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

                             FORM 10-Q

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

           For the quarterly period ended March 31, 1997

                                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

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 
                               ---    ---
   
The number of outstanding shares of the registrant's Common Stock, no par value,
was 33,075,942 on May 1, 1997.

                      Exhibit Index on Page 17


<PAGE>

                TELCO COMMUNICATIONS GROUP, INC.

                            FORM 10-Q

              For the Quarter Ended March 31, 1997

                        Table of Contents



                                                                         Page
PART I -  FINANCIAL INFORMATION                                         Number

  Item 1.    Financial Statements

             Consolidated Balance Sheets as of March 31, 1997               3
                and December 31, 1996

             Consolidated Statements of Income for the three
              months ended March 31, 1997 and 1996                          4

             Consolidated Statement of Shareholders' Equity for the
               three months ended March 31, 1997 and the year               5
               ended December 31, 1996
 
             Consolidated Statements of Cash Flows for the three
               months ended March 31, 1997 and 1996                         6

             Notes to Consolidated Financial Statements                     7

  Item 2.    Management's Discussion and Analysis of Financial
             Conditions and Results of Operations                           9
 

PART II -  OTHER INFORMATION                                               13

<PAGE>
 

PART I.           FINANCIAL INFORMATION
 
    ITEM 1.       Financial Statements
<TABLE>
<CAPTION>
               TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

 
                                                 December 31,       March 31,
                                                     1996              1997
 ASSETS                                                            (unaudited)

<S>                                              <C>             <C>
 CURRENT ASSETS
   Cash and cash equivalents                        $ 25,373      $ 27,322
   Accounts receivable, trade (net of
     allowances $7,972 and                            89,114        98,525
     $6,085, respectively)
   Prepaid income taxes                                2,394            --
   Deferred tax asset                                    357            --
   Other                                               8,947         8,219
                                             ------------------------------
     Total current assets                            126,185       134,066
                                            --------------------------------

 PROPERTY, PLANT AND EQUIPMENT
   Leasehold improvements                              2,189         2,304
   Network equipment                                  34,749        36,002
   Office furniture and equipment                      5,474         6,626
   Network facilities under development                7,375         7,929
   Accumulated depreciation                         (10,121)      (12,305)
                                          ------------------------------------
                                                      39,666        40,556
                                          ------------------------------------

 OTHER ASSETS
    Goodwill                                          43,663        43,233
    Other assets                                       1,082         1,074
                                          ------------------------------------
                                                      44,745        44,307
                                          ====================================
     Total assets                                  $  210,596    $ 218,929
                                          ====================================

 LIABILITES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES
   Capital lease obligation, current portion       $    681      $     681
   Excise taxes payable                               3,103          1,946
   Accounts payable                                  21,062         19,904
   Accrued network access and transmission           21,450         21,253
     expense
   Other accrued expenses                            12,670         15,365
   Income taxes payable                                  --            471
   Deferred taxes                                     1,225          1,225
                                                  -------------------------
      Total current liabilities                      60,191         60,845
                                                  -------------------------

 LONG TERM LIABILITIES                                      
   Deferred taxes                                     2,065          2,643
   Capital lease obligations, less current            2,620          2,514
    portion
                                                  -------------------------
      Total long term liabilities                     4,685          5,157
                                                  -------------------------
                                                            
<PAGE>

 COMMITMENTS AND CONTINGENCIES (Note 5)

 SHAREHOLDERS' EQUITY
   Common stock (no par, 150,000,000 shares                       
     authorized 33,062,662 shares outstanding)      111,309        111,751
   Preferred stock (15,000,000 shares                    --             --
     authorized, unissued)
   Accumulated deficit                              (1,247)         (1,247)
   Unrealized gain (loss) on securities                  10            (84)
     available for sale
   Retained earnings                                 35,648          42,507
                                           --------------------------------
     Total Shareholders' Equity                     145,720         152,927
                                           --------------------------------
     Total Liabilities and Shareholders' Equity   $ 210,596      $  218,929
                                       ====================================
</TABLE>

          See accompanying notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>
                 TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF INCOME
                                    (unaudited)
                       (in thousands, except per share data)


                                             Three months ended March 31, 

                                              1996                  1997
                                             ------                ------ 
<S>                                     <C>                     <C>
Revenues, net                            $   91,928             $  122,853

Cost of services                             54,730                 72,419
                                        --------------          --------------
         Gross margin                        37,198                 50,434
                                        --------------          --------------

