Board of Directors declares that a 15% or
      more stockholder has become an "adverse person" as defined in the plan.





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





**(b)**  **Treasury
      Stock**





In
      2003,
      we purchased 1,315,789 of our common shares from America Online, Inc. at an
      aggregate price of $5.0 million.





27


**NOTE
      6. STOCK OPTIONS, WARRANTS AND RIGHTS**





**(a)**  **Stock
      Based Compensation Plan**





Incentive
      stock options, non-qualified stock options and other stock based awards may
      be
      granted by us to employees, directors and consultants under the 2005 Incentive
      Plan (“2005 Plan”), 2003 Long Term Incentive Plan (“2003 Plan”), 2000 Long Term
      Incentive Plan ("2000 Plan"), 1998 Long Term Incentive Plan ("1998 Plan") and
      otherwise in connection with employment and to employees under the 2001
      Non-Officer Long Term Incentive Plan ("2001 Plan"). Generally, the options
      vest
      over a three-year period and expire ten years from the date of grant. At
      December 31, 2005: 504,000; 360,000; 339,306; 541; and 19,055 shares of common
      stock were available under the 2005 Plan, 2003 Plan, 2001 Plan, 2000 Plan,
      and
      1998 Plan, respectively, for possible future issuances.





Stock
      options granted in 2005 generally have contractual terms of 10 years. The
      options granted to employees have an exercise price equal to the fair market
      value of the stock on the grant date. The vast majority of options granted
      in
      2005 vest one-third each year, beginning on the first anniversary of the date
      of
      grant.





Information
      with respect to options under our plans is as follows:





**Options**
              **Shares**
            
            **Exercise**
              **Price
                Range**
              **Per
                Share**
            
            **Weighted**
              **Average**
              **Exercise
                Price**Outstanding,
                December 31, 2002
            
            4,185,701
            
            $1.11-$48.54
            
            $6.84Granted
            
            1,873,171
            
            $3.70-$14.35
            
            $10.33Exercised
            
            (509,149)
            
            $0.99-$15.75
            
            $2.34Cancelled
            
            (112,616)
            
            $1.38-$30.18
            
            $12.48Outstanding,
                December 31, 2003
            
            5,437,107
            
            $0.99-$47.64
            
            $8.35Granted
            
            220,833
            
            $5.14-$10.87
            
            $6.83Exercised
            
            (374,144)
            
            $1.05-$6.81
            
            $1.75Cancelled
            
            (401,952)
            
            $1.32-$29.63
            
            $12.86Outstanding,
                December 31, 2004
            
            4,881,844
            
            $0.99-$47.64
            
            $8.41Granted
            
            1,670,000
            
            $6.22-$9.57
            
            $8.52Exercised
            
            (1,240,706)
            
            $0.99
                - $10.49
            
            $2.43Cancelled
            
            (310,334)
            
            $1.11-$30.38
            
            $10.28Outstanding,
                December 31, 2005
            
            5,000,804
            
            $1.20-$47.64
            
            $9.82








28


The
      following table summarizes options exercisable at December 31, 2005, 2004 and
      2003:







**Option
                Shares**
            
            **Exercise
                Price Range**
              **Per
                Share**
            
            **Weighted
                Average Exercise Price**2003
            2,939,893
            
            $0.99-$47.64
            
            $7.992004
            3,413,585
            
            $0.99-$47.64
            
            $8.362005
            3,237,232
            
            $1.20-$47.64
            
            $10.57





The
      following table summarizes the status of stock options outstanding at December
      31, 2005:





**Range
                of Exercise Prices**
            
            **Number
                Outstanding at December 31, 2005**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Number
                Exercisable at December 31, 2005**
            
            **Weighted
                Average Exercise Price**$1.20
                to $10.31
            
            2,707,611
            
            $
                6.81
            
            7.6
            
            961,838
            
            $
                3.91$10.32
                to $14.35
            
            1,987,250
            
            11.61
            
            6.9
            
            1,969,451
            
            11.62$14.36
                to $21.00
            
            144,335
            
            19.85
            
            3.2
            
            144,335
            
            19.85$21.01
                to $30.00
            
            66,666
            
            26.65
            
            3.1
            
            66,666
            
            26.65$30.01
                to $47.64
            
            94,942
            
            30.94
            
            3.4
            
            94,942
            
            30.94





The
      weighted average estimated fair values of the stock options granted during
      the
      years ended December 31, 2005, 2004 and 2003 based on the Black-Scholes option
      pricing model were $6.20, $4.99, and $7.79, respectively. The fair value of
      stock options used to compute pro forma net income (loss) and basic and diluted
      earnings (loss) per share disclosures is the estimated fair value at grant
      date
      using the Black-Scholes option-pricing model with the following assumptions:





**Assumption**
            
            **2005**
            
            **2004**
            
            **2003**Expected
                Term
            
            5
                years
            
            5
                years
            
            5
                yearsExpected
                Volatility
            
            92.16%
            
            93.82%
            
            98.63%Expected
                Dividend Yield
            
            --%
            
            --%
            
            --%Risk-Free
                Interest Rate
            
            4.10%
            
            3.49%
            
            3.15%





**(b)**  **Warrants**





In
      connection with a credit facility agreement with a lender and certain consulting
      services that the lender provided to us, we issued warrants to the lender as
      follows: in August 2000, a warrant for 100,000 shares of our common stock,
      at an
      exercise price of $14.19 per share and expiring August 2007; in October 2000
      a
      warrant for 50,000 shares of our common stock, at an exercise price of $13.08
      per share and expiring March 31, 2007; in August 2001, a warrant for 50,000
      shares of our common stock, at an exercise price of $2.04 per share and expiring
      August 16, 2006. All of these warrants were outstanding at December 31,
      2005.





29


**NOTE
      7. INCOME TAXES**





The
      provision (benefit) for income taxes is as follows (in thousands):





**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**Current
              income tax expense:Federal
            
            $
            1,132
            
            $
            1,401
            
            $
            1,032State
            
            
            2,184
            
            
            2,978
            
            
            2,3553,316
            
            
            4,379
            
            
            3,387Deferred
                income tax expense (benefit):Federal
            
            
            14,079
            
            
            18,721
            
            
            (17,206
            )State
            
            
            849
            
            
            869
            
            
            (6,205
            )14,928
            
            
            19,590
            
            
            (23,411
            )Total
                provision (benefit) for income taxes
            
            $
            18,244
            
            $
            23,969
            
            $
            (20,024
            )





30


Deferred
      tax assets and liabilities at December 31, 2005 and 2004 are comprised of the
      following elements (in thousands):





**Year
                Ended December 31,****2005**
            
            
            **2004****Deferred
                Tax Assets**Net
                operating loss carry-forwards
            
            $
            38,573
            
            $
            49,546Amortization
            
            
            80
            
            
            198Allowance
                for uncollectible accounts
            
            
            5,483
            
            
            6,857Warrants
                issued for compensation
            
            
            1,050
            
            
            1,074Accruals
                not currently deductible
            
            
            2,343
            
            
            279Capitalized
                acquisition costs
            
            
            737
            
            
            --Alternative
                minimum tax credit carryforward
            
            
            3,746
            
            
            2,613Gross
                deferred tax assets
            
            
            52,012
            
            
            60,567Less
                valuation allowance
            
            
            (12,883
            )
            
            (11,461
            )Net
                deferred tax assets
            
            $
            39,129
            
            $
            49,106








**Deferred
                Tax Liabilities**Depreciation
                and amortization
            
            $
            4,608
            
            $
            12,941Deductions
                not currently expensed
            
            
            245
            
            
            965Deferred
                tax liabilities
            
            $
            4,853
            
            $
            13,906




A
      reconciliation of the Federal statutory rate to our effective tax rate is as
      follows (in thousands):





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Federal
                income taxes computed at the statutory rate
            
            35.0%
            
            35.0%
            
            35.0%Increase
                (decrease) in income taxes resulting from:State
                income taxes less Federal benefit
            
            4.5
            
            4.4
            
            4.0Valuation
                allowance increase (reversal)
            
            2.4
            
            --
            
            (71.4)Other
            
            (0.8)
            
            --
            
            --Total
                provision (benefit) for income taxes
            
            41.1%
            
            39.4%
            
            (32.4)%





31




In
      connection
      with our acquisition of LDMI in July 2005, we acquired $35 million of federal
      Net Operating Losses previously generated by LDMI. Due to restrictions imposed
      as a result of ownership changes of acquired subsidiaries, the amount of LDMI’s
      Net Operating Loss carryforwards available to offset future taxable income
      are
      subject to limitations imposed under Section 382 of the Internal Revenue Code.
      Annual NOL utilization may be further limited if additional changes in ownership
      occur. Of the $35 million acquired, approximately $1.0 million was recovered
      in
      2005 and we believe that $34 million are recoverable in varying amounts over
      the
      next 13 years.





