SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                      FOR THE YEAR ENDED DECEMBER 31, 1998
                        COMMISSION FILE NUMBER 000-09613

                               FAXSAV INCORPORATED
             (Exact Name of Registrant as Specified in its Charter)

              DELAWARE                           11-3025769
      (State of Incorporation)         (I.R.S. Employer Identification
                                                    Number)

                               399 Thornall Street
                            Edison, New Jersey 08837
                                 (732) 906-2000
               (Address, Including Zip Code, and Telephone Number,
        Including Area Code, of Registrant's Principal Executive Offices)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                   -----------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                           COMMON STOCK $.01 PAR VALUE

      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.
                                 |X| Yes |_| No

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

      The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1999 was $89,006,467 (based on the last reported sale
price on the NASDAQ National Market on that date).

      The number of shares outstanding of the registrant's common stock as of
March 24, 1999 was 14,067,105

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of FaxSav Incorporated's definitive Proxy Statement relating to
its 1999 Annual Meeting of the Stockholders to be held on June 4, 1999, which is
to be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report, are incorporated by
reference into Part III of this report.

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      THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT FAXSAV AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
FAXSAV'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. FAXSAV UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

ITEM 1. BUSINESS

General

      FaxSav Incorporated (the "Company") designs, develops and markets a
variety of business-to-business facsimile transmission services, including
computer-to-fax, fax-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 twenty-one countries as of December 31, 1998,
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, the major carrier being MCI WorldCom, 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, many FaxSav customers use the Company's services for ease of use
and productivity improvements rather than cost savings.

      The Company has deployed Internet-capable facsimile nodes in twenty-one
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 seamlessly integrates with
FaxSav's 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.

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 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

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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
collection of connected computer systems and networks that link millions of
public and private computers to form what is essentially the largest computer
network in the world and 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 twenty-one countries as of December 31, 1998 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
seamlessly integrates with FaxSav's 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 computer-to-fax, 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 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 WorldCom ("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, are designed to reduce the cost of
sending international faxes, and to make the process of sending faxes easier and
less


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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 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 telephony-based and an
Internet-based network but with an increasing level of customer traffic being
routed 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.


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<PAGE>

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 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


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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 using FaxSav's patented e-mail security technology, 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 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.

      o faxCourier which was introduced in the first quarter of 1998 enables
customers to route faxes straight to their email address. A local or toll-free
fax number in the FaxSav Network is allocated to the user. All faxes sent to
these numbers are automatically converted to a standard TIFF file format and
forwarded as attachments to email to the customer's email address. Users can
view or print their faxes using standard, freely available TIFF viewing
software.

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


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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
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 over 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 throughout the
world. 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 and in 1998, revenues from these international customers
amounted to $5.9 million or 27.9% 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 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 WorldCom,
Sprint, and the regional Bell operating companies, and telecommunications
resellers, (ii) Internet service providers, such as Uunet Technologies, Inc. (an
affiliate of MCI 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 Premiere
Document Distribution (formerly Xpedite Systems, Inc.), and IDT Corporation.
Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial,


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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 MCI WorldCom . 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 patents related to
its faxSAV Connector and for its "e-mail Stamps" security technology
incorporated into its faxMailer service. There can be no assurance that the
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.

      Effective September 22, 1998 the Company settled all outstanding
litigation with AudioFAX IP, L.L.P. ("AudioFAX") to avoid the expense and
disruption of protracted litigation. In 1997 the Company had filed a lawsuit
against AudioFAX seeking declaratory relief that FaxSav services did not
infringe on any valid claims in certain AudioFAX's patents relating to
store-and-forward technology or that certain claims of the AudioFAX patents are
not valid. Immediately after the filing of FaxSav's complaint, AudioFAX filed a
lawsuit against FaxSav alleging patent infringement. The terms of the settlement
agreement required the Company to issue 275,000 shares of common stock to
AudioFAX and to register such shares for resale in exchange for a fully paid-up
license to the patents in the dispute. Although under certain circumstances the
Company would have been required to issue additional shares or pay a certain
amount of cash to AudioFAX, these requirements are no longer applicable. The
Company has recorded a charge of $1,025,000 in 1998 representing all costs
associated with the settlement. No costs have been capitalized, as the Company
could not determine the future economic benefit, if any, to the Company of the
patent licenses acquired.

      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


                                       8
<PAGE>

      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.

Employees

      As of December 31, 1998, the Company had 133 full-time employees,
including 17 in research and development, 45 in network operations and support,
55 in sales and marketing and 16 in finance and administration. The Company's
employees are not covered by any collective bargaining agreements. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

      The Company's corporate headquarters are located in Edison, New Jersey in
facilities consisting of approximately 18,900 square feet of office space
occupied under two leases expiring in August 1999 and 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

      Effective September 22, 1998 the Company settled all outstanding
litigation with AudioFAX IP, L.L.P. ("AudioFAX") to avoid the expense and
disruption of protracted litigation. In 1997 the Company had filed a lawsuit
against AudioFAX seeking


                                       9
<PAGE>

declaratory relief that FaxSav services did not infringe on any valid claims in
certain AudioFAX's patents relating to store-and-forward technology or that
certain claims of the AudioFAX patents are not valid. Immediately after the
filing of FaxSav's complaint, AudioFAX filed a lawsuit against FaxSav alleging
patent infringement. The terms of the settlement agreement required the Company
to issue 275,000 shares of common stock to AudioFAX and to register such shares
for resale in exchange for a fully paid-up license to the patents in the
dispute. Although under certain circumstances the Company would have been
required to issue additional shares or pay a certain amount of cash to AudioFAX,
these requirements are no longer applicable. The Company has recorded a charge
of $1,025,000 in 1998 representing all costs associated with the settlement. No
costs have been capitalized, as the Company could not determine the future
economic benefit, if any, to the Company of the patent licenses acquired.

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

      None.


                                       10
<PAGE>

                                     PART II

 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                           PRICE RANGE OF COMMON STOCK

      The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "FAXX." The following table sets forth for 1997 and 1998, 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.

      1997                                                  High        Low

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

      1998

      First Quarter.........................................$4.00       $2.38
      Second Quarter.........................................5.06        2.56
      Third Quarter..........................................8.31        2.38
      Fourth Quarter........................................11.00        3.00

      On December 31, 1998, the last reported sale price of the common stock on
the Nasdaq National Market was $6.19 per share. On March 24, 1999 the last
reported sale price of the common stock on the Nasdaq National Market was $8.44
per share.

                                     HOLDERS

      As of March 24, 1999, there were approximately 132 holders of record of
the common stock.

                                 DIVIDEND POLICY

      FaxSav has never declared or paid any cash dividends on its capital stock.
FaxSav currently intends to retain future earnings, if any, to finance the
operation and expansion of its business and does not expect to pay any cash
dividends for the foreseeable future.

    SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED DECEMBER 31, 1998

      During the year ended December 31, 1998, the Company issued and sold the
following securities without registration under the Securities Act of 1933, as
amended (the "Securities Act"):

            (1) In September 1998, the Company issued to AudioFAX 275,000 shares
      of Common Stock in consideration for a fully paid-up license to certain
      AudioFAX patents in settlement of a dispute between the parties.

            (2) In July 1998, the Company issued 2,000,000 shares of Common
      Stock for cash consideration of $7,000,000.

            (3) In December 1998, the Company issued to the Tail Wind Fund Ltd.
      645,161 shares of Common Stock and warrants to purchase 64,516 shares of
      Common Stock for aggregate cash consideration of $3,500,000.

      No underwriter was involved in any of the above sales of securities. All
of the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act on the basis that they were issued under
circumstances not involving a public offering.


                                       11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The selected financial data set forth below with respect to FaxSav's
statement of operations for the five years ended December 31, 1998, and with
respect to FaxSav's balance sheet as of December 31, 1998, 1997, 1996, 1995 and
1994, are derived from the audited financial statements of FaxSav which are
included elsewhere herein. The selected consolidated financial data set forth
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes to those
statements included elsewhere herein.

