<TABLE>
<CAPTION>
Selected Consolidated Financial Data 
Years Ended December 31,
<S>                                 <C>          <C>         <C>         <C> 
                                    1993(1)      1994        1995        1996
(in thousands, except per share
and per minute of use amounts)

Statement of Operations Data:
Revenues, net                     $ 1,135    $ 44,707   $ 215,376   $ 428,552
  Cost of services                    993      27,736     133,728     252,036
Gross margin                          142      16,971      81,648     176,516
  Selling, general and
    administrative                  1,310      12,018      55,936     125,575
  Depreciation and amortization        54         496       3,326       7,967
Operating income (loss)            (1,222)      4,457      22,386      42,974
  Interest expense                     25         897       2,952       3,515
  Other income (expense)               --          15         (92)        501
  Provision for income taxes           --       1,432       7,531      16,394
  Minority interest                    --         137       1,046         689
Net income (loss)                $ (1,247)   $  2,006   $  10,765    $ 22,877
Net income (loss) per share      $  (0.05)   $   0.07   $    0.38      $ 0.75
Weighted average number of
 shares outstanding
 (in thousands)                    26,077      26,884      28,285      30,533


Balance Sheet Data (at Period End):
Cash and cash equivalents        $    140    $    475       $ 937      25,373
Total assets                        2,051      33,533      87,124     210,596
Total debt (including capital
 lease obligations)                 1,559      18,884      44,411       3,301
Minority interest                     --          137       1,183          --
Shareholders' equity (deficit)       (376)      1,655      12,420     145,720

Other Operating Data:
Billed minutes of use                                   1,384,300   2,963,080
Revenue per billed minute of use                          $ 0.156     $ 0.145
Cost of services per billed minute of use                 $ 0.097     $ 0.085

(1) The Company commenced operations in November 1993.

</TABLE>

Forward-Looking Information

     Statements  in  this  report   concerning   future  results,  
performance,
achievements,  expectations or trends, if any, are  forward-looking 
statements.
Actual  results,  performance,  achievements,  events  or  trends  could 
differ
materially from those expressed or implied by such forward-looking statements
as
a result of known and unknown risks,  uncertainties  and other factors
including
those described below and those identified by the Company in the Company's
other
filings with the Securities and Exchange Commission.

Introduction

     Telco  Communications   Group,  Inc.  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  five
digit
Carrier  Identification  Code (CIC) 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 presubscribed 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.

     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.   Because  the   Company's   existing   customer  base  is 
primarily
residential,  the  majority of calls are  handled  during  off-peak  evening
and
weekend periods.  As of December 31, 1996, CSD had opened 22 sales offices in
13
states and employed approximately 220 sales personnel. For the fourth quarter
of
1996,  CSD  revenues  were  $9.3  million,   or  approximately   7.8%  of 
total
consolidated revenues.

     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 casual  calling  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.

     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.

     Future issues affecting the Company's operations for 1997 and beyond are
as
follows:

     Competitive  Factors.  The Company has observed new entrants and 
increased
competition in the Company's  dial around  segment.  Additionally,  although
the
basic rates of the largest long distance carriers  available to most
residential
customers  increased  during 1996,  the Company has also observed an increase
in
the number of promotional,  discounted ca lling plans available to long
distance
consumers.

     Regulatory  Changes.  The  operations  of the Company  will  continue to
be
affected by the ongoing events associated with the 1996  Telecommunications
Act.
Such  events  include  access  charge  reform  which  could  materially  
reduce
transmission costs for both the Company and other long distance  companies, 
the
entrance of the RBOCs into the long distance marketplace and the ability of
long
distance companies like Telco to begin marketing local telephone services.

     Availability  of  Transmission  Facilities.  The  Company  has  observed 
a
tightening in the market for the  availability of leased fiber optic 
facilities
connecting the Company's  switches.  The Company leases these  facilities 
under
multi-year  contracts  with three major  vendors and, to date,  has been able
to
secure the necessary facilities.

     Expansion of the Commercial  Sales Division.  The costs associated with
the
continuing  expansion of CSD are expected to reduce the  Company's net income
at
least through 1997. The Company expects that the revenue growth  associated
with
this division  will  represent a material  portion of the overall  growth of
the
Company.

     Integration  of Voice Network  Acquisition.  On March 11, 1997, the
Company
announced the proposed acquisition of certain voice network assets which
include
the capacity rights to 100,000 DS-3 miles of transmission capacity, 5 Nortel
DMS
250 switches and other associated  telecommunications  equipment. The ability
of
the Company to generate  adequate ca sh flow from this asset acquisition will
be
based on the integration of these network assets into Telco's  existing 
network
and the resale of surplus capacity to third party customers.

Results of Operations

     The following table sets forth for the periods  indicated certain
financial
data as a percentage of revenues:
<TABLE>
<CAPTION>
                                           Percentage of Revenues
                                           Year Ended December 31,

<S>                                       <C>     <C>     <C>     <C> 
                                          1993    1994    1995    1996

Revenues, net                           100.0%   100.0%  100.0%  100.0%
Cost of services                         87.5     62.0    62.1    58.8
Gross margin                             12.5     38.0    37.9    41.2
Operating expenses:
  Selling, general and administrative   115.3     26.9    26.0    29.3 
  Depreciation and amortization           4.8      1.1     1.5     1.9
Operating income                       (107.6)    10.0    10.4    10.0
Interest and other                        2.2      2.0     1.4     0.7

Income taxes                               --      3.2     3.5     3.8
Net income                            (109.8%)     4.5%    5.0%    5.3%
</TABLE>


1996 Compared to 1995

     Revenues.  Revenues  increased 99%, or $213.2 million,  from $215.4
million
for 1995 to $428.6  million  for 1996.  The  increase  in revenue  was due to
an
increase  in billed  customer  minutes  from  both the  Company's  Consumer 
and
Commercial  Sales Divisions  offset by a decline in revenue per billed minute
of
use. Total billed minutes of use were 2,963.1 million for 1996, a 114%
increase,
versus 1,384.3  million  minutes for 1995.  Revenue per minute of use was
$0.145
for 1996  versus  $0.156 per  minute of use for 1995.  This  revenue  per
minute
decrease was primarily  attributable to an increase in carrier revenue both as
a
percentage  of total  revenue  and in  aggregate,  which is a lower  revenue
per
minute of use product than the Company's other product lines.

