SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 ---------------

                                    FORM 10-K
(Mark One)

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

For the fiscal year ended   December 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    0-09613
                                                 -------

                               FaxSav Incorporated
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             (Exact name of registrant as specified in its charter)

          Delaware                                       11-3025769
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  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

399 Thornall Street, Edison, New Jersey                    08837
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(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code   (732) 906-2000
                                                  ------------------------------

Securities registered pursuant to Section 12(b) of the Act:

     Title of each class               Name of each exchange on which registered

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

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

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, par value $.01
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                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                               Yes |X|   No |_|

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

     While it is difficult to determine the number of shares owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding Common Stock on March 24 (based upon the last sale of such Common
Stock reported on the Nasdaq National Market on March 24), held by
non-affiliates was approximately $22,115,000. For this computation, the
registrant has excluded the market value of all shares of its Common Stock
reported as beneficially owned by officers, directors and certain significant
stockholders of the registrant. Such exclusion shall not be deemed to constitute
an admission that any such stockholder is an affiliate of the registrant.

     As of March 24, 1998, there were outstanding 10,813,541 shares of the
registrant's Common Stock, par value $.01.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Proxy Statement of FaxSav Incorporated relative to the Annual Meeting of
the Stockholders to be held on May 28, 1998, which is incorporated by reference
into Part III of this Form 10-K.
<PAGE>

                                     PART I

Item 1. Business

General

     FaxSav Incorporated (the "Company") designs, develops and markets a variety
of business-to-business facsimile transmission services, including fax-to-fax,
desktop-to-fax, enhanced fax and broadcast fax services. The Company has
developed proprietary software which enables its customers to specify on a
call-by-call basis whether a facsimile transmission will be delivered through
FaxSav's real-time, "virtual real-time (Internet fax)" or broadcast services.
This software, coupled with FaxSav's fax-only network of three interconnected
switching nodes in the United States and Internet-capable facsimile nodes
located in seventeen countries as of December 31, 1997, automatically delivers
each outgoing transmission through the route that provides the lowest cost and
the highest transmission quality available on the FaxSav network. Pre-negotiated
volume-based arrangements with several telephony common carriers (including LDDS
WorldCom Inc. ("World Com") and MCI Communications Corp. ("MCI")) and the cost
savings available for transmission through the Internet enable FaxSav to
transmit its customers' documents and images to fax machines worldwide at rates
that are below the international rates charged by long distance voice carriers.
While FaxSav generates cost savings for customers transmitting faxes to
international destinations, the principal motivation for many FaxSav customers
to use the Company's services is ease of use, rather than cost savings.

     The Company has deployed Internet-capable facsimile nodes in seventeen key
international telecommunications markets to enable it to migrate a portion of
its customer traffic off of its telephony-based network and to route it over the
Internet. This global Internet backbone, which is designed to seamlessly
integrate with FaxSav's existing telephony-based network, enables the Company to
bypass long distance common carriers for transmissions originating and
terminating in countries where such nodes have been deployed, thereby further
reducing its customers' international transmission costs. FaxSav believes that
the combination of its telephony-based network and its growing Internet-based
network will enable it to emerge as a leading supplier of comprehensive,
convenient, low-cost global faxing services. FaxSav intends to expand its
network of Internet-capable facsimile nodes in key telecommunications markets
worldwide throughout 1998 to enable it to route a majority of its customers'
international traffic through the Internet.

Industry Background

The Market For Facsimile Services

     Technological advances over the past decade have improved the speed and
quality of facsimile transmissions and reduced the cost of fax machines to
consumers, resulting in a large and increasing worldwide installed base of fax
machines. In addition, there recently has been a rapid increase in the installed
base of fax-capable personal computers. The proliferation of fax machines and
fax capable computers, and improvements in the transmission quality of domestic
and international telephone networks, have resulted in facsimile transmission
being the preferred means of immediate business-to-business document delivery.

Traditional International Facsimile Transmission

     A facsimile message typically is transmitted by means of a telephone call
from one fax machine to another over the voice telephony network. Once a
connection has been established between the two machines, the scanned image from
the originating fax machine is electronically transmitted to the destination fax
machine. Facsimile transmissions historically have been, and substantially all
of such
<PAGE>

transmissions continue to be, implemented on a real-time continuous connection
basis using the voice telephony network as a transmission medium.

     An international facsimile transmission from the United States typically is
routed as follows: (i) the sending fax machine accesses the local exchange
carrier (an "LEC"), which then routes the fax to the customer's long distance
carrier; (ii) the long distance carrier then routes the fax via its voice
telephony network to the telephone company of the destination country; and (iii)
the foreign telephone company then routes the fax to a local telephone number to
which the destination fax machine is attached. In this example, the long
distance company will bill the customer to cover the LEC access fee, the fee for
use of its voice telephony network and the fee for the connection between the
long distance carrier's network and the foreign telephone company, which
includes the fee for delivery to the destination fax machine. The majority of
the cost for international transmissions from the United States to destinations
outside of North America is attributable to the inter-country connection fee.

Document Delivery Over The Internet

     Substantially all inter-country facsimile traffic worldwide is transmitted
through voice telephony networks at rates which are largely dictated by the
inter-country connection fees. Unlike traditional public and private
telecommunications networks, which are individually managed, the Internet is a
cooperative interconnection of many such public and private networks which
enables businesses, educational institutions, government agencies and
individuals to transmit data internationally without incurring inter-country
voice telephony connection fees.

     Although the Internet has been used for a number of years as a medium for
the international delivery of documents from computer to computer, substantially
all facsimile traffic worldwide continues to originate and terminate on fax
machines. The ability to effectively capture the savings enabled by Internet
document delivery in the international facsimile market therefore requires the
deployment, on a global basis, of a network of Internet-capable facsimile nodes
to bridge the gap between the Internet and the fax machine.

The FaxSav Solution

     FaxSav has deployed an international network of Internet-capable facsimile
nodes in seventeen countries (as of December 31, 1997) which are designed to
provide a reliable means to deliver facsimile transmissions to fax machines
worldwide at substantially reduced costs. This global Internet backbone, which
is designed to seamlessly integrate with FaxSav's existing telephony-based
network, enables the Company to bypass inter-country connection fees for
transmissions originating and terminating through such nodes.

     FaxSav, through its integrated Internet and telephony network, provides a
comprehensive range of services for the global transmission of documents and
images, including fax-to-fax, enhanced fax and broadcast fax services. In
addition, to position itself in the emerging desktop-to-fax market, the Company
has developed several proprietary software products which enable the
transmission of documents or images created in any Windows, Macintosh or e-mail
application to be routed directly from an Internet-connected computer desktop
through the FaxSav network to fax machines worldwide.

     The FaxSav solution provides substantial ease of use to the customer.
Customers may begin transmitting faxes at substantially reduced costs without
any upfront investment or complex system installation. FaxSav is quickly and
easily installed by the customer and does not require any changes in customer
business practices. Customers connect to the FaxSav network from a fax machine
by simply installing a faxSAV Connector, a small proprietary device that easily
plugs between the customer's fax machine and the wall jack, or by simply
installing FaxSav's proprietary desktop software on an Internet-connected
personal computer. FaxSav's proprietary routing algorithms then automatically
deliver


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<PAGE>

each facsimile transmission, through either FaxSav's telephony network or
Internet backbone in order to optimize the lowest cost and the highest
transmission quality available on the FaxSav network. Additionally, the FaxSav
solution is both modular and scalable to meet customer business needs in that it
can be easily deployed across multiple fax machines or personal computers within
an organization on an unlimited basis.

The FaxSav Network

Overview

     Traditional International Facsimile Transmission. In the United States,
traditional international facsimile transmission begins when the originating fax
machine places a call over the local telephone network. Because the number
dialed has an international prefix, the Local Exchange Carrier ("LEC") switches
the call to the sender's long distance carrier (typically AT&T Corp. ("AT&T")
MCI or Sprint Corp., ("Sprint"). The long distance carrier ("LDC") delivers the
call to the corresponding long distance company (the "PTT") in the country of
destination, which in turn completes the call by providing a connection through
the local telephone network to the receiving fax machine. Thus a real-time
connection is established over the traditional telephony networks, and the
originating fax machine sends a data stream, comprising a scanned image, to the
receiving fax machine.

     Facsimile Transmission via FaxSav's Network. FaxSav's services, which are
targeted at businesses and professionals engaged in international facsimile
messaging, are designed to reduce the cost of sending international faxes, and
to make the process of sending such faxes easier and less time-consuming. The
FaxSav network offers its customers the benefits of increased savings and
convenience by bypassing parts or all of the traditional network described
above. For example, an international fax-to-fax message delivered through
FaxSav's Internet-based network utilizes the Internet as a delivery medium,
bypassing the long distance carriers and thereby avoiding expensive
inter-country connection fees. In addition, a customer using the faxSAV for
Internet suite of services accesses the FaxSav network through its Internet
service provider (an "ISP") rather than through the local telephone network; the
Company's proprietary software then either routes the call over FaxSav's
telephony network or bypasses the long distance carriers and the associated
inter-country connection fees by routing the call through FaxSav's
Internet-based network.

The FaxSav Network

     The FaxSav network is designed to minimize the cost of sending faxes
internationally by selecting the optimal route and carrier for each facsimile
transmission. Currently FaxSav provides its customers with the ability to reach
fax machines worldwide via its telephony-based network. FaxSav's telephony-based
services are competitively priced and, on faxes to most international
destinations, FaxSav customers are expected to realize substantial savings as
compared to the rates charged by traditional long distance carriers.

     In addition to its telephony-based network, FaxSav has deployed an
Internet-based network which connects key telecommunications markets worldwide.
FaxSav's Internet-based network complements its telephony-based network and
provides the Company with the opportunity to further lower the retail price of
its customers' international facsimile transmissions while increasing its market
share. As FaxSav continues to deploy its Internet nodes internationally, it will
be able to route an increasing portion of its customers' traffic over the
Internet.

     FaxSav believes that the combination of its telephony-based network and its
growing Internet-based network is critical to achieving its objective of
emerging as the leading provider of comprehensive low-cost global faxing
solutions. Therefore FaxSav intends to maintain both a


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<PAGE>

telephony-based and an Internet-based network, and expects to eventually route a
majority of its customers' traffic through the Internet.

Network Infrastructure

     At the core of the FaxSav network are three main switching nodes, installed
in New York, New Jersey and Washington, D.C. These switching nodes utilize
FaxSav's proprietary messaging software to provide the full range of the
Company's service offerings, including real-time delivery, "virtual real-time
(Internet fax)" delivery, least cost fax routing, e-mail to fax conversion,
Internet access, broadcast delivery, customer registration and customer query
capabilities. Each switching node employs switch-to-host architecture and fully
redundant hardware and software, and is interconnected to the others through a
private intranet utilizing T1 links. A backup connection is also provided
through separate T1 links to the Internet via firewalls. The switching nodes are
installed in secure locations and are supported by uninterruptible power
supplies with emergency power generators as further backup. The main switching
nodes are connected through the Internet to the Internet facsimile nodes
installed by FaxSav overseas, extending access to the Company's service in the
markets where such nodes are located. Internet nodes provide "virtual real-time"
fax delivery, least-cost fax routing via the best node, e-mail to fax conversion
and broadcast delivery capabilities. FaxSav has designed a network-wide
redundancy into its nodes, such that if any particular node fails for any reason
to complete a transmission, an alternative route through the FaxSav network will
automatically be selected. In addition, in the event of an Internet failure, the
Internet nodes have a spanning (multiple simultaneous calling) dial backup
capability to connect via telephony lines to the nearest node. This node-based
and network wide redundancy is designed to allow FaxSav to reliably provide
service to its customers without interruption. Additionally, RSA encryption is
provided in each Internet node such that each file delivered through FaxSav's
Internet nodes is encrypted, addressing security concerns of its customers. All
nodes are designed for unattended operation, provide a full range of system
monitoring and control capability and can be upgraded and maintained remotely.

Services

faxSAV

     faxSAV, the Company's first fax-to-fax service, is a real-time fax
transmission service that is delivered through the Company's telephony-based
network. The faxSAV service is accessed by customers through the installation of
a faxSAV Connector, a small proprietary device which is plugged between the fax
machine and the telephone jack. The faxSAV Connector, which is programmable
directly from FaxSav headquarters based on the customer's specified needs,
automatically identifies each outgoing call which the customer has pre-selected
for delivery by the Company and routes the call to the FaxSav network. The
faxSAV Connector is provided by FaxSav free of charge with no installation cost
to the customer. The Company believes that, depending on the volume and
destinations of the customer's traffic, the faxSAV service provides significant
savings to customers on fax usage costs in comparison to the international rates
charged by the major long distance carriers. faxSAV customers are charged on a
per-minute basis for the transmission time to the destination fax machine, and
are billed monthly. The Company also offers customized pricing plans based on
the customer's volume of traffic to individual countries.

faxSAV Assured

     faxSAV Assured is a "virtual real-time" enhanced delivery option available
to all faxSAV customers through the faxSAV Connector which may be selected for
all of the customer's traffic or on a call by call basis. faxSAV Assured shifts
the responsibility for repetitive completion attempts to the FaxSav network,
thereby reducing indirect costs and increasing the reliability, timeliness and
predictability of difficult facsimile deliveries. The standard faxSAV Assured
service immediately begins to attempt delivery, and


                                       4
<PAGE>

makes multiple attempts for a period of one hour. If the fax has not been
successfully completed within that time, the customer is sent a "Non-Delivery"
notice. The Company also offers customized faxSAV Assured services to meet
customer-specific delivery schedules.

faxSAV EZ-List

     faxSAV EZ-List is an easy to use fax broadcast service which, from a fax
machine, utilizes the capabilities of the faxSAV Connector to capture the fax
message and the customer's list identification number in a single transmission.
During 1997, the Company introduced its Broadcast List Manager software product
which enables customers to manage and submit broadcast lists from their
desktops. faxSAV EZ-List enables customers to send the same fax message to
multiple recipients by transmitting a single fax message to the FaxSav network
and identifying a specific list of fax addresses previously stored in the
Company's customer database. faxSAV EZ-List customers are charged on a
per-minute basis for the transmission time to each destination fax machine, and
are billed monthly. The Company also offers customized pricing plans based on
the customer's volume of traffic to individual countries.

faxSAV PLUS

     In the third quarter of 1996 the Company introduced faxSAV PLUS, a new
"virtual real-time" Internet fax service which is designed to provide reliable
delivery of facsimile transmissions at substantially reduced costs. This service
is designated as Internet fax because the Company utilizes a combination of its
traditional telephony-based network and its growing Internet-based network to
deliver faxSAV PLUS transmissions to fax machines worldwide. The Company is
currently implementing the faxSAV PLUS service with a two-tiered pricing
structure. Pricing for delivery to the key telecommunications markets that
either have Internet nodes installed or are currently targeted for Internet node
deployment is based on the economics of delivery through a planned Internet
backbone. Pricing for delivery to other destinations worldwide continues to be
based on the economics of delivery through the Company's telephony-based
network, which prices may or may not be reduced in the event that the Company
deploys Internet-capable facsimile nodes in such markets. faxSAV PLUS customers
are charged on a per-minute basis for the transmission time to the destination
fax machine, and are billed monthly.