We
      maintain a valuation allowance of $8.0 million related to a $23 million tax
      deduction taken on our 1996 federal income tax return. We have been involved
      in
      an administrative proceeding before the Internal Revenue Service and have
      concluded that it is less than probable that we will prevail in this matter.
      We
      maintain valuation allowances of $3.5 million and $3.4 million against state
      net
      operating losses in 2005 and 2004, respectively, for amounts that we believe
      will not be used prior to expiration. During 2005, we determined that a
      valuation allowance of $0.6 million should be established for the deferred
      tax
      asset related to warrants issued for compensation due to the fact that the
      warrants in question will expire in 2007 and, as of December 31, 2005, it is
      more likely than not that the deferred tax asset will not be fully realized.
      During 2005, we also established a valuation allowance of $0.7 million against
      the deferred tax asset related capitalized transaction costs related to our
      acquisition of LDMI. To the extent that this valuation allowance is reduced
      in
      future periods, the tax effect of any such reversals will be used to reduce
      the
      carrying value of LDMI goodwill as opposed to becoming a component of deferred
      tax benefit.





During
      2003, we evaluated the deferred tax asset valuation allowance and determined
      that a majority of the allowance should be reversed. The evaluation considered
      the profitability of our business, the ability to utilize deferred tax assets
      against future taxable income and possible restrictions on use due to provisions
      of the Internal Revenue Code Section 382. After consideration of each of these
      factors, we reversed deferred tax asset valuation allowances of $50.6 million.




At
      December 31, 2005, our federal net operating loss carryforwards are scheduled
      to
      expire as follows:





2012
            
            $
            2072018
            
            
            5,6422019
            
            
            8,5542020
            
            
            54,7422021
                and thereafter
            
            
            17,305$
            86,450




At
        December 31, 2005, we had gross deferred tax assets of $8.3 million related
        to
        state net operating loss carryforwards that are schedule to expire at various
        dates through 2025.




32




**NOTE
      8. SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION**





**(a)**  **Supplemental
      disclosure of other current liabilities (in thousands):**





**2005**
            
            **2004**Legal
                and regulatory reserves
            
            $
            7,431
            
            $
            5,230Other
            
            
            6,750
            
            
            4,792Total
                other current liabilities
            
            $
            14,181
            
            $
            10,022








**(b)**  **Supplemental
      disclosure of cash flow information (in thousands):**




**2005**
            
            
            **2004**
            
            
            **2003**Cash
                paid during the year for interest
            
            $
            270
            
            $
            3,506
            
            $
            9,930Cash
                paid during the year for taxes
            
            
            6,073
            
            
            3,821
            
            
            1,980


**(c)**  **Supplemental
      schedule of non-cash investing and financing activities (in
      thousands):**





**2005**
            
            **2004**
            
            **2003**Common
                stock issued in connection with the acquisition of LDMI
            
            
            15,962
            
            
            --
            
            
            --Asset
                retirement obligations accruals for property, plant and
                equipment
            
            
            1,617
            
            
            --
            
            
            --Change
                in accounts payables and accrued expenses related to capital
                expenditures
            
            
            5,700
            
            
            --
            
            
            --Acquisition
                of equipment and software under capital lease obligations and vendor
                financing agreement
            
            $
            --
            
            $
            2,545
            
            $
            3,392











**NOTE
      9. EMPLOYEE BENEFIT PLANS**





We
      sponsor a defined contribution pension plan (the “Plan”). The Plan qualifies as
      a deferred salary arrangement under Section 401(k) of the Internal Revenue
      Code.
      Eligible employees may contribute up to 15% of their compensation (subject
      to
      Internal Revenue Code limitations). The Plan allows employees to choose among
      a
      variety of investment alternatives. We are not required to contribute to the
      Plan. During the years ended December 31, 2005, 2004 and 2003, we elected to
      contribute $116,000, $125,000, and $125,000 to the Plan, respectively.





We
      sponsor a
      second defined contribution plan, as originally established, for the employees
      of the acquired LDMI ( the “LDMI Plan”). The LDMI plan qualifies as a deferred
      salary arrangement under Section 401 (k) of the Internal Revenue Code. Eligible
      employees may contribute up to 15% of their compensation (subject to Internal
      Revenue Code limitations). The plan allows employees to choose among a variety
      of investment alternatives. We are not required to contribute to the Plan.
      Since
      acquisition through December 31, 2005, we elected to contribute $52,000 to
      the
      LDMI Plan.





33


**NOTE
      10. PER SHARE DATA**





Basic
      earnings per common share is calculated by dividing net income by the average
      number of common shares outstanding during the year. Diluted earnings per common
      share is calculated by adjusting the weighted average number of common shares
      outstanding and the net income during the fiscal period for the assumed
      conversion of all potentially dilutive stock options, warrants and convertible
      bonds (and assuming that the proceeds hypothetically received from the exercise
      of dilutive stock options are used to repurchase our common stock at the average
      share price during the fiscal period). For the diluted earnings calculation,
      we
      also adjust the net income by the interest expense on the convertible bonds
      assumed to be converted. Income per share is computed as follows (in thousands
      except per share data):





**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**Income
                available to common stockholders used to compute basic income per
                share
            
            $
            26,161
            
            $
            36,812
            
            $
            81,817Interest expense on convertible bonds
            
            
            --
            
            
            --
            
            
            (1
            )Income available for common stockholders after assumed conversion
                of
                dilutive securities used to compute diluted income per share
            
            $
            26,161
            
            $
            36,812
            
            $
            81,816Weighted
                average number of common shares outstanding used to compute basic
                income
                per share
            
            
            28,675
            
            
            26,847
            
            
            26,376Effect
                of dilutive securities*:Stock
                options and warrants
            
            
            621
            
            
            1,007
            
            
            1,2335%
                Convertible subordinated notes due 2004
            
            
            --
            
            
            --
            
            
            98% Senior convertible subordinated notes due 2007
            
            
            --
            
            
            --
            
            
            188Weighted average number of common and common equivalent shares outstanding
                used to compute diluted income per share
            
            
            29,296
            
            
            27,854
            
            
            27,806Weighted
                average common shares outstanding:Basic
            
            
            28,675
            
            
            26,847
            
            
            26,376Diluted
            
            
            29,296
            
            
            27,854
            
            
            27,806Income
                per share:Basic
            
            $
            0.91
            
            $
            1.37
            
            $
            3.10Diluted
            
            $
            0.89
            
            $
            1.32
            
            $
            2.94





*
      The
      diluted share basis for the years ended December 31, 2005, 2004 and 2003
      excludes options and warrants to purchase 2.5 million, 3.1 million and 1.3
      million shares of common stock, respectively, because their exercise prices
      were
      greater than the average market value of the common stock for each
      year.





34


**NOTE
      11. FINANCIAL INSTRUMENTS**





Fair
      value estimates, assumptions, and methods used to estimate the fair value of
      our
      financial instruments are made in accordance with the requirements of SFAS
      No.
      107, “Disclosures about Fair Value of Financial Instruments”. We have used
      available market information, where available, to derive our
      estimates.





The
      carrying values of cash and cash equivalents, accounts receivable, prepaid
      expenses and other current assets, accounts payable and accrued expenses
      approximate their fair values due to the short-term nature of the instruments.





Debt
      is
      comprised of vendor financing and capital leases. The fair value of the vendor
      financed debt was estimated using discounted cash flow calculations, based
      on
      borrowing rates currently available to the company.  Capital
      leases are recorded at their net present value, which approximates fair
      value.





The
      estimated fair value of our financial instruments is as follows:





**December
                31,****2005**
            
            **2004****Carrying
                Amount**
            
            
            **Carrying
                Amount**
            
            
            **Fair
                Value**
            
            
            **Carrying
                Amount**
            
            
            **Fair
                Value**Vendor
                financing agreement
            
            $
            1,220
            
            $
            1,196
            
            $
            2,057
            
            $
            1,999Capital
                lease obligations
            
            
            4,057
            
            
            4,057
            
            
            2,189
            
            
            2,189





**NOTE
      12. QUARTERLY FINANCIAL DATA (UNAUDITED)**





There
      were certain adjustments recorded in the fourth quarter 2005 financial
      statements related to prior periods. The impact of these items, however, was
      not
      material to the current period or any prior periods.