     Revenues  for the Consumer  Division  were $405.7  million,  a 96%
increase
versus $206.9  million for 1995.  The Consumer  Division  expanded its
marketing
efforts  during 1996 into new states through both LDWC and Dial & Save, and
also
targeted its marketing efforts into many of its existing  geographical 
markets.
Revenues  for CDS,  which  consists  of  revenue  from  commercial  and 
carrier
customers,  were $22.1 million for 1996 versus $8.5 million for 1995, a 160%,
or
$13.6 million increase.  The total for both 1995 and for the first six months
of
1996 consists solely of carrier revenue.

     The Company  generated $0.8 million in revenue from its Tel Labs
subsidiary
for 1996,  all of which  occurred  after Telco's  acquisition of Tel Labs in
the
third quarter of 1996. The offsets to revenue  increased during 1996 compared
to
1995 both as a  percentage  of revenue  and in the  aggregate  due to 
increased
billed customer minutes and incre ases in revenue allowances, principally due
to
increases in revenues in  geographical  areas where LECs require higher
holdback
percentages.

     Cost of Services.  Cost of services increased 88%, or $118.3 million, 
from
$133.7 million for 1995 to $252.0 million for 1996. Approximately $101.8
million
of this increase was attributable to direct costs relating to LEC access
charges
and the Company's  transmission of on-net and off-net traffic,  all of which
was
partially  offset by a decrease in per minute costs. The remaining $16.5
million
increase was the result of higher  facilities  lease costs  associated  with
the
expanded  transmission  network and Tel Labs  expenses  offset by a $0.9
million
reduction  in  installation  charges.  The cost per  minute  for 1996 was
$0.085
versus $0.097 for 1995. The cost per minute decrease was largely the result of
a
higher  percentage of on-net traffic coupled with greater  network 
efficiencies
and improved off-net pricing.

     Gross Margin.  Gross margin  increased  116%, or $94.9 million,  from
$81.6
million for 1995 to $176.5 million for 1996, due to the reasons discussed
above.
As a percentage of revenues, gross margin increased from 37.9% for 1995 to
41.2%
for 1996.

     Selling,   General  and  Administrative  Expense.   Selling,   general 
and
administrative  expense increased $69.7 million, or 125%, from $55.9 million
for
1995 to $125.6  million for 1996.  Approximately  $11.4 million of this
increase
was  attributable  to the direct  expenses  of the  Commercial  Sales 
Division,
commenced  in June 1996.  Approximately  $31.0  million of the  increase was
the
result of higher Consumer Division marketing expenses for 1996 compared to
1995,
and the remaining  $27.3  million  increase was the result of higher LEC
billing
expenses,  customer service costs and other corporate general and
administrative
expense  generally  associated  with  increased  customer  minutes of use.  As
a
percentage of revenues, selling, general and administrative expense increased
to
29.3% for 1996 from 26.0% for 1995.

     Depreciation  and  Amortization  Expense.   Depreciation  and 
amortization
expense  increased by $4.7  million,  from $3.3 million for 1995 to $8.0
million
for 1996. As a percentage of revenues,  depreciation  and  amortization 
expense
increased to 1.9 % for 1996 from 1.5% for 1995.  The aggregate  increase in
this
expense was primarily attributable to increase d depreciation expense related
to
the  expansion of the  Company's  switch  network and  amortization  of
goodwill
associated  with  the Long  Distance  Wholesale  Club and Tel Labs 
acquisitions
during 1996.

     Interest  Expense.  Interest expense  increased by $0.5 million,  from
$3.0
million for 1995 to $3.5 million for 1996.  This  increase was due  primarily
to
increased borrowings and an increase in the Company's capital lease
obligations,
partially offset by the net proceeds  generated by the Company's  initial
public
offering  (IPO)  in  August  1996,  which   substantially   reduced 
outstanding
borrowings and capital lease obligations for the remainder of the year.

     Net Income.  Net income increased $12.1 million from $10.8 million for
1995
to net income of $22.9 million for 1996.


1995 Compared to 1994

     Revenues. Revenues increased 382%, or $170.7 million, from $44.7 million
in
1994 to $215.4  million in 1995.  This increase was due primarily to an
increase
in billed customer minutes of use from Consumer Division customers. During
1994,
the  Consumer   Division   marketed  dial  around  services  in  Florida,  
five
mid-Atlantic  states and the  District of Columbia.  During  1995,  the
Consumer
Division  expanded its mail  campaigns  into 21 additional  states and
conducted
remailings in certain states targeted during 1994. Dial & Save and Long
Distance
Wholesale  Club  products  were  jointly  marketed in two states and nine
states
during  1994 and  1995,  respectively,  and in the  District  of  Columbia. 
The
Company's  offsets to revenues  increased in the aggregate due to an increase
in
billed customer minutes.

     Cost of Services.  Cost of services increased 382%, or $106.0 million,
from
approximately  $27.7 million in 1994 to  approximately  $133.7  million in
1995.
Approximately  $93.4 million of this increase was  attributable  to direct
costs
relating to LEC access charges and from the Company's transmission of on-net
and
off-net traffic, all of which increased primarily as a result of the increase
in
the Company's  billed minutes of use.  Facilities  lease costs increased by
$8.9
million from $1.3 million in 1994 to $10.2  million in 1995 due to the
expansion
of the Company's transmission network. Installation expenses increased from
$0.5
million  in 1994 to $4.2  million  in 1995  primarily  as a result  of 
one-time
expenses  associated with provisioning  local network circuits at Company
switch
facilities  brought on-line during 1995. During 1995, the Company deployed
three
switches, in Austin, Texas, Chattanooga, Tennessee and Davenport, Iowa, while
in
1994 the Company deployed one switch in Washington, D.C.

     Gross Margin.  Gross margin  increased  381%, or $64.6 million,  from
$17.0
million in 1994 to $81.6 million in 1995, due to the reasons discussed above.
As
a percentage of revenues,  gross margin decreased from 38.0% in 1994 to 37.9%
in
1995.

     Selling,   General  and  Administrative  Expense.   Selling,   general 
and
administrative  expense increased 365%, or $43.9 million,  from $12.0 million
in
1994 to $55.9 million in 1995.  Approximately $28.3 million of this increase
was
due to increased mail marketing expenses as the Company expanded 
geographically
and  remailed to certain  existing  markets and to increased  LEC billing 
costs
which are  directly  related to the increase in the minutes of use. In
addition,
customer  service  expense  increased  $6.8 million  primarily as a result of
an
increase  in  customer  service  personnel  required  to service  the 
Company's
expanding  customer  base.  As a percentage  of revenues,  selling,  general
and
administrative  expense  decreased from 26.9% in 1994 to 26.0% in 1995
primarily
as a result of operating  efficiencies  associated with the Company's  growth
in
revenues.