faxSAV for Internet Suite of Services

     The faxSAV for Internet suite of services, introduced in stages during the
first half of 1996, enables Internet-connected customers to send faxes directly
from their computer desktops, either from their e-mail package or from a Windows
or Macintosh software application, through the Internet to fax machines
worldwide via the FaxSav network. The Company's World Wide Web site includes a
detailed explanation of these services, installation instructions and service
registration forms. Customers are charged on a per-page basis for the faxSAV for
Internet suite of services and generally are billed in advance of use. The
faxSAV for Internet suite of services includes the following discrete services:

     o faxLauncher enables customers to fax documents created in any Windows or
Macintosh application directly from an Internet-connected computer desktop to
fax machines worldwide. faxLauncher also supports documents scanned through
sheet-fed scanners manufactured by Visioneer, Inc., Hewlett-Packard Co. or
Compaq Computer Corporation. A new version of this software, faxLauncher Pro,
provides users with additional features including on-line fax status checking,
off-line queuing, account code support and storage of sent faxes. faxLauncher
software is provided to customers in diskette form or it may be downloaded from
the Company's World Wide Web site.

     o faxMailer enables customers to transmit messages from e-mail packages
over the Internet to the FaxSav network for delivery to fax machines worldwide.
faxMailer provides the desktop e-mail customer with the ability to reach the fax
machine of anyone not yet connected to the Internet without


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<PAGE>

the necessity of creating hard copy and manually sending a fax. Customers may
register for the faxMailer service through the Company's World Wide Web site.

     o faxScan enables customers to send documents scanned in any
TWAIN-compliant scanner over the Internet to the FaxSav network for delivery to
fax machines worldwide. The combination of a scanner and faxScan software puts a
virtual fax machine at the desktop for the customer. faxScan software is
provided to customers in diskette form.

     o Serverlink enables any fax software or applications developer the
flexibility of linking to the FaxSav Network in order to facilitate the seamless
distribution of fax documents worldwide. Use of Serverlink results in least
cost-routing and expanded availability of fax software or applications to
multiple users. Serverlink is provided to potential partners and customers
electronically.

faxSAV Custom Corporate Solutions

     faxSAV Custom Corporate Solutions are specialized services developed by the
Company to meet customer needs for specific volume fax applications. FaxSav will
custom tailor a software, networking and telecommunications solution designed to
provide the customer with additional savings in time and money.

Customer Support Services

     The Company believes that customer support is important in differentiating
its facsimile delivery services from other delivery approaches. The customer
support services provided by the Company include installation assistance on an
as-requested basis, facilitation of international fax completion and monitoring
the performance of faxSAV Connectors. The Company currently provides customer
support and network/faxSAV Connector monitoring functions twenty-four hours a
day, seven days a week. The Company's support personnel respond to telephone
inquiries and e-mail inquiries. The Company also provides information about its
services and new desktop software upgrades on its World Wide Web site.

     To provide immediate response to customer inquiries, the Company has
developed a wide area network that provides a real-time fax tracking system and
allows network operations and customer service personnel to redirect, reschedule
or repair fax transmissions that are experiencing completion difficulty. The
system accesses fax traffic information via an Oracle database that is updated
from the Company's three switching nodes in the United States and provides an
on-line connectivity to the Company's master customer database.

Sales and Marketing

Domestic Sales and Marketing

     The Company offers its services in the United States through multiple sales
channels which include a direct field sales force, an agent and dealer
distribution network, and promotional activities at trade shows and on the
FaxSav World Wide Web site. Through the first quarter of 1997, the Company had
employed a direct mail and direct response program supported by multiple third
party telemarketing firms. However, thereafter the Company changed its focus by
expanding its direct sales approach to reach larger prospective customers.

     During 1995 the Company established a direct field sales force to address
the specialized faxing needs of major accounts and to manage and support the
Company's agent channel. The Company's agent and dealer distribution network
consists of organizations which sell office equipment, office supplies and
telephony services, as well as independent marketing companies. These agents
offer FaxSav services as a companion offering to their other products lines. The
Company has also entered into agreements for


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<PAGE>

the bundling faxSAV for Internet suite of services with the products of computer
hardware, software and Internet services companies although revenues from these
agreements have been insignificant.

     The Company has used computer and Internet trade shows as forums to
introduce the faxSAV for Internet suite of services to prospective customers and
partners. The Company's promotions have included the distribution of free
software to access its services and free faxing during a trial period and the
Company currently offers 5 free pages of faxes to each new subscriber that
registers through the company's World Wide Web home page. The Company has
promoted its faxLauncher software on the World Wide Web since February 1996.

International Alliances

     In connection with the installation of Internet-capable facsimile nodes in
certain foreign countries, the Company has formed strategic sales and marketing
alliances with local Internet service providers, telecommunications companies
and resellers. The Company anticipates that these organizations will use their
knowledge of the local market, language, customs and regulations, as well as
their existing distribution, customer support and billing infrastructures, to
establish, grow and properly service an international FaxSav customer base. In
return, the Company is offering these organizations either exclusive or
non-exclusive rights to market the Company's services in their territories and
offering to provide such services at a discount to the Company's retail prices.

     In addition to the strategic alliances, the Company has developed a network
of commission-based agents to sell the faxSAV for Internet suite of services in
foreign markets. To date, this network consists of over 200 agents representing
the Company in 70 foreign markets. The Company has also implemented a reseller
program for those agents who have the infrastructure to generate invoices and
perform collections. Under this program, participating agents are provided
detailed billing information on their accounts from which they can create and
distribute invoices in the local language and currency, and locally service
customer billing inquiries.

Customers

     The Company sells its services primarily to businesses with international
document transmission needs. Customers can install FaxSav's services at
individual fax machine or desktop locations, across departments or throughout
organizations by simply plugging the faxSAV Connector, a small proprietary
device, between their fax machine and the telephone jack or by simply installing
FaxSav's desktop software on an Internet connected personal computer. Through
1995, all of the Company's customers were located in the United States. In 1996,
with the introduction of the faxSAV for Internet suite of services, the Company
began to expand its customer base to include foreign desktop customers. In the
first quarter of 1997, the Company began offering fax-to-fax services through
its international marketing alliances in certain countries where an Internet
node was installed. In 1997, revenues from these international customers
amounted to $2.3 million or 13.2% of total revenues.

Competition

     The market for facsimile transmission services is intensely competitive and
there are limited barriers to entry. The Company expects that competition will
intensify in the future. The Company believes that its ability to compete
successfully will depend upon a number of factors, including market presence;
the capacity, reliability and security of its network infrastructure; the
pricing policies of its competitors and suppliers; the timing of introductions
of new services and service enhancements by the Company and its competitors; and
industry and general economic trends. A key element of the Company's strategy is
to expand its market presence by leveraging its price leadership strategy both
domestically and internationally. The Company intends to maintain and improve
the capacity, reliability and security of its network infrastructure through
continued research and development activities and will


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<PAGE>

continue to place significant emphasis on the ongoing development of new
services and applications of its existing services.

     The Company's current and prospective competitors generally fall into the
following groups: (i) telecommunication companies, such as AT&T, MCI, Sprint,
WorldCom and the regional Bell operating companies, and telecommunications
resellers, (ii) Internet service providers, such as Uunet Technologies, Inc. (an
affiliate of WorldCom) and NETCOM On-Line Communications Services, Inc.; (iii)
on-line services providers, such as Microsoft Corporation and America Online,
Inc. and (iv) direct fax delivery competitors, including Xpedite Systems, Inc.
and UNIFI Communications, Inc. Many of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to the Company. As a result, they
may be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging technologies
and changes in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products and services than can the Company. Further, the
foundation of the Company's telephony network infrastructure consists of the
right to use the telecommunications lines of several of the above-mentioned long
distance carriers, including LDDS WorldCom and MCI. There can be no assurance
that these companies will not discontinue or otherwise alter their relationships
with the Company in a manner that would have a material adverse effect upon the
Company's business, financial condition and results of operations. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of the Company's current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of the Company's larger potential customers may seek
to internally fulfill their fax communication needs through the deployment of
their own computerized fax communications systems or network infrastructures for
intra-company faxing.

Intellectual Property

     The Company's success is dependent upon its proprietary technology. The
Company relies primarily on a combination of contract, copyright and trademark
law, trade secrets, confidentiality agreements and contractual provisions to
protect its proprietary rights. The Company has been granted a patent related to
its faxSAV Connector and has a patent application pending for its "e-mail
Stamps" security technology incorporated into its faxMailer service. There can
be no assurance that the pending patent will issue from such application or that
present or future patents will provide sufficient protection to the Company's
present or future technologies, products and processes. In addition, there can
be no assurance that others will not independently develop substantially
equivalent proprietary information or obtain access to the Company's know-how.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's services or to obtain and
use information that the Company regards as proprietary. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.

     On September 5, 1997, the Company filed a complaint for declaratory
judgment against AudioFAX IP, LLP ("AudioFAX") in the United States District
Court for the District of New Jersey. The Company is seeking declaratory relief
that current FaxSav service offerings do not infringe any valid claims in
AudioFAX's patents and that certain claims of AudioFAX's patents are invalid. On
September 8, 1997, AudioFAX filed a complaint against the Company in the United
States District Court for the Northern District of Georgia alleging patent
infringement, seeking a preliminary and permanent injunction against the
Company's alleged infringement and damages. On February 17, 1998, the Company
filed an answer to the complaint in the Georgia action, denying all allegations
of wrongdoing asserted by


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<PAGE>

AudioFax. On February 25, 1998, the New Jersey District Court entered an order:
(1) denying AudioFax's motion to dismiss for lack of personal jurisdiction; (2)
denying FaxSav's motion to stay or enjoin the Georgia action; and (3)
transferring the New Jersey action to the Georgia court. It is the Company's
intention to appeal items (2) and (3) of the February 25, 1998 order. The
Company has been advised and believes that its service offerings do not infringe
any valid patents of AudioFax and intends to vigorously pursue these actions.
There can be no assurance that the Company will prevail or that AudioFAX will
not prevail on its claims. Although the Company believes that it is likely to
prevail in such matter, there can be no assurance that the outcome of this
litigation will not have a material adverse effect on the Company's business,
financial condition and results of operations.

     There can be no assurance that other third parties will not assert
infringement claims against the Company in the future. Patents have been granted
recently on fundamental technologies in the communications and desktop software
areas, and patents may issue which relate to fundamental technologies
incorporated in the Company's services. As patent applications in the United
States are not publicly disclosed until the patent issues, applications may have
been filed which, if issued as patents, could relate to the Company's services.
The Company could incur substantial costs and diversion of management resources
with respect to the defense of any claims that the Company has infringed upon
the proprietary right of others, which costs and diversion could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, parties making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief
which could effectively block the Company's ability to license and sell its
services in the United States or abroad. Any such judgment could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event a claim relating to proprietary technology or
information is asserted against the Company, the Company may seek licenses to
such intellectual property. There can be no assurance, however, that licenses
could be obtained on terms acceptable to the Company, or at all. The failure to
obtain any necessary licenses or other rights could have a material adverse
effect on the Company's business, financial condition and results of operations.

Government Regulation

     The Company is subject to regulation by various state public service and
public utility commissions and by various international regulatory authorities.
FaxSav is licensed by the FCC as an authorized telecommunications company and is
classified as a "non-dominant interexchange carrier." Generally, the FCC has
chosen not to exercise its statutory power to closely regulate the charges or
practices of non-dominant carriers. Nevertheless, the FCC acts upon complaints
against such carriers for failure to comply with statutory obligations or with
the FCC's rules, regulations and policies. The FCC also has the power to impose
more stringent regulatory requirements on the Company and to change its
regulatory classification. There can be no assurance that the FCC will not
change the Company's regulatory classification or otherwise subject the Company
to more burdensome regulatory requirements.

     On August 7, 1997, the FCC issued new rules which may significantly reduce
the cost of international calls originating in the United States. Such rules are
scheduled to be phased in over a five-year period starting on January 1, 1998.
To the extent that these new regulations are implemented and result in
reductions in the cost of international calls originating in the United States,
the Company will face increased competition for its international fax services
which may have a material adverse effect on the Company's business, financial
condition or results in operations.

     In connection with the deployment of Internet-capable nodes in countries
throughout the world, the Company is required to satisfy a variety of foreign
regulatory requirements. The Company intends to explore and seek to comply with
these requirements on a country-by-country basis as the deployment of
Internet-capable facsimile nodes continues. There can be no assurance that the
Company will be able to satisfy the regulatory requirements in each of the
countries currently targeted for node deployment, and the failure to satisfy
such requirements may prevent the Company from installing Internet-capable


                                       9
<PAGE>

facsimile nodes in such countries. The failure to deploy a number of such nodes
could have a material adverse effect on the Company's business, operating
results and financial condition.

     The Company's nodes and its faxLauncher service utilize encryption
technology in connection with the routing of customer documents through the
Internet. The export of such encryption technology is regulated by the United
States government. The Company has authority for the export of such encryption
technology other than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda.
Nevertheless, there can be no assurance that such authority will not be revoked
or modified at any time for any particular jurisdiction or in general. In
addition, there can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit the Company's
ability to distribute its services outside of the United States or
electronically. While the Company takes precautions against unlawful exportation
of its software, the global nature of the Internet makes it virtually impossible
to effectively control the distribution of its services. Moreover, future
Federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Any such export restrictions, the
unlawful exportation of the Company's services, or new legislation or regulation
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Employees

     As of December 31, 1997, the Company had 108 full-time employees, including
16 in research and development, 32 in network operations and support, 46 in
sales and marketing and 14 in finance and administration. In addition, at
December 31, 1997, the Company was utilizing the services of 2 software engineer
consultants. The Company's employees are not covered by any collective
bargaining agreements. The Company believes that its relations with its
employees are good.


                                       10
<PAGE>

Item 2. Properties

     The Company's corporate headquarters are located in Edison, New Jersey in
facilities consisting of approximately 13,200 square feet of office space
occupied under a lease expiring in May 2002. The Company's three U.S. Network
facilities are co-located in telehousing facilities under short term leases. In
addition, the Company leases offices for its sales staff in the Chicago, Dallas,
Ft. Lauderdale, Los Angeles, New York and San Francisco metropolitan areas.
While it believes that these facilities are adequate for its present needs, the
Company is continually reviewing its needs and may add facilities in the future.
The Company believes that any required additional space would be available on
commercially reasonable terms. Finally, in connection with its deployment of
Internet-capable facsimile nodes, the Company has entered into, and will
continue to enter into, short-term leases in telehousing facilities worldwide.