(In
                thousands, except per share data)
            
            **First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****2005**Revenue
            
            $
            119,835
            
            $
            107,669
            
            $
            120,645
            
            $
            114,591Operating
                income
            
            
            15,362
            
            
            15,464
            
            
            9,309
            
            
            2,639Net
                income
            
            
            9,470
            
            
            9,368
            
            
            5,217
            
            
            2,106Net
                income per share - Basic
            
            
            0.35
            
            
            0.34
            
            
            0.18
            
            
            0.07Net
                income per share - Diluted
            
            
            0.34
            
            
            0.33
            
            
            0.17
            
            
            0.07**2004**Revenue
            
            $
            109,619
            
            $
            115,213
            
            $
            120,929
            
            $
            125,251Operating
                income
            
            
            14,401
            
            
            14,305
            
            
            14,256
            
            
            16,367Net
                income
            
            
            8,288
            
            
            8,422
            
            
            9,011
            
            
            11,091Net
                income per share - Basic
            
            
            0.31
            
            
            0.31
            
            
            0.33
            
            
            0.41Net
                income per share - Diluted
            
            
            0.29
            
            
            0.30
            
            
            0.32
            
            
            0.40





35


**NOTE
      13. ACQUISITION OF LDMI TELECOMMUNICATIONS, INC.**





On
      May 23,
      2005, we entered into an Agreement and Plan of Merger with LDMI
      Telecommunications, Inc. (the “LDMI Acquisition Agreement”), providing for our
      acquisition of LDMI Telecommunications, Inc. (“LDMI”). LDMI was privately held
      and is a facilities-based competitive local exchange carrier serving business
      and residential customers primarily in Michigan and Ohio. The acquisition of
      LDMI significantly accelerated our entry into the medium-sized business market
      with its established sales force and product portfolio. Under the terms of
      the LDMI Acquisition Agreement, LDMI became a wholly owned subsidiary on July
      13, 2005 and results of LDMI are included in the consolidated financial
      statements since that date. In exchange for all of the stock of LDMI, we paid
      $21.3 million in cash ($24 million less cash acquired of $2.7 million) and
      issued 1.8 million shares of our common stock. The aggregate purchase price
      was
      $42.8 million, including the 1.8 million shares of our common stock with a
      market value of $16.0 million, $0.8 million of transaction costs and a $4.7
      million repayment of LDMI debt.





The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed and the related deferred income taxes as of the date of
      acquisition. The excess of the purchase price paid over the fair value of net
      assets acquired was allocated to goodwill. Any changes to the fair value of
      net
      assets acquired, based on information as of the acquisition date, will result
      in
      an adjustment to the fair value of the assets acquired and liabilities assumed
      and a corresponding adjustment to goodwill. During the fourth quarter of 2005,
      we reduced the goodwill capitalized at acquisition from $26.5 million to $23.5
      million. This reduction is primarily related to a $4.1 million increase to
      the
      appraised value of fixed assets acquired, offset by the related reduction to
      deferred tax assets of $1.2 million.





AtJuly
                13, 2005(In thousands)Current
                assets
            
            $
            15,574Property
                and equipment
            
            
            19,080Goodwill
            
            
            23,466Intangible
                and other assets
            
            
            6,290Deferred
                income taxes, long-term
            
            
            12,229Total
                assets acquired
            
            
            76,639Current
                liabilities
            
            
            29,565Long-term
                debt
            
            
            1,534Deferred
                income taxes, long-term
            
            
            2,728Total
                liabilities assumed
            
            
            33,827Net
                assets acquired
            
            $
            42,812





Acquired
      intangibles consist of $0.7 million of registered trademarks that are being
      amortized over a two year period and $5.4 million to customer lists, which
      have
      an expected useful life of three years. Goodwill is not expected to be
      deductible for tax purposes.





36




The
      following unaudited pro forma information presents a summary of the consolidated
      results of our operations as if the LDMI acquisition had occurred on January
      1,
      2004:





**Year**
              **Ended
                December 31,**
              (In
                thousands, except
              for
                per share data)
              (Unaudited)**2005**
            
            
            **2004**Revenues
            $
            524,833
            
            $
            591,536Net
                income
            $
            24,454
            
            $
            31,908Earnings
                per share:Basic
            $
            0.83
            
            $
            1.11Diluted
            $
            0.81
            
            $
            1.08Weighted
                average shares:Basic
            
            29,631
            
            
            28,647Diluted
            
            30,252
            
            
            29,654





The
      pro
      forma consolidated results of operations include adjustments to give effect
      to
      amortization of intangibles, depreciation of equipment, interest expense and
      income, income taxes, transaction fees and shares of common stock issued. These
      unaudited pro forma results have been prepared for comparative purposes only
      and
      do not purport to be indicative of the results of operations that actually
      would
      have occurred had the acquisition been made at the beginning of 2004 or the
      future results of the combined operations.





The
      purchase price allocations used in the preparation of these financial statements
      are preliminary due to the continuing analyses relating to the determination
      of
      the fair values of the assets acquired and liabilities assumed.





**NOTE
      14. SUBSEQUENT EVENT.**





On
      October 18, 2005, we and one of our subsidiaries entered into an Agreement
      and
      Plan of Merger (the “NTC Acquisition Agreement”) with Network Telephone
      Corporation (“NTC”), providing for our acquisition of NTC. NTC was privately
      held and is a facilities-based competitive local exchange carrier serving
      business customers primarily in Southeast United States. Under the terms of
      the
      NTC Acquisition Agreement, NTC became our indirect wholly owned subsidiary
      on
      January 3, 2006, and, in exchange for all of the stock of NTC, we paid $18.0
      million in cash, of which approximately $1.8 million has been deposited in
      escrow to be held as security for certain indemnification obligations to us
      under the NTC Acquisition Agreement. It is expected that the acquisition will
      extend Talk America’s networking footprint to the southeastern United States and
      add significantly to our commercial services capabilities. In accordance with
      the requirements of SFAS No. 141, “Business Combinations,” we intend to undergo
      an extensive review of the fair values of the acquisition’s assets and
      liabilities during the first quarter of 2006. The purchase price will be
      allocated to the underlying assets acquired and liabilities assumed based upon
      their estimated fair values at the date of the acquisition. We will determine
      the estimated fair values based on independent appraisals, discounted cash
      flows, quoted market prices, and estimates made by management. To the extent
      that the purchase price exceeds the fair value of the net identifiable tangible
      and intangible assets acquired, such excess will be allocated to
      goodwill.





37


**ITEM
      9A. CONTROLS AND PROCEDURES.**





*Disclosure
      Controls and Procedures* —We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Securities
      Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission's rules and forms, and that such information is accumulated
      and communicated to management, including our principal executive officer and
      chief financial officer, as appropriate, to allow timely decisions regarding
      required disclosure. In connection with the preparation of this Annual Report
      on
      Form 10-K, we carried out an evaluation under the supervision and with the
      participation of our management, including our principal executive officer
      and
      chief financial officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures (as defined in Rule 13a-15(e) under the
      Exchange Act) as of December 31, 2005. Based upon this evaluation, our principal
      executive officer and chief financial officer concluded that our disclosure
      controls and procedures were effective as of December 31, 2005.





*Management's
      Report on Internal Control over Financial Reporting* —Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rule 13a-15(f) under the Exchange
      Act. Our internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles in the United States of America.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




Under
      the
      supervision and with the participation of our
      management ,
      including our principal executive officer and principal financial
      officer, we
      assessed the effectiveness of our internal control over financial reporting
      as
      of December 31, 2005. In making this assessment, management used the criteria
      set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission ("COSO") in *Internal
      Control-Integrated Framework.*





Management's
      assessment of our internal control over financial reporting as of December
      31,
      2005 did not include LDMI Telecommunications, Inc. ("LDMI"), which we acquired
      in a purchase business combination during 2005. LDMI is a wholly-owned
      subsidiary of the Company that represented approximately 24% and 10% of our
      consolidated total assets and our consolidated total revenue, respectively,
      as
      of and for the year ended December 31, 2005.





Based
      on
      management's assessment using the COSO criteria set
      forth  in *Internal
      Control-Integrated Framework* ,
      management concluded that, as of December 31, 2005, our internal control over
      financial reporting was effective.





Our
      management’s assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2005 has been audited by
      PricewaterhouseCoopers LLP, an independent registered public accounting firm,
      as
      stated in their report that appears in Item 8 of this Annual
      Report.





38


*Remediation
      of Material Weaknesses* —As
      reported in Item 9A of ourAnnual Report on Form 10-K/A (Amendment No. 1) for
      the
      year ended December 31, 2004, the Company reported material weaknesses in its
      internal control over financial reporting as the Company did not maintain
      effective controls over (i) the
      application of generally accepted accounting principles related to the financial
      reporting process for complex transactions and (ii) the reconciliation of sales,
      use and excise tax liability. ** Management
      took the following steps, which contributed to the remediation of the material
      weaknesses as of December 31, 2005:





1.
            We
                engaged outside contractors with technical and accounting related
                expertise to assist in the preparation of the income tax provision
                and
                related work papers. We also implemented controls to assure accurate
                data
                is provided to, and that we review and agree with the conclusions
                of,
                outside contractors.


2.
            We
                have retained the services of outside contractors with technical
                accounting capabilities to assist management with the analysis of
                complex
                and technical accounting issues that are outside the technical
                capabilities of our personnel. In addition, we have established processes
                to identify issues that would require such retention of outside
                contractors.




3. We
      have
      redesigned the account reconciliation process for sales, use and excise tax
      liabilities. An in-depth review of the account reconciliation is performed
      and
      our Chief


Accounting Officer reviews the analysis and confirms the review process has
      been
      completed in a timely manner.





We
      have
      concluded that based upon the actions taken the Company has remediated each
      of
      the aforementioned material weakness in our internal control over financial
      reporting.





*Changes
      in*  *Internal
      Control over Financial Reporting* —
There
      were no changes in internal control over financial reporting during our most
      recent fiscal quarter ended December 31, 2005, that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.





