
<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K
                                 ANNUAL REPORT

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                    FOR FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

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

                         COMMISSION FILE NUMBER 0-14567

                                   ACC CORP.
                                400 WEST AVENUE
                           ROCHESTER, NEW YORK 14611
                                  716-987-3000

Incorporated under the                                  Employer Identification
Laws of the State of Delaware                                 Number 16-1175232

        Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:

TITLE OF CLASS:  Class A Common Stock, par value $.015 per share
--------------                                                  

Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.        Yes [X] No[  ]

Indicate by 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 the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.          [X]

Aggregate market value of all Class A Common Stock held by non-affiliates as of
March 18, 1998, was $879,112,800.

17,519,684 shares of $.015 par value Class A Common Stock were issued and
outstanding as of March 18, 1998.

The Index of Exhibits filed with this Report begins at page ___.
<PAGE>
 
                                     PART I

Item 1.  BUSINESS.

     Certain of the information contained or incorporated by reference in this
Form 10-K, including the discussion which follows in this Item 1 of the
Company's plans and strategies for its business and related financing, and the
Management's Discussion and Analysis included herein, contain forward-looking
statements.  For a discussion of important factors that could cause actual
results to differ materially from such forward-looking statements, please
carefully review the discussion of Risk Factors contained in this Item 1, as
well as the other information contained in this Report and in the Company's
periodic reports filed with the Securities and Exchange Commission (the "SEC" or
"Commission").

GENERAL

     ACC is a switch-based provider of telecommunications services in the United
States, Canada, the United Kingdom (the "U.K."), and Germany. ACC primarily
provides long distance telecommunications services to a diversified customer
base of businesses, residential customers and educational institutions. ACC also
provides local telephone service as a switch-based local exchange reseller in
upstate New York and Massachusetts and as a reseller of local exchange services
in Ontario and Quebec, Canada. ACC entered the German market during 1997 as a
switchless reseller of long distance telecommunications services and became a
switch-based provider in Germany in February of 1998. ACC operates an advanced
telecommunications network, consisting of ten long distance international and
domestic switches located in the U.S., Canada, the U.K. and Germany, six local
exchange switches located in the U.S., leased transmission lines, indefeasible
rights of use in international submarine cables ("IRUs") and network management
systems designed to optimize traffic routing.

     ACC's objective is to grow its telecommunications customer base in its
existing markets and to establish itself in deregulating Western European
markets that have high density telecommunications traffic when ACC believes that
business and regulatory conditions warrant. The key elements of ACC's business
strategy are: (1) to broaden ACC's penetration of the U.S., Canadian, U.K. and
German telecommunications markets by expanding its long distance, local and
other service offerings and geographic reach; (2) to utilize ACC's operating
experience as an early entrant in deregulating markets in the U.S., Canada and
the U.K. to penetrate other deregulating telecommunications markets that have
high density telecommunications traffic; (3) to achieve economies of scale and
scope in the utilization of ACC's network; and (4) to seek acquisitions,
investments or strategic alliances involving assets or businesses that are
complementary to ACC's current operations.

     ACC's principal competitive strengths are: (1) ACC's sales and marketing
organization and the customized service ACC offers to its customers; (2) ACC's
offering of competitive prices, which ACC believes generally are lower than
prices charged by the major carriers in each of its markets; (3) ACC's position
as an early entrant in the U.S., Canadian and U.K. markets as an alternative
carrier; (4) ACC's focus on more profitable international telecommunications
traffic between the U.S., Canada and the U.K.; and (5) ACC's switched-based
networking capabilities. ACC believes that its ownership of switches reduces its
reliance on other carriers and enables ACC to efficiently route
telecommunications traffic over multiple leased transmission lines and IRUs and
to control costs, call record data and customer information. The availability of
existing transmission capacity in its markets makes leasing of transmission
lines attractive to ACC and enables it to grow network usage without having to
incur the significant capital and operating costs associated with the
development and operation of a transmission line infrastructure.

     ACC primarily targets business customers with approximately $500 to $15,000
of monthly usage, selected residential customers and colleges and universities.
ACC believes that, in addition to being price-driven, these customers tend to be
focused on customer service, more likely to rely on a single carrier for their
telecommunications needs and less likely to change carriers than larger
commercial customers. The diversity of ACC's targeted customer base enhances
network utilization by combining business-driven workday traffic with night and
weekend off-peak traffic from student and residential customers. ACC strives to
be more cost effective, flexible, innovative and responsive to the needs of its
customers than the major carriers, which principally focus their direct sales
efforts on large commercial accounts and residential customers.
<PAGE>
 
                                      -2-



RECENT DEVELOPMENTS

     ACC Management Changes.  On December 5, 1997, ACC announced that its
Chairman and Chief Executive Officer, David K. Laniak, 62, had died unexpectedly
due to health-related complications. As a result, ACC's Board of Directors named
Robert M. Van Degna, Chairman of the Board of Directors. Mr. Van Degna has
served as an outside director of ACC since 1995. ACC's Board of Directors also
established an office of the Chief Executive to jointly perform the functions of
Chief Executive Officer, consisting of Christopher Bantoft, Executive Vice
President, Michael R. Daley, Executive Vice President and Chief Financial
Officer, and Steve M. Dubnik, Executive Vice President.

     TCG Merger Agreement.  On November 26, 1997, ACC entered into an Agreement
and Plan of Merger (the "TCG Merger Agreement"), pursuant to which a wholly-
owned subsidiary of Teleport Communications Group, Inc., a Delaware corporation
("TCG"), would be merged with and into ACC and ACC would survive the merger as a
wholly-owned subsidiary of TCG (the "TCG Merger").  If the TCG Merger is
consummated, following the TCG Merger, all of the capital stock of the surviving
corporation will be owned by TCG.  Shares of ACC Common Stock will be exchanged
for merger consideration and then cancelled, with the result that ACC Common
Stock will no longer be listed on The Nasdaq National Market.  Under the TCG
Merger Agreement, ACC shareholders will receive $50 in value of TCG Class A
Common Stock for each share of ACC stock, based upon the average closing price
of TCG stock for a ten trading day period preceding the date of merger.  The
total value of the transaction would be approximately $1 billion.  However, if
TCG's average closing price during the ten day trading period prior to closing
is below $45 or above $55, the exchange ratios will be fixed at 1.11111 shares
of TCG stock or 0.90909 shares of TCG stock, respectively, and ACC shareholders 
will receive cash in lieu of any fractional shares.  It is anticipated
that the merger will be treated as a tax-free exchange. Consummation of the TCG
Merger is subject to closing conditions and shareholder approval. No assurance
can be given that the TCG Merger will be consummated.

     The Proposed Merger of TCG and AT&T.  On January 8, 1998, AT&T Corp.
("AT&T") and TCG announced that they had entered into a definitive merger
agreement (the "AT&T Merger Agreement"),  under which each share of TCG common
stock would be converted into the right to receive 0.943 of a share of common
stock, par value $1.00 per share, of AT&T.  Under the AT&T Merger Agreement, a
wholly-owned subsidiary of AT&T would be merged with and into TCG and TCG would
survive the merger as a wholly-owned subsidiary of AT&T (the "TCG/AT&T Merger").
If the TCG/AT&T Merger is consummated, following the TCG/AT&T Merger, all of the
capital stock of the surviving corporation will be owned by AT&T.  Shares of TCG
common stock will be exchanged for merger consideration in the form of AT&T
common stock, and cash in lieu of any fractional shares, and then cancelled.  As
a result, shares of TCG common stock will no longer be listed on The Nasdaq
National Market.  Consummation of the TCG/AT&T Merger is subject to closing
conditions and shareholder and regulatory approvals.  It is unlikely that the
proposed TCG/AT&T Merger will close before the consummation of the TCG Merger,
due to the anticipated timing of receipt of regulatory approvals and other
closing conditions.  No assurance can be given that the TCG/AT&T Merger will be
consummated.

     Termination of U.S. WATS Merger.  On October 28, 1997, ACC entered into an 
Agreement and Plan of Merger (the "USW Merger Agreement") by and among ACC, ACC
Acquistion - Blue Corp., a Delaware corporation ("Acquisition Sub"), and US
WATS, Inc., a New York corporation ("USW"), pursuant to which Acquisition Sub
would have merged with and into USW (the "USW Merger"). On March 11, 1998, for
reasons beyond the control of both parties which made it impossible to conclude
the USW Merger prior to the March 31, 1998 termination date, ACC and USW agreed 
to a mutual termination of the USW Merger Agreement.

INDUSTRY OVERVIEW

     The global telecommunications industry has dramatically changed during the
past several years, beginning in the U.S. with AT&T's divestiture of its RBOCs
in 1984 and culminating with the 1996 amendments to the U.S. Communications Act
of 1934 (the "U.S. Communications Act"), and continuing in Canada, the U.K.
and other countries with various regulatory changes. Previously, the long
distance telecommunications industry in the U.S., Canada and the U.K. consisted
of one or a few large facilities-based carriers, such as AT&T, Bell Canada and
British Telecom. As a result of the AT&T divestiture and the recent legislative
changes in the U.S. and fundamental regulatory changes in Canada and the U.K.,
coupled with technological and network infrastructure developments which
increased significantly the voice and data telecommunications transmission
capacity of dominant carriers, the long distance industry has developed into a
highly competitive one consisting of numerous alternative long distance carriers
in each of these 
<PAGE>
 
                                      -3-

countries. In addition, since the AT&T divestiture in 1984, competition has
heightened in the local exchange market in the U.S. and Canada. ACC anticipates
that deregulatory and economic influences will promote the development of
competitive telecommunications markets in other countries.

     Long Distance Market.  The U.S. long distance market has grown to over $93
billion in annual revenues during 1996, according to FCC estimates. AT&T has
remained the largest long distance carrier in the U.S. market, retaining
approximately 48% of the market, with MCI and Sprint with respective market
shares of approximately 20% and 10% of the market during 1996. AT&T, MCI and
Sprint constitute what generally is regarded as the first tier in the U.S. long
distance market. Large regional long distance companies, some with national
capabilities, such as WorldCom, Inc. (which in 1996 merged with MFS
Communications, Inc.), CWI, Frontier Corp., Excel Telecommunications and LCI
International, constitute the second tier of the industry, although WorldCom
would become a first tier company upon consummation of its pending merger with
MCI. The remainder of the U.S. long distance market share is comprised of
several hundred smaller companies, including ACC U.S., known as third-tier
carriers. In addition, recent U.S. legislation, which removes certain long-
standing restrictions on the ability of the RBOCs to provide long distance
services, and the World Trade Organization ("WTO") accord on basic services,
will have a substantial impact on the long distance market.

     Commencing in 1990, competition was introduced in the Canadian long
distance market. The Canadian long distance market is dominated by a consortium
of facilities-based local and long distance telephone companies (e.g., Bell
Canada, BC Tel, Maritime Tel) operating as the "Stentor" group of companies. A
second group of long distance providers, consisting principally of AT&T Canada
Long Distance Services Company ("AT&T Canada"), Sprint Canada (a subsidiary of
Call-Net Telecommunications Inc.) and fONOROLA Inc., own and operate
transmission lines through which they provide long distance voice and data
services in the Canadian markets. Other long distance providers, including ACC
Canada, generally lease transmission lines through which they resell long
distance services in the Canadian market.

     The international, national and local markets for voice telephone services
in the U.K. and Northern Ireland accounted for approximately (Pounds) l.5
billion, (Pounds) 2.0 billion and (Pounds) 2.2 billion, respectively, in
revenues during the 12 months ended March 31, 1997, according to estimates from
The Office of Telecommunications ("Oftel"), the U.K. telecommunications
regulatory authority. In the U.K., British Telecom historically has dominated
the telecommunications market. British Telecom was the largest carrier during
such 12 month period, with approximately 58.2%, 78.4% and 88.7% of the revenues
from international, national and local voice telephone services, respectively.
Cable & Wireless ("CWC") which owns and operates interexchange and local loop
transmission facilities, is the second largest carrier of voice
telecommunications in the U.K. The remainder of the U.K. long distance market is
comprised of an emerging market of licensed public telephone operators, such as
Energis Communications Ltd. ("Energis"), WorldCom, ACC U.K. and various cable
companies, and switched-based resellers such as First Telecom and Esprit Telecom
of the U.K. Ltd. ("Esprit") and Sprint.

     Long distance carriers in the U.S., Canada and the U.K. can be categorized
by several distinctions. One distinction is between transmission facilities-
based companies and non-transmission facilities-based companies, or resellers.
Transmission facilities-based carriers, such as AT&T, Bell Canada and British
Telecom, own their own long distance interexchange or transmission facilities
and originate and terminate calls through local exchange systems. Profitability
for transmission facilities-based carriers is dependent not only upon their
ability to generate revenues but also upon their ability to manage complex
networking and transmission costs. All of the first- and most of the second-tier
long distance companies in the U.S. markets are transmission facilities-based
carriers and generally offer service nationwide. Most transmission facilities-
based carriers in the third tier of the market offer their service only in a
limited geographic area. Some transmission facilities-based carriers contract
with other transmission facilities-based carriers to provide transmission where
they have geographic gaps in their facilities. Carriers that operate primarily
as switched-based resellers, such as ACC, carry their long distance traffic over
transmission lines leased from transmission facilities-based carriers, originate
and terminate calls through incumbent local exchange carriers or CLECs such as
TCG and contract with transmission facilities-based carriers to provide
transmission of long distance traffic either on a fixed rate lease basis or a
call volume basis. Profitability for non-transmission facilities-based carriers
is dependent largely on their 
<PAGE>
 
                                      -4-

ability to generate and retain sufficient revenue volume to negotiate attractive
pricing with one or more transmission facilities-based carriers.

     A second distinction among long distance companies is that of switch-based
versus switchless resellers. Switch-based resellers, such as ACC, have one or
more switches, which are sophisticated computers that direct telecommunications
traffic to form a transmission path between a caller and the recipient of a
call. All transmission facilities-based carriers are switch-based carriers, as
are many non-transmission facilities-based carriers, including ACC. Switchless
resellers, in contrast, depend on one or more transmission facilities-based
carriers or switch-based resellers for transmission and switching facilities.
ACC believes that its ownership of switches reduces its reliance on other
carriers and enables ACC to efficiently route telecommunications traffic over
multiple leased transmission lines and to control costs, call record data and
customer information. The availability of existing transmission capacity in its
markets makes leasing of transmission lines attractive to ACC and enables it to
grow network usage without having to incur the significant capital and operating
costs associated with the development and operation of a transmission line
infrastructure.

     Local Exchange Market.  In the U.S., the existing structure of the
telecommunications industry principally resulted from the AT&T divestiture. As
part of the divestiture, seven RBOCs were created to offer services in specified
geographic areas called Local Access and Transport Areas ("LATAs"). The RBOCs
were separated from the long distance provider, AT&T, resulting in the creation
of distinct local exchange and long distance markets. Since the AT&T
divestiture, several factors have served to promote competition in the local
exchange market, including (i) the local exchange carriers' monopoly position,
which provided little incentive for the local exchange companies to reduce
prices, improve service or upgrade their networks, and related regulations which
required the local exchange carriers to, among other things, lease transmission
facilities to alternative carriers, such as ACC, (ii) customer desire for an
alternative to the local exchange carriers, which developed in part as a result
of competitive activities in the long distance market and increasing demand for
lower cost, high quality, reliable services, and (iii) the advancement of fiber
optic and digital electronic technology, which combined the ability to transmit
voice, data and video at high speeds with increased capacity and reliability.

     In Canada, similar factors promoting competition in the local exchange
market developed in response to regulatory developments in the Canadian long
distance telecommunications market and to technological advances in the
telecommunications industry. The Canadian Radio-television and
Telecommunications Commission ("CRTC") has approved the introduction of
competition in local exchange services in Canada.

BUSINESS STRATEGY

     ACC was an early entrant as an alternative carrier in the U.S., Canada and
the U.K. ACC's objective is to grow its telecommunications customer base in its
existing markets and to establish itself in other deregulating Western European
markets with high density telecommunications traffic. The key elements of ACC's
business strategy are to increase penetration of existing markets, enter new
markets, improve operating efficiency, and pursue acquisitions, investments and
strategic alliances.

     Increase Penetration of Existing Markets.  ACC's consolidated revenue has
grown from $126.4 million to $372.6 million over the three fiscal years ended
December 31, 1997, although ACC expects its growth to decrease over time.  ACC
plans to further increase its revenue and customer base in the U.S., Canadian
and U.K. markets by expanding its service offerings and geographic reach.  The
expansion of ACC's service offerings is designed to reduce the effects of price
per minute decreases for long distance service and to decrease the likelihood
that customers will change telecommunication carriers.  Through this strategy,
ACC will seek to build a broad base of recurring revenues in the U.S., Canada
and the U.K.  ACC also offers local telephone services in selected additional
U.S. and Canadian markets, including New York, Massachusetts, Quebec and
Ontario, as well as additional data communications services in the U.S. and
Canada. ACC believes that offering local services will enhance its ability to
attract and retain long distance customers and reduce ACC's access charges as a
percentage of revenues.
<PAGE>
 
                                      -5-

     Enter New Markets.  ACC believes that its operating experience in
deregulating markets in the U.S., Canada and the U.K. and its experience as an
early entrant as an alternative carrier in those markets will assist ACC in
identifying opportunities in other deregulating countries with high density
telecommunications traffic. In particular, ACC believes that its position in the
U.S., Canadian and U.K. telecommunications markets and its experience in
providing international telecommunications service will assist it in
establishing a presence in Western European markets when ACC believes that
business and regulatory conditions warrant.

     Improve Operating Efficiency.  ACC strives to achieve economies of scale
and scope in the use of its network, which consists of leased transmission
facilities, ten international and domestic switches, six local exchange switches
and information systems. In order to enhance the efficiency of the fixed cost
elements of its network, ACC seeks to increase its traffic volume and balance
business-driven workday traffic with night and weekend off-peak traffic from
student and residential customers. ACC anticipates that competition among
transmission facilities-based providers of telecommunications services in the
U.S. and Canadian markets will afford ACC opportunities for reductions in the
cost of leased line facilities. ACC seeks to reduce its network cost per
billable minute by more than any reduction in revenue per billable minute. ACC
also intends to acquire additional switches and upgrade its existing switches to
enhance its network in anticipation of growth in ACC's customer base and provide
additional telecommunications services. ACC believes that its network switches
enable ACC to efficiently route telecommunications traffic over multiple
transmission facilities to reduce costs, control access to customer information
and grow network usage without a corresponding increase in support costs.

     Pursue Acquisitions, Investments and Strategic Alliances.   As ACC expands
its service offerings and its network, ACC anticipates that it will seek to
develop strategic alliances both domestically and internationally and to acquire
assets and businesses or make investments in companies that are complementary to
ACC's current operations. ACC believes that the pursuit of an active acquisition
strategy is an important means toward achieving growth and economies of scale
and scope in its targeted markets. Through acquisitions, ACC believes that it
can further increase its traffic volume to further improve the usage of the
fixed cost elements of its network.

SERVICES

     Commercial Long Distance Services.  ACC offers its commercial customers in
the U.S. and Canada an array of customized services and has developed a similar
range of service offerings for commercial customers in the U.K.

     In the U.S., although ACC historically has originated long distance voice
services principally in New York and Massachusetts, ACC is currently authorized
to originate intrastate long distance voice and data services in 48 states and
international voice and data services in all states. ACC's U.S. services include
"1+" inter-LATA long distance service, and private line service for which a
customer is charged a fixed monthly rate for transmission capacity that is
reserved for that customer's traffic. ACC's U.S. business services also include
toll-free "800" or "888" services. In addition, ACC currently provides
intra-LATA service in certain areas for customers who make a large number of
intra-LATA calls. ACC installs automatic dialing equipment to enable customers
to place such calls over ACC's network without having to dial an access code.
However, various states, including New York, are moving to implement "equal
access" for intra-LATA toll calls such that ACC's customers in such
jurisdictions will be able to use ACC's network on a "1+" basis to complete
intra-LATA toll calls. ACC's ability to compete in the intra-LATA toll market
depends upon the margin which exists between the access charges it must pay to
the local exchange company for originating and terminating intra-LATA calls, and
the retail toll rates established by the local exchange carriers for the local
exchange carriers' own intra-LATA toll service. ACC's commercial services
generally are priced below the rates charged by the major carriers for similar
services and are competitive with those of other carriers.

     In Canada, ACC currently originates long distance voice and data services
in the Montreal, Toronto and Vancouver metropolitan areas as well as throughout
Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario and
Quebec. ACC offers its Canadian commercial customers both voice and data
telecommunications services. ACC's long distance voice services are offered to
its business customers in a nine-level discount structure marketed under the
name "Edge." Discounts are based on calling volume and call destination and
typically result in savings 
<PAGE>
 
                                      -6-

ranging from 10% to 20% when compared to Stentor member rates. Calls to the U.S.
are priced at a flat rate regardless of the destination, and international calls
are priced at a percentage discount to the rates charged by the Stentor group.
ACC also offers toll-free "800" services within Canada, as well as to and from
the U.S., and offers an ACC Travel Card providing substantial savings off
Stentor member "Calling Card" rates. ACC Canada has introduced a frame relay
network, Internet access services (including Web design/hosting) and paging
services, and now provides these services in all provinces except Saskatchewan,
Manitoba, New Brunswick and Newfoundland.

     ACC originates long distance voice services throughout the U.K. ACC
presently offers its U.K. customers voice telecommunications services. These
services include indirect access (known as "ACCess 1601") through the public
switched telephone network ("PSTN") and the use of direct access lines to
ACC's network (known as "ACCess Direct") for higher-volume business users.
Because ACCess 1601 is a mass market service, the prices offered are built
around a standard price list with volume discounts for high-volume users. ACCess
Direct is generally cost effective only for customers making at least (Pounds)
5,000 per month in calls.

     ACC's U.S. and Canadian commercial customers are offered customized
services, such as comprehensive billing packages and its "Travel Service
Elite" domestic calling cards, which allow the customer to place long distance
calls at competitive rates from anywhere in the U.S. and Canada. ACC's standard
monthly statement includes a management summary report, a call detail report
recording every long distance call and facsimile call, and a pricing breakdown
by call destination. Optional calling pattern reports, which are available at no
extra cost, include call summaries by account code, area or city code, LATA (for
U.S. bound calls), international destination and time-of-day. This information
is available to customers in the form of hard copy, magnetic tape or disk.

     University Program.  ACC's university program offers a variety of
telecommunications services to educational institutions ranging from long
distance service for administration and faculty, to integrated on-campus
services, including local and long distance service, voice mail, intercom
calling and operator services for students, administrators and faculty. ACC's
sales, marketing and engineering professionals work directly with college and
university administrators to design and implement integrated solutions for
providing and managing telecommunications equipment and services to meet the
current and prospective communications needs of their institutions. As part of
its program, ACC often installs telecommunications equipment which, depending
upon the circumstances, may include a switch or private branch exchange, voice
mail, cabling and, in the U.K., pay telephones. Pay phone usage in the U.K.,
particularly at universities, is more prevalent than in the U.S. and Canada. To
access this market directly, ACC has established a pay phone division in the
U.K., which supplies pay phones that will automatically route calls from
universities and other institutions over ACC U.K.'s network.

     ACC's long distance rates in the U.S. for students generally are priced at
a 10% discount from those charged by the largest long distance carriers. ACC's
university contracts in Canada generally provide it with the exclusive right,
and in the U.K. the opportunity, to market to the school's students, faculty and
administration. Most of ACC's contracts in Canada also provide for exclusive
university support for marketing to alumni. These arrangements allow ACC to
market its services to these groups through its affinity programs.

     ACC offers university customers in the U.S., Canada and the U.K. certain
customized services. ACC offers academic institutions a comprehensive billing
package to assist them in reviewing and controlling their telecommunications
costs. For its university student customers in the U.S. and Canada, ACC provides
a billing format that indicates during each statement period the savings per
call (in terms of the discount from the largest long distance carrier's rates)
realized during the billing period, and for all university customers ACC
provides a call detail report recording every long distance call. In addition,
for university student customers, ACC provides individual bills for each user of
the same telephone in a dormitory room or suite so that each student in the
dormitory room or suite can be billed for the calls he or she made.

     Many of ACC's university customers in the U.S. are offered operator
services, which are available 24 hours per day, seven days per week. ACC also
offers its U.S. university customers its "'Travel Service Elite"' domestic
calling card. In addition, ACC sells a prepaid calling card in the U.S., which
allows customers to prepay for a predetermined 
<PAGE>
 
                                      -7-

number of "units" representing long distance minutes. The rate at which the
units are used is determined by the destination of the calls made by the
customer.

     ACC's sales group targets university customers in the U.S., Canada and in
the U.K. In the U.S. university market, ACC generally targets small to medium
size universities and colleges with full time enrollments in the range of 1,000
to 5,000 students. In Canada, ACC has been able to establish relationships with
several large universities. ACC believes that, while its marketing approach in
Canada is similar to that in the U.S., its nationwide presence in Canada assists
it in marketing to larger academic institutions. In the U.K., ACC has been able
to establish long-term relationships with several large universities. ACC
believes that, while its marketing approach in the U.K. is similar to that in
the U.S., it is able to access larger educational institutions because of its
nationwide presence and because transmission facilities-based carriers have not
focused on this market. ACC believes that competition in the university market
is based on price, as well as the marketing of unique programs and customizing
of telecommunications services to the needs of the particular institution and
that its ability to adapt to customer needs has enhanced its development of
relationships with universities.

     Residential Long Distance Services.  ACC offers its residential customers
in the U.S. and Canada a variety of long distance service plans and is currently
offering and developing similar plans for its residential customers in the U.K.
In the U.S., ACC's "Save Plus" program provides customers with competitively
priced long distance service. In addition, U.S. customers are provided with a
"Phone Home" long distance service through which, by dialing an 800 number
plus an access code, callers can call home at competitive rates. In general,
ACC's residential services are priced below AT&T's premium rates for similar
services. In Canada, ACC offers three different residential service programs.
The basic offering is a discount plan, with call pricing discounted from the
Stentor companies' tariffed rates for similar services depending on the time of
day and day of the week. ACC also offers its "Sunset Savings Plan," which
allows calling across Canada and to the continental U.S. at a flat rate per
minute. In the Toronto metropolitan area, ACC offers "Extended Metro Toronto"
calling, which provides flat rate calling within areas adjacent to Toronto that
are long distance from each other. Customized billing services are also offered
to ACC's U.S. and Canadian residential customers. In the U.K., all residential
customers use ACC's ACCess 1601 service, which provides savings off the standard
rates charged for residential service by British Telecom or CWC, but requires
the customer to dial a four digit access code before dialing the area code and
number.

     International Long Distance Services.  ACC offers international products
and services to both its existing customer base and to potential customers in
the U.S., Canada and the U.K. ACC's international authorizations
("International Licenses") allow ACC to resell international long distance
service on leased international circuits connected to the PSTN at both ends
between the U.S. and Canada, the U.S. and the U.K., Canada and the U.K., and,
subject to certain safeguards on non-competitive routes and destination country
regulations, the U.K. and all other countries and territories, and to own
interests in international submarine cable facilities for service between the
U.S. and the U.K. and other international points. ACC believes it can compete
effectively for international traffic because these international authorizations
allow it to offer end-to-end services on certain routes and route traffic
efficiently so as to price its services at cost-based rates that are lower than
the international settlement-based rates that would otherwise apply to such
traffic. However, numerous other carriers also have similar resale licenses.
Implementation of the WTO agreement is expected to increase opportunities for
alternative call routings but will also increase competition in the industry.
Moreover, a recent FCC decision, currently on appeal and subject to petitions
for reconsideration, is intended to accelerate reductions in international
calling rates and may reduce ACC's margin on international services.

     Local Exchange Services.  Building on its experience in providing local
telephone service to various university customers, ACC took advantage of
regulatory developments in New York State and in 1994 began offering local
telephone service to commercial customers in upstate New York. As a result of
its August 1995 acquisition of Metrowide Communications, ACC provides local
telephone service as a reseller in Ontario, Canada, and began providing such
service in Quebec in 1996. ACC believes that it can strengthen its relationships
with existing commercial, university and college and residential customers in
New York State and Canada and can attract new customers by offering them local
and long distance services, thereby providing a single source for comprehensive
telecommunications services. Providing local telephone service may enable ACC to
serve new local exchange customers 
<PAGE>
 
                                      -8-

even if they are already under contract with a different interexchange carrier
for long distance service. During 1997, ACC expanded its local telephone
operations by installing switches in New York City, Albany and Buffalo, New
York, and Boston and Springfield, Massachusetts.

     ACC has limited experience in providing local telephone services, having
commenced providing such services in 1994. In order to attract local customers,
ACC must offer substantial discounts from the prices charged by local exchange
carriers and must compete with other alternative local companies that offer such
discounts. Larger, better capitalized alternative local providers, including
AT&T, among others, will be better able to sustain losses associated with
discount pricing and initial investments and expenses. The local telephone
service business requires significant initial investments and expenses in
capital equipment, as well as significant initial promotional and selling
expenses. There can be no assurance that ACC will be able to lease transmission
facilities from local exchange carriers at wholesale rates that will allow ACC
to compete effectively with the local exchange carriers or other alternative
providers or that ACC will generate positive operating margins or attain
profitability in its local telephone service business.