Operating expenses:
  Selling, general and administrative        27,863                 37,170
  Depreciation and amortization               1,433                  2,614
                                        --------------          --------------
       Total operating expenses              29,296                 39,784
                                        --------------          --------------

Operating income                              7,902                 10,650
                                        --------------          --------------

Interest expense                              1,066                    163
Other income (expense)                           13                    619
Income taxes                                  3,135                  4,247

Minority interest                               433                     --                    
                                        --------------          --------------
 
Net income                                $   3,281               $  6,859
                                        ==============          ==============
 
Net income per common and 
 common equivalent share                  $    0.12               $   0.20
                                        ==============          ==============

Average common and common
 equivalent shares                           28,345                 34,233
                                        ==============          ==============

</TABLE>

          See accompanying notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>
                TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
             [For the three months ended March 31, 1997 (unaudited)
                      and the year ended December 31, 1996]
                                 (in thousands)


                                          Accumulated Deficit
                                           Remaining Upon                Unrealized
                                           Termination of                Gain (Loss)
                                 Common     S-Corporation   Retained    on Securities
                                  Stock      Election       Earnings  Available for Sale
<S>                           <C>         <C>           <C>               <C>

BALANCE DECEMBER 31, 1995      $   896     $ (1,247)      $  12,771           --
                                     

Issuance of common shares       59,912           --              --           --
Loans to option holders           (584)          --              --           --
Purchase of subsidiary          47,725           --              --           --
Proceeds from exercise
  of options                       840           --              --           --
Tax benefit from net
  warrant activity               2,520           --              --
Change in unrealized gain
  on securities available
  for sale                          --           --              --       $   10
   
Net income                          --           --          22,877           --
                             ---------------------------------------------------
BALANCE DECEMBER 31, 1996       $111,309   $ (1,247)      $  35,648       $   10

Proceeds from exercise of options    442         --              --           --
Change in unrealized gain (loss) on   --         --              --         (94)
    securities available for sale
Net income                            --         --           6,859           --
                             ===================================================
BALANCE MARCH 31, 1997          $111,751   $ (1,247)      $  42,507       $ (84)
                             ===================================================

</TABLE>
          See accompanying notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>
                   TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      (unaudited)
                                    (in thousands)


                                      For the three months ended March 31,

                                                1996               1997
                                               ------             ------
<S>                                       <C>                  <C>
  Cash Flows From (Used For) Operations:
  Net income                               $   3,281            $  6,859

  Adjustments to reconcile net income 
   to net cash from (used for)
   operating activities:
     Depreciation and amortization             1,433               2,614
     Minority interest                           433                  --
     Deferred income taxes                       246                 578
  Changes in current assets and
    liabilities:
     Trade accounts receivable              (20,175)             (9,411)
     Prepaid and other assets                  (188)               3,393
     Accounts payable                        (2,577)             (1,158)
     Accrued expenses                          8,188               1,341
     Income taxes payable                      2,394                 471
                                        --------------------------------
         Net cash from (used for)
          operating activities                (6,965)              4,687
         
                                        --------------------------------
                                                     
  Cash Flows Used For
    Investing Activities:
  Equipment purchases                        (2,253)             (3,074)
                                        --------------------------------
        Net cash used for
         investing activities                (2,253)             (3,074)
                                        --------------------------------

  Cash Flows From (Used For) Financing
  Activities:
  Proceeds from the line of credit            38,634                  --
  Payments on line of credit                (28,262)                  --
  Payments on capital leases                   (790)               (106)
  Proceeds from exercise of options               --                 442
                                        --------------------------------
  Net cash from financing activities           9,582                 336
                                        --------------------------------
   
  Increase in cash                               364               1,949

  Cash, beginning of the period                  936              25,373
                                        --------------------------------

  Cash, end of the period                  $   1,300           $  27,322
                                        ================================
</TABLE>

          See accompanying notes to Consolidated Financial Statements.


<PAGE>

                        TELCO COMMUNICATIONS GROUP, INC.

                   Notes to Consolidated Financial Statements



NOTE 1.   PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The interim consolidated financial statements included herein have been prepared
by Telco Communications Group, Inc. (the "Company"),  without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC"). All
adjustments have been made to the accompanying  interim  consolidated  financial
statements which are, in the opinion of the Company's management,  necessary for
a fair presentation of the Company's financial  position,  operating results and
cash flows for the periods presented.  All adjustments are of a normal recurring
nature.  Certain information footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been omitted pursuant to the SEC's rules and regulations. It is recommended
that these interim consolidated financial statements be read in conjunction with
the  consolidated  financial  statements and the notes thereto  contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.