Item 3. Legal Proceedings

     On September 5, 1997, the Company filed a complaint for declaratory
judgment against AudioFAX, IP, LLP ("AudioFAX") in the United States District
Court for the District of New Jersey. The Company seeks declaratory relief that
current FaxSav service offerings do not infringe any valid claims in AudioFAX's
patents or that certain claims of AudioFAX's patents are invalid. On September
8, 1997, AudioFAX filed a complaint against the Company in the United States
District Court for the District of Georgia alleging patent infringement, seeking
a preliminary and permanent injunction against the Company's alleged
infringement (and damages). On February 17, 1998, the Company filed an answer to
the complaint in the Georgia action, denying all allegations of wrongdoing
asserted by AudioFax. On February 25, 1998, the New Jersey District Court
entered an order: (1) denying AudioFax's motion to dismiss for lack of personal
jurisdiction; (2) denying FaxSav's motion to stay or enjoin the Georgia action;
and (3) transferring the New Jersey action to the Georgia court. It is the
Company's intention to appeal items (2) and (3) of the February 25, 1998 Order.
The Company has been advised and believes that its service offerings do not
infringe any valid patents of AudioFAX and intends to vigorously pursue these
actions. There can be no assurance that the Company will prevail or that
AudioFAX will not prevail on its claims. Although the Company believes it is
likely to prevail in such matter, there can be no assurance that the outcome of
this litigation will not have a material adverse effect on the Company's
business, financial condition and results of operations.

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

     None.


                                       11
<PAGE>

                                     PART II

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

     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "FAXX." The following table sets forth, from the calendar period
indicated since the Company's initial public offering in October 1996, the range
of high and low sales prices for the Common Stock of the Company on the Nasdaq
National Market. These prices do not include retail mark-up, mark-down or
commissions.

        1996                                             High           Low
                                                         ----           ---
        Fourth Quarter (from October 11, 1996)...........$8.50         $5.00

        1997

        First Quarter....................................$7.50         $4.00
        Second Quarter....................................5.25          1.25
        Third Quarter.....................................1.75          1.00
        Fourth Quarter....................................3.00          1.00

     As of March 24, 1998, there were 140 holders of record of the Company's
Common Stock. On March 24, 1998, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $2.94 per share.


                                       12
<PAGE>

Item 6. Selected Financial Data


<TABLE>
<CAPTION>
                                                     1997          1996           1995           1994          1993
                                                     ----          ----           ----           ----          ----
                                                            (in thousands, except for share and per share data)
<S>                                             <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:
Revenues ....................................   $    17,418    $    15,036    $    11,649    $     3,449    $     2,580
Cost of service .............................        10,414          8,898          7,021          2,297          1,856
                                                -----------    -----------    -----------    -----------    -----------
Gross margin ................................         7,004          6,138          4,628          1,152            724
Operating expenses:
   Network operations and support ...........         2,287          1,985          1,183            851            742
   Research and development .................         1,909          1,772            840            613            628
   Sales and marketing ......................         5,268          6,065          4,238          2,337          1,597
   General and administrative ...............         3,132          2,495          2,007            970            953
   Depreciation and amortization ............         1,702          1,437            928            242            102
   Other ....................................            --             --           (441)          (309)            --
                                                -----------    -----------    -----------    -----------    -----------
     Total operating expenses ...............        14,298         13,754          8,755          4,704          4,022
                                                -----------    -----------    -----------    -----------    -----------
Operating loss ..............................        (7,294)        (7,616)        (4,127)        (3,552)        (3,298)
Interest income (expense), net ..............            79             46             46             45             23
Other income (expense), net .................            96             94             (4)            14             15
                                                -----------    -----------    -----------    -----------    -----------
Loss before income taxes ....................        (7,119)        (7,476)        (4,085)        (3,493)        (3,260)
Provision for income taxes ..................            --             --             --             --             --
                                                -----------    -----------    -----------    -----------    -----------

Net loss ....................................   $    (7,119)   $    (7,476)   $    (4,085)   $    (3,493)   $    (3,260)
                                                ===========    ===========    ===========    ===========    ===========
Net loss per common and equivalent share ....   $     (0.72)   $     (2.74)   $    (12.48)   $    (10.70)   $    (10.07)
                                                ===========    ===========    ===========    ===========    ===========
Weighted average common and equivalent shares
   outstanding (1) ..........................     9,880,681      2,724,651        327,353        326,410        323,862
                                                ===========    ===========    ===========    ===========    ===========
Pro forma net loss per common and equivalent
   share (1) ................................   $     (0.72)   $     (0.86)   $     (0.45)   $     (0.50)
                                                ===========    ===========    ===========    ===========
Shares used in computing pro forma net loss
   per common and equivalent share (1) ......     9,880,681      8,712,054      9,079,566      6,957,411
                                                ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                       1997       1996       1995      1994     1993
                                                       ----       ----       ----      ----     ----
<S>                                                  <C>        <C>        <C>       <C>       <C>
Balance Sheet Data:
Working capital (deficit).......................     $1,333     $7,080     $ (849)   $ (385)   $(354)
Total assets....................................     10,496     14,448      4,840     2,430      989
Total long-term debt............................      1,169        678        326        --      321
Total stockholders' equity (deficit)............      4,664      9,659        687       621     (336)
</TABLE>

----------

(1)  See Note 2 of Notes to Financial Statements: "Summary of Significant
     Accounting Policies -- Earnings Per Share" and " -- Pro Forma Earnings Per
     Share."


                                       13
<PAGE>

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

Overview

     FaxSav derives its revenues from the provision of a variety of facsimile
services largely to businesses and professionals involved in international
commerce. Through the end of 1995, the Company offered its services exclusively
to customers located in the United States. In the first quarter of 1996, the
Company began to focus on the broader worldwide market for facsimile services
through the introduction of client software to enable faxing from the computer
desktop using the Internet as the means to access the FaxSav network. In the
first quarter of 1997, the Company also expanded its fax-to-fax service
offerings to certain international markets where it had installed an Internet
node. In 1997, revenues from international customers were $2.3 million, or 13.2%
of total revenues.

     The Company's network includes interconnection in the United States with
the existing worldwide telephony network through three network sites enabling
delivery of facsimile transmissions to virtually any domestic or international
destination. The Company also had Internet nodes installed in seventeen
countries as of December 31, 1997. The Company plans to continue to install
Internet nodes in key international telecommunications markets to enable the
Company ultimately to route a majority of its customers' traffic through the
Internet.

     The Company's revenue and expense levels have continued to increase,
particularly in 1996 as compared to 1995 and 1995 as compared to 1994, as the
Company's customer base has expanded and the Company invested in the design,
development and marketing of its newer services, including the faxSAV for
Internet suite of services and faxSav EZ-List, a fax broadcast service.

     This report contains certain statements of a forward-looking nature
relating to future events of the future financial performance of the Company.
Stockholders are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this report, including the matters set forth under the caption
"Certain Factors That May Affect Future Results, Financial Condition and the
Market Price of Securities," which could cause actual results to differ
materially from those indicated by such forward-looking statements.


                                       14
<PAGE>

Results of Operations

     The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated (subtotals not adjusted for rounding):

                                                 Years Ended December 31,
                                             ----------------------------------
                                             1997          1996         1995
                                             ----          ----         ----
Percentages of Revenues:
Revenues................................     100.0%        100.0%        100.0%
Cost of service.........................      59.8          59.2          60.3
                                             ------        ------        -----
Gross margin............................      40.2          40.8          39.7
Operating expenses:
   Network operations and support.......      13.1          13.2          10.2
   Research and development.............      11.0          11.8           7.2
   Sales and marketing..................      30.2          40.3          36.4
   General and administrative...........      18.0          16.6          17.2
   Depreciation and amortization........       9.8           9.6           8.0
   Other................................       --            --           (3.8)
                                             ------        ------        -----
      Total operating expenses..........      82.1          91.5          75.2
                                             ------        ------        -----
Operating loss..........................     (41.9)        (50.7)        (35.5)
Interest income (expense), net..........       0.5           0.3           0.4
Other income (expense), net.............       0.5           0.6          (0.0)
                                             ------        ------        -----
Loss before income taxes................     (40.9)        (49.8)        (35.1)
Provision for income taxes..............       --            --            --
                                             ------        ------        -----
Net loss................................     (40.9)%       (49.8)%       (35.1)%
                                             ======        ======        ======

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     Revenues. Revenues, which consist primarily of customer usage charges, grew
15.8% to $17.4 million in the year ended December 31, 1997 from $15.0 million in
the year ended December 31, 1996 primarily as a result of increased revenues
from (i) the Company's faxSAV for Internet suite of services first introduced in
1996, (ii) the Company's faxSAV EZ-List broadcast service and (iii) an
international fax-to-fax customer base developed in 1997. Fax volumes in total,
representing faxes delivered to domestic and international destinations, grew
40.0% to 39.5 million in 1997 as compared to 28.3 million in 1996, while faxes
to international destinations grew 33.0% to 22.0 million in 1997 from 16.5
million in 1996.

     Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance and international termination
charges. These are primarily variable costs based on actual facsimile volumes.
Cost of service increased in 1997 as a result of the increase in facsimile
volume for the year and also increased as a percentage of revenues to 59.8% in
1997 from 59.2% in 1996. The increased percentage is a result of a higher cost
of service for the revenues generated from the Company's lower priced Internet
services. These revenues were generated without the complete benefit of the
lower cost Internet network deployment that is still in process. By December 31,
1997 the Company had completed the installation of Internet nodes in seventeen
of the planned thirty countries.

     Network operations and support. Network operations and support costs
consist primarily of the expenses of operating and expanding the network
infrastructure, monitoring network traffic and quality of service and providing
customer support in service installations, fax deliveries and message reporting
and billing. Network operations and support costs increased to $2.3 million in
the year ended December 31, 1997 from $2.0 million in the year ended December
31, 1996 as a result of hiring additional personnel to implement the Internet
fax node deployment plan and to support the Company's expanding customer base.
As a percentage of revenues, these costs remained relatively unchanged amounting
to 13.1% in 1997 and 13.2% in 1996.


                                       15
<PAGE>

     Research and development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel. Research and development expenses increased to $1.9
million for the year ended December 31, 1997 in comparison to $1.8 million for
the year ended December 31, 1996 due to the continuing development efforts for
enhancements to the Company's Internet desktop-to-fax services both in client
software and network enhancements, and enhancements to the Company's faxSAV
EZ-List broadcast service. As a percentage of revenues, these expenses decreased
to 11.0% in 1997 from 11.8% in 1996 as a result of increased revenues in 1997.

     Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing staffs, promotion material
preparation and mailing costs, third-party telemarketing charges and agent and
dealer commissions. Sales and marketing expenses decreased to $5.3 million and
30.2% of revenues for the year ended December 31,1997 in comparison to $6.1
million and 40.3% for the year ended December 31, 1996. These costs decreased as
a result of reduced spending for third party telemarketing programs in 1997 in
connection with the Company's change in focus to a direct selling staff and as a
result of higher expenses incurred in 1996 for trade shows and an advertising
and promotion campaign for the introduction of the faxSAV for Internet suite of
services.

     General and administrative. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses increased to
$3.1 million and 18.0% of revenues in the year ended December 31, 1997 from $2.5
million and 16.6% of revenues for the year ended December 31, 1996. The
increases in total expenses and in the percentage of revenues result from
personnel increases to support the increased customer base, expenses incurred
for management information systems improvements and from expenses incurred in
1997 related to the public ownership of the Company's common stock.

     Depreciation and amortization. Depreciation and amortization increased to
$1.7 million and 9.8% of revenues in the year ended December 31, 1997 in
comparison to $1.4 million and 9.6% of revenues in the year ended December 31,
1996, primarily reflecting depreciation of the company's increased investment in
international Internet nodes as part of the Company's strategy to deploy a
global Internet network and in faxSAV Connectors installed at customer premises
to allow access to the FaxSav network.

     Provision for income taxes. The Company had losses for income tax purposes
for the years ended December 31, 1997 and 1996. Accordingly, there was no
provision or credit for income taxes. Any income tax benefits at the Company's
expected effective tax rate for these losses has been offset by a valuation
allowance for deferred tax assets.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     Revenues. Revenues, which consist primarily of customer usage charges, grew
29.1% to $15.0 million in year ended December 31, 1996 from $11.6 million in the
year ended December 31, 1995 primarily as a result of the continued expansion of
the Company's customer base. Contributing to the increase were revenues from the
Company's faxSAV EZ-List broadcast service and faxSav for Internet suite of
services which were commercially introduced in the first quarter of 1996. Usage
volumes in total, representing domestic and international fax traffic, grew 39%
in 1996 as compared to 1995, while international fax minutes grew 62% to 16.5
million minutes in 1996 as compared to 10.2 million minutes in 1995.

     Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance domestic and international
termination charges. These are primarily variable costs based on actual
facsimile volume. Cost of service increased as a result of the increase in
facsimile volume for the period but decreased as a percentage of revenues in the
year ended December 31, 1996


                                       16
<PAGE>

to 59.2% from 60.3% in the year ended December 31, 1995. This percentage
decrease was a result of volume discounts on long distance termination charges.

     Network operations and support. Network operations and support costs
consist primarily of the expenses of operating and expanding the network
infrastructure, monitoring network traffic and quality of service and providing
customer support in service installations, fax deliveries and message reporting
and billing. Network operations and support costs increased to $2.0 million and
13.2% of revenues in the year ended December 31, 1996 from $1.2 million and
10.2% of revenues in the year ended December 31, 1995 as a result of hiring
additional personnel to implement the Internet fax node deployment plan and to
support the Company's expanding customer base.

     Research and development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel. Research and development expenses increased by 111% in
the year ended December 31, 1996 in comparison to the year ended December 31,
1995 due to the continuing development efforts for enhancements to the Company's
Internet desktop-to-fax services both in client software and network
enhancements and the continuing development of the Company's faxSav EZ-List
broadcast service. Such development efforts resulted in increased expenses
amounting to 11.8% of revenues in 1996 from 7.2% of revenues in 1995.

     Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing staffs, promotional material
preparation and mailing costs, third-party telemarketing charges and agent and
dealer commissions. Sales and marketing expenses increased to $6.1 million for
the year ended December 31, 1996 in comparison to $4.2 million in the year ended
December 31, 1995. As a percentage of revenues, these costs were 40.3% in 1996
and 36.4% in 1995. These increases were a result of the Company initiating a
program of presenting its faxSAV for Internet suite of services at trade shows
in the United States and in foreign countries where it plans to deploy Internet
fax nodes. The Company also initiated an advertising and promotion campaign to
promote its new services and expanded its sales and marketing staff.

     General and administrative. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses increased to
$2.5 million in the year ended December 31, 1996 from $2.0 million in the year
ended December 31, 1995. As a percentage of revenues, these costs decreased to
16.6% of revenues in the year ended December 31, 1996 from 17.2% of revenues in
the year ended December 31, 1995. The increase in total general and
administrative expenses results from personnel increases to support the
increased customer base, expenses incurred for management information system
improvements and management recruiting fees. The percentage decrease was a
result of the increase in revenue.