     Depreciation  and  Amortization  Expense.   Depreciation  and 
amortization
expense increased by $2.8 million,  from $0.5 million in 1994 to $3.3 million
in
1995. As a percentage of revenues,  depreciation and amortization increased
from
1.1% in 1994 to 1.5% in 1995.  These  expenses were  primarily  attributable 
to
depreciation related to the expansion of the Company's switch network.

     Interest Expense. Interest expense increased $2.1 million from $0.9
million
in 1994 to $3.0 million in 1995.  This  increase  was due  primarily to
interest
expense  associated with borrowings  under the Credit Facility used primarily
to
fund working capital requirements and increases in capital leases outstanding
as
a result of the expansion of the Company's switch network.

     Net Income.  Net income increased $8.8 million from $2.0 million in 1994
to
$10.8 million in 1995.

Liquidity and Capital Resources

     The Company conducts its operations  through its direct and indirect
wholly
owned subsidiaries. There are no restrictions on the movement of cash within
the
consolidated  group,  and the Company's  discussion of its liquidity is based
on
the consolidated group. The Company measures its liquidity based on cash flow
as
reported in its Consolidated Statements of Cash Flows.

     On August 14, 1996 the Company  sold  4,681,000  shares of Common Stock
(of
which  825,000  shares  were sold on August  27,  1996 in  conjunction  with
the
underwriters'  exercise  of the  over-allotment  option)  in its  IPO.  The 
net
proceeds to the Company  (after  expenses) of  approximately  $60.0 million
were
used to repay existing indebtedness, including capital lease obligations and
the
outstanding  balance on the Company's  existing credit  facility.  The
remaining
proceeds,  coupled with the  Company's  cash and  borrowing  capacity  under
the
credit facility,  were used to fund working capital and capital expenditures
and
for general corporate purposes.

     Since  commencing  operations in 1993,  the Company has  experienced 
rapid
growth   requiring   substantial   investments  in  working   capital,  
capital
expenditures  and  mail  marketing   expenses.   Additionally,   start-up 
costs
associated  with the  formation  of CSD are  expected  to reduce  the 
Company's
consolidated  net income at least through 1997.  In December  1996,  the
Company
entered into a new credit  facility for  borrowings  up to $100 million (the
New
Credit  Facility).  Borrowings  under the New  Credit  Facility  are  subject
to
limitations  within  various  financial  covenants  and ratios  including 
Total
Leverage Ratio,  Interest Coverage Ratio and Current Ratio. The interest rate
on
the New Credit  Facility is based on the prevailing  Total Leverage Ratio not
to
exceed  2.5 times and ranges on a  Eurodollar  (LIBOR)  option  from a spread
of
0.75% to  1.625%,  and on a Base  (Prime)  Rate  option  from a spread  of 0%
to
0.625%.

     Net cash from operating activities increased $24.8 million from $0 for
1995
to $24.8  million for 1996.  The increase was largely the result of increases
in
net income and depreciation  and  amortization  expense offset by an increase
in
working capital accounts.  Net cash used for investing activities increased
$2.2
million  from  $9.8  million  for  1995 to $12.0  million  for  1996. 
Including
equipment acquired under capital leases, net cash used for investing 
activities
decreased  $5.6 million from $25.0  million for 1995 to $19.4  million for
1996.
The decrease was the result of reducing expenditures on the Company's
nationwide
transmission  network. Net cash from financing activities increased $1.3
million
from $10.3  million for 1995 to $11.6  million for 1996.  This  increase was
the
result of the  receipt of  proceeds  from the IPO offset by the use of 
proceeds
from the IPO to reduce the  outstanding  debt under  Company's  existing 
Credit
Facility and capital lease obligations.

     In  connection  with the  Company's  March  11,  1997  announcement  of
the
proposed  acquisition  of certain  voice network  assets for $170  million, 
the
Company has received a commitment for a $100 million  increase in the New
Credit
Facility,  bringing the total facility, upon completion of documentation and
the
satisfaction of the other requirement s stated in the bank's commitment 
letter,
to a total of $200 million.  The commitment calls for an increase in the
overall
interest costs of the New Credit  Facility  versus those  discussed  above. 
The
Company intends to utilize a portion of the $200 million facility along with
its
existing cash  balances,  to fund the purchase  price of the voice network
asset
acquisition.  There can be no assurance that the Company will be able to
satisfy
the requirements  stated in such commitment  letter necessary to obtain the
$100
million  increase in the New Credit  Facility  and, in such  circumstances, 
the
Company may be forced to seek other alternatives.

<PAGE>

To the Shareholders and Board of Directors of Telco
Communications Group, Inc.,

     We have  audited  the  accompanying  consolidated  balance  sheets of
Telco
Communications Group, Inc. and subsidiaries as of December 31, 1996 and 1995
and
the related consolidated statements of income and retained earnings, and of
cash
flows for each of the three years in the period ended  December 31, 1996. 
These
consolidated  financial  statements  are  the  responsibility  of the 
Company's
management.  Our  responsibility is to express an opinion on these 
consolidated
financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted 
auditing
standards.  Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements are free of
material
misstatement.  An audit includes examining, on a test basis, evidence
supporting
the amounts and disclosures in the financial statements.  An audit also
includes
assessing the  accounting  principles  used and  significant  estimates  made
by
management,  as well as evaluating the overall financial statement
presentation.
We believe that our audits provide a reasonable basis for our opinion.
   
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Telco Communications Group, Inc.
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
    
/s/Deloitte & Touche

Richmond, Virginia
February 7, 1997

<PAGE>
<TABLE>
Consolidated Balance Sheets
(In thousands, except share data)
December 31

<CAPTION>
<S>                                               <C>               <C> 
                                                 1995              1996
ASSETS
Current Assets
  Cash and cash equivalents                     $  937          $ 25,373
  Accounts receivable, trade (net of
    allowances of $3,771 and $7,972
    at December 31, 1995 and 1996,
    respectively)                               55,824            89,114
  Prepaid income taxes                             333             2,394
  Deferred income tax asset                        885               357
  Other                                          1,112             8,947
    Total current assets                        59,091           126,185

Property and Equipment
  Leasehold improvements                         1,148             2,189
  Network equipment                              4,534            34,749
  Office furniture                               1,958             5,474
  Network equipment under capital lease         19,290                --
  Network facilities under development           4,076             7,375
  Accumulated depreciation                      (3,479)          (10,121)
    Total property and equipment, net           27,527            39,666

Other Assets
  Goodwill                                         245            43,663
  Other assets                                     261             1,082
                                                   506            44,745
    Total Assets                              $ 87,124          $210,596