39


**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





**DIRECTORS
      AND EXECUTIVE OFFICERS**





See
      the
      information regarding our executive officers included in Part I of this Annual
      Report under the caption “EXECUTIVE OFFICERS OF THE REGISTRANT,” which
      information is incorporated herein by reference. Our directors, as of March
      1,
      2006, were as follows:





**Name**
            
            **Age**
            
            **Position**Gabriel
                Battista (2)
            
            61
            
            Chairman
                of the Board of DirectorsMark
                Fowler (3)
            
            64
            
            DirectorRobert
                Korzeniewski (3)
            
            49
            
            DirectorEdward
                B. Meyercord, III (1)
            
            40
            
            Chief
                Executive Officer, President and DirectorRonald
                Thoma (2)
            
            71
            
            Director





(1) Director
      whose term expires in 2006.


(1)
            Director
                whose term expires in 2007.


(2)
            Director
                whose term expires in 2008.





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





GABRIEL
      BATTISTA. Mr. Battista currently serves as Chairman of our Board of Directors.
      From January 1999 through May 2001 Mr. Battista served as our Chairman of the
      Board of Directors, Chief Executive Officer and President. From May 2001 through
      December 2003, Mr. Battista served as our Chairman of the Board of Directors
      and
      Chief Executive Officer. From January 2004 through December 2005, Mr. Battista
      served as Executive Chairman of the Board of Directors; Mr. Battista’s term as
      an employee of the Company ended on December 31, 2004 (he continues as the
      non-executive Chairman of our Board and a Director). Prior to joining us in
      January of 1999 as a Director and Chief Executive Officer, Mr. Battista served
      as Chief Executive Officer of Network Solutions Inc., an Internet domain name
      registration company. Prior to joining Network Solutions, Mr. Battista served
      both as CEO and as President and Chief Operating Officer of Cable &
Wireless, Inc., a telecommunication provider. His career also included
      management positions at US Sprint, GTE Telenet and The General Electric Company. Mr.
      Battista serves as a trustee of Capitol College and as a director of a privately
      held company.





MARK
      FOWLER. Mr. Fowler has been one of our Directors since September 1999. From
      1981
      to 1987, he was the Chairman of the FCC. From 1987 to 1994, Mr. Fowler was
      Senior Communications Counsel at Latham & Watkins, a law firm, and of
      counsel from 1994 to 2000. From 2000 through 2004, Mr. Fowler founded and served
      as Chairman of the Board of Directors of AssureSat, Inc., a provider of
      telecommunications satellite backup services. Since 2002, Mr. Fowler has been
      self-employed and pursuing investments in various companies and real estate.
      From 1991 to 1994, he was the founder, Chairman and Chief Executive Officer
      of
      PowerFone Holdings Inc., a telecommunications company. From 1994 to 2000 he
      was
      a founder and chairman of UniSite, Inc., a developer of antenna sites for use
      by
      multiple wireless operators. From 1999 to December 2002, Mr. Fowler served
      as a
      director of Pac-West Telecomm, Inc., a competitive local exchange carrier.
      From
      1999 to date, Mr. Fowler has served as a director of Beasley Broadcast Group,
      a
      radio broadcasting company.





ROBERT
      KORZENIEWSKI. Mr. Korzeniewski has been one of our Directors since July 2003.
      He
      is currently the Executive Vice President, Corporate Development and Strategy,
      with VeriSign Inc., which provides infrastructure services for Internet and
      telecommunications networks. From 1996 to 2000, Mr. Korzeniewski served as
      Chief
      Financial Officer of Network Solutions, Inc., which was acquired by VeriSign
      in
      June 2000. From 1987 to 1996, he held a variety of senior financial positions
      with SAIC. Mr. Korzeniewski is a certified public accountant. He serves as
      a
      director of Kintera, Inc., a software provider for nonprofit organizations.
      Mr.
      Korzeniewski is also a director of a number of privately held
      companies.





40


EDWARD
      B.
      MEYERCORD, III. Mr. Meyercord currently serves as our Chief Executive Officer
      and President. From May 2001 through December 2003, Mr. Meyercord served as
      our
      President. He served as our Chief Financial Officer between August 1999 and
      December 2001 and Chief Operating Officer between January 2000 and May 2001.
      He
      joined us in September of 1996 as the Executive Vice President, Marketing and
      Corporate Development. Prior to joining us, Mr. Meyercord was a Vice President
      in the Global Telecommunications Corporate Finance Group at Salomon Brothers,
      Inc., based in New York. Prior to Salomon Brothers he worked in the corporate
      finance department at PaineWebber Incorporated. Mr. Meyercord is also a member
      of our Board of Directors.





RONALD
      THOMA. Mr. Thoma is currently a business consultant, having retired in 2000
      as
      an Executive Vice President of Crown Cork and Seal Company, Inc., a manufacturer
      of packaging products, where he had been employed since 1955. Mr. Thoma is
      a
      trustee of Frankford Health System and a trustee of Delaware Valley College.
      Mr.
      Thoma has served as one of our Directors since 1995.





*Audit
      Committee.* In 2005,
      the Audit Committee consisted of Mark S. Fowler, Robert Korzeniewski and Ronald
      R. Thoma. Our Board of Directors has determined that all of the members of
      the
      Audit Committee are independent, as that term is defined in the NASD’s listing
      standards. Our Board of Directors has also determined that Robert Korzeniewski
      is an "audit committee financial expert" as this term is defined in the rules
      and regulations adopted by the SEC.





*Code
      of Ethics.* We have
      adopted a code of ethics that applies to our principal executive officer,
      principal financial officer and principal accounting officer. The text of this
      code of ethics is posted on our Internet website, www.talkamerica.com. We intend
      to satisfy our disclosure requirements regarding an amendment to, or waiver
      from, a provision of this code of ethics by posting such information on our
      internet website, www.talkamerica.com.





**SECTION
      16(a) BENEFICIAL OWNERSHIP COMPLIANCE**





Under
      Section 16(a) of the Securities Exchange Act of 1934, as amended, our directors
      and certain officers and persons who are the beneficial owners of more than
      10
      percent of our Common Stock are required to report their ownership of the Common
      Stock, options and certain related securities and any changes in that ownership
      to the SEC. Specific due dates for these reports have been established, and
      we
      are required to report any failure to file by such dates in 2005. We believe
      that all of the required filings have been made in a timely manner. In making
      this statement, we have relied on copies of the reporting forms received by
      us.




41


**ITEM
      11. EXECUTIVE COMPENSATION.**





The
      following table sets forth information for the fiscal years ended December
      31,
      2005, 2004 and 2003 as to the compensation for services rendered paid or awarded
      by us to our Chief Executive Officer and to the four other most highly
      compensated executive officers whose annual salary and bonus exceeded
      $100,000.





**Summary
      Compensation Table**


**Annual
                Compensation**
            **Long
                Term Compensation****Name
                and Principal Position**
            **Year**
            **Salary
                (1)**
            **Bonus
                (1)**
            **Securities**
              **Underlying**
              **Options/SARS**Edward
                B. Meyercord, III, Chief
            2005
            $500,000
            $470,000
            250,000(2)Executive
                Officer, President and Director
            2004
            $500,000
            $310,000
            --2003
            $350,000
            $452,500
            300,000(3)(4)Patrick
                O'Leary, Executive
            2005
            $162,000(5)
            $454,540(6)
            75,000(2)Vice
                President - Business Services
            2004
            --
            --
            --2003
            --
            --
            --Aloysius
                T. Lawn, IV, Executive Vice
            2005
            $275,000
            $210,800
            75,000(2)President
                - General Counsel and
            2004
            $275,000
            $139,900
            --Secretary
            2003
            $275,000
            $287,800
            60,000(3)Warren
                A. Brasselle, Executive Vice
            2005
            $250,000
            $196,000
            75,000(2)President
                - Network Operations
            2004
            $250,000
            $127,500
            --2003
            $250,000
            $265,500
            60,000(3)Jeffrey
                Earhart, Executive Vice
            2005
            $250,000
            $197,000
            75,000(2)President
                - Customer Operations
            2004
            $250,000
            $124,000
            --2003
            $230,000
            $312,000
            60,000(3)





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





(
      2)  Options
      to purchase shares of our common stock. Messrs. Meyercord, Lawn, Earhart,
      Brasselle, and O'Leary, were granted options under our 2005 Long Term Incentive
      Plan to purchase 250,000, 75,000, 75,000, 75,000, and 75,000 shares,
      respectively, of our common stock at an exercise price of $8.62 per share that
      vest over three years, except for Mr. O'Leary's shares, which vest in their
      entirety in one year.





(3)  Options
      to purchase shares of our common stock. Messrs. Meyercord, Lawn, Earhart, and
      Brasselle were granted options under our 2003 Long Term Incentive Plan to
      purchase 200,000, 60,000, 60,000, and 60,000 shares, respectively, of our common
      stock at an exercise price of $10.49 per share that vested over three years
      when
      granted but, due to the acceleration in vesting of certain out-of-the-money
      options in 2005, were fully vested in 2005.





(4)  Options
      to purchase shares of our common stock. Mr. Meyercord was granted options under
      our 1998 Long Term Incentive Plan to purchase 50,000 shares of our common stock
      at an exercise price of $10.49 per share that vest over three years. Mr.
      Meyercord was also granted options under our 2000 Long Term Incentive Plan
      to
      purchase 50,000 shares of our common stock at an exercise price of $10.49 per
      share that vest over three years.