The  results of  operations  for the three  months  ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.


NOTE 2.     STATEMENT OF CASH FLOWS

Cash payments and non-cash  activities for the three months ended March 31, were
as follows:
                                                  1996               1997
                                                 ------             ------

Cash payments for income taxes              $    177,330          $   424,017
Cash payments for interest                  $  1,060,692          $    99,422
 
Non cash investing and 
   financing activities:
 
Capital lease obligations incurred          $   445,068           $       --


NOTE 3.     CHANGE IN ACCOUNTING STANDARD

In February,  1997 the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 128 "Earnings Per Share". This new standard
requires dual  presentation  of basic and diluted  earnings per share ("EPS") on
the  face  of the  earnings  statement  and  requires  a  reconciliation  of the
numerators  and  denominators  of  basic  and  diluted  EPS  calculations.  This
statement  will be effective for the Company's  1997 fiscal year.  The Company's
current EPS calculation  conforms to the diluted EPS presentation.  Basic EPS is
not expected to be materially  different from diluted EPS since potential common
shares in the form of stock options are not materially dilutive.



NOTE 4.     SUBSEQUENT EVENTS

On April 15,  1997,  the  Company's  existing  credit  facility  was  amended to
increase  the  maximum  amount  available  for  borrowing  to $200  million,  in
conjunction with the Company's  acquisition of certain voice network assets (the
"New Credit Facility").  Borrowings under the New Credit Facility are subject to
various financial covenants and ratios.

On April 15, 1997, the Company purchased the voice networks of Advantis,  a data
and voice network  partnership  of  International  Business  Machines  Corp. and
Sears,  Roebuck and Co., for $170 million.  The purchase includes 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.   The  Company  financed  the  acquisition  with  existing  cash  and
approximately  $146.0  million in debt  borrowed  under the Company's New Credit
Facility.

<PAGE>


NOTE 5.     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 deposition
of these items will not have an adverse  material  effect on  operations  or the
financial position of the Company. For additional discussion,  see Form 10-Q for
the  quarter  ended March 31,  1997,  Part II Other  Information,  Item 1. Legal
Proceedings.

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.

<PAGE>

ITEM 2.           Management's Discussion and Analysis of  Financial
                  Condition and Results of Operations

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 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  facilities-based  provider of
domestic and  international  long  distance  telecommunication  services to both
residential and commercial  customers in the United States.  The majority of the
Company's current revenue is generated by customers  accessing the Telco 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 2.3 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.
Consumer  Division revenues were $105.4 million for the three months ended March
31, 1997, and accounted for approximately  85.8% of total revenues.

To increase its volume of call traffic,  Telco has been  marketing long distance
telecommunications products utilizing its daytime network capacity to commercial
and carrier customers through its Commercial Sales Division ("CSD"). 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 March 31, 1997,
CSD had opened 28 sales offices and employed  approximately 300 sales personnel.
For the three months ended March 31, 1997, CSD revenues were $17.0  million,  or
approximately 13.8% of total 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,  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  telecommunications  billing company
started in 1991 by Telco's  Chairman of the Board and acquired by the Company in
August 1996. Tel Labs revenues from third parties were $0.5 million,  or 0.4% of
total revenues, for the three months ended March 31, 1997.

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 currently  installing a DEX 600E switch in the New
York City  metropolitan  area and has taken  receipt  of an eighth  switch to be
installed later in 1997 in a yet undetermined location.

On April 15, 1997,  the Company  completed its  acquisition of the voice network
assets of Advantis for $170 million.  The Advantis assets include  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 22
locations  (including  the five switch  locations).  The  Company  has  received
commitments to lease portions of the network to third party customers under long
term agreements.  The remaining  capacity will either be leased to third parties
or be integrated into the Company's  existing  leased fiber optic capacity.  The
Company intends to sell the five Nortel DMS 250 switches and all other equipment
in the five switch sites.

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 available to most residential  customers  increased during 1996, the
Company also has observed an increase in the number of  promotional,  discounted
calling 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 change  existing  transmission
costs for both the Company and other long  distance  companies,  the entrance of
the Regional Bell Operating Companies into the long distance marketplace and the
ability of long distance companies like Telco to begin marketing local telephone
services.

In conjunction with upcoming local competition,  incumbent local phone companies
are not likely to provide billing  services for customers  presubscribed  to the
competitive  local phone companies.  This would force the Company to either bill
the customer  directly,  enter into a billing and collection  agreement with the
new local phone company or seek other alternatives.