Liabilities and Shareholders' Equity
Current Liabilities
  Capital lease obligation, current portion     2,973                 681
  Excise taxes payable                          1,289               3,103
  Accounts payable                             15,303              21,062
  Accrued network access and
    transmission expense                        9,429              21,450
  Other accrued expenses                        1,322              12,670
  Deferred income taxes payable                    --               1,225
  Payable to related parties                      414                  --
      Total current liabilities                30,730              60,191

Long Term Liabilities
  Long-term debt                               28,262                  --
  Capital lease obligation, noncurrent         13,176               2,620
  Deferred income taxes                         1,353               2,065
       Total long term liabilities             42,791               4,685

Minority Interest                               1,183                   0

Commitments and Contingencies (Note 14)

Shareholders' Equity                               --                   --

  Common stock (no par value; 150,000,000
   shares authorized 32,754,869 shares
   outstanding)                                   896              111,309
  Preferred stock (15,000,000 shares
   authorized, unissued)                           --                   --
  Additional paid-in capital-accumulated
   deficit remaining upon termination
   of S-corporation election                   (1,247)              (1,247)
  Unrealized gain on marketable securities,
    net of tax                                     --                   10
  Retained earnings                            12,771               35,648
        Total shareholders' equity             12,420              145,720
        Total Liabilities and Shareholders'
          Equity                             $ 87,124            $ 210,596
</TABLE>

<PAGE>
<TABLE>
Consolidated Statements of Income and
   Retained Earnings
(in thousands, except per share data)
Years ended December 31
<CAPTION>
<S>                                             <C>         <C>         <C> 
                                                1994        1995        1996

Revenues, net                               $ 44,707    $215,376    $428,552
Cost of services                              27,736     133,728     252,036
Gross margin                                  16,971      81,648     176,516

Operating Expenses:

Selling, general and administrative           12,018      55,936     125,575
Depreciation and amortization                    496       3,326       7,967
        Total operating expenses              12,514      59,262     133,542

Operating income                               4,457      22,386      42,974

Interest expense                                 897       2,952       3,515
Other income (expense)                            15         (92)        501

Income taxes:
   Current                                     1,075       7,420      14,175
   Deferred                                      357         111       2,219   

 Total income taxes                            1,432       7,531      16,394

Minority interest                                137       1,046         689

Net income                                     2,006      10,765      22,877
Retained earnings (deficit), beginning
  of period                                   (1,247)      2,006      12,771
Conversion of S-Corporation tax status         1,247          --          --
Retained earnings, end of period             $ 2,006    $ 12,771    $ 35,648

Net income per common and common
   equivalent share                           $ 0.07      $ 0.38      $ 0.75

Average common and common equivalent          26,884      28,285      30,533
    shares
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31
<CAPTION>
<S>                                            <C>         <C>         <C> 
                                               1994        1995        1996

Cash Flows From (Used For) Operations 
 Net income                                 $ 2,006     $ 10,765    $ 22,877

Adjustments to reconcile net income to
 net cash from (used for) operating
 activities:
  Depreciation and amortization                 496        3,326       7,968
  Minority interest                             137        1,046         689
  Loss on disposal of fixed assets               --          110         526
  Deferred income taxes                         357          123       2,465
Change in current assets and liabilities:
  Trade accounts receivable                 (24,115)     (30,838)    (33,290)
  Prepaid and other assets                   (1,617)         514      (6,964)
  Accounts payable                            1,300       13,828       7,158
  Accrued expenses                            8,796        2,172      23,369
  Income taxes payable                          741       (1,075)         --
     Net cash from (used for)               (11,899)         (29)     24,798
      operating activities

Cash Flows Used For Investing
 Activities:
 Equipment purchases                         (1,301)      (9,815)    (11,987)
 Investments, net of cash acquired               (8)          --          --
     Net cash from (used for)
      investing activities                   (1,309)      (9,815)    (11,987)

Cash Flows From Financing
 Activities:
 Proceeds from the line of credit            29,127       28,262          --
 Payments on the line of credit             (13,759)     (15,367)    (28,262)
 Payments on capital leases                  (1,267)      (2,376)    (20,281)
 Payments on short-term debt                   (583)        (213)         --
 Proceeds from contributed capital               50           --          --
 Repurchase of common shares                    (25)          --          --
 Proceeds from sale of options                   --           --         256
 Proceeds from sale of stock                     --           --      59,912
      Net cash from financing activities     13,543       10,306      11,625

Increase in Cash                                335          462      24,436
Cash, beginning of the period                   140          475         937
Cash, end of the period                     $   475      $   937      25,373
</TABLE>
<PAGE>

1. Nature of the Business and Significant Accounting Policies

     Nature of Operations-The  Company is a switch-based long distance
telephone
company headquartered in Chantilly,  Virginia.  The Company principally
provides
service to residential and commercial customers in 48 states and the District
of
Columbia.

Significant Accounting Policies:

     Basis of  Consolidation-The  consolidated  financial statements include
the
accounts of Telco  Communications  Group,  Inc. and its wholly owned Dial &
Save
subsidiaries as well as Long Distance Wholesale Club, Telco Development Group
of
Delaware, Inc. and Tel Labs, Inc. (collectively,  the Company). All
intercompany
transactions and accounts have been e liminated in consolidation (see Note 3).

     Revenue  Recognition-Revenue is recorded when service is rendered, which
is
measured  when a long  distance  call is  completed  and is  recorded  net of
an
allowance for revenues which the Company  estimates will ultimately be
refunded,
rebated, uncollectible or unbillable.

     Sales,   Advertising  and  Related  Marketing  Expenses-Costs  incurred 
in
connection with sales,  advertising  and marketing  activities are recognized
in
the period in which they are incurred.  Costs incurred in advance of
utilization
in sales,  advertising  or marketing  activity are  recognized as prepaid
assets
until such activity  occurs.  The Company had re corded prepaid  advertising
and
mail  marketing  costs of  $1,055,414,  $377,745 and  $1,681,898 at December
31,
1994,  1995  and  1996,  respectively.   These  expenditures  were  utilized 
in
promotional  activities and mailings in subsequent  periods and were expensed
in
the periods in which the items were mailed.  The Company defers the 
recognition
of certain sales  commissions  paid pursuant to long-term  customer 
commitments
(one year or greater) and  recognizes  the expense for the  commissions  over
an
estimated time in which the commissions are earned.  All other sales
commissions
are expensed when  incurred.  As of December 31, 1996,  the Company had
recorded
prepaid commissions of $737,987.

     Cash and Cash  Equivalents-For  the purposes of reporting  cash flows, 
the
Company considers all highly liquid instruments with original maturities of
less
than three months to be cash equivalents.

     Accounts Receivable-Accounts receivable principally consists of amounts
due
from customers. The Company contracts with Local Exchange Carriers (LECs), or
an
authorized  clearinghouse,  to bill and collect from its residential 
customers.
The fees vary by LEC.

