SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 --------------

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2000
                           Commission File No. 0-26728

                                  TALK.COM INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                      23-2827736
                --------                                      ----------
    (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                     Identification Number)

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


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


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

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

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

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

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

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

         As of March 29, 2001,  the aggregate  market value of voting stock held
by  non-affiliates  of the registrant,  based on the average of the high and low
prices of the Common  Stock on March 29, 2001 of $1.625 per share as reported on
the Nasdaq National Market,  was  approximately  $123,541,687.75  (calculated by
excluding solely for purposes of this form outstanding shares owned by directors
and executive officers).

         As of March  29,  2001,  the  registrant  had  issued  and  outstanding
78,374,387 shares of its Common Stock, par value $.01 per share.

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.


<PAGE>

                                  TALK.COM INC.

                               INDEX TO FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
ITEM                                                                            PAGE
 NO.                                                                             NO.
<S>                                                                              <C>
                                    PART I
     1.  Business                                                                 1
     2.  Properties                                                               9
     3.  Legal Proceedings                                                        9
     4.  Submission of Matters to a Vote of Security Holders                      9

                                    PART II
     5.  Market for Registrant's Common Equity and Related Stockholders Matters  10
     6.  Selected Consolidated Financial Data                                    11
     7.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                              12
     7a. Quantitative and Qualitative Disclosure About Market Risk               17
     8.  Financial Statements and Supplementary Data                             17
     9.  Changes in and Disagreements with Accountants and Financial Disclosure  41

                                   PART III
    10.  Directors and Executive Officers of the Registrant                      41
    11.  Executive Compensation                                                  43
    12.  Security Ownership of Certain Beneficial Owners and Management          47
    13.  Certain Relationships and Related Transactions                          48

                                   PART IV
    14. Exhibits, Financial Statement Schedules and Reports on Form 8-K          48
</TABLE>


















                                        i


<PAGE>

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

         Talk.com Inc.,  through its subsidiaries (the "Company" or "Talk.com"),
provides local and long distance  telecommunication  services to residential and
small business customers throughout the United States. The Company has developed
advanced order processing,  provisioning, billing, payment, customer service and
information systems that enable the Company to integrate data and information on
a real time basis into the Company's various operations.

         The Company's  telecommunication  services  offerings include local and
long distance telecommunication services,  including local services bundled with
long distance  services,  inbound  toll-free  service and dedicated private line
services for data  transmission.  The Company  seeks to expand its customer base
through  its new  direct  marketing  channels  and  existing  and new  marketing
arrangements  with  business  partners and to build a more diverse  products and
services portfolio,  including  non-telecommunication  products and services. In
connection with the Company's strategy to diversify its product portfolio and to
bundle local service with its core long distance  service  offerings the Company
acquired Access One Communications  Corp. ("Access One") in August, 2000. Access
One was a private, local  telecommunication  services provider to nine states in
the southeastern United States.

         The  Company  markets  its   telecommunication   services  directly  to
customers  under  its own  brand  as well as  through  the  brand  names  of its
marketing  partners,  including America Online, Inc. ("AOL"). In addition to its
direct marketing channels,  consumers and small businesses can subscribe for the
Company's services on the Internet through its web site located at www.talk.com.

         The  Company  owns  and  maintains  its own  nationwide  long  distance
network,  which includes  Company-owned  Lucent  5ESS-2000  switches  located in
selected areas throughout the United States.  The Company's  network carries the
vast  majority  of  its  customers'   long  distance  calls.  To  provide  local
telecommunication  services to its  customers,  the Company  uses the  unbundled
network  elements  platform  ("UNE-P")  from,  and,  to a lesser  extent  resale
agreements with, the incumbent local exchange carriers ("ILECs").  The Company's
network is further  supported by agreements  with major  interexchange  carriers
that provide  interconnections  among the Company's switches and local carriers'
switches, origination and termination of calls, overflow capacity, international
long  distance  services  and other  services  that the Company  provides to its
customers.

         The  Company  has  developed  advanced,  integrated  order  processing,
provisioning,   billing,  payment,  customer  service  and  information  systems
utilizing state-of-the-art technology.  Through dedicated electronic connections
with the Company's  long  distance  network and the ILECs from which the Company
purchases local services,  the Company has designed its systems to process, on a
real-time  basis,  information  that is integrated  into the  Company's  various
operations.  The  Company  processes  millions  of call  records  each  day.  In
addition,  through  its  proprietary  software,  the  Company  rates,  and makes
available on the Internet to its  customers,  call detail records within minutes
of actual calls.

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

SALES AND MARKETING

         The Company  conducts its sales and marketing  efforts  through  direct
mail,  inbound and outbound  telemarketing  and agent sales,  as well as online,
through its various  partners and through the  Company's own web site located at
www.talk.com.

         In 2000,  the  Company's  sales and marketing  efforts  focused both on
marketing  long  distance  services  and  marketing  a bundle  of local and long
distance  telecommunication  services  directly to customers under its own brand


                                      -1-
<PAGE>
and under the brand of its  marketing  partners,  principally  AOL.  The Company
began offering a bundle of local and long distance telecommunication services in
the  second  quarter  to small  business  and select  residential  customers  in
Florida,   Georgia,  North  Carolina,  South  Carolina,   Kentucky,   Louisiana,
Mississippi,  Tennessee,  Alabama and New York through the  Company's  marketing
partnerships  and new direct  marketing  channels.  Late in the third quarter of
2000,   the  Company  began  offering   local   telecommunication   services  in
Pennsylvania  and began  offering  local  services  in Texas  during  the fourth
quarter of 2000.  Recently,  the  Company  announced  that it had begun to offer
local  telecommunication  services in California and that it expects to continue
to add to the  states  in which  it  offers  bundled  local  and  long  distance
telecommunication  services.  Of the  Company's  approximately  1.4 million long
distance  subscribers,  approximately  1.15 million are AOL  subscribers and the
remainder  of the  customers  were  obtained  through the  Company's  own direct
marketing or with its other marketing partners.  The Company ended the year with
approximately  265,000 bundled lines (local and long distance  services)  billed
for December 2000.

         The Company's  rights under its marketing  agreement with AOL to market
long distance  telecommunication services on AOL on an exclusive basis expire on
June 30, 2003.  However,  AOL may elect to allow others to market long  distance
telecommunication  services  on AOL  after  June  30,  2001,  provided  that the
Company's  rights to  continue  to market  its long  distance  telecommunication
services to AOL subscribers on a non-exclusive basis, with significant marketing
rights, would continue until June 30, 2003. Among the marketing rights available
to the Company  under the AOL  agreement  throughout  the term of the  agreement
until June 2003 are the following:

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

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

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

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

         AOL  provided  the  Company  with  notice  in 2000  that the  Company's
exclusivity as to wireless  services would  terminate on July 1, 2000,  although
the Company's  right to offer  wireless  services  continues on a  non-exclusive
basis. In addition, the Company has the right to market local  telecommunication
services bundled with long distance,

         Because  of the  opportunities  to offer  the  bundle of local and long
distance  telecommunication  services  directly to customers and the significant
marketing  rights  that  would  continue  even  were a  termination  of the long
distance  exclusivity  period  under the AOL  agreement  to occur,  the  Company
believes  that the early  termination  of the  exclusivity  period should not be
detrimental to the Company's business. The Company believes that the exclusivity
opportunity  under the AOL  agreement  already  has given the Company a valuable
lead in marketing  telecommunication  services to AOL subscribers.  The value of
this barrier to entry is  uncertain,  however,  because the Company is unable to
predict  whether  potential  competitors  would be  required,  or  otherwise  be
willing,  to invest the  substantial  sums that the  Company  believes  would be
required  to  acquire a base of AOL  customers  for  telecommunication  services
comparable to the Company's existing base of AOL subscribers.

         The Company  continues to seek new marketing  partners and arrangements
to expand both its  opportunities to attract other customers to its services and
the products and services  that it offers to its customer  base.  As part of its
efforts to expand the bundle of services available to its customers, the Company
introduced  teleconferencing  with real-time  document sharing via the Internet,
keyboard  calling which allows customers to send free text or voice messages via
the Internet,  access to wireless  products and  services,  and  voicemail.  The
Company  continues to offer access to on-line  white and yellow pages  through a
private label relationship with InfoSpace.com, Inc. and a single click procedure
for "reverse" look up of phone numbers that enables  on-line  customers to track
and  verify  their  billing  information  by  identifying  the name and  address
associated with the phone number called.

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

                                      -2-
<PAGE>

TELECOMMUNICATION NETWORK AND SERVICES

         Long Distance

         To provide its long distance  telecommunication  services to customers,
the Company  predominantly uses its own  telecommunication  network. The Company
generally uses its long distance network to provide services directly to its end
users and partitions.  As of December 31, 2000, the Company provisioned over its
network approximately 95% of the lines using its services.

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

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

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

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

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

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

         Service Agreements with Other Carriers

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

         o        Connect the Company's switches to each other

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



                                      -3-
<PAGE>
         o        Carry overflow traffic during peak calling times

         o        Connect international calls

         o        Provide  directory  assistance  and  other  operator  assisted
                  services

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

         In  February  1999,  the  Company  entered  into a new  Master  Carrier
Agreement with AT&T.  The  agreement,  which has since been amended from time to
time,  provides the Company with a variety of services,  including  transmission
facilities  to connect the  Company's  network  switches as well as services for
international  calls,  local  traffic,  international  calling  cards,  overflow
traffic and operator  assisted calls.  Consistent  with the Company's  desire to
expand the  sources of its  network  services,  the new  contract  eliminated  a
requirement  for the Company to purchase  the majority of its  requirements  for
these  services from AT&T and replaced it with a requirement  for the Company to
purchase  minimum  dollar  amounts of services  from AT&T during the term of the
agreement.  The Company does not anticipate  any difficulty in satisfying  these
minimum requirements.

         Local

         The Company uses the  unbundled  network  element  platform,  or UNE-P,
from,  and, to a lesser extent,  resale  agreements  with,  the incumbent  local
exchange  carriers,  or  ILECs,  to  provide  local  telephone  services  to its
customers.

         On November  5, 1999,  the Federal  Communications  Commission  ("FCC")
released an order  reconfirming that ILECs nationwide must offer to competitors,
in an individual or combined form, a series of unbundled  network  elements that
comprise the most important facilities, features, functions, and capabilities of
an  incumbent  local  carrier's  network.  The price at which such  elements are
offered must correspond to the forward-looking cost of providing these elements.
When offered in the combination known as UNE-P,  these  piece-parts  include the
loop and  switching  elements  needed to provide  local  telephone  service to a
customer.  Although  ILECs  have a general  obligation  to  provide  UNE-P,  the
obligation  is  limited  in  the  central  business  districts  of  the  top  50
metropolitan statistical areas of the nation. In such markets, the obligation to
provide UNE-P currently is limited to carriers serving  customers with less than
four  telephone  lines.  The FCC is  currently  reviewing  whether  to expand or
further  restrict the availability of UNE-P and the availability of combinations
of network elements, including UNE-P, is being challenged in the courts.

         The  Company  uses UNE-P to provide  local  telecommunication  services
primarily to residential and small business  customers,  and the Company expects
that its  experience  in  providing  local  telephone  service  will  facilitate
nationwide  delivery of this product.  Because the Company's current focus is on
residential and small business markets, the restriction on UNE-P availability in
the central business districts of the top 50 metropolitan  statistical areas has
not been a major impediment to its operations to date.

         Providing  local  telephone  service  through use of UNE-P provides the
Company with significant advantages. Foremost, UNE-P allows the Company to offer
local  telephone  service  to  customers  located  virtually   anywhere  without
deploying  costly local  switching  facilities.  The Company is able to minimize
current capital  expenditures  and at the same time maintain network and service
design flexibility for the next generation of telecommunication technology.

         In addition,  by providing  local  telephone  service using UNE-P,  the
Company  believes it can realize  significantly  higher margins than competitors
that  provide  service by  reselling  the retail  services  of  incumbent  local
carriers.  However,  in some  instances  such as  customers  having  high  usage
volumes,  resale may provide the Company with more  attractive  pricing than the
use of UNE-P.  The Company is not required to pay local  network  access fees to
ILECs in some  instances,  and the Company  often is  entitled to collect  local
network access fees from other  companies for delivering  calls to the Company's
local telephone customers. Importantly, use of UNE-P also

                                      -4-
<PAGE>

enables the Company to control the underlying  network  platform used to provide
local telecommunication services, which enables the Company to create and deploy
innovative products and service applications.

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

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

         With these and other  considerations in mind, the Company believes that
UNE-P provides it with a cost-effective means of adding innovative local service
components  to its existing  long  distance  product  offerings.  The Company is
utilizing  its  resources  and  its  operational   experience   providing  local
telecommunication services to continue a national roll-out of the bundle of long
distance and local service using UNE-P.  The Company beleive that this will give
it a  first-mover  advantage in  delivering a bundled  package of local and long
distance telecommunication services to residential and small business consumers.

INFORMATION AND BILLING SERVICES

         The  Company  has  developed  advanced   integrated  order  processing,
provisioning,   billing,  payment,  customer  service  and  information  systems
utilizing state-of-the-art technology.  Through dedicated electronic connections
with its long  distance  network and the ILECs from which the Company  purchases
local services, the Company has designed its systems to process information on a
"real time"  basis.  The Company  processes  millions of call  records each day.
Through its  proprietary  software the Company rates and makes  available on the
Internet to its customers  call detail  records  within minutes of actual calls.
The Company  recently  completed a $40 million  capital  investment in its order
processing,  provisioning,  billing,  payment,  customer service and information
systems.  The Company's  technology  investment  includes  state of the art UNIX
servers  and  database  storage  systems,   back-up  and  replications  systems,
interactive  voice  response  and  predictive  dialing   technology,   end  user
equipment, e-commerce data exchange and advanced inbound call switching.

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

         o        Detailed  rate  schedules  and  product  and  service  related
                  information.

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

         o        Credit card billing.


                                      -5-
<PAGE>
         o        Real-time and 24 x 7 billing services and online  information,
                  providing customers with up to the hour billing information.

With the  development  of the Company's  advanced  sign up and billing  systems,
customers can purchase the  Company's  telecommunication  and other  products or
services while online  through the Company's own web site or AOL's network.  The
Company employs its own proprietary  provisioning  and billing systems to enable
efficient  provisioning  of a customer,  online billing and credit card payment.
The Company's  billing  system enables a customer to view his or her bill online
or over the Internet on a real-time basis with the call detail and cost for most
calls  posted  within  minutes  after a customer  completes a call.  The Company
believes this online service provides the most current  information to customers
offered  by any  telecommunication  company  and a  competitive  advantage.  The
Company also acquires billing and customer care services from other carriers and
third party vendors. In connection with the initial deployment of its integrated
information  system and the bundle of local and long distance service offerings,
the Company experienced delays in the provisioning and billing of customers. The
Company  believes that it has since  corrected these problems but if the Company
is unable to timely provision or timely and accurately bill its customers it may
have an adverse effect upon the Company.

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

COMPETITION

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

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

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

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

         The entry of the Bell operating companies into the long distance market
may further heighten competition.  Under the Telecommunications Act of 1996, the
Bell operating  companies were authorized to provide long distance  service that
originates  outside their traditional  services areas, and may gain authority to
provide  long  distance  service  that  originates  within  their  region  after
satisfying certain market opening  conditions.  While currently only Verizon and
SBC  Communications,  Inc.  have entered the long distance  market,  a number of
others have made
                                      -6-
<PAGE>
proposals to offer such  services.  Bell  operating  company entry into the long
distance  market  means  new  competition  from   well-capitalized,   well-known
companies that have the capacity to "bundle" other  services,  such as local and
wireless  telephone  services,  Internet access and cable television,  with long
distance telephone services.  While the  Telecommunications Act includes certain
safeguards against  anti-competitive conduct by the Bell operating companies, it
is impossible to predict whether such safeguards will be adequate or what effect
such conduct would have on the Company. Because of the Bell operating companies'
name recognition in their existing markets,  the established  relationships that
they have with their existing local service customers, and their ability to take
advantage of those relationships,  as well as the possibility of interpretations
of the Telecommunications Act favorable to the Bell operating companies,  it may
be  more   difficult   for  other   providers   of  long   distance   and  local
telecommunication services, such as the Company, to compete.

         In addition, the telecommunication  industry is characterized by: rapid
technological change, frequent new service introductions, intense competition on
pricing, and evolving industry standards.  The Company's inability to anticipate
these changes and to respond  quickly by offering  services that meet or compete
with these evolving  standards could negatively  affect its chances for success.
There can be no  assurance  that the Company will have  sufficient  resources to
make the necessary  investments  or to introduce new services that would satisfy
an expanded  range of customer  needs.  Any failure by the Company to obtain new
technology  could cause the Company to lose customers and market share and could
hamper the Company's ability to attract new customers.