Additionally, the Federal Communications Commission has mandated that by January
1, 1998, all telecommunications  companies must migrate from their existing five
digit CIC codes (10+XXX) to seven digit CIC codes (10+10+XXX). This will require
a change in the dialing patterns of the Consumer Division  customers in order to
utilize  the  Company's   services,   and  the  Company   intends  to  integrate
re-education  materials  into its marketing  activities for the remainder of the
year.

Availability of Transmission  Facilities.  The Company has observed a tightening
market in the  availability  of leased  fiber optic  facilities  connecting  the
Company's  switches.  The  Company  leases  these  facilities  under  multi-year
contracts  primarily  from three major  vendors,  and to date,  has been able to
secure the  necessary  facilities.  Although the Advantis  voice  network  asset
acquisition  provides the Company  with a  significant  amount of captive  fiber
optic  capacity,  the Company will  continue to lease  additional  capacity from
third party providers.

Expansion  of the  Commercial  Sales  Division.  The costs  associated  with the
Company's  Commercial  Sales  Division 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.


RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1996

Revenues.  Revenues increased 34%, or $31.0 million, from $91.9 million, for the
three months  ended March 31, 1996 to $122.9  million for the three months ended
March 31,  1997.  The  increase  in  revenue  was due to an  increase  in billed
customer minutes in both the Company's  Consumer and Commercial Sales Divisions.
Revenues  for the  Consumer  Division  for the three months ended March 31, 1997
were $105.4 million,  an increase of $16.5 million, or 19%, versus $88.9 million
for the three months ended March 31, 1996.  Consumer Division growth,  primarily
attributable  to dial around  revenues,  was largely the result of the  Consumer
Division marketing activities for the three months ended March 31, 1997 combined
with the carryover  customer base from 1996. During the three months ended March
31, 1997, the Consumer Division introduced a fee-based,  9.5 cent state-to-state
dial around product  through the LDWC brand targeting  heavy-volume  residential
callers.  To date, this new product has produced  higher customer  retention and
usage levels offset by lower initial  response  rates when compared  against the
Company's non-fee products.

CSD  generated  revenues of $17.0  million for the three  months ended March 31,
1997, which includes both direct and dealer revenue as well as wholesale carrier
revenue.  Prior to the  formation  of CSD in June 1996,  the  Company  generated
wholesale carrier revenues which totaled $3.0 million for the three months ended
March 31, 1996.  The Company  generated  $9.3 million in CSD revenue  during the
three months ended  December 31, 1996.  The revenue for CSD for the three months
ended March 31, 1997  represents a 467% and 83% increase  versus the three month
periods ended March 31, 1996 and December 31, 1996, respectively. This growth is
attributable  to the  significant  increase in the number of sales personnel and
other  marketing  efforts of CSD since its formation.  Also included in revenues
for the three months ended March 31, 1997 was $0.5 million from Tel Labs,  which
the Company acquired  concurrently  with the completion of the Company's initial
public offering ("IPO") in August 1996.

Overall, billed minutes of use ("MOUs") increased 41% from 653.1 million for the
three  months  ended March 31, 1996 to 922.2  million for the three months ended
March 31, 1997.  The  Company's  revenue per MOU was $0.133 for the three months
ended March 31,  1997,  a decrease  from $0.141 for the three months ended March
31, 1996.  This decrease is due to an increasing  contribution  of lower revenue
per minute products  including carrier products and commercial  products such as
800/888  service and  dedicated T-1 service.  The Company's  offsets to revenues
decreased  during the three  months  ended March 31, 1997  compared to the three
months ended March 31, 1996 both as a percentage of revenue and in the aggregate
due to decreased  LEC  holdbacks  and a one time increase in the accrual for the
three month period ended March 31, 1996 in conjunction  with the  acquisition of
the remaining 44.4% of LDWC.

Cost of Services.  Cost of services increased 32%, or $17.7 million,  from $54.7
million for the three months ended March 31, 1996 to $72.4 million for the three
months ended March 31, 1997. Approximately $15.4 million of the cost of services
increase was due to the recurring  costs related to increased MOUs, $2.6 million
of the increase was the result of increased facilities lease expense as a result
of the Company's expansion of its transmission  network, and $0.3 million of the
increase was the result of the  inclusion of Tel Labs' cost of services,  all of
which was offset by a $0.6  million  reduction  in  installation  expenses.  The
reduction in the cost of services per MOU from $0.084 for the three months ended
March 31, 1996 to $0.078 for the three  months  ended March 31, 1997 was largely
the  result  of  an  increased  percentage  of  on-net  traffic,  other  network
efficiencies and an increasing  percentage of dedicated products that have lower
LEC access costs per MOU.