SALES AND MARKETING

     ACC markets its services in the U.S., Canada, the U.K. and Germany through
a variety of channels, including ACC's internal sales forces, independent sales
agents, co-marketing arrangements and affinity programs, as described below. As
of December 31, 1997, ACC had a total of approximately 380 internal sales
personnel and approximately 580 independent sales agents serving its U.S.,
Canadian, U.K. and German markets. Although it has not experienced significant
turnover in recent periods, a loss of a significant number of independent sales
agents could have a material adverse effect on ACC's ability to generate
additional revenue. ACC maintains a number of sales offices in the Northeastern
U.S., Canada, and the U.K. In addition, with respect to its university and
student customers in each country, ACC has designated representatives to assist
in customer enrollment, dissemination of marketing information, complaint
resolution and, in some cases, collection of customer payments, with
representatives located on some campuses. ACC actively seeks new opportunities
for business alliances in the form of affinity programs and co-marketing
arrangements to provide access to alternative distribution channels.

     During each of the last three years, no customer accounted for 10% or more
of ACC's total revenue.

     United States.  ACC markets its services in the U.S. through ACC's internal
sales personnel and independent sales agents as well as through attendance and
representation at significant trade association meetings and industry
conferences of target customer groups. ACC's sales and marketing efforts in the
U.S. are targeted primarily at business customers with $500 to $15,000 of
monthly usage, selected residential customers and universities and colleges. ACC
also markets its services to other resellers and rebillers. ACC plans to
leverage its market base in New York and Massachusetts into other New England
states and Pennsylvania and to eventually extend its marketing focus to other
states. ACC has obtained authorization to originate intrastate long distance
voice services in 48 states.

     Canada.  ACC markets its long distance services in Canada through internal
sales personnel and independent sales agents, co-marketing arrangements and
affinity programs. ACC focuses its direct selling efforts on medium-sized and
large business customers. ACC also markets its services to other resellers and
rebillers. ACC uses independent sales agents to target small to medium-sized
business and residential customers throughout Canada. These independent sales
agents market ACC's services under contracts that generally provide for the
payment of commissions based on the revenue generated from new customers
obtained by the representative. The use of an independent agent network allows
ACC to expand into additional markets without incurring the significant initial
costs associated with a direct sales force.

     In addition to marketing its residential services in Canada through
independent sales agents, ACC has developed several affinity programs designed
to attract residential customers within specific target groups, such as clubs,
alumni groups and buying groups. The use of affinity programs allows ACC to
target groups with a nationwide presence without engaging in costly nationwide
advertising campaigns. For example, ACC Canada has established affinity programs
with such groups as the Home Service Club of Canada, the University of Toronto
and McGill and Western Universities. In addition, ACC has developed a co-
marketing arrangement with Hudson's Bay Company (a large 
<PAGE>
 
                                      -9-

Canadian retailer) through which ACC's telecommunications services are marketed
under the name "The Bay Long Distance Program" and "Zellers Long Distance."

     United Kingdom.  In the U.K., ACC markets its services to business and
residential customers, as well as other telecommunications resellers, through a
multichannel distribution plan including its internal sales force, independent
sales agents, co-marketing arrangements and affinity programs.

     ACC generally utilizes its internal sales force in the U.K. to target
medium and large business customers, a number of which have enough volume to
warrant a direct access line to ACC's switch, thereby bypassing the PSTN. ACC
markets its services to small and medium-sized businesses through independent
sales agents. Telemarketers also are used to market services to small business
customers and residential customers and to generate leads for the other members
of ACC's internal sales force and independent sales agents. ACC U.K. has
established an internal marketing group that is focused on selling its service
to other telecommunications resellers in the U.K. and certain European countries
on a wholesale basis. ACC U.K. has entered into co-marketing arrangements with
utilities, university alumni groups and other organizations.

NETWORK

     In the U.S., Canada and the U.K., ACC utilizes a network of lines leased
under volume discount contracts with transmission facilities-based carriers,
much of which is fiber optic cable. The selection of any particular circuit for
the transmission of a call is controlled by routing software, located in the
switches, that is designed to cause the most efficient use of ACC's network. ACC
evaluates opportunities to install switches in selected markets where the volume
of its customer traffic makes such an investment economically viable.
Utilization of ACC's switches allows ACC to route customer calls over multiple
networks to reduce costs.

     Some of ACC's contracts with transmission facilities-based carriers contain
underutilization provisions. These provisions require ACC to pay fees to the
transmission facilities-based carriers if ACC does not meet minimum periodic
usage requirements. ACC has not been assessed any underutilization charges in
the past. However, there can be no assurance that such charges would not be
assessed in the future. Other resellers generally contract with ACC on a month-
to-month basis, select ACC almost exclusively on the basis of price and are
likely to terminate their arrangements with ACC if they can obtain better
pricing terms elsewhere. ACC uses projected sales to other resellers in
evaluating the trade-offs between volume discounts and the minimum utilization
rates it negotiates with transmission facilities-based carriers. If sales to
other resellers do not meet ACC's projected levels, ACC could incur
underutilization charges and be placed at a disadvantage in negotiating future
volume discounts.

     ACC generally utilizes redundant, highly automated advanced
telecommunications equipment in its network and has diverse alternate routes
available in cases of component or facility failure. Automatic traffic re-
routing enables ACC to provide a high level of reliability for its customers.
Computerized automatic network monitoring equipment facilitates fast and
accurate analysis and resolution of network problems. ACC provides customer
service and support, 24-hour network monitoring, trouble reporting and response,
service implementation coordination, billing assistance and problem resolution.

     In the U.S., ACC maintains three long distance switches and six local
exchange switches. These switches and additional points of presence ("POPs")
provide an interface with the PSTN to service ACC's customers. Lines leased from
transmission facilities-based carriers link ACC's U.S. points of presence to its
switches. ACC U.S. maintains a leased, direct trans-Atlantic link with ACC U.K.
that it established in 1994 following ACC's receipt of its U.K. International
Simple Resale License for U.K.-U.S. calls and international private line resale
authority in the U.S. ACC has purchased an IRU to supplement such trans-Atlantic
leased-lines to the U.K. and to enable ACC to reduce network costs.

     In Canada, ACC maintains long distance switches in Toronto, Montreal and
Vancouver. ACC also maintains frame relay nodes for switched data in Toronto,
Montreal, Vancouver and Calgary. ACC uses transmission lines leased 
<PAGE>
 
                                      -10-

from transmission facilities-based carriers to link its Canadian POPs to its
switches. This network is also linked with ACC's switches in the U.S. and the
U.K. ACC Canada also maintains a leased, direct trans-Atlantic link with ACC
U.K. that it established following the grant to ACC U.K. of its ISR License.
This transmission line enables ACC Canada to send traffic to the U.K. at rates
below those charged by Teleglobe Canada, the exclusive Canadian transmission
facilities-based carrier for international calls, other than those to and from
the U.S. and Mexico.

     In the U.K., ACC maintains long distance switches in London, Manchester and
Bristol, England. This network is also linked with ACC's switches in the U.S.
and Canada. Customers can access ACC's U.K. network through direct access lines
or by dial-up access using auto dialing equipment, indirect access code dialing
or least cost routing software integrated in the customer's telephone equipment.
In December 1996, ACC U.K. was awarded an International Facilities License, and
received a Public Telecommunications Operator license in April 1997, which
licenses have enabled ACC to build a microwave network in the U.K. and to begin
to use the U.K. as a regional hub for international telecommunications traffic.

     In February 1998 ACC installed a long distance switch in Dusseldorf,
Germany and commenced offering switch-based long distance service to its
customers.  In 1997, the Company received a Class 4 full voice telephony license
from the German Ministry of Post and Telecommunications, which became effective
January 1, 1998, and which is a requirement in order to provide switch-based
telecommunication services in Germany.

     Network costs are the single largest expense incurred by ACC. ACC strives
to control its network costs and its dependence on other carriers by leasing
transmission lines on an economical basis. ACC is also considering ownership of
certain transmission facilities as a means of reducing its network costs. ACC
has purchased IRUs and negotiated leases of private line circuits with carriers
that operate fiber optic transmission systems at rates independent of usage,
particularly on routes over which ACC carries high volumes of calls such as
between the U.S. and Canada and the U.S. and the U.K. ACC attempts to maximize
the efficient utilization of its network in the U.S., Canada and the U.K. by
marketing to commercial and academic institution customers, who tend to use its
services most frequently on weekdays during normal business hours, and
residential and student customers, who use these services most often during
night and weekend off-peak hours.

INFORMATION SYSTEMS

     ACC believes that maintaining sophisticated and reliable billing and
customer services information systems that integrate billing, accounts
receivable and customer support is a core capability necessary to record and
process the data generated by a telecommunications service provider. While ACC
believes its management information system is currently adequate, it has not
grown as quickly as ACC's business and substantial investments are needed. ACC
is developing and implementing new systems designed to (i) enhance ACC's ability
to monitor and respond to the evolving needs of its customers by developing new
and customized services, (ii) improve least-cost routing of traffic on ACC's
international network, (iii) provide sophisticated billing information that can
be tailored to meet the requirements of its customer base, (iv) provide high
quality customer service, (v) detect and minimize fraud, (vi) verify payables to
suppliers of telecommunications transmission facilities and (vii) integrate
additions to its customer base. A variety of problems are often encountered in
connection with the implementation of new information systems. There can be no
assurance that ACC will not suffer adverse consequences or cost overruns in the
implementation of the new information systems or that the new systems will be
appropriate for ACC.

COMPETITION

     The telecommunications industry is highly competitive and is significantly
influenced by the marketing and pricing decisions of the larger industry
participants. In each of its markets, ACC competes primarily on the basis of
price and also on the basis of customer service and its ability to provide a
broad array of telecommunications services. The industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Although many of ACC's customers are under multi-year
contracts, several of ACC's largest customers (primarily other long distance
carriers) are on month-to-month contracts and are particularly 
<PAGE>
 
                                      -11-

price sensitive. Revenues from other resellers accounted for approximately 32%,
4% and 28% of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively,
in 1997. With respect to these customers, ACC competes almost exclusively on
price and does not have long term contracts. The industry has experienced and
will continue to experience rapid regulatory and technological change. Many
competitors in each of ACC's markets are significantly larger than ACC, have
substantially greater resources than ACC, control transmission lines and larger
networks than ACC and have longstanding relationships with ACC's target
customers. There can be no assurance that ACC will remain competitive in this
environment. Regulatory trends have had, and may have in the future, significant
effects on competition in the industry. As ACC expands its geographic coverage,
it will encounter increased competition. Moreover, ACC believes that competition
in non-U.S. markets is likely to increase and become more like competition in
the U.S. markets over time as such non-U.S. markets continue to experience
deregulatory influences.

     Competition in the long distance industry is based upon pricing, customer
service, network quality, value-added services and customer relationships. The
success of a non-transmission facilities-based carrier such as ACC depends
largely upon the amount of traffic that it can commit to the transmission
facilities-based carriers and the resulting volume discounts it can obtain.
Subject to contract restrictions and customer brand loyalty, resellers like ACC
may competitively bid their traffic among other national long distance carriers
to gain improvement in the cost of service. The relationship between resellers
and the larger transmission facilities-based carriers is twofold. First, a
reseller is a customer of the services provided by the transmission facilities-
based carriers, and that customer relationship is predicated primarily upon the
pricing strategies of the first tier companies. The reseller and the
transmission facilities-based carriers are also competitors. The reseller will
attract customers to the extent that its pricing for customers is generally more
favorable than the pricing offered the same size customers by larger
transmission facilities-based carriers. However, transmission facilities-based
carriers have been aggressive in developing discount plans which have had the
effect of reducing the rates they charge to customers whose business is sought
by the reseller. Thus, the business success of a reseller is significantly tied
to the pricing policies established by the larger transmission facilities-based
carriers. There can be no assurance that favorable pricing policies will be
continued by those larger transmission facilities-based carriers.

     United States.  In the U.S., ACC is authorized to originate interstate and
international long distance services nationwide and to originate intrastate long
distance service in 48 states (although it currently derives most of its U.S.
revenues principally from calls originated in New York and Massachusetts). ACC
competes for customers, transmission facilities and capital resources with
numerous long distance telecommunications carriers and/or resellers, some of
which are substantially larger, have substantially greater financial, technical
and marketing resources, and own or lease larger transmission systems than ACC.
AT&T is the largest supplier of long distance services in the U.S. inter-LATA
market. ACC also competes within its U.S. call origination areas with other
national long distance telephone carriers, such as MCI, Sprint and regional
companies which resell transmission services. RBOCs from outside the NYNEX/Bell
Atlantic region, including SBC Communications, have, under the authority
contained in the 1996 Act, begun to offer long distance services in the
NYNEX/Bell Atlantic region. In the intra-LATA market, ACC also competes with the
local exchange carriers servicing those areas. In its local service areas in New
York State and Massachusetts, ACC presently competes or in the future will
compete with NYNEX/Bell Atlantic, Frontier Corp., AT&T, Citizens Telephone Co.
and WorldCom and with cellular and other wireless carriers. These local exchange
carriers all have long-standing relationships with their customers and have
financial, personnel and technical resources substantially greater than those of
ACC. Furthermore, joint ventures such as those between MCI and Microsoft
Corporation ("Microsoft"), under which Microsoft will promote MCI's services,
the joint venture among Sprint, Deutsche Telekom AG and France Telecom, called
Global One, the recently announced merger of WorldCom and MCI, and other
strategic alliances could increase competitive pressures upon ACC. The recent
merger between Nynex Corp. and Bell Atlantic is likely to strengthen the
financial resources of the new, combined company, and its integrated networks
may enhance its ability to offer long distance services in the combined
NYNEX/Bell Atlantic region.

     In addition to these competitive factors, recent and pending deregulation
in each of ACC's markets may encourage new entrants. For example, as a result of
the 1996 Act, RBOCs are allowed to enter the long distance market immediately in
"out of region" states, and in the states where the RBOC is an incumbent LEC
upon a showing that certain conditions related to competition have been met.
AT&T, MCI and other long distance carriers, utilities and cable 
<PAGE>
 
                                      -12-

television companies are allowed to enter the local telecommunications market.
In addition, the FCC has, on several occasions since 1984, approved or required
price reductions by AT&T and, in 1995 and 1996, the FCC reclassified AT&T as a
"non-dominant" carrier for domestic and international long distance services,
which substantially reduces the regulatory constraints on AT&T. In the recently-
completed World Trade Organization talks, the U.S. committed to allowing foreign
carriers heretofore prohibited from competing in U.S. markets, to enter the U.S.
local, long distance, and international markets, and the FCC has amended its
rules, effective February 1998, to implement these commitments, allowing
virtually open entry to the U.S. market by all entities from WTO member
countries. The WTO accord will likely increase the level of competition in the
U.S. local, long distance, and international markets. ACC believes that the
principal competitive factors affecting its market share in the U.S. are
pricing, customer service and variety of services. By offering high quality
telecommunications services at competitive prices and by offering a portfolio of
value-added services including customized billing packages, call management and
call reporting services, together with personalized customer service and
support, ACC believes that it competes effectively with other local and long
distance telephone carriers and resellers in its service areas. ACC's ability to
continue to compete effectively will depend on its continued ability to maintain
high quality, market-driven services at prices generally below those charged by
its competitors.

     Canada.  In Canada, ACC competes with facilities-based carriers, other
resellers and rebillers. ACC's principal transmission facilities-based
competitors are the Stentor group of companies, in particular, Bell Canada, the
dominant suppliers of long distance services in Canada, AT&T Canada, which
provides certain facilities-based and long distance services to business and
residential customers, and Sprint Canada and fONOROLA Inc., which provide
certain transmission facilities-based services and also act as reseller of
telecommunications services. ACC also competes against London Telecom, a
reseller of telecommunications services. ACC believes that, for some of its
customers and potential customers, it has a competitive advantage over other
Canadian resellers as a result of its operations in the U.S. and the U.K. In
particular, the trans-Atlantic link that it established in June 1993 between the
U.K. and Canada allows ACC Canada to sell traffic to the U.K. with a
significantly lower cost structure than many other resellers.

     United Kingdom.  ACC U.K. currently holds a National PTO License and an
International Facilities License and competes with facilities-based carriers and
other resellers. ACC's principal competitors in the U.K. are British Telecom,
the dominant supplier of telecommunications services in the U.K., and CWC. ACC
also faces competition from other operators such as Energis and WorldCom, and
from resellers including Esprit and Sprint. ACC believes the services of ACC
U.K. are competitive, in terms of price and quality, with the service offerings
of its U.K. competitors primarily because of its advanced network-related
hardware and software systems and the network configuration and traffic
management expertise employed by it in the U.K.

REGULATION

     United States

     The services which the Company's U.S. operating subsidiaries provide are
subject to varying degrees of federal, state and local regulation.  The FCC
exercises jurisdiction over all facilities of, and services offered by,
telecommunications common carriers to the extent that they involve the
provision, origination or termination of jurisdictionally interstate or
international communications.  The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they involve
origination or termination of jurisdictionally intrastate communications.  In
addition, many regulations may be subject to judicial review, the result of
which the Company is unable to predict.

     Telecommunications Act of 1996 and the FCC's Interconnection Orders.  The
1996 Act is intended to introduce increased competition in U.S.
telecommunications markets.  It opens the local services market by requiring
incumbent LECs to permit interconnection to their networks and by establishing
incumbent LEC obligations with respect to unbundled access, resale, number
portability, dialing parity, access to rights-of-way, mutual compensation and
other matters.  In addition, the 1996 Act codifies the local exchange carriers'
equal access and nondiscrimination obligations and preempts state regulation
that prohibits or may have the effect of prohibiting the ability of any entity
to provide any 
<PAGE>
 
                                      -13-

intra- or interstate telecommunications service. The legislation also contains
special provisions that eliminate the AT&T Divestiture Decree (the "AT&T
Divestiture Decree") (and similar antitrust restrictions on the GTE Operating
Companies) which restricts the RBOCs from providing long distances services.
These new provisions permit an RBOC to enter the "out-of-region" long distance
market immediately and the "in-region" long distance market if it satisfies
several procedural and substantive requirements, including showing that
facilities-based competition is present in its market and that it has entered
into interconnection agreements which satisfy a 14-point "checklist" of
competitive requirements. The Company is likely to face significant additional
competition from several companies, including from NYNEX/Bell Atlantic, the RBOC
in the Company's Northeastern U.S. service area, which may be among the first
RBOCs permitted to offer in-region long distance services. The NYSPSC is
currently reviewing an application by NYNEX/Bell Atlantic for such in-region
service. The 1996 Act provides for certain safeguards to protect against
anticompetitive abuse by the RBOCS, but whether these safeguards will provide
adequate protection to alternative carriers, such as the Company, and the impact
of anticompetitive conduct if such conduct occurs, is unknown.

     As required by the 1996 Act, in August 1996 the FCC adopted new rules
implementing certain provisions of the 1996 Act (the "Interconnection Orders").
These rules are designed to implement the pro-competitive , deregulatory
national policy framework of the new statute by removing or minimizing the
regulatory, economic and operational impediments to competition for facilities-
based and resold local services, including switched local exchange service.
Although setting minimum, uniform, national rules, the Interconnection Orders
also rely heavily on states to apply these rules and to exercise their own
discretion in implementing a pro-competitive regime in their local telephone
markets.

     Among other things, the Interconnection Orders establish rules requiring
incumbent LECs to interconnect with new entrants such as the Company at
specified network points; require incumbent LECs to provide carriers
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point at rates that are just, reasonable and
nondiscriminatory; establish rules requiring incumbent LECs to allow
interconnection via physical virtual collocation; require the states to set
prices for interconnection, unbundled elements, and termination of local calls
that are nondiscriminatory and cost-based; require incumbent LECs to offer for
resale any telecommunication service that the carrier provides at retail to end
users at prices to be established by the states but which generally are at
retail prices minus reasonably avoided costs; and require LECs and utilities to
provide new entrants with nondiscriminatory access to poles, ducts, conduit and
rights of way owned or controlled by LECs or utilities.  Exemptions from some of
these rules are available to LECs which qualify as rural LECs under the 1996
Act.  The Interconnection Orders also require that intra-LATA presubscription
(pursuant to which LEC's must allow customers to choose different carriers from
intra-LATA toll service without having to dial extra digits) be implemented no
later than February 1999; that incumbent LECs provide new entrants with
nondiscriminatory access to directory assistance services, directory listings,
telephone numbers, and operator services; and that incumbent LECs comply with
certain network disclosure rules designed to ensure interoperability of multiple
local switched networks.

     Petitions seeking reconsideration of one or more aspects of the
Interconnection Orders have been filed with the FCC and are pending.  Also, the
Interconnection Orders have been appealed to various circuits of the U.S. Court
of Appeals which appeals were consolidated into proceedings before the U.S.
Eighth Circuit Court of Appeals.  Certain of the rules adopted in the
Interconnection Orders, including rules that concern the pricing of
interconnection, have been vacated by the Court.  Both the FCC and various
competitive carriers have petitioned the U.S. Supreme Court to review the Eighth
Circuit's rulings on the Interconnection Orders.

     The 1996 Act both provided the FCC with deregulatory authority and required
the FCC to adopt rules to implement specific provisions of the 1996 Act.
Specifically, the FCC was provided authority to forebear from regulating, in
whole or in part, carriers where the FCC determines to that such forbearance is
consistent with the public interest.  The FCC has engaged in a number of
additional rulemakings designed to transition to the increasingly deregulated
local and long distance markets.  Two of the most prominent proceedings involved
universal service and access charge reform.  Others are anticipated.  There can
be no assurance as to how the 1996 Act, the Interconnection Orders or other FCC
and PSC rulemakings will be implemented or enforced or as to what effect they
will have on competition within the telecommunications industry generally or on
the competitive position of the Company.
<PAGE>
 
                                      -14-

     Federal.  The FCC has classified ACC U.S. 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.  The
Company believes that, in the current regulatory environment, the FCC is
unlikely to do so.

     Until October 1995, AT&T was classified as a dominant carrier but AT&T
successfully petitioned the FCC for non-dominant status in the domestic
interstate and interexchange market.  Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated, which could result in increased
prices for services the Company purchases from AT&T and more competitive retail
prices offered by AT&T to customers.  However, to date, the Company has not
found rate changes attributable to the price cap regulation of AT&T and the
local exchange carriers to have substantially adversely affected its business.
In 1996, AT&T was re-classified as a non-dominant carrier to international
services.

     Carriers such as the Company have traditionally been required to file
tariffs with the FCC containing the rates, terms and conditions of interstate
service.  However, the FCC recently ordered that following a transition period,
scheduled to have concluded in November 1997, non-dominant carrier will no
longer be able to file tariffs with the FCC concerning their long distance
services.  Such carriers will, however, be required to maintain at their
offices, and to provide to customers or regulators upon request, information
concerning their long distance services.  The FCC order eliminating tariffs has
been appealed to the U.S. Court of Appeals for the District of Columbia.  That
appeal is pending.  A motion requesting stay of the FCC's detariffing order has
been filed with the Court.  It argued that tariffing establishes a legal binding
relationship between carriers and customers, and that detariffing eliminates
certainty with regard to those legal relationships.  It also argued that
detariffing imposes costs upon carriers because carriers will need to enter into
alternative forms of legally binding relationships with customers.  That motion
was granted in February 1997.  Therefore, carriers such as the Company must
continue to tariff interstate services until the appeal is concluded or the stay
is lifted.  There can be no assurance of whether the appeal will be successful,
or if successful, what effect it may have on the Company.  However if
detariffing ultimately takes effect, the Company, like other long distance
companies, would likely incur some additional costs in establishing legally
binding relationships with customers.

     In contrast to these recent developments affecting domestic long distance
service, the Company's U.S. subsidiaries have long been subject to certification
and tariff filing requirements for all international operations.  The Company's
U.S. subsidiaries' international rates are not subject to either rate-of-return
or price cap regulation.  The Company must seek separate certification authority
from the FCC to provide private line or switched services or to resell private
line services between the U.S. and any foreign country.  The Company's ACC
Global Corp. subsidiary has received authority from the FCC to resell private
lines for switched services between the U.S. and Canada, and was the first
entity to file to obtain such authority between the U.S. and the United Kingdom,
which it received in September 1994.  The Company has sought authority to resell
private lines on a switched service basis between the U.S. and other countries.
Under recently adopted FCC policies and under proposals to implement the WTO
agreement, it is expected to become easier, from a regulatory perspective, to
obtain such authority for additional markets.  The Company is also authorized to
acquire interests in international facilities, enabling its recent acquisition
of IRUs.

     Among domestic local carriers, only the incumbent local exchange carriers
are currently classified as dominant carriers.  Thus, the FCC regulates many of
the local exchange carriers' rates, charges and services to a greater degree
than the Company's, although FCC regulation of the local exchange carriers is
expected to decrease over time, particularly in light of recent U.S.
legislation.

     The 1996 Act mandated several important federal regulatory developments.
The first concerns universal services.  On May 8, 1997, the FCC issued an order
to implement the provisions of the 1996 Act relating to the preservation and
advancement of universal telephone service (the "Universal Service Order").  The
Universal Service Order affirmed the policy principles for universal telephone
services set forth in the Telecommunications Act, including quality service,
affordable rates, access to advanced services, access in rural and high-cost
areas, equitable and non-discriminatory contributions, specific and predictable
support mechanisms, and access to advanced telecommunications 
<PAGE>
 
                                      -15-

services for schools, health care providers and libraries. The Universal Service
Order added "competitive neutrality" to the 1996 Act's universal service
principles by provided that universal service support mechanisms and rules
should not unfairly advantage or disadvantage one provider over another, nor
unfairly favor or disfavor one technology over another. The Universal Service
Order also requires all telecommunications carriers providing interstate
telecommunications services, including the Company, to contribute to universal
service support. However, because the contribution factors are likely to vary
quarterly, the annualized impact on ACC cannot be estimated at this time.

     An issue that may affect the Company is access charge reform.  Access
charges are charges imposed by the LECs on long distance providers for access to
the local exchange network, and were designed to compensate the LEC for its
investment in the local network.  In addition to economic considerations, when
adopted in 1984 at the time AT&T was divested from the RBOCs, access charge
rates reflected public policy considerations related to universal service and
the desirability of low local rates.  Interstate access charges are regulated by
the FCC and intrastate access charges are regulated by the state public service
commissions.  Pursuant to the 1996 Act, on May 16, 1997, the FCC issued an order
to implement certain reforms to its access charge rules (the "Access Charge
Reform Order").  The Access Charge Reform Order will require incumbent LECs to
substantially decrease over time the prices they charge for switched access, and
change how access charges are calculated.  These changes are intended to reduce
access charges paid by interexchange carriers to LECs and shift usage-based
charges to flat-rated, monthly per-line charges.  To the extent that these rules
being to reduce charges to reflect the forward-looking cost of providing access,
the Company's competitive advantage in provided customers with access services
might decrease.  In addition, the FCC has determined that it will give incumbent
LECs pricing flexibility with respect to access charges.  To the extent such
pricing flexibility is granted before substantial facilities-based competition
develops, such flexibility could be misused to the detriment of new entrants,
including the Company.  Until the FCC adopts and releases rules detailing the
extent and timing of such pricing flexibility, the impact of these rules on the
company cannot be determined.  In its order, the FCC abolished the unitary rate
structure option for tandem-switched transport.  This may have an adverse effect
on smaller interexchange carriers such as the Company because it may increase
the costs of transport which smaller interexchange carriers must purchase from
LECs to reach end user customers on the local exchange network.

     Both the Universal Service and Access Charge Reform Orders are subject to
petitions seeking reconsideration by the FCC and direct appeals to U.S. Court of
Appeals.  Until the time when any such petitions or appeals are decided, there
can be no assurance as to how the Universal Service and/or Access Charge Reform
Orders will be implemented or enforced, or what effect the orders will have on
competition within the telecommunications industry, generally, or on the
competitive position of the Company, specifically.

     There can be no assurances as to how the 1996 Act will be implemented or
enforced or to what affect it or implementing regulations will have on
competition within the telecommunications industry generally or on the
competitive position of the Company.

     In addition to its status as an access customer, the Company is now an
access provider in connection with its provision of local telephone service in
upstate New York and Massachusetts.  Under the 1996 Act, as a local exchange
carrier, the Company is subject to many of the same obligations to which other
local exchange carriers, including the RBOCs, are subject in their provision of
local exchange services, such as resale, dialing parity and reciprocal
compensation.

     State.  The Company's intrastate long distance operations are subject to
various state laws and regulations including, in most jurisdictions,
certification and tariff filing requirements.  The Company provides long
distance service in all or some portion of 40 states and has received the
necessary certificate and tariff approvals to provide intrastate long distance
service in 48 states.  All states today allow some form of intrastate
telecommunications competition.  However, some states restrict or condition the
offering of intrastate/intra-LATA long distance services by the company and
other interexchange carriers.  In the majority of those states that do permit
interexchange carriers to offer intra-LATA services, customers desiring to
access those services are generally required to dial special access codes, which
puts the company at a disadvantage relative to the local exchange carrier's
intrastate long distance service, which generally requires no such access code
dialing.  Increasingly, states are reexamining this policy and some states, such
as 
<PAGE>
 
                                      -16-

New York, have ordered that this disadvantage be removed. The 1996 Act requires
the incumbent local exchange carriers to adopt "intra-LATA equal access" as a
precondition of the local exchange carriers' entering into the inter-LATA long
distance business. The 1996 Act precludes states which have not already ordered
intra-LATA equal access from mandating such equal access until the earlier of
either (i) the date the incumbent local exchange carrier receives in-region
inter-LATA authority in that state, or (ii) February of 1999. Because the timing
of incumbent local exchange carrier entry into the long distance business, or
actions by state authorities which had not already ordered intra-LATA equal
access, cannot be determined with certainty, it is not possible to predict when
intra-LATA equal access will be available in each State.