     Depreciation and amortization. Depreciation and amortization amounted to
$1.4 million and 9.6% of revenues in the year ended December 31, 1996, in
comparison to $0.9 million and 8% of revenues in the year ended December 31,
1995, primarily reflecting depreciation of the Company's increased investment in
faxSAV Connectors installed at customer premises to allow access to the FaxSav
network.

     Other. Other operating income of $0.4 million for the year ended December
31, 1995 represents service fees received under a Service Agreement with Telstra
which offset various operating expenses incurred in support of the development
of Telstra's "WorldFax" service in the U.S. The Agreement expired in 1995.

     Provision for income taxes. The Company had losses for income tax purposes
for the years ended December 31, 1996 and 1995. Accordingly, there was no
provision or credit for income taxes for those periods. Any income tax benefits
for these losses has been offset by an increase in a valuation allowance for
deferred tax assets.


                                       17
<PAGE>

Liquidity and Capital Resources

     The Company has financed its cash requirements for operations and
investments in equipment through public and private sales of equity securities,
bank borrowings and capital lease financing. During the year ended December 31,
1997, the Company entered into (1) an agreement for a $0.8 million secured
equipment line of credit with Silicon Valley Bank and (2) an agreement for a
$0.5 million equipment loan facility from Phoenix Growth Capital Corp. All
amounts available to the Company under these agreements had been advanced by
December 31, 1997. The net proceeds from the Company's initial public offering
completed in October 1996 amounted to $10.6 million. Cash flows from the private
sales of equity securities amounted to $2.1 million in 1997 and $7.9 million in
1996, net of issuance costs. $2.2 million of the 1996 proceeds were used to
repurchase shares of the Company's Series D Preferred Stock from a major
stockholder pursuant to a pre-existing option.

     As a result of operating losses, cash used in operating activities amounted
to $5.5 million in 1997, as compared to $4.9 million in 1996. Cash used for the
purchase of equipment amounted to $2.9 million in 1997 and $2.3 million in 1996.
The equipment includes network equipment (particularly in the 1997 period) and
faxSAV Connectors purchased by the Company for installation at customer
locations. The Company is obligated through June 1999 to MCI Communications
Corp. for a minimum monthly usage commitment for total long distance services of
$0.2 million per month.

     The Company's principal sources of liquidity at December 31, 1997 included
cash and cash equivalents of $3.6 million and the $0.5 million in equipment
financing resulting from its agreement with Silicon Valley Bank effective March
1998. The Company currently believes that its current cash and cash equivalents
and available equipment financing facility will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
through at least the end of 1998, but, in order to meet minimum requirements for
the Nasdaq National Market ("Nasdaq"), the Company anticipates raising
additional equity financing during 1998. If the Company's cash requirements vary
materially from those now planned as a result of unforeseen changes, management
believes that its current sources of liquidity will be sufficient to satisfy the
Company's requirements through the end of 1998 after limiting its network
expansion and reducing or eliminating research and development activities and
sales and marketing expenditures. Thereafter, if the Company does not begin to
generate positive cash flows from operations in amounts that are sufficient to
satisfy the Company's liquidity requirements, it will be necessary for the
Company to raise additional funds through bank facilities, debt or equity
offerings or other sources of capital. Additional funding may not be available
when needed or on terms acceptable to the Company, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Certain Factors That May Affect Future Results, Financial Condition
  and the Market Price of Securities.

     History of Operating Losses; Accumulated Deficit. From its inception in
1989 through the year ended December 31, 1997, the Company has experienced
significant operating losses. The Company incurred operating losses of $7.1
million, $7.5 million and $4.1 million during the years ended December 31, 1997,
1996 and 1995, respectively. The Company currently anticipates incurring further
operating losses as it attempts to expand its business and there can be no
assurance that its future operations will generate positive operating income. As
of December 31, 1997, the Company had an accumulated deficit of $32.2 million.
The Company has generated net operating loss ("NOL") carryforwards for income
tax purposes of approximately $30.0 million through December 31, 1997. These NOL
carryforwards have been recorded as a deferred tax asset of approximately $9.5
million. Based upon the Company's history of operating losses and presently
known factors, management has determined that it is more likely than not that
the Company will be unable to generate sufficient taxable income prior to the
expiration of these NOL carryforwards and has accordingly reduced its deferred
tax assets to zero with a full valuation allowance.


                                       18
<PAGE>

     Intense Competition. The market for facsimile transmission services is
intensely competitive and there are limited barriers to entry. The Company
expects that competition will intensify in the future. The Company believes that
its ability to compete successfully will depend upon a number of factors,
including market presence; the capacity, reliability and security of its network
infrastructure; the pricing policies of its competitors and suppliers; the
timing of introductions of new services and service enhancements by the Company
and its competitors; and industry and general economic trends.

     The Company's current and prospective competitors generally fall into the
following groups: (i) telecommunication companies, such as AT&T, MCI, Sprint,
WorldCom and the regional Bell operating companies, and telecommunications
resellers; (ii) Internet service providers, such as Uunet Technologies, Inc. and
NETCOM On-Line Communications Services, Inc., (iii) on-line services providers,
such as Microsoft Corporation and America Online, Inc. and (iv) direct fax
delivery competitors, including Xpedite Systems, Inc. and UNIFI Communications,
Inc. Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to the Company. As a result, they may be able to develop
and expand their communications and network infrastructures more quickly, adapt
more swiftly to new or emerging technologies and changes in customer
requirements, take advantage of acquisition and other opportunities more
readily, and devote greater resources to the marketing and sale of their
products and services than can the Company. Further, the foundation of the
Company's telephony network infrastructure consists of the right to use the
telecommunications lines of several of the above-mentioned long distance
carriers, including WorldCom and MCI. There can be no assurance that these
companies will not discontinue or otherwise alter their relationships with the
Company in a manner that would have a material adverse effect upon the Company's
business, financial condition and results of operations. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of the Company's current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of the Company's larger potential customers may seek
to internally fulfill their fax communication needs through the deployment of
their own computerized fax communications systems or network infrastructures for
intra-company faxing. Increased competition is likely to result in price
reductions and could result in reduced gross margins and erosion of the
Company's market share, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not have a
material adverse effect on the Company's business, financial condition and
results of operations.

     On August 7, 1997, the Federal Communications Commission (the "FCC") issued
new rules which may significantly reduce the cost of international calls
originating in the United States. Such rules are scheduled to be phased in over
a five-year period starting on January 1, 1998. To the extent that these new
regulations are implemented and result in reductions in the cost of
international calls originating in the United States, the Company will face
increased competition for its international fax services which may have a
material adverse effect on the Company's business, financial condition or
results of operations.

     Possible Delisting from Nasdaq and Market Illiquidity. The Common Stock of
the Company is listed on Nasdaq and continued inclusion of such securities on
Nasdaq requires, among other criteria, that the Company maintain at least
$4,000,000 in net tangible assets. As of December 31, 1997, the Company had net
tangible assets of approximately $4.7 million. Without an equity financing, the
Company is likely not to meet the net tangible assets maintenance requirement as
of March 31, 1998. The Company is currently exploring equity financing
alternatives. If the Company is unable to satisfy such maintenance requirements,
the Company's securities may be delisted from the Nasdaq System. In such event,
trading, if any, in the Common Stock would thereafter be conducted in the
over-the-counter market in the "pink sheets" or the NASD's "Electronic Bulletin
Board." Consequently, the liquidity of


                                       19
<PAGE>

the Company's securities could be materially impaired, not only in the number of
securities that can be bought and sold at a given price, but also through delays
in the timing of transactions and reduction in security analysts' and the
media's coverage of the Company, which could result in lower prices for the
Company's securities than might otherwise be attained and could also result in a
larger spread between the bid and asked prices for the Company securities. In
addition, under the Securities Exchange Act of 1934, as amended, and the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, if the
Common Stock is delisted from trading on Nasdaq and the trading price of the
Common Stock is less than $5.00 per share, trading in the Common Stock would
also be subject to certain broker special sales practice requirements and
special disclosure requirements which could severely limit the market liquidity
of the Common Stock. There can be no assurance that the Common Stock will not be
delisted or treated as penny stock.

     Future Capital Needs; Uncertainty of Additional Financing; Dilution. The
Company currently believes that its current cash and cash equivalents will be
sufficient to meet its presently anticipated cash needs for working capital and
capital expenditure requirements through at least the end of 1998. However, the
Company's cash requirements may vary materially from those now planned as a
result of unforeseen changes that could consume a significant portion of the
available resources before such time. To the extent that funds expected to be
generated from the Company's operations are insufficient to meet current or
planned operating requirements or to maintain Nasdaq listing, the Company will
seek to obtain additional funds through bank facilities, equity or debt
financing, collaborative or other arrangements with corporate partners and
others and from other sources. See "-- Possible Delisting from Nasdaq and Market
Illiquidity." Additional funding may not be available when needed or on terms
acceptable to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. If adequate
funds are not available, the Company may be required to delay or to eliminate
certain expenditures or to license to third parties the rights to commercialize
technologies that the Company would otherwise seek to develop itself. In
addition, in the event that the Company obtains any additional funding, such
financings may have a dilutive effect on the holders of the Company's
securities.

     Limited Protection of Intellectual Property Rights; Risk of Third Party
Claims of Infringement. The Company's success is dependent upon its proprietary
technology. The Company relies primarily on a combination of contract, copyright
and trademark law, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company has been granted a
patent related to its faxSAV Connector and has a patent application pending for
its "e-mail Stamps" security technology incorporated into its faxMailer service.
There can be no assurance that a patent will issue from such application or that
present or future patents will provide sufficient protection to the Company's
present or future technologies, services and processes. In addition, there can
be no assurance that others will not independently develop substantially
equivalent proprietary information or obtain access to the Company's know-how.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's services or to obtain and
use information that the Company regards as proprietary. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.

     On September 5, 1997, the Company filed a complaint for declaratory
judgment against AudioFAX IP, LLP ("AudioFAX") in the United States District
Court for the District of New Jersey. The Company is seeking declaratory relief
that current FaxSav service offerings do not infringe any valid claims in
AudioFAX's patents and that certain claims of AudioFAX's patents are invalid. On
September 8, 1997, AudioFAX filed a complaint against the Company in the United
States District Court for the Northern District of Georgia alleging patent
infringement, seeking a preliminary and permanent injunction against the
Company's alleged infringement and damages. On February 17, 1998, the Company
filed


                                       20
<PAGE>

an answer to the complaint in the Georgia action, denying all allegations of
wrongdoing asserted by AudioFax. On February 25, 1998, the New Jersey District
Court entered an order: (1) denying AudioFax's motion to dismiss for lack of
personal jurisdiction; (2) denying FaxSav's motion to stay or enjoin the Georgia
action; and (3) transferring the New Jersey action to the Georgia court. It is
the Company's intention to appeal items (2) and (3) of the February 25, 1998
order. The Company has been advised and believes that its service offerings do
not infringe any valid patents of AudioFax and intends to vigorously pursue
these actions. There can be no assurance that the Company will prevail or that
AudioFAX will not prevail on its claims. Although the Company believes that it
will prevail in such matter, there can be no assurance that this litigation will
not have a material adverse effect on the Company's business, financial
condition and results of operations.

     There can be no assurance that other third parties will not assert
infringement claims against the Company in the future. Patents have been granted
recently on fundamental technologies in the communications and desktop software
areas, and patents may issue which relate to fundamental technologies
incorporated in the Company's services. As patent applications in the United
States are not publicly disclosed until the patent issues, applications may have
been filed which, if issued as patents, could relate to the Company's services.
The Company could incur substantial costs and diversion of management resources
with respect to the defense of any claims that the Company has infringed upon
the proprietary right of others, which costs and diversion could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, parties making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief
which could effectively block the Company's ability to license and sell its
services in the United States or abroad. Any such judgment could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event a claim relating to proprietary technology or
information is asserted against the Company, the Company may seek licenses to
such intellectual property. There can be no assurance, however, that licenses
could be obtained on terms acceptable to the Company, or at all. The failure to
obtain any necessary licenses or other rights could have a material adverse
effect on the Company's business, financial condition and results of operations.

     Quarterly Fluctuations; Possible Volatility of Stock Price. The Company may
in the future experience significant quarter to quarter fluctuations in its
results of operations, which may result in volatility in the price of the
Company's Common Stock. Quarterly results of operations may fluctuate as a
result of a variety of factors, including demand for the Company's services, the
introduction of new services and service enhancements by the Company or its
competitors, market acceptance of new services, the mix of revenues between
Internet-based versus telephony-based deliveries, the timing of significant
marketing programs, the number and timing of the hiring of additional personnel,
competitive conditions in the industry and general economic conditions. The
Company's revenues are difficult to forecast. Shortfalls in revenues may
adversely and disproportionately affect the Company's results of operations
because a high percentage of the Company's operating expenses are relatively
fixed, and planned expenditures, such as the anticipated expansion of the
Company's Internet infrastructure, are based primarily on sales forecasts. In
addition, the stock market in general has experienced extreme price and volume
fluctuations, which have affected the market price of securities of many
companies in the telecommunications and technology industries and which may have
been unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the market price of the Company's Common
Stock. Accordingly, the Company believes that period to period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future results of operations. There can be no assurance
that the Company will be profitable in any future quarter. Due to the foregoing
factors, it is likely that in one or more future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event would have a material adverse effect on the price of
the Company's Common Stock.

     Dependence on Network Infrastructure; No Assurance of Additional
Internet-Capable Node Deployment. The Company's future success will depend in
part upon the capacity, reliability and security


                                       21
<PAGE>

of its network infrastructure and in part upon its ability to expand the
deployment of an international network of Internet-capable facsimile nodes. The
Company must continue to expand and adapt its network infrastructure as the
number of customers and the volume of traffic they wish to transmit increases.
The expansion and adaptation of the Company's network infrastructure will
require substantial financial, operational and management resources. There can
be no assurance that the Company will be able to expand or adapt its network
infrastructure to meet any additional demand on a timely basis, at a
commercially reasonable cost, or at all. In addition, there can be no assurance
that the Company will be able to deploy additional contemplated Internet-capable
facsimile nodes on a timely basis, at a commercially reasonable cost, or at all.
Any failure of the Company to expand its network infrastructure on a timely
basis, to adapt it to changing customer requirements or evolving industry
standards or to complete the development of the contemplated Internet-capable
facsimile node infrastructure on a timely basis would have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, there can be no assurance that the Company will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, which may prevent the Company from installing Internet-capable
facsimile nodes in such countries and may have a material adverse effect on the
Company's business, operating results and financial condition.