<TABLE>
<CAPTION>
                                           1998           1997           1996           1995         1994
                                           ----           ----           ----           ----         ----
                                                  (in thousands, except for share and per share data)
<S>                                   <C>            <C>            <C>            <C>            <C>        
Statement of Operations Data:
Revenues ..........................   $    21,117    $    17,418    $    15,036    $    11,649    $     3,449
Cost of service ...................        11,129         10,414          8,898          7,021          2,297
                                      -----------    -----------    -----------    -----------    -----------
Gross margin ......................         9,988          7,004          6,138          4,628          1,152
Operating expenses:
  Network operations and
    support .......................         3,608          2,287          1,985          1,183            851
  Research and
    development ...................         1,995          1,909          1,772            840            613
  Sales and marketing .............         6,640          5,268          6,065          4,238          2,337
  General and
    administrative ................         3,285          3,132          2,495          2,007            970
  Depreciation and
    amortization ..................         1,492          1,702          1,437            928            242
  Other ...........................         1,025             --             --           (441)          (309)
                                      -----------    -----------    -----------    -----------    -----------
    Total operating
      expenses ....................        18,045         14,298         13,754          8,755          4,704
                                      -----------    -----------    -----------    -----------    -----------
Operating loss ....................        (8,057)        (7,294)        (7,616)        (4,127)        (3,552)
Interest (expense)
  income, net .....................          (134)            79             46             46             45
Other income (expense),
  net .............................           106             96             94             (4)            14
                                      -----------    -----------    -----------    -----------    -----------
Loss before income taxes ..........        (8,085)        (7,119)        (7,476)        (4,085)        (3,493)
Provision for income
  taxes ...........................            --             --             --             --             --
                                      -----------    -----------    -----------    -----------    -----------
Net loss ..........................   $    (8,085)   $    (7,119)   $    (7,476)   $    (4,085)   $    (3,493)
                                      ===========    ===========    ===========    ===========    ===========
Net loss per common and
  equivalent share ................   $     (0.68)   $     (0.72)   $     (2.74)   $    (12.48)   $    (10.70)
                                      ===========    ===========    ===========    ===========    ===========
Weighted average common
  and equivalent shares
  outstanding (1)..................    11,842,956      9,880,681      2,724,651        327,353        326,410
                                      ===========    ===========    ===========    ===========    ===========
Pro forma net loss per
  common and equivalent
  share (1) .......................   $     (0.68)   $     (0.72)   $     (0.86)   $     (0.45)   $     (0.50)
                                      ===========    ===========    ===========    ===========    ===========
Shares used in computing
  pro forma net loss per common
  and equivalent share (1).........    11,842,956      9,880,681      8,712,054      9,079,566      6,957,411
                                      ===========    ===========    ===========    ===========    ===========

                                          1998           1997           1996           1995           1994
                                          ----           ----           ----           ----           ----
Balance Sheet Data:
Working capital (deficit) .........   $     3,724    $     1,333    $     7,080    $      (849)   $      (385)
Total assets ......................        14,488         10,496         14,448          4,840          2,430
Total long-term debt ..............         1,540          1,169            678            326             --
Total stockholders'
  equity ..........................         8,050          4,664          9,659            687            621
</TABLE>

----------

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


                                       12
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FAXSAV TOGETHER WITH THE FINANCIAL STATEMENTS AND THE
NOTES TO SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS,
ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT FAXSAV AND OUR INDUSTRY. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. FAXSAV'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK
FACTORS" SECTION AND ELSEWHERE IN THIS REPORT. WE UNDERTAKE NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

Overview

      FaxSav derives its revenues from the provision of a variety of facsimile
services largely to businesses and professionals. 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 1998, revenues from international
customers were $5.9 million, or 27.9% 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 twenty-one
countries as of December 31, 1998.

      As the Company's customer base has expanded, the Company has 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.


                                       13
<PAGE>

Results of Operations

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

                                                    Years Ended December 31,
                                                ------------------------------
                                                1998         1997         1996
                                                ----         ----         ----
Percentages of Revenues:
Revenues ................................      100.0%       100.0%       100.0%
Cost of service .........................       52.7         59.8         59.2
                                               -----        -----        -----
Gross margin ............................       47.3         40.2         40.8
Operating expenses:
  Network operations and support ........       17.0         13.1         13.2
  Research and development ..............        9.4         11.0         11.8
  Sales and marketing ...................       31.4         30.2         40.3
  General and administrative ............       15.6         18.0         16.6
  Depreciation and amortization .........        7.1          9.8          9.6
  Other .................................        4.9           --           --
                                               -----        -----        -----
     Total operating expenses ...........       85.4         82.1         91.5
                                               -----        -----        -----
Operating loss ..........................      (38.1)       (41.9)       (50.7)
Interest income (expense), net ..........       (0.6)         0.5          0.3
Other income (expense), net .............        0.5          0.5          0.6
                                               -----        -----        -----
Loss before income taxes ................      (38.2)       (40.9)       (49.8)
Provision for income taxes ..............         --           --           --
                                               -----        -----        -----
Net loss ................................      (38.2)%      (40.9)%      (49.8)%
                                               =====        =====        =====

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

      Revenues. Revenues, which consist primarily of customer usage charges,
grew 21.3% to $21.1 million in the year ended December 31, 1998 from $17.4
million in the year ended December 31, 1997 primarily as a result of the
continued expansion of the Company's customer base, particularly in
international markets. The increased revenues resulted largely from the
Company's Internet desktop-to-fax and faxSAV EZ-List broadcast services. Fax
volumes in total, representing faxes delivered to domestic and international
destinations, grew 58.0% to 62.4 million minutes in 1998 as compared with 39.5
million minutes in 1997, while faxes routed through the internet grew 127.4% to
50.7 million minutes in 1998 from 22.3 million minutes in 1997.

      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 1998 as a result of the increase in facsimile
volume for the year but decreased as a percentage of revenues to 52.7% in 1998
from 59.8% in 1997. The decreased percentage is a result of transmitting an
increased level of customer faxes over the Company's Internet Fax Network and
lower costs for international fax 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 $3.6 million in
the year ended December 31, 1998 from $2.3 million in the year ended December
31, 1997 as a result of hiring additional personnel to implement the Internet
fax node deployment plan and to support the Company's expanding customer base on
a 7 days per week / 24-hour basis. As a percentage of revenues, these costs
increased to 17.0% from 13.1% in 1997.

      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 $2.0
million for the year ended December 31, 1998 compared with $1.9 million for the
year ended December 31, 1997 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 continuing development of the Company's
faxSAV EZ-List broadcast service. As a percentage of revenues, these expenses
decreased to 9.4% in 1998 from 11.0% in 1997 as a result of increased revenues
in 1998.

      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 increased to $6.6 million and
31.4% of revenues for the year ended December 31, 1998 compared with $5.3
million and 30.2% for the year ended December 31, 1997. The higher costs in 1998
relate to


                                       14
<PAGE>

additional expenses to support the growth in international revenues, the
expansion of the Company's direct sales staff in the U.S. and increased spending
for U.S. marketing programs.

      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
$3.3 million in the year ended December 31, 1998 from $3.1 million in the year
ended December 31, 1997. The increases in total expenses result from personnel
increases to support the increased customer base and expenses incurred for
management information systems improvements. As a percentage of revenues, these
expenses decreased to 15.6% in 1998 from 18.0% in 1997 as a result of increased
revenues in 1998.

      Depreciation and amortization. Depreciation and amortization decreased to
$1.5 million and 7.1% of revenues in the year ended December 31, 1998 in
comparison to $1.7 million and 9.8% of revenues in the year ended December 31,
1997, primarily reflecting reduced charges for faxSAV Connectors installed on
fax machines at customer premises, resulting from the Company's shift in its
business to desktop originated services.

      Other. The Company incurred other expenses in 1998 of $1.0 million or 4.9%
of revenues for settlement of the AudioFAX litigation. No such expenses were
incurred in 1997.

      Provision for income taxes. The Company had losses for income tax purposes
for the years ended December 31, 1998 and 1997. 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, 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 minutes in 1997 as compared to 28.3
million minutes in 1996, while faxes to international destinations grew 33.0% to
22.0 million minutes in 1997 from 16.5 million minutes 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. As of December
31, 1997 the Company had completed the installation of Internet nodes in
eighteen 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.

      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


                                       15
<PAGE>

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.

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. In 1998
both of these agreements were amended to increase available borrowings by $0.5
million and $1 million for Silicon Valley Bank and Phoenix Growth Capital Corp.
respectively. All amounts available to the Company under these agreements had
been advanced by December 31, 1998. 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 $10.5 million in 1998,
$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 $6.6 million in 1998, as compared with $5.5 million in 1997. Cash
used for the purchase of equipment amounted to $3.1 million in 1998 and $2.9
million in 1997. The equipment includes network equipment and faxSAV Connectors
(in 1997) purchased by the Company for installation at customer locations. 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 $0.7 million per month through June 1999 and
$0.5 million per month thereafter through January 2001.

      The Company's principal sources of liquidity at December 31, 1998 included
cash and cash equivalents of $5.3 million. In February 1999, the Company entered
into a $1 million equipment line of credit. Draw downs are to be paid over a
term of 42 months with an effective interest rate of 16%. The Company 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 1999.
However, our cash requirements may vary materially from those now planned as a
result of unforeseen changes that could consume a significant portion of our
available resources before such time. To the extent that funds expected to be
generated from our operations are insufficient to meet current or planned
operating requirements or to maintain a Nasdaq listing, we will seek to obtain
additional funds through bank facilities, equity or debt financing,
collaborative or other arrangements with corporate partners and from other
sources. Additional funding may not be available when needed or on terms
acceptable to us, which could have a material adverse effect on our business,
financial condition and results of operations. If adequate funds are not
available, we may be required to delay or to eliminate certain expenditures or
to license to third parties the rights to commercialize technologies that we
would otherwise seek to develop ourselves. In addition, in the event that we
obtain any additional funding, such financings may have a dilutive effect on the
holders of our securities.