     With regard to New York, the Company's largest U.S. market, intra-LATA
equal access is currently being implemented for over 90% of its New York State
subscribers.  Implementation in other states may take longer.  Relevant state
public service commissions ("PSCs") also regulate access charges and other
pricing for telecommunications services within each state. The New York State
PSC ("NYPSC") has recently initiated a proceeding, to examine intrastate access
charges.  The RBOCs and other local exchange carriers have been seeking
reduction of state regulatory requirements, including greater pricing
flexibility.  This could adversely affect the Company in several ways.  The
regulated prices for intrastate access charges that the Company must pay could
increase both relative to the charges paid by the largest interexchange
carriers, such as AT&T, and in absolute terms as well.  Additionally, the
Company could face increased price competition from the RBOCs and other local
exchange carriers for intra-LATA long distance services, which may also be
increased by the removal of former restrictions on long distance service
offerings by the RBOCs as a result of recently enacted legislation.

     New York State Regulation of Long Distance Service.  Beginning in 1992, the
NYSPSC commenced several proceedings to investigate the manner in which local
exchange carriers should be regulated.  In July 1995, the NYPSC ordered the
acceptance of a Performance Regulation Plan for New York Telephone.  The terms
of the plan, as ordered, included: (i) a limitation on increases in basic local
rates for the 5-year term of the plan, (ii) implementation of intra-LATA equal
access by no later than March 1996, (iii) reductions in the intrastate inter-
LATA equal access charges which the Company and other interexchange carriers pay
over the next five years totaling 33%, (iv) reductions in the intra-LATA toll
rates charged to the end user customer over the next five years totaling 21%,
and (v) an intercarrier compensation plan that reduced the rates paid by the
competitive local exchange carriers (including the Company's subsidiaries) by
one-half.  New York Telephone does have some increased ability to restructure
rates and to request rate reductions, but all rate changes are still subject to
NYPSC approval.  New York Telephone is also required to meet various service
quality measurements, and will be subject to financial penalties for failure to
meet these objectives.

     On March 17, 1998, staff of the NYPSC released a draft pre-filing agreement
it was considering entering into with New York Telephone.  That agreement would
set forth certain commitments by New York Telephone relating to opening its
local market to competition and complying with the FCC's competitive checklist,
in return for which the NYPSC would endorse New York Telephone's FCC petition to
enter the inter-LATA toll market.  If the agreement is finalized, it would
likely expedite New York Telephone's long distance entry, and could
significantly impact the Company's competitive standing in the long distance
market.

     In a manner similar to the FCC, the NYPSC has adopted revised rules
governing the manner in which intrastate local transport elements of access
charges are to be priced.  These revisions accompanied its decision ordering,
local exchange carriers to permit "collocation" for intrastate special access
and switched access transport services.  In general, where CAPs have established
interconnections at the switches of individual local exchange carriers, the
local exchange carriers will be given expanded authority to enter into
individually negotiated contracts with interexchange carriers for transport
service.  At the same time, the access charges to other interexchange carriers
located at the same switching facilities generally will be lowered.  If
insufficient competition is present at that switching facility, the preexisting
intrastate "equal price per unit of traffic" rule will remain in effect.  While
the presence of switch interconnections may actually lower the price the Company
may pay for local transport services, the ability of carriers that handle large
traffic volumes, such as AT&T, to negotiate flat rate direct transport charges
may result in the Company's paying more per unit of traffic than its competitors
for local transport service.
<PAGE>
 
                                      -17-

     The NYPSC is currently reviewing the further restructuring of intra-State
access charges, and is considering whether to restructure State access charges
so that they mirror all of the rate elements set forth in recently revised
federal access charge structures.  This includes possible removal of any
remaining "equal price per unit of traffic" applications, and the establishment
of an intrastate Primary Interexchange Carrier Charge ("PICC"), which would
shift certain usage sensitive access charges to a flat rate fee applicable to
carriers based upon their numbers of presubscribed intra-LATA and inter-LATA
customers.  Establishment of such an intrastate PICC could have adverse effects
on carriers which serve low volume customers and customers located in rural or
remote areas.  The NYPSC is also reviewing proposals to modify the mileage
formula utilized to calculate transport charges for carriers, such as the
Company, which use common transport rather than direct trucking transport.  It
is not possible to determine the impact, if any, which such changes would have
on the Company's intra-state access costs.

     New York State Regulation of Local Telephone Service.  The NYPSC has
determined that it will allow competition in the provision of local telephone
service in New York State, including "alternate access," private line services
and local switched services.  The Company applied to the NYPSC for authority to
provide such services, and received certifications in early 1994 to offer these
services.  The NYPSC has also authorized resale of local exchange services,
which may allow significant market entry by large toll carriers such as AT&T and
MCI.

     The Company's ability to offer competing local services profitably will
depend on a number of factors.  For the Company to compete effectively against
New York Telephone, Frontier Corp. and other local exchange carriers in the
Company's upstate New York service areas, it must be able to interconnect with
the network of local exchange carriers in the markets in which it plans to offer
local services, obtain direct telephone number assignments and, in most cases,
negotiate with those local exchange carriers for certain services such as leased
lines, directory assistance and operator services on commercially acceptable
terms.  The order issued in the New York Telephone Performance Regulation Plan
(described above) established prices for interconnection and required New York
Telephone to tariff this service, making it generally available to all
competitors, including the Company.  The actual monies paid by the Company to
New York Telephone for terminating the Company's traffic, and the monies
received by the Company from New York Telephone for terminating New York
Telephone traffic, are subject to NYPSC regulation and will depend upon the
Company's compliance with certain service obligations imposed by the NYPSC,
including the obligation to serve residential customers.  The rates will also
affect the Company's competitive position in the intra-LATA toll market relative
to the local exchange carrier and major interexchange carriers such as AT&T and
MCI, which may offer intra-LATA toll services.  The NYPSC has also issued orders
assuring local telephone service competitors access to number resources, listing
in the local exchange carrier's directory and the right to reciprocal
intercarrier compensation arrangements with the local exchange carriers, and
also establishing interim rules under which competitive providers of local
telephone service are entitled to comparable access to and inclusion in local
telephone routing guides and access to the customer information of other
carriers necessary for billing or other services.  The Company has obtained
number assignments in several New York markets.

     Many competitive local exchange companies, including the Company, receive
significant revenues from incumbent local exchange carriers (such as New York
Telephone) through the reciprocal compensation mechanism for terminating traffic
which the Company delivers to Internet providers.  In early 1997, New York
Telephone announced it would refuse to pay such terminating compensation for
Internet traffic, and the Company, as well as other competing local exchange
carriers, have filed complaints with the NYPSC.  The NYPSC is now reviewing
whether Internet traffic should be treated as "local" traffic for purposes of
reciprocal compensation.  A petition has also been filed at the FCC for a
declaration that Internet traffic is to be considered "local" traffic for
reciprocal compensation purposes.  If either the FCC or the NYPSC issues an
adverse ruling, and determines that Internet traffic delivered to the Company
for termination will not be eligible for reciprocal compensation, there could be
a significant impact upon the Company's local service revenues.

     The NYPSC has also adopted interim rules that would subject competitive
providers of local telephone service to a number of rules, service standards and
requirements not previously applicable to "nondominant" competitors such as the
Company.  These rules include requirements involving "open network
architecture," provision of reasonable interconnection to competitors, and
compliance with the NYPSC's service quality standards and consumer protection
<PAGE>
 
                                      -18-

requirements.  As part of its "open network architecture" obligations, the
Company could be required to allow collocation with its local toll switch upon
receipt of a bona fide request by an interexchange carrier or other carrier.
Compliance with these rules in connection with the Company's provision of local
telephone service may impose new and significant operating and administrative
burdens on the Company.  This proceeding will also determine the
responsibilities of new local service providers with respect to subsidies
inherent in existing local exchange carrier rates.

     Under the 1996 Act, incumbent local exchange companies such as New York
Telephone and Frontier must allow the resale of both bundled local exchange
services (known as "loops") as well as unbundled local exchange "elements"
(known as "links" and "ports").  The Company generally intends to provide local
service through the resale of unbundled links rather than through the sale of
bundled loops.

     On April 1, 1997, the NYPSC adopted permanent rates for unbundled links and
certain other unbundled network elements for New York Telephone.  The monthly
rate for unbundled links in designated areas of dense traffic (accounting for
approximately 70% of all loops in the state) is $12.49, plus a recurring $1.90
connection charge.  The monthly rate in other areas of the state is $19.24, plus
a $1.90 recurring connection charge.  Permanent unbundled link and unbundled
network element rates have not yet been established for Frontier Corp.  The
permanent New York Telephone link rate is lower than the temporary rates for New
York Telephone's unbundled links; it is greater than the $10.10 rate for the
comparable service New York Telephone offers to its own residential customers,
but below the rate of approximately $22 for the comparable service New York
Telephone offers to its business customers.  However, in order to utilize
unbundled links, the Company must arrange for collocation in New York
Telephone's central offices, which adds significant costs.  As a result, the
Company's marketing efforts are primarily directed toward business customers
(and certain concentrated residential customers) which can be served through the
Company's own facilities, rather than through use of unbundled links obtained
from New York Telephone or Frontier Corp.

     One of the unbundled elements required to be provided by incumbent local
exchange carriers under the 1996 Act is access to the carrier's Operational
Support systems ("OSS"), which are electronic systems used by competing
carriers, such as the Company, to order services, including unbundled network
elements and resold services, from the incumbent local exchange company.  Rates
for use of such OSS are established by the PSCs.  The NYPSC has been reviewing
charges proposed by New York Telephone of approximately $2,500 per month for the
right to order resold services, and approximately $5,000 per month for the right
to order unbundled network elements, including unbundled links.  A carrier which
orders both unbundled network elements and resold services would pay
approximately $7,500 per month.  In addition to those monthly service charges,
an ordering carrier would pay approximately $1 for each preordering, ordering
and maintenance transaction.  The NYPSC has issued an interim decision denying
New York Telephone the ability to apply the monthly recurring charges, subject
to New York Telephone's ability to further substantiate its entitlement to such
charges.  The final outcome of that proceeding, and the level of OSS charges
which the Company will have to pay to order resold services and unbundled
network elements from New York Telephone, is not known.  The establishment of
excessive OSS charges could have a significant effect on the Company's ability
to order services and compete in the local exchange market.

     Local Telephone Service in Massachusetts.  The Massachusetts Department of
Public Utilities ("DPU") requires LECs to file a Statement of Business
Operations and a tariff before providing intrastate telecommunications service,
including local exchange service in Massachusetts.  The Company has filed its
Statement and tariff and has received DPU approval of its interconnection
agreement with NYNEX/Bell Atlantic.

     The Company's ability to construct and operate competitive local service
networks for both local private line and switched services will depend upon,
among other things, implementation of the structural market reforms discussed
above, favorable determinations with respect to obligations by the state and
federal regulators, and the satisfactory implementation of interconnection with
the local exchange carriers.
<PAGE>
 
                                      -19-

     Canada

     Long Distance Telephone Services.  Long distance telecommunications
services in Canada generally are subject to regulation by the CRTC.  As a result
of significant regulatory changes during the past several years, the historical
monopolies for long distance service granted to regional telephone companies in
Canada have been terminated.  This has resulted in a significant increase in
competition in the Canadian long distance telecommunications industry.
Competition is also emerging in many other segments of the market.  However,
despite the very impressive competitive in-roads that have been made in the long
distance market, the Stentor companies continue to have the vast share of the
local and calling card markets.  In addition to the proceedings referred to
below, the CRTC continues to take steps toward increased competition, including
proceedings relating to the convergence between telecommunications and
broadcasting.

     CRTC Decisions.  In March 1990, the CRTC for the first time permitted non-
facilities-based carriers, such as ACC Canada, to aggregate the traffic of
customers on the same leased interexchange circuits in order to provide
discounted long distance voice services in the provinces of Ontario, Quebec and
British Columbia.  In September 1990, the CRTC also authorized carriers in
addition to members of the Stentor consortium to interconnect their transmission
facilities with the Message Toll Service ("MTS") facilities of Teleglobe Canada,
for the purpose of allowing resellers, such as ACC Canada, to resell
international long distance MTS service.  Prior to this decision, Bell Canada
and other members of Stentor were the exclusive long distance carriers
interconnected to Teleglobe Canada's MTS facilities.

     In December 1991, the CRTC permitted the resale on a joint-use basis of the
international private line services of Teleglobe Canada to provide
interconnected voice services.  Resellers are subject to charges levied by
Teleglobe Canada for the use of its facilities and contribution charges payable
to Teleglobe Canada and remitted to the telephone companies.  In September 1993,
the CRTC allowed Teleglobe Canada to restructure its overseas MTS to allow
domestic service providers (including resellers) who commit to a minimum level
of usage to interconnect with Teleglobe Canada's international network at its
gateways for the purpose of providing outbound direct-dial telephone service.
Overseas inbound traffic would be allocated to Stentor and other domestic
service providers (including resellers) in proportion to their outbound market
shares.

     In a decision released in May 1997, the CRTC removed restrictions on
international simple resale by Canadian domestic transmission facilities-based
carriers.  Prior to this decision, only non-facilities based carriers such as
ACC Canada were permitted to engage in international simple resale.  The
decision also re-emphasized the restriction on "switched hubbing" (i.e. routing
Canada overseas traffic to or from a destination country over resold
international private lines supplied by Teleglobe between Canada and an
intermediary country), unless agreed to by all countries or operating
authorities involved, including Teleglobe.  After subsequent proceedings in the
courts and the CRTC to vary or reverse these rulings, the CRTC determined in
December 1997 to permit switched hubbing.

     In February 1996, the CRTC introduced a regime of price regulation for
Teleglobe Canada's services to be in effect from April 1996 to December 1999,
barring any exceptional changes to Teleglobe Canada's operating environment.
Under this regime, Teleglobe Canada must reduce prices on an annual basis for
its telephone and Globeaccess VPN Services, and must adhere to a price ceiling
for most of its regulated non-telephone services.  These rate reductions will
have the effect of reducing the price the Company can charge its customers.  In
February 1997, the Canadian government committed under the WTO negotiations to
terminate Teleglobe Canada's status as the monopoly transmission facilities-
based provider of Canada-overseas telecommunications services by October 1,
1998.  The Canadian House of Commons has passed legislation to implement this
change in Teleglobe's status, to put in place a licensing regime for
telecommunications service providers providing international telecommunications
services within a class or classes specified by the CRTC, and to administer
numbering resources in Canada.  In October 1997 the CRTC issued a public notice
asking for comments on, among other things, the licensing and regulatory regime
which should be used for Teleglobe and other international telecommunications
services providers after October 1, 1998.  The CRTC suggested that international
services provided by resellers might be within such a regime.
<PAGE>
 
                                      -20-

     In June 1992, the CRTC effectively removed the monopoly rights of certain
Stentor member companies with respect to the provision of transmission
facilities-based long distance voice services in the territories in which they
operate and opened the provision of these services to substantial competition in
all provinces of Canada other than Alberta, Saskatchewan and Manitoba.
Competition has subsequently been introduced in Alberta and Manitoba, which are
subject to CRTC regulation, and Saskatchewan, which has not yet become subject
to CRTC regulation.  Among other things, the CRTC also directed the telephone
companies that were subject to this decision to provide AT&T Canada (then named
Unitel Communications Inc.) with "equal ease of access," i.e., to allow it to
directly connect its network to the telephone companies' toll and end office
switches to allow its customers to make long distance calls without dialing
extra digits.  In July 1993, the CRTC ordered the same telephone companies to
provide resellers with equal ease of access upon payment of contribution,
network modification and ongoing access charges on the same general basis as for
transmission facilities-based carriers.

     The CRTC required telephone company competitors to assume certain financial
obligations, including the payment of "contribution charges" designed to ensure
that each long distance carrier bears a fair proportion of the subsidy that long
distance services have traditionally contributed to the provision of local
telephone service.  These charges are levied on resellers based on leased access
lines.  The charges vary for each telephone company based on that company's
estimated loss on local services.  Contribution charges were subject to a
discount which was initially 25%, and which declines over time to zero in 1998.
Resellers whose access lines were connected only to end offices on a non-equal
access basis initially paid contribution charges of 65% of the equal access
contribution rates, rising over a five-year period to an 85% rate thereafter.
The CRTC also established a mechanism under which contribution rates will be re-
examined on a yearly basis.

     Transmission facilities-based competitors and resellers that obtained equal
ease of access also assumed approximately 30% of the estimated Cdn. $240 million
cost required to modify the telephone companies' networks to accommodate
interconnection with competitors as well as a portion of the ongoing costs of
the telephone companies to provide such interconnection.  Initial modification
charges are spread over a period of 10 years.  These charges and costs are
payable on the basis of a specified charge per minute.  In April 1997 the CRTC
issued a decision unbundling these charges and costs.  Previously, long distance
carriers paid the telephone companies a flat rate of $0.011 per minute.
Effective July 1, 1997, a separate rate of $0.007 per minute is payable for
local end office connections, and between $0.004 and  $0.007 per minute for toll
or access tandem connections.  In June 1997 AT&T Canada asked the CRTC to
reconsider and vary the flat $0.007 per minute rate for local end office
connections.

     As contemplated in the CRTC's June 1992 decision, initial implementation of
single carrier 800 number portability occurred in Canada in January 1994 and 800
number multi-carrier selection capability was subsequently approved on an
interim basis.

     In September 1994, the CRTC established substantial changes to Canadian
telecommunications regulation, including:  (i) initiation of a program of rate
rebalancing, which would entail three annual increases of Cdn. $2 per month in
rates for local service, with corresponding decreases in rates for basic toll
service, and an indication from the CRTC that there would be no price changes
which would result in an overall pace increase for North American basic toll
schedules combined; (ii) the telephone companies' monopoly local and access
services, including charges for bottleneck services (i.e., essential services
which competitors are required to obtain from Stentor members) provided to
competitors (the Utility segment), would remain in the regulated rate base, and
the CRTC would replace earnings regulation for the Utility segment with price
caps effective January 1, 1998; (iii) other services (the Competitive segment)
would not be subject to earnings regulation after January 1, 1995, after which a
Carrier Access Tariff would become effective, which would include charges for
contribution, start-up cost recovery and bottleneck services and would be
applicable to the telephone companies' and competitors' traffic based on a per
minute calculation, rather than the per trunk basis previously used to calculate
contribution charges; (iv) while the CRTC considered it premature to forbear
from regulating interexchange services, it considered that the framework set
forth in the decision may allow forbearance in the future (such forbearance has
subsequently occurred in the case of certain non-dominant transmission
facilities-based carriers and certain telephone company services); (v) the CRTC
concluded that barriers to entry should be reduced for the local service market,
including basic local telephone service and switched network alternatives, and
subsequently 
<PAGE>
 
                                      -21-

conducted proceedings to implement unbundled tariffs, co-location of facilities
and local number portability; and (vi) the intention to consider applying
contribution charges to other services using switched access, not only to long
distance voice services.

     Changes to these matters that were announced in October 1995 were the
following:  (i) rate rebalancing, with Cdn. $2 per month local rate increases
commencing in each of January 1996 and January 1997 and another unspecified
increase in 1998 (the contribution component of the Carrier Access Tariff was
reduced correspondingly, but a corresponding reduction of basic North American
long distance rates ordered by the CRTC was reversed by the Federal Cabinet in
December 1995); (ii) reductions in contribution charges effective January 1,
1995; (iii) changes to the costing methodology of the telephone companies
including (a) the establishment of strict rules governing telephone company
investments in competitive services involving broadband technology, (b) the
requirement that the Competitive segment pay its fair share of joint costs
incurred by both the Utility and Competitive segments, and (c) a directive
specifying that revenues for many unbundled items must be allocated to the
Utility segment thereby reducing the local shortfall and therefore contribution
charges; (iv) directory operations of the telephone companies will continue to
remain integral to the Utility segment, meaning that revenues from directory
operations will continue to be assigned to the Utility segment to help reduce
the local shortfall and therefore contribution payments; and (v) Stentor's
request to increase the allowed rate of return of the Utility segment was denied
and the CRTC restated its intention to retain the fifty basis point downward
adjustment to the total company rate of return used to derive the Utility
segment rates of return for the telephone companies.

     In December 1995, the CRTC announced that the per trunk basis for
calculating contribution charges would be replaced by a per minute basis for
calculating contribution charges starting June 1, 1996.  The off-peak
contribution rate is one-half the peak rate, with the peak rate applicable
between 8 a.m. and 5 p.m., Monday through Friday.

     In October 1996 the CRTC ended the Stentor monopoly over access to swipe
readers found on the latest generation of pay telephones and ordered the
telephone companies to file a tariff that would provide competitors with swipe
access.  The CRTC agreed that lack of swipe access for their calling cards is a
major disadvantage for the Company and other competitors.  The new swipe access
tariff was approved on an interim basis in May, 1997.

     In December 1996, in Telecom Decision CRTC 96-11, the CRTC established 1996
contribution rates retroactive to January 1, 1996.  The contribution rates were
reduced by up to 42% from 1995 levels, depending on the province.  The CRTC also
ruled in Telecom Decision CRTC 96-12, that effective July 1, 1997, contribution
on line-side connections would be changed from a per circuit to a per minute
basis.  This is consistent with the ruling in 1995 which implemented per minute
contribution for trunk-side connections.

     The CRTC began a public proceeding in 1996 to examine and establish the
preconditions for deregulation of the Stentor companies' long distance services.
The Company and the other members of the Competitive Telecommunications Alliance
have proposed a timetable for deregulating the long distance market.  In
December 1997, the CRTC released a decision under which it will forbear from
regulation of Stentor toll and toll-free services.  Among other things, the
Stentor companies will no longer be required to file tariffs for these services
or demonstrate that the rates for them are just and reasonable, and these
services will no longer be required to meet an imputation test (which prevented
pricing below cost).  However, the CRTC will continue to apply a cap on overall
North American basic toll rates charged by the Stentor companies, and will
continue to exercise a number of its powers with respect to the prohibitions on
unjust discrimination and undue preference in respect of these services.  The
CRTC also released a decision under which it will forbear from regulation of
certain Stentor high capacity interexchange private line services on specified
high traffic routes.  Among other things, the Stentor companies will no longer
be required to file tariffs for these services or demonstrate that the rates for
them are just and reasonable, there will no longer be a prohibition on unjust
discrimination and undue preference in respect of these services, and these
services will no longer be required to meet an imputation test.

     In June 1997 Stentor applied to the CRTC for:  (i) the elimination of
contribution on international circuits, with offsetting adjustments to domestic
contribution rates; or (ii) the implementation of a per-minute contribution
mechanism 
<PAGE>
 
                                      -22-

applicable to international long distance minutes, rather than the per-circuit
mechanism still used for international circuits.

     The Company cannot predict the timing or the outcome of any of the pending
and ongoing proceedings described above, or the impact they may have on the
competitive position of ACC Canada.

     Local Telephone Services.  On May 1, 1997 the CRTC released a number of
decisions which opened the Canadian local telecommunications market to
competition.  The decisions apply in the territories of the Stentor telephone
companies, except SaskTel in Saskatchewan (which has subsequently announced
plans to open local telephone service in the province to competition).  The
decision enables the systems operated by competitive local exchange carriers
("CLECs") to be interconnected with the systems operated by incumbent local
exchange carriers ("ILECs").  CLECs will not merely be customers of ILECs, but
will be carriers equal in status to ILECs in the local exchange market.

     CLECs are not required to provide universal service in their serving areas,
or to file tariffs for services provided to their customers.  However, the CRTC
imposed certain consumer protection and regulatory obligations on CLECs.  Also,
CLECs must file tariffs to provide equal access to all inter-exchange ("IX")
service providers and wireless service providers.  Such access must be on terms
and conditions equivalent to those contained in ILECs' tariffs, unless the CLEC
can justify any departure.  ILECs cannot refuse to connect their IX networks
with a CLEC's network.

     CLECs will have access to the following services of the ILECs found to be
essential by the CRTC:  central office codes; subscriber listings; and local
loops situated in small urban and rural areas.  These facilities are subject to
mandatory unbundling and mandated pricing.  A number of other items, while not
found to be essential, were directed by the CRTC to be unbundled for a period of
five years, during which period those items are also to be provided to
competitors at mandated prices.

     The May 1 decisions replaced the historical rate base rate of return
regulation of ILECs with price cap regulation for an initial period of four
years.  In order to prevent ILECs from engaging in anti-competitive pricing,
ILECs will be required to demonstrate that services provided to their customers
are not priced below cost.

     Contribution currently paid by IX carriers to ILECs will continue to be
collected, but will be treated as a "portable contribution", i.e. such amounts
will be pooled and distributed to ILECs and CLECs based on the number of
residential lines served by the respective local exchange carriers in each rate
band and the subsidy requirement associated with the rate band.  Contrary to the
submissions of some parties, no explicit contribution will be payable from local
business exchange services or directory revenues.

     Prior to these decisions, competitors could resell Centrex and other bulk
services, as well as individual business lines.  Resale of residential lines was
not allowed.  The decisions now allow competitors to resell all bundled local
services (including residential lines), and those services which are unbundled
pursuant to the decisions.  However, contrary to the submissions of some
resellers, the CRTC did not order the ILECs to provide their services to
resellers at wholesale prices.  Therefore, the scope for non-facilities-based
local competition is significantly restricted.

     The ILECs will be permitted to raise basic residential local monthly rates
effective January 1, 1998.  Toll contribution will be frozen for the price cap
period at the January 1, 1998 levels.  These contribution levels will be reduced
to levels which take into account the effect of the basic residential local rate
increase.  The CRTC also expanded somewhat the scope of contribution paying
services.  While reduced interim contribution rates have been approved for 1997
and the price cap period, final contribution rates for 1997 and for the price
cap period have not yet been determined.  On September 8, 1997, AT&T Canada
asked the CRTC to allow for the adjustment of the contribution charge payable by
IX carriers on a quarterly basis during the initial price cap term to account
for the growth in toll minutes.
<PAGE>
 
                                      -23-

     A subsequent decision of the CRTC in June 1997 allowed transmission
facilities-based local and long distance carriers (but not resellers such as ACC
Canada) to "co-locate" their equipment in the central offices of ILECs on terms
and conditions contained in tariffs or intercarrier agreements.

     A number of issues relating to local competition remain to be resolved,
including the determination of final rates, finalization of arrangements
regarding local number portability, and certain other interconnection
arrangements.

     Under the local competition decisions, only transmission facilities-based
carriers (which are required, among other things, to meet Canadian ownership
requirements) may become CLECs.  In September 1997 ACC Canada asked the CRTC to
remove this requirement and to establish entry procedures and regulatory
obligations for telecommunications service providers that are not facilities-
based carriers but that wish to become CLECs.

     Telecommunications Act.  In October 1993, the Telecommunications Act
replaced the Railway Act (Canada) as the principal telecommunications regulatory
statute in Canada.  This Act provides that all federally-regulated
telecommunications common carriers as defined therein (essentially all
transmission facilities-based carriers) are under the regulatory jurisdiction of
the CRTC.  It also gives the federal government the power to issue directions to
the CRTC on broad policy matters.  The Act does not subject non-facilities-based
carriers, such as ACC Canada, to foreign ownership restrictions, tariff filing
requirements or other regulatory provisions applicable to facilities-based
carriers.  However, to the extent that resellers acquire their own facilities in
order to better control the carriage and routing of their traffic, certain
provisions of this Act may be applicable to them.

     United Kingdom

     Until 1981, British Telecom was the sole provider of public
telecommunications services throughout the U.K.  This monopoly ended when, in
1981, the British government granted Mercury Communications Ltd. (now known as
"CWC") a license to run its own telecommunications system under the British
Telecommunications Act 1981.  Both British Telecom and CWC are licensed under
the subsequent Telecommunications Act 1984 to run transmission facilities-based
telecommunications systems and provide telecommunications services.

     In 1991, the British government established a "multi-operator" policy to
replace the duopoly that had existed between British Telecom and CWC.  Under the
multi-operator policy, the U.K Department of Trade and Industry (the "DTI") will
recommend the grant of a license to operate a telecommunications network to any
applicant that the DTI believes has a reasonable business plan and where there
are no other overriding considerations not to grant such license.  All public
telecommunications operators and international simple resellers operate under
individual licenses granted by the Secretary of State for Trade and Industry
pursuant to the Telecommunications Act 1984.  Any telecommunications system with
compatible equipment that is authorized to be run under an individual license
granted under this Act is permitted to interconnect to British Telecom's
network.  Under the terms of British Telecom's license, it is required to allow
any such licensed operator to interconnect its system to British Telecom's
system, unless it is not reasonably practicable to do so (e.g., due to
incompatible equipment).

     Oftel has imposed further mandatory price reductions on British Telecom
from August 1997 which, although more limited in scope than those previously
set, may have, the effect of reducing the prices the Company can charge its
customers in order to remain competitive.  Oftel is introducing a new access
charge control regime, which is expected to become effective in August 1997.
Under the new regime, British Telecom will have flexibility in setting access
charges, subject to certain safeguards.  Oftel will set the starting charges
(which will be based on historical incremental costs) and the rates charged by
British Telecom to other carriers will be subject to certain price ceilings
established by Oftel for competitive and non-competitive services.