     Marketable Securities-Marketable securities are classified as available
for
sale. These are reported at fair value with unrealized gains and losses
reported
in shareholders' equity, net of tax.

     Property  and  Depreciation-Property,  plant and  equipment  is recorded
it
cost.  Depreciation  is computed  using the  straight-line  method on 
estimated
useful lives (or lease terms, if shorter for facilities under capital leases
and
leasehold improvements) of five years.  Expenditures for maintenance and
repairs
are  charged to expense as  incurred  whereas  expenditures  for  additions 
and
replacements are capitalized.  The cost and related accumulated  depreciation
of
assets sold or  otherwise  disposed  of during the period are  removed  from
the
accounts. Any gain or loss is reflected in the year of disposal.

     Income  Taxes-Income taxes are provided for the tax effects of
transactions
reported in the  financial  statements  and consist of taxes  currently  due
and
deferred taxes.  Deferred taxes are recognized for differences between the
basis
of assets and liabilities for financial statement and income tax purposes.

     Excise Taxes  Payable-Excise  taxes payable  represent sales and excise
tax
amounts collected which are subsequently remitted to taxing authorities.

     Reclassification-Certain   amounts  in  the  1994  and  1995  
consolidated
financial statements have been reclassified to conform to the 1996
presentation.

     Use of Estimates-The preparation of financial statements in conformity
with
generally accepted  accounting  principles requires management to make
estimates
and  assumptions  that affect the reported  amounts of assets and liabilities
at
the date of the financial  statements  and the reported  amounts of revenues
and
expenses  during the reporting  period.  Actual  results could differ from
those
estimates.

     Net Income Per Share-Net  Income per share is based on the weighted
average
number of shares of common stock and common stock equivalent shares 
outstanding
using the treasury stock method.  Pursuant to Securities and Exchange
Commission
requirements, common and common equivalent shares issued during the
twelve-month
period  prior to the  initial  filing  of the  Company's  public  offering 
were
included  in the  calculation  as if  they  were  outstanding  for  all 
periods
presented using the treasury stock method,  based on an estimated initial
public
offering price of $15.

     Long-Lived Assets,  Identifiable  Intangibles and Goodwill-The  Company
has
recorded  goodwill and certain  identified  intangibles  in connection  with
its
acquisitions  of Long  Distance  Wholesale  Club,  Tel  Labs  and Dial & Save
of
Pennsylvania.  These  assets are  amortized  over  periods  ranging from 5 to
35
years. Telco reviews long-lived assets, certain identifiable  intangibles, 
and
goodwill pertaining to those assets for impairment whenever events or changes
in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not 
be
recoverable. In performing the review for recoverability,  the Company
estimates
the  future  cash  flows  expected  to result  from the use of the asset and
its
eventual dispos ition. If the sum of the expected future cash flows is less
than
the carrying amount of the asset, an impairment loss is recognized.

     Stock Based  Compensation-The  Company,  as permitted  by the  Statement
of
Financial   Accounting   Standards   No.  123,   'Accounting   for  
Stock-Based
Compensation'  (SFAS No. 123), has chosen to continue to account for stock
based
compensation   using  the  intrinsic  value  method   prescribed  in 
Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to 
Employees."
Accordingly,  compensation  cost for stock options is measured as the excess,
if
any, of the quoted market price of the Company's stock at the date of grant
over
the amount an employee  must pay to acquire  the stock.  The Company has
adopted
the disclosure requirements of SFAS No. 123 (see Note 9).

2. Initial Public Offering

     In August 1996, a total of 6,325,000  shares of the Company's common
stock,
no par value (the Common Shares),  were sold in an initial public offering
(IPO)
at $14 per share. Certain selling 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.

3. Business Combinations

     Long Distance Wholesale  Club-Pursuant to an agreement dated April 1,
1996,
the Company acquired the remaining minority interest in LDWC in a transaction
in
which all of the remaining  LDWC shares were  exchanged for a total of
5,102,125
shares of the Company's  common stock and LDWC became a wholly owned 
subsidiary
of the Company.  In connection with such  transaction,  all outstanding 
options
under the LDWC stock option plan were converted into options to purchase a
total
of 291,842 shares of common stock under the Company's  Stock Option Plan and
the
LDWC stock option plan was terminated.

     In June  1995,  the  Company  exercised  its  option to  convert a
$250,000
short-term  note  receivable  from its  majority-owned  subsidiary Long
Distance
Wholesale Club to equity in that entity. 3.046 shares of Long Distance
Wholesale
Club common  stock were issued in the  transaction,  resulting in an increase
in
the Company's ownership interest from 55% to 55.55%.

     Tel Labs,  Inc.- Pursuant to the Share Exchange  Agreement dated as of
June
1, 1996 and concurrent  with the completion of the IPO, Tel Labs became a
wholly
owned  subsidiary  of the  Company,  and the Tel Labs  shareholders  received
an
aggregate of 593,334 shares of the Company+s common stock in exchange for all
of
their shares in Tel Labs. As a result of the Tel Labs share  exchange 
described
above, the remaining  minority  interest in Telco Development Group of
Delaware,
Inc. was acquired. (see Note 4)

     The following  represents  the results of operations on a proforma basis
as
though the LDWC and Tel Labs  combinations  had occurred at the beginning of
the
respective periods presented:
<TABLE>
<CAPTION>
<S>                                                      <C>           <C> 
                                                         1995          1996
(in thousands)
Revenues, net                                       $ 217,011     $ 430,434
Net income                                             10,688        23,144
Net income per share                                $     .37     $     .76
</TABLE>

4. Related Party Transactions

     The Company  leases  office and switch site  facilities  from Bricks In
The
Sticks,  Ltd.,  which is  controlled  by the  Company's  Chairman  who is also
a
shareholder  of the Company.  The Company paid total rents of $63,500, 
$179,420
and $221,868 for these  facilities,  for the years ended December 31, 1994,
1995
and 1996, respectively.

     Total annual future  minimum  operating  lease  payments due to the
related
party for the above lease are as follows for the years ending December 31:

                1997                                      $ 251,981
                1998                                        265,127
                1999                                        213,669
                2000                                         13,913
                2001                                          2,539

     The Company  purchased data  processing  services for call  translation
and
rating from Tel Labs, which prior to its acquisition by Telco in August 1996
was
controlled by the Company's Chairman. The Company paid $155,000, $1,260,000,
and
$751,382  for these  services for the years ended  December  31, 1994,  1995
and
1996,  respectively.  Concurrent with the Company's initial public offering,
Tel
Labs became a wholly owned subsidiary of Telco (see Note 3).
 