Gross Margin.  Gross margin increased 36%, or $13.2 million,  from $37.2 million
for the three months ended March 31, 1996 to $50.4  million for the three months
ended March 31, 1997 due to the reasons  discussed  above.  As a  percentage  of
revenues, gross margin increased from 40.5% for the three months ended March 31,
1996 to 41.1% for the three months ended March 31, 1997.

Selling, General and Administrative Expense. Selling, general and administrative
expense increased 33%, or $9.3 million,  from $27.9 million for the three months
ended March 31, 1996 to $37.2 million for the three months ended March 31, 1997.
Approximately  $8.9  million of this  increase  was  attributable  to the direct
expenses of CSD which  generated  negligible  expenses  during the three  months
ended March 31, 1996. The remaining  increase of approximately  $0.4 million for
the three  months  ended  March 31,  1997  consisted  of  increased  general and
administrative  expense,  flat expense growth  associated with Consumer Division
marketing and customer  service  expenses and reduced costs  associated with LEC
billing   expenses.   As  a  percentage  of  revenues,   selling,   general  and
administrative  expense  remained  constant  at 30.3% for both the three  months
ended March 31, 1996 and 1997.

Depreciation and  Amortization  Expense.  Depreciation and amortization  expense
increased by $1.2 million from $1.4 million for the three months ended March 31,
1996 to $2.6 million for the three  months  ended March 31,  1997.  Depreciation
expense  increases  were  primarily  related to the  expansion of the  Company's
switch network, and goodwill amortization expense increases were associated with
the acquisition of the remaining 44.4% of LDWC and the acquisition of Tel Labs.

Interest Expense.  Interest expense decreased $0.9 million from $1.1 million for
the three months  ended March 31, 1996 to $0.2  million in interest  expense for
the three  months ended March 31,  1997.  This  decrease was due to the proceeds
from the Company's August 1996 IPO which were used to repay substantially all of
the Company's  indebtedness  combined with free cash flow  generated  since that
time.

Net income.  Net income  increased  $3.6 million from $3.3 million for the three
months ended March 31, 1996 to $6.9 million for the three months ended March 31,
1997.


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 9, 1996 the Company sold  4,681,000  Common  Shares (of which  825,000
shares  were sold on  August  26,  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 credit  facility for borrowings up
to $100  million,  which was later  amended  in April  1997 to $200  million  in
connection  with the Company's  acquisition of certain voice network assets from
Advantis (the "New Credit  Facility").  Borrowings under the New Credit Facility
are subject to various financial covenants and ratios including a Total Leverage
Ratio,  Interest Coverage Ratio, Current Ratio, Pro Forma Debt Service Ratio and
Fixed Charge Ratio. The interest rate on the New Credit Facility is based on the
prevailing Total Leverage Ratio and ranges on a Eurodollar (LIBOR) option from a
spread of 0.75% to 2.00%,  and on a Base (Prime) Rate option from a spread of 0%
to 1.00%.  No scheduled  principal  payments on the New Credit  Facility are due
until June 30, 1998.  Borrowings  under the New Credit Facility on the April 15,
1997  closing  date  of  the  Advantis   voice   network   acquisition   totaled
approximately  $146.0  million which  resulted in an initial spread of 1.75% for
LIBOR  and  .075%  for   Prime.   The   remaining   purchase   price  and  other
transaction-related  expenses  were  funded  using a  portion  of the  Company's
existing cash.

Net cash from operating  activities increased $11.7 million from $7.0 million in
cash used for operating  activities for the three months ended March 31, 1996 to
$4.7 million in cash provided by operating activities for the three months ended
March 31,  1997.  The increase was largely the result of increases in net income
and depreciation  and  amortization  expense combined with a smaller increase in
working capital accounts.  Net cash used for investing activities increased $0.9
million,  from $2.3  million for the three  months  ended March 31, 1996 to $3.1
million for the three months  ended March 31, 1997.  The increase was the result
of increased  expenditures on the Company's nationwide  transmission network and
the  deployment  of CSD  sales  offices.  Net  cash  from  financing  activities
decreased  $9.3  million  from $9.6 million for the three months ended March 31,
1996 to $0.3 million for the three months  ended March 31, 1997.  This  decrease
was the result of the Company's  increases in net income and reduced investments
in working capital partially offset by increases in capital expenditures for the
three months  ended March 31, 1997  compared to the three months ended March 31,
1996.