Germany
 
  The German telecommunications market began deregulating in January 1998, as
a result of the European Union ("EU") mandate to open telecommunications markets
to competition. Most significantly, the German market opened for interconnection
in January 1998. ACC has established a subsidiary in Germany and signed a resale
agreement with Deutsche Telekom ("DT") on May 20, 1997. Further, ACC received a
Class 4 full voice telephony license from the German Ministry of Post and
Telecommunications which was effective January 1, 1998. This license is a
requirement for ACC to become a switch-based provider of telecommunications
services in Germany. In October 1997, ACC signed a network interconnect
agreement with DT, which permits utilization of DT's network to link ACC with
its customers. With this agreement in place, ACC has installed a switch which it
plans to have in service during the first quarter of 1998. ACC achieved a small
amount of revenue in the fourth quarter of 1997 as a switchless reseller, and
anticipates potentially more substantial revenue growth as a switch-based
reseller when the market is fully deregulated. Through December 31, 1997, the
German Ministry of Post and Telecommunications was responsible for acting as the
regulatory authority for telecommunications in Germany. After January 1, 1998, a
new body called the Regulatory Authority for Telecommunications and Post (the
"Reg TP") assumed responsibility for telecommunications-related regulatory
activities. Among other powers, the Reg TP will grant licenses, decide disputes
over special network access and interconnection, approve telecommunication
rates, discharge numbering functions, promote and safeguard competition, oversee
compliance with the German Telecommunications Act, oversee compliance with the
conditions imposed on licensees and prohibit providers of telecommunications
services without valid licenses from performing such activities.
 

ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

     As ACC expands its service offerings, geographic focus and its network, ACC
anticipates that it will seek to acquire assets and businesses of, make
investments in or enter into strategic alliances with, companies providing
services 
<PAGE>
 
                                      -24-

complementary to ACC's existing business. ACC believes that, as the global
telecommunications marketplace becomes increasingly competitive, expands and
matures, such transactions will be important in maintaining a competitive
position in the industry.

     ACC's ability to effect acquisitions and strategic alliances and make
investments may be dependent upon its ability to obtain additional financing
and, to the extent applicable, consents from the holders of debt and preferred
stock of ACC. If ACC were to proceed with one or more significant strategic
alliances, acquisitions or investments in which the consideration consists of
cash, a substantial portion of ACC's available cash could be used to consummate
the acquisitions or investments. If ACC were to consummate one or more
significant strategic alliances, acquisitions or investments in which the
consideration consists of stock, shareholders of ACC could suffer a significant
dilution of their interests in ACC.

     Many business acquisitions must be accounted for as purchases. Most of the
businesses that might become attractive acquisition candidates for ACC are
likely to have significant goodwill and intangible assets, and the acquisitions
of these businesses, if accounted for as a purchase, would typically result in
substantial amortization charges to ACC. In the event ACC consummates additional
acquisitions in the future that must be accounted for as purchases, such
acquisitions would likely increase ACC's amortization expenses. In connection
with acquisitions, investments or strategic alliances, ACC could incur
substantial expenses, including the fees of financial advisors, attorneys and
accountants, the expenses of integrating the business of the acquired company or
the strategic alliance with ACC's business and any expenses associated with
registering shares of ACC's capital stock, if such shares are issued. The
financial impact of such acquisitions, investments or strategic alliances could
have a material adverse effect on ACC's business, financial condition and
results of operations and could cause substantial fluctuations in ACC's
quarterly and yearly operating results.

     The Merger Agreement contains restrictions on the conduct of ACC's business
prior to the consummation of the Merger which are likely to affect ACC's pursuit
of its strategies.

EMPLOYEES

     As of December 31, 1997, ACC had 1,268 full-time employees worldwide. Of
this total, 384 employees were in the U.S., 482 were in Canada, 369 were in the
U.K. and 33 were in Germany. ACC has never experienced a work stoppage and its
employees are not represented by a labor union or covered by a collective
bargaining agreement. ACC considers its employee relations to be good.

RISK FACTORS

CONSUMMATION OF TCG MERGER AND TCG/AT&T MERGER

     Consummation of the proposed TCG Merger and TCG/AT&T Merger are subject to 
certain closing conditions, including obtaining approval of stockholders, 
certain required regulatory approvals and other related consents. Accordingly, 
there can be no assurance that the TCG Merger or TCG/AT&T Merger will be 
successfully consummated or, if successfully completed, when the mergers might 
be completed. Substantial delay in consummating, or failure to consummate, the 
TCG Merger or TCG/AT&T Merger could materially adversely affect the market price
of ACC's Class A Common Stock.

Recent Losses; Potential Fluctuations in Operating Results

     Although the Company has experienced revenue growth on an annual basis
since 1990 and net income in fiscal 1996 and 1997, it has incurred net losses
and losses from continuing operations during 1994 and 1995. There can be no
assurance that revenue growth will continue or that the Company will be able to
maintain its profitability and positive cash flow from operations.  If the
Company cannot continue its revenue growth and maintain profitability and
positive cash flow from operations, it may not be able to meet its debt service
or working capital requirements.  The Company intends to focus in the near term
on the expansion of its service offerings, including its local telephone
business and Internet services, and expanding its geographic markets, including
deregulating Western European markets.  Such expansion, particularly the
establishment of new operations or acquisition of existing operations in
deregulating Western European markets, may adversely affect cash flow and
operating performance and these effects may be material, as was the case with
the Company's U.K. operations in 1994 and 1995.  As each of the
telecommunications markets in which the Company operates continues to mature,
growth in the Company's revenues and customer base is likely to decrease over
time.
<PAGE>
 
                                      -25-

     The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside of the Company's control, including general economic
conditions, specific economic conditions in the telecommunications industry, the
effects of governmental regulation and regulatory changes, user demand, capital
expenditures and other costs relating to the expansion of operations, the
introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
pricing changes and new service introductions by the Company and its competitors
and prices charged by suppliers.  As a strategic response to a changing
competitive environment, the Company may elect from time to time to make certain
pricing, service or marketing decisions or enter into strategic alliances,
acquisitions or investments that could have a material adverse effect on the
Company's business, results of operations and cash flow.  Revenues from other
resellers accounted for approximately 12.7% of ACC's consolidated revenues in
1995, 25.2% of consolidated revenues in 1996 and 21.2% of consolidated revenues
in 1997.  Because sales to other carriers are at margins that are lower than
those derived from most of the Company's other revenues, increases in carrier
revenue as a percentage of revenues have in the past, and may in the future,
reduce the Company's gross margins as a percentage of revenue.  In addition,
certain of its long distance carrier customers may pose credit or collection
risks.  See the Risk Factor discussion below of "Risks Associated With
Acquisitions, Investments and Strategic Alliances" in this Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report.

SUBSTANTIAL INDEBTEDNESS; NEED FOR ADDITIONAL CAPITAL

     The Company will need to continue to enhance and expand its operations in
order to maintain its competitive position, expand its service offerings and
geographic markets and continue to meet the increasing demands for service
quality, availability and competitive pricing.  As of the end of the previous
four fiscal years, the Company had experienced a working capital deficit.  The
Company believes that, under its present business plan, cash from operations and
borrowings under its credit facility will be sufficient to meet its anticipated
capital and capital expenditure requirements for the foreseeable future.  The
Company may need to raise additional capital from public or private equity or
debt sources in order to finance its anticipated growth, including local service
expansion and expansion into international markets, (both of which will be
capital intensive), working capital needs, debt service obligations, and,
contemplated capital expenditures. In addition, the Company may need to raise
additional funds in order to take advantage of unanticipated opportunities,
including more rapid international expansion or acquisitions of, investments in
or strategic alliances with companies that are complementary to the Company's
current operations, or to develop new products or otherwise respond to
unanticipated competitive pressures.  If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's then
current shareholders would be reduced and, if such equity securities take the
form of Preferred Stock or Class B Common Stock, the holders of such Preferred
Stock or Class B Common Stock may have rights, preferences or privileges senior
to those of holders of Class A Common Stock.  There can be no assurance that the
Company will be able to raise such capital on satisfactory terms or at all.  If
the Company decides to raise additional funds through the incurrence of debt,
the Company would need to obtain the consent of its lenders under the Company's
credit facility and would likely become subject to additional or more
restrictive financial covenants.  In the event that the Company is unable to
obtain such additional capital or is unable to obtain such additional capital on
acceptable terms, the Company may be required to reduce the scope of its
presently anticipated expansion, which could materially adversely affect the
Company's business, results of operations and financial condition and its
ability to compete.  See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" under
Item 7 of this Report.

DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS

     The Company does not own telecommunications transmission lines other than
indefeasible rights of use.  Telephone calls made by the Company's customers are
connected through transmission lines that the Company leases under a variety of
arrangements with transmission facilities-based long distance carriers, some of
which are or may become competitors of the Company, including AT&T, Bell Canada
and British Telecom.  Most inter-city transmission lines used by the Company are
leased on a monthly or longer-term basis at rates that currently are less than
the rates the Company charges its customers for connecting calls through these
lines.  Accordingly, to the extent that the Company 
<PAGE>
 
                                      -26-

continues to lease transmission lines, it will remain vulnerable to changes in
its lease arrangements, such as price increases and service cancellations. ACC's
ability to maintain and expand its business is dependent upon whether the
Company continues to maintain favorable relationships with the transmission
facilities-based carriers from which the Company leases transmission lines,
particularly in the U.K., where British Telecom and Cable and Wireless
Communications Ltd. ("CWC") are the two principal, dominant carriers. The
Company's U.K. operations are highly dependent upon the transmission lines
leased from British Telecom. Although the Company believes that its
relationships with carriers generally are satisfactory, the deterioration or
termination of the Company's relationships with one or more of those carriers
could have a material adverse effect upon the Company's business, results of
operations and financial condition. Certain of the vendors from whom the Company
leases transmission lines, including the RBOCs and other local exchange
carriers, currently are subject to tariff controls and other price constraints
which in the future may be changed. Under the 1996 Act, constraints on the
operations of the RBOCs have been dramatically reduced, which will bring into
the long distance market additional competitors from whom the Company leases
transmission lines. In addition, regulatory proposals are pending that may
affect the prices charged by the RBOCs and other incumbent local exchange
carriers to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See the Risk
Factor discussion of "Potential Adverse Effects of Regulation" below and the
discussion of "Regulation" above in this Item 1.

POTENTIAL ADVERSE EFFECTS OF REGULATION

     The 1996 Act provides specific guidelines under which the RBOCs can provide
long distance services, which will permit the RBOCs to compete with the Company
in the provision of domestic and international long distance services.  The
legislation also opens all local service markets, subject to limited exemptions
for rural telephone companies, to competition from any entity (including, for
example, long distance carriers, such as AT&T, cable television companies and
utilities).  Because the legislation opens the Company's markets to additional
competition, particularly from the RBOCs, the Company may be subject to
additional competition.  Moreover, as a result of and to implement the
legislation, certain federal and other governmental regulations will be adopted,
amended or modified, and any such adoption, amendment or modification could have
a material adverse effect on the Company's business, results of operations and
financial condition.

     In the U.S., the FCC and relevant PSCs have the authority to regulate
interstate and intrastate rates, respectively, ownership of transmission
facilities, and the terms and conditions under which the Company's services are
provided.  Federal and state regulations and regulatory trends have had, and in
the future are likely to have, both positive and negative effects on the Company
and its ability to compete.  The recent trend in both Federal and state
regulation of telecommunications service providers has been in the direction of
lessened regulation.  Incumbent LECs have been subjected to new regulations
designed to encourage competition in the provision of local exchange services,
but incumbent LECs are also being allowed increased freedom to enter new markets
and increased pricing flexibility.  As a consequence, both AT&T and RBOCs will
have more freedom to maneuver when competing with smaller interexchange
carriers.  In general, neither the FCC nor the relevant state PSCs currently
regulate the Company's long distance rates or profit levels, but either or both
may do so in the future.  In addition, the commitments made by the U.S.
government in the WTO negotiations will allow foreign-affiliated carriers
theretofore prohibited from providing service in the U.S. market to compete with
the Company in the U.S. market.  There can be no assurance that changes in
current or future Federal or state regulations or future judicial changes would
not have a material adverse effect on the Company's business, results of
operations and financial condition.

     In order to provide their services, interexchange carriers, including the
Company, must generally purchase "access" from local exchange carriers to
originate calls from and terminate calls in the local exchange telephone
networks.  Access charges presently represent a significant portion of the
Company's network costs in all areas in which it operates.  In the U.S., the FCC
regulates interstate access and the states regulate intrastate access.  Pursuant
to the 1996 Act, on May 16, 1997, the FCC issued an order to implement certain
reforms to its access charge rules (the "Access Charge Reform Order").  The
Access Charge Reform Order will require incumbent LECs to substantially decrease
over time the prices they charge for switched access, and change how access
charges are calculated.  These changes are intended to reduce access charges
paid by interexchange carriers to LECs and shift certain usage-based charges to
<PAGE>
 
                                      -27-

flat-rated, monthly per-line charges.  To the extent that these rules begin to
reduce charges to reflect the forward-looking cost of providing access, the
Company's competitive advantage in providing customers with access services
might decrease.  In addition, the FCC has determined that it will give incumbent
LECs pricing flexibility with respect to access charges.  To the extent such
pricing flexibility is granted before substantial facilities-based competition
develops, such flexibility could be misused to the detriment of new entrants,
including the Company.  Until the FCC adopts and releases rules detailing the
extent and timing of such pricing flexibility, the impact of these rules on the
Company cannot be determined.  In its order, the FCC abolished the unitary rate
structure option for tandem-switched transport.  This may have an adverse effect
on smaller interexchange carriers such as the Company because it may increase
the costs of transport which smaller interexchange carriers must purchase from
LECs to reach end user customers on the local exchange market.

     On May 8, 1997, the FCC issued an order to implement the provisions of the
1996 Act relating to the preservation and advancement of universal telephone
service (the "Universal Service Order").  The Universal Service Order affirmed
the policy principles for universal telephone services set forth in the
Telecommunications Act, including quality service, affordable rates, access to
advanced services, access in rural and high-cost areas, equitable and non-
discriminatory contributions, specific and predictable support mechanisms, and
access to advanced telecommunications services for schools, health care
providers and libraries.  The Universal Service Order added "competitive
neutrality" to the 1996 Act's universal service principles by providing that
universal service support mechanisms and rules should not unfairly advantage or
disadvantage one provider over another, nor unfairly favor or disfavor one
technology over another.  The Universal Service Order also requires all
telecommunications carriers providing interstate telecommunications services,
including the Company, to contribute to universal service support.  Such
contributions will be assessed based on intrastate, interstate and international
end-user telecommunications revenues.  However, because the contribution factors
are likely to vary quarterly, the annualized impact on ACC cannot be estimated
at this time.

     Both the Universal Service and Access Charge Reform Orders are subject to
petitions seeking reconsideration by the FCC and direct appeals to U.S. Courts
of Appeals.  Until the time when any such petitions or appeals are decided,
there can be no assurance of how the Universal Service and/or Access Charge
Reform Orders will be implemented or enforced, or what effect the Orders will
have on competition within the telecommunications industry, generally, or on the
competitive position of the Company, specifically.

     The Company currently competes with the RBOCs and other local exchange
carriers such as the GTE Operating Companies ("GTOCs") in the provision of
"short haul" toll calls completed within a Local Access and Transport Area
("LATA").  Subject to a number of conditions, the 1996 Act established
conditions that would allow for the eventual elimination of many of the
restrictions which prohibited the RBOCs from providing long-haul or inter-LATA,
toll service, and thus the Company will face additional competition in this
market.  To complete long-haul and short-haul toll calls, the Company must
purchase "access" from the local exchange carriers.  The Company must generally
price its toll services at levels equal to or below the retail rates established
by the local exchange carriers for their own short-haul or long-haul toll rates.
To the extent that the local exchange carriers are able to reduce the margin
between the access costs to the Company and the retail toll prices charged by
local exchange carriers, either by increasing access costs or lowering retail
toll rates, or both, the Company will encounter adverse pricing and cost
pressures in competing against local exchange carriers in both the short-haul
and long-haul toll markets.

     Under the 1996 Act, local exchange carriers must permit resale of their
bundled local services and all incumbent LECs must permit resale of their
bundled local services and unbundled network elements.  Pricing principles for
those services were set forth in the 1996 Act, with states directed to approve
specific cost-based rates based on these principles.  At the end of 1996, the
New York State PSC ("NYSPSC") replaced temporary wholesale discounts with
permanent wholesale discounts of 19.1% for New York Telephone (business and
residential) and 17% for Frontier Corp. (business and residential).  Discounts
were made applicable to virtually all services provided to the public.

     On April 1, 1997, the NYPSC adopted permanent rates for unbundled links and
certain other unbundled network elements for New York Telephone.  The monthly
rate for unbundled links in designated areas of dense traffic 
<PAGE>
 
                                      -28-

(accounting for approximately 70% of all loops in the state) is $12.49, plus a
recurring $1.90 connection charge. The monthly rate in other areas of the state
is $19.24, plus a $1.90 recurring connection charge. Permanent unbundled link
and unbundled network element rates have not yet been established for Frontier
Corp. The permanent New York Telephone link rate is lower than the temporary
rates for New York Telephone's unbundled links; it is greater than the $10.10
rate for the comparable service New York Telephone offers to its own residential
customers, but below the rate of approximately $22 for the comparable service
New York Telephone offers to its business customers. However, in order to
utilize unbundled links, the Company must arrange for physical or virtual
collocation in New York Telephone's central offices, which adds significant
costs. As a result, the Company's marketing efforts are primarily directed
toward business customers (and certain concentrated residential customers) which
can be served through the Company's own facilities, rather than through use of
unbundled links obtained from New York Telephone or Frontier Corp.

     In Canada, the Canadian Radio-television and Telecommunications Commission
("CRTC") annually reviews the "contribution charges" (the equivalent of access
charges in the U.S.) assessed by the dominant carriers for the access lines
leased by Canadian long distance resellers, including the Company, from the
local telephone companies in Canada.  Changes in these contribution charges
could have a material adverse effect on the Company's business, results of
operations and financial condition.  On May 1, 1997, the CRTC issued several
rules intended to encourage increased competition in the telecommunications and
broadcast distribution (cable) industries.  Generally, the rules describe how
new service providers can enter the local exchange market, how and when
telephone companies can apply for broadcasting licenses, and the details of a
new methodology that will be used to regulate local telephone rates.  The rules
governing entry in the local exchange market cover issues of inter-connection,
resale, subscriber listings, number portability, rate rebalancing, local service
subsidies, rate regulation, service obligations and cable competition.  While
certain of the rules appear favorable to the Company, the rules will likely
increase competition in Canadian local exchange service through new entrants.
The Company is unable to predict the extent to which the full implementation of
the rules will have a material adverse effect on the Company's business, results
of operations or financial condition.  The Canadian long distance
telecommunications industry is the subject of ongoing regulatory change.  These
regulations and regulatory decisions have a direct and material effect on the
ability of the Company to conduct its business.  The recent trend of such
regulatory changes has been to open the market to commercial competition.  There
can be no assurance, however, that any future changes in or additions to laws,
regulations, government policy or administrative rulings will not have a
material adverse effect on the Company's business, results of operations and
financial condition.

     The telecommunications services provided by ACC U.K. are subject to and
affected by regulations introduced by the U.K. telecommunications regulatory
authority, The Office of Telecommunications ("Oftel").  Since the break up of
the U.K. telecommunications duopoly consisting of British Telecom and Mercury
Communications Ltd. (now known as "CWC") in 1991, it has been the stated goal of
Oftel to create a competitive marketplace from which detailed regulation could
eventually be withdrawn.  The regulatory regime currently presided over by Oftel
has a direct and material effect on the ability of the Company to conduct its
business.  From the middle of 1997, Oftel has imposed a new price cap on British
Telecom's retail charges which, while only applying to four out of five
residential customers and to small (but not large) business customers, may have
the effect of reducing the prices the Company can charge its customers.  In
addition, the new network charge control regime implemented in October 1997
gives British Telecom much more freedom to set its own prices (although subject
to certain charge caps and other safeguards), and as such increases the
uncertainty with regard to the Company's network costs in the U.K. market.
Although the Company is optimistic about its ability to continue to compete
effectively in the U.K. market, there can be no assurance that future changes in
regulation and government will not have a material adverse effect on the
Company's business, results of operations and financial condition.

EXPANSION OF LOCAL EXCHANGE BUSINESS

     The Company anticipates that a significant portion of its growth in its
U.S. operations in the future will come from local exchange operations and
incurred approximately $21.6 million in capital expenditures during 1997 related
to the installation of additional local exchange switches in the northeastern
United States.  The Company has only limited experience in providing local
telephone services, having commenced providing such services in 1994.  The
Company's revenues from local telephone services in the United States in 1995,
1996 and 1997 were $.6 million, $5.8 million and 
<PAGE>
 
                                      -29-

$20.4 million respectively. In order to attract local customers, the Company
must offer substantial discounts from the prices charged by local exchange
carriers and must compete with other alternative local service companies that
offer such discounts. The local service business requires significant initial
investments in capital equipment as well as significant initial promotional and
selling expenses. Larger, better capitalized local service providers, including
AT&T, among others, will be better able to sustain losses associated with
discount pricing and initial investments and expenses. Although the Company's
local service business generated operating profits in 1996 and 1997, it incurred
operating losses in 1994 and 1995 and many companies that compete with the
Company's local service business are not profitable. There can be no assurance
that the Company will continue to achieve positive cash flow or profitability in
its local telephone service business. In addition, the FCC and PSCs are
considering regulatory changes in rate structures and access charges which would
materially adversely affect the ability of small interexchange carriers, such as
the Company, to compete in the provision of local service. The Company's success
in the local exchange market also requires the negotiation and implementation of
interconnection agreements with incumbent local exchange carriers in the areas
that the Company seeks to serve, and there can be no assurance that these
agreements will be concluded in a timely manner.

INCREASING DOMESTIC AND INTERNATIONAL COMPETITION

     The long distance telecommunications industry is highly competitive and is
significantly influenced by the marketing and pricing decisions of the larger
industry participants.  The industry has relatively insignificant barriers to
entry, numerous entities competing for the same customers and high churn rates
(customer turnover), as customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors.  In each of its markets, the Company competes primarily on the
basis of price and also on the basis of customer service and its ability to
provide a variety of telecommunications services, including the ability to
provide both intra- and inter-LATA toll service.  The Company expects
competition on the basis of price and service offerings to increase.  Although
many of the Company's university customers are under multi-year contracts,
several of the Company's largest customers (primarily other long distance
carriers) are on month-to-month contracts and are particularly price sensitive.
With respect to these customers, the Company competes almost exclusively on
price.

     Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than the Company, control transmission lines and have long-standing
relationships with the Company's target customers.  These competitors include,
among others, AT&T, MCI and Sprint in the U.S.; Bell Canada, BC Telecom, Inc.,
AT&T Canada and Sprint Canada (a subsidiary of Call-Net Telecommunications Inc.)
in Canada; and British Telecom, CWC, AT&T and WorldCom in the U.K. Other U.S.
carriers also have entered and/or are also expected to enter the U.K. market.
The Company also competes with numerous other long distance providers, some of
which focus their efforts on the same business customers targeted by the Company
and selected residential customers and colleges and universities, the Company's
other target customers.  In addition, through its local telephone service
business in upstate New York and Massachusetts, the Company competes with New
York Telephone, Frontier Corp., Citizens Telephone Co., WorldCom and Time Warner
and others, including cellular and other wireless providers.  Furthermore,
corporate transactions such as the merger of Bell Atlantic Corp. and Nynex
Corp., the proposed merger of MCI and WorldCom, the joint venture between MCI
and Microsoft under which Microsoft will promote MCI's services, the joint
venture among Sprint, Deutsche Telekom AG and France Telecom called Global One,
and additional mergers, acquisitions and strategic alliances which are likely to
occur, could also increase competitive pressures upon the Company and have a
material adverse effect on the Company's business, results of operations and
financial condition.

     In addition to these competitive factors, recent and pending deregulation
in each of the Company's markets may encourage new entrants.  For example, as a
result of the 1996 Act, an RBOC is allowed to originate long distance calls
outside of its region immediately and may enter the long distance markets in
states in which it is an incumbent LEC once it has received FCC approval to do
so.  AT&T, MCI and other long distance carriers are allowed to enter the local
telephone services market, and any other entity (including cable television
companies and utilities) is allowed to enter both the local service and long
distance telecommunications markets.  In addition, the FCC has, on several
occasions since 1984, approved or required price reductions by AT&T and, in 1995
and 1996, the FCC reclassified AT&T as a "non-dominant" carrier, which
substantially reduces the regulatory constraints on AT&T.  As the Company
expands its 
<PAGE>
 
                                      -30-

geographic coverage, it will encounter increased competition. Moreover, the
Company believes that competition in non-U.S. markets is likely to increase and
become more similar to competition in the U.S. markets over time as such non-
U.S. markets continue to experience deregulatory influences. Implementation of
the WTO accord reached in February 1997 is likely to accelerate this trend in
some markets. Prices in the long distance industry have declined from time to
time in recent years and, as competition increases in Canada and the U.K.,
prices are likely to continue to decrease. For example, Bell Canada
substantially reduced its rates during the first quarter of 1994 and British
Telecom substantially reduced its rates in 1996. The Company's competitors may
reduce rates or offer incentives to existing and potential customers of the
Company. To maintain its competitive position, the Company believes that it must
be able to reduce its prices in order to meet reductions in rates, if any, by
others. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 7 of this Report and the discussion "Business 
--Competition" above in this Item 1.

RISKS OF GROWTH AND EXPANSION

     The Company plans to expand its service offerings and principal geographic
markets in the United States, Canada and the United Kingdom.  In addition, the
Company may establish a presence in deregulating Western European markets that
have high density telecommunications traffic, when the Company believes that
business and regulatory conditions warrant.  The Company has entered the German
market as a switchless reseller in anticipation of deregulation in 1998, and has
established a German subsidiary, ACC Telekommunikation GmbH.  The German
subsidiary signed an interconnect agreement with Deutsche Telekom ("DT") in
October 1997 with a view to establishing a German switch in 1998, although the
interconnect rates set by the German Regulatory Authority are subject to
retrospective change following a challenge by DT in the national courts.

     There can be no assurance that the Company will be able to add service or
expand its markets at the rate presently planned by the Company or that the
existing regulatory barriers will be reduced or eliminated.  The Company's rapid
growth has placed, and in the future may continue to place, a significant strain
on the Company's administrative, operational and financial resources and
increased demands on its systems and controls.  As the Company increases its
service offerings and expands its targeted markets, there will be additional
demands on the Company's customer support, sales and marketing and
administrative resources and network infrastructure.  There can be no assurance
that the Company's operating and financial control systems and infrastructure
will be adequate to maintain and effectively monitor future growth. The failure
to continue to upgrade the administrative, operating and financial control
systems or the emergence of unexpected expansion difficulties could materially
adversely affect the Company's business, results of operations and financial
condition.


RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

     A key component of the Company's strategy is its planned expansion in
international markets.  In the WTO accord reached in February 1997, a number of
countries agreed to accelerate or initiate liberalization of their
telecommunications markets by allowing increased competition and foreign
ownership of telecommunications providers and by adopting measures to ensure
reasonable nondiscriminatory interconnection, effective competitive safeguards,
and an effective independent regulation.  This agreement may, therefore, expand
the international opportunity available to the Company.  To date, the Company
has no significant experience in providing telecommunications service outside
the United States, Canada and the U.K.  There can be no assurance that the
Company will be able to obtain the capital it requires to finance its expansion
in international markets on satisfactory terms or at all.  In many international
markets, protective regulations and long-standing relationships between
potential customers of the Company and their local providers create barriers to
entry.  Where protective regulations are being eliminated, the pro-competitive
effect of this action could substantially increase the number of entities
competing with the Company.  Pursuit of international growth opportunities may
require significant investments for an extended period before returns, if any,
on such investments are realized.  The Company intends to focus in the near term
on the expansion of its service offerings, including its local telephone
business and Internet services, and expanding its geographic markets to more
locations in its existing markets, 
<PAGE>
 
                                      -31-

and when conditions warrant, to deregulating Western European markets. Such
expansion, particularly the establishment of new operations or acquisition of
existing operations in deregulating international markets, may adversely affect
cash flow and operating performance and these effects may be material, as was
the case with the Company's U.K. operations in 1994 and 1995. In addition, there
can be no assurance that the Company will be able to obtain the permits and
operating licenses required for it to operate, to hire and train employees or to
market, sell and deliver high quality services in these international markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent to doing business on an
international level, such as unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political risks, fluctuations in currency exchange rates,
foreign exchange controls which restrict or prohibit repatriation of funds,
technology export and import restrictions or prohibitions, delays from customs
brokers or government agencies, seasonal reductions in business activity during
the summer months in Europe and certain other parts of the world and potentially
adverse tax consequences resulting from operating in multiple jurisdictions with
different tax laws, which could materially adversely impact the success of the
Company's international operations. In many countries, the Company may need to
enter into a joint venture or other strategic relationship with one or more
third parties in order to successfully conduct its operations. As its revenues
from its Canadian and U.K. operations increase, an increasing portion of the
Company's revenues and expenses will be denominated in currencies other than
U.S. dollars, and changes in exchange rates may have a greater effect on the
Company's results of operations. There can be no assurance that such factors
will not have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, results of operations and financial
condition. In addition, there can be no assurance that laws or administrative
practices relating to taxation, foreign exchange or other matters of countries
within which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

     As part of its business strategy, the Company expects to seek to develop
strategic alliances both domestically and internationally and to acquire assets
and businesses or make investments in companies that are complementary to its
current operations.  The Company has no present commitments or agreements with
respect to any such strategic alliance, investment or acquisition.  Any such
future strategic alliances, investments or acquisitions would be accompanied by
the risks commonly encountered in strategic alliances with or acquisitions of or
investments in companies.  Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the companies, the
potential disruption of the Company's ongoing business, the inability of
management to maximize the financial and strategic position of the Company by
the successful incorporation of licensed or acquired technology and rights into
the Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management.  In addition, the Company has
experienced higher attrition rates with respect to customers obtained through
acquisitions, and may continue to experience higher attrition rates with respect
to any customers resulting from future acquisitions.  Moreover, to the extent
that any such acquisition, investment or alliance involved a business located
outside the United States, the transaction would involve the risks associated
with international expansion discussed above under "Risks Associated with
International Expansion."  There can be no assurance that the Company would be
successful in overcoming these risks or any other problems encountered with such
strategic alliances, investments or acquisitions.

