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 September 30, 1996

                                    OR

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

             For the transition period from __________ to _________

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


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

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


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

     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 filesuch  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 32,754,869 on October 31, 1996.


                               Exhibit Index on Page 16

<PAGE>

                            TELCO COMMUNICATIONS GROUP, INC.

                                       FORM 10-Q

                         For the Quarter Ended September 30, 1996

                                   Table of Contents
                                   -----------------

                                                                    Page
                                                                   Number    
PART I -  FINANCIAL INFORMATION                                    -------    
                                                                      
 Item 1.    Financial Statements                                      3

            Consolidated Balance Sheets                               3
              as of September 30, 1996 and December 31, 1995

            Consolidated Statements of Income                         4
              for the three and nine months ended                   
              September 30, 1996 and 1995

            Consolidated Statement of Shareholders' Equity            5
              for the nine months ended September 30, 1996  
 
            Consolidated Statements of Cash Flows                     6
              for the nine months ended September 30, 1996          
              and 1995
                        
            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                                         14


<PAGE>
PART I.    FINANCIAL INFORMATION
 
 ITEM 1.   Financial Statements
<TABLE>
<CAPTION>
                TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
                        (in thousands, except share data)
 
                                           December 31,      September 30,
                                           ------------      -------------
                                               1995              1996
                                               ----              ----
<S>                                         <C>                 <C>
CURRENT ASSETS 
                                                  
   Cash and cash equivalents                   $937              $10,581
   Accounts receivable                       55,824               89,370
   Prepaid income taxes                         333                    -
   Deferred tax asset                           885                1,047
   Other                                      1,113                6,473
                                          -----------------------------------
     Total current assets                    59,092              107,471
                                          -----------------------------------

 PROPERTY, PLANT AND EQUIPMENT

   Leasehold Improvements                     1,148                1,830
   Network equipment                          4,534               32,783
   Office furniture and equipment             1,958                3,897
   Network equipment under capital lease     19,290                    -
   Network facilities under development       4,074                5,622
   Office equipment under capital lease           -                  178
   Accumulated depreciation                  (3,478)              (8,376)
                                           ----------------------------------
                                             27,526               35,934
                                           ----------------------------------
 OTHER ASSETS                                   506               45,126
                                           ----------------------------------
   Total Assets                             $87,124             $188,531
                                           ----------------------------------
                                           ----------------------------------

 LIABILITES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES
   Capital lease obligation,                 $2,973                   $16
    current portion
   Excise taxes payable                       1,289                 3,080
   Accounts payable                          15,303                18,970
   Accrued network access and                 9,429                17,315
    transmission expense
   Other accrued expenses                     1,322                11,095
   Income taxes payable                           -                   954
   Payable to related parties                   414                     -
   Deposits payable                               -                   120
                                         ------------------------------------
    Total current liabilities                30,730                51,550
                                         ------------------------------------

LONG TERM LIABILITIES                                            
   Deferred taxes                             1,353                 2,110
   Long term debt                            28,262                     -
   Capital leases obligations,               13,176                     -
     less current portion
                                         ------------------------------------
   Total long term liabilities               42,791                 2,110
                                         ------------------------------------
                                                                                
MINORITY INTEREST                             1,183                     -
                                         ------------------------------------
<PAGE>

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
   Common stock 
    (no par value; 150,000,000 shares                       
     authorized 32,754,869 shares
     outstanding)                                896             108,711
   Additional paid in capital-                         
    accumulated deficit remaining
    upon termination of S-corporation 
    election                                  (1,247)             (1,247)
   Unrealized gain on securities                   -                   4
    available for sale
   Retained earnings                          12,771              27,403
                                         ------------------------------------
   Total Shareholders' equity                 12,420             134,871
                                         ------------------------------------
   Total Liabilities and                     $87,124            $188,531
    Shareholders' equity                 ------------------------------------
                                         ------------------------------------                                
</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               Nine months
                                ended September 30,        ended September 30,
                             ------------------------    ----------------------
                                1995       1996            1995       1996
                                ----       ----            ----       ----    
<S>                           <C>        <C>            <C>         <C>    
Revenues, net                 $58,341     $113,768       $150,936   $309,774
                                                            
