UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-K

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

                 For the fiscal year ended December 31, 1996

                                     OR

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

           For the transition period from __________ to _________

                       Commission file number: 0-28668
       _______________________________________________________________
                      TELCO COMMUNICATIONS GROUP, INC.
          Exact name of registrant as specified in its charter)
       ______________________________________________________________

         Virginia                                   54-1674283
(State or other jurisdiction of        (I.R.S. Employer Identification No.)
incorporation or organization)

4219 Lafayette Center Drive, Chantilly, Virginia    20151-1209
(Address of principal executive offices)            (Zip Code)

Registrant's telephone number, including area code:  (703) 631-5600

Securities Registered Pursuant to Section 12(b) of the Act:

                                       Name of each exchange on
  Title of each class                    which registered
        None

         Securities Registered Pursuant to Section 12(g) of the Act:
                       Common Stock, no par value

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the Registrant as of March 18, 1997 was approximately  $166,839,689  (based upon
the closing price of the Registrant's Common Stock on the Nasdaq National Market
on such  date.)  The number of shares  outstanding  of the  Registrant's  Common
Stock, as of the close of business on March 18, 1997 was 33,062,662 shares.

                         DOCUMENTS INCORPORATED BY REFERENCE

     (1) Portions of the  Registrant's  Annual  Report to  Shareholders  for the
fiscal year ended December 31, 1996 are  incorporated by reference into Parts II
and IV hereof, as specifically set forth in Parts II and IV.

     (2)  Portions  of the  Registrant's  definitive  Proxy  Statement  filed in
connection  with its Annual Meeting of Shareholders to be held May 15, 1997, are
incorporated by reference in Part III, as specifically set forth in Part III.


                             Exhibit Index on Page 30

<PAGE>

                        TELCO COMMUNICATIONS GROUP, INC.

                                   Form 10-K

                       For the fiscal year ended December 31, 1996

                                 Table of Contents

Part I                                                             Page

Item 1.  Business                                                     4
Item 2.  Properties                                                  21
Item 3.  Legal Proceedings                                           22
Item 4.  Submission of Matters to a Vote of Security Holders         23

         Executive Officers of the Registrant                        24

Part II

Item 5.  Market for the Registrant's Common Equity and
           Related Stockholder Matters                               26
Item 6.  Selected Financial Data                                     27
Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                       27
Item 8.  Financial Statements and Supplementary Data                 27
Item 9.  Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure                    28

Part III

Item 10. Directors and Executive Officers of the Registrant          28
Item 11. Executive Compensation                                      28
Item 12. Security Ownership of Certain Beneficial Owners
           and Management                                            28
Item 13. Certain Relationships and Related Transactions              28


Part IV

Item 14. Exhibits, Financial Statement Schedules and
          Reports on Form 8-K                                        29

Index to Exhibits                                                    30

Signatures                                                           35

<PAGE>

                                      PART I

Item 1.   Business

     Telco  Communications  Group, Inc., a Virginia  corporation formed in 1993,
and its wholly owned subsidiaries  (collectively  "Telco" or "the Company") is a
rapidly  growing  switch-based  provider  of  domestic  and  international  long
distance  telecommunication  services primarily to residential  customers in the
United States.  Substantially all of the Company's  customers access its network
by dialing a unique carrier  identification code ("CIC Code") before dialing the
number they are  calling.  Using a CIC Code to access the  Company's  network is
known as  "dial  around"  or  "casual  calling"  because  customers  can use the
Company's  services at any time without  changing  their  existing long distance
carrier.  The Company markets its  residential  long distance  services  through
marketing  subsidiaries  under two brands,  each with a unique CIC Code:  Dial &
Save (CIC Code 10457) and the Long  Distance  Wholesale  Club ("LDWC") (CIC Code
10297),  and  prices its  services  at a  discount  to the basic "1 plus"  rates
offered by the three major long distance carriers:  AT&T, MCI and Sprint. During
December 1996, the Company provided long distance  services to approximately 2.6
million  customers  (switched  access  lines) in 48 states and the  District  of
Columbia.   All  dial  around   operations  are  conducted   through   marketing
subsidiaries that are referred to collectively as the Consumer Division.

     Although  dial  around  has been in  existence  since the  mid-1980s,  only
recently  have  companies  such  as  Telco  aggressively   pursued  this  market
opportunity.  The Company markets its services primarily through direct mail and
inbound  telesales  and  marketing,  and believes that this  marketing  strategy
enables the Company to attract residential customers in a cost effective manner.
Because  dial  around  customers  are not  required  to cancel  or change  their
presubscribed  long  distance  carrier,  the Company  believes  that  aggressive
"win-back" and other customer  acquisition programs prevalent in the residential
long distance market have a limited impact on the Company's business.

     The Company bills its dial around customers  through local exchange carrier
("LEC") billing and collection  agreements which enable the Company to place its
charges on the  monthly  local phone  bills of its dial  around  customers.  The
Company has agreements  with LECs,  including all of the Regional Bell Operating
Companies  ("RBOCs"),  that cover substantially all of the switched access lines
in the United States.  The Company believes that these billing  arrangements are
the most effective  mechanism for billing the Company's  residential  customers,
because of the convenience to its customers of receiving one bill for both local
and long  distance  service and the benefits  derived  from the LECs'  extensive
collections  infrastructure.  The  Company's  billing  information  systems  and
services  are  provided  by  Tel  Labs,  Inc.  ("Tel  Labs"),   a  wholly  owned
telecommunications  billing company  started in 1991 by Telco's  Chairman of the
Board.

     Since the Company's  existing customer base is primarily  residential,  the
majority of calls are handled during off-peak  evening and weekend  periods.  In
order to  increase  its  volume  of call  traffic,  Telco  has begun to sell its
daytime  capacity on a wholesale  basis to other long  distance  carriers and in
addition has created a Commercial  Sales Division ("CSD") to target business and
carrier customers.  As of December 31, 1996, CSD had opened 22 sales offices and
employed  approximately  220 sales  personnel.  For the fourth  quarter of 1996,
CSD's  revenues  were  $9.3  million,  or  approximately  7.8% of the  Company's
consolidated revenues.

     The Company's  switch-based network currently consists of six DSC DEX 600S,
600 and 600E switches  located in Washington,  D.C.; Fort  Lauderdale,  Florida;
Davenport,  Iowa; Chattanooga,  Tennessee;  Austin, Texas and Las Vegas, Nevada.
Additionally,  the Company is  installing a DEX 600E switch in the New York City
metropolitan area which is expected to be made operational during the first half
of 1997 and has taken receipt of an eighth switch to be installed  later in 1997
in a yet undetermined location.

     In August 1996, a total of 6,325,000  shares of the Company's  common stock
("Common  Shares") were sold in an initial  public  offering  ("IPO") at $14 per
share.  Existing stockholders sold 1,644,000 Common Shares, and 4,681,000 Common
Shares were sold by the Company which resulted in net proceeds to the Company of
approximately  $60.0  million,  after  deducting  the expenses of the  offering.
Concurrent  with the IPO, the Company  acquired Tel Labs in exchange for 593,334
Common Shares. Tel Labs was owned by Henry G. Luken, III, the Company's Chairman
of the Board,  Bryan K.  Rachlin,  the  Company's  Chief  Operating  Officer and
General Counsel and two employees of Tel Labs.

     Prior to April 1, 1996,  LDWC was a 55.6%-owned  subsidiary of the Company;
the  remaining  44.4% was held by Thomas J.  Cirrito,  President of the Consumer
Division and a director of the  Company,  and two of his  children.  On April 1,
1996,  the Company  agreed to acquire the  remaining  44.4%  interest in LDWC in
exchange for the issuance of 5,102,125  Common  Shares.  In connection  with the
transaction,  options  issued  pursuant  to the  LDWC  stock  option  plan  were
converted  into options to purchase  291,842  Common  Shares under the Company's
Amended and Restated 1994 Stock Option Plan.

INDUSTRY OVERVIEW

     The U.S.  long distance  market is dominated by the nation's  three largest
long  distance  carriers,  AT&T,  MCI and Sprint,  which,  according to a recent
report issued by the Federal  Communications  Commission  (the "FCC"),  together
accounted  for  approximately  81% of the  $72  billion  in  aggregate  revenues
generated  by all U.S.  long  distance  carriers  in 1995.  Other long  distance
carriers, some with national transmission and marketing capabilities,  accounted
for the remainder of the market.  The three largest long distance  providers and
certain  other  carriers own  transmission  and  switching  facilities,  and are
therefore    sometimes    referred    to    as    facilities-based     carriers.
Non-facilities-based  carriers lease  transmission  lines from  facilities-based
carriers and are either switch-based  carriers,  like the Company, or switchless
resellers   which  rely  on  third-party   carriers  for  all  aspects  of  call
transmission.

     The structure of the telecommunications industry since 1984 has been shaped
largely by the AT&T divestiture  decree,  which required the divestiture by AT&T
of its Bell Operating  Companies ("BOCs") and divided the country into 201 local
access and transport areas ("LATA") (the "AT&T Divestiture Decree"). The 22 Bell
operating companies were combined into seven RBOCs and were permitted to provide
local telephone service, local access service to long distance carriers and long
distance  ("intraLATA")  service within the LATAs.  However,  the Bell operating
companies  were  prohibited  from providing  long distance  service,  or service
between  LATAs  ("interLATA").  To encourage  competition  in the long  distance
market, the AT&T Divestiture  Decree and certain  regulations of the FCC require
most LECs to provide  carriers  with access to local  exchange  service  that is
equal  in  type,  quality  and  prices  to that  provided  to AT&T and with the
opportunity  to be selected by customers as a preferred  long  distance  service
provider ("equal access").

     For each long distance call, the originating and terminating LECs charge an
access fee to the long distance  carrier.  The long distance carrier charges its
customers a fee for its  transmission of the call, a portion of which covers the
cost of the  access  fees  charged  by the  LECs.  Access  charges  represent  a
significant  portion of the  Company's  cost of services  and,  generally,  such
access  charges are  regulated by the FCC. The FCC has commenced a preceeding to
reform the rules governing interstate access charges which is designed to foster
a more efficient  pricing of access,  competition  for access  services,  and to
reflect   the   development   of   local   services   prompted   by   the   1996
Telecommunications Act.

     Thus, judicial,  legislative and regulatory factors have helped to create a
foundation for smaller companies,  such as the Company, to emerge as competitive
alternatives to the larger facilities-based carriers for long distance services.
Equal  access,  combined  with the FCC's  policy  mandating  that  carriers  not
unreasonably  restrict  resale of their services,  allows  resellers such as the
Company to lease  transmission  facilities from  facilities-based  long distance
carriers and to offer consumers long distance telecommunications services having
the same quality and convenience as those of the facilities-based carriers.