     In addition, if the Company were to proceed with one or more significant
strategic alliances, acquisitions or investments in which the consideration
consists of cash, a substantial portion of the Company's available cash could be
used to consummate the strategic alliances, acquisitions or investments.  If the
Company were to consummate one or more significant strategic alliances,
acquisitions or investments in which the consideration consists of stock,
shareholders of the Company could suffer a significant dilution of their
interests in the Company.  Many of the businesses that might become attractive
acquisition candidates for the Company may have significant goodwill and
intangible assets, and acquisitions of these businesses, if accounted for as a
purchase, would typically result in substantial amortization charges to the
Company.  The financial impact of acquisitions, investments and strategic
alliances could have a material adverse effect on the Company's business,
financial condition and results of operations 
<PAGE>
 
                                      -32-

and could cause substantial fluctuations in the Company's quarterly and yearly
operating results. See the discussion "Business --Acquisitions, Investments and
Strategic Alliances" above in this Item 1.

TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT COMPETITIVENESS AND FINANCIAL RESULTS

     The telecommunications industry is characterized by rapid and significant
technological advancements and introductions of new products and services
utilizing new technologies.  There can be no assurance that the Company will
maintain competitive services or that the Company will obtain appropriate new
technologies on a timely basis or on satisfactory terms.

RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY

     The international telecommunications industry is changing rapidly due to,
among other things, deregulation, privatization of dominant telecommunications
providers, technological improvements, expansion of telecommunications
infrastructure and the globalization of the world's  economies and free trade.
There can be no assurance that one or more of these factors will not vary
unpredictably, which could have a material adverse effect on the Company.  There
can also be no assurance, even if these factors turn out as anticipated, that
the Company will be able to implement its strategy or that its strategy will be
successful in this rapidly evolving market.  There can be no assurance that the
Company will be able to compete effectively or adjust its contemplated plan of
development to meet changing market conditions.

     Much of the Company's planned growth is predicated upon the deregulation of
telecommunications markets.  There can be no assurance that such deregulation
will occur when or as anticipated, if at all, or that the Company will be able
to grow in the manner or at the rates currently contemplated.

     As a result of existing excess international transmission capacity, the
marginal cost of carrying an additional international call is often very low for
carriers that own transmission lines.  Industry observers have predicated that
these low marginal costs may result in significant pricing pressures and that,
within a few years after the end of this century, there may be little difference
in charges based on the distance a call is carried.  A number of the Company's
competitors have introduced calling plans that provide for flat rates on calls
within the U.S. and Canada, regardless of time of day or distance of the call.
If this type of pricing were to become prevalent, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.

DEPENDENCE ON KEY PERSONNEL

     The Company's success depends to a significant degree upon the continued
contributions of its management team and technical, marketing and sales
personnel.  The Company's employees may voluntarily terminate their employment
with the Company at any time.  Competition for qualified employees and personnel
in the telecommunications industry is intense and, from time to time, there are
a limited number of persons with knowledge of and experience in particular
sectors of the telecommunications industry.  The Company's success also will
depend on its ability to attract and retain qualified management, marketing,
technical and sales executives and personnel.  The process of locating such
personnel with the combination of skills and attributes required to carry out
the Company's strategies is often lengthy.  The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on the Company's results of operations,
development efforts and ability to expand.  There can be no assurance that the
Company will be successful in attracting and retaining such executives and
personnel.  Any such event could have a material adverse effect on the Company's
business, financial condition and results of operations.

RISK ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS

     The Company's financing arrangements are secured by substantially all of
the Company's assets and require the Company to maintain certain financial
ratios and restrict the payment of dividends, and the Company anticipates that
it will not pay any dividends on Class A Common Stock in the foreseeable future.
The Company's secured lenders 
<PAGE>
 
                                      -33-

would be entitled to foreclose upon those assets in the event of a default under
the financing arrangements and to be repaid from the proceeds of the liquidation
of those assets before the assets would be available for distribution to the
Company's other creditors and shareholders in the event that the Company is
liquidated. In addition, the collateral security arrangements under the
Company's existing financing arrangements may adversely affect the Company's
ability to obtain additional borrowings or other capital. The Company may need
to raise additional capital from equity or debt sources to finance its projected
growth and capital expenditures contemplated for periods after 1997. See the
Risk Factor discussion above under "Substantial Indebtedness; Need for
Additional Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" under
Item 7 of this Report.

HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DIVIDENDS

     ACC Corp. is a holding company, the principal assets of which are its
operating subsidiaries in the U.S., Canada and the U.K.  ACC U.S., ACC Canada,
ACC U.K., ACC Germany, and other operating subsidiaries of the Company are
subject to corporate law restrictions on their ability to pay dividends to ACC
Corp. There can be no assurance that ACC Corp. will be able to cause its
operating subsidiaries to declare and pay dividends or make other payments to
ACC Corp. when requested by ACC Corp. The failure to pay any such dividends or
make any such other payments could have a material adverse effect upon the
Company's business, financial condition and results of operations.

POTENTIAL VOLATILITY OF STOCK PRICE

     The market price of the Class A Common Stock has been, and may continue to
be, highly volatile.  Factors such as variations in the Company's revenue,
earnings and cash flow, the difference between the Company's actual results and
the results expected by investors and analysts, "buy," "hold" and "sell" ratings
by securities analysts and announcements of new service offerings, marketing
plans or price reductions by the Company or its competitors could cause the
market price of the Class A Common Stock to fluctuate substantially.  In
addition, in view of the proposed TCG Merger and TCG/AT&T Merger, the market
price of ACC Common Stock may be affected by changes in the stock prices of TCG
and AT&T.  In addition, the stock markets have also recently experienced
significant price and volume fluctuations that particularly have affected
telecommunications companies and resulted in changes in the market prices of the
stocks of many companies that have not been directly related to the operating
performance of those companies.  Such market fluctuations may materially
adversely affect the market price of the Class A Common Stock.

RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS

     In the normal course of business, the Company uses various financial
instruments, including derivative financial instruments, to hedge its foreign
exchange and interest rate risks.  The Company does not use derivative financial
instruments for speculative purposes.  By their nature, all such instruments
involve risk, including the risk of nonperformance by counterparties, and the
Company's maximum potential loss may exceed the amount recognized on the
Company's balance sheet.  Accordingly, losses relating to derivative financial
instruments could  have a material adverse effect upon the Company's business,
financial condition and results of operations.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" under Item 7 of this Report.

ANTI-TAKEOVER PROVISIONS

     ACC's Board of Directors has the authority to issue up to 1,990,000 shares
of Preferred Stock and 25,000,000 shares of Class B Common Stock, and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the shareholders.  The rights of the holders of
any ACC Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock or Class B Common Stock that may be
issued in the future.  While the Company has no present intention to issue any
additional shares of Preferred Stock or Class B Common Stock, any such issuance
or the perception that such issuances may occur could 
<PAGE>
 
                                      -34-

have the effect of making it more difficult for a third party to acquire control
of the Company. The issuance of Preferred Stock or Class B Common Stock could
also decrease the amount of earnings and assets available for distribution to
holders of ACC Common Stock or could adversely affect the rights and powers,
including voting rights, of holders of ACC Common Stock. In addition, the
Company is and, subject to certain conditions, will continue to be, subject to
the anti-takeover provisions of the DGCL, which could have the effect of
delaying or preventing a change of control of the Company. Furthermore, upon a
change of control, the Company's indebtedness under its credit facility is
required to be repaid and the salary continuation and employment agreements with
executive officers and directors of the Company require certain payments to be
made by the Company and provide for vesting of stock options and stock incentive
rights. In addition, ACC has adopted a rights plan ("ACC Shareholder Rights
Plan"), which will cause substantial dilution to a person or group that attempts
to acquire ACC on terms not approved by the ACC Board of Directors. All of these
provisions and the ACC Shareholder Rights Plan could have the effect of delaying
or preventing changes in control or management of the Company. The TCG Merger
Agreement also contains provisions which restrict the ability of ACC to solicit
or participate in discussions concerning acquisition proposals with respect to
ACC and require ACC to pay to TCG a termination fee and expense reimbursements
under certain circumstances. These provisions could discourage or increase the
cost of an acquisition proposal with respect to ACC from a person other than
TCG.

THE YEAR 2000

     The Year 2000 problem arises from the fact that due to early limitations on
memory and disk storage many computer programs indicate the year by only two
digits, rather than four.  This limitation can cause programs (both system and
application) that perform arithmetic operations, comparisons, or sorting of data
fields to yield incorrect results when working outside the year range of 1990 -
1999.  The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance.  The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations.  ACC is working closely with its vendors to effectuate their Year
2000 correction plans on a timely basis.  There can be no assurance that such
procedures will be successfully implemented within the required time frames or
that additional procedures will not be necessary.  A failure of ACC's or of its
significant vendors' computer systems could have a material adverse effect on
ACC's business and financial position and results of operation.

ITEM 2.        PROPERTIES.

     ACC's principal executive offices are located at 400 West Avenue,
Rochester, New York in corporate office space leased through June 2004. It also
leases office space for its Canadian headquarters in Toronto, Canada, as well as
office space at various other locations. For additional information regarding
these leases, see Notes 7 and 9 to ACC's Consolidated Financial Statements
included herein.

     ACC U.K.'s headquarters are located at Adelaide House in Chiswick, London.
ACC U.K. entered into an Agreement for Lease for such location in October 1997.
The term is for approximately six years through March 2004. The lease for the
current headquarters will also continue until September 1998.

     ACC has sixteen switching centers worldwide. ACC's switching equipment for
the Rochester call origination area is located at its headquarters at 400 West
Avenue, Rochester, New York with additional switching equipment located in the
U.S. in Albany, Buffalo, New York City and Syracuse, New York and in Boston and
Springfield, Massachusetts; in Canada in Toronto, Ontario, Montreal, Quebec, and
Vancouver, British Columbia; and in London, Bristol and Manchester, England, and
in Dusseldorf, Germany all of which sites are leased. Branch sales offices are
leased by ACC at various locations in the northeastern U.S., Canada and the U.K.
ACC also leases equipment and space located at various sites in its service
areas.

     ACC's financing arrangements are secured by substantially all of ACC's
assets. ACC's secured lenders would be entitled to foreclose upon those assets
and to be repaid from the proceeds of the liquidation of those assets in the
event of a default under ACC's financing arrangements.
<PAGE>
 
                                      -35-

ITEM 3.        LEGAL PROCEEDINGS.

     There were no material legal proceedings pending at December 31, 1997
involving the Company.

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

     Not  applicable.

ITEM 4-A. EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following sets forth information concerning the executive officers of
the Company and its principal operating subsidiaries as of March 1, 1998:

<TABLE>
<CAPTION>
        Name           Age                             Position(s)
        ----           ---                             -----------         
<S>                    <C>  <C>
Christopher Bantoft     50  President of European Operations
Michael R. Daley        36  Executive Vice President and Chief Financial Officer
Steve M. Dubnik         35  President and Chief Operating Officer of North American Operations
Arunas A. Chesonis      35  President and Director
Mae H. Squier-Dow       36  President of ACC TeleCom
Kevin S. Dickens        34  President and Chief Executive Officer of ACC TelEnterprises Ltd.
Frank C. Szabo          45  Vice President and Controller
John J. Zimmer          39  Vice President and Treasurer
</TABLE>

     Christopher Bantoft was elected President of European Operations of the
Company in November 1996, and has served as Managing Director of ACC Long
Distance UK Ltd. since February 1994.  From 1986 through 1993, he served as
Sales and Marketing Director, Deputy Managing Director, and most recently as
Managing Director of Alcatel Business Systems Ltd., the U.K. affiliate of
Alcatel, N.V.  Since December 1997, following the death of David K. Laniak, he
has also jointly performed the functions of Chief Executive Officer of the
Company.

     Michael R. Daley was elected the Company's Executive Vice President and
Chief Financial Officer in February 1994.  He previously served as the Company's
Treasurer from March 1991 through February 1997, Vice President-Finance from
August 1990 through February 1994, as Treasurer and Controller from August 1990
through March 1991, as Controller from January 1989 through August 1990, and
various other positions with the Company from July 1985 through January 1989.
Mr. Daley has served as a Director of ACC TelEnterprises Ltd. from October 1994
through January 1997.  Since December 1997, following the death of David K.
Laniak, he has also jointly performed the functions of Chief Executive Officer
of the Company.

     Steve M. Dubnik was elected President and Chief Operating Officer of North
American Operations of the Company in November 1996, and has served as the
Chairman of the Board of Directors of ACC TelEnterprises Ltd. since July 1994.
Previously, he served from 1992 through June 1994 as President, Mid-Atlantic
Region, of RCI Long Distance.  For more than five years prior thereto, he served
in progressively senior positions with Rochester Telephone Corporation (now
Frontier Corp.) including assignments in engineering, operations, information
technology and sales.  Since December 1997, following the death of David K.
Laniak, he has also jointly performed the functions of Chief Executive Officer
of the Company.

     Arunas A. Chesonis was elected President of the Company in April 1994.  He
previously served as President of ACC Long Distance Corp. from January 1989
through April 1994.  From August 1990 through March 1991, he also served as
President of ACC TelEnterprises Ltd., and from May 1987 through January 1989,
Mr. Chesonis served as Senior Vice President of Operations for ACC Long Distance
Corp.  Mr. Chesonis was elected a Director of the Company in October 1994.
<PAGE>
 
                                      -36-

     Mae H. Squier-Dow was elected President of ACC Telecom in June 1996, and
served as Commercial Director of ACC Long Distance U.K. Ltd. from April 1995 to
June 1996.  She previously held a number of positions at ACC Long Distance U.K.
Ltd. from October 1993 to April 1995, including Director of Customer Relations
and Marketing, Vice President of International Planning and Operations Director.
She previously served as Vice President of Customer Relations at ACC Long
Distance Corp. from March 1992 to October 1993 and as its Director of Customer
Relations from January 1991 to March 1992.

     Kevin S. Dickens was elected President and Chief Executive Officer of ACC
TelEnterprises Ltd. in April 1997.  Prior to joining the Company, Mr. Dickens
spent eight years with Frontier Corp., where he most recently served as Vice
President, Network Planning and Optimization.

     Frank C. Szabo, a certified public accountant, was elected the Company's
Vice President and Controller in February 1997.  Prior to joining the Company,
Mr. Szabo was the Vice President and Controller of First Federal Savings and
Loan, Rochester, New York, for more than 10 years.

     John J. Zimmer, a certified public accountant, was elected the Company's
Treasurer in February 1997 and has served as a Vice President since September
1994.  He previously served as the Company's Controller from March 1991 through
September 1994.  Prior to March 1991, he served as a staff accountant and then
as a manager of accounting with Arthur Andersen LLP.


                                    PART II

Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

     The Company's Class A Common Stock is quoted on The Nasdaq Stock Market's
National Market System under the symbol "ACCC."  The following table sets forth,
for the periods indicated, the high and low sale prices of the Class A Common
Stock, as reported by The Nasdaq Stock Market, and the cash dividends declared
per share of Class A Common Stock.  The prices do not include retail mark ups,
mark downs or commissions.  Information presented below has been adjusted to
reflect a three-for-two stock split that was distributed on August 8, 1996.

                                               
                                                 Cash    
                          Common Stock Price   Dividends 
                         --------------------  Declared   
                           High        Low     Per Share
                         ---------  ---------  ---------

1996:    First Quarter   $20 11/64  $14 53/64     ---   
         Second Quarter   32 27/64   18 37/64     ---   
         Third Quarter      54 3/4     29 1/2     ---   
         Fourth Quarter     47 3/4     24 3/4     ---   
                                                        
1997:    First Quarter     36  1/4    20  1/2     ---   
         Second Quarter     31 5/8    14  1/4     ---   
         Third Quarter          37    28  1/2     ---   
         Fourth Quarter     52 7/8         25     ---    


     On March 18, 1998, the closing price for the Company's Class A Common Stock
in trading on The Nasdaq Stock Market was $52 7/16 per share, as published in
The Wall Street Journal.  As of March 18, 1998, the Company had approximately
3,800 holders of record of its Class A Common Stock.
<PAGE>
 
                                      -37-

     The Company ceased paying quarterly cash dividends on its Class A Common
Stock in 1995 to use its cash to invest in the growth of its business.  The
Company anticipates that future earnings, if any, generated from operations will
be retained by the Company to develop and expand its business.  Any future
determination with respect to the payment of dividends on the Class A Common
Stock will be at the discretion of the Board of Directors and will depend upon,
among other things, the Company's operating results, financial condition and
capital requirements, the terms of then-existing indebtedness and Preferred
Stock, general business conditions, Delaware corporate law limitations and such
other factors as the Board of Directors deems relevant.  The terms of the
Company's Credit Facility prohibit the payment of dividends without the lender's
consent. The Company's holding company structure may adversely affect the
Company's ability to obtain payments when needed from ACC Corp.'s operating
subsidiaries.  See the Risk Factor discussion of "Holding Company Structure;
Reliance on Subsidiaries for Dividends" in Item 1 of this Report and Note 3 of
the Notes to the Company's Consolidated Financial Statements included elsewhere
in this Report.

ITEM 6.        SELECTED FINANCIAL DATA.

     The following selected historical consolidated financial data for each of
the years presented have been derived from ACC's audited consolidated financial
statements. The consolidated financial statements of ACC as of December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
together with the notes thereto and related report of Arthur Andersen LLP,
independent public accountants, are included elsewhere herein. The following
data should be read in conjunction with, and is qualified by, the consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of ACC," which are
included elsewhere herein.
<PAGE>
 
                                     -38-



<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                                        1993         1994        1995            1996          1997(4)
                                                    ------------   ----------  -----------    -----------   ----------- 
 
Consolidated Statement of Operations Data:
<S>                                                 <C>           <C>           <C>           <C>           <C>
Revenue:
 Toll revenue.....................................  $   100,646   $   118,331     $ 175,269   $   282,497   $   327,490
 Local exchange and other.........................        5,300         8,113        13,597        26,270        45,123
                                                    -----------   -----------     ---------   -----------   -----------
    Total revenue.................................      105,946       126,444       188,866       308,767       372,613
Network costs.....................................       70,286        79,438       114,841       193,599       218,361
                                                    -----------   -----------     ---------   -----------   -----------
Gross Profit......................................       35,660        47,006        74,025       115,168       154,252
Other operating expenses:
 Depreciation and amortization....................        5,832         8,932        11,614        16,433        23,712
 Selling, general and administrative..............       28,807        44,228        60,865        84,511       111,027
 Management restructuring.........................            -             _         1,328             _             -
 Equal access charges.............................            _         2,160             _             _             -
 Assets write-down................................       12,807             _             _             _             -
                                                    -----------   -----------     ---------   -----------   -----------
    Total other operating expenses................       47,446        55,320        73,807       100,944       134,739
                                                    -----------   -----------     ---------   -----------   -----------
Income (loss) from operations(1)..................      (11,786)       (8,314)          218        14,224        19,513
Other income (expense):
 Interest income..................................          205           124           198         1,151           215
 Interest expense.................................         (420)       (2,023)       (5,131)       (5,025)       (3,729)
 Merger costs.....................................            _          (200)            _             _        (4,970)
 Gain on sale of subsidiary stock.................        9,344             _             _             _             - 
 Foreign exchange gain (loss).....................       (1,094)          169          (110)          509          (162)
                                                    -----------   -----------     ---------   -----------   -----------
    Total other income (expense)..................        8,035        (1,930)       (5,043)       (3,365)       (8,646)
                                                    -----------   -----------     ---------   -----------   -----------
Income (loss) from continuing operations
 before provision for (benefit from)
 income taxes and minority interest...............       (3,751)      (10,244)       (4,825)       10,859        10,867
Provision for (benefit from) income taxes.........       (3,743)        3,456           396         2,185           476
Minority interest in loss (earnings) of
 consolidated subsidiary..........................        1,661         2,371          (133)         (909)            -
                                                    -----------   -----------     ---------   -----------   -----------
Income (loss) from continuing operations..........        1,653       (11,329)       (5,354)        7,765        10,391

Loss from discontinued operations (net
 of income tax benefit of $667 in 1993)
                                                         (1,309)            _            _            _               -
Gain on disposal of discontinued operations
 (net of income tax provision of $8,350 in 1993)..       11,531             _            _            _               - 
                                                    -----------   -----------     ---------   -----------   -----------
Net income (loss).................................  $    11,875       (11,329)       (5,354)  $     7,765   $    10,391
Less Series A Preferred Stock dividend............            _             _          (401)         (972)            -  
Less Series A Preferred Stock accretion...........            _             _          (139)       (1,509)            -
                                                    -----------   -----------     ---------   -----------   -----------
Income (loss) applicable to Common Stock..........  $    11,875   $   (11,329)  $    (5,894)  $     5,284   $    10,391
                                                    ===========   ===========     =========   ===========   ===========
Net income (loss) per share - basic: (2)
  continuing operations...........................  $      0.16        $(1.09)       $(0.52)        $0.37   $      0.62
  discontinued operations.........................        (0.13)           _            _            _                -
  Gain on disposal of discontinued operations.....         1.13            _            _            _                -
                                                    -----------   -----------     ---------   -----------   -----------
  Net income (loss) per share - basic.............  $      1.16        $(1.09)       $(0.52)        $0.37   $      0.62
                                                    ===========   ===========     =========   ===========   ===========
Net income (loss) per share - diluted: (2)
  continuing operations...........................  $      0.16        $(1.09)       $(0.52)        $0.34   $      0.59
  discontinued operations.........................        (0.12)           _            _            _                -
  Gain on disposal of discontinued operations.....         1.09            _            _            _                -
                                                    -----------   -----------     ---------   -----------   -----------
  Net income (loss) per share - diluted...........  $      1.13        $(1.09)       $(0.52)        $0.34   $      0.59
                                                    ===========   ===========     =========   ===========   ===========

Weighted average number of shares outstanding:(2)
   Basic..........................................   10,206,833    10,366,778    11,358,693    14,463,728    16,839,039
                                                    ===========   ===========     =========   ===========   ===========
  Diluted.........................................   10,537,388    10,366,778    11,358,693    15,540,115    17,690,223
                                                    ===========   ===========     =========   ===========   ===========
 
</TABLE>
<PAGE>
 
                                      -39-

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31
                                                                                  ----------------------
                                                                1993       1994      1995(6)        1996         1997 (4)
                                                             ----------  --------  -----------   ----------    ----------
                                                                        
                                                                       (Dollars in thousands, except per share data)

<S>                                                          <C>         <C>       <C>          <C>           <C> 
Consolidated Balance Sheet Data(5):                
Cash and cash equivalents..................................   $  1,467   $ 1,021   $    518        $  2,035         $  3,988
Current assets.............................................     22,476    28,045     45,726          61,933           92,347
Current liabilities........................................     23,191    32,016     56,074          77,394           89,793
Net working capital (deficit)..............................       (715)   (3,971)   (10,348)        (15,461)           2,554
Property, plant and equipment, net.........................     27,077    44,081     56,691          80,452          135,726
Total assets...............................................     61,718    84,448    123,984         204,031          319,618
Short-term debt, including current maturities of   
 long- term debt...........................................      2,424     1,613      4,885           4,251            3,853
Long-term debt, excluding current maturities...............      1,795    29,914     28,050           6,007           90,221
Redeemable preferred stock.................................         --        --      9,448              --
                                                                                                                          --
Shareholders' equity.......................................     31,506    19,086     26,407         117,863          137,716
Other Financial and Operations Data:               
Net cash provided by (used in) operating           
 Activities................................................   $(11,828)  $ 1,093   $  3,967        $ 24,248         $  3,691
Class A Common Stock cash dividends                
 Declared(3)...............................................   $  4,233   $   831   $    243        $     --
                                                                                                                          --
Cash dividends declared per share of Class A       
 Common Stock(2) (3).......................................      $0.40     $0.08      $0.02        $     --
                                                                                                                          --
Book Value per common share (2)............................      $3.03     $1.84      $2.23           $7.10            $8.00
</TABLE>
                                                                                
(1) Includes impact of $2,160 of charges incurred in 1994 in connection with
    enhancement of the ACC network to prepare for equal access for its Canadian
    customers. Also includes an asset write-down of $12,807 in 1993.
(2) On June 14, 1996, the ACC Board of Directors authorized a three-for-two
    stock split in the form of a stock dividend issued on August 8, 1996 of the
    ACC Class A Common Stock to shareholders of record as of July 3, 1996. Share
    and per share amounts for all prior periods have been adjusted for the stock
    split.
(3) The ACC financing arrangements restrict the payment of dividends on the ACC
    Common Stock. ACC anticipates that it will not pay dividends in the
    forseeable future.
(4) Includes the results of operations of companies acquired by ACC during 1997:
    Transphone International Ltd. from June 1, 1997, United Telecom Ltd. from
    July 1, 1997, VISTA International Communications Inc. from August 1, 1997,
    and Telenational Communications Deutschland Limited Partnership from July 1,
    1997.
(5) Balance sheet data from discontinued operations is excluded.
(6) Includes the results of operations of Metrowide Communications from August
    1, 1995, the date of acquisition.
<PAGE>
 
                                      -40-

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

General

     The Company's revenue is comprised of toll revenue (per minute charges for
long distance services) and local service and other revenue.  Toll revenue
consists of revenue derived from ACC's long distance and operator-assisted
services.  Local service and other revenue consists of revenue derived from the
provision of local exchange services, including local dial tone, direct access
lines, Internet fees and monthly subscription fees, and data services.  Network
costs consist of expenses associated with the leasing of transmission lines,
access charges, and certain variable costs associated with the Company's
network.  The following table shows the total revenue (net of intercompany
revenue) and billable minutes of use attributable to the Company's North
American and European operations during each of 1997, 1996, and 1995:
<TABLE>
<CAPTION>
 
                                                              Year Ended December 31,
                                          ----------------------------------------------------------------
                                                  1997                  1996                  1995
                                          --------------------  --------------------  --------------------
                                            Amount    Percent     Amount    Percent     Amount    Percent
                                          ----------  --------  ----------  --------  ----------  --------
                                                                 (Amounts in 000s)
<S>                                       <C>         <C>       <C>         <C>       <C>         <C>
TOTAL REVENUE:
North America:
   United States........................  $  120,627     32.4%  $   99,461     32.2%  $   65,975     34.9%
   Canada...............................     116,638     31.3      117,168     38.0       84,421     44.7
                                          ----------    -----   ----------    -----   ----------    -----
Total North America.....................     237,265     63.7      216,629     70.2      150,396     79.6
                                          ----------    -----   ----------    -----   ----------    -----
 
Europe:
   United Kingdom.......................     132,151     35.4       92,138     29.8       38,470     20.4
   Germany..............................       3,197       .9            -        -            -        -
                                          ----------    -----   ----------    -----   ----------    ----
Total Europe............................     135,348     36.3       92,138     29.8       38,470     20.4
                                          ----------    -----   ----------    -----   ----------    -----
     Total..............................  $  372,613    100.0%  $  308,767    100.0%  $  188,866    100.0%
                                          ==========    =====   ==========    =====   ==========    =====
 
BILLABLE LONG DISTANCE MINUTES OF USE:
North America:
   United States........................     780,232     33.2%     590,341     32.8%     486,618     41.2%
   Canada...............................     798,458     33.9      681,200     37.9      522,764     44.2
                                          ----------    -----   ----------    -----   ----------    -----
Total North America.....................   1,578,690     67.1    1,271,541     70.7    1,009,382     85.4
                                          ----------    -----   ----------    -----   ----------    -----
Europe:
   United Kingdom.......................     770,151     32.7      527,905     29.3      172,281     14.6
   Germany..............................       4,343       .2            -        -            -        -
                                          ----------    -----   ----------    -----   ----------    -----
Total Europe............................     774,494     32.9      527,905     29.3      172,281     14.6
                                          ----------    -----   ----------    -----   ----------    -----
Total...................................   2,353,184    100.0%   1,799,446    100.0%   1,181,663    100.0%
                                          ==========    =====   ==========    =====   ==========    =====
</TABLE>

The following table presents certain information concerning long distance toll
revenue (net of intercompany revenue) per billable minute and network cost per
billable minute attributable to the Company's North American and European
operations during each of 1997, 1996, and 1995:
 
                                                   1997   1996   1995
                                                   -----  -----  -----
TOLL REVENUE PER BILLABLE LONG DISTANCE MINUTE:
North America:
   United States.................................  $.122  $.150  $.126
   Canada........................................   .122   .150   .146
Total North America..............................   .122   .150   .137
Europe:
<PAGE>
 
                                      -41-

   United Kingdom................................   .171   .174   .220
   Germany.......................................   .736      -      -
Total Europe.....................................   .174   .174   .220
 
NETWORK COST PER BILLABLE MINUTE:
Total North America..............................  $.084  $.105  $.089
Total Europe.....................................   .110   .114   .149

     The Company believes that its historic revenue growth as well as its
historic network costs and results of operations for its Canadian and UK
operations generally reflect the state of development of the Company's
operations, the Company's customer mix, and the competitive and regulatory
environment in those markets. The Company entered the US, Canadian, and UK
telecommunications markets in 1982, 1985, and 1993, respectively. In 1997, the
Company established a subsidiary in Germany, and commenced offering long
distance service as a switchless reseller during the third quarter of 1997.  For
US operations, 1996 revenue and network cost per minute include the effect of
$9.0 million of non-recurring, higher rate per minute and lower margin
international carrier sales in the second quarter.  The Company believes that
toll revenue per billable minute and network cost per billable minute may be
lower in future periods, and heavily influenced by competitive pressures and
regulatory actions.