                              YEAR 2000 COMPLIANCE

OVERVIEW


                                       16
<PAGE>

      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 a year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements or risk system failure or miscalculations causing
disruptions of normal business activities.

      STATE OF READINESS. We have conducted a study of the Year 2000 readiness
of our information technology systems, including our computing and networking
systems, and our non-information technology systems. Our study consisted of:

      o     Inventory and Assessment - conducting an inventory and review of
            faxSAV software, third-party software and hardware, and
            telecommunications and Internet service providers; contacting
            third-party vendors and licensors of material hardware, software and
            services that are both directly and indirectly related to the
            delivery of the our faxSAV for internet suite of services and the
            faxSAV Connector; contacting third-party vendors and licensors of
            material hardware, software and services that are both directly and
            indirectly related to the delivery of the our faxSAV for internet
            suite of services and the faxSAV Connector

      o     Review - conducting a review of faxSAV's application and product
            software code to determine Year 2000 compliance; assessment of
            repair or replacement requirements

      o     Correction and Testing - implementing code modifications and
            complete system re-testing where necessary; modification, upgrade,
            repair or replacement of all non-compliant systems

We have completed a test our information technology systems to verify the
results of our study. We are currently in the process of remedying certain minor
discrepancies that were discovered and plan to complete this process during the
first half of 1999. We have been informed by many of our vendors of material
hardware and software components of our information technology systems that the
products that we use are currently Year 2000 compliant. The computing systems
that provide application layer services (i.e., FaxSav customer services) within
the FaxSav network are based upon some variant of the Unix operating system,
which adequately represents dates beyond the year 2000. Many of the computing
systems that support the internal operations of our business have the similar
capacity to represent dates beyond the year 2000. In addition, for all of our
internal accounting applications, we have purchased new accounting system
software that the manufacturer specifies as Year 2000 compliant. We will require
vendors of our other material hardware and software components of our
information technology systems to provide assurances of their Year 2000
compliance, and we plan to complete this process during the first half of 1999.
We will also seek assurances of Year 2000 compliance from providers of our
material non-information technology systems.

      COSTS. To date, we have not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. Our expected cost to
purchase and implement the new accounting software mentioned above is
approximately $0.2 million.

      RISKS. We are not currently aware of any Year 2000 compliance problems
relating to the faxSAV for internet suite of services, the faxSAV Connector or
our other information technology or non-information technology systems that
would have a material adverse effect on our business, financial condition and
results of operations, without taking into account our efforts to avoid or fix
such problems. There can be no assurance that our software contains all
necessary date code changes or that all problems can be identified by our study
and subsequent testing. Compliance with Year 2000 requirements may disrupt our
ability to continue developing and marketing facsimile transmission products and
services. The failure to adequately address Year 2000 compliance issues in our
products and services, and in our information technology and non-information
technology systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend. In addition, there can be no assurance that
governmental agencies, utility companies, Internet access companies, third-party
service providers and others outside of our control will be Year 2000 compliant.
The failure by such entities to be Year 2000 compliant could result in a
systemic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering services to our customers, which could have a material adverse effect
on our business, financial condition and results of operations.

      CONTINGENCY PLAN. As discussed above, we intend to conduct further tests
of our Year 2000 compliance to confirm the results of our study, including
frequent re-testing of the integrity of the FaxSav network, and have not yet
developed any


                                       17
<PAGE>

contingency plans. The results of our tests and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.

      FORWARD-LOOKING STATEMENTS. The foregoing Year 2000 discussion and the
information contained herein is provided as a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act of 1998
(Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contains
"forward-looking statements" within the meaning of the Private Securities
Litigation reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which FaxSav expects to complete certain
actions, are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third parties
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially form those anticipated.
Specific factors that might cause such material difference include, but are not
limited to, the ability to identify and remediate all relevant systems, results
of Year 2000 testing, adequate resolution of Year 2000 issues by governmental
agencies, businesses and other third parties who are outsourcing service
providers, suppliers, and vendors of FaxSav, unanticipated system costs, the
adequacy of and ability to implement contingency plans and uncertainties. The
"forward-looking statements" made in the foregoing Year 2000 discussion speak
only as of the date on which such statements are made, and FaxSav undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. governmental agencies, businesses and other
third parties who are outsourcing service providers, suppliers, and vendors of
FaxSav, unanticipated system costs, the adequacy of and ability to implement
contingency plans and uncertainties. The "forward-looking statements" made in
the foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and FaxSav undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.

                                  RISK FACTORS

      THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT FAXSAV AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
FAXSAV'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. FAXSAV UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

RISK FACTORS

Risks Related to our Business

We have a history of net losses and expect future losses.

From our inception in 1989 through the year ending December 31, 1998, we have
experienced significant net losses. We incurred net losses of $7.5 million, $7.1
million and $8.1 million during the years ended December 31, 1996, 1997 and
1998, respectively. We currently anticipate that we will have additional net
losses as we attempt to expand our business and we may not have positive
operating or net income in the future. As of December 31, 1998, we had an
accumulated deficit of $40.3 million.

Since inception, we have incurred substantial costs to develop and enhance our
technology and to create, introduce and enhance our service and product
offerings. We intend to continue these efforts and, in addition, to increase our
marketing spending. In early 1999, we announced a new marketing campaign which
will involve significant expenditures by us, including the hiring of an outside
advertising agency. As a result of these expenditures, we expect to continue to
experience operating losses. There can be no assurance that these expenditures
will result in any increase in revenues.

We may not be able to use our net operating loss carryforwards which could
increase the amount of taxes that we are required to pay when we become
profitable


                                       18
<PAGE>

We generated net operating loss carryforwards for income tax purposes of
approximately $35.0 million through December 31, 1998. These net operating loss
carryforwards have been recorded as a deferred tax asset of approximately $13.7
million. Based on our history of operating losses and overall financial
condition, management has determined that it is more likely than not that we
will be unable to generate sufficient taxable income prior to the expiration of
these net operating loss carryforwards in order to receive the benefit of them
and has accordingly reduced our deferred tax assets to zero with a full
valuation allowance. Additionally, as we have experienced a change in ownership
of over 50% of our common stock, the amount of net operating loss carryforwards
that we will be able to use to offset any future taxable income will be limited.

We have many competitors and we may not be able to compete effectively against
them.

The market for facsimile transmission services is intensely competitive and the
industry is characterized by low barriers to entry. We expect that competition
will intensify in the future. Our failure to compete successfully could have a
material adverse affect on our business, financial condition and results of
operations.

We believe that our ability to compete successfully will depend upon a number of
factors, including:

      o     market presence;
      o     the capacity, reliability and security of our network
            infrastructure;
      o     the pricing policies of our competitors and suppliers;
      o     the timing of introductions of new services and service enhancements
            by us and our competitors; and
      o     industry and general economic trends.

Our current and future competitors generally fall into the following groups:

      o     telecommunications companies, such as AT&T, MCI WorldCom, Sprint,
            the regional Bell operating companies and telecommunications
            resellers;
      o     Internet service providers, such as Uunet Technologies, Inc., a
            subsidiary of MCI WorldCom, and NETCOM On-Line Communications, Inc.;
      o     on-line services providers, such as Microsoft Corporation and
            America Online, Inc.; and
      o     direct fax delivery competitors, including Premiere Document
            Distribution (formerly Xpedite Systems, Inc.) and IDT Corporation.

      Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than we do. As a result, they may be able to:

      o     develop and expand their communications and network infrastructures
            more quickly;
      o     adapt more swiftly to new or emerging technologies and changes in
            customer requirements;
      o     take advantage of acquisition and other opportunities more readily;
            and
      o     devote greater resources to the marketing and sale of their products
            and services than we can.

Further, the foundation of our telephony network infrastructure consists of the
right to use the telecommunications lines of several of the above-mentioned long
distance carriers, including MCI WorldCom. There can be no assurance that these
companies will not discontinue or otherwise change their relationships with us
in a manner that would have a material adverse effect upon our 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 our 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 our 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 our market
share, any of which would have a material adverse effect on our business,
financial condition and results of operations. There can be no assurance that we
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on our
business, financial condition and results of operations.


                                       19
<PAGE>

On August 7, 1997, the Federal Communications Commission issued new rules which
may significantly reduce the cost of international calls originating in the
United States. The five-year phase-in period began 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, we will face
increased competition for our international fax services which may have a
material adverse effect on our business, financial condition or results of
operations.