     For policy reasons,  equal access was fully  implemented for interLATA long
distance service only. For intraLATA long distance  service,  a modified form of
equal access was adopted,  which enables  customers to reach a preferred carrier
(other than the customers LEC) on a call-by-call  basis by dialing a CIC Code.
Where equal access is available,  a customer can reach the preferred  carrier by
dialing an access code,  such as 10XXX,  or 950-OXXX (or on a toll-free  basis),
where XXX is the CIC. The use of access codes to reach a preferred long distance
carrier has recently gained  significant  exposure and customer  acceptance,  as
evidenced by marketing campaigns of the larger  facilities-based  carriers, such
as AT&T's "1-800-CALLATT" and MCI's "1-800-COLLECT".

     In view of  anticipated  exhaustion  of CIC  Codes,  in April  1994 the FCC
initiated a  proceeding  on the issue and  concluded  that the  expansion of CIC
Codes is important because it increases access to the public switched  telephone
network by both end users and carriers.  The FCC tentatively  proposed to expand
codes from 10XXX to a 101XXXX  format,  with a  transition  period of six years,
during which both formats  could be utilized.  Under the FCC's  proposal,  after
expiration of the transition period only the 101XXXX codes will be utilized. The
FCC has not yet acted upon its proposal to finally  determine  the length of the
transition  period. On April 30, 1996, the FCC released a Public Notice in which
it requested additional public comment on the issue of the appropriate length of
the  transition  period.  Comments were required to be filed with the FCC by May
21,  1996.  It is not  known  when  the  FCC  will  take  final  action  in this
proceeding.  However,  all of the 10XXX CIC Codes have been  allocated.  Since
March 31, 1995, Bell  Communications  Research,  Inc., the  administrator of the
North American Numbering Plan, has been issuing 101XXXX codes.

     The 1996  Telecommunications  Act removed the  restrictions  concerning the
provision  of long  distance  service by the RBOCs and GTE  Operating  Companies
("GTOCs"),  although  the RBOCs will need to obtain  specific  FCC  approval and
satisfy other  conditions,  including a checklist of  interconnection  and other
requirements on LECs, prior to providing long distance service in the regions in
which they provide local exchange service.

     In  addition  to  promoting   competition   in  the  U.S.   long   distance
telecommunications  market,  the 1996  Telecommunications  Act also  opened U.S.
local service  telecommunication  markets to competition by preempting state and
local laws to the extent they prevent  competitive  entry into the  provision of
any telecommunications  service, and by imposing a variety of new duties on LECs
to promote competition in local exchange services. Among other requirements, all
LECs are required to permit resale of their telecommunications  services without
unreasonable restrictions or conditions,  and on a non-discriminatory basis. The
law and its accompanying  regulations  will enable the Company,  upon receipt of
all necessary regulatory approvals, to resell local  telecommunication  services
in  addition  to its long  distance  services.  The bases  upon which such local
services  will be available to carriers such as the Company for resale are to be
determined  in  proceedings  of the various  state public  service  commissions.
Significantly,  the 1996  Telecommunications  Act mandates  that LECs make their
services  available to resellers at wholesale  rates, defined as retail rates
less any marketing,  bill collection and other costs that will be avoided by the
LEC by providing the wholesale service. The Company believes that the opening of
the local  telecommunication  services market to resellers  provides the Company
with significant growth opportunities.

BUSINESS STRATEGY

     The Company's  strategy is to achieve continued growth by providing a broad
array of  competitively  priced long distance  services.  The Company's  primary
objectives in pursuing this strategy are to:

     Continue to Expand the Consumer Division's Dial Around Distribution Channel
and Brand  Awareness  by  increasing  its direct  mail and  telesales  marketing
efforts for both the Dial & Save and Long Distance  Wholesale  Club brand names.
The Company continues to explore  innovations within this product line including
the use of advertising  media that are  alternative or  complementary  to direct
mail, the development of dial around  advertising  targeting existing and former
customers, specific affinity groups and the creation of new dial around products
and  services.  The  Company's  goal  in all of  these  efforts  is to  increase
advertising  response rates and customer usage and to lower customer  attrition,
thereby decreasing  customer  acquisition costs. During 1997 the Company intends
to  continue  its  re-marketing  efforts  in the  contiguous  48 states  and the
District of  Columbia,  including  the ten  western  states in which the Company
began marketing in late 1996 and January 1997.

     Expand CSD to enhance the growth  prospects  of the Company and to optimize
the use of the  network.  CSD's  sales  strategy  is to build its  sales  force,
including direct and independent sales  representatives  and telesales marketing
agents  targeting  commercial  and  carrier  accounts.  The  Company  intends to
supplement this sales force with its existing strong customer support  functions
and  field  service  operations  and  Tel  Labs  direct  billing  capabilities.
Currently,  usage of the Company's network occurs mostly during the evenings and
on weekends.  By  increasing  the number of  commercial  customers,  the Company
intends to more  effectively use the significant  available  daytime capacity of
its network.

     Decrease Network Cost per minute of use through the continued expansion and
development of the Company's network. The Company completed its national network
in the third quarter of 1996 with the  deployment  of its Las Vegas,  NV switch.
The Company  further  intends to continue to add low cost fixed  capacity to its
network  in  order  to  keep  pace  with  the  Company's  growth  and to  reduce
off-network  transmission  expenses. To enhance the efficiency of the fixed-cost
elements of its network,  the Company  seeks to increase  both  overall  traffic
volume and  business-driven  daytime  traffic in order to balance  the  existing
night  and  weekend  off-peak  traffic  from  residential  customers.  Low  cost
transmission  expenses,  coupled  with an  expansive  network,  are  expected to
provide the Company with the continued  ability to grow its existing dial around
distribution segment and to expand into new distribution  channels.  Such growth
may  also  be  facilitated  by  select  strategic   alliances,   investments  or
acquisitions as the Company deems appropriate.

     Offer  Innovative  Products and Services  while  leveraging its Network and
Operating  Infrastructure and Business Information Systems, to meet the needs of
the Company's  residential and commercial  customer base.  During December 1996,
Tel Labs, the Company's wholly owned billing subsidiary, processed approximately
94 million call records.  The Company  believes that accurate and  sophisticated
information  systems  are key to growth and  success  in the  telecommunications
industry. Tel Labs provides the support that will enable the Company to grow its
existing  customer  base  and  to  provide  new  products  and  services  to its
residential and commercial customers, including the provision of direct bills to
commercial customers.  Such products and services may also include the resale of
local exchange services,  internet services, voice mail, FAX broadcast,  paging,
video conferencing and conference calling. The Company believes that its network
intelligence,  billing and reporting  systems enhance the Company's  competitive
ability and provide a platform for future growth and product expansion.

MARKETING AND SERVICES

     Since it commenced operations in 1993, the Company's primary focus has been
residential  sales  through the  Consumer  Division's  marketing  of dial around
services.  The Company  intends to expand its customer  base by adding  business
customers  through CSD. A discussion  of the  Company's  service  offerings  and
residential and commercial marketing follows.

     Consumer Division. The Company markets its residential dial around services
through marketing subsidiaries under the Dial & Save and Long Distance Wholesale
Club brand  names.  The two  brands are  differentiated  by rate  structure  and
marketing  approach,  and the  Company  believes  that its dual  brand  strategy
heightens market penetration by broadening  customer exposure to dial around and
appealing  to  different  segments  of  the  population.  Customers  access  the
Company's  network  by dialing a five  digit  code  before  the number  they are
calling (10457 for Dial & Save; 10297 for the Long Distance Wholesale Club), and
therefore are not required to  permanently  change or cancel their existing long
distance carrier in order to use the Company's  service.  Since  inception,  the
Company has targeted  the domestic  residential  market,  with an estimated  110
million households,  and typically offers its customers savings off of the basic
direct  dialed "1 plus" rates  charged by AT&T,  MCI and Sprint.  Recently,  the
Consumer  Division also introduced a flat rate per minute product with a monthly
fee.  Approximately  99% of  the  Company's  total  customers  were  residential
customers  at December 31, 1996.  Customers  who prefer to access the  Company's
network by dialing "1 plus"  rather  than  dialing the  Company's  CIC Codes may
select Dial & Save or Long Distance  Wholesale Club as their  presubscribed long
distance  carrier.  Whether a residential  customer  dials the Company's  access
codes or is  presubscribed,  their calls will appear on the  customers  regular
monthly local telephone bill.

     The Company markets its residential  services primarily through direct mail
pieces that seek to educate  potential  customers  regarding dial around and its
benefits.  Direct  mail is  targeted  towards  residential  customers  within  a
specified  geographic  region and  includes a service  explanation  and  dialing
instructions,  a  general  pricing  comparison  and a set of  reminder  stickers
highlighting the Company's CIC Codes for customers to keep near their telephone.

     Prospective  customers  do not need to sign-up or call the  Company to take
advantage of its  discounted  service  offerings  upon  receiving a Company mail
solicitation.  The Company works with various  outside  advertising  agencies to
design the copy and creative  components of the direct mail marketing pieces and
contracts with various  vendors of mail shop and printing  services in an effort
to  ensure  that mail is sent out in a timely  and  cost-effective  manner.  The
Company's data processing resources allow for prompt monitoring of customer long
distance usage and permit the Company to carefully measure response rates to its
direct mail campaigns.  The Company constantly strives to improve response rates
by varying the design and components of its direct mail marketing packages,  and
seeks to engineer the timing of its initial and follow-on  direct mail campaigns
to maximize response rate and grow overall market penetration.  In addition, the
Company also utilizes other media to supplement direct mail.

     The Company typically has targeted new and existing  geographical areas for
a  mailing  campaign  when  its  switch  network,   marketing  and  back  office
infrastructure have allowed it to effectively manage incremental growth. Initial
mailings to new states are usually sequenced over a time period of several weeks
in an effort to ensure proper customer support and efficient call  transmission.
The Company has  periodically  conducted  subsequent  mailings into its existing
territory to stimulate  incremental  usage by new and existing  customers and to
build brand  awareness.  The  Company's  experience  indicates  that  subsequent
mailings into its  geographic  markets have generated  incremental  new customer
usage,  in some cases with  response  rates equal to initial  mailings into such
markets.
<PAGE>
     The Company's in-bound telesales customer service department is designed to
complement  the  Company's  direct mail  marketing  strategy.  Customer  service
representatives  ("CSRs") are  available 24 hours a day, 7 days a week to answer
marketing inquiries generated by the Company's marketing  campaigns,  as well as
to support  existing  customers.  CSRs are  trained  to answer a broad  range of
inquiries from prospective  customers relating to service,  pricing and optional
features.