     Deregulatory influences have affected the telecommunications industry in
the US since 1984, and the US market has experienced considerable competition
for a number of years. The competitive influences on the pricing of ACC US's
services and network costs have been stabilizing during the past few years.
This may change in the future as a result of the 1996 Amendment to the US
Communications Act (the "Act") that further opened the market to competition,
particularly from the regional operating companies ("BOCs").  The Company has
actively pursued growth opportunities in the US market.  During the third
quarter of 1997, the Company acquired VISTA International Communications Inc.,
("VISTA").  VISTA, headquartered in Mount Arlington, New Jersey, provides long
distance and other services to small and medium-sized commercial customers in
the Northeastern US with concentrations primarily in New Jersey and
Pennsylvania.  The VISTA acquisition represents expansion into a contiguous
geographic area, with a similar targeted customer segment which is viewed as
consistent with the Company's expansion strategy.

     The deregulatory trend in Canada, which commenced in 1989, has increased
competition.  ACC Canada experienced significant downward pressure on the
pricing of its services during 1994 and 1995.  Although revenue per minute
increased from 1995 to 1996 due to changes in customer and product mix, revenue
per minute fell during 1997, and the Company expects downward pressure to
continue.  The impact of this pricing pressure on revenues of ACC Canada is
being offset by an increase in the Canadian commercial and student billable
minutes of usage as a percentage of total Canadian billable minutes of usage,
and introduction of new products and services including 800 service, local
exchange resale, Internet services, and, since February 1997, paging services.

     The Company believes that, because deregulatory influences have only fairly
recently begun to impact the UK telecommunications industry, the Company will
continue to experience a significant increase in revenue from that market, but
the rate of growth is expected to decline.  The foregoing belief is based upon
expectations of actions that may be taken by UK regulatory authorities and the
Company's competitors; if such third parties do not act as expected, the
Company's opportunities for revenue growth experience increased revenues, the
Company believes it should be able to enhance its economies of scale and scope
in the use of the fixed cost elements of its network. Nevertheless, the
deregulatory trend in that market is expected to result in competitive pricing
pressure on the Company's UK operations, which could adversely affect revenues
and margins. Since the UK market for transmission facilities is dominated by
British Telecom and Cable & Wireless, the downward pressure on prices for
services offered by ACC UK may not be accompanied by a corresponding reduction
in ACC UK's network costs in the short term and, consequently, could adversely
affect the Company's business, results of operations and financial condition,
particularly in the event revenue derived from the Company's UK operations
accounts for an increasing percentage of the Company's total revenue. Moreover,
the Company's UK operations are highly dependent upon the transmission lines
leased from British Telecom. As each of the telecommunications markets in which
it operates continues to mature, the rate of growth in its revenue and customer
base in each such market is likely to decrease over
<PAGE>
 
                                      -42-

time. The Company has actively pursued growth opportunities and alternate
network solutions in the UK market. During the second quarter of 1997, the
Company acquired Transphone International Ltd. ("Transphone"). Transphone
provides domestic and international long distance service as a reseller, and is
based in London, UK In acquiring Transphone, the Company obtained what it
believes is a strong base of commercial customers in a desirable geographic
area. During the third quarter of 1997, the Company also acquired United Telecom
Ltd. ("UT"). UT provides domestic and international long distance services
through a pre-paid calling card platform in retail telephone shops. UT is based
in London, UK In acquiring UT, the Company obtained what it believes is a new
delivery channel in a growing niche market. The acquisition is also expected to
create network cost efficiencies, as UT's customers have peak calling activity
at night and on weekends. This calling pattern will enable the Company to
facilitate routing of off-peak traffic over the Company's switch based network,
thereby adding to economies of scale. The Transphone and UT acquisitions are
expected to be accretive to earnings commencing in 1998. During the first
quarter of 1998, the Company anticipates putting into operations its own
microwave facility, linking its three UK switching centers. This microwave
facility will provide the Company with its own domestic redundant network
alternative access to the Company's network for its customers and a lower cost
network platform. The foregoing forward looking statements are based upon
expectations with respect to customer behavior, market trends and the Company's
ability to successfully integrate and develop the businesses acquired. If such
expectations are not realized, actual results may differ materially from the
foregoing discussion.

     The German telecommunications market substantially deregulated in January
1998, as a result of the European Union ("EU") mandate to open
telecommunications markets to competition.  Most significantly, the German
market opened for interconnection in January 1998.  The Company has established
a subsidiary in Germany, and signed a resale agreement with Deutsche Telekom
("DT") on May 20, 1997.  Further, the Company received a Class 4 full voice
telephony license from the Germany Ministry of Post and Telecommunications which
became effective January 1, 1998.  This license is a requirement for the Company
to become a switch-based provider of telecommunications services in Germany.  In
October 1997, the Company signed a network interconnect agreement with DT, which
permits utilization of DT's network to link the Company with its customers.
With this agreement in place, the Company has installed a switch which it placed
in service in February 1998.  The Company achieved a small amount of revenue in
the fourth quarter of 1997 as a switchless reseller and anticipates potentially
more substantial revenue growth in 1998 as a switch-based reseller.  The
foregoing forward looking statement is based upon expectations with respect to
regulatory actions and cooperation from DT which the Company is unable to
control. If such expectations are not realized, the expected revenue growth from
the German market may not materialize. In addition to the core growth expected
from switch-based resale, the Company has actively pursued other growth
opportunities in Germany. During the third quarter of 1997, the Company acquired
Telenational Communications Deutschland Limited Partnership ("TNC"), a privately
held telecommunications service provider headquartered in Hamburg, Germany. TNC
provides prepaid calling cards through affinity programs with large commercial
customers including Lufthansa, Citibank and Diners Club. The TNC acquisition
provides the Company an existing customer base, proven management team and
facilitates the start-up efforts in Germany.

     Since the commencement of the Company's operations, the Company has
undertaken a program of developing and expanding its service offerings,
geographic focus, and network.  In connection with this development and
expansion, the Company has made significant investments in telecommunications
circuits, switches, equipment, and software.  These investments generally are
made significantly in advance of anticipated customer growth and resulting
revenue.  The Company also has increased its sales and marketing, customer
support, network operations, and field services commitments in anticipation of
the expansion of its customer base and targeted geographic markets.  The Company
expects to continue to expand the breadth and scale of its network and related
sales and marketing, customer support, and operating activities.  These
expansion efforts are likely to cause the Company to incur significant increases
in expenses from time to time, in anticipation of potential future growth in the
Company's customer base and targeted geographic markets.

     In 1997, the Company announced the creation of two continental operating
divisions in North America and Europe.  In conjunction with this new structure,
the Company plans to further expand its European operations as business activity
more fully develops in the deregulating German market and by entering other
telecommunications 
<PAGE>
 
                                      -43-

marketplaces when regulatory and market conditions warrant. While the Company
has had a successful history of entering into newly deregulated markets, there
can be no assurances that the same successes will be experienced in the future.

     The Company has also expanded operations in the US local exchange business
and anticipates that a significant portion of its future growth will come from
this business.  The local exchange business is highly competitive and includes
several larger, better capitalized local service providers, including AT&T,
among others, who can sustain losses associated with discount pricing, and the
high initial investment and expenses typically incurred to attract local
customers.  The Company's US local service commenced operations in 1994 and
generated an operating profit for 1997 and 1996.  However, there can be no
assurances that the Company will continue to achieve positive operating cash
flow or profitability in this business in the future.

     The Company's operating results have fluctuated in the past and they may
continue to fluctuate significantly in the future as a result of a variety of
factors, some of which are beyond the Company's control.  The Company expects to
focus in the near term on building and increasing its customer base, service
offerings, and targeted geographic markets, which will require it to increase
significantly its expenses for marketing and development of its network and new
services, and may adversely impact operating results from time to time.  The
Company's sales to other long distance carriers have been increasing due to the
Company's marketing efforts to promote its lower international network costs.
Revenue from other resellers accounted for approximately 18% and 27% of the
revenues of ACC North America and ACC Europe, respectively, in 1997.  Included
in 1996 was $9 million of US  non recurring carrier revenue, or 3% of
consolidated revenue.  Additionally, in 1997 the Company realized significantly
reduced revenue from two Canadian carriers of $10.8 million compared to 1996.
With respect to these customers, the Company competes almost exclusively on
price, does not have long term contracts, and generates lower gross margins as a
percentage of revenue. The Company's primary interest in carrier revenue is to
utilize excess capacity on its network.  Carrier revenue in 1997 was 21% of
consolidated total revenue compared to 24% in 1996.  Management believes that
carrier revenue will continue to average 20% to 25% of consolidated total
revenue as the core businesses continue to grow.  The foregoing forward-looking
statement is based upon expectations with respect to growth in the Company's
customer base and total revenues.  If such expectations are not realized, the
Company's actual results may differ materially from the foregoing discussion.

RESULTS OF OPERATIONS

     The following table presents, for the three years ended December 31, 1997,
certain statement of operations data expressed as a percentage of total revenue:
 
                                                 Year Ended December 31,
                                                 -----------------------
 
                                                 1997(1)   1996    1995(2)
                                                 -------   -----   -------
Revenue:
   Toll revenue................................   87.9%     91.5%   92.8%
   Local service and other.....................   12.1       8.5     7.2
                                                 -------   -----   -------
       Total revenue...........................  100.0     100.0   100.0
Network costs..................................   58.6      62.7    60.8
                                                 -------   -----   -------
Gross profit...................................   41.4      37.3    39.2
Other operating expenses:
   Depreciation and amortization...............    6.4       5.3     6.1
   Selling expenses............................   13.7      11.0    11.4
   General and administrative..................   16.1      16.4    20.8
   Management restructuring....................    ---       ---     0.7
                                                 -------   -----   -------
       Total other operating expenses..........   36.2      32.7    39.0
                                                 -------   -----   -------
Income from operations.........................    5.2       4.6     0.2
Total other expense............................   (2.3)     (1.1)   (2.7)
Loss from operations before provision
<PAGE>
 
                                      -44-

   for (benefit from) income taxes and
   minority interest...........................    2.9       3.5    (2.5)
Provision for income taxes.....................    0.1       0.7     0.2
Minority interest in earnings of consolidated
   subsidiary..................................    ---      (0.3)   (0.1)
                                                 -----     -----   -----
Income (loss) from operations..................    2.8%      2.5%  (2.8)%
                                                 =====     =====   =====

(1) Includes the results of operations of companies acquired during 1997:
    Transphone International Ltd. from June 1, 1997, United Telecom Ltd. from
    July 1, 1997,  VISTA  International from August 1, 1997 and Telenational
    Communications Deutschland  Limited Partnership from July 1, 1997.

(2) Includes the results of operations of Metrowide Communications from August
    1, 1995, the date of acquisition.

1997 Compared with 1996

   Revenue.  Total revenue for 1997 increased $63.8 million, or 21% to $372.6
million from $308.8 million in 1996.  Long distance toll revenue increased $45.0
million, or 16%, to $327.5 million from $282.5 million in 1996.  The growth in
long distance toll revenue was fueled by a 31% increase in billable minutes.
Revenue from wholesale carriers in 1997 increased to $78.9 million (21% of total
revenue) from $73.4 million (24% of total revenue) in 1996.  Significantly
reduced revenue from two Canadian carriers were realized in 1997, accounting for
a $10.8 million reduction in carrier revenue from the same period in 1996.
Additionally, the 1996 period reflects $9 million of US non-recurring carrier
revenue.  Excluding total wholesale carrier revenue, long distance toll revenue
for 1997 increased 19% from 1996.  Long distance toll revenue per billable
minute for the current period decreased 11%, from $.157 to $.139, largely a
result of competitive pricing pressures and change in customer mix.  The growth
in other revenue is largely attributable to growth in market share in the
competitive local exchange business in the US and a full year of revenues from
Internet Canada compared to seven months in 1996.

   Total revenue (unaffiliated) in North America for 1997 increased 10% from
1996.  Long distance toll revenue (unaffiliated) increased 1% from 1996.
However, 1996 included $9 million of non-recurring carrier revenue, and 1997
reflects reduced revenue from two carriers of $10.8 million.  Excluding total
carrier revenue, long distance toll revenue in 1997 increased 11% from 1996, and
is attributable to core growth in minutes and customer accounts and from
acquisitions.  Long distance toll revenue per minute for 1997 decreased 19% from
$.150 to $.122, largely a result of competitive pricing pressures in both the US
and Canada.  Retail price pressures in each market are expected to continue
which may impact the Company's margin.  Local service and other revenue for 1997
increased $18.9 million or 72% from 1996, a result of growth in US local
exchange revenue and increased Internet related revenue in Canada.  The Company
continues to invest in the local exchange business, having installed switches
during 1997 in Buffalo, Albany, New York City, Boston and Springfield
Massachusetts.  Continued expansion and growth in non-toll revenue, including
local exchange service, Internet and other services is expected to become a
larger component of total revenue in future periods.  As a percent of total
revenue, non-toll revenue for 1997 was 12% compared to 8% for 1996.

   Total revenue (unaffiliated) in Europe (substantially all long distance toll
revenue) for 1997 increased 47% from 1996.  Excluding carrier revenue, long
distance toll revenue for 1997 increased 33% from 1996, and is attributable to
core growth in minutes and commercial and student customer accounts, and from
acquisitions.  Long distance toll revenue per billable minute for 1997 of $.174
remained unchanged from 1996, as the impact of higher revenue from carriers
partially offset retail price reductions implemented during the period for
international and domestic long distance rates.  The German operating unit
contributed a modest amount of revenue from the acquired TNC customer base as
well as from switchless resale activity.  Revenue per minute in Germany of
$.736 in 1997 reflects a high concentration of higher rate international
traffic.

   Network Costs.  Network costs for 1997 increased $24.8 million or 13% to
$218.4 million from $193.6 million in 1996.  As a percent of revenue, network
costs for 1997 was 59% compared to 63%  in 1996.  Network costs per billable
minute for 1997 decreased 14%, from $.108 to $.093.  The reduction in network
costs as a percent of revenue, and per 
<PAGE>
 
                                      -45-

billable minute, is largely attributable to reduced contribution charges enacted
during 1997 in Canada, a favorable shift in business/customer mix as higher
margin local exchange revenue constitute a higher percent of revenue in 1997 as
compared to 1996, declining access rates for origination and termination, and
internal network efficiencies.

   Network costs in North America for 1997 as a percent of unaffiliated revenue
decreased to 57% from 62% for 1996, and per billable minute also decreased from
$.105 to $.084.  These improvements resulted from the aforementioned reduction
in Canadian contribution charges, increased amount of higher margin local
exchange revenue in the US, and internal network efficiencies. Network costs in
Europe for 1997 as a percent of unaffiliated revenue decreased to 62% from 65%
in 1996, and per billable minute decreased from $.114 to $.110. Recent
investments in switches, a UK microwave network and IRU are expected to more
significantly lower network costs in the near term, as ownership of these
facilities will enable the Company to reduce reliance on leased lines and
increase network capacity. This forward looking statement is based on
expectations regarding customer demand and the relative cost and availability of
leased lines and alternative transmission facilities in the Company's markets,
and could be adversely impacted by competitive pricing pressures. If such
expectations are not realized, the Company's actual results may differ
materially from the foregoing discussion.

   Other Operating Expenses - Selling, General and Administrative Expenses.
Total Selling, General and Administrative expenses ("SG&A") for 1997 increased
$26.5 million, or 31%, to $111.0 million from $84.5 million in 1996.   As a
percent of revenue, SG&A increased to 30% from 27%.  This increase is largely
attributable to higher selling expenses (i.e., agents, salesperson and customer
commissions) associated with growth in local exchange revenue, added overhead
from acquired entities and infrastructure costs to support expansion in Germany.

   Other Income (Expense).  Net interest expense for 1997 decreased by $.4
million from 1996.  Merger costs in 1997 of $5.0 million were incurred in
connection with the then pending mergers with US WATS Inc., and Teleport
Communications Group Inc., and includes costs for investment advisory, legal,
accounting and other professional services.  Foreign exchange gains/losses
reflect changes in the value of amounts borrowed by the foreign subsidiaries
from ACC Corp., and ACC US, net of gains/losses on associated hedging contracts.
The Company continues to hedge substantially all intercompany loans to foreign
subsidiaries in an attempt to reduce the impact of transaction gains or losses.
The Company does not engage in speculative foreign currency transactions.  In
1997, the Company recognized losses on foreign currency transactions of $.2
million compared to gains of $.5 million in 1996.

   Provision for Income Taxes.  Provision for income taxes for 1997 of $.5
million represented an effective tax rate of 4% compared to $2.2 million or an
effective tax rate of 20% in 1996.  Income taxes are provided on all taxable
income in excess of available net operating loss carryforwards ("NOL's") at the
statutory rate applicable for each country.  The Company continues to utilize
NOL's to offset taxable income generated in Canada and the UK  The increase in
operating earnings in both of these subsidiaries, which is not subject to tax
due to utilization of NOL's, reduces the effective tax rate for the consolidated
company.  The Company anticipates that its effective tax rate will increase
significantly in the future as taxable income in each country increases.

   Minority Interest in Earnings of Consolidated Subsidiary.  Minority interest
for 1996 reflects the portion of the Company's Canadian subsidiary's income
attributable to the approximately 30% of that subsidiary's common stock that was
publicly traded in Canada.  Prior to December 31, 1996, the Company repurchased
approximately 24% of the outstanding shares, and the remaining 6% was
repurchased in January 1997.  As a result, the Canadian subsidiary is currently
100% owned, with no remaining minority interest.

   The Company's income from operations for 1997 was $19.5 million compared to
$14.2 million in 1996, and was comprised of the following:  North American
operations $13.2 million as compared to $12.0 million in 1996, and European
operations $6.3 million as compared to $2.2 million in 1996.

1996 COMPARED WITH 1995

     Revenue.  Total revenue for 1996 increased by 63% to $308.8 million from
$188.9 million in 1995, reflecting growth in both toll revenue and local service
and other revenue.  Toll revenue for 1996 increased by 61% to $282.5 million
<PAGE>
 
                                      -46-

from $175.2 million in 1995.  In the United States, toll revenue increased 45%
as a result of a 21% increase in billable minutes of use, primarily due to
increased international sales to carriers.  These international sales have a
higher rate per minute, also contributing to the revenue increase.  The 1996
results include $9.0 million in non-recurring carrier revenue.  Excluding this
non-recurring revenue, US toll revenue increased 30% over 1995. In Canada, toll
revenue increased 34%, as a result of a 30% increase in billable minutes, and an
increase in prices due to additional residential customers which typically have
a higher revenue per minute.  In the United Kingdom, toll revenue increased
142%, due to significant volume increases offset by lower prices that resulted
from entering the commercial and residential markets and from competitive
pricing pressure.  Since the end of 1994, ACC's revenues per minute on a
consolidated basis have been increasing slightly as a result of the increasing
percentage of UK revenues and the Company's successful introduction of higher
price per minute products, including international carrier revenue.  Exchange
rates did not have a material impact on the Company's consolidated revenue.

     For 1996, local service and other revenue increased by 93% to $26.3 million
from $13.6 million in 1995.  This increase was primarily due to the Metrowide
Communications acquisition as of August 1, 1995 (approximately $5.2 million),
local service revenue generated through the university program in the US
(approximately $0.4 million), and the competitive local exchange company
("CLEC") operations in upstate New York (approximately $5.6 million).  The
Company is anticipating that a significant portion of its growth in the US
operations in the future will come from CLEC operations.

     Gross Profit.  Gross profit (defined as revenue less network costs) for
1996 increased to $115.2 million from $74.0 million in 1995, primarily due to
the increases in revenue discussed above.  Expressed as a percentage of revenue,
gross profit decreased to 37% for 1996 from 39% for 1995, due to an increase in
lower margin carrier traffic in the US, offset partially by improved margins in
Canada and the UK due to network efficiencies and reductions in fixed charges
from suppliers.

     Other Operating Expenses.  Depreciation and amortization expense increased
to $16.4 million for 1996 from $11.6 million in 1995.  Expressed as a percentage
of revenue, these costs decreased to 5% in 1996 from 6% in 1995, reflecting the
increases in revenue realized during 1996.  The $4.8 million increase in
depreciation and amortization expense was primarily attributable to assets
placed in service throughout 1996.  Amortization of approximately $1.1 million
associated with the customer base and goodwill recorded in the Metrowide
Communications and Internet Canada asset acquisitions also contributed to the
increase.

     Selling expenses for 1996 increased by 58% to $34.1 million compared with
$21.6 million in 1995.  Expressed as a percentage of revenue, selling expenses
were 11% for 1996 compared to 11% for 1995.  The $12.5 million increase in
selling expenses was primarily attributable to increased marketing costs and
sales commissions associated with supporting the Company's 63% growth in revenue
for 1996, particularly in the UK.  General and administrative expenses for 1996
were $50.4 million compared with $39.2 million in 1995.  Expressed as a
percentage of revenue, general and administrative expenses were 16% for 1996,
compared to 21% in 1995.  The increase in general and administrative expenses
was primarily attributable to the Canadian ($4.3 million increase) and the UK
($4.4 million increase) subsidiaries.  In the UK, costs were incurred to develop
an infrastructure to support the sizable revenue growth experienced in 1996,
with headcount increasing 56% over previous year levels.  In Canada, headcount
increased approximately 52%, partially as a result of the acquisition of
Internet Canada, and partially to develop an infrastructure to support the
increasing product lines and services being offered.   Also included in general
and administrative expenses for 1996 was approximately $4.4 million related to
the Company's local service market sector in New York State, compared to $1.8
million in 1995.

     Other Income (Expense).  Interest expense remained fairly constant at $5.0
million for 1996 compared to $5.1 million in 1995.  The 1996 expense includes
the accrual of a $2.1 million contingent interest payment due to the lenders
under the Company's credit facility.  The 1995 amount includes expense
associated with the subordinated debt which was converted to Series A Preferred
Stock in September 1995, as well as expense associated with line of credit
borrowings to finance working capital and capital expenditure needs.  Interest
income increased to $1.2 million in 1996 from $0.2 million in 1995, due to the
invested proceeds from the ACC Class A Common Stock offering in May 1996.
<PAGE>
 
                                      -47-

     Foreign exchange gains and losses reflect changes in the value of the
Canadian dollar and the British pound sterling relative to the US dollar for
amounts lent to foreign subsidiaries.  Foreign exchange rate changes resulted in
a net gain of $0.5 million for 1996,  compared to a $0.1 million loss in 1995,
which was primarily due to a one-time gain related to a transaction which
occurred on October 21, 1996 and was hedged 28 days later.  The Canadian dollar
moved favorably relative to the US dollar during that period.  The Company
continues to hedge all foreign currency transactions in an attempt to minimize
the impact of transaction gains and losses on the income statement.  The
Company's policy is to not engage in speculative foreign currency transactions.

     Provision for Income Taxes.  Provision for income taxes reflects the
anticipated income tax liability of the Company's US operations based on its
pretax income for the year.  The provision for income taxes increased in 1996
due to increased profitability in the US business.  The Company does not provide
for income taxes nor recognize a benefit related to income in foreign
subsidiaries due to net operating loss carryforwards generated by those
subsidiaries in prior years.

     Minority Interest in Earnings of Consolidated Subsidiary.  Minority
interest in earnings of consolidated subsidiary reflects the portion of the
Company's Canadian subsidiary's income or loss attributable to the percentage of
that subsidiary's common stock that was publicly traded in Canada.  Prior to
October 1996, approximately 30% of ACC Canada's stock was publicly traded.
Prior to December 31, 1996,  the Company repurchased approximately 24% of the
outstanding shares, and the remaining 6% was repurchased subsequent to December
31, 1996.  The purchase of the remaining shares was approved prior to December
31, 1996.  For 1996, minority interest in earnings of the consolidated
subsidiary was a loss of $0.9 million compared to a loss of $0.1 million in
1995.

     The Company's net income for 1996 was $7.8 million, compared to a net loss
of $5.4 million in 1995.  The 1996 net income resulted from the Company's
operations in Canada (approximately $2.6 million); in the United Kingdom
(approximately $0.7 million); and in the United States (approximately $4.5
million).  The 1995 net loss resulted primarily from the expansion of operations
in the UK (approximately $6.8 million); increased net interest expense
associated with additional borrowings (approximately $4.9 million); increased
depreciation and amortization from the addition of equipment and costs
associated with the expansion of local service in New York State (approximately
$1.6 million); and management restructuring costs (approximately $1.3 million),
offset by positive operating income from the US and Canadian long distance
subsidiaries of approximately $9.0 million.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash flows provided by operations in 1997 were $3.7 million compared to
$24.2 million for  1996.  The decrease of $20.5 million primarily resulted from
reductions in other accrued expenses of $9.5 million in 1997 versus increases of
$9.0 million in 1996.  The reduction of other accrued expenses in 1997 includes
the impact of payments of approximately $16 million of non-recurring expenses
accrued as of December 31, 1996.  Cash provided from net income before
depreciation and amortization in 1997 increased $10 million over 1996, but this
was offset by increases in accounts receivable (which increased in tandem with
revenue growth) and changes in other working capital accounts.

     Net cash flows used in investing activities in 1997 were $91.3 million
compared to $67.7 million for 1996.  The increase of  $23.6 million primarily
resulted from greater investments in capital expenditures (largely switch
equipment) of $68.5 million in 1997 compared to $33.0 million in 1996, and from
the purchase in 1997 of Transphone, United Telecom, TNC and VISTA with an
aggregate payment (net of cash acquired) of $22.0 million.  In 1996, the Company
repurchased the minority interest of ACC Canada, and that investment totaled
$32.1 million.

     Net cash provided by financing activities for 1997 was $86.1 million
compared to $46.2 million in 1996.  The increase of $39.9 million reflects
greater utilization of the Credit Facility in 1997 to fund expansion (net
increase in 1997 of $89 million versus a net decrease of $22 million in 1996),
partially offset by lower proceeds in 1997 from issuance of common stock ($9.8
million in 1997 versus $72.7 million in 1996).

     The Company's principal need for working capital is to meet its selling,
general, and administrative expenses, network costs and capital expenditures as
its business expands.  In addition, the Company's capital resources have been
<PAGE>
 
                                      -48-

used for acquisitions, (i.e., Metrowide Communications, Internet Canada,
Transphone, United Telecom, VISTA and TNC), capital expenditures, and the
repurchase of the minority interest in ACC Canada.  The Company has historically
reflected working capital deficits at the end of the last several years, but at
December 31, 1997, reflected a working capital surplus of approximately $2.6
million, due primarily to utilization of its credit facility to satisfy current
liabilities.

     Approximately $68.5 million in capital expenditures were recorded in 1997.
The Company expects that it will continue to make significant capital
expenditures during future periods, particularly for switching equipment for the
UK and Germany, and for local exchange switches in the US markets and related
costs, and billing systems.  The Company's actual capital expenditures and cash
requirements will depend on numerous factors, including the nature of future
expansion (including the extent of local exchange services, which is
particularly capital intensive), and acquisition opportunities, economic
conditions, competition, regulatory developments, the availability of capital
and the ability to incur debt and make capital expenditures under the terms of
the Company's financing arrangements.

     As of December 31, 1997, the Company had approximately $4.0 million of cash
and cash equivalents and maintained a $150 million credit facility, subject to
availability under a borrowing base formula and certain other conditions
(including borrowing limits based on the Company's operating cash flow), under
which $87.8 million was outstanding.

     As of December 31, 1997, the Company had $5.3 million of capital lease
obligations which mature at various times from 1998 through 2002.  During 1997,
the Company prepaid a $4.0 million capitalized lease obligation using funds from
its credit facility.  The Company's financing arrangements, which are secured by
substantially all of the Company's assets including stock of certain
subsidiaries, require the Company to maintain certain financial ratios.

     In the normal course of business, the Company uses various financial
instruments, including derivative financial instruments, for purposes other than
trading.  These instruments include letters of credit, guarantees of debt,
interest rate swap agreements, and foreign currency exchange contracts relating
to intercompany payables of foreign subsidiaries.  The Company does not use
derivative financial instruments for speculative purposes.  Foreign currency
exchange contracts are used to mitigate foreign currency exposure and are
intended to protect the US dollar value of certain currency positions and future
foreign currency transactions.  The aggregate fair value, based on published
market exchange rates, of the Company's foreign currency forward contracts at
December 31, 1997 was $61.8 million.  When applicable, interest rate swap
agreements are used to reduce the Company's exposure to risks associated with
interest rate fluctuations. As is customary for these types of instruments,
collateral is generally not required to support these financial instruments.