     Dependence on the Internet as a Low-Cost Facsimile Transmission Medium; No
Assurance of Increased Market Acceptance. The Company believes that its future
success will depend in part upon its ability to significantly expand its base of
Internet-capable nodes and route more of its customers' traffic through the
Internet. The Company's success is therefore largely dependent upon the
viability of the Internet as a medium for the transmission of documents. There
can be no assurance that document transmission over the Internet will continue
to be reliable or that Internet capacity constraints will not develop which
inhibit efficient document transmission. The Company accesses the Internet from
its Internet-capable nodes by dedicated connection to third party internet
service providers. The Company pays fixed monthly fees for such Internet access,
regardless of the Company's usage or the volume of its customers' traffic. There
can be no assurance that the current pricing structure for access to and use of
the Internet will not change unfavorably. If material capacity constraints
develop on the Internet or the current Internet pricing structure changes
unfavorably, the Company's business, financial condition and results of
operations would be materially and adversely affected. In addition, the
Company's future success is dependent upon the increased acceptance by potential
customers of the Internet as the preferred medium for transmission of documents.
There can be no assurance that such market acceptance shall continue to
increase. Lack of increased market acceptance would materially and adversely
affect the Company's business, financial condition and results of operations.

     No Assurance of Successful Management of Growth. The Company has rapidly
and significantly expanded its operations and anticipates that significant
expansion will continue to be required in order to address potential market
opportunities. There can be no assurance that such expansion will be
successfully completed or that it will generate sufficient revenues to cover the
Company's expenses. The inability of the Company to promptly address and respond
to these circumstances could have a material adverse effect on the Company's
business, financial condition and results of operations.

     Rapid Industry Change. The telecommunications industry in general, and the
facsimile transmission business in particular, are characterized by rapid and
continuous technological change. Future technological advances in the
telecommunications industry may result in the availability of new services or
products that could compete with the facsimile transmission services provided by
the Company or reduce the cost of existing products or services, any of which
could enable the Company's existing or potential customers to fulfill their fax
communications needs more cost efficiently. There can be no assurance that the
Company will be successful in developing and introducing new services that meet
changing customer needs and respond to technological changes or evolving
industry standards in a timely manner, if at all, or that services or
technologies developed by others will not render the Company's services
noncompetitive. The inability of the Company to respond to changing market
conditions, technological developments, evolving industry standards or changing
customer requirements, or the


                                       22
<PAGE>

development of competing technology or products that render the Company's
services noncompetitive would have a material adverse effect on the Company's
business, financial condition and results of operations.

     Risk of System Failure; Security Risks. The Company's operations are
dependent on its ability to protect its network from interruption by damage from
fire, earthquake, power loss, telecommunications failure, unauthorized entry,
computer viruses or other events beyond the Company's control. Most of the
Company's current computer hardware and switching equipment, including its
processing equipment, is currently located at three sites. There can be no
assurance that the Company's existing and planned precautions of backup systems,
regular data backups and other procedures will be adequate to prevent
significant damage, system failure or data loss. Despite the implementation of
security measures, the Company's infrastructure may also be vulnerable to
computer viruses, hackers or similar disruptive problems caused by its customers
or other Internet users. Persistent problems continue to affect public and
private data networks, including computer break-ins and the misappropriation of
confidential information. Such computer break-ins and other disruptions may
jeopardize the security of information stored in and transmitted through the
computer systems of the individuals, businesses and financial institutions
utilizing the Company's services, which may result in significant liability to
the Company and also may deter potential customers from using the Company's
services. Any damage, failure or security breach that causes interruptions or
data loss in the Company's operations or in the computer systems of its
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.

     Dependence Upon Suppliers; Sole and Limited Sources of Supply. The Company
relies on third parties to supply key components of its network infrastructure,
including long distance telecommunications services and telecommunications node
equipment, many of which are available only from sole or limited sources.
WorldCom and MCI are the primary providers of long distance telecommunications
services to the Company. The Company has from time-to-time experienced partial
interruptions of service from its telecommunications carriers which have
temporarily prevented customers in limited geographical areas from reaching the
FaxSav network. There can be no assurance that the Company will not experience
partial or complete service interruptions in the future. The fixed term of the
Company's contract with WorldCom expired on November 30, 1997, after which the
contract continues on a month-to-month basis until renegotiated by the parties
or terminated by either party. There can be no assurance that WorldCom and the
Company's other telecommunications providers will continue to provide long
distance services to the Company at attractive rates, or at all, or that the
Company will be able to obtain such services in the future from these or other
long distance providers on the scale and within the time frames required by the
Company. Any failure to obtain such services on a timely basis at an affordable
cost, or any significant delays or interruptions of service from such carriers,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

     All of the faxboards used in the Company's telecommunications nodes are
supplied by Brooktrout Technology, Inc. ("Brooktrout"). The Company purchases
Brooktrout faxboards on a non-exclusive basis pursuant to purchase orders placed
from time-to-time, carries a limited inventory of faxboards and has no
guaranteed supply arrangement with Brooktrout. In addition to faxboards, many of
the routers, switches and other hardware components used in the Company's
network infrastructure are supplied by sole or limited sources on a
non-exclusive, purchase order basis. There can be no assurance that Brooktrout
or the Company's other suppliers will not enter into exclusive arrangements with
the Company's competitors, or cease selling these components to the Company at
commercially reasonable prices, or at all. The anticipated expansion of the
Company's network infrastructure is expected to place a significant demand on
the Company's suppliers, some of which have limited resources and production
capacity. In addition, certain of the Company's suppliers, in turn, rely on sole
or limited sources of supply for components included in their products. Failure
of the Company's suppliers to adjust to meet such increasing demand may prevent
them from continuing to supply components and products in the quantities and
quality and at the times required by the Company, or at all. The Company's
inability to


                                       23
<PAGE>

obtain sufficient quantities of sole or limited source components or to develop
alternative sources if required could result in delays and increased costs in
the expansion of the Company's network infrastructure or in the inability of the
Company to properly maintain the existing network infrastructure, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.

     Risk of Software Defects or Development Delays. Software-based services and
equipment, such as the Company's faxSAV for Internet suite of services and the
faxSAV Connector, may contain undetected errors or failures when introduced or
when new versions are released. There can be no assurance that, despite testing
by the Company and by current and potential customers, errors will not be found
in such software or other releases after commencement of commercial shipments,
or that the Company will not experience development delays, resulting in delays
in the shipment of software and a loss of or delay in market acceptance, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.

     Dependence on Key Personnel. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical, sales and managerial employees or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.

     Reliance on International Strategic Alliances; Risks Associated with
International Operations. The Company has established and intends to expand an
international customer base by forming strategic sales and marketing alliances
with foreign Internet service providers, telecommunications companies and
resellers. There can be no assurance that the Company will be able to establish
additional strategic alliances or to maintain such strategic alliances. The
Company's success in expanding its international customer base depends not only
on the formation of additional such alliances but also on the success of these
partners and their ability to market the Company's services. The failure to
maintain such strategic alliances or the failure of these partners to
successfully develop and sustain a market for the Company's service will have a
material adverse effect on the Company's ability to expand its international
customer base, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

     The Company derived approximately $2.3 million or 13.2% of its total
revenues, from customers outside of the United States in 1997. The Company
expects that such revenues will represent an increasing percentage of its total
revenues in the future. Risks inherent in the Company's international business
activities generally include foreign currency exchange risk, unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs of
localizing products for foreign countries, lack of acceptance of localized
products in foreign markets, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially adverse tax
consequences, and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international revenues and, consequently, on the
Company's business, financial condition and results of operations.

     Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. There can be no assurance that the Company's
software contains all necessary date code changes. The Company and its customers
may be affected by Year 2000 issues. Compliance with Year 2000 requirements may
disrupt the Company's ability to continue developing and marketing its facsimile
transmission products and services. The Company may


                                       24
<PAGE>

also incur certain unexpected expenditures in connection with Year 2000
compliance. Any of the foregoing could result in a material adverse effect on
the Company's business, financial condition and results of operations.

     Government Regulation. The Company is subject to regulation by various
state public service and public utility commissions and by various international
regulatory authorities. FaxSav is licensed by the FCC as an authorized
telecommunications company and is classified as a "non-dominant interexchange
carrier." Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on the Company and to change its regulatory classification. There
can be no assurance that the FCC will not change the Company's regulatory
classification or otherwise subject the Company to more burdensome regulatory
requirements.

     On August 7, 1997, the FCC issued new rules which may significantly reduce
the cost of international calls originating in the United States. Such rules are
scheduled to be phased in over a five-year period starting on January 1, 1998.
To the extent that these new regulations are implemented and result in
reductions in the cost of international calls originating in the United States,
the Company will face increased competition for its international fax services
which may have a material adverse effect on the Company's business, financial
condition or results in operations.

     In connection with the deployment of Internet-capable nodes in countries
throughout the world, the Company is required to satisfy a variety of foreign
regulatory requirements. The Company intends to explore and seek to comply with
these requirements on a country-by-country basis as the deployment of
Internet-capable facsimile nodes continues. There can be no assurance that the
Company will be able to satisfy the regulatory requirements in each of the
countries currently targeted for node deployment, and the failure to satisfy
such requirements may prevent the Company from installing Internet-capable
facsimile nodes in such countries. The failure to deploy a number of such nodes
could have a material adverse effect on the Company's business, operating
results and financial condition.

     The Company's nodes and its faxLauncher service utilize encryption
technology in connection with the routing of customer documents through the
Internet. The export of such encryption technology is regulated by the United
States government. The Company has authority for the export of such encryption
technology other than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda.
Nevertheless, there can be no assurance that such authority will not be revoked
or modified at any time for any particular jurisdiction or in general. In
addition, there can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit the Company's
ability to distribute its services outside of the United States or
electronically. While the Company takes precautions against unlawful exportation
of its software, the global nature of the Internet makes it virtually impossible
to effectively control the distribution of its services. Moreover, future
Federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Any such export restrictions, the
unlawful exportation of the Company's services, or new legislation or regulation
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Item 8. Financial Statements and Supplementary Data

The information in response to this item is set forth in the Financial
Statements beginning on page F-3 of this report on Form 10-K.

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

None.


                                       25
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Certain information in response to this item regarding the directors and
executive officers of FaxSav is incorporated herein by reference to FaxSav
Incorporated's Proxy Statement dated April 1998 to be filed with the Securities
and Exchange Commission (the "SEC"). Information on compliance with Section
16(a) of the Exchange Act is incorporated herein by reference to "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Company's
Proxy Statement dated April 1998 to be filed with the SEC.

Item 11. Executive Compensation

Information in response to this item is incorporated herein by reference to
"Executive Compensation" in the Company's Proxy Statement dated April 1998 to be
filed with the SEC.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information in response to this item is incorporated herein by reference to
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement dated April 1998 to be filed with the SEC.

Item 13. Certain Relationships and Related Transactions

Information in response to this item is incorporated herein by reference to
"Certain Transactions" in the Company's Proxy Statement dated April 1998 to be
filed with the SEC.


                                       26
<PAGE>

                                     PART IV

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

(a) (1)  Financial Statements                                           Page No.
                                                                        --------

         Report of Independent Accountants...................................F-2
         Balance Sheets at December 31, 1997 and 1996........................F-3
         Statement of Operations for the years ended December 31, 1997,
            1996 and 1995....................................................F-4
         Statement of Cash Flows for the years ended December 31, 1997,
            1996 and 1995....................................................F-5
         Statement of Stockholders' Equity (Deficit) for the years
            ended December 31, 1997, 1996 and 1995...........................F-6
         Notes to Financial Statements..................................F-7-F-21

    (2)  Financial Statement Schedules

         Supplemental Schedules to Financial Statements.....................F-22

(b)  Reports on Form 8-K

     None.

(c)  Exhibits

3.1       Registrant's Sixth Amended and Restated Certificate of Incorporation
          (incorporated by reference to exhibit 3.3 to the Registrant's
          Registration Statement on Form S-1, Registration No. 333- 09613
          ("Registrant's Registration Statement")).

3.2       By-laws of the Registrant (incorporated by reference to exhibit 3.4
          and 3.5 to the Registrant's Registration Statement and Exhibit 3.3 to
          the Registrants. Report on Form 10-Q for the quarter ended June 30,
          1997).

4.1       Specimen Common Stock Certificate (incorporated by reference to
          exhibit 4.1 to the Registrant's Registration Statement).

4.2       See Exhibits 3.1 and 3.2 for provisions of the Certificate of
          Incorporation and Bylaws of the Registrant defining rights of holders
          of Common Stock of the Registrant.

10.1      Fifth Amended and Restated Investor Rights Agreement, as amended
          (incorporated by reference to exhibits 10.1 and 10.2 to the
          Registrant's Registration Statement).

10.2      1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to
          the Registrant's Registration Statement).

10.3      1996 Stock Option/Stock Issuance Plan (incorporated by reference to
          exhibit 10.4 to the Registrant's Registration Statement).

10.4      Form of Officer Severance Agreement (incorporated by reference to
          exhibit 10.5 to the Registrant's Registration Statement).

10.5      Form of Director Severance Agreement (incorporated by reference to
          exhibit 10.6 to the Registrant's Registration Statement).

10.6*     Telecommunications Services Agreement, between LDDS WorldCom and the
          Registrant, dated December 1, 1996 (incorporated by reference to
          exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter
          ended March 31, 1997).


                                       27
<PAGE>

10.7*     Agreement between MCI Telecommunications Corporation and the
          Registrant, effective March 1, 1996 (incorporated by reference to
          exhibit 10.9 to the Registrant's Registration Statement).

10.8      Lease Agreement, dated May 28, 1992, between Metro Four Associates
          Limited Partnership, Thornall Associates and the Registrant (the
          "Metro Four Lease"), as extended and amended prior to May 5, 1997
          (incorporated by reference to exhibit 10.10 to the Registrant's
          Registration Statement).

10.9**    Amendment to Metro Four Lease, dated May 5, 1997.

10.10**   Loan and Security Agreement, dated September 26, 1997, between the
          Company and Silicon Valley Bank.

10.11     Letter Agreement, dated November 1, 1994 between Telstra Incorporated
          and the Registrant (incorporated by reference to exhibit 10.12 to the
          Registrant's Registration Statement).

10.12     Series B Preferred Stock Warrant between the Registrant and Comdisco,
          Inc., dated May 30, 1991 (incorporated by reference to exhibit 10.14
          to the Registrant's Registration Statement).

10.13     Series B Preferred Stock Warrant between the Registrant and Comdisco,
          Inc., dated September 16, 1992 (incorporated by reference to exhibit
          10.15 to the Registrant's Registration Statement).

10.14     Series D Preferred Stock Warrant between the Registrant and Comdisco,
          Inc., dated October 28, 1993 (incorporated by reference to exhibit
          10.16 to the Registrant's Registration Statement).

10.15     Common Stock Warrant between the Registrant and LTI Ventures Leasing
          Corp., dated February 15, 1993 (incorporated by reference to exhibit
          10.17 to the Registrant's Registration Statement).

10.16     Common Stock Warrant between the Registrant and LTI Ventures Leasing
          Corp., dated May 5, 1994 (incorporated by reference to exhibit 10.18
          to the Registrant's Registration Statement).

10.17     Common Stock Warrant between the Registrant and Silicon Valley
          Bancshares, dated April 6, 1992 (incorporated by reference to exhibit
          10.19 to the Registrant's Registration Statement).