     Commercial Sales Division.  In order to provide an additional  distribution
channel for the Company's  telecommunications products and services, the Company
implemented  a plan during 1996 to build a direct  commercial  sales  force.  In
April 1996,  the Company  hired  Stephen G. Canton as the President of its newly
formed  CSD as part of the  Company's  plan to sell  voice,  data  and  enhanced
telecommunications services to business customers. By December 1996, the Company
had opened 22  regional  sales  offices  and  employed  approximately  220 sales
personnel in 13 states to market these services. Sales personnel will market the
Company's  services through personal contacts which emphasize  customer service,
term  plans,  network  quality,  value-added  services,  reporting,  rating  and
promotional  discounts.  The  expenses  associated  with the  growth  of CSD are
expected to reduce net income at least through 1997.

     Current  products  offered by the Commercial  Sales  Division  include long
distance,  calling card, 800/888 services,  call accounting and enhanced billing
services and dedicated T-1. In addition to competitive  rates and a wide variety
of  products,  the  Company  is  able  to  offer  business  customers  a  highly
specialized  direct bill summary package that includes call summaries by service
type, call type,  originating  number,  account code,  area code,  country code,
time-of-day and most frequently called numbers.

     The Company also markets  basic long distance  services on a  presubscribed
basis  to  small  business  customers  through  telemarketing  campaigns.  As of
December 31, 1996, CSD employed approximately 37 people in its telesales group.

     CSD also sells  transmission  capacity and services to other long  distance
carriers.  The Company believes that the combination of the Company's nationwide
network and Tel Labs' data processing resources provides an avenue of continuing
growth through the wholesaling of one-stop  telecommunications  services to long
distance resellers. The Company offers a complete package of networking, billing
and customer  service,  eliminating  the need for resellers to  coordinate  with
multiple  vendors  and  giving  them the  ability  to obtain  all of their  long
distance  services  from a single  source.  Additionally,  the Company  provides
reseller  clients with a customized  version of the Tel Labs'  customer  account
database software,  the TelePhone  Maintenance system ("PM").  While revenue per
minute  from  wholesale  service  sales is  generally  lower than the  Company's
average sales to end users, the cost of sales and overhead involved in servicing
carrier  customers  is also  lower.  Moreover,  the Company has used this market
segment to more  effectively  utilize its network during the daytime hours,  the
busiest time of day for many carrier and reseller customers.

     The Company is positioning  itself to resell local  exchange  services and,
accordingly,  has filed or intends to file applications in all 50 states seeking
authorization to resell local exchange telecommunications products and services.
As of March 18, 1997, local exchange resale authorization has been obtained from
21 states.

CUSTOMER SERVICES

     To ensure that in-bound telesales marketing and customer service are always
available,  the Company's customer service department operates 24 hours a day, 7
days a week to provide  full-service  support for its residential and commercial
customer  base and to handle  marketing  inquiries  from  potential and existing
customers.  During December 1996, the Company's  customer  telesales and service
department  personally responded to approximately 230,000 customer inquiries and
service calls.

     As of December  31, 1996 the Company  employed  approximately  245 CSRs and
related customer service  personnel.  In connection with its mailing  campaigns,
the Company also employs  additional  personnel  through a temporary  employment
agency on an ongoing basis,  particularly in connection  with mass mailings.  An
intensive  two week  training  program  (including   hands-on  training  in  the
Company's  PM  system  and  computer  software,  participation  in role  playing
exercises, and monitoring of actual customer calls), as well as regular training
and  repeated  quality  assurance  assessments  ensure  that  CSRs are  properly
prepared to handle customer calls. The Company  maintains a relationship with an
inbound  telemarketing  service provider capable of handling  incoming  customer
service calls should the  Company's  customer  telesales and service  department
become disabled.

     The Company's call centers are equipped with state-of-the-art  computer and
telecommunications  technology.  Incoming calls are managed efficiently with the
help of a Mitel Phone System,  which includes an automatic call  distributor and
an automated attendant. This high-powered,  multi-tasked system allows for swift
management  of call queue  time,  the  formation  of  distinct  work  groups for
different  projects and on-line monitoring of customer service calls for quality
assurance purposes. Bilingual CSRs are available during day and evening shifts.

     CSRs use the Company's PM proprietary software which delivers prompt access
to accurate,  up-to-date customer account information.  This customized software
is a powerful  database which provides CSRs the capability to respond swiftly to
customer  needs.  CSRs are able to issue credits while speaking with a customer,
log service  trouble  tickets for  treatment by the  Company's  Network  Control
Center,  record  pertinent  customer  information  into an account memo field to
maintain  customer  history,  enter new  customers  into the database and assign
appropriate  billing codes.  The software also generates actual credit vouchers,
as well as letters  responding to customer requests for additional  stickers and
other  marketing  materials.  While  Tel Labs has  customized  the  software  to
accommodate the Company's  specific needs,  Tel Labs also has made this software
available to its other long distance clients.

BILLING AND DATA PROCESSING

     The Company believes that accurate and  sophisticated  information  systems
are key to growth and success in the  telecommunications  industry.  The Company
has dedicated substantial resources to its information systems and believes that
the strong  growth of its dial around  business is largely  attributable  to the
existence  of the Tel Labs back  office  and  billing  platform.  The  Company's
information  systems  enable  the  Company  to (i)  monitor  and  respond to the
evolving needs of its customers by developing new and customized services;  (ii)
provide  sophisticated  billing  information  that can be  tailored  to meet the
requirements of its customer base; (iii) provide high quality customer  service;
(iv) detect and  minimize  fraud;  (v) verify  payables to  suppliers;  and (vi)
integrate  additions to its customer base. The Company believes that its network
intelligence,  billing and  financial  reporting  systems  enhance the Company's
competitive  ability and provide a platform for future  growth and the expansion
of its product line.

     Tel Labs  processes  raw  switch  data  into a  format  that can be used to
produce   end-user   invoices.   During   December   1996,  Tel  Labs  processed
approximately  94 million  call  records  for 20  telecommunications  companies,
including the Company.  This data  processing is executed on specially  designed
personal computers operating a proprietary  software program.  Tel Labs receives
the  Company's  raw call  records  directly  from the  Company's  switches,  and
prepares them for rating by determining the answer status, originating location,
terminating location and mileage. The calls are then rated according to standard
rates or according to customer  specific rates,  if applicable.  Rated calls are
then sorted depending on which LEC will actually bill the end-user and placed in
an industry standard format ("EMI").  Tel Labs then prepares  management reports
which  provide the Company with the total  number of calls,  minutes and dollars
billed during that bill cycle.

     Since its inception,  the Company has billed all of its residential traffic
through  LECs.  The Company has entered into billing and  collection  agreements
with LECs,  including  all of the RBOCs,  that  cover  substantially  all of the
switched access lines in the U.S. These  agreements  permit the Company to place
its customers' call detail records on the customers' regular monthly local phone
bill. In addition,  by billing  through the LECs, the Company  benefits from the
LECs'  extensive  collections  infrastructure.  The  Company  believes  that LEC
billing  agreements are the most  effective  mechanism for billing the Company's
residential  customers because consumers can receive one bill for both local and
long distance service. The Company also provides billing clearinghouse  services
through Tel Labs to other unaffiliated long distance carriers.

     Since April 1995, the Company has  contracted  with a third party to manage
its billing and collection  agreements  ("Contract  Manager").  After  receiving
rated call records from Tel Labs, the Contract Manager transmits them to the LEC
and ensures that  incoming  and outgoing  call records and revenues are properly
tracked.  The Company is considering  managing its own contracts to enable it to
realize greater  operating  efficiencies  and more  effectively  manage its cash
flow.

NETWORK AND OPERATIONS

     The  Company  operates a  nationwide  advanced  telecommunications  network
consisting of six switches,  leased transmission lines and sophisticated network
management  systems designed to optimize traffic routing.  The Company's network
currently  originates  traffic in all or some part of 48 states and the District
of Columbia. The Company operates an "open network", meaning that any individual
within the Company's  originating  service area whose LEC provides  equal access
can  access  the  Company's  long  distance  network  by  dialing  either of the
Company's  CIC codes,  10457 or 10297,  or by  presubscribing  to the Company as
their long distance service provider.  Because customers do not need to register
with the Company  before  accessing  its  network,  the Company  must  determine
capacity  needs and install and test circuits  before  entering a new geographic
market.

     The Company's  network  provides high quality,  reliable  transmission  and
switching.   The  Company's   network   surveillance   capabilities,   including
self-diagnostic software, generally enable the Company to anticipate and correct
problems before they result in service  interruption.  The Company's technicians
remotely  monitor the  Company's  entire  network 24 hours a day, 7 days a week,
from its two Network Control Centers located in Chantilly,  Virginia and Austin,
Texas. To reduce the potential impact of any equipment or transmission  failure,
the Company can reroute or restore  transmissions  through the Company's standby
transmission  facilities or reroute traffic over the networks of other carriers.
The  Company's  technicians  also  monitor  the network for fraud on a real-time
basis,  using  computer  systems  that  detect  unusual or high  volume  calling
patterns.

     Switching Facilities.  The Company currently operates six DSC DEX 600S, 600
and  600E  digital  telecommunications  switches  in Fort  Lauderdale,  Florida;
Davenport, Iowa; Chattanooga, Tennessee; Austin, Texas; Washington, D.C. and Las
Vegas,  Nevada.  Additionally,  the Company is  installing  a DEX 600E switch in
metropolitan  New York City which is expected to be  operational in 1997 and has
acquired an eighth  switch for a  yet-to-be-determined  location.  Switches  are
digital  computerized routing facilities that receive calls, route calls through
transmission lines to their destination and record information about the source,
destination  and  duration  of the  calls.  In order for a call to be  completed
through a switch,  there must be two ports  available -- an incoming port and an
outgoing  port.  For example,  if a switch is equipped  with 30,000  ports,  the
switch can accommodate up to 15,000 simultaneous  telephone calls. The Company's
switches are currently configured with between 13,824 and 42,420 equipped ports.
The  Company's DEX 600 switches can be expanded to a  configuration  with 30,720
equipped  ports while the Company's  four DEX 600E switches can be expanded to a
configuration with 107,520 equipped ports. The Company continually evaluates the
capacity of its switches and in the future may expand its switches'  capacity or
add new switches in selected  markets  where the volume of its customer  traffic
makes such an investment economically viable.