REGULATION

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

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

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

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

         The FCC requires the Company and other  providers of  telecommunication
services to contribute to the universal  service fund,  which helps to subsidize
the  provision  of  local  telecommunication  services  and  other  services  to
low-income consumers,  schools,  libraries, health care providers, and rural and
insular areas that are costly to

                                      -7-
<PAGE>
serve. The Company's mandatory contributions to the universal service fund could
increase over time,  and some of the Company's  potential  competitors  (such as
providers of Internet  telephony) are not  currently,  and in the future may not
be, required to contribute to the universal service fund.

         The FCC imposes additional  reporting,  accounting,  record-keeping and
other regulatory  obligations on the Company.  The Company must offer interstate
services  under rates,  terms and conditions  that are just,  reasonable and not
unreasonably discriminatory. The Company currently must file tariffs listing the
rates,  terms and  conditions  of the  Company's  service,  although the FCC has
decided to abolish most such domestic tariff filing requirements later this year
and  instead  mandate  the  posting of similar  information  on the  Internet or
elsewhere.  Although the Company's  FCC tariffs,  and the rates and charges they
specify,  are subject to review,  they are  presumed to be lawful and have never
been  formally  contested by customers  or other  consumers.  The Company may be
subject to forfeitures and other penalties if it violates the FCC's rules.

         The vast  majority  of the  states  require  the  Company  to apply for
certification to provide local and intrastate  telecommunication services, or at
least to  register  or to be found  exempt from  regulation,  before  commencing
intrastate service. The vast majority of states also require the Company to file
and maintain  detailed  tariffs listing its rates for intrastate  service.  Many
states also impose various reporting  requirements and/or require prior approval
for  transfers  of control of  certified  carriers,  corporate  reorganizations,
acquisitions  of  telecommunication  operations,  assignments of carrier assets,
including  subscriber bases,  carrier stock offerings and incurrence by carriers
of  significant  debt  obligations.  Certificates  of authority can generally be
conditioned,  modified,  canceled,  terminated  or revoked  by state  regulatory
authorities for failure to comply with state law and the rules,  regulations and
policies  of the  state  regulatory  authorities.  Fines  and  other  penalties,
including  the  return  of all  monies  received  for  intrastate  traffic  from
residents  of a state,  may be imposed  for such  violations.  State  regulatory
authorities  may  also  place  burdensome   requirements  on   telecommunication
companies seeking transfers of control for licenses and the like.

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

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

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

EMPLOYEES

         As of December  31,  2000,  the Company  employed  approximately  1,910
persons. The Company considers relations with its employees to be good.

                                      -8-
<PAGE>

ITEM 2. PROPERTIES

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

         With respect to the Company's customer service operations,  the Company
owns a 32,000 square foot facility located in Clearwater,  Florida.  The Company
also  leases the  following  facilities  for  customer  service  operations:  an
approximately   29,000  square  foot  facility  in  Orlando,   Florida,  and  an
approximately 39,000 square foot facility in Fort Lauderdale, Florida.

ITEM 3. LEGAL PROCEEDINGS

            On June 16, 1998, a purported  shareholder class action was filed in
the United  States  District  Court for the  Eastern  District  of  Pennsylvania
against  the  Company  and certain of its  officers  alleging  violation  of the
securities  laws in connection with certain  disclosures  made by the Company in
its public  filings  and seeking  unspecified  damages.  Thereafter,  additional
lawsuits  making   substantially  the  same  allegations  were  filed  by  other
plaintiffs  in the same  court.  A motion to dismiss  was  granted as to certain
officers of the Company and denied as to the  Company.  There are  currently  no
officers  of the Company  who are a party to these  actions.  On July 19, 2000 a
class was certified.  The Company believes the allegations in the complaints are
without merit and intends to defend the litigations vigorously.

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

            The Company  believes  that the  ultimate  outcome of the  foregoing
actions will not result in liability  that would have a material  adverse effect
on the Company's financial condition or results of operations.

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

         None.


                                      -9-
<PAGE>

                                     PART II

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

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

<TABLE>
<CAPTION>
COMMON STOCK                                    PRICE RANGE OF COMMON STOCK
------------                                    ---------------------------
                                                 HIGH                  LOW
                                                 ----                  ---
<S>                                              <C>                 <C>
1999
First Quarter                                    19 5/8               8 1/16
Second Quarter                                   14 1/4               9 7/8
Third Quarter                                    12 29/32             8 11/16
Fourth Quarter                                   18 15/16            11 1/8

2000
First Quarter                                    20 5/8              13 7/16
Second Quarter                                   16 1/2               5 5/8
Third Quarter                                     8 1/16              4 1/4
Fourth Quarter                                    4 13/16               9/16

2001
First Quarter (through March 29, 2001)            2 17/32             1 9/32
</TABLE>


         As of March 29, 2001, there were approximately  1,016 record holders of
Common Stock.

         The  Company  has  never  declared  or paid any cash  dividends  on its
capital stock. The Company currently intends generally to retain future earnings
to finance the growth and development of its business and,  therefore,  does not
anticipate  paying cash dividends in the foreseeable  future.  In addition,  the
Company's guarantee to MCG Finance Corporation  prohibits the Company paying any
dividends on its capital stock.


                                      -10-
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                    ---------------------------------------------------------------
                                                                      2000         1999          1998         1997          1996
                                                                    ---------    ---------   -----------   ----------   -----------
                                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                                  <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:

    Sales                                                            $ 544,548    $ 516,548    $ 448,600    $ 304,768    $ 232,424
    Cost of sales                                                      292,931      289,029      321,215      285,145      200,249
    Gross profit                                                       251,617      227,519      127,385       19,623       32,175
    General and administrative expenses                                 65,360       39,954       39,393       29,221        7,577
    Provision for doubtful accounts                                     53,772       28,250       37,789        9,339          348
    Promotional, marketing and advertising                             170,864       96,264      210,552       60,685           --
    Depreciation and amortization                                       19,257        6,214        5,499        5,429        2,462
    Significant other charges (income)                                      --       (2,718)      91,025           --           --
    Operating income (loss)                                            (57,636)      59,555     (256,873)     (85,051)      21,788
    Interest (income) expense, net                                         438          741       (9,692)     (19,081)      (7,053)
    Other (income) expense, net                                          3,822        1,115       20,867      (31,634)      (3,532)
    Income (loss) before provision (benefit) for
      income taxes                                                     (61,896)      57,699     (268,048)     (34,336)      32,373
    Provision (benefit) for income taxes (1)                                --           --       40,388      (13,391)      12,205
    Income (loss) before extraordinary gain                            (61,896)      57,699     (308,436)     (20,945)      20,168
    Extraordinary gain (from extinguishments of debt)                       --       21,230       87,110           --           --
    Net income (loss)                                                $ (61,896)   $  78,929    $(221,326)   $ (20,945)   $  20,168
    Income (loss) before extraordinary gain per share - Basic        $   (0.88)   $    0.94    $   (5.20)   $   (0.33)   $    0.38
    Extraordinary gain per share - Basic                                    --         0.35    $    1.47           --           --
    Net income (loss) per share - Basic                              $   (0.88)   $    1.29    $   (3.73)   $   (0.33)   $    0.38
    Weighted average common shares outstanding - Basic                  70,527       61,187       59,283       64,168       52,650
    Income (loss) before extraordinary gain per
        share - Diluted                                              $   (0.88)   $    0.90    $   (5.20)   $   (0.33)   $    0.35
    Extraordinary gain per share - Diluted                                  --         0.33    $    1.47           --           --
    Net income (loss) per share - Diluted                            $   (0.88)   $    1.23    $   (3.73)   $   (0.33)   $    0.35
    Weighted average common and common equivalent
      shares outstanding - Diluted                                      70,527       64,415       59,283       64,168       57,002
</TABLE>
<TABLE>
<CAPTION>
                                                                                             AT DECEMBER 31,
                                                                    ---------------------------------------------------------------
                                                                      2000         1999          1998         1997          1996
                                                                    ---------    ---------   -----------   ----------   -----------
                                                                                             (IN THOUSANDS)
<S>                                                                  <C>          <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:

Working capital(2)                                                   $   9,929    $  87,125    $  13,061    $ 634,788    $ 175,597
Total assets                                                           407,749      215,008      272,560      814,891      257,008
Convertible debt                                                        84,945       84,985      242,387      500,000           --
Long-term debt                                                          18,750           --           --           --           --
Total stockholders' equity (deficit)                                    82,700      (69,375)    (136,785)     222,828      230,720
<FN>
(1)      The provision for income taxes in 1998  represents a valuation  allowance for deferred tax assets recorded in prior periods
         and current tax benefits that may result from the 1998 loss. The Company  provided the valuation  allowances in view of the
         loss incurred in 1998, the uncertainties resulting from intense competition in the telecommunication  industry and the lack
         of any assurance that the Company will realize any tax benefits. The Company has continued to provide a valuation allowance
         against its deferred tax assets at December 31, 2000 and December 31, 1999.

(2)      Working capital is current assets less current liabilities net of deferred revenue.

</FN>
</TABLE>



                                      -11-
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The  following  discussion  should  be read  in  conjunction  with  the
Consolidated Financial Statements included elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

         The  following  table  sets  forth for the  periods  indicated  certain
financial data as a percentage of sales:
<TABLE>
<CAPTION>
                                                      2000      1999      1998
                                                      ----      ----      ----
<S>                                                  <C>       <C>       <C>
Sales                                                100.0%    100.0%    100.0%
Cost of sales                                         53.8      56.0      71.6
                                                     -----     -----     -----
Gross profit                                          46.2      44.0      28.4
General and administrative expenses                   12.0       7.7       8.8
Provision for doubtful accounts                        9.9       5.5       8.4
Promotional, marketing and advertising expenses       31.4      18.6      46.9
Depreciation and amortization                          3.5       1.2       1.2
Significant other charges (income)                      --      (0.5)     20.3
                                                     -----     -----     -----
Operating income (loss)                              (10.6)     11.5     (57.2)
Interest (income) expense, net                         0.1       0.2      (2.2)
Other (income) expense, net                            0.7       0.2       4.7
                                                     -----     -----     -----
Income (loss) before income taxes                    (11.4)     11.1     (59.7)
Provision (benefit) for income taxes                    --        --       9.0
                                                     -----     -----     -----
Income (loss) before extraordinary gain              (11.4)     11.1     (68.7)
Extraordinary gain                                      --       4.1      19.4
                                                     -----     -----     -----
Net income (loss)                                    (11.4)%    15.2%    (49.3)%
                                                     =====     =====     =====
</TABLE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         Sales.  Sales  increased by 5.4% to $544.5  million in 2000 from $516.5
million in 1999. The increase in sales  primarily  reflected the Company's entry
into the local  telecommunication  market by  offering  local  telecommunication
services bundled with long distance services and the resulting increase in sales
from new bundled  customers and the revenues of Access One since the date of its
acquisition  by the Company.  The increase in local sales was offset during 2000
by the  Company's  election  to exit the  international  wholesale  business,  a
decline in the number of long distance customers and a decrease in the Company's
other sales. The Company elected to exit the  international  wholesale  business
because of the low gross profit margins associated therewith.  During the second
quarter  of  2000,  there  was also a  significant  reduction  in the  principal
marketing  opportunity  provided  to the  Company by AOL,  which  resulted  in a
decline in gross  additions of new long  distance  customers.  In addition,  the
Company instituted new collection procedures in the first quarter of 2000, which
the  Company   believes   contributed  to  customer   terminations   during  the
introduction  period of the new  procedures at a rate greater than the Company's
historical  churn  experience.  There can be no assurance  that the Company will
continue to increase sales on a quarter-to-quarter or year-to-year basis.

         A significant percentage of the Company's revenues in 2000 and 1999 was
derived from long distance  telecommunication services provided to customers who
were  obtained  under the AOL  agreement  and a  significant  decline in its AOL
subscribers  that is not  offset  by growth in other  subscribers  could  have a
significant  effect on the Company's  results of operations and cash flow. While
the Company's rights to market long distance exclusively under the AOL agreement
do not expire until June 30, 2003,  AOL has the right in each year to elect,  on
or  before  May 1 of such  year,  to  permit  others  to  market  long  distance
telecommunication  services  after  June 30 of such  year to AOL's  subscribers.
Notwithstanding  any such AOL  election,  the  Company's  rights to  continue to
market its  services  to AOL  subscribers  on a  non-exclusive  basis,  but with
significant  marketing  rights,  would continue until June 30, 2003. AOL did not
exercise its right as to 2000 and, accordingly,  the exclusivity period for long
distance  will  continue  through  at least  June 2001 and the  Company  will be
obliged  to make  fixed  quarterly  payments  to AOL of at least  $15.0  million
through June 30, 2001. AOL did elect to terminate the Company's  exclusive right
to offer wireless services to AOL subscribers,  but the Company's right to offer
wireless  services will continue on a non-exclusive  basis. The Company plans to
continue to market its services to AOL  subscribers,  and also plans to increase
its  efforts  outside  of AOL to expand its base of  bundled  and long  distance
customers as discussed above.

                                      -12-
<PAGE>
         Cost of Sales.  Cost of sales  increased  by 1.4% to $292.9  million in
2000 from $289.0 million in 1999. The increases were primarily due to additional
cost of sales relating to the growth of the local business and the cost of sales
of Access One since the date of its acquisition by the Company.  The increase in
cost of sales was offset by a decrease  in network  costs as a result of exiting
the international wholesale business, a lower number of long distance customers,
a reduction in local access  charges,  and a reduction in primary  interexchange
carrier charges  ("PICC").  In addition,  partition costs and billing costs were
lower.

         Gross Profit. Gross profit increased by 10.6% in 2000 to $251.6 million
from $227.5 million in 1999. As a percentage of sales, gross profit increased in
2000 to 46.2% as  compared  to 44.0%  for 1999.  The  increase  in gross  profit
percentage  was primarily  due to lower  network,  partition and billing  costs,
offset by additional  provisions for bad debt and increased cost associated with
the growing local business,  as noted above.  Due to the growth of local bundled
service revenue as a percentage of total revenue, the early stage of development
of the Company's local service  initiative,  fluctuations  in doubtful  accounts
expense,  as well as the  intensification of price competition for the Company's
products,  the Company may not continue to  experience  an upward trend in gross
profits in the future.

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

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

         Promotional,  Marketing  and  Advertising  Expenses.  During 2000,  the
Company  incurred  $170.9  million of  promotional,  marketing  and  advertising
expense as compared to $96.3 million in 1999, a 77.5% increase.  As a percentage
of sales,  promotional,  marketing and advertising expenses increased in 2000 to
31.4% as  compared to 18.6% for 1999.  This  increase  relates to the  Company's
efforts to expand its long distance and local  bundled  customer base as well as
higher  promotional costs, an increase in fixed payments to AOL and the addition
of  Access  One  marketing  and  promotional  expenses  since  the  date  of its
acquisition by the Company.  The Company  expects to continue to incur marketing
and promotional expenses as it implements its plans to pursue subscribers to its
bundle  of  local  and long  distance  telecommunication  service,  particularly
non-AOL customers.  Fixed payments to AOL increased by $3.0 million for both the
third and fourth  quarters of 2000 in connection with AOL's agreement to provide
certain additional  marketing in the last five months of 2000. After taking into
account a third  quarter  credit  from AOL,  fixed  payments  to AOL were  $17.0
million in the third quarter of 2000 and $18.0 million for the fourth quarter of
2000. Fixed payments to AOL in 2000 were $59.0 million compared to $40.0 million
in 1999.

         Depreciation and  Amortization.  Depreciation and amortization for 2000
was $19.3  million,  an increase of $13.1  million  compared to $6.2  million in
1999. As a percentage of sales,  depreciation and amortization increased in 2000
to 3.5% as compared to 1.2% for 1999.  This  increase  is due  primarily  to the
amortization  of the goodwill  recorded  upon the Access One  acquisition  ($9.4
million of amortization for 2000),  and also reflects the continued  purchase of
property and equipment to support the  Company's  ongoing  growth,  particularly
with investment in a state-of-the-art billing, provisioning and customer service
system platform, along with additional property,  equipment and intangibles that
were acquired by the Company in the acquisition of Access One. The excess of the
purchase price over the fair value of the net assets  acquired in the Access One
acquisition was  approximately  $225.9 million and has been recorded as goodwill
and  intangible  assets,  which is being  amortized  on a  straight-line  basis.
Intangibles  consist  of a service  mark and  purchased  customer  accounts  and
workforce.

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

         Interest  Income.  Interest income was $4.9 million in 2000 versus $3.9
million in 1999.  During  2000,  the  interest  income  increase  related to the
Company's average cash balance, which was higher during 2000.
                                      -13-
<PAGE>

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

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

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

         Sales.  Sales  increased by 15.1% to $516.5 million in 1999 from $448.6
million in 1998.  The increase in sales  primarily  reflected an increase in the
number of long distance customers. The increase in these long distance sales was
partially  offset by a decrease in the Company's  other sales  (partitions).  In
1999,  the Company  increased  the number of  agreements  it had with  marketing
partners,  which  significantly  contributed  to the rate of  growth in the long
distance business.