     The Company  purchased  computer  equipment and support until May 1996
from
Telco Development Group, Inc. which is controlled by the Company's Chairman,
who
is also a shareholder of the Company.  The Company paid  $229,100,  $779,918
and
$552,424  for these  services for the years ended  December  31, 1994,  1995
and
1996, respectively.

     A non-management shareholder of the Company also holds a minority
ownership
interest in an international long distance services provider. This
international
provider  and the  Company  purchase  transmission  services  from  one 
another
pursuant to service agreements.


5. Allowances
 
     Changes in the  allowance  for  unbillable  or  uncollectible  accounts
and
billing services fees were as follows at December 31:
<TABLE>
<CAPTION>
<S>                                      <C>            <C>              <C> 
                                         1994           1995             1996

Balance at the beginning of year  $    59,763    $ 1,078,442      $ 3,771,413
Provision charged to operations     2,545,350     11,517,017       22,525,369
Write-offs, net of recoveries      (1,526,671)    (8,824,046)     (18,324,678)
Balance at the end of year        $ 1,078,442    $ 3,771,413      $ 7,972,104
</TABLE>

     Amounts  reducing  gross  revenues  as a result of  refunds,  rebates, 
and
unbilled or uncollectible revenue totaled $2,625,451, $9,143,602 and
$23,045,788
for the years ended 1994, 1995 and 1996, respectively.

6. Long Term and Other Debt

     On December 27, 1996,  the Company  entered into a credit  agreement with
a
group of banks  under  which the  company  may  borrow up to  $100,000,000 
(the
Facility).  The Facility  expires on December 27, 1999. The interest rate on
the
Facility is determined  either at a Prime Rate or an Eurodollar  (LIBOR) 
option
based on the Company's  prevailing  total  leverage ratio as defined in the
loan
agreement.  The applicable  margin on the Prime Rate is from 0% to 0.625% and
on
the Eurodollar Rate from 0.75% to 1.625%. The Facility is secured by a pledge
of
stock of all the Company's subsidiaries and a negative pledge of its assets.
The
Facility contains certain financial  covenants which prescribe certain
leverage,
interest  coverage and working  capital ratios as well as limitations on
capital
expenditures.  There were no  borrowings  under the  Facility as of December
31,
1996.

     As of December 31, 1995 the long term debt consisted of a $25,000,000 
line
of credit,  plus interim  financing of  $10,000,000.  The credit  agreement
also
included a warrant  agreement which was exercised  concurrent with the
Company's
IPO (see note 11).  Also  concurrent  with the IPO,  the  Company  utilized 
the
proceeds  from the IPO to reduce the line of credit.  On January 24,  1996, 
the
Company entered into a two year credit  agreement with a group of banks
totaling
$45,000,000.  On March 20,  1996,  the credit  agreement  was amended to
provide
$20,000,000  of  additional  financing.  The  credit  agreement  was  secured
by
substantially  all of the Company's  assets and required the Company to
maintain
certain financial ratios,  restricted the payment of dividends, and required
all
subsidiary companies' stock to be pledged as collateral.  As a result of the
new
financing in January and March 1996,  $28,261,527 was  reclassified to long
term
debt at December 31, 1995.

7. Obligations Under Capital and Operating Leases

     The Company leases certain equipment under capital leases. Accordingly,
the
Company has capitalized such equipment in the amount of $4,819,099, 
$22,214,849
and $4,886,175 less accumulated  depreciation of $412,372,  $2,587,847 and $
-0-
as of December 31, 1994, 1995 and 1996, respectively. At December 31, 1996,
100%
of such  equipment  was leased from one vendor.  Total  equipment  under
capital
leases  includes  $1,685,000,  $2,925,000 and  $4,886,175  classified as
network
facilities  under  development,   as  of  December  31,  1994,  1995  and 
1996,
respectively.

     During  September and October of 1996, the Company  utilized  proceeds
from
the IPO to retire $20,177,000 in capital lease obligations.

     Future  minimum lease  payments for assets under capital leases at
December
31, 1996 are as follows:

                    1997                                   $ 720,131
                    1998                                     823,006 
                    1999                                     823,007     
                    2000                                     823,007 
                    2001                                     720,131

                    Thereafter                               102,876 
                    Total minimum payments                 4,012,158
                    Imputed interest                        (711,426)
                    Net obligation                         3,300,732
                    Current portion                          681,000
                    Capital lease obligation, noncurrent $ 2,619,732

 
     In  addition  to  operating  leasing  activities  discussed  in Note 4,
the
Company  leases switch sites and office space in various  cities  throughout
the
United States.  The total minimum rental  commitment as of December 31, 1996
due
in future years is as follows:

     Years ending December 31,
             1997                                       $  718,875
             1998                                          718,465
             1999                                          617,454
             2000                                          362,818
             2001                                           49,760

     Total rent expense  under these  leases was $68,809,  $206,534 and
$614,256
for the years ended December 31, 1994, 1995 and 1996, respectively.

8. Income Taxes

     The Company accounts for income taxes using the liability  method, 
whereby
deferred  tax  liabilities  and assets  are  determined  based on the 
temporary
differences  between  the  financial  statements  and tax  bases of  assets 
and
liabilities by applying  enacted  statutory tax rates applicable to future
years
in which the differences are expected to reverse.

     Significant  components  of income taxes are as follows for the years
ended
December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
<S>                                         <C>           <C>            <C> 
                                            1994          1995           1996
Current:
   Federal                            $  822,612    $6,023,084    $11,618,476
   State                                 252,225     1,397,387      2,556,995
       Total Current                  $1,074,837    $7,420,471    $14,175,471

Deferred:
    Federal                           $  320,589      $ 91,780     $1,878,830
    State                                 36,200        19,341        339,744
       Total Deferred                 $  356,789     $ 111,121     $2,218,574
       
</TABLE>
     Temporary  differences  which give rise to  significant  components  of
the
Company's  deferred tax  liabilities and assets for the years ended December
31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
<S>                                                     <C>             <C> 
                                                        1995            1996

Deferred Tax Liabilities (current):
Bad debts-non-accrual method                       $      --     $(1,035,505)
Other                                                     --        (189,652)
                                                          --      (1,225,157)

Deferred Tax Liabilities (non-current):
Book over tax basis in property, plant and
equipment                                         (1,161,939)     (1,726,877)
Other                                               (191,443)       (338,802)
                                                  (1,353,382)     (2,065,679)

Deferred Tax Assets (current):
Bad debts-non-accrual method                         580,643              --
Other                                                304,126         357,212
                                                     884,769         357,212   
                     
Deferred Tax Liability, net                       $ (468,613)    $(2,933,624)
</TABLE>
     No  valuation  allowance  has  been  recorded  for the  realization  of
the
deferred  tax asset  resulting  from the  temporary  differences  as 
management
believes that it will, more likely than not, be able to realize the deferred
tax
asset.