     Leased  Transmission  Lines. The Company leases  transmission  lines from a
variety of  facilities-based  and resale long distance  carriers.  The Company's
contracts with these entities typically have terms ranging from 18 to 36 months.
The Company supplements its leased "on-network" capacity with "off-net" services
from a  variety  of resale  and  facilities-based  long  distance  carriers.  In
addition,  the  Company  does  not  have any  on-network  international  network
arrangements  and exclusively  resells the network  capacity of other resale and
facilities-based long distance carriers to international destinations.

     Network  Management  Systems.  Once calls are originated over the Company's
circuits,  the calls are routed over leased  digital,  fiber optic  transmission
facilities  to the  Company's  nearest  switch  location  and then  routed  on a
least-cost  basis to  either  the  Company's  leased  network  or to an  off-net
supplier for termination.  The Company utilizes  state-of-the-art Digital Access
Cross Connect Systems ("DACS") to electronically  cross-connect circuits thereby
increasing call routing and circuit provisioning efficiency and providing better
network  monitoring  capabilities.  The Company has installed  Tellabs ABS Titan
5500  3/1  and 530  1/0  DACS  equipment  on  five  of the  Company's  switches.
Additional   DACS  systems  are  expected  to  be  installed  on  the  remaining
operational switches by the end of 1997. In addition, the Company has configured
a large portion of its network with Signaling System 7 Common Channel  Signaling
("SS7").  This  network  protocol  reduces  connect  time  delays  and  provides
additional technical capabilities and efficiencies for call routing. The Company
is  currently  in the process of  deploying  SS7 in  additional  portions of its
network.

COMPETITION

     The telecommunications industry is highly competitive and affected by rapid
regulatory and  technological  change.  The Company  believes that the principal
competitive factors in its business include pricing,  customer service,  network
quality,  service  offerings  and the  flexibility  to adapt to changing  market
conditions. The Company's future success will depend upon its ability to compete
with AT&T, MCI, Sprint and other carriers  (including the RBOCs when approved to
enter the long distance market) and other dial around  companies,  many of which
have considerably greater financial and other resources than the Company.

     The Company believes it competes favorably in its targeted markets,  due to
its dial around service and billing services,  competitive pricing, high network
quality and customer service infrastructure.  The Company also believes that its
success will depend  increasingly  on its ability to offer on a timely basis new
services based on evolving technologies and industry standards.  There can be no
assurance that new  technologies or services will be available to the Company on
favorable terms.

     Regulatory trends have had, and may have in the future, significant effects
on competition in the industry.

REGULATION

     The services which the Company  provides are subject to varying  degrees of
federal,  state and local  regulation.  The FCC exercises  jurisdiction over all
facilities of, and services  offered by,  telecommunications  common carriers to
the extent that they  involve  the  provision,  origination  or  termination  of
jurisdictionally  interstate or international  communications.  The state Public
Service   Commissions   ("PSCs")  retain   jurisdiction  over   jurisdictionally
intrastate communications.

     1996 Telecommunications Act. The 1996 Telecommunications Act was enacted in
February,  1996. The legislation is intended to introduce increased  competition
in U.S.  telecommunication  markets.  The  legislation  opens the local services
markets by requiring local exchange carriers to permit  interconnection to their
networks and by establishing local exchange carrier  obligations with respect to
unbundled  access,  resale,  number  portability,   dialing  parity,  access  to
rights-of-way,   mutual  compensation  and  other  matters.  In  addition,   the
legislation   codifies   the  local   exchange   carriers'   equal   access  and
nondiscrimination  obligations and preempts  inconsistent state regulation.  The
legislation also contains special  provisions that eliminate the restrictions on
the  RBOCs  and the GTOCs  from  providing  long  distance  services.  These new
provisions  permit an RBOC to enter the  "out-of-region"  long  distance  market
immediately,  upon the receipt of any state and/or federal regulatory  approvals
otherwise  applicable  to the  provision  of  long  distance  service,  and  the
"in-region"  long  distance  market  if  it  satisfies  several  procedural  and
substantive  requirements,  including obtaining FCC approval upon a showing that
in certain situations facilities-based competition is present in its market, and
that it has entered into  interconnection  agreements  which  satisfy a 14-point
"checklist" of competitive requirements.

     The legislation  defines  in-region  service to include every state, in its
entirety, in which the RBOC provides local exchange service, even if the RBOC is
not the incumbent local exchange service provider in all portions of that state.
The GTOCs are  permitted  to enter  the long  distance  market as of the date of
enactment of the 1996  Telecommunications  Act, without regard to limitations by
region,  although  necessary  regulatory  approvals  to  provide  long  distance
services  must be obtained,  and the GTOCs are subject to the  provisions of the
1996  Telecommunications  Act that impose interconnection and other requirements
on LECs. The Company will be facing new competition from the RBOCs and the GTOCs
that are able to obtain the  necessary  state  and/or FCC  approvals  to provide
out-of-region  and/or in-region long distance service,  and at last search RBOCs
have announced their  intention to request  permission from the FCC to enter the
long  distance  market in one or more of their state  markets.  The  legislation
provides for certain safeguards to protect against anti-competitive abuse by the
RBOCs.  Among other things,  the legislation  limits the ability of the RBOCs to
market  jointly  for a certain  time period  interLATA  long  distance  service,
equipment,  and certain information  services together with local services.  The
RBOCs must  pursue such  activities  only  through  separate  subsidiaries  with
separate books and records, financing,  management, and employees. All affiliate
transactions  must be conducted on an arms length and  nondiscriminatory  basis.
The RBOCs are also  prohibited  from jointly  marketing  local and long distance
services,  equipment,  and  certain  information  services  unless  they  permit
competitors  to offer  similar  packages  of local and long  distance  services.
Further,  the RBOCs must obtain in-region long distance authority before jointly
marketing local and long distance  service in a particular  state. It is unknown
whether   these   safeguards   will   provide   adequate    protection   against
anti-competitive  conduct  by the  RBOCs,  and the  impact  of anti-competitive
conduct on the Company, if such conduct occurs, is uncertain.  In addition, long
distance service providers such as the Company will be significantly affected by
the  implementation  and  enforcement  of statutory  and  regulatory  provisions
designed  to  prevent  the  RBOCs  and the  GTOCs  from  capitalizing  on  their
monopolistic  provision  of  local  services  to  existing  subscribers  to  win
interLATA business.

     The  1996  Telecommunications  Act  also  addresses  a wide  range of other
telecommunications issues that will potentially impact the Company's operations,
including a sunset provision  pertaining to when safeguards  designed to prevent
RBOCs from capitalizing on their local exchange  monopolies will cease to apply;
provisions pertaining to regulatory  forbearance by the FCC; the creation of new
opportunities  for  competitive  local  service   providers;   and  requirements
pertaining  to  the  treatment  and   confidentiality   of  subscriber   network
information.  The legislation also restricts for some period AT&T and other long
distance  carriers serving more than five percent of the nations'  presubscribed
access lines from  packaging  their long distance  services with local  services
provided over RBOC  facilities.  It is unknown at this time precisely the nature
and extent of the  impact  that the  legislation  will have on the  Company.  As
required by the  legislation,  the FCC is still in the process of  conducting  a
large number of proceedings to adopt rules and  regulations to implement the new
statutory provisions and requirements.

     Depending on the exact nature and timing of GTOC and RBOC out-of-region and
in-region entry into the long distance market, such entry and the ability of the
Company's  competitors to market jointly local and long distance  services could
have a material adverse effect upon the Company's  results of operations.  It is
expected by the Company that most or all of the RBOCs will file applications for
out-of-region  (and also eventually  in-region) long distance service authority.
Certain of the RBOCs have already  obtained the  necessary  authority to provide
out-of-region  long distance  services in multiple states. It is not known when,
and  under  what  specific  conditions,  other  applications  for long  distance
authority   will  be  filed  by  the  RBOCs  and/or  granted  by  state  utility
commissions.

     FCC Interconnection Orders. As required by the 1996 Telecommunications Act,
in August 1996, the FCC adopted new rules implementing certain provisions of the
1996  Telecommunications  Act (the  "Interconnection  Orders").  These rules are
designed  to  implement  the  pro-competitive,   deregulatory   national  policy
framework of the new statute by removing or minimizing the regulatory, economic,
and operational impediments to competition for facilities-based and resold local
services,  including switched local exchange service.  Although setting minimum,
uniform,  national rules, the Interconnection Orders also rely heavily on states
to apply these rules and to exercise  their own  discretion  in  implementing  a
pro-competitive regime in their local telephone markets.

     The  Interconnection  Orders are primarily important to the Company at this
time  insofar  as they  establish  the  basis  for the  cost to the  Company  of
providing  resold local services.  Consistent  with the 1996  Telecommunications
Act,  the   Interconnection   Orders  require  incumbent  LECs  to  offer  their
telecommunications   services  at  retail  prices  minus  avoided   costs.   The
Interconnection  Orders  also  requires,  among  other  things,  that  intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for  intraLATA  toll service  without  having to dial extra  digits) be
implemented no later than February 1999.

     Petitions   seeking   reconsideration   of  one  or  more  aspects  of  the
Interconnection  Orders  have been  filed  with the FCC and are  pending.  Also,
Interconnection  Orders  have been  appealed to various  U.S.  Court of Appeals.
These appeals have been consolidated  into proceedings  currently pending before
the U.S.  Eighth  Circuit Court of appeals.  Certain of the rules adopted in the
Interconnection  Orders,  including  rules  that  concern  the  pricing of local
services  such as resold local  service,  have been stayed by the Court  pending
resolution of the appeal. Although a number of state regulatory Commissions have
voluntarily   adopted   pricing   rules   similar  to  those   mandated  in  the
Interconnection  Orders,  there can be no assurance  of how the  Interconnection
Orders  will be  implemented  or  enforced,  or what  effect  they  will have on
competition  within  the  telecommunications  industry,  generally,  or  on  the
competitive  position of the  Company,  specifically.  Nonetheless,  the Company
believes  the  trend  toward  increased  competition  and  deregulation  of  the
telecommunications  industry will be accelerated by the 1996 Tele-communications
Act and subsequent developments.

     Federal.   The  FCC  has   classified   the   Company  as  a   non-dominant
inter-exchange  carrier.  As a  non-dominant  carrier,  the  Company may provide
domestic interstate communications without prior FCC authorization, although FCC
authorization is required for the provision of international  telecommunications
by non-dominant  carriers.  Non-dominant carriers currently are required to file
tariffs listing the rates,  terms and conditions of interstate and international
services provided by the carrier.  However,  generally the FCC has chosen not to
exercise  its  statutory  power to closely  regulate the charges or practices of
non-dominant  carriers.  Nevertheless,  non-dominant  carriers  are  required by
statute to offer interstate and  international  services under rates,  terms and
conditions that are just, reasonable, and not unduly discriminatory, and the FCC
acts upon complaints  against such carriers for failure to comply with statutory
obligations or with the FCC's rules,  regulations and policies. The FCC also has
the power to impose more stringent regulatory requirements on the Company and to
change its regulatory classification.  The Company believes that, in the current
regulatory environment, the FCC is unlikely to do so.