         Cost of Sales.  Cost of sales  decreased by 10.0% to $289.0  million in
1999 from $321.2  million in 1998.  This  decrease  was  primarily  due to lower
network  usage costs for services on the  Company's  OBN network on a per minute
basis and lower  partition  costs due to the decrease in other  sales,  as noted
above.

         Gross  Profit.  Gross  profit  increased to 44.0% in 1999 from 28.4% in
1998.  The increase in gross profit was  primarily  due to lower  network  usage
costs for OBN services on a per minute basis,  and lower  partition costs due to
the decrease in other sales, as noted above.

         General  and  Administrative   Expenses.   General  and  administrative
expenses  increased by 1.4% to $39.9 million in 1999 from $39.4 million in 1998,
but  decreased  as  a  percentage   of  sales.   The  increase  in  general  and
administrative  expenses was due primarily to increased  costs  associated  with
hiring additional personnel to support the Company's  continuing growth,  offset
in part by the  elimination  of  general  and  administrative  expenses  of TSFL
Holdings,  Inc.  (as  discussed  below)  and  decreased  fees  for  professional
services.

         Provision  for Doubtful  Accounts.  Provisions  for  doubtful  accounts
decreased  by 25.2% to $28.3  million in 1999 from $37.8  million in 1998.  As a
percentage of sales,  provision for doubtful accounts  decreased in 1999 to 5.5%
as compared to 8.4% for 1998.

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

         Significant Other Charges  (Income).  During 1999, the Company sold the
business units of TSFL Holdings,  Inc. (formerly  Symetrics  Industries,  Inc.),
resulting in a gain of $2.7  million,  which was included in  significant  other
charges (income).  For 1998, significant other charges consists of $91.0 million
of expense  incurred in the fourth  quarter  related to changes in the Company's
basic business operations.

         Interest Income.  Interest income was $3.9 million in 1999 versus $38.9
million in 1998.  During 1999,  interest  income  decreased due to a significant
decline in cash and marketable securities.

         Interest  Expense.  Interest  expense  was $4.6  million in 1999 versus
$29.2  million in 1998.  During  1999,  interest  expense  decreased  due to the
Company's reacquisition of convertible debt.

         Other Expenses, Net. For 1998, other expenses primarily included losses
on  investments.

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


                                      -14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

         The  Company  had  $40.6  million  of cash and cash  equivalents  as of
December 31, 2000,  and $78.9  million as of December 31, 1999.  The decrease in
cash is primarily  the result of $34.9 million in capital  expenditures  for the
purchase of property and  equipment,  related  primarily to the expansion of the
business  discussed  above,  and of the  use of  $14.9  million  in  cash in the
Company's operations, principally for the promotional, marketing and advertising
expenses that the Company incurred to support its efforts to expand its customer
base,  which decreases were partially  offset by the receipt of $11.1 million in
connection  with the exercise of outstanding  Common Stock rights prior to their
expiration in February 2000.

         Net cash used in operating  activities  was $14.9 million for 2000. Net
cash provided by operating  activities was $18.4 million for 1999. For 2000, the
major contributors to the net cash used in operating  activities were a decrease
in prepaid  expenses and other current  assets of $7.7  million,  an increase in
accounts  payable and accrued  expenses of $12.8 million and  adjustments to net
income for non-cash items of $22.5 million excluding the provision  for doubtful
accounts. This was offset by a net loss of $61.9 million, and an increase in net
trade  accounts  receivable  of $43.4  million.  For 1999,  net cash provided by
operating  activities  was mainly  generated  by net income of $78.9 offset by a
reduction  in  accounts  payable  and  accrued  expenses  of $23.5  million,  an
adjustment  for the  extraordinary  gain of  $21.2  million  recorded  from  the
acquisition  of the  Company's  convertible  debt and an  increase  in  accounts
receivable, trade of $41.0 million.

         Net  cash  used  in  investing  activities  of  $39.0  million  related
primarily to the purchase of property,  equipment and  intangibles  during 2000.
For 1999, the net cash provided by investing activities was mainly from the sale
of marketable securities of $89.6 million.

         The $15.6  million net cash provided by financing  activities  for 2000
was received  primarily  from the exercise of employee  stock options and common
stock  purchase  rights.  For 1999,  the net cash used in  financing  activities
totaled $25.7 million. On January 5, 1999,  pursuant to an Investment  Agreement
between AOL and the Company,  AOL made a  significant  equity  investment in the
Company,  acquiring  4,121,372  shares of Common Stock for $55.0 million in cash
and the  surrender of rights to acquire up to  5,076,016  shares of Common Stock
pursuant  to  various  warrants  held by AOL.  Additional  financing  activities
generated  $48.3  million from the  exercise of employee  stock  options.  These
activities in 1999 were offset by the  acquisition of convertible  debt of $72.3
million,  the repayment of margin account  indebtedness of $49.6 million and the
acquisition of treasury stock of $7.7 million.

         Under the terms of the  Investment  Agreement  with  AOL,  the  Company
agreed  to  reimburse  AOL for  losses  AOL may  incur on the sale of any of the
4,121,372 shares of Company common stock held by AOL during the period from June
1, 1999 through  September 30, 2000. By an amendment dated as of August 2, 2000,
the period during which AOL may exercise its rights to reimbursement  for losses
on the sale of stock, as described  above,  was extended from September 30, 2000
to September  30, 2001.  The Company also received a letter from AOL dated as of
August 2, 2000  confirming  that AOL did not intend to  exercise  such rights to
reimbursement  for shortfalls  earlier than December 31, 2000. The reimbursement
amount would be determined by multiplying the number of shares, if any, that AOL
sells during the applicable period by the difference  between the purchase price
per share paid by AOL, or $19 per share,  and the price per share that AOL sells
the shares for,  if less than $19 per share.  The  reimbursement  amount may not
exceed $14 per share for 2,894,737 shares or $11 per share for 1,226,635 shares.
Accordingly,  the maximum amount payable to AOL as  reimbursement on the sale of
AOL's shares would be approximately $54.0 million plus AOL's reasonable expenses
incurred in  connection  with the sale.  The Company has the option of issuing a
six-month 10% note payable to AOL to satisfy the  reimbursement  amount or other
amounts  payable on exercise of its first refusal  rights.  Assuming AOL were to
sell all of its shares  subject to the Company  reimbursement  obligation at the
closing price of Company  common stock as of March 29, 2001,  the  reimbursement
amount would be approximately $54.0 million.

         In addition,  AOL also has the right,  on  termination of the Company's
long distance exclusivity under its marketing agreement with AOL, to require the
Company to  repurchase  warrants  held by AOL to  purchase  2,721,984  shares of
Company common stock for $36.3 million,  which  repurchase  price can be paid in
Common Stock or cash (provided that some portion of the repurchase  price may be
payable in a quarterly amortization,  two-year promissory note of the Company if
the  repurchase  price exceeds the then current  valuation of the warrants being
purchased).  In  addition,  upon the  occurrence  of certain  events,  including
material defaults by the Company in its AOL agreements and a "change of control"
of the Company,  the Company may be required to  repurchase  for cash all of the
shares held by AOL for $78.3 million ($19 per share), and the warrants for $36.3
million.  The Company  has pledged the stock of its  subsidiaries and has agreed
to fund an escrow account of up to $35.0 million from 50% of the proceeds of any
debt financing, other than a bank, receivable or

                                      -15-
<PAGE>
other asset based  financing of up to $50.0 million,  to secure its  obligations
under the Investment Agreement with AOL.

         The Company  generally  does not have a  significant  concentration  of
credit  risk with  respect to net trade  accounts  receivable,  due to the large
number of end users comprising the Company's  customer base and their dispersion
across  different  geographic  regions.  The increase in provision  for doubtful
accounts  was due to the  provision  for certain aged  receivables  that are now
deemed not collectible and a change in reserve estimates regarding the Company's
non-AOL long distance  marketing  partners.  The Company maintains  reserves for
potential credit losses and, to date, such losses have been within the Company's
expectations.

         At the time of the Company's  acquisition of Access One, Access One and
its subsidiaries had  approximately  $15.0 million of loans outstanding under an
existing  credit  facility  with MCG  Finance  Corporation.  The loans under the
credit  facility were secured by a pledge of all of the assets of Access One and
its subsidiaries.  In addition, the Company guaranteed the obligations of Access
One and its subsidiaries  under the credit facility.  The $15.0 million loan was
repaid on October 20, 2000 when certain subsidiaries of the Company entered into
a Credit Facility Agreement with MCG Finance  Corporation,  providing for a term
loan of up to  $20.0  million  and a line of  credit  facility  permitting  such
subsidiaries to borrow up to an additional $30.0 million.  The  effectiveness of
the line of credit  facility is subject,  among other things,  to the successful
syndication  of that  facility,  which is expected to occur in 2001.  The Credit
Facility  Agreement  subjects  the  Company  and  its  subsidiaries  to  certain
restrictions   and  covenants   related  to,  among  other  things,   liquidity,
per-subscriber-type  revenue,  subscriber  acquisition costs, leverage ratio and
interest  coverage ratio  requirements.  The credit  facilities under the Credit
Facility  Agreement  terminate  on June 30,  2001,  but can be  extended  at the
Company's election up to June 30, 2005 for the term loan facility and up to June
30,  2003 for the line of credit  facility.  The  principal  of the term loan is
required to be repaid in  quarterly  installments  of $1.25  million on the last
calendar day of each fiscal quarter, commencing on September 30, 2001. The loans
under the Credit Facility Agreement are collateralized by a pledge of all of the
assets of the subsidiaries of the Company that are parties to that agreement. In
addition, the Company has guaranteed the obligations of those subsidiaries under
the Credit Facility  Agreement and related  documents.  The Company's  guarantee
subjects  the  Company  to  certain  restrictions  and  covenants,  including  a
prohibition  against the payment of dividends in respect of the Company's equity
securities,  except under certain limited  circumstances.  Upon its execution of
the Credit Facility  Agreement,  the Company issued warrants to purchase 300,000
shares  of its  common  stock at $4.36 per  share,  150,000  of which  vested on
December  31, 2000 and the  balance of which will vest if the  Company  fails to
exceed certain EBITDA thresholds for the fiscal quarter ended March 31, 2001. On
October  20,  2000,  the  Company  borrowed  $20.0  million  under the term loan
facility,  of which approximately $15.0 million was used to repay the Access One
loans.

         The Company does not, and has not  historically,  required  significant
amounts of working capital for its day-to-day  operations.  The Company believes
that its current cash position and the cash flow  expected to be generated  from
operations will be sufficient to fund its capital expenditures,  working capital
and other cash requirements,  including  marketing and promotional  expenditures
discussed above, for at least the next twelve months. The Company also believes,
based on its  existing  cash and cash  equivalents  and its  expectations  as to
future cash flow from  operations,  that,  should AOL elect  during the exercise
period of January 1, 2001 through  September  30, 2001 to sell its shares of the
Company's common stock at a price below $19 per share, the Company will have the
ability  to  obtain  the  financing  necessary  to  fund  such  portion  of  its
reimbursement  obligations  under the AOL Investment  Agreement that it does not
fund  from its  cash on hand at such  time.  Should  the  Company  seek to raise
additional  capital,  however,  there can be no assurance  that,  given  current
market conditions, the Company would be able to raise such additional capital on
terms acceptable to the Company.

Potential Effect of Recent Accounting Pronouncements

         Statement of Financial  Accounting  Standards No. 133  "Accounting  for
Derivative  Instruments and Hedging Activities" ("SFAS 133"),  requires entities
to recognize  all  derivatives  as either assets or  liabilities  in the balance
sheet and measure those  instruments at fair value.  SFAS No. 133, as amended by
SFAS No. 138,  becomes  effective for all fiscal years  beginning after December
31, 2000. The Company anticipates that the new standard will not have a material
effect on its financial statements.

         The Financial  Accounting  Standards  Board (FASB) Emerging Issues Task
Force (EITF) has issued Abstract No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" which
addresses how such  contracts  should be classified and measured by the Company.
Under this issue,  contracts that require net-cash settlement would be initially
classified as assets or liabilities,  then measured at fair value,  with changes
in fair value reported in earnings and disclosed in the financial  statements as
long as the contracts remain  classified as assets or liabilities.  If contracts
classified as assets or liabilities are ultimately  settled in shares, any gains
or losses on those contracts  should  continue to be included in earnings.  This
abstract is effective  for all  contracts  that remain  outstanding  at June 30,
2001, and presented  that date as a cumulative  effect of a change in accounting
principle.  Assuming there is no change in the Company's outstanding  agreements
prior to June 30, 2001, the cumulative  effect of the adoption of this change in
accounting  principal could result in a non-cash charge to earnings in excess of
$40 million in the quarter ended June 30, 2001.

                                  * * * * * * *

         Certain  of  the   statements   contained   herein  may  be  considered
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933  and  Section  21E of the  Securities  Exchange  Act of  1934.  Such
statements  are  identified  by the use of  forward-looking  words  or  phrases,
including,   but   not   limited   to,   "estimates,"   "expects,"   "expected,"
"anticipates," and "anticipated." These forward-looking  statements are based on
the  Company's  current  expectations.  Although the Company  believes  that the
expectations reflected in such forward-looking statements are reasonable,  there
can be no  assurance  that such  expectations  will prove to have been  correct.
Forward-looking  statements  involve risks and  uncertainties  and the Company's
actual  results  could differ  materially  from the Company's  expectations.  In
addition to those factors discussed in the foregoing Management's Discussion and
Analysis and in Part I of this Report,  important  factors that could cause such
actual  results to differ  materially  include,  among others,  increased  price
competition for long distance and local services, failure of the

                                      -16-
<PAGE>

marketing of the bundle of local and long  distance  services and long  distance
services under its agreements with its various marketing partners and its direct
marketing channels,  attrition in the number of end users,  adverse developments
in  the  Company's   relationship  with  its  marketing  partners,   failure  or
difficulties  in  managing  the  Company's  growth,   including  attracting  and
retaining of qualified personnel,  failure of the Company to expand its offering
of local bundled services to new states,  failure to provide timely and accurate
billing  information  to customers,  interruption  in the Company's  network and
information   systems,   and  changes  in  government  policy,   regulation  and
enforcement.  The Company undertakes no obligation to update its forward-looking
statements.

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

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

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

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         TALK.COM INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                            PAGE
                                                                                                                         ----------
<S>                                                                                                                       <C>
Reports of Independent Accountants                                                                                            18

Consolidated  balance  sheets  as of  December  31,  2000 and 1999                                                            20

Consolidated statements of operations for the years ended December 31, 2000, 1999 and 1998                                    21

Consolidated statements of stockholders' equity (deficit) for the years ended December 31, 2000, 1999 and 1998                22

Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998                                    23

Notes to consolidated financial statements                                                                                    24
</TABLE>


                                      -17-
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion,  the accompanying  consolidated balance sheet as of December 31,
2000 and the related  consolidated  statements of operations,  of  stockholders'
(deficit) equity and of cash flows present fairly, in all material respects, the
financial  position of Talk.com Inc. and its  subsidiaries at December 31, 2000,
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audit.  We conducted  our audit of these  statements in
accordance with auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP (signed)
Philadelphia, Pennsylvania
February 27, 2001


                                      -18-
<PAGE>

                        Report of Independent Accountants

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

         We have audited the accompanying consolidated balance sheet of Talk.com
Inc. and  subsidiaries  as of December 31,  1999,  and the related  consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the two  years  in the  period  ended  December  31,  1999.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

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

BDO Seidman, LLP

New York, New York
February 7, 2000


                                      -19-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                      -----------------------------
                                                                                                        2000                1999
                                                                                                      ---------           ---------
<S>                                                                                                   <C>                 <C>
                                  Assets

Current assets:
   Cash and cash equivalents                                                                          $  40,604           $  78,937
   Accounts receivable, trade, net of allowance for uncollectible
       accounts of $29,459 and $5,021, respectively                                                      53,637              59,501
   Advances to partitions and notes receivable                                                            1,780               3,600
   Prepaid expenses and other current assets                                                              1,182               8,855
                                                                                                      ---------           ---------
       Total current assets                                                                              97,203             150,893


Property and equipment, net                                                                              83,656              57,335
Goodwill and intangibles, net                                                                           218,639               1,068
Other assets                                                                                              8,251               5,712
                                                                                                      ---------           ---------
       Total assets                                                                                   $ 407,749           $ 215,008
                                                                                                      =========           =========

Liabilities, Contingent Redemption Value of Warrants and Common Stock and
  Stockholders' Equity (Deficit)
Current liabilities:
      Accounts payable, trade and other                                                               $  70,432           $  47,965
      Partitions                                                                                            362               1,676
      Sales, Use and Excise taxes                                                                         7,935               7,851
      Other payables                                                                                      5,723               6,276
      Deferred revenue                                                                                   12,997               7,400
      Notes payable and current portion of long-term debt                                                 2,822                  --
                                                                                                      ---------           ---------
       Total current liabilities                                                                        100,271              71,168