10.18     Common Stock Warrant between the Registrant and Silicon Valley
          Bancshares, dated July 7, 1995 (incorporated by reference to exhibit
          10.20 to the Registrant's Registration Statement).

10.19     Form of Common Stock Purchase Agreement, dated November 21, 1997
          (incorporated by reference to Exhibit 10.1 to the Registrant's
          Registration Statement on Form S-3, Registration No. 333-43929).

11.**     Statement Regarding Computation of Earnings Per Share.

23.**     Consent of Coopers & Lybrand L.L.P.

27.**     Financial Data Schedule.

99.       Proxy Statement of FaxSav Incorporated relative to the Annual Meeting
          of the Stockholders to be held on May 28, 1998, which is incorporated
          by reference into Part III of this Form 10-K.

----------
*   Confidential treatment granted.
**  Filed herewith.


                                       28
<PAGE>

                                   SIGNATURES

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


                          FAXSAV INCORPORATED

                          By:  /s/ Thomas F. Murawski
                               ----------------------
                          Thomas F. Murawski
                          Chief Executive Officer, President and Chairman of the
                          Board of Directors


          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
on March 30, 1998:


Signature                       Title(s)

/s/ Thomas F. Murawski          Chief Executive Officer, President and Chairman
----------------------          of the Board of Directors

/s/ Peter S. Macaluso           Chief Financial Officer (Principal Financial and
----------------------          Accounting Officer), Treasurer and Secretary

/s/ Jeffrey M. Drazan           Director
----------------------

/s/ Peter A. Howley             Director
----------------------

/s/ Robert Labant               Director
----------------------


                                       29
<PAGE>

FaxSav Incorporated
(formerly Digitran Corporation)

Index to Financial Statements


                                                                            Page
                                                                            ----

Report of Independent Accountants............................................F-2

Balance Sheets as of December 31, 1997 and 1996..............................F-3

Statements of Operations for the years ended December 31, 1997,
  1996 and 1995..............................................................F-4

Statements of Cash Flows for the years ended December 31, 1997,
  1996 and 1995..............................................................F-5

Statements of Stockholders' Equity (Deficit) for the years ended
  December 31, 1997, 1996 and 1995...........................................F-6

Notes to Financial Statements ..........................................F-7-F-21

Supplemental Schedule to Financial Statements...............................F-22


                                                                             F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
  FaxSav Incorporated:

We have audited the financial statements and financial statement schedule of
FaxSav Incorporated (formerly Digitran Corporation) (the "Company") listed in
the index on page F-1 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FaxSav Incorporated as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.

                                          COOPERS & LYBRAND L.L.P.

Parsippany, New Jersey
February 4, 1998


                                                                             F-2
<PAGE>

FaxSav Incorporated

Balance Sheets
as of December 31, 1997 and 1996


<TABLE>
<CAPTION>
                                                                 December 31,
                                                          ---------------------------
                                                              1997           1996
                                                          -----------   -------------
<S>                                                       <C>            <C>
Current assets:
  Cash and cash equivalents                               $ 3,680,185    $ 7,923,105
  Marketable securities                                                    1,002,513
  Accounts receivable, less allowances of $330,724 and
    $229,376 as of December 31, 1997 and 1996,
    respectively                                            2,280,119      2,015,155
  Prepaid expenses and other current assets                    35,844        251,417
                                                          -----------   -------------

        Total current assets                                5,996,148     11,192,190

Property and equipment, net                                 4,175,264      3,086,845
Other assets, net                                             324,173        169,211
                                                          -----------   -------------

        Total assets                                      $10,495,585    $14,448,246
                                                          ===========   =============

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                        $   658,703    $   263,446
  Accrued expenses and other liabilities                    3,219,846      3,413,787
  Obligation under capital lease                              315,370        282,776
  Current portion of notes payable                            469,217        152,111
                                                          -----------   -------------

        Total current liabilities                           4,663,136      4,112,120

Obligation under capital lease                                 85,551        398,662
Notes payable                                               1,083,190        278,871
                                                          -----------   -------------

        Total liabilities                                   5,831,877      4,789,653
                                                          -----------   -------------
Commitments and contingencies (Note 12)

Stockholders' equity:

    Common stock, $0.01 par value; 40,000,000 shares
       authorized; 10,827,855 and 9,792,010 shares
       issued as of December 31, 1997 and 1996,
       respectively, and 10,806,466  and 9,770,621
       shares outstanding as of December 31, 1997
       and 1996, respectively                                 108,065         97,706
  Additional paid-in capital                               36,730,403     34,616,745
  Accumulated deficit                                     (32,174,745)   (25,055,843)
  Treasury stock, at cost, 21,389 common shares as
     of December 31, 1997 and 1996, respectively                  (15)           (15)
                                                          -----------   -------------

        Total stockholders' equity                          4,663,708      9,658,593
                                                          -----------   -------------

          Total liabilities and stockholders' equity      $10,495,585   $ 14,448,246
                                                          ===========   =============
</TABLE>

The accompanying notes are an integral part of the financial statements.     F-3
<PAGE>

FaxSav Incorporated

Statements Of Operations
for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                            1997            1996            1995
                                        ------------    ------------    ------------
<S>                                     <C>             <C>             <C>
Revenue                                 $ 17,418,333    $ 15,035,711    $ 11,649,499
Cost of service                           10,413,797       8,898,308       7,020,659
                                        ------------    ------------    ------------

        Gross margin                       7,004,536       6,137,403       4,628,840
                                        ------------    ------------    ------------

Operating expenses:
  Network operations and support           2,286,594       1,984,607       1,183,119
  Research and development                 1,909,137       1,771,822         840,083
  Sales and marketing                      5,268,099       6,065,045       4,237,787
  General and administrative               3,132,438       2,495,624       2,006,901
  Depreciation and amortization            1,702,054       1,436,673         928,652
  Other                                            0               0        (440,625)
                                        ------------    ------------    ------------

        Total operating expenses          14,298,322      13,753,771       8,755,917
                                        ------------    ------------    ------------

        Operating loss                    (7,293,786)     (7,616,368)     (4,127,077)
                                        ------------    ------------    ------------

Other income (expense):
  Interest income                            240,987         188,680          98,408
  Interest expense                          (162,218)       (142,269)        (52,727)
  Other                                       96,115          93,568          (4,051)
                                        ------------    ------------    ------------

                                             174,884         139,979          41,630
                                        ------------    ------------    ------------

        Net loss                        $ (7,118,902)   $ (7,476,389)   $ (4,085,447)
                                        ============    ============    ============

Historical basic and diluted net loss
  per common share                      $      (0.72)   $      (2.74)   $     (12.48)
                                        ============    ============    ============

Shares used in computing historical
  net loss per common shares               9,880,681       2,724,651         327,353
                                        ============    ============    ============

Unaudited pro forma data (Note 2):
  Pro forma basic and diluted
    net loss per common share           $      (0.72)   $      (0.86)   $      (0.45)
                                        ============    ============    ============

  Shares used in computing pro
    forma net loss per common
    share                                  9,880,681       8,712,054       9,079,566
                                        ============    ============    ============
</TABLE>


The accompanying notes are an integral part of the financial statements.     F-4
<PAGE>

FaxSav Incorporated

Statements Of Cash Flows
for the years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                           1997            1996           1995
                                                      -------------    ------------   --------------
<S>                                                   <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                            $ (7,118,902)   $ (7,476,389)   $ (4,085,447)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization expense              1,702,054       1,436,673         928,652
      Provision for doubtful accounts                      230,520         219,400         194,720
      Gain on sale of property and equipment               (18,791)          --              --
      Changes in assets and liabilities:
        Accounts receivable                               (495,484)        123,497      (1,440,046)
        Prepaid expenses and other current
            assets                                         215,573        (184,111)         48,363
        Other assets                                      (182,462)        (80,199)        (63,584)
        Accounts payable                                   395,257         (40,961)       (263,097)
        Accrued expenses and other
            liabilities                                   (193,941)      1,086,523       1,171,916
                                                      -------------    ------------   --------------

        Net cash used in operating activities           (5,466,176)     (4,915,567)     (3,508,523)
                                                      -------------    ------------   --------------

Cash flows used in investing activities:
  Proceeds/(purchase) of marketable
    securities                                           1,002,513      (1,002,513)          --
  Purchase of property and equipment                    (2,856,952)     (2,328,829)     (1,267,219)
  Proceeds from sales of property and
    equipment                                              112,770
                                                      -------------    ------------   --------------

        Net cash used in investing activities           (1,741,669)     (3,331,342)     (1,267,219)
                                                      -------------    ------------   --------------

Cash flows from financing activities:
  Principal payments made under capital
    lease obligation                                      (280,517)       (219,201)       (135,343)
  Borrowings under line of credit                        1,299,797         956,334       1,000,000
  Repayments of notes payable                             (178,372)     (1,525,352)          --
  Proceeds from issuance of preferred stock, net             --          7,933,434       4,151,863
  Proceeds from issuance of common stock
    and exercise of stock options and warrants, net      2,124,017      10,636,307           --
  Treasury stock acquired - preferred                        --         (2,163,878)          --
                                                      -------------    ------------   --------------

        Net cash provided by financing
            activities                                   2,964,925      15,617,644       5,016,520
                                                      -------------    ------------   --------------

Net increase in cash                                    (4,242,920)      7,370,735         240,778

Cash and cash equivalents at beginning of
    period                                               7,923,105         552,370         311,592
                                                      -------------    ------------   --------------

Cash and cash equivalents at end of period            $  3,680,185    $  7,923,105    $    552,370
                                                      =============    ============   ==============

Supplemental Disclosure:
  Cash paid for interest                              $     45,918    $     68,421    $     41,685
                                                      =============    ============   ==============

Noncash investing and financing activities:
  Equipment acquired under capital lease              $      --       $    421,805    $    569,178
                                                      =============    ============   ==============

  Issuance of common stock under option
    pursuant to severance agreement                   $      --       $     42,091    $      --
                                                      =============    ============   ==============
</TABLE>


The accompanying notes are an integral part of the financial statements.     F-5
<PAGE>

FaxSav Incorporated

Statements Of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                        Convertible
                                                      Preferred Stock                   Common Stock           Additional
                                                ----------------------------     --------------------------      Paid-In
                                                  Shares         Amount           Shares          Amount         Capital
                                                ------------  --------------     ----------    ------------    ------------

<S>                                              <C>           <C>                  <C>        <C>             <C>
Balance at January 1, 1995                       39,679,021    $     39,679         327,353    $      3,274    $ 14,071,681
Issuance of Series E preferred stock             19,090,900          19,091                                       4,180,828
Expense in connection with stock issuance                                                                           (48,056)
Net loss
                                                ------------  --------------     ----------    ------------    ------------

Balance at December 31, 1995                     58,769,921          58,770         327,353           3,274      18,204,453

Issuance of Series F preferred stock             19,999,988          20,000                                       7,979,998
Treasury stock acquired - Series D preferred
  stock                                          (8,655,510)                                                     (2,155,222)
Conversion of preferred stock into common
  stock                                         (70,127,830)        (78,783)      7,791,981          77,920          (7,793)
Issuance of common stock in connection with
  initial public offering                                                         1,600,000          16,000      11,888,000
Expense in connection with stock issuances                                                                       (1,343,035)
Exercise of warrants                                 13,431              13             131                           8,765
Exercise of stock options                                                            51,156             512          41,579
Net loss
                                                ------------  --------------     ----------    ------------    ------------

Balance at December 31, 1996                              0               0       9,770,621          97,706      34,616,745
                                                ------------  --------------     ----------    ------------    ------------

Issuance of common stock in connection with
  private placement                                                               1,000,000          10,000       2,165,000
Exercise of stock options                                                            35,746             358          27,277
Exercise of warrants                                                                     99               1             539
Expenses in connection with stock issuance                                                                          (79,158)
Net loss
                                                ------------  --------------     ----------    ------------    ------------

Balance, at December 31, 1997                        -0-      $     -0-          10,806,466    $    108,065    $ 36,730,403
                                                ============  ==============     ==========    ============    ============

<CAPTION>
                                                 Accumulated     Treasury
                                                   Deficit         Stock          Total
                                                -------------   -------------  --------------

<S>                                             <C>             <C>             <C>
Balance at January 1, 1995                      $(13,494,007)   $        (15)   $    620,612
Issuance of Series E preferred stock                                               4,199,919
Expense in connection with stock issuance                                            (48,056)
Net loss                                          (4,085,447)                     (4,085,447)
                                                -------------   -------------  --------------

Balance at December 31, 1995                     (17,579,454)            (15)        687,028

Issuance of Series F preferred stock                                               7,999,998
Treasury stock acquired - Series D preferred
  stock                                                               (8,656)     (2,163,878)
Conversion of preferred stock into common
  stock                                                                8,656              --
Issuance of common stock in connection with
  initial public offering                                                         11,904,000
Expense in connection with stock issuances                                        (1,343,035)
Exercise of warrants                                                                   8,778
Exercise of stock options                                                             42,091
Net loss                                          (7,476,389)                     (7,476,389)
                                                -------------   -------------  --------------

Balance at December 31, 1996                     (25,055,843)            (15)      9,658,593
                                                -------------   -------------  --------------

Issuance of common stock in connection with
  private placement                                                                2,175,000
Exercise of stock options                                                             27,635
Exercise of warrants                                                                     540
Expenses in connection with stock issuance                                           (79,158)
Net loss                                          (7,118,902)                     (7,118,902)
                                                -------------   -------------  --------------

Balance, at December 31, 1997                   $(32,174,745)   $        (15)   $  4,663,708
                                                =============   =============  ==============
</TABLE>

The Company has 1,000,000 authorized shares of preferred stock at $0.01 par
value. No preferred stock is currently issued or outstanding.


The accompanying notes are an integral part of the financial statements.     F-6
<PAGE>

FaxSav Incorporated

Notes To Financial Statements

1.   Organization and Nature of Operations:

     FaxSav Incorporated, formerly known as Digitran Corporation (the
     "Company"), was formed in November 1989 to engage in the sale of network
     services customized for the transmission of data, facsimile and graphical
     information. In February 1996, the Company changed its name to FaxSav
     Incorporated.

     The Company designs, develops, and markets a variety of
     business-to-business facsimile transmission services, including fax-to-fax,
     desktop to fax, enhanced fax and broadcast fax services and operates in one
     business segment. Through the use of its integrated Internet-based and
     telephony-based network and its proprietary software, the Company enables
     its customers to send documents and images to fax machines worldwide. In
     early 1996, the Company began to deploy a global Internet-based network of
     nodes that enable it to bypass the long distance carriers' networks when
     sending faxes to or from international areas serviced by these nodes. Prior
     to 1997, most of the Company's revenues have been derived from delivering
     facsimile transmissions to locations outside the United States from
     customers located throughout the United States. In 1997, the Company
     expanded its customer base in international markets including the
     development of a fax-to-fax business in certain markets in the Asia Pacific
     region. As a result, international revenues were approximately $2,300,000
     in 1997. Due to the ubiquitous nature of the Company's network and its
     centralized operations in the United States, the Company measures the
     results of its international business to the gross margin level only, which
     approximated the overall results for the Company in 1997. Identifiable
     assets from all international localities were less than 10% of the
     Company's total assets.