     Until October 1995,  AT&T was  classified as a dominant  carrier,  but AT&T
successfully  petitioned  the  FCC  for  non-dominant  status  in  the  domestic
interstate market. Therefore,  certain pricing restrictions that once applied to
AT&T have been  eliminated,  which could result in increased prices for services
the Company  purchases from AT&T and more  competitive  retail prices offered by
AT&T to customers.  AT&T is, however, still classified as a dominant carrier for
international services.

     Currently,  the Company maintains two types of tariffs on file with the FCC
containing  the  rates,  terms  and  conditions  of its  services.  One  governs
interstate service and the other governs international service. (As is required,
the Company  obtained  authority  from the FCC prior to providing  international
services.) Changes to either tariff can be made on one-day notice,  without need
for cost support. The 1996  Telecommunications  Act, however, grants the FCC the
authority to  "forbear"  from  regulating  any provider or service if the agency
determines  that it is in the public  interest  to do so. In an  exercise of its
"forbearance authority," the FCC has recently issued an order changing this and,
following  a  transition  period  which is  currently  scheduled  to conclude in
November 1997,  nondominant carriers will no longer be able to file tariffs with
the FCC  concerning  their  interstate  long distance  services.  (International
services will continue to be tariffed.) In lieu of tariffs, nondominant carriers
such as the  Company  will be required  to  maintain  at their  offices,  and to
provide to customers or regulators upon request,  information  concerning  their
long distance services.

     The FCC order  eliminating  tariffs has been appealed to the U.S.  Court of
Appeals for the  District  of  Columbia.  That appeal is pending.  The court has
stayed the FCC's order  pending the  resolution  of the appeal.  The  appellants
argue that tariffing establishes a legally binding relationship between carriers
and customers,  and that detariffing  eliminates  certainty with regard to those
relationships.  They also argue that  detariffing  imposes  costs upon  carriers
because  carriers will need to enter into  alternative  forms of legally binding
relationships  with  customers.  There can be no assurance of whether the appeal
will be successful or, if successful,  what effect it may have on the Company.
However,  if mandatory  detariffing  ultimately takes effect, the Company,  like
other long  distance  companies,  would  likely incur some  additional  costs in
establishing legally binding relationships with customers.

     The 1996  Telecommunications  Act mandated several other important  federal
regulatory  developments.  The first concerns universal service.  As required by
the 1996 Telecommunications,  a joint board of federal and state regulators were
convened to consider  possible changes to the FCC's existing  universal  service
support mechanisms - mechanisms designed to ensure affordable  telephone service
is available to all customers,  including low-income consumers - in light of the
pro-competitive   paradigm  for  local  competition   established  by  the  1996
Telecommunications  Act. In November  1996,  the FCC  initiated a proceeding  to
examine universal service issues,  and has received comment on the proposals set
forth by the joint  board.  Any  decision  is expected to comply with the policy
principles for preservation and advancement of universal  telephone  service set
forth  in the  Act:  quality  service,  affordable  rates,  access  to  advanced
services,  access  to  service  in  rural  and  high-cost  areas,  specific  and
predictable support mechanisms, equitable and non-discriminatory contribution to
support  mechanisms,  and access to  advanced  telecommunications  for  schools,
health care  providers,  and libraries.  An initial  decision is expected in May
1997. It is uncertain how any decision might affect the Company.

     Another issue that may affect the Company is access charge  reform.  Access
charges are charges imposed by LECs on long distance providers for access to the
local  exchange  network,  and  are  designed  to  compensate  the  LEC  for its
investment in the local network.  In addition to economic  considerations,  when
adopted  in 1984,  at the time  AT&T was  required  to divest  the BOCs,  access
charges  rates  reflected  public  policy  considerations  related to  universal
service and the desirability of low local rates.  Interstate  access charges are
regulated by the FCC and  intrastate  access  charges are regulated by the state
public service commissions.  As required by the 1996  Telecommunications Act, in
December  1996,  the FCC issued an order which,  among other  things,  requested
comment on a number of access charge reform issues designed to foster  efficient
pricing  of  access,  competition  for  access  services,  and  to  reflect  the
development for local services prompted by the 1996  Telecommunications Act. The
FCC has also sought  comment on whether  Internet  service  providers  and other
information  service  providers should be subject to access charges.  An initial
decision is expected in May 1997. It is uncertain how any decision  might affect
the Company.

     An  additional  issue that may affect the Company  relates to the manner in
which carriers will be required to compensate payphone owners when a payphone is
used to originate a long distance call. The 1996 Telecommunications Act requires
carriers to compensate  payphone owners on a per call basis. In Orders issued in
September and October of 1996, the FCC imposed a compensation scheme that called
for certain  carriers,  including the Company,  to compensate  payphone owners a
flat  amount  per  month  for  one  year  before  transitioning  to a  per  call
compensation  system.  This  flat rate  compensation  scheme  would  effectively
require the Company to pay for  services  it does not  receive.  The Company and
other carriers such as AT&T,  have appealed these decisions to the U.S. Court of
Appeal for the  District of  Columbia.  The appeal is  pending.  There can be no
assurance  of whether  the appeal will be  successful  or, if  successful,  what
effect it may have on the Company.

     The FCC also imposes prior  approval  requirements  on transfers of control
and  assignments  of  operating  authorizations.  The FCC has the  authority  to
generally condition, modify, cancel, terminate or revoke operating authority for
failure to comply with federal laws and/or the rules,  regulations  and policies
of the FCC. Fines or other  penalties  also may be imposed for such  violations.
There can be no  assurance  that the FCC or third  parties will not raise issues
with regard to the Company's compliance with applicable laws and regulations.

     Among domestic local carriers,  only the incumbent local exchange  carriers
are currently  classified as dominant carriers.  Thus, the FCC regulates many of
the local  exchange  carriers'  rates,  charges and services to a greater degree
than the Company's,  although FCC  regulation of the local exchange  carriers is
expected   to   decrease   over  time,   particularly   in  light  of  the  1996
Telecommunications  Act.  As a  result  of the  Act,  incumbent  local  exchange
carriers have recently been afforded a degree of pricing  flexibility in setting
interstate  access charges where adequate  competition is perceived to exist. In
January  1997,  the FCC  issued  an  order  streamlining  the  process  by which
incumbent  LECs file tariffs for switched and special access  services.  The new
streamlined  rules allow LECs to change tariffs on no more than 15-days  notice.
The shortened  notice periods adopted by the FCC may prompt LECs to file tariffs
containing discriminatory and anti-competitive rates. It is unclear whether the
order will be subject to  reconsideration  or appeal and, if not, what effect it
may have on the Company.

     Like other long  distance  carriers,  the  Company  has been the subject of
informal  complaints  before the FCC  regarding  certain  marketing  and billing
issues. The Company has filed timely responses to these informal complaints. The
Company  believes that such matters will be  satisfactorily  resolved  without a
material adverse impact upon the Company's results of operations.

     State.  The  Company's  intrastate  long  distance  and  anticipated  local
exchange operations are subject to various state laws and regulations including,
in most jurisdictions,  certification and tariff filing  requirements.  The vast
majority of the states require the Company to apply for certification to provide
intrastate local and long distance  telecommunications  services, or at least to
register or to be found exempt from  regulation,  before  commencing  intrastate
service.  The vast  majority  of states  also  require  the  Company to file and
maintain  detailed  tariffs  listing their rates for  intrastate  service.  Many
states also impose various reporting  requirements and/or require prior approval
for   transfers  of  control  of  certified   carriers,   and/or  for  corporate
reorganizations;  acquisitions of telecommunications operations;  assignments of
carrier  assets,  including  subscriber  bases;  carrier  stock  offerings;  and
incurrence  by  carriers  of  significant  debt  obligations.   Certificates  of
authority can  generally be  conditioned,  modified,  canceled,  terminated,  or
revoked by state  regulatory  authorities  for  failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory authorities.
Fines and other penalties also may be imposed for such violations.

     The  Company  has  received  the  necessary  FCC  authorization  and  state
certificate  and tariff  approvals to provide  interstate  and  intrastate  long
distance  service in 48 states and the  District of Columbia.  In addition,  the
Company has received  the  necessary  authorization  to provide  local  exchange
telecommunications  service in 21 states as of March 18, 1997.  Applications are
pending for multiple subsidiaries for additional state certifications.  Although
the  Company  intends  and  expects  to  obtain  operating   authority  in  each
jurisdiction in which operating authority is required, there can be no assurance
that one or more of these  jurisdictions will not deny the Company's request for
operating  authority.  The Company  monitors  regulatory  developments in all 50
states to ensure regulatory compliance.

     Informal  complaints  concerning  certain marketing and billing issues have
been lodged against the Company before certain state PSCs. The Company  believes
that such matters will be  satisfactorily  resolved  without a material  adverse
impact upon the Company's results of operations.

     PSCs also regulate access charges and other pricing for  telecommunications
services  within each state.  The RBOCs and other local  exchange  carriers have
been  seeking  reduction of state  regulatory  requirements,  including  greater
pricing flexibility. This could adversely affect the Company in several ways. If
regulations  are changed to allow  variable  pricing of access  charges based on
volume,  the Company could be placed at a competitive  disadvantage  over larger
long distance carriers.  The Company also could face increased price competition
from the RBOCs and other local  exchange  carriers for intraLATA and interLATA
long  distance  services,  which  may be  increased  by the  removal  of  former
restrictions on long distance service  offerings by the RBOCs as a result of the
1996 Telecommunications Act.

INTELLECTUAL PROPERTY

     The Company has  registered  several  trademarks  for use in its  marketing
materials.  The  original  logo  used to  market  Dial & Save  residential  long
distance service is a registered trademark of the Company. The logo is used in a
limited  fashion  today,  as it has been replaced by a more updated logo design.
The new logo used to market the Dial & Save residential long distance service is
actively  used on all  Dial & Save  marketing  materials.  The  Company  filed a
registration  application  to obtain a trademark  for the new logo design and to
trademark the words "Dial & Save" in late 1994. The registration application has
been  suspended  pending the  disposition  of one other  application  before the
Patent and  Trademark  Office  ("PTO").  While each of the Company and the other
applicant  filed  an  opposition  to the  others  application,  they  commenced
discussions to resolve the matter.  In December 1996,  however,  the Company was
named as a defendant in litigation  brought by An Apple A Day,  Inc.  d/b/a Dial
and Save  ("Apple"),  a company  involved in telephone order sales of electronic
equipment.  The suit claims that the new logo  design  accompanied  by the words
"Dial & Save"  is  confusingly  similar  to a  trademark  held by Apple so as to
constitute  trademark  infringement  and violations of related laws. The Company
believes it has strong  defenses to Apple's claims  including that the marks and
markets at issue are dissimilar. See "Item 3 - Legal Proceedings." The Company's
CIC Code for its Long Distance Wholesale Club brand is a registered trademark of
the Company.