Convertible debt                                                                                         84,945              84,985
Deferred revenue                                                                                          6,200              13,600
Long-term debt                                                                                           18,750                  --
Other liabilities                                                                                           253                  --
                                                                                                      ---------           ---------
       Total liabilities                                                                                210,419             169,753
                                                                                                      ---------           ---------

Commitments and Contingencies

Contingent redemption value of warrants                                                                  36,324              36,324

Contingent redemption value of common stock                                                              78,306              78,306

Stockholders' equity (deficit):
   Preferred stock, $.01 par value, 5,000,000 shares authorized; no
     shares outstanding                                                                                      --                  --
   Common stock - $.01 par value, 300,000,000 shares authorized;
     78,445,134 and 66,972,960 issued and outstanding, respectively                                         784                 670
   Additional paid-in capital                                                                           286,963              98,975
   Deficit                                                                                             (201,196)           (139,300)
   Treasury stock, 274 and 2,120 shares, at cost                                                         (3,851)            (29,720)
                                                                                                      ---------           ---------
       Total stockholders' equity (deficit)                                                              82,700             (69,375)
                                                                                                      ---------           ---------

       Total liabilities, contingent redemption value of warrants and
         common stock and stockholders' equity (deficit)                                              $ 407,749           $ 215,008
                                                                                                      =========           =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -20-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               YEAR ENDED DECEMBER 31,
                                                                                    -----------------------------------------------
                                                                                      2000               1999                1998
                                                                                    ---------          ---------          ---------
<S>                                                                                 <C>                <C>                <C>
Sales                                                                               $ 544,548          $ 516,548          $ 448,600
Cost of sales                                                                         292,931            289,029            321,215
                                                                                    ---------          ---------          ---------
Gross profit                                                                          251,617            227,519            127,385
General and administrative expenses                                                    65,360             39,954             39,393
Provision for doubtful accounts                                                        53,772             28,250             37,789
Promotional, marketing and advertising expenses                                       170,864             96,264            210,552
Depreciation and amortization                                                          19,257              6,214              5,499

Significant other charges (income)                                                         --             (2,718)            91,025
                                                                                    ---------          ---------          ---------
Operating income (loss)                                                               (57,636)            59,555           (256,873)
Interest (income)                                                                      (4,859)            (3,875)           (38,876)
Interest expense                                                                        5,297              4,616             29,184
Other expense, net                                                                      3,822              1,115             20,867
                                                                                    ---------          ---------          ---------
Income (loss) before provision for income taxes                                       (61,896)            57,699           (268,048)

Provision for income taxes                                                                 --                 --             40,388
                                                                                    ---------          ---------          ---------
Income (loss) before extraordinary gain                                               (61,896)            57,699           (308,436)

Extraordinary gain from extinguishment of debt                                             --             21,230             87,110
                                                                                    ---------          ---------          ---------
Net income (loss)                                                                   $ (61,896)         $  78,929          $(221,326)
                                                                                    =========          =========          =========
Income (loss) before extraordinary gain per share - Basic                           $   (0.88)         $    0.94          $   (5.20)

Extraordinary gain per share - Basic                                                       --               0.35               1.47
                                                                                    ---------          ---------          ---------
Net income (loss) per share - Basic                                                 $   (0.88)         $    1.29          $   (3.73)
                                                                                    =========          =========          =========
Weighted average common shares
     outstanding - Basic                                                               70,527             61,187             59,283
                                                                                    =========          =========          =========
Income (loss) before extraordinary gain per share - Diluted                         $   (0.88)         $    0.90          $   (5.20)

Extraordinary gain per share - Diluted                                                     --               0.33               1.47
                                                                                    ---------          ---------          ---------
Net income (loss) per share - Diluted                                               $   (0.88)         $    1.23          $   (3.73)
                                                                                    =========          =========          =========
Weighted average common and common equivalent shares
     outstanding - Diluted                                                             70,527             64,415             59,283
                                                                                    =========          =========          =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -21-
<PAGE>

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

<TABLE>
<CAPTION>
                                                 COMMON STOCK         ADDITIONAL                    TREASURY STOCK
                                            ----------------------     PAID-IN    ACCUMULATED   ----------------------
                                              SHARES       AMOUNT      CAPITAL      DEFICIT       SHARES       AMOUNT       TOTAL
                                            ---------    ---------    ---------    ---------    ---------    ---------    ---------
<S>                                            <C>       <C>          <C>          <C>             <C>       <C>          <C>
Balance, December 31, 1997                     67,250    $     672    $ 291,952    $   3,097       (3,608)   $ (72,893)   $ 222,828
Net (loss)                                         --           --           --     (221,326)          --           --     (221,326)
Issuance of warrants to AOL                        --           --       33,086           --           --           --       33,086
Exercise of common stock warrants                  --           --       (3,620)          --          250        5,052        1,432
Exercise of common stock options                   --           --      (41,493)          --        2,853       55,550       14,057
Exercise of AOL warrants                           --           --       (7,693)          --          381        7,693           --
Retirement of common stock                       (315)          (3)      (1,467)          --           --           --       (1,470)
Acquisition of treasury stock                      --           --           --           --      (18,809)    (265,054)    (265,054)
Issuance of common stock and
  options for compensation                         --           --       (3,123)          --          895       13,224       10,101
Issuance of common stock for
  convertible debt                                 --           --       (2,317)          --        5,089       71,878       69,561
                                            ---------    ---------    ---------    ---------    ---------    ---------    ---------

Balance, December 31, 1998                     66,935          669      265,325     (218,229)     (12,949)    (184,550)    (136,785)
Net income                                         --           --           --       78,929           --           --       78,929
AOL investment                                     --           --       (3,730)          --        4,121       58,730       55,000
Exercise of common stock options                   --           --      (47,313)          --        6,773       95,600       48,287
Exercise of common stock rights                    38            1          651           --           --           --          652
Acquisition of treasury stock                      --           --           --           --         (639)      (7,686)      (7,686)
Issuance of common stock for
  convertible debt                                 --           --       (1,328)          --          574        8,186        6,858
Contingent redemption value
  of common stock and warrants                     --           --     (114,630)          --           --           --     (114,630)
                                            ---------    ---------    ---------    ---------    ---------    ---------    ---------

Balance, December 31, 1999                     66,973    $     670    $  98,975    $(139,300)      (2,120)   $ (29,720)   $ (69,375)
Net (loss)                                         --           --           --      (61,896)          --           --      (61,896)
Exercise of common stock options                   --           --       (2,274)          --          342        4,802        2,528
Exercise of common stock rights                    --           --        1,940           --          653        9,154       11,094
Issued in connection with acquisition          11,472          114      187,926           --          699        9,796      197,836
Warrants issued for consulting                     --           --        2,175           --           --           --        2,175
Issuance of common stock for
  convertible debt                                 --           --           17           --            3           23           40
Issuance of common stock for
  compensation                                     --           --       (1,796)          --          149        2,094          298
                                            ---------    ---------    ---------    ---------    ---------    ---------    ---------

Balance, December 31, 2000                     78,445    $     784    $ 286,963    $(201,196)        (274)   $  (3,851)   $  82,700
                                            =========    =========    =========    =========    =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      -22-
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                 YEAR ENDED DECEMBER 31,
                                                                                          -----------------------------------------
                                                                                            2000            1999            1998
                                                                                          ---------       ---------       ---------
<S>                                                                                       <C>             <C>             <C>
Cash flows from operating activities:

Net income (loss)                                                                         $ (61,896)      $  78,929       $(221,326)
Reconciliation of net income (loss) to net cash provided by (used in)
   operating activities:
   Provision for doubtful accounts                                                           53,772          28,250          37,789
   Depreciation and amortization                                                             19,257           6,214           5,499
   Non-cash compensation                                                                        706              --           8,402
   Provision for uncollectible note                                                           2,500              --              --
   Loss on retirement of assets                                                                  68              --              --
   Vested AOL warrants and amortization of prepaid AOL marketing costs                           --              --          71,665
   Significant other charges                                                                     --              --          55,034
   Valuation allowance for deferred tax assets                                                   --              --          40,388
   Extraordinary gain from extinguishment of debt                                                --         (21,230)        (87,110)
   Changes in assets and liabilities, net of acquisitions of businesses:
     Accounts receivable, trade                                                             (43,390)        (41,026)        (39,274)
     Advances to partitions and notes receivable                                                370          (1,730)         24,241
     Prepaid expenses and other current assets                                                7,696            (254)        (23,712)
     Other assets                                                                            (1,252)          1,957         (49,127)
     Accounts payable and accrued expenses                                                   12,763         (23,457)         56,419
     Deferred revenue                                                                        (1,433)         (7,400)         (7,400)
     Sales, Use & Excise taxes                                                                   84             972           5,370
     Other liabilities                                                                       (4,181)         (2,822)         (6,672)
                                                                                          ---------       ---------       ---------
       Net cash provided by (used in) operating activities                                  (14,936)         18,403        (129,814)
                                                                                          ---------       ---------       ---------

Cash flows from investing activities:

   Acquisition of intangibles                                                                  (515)             --            (285)
   Acquisition of Symetrics Industries, Inc.                                                     --              --         (26,707)
   Acquisition of Access One, net of cash acquired                                           (3,617)             --              --
   Capital expenditures                                                                     (34,862)         (6,506)        (16,928)
   Securities sold short                                                                         --              --         (21,087)
   Due from broker                                                                               --              --          21,087
   Sale of marketable securities, net                                                            --          89,649         122,620
                                                                                          ---------       ---------       ---------
       Net cash provided by (used in) investing activities                                  (38,994)         83,143          78,700
                                                                                          ---------       ---------       ---------

Cash flows from financing activities:

   Proceeds from borrowings                                                                  20,000              --              --
   Payments of borrowings                                                                   (18,025)             --              --
   Repayment of margin account indebtedness                                                      --         (49,621)             --
   Proceeds from margin account indebtedness                                                     --              --          49,621
   Acquisition of convertible debt                                                               --         (72,304)        (86,301)
   Proceeds from exercise of options and warrants                                             2,528          48,287          15,489
   AOL investment                                                                                --          55,000              --
   Retirement of common stock                                                                    --              --          (1,470)
   Proceeds from exercise of common stock rights                                             11,094             652              --
   Acquisition of treasury stock                                                                 --          (7,686)       (239,892)
                                                                                          ---------       ---------       ---------
       Net cash provided by (used in) financing activities                                   15,597         (25,672)       (262,553)
                                                                                          ---------       ---------       ---------

Net increase (decrease) in cash and cash equivalents                                        (38,333)         75,874        (313,667)
Cash and cash equivalents, beginning of year                                                 78,937           3,063         316,730
                                                                                          ---------       ---------       ---------
Cash and cash equivalents, end of year                                                    $  40,604       $  78,937       $   3,063
                                                                                          =========       =========       =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -23-
<PAGE>

NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES

         (a) Business

         Talk.com  Inc.,  a  Delaware  corporation,   through  its  consolidated
subsidiaries   (the   "Company"),   provides   telecommunications   services  to
residential  and small business  customers  throughout  the United  States.  The
Company's  telecommunications  service offerings include long distance and local
outbound service,  including local services bundled with long distance services,
inbound  toll-free  service and dedicated  private line  services for data.  The
Company sells these services directly to consumers and through its relationships
with marketing partners and its web site located at www.talk.com.

         (b) Basis of financial statements presentation

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

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

         Amounts  from  additional  paid-in  capital have been  reclassified  to
contingent redemption value of common stock and warrants issued to AOL, in order
to properly reflect the latter at December 31, 1999. This  reclassification  did
not have an effect on net income.

         Certain  amounts in the  statements  of  operations  for 1999 and 1998,
primarily the provision for doubtful accounts, have been reclassified to conform
to the current year presentation.

         (c)  Risks and Uncertainties

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

         -        Company's  business strategy with respect to bundled local and
                  long distance services may not succeed
         -        Failure to or difficulties  in managing the Company's  growth,
                  including  attracting  and retaining  qualified  personnel and
                  opening up new territories for its services
         -        Dependency on the  availability or  functionality of incumbent
                  local  telephone  companies'  networks,  as they relate to the
                  unbundled  network  element  platform  or the  resale  of such
                  services
         -        Increased  price   competition  in  local  and  long  distance
                  services
         -        Company   has   significant   reimbursement   and   repurchase
                  obligations under the Investment Agreement with AOL
         -        Failure  or   interruption   in  the  Company's   network  and
                  information systems
         -        Changes in government  policy,  regulation  and  enforcement
         -        Adverse  developments in the Company's  relationship  with its
                  marketing partners
         -        Failure of the marketing of the bundle of the Company's  local
                  and long distance  services and long distance  services  under
                  its direct  marketing  channels and under its agreements  with
                  its various marketing partners
         -        Inability  to  obtain  additional  capital  required  to fully
                  implement business plan
         -        Inability to adapt to technological change
         -        Competition in the telecommunications industry
         -        Inability to manage customer attrition and bad debt expense
         -        Adverse  change in  Company's  relationship  with third  party
                  carriers

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



                                      -24-
<PAGE>

         (d) Recognition of revenue

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

         Deferred  revenue  represents the unearned portion of local service and
features  that are billed a month in  advance  and a  non-refundable  prepayment
received  in 1997 in  connection  with an  amended  telecommunications  services
agreement with Shared Technologies Fairchild,  Inc., which is amortized over the
five-year term of the agreement. This agreement is terminable by either party on
thirty days notice.  Termination by either party would accelerate recognition of
the deferred revenue.

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

         (e) Cash and cash equivalents

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

         (f) Advances to partitions and notes receivable

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

         (g) Property and equipment and depreciation

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


         Buildings and building improvements               39 years
         Switching equipment                               15 years
         Equipment and other                               5-7 years
         Software                                          3 years


          (h) Goodwill and intangibles

         Goodwill  and  intangibles  were  approximately  $218,639 and $1,068 at
December 31, 2000 and 1999, respectively. Goodwill represents the cost in excess
of net assets of acquired  companies and is amortized on a  straight-line  basis
over  periods  of 10 and 15 years.  Intangibles  consist  of a service  mark and
purchased  customer  accounts and workforce and are amortized on a straight-line
basis over periods ranging from three to fifteen years. Accumulated amortization
at December 31, 2000 and 1999, was $11,402 and $807, respectively.  Amortization
of goodwill and  intangibles  was $9,680,  $82 and $725 in 2000,  1999 and 1998,
respectively.  Goodwill, intangibles and related amortization have increased due
to the Access One merger as discussed in Note 3.

          (i) Long-lived assets

         The  Company  adopted  Statement  of  Financial   Accounting  Standards
("SFAS") No. 121,  "Accounting  For the Impairment of Long-Lived  Assets and for
Long-Lived  Assets to be Disposed of" as of January 1, 1996.  Long-lived  assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.  If the fair value is less than
the  carrying  amount of the asset,  a loss is  recognized  for the  difference.
Certain of the Company's  long-lived assets were considered impaired at December
31, 1998 (Note 4). There have been no additional  impairments as of December 31,
2000 and 1999.


                                      -25-
<PAGE>

         (j) Income taxes

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

         Since 1998,  the Company has provided a full  valuation  allowance  for
deferred  tax assets  and  liabilities  for the  estimated  future  tax  effects
attributable  to  temporary   differences   between  the  basis  of  assets  and
liabilities for financial and tax reporting purposes (Note 12).


         (k) Net income (loss) per share

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

         (l) Financial instruments and risk concentration

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

         The carrying values of accounts receivable,  advances to partitions and
notes receivable, accounts payable and accrued expenses approximate fair values.
Convertible debt is recorded at face amount but such debt has traded in the open
market at substantial discounts to face amount (Note 7). The market value of the
convertible  debt was  approximately  61% and 83% of face amount at December 31,
2000 and 1999, respectively

         (m) Stock-based compensation

         The Company  accounts for its stock option  awards under the  intrinsic
value based method of accounting  prescribed by APB Opinion No. 25,  "Accounting
for Stock  Issued to  Employees,"  and related  interpretations  including  FASB
Interpretation  No. 44  "Accounting  for Certain  Transactions  Including  Stock
Compensation,"  an  interpretation  of APB Opinion No. 25.  Under the  intrinsic
value  based  method,  compensation  cost is the  excess,  if any, of the quoted
market  price of the  stock at grant  date or other  measurement  date  over the
amount an employee  must pay to acquire the stock.  The Company  makes pro forma
disclosures  of net income  and  earnings  per share as if the fair value  based
method of accounting  had been applied as required by SFAS No. 123,  "Accounting
for Stock-Based Compensation" (Note 11).

         (n) Comprehensive income

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

         (o) New Accounting Pronouncements

         Statement of Financial  Accounting  Standards No. 133  "Accounting  for
Derivative  Instruments and Hedging Activities" ("SFAS 133"),  requires entities
to recognize  all  derivatives  as either assets or  liabilities  in the balance
sheet and measure those  instruments at fair value.  SFAS No. 133, as amended by
SFAS No. 138,  becomes  effective for all fiscal years  beginning after December
31, 2000. The Company anticipates that the new standard will not have a material
effect on its financial statements.