     The Company is subject to risks common to rapidly growing technology-based
     companies, including limited operating history, dependence on key
     personnel, raising capital, rapid technological change, dependence on
     network infrastructure, competition from substitute products and larger
     companies, and the successful development and marketing of commercial
     products and services.

     The Company currently believes its cash and cash equivalents will be
     sufficient to meet its presently anticipated cash needs through at least
     the end of 1998 and, in order to meet minimum NASDAQ listing requirements,
     the Company anticipates raising additional equity financing during 1998.
     Even if the Company's cash requirements vary materially from those now
     planned as a result of unforeseen changes, management believes that its
     current sources of liquidity are sufficient for it to continue operations
     through the end of 1998. In this regard, the Company is prepared to limit
     its network expansion and reduce or eliminate research and development
     activities, and sales and marketing expenditures, if necessary.

     Fax boards used in the Company's telecommunications network are supplied by
     one vendor on a non-exclusive basis. Other components of the Company's
     operating network are supplied by a limited number of vendors, also on a
     non-exclusive basis. Management believes that other suppliers could be
     identified to provide this equipment at a competitive price if this
     supplier was unable to provide equipment.


                                                                             F-7
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

1.   Organization and Nature of Operations (Continued):

     Operation of the Company's network is dependent upon long distance
     telecommunications companies transmitting information for the Company. The
     Company has typically utilized only a limited number of these providers to
     generate volume discounts. The Company's business strategy is also
     dependent upon providing this service at the lowest possible cost which is
     greatly affected by the cost of long distance transmission service.
     Management believes that its long-distance transmissions could be made at
     competitive rates with any number of companies providing long distance
     service.

     In October 1996, the Company completed an initial public offering of 1.6
     million shares of its common stock. The aggregate gross proceeds of the
     offering were approximately $12 million.

     In connection with the offering, the Company filed an amendment to its
     Fifth Amended and Restated Certificate of Incorporation to effect a
     one-for-nine reverse stock split at a par value of $0.01 and to change the
     authorized number of common shares to 40,000,000. All share and per share
     amounts in the financial statements have been retroactively restated to
     reflect the reverse stock split.

     The Company also filed immediately prior to the closing of the offering its
     Sixth Amended and Restated Certificate of Incorporation which changed the
     authorized amount of preferred stock. All outstanding shares of preferred
     stock were converted at the consent of the holders into an aggregate of
     7,791,981 shares of common stock.

2.   Summary Of Significant Accounting Policies:

     A.   Revenue Recognition and Cost of Service:

          The Company recognizes revenue as services are provided to customers
          and records the related cost of service as incurred. Cost of service
          consists of local access charges, leased network backbone circuit
          costs and long distance domestic and international termination
          charges.

     B.   Estimates:

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


                                                                             F-8
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

2.   Summary Of Significant Accounting Policies (Continued):

     B.   Estimates (Continued):

          Significant estimates made by management and included in the financial
          statements are the allowance for bad debts, the valuation allowance
          for deferred tax assets, and the accrual for legal defense.

     C.   Reverse Stock Split and Conversion of Preferred Stock:

          In October 1996, in connection with an initial public offering of the
          Company's common stock, the Company effectuated a reverse stock split
          for common shares of one-for-nine shares. The effect of this reverse
          stock split on all share and per share amounts has been retroactively
          restated in the financial statements.

          The Company also converted all of its outstanding preferred stock at
          the election of the holders into 7,791,981 shares of common stock in
          connection with the offering.

     D.   Earnings Per Share:

          In 1997, the Company adopted Statement of Financial Accounting
          Standards ("SFAS") No. 128, "Earnings per Share". In accordance with
          SFAS 128, both basic and diluted net loss per share are presented in
          the financial statements.

          In February 1998, the SEC issued Staff Accounting Bulletin No. 98
          ("SAB 98"), which revised the views of the staff contained in previous
          staff accounting bulletins, to be consistent with the provisions of
          SFAS 128. All prior periods have been restated in accordance with SAB
          98.

          Stock options outstanding of approximately 1,523,000, 1,256,000 and
          1,067,000 for the years ended December 31, 1997, 1996, and 1995,
          respectively, have been excluded from the calculation of diluted
          earnings per share, since their effect would be antidilutive.

          In addition, approximately 100,000 warrants outstanding for each of
          the three years ended December 31, 1997, have been excluded from
          diluted earnings per share, since their effect would be antidilutive.


                                                                             F-9
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

2.   Summary Of Significant Accounting Policies (Continued):

     E.   Pro Forma Earnings Per Share:

          Pro forma basic and diluted net loss per common shares is based on the
          weighted average number of shares outstanding during the periods
          presented, including the effect of pro forma conversion for all
          periods of all outstanding preferred stock into 7,791,981 shares of
          common stock in October 1996 in connection with the initial public
          offering of the Company. Pro forma basic and diluted net loss per
          share has been presented as additional information to enhance the
          comparability of results for all periods presented assuming conversion
          of the preferred stock into common shares of the Company.

     F.   Cash Equivalents:

          The Company considers all highly liquid debt instruments purchased
          with an original maturity of three months or less to be cash
          equivalents.

     G.   Marketable Securities:

          The Company accounts for its marketable securities in accordance with
          statement of Financial Accounting Standards No. 115, "Accounting for
          Certain Investments in Debt and Equity Securities" ("SFAS No. 115").
          SFAS 115 requires a more detailed disclosure of debt and equity
          securities held for investment, the methods to be used in determining
          fair value and when to record unrealized holding gains and losses in
          earnings or in a separate component of stockholders' equity. It is the
          Company's policy to invest primarily in government and commercial
          paper securities. It is the Company's intent and ability to hold
          investments to maturity.

     H.   Property and Equipment:

          Property and equipment are stated at cost, net of accumulated
          depreciation and amortization. Depreciation of furniture and
          equipment, except enhanced fax equipment, is calculated using the
          straight-line method over their estimated useful lives of five years.
          Enhanced fax equipment is included in equipment and is depreciated
          over its estimated life of 30 months. Leasehold improvements are
          amortized using the straight-line method over the lesser of the lease
          term or the estimated useful life of the related asset. Repairs and
          maintenance costs are expensed as incurred; major renewals and
          betterments are capitalized. When assets are sold or otherwise
          disposed of, the cost and related accumulated depreciation are removed
          from the accounts and any gain or loss on the disposition is reflected
          in current operations.


                                                                            F-10
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

2.   Summary Of Significant Accounting Policies (Continued):

     H.   Property and Equipment (Continued):

          Long-lived assets are reviewed for impairment whenever events or
          changes in circumstances indicate that the carrying amount may not be
          recoverable. If the sum of the expected future undiscounted cash flows
          is less than the carrying amount of the asset, a loss is recognized
          for the difference between the estimated fair value and carrying value
          of the assets.

     I.   Income Taxes:

          The Company accounts for income taxes in accordance with Statement of
          Financial Accounting Standards No. 109, "Accounting for Income Taxes".
          This statement requires an asset and liability approach for deferred
          taxes that recognizes deferred tax assets and liabilities for the
          expected future tax consequences of events that have been recognized
          in the Company's financial statements or tax returns.

     J.   Concentration of Credit Risk:

          Statement of Financial Accounting Standards No. 105, "Disclosure of
          Information about Financial Instruments with Off-Balance-Sheet Risk
          and Financial Instruments with Concentration of Credit Risk" requires
          disclosure of any significant off-balance-sheet and credit risk
          concentrations. Financial instruments that potentially subject the
          Company to concentrations of credit risk consist primarily of cash and
          cash equivalents and accounts receivable. From time to time, the
          Company had concentrations of cash in several banks in the form of
          demand deposits and money market accounts. The Company believes that
          concentrations of credit risk with respect to trade accounts
          receivable are limited due to the large number of entities comprising
          the Company's customer base.

     K.   Financial Instruments:

          The estimated fair value of the Company's financial instruments, which
          include cash, cash equivalents, accounts receivable, obligations under
          capital lease and amounts outstanding under line of credit,
          approximates their carrying value.

          The fair value of cash and cash equivalents and accounts receivable
          approximates their carrying value because their maturity is generally
          less than one year in duration. The fair value of obligations under
          capital lease and amounts outstanding under the line of credit was
          determined using valuation techniques that considered cash flow
          discounted at current rates.


                                                                            F-11
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

2.   Summary Of Significant Accounting Policies (Continued):

     L.   Impact of Recently Issued Accounting Standards:

          In 1997, the Financial Accounting Standards Board issued Statement of
          Financial Accounting Standards (SFAS) No. 130, "Reporting
          Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
          of an Enterprise and Related Information." These statements, which are
          effective for fiscal years beginning after December 15, 1997, expand
          or modify disclosures and will have no impact on the financial
          position, results of operations or cash flows.

     M.   Legal Defense:

          The Company accrues the estimated future cost of defending itself
          against lawsuits or other claims when management has determined, in
          consultation with its legal counsel, that these matters are probable
          of assertion against the Company.

     N.   Reclassification:

          Certain items in 1996 have been reclassified to conform to 1997
          presentation.

3.   Marketable Securities:

     Held-to-maturity marketable securities consist of corporate commercial
     paper. These securities are carried at original cost, which approximates
     fair value. Any realized gains or losses would be recognized on the
     specific identification method. There were no gross unrealized gains or
     losses at December 31, 1996.

     Investments in securities classified as held-to-maturity at December 31,
     1996 had a maturity date which did not exceed one year.


                                                                            F-12
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

4.   Property And Equipment:

     Property and equipment is comprised of the following:

                                                   December 31,
                                              -------------------------
                                                 1997          1996
                                              -----------  ------------

      Equipment                               $7,844,450   $ 5,361,788
      Computer software                          364,385       210,833
      Furniture and fixtures                     113,386        44,611
      Leasehold improvements                     160,008       127,506
                                              -----------  ------------

                                               8,482,229     5,744,738
        Less, accumulated depreciation and
          amortization                         4,306,965     2,657,893
                                              -----------  ------------

                                              $4,175,264   $ 3,086,845
                                              ===========  ============


     Included in the equipment balance is certain equipment under capital leases
     of approximately $966,058 and $935,250 at December 31, 1997 and 1996,
     respectively. Accumulated amortization of equipment under capital leases
     approximated $394,867 and $201,656 as of December 31, 1997 and 1996,
     respectively. Depreciation and amortization expense for owned property and
     equipment for the years ended December 31, 1997, 1996, and 1995, amounted
     to $1,674,554, $1,388,753, and $897,260, respectively.

5.   Accrued Expenses and Other Liabilities:

     Accrued expenses and other liabilities is comprised of the following:

                                                           December 31,
                                                     --------------------------

                                                         1997          1996
                                                     ------------  ------------

      Accrued carrier charges                        $ 1,926,925   $ 1,737,370
      Accrued salaries, bonuses and commissions          195,688       173,830
      Excise and state taxes payable                     269,245       309,959
      Accrual for legal defense                          251,917       381,073
      Insurance premiums payable                          79,449       235,021
      Other                                              496,622       576,534
                                                     ------------  ------------

                                                     $ 3,219,846   $ 3,413,787
                                                     ============  ============


                                                                            F-13
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

6.   Line of Credit and Note Payable to Bank:

     In July 1995, the Company entered into a Credit Agreement ("Agreement")
     with a bank ("the Bank") comprised of a $1,000,000 working capital line of
     credit. The Agreement provided for certain restrictions and covenants,
     including the payment of dividends on the Company's common stock and
     incurring additional indebtedness. In connection with the Agreement, the
     Company issued warrants (see Note 8) to the Bank. In April 1996, the
     Company accepted a revised commitment which renewed the $1,000,000 working
     capital line of credit and extended a $750,000 equipment line of credit
     under the same terms (collectively referred to as line of credit). Under
     the revised Agreement, the working capital line of credit expired in April
     1997. Any amounts borrowed under the equipment line of credit were to be
     repaid in monthly installments over a three-year period commencing in
     October 1996 with a 9% annual interest rate applied to the unpaid-principal
     balance. As of June 30, 1996, the Company was in default of certain
     financial covenants contained in the revised Agreement; however, the Bank
     waived these defaults and revised the covenants for the period July 31,
     1996 until December 31, 1996. The revised agreement limited the total
     amount outstanding under both credit lines to $1 million until the Company
     raised additional equity on or before October 30, 1996.

     In October 1996, the Company paid off the balance outstanding on the
     working capital line of credit of $500,000 from the proceeds of its initial
     public offering. In November 1996, a further amendment to the Agreement
     eliminated the working capital line of credit and the financial covenants
     and restrictions. Under the revised agreement, the Company agreed to
     maintain cash and cash equivalent balances of at least twice the amount
     outstanding under the equipment line of credit. As of December 31, 1997,
     the Company had approximately $279,000 outstanding under this line of
     credit which will be paid off in equal installments over the next
     twenty-two months.

     During 1997, the Company entered into two new loan agreements. The first
     agreement was an equipment line of credit, in the form of a promissory
     note, in the amount of $800,000. Interest on advances, if any, are at the
     Bank's prime rate plus an applicable margin, as defined in the credit
     agreement, which resulted in a borrowing rate of 9.5% for 1997. Among the
     covenants stated in the agreement, specific liquidity ratios, debt service
     ratios, and net worth ratios are required to be maintained, and disclosed
     to the Bank on a monthly basis. As of December 31, 1997, the Company had
     fully utilized the line of credit.

     The second agreement, an equipment loan line of $500,000, is in the form of
     two secured promissory notes, both of which the Company is required to pay
     over a term of forty-eight months with effective interest rate of 16%. The
     equipment purchased with the proceeds of this loan will serve as
     collateral.


                                                                            F-14
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

7.   Commitments:

     Telecommunications Lines

     The Company has committed to minimum monthly usage levels with its primary
     telecommunications carriers. The commitments require minimum monthly
     payments, exclusive of usage discounts, of $200,000 per month through June,
     1999. The Company also leases space under co-locate agreements for certain
     of its telecommunications equipment.

     Leases

     Total rent expense for office facilities for the years ended December 31,
     1997, 1996 and 1995 amounted to $302,643, $181,594 and $147,516,
     respectively.

     The Company leases certain computer equipment pursuant to operating leases
     which expire through 2000. Rent expense related to these leases for the
     years ended December 31, 1997, 1996 and 1995 amounted to $120,085, $168,666
     and $247,167, respectively.

     The Company acquired equipment for $421,805 and $569,178 under capital
     lease obligations during the years ended December 31, 1996 and 1995,
     respectively. Interest paid for capital lease obligations during the years
     ended December 31, 1997, 1996 and 1995 was $59,658, $69,682 and $20,796,
     respectively.