<PAGE>

PART II. OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

In December 1996,  Telco and 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 certain LDWC advertisements stating 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 contained
clearly in LDWC's  advertisements  and that it is possible for  consumers in the
United States to place calls that will achieve up to a 50% savings.  Further the
Company filed a separate complaint against AT&T (which has now been consolidated
with this litigation) and also asserted  additional  counterclaims  against AT&T
based on AT&T's  advertising  which the Company  believes  contains a variety of
misleading  and deceptive  statements.  If AT&T  prevails,  the Company could be
found liable for damages and an injunction might be issued against future use of
specific LDWC advertisements.

On December  31, 1996,  An Apple A Day,  Inc.  ("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 and uses that mark in the State of Missouri.  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  preparation  and  distribution  of  corrective  advertising,
damages for loss of sales,  loss of goodwill and damage to reputation,  trebling
of damages  and payment of  attorney's  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 and may be
enjoined from using a Dial & Save service mark.

In related  litigation,  on April 15, 1997, the Company filed suit against Apple
and two (2)  individuals  in the United  States  District  Court for the Eastern
District of Virginia. The suit includes claims for defamation, and conspiracy to
harm the  Company's  business,  in violation of the statutory and common laws of
Virginia, and for tortious interference with contractual  relationships and with
reasonable business  expectations,  in violation of the common laws of Virginia.
The Company seeks an injunction  barring the  defendants  from making or causing
others to make further  false and  defamatory  statements  about the Company and
seeks  compensatory  and  exemplary  damages  for  wrongful  diminution  of  the
Company's reputation and goodwill,  for tortious interference with the Company's
business  and for  defamation,  as well as payment of the  Company's  litigation
costs and expenses.  The court has entered a preliminary  injunction prohibiting
the defendants from directly or indirectly  making  defamatory  statements about
the Company.  The defendants have not yet filed their respective  answers to the
Company's complaint in this litigation.

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 ("CTC"),
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, CTC 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 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 formerly were employed by
the  plaintiffs,  left  the  employ  of  plaintiffs,  joined  the  Company,  and
thereafter  solicited  on  behalf  of  the  Company  plaintiffs'  employees  and
customers,  in breach of  written  agreements  between  the  plaintiffs  and the
employees,  and in violation of the common laws. 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 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
court has  entered a  preliminary  injunction  prohibiting  one of the  employee
defendants  from  performing  certain limited acts in violation of her agreement
with  Frontier,  and requiring the other  defendants to take certain  actions to
enable and ensure her  compliance.  The Company has filed an answer  denying the
allegations against it, and is vigorously defending the action.
 

    ITEM 2.       CHANGES IN SECURITIES

                  None.


    ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

                  None.


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

                  None.


    ITEM 5.       OTHER INFORMATION

                  None.


    ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

                  A.   Exhibits

                      See Exhibit Index on page 17.

                  B.  Reports on Form 8-K

                      On March 18, 1997, the Company filed a report on Form 8-K 
announcing that it had entered  into an agreement to acquire the voice network  
assets of Advantis,  a partnership formed by International  Business Machines 
Corp. and Sears,  Roebuck and Co., for approximately $170 million.

                      On March 24, 1997, the Company filed a report on Form 8-K 
in  connection  with certain  litigation  filed  against  the  Company by 
Frontier  Corporation  and Frontier Communications Services, Inc. 


<PAGE>

                                    SIGNATURE


Pursuant  to the  requirements  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,  in the City of  Chantilly,  State of
Virginia, on May 14, 1997.


                    Telco Communications Group, Inc.


                    By: /s/ Donald A. Burns
                        ---------------------------------------------------
                        Donald A. Burns, President & Chief Executive Officer
 

                    By: /s/ Nicholas A. Merrick
                        ---------------------------------------------------
                        Nicholas A. Merrick, Chief Financial Officer


                    By: /s/ Janet A. Anastasi
                        ---------------------------------------------------
                        Janet D. Anastasi, Vice President & Corporate Controller

 
<PAGE>

                        TELCO COMMUNICATIONS GROUP, INC.

                                  EXHIBIT INDEX


Exhibit                                                            
No.               Description                                             

11.1              Computation of Earnings Per Common and Common Equivalent Share

27.1              Financial Data Schedule