We are uncertain about our need for and availability of additional funds.

We believe that our current cash and cash equivalents will be sufficient to meet
our presently anticipated cash needs for working capital and our capital
expenditure requirements through at least December 31, 1999. However, our cash
requirements may vary materially from those now planned as a result of
unforeseen changes that could consume a significant portion of our available
resources before such time. To the extent that funds expected to be generated
from our operations are insufficient to meet current or planned operating
requirements or to maintain a Nasdaq listing, we will seek to obtain additional
funds through bank facilities, equity or debt financing, collaborative or other
arrangements with corporate partners and from other sources. See "--We may be
delisted from Nasdaq which would affect your ability to sell our stock."
Additional funding may not be available when needed or on terms acceptable to
us, which could have a material adverse effect on our business, financial
condition and results of operations. If adequate funds are not available, we may
be required to delay or to eliminate certain expenditures or to license to third
parties the rights to commercialize technologies that we would otherwise seek to
develop ourselves. In addition, in the event that we obtain any additional
funding, such financings may have a dilutive effect on the holders of our
securities.

We may be unable to protect our intellectual property rights.

Our success is dependent upon our proprietary technology. We rely primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect our proprietary
rights. We were granted patents related to our faxSAV Connector and our "e-mail
Stamps" security technology incorporated into our faxMailer service. There can
be no assurance that present or future patents will provide sufficient
protection to our 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 our
know-how. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our services or to obtain and use
information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that the steps taken by us
to protect our proprietary rights will be adequate or that our competitors will
not independently develop technologies that are substantially equivalent or
superior to our technologies.

There can be no assurance that other third parties will not assert infringement
claims against us 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 our
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 our services. We could incur substantial costs and
diversion of management resources with respect to the defense of any claims that
we have infringed upon the proprietary rights of others, which costs and
diversion could have a material adverse effect on our 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 our ability to license and
sell our services in the United States or abroad. Any such judgment could have a
material adverse effect on our business, financial condition and results of
operations. In the event a claim relating to proprietary technology or
information is asserted against us, we may seek licenses to such intellectual
property. There can be no assurance, however, that licenses could be obtained on
terms acceptable to us, or at all. The failure to obtain any necessary licenses
or other rights could have a material adverse effect on our business, financial
condition and results of operations.

We are dependent on the reliability and expansion of our network infrastructure.

Our future success will depend in part upon the capacity, reliability and
security of our network infrastructure and in part upon our ability to expand
the deployment of an international network of Internet-capable facsimile nodes.
We must continue to expand and adapt our network infrastructure as the number of
customers and the volume of traffic they wish to transmit increases. The
expansion and adaptation of our network infrastructure will require substantial
financial, operational and management resources.

There can be no assurance that we will be able to expand or adapt our 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 we will be able to deploy


                                       20
<PAGE>

additional contemplated Internet-capable facsimile nodes on a timely basis, at a
commercially reasonable cost, or at all. Any failure to expand our network
infrastructure on a timely basis, to adapt it to changing customer requirements
or evolving industry standards or to expand our Internet-capable facsimile node
infrastructure on a timely basis would have a material adverse effect on our
business, financial condition and results of operations. Further, there can be
no assurance that we will be able to satisfy the regulatory requirements in each
of the countries currently targeted for node deployment, which may prevent us
from installing Internet-capable facsimile nodes in such countries and may have
a material adverse effect on our business, financial condition and results of
operations.

Our failure to manage growth could adversely affect us.

We have rapidly and significantly expanded our operations and anticipate 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 our
expenses. Our inability to promptly address and respond to these circumstances
could have a material adverse effect on our business, financial condition and
results of operations.

Because we are dependent on computer systems, a systems failure could cause a
significant disruption to our business.

Our business depends upon the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain our computer hardware and switching equipment, including our processing
equipment, at three sites. While we have taken precautions against systems
failure, interruptions could result from natural disasters as well as power
loss, telecommunications failure and similar events. Any damage or failure that
disrupts or delays our operations could have a material adverse effect on our
business, financial condition and results of operations.

If our security measures are inadequate, our business will be adversely
affected.

      We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored in and transmitted
through the computer systems of the individual, businesses and financial
institutions utilizing our services. This may result in significant liability to
us and may also deter potential customers from using our services. Any security
breach that causes interruptions or data loss in our operations or in the
computer systems of our customers could have a material adverse effect on our
business, financial condition and results of operations.

We are dependent upon our current suppliers, and may not be able to obtain some
products or services from other suppliers.

We rely on third parties to supply key components of our network infrastructure,
including long distance telecommunications services and telecommunications node
equipment, many of which are available only from sole or limited sources. MCI
WorldCom is our primary provider of long distance telecommunications services.
We have from time-to-time experienced partial interruptions of service from our
telecommunications carriers which have temporarily prevented customers in
limited geographical areas from reaching the FaxSav network. There can be no
assurance that we will not experience partial or complete service interruptions
in the future. There can be no assurance that MCI WorldCom and our other
telecommunications providers will continue to provide long distance services to
us at attractive rates, or at all, or that we 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 we require. 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 our
business, financial condition and results of operations.

All of the faxboards used in our telecommunications nodes are supplied by
Brooktrout Technology, Inc. We purchase Brooktrout faxboards on a non-exclusive
basis pursuant to purchase orders placed from time-to-time, carry a limited
inventory of faxboards and have no guaranteed supply arrangement with
Brooktrout. In addition to faxboards, many of the routers, switches and other
hardware components used in our network infrastructure are supplied by sole or
limited sources on a non-exclusive, purchase order basis. There can be no
assurance that Brooktrout or our other suppliers will not enter into exclusive
arrangements with our competitors, or cease selling these components to us at
commercially reasonable prices, or at all.


                                       21
<PAGE>

The anticipated expansion of our network infrastructure is expected to place a
significant demand on our suppliers, some of which may have limited resources
and production capacity. In addition, certain of our suppliers, in turn, may
rely on sole or limited sources of supply for components included in their
products. Should our suppliers fail to adjust to meet such increasing demand,
they may be unable to continue to supply components and products in the
quantities and quality and at the times required by us, or at all. Our inability
to 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 our network infrastructure or in our inability to
properly maintain the existing network infrastructure, which would have a
material adverse effect on our business, financial condition and results of
operations.

We may experience development delays or have software defects which could
adversely affect our business.

Software-based services and equipment, such as our 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 us and by current and potential customers, errors will
not be found in such software or other releases after commencement of commercial
shipments, or that we 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 our business, financial
condition and results of operations.

We may not be able to retain the key personnel we need to succeed.

Our future performance depends in significant part upon the continued service of
our 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 we can retain our key technical, sales and managerial
employees or that we can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.

We depend on our international strategic alliances to expand our international
customer base.

We have established and intend 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 we will be able to establish additional strategic alliances or to maintain
such strategic alliances. Our success in expanding our international customer
base depends not only on the formation of additional strategic alliances but
also on the success of these partners and their ability to market our services.
The failure to maintain such strategic alliances or the failure of these
partners to successfully develop and sustain a market for our services will have
a material adverse effect on our ability to expand our international customer
base, which could have a material adverse effect on our business, financial
condition and results of operations.

We face risks associated with international operations which could materially
and adversely affect our business.

In 1998, we derived approximately $5.9 million, or 27.9% of our total revenues
from customers outside of the United States. We expect that such revenues will
represent an increasing percentage of our total revenues in the future. Risks
inherent in our international business activities generally include 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 our future international revenues and, consequently, on our business,
financial condition and results of operations.

Problems relating to the "Year 2000 Issue" could adversely affect our business.

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 a year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements or risk system failure or miscalculations causing
disruptions of normal business activities.

We have conducted a study of the Year 2000 readiness of our information
technology systems, including our computing and networking systems, and our
non-information technology systems and believe that they are currently Year 2000
compliant. Additionally, We have been informed by many of our vendors of
material hardware and software components of our information technology systems
that the products that we use are currently Year 2000 compliant. Despite our
efforts, there can be no assurance that our software contains all necessary date
code changes or that all Year 2000 problems were identified by our study


                                       22
<PAGE>

and subsequent testing. Compliance with Year 2000 requirements may disrupt our
ability to continue developing and marketing facsimile transmission products and
services. The failure to adequately address Year 2000 compliance issues in our
products and services, and in our information technology and non-information
technology systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend.

In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by such entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could also prevent us from delivering services to our customers, which could
have a material adverse effect on our business, financial condition and results
of operations.

Risks Related to Our Industry

Our future growth depends upon an increase in the use of the Internet as a
medium for facsimile transmissions.

We believe that our future success will depend in part upon our ability to
significantly expand our base of Internet-capable nodes and route more of our
customers' traffic through the Internet. Our 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.