     "Prime Business" is the name of the Company's  commercial product line. The
Company filed  registration  applications  to obtain  trademarks  for the phrase
"Prime  Business"  and for its logo in 1995.  The  registration  was  granted in
September 1996.

EMPLOYEES

     As of  December  31,  1996,  the Company has  approximately  603  full-time
employees, 8 part-time employees, and approximately 185 workers who are employed
through various  temporary  agencies.  The temporary agency workers are CSRs who
handle inbound marketing  inquiries from customers.  None of these employees are
represented by a union. The Company believes that it has good relations with its
employees.

FORWARD-LOOKING STATEMENTS

     This annual report contains  forward-looking  statements  which express the
current  beliefs and  expectations of Telco's  management,  but are subject to a
number of known and  unknown  risks that could  cause  actual  results to differ
materially from those projected or implied in the forward-looking  statements in
this press release.  Among the risks, factors and uncertainties that could cause
actual  results to differ  materially  from  those  referred  to above are:  the
Company's  ability to maintain  its current  pace in  attracting  and  retaining
customers,  the development of price competition in the long distance  industry,
an  increase  in  rates  for  access  and  transmission  facilities,  the  costs
associated  with the  continued  expansion  of the  Company's  Commercial  Sales
Division and the ability of the Company to integrate the pending  acquisition of
the Advantis assets and to generate the anticipated earnings and cash flow.

Item 2.   Properties

     The Company currently leases  approximately 36,327 square feet of space for
its corporate headquarters at 4219 Lafayette Center Drive, 4215 Lafayette Center
Drive and 4200 Pleasant Valley Road in Chantilly,  Virginia, pursuant to various
agreements. See "Certain Transactions- Leases of Real Property from Affiliate of
Shareholder."  The average monthly rent (not including  electricity) as of March
1997 is approximately  $28,906. In addition,  the Company occupies approximately
14,508  square  feet of leased  office  space on the 11th  floor of 1401  Wilson
Boulevard in Arlington,  Virginia,  which also houses the Company's  Washington,
D.C. Commercial Sales Division. The monthly rental for this space as of December
1996 is approximately  $25,651. The lease expires on May 31, 2000 with an option
to renew for one  additional  term of five  years.  The  Company  also leases an
aggregate of 27,432  square feet of space in seven  locations in Florida,  Iowa,
Nevada, Tennessee, Texas, and Washington,  D.C., to house its telecommunications
switching  equipment  sites and one of its network control  centers.  Due to the
rapid  expansion  and  growth  of the  Company,  there  may be a need  to  lease
additional  office space. If this need arises,  the Company believes  additional
space can be readily obtained as needed. The Company's Commercial Sales Division
is currently  utilizing  temporary  office space in twenty-one of its twenty-two
existing  locations.  The Company  expects to secure longer term office space in
1997.

<PAGE>
Item 3.   Legal Proceedings
     In December  1996,  Telco  Communications  Group,  Inc.  and Long  Distance
Wholesale  Club (LDWC) became  involved in a civil  action,  AT&T Corp. v. Telco
Communications  Group,  Inc. and Long Distance  Wholesale  Club,  pending in the
United States District Court for the District of New Jersey. In this litigation,
AT&T claims that Long Distance Wholesale Club  advertisements that consumers can
save up to 50% off AT&T's basic rates are false and misleading under federal and
state law. AT&T seeks treble damages,  statutory  attorneys' fees and costs, and
an  injunction.  The Company denies the  allegations  in this  litigation and is
vigorously  defending  against them,  including that all disclosures are clearly
contained in LDWC's  advertisements and that it is possible for consumers in any
geographic  location of the United States to place calls that will achieve up to
a 50%  savings.  Toward that end,  the Company is  preparing  to  stipulate  the
transfer of its own false advertising and tortious  interference  claims against
AT&T,  presently  pending in the United  States  District  Court for the Eastern
District  of  Virginia,  to the  District of New Jersey for  consolidation  with
AT&T's action. The Company also plans to file additional  counterclaims  against
AT&T based on AT&T's  advertising  which the Company believes contains a variety
of misleading  and deceptive  statements.  The Company could be found liable for
damages  and  an  injunction   might  issue  against  future  use  of  the  LDWC
advertisements, although such advertisements are no longer in use.

     On December  31,  1996,  Apple filed suit against the Company in the United
States District Court for the Eastern  District of Maryland  alleging  trademark
and tradename  infringement,  unfair  competition,  false designation of origin,
federal  trademark  dilution,  trade dress  dilution and  violations of Missouri
common law. According to the complaint, Apple holds a Dial and Save service mark
for telephone order services in the field of electronic equipment. Apple alleges
that the Company's  use of a Dial & Save logo and  tradename in connection  with
its sale to consumers of long distance  service  infringes  Apple's mark.  Apple
seeks an injunction  against the  Company's  further use of the Dial & Save logo
and name,  disgorgement of all profits made from use of the Dial & Save logo and
name,  damages  for loss of sales,  loss of good will and damage to  reputation,
trebling of damages and payment of attorneys fees and costs. The Company denies
the  allegations  and is vigorously  defending  against  them,  including on the
grounds,  among others, that there is no competitive proximity of the electronic
equipment that Apple sells and the long distance service that the Company offers
and no likelihood of, or actual,  confusion  regarding the seller, and therefore
the source,  of each.  If the Company is found to have  infringed  Apple's mark,
and/or to have  liability for Apple's other claims,  then it may be found liable
to Apple in whole, or in part, for damages of the nature sought by Apple.

     On May 8, 1995,  the Company,  and its  subsidiary,  Dial & Save of Nevada,
Inc., filed suit against Central Telephone Company-Nevada,  d/b/a Sprint/Central
Telephone  Company-Nevada,  a division of the Central Telephone Company, Sprint,
Inc., et al, in the District  Court of Clark County,  Nevada.  The suit includes
claims for breach of contract,  promissory and equitable estoppel,  unfair trade
practices,  and  breach  of the  duty of good  faith  and fair  dealing,  all in
violation of the laws of Nevada.  The Company and its  subsidiary  seek an order
for temporary injunctive relief preventing the defendant from denying possession
of  certain  commercial  real  property  in Las  Vegas  to the  Company  and its
subsidiary and  compelling the defendant to execute and honor a commercial  real
property lease with the Company,  as well as compensatory and punitive  damages,
attorneys fees and costs.

     In related  litigation,  on May 5, 1995, Central Telephone  Company-Nevada,
d/b/a  Sprint/Central  Telephone  Company-Nevada,  a  division  of  the  Central
Telephone Company,  filed suit against the Company in the United States District
Court for the District of Nevada.  The suit includes claims for negligent and/or
malicious  omission or  concealment  of material  facts,  conversion of personal
property and  trespass to chattel in violation of the common laws of Nevada,  in
connection  with  certain   commercial  real  property  and   telecommunications
facilities  owned by the plaintiff in Las Vegas,  Nevada.  The  plaintiff  seeks
damages and a  declaratory  judgment  specifying  the  respective  rights of the
plaintiff and the Company  regarding  occupancy of the commercial  real property
and use of the  telecommunications  facilities  in Las Vegas,  and requiring the
Company to present  any  complaint  against  the  plaintiff  to the FCC prior to
bringing any court action. The Company denies the allegations, intends to defend
vigorously  against them and has filed the suit described  above the against the
plaintiff.

     On  March  14,  1997,  Frontier  Corporation  and  Frontier   Communication
Services,  Inc.  filed suit against the Company,  and three (3) of the Company's
employees,  in the United  States  District  Court for the Southern  District of
Indiana,  alleging breach of contract,  tortious  interference  with contractual
relations and tortious  interference with prospective  economic  relations.  The
plaintiffs allege that three (3) of the Company's  employees,  who were employed
formally by the plaintiffs,  left the employ of plaintiffs,  joined the Company,
and thereafter  solicited on behalf of the Company  plaintiffs'  employees,  and
plaintiffs'  customers,  in breach of written  agreements between the plaintiffs
and  the  employees,  and in  violation  of the  common  laws  of  Indiana.  The
plaintiffs also allege that the Company breached a written agreement between the
Company and the plaintiffs in which the Company agreed not to allow solicitation
of the  plaintiffs'  employees or customers by the Company's  employees who were
formerly  employed  by  the  plaintiffs.   The  plaintiffs  seek  an  injunction
preventing  the  Company  and the  three  (3)  employees  from  breaching  their
respective  written  agreements  with plaintiffs and preventing the Company from
aiding or abetting the employees in breach of the employees'  written agreements
with the plaintiffs;  an accounting and  disgorgement of all profits made by the
Company and the employees arising from the breach of the written agreements with
the plaintiffs;  a declaratory  judgment that the Company and the employees have
breached their  respective  written  agreements  with the  plaintiffs,  and have
tortiously  interfered with the plaintiffs' existing contractual and prospective
economic  relations;  damages  for  breach of  contract  and  interference  with
plaintiffs' existing contractual and prospective economic relations; and payment
of attorneys' fees, and costs. The Company denies the allegations and intends to
defend vigorously against them.

Item 4.   Submission of Matters to a Vote of Security Holders

            None.

<PAGE>
            Executive Officers of the Registrant

     The following table sets forth, as of March 18, 1997,  certain  information
regarding  the  Company's  executive  officers  and  certain  other  significant
employees.

Name                         Age                        Position
-------------------------------------------------------------------------------
Henry G. Luken, III          37      Chairman of the Board
Donald A. Burns              33      Vice Chairman of the Board, Chief Executive
                                       Officer and President
Thomas J. Cirrito            48      President-Consumer Division and Director
Stephen G. Canton            41      President-Commercial Division
Bryan K. Rachlin             40      Chief Operating Officer, Secretary and
                                       General Counsel
Nicholas A. Merrick          34      Chief Financial Officer, Treasurer and
                                       Vice President
Natalie J. Marine-Street     28      Executive Vice President
Janet D. Anastasi            50      Vice President and Corporate Controller
Mark J. Stodter              37      Vice President-Electronic Data Processing


     Henry G.  Luken,  III,  a  co-founder  of the  Company,  has  served as the
Chairman of the Company's  Board of Directors  since its formation in July 1993.
Mr. Luken served as the Company's  Chief  Executive  Officer and Treasurer  from
July 1993 to April 1996. Mr. Luken has also served as chairman of Tel Labs since
1991 and chairman of Telco Development  Group,  Inc., a computer systems company
owned by Mr. Luken, since 1987, both of which entities he founded.