(5)  Mr.
      O'Leary commenced his employment with the company on July 13, 2005 and the
      above
      table includes compensation from that date. Prior to that time he was President
      and Chief Executive Officer of LDMI Telecommunications, Inc., which we acquired
      on July 13, 2005.





(6)  Mr.
      O’Leary’s bonuses include: (i) $17,718 payable to him under his previously
      reported employment agreement based on certain performance criteria relating
      to
      the performance of our subsidiary, LDMI, (ii) $366,135 payable to him under
      the
      Employee Severance Retention Agreement entered into with our subsidiary, LDMI,
      prior to our acquisition thereof, and (iii) $70,687 payable to him under our
      bonus plan.





42


The
      following table sets forth further information regarding grants of options
      to
      purchase our common stock made by us during the fiscal year ended December
      31,
      2005 to the executive officers named in the Summary Compensation Table,
      above.








**Option/SAR
      Grants in Last Fiscal Year**


**Name**
            **Number
                of Securities Underlying**
              **Options/SARs
                Granted (#)**
            **Percent
                of Total Options/SARs Granted to Employees in
                2005**
            **Exercise
                or Base Price ($/Sh) (1)**
            **Expiration
                Date**
            **Potential
                Realizable Value at Assumed Annual Rates of Stock Price Appreciation
                For
                Option Term (3)****5%($)**
            **10%($)**Edward
                B. Meyercord, III
            250,000
                (2)
            15%
            $8.62
            8/12/15
            1,355,268
            3,434,515Aloysius
                T. Lawn, IV
            75,000
                (2)
            4%
            $8.62
            8/12/15
            406,580
            1,030,355Warren
                A. Brasselle
            75,000
                (2)
            4%
            $8.62
            8/12/15
            406,580
            1,030,355Jeffrey
                Earhart
            75,000
                (2)
            4%
            $8.62
            8/12/15
            406,580
            1,030,355Patrick
                O'Leary
            75,000
                (2)
            4%
            $8.62
            7/13/10
            406,580
            1,030,355





(1)  All
      options have been granted at market price on the date of issue.





(2)  The
      options granted to Messrs. Meyercord, Lawn, Earhart, Brasselle and O'Leary
      were
      granted under our 2005 Long Term Incentive Plan. The options granted vest over
      three years, except for Mr. O'Leary's shares, which vest in their entirety
      in
      one year.





(3)  Disclosure
      of the 5% and 10% assumed annual compound rates of stock appreciation based
      on
      exercise prices are mandated by the rules of the SEC and do not represent our
      estimate or projection of future common stock prices. The actual value realized
      may be greater or less than the potential realizable value set forth in the
      table.





The
      following table sets forth certain information as to aggregated option/SAR
      exercises in our fiscal year ended December 31, 2005 and option/SAR values
      as of
      December 31, 2005 for each of the executive officers named in the Summary
      Compensation Table, above.





**Aggregate
      Option/SAR Exercises in Last Fiscal Year**


**and
      Fiscal Year-End Option/SAR Values**





**Name**
            **Shares
                Acquired on Exercise**
            **Value
                Realized**
            **Number
                of Securities Underlying Unexercised Options/SARs**
              **-----------------------------**
              **Exercisable/Unexercisable**
            **Value
                of Unexercised In-the-Money**
              **Options/SARs
                (1)**
              **-----------------------------**
              **Exercisable/Unexercisable**Edward
                B. Meyercord, III
            100,000
            $719,000
            466,666/250,000
            $486,500/$2,500Aloysius
                T. Lawn, IV
            26,666
            $101,732
            207,499/75,000
            $546,541/$750Warren
                A. Brasselle
            40,000
            $287,600
            113,333/75,000
            $201,164/$750Jeffrey
                Earhart
            30,000
            $215,700
            146,000/75,000
            $294,530/$750Patrick
                O'Leary
            0
            $0
            0/75,000
            $0/$750





(1)  Calculated
      as the difference between the exercise/base-price of the options/SARs and a
      year-end fair market value of the underlying securities equal to
      $8.63.





During
      2005, the executive officers named in the Summary Compensation Table, above,
      did
      not participate in either a long-term incentive plan or a defined benefit or
      actuarial plan.





43


**Compensation
      Of Directors**





The
      following table shows the compensation for our non-employee directors for the
      fiscal year ended December 31, 2005:





_____________________________________________________________________________________________





Annual
      Board retainer           $20,000


Annual
      Chair of Audit Committee retainer (1)        $5,000


_____________________________________________________________________________________________


(1)  Paid
      in
      addition to the Annual Board retainer.





For
      2005,
      the Board also approved grants to each of the non-employee directors of options
      to purchase 15,000 shares of Common Stock under the 2003 Long Term Incentive
      Plan at an exercise price of $8.86 per share, the market value on the date
      of
      grant. The options vest in equal installments over three years and have a
      ten-year term. Non-employee directors were also reimbursed for reasonable
      expenses incurred in connection with attendance at Board meetings or meetings
      of
      committees thereof and Board- and committee-related activities.





We
      also
      paid Mr. Battista a total of $300,000 ($25,000 per month) in 2005 for consulting
      services to us under our one-year consulting agreement with him, which was
      effective as of January 1, 2005 and expired on December 31, 2005. Under
      the
      terms of the consulting agreement, in 2005 we also provided Mr. Battista with
      access to and use of an office and related services in our offices and cellular
      phone service and provided him with health benefits comparable to those provided
      to our senior executive officers.





Effective
      January 1, 2006, we will pay our non-employee directors an annual retainer
      of
      $40,000 and the non-employee Chairman of the Board an additional annual fee
      of
      $40,000 per year, in each case payable in equal quarterly installments, and
      will
      pay the Chairman of our Audit Committee an additional annual retainer of $5,000
      in a single payment. In addition, the non-employee Chairman of the Board is
      provided with access to and use of an office and related services in our offices
      and cellular phone service and is provided with or reimbursed for the costs
      of
      health benefits comparable to those provided to our senior executive
      officers.  Non-employee
      directors will also be reimbursed for reasonable expenses incurred in connection
      with attendance at Board meetings or meetings of committees thereof and Board-
      and committee-related activities.





In
      addition, non-employee directors will continue to be eligible to receive awards
      for a number of shares to be determined by the Board. Subject to the limits
      in
      our various incentive plans, the Board has the discretion to determine the
      form
      and terms of any awards to non-employee directors.





44


**Employment
      Contracts**





Edward
      B.
      Meyercord, III entered into a three-year employment agreement to serve as our
      Chief Executive Officer and President effective as of January 1, 2004.
      Commencing in 2004, under the contract, Mr. Meyercord is entitled to a minimum
      annual base salary of $500,000 and certain other perquisites made generally
      available to our senior executive officers.





Aloysius
      T. Lawn, IV entered into a three-year employment agreement effective as of
      July
      30, 2004. Under the contract, Mr. Lawn is entitled to a minimum annual base
      salary of $275,000 and certain other perquisites made generally available to
      our
      senior executive officers.





Warren
      Brasselle entered into a three-year employment agreement effective as of July
      30, 2004. Under the contract, Mr. Brasselle is entitled to a minimum annual
      base
      salary of $250,000 and certain other perquisites made generally available to
      our
      senior executive officers.





Jeffrey
      Earhart entered into a three-year employment agreement effective as of July
      30,
      2004. Under the contract, Mr. Earhart is entitled to a minimum annual base
      salary of $250,000 and certain other perquisites made generally available to
      our
      senior executive officers.





Patrick
      O'Leary entered into an eighteen-month employment agreement effective as of
      July
      13, 2005. Under the contract, Mr. O'Leary is entitled to a minimum annual base
      salary of $350,000 and certain other perquisites made generally available to
      our
      senior executive officers.





Each
      of
      the employment agreements for Messrs. Meyercord, Lawn, Brasselle, Earhart and
      O'Leary provides for immediate vesting of options in event of a "change of
      control" (as defined in the agreements) of us and provides for severance
      benefits in the event employment is terminated by us without cause prior to
      the
      end of the term and for a certain period beyond the end of the term in the
      event
      of a "change of control." The severance benefits in the event employment is
      terminated by us without cause prior to the end of the term are generally the
      payment of an amount equal to one year’s base salary plus all bonus amounts due
      such executive at the time of termination, as well as the continuation of
      various employee benefits for one year. The severance benefits in the event
      employment is terminated for a certain period beyond the end of the term in
      the
      event of a "change of control" are generally the payment of an amount equal
      to
      one year’s base salary plus all the average annual incentive bonus earned by the
      executive in the preceding four years, as well as the continuation of various
      employee benefits for one year.





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





**Compensation
      Committee**





In
      2005,
      the Compensation Committee consisted of Mark S. Fowler and Ronald R. Thoma.
      The Compensation Committee is responsible for determining compensation for
      our
      executive officers and currently administers the 1998 Long Term Incentive Plan,
      the 2000 Long Term Incentive Plan, the 2001 Non-Officer Long Term Incentive
      Plan, the 2003 Long Term Incentive Plan and the 2005 Incentive Plan and reviews
      and approves the grant of options to our employees.