Cost of services               36,338       67,729         92,833    183,260
                             ----------  -----------    ----------  ----------
Gross margin                   22,003       46,039        58,103     126,514
                             ----------  -----------    ----------  ----------
Operating expenses:
  Selling, general             13,117       32,512        34,994      91,915
   and administrative
  Depreciation and                997        2,200         1,989       5,505
   amortization              ----------  -----------    ----------  ----------    
  Total operating expenses     14,114       34,712        36,983      97,420
                             ----------  -----------    ----------  ----------

Operating income                7,889       11,327        21,120      29,094
                             ----------  -----------    ----------  ----------

Interest expense                  783        1,153         1,917       3,341
Other income                     (19)          374          (12)         491
Income taxes                    2,760        4,247         7,473      10,923

Minority interest                 560          135           678         689
                             ----------  -----------    ----------  ----------

Net income                     $3,767       $6,166       $11,040     $14,632
                             ----------  -----------    ----------  ----------
                             ----------  -----------    ----------  ----------

Net income per share            $0.13        $0.20         $0.39       $0.50
                             ----------  -----------    ----------  ----------
                             ----------  -----------    ----------  ----------
                                                          
Weighted average number
of shares outstanding          28,290       31,274        28,280      29,321
                             ----------  -----------    ----------  ----------
                             ----------  -----------    ----------  ----------
</TABLE>
 
          See accompanying notes to Consolidated Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
                TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  (For the nine months ended September 30, 1996
                     and the year ended December 31, 1995)
                                 (in thousands)


                             Accumulated Deficit
                                Remaining Upon      Unrealized Gain
                   Common       Termination of       on Securities    Retained
                   Stock    S-Corporation Election   Held for Sale    Earnings

<S>               <C>              <C>                       <C>     <C>
BALANCE DECEMBER      
  31, 1994           $896          ($1,247)                   -        $2,006

                                          
Net income              -                -                    -        10,765
                  -------------------------------------------------------------

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

Issuance of
 common shares     59,964                -                    -             -
Loans to option 
 holders            (584)                -                    -             -
Purchase of 
 subsidiary        47,725                -                    -             -
Proceeds from 
 exercise of 
 options              710                -                    -             -
Change in
 unrealized gain
 on securities                                                          
 available for
 sale                   -                -                    4             - 
Net income              -                -                    -        14,632
                 --------------------------------------------------------------
BALANCE SEPTEMBER                               
  30, 1996       $108,711          ($1,247)                  $4       $27,403
                 --------------------------------------------------------------
                 --------------------------------------------------------------
</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 nine months ending September 30,
                                             1995                1996
                                             ----                ----
<S>                                         <C>                 <C>

Cash Flows From Operations:
Net income                                   $11,040             $14,632


Adjustments to reconcile net 
income to net cash from 
(used for) operating activities:
  Depreciation and amortization                1,989               5,505
  Minority interest                              678               1,872
  Deferred income taxes                         (176)                595
Changes in current assets and 
liabilities:  
  Trade accounts receivable                  (23,483)            (33,546)
  Prepaid and other assets                       535              (5,797)
  Accounts payable                            10,900               5,044
  Accrued expenses                               515              17,659
  Income taxes payable                            25                 954
  Other liabilities                                -                 120
                                    -------------------------------------------
  Net cash from operating 
  activities                                   2,023               7,038
                                    -------------------------------------------
                                                                               
Cash Flows From (Used For) 
Investing Activities:
Equipment purchases                          (10,775)             (9,060)
                                    -------------------------------------------

  Net cash used for 
  investing activities                       (10,775)             (9,060)
                                    -------------------------------------------