     Reconciliation  of income taxes computed at the federal  statutory tax
rate
to actual  income tax expense for the years ended  December 31,  1994,  1995
and
1996 are as follows:
<TABLE>
<CAPTION>
<S>                                         <C>            <C>           <C> 
                                            1994           1995          1996

Federal Statutory Rate                     34.00%         35.00%        35.00%
Effect of:
   State taxes-net of Federal benefit       6.23           4.76          4.66%
   Other                                    1.42           1.40          2.09%
Income Tax Expense                         41.65%         41.16%        41.75%
</TABLE>

9. Incentive Stock Options

     On July 1, 1994,  the Company  adopted a stock plan which  provides for
the
granting of one or any  combination  of incentive  stock  options, 
nonqualified
stock options,  restricted stock awards and bargain  purchases of Company
stock.
In  April  1996,  the  Board  of  Directors  of  the  Company  adopted  and 
the
shareholders  of the  Company  approved  the Telco  Communications  Group, 
Inc.
Amended and Restated 1994 Stock Option Plan, (the "Plan") which provides for
the
grant  to  officers,  key  employees  and  directors  of  the  Company  and 
its
subsidiaries  of both "incentive  stock options"  within the meaning of
Section
422 of the Internal Revenue Code of 1986, as amended, and stock options that
are
non-qualified  for federal  income tax purposes.  The total number of shares
for
which  options may be granted  pursuant  to the Plan and the  maximum  number
of
shares for which  options  may be granted  to any  person is  7,500,000 
shares,
subject   to  certain   adjustments   reflecting   changes   in  the  
Company's
capitalization.  The  Company  has adopted  the  disclosure-only  provisions 
of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based
Compensation".  Accordingly,  no  compensation  cost has been recognized for
the
Plan. Had  compensation  cost for the Company's Plan been determined on the
fair
value at the grant date for awards in 1996  consistent  with the  provisions 
of
SFAS No. 123,  the  Company's  net income and earnings per share would have
been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S>                                                  <C>            <C> 
                                                     1995           1996

Net income - as reported                     $ 10,764,912    $22,876,735
Net income - pro forma                       $ 10,734,973    $22,125,831
Earnings per share - as reported             $       0.38    $      0.75
Earnings per share - pro forma               $       0.38    $      0.72
</TABLE>

     The fair value of each option grant is estimated on the date of grant
using
the  Black-Scholes  option-pricing  model with the  following  weighted 
average
assumptions used for grants in the following periods:
<TABLE>
<CAPTION>
<S>                                   <C>      <C>             <C>           
                                      1995     1996(pre-IPO)   1996(post-IPO)

Expected lives                      5 years     5 years         5 years
Expected volatility                 Near 0%     Near 0%            110%
Dividend yield                           0%          0%              0%
Risk-free interest rate              6.383%      6.175%          6.175%
</TABLE>
    Information regarding the Plan for 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
<S>                          <C>          <C>                  <C> 
                             1994         1995                 1996
                                              Weighted-            Weighted-
                                               Average              Average
                                              Exercise             Exercise
                            Shares    Shares    Price     Shares     Price
Options outstanding,
  beginning of year           --    1,633,487   $1.22    2,137,829    $0.54
Options exercised             --           --   $0.80     (878,151)   $0.80
Options granted          1,633,487    504,342   $2.61    2,482,000   $10.55
Options outstanding,
  end of year            1,633,487  2,137,829   $1.54    3,741,678    $7.69
Option price range
  at end of year          $0.31 to   $0.31 to             $0.67 to
                             $1.85      $3.55               $18.75
Option price range
  for exercised shares                                    $0.31 to 
                                                             $3.55
Options available for
  grant at end of year   5,866,513   5,362,171            2,880,171
Weighted-average fair
  value of options,
  granted during the year                $0.70                $6.09
</TABLE>

     The following table summarizes  information about fixed price stock
options
outstanding at December  31,  1996:

                         Options  Outstanding          Options  Exercisable
                         --------------------          --------------------
                               Weighted-
                               Average    Weighted-                   
Weighted-
                     Number    Remaining  Average        Number        
Average
                  Outstanding Contractual Exercise     Exercisable    
Exercise
Exercise Price    at 12/31/96    life      Price       at 12/31/96      Price

$0.67               109,101    8.0 years   $0.67         109,101        $0.67
$1.76 to $1.85      803,080    7.9 years   $1.78         803,080        $1.78
$2.51 to $3.55      347,497    8.7 years   $2.56         171,111        $3.01
$7.53             1,487,500    9.3 years   $7.53              --           --
$14.00 to $18.75    994,500    9.7 years   $15.08             --           --
Total             3,741,678                            1,083,292


10. Supplemental Cash Flow Information

     The following  represents  supplemental cash flow information for the
years
ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
<S>                                        <C>             <C>            <C> 
                                           1994            1995           1996
Cash paid for:
  Interest                            $ 656,958     $ 2,939,472    $ 3,324,870
  Income taxes                          336,598       8,223,750     10,611,427
Non-cash investing and financing
 activities:
  Conversion of note receivable
    to equity                                --         250,000             --
  Equipment purchased through
    capital leases                    2,821,353      15,220,222      7,433,469
Business Combination:
  Fair value of assets acquired       1,025,533              --     47,388,826
  Stock issued                               --              --   
(46,629,000)
  Liabilities assumed                  (855,173)             --      
(759,826)
  Cash paid for common stock         $  170,360        $     --     $       --

</TABLE>

11. Capital Stock
                                            Accumulated Deficit
                                               Remaining Upon 
                                               Termination of  Unrealized
Gains
                             Shares    Common   S-Corporation   On Securities
                          Outstanding   Stock     Election      Held For Sale
                                            (in thousands)

Balance December 31, 1995:   20,864  $   896     $ (1,247)            --
  Issuance of common shares   5,317   59,912           --             --
  Loans to option holders              (584)           --             --
  Purchase of subsidiary      5,696   47,725           --             --
  Proceeds from exercise
    of options                  878      840           --             --
  Tax benefit from net
    warrant activity             --    2,520           --             --
  Unrealized gain on marketable
    securities                   --       --           --           $ 10
  Net income                     --       --           --             --

Balance December 31, 1996:   32,755 $111,309     $ (1,247)          $ 10


     Stock Split-On June 12, 1996,  the  shareholders  and directors  executed
a
joint consent in lieu of a meeting.  The joint consent  provided that 
effective
immediately prior to the completion of the Company's IPO, the Company declared
a
425 to 1 stock split to  shareholders  of record on that date. Per share
amounts
in the  accompanying  financial  statements and footnotes have been adjusted
for
the split.