     Donald A. Burns, a co-founder of the Company, has served as Chief Executive
Officer and Vice Chairman of the Company's  Board of Directors since April 1996,
and has served as the  President  and as a  director  of the  Company  since its
formation in July 1993.  Mr. Burns served as the Company's  Secretary  from July
1993 to April  1996.  Prior to joining  the  Company,  Mr.  Burns  held  several
positions  with Mid Atlantic  Telecom,  Inc. ("Mid  Atlantic"),  a regional long
distance carrier based in Washington,  D.C.,  including executive vice president
and chief  operating  officer  from  October  1992 to July 1993 and  director of
operations from 1988 to October 1992.

     Thomas J.  Cirrito has served as the  President of the  Company's  Consumer
Division  since April 1996 and as a director of the Company since June 1996. Mr.
Cirrito  is a  co-founder  of LDWC and has  served  as its  president  and chief
executive  officer  since its  formation in September  1993.  From November 1991
through  September  1993, Mr.  Cirrito  served as president and chief  executive
officer of  Telecommunications  Associates,  Inc., an operator assisted services
company.  Mr.  Cirrito was vice president of  marketing/sales  with Mid Atlantic
from November 1988 to November 1991.

     Stephen G. Canton has served as the President of the  Company's  Commercial
Division since April 1996. Prior to joining the Company, Mr. Canton held several
positions   with  Allnet   Communications   Services,   Inc.,  a  long  distance
telecommunications  company,  including vice president of the sales division and
regional sales director from 1988 to 1995.

     Bryan K. Rachlin has served as the Chief Operating Officer and Secretary of
the Company  since  April 1996.  Mr.  Rachlin has served as Vice  President  and
General  Counsel of the Company since its inception,  and as the Chief Executive
Officer of Tel Labs since May 1994.  Prior to joining the Company,  Mr.  Rachlin
was a partner in the law firm of Rachlin & Fitzgerald.

     Nicholas A.  Merrick has served as Chief  Financial  Officer of the Company
since March 1996.  Prior to joining the  Company,  from July 1990 to March 1996,
Mr.  Merrick held several  positions as an  investment  banker in the  corporate
finance department of The Robinson-Humphrey  Company, Inc. In this capacity, Mr.
Merrick was involved in numerous  public and private  financing  and merger and
acquisition transactions involving companies in the telecommunications industry.

     Natalie J.  Marine-Street  has served as an Executive Vice President of the
Company since February 1996. Ms. Marine-Street served in several other positions
with the Company since its formation in July 1993,  including  vice president of
administration from February 1995 to February 1996 and marketing manager/special
projects  from July 1993 to February  1995.  Prior to joining the  Company,  Ms.
Marine-Street  served as marketing  coordinator  and in other  capacities at Mid
Atlantic from April 1991 to July 1993.

     Janet D. Anastasi has served as Vice President and Corporate  Controller of
the Company  since  October  1994.  Prior to joining the Company,  Ms.  Anastasi
served as a  manager  at Chase  and  Associates  CPAs,  P.C.,  certified  public
accountants, from 1988 to 1994.

     Mark J. Stodter has served as Vice  President-Electronic Data Processing of
the Company since its formation in July 1993.  Additionally,  Mr. Stodter served
as Chief Operating Officer of the Company from July 1993 to March 1996. Prior to
joining the Company,  Mr. Stodter  served as director of management  information
systems with Long Distance Service, Inc., a regional long distance carrier based
in Washington, D.C. from 1986 to 1993.

<PAGE>
                                PART II


Item 5.Market for the Registrant's Common Equity and Related Shareholder Matters

     The Common Shares are traded on the Nasdaq National Market under the symbol
"TCGX".  The following table sets forth, on a per share basis,  the range of the
high and low sales  price  information  of the Common  Shares as reported by the
Nasdaq National Market, for the periods indicated.

                                                            1996

                                                 High                  Low

Third Quarter (from August 9, 1996)             $19 1/2                $14

Fourth Quarter                                  $19 1/4                $15


     As of March 18, 1997, the closing price of the Common Shares as reported by
the  Nasdaq  National  Market  was  $20.38.  As of March 18,  1997,  there  were
approximately 2,877 registered holders of Common Shares.

     The Company has never paid any dividends.  The Company currently intends to
retain  all  future  earnings  for use in the  operation  of its  business  and,
therefore,  does not  anticipate  paying any cash  dividends in the  foreseeable
future.  The declaration and payment in the future of any cash dividends will be
at the  discretion  of the  Company's  Board of Directors  and will depend upon,
among other things, the earnings, capital requirements and financial position of
the  Company,  existing  and/or  future  loan  covenants  and  general  economic
conditions.

Recent Sales of Unregistered Securities

     On March 19, 1996,  options to acquire 425,000 Common Shares were issued to
Mr. Merrick at an exercise price of $7.53 per share.

     On April 1, 1996,  Bonita Anderson,  James Sznadjer,  Dennis Jarman and Mr.
Rachlin  exchanged their options in LDWC for options to acquire 25,511;  51,021;
113,267 and 102,043  Common  Shares,  respectively,  under the  Company's  Stock
Option Plan.

     On April 1, 1996,  the Company issued  5,102,125  Common Shares in exchange
for the remaining minority interest in LDWC.

     On April 4, 1996, options to acquire 1,062,500 Common Shares were issued to
Mr. Canton at an exercise price of $7.53 per share.

     On June 1, 1996,  the Company  agreed to issue 593,334 Common Shares to the
shareholders of Tel Labs in exchange for all of their shares in Tel Labs.

     On June 21, 1996, Mr. Rachlin  exercised options to purchase 649,198 Common
Shares at a weighted average exercise price of $0.44 per share.

     On August 9, 1996, Ms. Marine-Street  exercised options to purchase 169,575
shares at a weighted average exercise price of $1.76 per share.

     Each  issuance of  securities  described  above was made in reliance on the
exemption from the  registration  provided by Section 4(2) of the Securities Act
as a transaction by an issuer not involving any public offering.  The recipients
of securities in each such  transaction  represented  their intention to acquire
the  securities  for  investment  only  and not  with a view  to or for  sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates issued in such transactions.  All recipients had adequate
access,  through their  relationships with the Company, to information about the
Company.

Item 6.       Selected Financial Data

     The information called for by Item 6 is incorporated herein by reference to
page 10 of the  Registrant's  Annual Report to  Shareholders  for the year ended
December 31, 1996 (the "1996 Annual Report").


Item 7.       Management's Discussion and Analysis of Financial Condition
                and Results of Operations

     The information called for by Item 7 is incorporated herein by reference to
pages 11 through 15, inclusive, of the 1996 Annual Report.


Item 8.   Financial Statements and Supplementary Data

     The information called for by Item 8 is incorporated herein by reference to
pages 16 through 30, inclusive, of the 1996 Annual Report.

     With the exceptions of the  aforementioned  information  and the additional
information incorporated by reference in Parts II and IV hereof, the 1996 Annual
Report is not deemed to be filed as part of this report.


Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
          Financial Disclosure

         None.


Item 10.  Directors and Executive Officers of the Registrant

     The  information  required by Item 10 and Item 401 of Regulation  S-K as to
the  Directors  of the  Company,  and the  information  required  by Item 405 of
Regulation S-K, is incorporated herein by reference to the Company's  definitive
proxy statement dated April 8, 1997 to be filed with the Securities and Exchange
Commission  pursuant to Regulation 14A in connection  with the Company's  Annual
Meeting of  Shareholders  to be held on May 15, 1997 (the "Proxy Statement").


Item 11.  Executive Compensation

     The information  required by Item 11 is incorporated herein by reference to
the Proxy Statement, except for the sections entitled "Board Report on Executive
Compensation"  and  "Performance   Graph"  which  shall  not  be  deemed  to  be
incorporated herein.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information  required by Item 12 is incorporated herein by reference to
the Proxy Statement.


Item 13.  Certain Relationships and Related Transactions

     The information  required by Item 13 is incorporated herein by reference to
the Proxy Statement.


<PAGE>

                                       PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)      1.   Financial Statements:

              The following consolidated financial statements of the Company are
              included in Part II, Item 8 (which incorporates information by
              reference to the 1996 Annual Report):

                 Consolidated balance sheets as of December 31, 1996 and
                    December 31, 1995.

                 Consolidated  statements  of income and  retained earnings for
                    the years ended December 31, 1996, December 31, 1995 and
                    December 31, 1994.

                 Consolidated  statements  of cash flows for the years ended
                    December 31, 1996,  December 31, 1995 and December 31, 1994.

                 Notes to Consolidated Financial Statements and Independent
                    Auditors' Report.

         2.   Financial Statement Schedules:

                Independent Auditors' Report

         3.   Exhibits:  See Exhibit Index on pages 30 to 34.

              The  Registrant  hereby agrees to furnish the  Commission a copy
              of each of the indentures or other  instruments  defining the
              rights of security holders of the long-term debt securities of the
              Registrant and any of its  subsidiaries for which consolidated or
              unconsolidated financial statements are required to be filed.

(b)      Reports on Form 8-K:

         The Company filed no reports on Form 8-K during the quarter ended
         December 31, 1996.

 (c)     Refer to Item 14 (a) (3) above for Exhibits required by Item 601 of
         Regulation S-K.

(d)      Schedules  other  than set  forth in  response  to Item  14(a)(2) above
         for which provision is made in the applicable accounting regulations of
         the Securities and Exchange Commission are not required under the
         related instructions or are inapplicable and therefore have been
         omitted.


<PAGE>

                              TELCO COMMUNICATIONS GROUP, INC.