         The Financial  Accounting  Standards  Board (FASB) Emerging Issues Task
Force (EITF) has issued Abstract No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a



                                      -26-
<PAGE>

Company's Own Stock," which  addresses how such  contracts  should be classified
and measured by the Company.  Under this issue,  contracts that require net-cash
settlement would be initially classified as assets or liabilities, then measured
at fair value,  with changes in fair value reported in earnings and disclosed in
the financial statements as long as the contracts remain classified as assets or
liabilities.  If contracts  classified as assets or  liabilities  are ultimately
settled in shares,  any gains or losses on those contracts should continue to be
included in earnings.  This abstract is effective for all contracts  that remain
outstanding at June 30, 2001, and presented on that date as a cumulative  effect
of a  change  in  accounting  principle.  Assuming  there  is no  change  in the
Company's  outstanding  agreements prior to June 30, 2001, the cumulative effect
of the adoption of this change in accounting principal could result in a noncash
charge to earnings in excess of $40 million in the quarter ended June 30, 2001.

         (p)  Segment Disclosure

         The Company adopted Statement of Financial Accounting Standards No. 131
- "Disclosures about Segments of an Enterprise and Related  information"  ("SFAS
131") whose effective date was December 15, 1997.  Management  believes that the
Company operates as one reportable operating segment.



NOTE 2 -- AOL AGREEMENTS

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

         AOL did not elect to exercise its right to terminate  the long distance
exclusivity as of June 30, 2000 and,  accordingly,  the  exclusivity  period for
long distance will continue  through at least June 30, 2001. AOL did provide the
Company with notice that its exclusivity as to wireless services would terminate
on July 1, 2000,  although the Company's  right to offer wireless  services will
continue on a non-exclusive basis.

         On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company,  AOL  purchased a total of 4,121,372  shares of Common Stock of the
Company  for $55.0  million  in cash and the  surrender  of  rights to  purchase
5,076,016  shares of Common  Stock of the Company  pursuant to various  warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant and retained vested warrants  exercisable for 2,721,984 shares of Common
Stock.  See Note 10 below for a discussion of certain  contingent  reimbursement
obligations of the Company in favor of AOL.




                                      -27-
<PAGE>

NOTE 3 -- ACQUISITION

         On August 9, 2000, a wholly owned subsidiary of the Company merged with
and into  Access One  Communications  Corp.,  ("Access  One").  Access One was a
private,  local  telecommunications  service  provider  to  nine  states  in the
southeastern  United  States.  As a result of such  merger,  Access One became a
wholly owned subsidiary of the Company and Access One  stockholders  received an
aggregate of  approximately  12.2 million shares of the Company's  common stock,
and  outstanding  options and  warrants to purchase  shares of Access One common
stock  converted to options and warrants to purchase an aggregate of 2.1 million
shares of the Company's common stock. The total purchase price was approximately
$201.6  million and the merger was  accounted  for under the purchase  method of
accounting for business  combinations.  Accordingly,  the consolidated financial
statements include the results of operations of Access One from the merger date.
The merger resulted in the recording of intangible assets of approximately $15.9
million  and  goodwill  of  $210.0  million,  which  are  being  amortized  on a
straight-line  basis over their expected  benefit period.  The Company  acquired
$19.8 million of notes payable as part of the  acquisition  of Access One; as of
December 31, 2000 approximately $1.6 million remained outstanding.

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


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

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

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

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

NOTE 4 -- SIGNIFICANT OTHER CHARGES (INCOME)

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

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

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




                                      -28-
<PAGE>

million per quarter for offline  marketing.  As a result of the amendments,  the
Company wrote off prepaid AOL, CompuServe and other  marketing-related  expenses
of $37.6 million.

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

         The Company acquired ADS Holdings,  Inc. (formerly Symetrics,  Inc.), a
manufacturer of digital telephone switching equipment, in January 1998 for $18.6
million.  The Company  planned to complete  development of the digital switch to
provide  state of the art  features  for use in the  Company's  operations  as a
competitive  local exchange  carrier.  The Company  allocated $21 million of the
acquisition  cost to  purchased  research and  development  expense in the first
quarter of 1998 and continued to invest in additional  research and  development
throughout 1998. In November 1997, the Company acquired Compco,  Inc, a provider
of communications  software in the college and university  marketplace for $13.7
million, which exceeded the net assets acquired by $10.6 million.

         In the fourth quarter of 1998,  the Company  decided to sell the assets
of ADS  Holdings,  Inc.  and to delay  entry  into the  college  and  university
marketplace. As a result, the assets of ADS Holdings, Inc. and Compco, Inc. were
written down to expected  realizable  value.  The Company recorded $15.0 million
relating to the  impairment  of these assets and  reclassified  $22.2 million of
research and development expense to significant other charges.

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

NOTE 5. -- LEASES

         The Company  leases office space and equipment  under  operating  lease
agreements.  Certain leases contain  renewal options and purchase  options,  and
generally  provide  that  the  Company  shall  pay  for  insurance,   taxes  and
maintenance.  Total rent  expense for all  operating  leases for the years ended
December  31,  2000,  1999  and  1998  was  $1.37,  $1.04,  and  $0.77  million,
respectively.  As of December 31, 2000,  the Company had future  minimum  annual
lease obligations under leases with noncancellable  lease terms in excess of one
year as follows:

<TABLE>
<CAPTION>
         Year                                                 (in Thousands)
<S>                                                              <C>
         2001 ..............................................     $1,663
         2002 ..............................................      1,632
         2003 ..............................................      1,605
         2004 ..............................................      1,565
         2005 ..............................................      1,416
         Thereafter ........................................      1,424
                                                                 ------
                                                                 $9,305
                                                                 ======
</TABLE>


                                      -29-
<PAGE>

NOTE 6 -- PROPERTY AND EQUIPMENT

         The  following is a summary of property and  equipment - at cost,  less
accumulated depreciation.

<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                           -------------------------------
                                                                                             2000                  1999
                                                                                           ---------             ---------
<S>                                                                                        <C>                   <C>
         Land                                                                              $     340             $      80
         Buildings and building/leasehold improvements                                         6,350                 2,956
         Switching equipment                                                                  57,861                53,101
         Software                                                                              1,527                    --
         Equipment and other                                                                  42,667                16,961
                                                                                           ---------             ---------
                                                                                             108,745                73,098
         Less: Accumulated depreciation                                                      (25,089)              (15,763)
                                                                                           ---------             ---------
                                                                                           $  83,656             $  57,335
                                                                                           =========             =========
</TABLE>

For the years ended  December  31,  2000,  1999 and 1998,  depreciation  expense
amounted to $9,574, $5,874 and $4,774, respectively.

NOTE 7 -- DEBT

(a)      Convertible Debt

         In September 1997, the Company sold $300 million of 4 1/2%  Convertible
Subordinated  Notes that mature on  September  15,  2002 (the "2002  Convertible
Notes").  Interest on the 2002 Convertible Notes is due and payable semiannually
on March 15 and  September  15 of each  year.  The 2002  Convertible  Notes  are
convertible,  at the option of the holder,  into shares of the Company's  Common
Stock at a  conversion  price of $24.54 per share,  as adjusted for the dilutive
effect of the exercise of rights pursuant to the Company's rights offering (Note
11). The 2002  Convertible  Notes are  redeemable,  in whole or in part,  at the
Company's  option,  at any time on or after September 15, 2000 at 101.80% of par
prior to September 14, 2001 and 100.90% of par thereafter. During 1999 and 1998,
the Company reacquired $80,650 and $152,458,  respectively,  principal amount of
the 2002 Convertible Notes and $66,852 principal amount remained  outstanding at
December 31, 2000.

         In December  1997,  the  Company  sold $200  million of 5%  Convertible
Subordinated  Notes that  mature on  December  15,  2004 (the "2004  Convertible
Notes").  Interest on the 2004 Convertible Notes is due and payable semiannually
on  June 15 and  December  15 of each  year.  The  2004  Convertible  Notes  are
convertible,  at the option of the holder,  at a conversion  price of $25.38 per
share, as adjusted for the dilutive effect of the exercise of rights pursuant to
the  Company's  rights  offering  (Note  11).  The 2004  Convertible  Notes  are
redeemable, in whole or in part at the Company's option, at any time on or after
December  15, 2002 at 101.43% of par prior to  December  14, 2003 and 100.71% of
par  thereafter.  During  1999 and 1998,  the  Company  reacquired  $76,752  and
$105,155,  respectively,  face amount of the 2004 Convertible  Notes and $18,093
principal amount remained outstanding at December 31, 2000.

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

         During 1999,  the Company (a)  purchased  from Mr. Daniel  Borislow,  a
founder of the Company and its Chairman of the Board and Chief Executive Officer
until he  resigned  on January 5,  1999,  and two trusts for the  benefit of Mr.
Borislow's  children,  $85,857  aggregate  principal  amount  of  the  Company's
Convertible  Notes for $72.3 million in cash; (b) exchanged the remaining  $53.7
million  principal  amount of subordinated  notes of  Communication  TeleSystems
International  d/b/a WorldxChange  Communications,  which were included in other
assets at  December  31,  1998,  to a trust for the  benefit  of Mr.  Borislow's
children for $62,545  aggregate  principal  amount of the Company's  Convertible
Notes and (c)  purchased  $9,000  aggregate  principal  amount of the  Company's
Convertible Notes for $6.9 million in Common Stock.



                                      -30-
<PAGE>

         The  2002  Convertible  Notes  and 2004  Convertible  Notes  that  were
reacquired  by the  Company  during  1999  were  reacquired  at a $21.2  million
discount from face amount.  This amount is reported as an extraordinary  gain in
the consolidated statement of operations.

(b)      Long-Term Debt

         On October 20, 2000, certain subsidiaries of the Company entered into a
Credit Facility Agreement with MCG Finance Corporation providing for a term loan
of  up  to  $20.0  million  and  a  line  of  credit  facility  permitting  such
subsidiaries to borrow up to an additional  $30.0 million.  The  availability of
the line of credit  facility is subject,  among other things,  to the successful
syndication  of that facility,  which is expected to occur in 2001.  Loans under
the Credit  Facility  Agreement  bear interest at a rate equal to either (a) the
Prime Rate,  as  published  by the Board of  Governors  of the  Federal  Reserve
System, or (b) LIBOR,  plus, in each case, the applicable margin. The applicable
margin will initially be 2.5% for borrowings accruing interest at the Prime Rate
and 4% for borrowings  accruing interest at LIBOR;  after December 31, 2000, the
applicable  margin  will be  based  on the  ratio  of  funded  debt to  trailing
twelve-month  operating cash flow,  determined on a consolidated basis, and will
vary from 2.0% to 2.5% for  borrowings  accruing  interest at the Prime Rate and
from 3.5% to 4.0% for borrowings accruing interest at LIBOR. The Credit Facility
Agreement subjects the Company and its subsidiaries to certain  restrictions and
covenants  related  to,  among  other  things,  liquidity,   per-subscriber-type
revenue,  subscriber  acquisition  costs,  leverage ratio and interest  coverage
ratio  requirements.  The credit facilities under the Credit Facility  Agreement
terminate on June 30, 2001, but can be extended at the Company's  election up to
June 30, 2005 for the term loan facility and up to June 30, 2003 for the line of
credit  facility.  The  principal  of the term loan is  required to be repaid in
quarterly  installments of $1.25 million on the last calendar day of each fiscal
quarter,  commencing on September 30, 2001. The loans under the Credit  Facility
Agreement  are secured by a pledge of all of the assets of the  subsidiaries  of
the Company that are parties to that  agreement.  In  addition,  the Company has
guaranteed  the  obligations  of those  subsidiaries  under the Credit  Facility
Agreement and related documents; the Company's guarantee subjects the Company to
certain restrictions and covenants,  including a prohibition against the payment
of dividends in respect of the Company's equity securities, except under certain
limited  circumstances.  The Company  borrowed $20.0 million under the term loan
facility  (approximately  $15.0 million was used to repay indebtedness of Access
One).

As of December 31, 2000,  the required  minimum  annual  principal  reduction of
convertible  and  long-term  debt  obligations  for each of the next five fiscal
years is as follows:

<TABLE>
<CAPTION>
        Year Ending December 31,                                Total
<S>                                                           <C>
                 2001                                         $  2,822
                 2002                                         $ 71,852
                 2003                                         $  5,000
                 2004                                         $ 23,093
                 2005                                         $  3,750
                                                              --------
                                                              $106,517
                                                              ========
</TABLE>

NOTE 8 -- RELATED PARTY TRANSACTIONS

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

         In addition,  during 1999, the Company (a) purchased from Mr. Borislow,
and two  trusts  for the  benefit  of Mr.  Borislow's  children,  $85.9  million
aggregate principal amount of the Company's  Convertible Notes for $72.3 million
in  cash;  (b)  exchanged  the  remaining  $53.7  million  principal  amount  of
subordinated notes of Communication TeleSystems International d/b/a WorldxChange
Communications,  which were  included in other assets at December 31, 1998, to a
trust for the benefit of Mr.  Borislow's  children for $62.5  million  aggregate
principal  amount of the  Company's  Convertible  Notes and (c)  purchased  $9.0
million aggregate  principal amount of the Company's  Convertible Notes for $6.9
million in Common Stock. Also during 1999, pursuant to the agreements



                                      -31-
<PAGE>

with Mr.  Borislow as described  above the Company  purchased from Mr.  Borislow
approximately 639,000 shares of Common Stock for approximately $7.7 million with
proceeds from the exercise of stock options by other employees.

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


NOTE 9 -- LEGAL PROCEEDINGS

         On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern  District of  Pennsylvania  against
the Company and certain of its officers  alleging  violation  of the  securities
laws in connection  with certain  disclosures  made by the Company in its public
filings and seeking unspecified damages. Thereafter,  additional lawsuits making
substantially  the same  allegations  were filed by other plaintiffs in the same
court. A motion to dismiss was granted as to certain officers of the Company and
denied as to the Company. There are currently no officers of the Company who are
a party to these actions.  On July 19, 2000, a class was certified.  The Company
believes the  allegations  in the  complaints  are without  merit and intends to
defend the litigations vigorously.

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

         The Company believes that the ultimate outcome of the foregoing actions
will not result in liability  that would have a material  adverse  effect on the
Company's financial condition or results of operations.

NOTE 10 -- STOCKHOLDERS' EQUITY

         (a)      Authorized Shares

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

         (b)      Contingent Redemption Value of Warrants

         Under the terms of the marketing  agreements  with AOL (as discussed in
Note 2),  AOL has the  right on  termination  of long  distance  exclusivity  to
require the Company to repurchase the warrants to purchase  2,721,984  shares of
Common Stock of the Company held by AOL for an aggregate price of $36.3 million,
which  repurchase  price  can be  paid in  Common  Stock,  cash  or a  quarterly
amortizing  two-year  promissory  note of the Company.  Upon the  occurrence  of
certain events, including material defaults by the Company in its AOL agreements
and a "change of  control"  of the  Company,  the  Company  may be  required  to
purchase the warrants for cash.  Accordingly,  at December 31, 1999 and 2000 the
Company  recorded  $36.3 million for the  contingent  redemption  value of these
warrants with a corresponding  reduction in additional paid-in capital.  AOL can
end the Company's long distance exclusivity period on or after June 30, 2001.

         (c)      Contingent Redemption Value of Common Stock

         Under the terms of the  Investment  Agreement with AOL (as discussed in
Note 2), the Company has agreed to reimburse AOL for losses AOL may incur on the
sale of any of the 4,121,372  shares of Common Stock during the period from June
1, 1999 through  September 30, 2001. The Company has the first right to purchase
any of the 4,121,372  shares of Common Stock at the market value on the day that
AOL notifies the Company of its intent to sell any of the shares plus an amount,
if any, equal to the Company's  reimbursement  obligation  described  below. The
reimbursement amount would be determined by multiplying the number of shares, if
any, that AOL sells during the applicable  period by the difference  between the
purchase price per share paid by AOL, or $19 per share,  and the price per share
that AOL sells the shares  for,  if less than $19 per share.  The  reimbursement
amount may not exceed  $14 per share for  2,894,737  shares or $11 per share for
1,226,635 shares. Accordingly, the maximum amount payable to AOL as


                                      -32-
<PAGE>

reimbursement on the sale of AOL's shares would be  approximately  $54.0 million
plus AOL's reasonable expenses incurred in connection with the sale. The Company
has the option of issuing a  six-month  10% note  payable to AOL to satisfy  the
reimbursement  amount or other amounts  payable on exercise of its first refusal
rights.  Assuming  AOL were to sell all of its shares  subject to the  Company's
reimbursement obligation at the closing price of Common Stock as of December 31,
2000, the  reimbursement  amount would be  approximately  $54 million.  Upon the
occurrence of certain events,  including  material defaults by the Company under
its AOL  agreements  and a "change of control" of the Company,  the Company also
may be required to repurchase  all of the shares at $19 per share.  Accordingly,
the Company has recorded  $78.3 million for the contingent  redemption  value of
this Common Stock with a corresponding  reduction in additional  paid-in capital
at  December  31,  2000 and  1999.  The  Company  has  pledged  the stock of its
subsidiaries  and has agreed to fund an escrow account of up to $35 million from
50% of the  proceeds of any debt  financing,  other than a bank,  receivable  or
other asset based  financing  of up to $50  million,  to secure its  obligations
under the Investment Agreement with AOL. AOL has agreed that it will subordinate
its security interests to permit the securitization of certain future financings
by the Company.