Cash Flows From (Used For) 
 Financing Activities:
Proceeds from long term borrowing             24,689                   -
Payments on line of credit                   (15,367)            (28,262)
Payments on capital leases                    (1,005)            (20,161)
Proceeds from short term debt                    310                   -
Proceeds from sale of stock                        -              59,964
Proceeds from exercise of options                  -                 125
                                    -------------------------------------------
           
  Net cash from 
  financing activities                         8,627              11,666
                                    -------------------------------------------
           
Increase (decrease) in cash                     (125)              9,644

Cash, beginning of the period                    475                 937
                                    -------------------------------------------
Cash, end of the period                         $350             $10,581
                                    -------------------------------------------
                                    -------------------------------------------
</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 such 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
included in the Company's  Registration  Statement on Form S-1 (Registration No.
333-05857),  as filed with the SEC in June 1996 (as amended) (the  "Registration
Statement").

     The results of operations  for the three month and nine month periods ended
September 30, 1996 are not necessarily  indicative of the results to be expected
for the full year.


NOTE 2.     INITIAL PUBLIC OFFERING
-----------------------------------

     On August 9, 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. Stockholders sold 1,644,000 Common Shares and
4,681,000   were  sold  by  the  Company  which  resulted  in  net  proceeds  of
approximately $60.0 million after deducting the expenses of the offering.


NOTE 3.     STATEMENT OF CASH FLOWS
-----------------------------------

     Cash  payments  and  non-cash  activities  during  the nine  month  periods
indicated were as follows:
                                        1995                    1996
                                        ----                    ----

Cash payments for income taxes      $   7,206,720           $  9,183,459
Cash payments for interest          $   1,916,853           $  3,324,870

Non cash investing and financing 
 activities:

Assets acquired in connection 
 with acquisitions                                          $ 18,543,864
Liabilities assumed in connection 
 with acquisitions                                          $ 16,457,389
Capital lease obligations 
 incurred                     $ 10,044,800                  $  4,028,469
Conversion of short term 
 debt to equity               $    250,000



NOTE 4.     OPTION EXERCISE
---------------------------

     In August,  1996 an option  holder  exercised  options for  169,575  Common
Shares. The Company received a note for the option price of $298,450.



NOTE 5.     ACQUISITION
-----------------------

     Concurrent with the IPO the Company  purchased 100% of Tel Labs, Inc. ("Tel
Labs"),  a  telecommunications  billing  company.  The  shareholders of Tel Labs
received 593,334 of the Company's Common Shares. Tel Labs shareholders  included
Henry G. Luken,  III,  the  Company's  current  Chairman of the Board,  Bryan K.
Rachlin,  the Company's current Chief Operating Officer and General Counsel, and
two employees of Tel Labs.

<PAGE>

NOTE 6.     SHAREHOLDERS' EQUITY
--------------------------------

     The Company has stock option plans under which  options to purchase  Common
Shares may be granted to directors and key employees.  Concurrent  with the IPO,
the Company granted options to purchase 618,500 Common Shares.  The Company also
issued options  totaling  10,000 Common Shares between August 9 and September 30
and proposed to issue other options  totaling  110,000  Common Shares subject to
the final approval of the Compensation Committee of the Board of Directors.  The
option  price for all options  granted  was the fair market  value of the Common
Shares on the date of grant.


NOTE 7.     INVESTMENTS IN MARKETABLE SECURITIES
------------------------------------------------

     The  Company  classifies  its  marketable   securities  that  have  readily
determinable fair values as available for sale. These securities are reported at
fair  value,  and  unrealized  gains and losses are  reported  in  shareholders'
equity, net of tax.


NOTE 8.     STOCK SPLIT
-----------------------

     On June 12, 1996, the shareholders  and directors  executed a joint consent
in lieu of a meeting.  That 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 (August 9, 1996).  Per share
amounts  in the  accompanying  financial  statements  and  footnotes  have  been
adjusted for the split.




<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 by the Company in the  Registration
Statement.