     By their nature, all such instruments involve risk, including the risk of
nonperformance by counterparties, and the Company's maximum potential loss may
exceed the amount recognized on the Company's balance sheet.  However, at
December 31, 1997, in management's opinion there was no significant risk of loss
in the event of nonperformance of the counterparties to these financial
instruments.  The Company controls its exposure to counterparty credit risk
through monitoring procedures and by entering into multiple contracts, and
management believes that no reserves for losses are required.  Based upon the
Company's knowledge of the financial position of the counterparties to its
existing derivative instruments, the Company believes that it does not have any
significant exposure to any individual counterparty or any major concentration
of credit risk related to any such financial instruments.

     On December 19, 1997, the Company amended and restated its credit facility
increasing the amount available to $150 million (the "Amended Credit Facility").
The Amended Credit Facility is syndicated among six financial institutions.
Borrowings can be made in US dollars, Canadian dollars, British pounds sterling
and German Deutsche Marks, and are limited individually to $30.0 million for ACC
Canada, $50.0 million for ACC UK, and $20.0 million for ACC Germany, with any
unused capacity available for ACC Corp. and its US subsidiaries.  The Amended
Credit Facility will be used to finance capital expenditures and provide working
capital.  The Amended Credit Facility limits the amount that may be borrowed
against this facility based on the Company's operating cash flow.  The Amended
Credit Facility also contains certain covenants including restrictions on the
payment of dividends, maintenance of a maximum leverage ratio, minimum debt
service coverage ratio, maximum fixed charge coverage ratio, and minimum net
<PAGE>
 
                                      -49-

worth, all as defined under the Amended Credit Facility and subjective
covenants.  At December 31, 1997, the Company had available $59.0 million under
the Amended Credit Facility.  Borrowings under the Amended Credit Facility are
secured by certain of the Company's assets and will bear interest at either the
LIBOR rate or the base rate (representing the greater of the prime interest rate
or the federal funds rate plus 1/2%), with additional percentage points added
based on a ratio of debt to operating cash flow, as defined in the Amended
Credit Facility.  The maximum aggregate commitment and the sublimits of the
Amended Credit Facility are required to be reduced by 8.0% per quarter
commencing on March 31, 2000 until December 31, 2001, and by 9.0% per quarter
commencing on March 31, 2002 until maturity of the loan in December 2002.  All
amounts outstanding under the Amended Credit Facility may become due and
payable, at the discretion of the financial institutions, upon the closing of
the Merger.  The Company is currently negotiating with its lenders to obtain a
waiver of this requirement.  There can be no assurance that such a waiver will
be obtained.

     The Company believes that, under its present business plan, access to cash
through the Amended Credit Facility, and cash from operations, will be
sufficient to meet anticipated working capital needs, capital expenditure
requirements and expansion plans for the forseeable future.  The forward-looking
information contained in the previous sentence may be affected by a number of
factors, including the matters described in this paragraph and "Risk Factors".
The Company may need to raise additional capital from public or private equity
or debt sources in order to finance its operations, capital expenditures, and
growth for future periods.  In addition, the Company may have to refinance a
substantial amount of indebtedness and obtain additional funds prior to 2002,
when the Amended Credit Facility matures.  Moreover, the Company believes that
continued growth and expansion through acquisitions, investments, and strategic
alliances is important to maintain a competitive position in the market and,
consequently, a principal element of the Company's business strategy is to
develop relationships with strategic partners and to acquire assets or make
investments in businesses that are complementary to its current operations.  The
Company may need to raise additional funds in order to take advantage of
opportunities for acquisitions, investments, and strategic alliances or more
rapid international expansion, to develop new products, or to respond to
competitive pressures.  There can be no assurance that the Company will be able
to raise such capital on acceptable terms or at all.  The Company's ability to
obtain additional sources of capital will depend upon, among other things, its
financial condition at the time, the restrictions and the instruments governing
its indebtedness and other factors, including market conditions, beyond the
control of the Company.  Additional sources of capital may include public and
private equity and debt financings, sale of assets, capitalized leases and other
financing arrangements.  In the event that the Company is unable to obtain
additional capital or is unable to obtain additional capital on acceptable
terms, the Company may be required to reduce the scope of its presently
anticipated expansion opportunities and capital expenditures, which could have a
material adverse effect on its business, results of operations and financial
condition and could adversely impact its ability to compete.

     The Company may seek to develop relationships with strategic partners both
domestically and internationally and to acquire assets or make investments in
businesses that are complementary to its current operations.  Such acquisitions,
strategic alliances, or investments may require that the Company obtain
additional financing and, in some cases, the approval of  the Company's
creditors.  The Company's ability to effect acquisitions, strategic alliances,
or investments may depend upon its ability to obtain such financing and, to the
extent applicable, consents from creditors.
 
     The TCG Merger Agreement contains certain restrictions on the conduct of 
ACC's business prior to the consummation of the Merger.

RECENTLY ISSUED ACCOUNTING STANDARDS 

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income".  SFAS No. 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.  This statement is effective for
financial statements issued for periods beginning after December 15, 1997.
Management believes that the adoption of this statement will not have a material
effect on the Company's consolidated results of operations or financial
position.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information".  SFAS No. 131 requires the reporting of
profit and loss, certain specific revenue and expense items, and assets for
reportable segments. It also requires the reconciliation of total segment
revenues, total segment profit or loss, total
<PAGE>         
 
                                      -50-

segment assets, and other amounts disclosed for segments to the corresponding
amounts in the general purpose financial statements. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. Management believes that the
adoption of this statement will not have a material effect on the Company's
consolidated results of operations or financial position.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Financial statements and supplementary data are included under Item 14(a).

ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE.

     None.

                                    PART III

Item 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by Item 10 of Form 10-K relating to directors who
are nominees for election as directors at the Company's Annual Meeting of
Shareholders, if an Annual Meeting is held during 1998, will be set forth under
the heading "Election of Directors" in the Company's Definitive Proxy Statement
for such Annual Meeting, which is incorporated by reference herein.

     The information required by Item 10 of Form 10-K with respect to executive
officers is, pursuant to Instruction 3 of Paragraph (b) of Item 401 of
Regulation S-K, set forth in Part I as Item 4-A of this Form 10-K under the
heading "Executive Officers of the Registrant."

ITEM 11.       EXECUTIVE COMPENSATION.

     The information required by Item 11 of Form 10-K will be set forth under
the heading "Compensation of Executive Officers and Directors" in the Company's
Definitive Proxy Statement for its Annual Meeting of Shareholders, if an Annual
Meeting is held during 1998, which is incorporated by reference herein.
<PAGE>
 
                                      -51-


ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth, as of December 31, 1997, the number and
percentage of outstanding shares of ACC Stock beneficially owned by: (i) each
director of ACC; (ii) each of the persons comprising the office of the Chief
Executive Officer of ACC and the other four most highly compensated executive
officers of ACC; (iii) each person or group known to ACC to be the beneficial
owner of more than 5% of the outstanding shares of ACC Stock; and (iv) all
directors and executives officers of ACC as a group. ACC believes that each
individual in this group has sole investment and voting power with respect to
his or her shares subject to community property laws where applicable and except
as otherwise noted:

<TABLE>
<CAPTION>
                              NAME OF BENEFICIAL OWNER                                         Shares Beneficially Owned
                                                                                       ------------------------------------------
                                or Identity of Group                                            NUMBER              PERCENTAGE
                                --------------------                                            ------              ----------
<S>                                                                                    <C>                        <C>
Christopher Bantoft..................................................................         46,100(1)                  *  
Michael R. Daley.....................................................................        141,241(2)                  *  
Steve M. Dubnik......................................................................        109,475(3)                  *  
Richard T. Aab.......................................................................      1,085,872(4)                 6.3 
Hugh F. Bennett......................................................................         18,300(5)                  *  
Arunas A. Chesonis...................................................................        238,234(6)                 1.3 
Willard Z. Estey.....................................................................         15,000(7)                  *  
Leslie D. Shroyer....................................................................          2,000(8)                  *  
Daniel D. Tessoni....................................................................         30,000(9)                  *  
Robert M. Van Degna..................................................................         18,000(10)                 *  
Mae H. Squier-Dow....................................................................         79,490(11)                 *  
Kevin S. Dickens.....................................................................              0(12)                 *  
John J. Zimmer.......................................................................         38,130(13)                 *  
All directors and executive officers as a group (14 persons, including those persons                                        
named above other than Richard T. Aab and the Equitable Companies)...................        743,470(1)(2)              4.4  
                                                                                                    (3)(4)  
                                                                                                    (5)(6)  
                                                                                                    (7)(8)  
                                                                                                    (9)(10) 
                                                                                                   (11)(12) 
                                                                                                   (13)(14)  
</TABLE>

________________
* Indicates less than 1% of ACC's issued and outstanding shares.
(1) Includes options to purchase 46,100 shares that are or will become
    exercisable by Mr. Bantoft within the next 60 days. Does not include 31,175
    shares issuable upon the exercise of options that are not deemed to be
    presently exercisable, nor stock incentive rights with respect to 15,000
    shares granted pursuant to ACC's Long-Term Incentive Plan.

(2) Includes options to purchase 13,662 shares that are or will become
    exercisable by Mr. Daley within the next 60 days. Does not include 27,238
    shares issuable upon the exercise of options that are not deemed to be
    presently exercisable.

(3) Includes options to purchase 45,897 shares that are or will become
    exercisable by Mr. Dubnik within the next 60 days. Does not include 35,225
    shares issuable upon the exercise of options that are not deemed to be
    presently exercisable, nor stock incentive rights with respect to 15,000
    shares granted pursuant to ACC's Long-Term Incentive Plan.
<PAGE>
 
                                      -52-

(4)  Includes 100,000 shares that are owned by Melrich Associates, L.P., a
     family partnership of which Mr. Aab is a general partner and therefore
     shares investment and voting power with respect to such shares. Mr. Aab's
     address is 29 Woodstone Rise, Pittsford, New York 14534. The foregoing
     information was reported in a Schedule 13G (Amendment No. 9) that was filed
     with the Commission in January 1998, a copy of which was received by ACC.

(5)  Mr. Bennett and his spouse share voting and investment power with respect
     to 400 of the shares. Includes options to purchase 15,000 shares under the
     Non-Employee Directors' Stock Option Plan that are presently exercisable.
     Does not include an option to purchase 7,500 shares granted under such Plan
     that is not deemed to be presently exercisable.

(6)  Includes 13,730 shares owned by Mr. Chesonis's spouse and options to
     purchase 129,709 shares that are or will become exercisable by Mr. Chesonis
     or his spouse within the next 60 days. Does not include 32,477 shares
     issuable upon the exercise of options that are not deemed to be presently
     exercisable by Mr. Chesonis or his spouse.

(7)  Includes options to purchase 15,000 shares under the Non-Employee
     Directors' Stock Option Plan that are presently exercisable. Does not
     include an option to purchase 7,500 shares granted under such Plan that is
     not deemed to be presently exercisable.

(8)  Does not include an option to purchase 7,500 shares under the Non-Employee
     Directors' Stock Option Plan that is not deemed to be presently
     exercisable.

(9)  Mr. Tessoni and his spouse share investment and voting power with respect
     to all shares which he beneficially owns. Includes options to purchase
     15,000 shares under the Non-Employee Directors' Stock Option Plan that are
     presently exercisable. Does not include an option to purchase 7,500 shares
     granted under such Plan that is not deemed to be presently exercisable.

(10) Includes options to purchase 15,000 shares under the Non-Employee
     Directors' Stock Option Plan that are presently exercisable. Does not
     include an option to purchase 7,500 shares granted under such Plan that is
     not deemed to be presently exercisable.

(11) Includes options to purchase 61,813 shares that are or will become
     exercisable by Ms. Squier-Dow within the next 60 days. Does not include
     38,225 shares issuable upon the exercise of options that are not deemed to
     be presently exercisable, nor stock incentive rights with respect to 10,000
     shares granted pursuant to ACC's Long-Term Incentive Plan.

(12) Does not include 45,000 shares issuable upon the exercise of options that
     are not deemed to be presently exercisable.

(13) Includes options to purchase 28,199 shares that are or will become
     exercisable by Mr. Zimmer within the next 60 days. Does not include 8,551
     shares issuable upon the exercise of options that are not deemed to be
     presently exercisable.

(14) Includes options to purchase a total of 7,500 shares that are or will
     become exercisable by two executive officers of ACC, in addition to those
     named above, within the next 60 days. Does not include a total of 7,500
     shares issuable upon the exercise of options that are not deemed to be
     presently exercisable by such executive officers.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
<PAGE>
 
                                      -53-

     The information required by Item 13 of Form 10-K will be set forth under
the heading "Certain Transactions" in the Company's Definitive Proxy Statement
for its Annual Meeting of Shareholders, if an Annual Meeting is held during
1998, which is incorporated by reference herein.

                                    PART IV

Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a)    FINANCIAL STATEMENTS AND EXHIBITS.
            --------------------------------- 

            (1) FINANCIAL STATEMENTS.  (a) The following Financial Statements of
                --------------------                                            
the Company are included herewith as follows:

     Report of Independent Public Accountants

     Consolidated Balance Sheets, December 31, 1997 and 1996

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

     Consolidated Statements of Changes in Shareholders' Equity for the years
     ended December 31, 1997, 1996 and 1995

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

     Notes to Consolidated Financial Statements
<PAGE>
 
                                      -54-


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of ACC Corp.:

We have audited the accompanying consolidated balance sheets of ACC Corp. (a
Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACC Corp. and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.


                                  Arthur Andersen LLP

Rochester, New York,
 February 3, 1998, except for
the matter described in the second
paragraph of Note 10, as to which
the date is March 11, 1998.
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
              (Amounts in 000s, except share and per share data)

<TABLE> 
<CAPTION> 
                                                  December 31,       December 31,
                                                      1997               1996    
                                                 ---------------    -------------- 
                                                                                   
<S>                                             <C>                 <C> 
CURRENT ASSETS:                                                                                    
 Cash and cash equivalents                               $3,988            $2,035                                                
 Accounts receivable, net of allowance                                                             
  for doubtful accounts of $5,291 in                                                                                             
  1997 and $3,795 in 1996                                76,909            51,474                                              
 Other receivables                                        3,732             3,792                                             
 Prepaid expenses and other assets                        7,718             4,632                                             
                                                 ---------------    --------------
                                                                                                                                 
  TOTAL CURRENT ASSETS                                   92,347            61,933                                              
                                                 ---------------    --------------                                               

                                                                                                                                 
                                                                                                                                 
PROPERTY, PLANT, AND EQUIPMENT:
 At cost                                                189,249           119,398
 Less-accumulated depreciation and
  amortization                                          (53,523)          (38,946)
                                                 ---------------    --------------
  TOTAL PROPERTY, PLANT, AND EQUIPMENT                  135,726            80,452
                                                 ---------------    --------------
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
OTHER ASSETS:                                                                                                   
 Goodwill and customer base, net                         73,607            50,629                   
 Deferred installation costs, net                         5,668             4,312                  
                                                                                                                
 Other                                                   12,270             6,705                  
                                                ---------------    --------------
  TOTAL OTHER ASSETS                                     91,545            61,646                   
                                                ---------------    --------------
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                

                                                                                                                
   TOTAL ASSETS                                        $319,618          $204,031                     
                                                ===============    ==============                    

The accompanying notes to consolidated financial statements are an integral part of these balance sheets
</TABLE> 

<TABLE> 
<CAPTION> 
                                                  December 31,       December 31,        
                                                      1997              1996           
                                                 ---------------   ---------------     
                                      
<S>                                             <C>                <C> 
   CURRENT LIABILITIES:                                  $1,000               $730          
    Notes payable                                                             
    Current maturities of                                 2,853              3,521        
     long-term debt                                      23,374             15,351         
    Accounts payable                                     35,973             22,908         
    Accrued network costs                                26,593             34,884         
    Other accrued expenses                                                    
                                                  ---------------   ---------------         
                                                         89,793             77,394         
      TOTAL CURRENT LIABILITIES                   ---------------   ---------------         
                                                                              
                                                          1,888              2,767        
   Deferred income taxes                          ---------------   ---------------         
                                                                              
                                                         90,221              6,007        
   Long-term debt                                 ---------------   ---------------         
                                                                              
                                                                              
                                                                              
 SHAREHOLDERS' EQUITY: 
  Preferred Stock, $1.00 par value, Authorized -
   1,990,000 shares; Issued - no shares                                                                      
  Class A Common Stock, $.015 par value                                                                      
   Authorized - 50,000,000 shares                          -                 -                       
   Issued - 18,297,145 in 1997 and                                                                           
   17,684,361  in 1996                                      275                265               
  Class B Common Stock, $.015 par value,                                                                     
   Authorized - 25,000,000 shares;                                                                           
   Issued - no shares                                      -                 -                       
  Capital in excess of par value                        126,707            116,878                 
  Cumulative translation adjustment                      (1,739)            (1,362)               
  Retained earnings                                      14,083              3,692               
                                                   ---------------   ---------------                
                                                        139,326            119,473                 
                                                                                                             
  Less-                                                                                                      
                                                                                                             
  Treasury stock, at cost (1,089,884                                                                         
    shares)                                              (1,610)            (1,610)               
                                                   ---------------   ---------------                
     TOTAL SHAREHOLDERS' EQUITY                         137,716            117,863                 
                                                   ---------------   ---------------                
                                                                                                             
     TOTAL LIABILITIES AND                                                                                   
     SHAREHOLDERS' EQUITY                              $319,618           $204,031                 
                                                   ===============   ===============                
</TABLE> 



<PAGE>
 
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000s, except share and per share data)

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------

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

For the Years Ended December 31,                                  1997                  1996                  1995

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

<S>                                                             <C>                  <C>                    <C> 
REVENUE:
 Toll revenue                                                   $327,490              $282,497              $175,269
 Local service and other                                          45,123                26,270                13,597
                                                        -----------------     -----------------     -----------------

Total revenue                                                    372,613               308,767               188,866

Network costs                                                    218,361               193,599               114,841
                                                        -----------------     -----------------     -----------------

Gross profit                                                     154,252               115,168                74,025

OTHER OPERATING EXPENSES:
  Depreciation and amortization                                   23,712                16,433                11,614
  Selling expenses                                                50,958                34,072                21,617
  General and administrative                                      60,069                50,439                39,248
  Management restructuring                                             -                     -                 1,328
                                                        -----------------     -----------------     -----------------
Total other operating expenses                                   134,739               100,944                73,807
                                                        -----------------     -----------------     -----------------

 Income from operations                                           19,513                14,224                   218

OTHER INCOME (EXPENSE):
  Interest income                                                    215                 1,151                   198
  Interest expense                                                (3,729)               (5,025)               (5,131)
  Merger costs                                                    (4,970)                   -                      -
  Foreign exchange gain (loss)                                      (162)                  509                  (110)
                                                        -----------------     -----------------     -----------------

Total other income (expense)                                      (8,646)               (3,365)               (5,043)
                                                        -----------------     -----------------     -----------------

 Income (loss) from operations before provision         
  for income taxes
  and minority interest                                           10,867                10,859                (4,825)

Provision for income taxes                                           476                 2,185                   396

 Minority interest in earnings of
  consolidated subsidiary                                              -                  (909)                 (133)
                                                        -----------------     -----------------     -----------------


 NET INCOME (LOSS)                                                10,391                 7,765                (5,354)
 Less Series A Preferred Stock dividend                                -                  (972)                 (401)
 Less Series A Preferred Stock accretion                               -                (1,509)                 (139)
                                                        -----------------     -----------------     -----------------

Net income (loss) applicable to Common Stock                     $10,391                $5,284               ($5,894)
                                                        =================     =================     =================

Net income (loss) per common share:
  Basic                                                            $0.62                 $0.37                ($0.52)
                                                        =================     =================     =================
  Diluted                                                          $0.59                 $0.34                ($0.52)
                                                        =================     =================     =================

Weighted average shares outstanding:
  Basic                                                       16,839,039            14,463,728            11,358,693
                                                        =================     =================     =================
  Diluted                                                     17,690,223            15,540,115            11,358,693
                                                        =================     =================     =================

The accompanying notes to consolidated financial statements are an integral part of these statements.

</TABLE> 

<PAGE>
 
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Amounts in 000s, except share and per share data)

<TABLE> 
<CAPTION> 
                                                               Class A                                        
                                                             Common Stock       Capital in  Cumulative     Retained  
                                                          ---------------------  Excess of  Translation    Earnings  Treasury
                                                            Shares       Amount  Par Value   Adjustment    (Deficit)  Stock   Total
                                                          -------------------------------------------------------------------------
<S>                                                       <C>           <C>     <C>       <C>           <C>       <C>        <C> 
Balance, December 31, 1994                                 11,478,902    $172   $20,013   ($1,013)       $1,524   ($1,610)   $19,086
                                                                                                                          
Stock options exercised                                        50,287       1       479     -           -           -            480
Sale of stock                                               1,237,500      18    11,078     -           -           -         11,096
Employee stock purchase plan shares issued                     35,450       1       296     -           -           -            297
Stock warrants exercised                                      123,750       2     1,186     -           -           -          1,188
Stock warrants issued                                        -              -       200     -           -           -            200
Accretion of Series A Preferred Stock                        -              -      (139)    -           -           -          (139)
Series A Preferred Stock dividends                           -              -      (401)    -           -           -          (401)
Acceleration of stock option vesting due to termination      -              -       134     -           -           -           134
Dividends ($.02 per common share)                            -              -       -       -              (243)    -          (243)
Cumulative translation adjustment                            -              -       -         63        -           -            63
Net loss                                                     -              -       -       -            (5,354)    -        (5,354)
                                                         -------------------------------------------------------------------------
                                                          
                                                          
Balance, December 31, 1995                                 12,925,889    $194   $32,846    ($950)       ($4,073)  ($1,610)  $26,407
                                                          
Stock options exercised                                       587,881       9     4,712       -             -         -       4,721
Class A Common Stock offerings                              3,018,750      45    62,849       -             -         -      62,894
Conversion of Series A Preferred Stock                        937,500      14    11,915       -             -         -      11,929
Employee stock purchase plan shares issued                     19,341      -        343       -             -         -         343
Stock warrants exercised                                      195,000       3     2,077       -             -         -       2,080
Increase in investment in Canadian subsidiary                    -         -      1,254       -             -         -       1,254
Disqualifying dispositions                                       -         -      3,000       -             -         -       3,000
Accretion of Series A Preferred Stock                            -         -     (1,509)      -             -         -      (1,509)
Series A Preferred Stock dividends                               -         -       (972)      -             -         -        (972)
Acceleration of stock option vesting due to termination          -         -        206       -             -         -         206
Stock incentive rights issued                                    -         -        157       -             -         -         157
Cumulative translation adjustment                                -         -        -       (412)           -         -        (412)
Net income                                                       -         -        -         -           7,765       -       7,765
                                                           ------------------------------------------------------------------------
                                                          
                                                          
Balance, December 31, 1996                                 17,684,361    $265  $116,878  ($1,362)        $3,692   ($1,610) $117,863
                                                          
Stock options exercised                                       573,195       9     7,241      -             -        -         7,250
Employee stock purchase plan shares issued                     28,339       1       686      -             -        -           687
Stock warrants exercised                                       11,250       -       140      -             -        -           140
Disqualifying dispositions                                     -            -     1,200      -             -        -         1,200
Stock incentive rights issued                                  -            -       562      -             -        -           562
Cumulative translation adjustment                              -            -        -      (377)          -        -          (377)
Net income                                                     -            -        -       -            10,391    -        10,391
                                                           -----------------------------------------------------------------------
                                                          
Balance, December 31, 1997                                 18,297,145    $275  $126,707  ($1,739)        $14,083  ($1,610) $137,716
                                                           =======================================================================



The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE> 

<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Amounts in 000s)

<TABLE> 
<CAPTION> 
                         
                                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                                       1997           1996          1995
                                                                     ----------    -----------    ----------
<S>                                                                  <C>           <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                                     $10,391         $7,765       ($5,354)
                                                                                                   
 Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
   Depreciation and amortization                                        23,712         16,433        11,614
   Deferred income taxes                                                  (930)         3,110           609
   Minority interest in earnings (loss) of consolidated subsidiary           -            909           133
   Unrealized foreign exchange (gain) loss                                (121)          (758)          180
   Amortization of deferred financing costs                                629            425           263
   (INCREASE) DECREASE IN ASSETS:
      Accounts receivable, net                                         (22,442)       (11,212)      (17,437)
      Other receivables                                                     87          1,955         1,782
      Prepaid expenses and other assets                                 (8,289)        (2,282)       (1,057)
      Deferred installation costs                                       (3,884)        (2,631)       (2,983)
      Other                                                                              (148)          846
   INCREASE (DECREASE) IN LIABILITIES:                                                             
      Accounts payable                                                   4,417          7,511        (7,013)
      Accrued network costs                                              9,627         (5,837)       17,824
      Other accrued expenses                                            (9,506)         9,008         4,560
                                                                     ----------    -----------    ----------
                                                                                                   

        Net cash provided by operating activities                        3,691         24,248         3,967
                                                                     ----------    -----------    ----------
                                                                                                   
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures, net                                            (68,479)       (33,030)      (12,424)
  Repurchase of minority interest                                            -        (32,092)        -
  Payment for purchase of subsidiaries, net of cash acquired           (21,958)        -             (2,313)
  Acquisition of customer base                                            (840)        (2,620)         (557)
                                                                     ----------    -----------    ----------
                                                                                                   
        Net cash used in investing activities                          (91,277)       (67,742)      (15,294)
                                                                     ----------    -----------    ----------
                                                                                                   
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under lines of credit and notes payable                   211,673         26,375       113,602
  Repayments under lines of credit and notes payable                  (123,145)       (48,676)     (119,204)
  Repayment of long-term debt, other than lines of credit              (10,414)        (3,704)       (3,078)
  Proceeds from issuance of common stock                                 9,839         72,669        13,261
  Proceeds from issuance of convertible debt                                 -              -        10,000
  Financing costs                                                       (1,805)          (495)       (2,876)
  Dividends paid                                                             -              -          (451)
                                                                     ----------    -----------    ----------
                                                                                                   
        Net cash provided by financing activities                       86,148         46,169        11,254
                                                                     ----------    -----------    ----------

Effect of exchange rate changes on cash                                  3,391         (1,158)         (430)
                                                                     ----------    -----------    ----------
                                                                                                   
Net increase (decrease) in cash                                          1,953          1,517          (503)

Cash and cash equivalents at beginning of year                           2,035            518         1,021
                                                                     ----------    -----------    ----------
                                                                                                   
Cash and cash equivalents at end of year                                $3,988         $2,035          $518
                                                                     ==========    ===========    ==========
                                                                                                   
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
  Interest                                                              $4,122         $2,840        $4,146
                                                                     ==========    ===========    ==========

  Income taxes, net of refunds                                            $884         $1,808          $203
                                                                     ==========    ===========    ==========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

  Equipment purchased through capital leases                            $2,333         -             $7,389
                                                                     ==========    ===========    ==========

  Fair value of assets acquired                                        $36,061         $5,136       $10,800
    Less -  cash paid at acquisition date, net of cash acquired        (21,958)        (3,001)       (1,500)
    Less  - short term notes payable                                         -              -        (2,966)
                                                                     ----------    -----------    ----------
  Liabilities assumed                                                  $14,103         $2,135        $6,334
                                                                     ==========    ===========    ==========

  Other assets purchased with long-term debt                                 -         $2,775              -
                                                                     ==========    ===========    ==========

  Conversion of convertible debt to Series A Preferred Stock                 -              -        $10,000
                                                                     ==========    ===========    ==========

  Conversion of Series A Preferred Stock to Class A Common
  Stock, including cumulative dividends and accretion                        -        $11,929         -
                                                                     ==========    ===========    ==========

The accompanying notes to consolidated financial statements are an integral part of these statements.

</TABLE> 

<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A.  PRINCIPLES OF CONSOLIDATION:

     The consolidated financial statements include all accounts of ACC Corp. (a
Delaware corporation) and its direct and indirect subsidiaries ("the Company" or
"ACC").  Principal operating subsidiaries include:  ACC TeleCom ("ACC US"), ACC
TelEnterprises Ltd. ("ACC Canada"), ACC Long Distance UK Ltd. ("ACC UK"), and
ACC Telekommunikation GmbH ("ACC Germany").  All operating subsidiaries are
wholly-owned.  All significant intercompany accounts and transactions have been
eliminated.

     The accompanying consolidated financial statements reflect the results of
operations of acquired companies since their respective acquisition dates.

     B.  MINORITY INTEREST:

     On July 6, 1993, the Company's then wholly-owned Canadian subsidiary, ACC
TelEnterprises Ltd., completed an initial public offering of 2 million common
shares for Cdn. $11.00 per share.  The Company received net proceeds of
approximately Cdn. $20.7 million after underwriters' fees and before other
direct costs of the offering of Cdn. $1.3 million.  As a result of the offering,
ACC Corp.'s ownership was reduced to approximately 70%.

     Minority interest represents the non-Company owned shareholder interest in
ACC TelEnterprises Ltd.'s equity primarily resulting from the 1993 public
offering. In the third quarter of 1996, the Company made a cash tender offer of
Cdn. $21.50 per share for the repurchase of the minority-held shares.  In
September 1996, the tender offer was approved by the Boards of Directors of both
companies and, in the fourth quarter of 1996, approximately 1.9 million of the
outstanding shares, representing approximately 81.5% of the minority interest,
were tendered and purchased by the Company for Cdn. $40.4 million (US $29.5
million), increasing the Company's ownership in ACC Canada to 93.9% as of
December 31, 1996. As fewer than 90% of the publicly held shares were deposited
under the tender offer, the Company formed a subsidiary for the purpose of
acquiring the remaining minority interest of ACC Canada. Prior to December 31,
1996, the shareholders of ACC Canada approved the amalgamation of ACC Canada and
the new subsidiary.  The amalgamation was effective January 1, 1997 and the
remaining minority interest shares of ACC Canada were replaced with shares of
the new subsidiary.  These shares were purchased by the new subsidiary at a
price of Cdn. $21.50 per share (see Note 1 G).