     Preferred Stock-The Company has authorized but not issued 15,000,000
shares
of Preferred Stock. Such shares may be issued in one or more series with
rights,
designations, preferences,  qualifications,  limitations and restrictions as
may
be authorized by the Board of Directors of the Company.

     Warrants-As part of the consideration for establishing the Company's
credit
facility in June 1994,  the Company  issued to Signet  Media  Capital  Group, 
a
division of Signet Bank, the Signet Warrant to acquire 2% of the common stock
of
the Company on a fully diluted  basis.  The exercise price for the warrant was
a
nominal  price which was  negotiated  at the time the Company  entered  into
the
credit agreement.  Concurrent with the Company's IPO, Signet Media Capital
Group
exercised the Signet Warrant in full for 636,158 shares of common stock and
sold
all shares of common stock issuable upon exercise of such warrant in the IPO.

     Shareholder Loans-As of December 31, 1996 the Company had outstanding
loans
to  shareholders  in the amount of $584,147.  The loans were made in 
connection
with the  concurrent  exercise  of  options  to  acquire  818,773  shares of
the
Company's  common  stock.  As a result,  such loans are  recorded  as a
separate
component  of  stockholders'  equity.  Each of the loans were made at the
lowest
interest  rate  permitted by law and either will become due and payable upon
the
earlier of three years from the date of the loan; or three days after the
shares
purchased  from the  exercised  options are sold; or due and payable the day
the
shares purchased upon exercise of the options are marginable.

12. Employee Benefit Plans

     The Company  implemented a 401(k) pension plan in December 1996. 
Employees
are  eligible  to  participate  in the plan if they  have been  employed  by
the
Company for six months. Generally,  employees can defer up to 15% of their
gross
bi-weekly  salary into the plan. The Company's  contribution is to be
determined
annually  by the  Board of  Directors.  In 1995 the  Company's  subsidiary 
Long
Distance  Wholesale Club implemented a 401(k) pension plan.  Concurrent with
the
formation of the Company's plan , no more  contributions by the employees or
the
employer  will be made to the LDWC plan.  The  Company  contributed  $11,781
and
$65,605 to the plan for the years ended December 31, 1995 and 1996.

13. Deferred Compensation Plan

     The Company,  through its wholly owned subsidiary LDWC, provided a
deferred
compensation  plan  for  one of its  officers.  The  plan  provided  for 
annual
elections  to be made by the officer of deferral  amounts,  such  deferral to
be
made only from  compensation  amounts  earned and  otherwise  payable.  The
plan
required  funding of the deferred  compensation  amount  equal to the 
officer's
deferral  plus  interest at an annual rate that was  determined  by the Board
of
Directors from time to time. The Company  recognized expense of $257,661 in
1995
and $274,506 in 1996 related to this  agreement.  Amounts  funded by the
Company
were $215,877 in 1995 and $363,636 in 1996.

14. Commitments and Contingencies

     The  Company is a party  from time to time to  litigation  in the 
ordinary
course of business  including  employment related  litigation.  No provision
has
been reflected in the  accompanying  financial  statements  for any 
litigation.
Based  upon  information  presently  available,  management  believes  the
final
disposition  of  these  items  will  not  have an  adverse  material  effect 
on
operations or the financial position of the Company.

     During 1996, the Company entered into employment and consulting 
agreements
with certain members of management.  The agreements provide for the employees
to
receive amounts not less than specified base annual  salaries  through the
terms
of the  agreements,  which  have  terms  of one to five  years.  Certain  of
the
contracts also include non-competition covenants and options to purchase
shares
of the Company's common stock.

15. Fair Value of Financial Instruments

     The carrying  amounts of cash,  accounts  receivable,  accounts payable
and
accrued  expenses  approximate fair value because of the short maturity of
these
items.

     The  carrying  amounts of notes  payable  and debt  issued  pursuant to
the
Company's  bank credit  agreements  approximate  fair value because the
interest
rates on these  instruments  change with market  interest rates.

16.  Quarterly Operating Results (Unaudited)

     The following  amounts reflect all  adjustments,  consisting of only
normal
recurring accruals (except as disclosed below),  necessary in the opinion of
the
Company's  management  for a fair  statement  of the  results  for  the 
interim
periods.                                               
                                                         1995
                                  First       Second      Third       Fourth
                                 Quarter      Quarter     Quarter     Quarter

Total revenues                $45,276,969  $47,317,674  $58,341,464
$64,439,376
Earnings (loss)
   before income taxes          5,863,870    6,122,628    6,526,647   
(216,640)
Net earnings (loss)             3,538,031    3,735,088    3,766,887   
(275,094)
Net earnings (loss) per
  common and common equivalent
  share                       $      0.13  $      0.13   $     0.13 $    
(0.01)


                                                   1996
                              First       Second          Third       Fourth
                             Quarter      Quarter        Quarter     Quarter

Total revenues             $91,927,548  $104,078,360  $113,768,316 
$118,778,212
Earnings before income
  taxes                      6,415,231     8,727,375    10,412,800   
13,715,374
Net earnings                 3,280,690     5,185,541     6,165,852    
8,244,651
Net earnings per common
 and common equivalent
 share                     $      0.12  $       0.18  $       0.20  $      
0.24

     The  Company's  results  for the fourth  quarter of 1995 were  affected 
by
increased  allowances,  significant  switch  installation  charges,  and  end
of
quarter  mail  marketing  expenses  materially  exceeding  those of any
previous
quarter.

17. Subsequent Events (Unaudited)

     On March 11, 1997, the Company signed a definitive asset purchase
agreement
to acquire the voice networks of Advantis,  a data and voice network
partnership
of  International  Business  Machines  Corp.  and Sears,  Roebuck  and Co., 
for
approximately  $170 million in cash. The Advantis  assets include service
rights
to  approximately  100,000  network miles of DS-3 fiber optic capacity  (under
a
long term  lease),  five Nortel DMS 250  switches  and other  ancillary 
network
equipment.  In  conjunction  with the  agreement,  the  Company  has  received
a
commitment  for an increase in its credit  facility  to $200  million.  The
bank
financing  commitment  calls for an increase in the prevailing  interest 
costs,
other fees and related items.  The transaction is conditioned  upon, among
other
things,   receiving  governmental  approval  under   Hart-Scott-Rodino  Act. 
It
anticipated  that the acquisition will be completed during the second quarter
of
1997.