INTRODUCTION

     Telco  Communications  Group,  Inc. ("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 CIC Code before  dialing the number they are  calling.  Using a
CIC Code to access the  Company's  network is known as "dial  around" or "casual
calling"  because  customers can use the Company's  services at any time without
changing  their  existing long distance  carrier.  The Company  markets its long
distance  services  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 September 1996,
the  Company  provided  long  distance  services  to  approximately  2.7 million
customers (switched access lines) in 38 states and the District of Columbia. The
Company  plans to expand  its  marketing  efforts  in these  states and to offer
service in 10 additional western states during the remainder of 1996.

     Although  dial  around  has been in  existence  since the  mid-1980s,  only
recently  have  companies  such  as  Telco  aggressively   pursued  this  market
opportunity.  The Company markets its services primarily through direct mail and
inbound  telesales  and  marketing,  and believes that this  marketing  strategy
enables the Company to attract residential customers in a cost effective manner.
Because  dial  around  customers  are not  required  to cancel  or change  their
presubscribed  long  distance  carrier,  the Company  believes  that  aggressive
"win-back" and other customer  acquisition programs prevalent in the residential
long distance market have a limited impact on the Company's business.
        
     The Company  bills its casual  calling  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  approximately 96% 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.

     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  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 September 30, 1996, the  Commercial  Sales Division had
opened 19 sales offices and employed approximately 176 sales personnel.

     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;  and Austin,  Texas and one DEX 600E
switch which recently became operational in Las Vegas, Nevada. Additionally, the
Company has made a commitment  to install a DEX 600E switch in the New York City
metropolitan area during the first quarter of 1997.
        
     In August 1996, a total of 6,325,000  shares of the Company's  common stock
("Common  Shares") were sold in an initial  public  offering  ("IPO") at $14 per
share.  Existing stockholders sold 1,644,000 Common Shares, and 4,681,000 Common
Shares were sold by the Company which resulted in net proceeds of  approximately
$60.0 million, after deducting the expenses of the offering. Concurrent with the
offering, the Company acquired Tel Labs in exchange for 593,334 Common Shares of
the Company.  Tel Labs was owned by Henry G. Luken, III, the Company's  Chairman
of the Board,  Bryan K.  Rachlin,  the  Company's  Chief  Operating  Officer and
General Counsel, and two employees of Tel Labs.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS 
ENDED SEPTEMBER 30, 1995

     Revenues.  Revenues increased 95%, or $55.5 million, from $58.3 million for
the three months ended September 30, 1995 to $113.8 million for the three months
ended  September  30,  1996.  The  increase in revenue was due to an increase in
billed  customer  minutes which  resulted  from both the Company's  Consumer and
Commercial Sales  Division(s).  Revenues for the Consumer Division for the three
months  ended  September  30,  1996 were  $107.6  million,  an increase of $53.8
million,  or 100%, versus $53.8 million for the three months ended September 30,
1995. Consumer Division growth,  primarily attributable to dial around revenues,
was largely the result of a significant increase in the amount of mail marketing
sent by the Company during the nine months ended September 30, 1996.  During the
three months ended September 30, 1996, the Company entered eight new states with
the LDWC  brand and one new state  with the Dial & Save  brand.  The  Commercial
Sales  Division  generated  revenues of $5.9  million for the three months ended
September 30, 1996,  which  includes  both direct and dealer  revenue as well as
wholesale  carrier  revenue.  Prior to the  formation  of the  Commercial  Sales
Division,  the Company  generated  wholesale carrier revenues which totaled $3.9
million for the three  months ended June 30, 1996.  The Company  generated  $4.5
million in wholesale carrier revenue during the three months ended September 30,
1995.  Also  included in revenues for the three months ended  September 30, 1996
was $0.3 million from Tel Labs,  acquired  concurrent with the completion of the
Company's IPO in August 1996.