We access the Internet from our Internet-capable nodes by dedicated connection
to third party internet service providers. We pay fixed monthly fees for such
Internet access, regardless of our usage or the volume of our 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, our business, financial condition and results of operations
would be materially and adversely affected. In addition, our 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 our business, financial
condition and results of operations.

Our success depends on keeping up with rapid technological changes in our
markets.

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 we provide or reduce the cost of existing
products or services, any of which could enable our existing or potential
customers to fulfill their fax communications needs more cost efficiently. There
can be no assurance that we 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 our services noncompetitive.
Our inability to respond to changing market conditions, technological
developments, evolving industry standards or changing customer requirements, or
the development of competing technology or products that render our services
noncompetitive would have a material adverse effect on our business, financial
condition and results of operations.

We are subject to extensive government regulation which could negatively impact
our business.

We are subject to regulation by various state public service and public utility
commissions and by various international regulatory authorities. We are licensed
by the FCC as an authorized telecommunications company and are 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 us and to change our regulatory
classification. There can be no assurance that the FCC will not change our
regulatory classification or otherwise subject us to more burdensome regulatory
requirements.

In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. We intend 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 we will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such


                                       23
<PAGE>

requirements may prevent us 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 our business, operating results and financial
condition.

Our nodes and 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. We have the
authority to export such encryption technology except 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 our ability to distribute our services outside of the United
States or electronically. While we take precautions against unlawful exportation
of our software, the global nature of the Internet makes it virtually impossible
to effectively control the distribution of our 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 our services, or new legislation or regulation could
have a material adverse effect on our business, financial condition and results
of operations.

Risks Related to our Common Stock

We may be delisted from Nasdaq which would affect your ability to sell our
stock.

Our common stock is currently traded on the Nasdaq National Market. In order to
continue to trade on Nasdaq, we need to maintain at least $4.0 million in net
tangible assets. In the past, we have not been in compliance with this
requirement. We believe that we are currently in compliance with Nasdaq's
requirements. However, if in the future we are unable to satisfy Nasdaq's
requirements, our securities may be delisted from Nasdaq. There can be no
assurance that our common stock will not be delisted, which would materially
affect your ability to buy or sell shares of our common stock.

Fluctuations in our quarterly results may negatively impact our stock price.

We may experience significant quarter to quarter fluctuations in our results of
operations, which may result in volatility in the price of our common stock.
Quarterly results of operations may fluctuate as a result of a variety of
factors, including:

      o     demand for our services;

      o     the introduction of new services and service enhancements by us or
            our competitors;

      o     market acceptance of new services;

      o     the mix of revenues between Internet-based versus telephony-based
            deliveries;

      o     the timing of significant marketing programs;

      o     the number and timing of the hiring of additional personnel;

      o     competitive conditions in the industry; and

      o     general economic conditions.

Our revenues are difficult to forecast. Shortfalls in revenues may adversely and
disproportionately affect our results of operations because a high percentage of
our operating expenses are relatively fixed, and planned expenditures, such as
the anticipated expansion of our 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
our common stock. Accordingly, we believe 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 we will be profitable in any future quarter. Due to the foregoing factors,
it is likely that in one or more future quarters our 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 our common stock.

Future sales of our common stock could cause the price of our shares to decline
and affect our ability to raise capital.

The market price of our common stock could drop as a result of sales of
substantial amounts of common stock in the public market or the perception that
such sales could occur. Registration statements are in effect covering the sale
of up to 2,000,000 shares of our common stock. In addition, we have also filed a
registration statement covering the sale of up to 709,677 shares of our common
stock which has not yet been declared effective by the Securities and Exchange
Commission. Such a price drop may make it more difficult for us to raise the
capital necessary to fund our future operations by selling common stock. As of


                                       24
<PAGE>

March 24, 1998, without taking into account shares of common stock issued upon
exercise of stock options, warrants or other rights to acquire common stock
after such date, we had outstanding 14,067,105 shares of common stock.

Substantially all of the shares of common stock already outstanding will be
freely tradeable in the public market without restriction under the Securities
Act, except that any shares held by our "affiliates", as such term is defined in
Rule 144(a) under the Securities Act, may generally only be sold in compliance
with the applicable provisions of Rule 144 of the Securities Act. In general,
under Rule 144 an "affiliate" is entitled to sell within any three-month period
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of our common stock, approximately 140,671 shares, or the
average weekly trading volume in our common stock on Nasdaq during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144. Sales under Rule 144 are also subject to certain provisions relating
to the manner and notice of sale and the availability of current public
information about us. Additional shares of common stock, including shares
issuable upon exercise of options, warrants and other rights to acquire common
stock, will also become eligible for sale in the public market from time to time
in the future. Furthermore, certain holders of common stock have the right to
cause us to register their shares under the Securities Act in the future. We are
required to bear the expenses of all such required registrations, except
underwriting discounts and commissions. We are required to use our best efforts
to effect such registrations, subject to certain conditions and limitations.

Our certificate of incorporation and bylaws, and Delaware laws make it more
difficult for a third party to acquire us.

Our sixth amended and restated certificate of incorporation authorizes the board
of directors to issue, without stockholder approval, up to 1,000,000 shares of
preferred stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of common
stock. Our certificate of incorporation also provides for staggered terms for
the members of the board of directors. In addition, we will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, which will
generally prohibit us from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The foregoing and other
provisions of our certificate of incorporation and our by-laws, as amended and
the application of Section 203 of the Delaware General Corporation Law could
have the effect of deterring certain takeovers or delaying or preventing certain
changes in our control or management, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.

We do not intend to pay cash dividends and, as a result, stockholders will need
to sell shares to realize a return on their investment.

We have never paid any cash dividends on our common stock and do not intend to
pay any cash dividends in the foreseeable future.

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

      Not Applicable.


                                       25
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference. 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 to be mailed to Stockholders on or about April 29, 1999, which
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference.

<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 as of December 31, 1998 and 1997 ........................F-3
     Statements of Operations for the years ended December 31, 1998, 
          1997 and 1996 .....................................................F-4
     Statements of Cash Flows for the years ended December 31, 1998, 
          1997 and 1996......................................................F-5
     Statements of Stockholders' Equity for the years ended
          December 31, 1998, 1997 and 1996 ..................................F-6
     Notes to Financial Statements ..................................F-7 to F-19

 (2) Financial Statement Schedule

     Report of Independent Accountants on Financial Statement Schedule .....F-20
     Supplemental Schedule to Financial Statements .........................F-21

(b) Reports on Form 8-K

    None

<PAGE>

(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

<PAGE>

       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).

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).

10.20** Loan and Security Agreement, dated March 27, 1998, between the Company
       and Silicon Valley Bank.

10.21  Form of Common Stock Purchase Agreement, dated July 22, 1998.
       (incorporated by reference to Exhibit 10.1 to the Registrant's
       Registration Statement on Form S-3, Registration No. 333-64515).

10.22  Rights Agreement, dated September 17, 1998 between the Registrant and
       AudioFax IP LLC. (incorporated by reference to Exhibit 10.1 to the
       Registrant's Registration Statement on Form S-3, Registration No.
       333-67355).

10.23  Purchase Agreement, dated December 24, 1998, between the Registrant and
       the Tail Wind Fund Ltd. (incorporated by reference to Exhibit 10.1 to the
       Registrant's Registration Statement on Form S-3, Registration No.
       333-70915).

10.24  Common Stock Warrant between the Registrant and the Tail Wind Fund Ltd.,
       dated December 28, 1998 (incorporated by reference to Exhibit 10.2 to the
       Registrant's Registration Statement on Form S-3, Registration No.
       333-70915).

<PAGE>

23.**  Consent of PricewaterhouseCoopers LLP, independent accountants

27.**  Financial Data Schedule.

99.    Proxy Statement of FaxSav Incorporated relative to the 1999 Annual
       Meeting of the Stockholders to be held on June 4, 1999, which is
       incorporated by reference into Part III of this Form 10-K.