                                        EXHIBIT INDEX


Exhibit Number                Exhibit Description
--------------------------------------------------------------------------------
          *2.1 Share  Exchange  Agreement  between Telco  Communications  Group,
               Inc., Henry G. Luken, III, Bryan Rachlin, Michael Cheng and Kevin
               Yang dated as of June 1, 1996 (Tel  Labs,  Inc.,  Share  Exchange
               Agreement)
--------------------------------------------------------------------------------
          *2.2 Share Exchange Agreement between Telco Communications Group,
               Inc.,  Thomas  Cirrito,  Nicole Cirrito and Michael Cirrito
                dated as of April 1,  1996  (Long  Distance  Wholesale  Club
                Share Exchange Agreement)
--------------------------------------------------------------------------------
          *3.1 Restated Articles of Incorporation of Telco Communications Group,
               Inc.
--------------------------------------------------------------------------------
          *3.2  Amended and Restated Bylaws of Telco Communications Group, Inc.
------------------------------------------------------------- ------------------
          *4.1  Form of Common Stock Certificate of Telco Communications Group,
                Inc.
--------------------------------------------------------------------------------
          *10.1 Agreement  for  the  Provision  of  Billing  and  Collection
                Services between Telco Development  Group of Delaware,  Inc.
                and the Ameritech Companies dated July 1, 1995
--------------------------------------------------------------------------------
          *10.2 Agreement  for  the  Provision  of  Billing  and  Collection
                Services  between  the  Bell  Atlantic  Operating  Telephone
                Companies  and Telco  Development  Group of  Delaware,  Inc.
                dated June 10, 1994
--------------------------------------------------------------------------------
          *10.3 Clearinghouse  Billing  and  Collection  Services  Operating
                Contract between Telco Development  Group of Delaware,  Inc.
                and  Bell  South   Communications   dated  January  3,  1994
--------------------------------------------------------------------------------
          *10.4 Agreement for Billing  Services by Tel Labs, Inc. and Esprit
                Telecom dated December 29, 1995
--------------------------------------------------------------------------------
          *10.7 Agreement  between Nevada Bell and Telco  Development  Group
                of Delaware,  Inc. for Billing and Collection Services dated
                September 3, 1995
<PAGE>

Exhibit Number           Exhibit Description                       Page
---------------- ---------------------------------------------------------------
          *10.8 Agreement for  Interstate  Billing and  Collection  Services
                Agreement   between  New  England  Telephone  and  Telegroup
                Company and Telco Development Group of Delaware,  Inc. dated
                July 31, 1995
--------------------------------------------------------------------------------
          *10.9 Agreement for  Interstate  Billing and  Collection  Services
                between New York  Telephone  Company  and Telco  Development
                Group of Delaware, Inc. dated July 31, 1995
--------------------------------------------------------------------------------
        *~10.10 Agreement  for the  Provision  of Billing and  Collection
                Services between Pacific Bell and Telco Development Group of
                Delaware, Inc. dated July 12, 1996
------------------------------------------------------------ ------------------
        *~10.11 Casual Billing  Services  Agreement  between the Southern
                New England Telephone Company and Telco Development Group of
                Delaware, Inc. dated February 9, 1996
--------------------------------------------------------------------------------
         *10.12 Agreement  for the  Provision  of Billing  and  Collection
                Services  between  Southwestern  Bell Telephone  Company and
                Telco Development Group of Delaware, Inc. dated December 16,
                1994;  and  Amendment to the  Agreement for the Provision of
                Billing and Collection  Services between  Southwestern  Bell
                Telephone  Company and Telco  Development Group of Delaware,
                Inc. dated December 19, 1994
--------------------------------------------------------------------------------
       **~10.15 Agreement  for the  Provision of Billing and  Collection
                Services for Clearing Agents between US West, Inc. and Telco
                Development  Group of  Delaware,  Inc.  dated April 1, 1995;
                Amendment dated June 6, 1996
--------------------------------------------------------------------------------
        *~10.16 Standard  Agreement  for the  Provision  of Billing  and
                Collection  Services  between  United  Telephone  Company of
                Florida and Telco Development Group of Delaware,  Inc. dated
                October 19, 1994
--------------------------------------------------------------------------------
         *10.17 Service  Agreement  between IXC  Carrier,  Inc.  and Telco
                Communication Group, Inc. dated December 15, 1995
--------------------------------------------------------------------------------
         *10.18 Telco  Communications   Group,  Inc.  Wholesale  Customer
                Agreement  for  Special  International  Pricing  with Esprit
                Telecom dated February 21, 1996
--------------------------------------------------------------------------------
         *10.19 Telco Communications Group, Inc. Amended and Restated 1994
                Stock Option Plan
---------------- ---------------------------------------------------------------
         *10.20  Lease   Agreement   between  CPL   Properties  and  Telco
                 Communications   Group,   Inc.   effective   March  1,  1995
                 (Davenport, Iowa Switch Site)
--------------------------------------------------------------------------------
         *10.21  Lease  Agreement   between  Thomas  Kurschner  and  Telco
                 Communications  Group, Inc.  effective November 2, 1995 (Las
                 Vegas, Nevada Switch Site)
--------------------------------------------------------------------------------
         *10.22  Deed of Lease Agreement between Bricks in the Sticks, Ltd.
                 and Telco Communications Group, Inc. effective March 1, 1995
                 (Chattanooga, Tennessee Switch Site)
--------------------------------------------------------------------------------
         *10.23  Lease Agreement between The University of Texas System and
                 Telco  Communications  Group, Inc. effective August 22, 1994
                 (Austin, Texas Switch Site)
--------------------------------------------------------------------------------
         *10.24  Agreement of Lease between 13th and L Associates and Telco
                 Communications   Group,  Inc.   effective  August  25,  1994
                 (Washington, DC Switch Site)
--------------------------------------------------------------------------------
         *10.25  Deed of Lease Agreement between Bricks in the Sticks, Ltd.
                 and Tel Labs, Inc. effective July 1, 1994 (Corporate Office)
--------------------------------------------------------------------------------
         *10.26  Deed of Lease Agreement between Bricks in the Sticks, Ltd.
                 and Telco Communications Group, Inc. effective March 1, 1995
                 (Corporate Office)
--------------------------------------------------------------------------------
         *10.29  Equipment Leases between DSC Finance Corporation and Telco
                 Communications  Group,  Inc.  (Master Lease dated January 1,
                 1994 and Schedules A-P1)
-------------------------------------------------------------------------------
         *10.30  Credit  Agreement  between  Telco  Communications  Group,
                 Incorporated,  Signet  Bank and the  Banks  listed  therein,
                 dated as of January 24, 1996
-------------------------------------------------------------------------------
         *10.31  Employment Agreement between Telco  Communications  Group,
                 Inc. and Donald A. Burns dated as of July 10, 1996
--------------------------------------------------------------------------------
         *10.32  Employment Agreement between Telco  Communications  Group,
                 Inc. and Thomas J. Cirrito dated as of April 1, 1996
--------------------------------------------------------------------------------
         *10.33  Employment  and  Stock  Option  Agreement  between  Telco
                 Communications Group, Inc. and Stephen G. Canton dated as of
                 April 4, 1996
--------------------------------------------------------------------------------
         *10.34  Employment Agreement between Telco  Communications  Group,
                 Inc. and Bryan K. Rachlin dated as of July 10, 1996
--------------------------------------------------------------------------------
         *10.35  Employment Agreement between Telco  Communications  Group,
                 Inc. and Nicholas A. Merrick dated as of March 19, 1996
--------------------------------------------------------------------------------
         *10.36  Employment Agreement between Telco  Communications  Group,
                 Inc. and Janet D. Anastasi dated as of May 2, 1996
--------------------------------------------------------------------------------
         *10.37  Employment Agreement between Telco  Communications  Group,
                 Inc. and Natalie Marine-Street dated as of May 3, 1996
--------------------------------------------------------------------------------
         *10.38  Employment Agreement between Telco  Communications  Group,
                 Inc. and Mark J. Stodter dated as of May 2, 1996
--------------------------------------------------------------------------------
         *10.39  Employment  Agreement  between  Telco  Communications  and
                 Henry G. Luken, III dated as of July 10, 1996
--------------------------------------------------------------------------------
         *10.41  Form  of  Registration  Rights  Agreement  between  Telco
                 Communications  Group, Inc. and holders of certain shares of
                 common stock of the Company and certain  options to purchase
                 common stock
--------------------------------------------------------------------------------
         *10.42  Billing  and  Collection  Services  Agreement  between GTE
                 Telephone   Operations  and  Telco   Development   Group  of
                 Delaware, Inc. dated March 15, 1995
--------------------------------------------------------------------------------
          10.43  Credit Agreement  between Telco  Communications  Group, Inc.
                 and NationsBank of Texas, N.A. as Administrative  Lender and
                 Lenders, dated December 20, 1996
--------------------------------------------------------------------------------
          10.44  Carrier Agreement between AT&T Corp. and  Telco
                 Communications Group, Inc., dated December 23, 1996
--------------------------------------------------------------------------------
         ~10.45  Network  Purchase  Agreement  between  Advantis  and Telco
                 Network Services, Inc., dated March 11, 1997
--------------------------------------------------------------------------------
          10.46  Lease Agreement  between Telco  Communications  Group,  Inc.
                 and Frederic C. Stein,  dated May 1, 1996 (Fort  Lauderdale,
                 Florida Switch Site)
--------------------------------------------------------------------------------
          10.47  Lease Agreement  between Telco  Communications  Group,  Inc.
                 and Hudson  Telegraph  Associates,  dated September 26, 1996
                 (New York, New York Switch Site)
--------------------------------------------------------------------------------
          11.1   Schedule of Computation of Earnings Per Share
--------------------------------------------------------------------------------
          13.1   Portions  of the Telco  Communications  Group,  Inc.  Annual
                 Report to Shareholders for the year ended December 31, 1996
--------------------------------------------------------------------------------
          21.1   Subsidiaries of Telco Communications Group, Inc.
--------------------------------------------------------------------------------
          23.1   Independent Auditors' Consent
--------------------------------------------------------------------------------
          27.1   Financial Data Schedule
--------------------------------------------------------------------------------

 *    Incorporated  by reference  from the Company's  Registration Statement on
      Form S-1 (Commission File No. 333-05857)

 ~    Portions of this Exhibit have been omitted pursuant to a request for
      confidential treatment and filed separately with the Commission.

<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.

                                       TELCO COMMUNICATIONS GROUP, INC.

                                           /s/Donald A. Burns
                                       By: __________________________
                                           Donald A. Burns
                                           President and Chief Executive Officer
                                           March 28, 1997

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

Signature                                            Date

/s/Henry G. Luken, III
__________________                                   ________
Henry G. Luken, III
Chairman of the Board and Director


/s/Donald A. Burns
_____________________                                ________
Donald A. Burns
Vice Chairman of the Board, President,
Executive Officer and Director (Principal
Chief Executive Officer)


/s/Thomas J. Cirrito
_____________________                                ________
Thomas J. Cirrito
President of Consumer Division and Director


/s/Robert W. Ross
______________________                               ________
Robert W. Ross
Director


/s/Gary L. Nelson
______________________                               ________
Gary L. Nelson
Director


/s/Nicholas A. Merrick
______________________                               ________
Nicholas A. Merrick
Chief Financial Officer and Treasurer
(Principal Financial Officer)


/s/Janet A. Anastasi
______________________                               ________
Janet D. Anastasi
Vice President and Corporate Controller