     Overall,  billed minutes of use ("MOUs")  increased 104% from 379.2 million
for the three months  ended  September  30, 1995 to 771.8  million for the three
months ended  September 30, 1996.  The Company's  revenue per MOU was $0.147 for
the three months ended  September 30, 1996, a decrease from $0.154 for the three
months ended  September 30, 1995.  The Company's  offsets to revenues  increased
during the three months ended  September  30, 1996  compared to the three months
ended  September  30, 1995 both as a percentage  of revenue and in the aggregate
due to increased  billed customer  minutes and increases in revenue  allowances,
principally due to increases in revenues in geographic  areas where LECs require
a higher holdback percentage.
         
     Cost of Services.  Cost of services  increased 87%, or $31.4 million,  from
$36.3 million for the three months ended September 30, 1995 to $67.7 million for
the three months ended  September 30, 1996.  Approximately  $32.3 of the cost of
services  increase was due to the recurring costs related to increased MOUs, and
$0.1 million of the  increase was the result of the  inclusion of Tel Labs' cost
services,  both of which were offset by a $1.0 million reduction in installation
expenses.  The 104% quarterly  increase in MOUs was offset by a reduction in the
cost of services per MOU from $0.096 for the three months  ended  September  30,
1995 to $0.088 for the three months ended  September  30, 1996 which was largely
the  result of an  increased  percentage  of on-net  traffic  and other  network
efficiencies. As a percentage of revenues, cost of services decreased from 62.3%
for the three  months  ended  September  30, 1995 to 59.5% for the three  months
ended September 30, 1996.

     Selling,   General  and  Administrative  Expense.   Selling,   general  and
administrative  expense  increased 148%, or $19.4 million from $13.1 million for
the three months ended  September 30, 1995 to $32.5 million for the three months
ended  September  30,  1996.  Approximately  $7.7  million of this  increase was
attributable  to an  increase  in Consumer  Division  marketing  expenses as the
Company  increased by approximately  279% the number of mail pieces sent. During
the three months ended  September 30, 1996, the Commercial  Sales Division spent
approximately  $4.1  million  in  direct  selling,  general  and  administrative
expenses.  The remaining  increases of approximately  $7.6 million for the three
months ended September 30, 1996 consisted of increased expenses  associated with
LEC billing,  customer service,  data processing and general corporate  overhead
costs. As a percentage of revenues, selling, general and administrative expenses
increased from 22.5% for the three months ended  September 30, 1995 to 28.6% for
the three months ended September 30, 1996.

     Depreciation  and  Amortization  Expense.   Depreciation  and  amortization
expense  increased  by $1.2 million from $1.0 million for the three months ended
September  30, 1995 to $2.2  million for the three months  ended  September  30,
1996.  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 the LDWC and the
acquisition of Tel Labs.

     Interest Expense. Interest expense increased $0.4 million from $0.8 million
for the three  months  ended  September  30, 1995 to $1.2  million for the three
months ended  September 30, 1996.  This increase was due to  approximately  $0.4
million in penalties  and interest  relating to the early  prepayment of capital
leases.  The Company  used the proceeds of the  recently-completed  IPO to repay
substantially all of its indebtedness  including the credit facility and capital
leases.
        
     Net income.  Net income  increased  $2.4  million from $3.8 million for the
three months ended September 30, 1995 to $6.2 million for the three months ended
September 30, 1996.
<PAGE>