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

<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 25, 1999:

Signature                      Title(s)
---------                      --------


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


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


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


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


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


/s/ Richard Miller            Director
---------------------------

<PAGE>

FaxSav Incorporated
(Formerly Digitran Corporation)

Index to Financial Statements

                                                                            Page
                                                                            ----

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

Balance Sheets as of December 31, 1998 and 1997 .............................F-3

Statements of Operations for the years ended December 31, 1998, 
    1997 and 1996 ...........................................................F-4

Statements of Cash Flows for the years ended December 31, 1998, 
    1997 and 1996............................................................F-5

Statements of Stockholders' Equity for the years ended
   December 31, 1998, 1997 and 1996 .........................................F-6

Notes to Financial Statements .......................................F-7 to F-19

Report of Independent Accountants on Financial Statement Schedule ..........F-20

Supplemental Schedule to Financial Statements ..............................F-21


                                                                             F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of FaxSav Incorporated:

In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of FaxSav Incorporated (formerly Digitran
Corporation) (the "Company") at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

                                                      PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey

February 3, 1999


                                                                             F-2
<PAGE>

FaxSav Incorporated

Balance Sheets
as of December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                               December 31,                  
                                                                       ------------    ------------          
                                                                           1998            1997              
                                                                       ------------    ------------          
<S>                                                                    <C>             <C>                   
Assets                                                                                                       
Current assets:                                                                                              
   Cash and cash equivalents                                           $  5,260,450    $  3,680,185          
   Accounts receivable, less allowances of $220,076 and                                                      
       $330,724 as of December 31, 1998 and 1997, respectively            3,198,688       2,280,119          
   Prepaid expenses and other current assets                                162,218          35,844          
                                                                       ------------    ------------          
                Total current assets                                      8,621,356       5,996,148          
                                                                                                             
Property and equipment, net                                               5,487,221       4,175,264          
Other assets, net                                                           379,148         324,173          
                                                                       ------------    ------------          
                Total assets                                           $ 14,487,725    $ 10,495,585          
                                                                       ============    ============          
Liabilities and Stockholders' Equity                                                                         
Current liabilities:                                                                                         
   Accounts payable                                                    $  1,153,688    $    658,703          
   Accrued expenses and other liabilities                                 2,654,658       3,219,846          
   Current portion of notes payable                                         992,960         469,217          
   Obligation under capital lease                                            95,804         315,370          
                                                                       ------------    ------------          
                Total current liabilities                                 4,897,110       4,663,136          
                                                                                                             
Notes payable                                                             1,540,481       1,083,190          
Obligation under capital lease                                                               85,551                          
                                                                       ------------    ------------          
                Total liabilities                                         6,437,591       5,831,877          
                                                                       ------------    ------------  
Commitments and contingencies (Notes 7 and 12)                         

Stockholders' equity:
   Common stock, $0.01 par value; 40,000,000 shares authorized;
       13,904,203 and 10,806,466 shares issued and outstanding as of
       December 31, 1998 and 1997, respectively                             139,042         108,065
   Additional paid-in capital                                            48,171,015      36,730,388
   Accumulated deficit                                                  (40,259,923)    (32,174,745)
                                                                       ------------    ------------
                Total stockholders' equity                                8,050,134       4,663,708
                                                                       ------------    ------------
                    Total liabilities and stockholders' equity         $ 14,487,725    $ 10,495,585
                                                                       ============    ============
</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, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                1998            1997            1996
                                            ------------    ------------    ------------
<S>                                         <C>             <C>             <C>         
Revenue                                     $ 21,116,726    $ 17,418,333    $ 15,035,711
Cost of service                               11,128,752      10,413,797       8,898,308
                                            ------------    ------------    ------------
                Gross margin                   9,987,974       7,004,536       6,137,403
                                            ------------    ------------    ------------
Operating expenses:
    Network operations and support             3,608,129       2,286,594       1,984,607
    Research and development                   1,995,039       1,909,137       1,771,822
    Sales and marketing                        6,639,575       5,268,099       6,065,045
    General and administrative                 3,285,126       3,132,438       2,495,624
    Depreciation and amortization              1,492,493       1,702,054       1,436,673
    Patent litigation settlement               1,025,000
                                            ------------    ------------    ------------
                Total operating expenses      18,045,362      14,298,322      13,753,771
                                            ------------    ------------    ------------
                Operating loss                (8,057,388)     (7,293,786)     (7,616,368)
                                            ------------    ------------    ------------
Other income (expense):
    Interest income                              123,838         240,987         188,680
    Interest expense                            (257,264)       (162,218)       (142,269)
    Other                                        105,636          96,115          93,568
                                            ------------    ------------    ------------
                                                 (27,790)        174,884         139,979
                                            ------------    ------------    ------------
                Net loss                    $ (8,085,178)   $ (7,118,902)   $ (7,476,389)
                                            ============    ============    ============
Historical basic and diluted net loss per
    common share                            $      (0.68)   $      (0.72)   $      (2.74)
                                            ============    ============    ============
Shares used in computing historical
    net loss per common share                 11,842,956       9,880,681       2,724,651
                                            ============    ============    ============
Unaudited pro forma data (Note 2):
    Pro forma basic and diluted
        net loss per common share           $      (0.68)          (0.72)   $      (0.86)
                                            ============    ============    ============
    Shares used in computing pro
        forma net loss per common
        share                                 11,842,956       9,880,681       8,712,054
                                            ============    ============    ============
</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, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                  1998           1997             1996
                                                             ------------    ------------    ------------
<S>                                                          <C>             <C>               <C>        
Cash flows from operating activities:
    Net loss                                                 $ (8,085,178)   $ (7,118,902)     (7,476,389)
    Adjustments to reconcile net loss to net cash used in
        Operating activities:
            Depreciation and amortization expense               1,492,493       1,702,054       1,436,673
            Patent litigation settlement                        1,000,000
            Provision for doubtful accounts                       269,470         230,520         219,400
            Gain on sale of property and equipment                (26,860)        (18,791)
            Changes in assets and liabilities:
                Accounts receivable                            (1,188,039)       (495,484)        123,497
                Prepaid expenses and other current assets        (126,374)        215,573        (184,111)
                Other assets                                      186,975        (182,462)        (80,199)
                Accounts payable                                  494,985         395,257         (40,961)
                Accrued expenses and other liabilities           (565,188)       (193,941)      1,086,523
                                                             ------------    ------------    ------------
                Net cash used in operating activities          (6,547,716)     (5,466,176)     (4,915,567)

Cash flows used in investing activities:
    Proceeds/(purchase) of marketable securities                                1,002,513      (1,002,513)
    Purchase of property and equipment                         (2,761,566)     (2,856,952)     (2,328,829)
    Purchase of intangibles                                      (314,223)
    Proceeds from sales of property and equipment                  56,250         112,770                
                                                             ------------    ------------    ------------
                Net cash used in investing activities          (3,019,539)     (1,741,669)     (3,331,342)
                                                             ------------    ------------    ------------
Cash flows from financing activities:
    Principal payments made under capital lease obligation       (305,117)       (280,517)       (219,201)
    Borrowings under line of credit                             1,522,845       1,299,797         956,334
    Repayments of notes payable                                  (541,812)       (178,372)     (1,525,352)
    Proceeds from issuance of preferred stock, net                                              7,933,434
    Proceeds from issuance of common stock
        and exercise of stock options and warrants, net        10,471,604       2,124,017      10,636,307
    Treasury stock acquired - preferred                                                        (2,163,878)
                                                             ------------    ------------    ------------
                Net cash provided by financing activities      11,147,520       2,964,925      15,617,644
                                                             ------------    ------------    ------------
Net increase (decrease) in cash                                 1,580,265      (4,242,920)      7,370,735

Cash and cash equivalents at beginning of  period               3,680,185       7,923,105         552,370
                                                             ------------    ------------    ------------
Cash and cash equivalents at end of period                   $  5,260,450    $  3,680,185    $  7,923,105
                                                             ============    ============    ============
Supplemental disclosure:
    Cash paid for interest                                   $    117,556    $     45,918    $     68,421
                                                             ============    ============    ============
Noncash investing and financing activities:
    Equipment acquired under capital lease                   $          0    $          0    $    421,805
                                                             ============    ============    ============
    Issuance of common stock pursuant to
        patent litigation settlement                         $  1,000,000    $          0    $          0
                                                             ============    ============    ============
    Issuance of common stock under option
        pursuant to severance agreement                      $          0    $          0    $     42,091
                                                             ============    ============    ============
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                                                             F-5
<PAGE>

FaxSav Incorporated

Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996

<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, 1996                                   58,769,921    $     58,770       327,353  $      3,274   $ 18,204,438 

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     34,616,730 
                                                           ------------    ------------  ------------  ------------   ------------ 
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     36,730,388 
                                                           ------------    ------------  ------------  ------------   ------------ 
Issuance of common stock in connection with private
    Placements                                                                              2,645,161        26,452     10,153,251 
Exercise of stock options                                                                     143,560         1,435        279,774 
Receivable from sale of stock                                                                                             (203,598)
Stock issuance                                                                                 34,016           340        101,708 
Stock issuance in connection with settlement of litigation                                    275,000         2,750        997,250 
Expenses in connection with stock issuance                                                                                (208,055)
Net loss                                                                                                                           
                                                           ------------    ------------  ------------  ------------   ------------ 
Balance at December 31, 1998                                          0    $          0    13,904,203  $    139,042   $ 47,850,718 
                                                           ------------    ------------  ------------  ------------   ------------ 

<CAPTION>

                                                                                                
                                                                              Accumulated      Treasury
                                                               Warrants         Deficit          Stock           Total
                                                              ------------    ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>             <C>         
Balance at January 1, 1996                                                    $(17,579,454)                   $    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)              0       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)              0       4,663,708
                                                                              ------------    ------------    ------------
Issuance of common stock in connection with private
    Placements                                                $    320,297                                      10,500,000
Exercise of stock options                                                                                          281,209
Receivable from sale of stock                                                                                     (203,598)
Stock issuance                                                                                                     102,048
Stock issuance in connection with settlement of litigation                                                       1,000,000
Expenses in connection with stock issuance                                                                        (208,055)
Net loss                                                                        (8,085,178)                     (8,085,178)
                                                              ------------    ------------    ------------    ------------
Balance at December 31, 1998                                  $    320,297    $(40,259,923)   $          0    $  8,050,134
                                                              ------------    ------------    ------------    ------------
</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 desktop to fax, enhanced fax and
broadcast fax services. 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. The Company
initially offered services (the "legacy fax services") through its
telephony-based network with termination by long distance carriers. 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
through the development of a wholesale business in desktop to fax services and a
fax-to-fax business in certain markets in the Asia Pacific region. In 1997,
revenues from international customers amounted to $2.3 million or 13.2% of total
revenues and in 1998, revenues from international customers amounted to $5.9
million or 27.9% of total revenues.