         (d)      Stockholders Rights Plan

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

         Under the terms of the  plan,  preferred  stock  purchase  rights  were
distributed  as a  dividend  at the rate of one right  for each  share of Common
Stock of the Company held as of the close of business on August 30, 1999.  Until
the rights become exercisable, Common Stock issued by the Company will also have
one right attached.  Each right will entitle holders to buy one  three-hundredth
of a share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $55. Each right will thereafter  entitle the holder to receive
upon  exercise  Common Stock (or, in certain  circumstances,  cash,  property or
other  securities of the Company) having a value equal to two times the exercise
price of the right.

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


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

NOTE 11 -- STOCK OPTIONS, WARRANTS AND RIGHTS

         (a) Stock Based Compensation Plan

         The  Company  grants  stock  options  under  a  stock-based   incentive
compensation  plan (the  "Plan").  The  Company  applies  APB Opinion No. 25 and
related  Interpretations  in accounting for the Plan.  SFAS 123  "Accounting for
Stock-Based  Compensation,"  if fully  adopted by the Company,  would change the
methods the Company applies in recognizing the cost of the Plan. The Company has
adopted the disclosure-only  provisions of SFAS 123. Pro forma disclosures as if
the Company  adopted the cost  recognition  provisions of SFAS 123 are presented
below.

         Under the Plan, the Company is authorized to issue 5,000,000  shares of
Common Stock pursuant to "Awards" granted in various forms,  including incentive
stock options  (intended to qualify  under  Section 422 of the Internal  Revenue
Code of 1986,  as  amended),  non-qualified  stock  options,  and other  similar
stock-based Awards.

         (b) Stock Options



                                      -33-
<PAGE>

         Stock options  granted in 2000 generally have  contractual  terms of 10
years. The options granted to employees have an exercise price equal to the fair
market value of the stock at grant date. The vast majority of options granted in
2000 vest one-third each year, beginning on the first anniversary of the date of
grant.

         In 1998, the Company  recognized $3.3 million of compensation  expenses
relating  to the grant of 650,000  options to purchase  shares of the  Company's
Common  Stock at prices  below the quoted  market price at the dates of grant or
issuance and the issuance of 135,000 shares of the Company's stock.

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


<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                          --------------------------------------------------
                                                                             2000                1999               1998
                                                                          -----------         -----------        -----------
<S>                                                                       <C>                 <C>                <C>
         NET INCOME (LOSS):
           As reported                                                    $   (61,896)        $    78,929        $  (221,326)
           Pro forma                                                      $   (99,420)        $    68,851        $  (244,487)
         BASIC EARNINGS (LOSS) PER SHARE:
           As reported                                                    $     (0.88)        $      1.29        $     (3.73)
           Pro forma                                                      $     (1.41)        $      1.13        $     (4.12)
         DILUTED EARNINGS (LOSS) PER SHARE:
           As reported                                                    $     (0.88)        $      1.23        $     (3.73)
           Pro forma                                                      $     (1.41)        $      1.07        $     (4.12)
</TABLE>

         The  fair  value  was   estimated  as  of  the  grant  date  using  the
Black-Scholes option pricing model with the following average assumptions:

<TABLE>
<CAPTION>
                                            2000              1999                      1998
<S>                                         <C>               <C>                       <C>
         Risk-free interest rate            6.27%             5.38%/5.85%               4.59%
         Dividend yield                     0.00%             0.00%                     0.00%
         Volatility factor                  87.46%            108.00%                   65%
         Expected lives                     5 years           1 to 10 years             1 to 10 years
</TABLE>

         The  following  tables  contain  information  on stock  options for the
three-year period ended December 31, 2000:

<TABLE>
<CAPTION>
                                                                                              EXERCISE             WEIGHTED
                                                                        OPTIONS              PRICE RANGE            AVERAGE
                                                                        SHARES                PER SHARE          EXERCISE PRICE
                                                                      -----------            ------------        --------------
<S>                                                                    <C>                   <C>                    <C>
         Outstanding, December 31, 1997                                 8,885,988            $ .32-$22.06           $  9.26
         Granted                                                        5,535,000            $5.75-$10.44           $  7.18
         Exercised                                                     (2,853,178)           $  .32-13.63           $  4.93
         Cancelled                                                     (1,337,000)           $ 5.75-17.50           $ 13.01
                                                                      -----------            ------------           -------

         Outstanding, December 31, 1998                                10,230,810            $4.08-$14.00           $  7.34
         Granted                                                        3,549,500            $8.75-$17.25           $ 11.63
         Exercised                                                     (6,773,378)           $4.08- 12.78           $  7.13
         Cancelled                                                       (158,000)           $5.75- 11.69           $  9.67
                                                                      -----------            ------------           -------

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

         Outstanding, December 31, 2000                                15,069,319            $0.88-$17.25           $  8.60
                                                                      ===========            ============           =======
</TABLE>

                                      -34-
<PAGE>

<TABLE>
<CAPTION>
                                                                                       EXERCISE            WEIGHTED
                                                             OPTIONS                  PRICE RANGE           AVERAGE
        EXERCISABLE AT:                                      SHARES                    PER SHARE         EXERCISE PRICE
                                                            ---------                -------------       --------------
<S>                                                         <C>                      <C>                     <C>
        1998                                                4,571,475                $4.08-$12.78            $7.39
        1999                                                2,541,095                $4.58-$14.00            $7.67
        2000                                                5,597,573                $0.88-$17.25$           $7.31
</TABLE>

<TABLE>
<CAPTION>
                                                                                                           WEIGHTED
                                                                                                            AVERAGE
        OPTIONS GRANTED:                                                                                   FAIR VALUE
                                                                                                         --------------
<S>                                                                                                          <C>
        1998                                                                                                 $4.83
        1999                                                                                                 $9.71
        2000                                                                                                 $6.56
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                        $0.88-$4.57    $4.58-$7.00    $7.01-$10.00   $10.01-$13.00   $13.01-$17.25
                                                        -----------    -----------    ------------   -------------   -------------
<S>                                                      <C>            <C>            <C>            <C>            <C>
OUTSTANDING OPTIONS:
Number outstanding at December 31, 2000                   2,553,970      4,387,624      1,505,391      2,168,334      4,454,000
Weighted-average remaining contractual life (Years)            7.24           7.47           7.08           7.26           9.07
Weighted-average exercise price                          $     2.06     $     5.38     $     9.20     $    10.54     $    14.39
EXERCISABLE OPTIONS:
Number outstanding at December 31, 2000                   1,182,904      1,852,432        841,059      1,384,347        336,831
Weighted-average exercise price                          $     2.02     $     6.07     $     9.12     $    10.44     $    15.30
</TABLE>

         (c) AOL Warrants

         On  January 5,  1999,  after the  repurchase  from AOL of  warrants  to
purchase 5,076,016 shares of Common Stock, warrants to purchase 2,721,984 shares
of Common Stock were held by AOL and were outstanding and currently exercisable,
with exercise prices from $14.00 to $22.25 and a weighted average exercise price
of $17.03.  AOL has the right,  commencing on  termination  of the long distance
exclusivity  under the AOL  marketing  agreement  up until  January 5, 2003,  to
require the Company to repurchase all or any portion of these warrants at prices
(the "Put Prices") ranging from $10.45 to $16.82 per warrant ($36,324  aggregate
amount).  In the event AOL requires  repurchase of the warrants,  the Company at
its  election may pay AOL in cash or in shares of Common Stock based on the then
current  market price for such stock.  The Company may also elect to issue a 10%
two-year note for a defined  portion of the  repurchase  price.  The Company can
require AOL to  exercise  its  warrants  at any time the market  price of Common
Stock  equals or exceeds two times the then call amount for such  warrants.  The
call  amount  of a  warrant  is the Put Price  for the  warrant  increased  at a
semi-annually  compounded  rate of 5% on  January  5, 1999 and on each six month
anniversary thereafter. The Company has certain reimbursement obligations in the
event that it requires  AOL to exercise  its  warrants.  In  addition,  upon the
occurrence of certain events,  including material defaults by the Company in its
AOL  agreements  and a "change of  control" of the  Company,  the Company may be
required to purchase the warrants for cash.

         (d) Other Warrants

         Pursuant to the terms of the Agreement and Plan of Merger,  dated as of
March 24, 2000, between a wholly owned subsidiary of the Company and Access One,
the Company assumed certain warrants to purchase shares of



                                      -35-
<PAGE>

Access One, which,  upon  consummation  of the Merger,  converted to warrants to
purchase an  aggregate  of 871,4214  shares of the  Company  common  stock at an
exercise price of $2.02. In connection with certain consulting services that MCG
Credit  Corporation was to provide to the Company,  the Company issued a warrant
to MCG to purchase 300,000 shares of its common stock,  which became exercisable
at $4.73.  Upon its execution of the Credit Facility  Agreement with MCG Finance
Corporation  in October 2000, the Company  issued  warrants to purchase  300,000
shares  of its  common  stock at $4.36 per  share,  150,000  of which  vested at
December  31,  2000 and the  balance  will vest if the  Company  fails to exceed
certain EBITDA thresholds for the fiscal quarter ended March 31, 2001.

         (e) Rights

         The Board of  Directors  had  approved an  offering of up to  3,523,285
shares of its Common Stock, $.01 par value, to holders of record of Common Stock
and holders of record of options or warrants  to  purchase  Common  Stock at the
close of business on December  31,  1998.  The shares were  offered  pursuant to
nontransferable rights to subscribe for and purchase shares of Common Stock at a
price of $17.00 per share.  Holders of record on the record date,  were eligible
to receive one such nontransferable right for every 20 shares of Common Stock or
underlying  options or warrants  held on the record date, as  applicable.  As of
December 31, 1999,  38,325 rights totaling  $651.5 were  exercised,  and 652,547
rights totaling $11,093 were exercised in 2000. These rights expired on February
12, 2000.

NOTE 12 -- INCOME TAXES

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

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

         During 1998, the Company incurred  significant  promotional,  marketing
and  advertising  expenses  attributable to its efforts to increase the customer
base.  Moreover,  competitive factors intensified during the period making gains
in subscriber base more costly and more time consuming. Accordingly, the Company
provided a valuation  allowance  against its deferred tax assets at December 31,
1998. The valuation  allowance  also  eliminated the net deferred tax asset that
had been recognized in previous periods.  The valuation  allowance increased the
net loss for the period by approximately $40.4 million. At December 31, 2000 and
1999, a valuation  allowance has been  provided  against the deferred tax assets
since management cannot predict, based on the weight of available evidence, that
it is more likely than not that such assets  will be  ultimately  realized.  The
Company has continued to provide a valuation  allowance against its deferred tax
assets at December 31, 2000.


                                      -36-
<PAGE>

         The provision  for income taxes for the years ended  December 31, 2000,
1999 and 1998 consisted of the following:

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                          -----------------------------------
                                           2000           1999         1998
                                          -------       -------       -------
<S>                                       <C>           <C>           <C>
Current:
     Federal                              $    --       $    --       $    --
     State and local                           --            --            --
                                          -------       -------       -------

Total current:                                 --            --            --

Deferred:
     Federal                                   --            --        34,140
     State and local                           --            --         6,248
                                          -------       -------       -------

Total deferred                                 --            --        40,388
                                          -------       -------       -------
                                          $    --       $    --       $40,388
                                          =======       =======       =======
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------------------------------
                                                                 2000                      1999                        1998
                                                          -----------------         ------------------         ------------------
<S>                                                       <C>         <C>           <C>           <C>          <C>          <C>
Federal income taxes computed at the statutory rate       $(20,657)   (35.0)%       $ 27,625      35.0%        $(63,328)    (35.0%)
Increase (decrease):
State income taxes less Federal Benefit                     (2,361)    (4.0)           3,157       4.0           (7,780)     (4.3)
Valuation allowance for deferred tax assets
   existing at beginning of year                                --       --               --        --           40,388      22.3
Valuation allowance changes                                 19,184     32.5          (31,000)    (39.3)          68,612      37.9
Other                                                        3,834      6.5              218        .3            2,496       1.4
                                                          --------    -----         --------     -----         --------     -----

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


                                      -37-
<PAGE>

Deferred tax (assets) liabilities at December 31, 2000 and 1999 are comprised of
the following elements:

<TABLE>
<CAPTION>
                                                                                                         YEAR ENDED DECEMBER 31,
                                                                                                       ----------------------------
                                                                                                          2000               1999
                                                                                                       ---------          ---------
<S>                                                                                                    <C>                <C>
Net operating loss carryforwards                                                                       $(105,000)         $ (71,000)
Deferred revenue taxable currently                                                                        (5,000)            (8,000)
Compensation for options granted below market price                                                       (1,000)            (1,000)
Allowance for uncollectible accounts                                                                     (11,000)            (3,000)
Warrants issued for compensation                                                                          11,000             (9,000)
Depreciation and amortization                                                                             (1,000)             8,000
Accruals not currently deductible                                                                             --             (2,000)
Net capital loss carryforwards                                                                            (9,000)            (8,000)
                                                                                                       ---------          ---------

Deferred tax (assets) liabilities, net                                                                  (121,000)           (94,000)
Less valuation allowance                                                                                 121,000             94,000
                                                                                                       ---------          ---------

Net deferred tax                                                                                       $      --          $      --
                                                                                                       =========          =========
</TABLE>


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

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

         The  Company's  deferred tax asset related to  operations,  net capital
loss  carryforwards and exercised stock options amounted to $96.0 million,  $9.0
million and $16.0 million, respectively at December 31, 2000.

         Internal  Revenue Code Section 382 provides for the  limitation  on the
use of net operating loss  carryforwards  in years subsequent to a more than 50%
cumulative  change in ownership.  A more than 50% cumulative change in ownership
occurred on August 31, 1998 and October 26, 1999. As a result, the net operating
loss  attributable  to offset taxable income is $16.7 million,  considering  the
effect  of both the  1998  and 1999  ownership  changes.  Of the  Company's  net
operating loss  carryforwards  of $271.4 million at December 31, 2000, a portion
is subject to this annual limitation subsequent to 2000.

NOTE 13 -- STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                               ---------------------------------------------
                                                                                2000               1999                1998
                                                                               -------            -------            -------
<S>                                                                            <C>                <C>                <C>
Supplemental disclosure of cash flow information:
   Cash paid for interest                                                      $ 4,864            $ 4,218            $28,695
</TABLE>



                                      -38-
<PAGE>

         In August 2000,  the Company  completed the  acquisition of Access One.
The Company  issued  11,472,174  shares and 698,382  shares of Common  Stock and
Treasury Stock,  respectively,  with a value of approximately  $170.4 million in
connection with the acquisition. A summary of the transaction is as follows:

<TABLE>
<S>                                                          <C>
         Fair value of assets acquired                       $  21,718
         Goodwill                                            $ 209,978

         Fair value of stock issued                          $ 170,388
         Fair value of options/warrants issued               $  27,448
         Liabilities assumed                                 $  30,243
         Cash paid, net of cash acquired                     $  (3,617)
</TABLE>

         Also,  during 2000, the Company  issued 300,000  warrants to MCG with a
value of approximately $2.2 million for a 3-year consulting agreement.

         The Company also  declared a stock bonus with a value of $706.1 in 2000
to be paid using Treasury Stock. At the election of certain employees, the bonus
payment  could be deferred  until 2001.  Therefore,  149,300  shares and 203,750
shares were issued out of Treasury Stock in 2000 and 2001, respectively.

         During 1999,  the Company  issued 574,482 shares of Common Stock with a
value of approximately  $6.9 million (Note 7), in connection with the repurchase
of the Company's Convertible Notes.

         Also,  during 1999, the Company  assigned to a trust for the benefit of
Mr.  Borislow's  children the Company's  interest in $53,700 principal amount of
subordinated   notes   of   Communications   TeleSystems   International   d/b/a
WorldXChange Communications,  in exchange for $62,545 aggregate principal amount
of the Company's Convertible Notes (Note 7).

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

         During 1998, the Company,  in exchange for a total of 783,706 shares of
Common Stock, sold certain assets to Mr. Borislow and released Mr. Borislow from
an obligation  borrowed from the Company (Note 8). The Company also, in exchange
for a total of 498,435  shares of Common Stock and $10,007  aggregate  principal
amount of the Company's Convertible Notes, released certain officers,  directors
and employees from obligations borrowed from the Company (Note 8). In connection
with the  repurchase  of the Company's  Convertible  Notes,  the Company  issued
5,084,483 shares of Common Stock with a value of approximately $69.5 million.

NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         FIRST           SECOND           THIRD           FOURTH
                                                                        QUARTER          QUARTER         QUARTER          QUARTER
                                                                        ---------       ---------        ---------        ---------
<S>                                                                     <C>             <C>              <C>              <C>
                            2000
                            ----
Sales                                                                   $ 156,043       $ 135,737        $ 121,233        $ 131,535
Gross profit                                                               69,515          57,573           60,395           64,133
Operating income                                                           13,666            (959)         (33,625)         (36,718)
Net income                                                                 13,380            (891)         (34,770)         (39,615)
Net income per share - Diluted                                               0.20           (0.01)           (0.48)           (0.59)


                            1999
                            ----
Sales                                                                   $ 110,572       $ 117,139        $ 140,027        $ 148,811
Gross profit                                                               42,076          52,674           64,051           68,718
Operating income                                                           12,355          14,979           15,579           16,642
Income before extraordinary gain                                           12,334          14,038           14,646           16,682
Net income                                                                 31,331          14,038           16,879           16,682
Income before extraordinary gain per share - Diluted                         0.20            0.22             0.23             0.25
Net income per share - Diluted                                               0.50            0.22             0.27             0.25
</TABLE>



                                      -39-
<PAGE>

NOTE 15 -- EMPLOYEE BENEFIT PLANS

         During  1999,  the Company  established  an Employee  Savings Plan that
permits  eligible  employees to contribute  funds on a pre-tax  basis.  The Plan
qualifies as a deferred salary  arrangement under Section 401(k) of the Internal
Revenue Code.  Eligible  employees may contribute up to 6% of their compensation
(subject to Internal  Revenue Code  limitations).  The Plan allows  employees to
choose among a variety of investment  alternatives.  The Company is not required
to contribute to the Plan.  During 2000 the Company elected to contribute  $0.11
million to the Plan.  No  contributions  were made during 1999.  No  significant
administration costs were incurred during 2000 or 1999.

NOTE 16 -- PER SHARE DATA:

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

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                 --------------------------------------------------
                                                                                    2000                1999               1998
                                                                                 -----------         -----------        -----------
<S>                                                                              <C>                 <C>                <C>
Income (loss) before extraordinary gain                                          $   (61,896)        $    57,699        $  (308,436)
Extraordinary gain                                                                        --              21,230             87,110
                                                                                 -----------         -----------        -----------
Net income (loss)                                                                $   (61,896)        $    78,929        $  (221,326)
                                                                                 ===========         ===========        ===========

Average shares of common stock outstanding used
to compute basic earnings per common share                                            70,527              61,187             59,283
Additional common shares to be issued assuming
exercise of stock options and warrants, net of
shares assumed reacquired                                                                 --               3,228                 --
                                                                                 -----------         -----------        -----------
Shares used to compute dilutive effect of stock options                               70,527              64,415             59,283
                                                                                 ===========         ===========        ===========

Basic earnings (loss) per share:

Income (loss) before extraordinary gain                                          $     (0.88)        $      0.94        $     (5.20)


Extraordinary gain                                                                        --                0.35               1.47
                                                                                 -----------         -----------        -----------

Net income (loss)                                                                $     (0.88)        $      1.29        $     (3.73)
                                                                                 ===========         ===========        ===========

Diluted earnings (loss) per share:

Income (loss) before extraordinary gain                                          $     (0.88)        $      0.90        $     (5.20)


Extraordinary gain                                                                        --                0.33               1.47
                                                                                 -----------         -----------        -----------

Net income (loss)                                                                $     (0.88)        $      1.23        $     (3.73)
                                                                                 ===========         ===========        ===========
</TABLE>


The  diluted  share  basis  for  the  year  ended  December  31,  2000  excludes
incremental  shares  related to stock options and warrants of  1,699,610.  These
shares  are  excluded  due to  their  antidilutive  effect  as a  result  of the
Company's net loss.



                                      -40-
<PAGE>

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

Not applicable.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

         The  directors  and  executive  officers of the Company as of March 29,
2001 were as follows:

<TABLE>
<CAPTION>
                 NAME                        AGE                                     POSITION
----------------------------------------    -------    ---------------------------------------------------------------------
<S>                                           <C>      <C>
Gabriel Battista (1)                          56       Chairman of the Board of Directors, Chief Executive Officer and
                                                       Director
Kenneth G. Baritz (3)                         44       President and Director
Mark S. Fowler (2)                            58       Director
Kevin D. Griffo                               40       Executive Vice President - Sales and Marketing
Aloysius T. Lawn, IV                          42       Executive Vice President - General Counsel and Secretary
Arthur J. Marks (3)                           56       Director
Edward B. Meyercord, III                      35       Chief Operating Officer - Chief Financial Officer and Treasurer
Ronald R. Thoma (1)                           66       Director
George Vinall                                 45       Executive Vice President - Business Development
Thomas Walsh                                  41       Senior Vice President - Finance
<FN>
(1)      Director whose term expires in 2001.
(2)      Director whose term expires in 2002.
(3)      Director whose term expires in 2003.
</FN>
</TABLE>

GABRIEL BATTISTA.  Mr. Battista  currently serves the Company as its Chairman of
the Board of Directors and Chief Executive Officer. Prior to joining the Company
in January of 1999 as a  Director  and Chief  Executive  Officer,  Mr.  Battista
served as Chief Executive  Officer of Network Solutions Inc., an Internet domain
name  registration  company.  Prior to joining Network  Solutions,  Mr. Battista
served  both as CEO and as  President  and Chief  Operating  Officer  of Cable &
Wireless,   Inc.,  a  telecommunication   provider.  His  career  also  included
management  positions at US Sprint, GTE Telenet and General Electric Information
Services.  Mr.  Battista  serves as a  director  of Capitol  College,  Systems &
Computer  Technology  Corporation (SCT),  Online Technologies Group, Inc. (OTG),
VIA Net.works and 2nd Century Communications, Inc.

KENNETH G. BARITZ. Mr. Baritz has served as President of the Company since March
2000.  Mr. Baritz was elected to the  Company's  Board of Directors on August 9,
2000.  Prior to joining the  Company,  Mr.  Baritz  served as Chairman and Chief
Executive  Officer of Access  One from 1997 to 2000.  Prior to Access  One,  Mr.
Baritz  served as  Chairman  and Chief  Executive  Officer  of  AMNEX,  Inc.,  a
telecommunications  company,  and also was a Director of AMNEX from October 1992
through  March 1997.  Prior to his tenure at AMNEX,  Mr. Baritz served as a Vice
President of Bear Stearns & Co.,  Inc., an  investment-banking  firm. Mr. Baritz
currently serves on the board of a number of privately held companies.

MARK S. FOWLER.  Mr. Fowler has been a director of the Company  since  September
1999.  From 1981 to 1987, he was the Chairman of the FCC. From 1987 to 1994, Mr.
Fowler was Senior Communications Counsel at Latham & Watkins, a law firm, and of
counsel from 1994 to 2000.  From 1991 to 1994, he was the founder,  Chairman and
Chief  Executive  Officer  of  PowerFone  Holdings  Inc.,  a  telecommunications
company.  From 1994 to 2000 he was a founder and  chairman of UniSite,  Inc.,  a
developer of antenna sites for use by multiple wireless operators. From



                                      -41-
<PAGE>

1999 to date Mr. Fowler has served as a director of Pac-West  Telecomm,  Inc., a
competitive local exchange carrier.  From 1999 to date, Mr. Fowler has served as
a director of Beasley Broadcast Group, a radio broadcasting  company. Mr. Fowler
is also a founder and serves as Chairman of the Board of Directors of AssureSat,
Inc., a provider of telecommunications satellite backup services.

KEVIN D. GRIFFO. Mr. Griffo has served as the Company's Executive Vice President
- Sales and Marketing since March 2000. Prior to joining the Company, Mr. Griffo
was the President and Chief Operating Officer of Access One. Mr. Griffo was also
employed by AMNEX from January 1995 to December 1997, holding various positions,
including  Chief Operating  Officer and President of AMNEX's  Telecommunications
Division.  Prior to joining AMNEX, he was  southeastern  regional Vice President
for LDDS  WorldCom  from August 1992 to December  1994.  In such  capacity,  Mr.
Griffo had significant operating  responsibility,  which included responsibility
for operating sales offices and hiring and supervising sales personnel.

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

ARTHUR J. MARKS. Mr. Marks has been a director of the Company since August 1999.
He has been a General  Partner of New Enterprise  Associates,  a venture capital
firm,  since  1984.  Mr.  Marks  serves as a director of three  publicly  traded
software companies, Advanced Switching Communications, Epicor Software Corp. and
Progress Software Corp., as well as a number of privately held companies.

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

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

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

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


COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
the Company's  directors and certain officers and persons who are the beneficial
owners of more than 10 percent of the Common  Stock of the Company are  required
to report  their  ownership  of the Common  Stock,  options and certain  related
securities and any changes in that ownership to the SEC.  Specific due dates for
these  reports  for these  reports  have been  established,  and the  Company is
required to report any failure to file by such dates in 2000. Mr. Marks' initial
report on Form 3 as to his  holdings  of shares of common  stock of the  Company
mistakenly  underreported the number of shares then owned by him. Upon discovery
of this mistake a corrective amendment was filed. Otherwise, the Company


                                      -42-
<PAGE>

believes that all of the required filings have been made in a timely manner.  In
making this  statement,  the Company has relied on copies of the reporting forms
received by it.

ITEM 11.  EXECUTIVE COMPENSATION.

         The following  table sets forth  information for the fiscal years ended
December 31, 2000, 1999 and 1998 as to the  compensation  for services  rendered
paid by the  Company to the Chief  Executive  Officer and to the four other most
highly  compensated  executive  officers of the Company  whose annual salary and
bonus exceeded $100,000.

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                                          LONG TERM
                                                              ANNUAL COMPENSATION                        COMPENSATION
                                                --------------------------------------------------      ----------------
                                                                                                          SECURITIES
                                                                                                          UNDERLYING
Name and Principal Position                        YEAR           SALARY (1)          BONUS (1)          OPTIONS/SARS
----------------------------------------------  -----------     --------------     ---------------      ----------------
<S>                                                <C>           <C>                 <C>                  <C>
Gabriel Battista, Chairman of the Board of         2000                  --(2)       $   50,000             500,000(3)
Directors and Chief Executive Officer
                                                   1999          $1,500,000(2)       $  750,000                  --
                                                   1998                  --          $3,000,000(4)        1,650,000(5)

Edward B. Meyercord, III
Chief Operating Officer, Chief Financial           2000          $  298,000          $   30,000             350,000(3)
Officer and Treasurer
                                                   1999          $  225,385          $  150,000             450,000(6)
                                                   1998          $  200,000          $  128,338(7)               --

Aloysius T. Lawn, IV,
Executive Vice President - General Counsel         2000          $  260,500          $   27,500             312,000(3)
and Secretary
                                                   1999          $  233,269          $  150,000             210,000(6)
                                                   1998          $  150,000          $  120,336(7)           50,000(6)

Kenneth G. Baritz, President                       2000          $  242,000(8)       $   30,000           1,645,257(5)(9)
                                                   1999          $  121,461(11)              --             100,000(11)
                                                   1998          $  120,960(11)              --                  --

George Vinall,
Executive Vice President- Business                 2000          $  248,000          $   25,000             245,000(3)
Development
                                                   1999          $  200,000          $  150,000                  --
                                                   1998                  --          $  175,000(10)         240,000(5)
</TABLE>

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



                                      -43-
<PAGE>

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

(3) Options to purchase the Company common stock. The options granted to Messrs.
Battista,  Meyercord, Lawn and Vinall were granted under the Company's 2000 Long
Term Incentive  Plan. In 2000, Mr.  Battista was granted (i) options to purchase
250,000  shares of the Company  common  stock at an exercise  price of $2.00 per
share that vest in five years and (ii) options to purchase 250,000 shares of the
Company  common  stock at an  exercise  price of $4.75 per share  that vest over
three years. In 2000, Mr.  Meyercord was granted (i) options to purchase 150,000
shares of the Company  common stock at an exercise price of $2.00 per share that
vest in five years and (ii)  options to purchase  200,000  shares of the Company
common stock at an exercise price of $4.75 per share that vest over three years.
In 2000,  Mr. Lawn was granted  (i)  options to purchase  137,500  shares of the
Company  common stock at an exercise  price of $2.00 per share that vest in five
years,  (ii) options to purchase 50,000 shares of the Company common stock at an
exercise  price of $2.31 half of which  vested upon grant and the  remainder  of
which vested six months  thereafter and (iii) options to purchase 125,000 shares
of the Company  common  stock at an exercise  price of $4.75 per share that vest
over three  years.  In 2000,  Mr.  Vinall was  granted  (i)  options to purchase
125,000  shares of the Company  common  stock at an exercise  price of $2.00 per
share that vest in five years and (ii) options to purchase  120,00 shares of the
Company  common  stock at an exercise  price of $4.75 per share that vested upon
grant. Each of the employment agreements for Messrs. Battista,  Meyercord,  Lawn
and Vinall  provide  for  immediate  vesting of options in event of a "change of
control" (as defined in such  agreements).  The above options that are stated to
vest in five years are subject to earlier  vesting upon  achievement  of certain
financial results by the Company.

(4) Mr. Battista received a cash sign-on bonus of $3,000,000,  which was paid in
December 1998.

(5) Options to purchase the Company common stock.  The options shown as granted,
except as indicated  below,  were granted in  connection  with the hiring of the
respective  executive  officers.  In 1998, Mr. Battista was granted options that
vest over three years to purchase 1 million  shares of the Company  common stock
at an exercise price of $10.4375 per share, and options that vested  immediately
upon  execution of his  employment  agreement to purchase an additional  650,000
shares at an exercise price of $7.00 per share.  In 2000, Mr. Baritz was granted
options that vest over three years to purchase  1,300,000  shares of the Company
common stock at an exercise  price of $13.69 per share.  In 1998, Mr. Vinall was
granted  options  that vest over three years to purchase  240,000  shares of the
Company common stock at an exercise price of $8.5625 per share.

(6) Options to purchase the Company common stock. The options granted to Messrs.
Meyercord  and Lawn were granted under the  Company's  1998 Long Term  Incentive
Plan. In 1999, Mr.  Meyercord was granted  options that vest over three years to
purchase  450,000  shares of the Company  common  stock at an exercise  price of
$15.94 per share.  In 1999,  Mr. Lawn was granted  options  that vest over three
years to  purchase  210,000  shares of the Company  common  stock at an exercise
price of $9.88 per share,  and in 1998, was granted  options to purchase  50,000
shares at an exercise price of $5.75 per share.

(7) Bonus  paid in shares  of the  Company  common  stock and  in-kind  property
valued, in each case, at the then current market value.

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

(9) Options to purchase  the  Company  common  stock.  In 2000,  Mr.  Baritz was
granted under the Company 2000 Long Term  Incentive Plan (i) options to purchase
150,000  shares of the Company  common  stock at an exercise  price of $2.00 per
share that vest in five years and (ii) options to purchase 105,000 shares of the
Company  common  stock at an  exercise  price of $4.75 per share  that vest over
three years.  The  remainder of the options  granted to Mr.  Baritz in 2000 were
granted under the 1999 Access One Incentive  Option Plan, which plan was assumed
by the Company pursuant to the terms of Access One's acquisition by the Company.
The  employment  agreement  for Mr.  Baritz  provides for  immediate  vesting of
options in event of a "change of control" (as defined in the agreement).



                                      -44-
<PAGE>

The above  options  that are stated to vest in five years are subject to earlier
vesting upon achievement of certain financial results by the Company.

(10) Mr.  Vinall  received a cash sign-on  bonus of $175,000,  which was paid in
December 1998.

(11) These  amounts were paid to Mr. Baritz by Access One where he was Chairman,
Chief Executive Officer and Director.