NINE MONTHS ENDED SEPTEMBER  30, 1996 COMPARED TO NINE MONTHS 
ENDED SEPTEMBER 30, 1995

     Revenues.  Revenues  increased  105%, or $158.9 million from $150.9 million
for the three months  ended  September  30, 1995 to $309.8  million for the nine
months ended  September 30, 1996. The increase in revenue was due to an increase
in billed customer  minutes which resulted from both the Company's  Consumer and
Commercial Sales  Division(s).  Revenues for the Consumer  Division for the nine
months  ended  September  30,  1996 were $296.8  million,  an increase of $152.1
million,  or 105% versus $144.7 million for the nine months ended  September 30,
1995. Consumer Division growth,  primarily attributable to dial around revenues,
was largely the result of a significant increase in the amount of mail marketing
sent by the Company during the nine months ended September 30, 1996.  During the
nine months ended September 30, 1996, the Company entered 17 new states with the
LDWC brand and 13 new states with the Dial & Save brand.  The  Commercial  Sales
Division generated revenues of $5.9 million for the three months ended September
30, 1996,  which  includes  both direct and dealer  revenue as well as wholesale
carrier revenue.  Prior to the formation of the Commercial  Sales Division,  the
Company generated  wholesale carrier revenues which totaled $6.8 million for the
six months ended  June  30,  1996.  The Company  generated  $6.2 million in
wholesale  carrier  revenue for the nine months ended  September 30, 1995.  Also
included  in  revenues  for the nine months  ended  September  30, 1996 was $0.3
million  from  Tel  Labs,  acquired  commensurate  with  the  completion  of the
Company's IPO in August 1996.

     Overall,  billed minutes of use ("MOUs")  increased 121% from 964.0 million
for the nine months  ended  September  30, 1995 to 2,128.1  million for the nine
months ended  September 30, 1996.  The Company's  revenue per MOU was $0.146 for
the nine months ended  September  30, 1996, a decrease  from $0.157 for the nine
months ended  September 30, 1995.  The Company's  offsets to revenues  increased
during the nine months  ended  September  30,  1996  compared to the nine months
ended  September  30, 1995 both as a percentage  of revenue and in the aggregate
due to increased  billed customer  minutes and increases in revenue  allowances,
principally due to increases in revenues in geographic  areas where LECs require
a higher holdback percentage.

     Cost of Services.  Cost of services  increased 98%, or $90.5 million,  from
$92.8 million for the nine months ended September 30, 1995 to $183.3 million for
the nine months ended September 30,1996,  of which  approximately  $89.6 million
was due to the recurring  costs related to increased  MOUs. The 121% increase in
MOUs for the nine months ended  September  30, 1996 was offset by a reduction in
the cost of services per MOU from $0.096 for the nine months ended September 30,
1995 to $0.086 for the nine months  ended  September  30, 1996 which was largely
the  result  of  increased  percentage  of  on-net  traffic  and  other  network
efficiencies.  The installation  expense component of cost of services increased
$0.8 million from $2.4 million for the nine months ended  September  30, 1995 to
$3.2 million for the nine months ended  September 30, 1996. The Tel Labs cost of
services since the acquisition date included for the nine months ended September
30, 1996 was approximately  $0.1 million.  As a percentage of revenues,  cost of
services  decreased  from 61.5% for the nine months ended  September 30, 1995 to
59.2% for the nine months ended September 30, 1996.
         
     Selling,   General  and  Administrative  Expense.   Selling,   general  and
administrative  expense  increased 163%, or $56.9 million from $35.0 million for
the nine months ended  September  30, 1995 to $91.9  million for the nine months
ended  September  30, 1996.  Approximately  $28.2  million of this  increase was
attributable  to an  increase  in Consumer  Division  marketing  expenses as the
Company  increased  by  approximately  178%  the  number  of mail  pieces  sent.
Increases of approximately $23.7 million for the nine months ended September 30,
1996 were increased expenses associated with LEC billing, customer service, data
processing and general  corporate  overhead costs. The Commercial Sales Division
which was started in May 1996 had direct  selling,  general  and  administrative
expenses of approximately  $5.0 million for the nine months ending September 30,
1996. As a percentage of revenues,  selling, general and administrative expenses
increased  from 23.2% for the nine months ended  September 30, 1995 to 29.7% for
the nine months ended September 30, 1996.

     Depreciation  and  Amortization  Expense.   Depreciation  and  amortization
expense  increased  by $3.5  million from $2.0 million for the nine months ended
September 30, 1995 to $5.5 million for the nine months ended September 30, 1996.
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 the LDWC and the
acquisition of Tel Labs.