**Compensation
      Committee Interlocks And Insider Participation**





None.





45


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





The
      following table sets forth certain information known to us with respect to
      beneficial ownership of our common stock as of March 1, 2006 (except as
      otherwise noted) by (i) each stockholder who is known by us to own beneficially
      more than five percent of the outstanding common stock, (ii) each of our
      directors and nominees for director, (iii) each of the executive officers named
      in the Summary Compensation Table above in Item 11 of this Annual Report and
      (iv) all our current directors and executive officers as a group. Except as
      otherwise indicated below, we believe that the beneficial owners of the common
      stock listed below have sole investment and voting power with respect to such
      shares.





**Name
                of Beneficial Owner or Identity of Group**
            
            **Number
                of Shares Beneficially Owned****(1)**
            
            **Percent
                of Shares Beneficially Owned**Paul
                Rosenberg
              650
                N. E. 5th Avenue
              Boca
                Raton, FL 33432
            
            1,919,995(2)
            
            6.3%Dimensional
                Fund Advisors Inc.
              1299
                Ocean Avenue, 11thFloor
              Santa
                Monica, CA 90401
            
            1,684,002(3)
            
            5.5%Mellon
                Financial Corporation
              One
                Mellon Center
              Pittsburgh,
                PA 15258
            
            1,751,170(4)
            
            5.8%Eton
                Park Fund, L.P., Eton Park Master Fund, Ltd.
              Eton
                Park Associates, L.P., Eton Park Capital
              Management,
                L.P., Eric M. Mindich
              825
                Third Avenue, 8thFloor
              New
                York, NY 10022
              
              Barclays
                Global Investors, NA., Barclays
              Global
                Fund Advisors, Barclays Global Investors, Ltd., Barclays Global Investors
                Japan Trust and Banking Company Limited
              45
                Fremont Street
              San
                Francisco, CA 94105
            
            2,800,000(5)
              
              
              
              
              
              2,406,912(6)
            
            9.2%
              
              
              
              
              
              7.9%Gabriel
                Battista
            
            646,666
            
            2.1%Mark
                S. Fowler
            
            137,374
            
            *Edward
                B. Meyercord, III
            
            473,333
            
            1.5%Ronald
                R. Thoma
            
            59,311
            
            *Robert
                Korzeniewski
            
            21,000
            
            *Aloysius
                T. Lawn, IV
            
            207,499
            
            *Jeffrey
                Earhart
            
            150,768
            
            *Warren
                Brasselle
            
            123,166
            
            *Patrick
                O’Leary
            
            0
            
            *All
                directors and executive officers as a group
              (14
                persons)
            
            2,123,782(7)
            
            6.6%





*  Less
      than
      1%





46


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





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





(3)  The
      foregoing information is derived from the Schedule 13G filed by Dimensional
      Fund
      Advisors Inc. on February 6, 2006.





(4)  The
      foregoing information is derived from the Schedule 13G filed by Mellon Financial
      Corporation on February 15, 2006. This Schedule indicates that, as of December
      31, 2005, Mellon Financial Corporation had beneficial ownership of 1,751,170
      shares, with sole voting power for 955,137 shares and sole dispositive power
      for
      1,706,670 shares.





(5)  The
      foregoing information is derived from the Schedule 13G/A filed by Eton Park
      Fund, L.P., Eton Park Master Fund, Ltd., Eton Park Associates, L.P., Eton Park
      Capital Management, L.P. and Eric M. Mindich on February 8, 2006. This Schedule
      indicates that, as of December 31, 2005: Eton Park Fund, L.P. had beneficial
      ownership of 980,000 shares, with shared voting power and shared dispositive
      power for 980,000 shares; Eton Park Master Fund Ltd. had beneficial ownership
      of
      1,820,000 shares, with shared voting power and shared dispositive power over
      1,820,000 shares; Eton Park Associates, L.P. had beneficial ownership of 980,000
      shares, with shared voting power and shared dispositive power for 980,000
      shares; Eton Park Capital Management, L.P. had beneficial ownership of 1,820,000
      shares, with shared voting power and shared dispositive power for 1,820,000
      shares, and; Eric M. Mindich had beneficial ownership of 2,800,000 shares,
      with
      shared voting power and shared dispositive power for 2,800,000
      shares.





(6)  The
      foregoing information is derived from the Schedule 13G filed by Barclays Global
      Investors, NA, Barclays Global Fund Advisors, Barclays Global Investors, Ltd.
      and Barclays Global Investors Japan Trust and Banking Company Limited on January
      26, 2006. This Schedule indicates that, as of December 31, 2005: Barclays Global
      Investors, NA had beneficial
      ownership of 2,406,912 shares, with sole
      voting power for 2,141,523 shares and sole dispositive power for 2,406,912
      shares; Barclays Global Fund Advisors had beneficial ownership of 341,217
      shares, with sole voting power and sole dispositive power for 341,217 shares;
      and Barclays Global Investors, Ltd. and Barclays Global Investors Japan Trust
      and Banking Company Limited had no beneficial ownership.





(7)  Includes
      shares of our common stock that could be acquired upon exercise of options
      exercisable within 60 days after March 1, 2006 as follows: Paul Walker -
      16,667.





47


**Equity
      Compensation Plans and Securities**





The
      following table sets forth certain information as of December 31, 2005 with
      respect to compensation plans under which our equity securities are authorized
      for issuance:





**Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans(1)**Equity
                compensation
              plans approved by
              security holders
            
            3,479,261
            
            $8.98
            
            883,596Equity
                compensation
              plans not approved
              by security holders (2)
            
            1,521,543
            
            $11.74
            
            339,306Total
            
            5,000,804
            
            $9.82
            
            1,222,902





(1)  Excludes
      securities reflected in the first column as “to be issued upon exercise of
      outstanding options, warrants and rights.” Under all plans, if any shares
      subject to a previous award are forfeited, or if any award is terminated without
      issuance of shares or satisfied with other consideration, the shares subject
      to
      such award shall again be available for future grants.




(2)  These
      are
      shares issuable upon exercise of options, most of which options were issued
      under our 2001 Non-Officer Long Term Incentive Plan (“2001 Plan”), pursuant to
      which up to 1,666,666 shares of our common stock (subject to certain
      adjustments) may be issued to our non-executive employees in the form of
      options, rights, restricted stock and incentive shares. Generally, the options
      granted under the 2001 Plan vest in equal annual portions over a three-year
      period and expire ten years from the date of grant, except that in limited
      circumstances certain options have a vesting period less than three years,
      including by reason of the acceleration in vesting of certain out-of-the-money
      options in December 2005, or a term less than ten years. At December 31, 2005,
      339,306 shares of common stock were available under the 2001 Plan for possible
      future issuances. All options granted under the 2001 Plan have an exercise
      price
      equal to the fair market value of the stock on the grant date.





The
      balance of these shares include shares issuable on exercise of certain options
      granted to non-executive employees or to executive officers in connection with
      their initial employment, in each case without shareholder approval as permitted
      by the rules of Nasdaq. These other options have an exercise price equal to
      the
      fair market value of the stock on the grant date, expire ten years from the
      date
      of grant and vest in equal annual portions over a three-year period, except
      that
      in limited circumstances certain options have a vesting period less than three
      years, including by reason of the acceleration in vesting of certain
      out-of-the-money options in December 2005. To the extent permitted by the rules
      of Nasdaq in connection with the initial employment of employees, there may
      be
      further grants of securities, by option or otherwise, without shareholder
      approval.





See
      also
      Note 6 of the Notes to Consolidated Financial Statements in Item 6 of Part
      II of
      this Form 10-K Annual Report, which Note is incorporated herein by
      reference





48


**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





**None.**




**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**





During
      our fiscal years ended December 31, 2005 and 2004, PricewaterhouseCoopers LLP
      provided services to us in the following categories and amounts:





**Description**
            
            
            **2005**
            
            
            **2004**Audit
              Fees
            
            $
            1,244,571
            
            $
            960,000Audit-Related
              Fees
            
            $
            143,929
            
            $
            0Tax
              Fees
            
            $
            0
            
            $
            8,696All
              Other Fees
            
            $
            1,500
            
            $
            1,500




In
        the above
        table, “audit fees” are fees we paid to PricewaterhouseCoopers LLP, our
        independent registered public accountants, for professional services for
        the
        audit of our consolidated financial statements included in our Form 10-K
        Annual
        Report (including for annual audit and attestation of management’s evaluation of
        internal control over financial reporting) and review of financial statements
        included in our Form 10-Q Quarterly Reports, and for services that are normally
        provided by the auditor in connection with statutory and regulatory filings
        or
        engagements (including internal control consultations associated with
        preparation for compliance with Sarbanes-Oxley Section 404); “audit related
        fees” are fees billed by PricewaterhouseCoopers LLP for assurance and related
        services that are reasonably related to the performance of the audit or review
        of our financial statements that are not reported under “audit fees” which
        primarily consisted, in fiscal 2005, of work related to the acquisition of
        LDMI;
“tax fees” are fees billed by PricewaterhouseCoopers LLP for tax compliance, tax
        advice, and tax planning services, which primarily consisted, in fiscal 2004,
        of
        tax research, and, in fiscal 2005, of tax advice related to the acquisition
        of
        LDMI; and “all other fees” are fees billed by PricewaterhouseCoopers LLP to us
        for any services not included in the first three categories, which consisted,
        in
        fiscal 2004 and 2005, of the annual subscription fee for an online information
        service.