In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Although the services provided to its customers are the same in
the U.S. and international markets, management views the two as separate
businesses and measures the results for both to the gross margin level. The
ubiquitous nature of the Company's network and its centralized operations in the
U.S. prohibit the allocation of expenses beyond that level. Accordingly, 1998
and 1997 segment Gross Margin and Assets for the Company were as follows:

<TABLE>
<CAPTION>
Gross Margin                         1998                                     1997
                    ---------------------------------------   ---------------------------------------
                       U.S.      International     Total         U.S.      International     Total
                    -----------   -----------   -----------   -----------   -----------   -----------
<S>                 <C>           <C>           <C>           <C>           <C>           <C>        
  Internet Fax
    Revenues        $ 9,069,808   $ 5,884,596   $14,954,404   $ 6,116,576   $ 2,306,249   $ 8,422,825
    Cost of Service   4,379,264     3,292,542     7,671,806     3,459,849     1,335,140     4,794,989
                    -----------   -----------   -----------   -----------   -----------   -----------
  Gross Margin        4,690,544     2,592,054     7,282,598     2,656,727       971,109     3,627,836
  
  Telephony Fax
    Revenues          6,162,322                   6,162,322     8,995,508                   8,995,508
    Cost of Service   3,456,946                   3,456,946     5,618,808                   5,618,808
                    -----------                 -----------   -----------                 -----------
  Gross Margin        2,705,376                   2,705,376     3,376,700                   3,376,700
  
  Total
    Revenues         15,232,130     5,884,596    21,116,726    15,112,084     2,306,249    17,418,333
    Cost of Service   7,836,210     3,292,542    11,128,752     9,078,657     1,335,140    10,413,797
                    -----------   -----------   -----------   -----------   -----------   -----------
  Gross Margin      $ 7,395,920   $ 2,592,054   $ 9,987,974   $ 6,033,427   $   971,109   $ 7,004,536
                    ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

1. Organization and Nature of Operations (Continued):

<TABLE>
<CAPTION>
Assets                                      1998                                       1997
                            ---------------------------------------   ---------------------------------------
                                U.S.     International     Total           U.S.    International     Total
                            -----------  -------------  -----------   -----------  -------------  -----------
<S>                         <C>           <C>            <C>          <C>           <C>            <C>       
Cash and Cash Equivalents   $ 5,260,450                 $ 5,260,450   $ 3,680,185                 $ 3,680,185
Accounts Receivable, net      2,037,549   $ 1,161,139     3,198,688     1,756,353   $   523,766     2,280,119
Property & Equipment, net     4,623,455       863,766     5,487,221     3,175,848       999,416     4,175,264
                            -----------   -----------   -----------   -----------   -----------   -----------
Sub-total                   $11,921,454   $ 2,024,905    13,946,359   $ 8,612,386   $ 1,523,182    10,135,568
                            ===========   ===========   ===========   ===========   ===========   ===========
Other unallocated amounts                                   541,366                                   360,017
                                                        -----------                               -----------
Total Assets                                            $14,487,725                               $10,495,585
                                                        ===========                               ===========
</TABLE>

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 1999.
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
1999. 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.

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.


                                                                             F-8
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

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. 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 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 2,065,000, 1,523,000 and
            1,256,000 for the years ended December 31, 1998, 1997, and 1996,
            respectively, have been excluded from the calculation of diluted
            earnings per share, since their effect would be antidilutive.

            In addition, approximately 169,000 warrants outstanding for the year
            ended December 31, 1998, and 100,000 warrants for the two 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.    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.
            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.

      H.    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.

      I.    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


                                                                            F-10
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

2. Summary of Significant Accounting Policies (Continued):

      I.    Concentration of Credit Risk (Continued):

            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.

      J.    Financial Instruments:

            The estimated fair value of the Company's financial instruments,
            which include cash, cash equivalents, accounts receivable, 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 amounts
            outstanding under the line of credit was determined using valuation
            techniques that considered cash flow discounted at current rates.

      K.    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.

      L.    Reclassification:

            Certain items in 1997 have been reclassified to conform to the 1998
            presentation.

3. Property and Equipment:

      Property and equipment is comprised of the following:

                                                        December 31,
                                               -------------------------
                                                      1998          1997
                                               -----------   -----------

      Equipment                                $10,232,895   $ 7,844,450
      Computer software                            625,413       364,385
      Furniture and fixtures                       132,609       113,386
      Leasehold improvements                       168,265       160,008
                                               -----------   -----------
                                                11,159,182     8,482,229
          Less, accumulated depreciation and
              amortization                       5,671,961     4,306,965
                                               -----------   -----------
                                               $ 5,487,221   $ 4,175,264
                                               ===========   ===========


                                                                            F-11
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

3. Property and Equipment (Continued):

      Included in the equipment balance is certain equipment under capital
      leases of approximately $966,058 at December 31, 1998 and 1997.
      Accumulated amortization of equipment under capital leases approximated
      $588,079 and $394,867 as of December 31, 1998 and 1997, respectively.
      Depreciation and amortization expense for owned property and equipment for
      the years ended December 31, 1998, 1997, and 1996, amounted to $1,420,208,
      $1,674,554 and $1,388,753, respectively.

4. Accrued Expenses and Other Liabilities:

      Accrued expenses and other liabilities is comprised of the following:

                                                             December 31,
                                                      -----------------------
                                                         1998         1997
                                                      ----------   ----------
      Accrued carrier charges                         $1,834,894   $1,926,925
      Accrued salaries, bonuses and commissions          224,933      195,688
      Excise and state taxes payable                     132,219      269,245
      Accrual for legal defense                                       251,917
      Insurance premiums payable                                       79,449
      Other                                              462,612      496,622
                                                      ----------   ----------
                                                      $2,654,658   $3,219,846
                                                      ==========   ==========

5.  Notes Payable:

         Long-term debt includes the following:

                                                             December 31,
                                                      -----------------------
                                                         1998         1997
                                                      ----------   ----------
      1996 notes payable to bank - $750,000           $  126,760   $  278,871
      1997 notes payable to bank - $800,000              559,935      799,908
      1997 notes payable - $500,000                      418,009      473,628
      1998 notes payable to bank - $500,000              449,942
      1998 notes payable - $1,000,000                    978,795
                                                      ----------   ----------
      Total notes payable                              2,533,441    1,552,407
      Less current portion                               992,960      469,217
                                                      ----------   ----------
      Non-current portion                             $1,540,481   $1,083,190
                                                      ==========   ==========

As of December 31, 1998, the Company had $126,760 outstanding under a line of
credit established in 1996, which will be repaid in equal installments over
the first ten months of 1999.

During 1997, the Company entered into two new loan agreements. The first
agreement was an equipment line of credit with the Bank, in the form of a
promissory note, in the amount of $800,000. In 1998 this agreement was amended
to increase available borrowings by an additional $500,000. The new line is also
evidenced by the Company's promissory notes which are payable over 30 months.
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 and 8.9% in 1998. Among the covenants stated in the agreement,
specific liquidity ratios, debt service ratios, and net worth ratios are
required to be maintained and


                                                                            F-12
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

5. Notes Payable (Continued):

      disclosed to the Bank on a monthly basis. As of December 31, 1998, the
      Company had fully utilized these lines of credit.

      The second agreement in 1997 was for an equipment loan line of $500,000
      with another lender and 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 an effective interest rate of 16%. In 1998 this agreement was
      amended to increase available borrowings by an additional $1,000,000. The
      new line is also evidenced by the Company's promissory notes which are
      payable over 42 months at an effective interest rate of 16%. The new line
      was fully utilized by December 31, 1998. The equipment purchased with the
      proceeds of these loans serve as collateral.