     Interest Expense. Interest expense increased $1.4 million from $1.9 million
for the nine months ended September 30, 1995 to $3.3 million for the nine months
ended September 30, 1996. Approximately $1.0 million of this increase was due to
interest expense  associated with borrowings under the credit facility primarily
to fund  working  capital  and  increases  in capital  leases as a result of the
expansion of the Company's  switch network.  Approximately  $0.4 million of this
increase  was due to  interest  and  penalties  associated  with  the  Company's
prepayment of capital leases.

     Net income.  Net income  increased  $3.6 million from $11.0 million for the
nine months ended  September 30, 1995 to $14.6 million for the nine months ended
September 30, 1996.
<PAGE>

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  will be used to fund working  capital,  capital  expenditures  and for
general corporate purposes.

     Since  commencing  operations in 1993,  the Company has  experienced  rapid
growth which has required  substantial  investments in working capital,  capital
expenditures  and mail marketing  expenses.  Additionally,  the formation of the
Commercial  Sales Division is expected to reduce the Company's  consolidated net
income at least  through  1997.  The  Company  maintains a credit  facility  for
borrowings up to $65 million. Such borrowings are subject to a limitation of 85%
of eligible  accounts  receivable  and bear interest at LIBOR plus 2%, or at the
option of the  Company,  at the  federal  funds  rate plus 0.5%,  provided  that
borrowings over $60 million bear interest at the higher of the prime rate or the
federal funds rate plus 0.5%.

     Net cash from operating activities increased $5.0 million from $2.0 million
for the nine months ended September 30, 1995 to $7.0 million for the nine months
ended  September  30, 1996.  The increase was largely the result of increases in
working  capital  accounts as a result of  continued  revenue  growth  offset by
increases in net income and depreciation and amortization expense. Net cash used
for investing  activities decreased $1.7 million from $10.8 million for the nine
months  ended  September  30, 1995 to $9.1  million  for the nine  months  ended
September 30, 1996. The reduction is largely the result of decreased spending on
the deployment of the Company's national switch-based  transmission network. Net
cash from financing  activities increased $3.1 million from $8.6 million for the
nine months ended  September 30, 1995 to $11.7 million for the nine months ended
September 30, 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  debt
outstanding under Company's credit facility and capital lease obligations.

<PAGE>

PART II. OTHER INFORMATION

    ITEM 1.    LEGAL PROCEEDINGS

               All matters  discussed in the  Registration  Statement are hereby
          incorporated  by reference.  The reader is directed to read the entire
          Registration Statement, but with regard to this item the reader should
          read: Litigation.

    ITEM 2.    CHANGES IN SECURITIES

               All matters  discussed in the  Registration  Statement are hereby
          incorporated  by reference.  The reader is directed to read the entire
          Registration Statement, but with regard to this item the reader should
          read:  Shares  Eligible for Future  Sale,  The  Reorganization,  Stock
          Option  Grants,  Option  Exercises and Holdings,  Amended and Restated
          1994 Stock Option  Plan,  Certain  Transactions,  and  Description  of
          Capital Stock.


    ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  
               All matters  discussed in the  Registration  Statement are hereby
          incorporated by reference.


    ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

               A.   Exhibits

                    See Exhibit Index on page 16.

               B.   Reports on Form 8-K

                    None.


<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 November 13, 1996.
                                         
                                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 D. Anastasi
                                ------------------------------------  
                                Janet D. Anastasi, Vice President & 
                                Corporate Controller

 

<PAGE>

                        TELCO COMMUNICATIONS GROUP, INC.

                                  EXHIBIT INDEX


Exhibit                                                         
No.       Description                                          
-------   -------------                                       

3.1       Articles of Incorporation: Restated Articles
          of Incorporation of the Registrant incorporated
          by reference to Exhibit 3.1 to the Registration
          Statement (Registration No. 333-05857).

3.2       Bylaws: Amended and  Restated  Bylaws of the
          Registrant incorporated by reference to Exhibit
          3.2 to the Registration Statement (Registration
          No. 333-05857).

11.1      Computation of Earnings Per Common and Common
          Equivalent Share

27.1      Financial Data Schedule

99.1      Press Release Dated October 29, 1996