The
      Audit
      Committee has determined that the services provided by PricewaterhouseCoopers
      LLP to us that were not related to its audit of our financial statements were
      at
      all relevant times compatible with that firm's independence and approved all
      such services.





The
      Audit
      Committee pre-approves all audit and permissible non-audit services provided
      by
      our independent registered public accounting firm. The Audit Committee may
      delegate pre-approval of audit and non-audit services to a subcommittee of
      the
      Audit Committee, provided that any decisions made by such subcommittee shall
      be
      presented to the full Audit Committee at its next scheduled
      meeting.





In
      both
      2004 and 2005, the Audit Committee pre-approved 100% of the services provided
      by
      our independent registered public accountants in such years.











49


**PART
      IV**





**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.**





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





(1)  Consolidated
      Financial Statements:





The
      Consolidated Financial Statements filed as part of this Form 10-K Annual Report
      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.


50


**TALK
      AMERICA HOLDINGS, INC. AND SUBSIDIARIES**





**INDEX
      TO S-X SCHEDULE**








**PAGE**Schedule
                II -- Valuation & Qualifying Accounts
            52








51





**SCHEDULE
      II -- VALUATION AND QUALIFYING ACCOUNTS**


**Deferred
      Tax Asset Valuation Allowance Rollforward**


**(In
      Thousands)**








**YEAR
                ENDED**
              **DECEMBER
                31,**
            
            **BALANCE
                AT BEGINNING OF PERIOD**
            
            **AMOUNTS**
              **CHARGED
                TO EXPENSE**
              **(INCOME)**
            
            **WRITE-OFFS**
            
            **OTHER
                (a)**
            
            **BALANCE
                AT END OF PERIOD**2005
            
            $
                11,461
            
            1,067
            
            (436)
            
            791
            
            $
                12,8832004
            
            $
                14,760
            
            (180)
            
            (3,119)
            
            --
            
            $
                11,4612003
            
            $
                77,591
            
            (50,585)
            
            (5,756)
            
            (6,490)
            
            $
                14,760


__________________





(a)  Column
      represents changes in the deferred tax asset valuation allowance related to
      business acquisitions.


52


(3)
      Exhibits:





EXHIBIT


NUMBER
      DESCRIPTION





3.1
            Our
                composite form of Amended and Restated Certificate of Incorporation,
                as
                amended through October 15, 2002 (incorporated by reference to Exhibit
                3.2
                to our Current Report on Form 8-K, dated October 16, 2002).





3.2
            Our
                Bylaws (incorporated by reference to Exhibit 3.2 to our registration
                statement on Form S-1 (File No. 33-94940)).





3.3
            Certificate
                of Designation of Series A Junior Participating Preferred Stock dated
                August 27, 1999 (incorporated by reference to Exhibit A to Exhibit
                1 to
                our registration statement on Form 8-A (File No. 000-26728)).





4.1
            Specimen
                of Talk America Holdings, Inc. common stock certificate (incorporated
                by
                reference to Exhibit 4.1 to our Annual Report on Form 10-K for the
                year
                ended December 31, 2002).





4.2
            Form
                of Warrant Agreement for MCG Credit Corporation dated August 9, 2000
                (incorporated by reference to Exhibit 4.3 to our Annual Report on
                Form
                10-K for the year ended December 31, 2000).





4.3
            Form
                of Warrant Agreement for MCG Credit Corporation dated October 20,
                2000
                (incorporated by reference to Exhibit 4.4 to our Annual Report on
                Form
                10-K for the year ended December 31, 2000).





4.4
            Form
                of Warrant Agreement for MCG Finance Corporation dated October 20,
                2000
                (incorporated by reference to Exhibit 4.5 to our Annual Report on
                Form
                10-K for the year ended December 31, 2000).





10.1
            Employment
                Agreement with Aloysius T. Lawn, IV dated July 30, 2004 (incorporated
                by
                reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for
                the
                quarter ended September 30, 2004).*





10.2
            Employment
                Agreement with Edward B. Meyercord, III dated January 1, 2004
                (incorporated by reference to Exhibit 10.2 to our Annual Report on
                Form
                10-K for the year ended December 31, 2003).*





10.3
            Tel-Save
                Holdings, Inc. 1995 Employee Stock Option Plan (incorporated by reference
                to Exhibit 10.15 to our registration statement on Form S-1 (File
                No.
                33-94940)).*





10.4
            Stock
                Option Agreement, dated as of November 13, 1998, with Gabriel Battista
                (incorporated by reference to Exhibit 10.4 to our Current Report
                on Form
                8-K dated January 20, 1999).*





10.5
            1998
                Long-Term Incentive Plan (incorporated by reference to Exhibit 10.14
                to
                our Current Report on Form 8-K dated January 20, 1999).*





10.6
            2000
                Long-Term Incentive Plan (incorporated by reference to Exhibit 10.31
                to
                our Registration Statement on Form S-4 (No. 333-40980)). *





10.7
            Form
                of Non-Qualified Stock Option Agreement, dated December 12, 2000,
                for each
                of Gabriel Battista, Aloysius T. Lawn IV and Edward B. Meyercord,
                III
                (incorporated by reference to Exhibit 10.40 to our Annual Report
                on Form
                10-K for the year ended December 31, 2000).*





10.8
            Rights
                Agreement dated as of August 19, 1999 by and between the Talk.com
                Inc. and
                First City Transfer Company, as Rights Agent (incorporated by reference
                to
                Exhibit 1 to our registration statement on Form 8-A (File No. 000-26728)).





10.9
            Employment
                Agreement with Thomas M. Walsh dated as of May 9, 2005 (incorporated
                by
                reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q dated
                March
                31, 2005).*





10.10
            Indemnification
                Agreement with Thomas M. Walsh dated as of August 7, 2000 (incorporated
                by
                reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q dated
                November 14, 2000).*





10.11
            Non-Qualified
                Stock Option Agreement with Thomas M. Walsh dated as of August 7,
                2000
                (incorporated by reference to Exhibit 10.3 to our Quarterly Report
                on Form
                10-Q dated November 14, 2000).*





53


10.12
            Lease
                by and between Talk.com Holding Corp. and University Science Center,
                Inc.
                dated April 10, 2000 (incorporated by reference to Exhibit 10.54
                to our
                Annual Report on Form 10-K for the year ended December 31, 2000).





10.13
            Lease
                by and between The Other Phone Company, dba Access One Communications
                and
                University Science Center, Inc. dated December 8, 1999 (incorporated
                by
                reference to Exhibit 10.55 to our Annual Report on Form 10-K for
                the year
                ended December 31, 2000).





10.14
            Restated
                Access One Communications Corp. 1997 Stock Option Plan (incorporated
                by
                reference to Exhibit 4.2 to our registration statement on Form S-8
                (File
                No. 333-52166).*





10.15
            Restated
                Access One Communications Corp. 1999 Stock Option Plan (incorporated
                by
                reference to Exhibit 4.3 to our registration statement on Form S-8
                (File
                No. 333-52166).*





10.16
            Employment
                Agreement with Jeffrey Earhart dated July 30, 2004 (incorporated
                by
                reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for
                the
                quarter ended September 30, 2004). *





10.17
            Employment
                Agreement with Warren Brasselle dated July 30, 2004 (incorporated
                by
                reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for
                the
                quarter ended September 30, 2004).
                *




10.18
            Employment
                Agreement with Timothy Leonard dated March 15, 2005 (incorporated
                by
                reference to Exhibit 10.18 to our Annual Report on Form 10-K for
                the year
                ended December 31, 2004).*





10.19
            Lease
                by and between Talk America Inc. and BTS Owners LLC, dated as of
                July 1,
                2003 (incorporated by reference to Exhibit 10.24 to our annual Report
                on
                Form 10-K for the year ended December 31,
                2003).





10.20
            Amendment
                to Office Lease by and between Michigan Plaza LLC (predecessor-in-interest
                to BTS Owners LLC) and Talk America Inc. dated November 30, 2005
                (1).





10.21
            First
                Amendment, dated as of September 19, 2001, to the Rights Agreement
                dated
                as of August 19, 1999, by and between Talk America Holdings, Inc.
                and
                First City Transfer Company, as Rights Agent (incorporated by reference
                to
                Exhibit 10.9 to our Current Report on Form 8-K filed on September
                24,
                2001).





10.22      
      Employment Agreement with David G. Zahka dated July 30, 2004 (incorporated
      by
      reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2004).*





54


10.23
            Our
                2001 Non-Officer Long Term Incentive Plan (incorporated by reference
                to
                Exhibit 4.1 to our registration statement on Form S-8 (File No.
                333-74820).*





10.24
            Office
                Lease by and between TMT Reston I & II, Inc. and Talk America Inc.
                dated as of September 16, 2005 (1).