     The Company was obligated under these agreements to make the following
     payments for office facilities and equipment:

                                December 31, 1997         December 31, 1996
                             -----------------------   -----------------------
                              Operating    Capital      Operating    Capital
                                Lease       Lease         Lease       Lease
                             ----------   ----------   ----------   ----------

1997                         $       --   $       --   $  100,891   $  342,435
1998                            316,641      331,716       38,260      322,680
1999                            311,808      103,126       25,567      103,126
2000                            295,400           --        6,224           --
2001 and thereafter             377,768           --
                             ----------   ----------   ----------   ----------

Total minimum lease
  payments                   $1,301,617      434,842   $  170,942      768,241
                             ==========                ==========

Less, amount representing
  interest                                    33,921                    86,803

Less, current principal
  maturities of obligation
  under capital lease                        315,370                   282,776
                                          ----------                ----------

Long-term lease obligation                $   85,551                $  398,662
                                          ==========                ==========


                                                                            F-15
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

8.   Capital Stock And Warrants (See also Note 13):

     Convertible Preferred Stock

     Prior to October 1996, the Company was authorized to issue 1,400,000 shares
     of Series A Preferred Stock, 4,000,000 shares of Series B Preferred Stock,
     8,700,000 shares of Series C Preferred Stock, 26,600,000 shares of Series D
     Preferred Stock, 19,500,000 shares of Series E Preferred Stock and
     20,000,000 shares of Series F Preferred Stock (collectively, "the Preferred
     Stock"). Holders of the Preferred Stock were entitled to dividends at the
     rate of $0.075 per share for Series A, $0.10 per share for Series B, $0.06
     per share for Series C, $0.01733 per share for Series D, $0.022 per share
     for Series E and $0.04 per share for Series F when and if declared by the
     Company's Board of Directors. Such dividends were not cumulative. Holders
     of the Series A, B, C, D, E and F Preferred Stock were entitled to a
     liquidation preference per share of $0.75, $1.00, $0.60, $0.1733, $0.22 and
     $0.40, respectively. No dividends had been declared on the Preferred Stock.

     In January 1994, under a Preferred Stock Purchase Agreement (the "Telstra
     Agreement") the Company issued 17,311,021 shares of Series D Preferred
     Stock to Telstra Incorporated ("Telstra") for an aggregate purchase price
     of $3,000,000 and 1,880,529 shares of Series D Preferred Stock to certain
     preferred stockholders upon conversion of the Company's promissory notes
     (and accrued interest thereon) which were due and payable on December 31,
     1993.

     The Telstra Agreement gave Telstra (a) a grant, on a one-time basis during
     1996, to acquire all of the fully diluted shares of the Company's stock not
     owned by Telstra; (b) representation on the FaxSav Board of Directors; and
     (c) approval over certain business decisions of the Company. Subsequent
     amendments to the Telstra Agreement and the occurrence of the initial
     public offering of the Company's common stock resulted in the termination
     of Telstra's option and other rights.

     In November 1994, the Company issued 7,241,343 shares of Series D Preferred
     Stock for an aggregate purchase price of $1,254,926. The shares were issued
     to certain existing preferred stockholders in several separate
     transactions.

     In January 1995, the Company issued 19,090,900 shares of Series E Preferred
     Stock for an aggregate purchase price of $4,199,919. The shares were issued
     to certain existing as well as new investors.


                                                                            F-16
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

8.   Capital Stock And Warrants (See also Note 13) (Continued):

     Convertible Preferred Stock (Continued)

     In February 1996 and March 1996, the Company issued 19,999,988 shares of
     Series F Preferred Stock for an aggregate purchase price of $7,979,998 to
     certain existing as well as other new investors in the Company. In
     accordance with a December 1995 Stock Option Agreement between the Company
     and Telstra, the Company on March 18, 1996 repurchased 8,655,510 shares of
     Series D Preferred Stock held by Telstra for $0.25 per share for a total of
     $2,163,878.

     All shares of Series A, B, C, D, E, and F Preferred Stock were converted
     into common stock of the Company in connection with the initial public
     offering of its common stock in October 1996.

     Warrants

     On July 8, 1993, the Company agreed to grant warrants to purchase 5,556
     shares of common stock to a firm providing equipment to the Company under a
     Master Lease Agreement. The exercise price was $5.40 per share and the
     warrants were to expire ten years from the date of grant. On May 5, 1994,
     the Company granted additional warrants, which were to expire ten years
     from the date of grant, to purchase 9,889 shares of common stock at $1.80
     per share to this firm in connection with an increase in the equipment
     covered by the Master Lease Agreement.

     On July 7, 1995, the Company granted warrants to purchase 28,889 shares of
     common stock to a bank in connection with the issuance of the working
     capital line of credit. The exercise price was $1.98 per share and the
     warrants were to expire five years from the date of grant.

     The number and purchase price of the shares could have been adjusted by the
     occurrence of certain events, as defined in the warrant agreements.

9.   Stock Options:

     The Company has a stock option plan which authorizes up to 1,794,175 shares
     of common stock to be issued. Under the stock option plan, the Company may
     grant incentive stock options or nonqualified stock options. The option
     exercise price of stock options may not be less than 85% of the fair value
     of a share of common stock on the date of the option grant, and the options
     expire in ten years. The shares issuable upon the exercise of nonqualified
     options generally vest over one or two years from the date of grant. The
     shares issuable upon the exercise of incentive stock options generally vest
     20% upon completion by the optionee of one year of service and the
     remaining 80% over 48 equal months of service thereafter based on continued
     service.


                                                                            F-17
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

9.   Stock Options (Continued):

     Stock option transactions under the plan are as follows:

                                                                   Weighted
                                                                   Average
                                        Incentive                 Exercise
                          Nonqualified    Stock      Available    Price Per
                            Options      Options     for Grant      Share
                            --------    ---------    ---------    ----------

December 31, 1994            44,347      440,703      308,074     $    0.90

  Available for Grant                                 455,556
  Granted                   320,430      290,360     (610,790)    $    0.235
  Exercised                      --           --           --             --
  Canceled                       --      (28,955)      28,955     $    0.355
                            --------    ---------    ---------

December 31, 1995           364,777      702,108      181,795     $    0.533

  Available for Grant                                 533,066
  Granted                   133,334      111,778     (245,112)    $    3.44
  Exercised                      --      (51,156)          --     $    0.823
  Canceled                   (4,927)          --        4,927     $    2.63
                            --------    ---------    ---------

December 31, 1996           493,184      762,730      474,676     $    1.09

  Granted                   173,329      392,280     (565,609)    $    3.38
  Exercised                              (35,746)          --     $    0.80
  Canceled                   (8,333)    (254,602)     262,935     $    1.63
                            --------    ---------    ---------

December 31, 1997           658,180      864,662      172,002     $    1.28
                            ========    =========    =========


     At December 31, 1997, 1996 and 1995, options for 785,584, 626,277 and
     404,833 shares, were vested and exercisable.

     In October 1995, The Financial Accounting Standards Board issued SFAS No.
     123, "Accounting for Stock-Based Compensation." The standard establishes a
     fair value method for accounting for or disclosing stock-based compensation
     plans. The Company adopted this standard by disclosing the pro forma net
     loss and loss per share amounts assuming the fair value method.


                                                                            F-18
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

9.   Stock Options (Continued):

     Accordingly, if the Company had elected to recognize compensation costs in
     accordance with SFAS No. 123 the reported net loss and loss per share for
     1997, 1996 and 1995, respectively, would have been as follows:

                                           1997          1996          1995
                                       ------------  --------------------------

     Net loss as reported              $ (7,118,902) $ (7,476,389) $ (4,085,447)
     Net loss - pro forma                (7,260,113)   (7,583,417)   (4,139,737)
     Loss per share - as reported             (0.72)        (2.60)        (7.46)
     Loss per share - pro forma               (0.73)        (2.64)        (7.56)




     The Company estimated the fair value, as of the date of grant, of options
     outstanding in the plan using the Black-Scholes option pricing model with
     the following assumptions:

                                           1997         1996           1995
                                      --------------------------  -------------

     Expected life                       5 years      10 years       10 years
     Risk free interest rate               6.3%         4.9%           5.5%
     Expected future dividend yield         0%           0%             0%
     Expected volatility                  85.2%        34.4%          34.6%


     In accordance with SFAS 123, the Company has utilized peer information when
     using the Black-scholes option pricing model. As the Company develops
     historical information, the Company will modify these assumptions
     accordingly.


                                                                            F-19
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

9.   Stock Options (Continued):

<TABLE>
<CAPTION>
                                       Options Outstanding             Options Exercisable
                              -------------------------------------  -----------------------
                                              Weighted
                                               Average    Weighted      Number      Weighted
                                Number        Remaining   Average     Exercisable   Average
                               Outstanding   Contractual  Exercise      as of       Exercise
     Range of Exercise Prices  12/31/97         Life       Price       12/31/97      Price
                              ------------    --------    -------    ----------     -------
     <S>                         <C>            <C>       <C>         <C>           <C>
     $0.23 - $0.23               544,577        7.24      $ 0.23      313,846       $ 0.23
     $0.90 - $1.50               681,042        6.99        1.12      403,221         0.91
     $2.13 - $3.60               262,501        8.67        3.10       60,723         3.60
     $5.38 - $8.00                34,722        8.84        7.30        7,794         7.82
                              ------------    --------    -------    ----------     -------

     $0.23 - $8.00             1,522,842        7.41      $ 1.28      785,584       $ 0.92
                              ============    ========    =======    ==========     =======
</TABLE>

10.  Income Taxes:

     The Company continues to incur operating losses and currently pays no
     income taxes and no provision or benefit for income taxes has been
     recorded.

     The income tax benefit at the United States federal statutory rate on the
     Company's operating loss, for all periods presented, has been eliminated by
     an increase in the valuation allowance for deferred tax assets and
     operating losses not recognized.

     At December 31, 1997, the Company had net operating loss carryforwards
     available for income tax purposes of approximately $30,000,000, which start
     to expire in 2005. Net operating loss carryforwards are subject to review
     and possible adjustment by the Internal Revenue Service and may be limited
     in the event of certain cumulative changes in the ownership interests of
     significant stockholders over a three-year period in excess of 50%. The
     Company has experienced changes in ownership in excess of 50% but does not
     believe that these changes in ownership will significantly impact the
     Company's ability to utilize its net operating loss carryforwards assuming
     the Company can generate sufficient taxable income.


                                                                            F-20
<PAGE>

FaxSav Incorporated

Notes to Financial Statements (Continued)

10.  Income Taxes (Continued):

     The components of the Company's deferred tax asset are as follows:

                                                    December 31,
                                              --------------------------
                                                  1997          1996
                                              ------------  ------------

       Operating loss carryforwards           $10,225,730   $ 7,730,622
       Temporary differences                      691,560       592,678
                                              ------------  ------------

                                                9,534,170     8,323,300

       Less - valuation allowance              (9,534,170)    (8,323,300)
                                              ------------  ------------

                                              $    -        $     -
                                              ============  ============


     In evaluating the reliability of these deferred tax assets, management has
     considered the market in which the Company operates, the operating losses
     incurred to date and the operating losses anticipated for the future, and
     believes that given the significance of this evidence, a full valuation
     allowance against its deferred tax assets is required as of December 31,
     1997, 1996, and 1995.

11.  Contingencies:

     The Company is involved in various disputes, claims or legal proceedings
     related to its normal course of business. In the opinion of management, all
     such matters are without merit or involve amounts, if disposed of
     unfavorably, which would not have a material adverse effect on the
     financial position or results of operations of the Company.

     On September 5, 1997, the Company filed a compliant for declaratory
     judgement against AudioFAX, IP, L.L.P. ("AudioFAX") in the United States
     District Court for the District of New Jersey. The Company seeks
     declaratory relief that current FaxSav service offerings do not infringe
     any valid claims in AudioFAX's patents or that certain claims of AudioFAX's
     patents are invalid. On September 8, 1997, AudioFAX filed a compliant
     against the Company in the United States District Court for the District of
     Georgia alleging patent infringement, seeking a preliminary and permanent
     injunction against the Company's alleged infringement and damages. The
     Company has been advised and believes that its service offerings do not
     infringe any valid patents of AudioFAX and intends to vigorously pursue
     these actions.


                                                                            F-21
<PAGE>

FaxSav Incorporated
Supplemental Schedule

Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                                 Additions
                                                        -----------------------------
                                         Balance at       Charges to     Charges to                             Balance at
                                          Beginning        Cost And         Other                                 end of
                                          of Period        Expenses       Accounts           Deductions           Period
                                       --------------   -------------- --------------      --------------     --------------
<S>                                    <C>              <C>             <C>                <C>                <C>
Year ended December 31, 1995
Provisions for bad debts               $      90,193    $     194,720   $     20,397(a)    $     130,573(b)   $     174,737
Accrual for legal defense                                     400,000                                  0            400,000
Deferred tax asset valuation
     allowance                             4,033,899                       1,628,194                              5,662,093
                                       --------------   -------------- --------------      --------------     --------------

                                       $   4,124,092    $     594,720   $  1,648,591       $     130,573      $   6,236,830
                                       ==============   ============== ==============      ==============     ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                 Additions
                                                        -----------------------------
                                         Balance at       Charges to     Charges to                             Balance at
                                          Beginning        Cost And         Other                                 end of
                                          of Period        Expenses       Accounts           Deductions           Period
                                       --------------   -------------- --------------      --------------     --------------
<S>                                    <C>              <C>             <C>                <C>                <C>
Year ended December 31, 1996
Provisions for bad debts               $     174,737    $     219,400   $     37,268(a)    $     202,029(b)   $     229,376
Accrual for legal defense                    400,000                                              18,927            381,073
Deferred tax asset valuation
     allowance                             5,662,093                       2,661,207                              8,323,300
                                       --------------   -------------- --------------      --------------     --------------

                                       $   6,236,830    $     219,400   $  2,698,475       $     220,956      $   8,933,749
                                       ==============   ============== ==============      ==============     ==============

</TABLE>

<TABLE>
<CAPTION>
                                                                 Additions
                                                        -----------------------------
                                         Balance at       Charges to     Charges to                             Balance at
                                          Beginning        Cost And         Other                                 end of
                                          of Period        Expenses       Accounts           Deductions           Period
                                       --------------   -------------- --------------      --------------     --------------
<S>                                    <C>              <C>             <C>                <C>                <C>
Year ended December 31, 1997
Provisions for bad debts               $     229,376    $     230,520   $     29,819(a)    $     158,991(b)   $     330,724
Accrual for legal defense                    381,073                                             129,156            251,917
Deferred tax asset valuation
     allowance                             8,323,300                       1,210,870                              9,534,170
                                       --------------   -------------- --------------      --------------     --------------

                                       $   8,933,749    $     230,520   $  1,240,689       $     288,147      $  10,116,811
                                       ==============   ============== ==============      ==============     ==============
</TABLE>

(a)  Recoveries of accounts receivable
(b)  Write-offs


                                                                            F-22