6. Related Party Transactions:

      During 1998 the Company loaned two officers a total of $203,598. These
      recourse loans bear interest at a rate of 5% and are collateralized by
      approximately 61,000 shares of the Company's common stock. The loans are
      due and payable in November 2003.

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 $700,000 per month through June
      1999 and $500,000 per month thereafter through January 2001. 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,
      1998, 1997 and 1996 amounted to $470,959, $302,643 and $181,594,
      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, 1998, 1997 and 1996 amounted to $69,313, $120,085
      and $168,666, respectively.

      The Company acquired equipment for $421,805 under capital lease
      obligations during the year ended December 31, 1996. Interest paid for
      capital lease obligations during the years ended December 31, 1998, 1997
      and 1996 was $27,064, $59,658 and $69,682, respectively.


                                                                            F-13
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

7. Commitments (Continued):

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

<TABLE>
<CAPTION>
                                                 December 31, 1998           December 31, 1997
                                              ----------------------       -----------------------
                                               Operating     Capital       Operating      Capital
                                                 Lease        Lease          Lease         Lease
                                              -----------   ----------   -----------   ------------
      <S>                                     <C>           <C>             <C>            <C>    
      1998                                                                  316,641    $   331,716
      1999                                    $  368,428    $ 103,126       311,808        103,126
      2000                                       274,404                    295,400
      2001                                       274,404                    275,173
      2002 and thereafter                        102,595                    102,595
                                              -----------   ----------   -----------   ------------
      Total minimum lease payments            $1,019,831      103,126    $1,301,617        434,842

      Less, amount representing interest                        7,322                       33,921

      Less, current principal maturities of
          obligation under capital lease                       95,804                      315,370
                                                            ----------                 ------------
      Long-term lease obligation                            $       0                  $    85,551
                                                            ==========                 ============
</TABLE>

8. Capital Stock and Warrants:

      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 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.


                                                                            F-14
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

8. Capital Stock and Warrants (Continued):

      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.

      On December 30, 1998, the Company granted warrants to purchase 64,516
      shares of common stock to an investor in connection with a private
      placement of 645,161 new unregistered shares of common stock. The exercise
      price is $5.425 per share and the warrants will expire three years from
      the date of grant.

9. Stock Options:

      The Company has a stock option plan which authorized up to 1,794,175
      shares of common stock to be issued. During 1998, the shareholders
      approved an amendment to the plan increasing the authorized number of
      shares by 650,000 to 2,444,175. 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. Stock option transactions under the plan are as
      follows:


                                                                            F-15
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

9. Stock Options (Continued):

<TABLE>
<CAPTION>
                                                                                   Weighted
                                                                                   Average
                                               Incentive                           Exercise
                              Nonqualified       Stock           Available         Price Per
                                Options         Options          for Grant           Share
                              ---------        ---------        ----------        ----------
<S>                             <C>              <C>               <C>            <C>       
January 1, 1996                 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
                                                                                       
   Available for Grant                                             650,000                                                
   Granted                      517,580          318,474          (836,054)       $     3.41
   Exercised                    (55,555)         (88,005)                         $     4.63
   Canceled                    (113,859)         (36,561)          150,420        $     4.40
                              ---------        ---------        ----------        
                                                                                       
December 31, 1998             1,006,346        1,058,570           136,368        $     1.80
                              =========        =========        ==========
</TABLE>

      At December 31, 1998, 1997 and 1996, options for 905,483, 785,584 and
      626,277 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 discloses the pro forma net loss and loss
      per share amounts assuming the fair value method.

      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
      1998, 1997 and 1996, respectively, would have been as follows:


                                                                            F-16
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

9. Stock Options (Continued):

<TABLE>
<CAPTION>
                                          1998             1997             1996
                                     -------------    -------------    -------------

<S>                                  <C>              <C>              <C>           
   Net loss as reported              $  (8,085,178)   $  (7,118,902)   $  (7,476,389)
   Net loss - pro forma                 (8,482,567)      (7,260,113)      (7,583,417)
   Loss per share - as reported              (0.68)           (0.72)           (2.74)
   Loss per share - pro forma                (0.72)           (0.73)           (2.78)
</TABLE>

      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:

                                          1998           1997           1996
                                     -------------  -------------  -------------
    
    Expected life                       5 years        5 years       10 years 
    Risk free interest rate               5.3%           6.3%          4.9%
    Expected future dividend yield         0%             0%            0%
    Expected volatility                  127.2%          85.2%         34.4%
                                                               
      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.

<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          12/31/98        Life         Price       12/31/98       Price
------------------------        -----------   -----------    --------    -----------    ---------
<S>                               <C>              <C>     <C>            <C>           <C>     
$0.23 - $0.23                     502,713          6.24    $    0.23      375,265       $   0.23
$0.72 - $1.50                     639,383          5.98         1.12      463,003           0.99
$2.13 - $2.94                     528,722          9.38         2.81       22,733           2.49
$3.00 - $5.38                     386,898          9.17         3.47       41,116           3.66
$6.38 - $6.38                       7,200          8.08         6.38        3,366           6.38
$0.23 - $6.38                   2,064,916          7.52    $    1.80      905,483       $   0.86
</TABLE>

10. Patent Litigation Settlement:

      Effective September 22, 1998 the Company settled all outstanding
      litigation with AudioFAX IP,L.L.P. ("AudioFAX") to avoid the expense and
      disruption of protracted litigation. In 1997 the Company had filed a
      lawsuit against AudioFAX seeking declaratory relief that FaxSav services
      did not infringe on any valid claims in certain AudioFAX's patents
      relating to store-and-forward technology or that certain claims of the
      AudioFAX patents are not valid. Immediately after the filing of FaxSav's
      complaint, AudioFAX filed a lawsuit against FaxSav alleging patent
      infringement.

      The terms of the settlement agreement required the Company to issue
      275,000 shares of common stock to AudioFAX and to register such shares for
      resale in exchange for a fully paid-up license to the patents in the
      dispute. Although under certain circumstances the Company


                                                                            F-17
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

10. Patent Litigation Settlement (Continued):

      would have been required to issue additional shares or pay a certain
      amount of cash to AudioFAX, these requirements are no longer applicable.

      The Company has recorded a charge of $1,025,000 in 1998 representing all
      costs associated with the settlement. No costs have been capitalized, as
      the Company could not determine the future economic benefit, if any, to
      the Company of the patent licenses acquired.

11. 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, 1998, the Company had net operating loss carryforwards
      available for income tax purposes of approximately $35,000,000 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. The components of the
      Company's deferred tax asset are as follows:

                                                            December 31,
                                                  -----------------------------
                                                       1998             1997 
                                                  ------------     ------------
                                                 
Operating loss carryforwards                      $ 12,765,029     $ 10,225,730
Temporary differences                                  914,450          691,560
                                                  ------------     ------------
                                                    13,679,479       10,917,290
                                                 
Less - valuation allowance                         (13,679,479)     (10,917,290)
                                                  ------------     ------------
                                                  $          0     $          0
                                                  ============     ============

      In evaluating the realization 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,
      1998, 1997, and 1996.


                                                                            F-18
<PAGE>

FaxSav Incorporated
Notes to Financial Statements (Continued):

12. 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.

13. Subsequent Event (Unaudited):

      In February 1999, the company entered into a new $1,000,000 equipment line
      of credit with a lender. Draw-downs are to be paid over a term of 42
      months with an effective interest rate of 16%.


                                                                            F-19
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE

To the Board of Directors of FaxSav, Incorporated

Our audits of the financial statements referred to in our report dated February
3, 1999 appearing on page F-2 of the 1998 Annual Report to Shareholders of
FaxSav, Incorporated (formerly Digitran Corporation) also included an audit of
the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.

                                                      PRICEWATERHOUSECOOPERS LLP

Florham Park, New Jersey
February 3, 1999


                                                                            F-20
<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, 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
                                          ===========    ===========    ===========       ===========       ===========
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                     2,593,990                          10,917,290
                                          -----------    -----------    -----------       -----------       -----------
                                          $ 8,933,749    $   230,520    $ 2,623,809       $   288,147       $11,499,931
                                          ===========    ===========    ===========       ===========       ===========
Year ended December 31, 1998
Provisions for bad debts                  $   330,724    $   269,470    $    21,422(a)    $   401,540(b)    $   220,076
Accrual for legal defense                     251,917                                         251,917
Deferred tax asset valuation allowance     10,917,290                     2,762,189                          13,679,479
                                          -----------    -----------    -----------       -----------       -----------
                                          $11,499,931    $   269,470    $ 2,783,611       $   653,457       $13,899,555
                                          ===========    ===========    ===========       ===========       ===========
</TABLE>

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


                                                                            F-21