10.25
            Our
                2003 Long Term Incentive Plan (incorporated by reference to Exhibit
                B of
                our Definitive Proxy Statement filed on May 6,
                2003).*





10.26
            Second
                Amendment to Rights Agreement, dated as of December 13, 2002, to
                the
                Rights Agreement dated as of August 19, 1999, by and between Talk
                America
                Holdings, Inc., First City Transfer Company and Stocktrans, Inc.
                (incorporated by reference to Exhibit 10.1 to our Current Report
                on Form
                8-K filed on December 13, 2002).





10.27
            2005
                Executive Officer and Management Bonus Program Summary (incorporated
                by
                reference to Exhibit 10.1 to our Current Report on Form 8-K filed
                on April
                26, 2005) *





10.28
            2005
                Supplemental Incentive Compensation Plan Summary (incorporated by
                reference to Exhibit 10.2to our Current Report on Form 8-K filed
                on April
                26, 2005). *





10.29
            Consulting
                Agreement between Talk America Holdings, Inc. and Gabriel Battista,
                dated
                as of January 1, 2005 (incorporated by reference to Exhibit 10.1
                to our
                Current Report on Form 8-K dated January 1, 2005).





10.30
            Indemnification
                Agreement with Edward B. Meyercord, III dated January 1, 2004
                (incorporated by reference to Exhibit 10.4 to our Annual Report on
                Form
                10-K for the year ended December 31,
                2003).





10.31
            Employment
                Agreement with Gabriel Battista dated January 1, 2004 (incorporated
                by
                reference to Exhibit 10.6 to our Annual Report on Form 10-K for the
                year
                ended December 31, 2003).*





10.32
            Agreement
                and Plan of Merger dated May 23, 2005 among LDMI Telecommunications,
                Inc.,
                Talk America Holdings, Inc. and Lion Acquisition Corp. (incorporated
                by
                reference to Exhibit 10.1 to our Current Report on Form 8-K filed
                on May
                23, 2005).





10.33
            Escrow
                Agreement, dated as of July 13, 2005 among LDMI Telecommunications,
                Inc.,
                Talk America Holdings, Inc., the representatives named therein and
                U.S.
                Bank National Association, as Escrow Agent (incorporated by reference
                to
                Exhibit 10.2 to our Current Report on Form 8-K filed on July 13,
                2005).





10.34
            Agreement
                and Plan of Merger dated as of October 18, 2005 among NT Corporation,
                Talk
                America Holdings, Inc. and THNetco, Inc. (incorporated by reference
                to
                Exhibit 10.1 to our Current Report on Form 8-K filed on October 18,
                2005).





10.35
            Employment
                Agreement with Patrick O'Leary dated July 13, 2005 (incorporated
                by
                reference to Exhibit 10.3 to our Current Report on Form 8-K filed
                on July
                13, 2005).*





55


10.36 Employment
      Agreement with Mark Wayne dated July 13, 2005 (1).*





10.37
            Summary
                of Talk America Holdings, Inc. Non-Employee Director Compensation
                (incorporated by reference to Exhibit 10.1 to our Current Report
                on Form
                8-K filed on December 28, 2005).*





10.38
            Talk
                America Executive Nonqualified Savings Plan (incorporated by reference
                to
                Exhibit 4.1 to Registrant's Registration Statement on Form S-8
                (Registration No. 333-131230)).*





10.39
            Executive
                Officer and Management Bonus Program Summary, as amended as of February
                14, 2006 (incorporated by reference to Exhibit 10.1 to our Current
                Report
                on Form 8-K filed on February 14,
                2005).*





10.40
            2006
                Executive Officer and Management Bonus Program Summary (incorporated
                by
                reference to Exhibit 10.2 to our Current Report on Form 8-K filed
                on
                February 14, 2005).*





10.41
            2006
                Supplemental Incentive Compensation Plan Summary (incorporated by
                reference to Exhibit 10.3 to our Current Report on Form 8-K filed
                on
                February 14, 2005).*





10.42
            Office
                Lease by and between Cordova Associates, LLC and NT Corporation dated
                as
                of September 7, 2000 (1).





10.43
            Amendment
                to Office Lease by and between Cordova Associates, LLC and NT Corporation
                dated as of November 28, 2001 (1).





10.44
            Second
                Amendment to Office Lease by and between Cordova Associates, LLC
                and NT
                Corporation dated as of October 21, 2002
                (1).





10.45
            Office
                Lease by and between BSRT Phoenix Business Park, LLC and LightNetworks,
                Inc. dated as of January 13, 2000 (1).





10.46
            Amendment
                to Office Lease by and between BSRT Phoenix Business Park, LLC and
                LightNetworks, Inc. dated February 17, 2000 (1).





10.47
            Second
                Amendment to Office Lease by and between BSRT Phoenix Business Park,
                LLC
                and LightNetworks, Inc. dated April 17, 2000
                (1).





10.48
            Assignment
                of Office Lease by and between LightNetworks, Inc., Network Telephone
                Corporation and BSRT Phoenix Business Park, LLC dated September 21,
                2000
                (1).




10.49
            Amendment
                to Office Lease by and between Phoenix Business Park, LLC, successor
                to DA
                Phoenix, LLC, successor to BSRT Phoenix Business Park LLC and Network
                Telephone Inc., successor to LightNetworks, Inc. dated August 4,
                2005
                (1).





56


10.50
            Amendment
                to Office Lease by and between Phoenix Business Park, LLC and Network
                Telephone Inc., dated October ___, 2005
                (1).





10.51
            Amendment
                to Office Lease by and between Phoenix Business Park, LLC and Network
                Telephone Inc., dated December 21, 2005
                (1).





10.52
            Amendment
                to Office Lease by and between Phoenix Business Park, LLC (successor
                in
                interest to BSRT Phoenix Business Park, LLC and Network Telephone,
                Inc.
                (successor in interest to LightNetworks, Inc.) dated as of January
                9, 2005
                (1).





10.53
            Office
                Lease by and between American Center LLC and LDMI Telecommunications,
                Inc.
                dated as of January 28, 2003 (1).





10.54      
      First Lease Modification to Office Lease by and between American Center LLC
      and
      LDMI Telecommunications, Inc. dated as of February 13, 2003 (1).





10.55      
      Second Lease Modification to Office Lease by and between American Center LLC
      and
      LDMI Telecommunications, Inc. dated as of May 9, 2003 (1).





10.56     
      Third Lease Modification to Office Lease by and between American Center LLC
      and
      LDMI Telecommunications, Inc. dated as of October 22, 2003 (1).





10.57      
      Fourth Lease Modification to Office Lease by and between American Center LLC
      and
      LDMI Telecommunications, Inc. dated as of May 19, 2004 (1).





10.58      
      Fifth Lease Modification to Office Lease by and between American Center LLC
      and
      LDMI Telecommunications, Inc. dated as of February 1, 2005 (1).





10.59      
      Six Lease Modification to Office Lease by and between American Center LLC and
      LDMI Telecommunications, Inc. dated as of May 1, 2005 (1).





10.60      
      Seventh Lease Modification to Office Lease by and between American Center LLC
      and LDMI Telecommunications, Inc. dated as of October 1, 2005 (1).





10.61
            Office
                Lease by and between Galleria Equities, LLC and LDMI Telecommunications,
                Inc. dated May 31, 2000 (1).





10.62
            Office
                Lease by and between Southfield Technecenter Re 1 LLC and Talk America
                Inc. dated February 24, 2003 (1).





10.63     
      Talk America Holdings, Inc. 2003 Long Term Incentive Plan Non-Qualified Stock
      Option Agreement for Non-Employee Directors (incorporated by reference to
      Exhibit 10.2 to our Current Report on Form 8-K filed on December 29, 2005).





57


14.1
            Code
                of Ethics (incorporated by reference to Exhibit 14.1 to our Annual
                Report
                on Form 10-K for the year ended December 31,
                2003).





21.1
            Our
                Subsidiaries (1).





23.1 Consent
      of PricewaterhouseCoopers LLP (filed herewith).





31.1
            Certification
                of Edward B. Meyercord, III Pursuant to Rule 13a-14(a) (filed
                herewith).





31.2
            Certification
                of David G. Zahka Pursuant to Rule 13a-14(a) (filed
                herewith).





32.1
            Certification
                of Edward B. Meyercord, III Pursuant to Rule 13a-14(b) and 18 U.S.C.
                Section 1350 (furnished herewith).





32.2
            Certification
                of David G. Zahka Pursuant to Rule 13a-14(b) and 18 U.S.C. Section
                1350
                (furnished herewith).





*
      Management contract or compensatory plan or arrangement.




(1)
      Previously filed as an exhibit to our Annual Report on Form 10-K for the year
      ended December 31, 2005, filed on March 16, 2005.


58











**SIGNATURES**





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





Date:
      March 27, 2006





**TALK
      AMERICA HOLDINGS, INC.**





By:  /s/
      Edward B. Meyercord, III


Edward
      B. Meyercord,
      III


Chief
      Executive
      Officer, President


and
      Director