STOCK OPTION GRANTS

         The following table sets forth further information  regarding grants of
options to purchase  the  Company  common  stock made by the Company  during the
fiscal year ended  December  31,  2000 to the  executive  officers  named in the
Summary Compensation Table, above.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
Name                     Number of      Percent of Total   Exercise Price   Expiration Date    Potential Realizable Value
                         Securities       Options/SARs        per Share                        at Assumed Annual Rates of
                         Underlying        Granted to                                             Stock Option Term (2)
                        Options/SARs      Employees in
                        Granted (1)            2000
----------------------------------------------------------------------------------------------------------------------------
                                                                                                      5%($)          10%($)
                                                                                              ------------------------------
<S>                        <C>                 <C>                 <C>             <C>          <C>             <C>
Gabriel Battista             250,000            5.16%               $2.00          12/12/10        $314,447        $769,871
                             250,000                                $4.75            8/9/10        $746,812      $1,892,569

Edward B.                    150,000            3.61%               $2.00          12/12/10        $188,668        $478,123
Meyercord, III               200,000                                $4.75            8/9/10        $597,450      $1,514,055

Aloysius T. Lawn, IV         137,500            3.22%               $2.00          12/12/10        $172,946        $438,279
                              50,000                                $2.31          11/15/05         $31,911         $70,514
                             125,000                                $4.75            8/9/10        $373,406        $946,285

Kenneth G. Baritz          1,300,000           16.99%              $13.69           3/24/10     $11,192,438     $28,363,835
                             105,000                                $4.75            8/9/10        $313,661        $794,879
                              57,143                                $2.89           6/15/09         $91,048        $224,256
                              33,114                                $5.78           3/15/10        $120,370        $305,041
                             150,000                                $2.00          12/12/10        $188,668        $478,123

George Vinall                125,000            2.53%               $2.00          12/12/10        $157,224        $398,436
                             120,000                                $4.75            8/9/10        $358,470        $908,433
<FN>
(1) All options granted to Messrs. Battista,  Meyercord, Lawn and Vinall in 2000
were granted under the Company 2000 Long Term Incentive Plan. The initial set of
options granted to Mr. Baritz in 2000 were granted pursuant to his entering into
an employment agreement with the Company in March, 2000. The options relating to
105,000  and  150,000  shares  were  granted  under the  Company  2000 Long Term
Incentive  Plan. The remainder of the options granted to Mr. Baritz in 2000 were
granted under the 1999 Access One Incentive  Option Plan, which plan was assumed
by the Company.

(2)  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  the  Company's  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.
</FN>
</TABLE>

         None of the executive officers in the Summary  Compensation Table above
acquired  any shares of the Company  upon the  exercise  of options in 2000.  On
December 31, 2000, the exercise prices of all of the options to



                                      -45-
<PAGE>

purchase  shares of the Company held by each of the executive  officers named in
the  Summary  Compensation  Table  were  above  the then  market  price  for the
Company's shares.

EMPLOYMENT CONTRACTS

         Gabriel  Battista is party to an employment  agreement with the Company
that was  amended as of March 28, 2001 and now  expires on  December  31,  2004.
Under the terms of the agreement,  as amended,  Mr. Battista  received a signing
bonus of  $3,000,000  and is entitled to an annual  salary of  $500,000,  plus a
discretionary  bonus.  The initial three years of salary under the agreement was
paid  in  advance.   Mr.  Battista  is  also  entitled  to  other  benefits  and
perquisites.  In addition, upon execution of the original agreement in 1998, Mr.
Battista was granted  options  that vest over three years to purchase  1,000,000
shares of the Company  common stock at an exercise  price of $10.4375 per share,
and options that vested  immediately upon execution of the agreement to purchase
an additional 650,000 shares at an exercise price of $7.00 per share.

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

         Edward B. Meyercord, III entered into a three-year employment agreement
with the  Company  effective  as of March  26,  2001.  Under the  contract,  Mr.
Meyercord  is entitled to a minimum  annual base salary of $300,000  and certain
other  perquisites  made  available  by  the  Company  to its  senior  executive
officers.

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

         Kenneth G. Baritz entered into a three-year  employment  agreement with
the Company  effective as of March 24, 2000.  Under the contract,  Mr. Baritz is
entitled  to a  minimum  annual  base  salary  of  $300,000  and  certain  other
perquisites made available by the Company to its senior executive  officers.  In
connection  with the  agreement,  Mr.  Baritz was  granted an option to purchase
1,300,000  shares of the Company common stock at an exercise price of $13.69 per
share.

         George Vinall entered into a three-year  employment  agreement with the
Company  effective as of December 28, 1998.  Under the  contract,  Mr. Vinall is
entitled  to a  minimum  annual  base  salary  of  $250,000  and  certain  other
perquisites made available by the Company to its senior executive  officers.  In
connection  with the  agreement,  Mr.  Vinall was  granted an option to purchase
240,000  shares of the Company  common stock at an exercise price of $8 9/16 per
share.

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

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None.


                                      -46-
<PAGE>

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

         The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company common stock as of March 29,
2001 (except as  otherwise  noted) by (i) each  stockholder  who is known by the
Company to own  beneficially  more than five percent of the  outstanding  common
stock,  (ii) each of the Company's  directors  and nominees for director,  (iii)
each of the executive  officers  named below and (iv) all current  directors and
executive  officers of the  Company as a group.  Except as  otherwise  indicated
below,  the Company  believes  that the  beneficial  owners of the common  stock
listed below have sole investment and voting power with respect to such shares.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES         PERCENT OF SHARES
NAME OF BENEFICIAL OWNER OR IDENTITY OF GROUP                        BENEFICIALLY OWNED (1)      BENEFICIALLY OWNED
<S>                                                                      <C>                            <C>
Legg Mason, Inc.                                                         7,678,250 (4)                  9.8%
100 Light Street
P. O. Box 1476
Baltimore, MD 21203

AOL Time Warner Inc./America Online, Inc.                                6,843,356 (3)                  8.4%
75 Rockefeller Plaza
New York, NY 10019

Massachusetts Financial Services Company                                 6,603,805 (2)                  8.4%
500 Boylston Street
Boston, Massachusetts 02116

Paul Rosenberg                                                           5,759,985 (5)                  7.7%
650 N. E. 5th Avenue
Boca Raton, Fl 33432

Geocapital LLC                                                           4,221,390 (6)                 5.39%
825 Third Avenue
New York, NY  10022

Gabriel Battista                                                         1,416,667 (7)                  1.8%

Kenneth G. Baritz                                                        2,285,017 (7)                  2.9%

Mark S. Fowler                                                             106,023 (7)                   *

Arthur J. Marks                                                            194,240 (7)                   *

Ronald R. Thoma                                                             97,934 (7)                   *

Edward B. Meyercord, III                                                   281,130 (7)                   *

Aloysius T. Lawn, IV                                                       278,650 (7)                   *

George Vinall                                                              280,000 (7)                   *


All directors and executive officers as a group                          5,668,488 (7)                  6.8%
(10 persons)
</TABLE>

---------
*        Less than 1%

(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


                                      -47-
<PAGE>

         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)      Massachusetts   Financial  Services  Company  ("MFS"),   an  investment
         adviser,  filed an amendment to a Schedule 13G with the SEC on February
         12, 2001 (the "MFS 13G"), in which it reported beneficial  ownership of
         6,603,805 shares, 6,025,055 of which are also beneficially owned by MFS
         Series Trust II-MFS  Emerging Growth Fund, an investment  company,  and
         578,750 of which are also owned by certain  non-reporting  entities  as
         well as MFS. The foregoing information is derived from the MFS 13G.

(3)      The foregoing information is derived from the Schedule 13G filed by AOL
         Time Warner Inc./America Online, Inc. on January 22, 2001.

(4)      Includes  6,600,000  shares of the Company  common  stock  beneficially
         owned by LMM,  LLC,  974,200  shares  beneficially  owned by Legg Mason
         Capital Management,  Inc. and 104,050 shares beneficially owned by Legg
         Mason Wood  Walker,  Inc.,  according to an amendment to a Schedule 13G
         filed by Legg Mason Wood Walker, Inc. on March 14, 2001.

(5)      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.

(6)      The foregoing  information  is derived from the Schedule 13G/A filed by
         Geocapital, LLC on March 29, 2001.

(7)      Includes shares of the Company common stock that could be acquired upon
         exercise of options exercisable within 60 days after March 29, 2001.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Not applicable

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

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

                  1.       Consolidated Financial Statements:

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

                  2.       Consolidated Financial Statement Schedule:

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

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


                                      -48-
<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

                              INDEX TO S-X SCHEDULE

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----
<S>                                                                                                <C>
Reports of Independent Accountants on Financial Statement Schedule                                  50
Schedule II -- Valuation & Qualifying Accounts                                                      52
</TABLE>


                                      -49-
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

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

Our audit of the  consolidated  financial  statements  referred to in our report
dated February 27, 2001 appearing in the 2000 Annual Report to  Shareholders  of
Talk.com  Inc. and its  subsidiaries  (which report and  consolidated  financial
statements  are  incorporated  by reference in this Annual  Report on Form 10-K)
also  included  an audit of the  financial  statement  schedule  listed  in Item
14(a)(2) of this Form 10-K. In our opinion,  these financial  statement schedule
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania

February 27, 2001


                                      -50-
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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

         The audits  referred to in our report dated February 7, 2000,  relating
to the  consolidated  financial  statements of Talk.com  Inc. and  subsidiaries,
which is  contained  in Item 8 of this Form  10-K,  included  the  audits of the
financial  statement  schedule listed in the accompanying  index for each of the
two years in the period  ended  December  31,  1999.  This  financial  statement
schedule is the  responsibility of management.  Our responsibility is to express
an opinion on this schedule based on our audits.

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


BDO Seidman, LLP


New York, New York
February 7, 2000


                                      -51-

<PAGE>

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                              BALANCE AT             ADDITIONS
                                             BEGINNING OF        CHARGED TO COSTS        DEDUCTIONS FOR         BALANCE AT END
       DESCRIPTION DEDUCTIONS                   PERIOD             AND EXPENSES            WRITE-OFFS             OF PERIOD
---------------------------------------    -----------------     ------------------     ------------------     -----------------
<S>                                              <C>                  <C>                 <C>                       <C>
YEAR ENDED DECEMBER 31, 2000:
Reserve and allowances deducted
   from asset accounts:
Allowance for uncollectible accounts             $5,021               $53,772             $(29,334)                 $29,459
                                                 ======               =======             =========                 =======

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

YEAR ENDED DECEMBER 31, 1998:
Reserve and allowances deducted
   from asset accounts:                          $2,419               $37,789             $(38,539)                  $1,669
                                                 ======               =======             =========                  ======
Allowance for uncollectible accounts
</TABLE>


                                      -52-
<PAGE>

(3) EXHIBITS:

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

2.1      Agreement and Plan of Merger,  dated as of March 24, 2000, by and among
         Talk.com Inc., Aladdin  Acquisition Corp. and Access One Communications
         Corp.,  and  Amendment  thereto,  dated as of June 29,  2000,  which is
         included as Annex A to the Joint Proxy  Statement/Prospectus  contained
         in   Registration   Statement   in  Form  S-4  (File   No.   333-40980)
         (incorporated by reference to Exhibit 2.1 to the Company's Registration
         Statement in Form S-4 (File No. 333-40980)).

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

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

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

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

4.2      Form of Warrant Agreement for Elec Communications, Kenneth Baritz, Joel
         Dupre, Keith Minella,  Rafael Scolari,  and William Rogers dated August
         9, 2000 (filed herewith).

4.3      Form of Warrant  Agreement for MCG Credit  Corporation  dated August 9,
         2000 (filed herewith).

4.4      Form of Warrant Agreement for MCG Credit  Corporation dated October 20,
         2000 (filed herewith).

4.5      Form of Warrant Agreement for MCG Finance Corporation dated October 20,
         2000 (filed herewith).

10.1     Employment Agreement between the Company and Aloysius T. Lawn, IV dated
         March 28, 2001 (filed herewith).*

10.2     Employment  Agreement between the Company and Edward B. Meyercord,  III
         dated March 28, 2001 (filed herewith).*

10.3     Indemnification  Agreement between the Company and Aloysius T. Lawn, IV
         dated March 28, 2001(filed herewith). *

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

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



                                      -53-
<PAGE>

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

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

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

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

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

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

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

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

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

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

10.16    Amendment to Employment  Agreement,  dated March 28, 2001,  between the
         Company and Gabriel Battista (filed herewith).*

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



                                      -54-
<PAGE>

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

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

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

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

10.22    Modification  of the Exchange  Agreement,  dated March 15, 1999, by and
         among the  Company,  Tel-Save,  Inc.  and Mark Pavol  (incorporated  by
         reference to Exhibit 10.34 to the Company's  Annual Report on Form 10-K
         for the year ended December 31, 1998).

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

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

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

10.26    1998 Long-Term Incentive Plan of the Company (incorporated by reference
         to  Exhibit  10.14 to the  Company's  Current  Report on Form 8-K dated
         January 20, 1999).*

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

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

10.29    Indemnification  Agreement,  effective as of March 24, 2000 by Talk.com
         Inc. and Access One  Communications  Corp. which is included as Annex C
         to the  Joint  Proxy  Statement/Prospectus  contained  in  Registration
         Statement in Form S-4 (File No.  333-40980)  (incorporated by reference
         to Exhibit  2.1 to the  Company's  Registration  Statement  in Form S-4
         (File No. 333-40980)).

10.30    Form of Escrow Agreement effective August 9, 2000 by and among Talk.com
         Inc.,  Aladdin  Acquisition Corp. and Access One  Communications  Corp.
         which is included  as Annex D to the Joint  Proxy  Statement/Prospectus
         contained in  Registration  Statement in Form S-4 (File No.  333-40980)
         (incorporated by reference to Exhibit 2.1 to the Company's Registration
         Statement in Form S-4 (File No. 333-40980)).



                                      -55-
<PAGE>

10.31    Employment  Agreement  between the Company and Kenneth G. Baritz  dated
         March 24,  2000  (incorporated  by  reference  to  Exhibit  10.5 to the
         Company's Registration Statement in Form S-4 (File No. 333-40980)).*

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

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

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

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

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

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

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

10.39    2000  Long-Term  Incentive Plan  (incorporated  by reference to Exhibit
         10.31  to  the  Company's  Registration  Statement  on  Form  S-4  (No.
         333-40980)). *

10.40    Form of Non-Qualified Stock Option Agreement,  dated December 12, 2000,
         for each of Gabriel Battista, Kenneth Baritz, Kevin Griffo, Aloysius T.
         Lawn IV, Edward B. Meyercord, III, and George Vinall (filed herewith).*

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

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

10.43    Amendment to Employment  Agreement  for Kenneth  Baritz dated March 28,
         2001 (filed herewith).*

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

10.45    Agreement and Plan of Merger dated  October 15, 1999,  among Access One
         Communications  Corp.,  OmniCall  Acquisition Corp. and OmniCall,  Inc.
         (incorporated   by  reference  to  Exhibit   10.48  to  the   Company's
         Registration Statement in Form S-4 (File No. 333-40980)).

10.46    Agreement    between    Talk.com    Holding    Corp.    and   BellSouth
         Telecommunications, Inc., dated May 22, 2000 (filed herewith).



                                      -56-
<PAGE>

10.47    Amendment to  Interconnection  Agreement between Talk.com Holding Corp.
         and BellSouth Telecommunications,  Inc., dated December 26, 2000 (filed
         herewith).

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

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

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

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

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

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

10.54    Lease by and between  Talk.com  Holding Corp.  and  University  Science
         Center, Inc. dated April 10, 2000 (filed herewith).

10.55    Lease  by  and  between  The  Other  Phone  Company,   dba  Access  One
         Communications  and University  Science Center,  Inc. dated December 8,
         1999 (filed herewith).

10.56    Lease by and between Talk.com Holding Corp. and Saw-Ban, Ltd. dated May
         11, 2000 (filed herewith).

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

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

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

10.60    Amendment to Employment Agreement for Kevin Griffo dated March 28, 2001
         (filed herewith).*

10.61    Amendment to  Employment  Agreement  for George  Vinall dated March 28,
         2001 (filed herewith).*

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

11.1     Net Income Per Share Calculation.

21.1     Subsidiaries of the Company.



                                      -57-
<PAGE>

23.1     Consent of Pricewaterhouse Coopers LLP.

23.2     Consent of BDO Seidman.

27       Financial Data Schedule.

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

(b)      Reports on Form 8-K.

No Current Reports on Form 8-K were filed by the Company during the three months
ended December 31, 2000.


                                      -58-
<PAGE>

                                   SIGNATURES

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

Date: March 30, 2001

                                         TALK.COM INC.

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

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

<TABLE>
<CAPTION>
         SIGNATURE                                            TITLE                                      DATE



<S>                                             <C>                                              <C>
         Gabriel Battista  /s/                  Chairman of the Board                            March 30, 2001
------------------------------------            of Directors, Chief Executive Officer and
Gabriel Battista                                Director (Principal Executive Officer)



         Edward B. Meyercord III /s/            Chief Financial Officer                          March 30, 2001
------------------------------------            (Principal Financial Officer)
Edward B. Meyercord, III



         Thomas M. Walsh /s/                    Vice President - Finance                         March 30, 2001
------------------------------------            (Principal Accounting Officer)
Thomas M. Walsh


         Kenneth G. Baritz /s/                  Director                                         March 30, 2001
------------------------------------
Kenneth G. Baritz

         Mark S. Fowler /s/                     Director                                         March 30, 2001
------------------------------------
Mark S. Fowler

         Arthur J. Marks /s/                    Director                                         March 30, 2001
------------------------------------
Arthur J. Marks

         Ronald R. Thoma /s/                    Director                                         March 30, 2001
------------------------------------
Ronald R. Thoma


                                      -59-

</TABLE>