     C.  REVENUE:

     The Company records as long distance toll revenue the amount of
communications services rendered, as measured by the related minutes of toll
traffic processed or flat-rate services billed, after deducting an estimate of
the traffic or services which will neither be billed nor collected.  Local
service and other revenue represents revenue derived from the provision of local
exchange services, including local dial tone, direct access lines, and monthly
subscription fees, as well as data services, and is recorded as the services are
provided and billed.  Revenue from prepaid calling cards is recognized when
received.

     D.  OTHER RECEIVABLES:

     Other receivables at December 31, 1997 consist of receivables primarily
related to taxes receivable (approximately $1.7 million), amounts due from
counterparties under cross-currency rate swap agreements (approximately $1.5
million), and other individually nominal, miscellaneous receivables
(approximately $0.5 million).  Other receivables at December 31, 1996 consist of
receivables primarily related to taxes receivable (approximately $1.8 million),
the financing of university projects (approximately $0.5 million), officer notes
receivable (approximately $0.4 million), and other individually nominal,
miscellaneous receivables (approximately $1.1 million).
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     E.  PROPERTY, PLANT, AND EQUIPMENT:

     The Company's property, plant, and equipment consisted of the following at
December 31, 1997 and 1996 (amounts in 000s):

                                                  1997      1996
                                                --------  --------
 
     Equipment................................  $126,661  $ 90,257
     Computer software and software licenses..    16,064    12,682
     Other....................................    46,524    16,459
                                                --------  --------
     Total....................................  $189,249  $119,398
                                                ========  ========

     Other property, plant and equipment includes accumulated costs for
uncompleted projects in progress of approximately $36.7 million as of December
31, 1997, and $9.5 million as of December 31, 1996.  These costs primarily
relate to projects to acquire, install and make operational switch and
transmission equipment, and major software systems.  Projects in progress at
December 31, 1997 are expected to be completed in the first half of 1998.

     Depreciation and amortization of property, plant, and equipment is computed
using the straight-line method over the following estimated useful lives:

     Leasehold improvements..............................  Life of lease  
     Equipment, including assets under capital leases....  2 to 15 years  
     Computer software and software licenses.............  5 to 7 years   
     Office equipment and fixtures.......................  3 to 10 years  
     Vehicles............................................  3 years         

     Equipment and computer software include assets financed under capital lease
obligations.   A summary of these assets at December 31, 1997 and 1996 is as
follows (amounts in 000s):
                                                  1997      1996   
                                                --------  -------- 
                                                                   
     Cost.....................................  $10,566   $14,336  
     Less -- accumulated amortization.........   (6,032)   (6,194) 
                                                -------   -------  
     Total, net...............................  $ 4,534   $ 8,142  
                                                =======   =======   

     Betterments, renewals, and extraordinary repairs that extend the life of
the asset are capitalized; other repairs and maintenance are expensed.  The cost
and accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.

     The Company reviews long-lived assets to be held and used, including
related goodwill, for possible impairment when events or changes in
circumstances indicate that their carrying amounts may not be recoverable.  If
an impairment exists, a loss is recognized to the extent the carrying value of
the asset exceeds its fair value.

     F.  DEFERRED COSTS:

     Costs incurred for the installation of direct access lines are amortized on
a straight-line basis over the estimated useful life of three to ten years.
Accumulated amortization of deferred installation costs totaled approximately
$8.6 million and $6.4 million at December 31, 1997 and 1996, respectively.

     G.  GOODWILL AND CUSTOMER BASE:

     Each of the Company's acquisitions have been accounted for as purchases
and, accordingly, the purchase prices were allocated to the assets and
liabilities of the acquired companies based on their fair values at the
acquisition date.
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     As of August 1, 1995, ACC TelEnterprises Ltd. acquired Metrowide
Communications ("Metrowide").  Metrowide, based in Toronto, Canada, provides
local and long distance services to customers based in Ontario and Quebec,
Canada.  The results of operations of Metrowide are included in the accompanying
financial statements since the date of acquisition.  The total cost of the
acquisition was Cdn. $15.1 million (US $11.0 million) including Cdn. $9.1
million (US $6.6 million) of liabilities assumed.  All payments related to the
purchase price of the acquisition were made as of December 31, 1996.

     In May 1996, ACC Canada purchased certain assets and assumed certain
liabilities of Internet Canada Corp., a company based in Toronto, Canada, which
is engaged in the business of providing Internet access and website design and
development. The purchase price was Cdn. $5.2 million.  All payments related to
the purchase price of the acquisition were made as of December 31, 1996.

     Goodwill of Cdn. $11.1 million (US $8.1 million) associated with the ACC
TelEnterprises Ltd. asset purchases is being amortized over 20 years.

     Also in 1996, as described above, the Company repurchased a significant
portion of the minority interest in ACC TelEnterprises Ltd.  The minority-held
shares were purchased for Cdn. $21.50 per share, which represented a premium
over the book value of the shares. The total amount paid in 1996 for this
acquisition was Cdn. $43.7 million (US $32.0 million).  In 1997, the remaining
6.1% interest was acquired for Cdn. $9.0 million (US $6.6 million).  The
resulting goodwill, approximately Cdn. $48.0 million (US $35.0 million), will be
amortized over a 40 year life.

     The following unaudited pro forma summary gives effect to the acquisition
of Internet Canada Corp. and the acquisition of the minority interest of ACC
Canada as if they had occurred at the beginning of 1995, after giving effect to
certain pro forma adjustments, including elimination of the minority interest in
earnings of ACC Canada, amortization of the goodwill and customer base acquired
in the acquisitions, interest expense on the acquisition financing, and related
income tax effects.  This unaudited pro forma financial information is presented
for informational purposes only and may not be indicative of the results of
operations as they would have been if the acquisitions had occurred at the
beginning of 1995, nor is it necessarily indicative of the results of operations
which may occur in the future.  Anticipated efficiencies from the combination of
Internet Canada and ACC Canada are not fully determinable and therefore have
been excluded from the amounts included in the pro forma summary below (amounts
in 000s, except share and per share data).

                                                     (Unaudited)
                                                    -------------
                                                Years ended December 31,
                                                   1996         1995
                                                ----------  -------------
 
Total revenue                                     $308,767    $188,866    
Income (loss) from operations                       13,175      (1,066)   
Net income (loss)                                    5,372      (8,659)   
Share data:                                                               
Net income (loss)                                 $   0.34    $  (0.74)   
Net income (loss) applicable to common stock      $   0.18    $  (0.79)   
Weighted average shares outstanding                 15,641      11,685     

     During 1997, the Company consummated several business combinations, all
accounted for as purchases, as follows:


     ACC UK acquired Transphone International Ltd. ("Transphone"), a long
distance reseller based in London, UK  The results of operations of Transphone
are reflected in the 1997 consolidated results of operations effective June 1,
1997.  Transphone reported 1.5 million pounds sterling (US $2.4 million) in
annual revenues for the calendar year ended December 31, 1996.

     ACC UK acquired United Telecom Ltd. ("UT"), a pre-paid calling card and
long distance services provider based in London, UK  The results of operations
of UT are reflected in 1997 consolidated results of operations effective July 1,
1997.  UT reported 2.8 million pounds sterling (US $4.5 million) in annual
revenue for the fiscal year ended April 30, 1997.
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     ACC US acquired VISTA International Communications Inc. ("VISTA"), a
privately held switch-based long distance provider based in Mount Arlington, New
Jersey.  VISTA provides services to small-to-medium sized commercial customers
in the Northeastern US, with concentrations primarily in New Jersey and
Pennsylvania.  The results of operations of VISTA are reflected in the 1997
consolidated results of operations effective August 1, 1997.   VISTA reported
$10 million in annual revenue for the calendar year ended December 31, 1996.

     ACC Germany acquired all the interests of Telenational Communications
Deutschland Limited Partnership ("TNC"), a privately held telecommunications
services provider based in Hamburg, Germany.  TNC was a supplier of prepaid
calling cards, and developed affinity programs with large commercial customers.
The results of operations of TNC are reflected in the 1997 consolidated results
of operations effective July 1, 1997.  TNC reported annualized revenue of German
Deutsche Marks (DM) 7.8 million (US $4.3 million).

     The aggregate amount paid for these acquisitions was US $22.9 million.  The
estimated fair value of assets acquired (including intangibles) was US $37.0
million, and liabilities assumed was US $14.1 million.  Goodwill associated with
these acquisitions was US $21.6 million, and is being amortized from 20 to 40
years.  Customer base intangibles associated with these acquisitions was US
$7.1 million, and is being amortized from 5 to 7 years.

     Accumulated amortization of all goodwill approximated US $2.3 million and
$0.5 million at December 31, 1997 and 1996, respectively.  The Company amortizes
acquired customer bases on a straight-line basis over five to seven years.
Accumulated amortization of customer base totaled approximately $8.3 million and
$5.5 million at December 31, 1997 and 1996, respectively.

     H.  EARNINGS PER SHARE:

     During 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share".  Adoption of this Statement did
not have a material effect on the reported earnings per share of the Company.
All prior-period earnings per share data have been restated to conform to the
provisions of the Statement.

     The following table reconciles the numerators and denominators of basic and
diluted earnings per share (amounts in 000s, except share and per share data):

<TABLE>
<CAPTION>


                                                              FOR THE YEAR ENDED DECEMBER 31, 1997

                                                      Income                  Shares                Per-Share
                                                   (Numerator)             (Denominator)              Amount
                                                   -----------             -------------              ------
<S>                                           <C>                     <C>                      <C>
BASIC EPS                                  
Net income applicable to common stock                $10,391                 16,839,039                $0.62
                                                                             ----------                -----
                                           
EFFECT OF DILUTIVE SECURITIES              
Stock options and warrants                              -                       851,184
                                                   -----------               ----------                 
DILUTED EPS                                           
Net income applicable to common stock                $10,391                 17,690,223                $0.59
                                                     -------                 ----------                -----
</TABLE>
                                        
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>   
<CAPTION>  
                                                                     FOR THE YEAR ENDED DECEMBER 31, 1996
           
                                                             Income                  Shares                Per-Share
                                                          (Numerator)            (Denominator)              Amount
                                                          -----------            -------------              ------         
<S>                                                  <C>                     <C>                     <C>
Net income                                                $ 7,765
Less:  Series A Preferred Stock dividend                     (972)
          Series A Preferred Stock accretion               (1,509)
                                                          ------- 
 
BASIC EPS
Net income applicable to common stock                       5,284              14,463,728                   $0.37
                                                                                                            -----
 
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants                                   -                  1,076,387
                                                          -------              ----------
 
DILUTED EPS
Net income applicable to common stock                       5,284              15,540,115                   $0.34
                                                           -------             ----------                   -----
</TABLE>
                                        
     No reconciliation is provided for 1995 as the effect would be anti-
dilutive.  All share information noted above represents the weighted-average
number of shares during the period.  All references to common shares have been
retroactively restated to reflect an August 8, 1996 three-for-two stock
dividend.

     I.  FOREIGN CURRENCY TRANSLATION:

     Assets and liabilities of ACC Canada,  ACC UK and ACC Germany, operating in
Canada, the United Kingdom and Germany, respectively, are translated into US
dollars using the exchange rates in effect at the balance sheet date.  Results
of operations are translated using the exchange rate at the date of the
transaction.  The effects of exchange rate fluctuations on translating foreign
currency assets and liabilities into US dollars are included as part of the
cumulative translation adjustment component of shareholders' equity, while gains
and losses resulting from foreign currency transactions are included in net
income.

     J.  INCOME TAXES:

     The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes."  Deferred income taxes reflect the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end.

     K.  CASH EQUIVALENTS:

     The Company considers investments with a maturity of less than three months
to be cash equivalents.

     L.  DERIVATIVE FINANCIAL INSTRUMENTS:

     The Company uses derivative financial instruments to reduce its exposure to
market risks from changes in foreign exchange rates and interest rates.  The
Company does not hold or issue financial instruments for speculative trading
purposes.  The derivative instruments used are currency forward contracts and
interest rate swap agreements.  These derivatives are non-leveraged and involve
little complexity.

     The Company monitors and controls its risk in the derivative transactions
referred to above by periodically assessing the cost of replacing, at market
rates, those contracts in the event of default by the counterparty.  The Company
believes such risk to be remote.  In addition, before entering into derivative
contracts, and periodically during the life of the contracts, the Company
reviews the counterparty's financial condition.
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The Company enters into contracts to buy and sell foreign currencies in the
future in order to protect the value of the US dollar denominated net
liabilities of its foreign subsidiaries.  The fair value method is used to
account for these instruments.  Under the fair value method, changes in fair
value are recognized in the consolidated balance sheets as a component of other
accrued expenses, and in the consolidated statements of operations as foreign
currency gain or loss.  For reporting purposes, the contractual assets or
liabilities of the foreign currency agreements are offset because the agreements
provide for a right of offset.  Any premiums or discounts related to foreign
currency contracts are amortized over the life of the contracts.

     At December 31, 1997, the Company had net foreign currency contracts
outstanding to buy forward the US dollar equivalent of Cdn. $45.4 million, 15.9
million pounds sterling and DM 6.4 million.  These contracts mature through May
1998.

     At December 31, 1996, the Company had net foreign currency contracts
outstanding to buy forward the US dollar equivalent of Cdn. $38.4 million and
14.5 million pounds sterling.

     The Company has entered into a cross-currency rate swap transaction with a
financial institution which hedges the foreign currency risk associated with a
portion of intercompany debt due from the Canadian subsidiary to ACC Corp. and
also converts the variable rate of interest to a fixed rate.  The agreement,
which commenced on December 31, 1996, has a two-year term.  Under the agreement,
the Company pays a fixed rate of interest on a notional amount of Cdn. $33.5
million at a rate of 6.98% and receives a variable rate of interest at the US
prime rate on a notional amount of $25.0 million. Interest is paid quarterly.
The net of the notional amounts based on the exchange rate at December 31, 1997
is reflected on the balance sheet at December 31, 1997.

     The Company uses interest rate swaps to effectively convert variable rate
obligations to a fixed rate basis.  The differentials to be received or paid
under these agreements are recognized as an adjustment to interest expense
related to the debt.  Gains and losses on terminations of interest rate swaps
are recognized when terminated in conjunction with the retirement of the
associated debt.  The fair value of interest rate swap agreements is estimated
based on quotes from the market makers of these instruments and represents the
estimated amounts that the Company would expect to receive or pay to terminate
these agreements.  The Company's exposure related to these interest rate swap
agreements is limited to fluctuations in the interest rate.  At December 31,
1997, the Company has entered into two interest rate swap agreements.  The first
agreement is for a notional amount of Cdn. $19.3 million, expires March 26,
1999, and ACC Canada pays interest at a fixed rate of 4.82% and receives
interest at the floating rate based on three month LIBOR.  The second agreement
is for a notional amount of 7.2 million pounds sterling, expires January 7,
2000, and ACC UK pays interest at a fixed rate of 7.41% and receives interest at
the floating rate based on three month LIBOR.  These swaps are settled every
three months and the related LIBOR rates are determined at each settlement date.
At December 31, 1996, the Company was not a party to any interest rate swap
agreements.

     M.  FINANCIAL INSTRUMENTS:

     The carrying amounts of cash and cash equivalents, trade receivables, other
current assets, accounts payable, and amounts included in accruals meeting the
definition of a financial instrument approximate fair value because of the
short-term maturity of these instruments.  The carrying value and related
estimated fair values for the Company's remaining financial instruments are as
follows:
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                           December 31, 1997     December 31, 1996
                                                          --------------------  --------------------
                                                          Carrying  Estimated   Carrying  Estimated
                                                           Amount   Fair Value   Amount   Fair Value
                                                          --------  ----------  --------  ----------
                                                                      (amounts in 000s)
<S>                                                       <C>       <C>         <C>       <C>
 
Off balance sheet financial instruments:
Foreign exchange forward contracts                         $     -     $61,751   $     -     $52,800
 
Foreign currency swap agreement receivable                  25,000      25,000    25,000      25,000
Foreign currency swap agreement payable                     23,448      23,448    24,516      24,516
Senior credit facility and lines of credit                  88,824      88,824       730         730
Capitalized lease obligation,including current portion       5,250       5,250     9,528       9,528
Interest Rate Swaps                                              -          12         -           -
</TABLE>

     Based on borrowing rates currently available to the Company for loans and
lease agreements with similar terms and average maturities, the fair value of
its debt approximates its recorded value.  Foreign currency contract obligations
are estimated by obtaining quotes from brokers.  Interest rate swaps are
estimated by obtaining quotes from the financial institution.  Letters of credit
and line of credit amounts are based on fees currently charged for similar
arrangements.

     N.  STOCK-BASED COMPENSATION:

     In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits either recording the
estimated  value of stock-based compensation over the applicable vesting period
or disclosing the unrecorded cost and the related effect on earnings per share
in the notes to the financial statements.  The Company has elected to comply
with the disclosure provisions of the statement.  The effects of SFAS No. 123 in
the pro forma disclosures are not indicative of future amounts.  The statement
does not apply to awards prior to 1995, and additional awards are anticipated.

     O.  USE OF ESTIMATES:

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.

     P.  RECLASSIFICATIONS:

     Certain reclassifications have been made to previously reported balances
for 1995 and 1996 to conform to the 1997 presentation.

2.   OPERATING INFORMATION

     Description of Business

     ACC is a switch-based provider of telecommunications services in the United
States, Canada, the United Kingdom and Germany.  The Company primarily provides
long distance telecommunications services to a diversified customer base of
businesses, residential customers, and educational institutions.  ACC also
provides local telephone service as a switch-based local exchange reseller in
upstate New York  and Massachusetts and as a reseller of local exchange services
in Ontario and Quebec, Canada.  ACC entered the German market during 1997 as a
switchless reseller of long distance telecommunications services and became a
switch-based provider in Germany in February  1998.  ACC operates an advanced
telecommunications network, consisting of ten long distance international and
domestic switches located in the US, Canada, the UK and Germany, six local
exchange switches located in the US, leased transmission lines, IRU's and
network management systems designed to optimize traffic routing.
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     ACC primarily targets business customers with both local service and long
distance needs, selected residential customers, and colleges and universities.
For the year ended December 31, 1997, long distance revenues accounted for
approximately 88% of total Company revenues, while local exchange and other
revenues were 12% of total Company revenues.

     At December 31, 1997, approximately $21.8 million of the Company's
telecommunications equipment was located on 65 university, college, and
preparatory school campuses in the northeastern United States and in the United
Kingdom.  Each of these institutions has signed agreements, with original terms
ranging from three to eleven years, for the provision of a variety of services
by the Company.

     In the United States, the Federal Communications Commission ("FCC") and
relevant state Public Service Commissions ("PSCs") have the authority to
regulate interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
services are provided. Legislation that substantially revises the US
Communications Act of 1934 (the "US Communications Act") was signed into law on
February 8, 1996.  The legislation provides specific guidelines under which the
regional operating companies ("RBOCs") can provide long distance services, which
will permit the RBOCs to compete with the Company in the provision of domestic
and international long distance services.  Further, the legislation, among other
things, opens local service markets to competition from any entity (including
long distance carriers such as AT&T, cable television companies, and utilities).

     Because the legislation opens the Company's US markets to additional
competition, particularly from the RBOCs, the Company's ability to compete could
be adversely affected.  Moreover, as a result of and to implement the
legislation, certain federal and other governmental regulations will be amended
or modified, and any such amendment or modification could have a material
adverse effect on the Company's business, results of operations, and financial
condition.

     In Canada, services provided by ACC TelEnterprises Ltd. are subject to or
affected by certain regulations of the Canadian Radio-television and
Telecommunications Commission (the "CRTC").  During 1997, the CRTC issued rules
that open the local telephone market to competition.  It is expected that these
rules will enable ACC Canada to bundle services and provide customers with local
as well as long distance services in areas that are not presently open to
competition.

     The telecommunications services provided by ACC Long Distance UK Ltd. are
subject to and affected by regulations introduced by The Office of
Telecommunications, the UK telecommunications regulatory authority ("Oftel").

     The German telecommunications market is expected to deregulate in January
1998, as a result of the European Union mandate to open telecommunications
markets to competition.  Most significantly, the Germany market is scheduled to
be open for interconnection in January 1998.   The telecommunications services
provided by ACC Telekommunikation GmbH  will be subject to and affected by
regulations introduced by the German Ministry of Post and Telecommunications.
During 1997, the Company received a Class 4 full voice telephony license which
is a requirement for the Company to become a switch-based provider of
telecommunications services in Germany.

     In addition to regulation, the Company is subject to other various risks in
connection with the operation of its business.  These risks include, among
others, dependence on transmission facilities-based carriers and suppliers,
price competition, and competition from larger industry participants.

     Concentrations with respect to trade receivables are limited, except with
respect to resellers, due to the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographic regions.  At December 31, 1997, approximately 26% of the
Company's billed accounts receivable balance was due from resellers.

3.         DEBT, LINES OF CREDIT, AND FINANCING ARRANGEMENTS

     A.    DEBT:

     The Company had the following debt outstanding as of December 31, 1997 and
1996 (amounts in 000s):
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                                        1997       1996
                                                                      ---------  ---------
<S>                                                                   <C>        <C>
 
          Senior credit facility....................................   $87,824    $     -
          Working capital lines of credit...........................     1,000        730
          Capitalized lease obligations payable in total monthly
             installments of $283 including interest, with rates
             ranging from 3.9% to 18.8%, maturing through
             2002, collateralized by related equipment..............     5,250      9,528
                                                                       -------   --------

                                                                       $94,074    $10,258
          Less current maturities                                       (3,853)    (4,251)
                                                                      --------   --------
                                                                       $90,221    $ 6,007
                                                                       =======   ========
 
                                                                        Year      Amount
                                                                      --------   --------
                                                                       (amounts in 000s)
 
          Maturities of debt, including capital lease obligations,
             are as follows at December 31, 1997:                         1998    $ 3,853
                                                                          1999      1,685
                                                                          2000        608
                                                                          2001     33,859
                                                                          2002     54,069
                                                                                 --------
                                                                                  $94,074
                                                                                 ========
</TABLE>


     B.  SENIOR CREDIT FACILITY AND LINES OF CREDIT:

     On July 21, 1995, the Company entered into an agreement for a $35.0 million
five year senior revolving credit facility with two financial institutions.
Borrowings were limited individually to $5.0 million for ACC UK and $2.0 million
for ACC US, with total borrowings for the Company limited to $35.0 million.
Initial borrowings under the agreement were used to pay down and terminate the
Company's previously existing lines of credit and to pay fees related to the
transaction.  Subsequent borrowings were used to finance capital expenditures
and to provide working capital.  On January 14, 1997 this facility was amended
and restated increasing the aggregate commitment to $100 million and including
three additional banks in the syndicate.  The amendment also allowed for
borrowing in Canadian dollars and increased the sublimits individually for ACC
UK to $20.0 million, ACC US to $15.0 million and Canada to $30.0 million.  Both
the $35 million facility and the $100 million facility had financial and other
covenants similar to those described below.

     In conjunction with the closing of the $35 million facility, the Company
issued to a financial advisor warrants to purchase 45,000 shares of the
Company's Class A Common Stock at an exercise price of $10.67 per share.  The
warrants were exercised in October 1996.

     Under the $35 million facility, the Company was obligated to pay the
financial institution an aggregate contingent interest payment based on the
minimum of $750,000 or the appreciation in value of 140,000 shares of the
Company's Class A Common Stock over the 18-month period ending January 21, 1997,
but not to exceed $2.1 million.  A payment of $2.1 million was made on January
15, 1997 in conjunction with the first amendment and restatement of the credit
facility, and was reflected as an accrued expense on the accompanying balance
sheet at December 31, 1996.

     On December 19, 1997, the Company amended and restated its credit facility
increasing the amount to $150 million.  The amended credit facility is
syndicated among six financial institutions.  Borrowings can be made in US
dollars, Canadian dollars, British pounds and German Deutsche Marks, and are
limited individually to $30.0 million for ACC Canada, $50.0 million for ACC UK,
and $20.0 million for ACC Germany, with any unused capacity available for ACC
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Corp. and its US subsidiaries.  The amended facility will be used to finance
investments, acquisitions and capital expenditures and provide working capital.
The agreement limits the amount that may be borrowed against this facility based
on the Company's operating cash flow.  The agreement also contains certain
covenants including restrictions on the payment of dividends, maintenance of a
maximum leverage ratio, minimum debt service coverage ratio, maximum fixed
charge coverage ratio, and minimum net worth, all as defined under the agreement
and subjective covenants.  At December 31, 1997, the Company had available $59.0
million under this facility. Borrowings under the facility are secured by
certain of the Company's assets and will bear interest at either the LIBOR rate
or the base rate (base rate being the greater of the prime interest rate or the
federal funds rate plus  1/2%), with additional percentage points added based on
a ratio of debt to operating cash flow, as defined in the agreement. The maximum
aggregate commitment and the sublimits of the amended facility are required to
be reduced by 8.0% per quarter commencing on March 31, 2000 until December 31,
2001, and by 9.0% per quarter commencing on March 31, 2002 until maturity of the
loan in December 2002.  All amounts outstanding under the amended facility may
become due and payable, at the discretion of the financial institutions, upon
closing of the merger with Teleport Communications Group (see Note 10,
"Mergers").  The Company is currently negotiating with its lenders to obtain a
waiver of this requirement.

     In connection with the credit facility, the Company has entered into two
interest rate swap agreements.  The amended and restated $150 million facility
requires the Company to enter into hedging agreements with respect to interest
rate exposure with an aggregate notional principal amount equal to 50% of the
outstanding borrowings if the Company's leverage ratio is equal to or exceeds
2.0 to 1.0.  The agreements have certain conditions regarding the interest
rates, and must have durations of at least two years.

     The weighted average interest rate during 1997 under these facilities was
6.97%.  Expenses related to obtaining these agreements are being amortized over
the original terms of the agreements.

     At December 31, 1997, the Company had issued letters of credit totaling
$3.2 million which reduce the available balance of the credit facility.  The
letters of credit guarantee performance to third parties.  Management does not
expect any material losses to result from these off-balance sheet instruments
because the Company will meet its obligations to the third parties.

     C.  WORKING CAPITAL LINES OF CREDIT:

     The Company has four working capital lines of credit for daily cash
management, one in each of the countries in which it operates.  The aggregate
amount available under these facilities at December 31, 1997 was approximately
$5.2 million of which $1.0 million was borrowed.  These facilities are due on
demand and are secured by a corporate guarantee or a letter of credit.  The
interest rates charged on these facilities are generally floating rates based on
the prime rate or local equivalent in each country.

     The Company had two working capital lines of credit for daily cash
management in 1996.  The first was a US $1.0 million facility, due on demand,
with an interest rate equal to US prime.  Outstanding borrowings on this line at
December 31, 1996 totaled $730,000 and the weighted average interest expense for
the year ended December 31, 1996 was 8.25%.  The second line was a Cdn. $1.0
million facility, due on demand, with an interest rate equal to Canadian prime
plus  1/2%.  There were no outstanding borrowings on this line at December 31,
1996.

4.   INCOME TAXES

     The following is a summary of the US and non-US income (loss) from
operations before provision for (benefit from) income taxes and minority
interest, the components of the provision for (benefit from) income taxes and
deferred income taxes, and a reconciliation of the US statutory income tax rate
to the effective income tax rate.

     Income (loss) from operations before provision for (benefit from) income
taxes and minority interest (amounts in 000s):

<TABLE>
<CAPTION>
                                                                                       1997          1996      1995
                                                                                     ---------     --------  ---------
<S>                                                                                  <C>           <C>       <C> 

</TABLE> 
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>

<S>                                                                                  <C>           <C>       <C> 
     US............................................................................  $  5,292      $ 6,675   $ 1,510
     Non-US........................................................................     5,575        4,184    (6,335)
                                                                                     --------      -------   -------
                                                                                     $ 10,867      $10,859   $(4,825)
                                                                                     ========      =======   =======
 
     Provision for (benefit from) income taxes (amounts in 000s):
 
                                                                                         1997         1996      1995
                                                                                     --------      -------   -------
 
     Current:
       US..........................................................................  $  1,797      $ 2,689   $   581
 
       Non-US......................................................................        --           --        --
                                                                                     --------      -------   -------
                                                                                        1,797        2,689       581
                                                                                     --------      -------   -------
     Deferred:
       US..........................................................................       107         (504)     (185)
 
       Non-US......................................................................    (1,428)          --        --
                                                                                     --------      -------   -------
                                                                                       (1,321)        (504)     (185)
                                                                                     --------      -------   -------
                                                                                     $    476      $ 2,185   $   396
                                                                                     ========      =======   =======
     Provision for (benefit from) deferred income taxes (amounts in 000s):
 
                                                                                         1997         1996      1995
                                                                                     --------      -------   -------
 
     Difference between tax and book depreciation
       and amortization............................................................  $  1,457      $   526   $   772
     Valuation allowance...........................................................    (1,894)          98     2,223
 
     Contingent interest...........................................................       459         (459)       --
     Severance costs...............................................................       113         (568)       --
     Software development costs....................................................        --            -      (502)
     Bad debt reserve..............................................................      (189)           -        --
 
     Other temporary differences...................................................    (1,267)        (101)     (103)
     Net operating loss............................................................        --           --    (2,575)
                                                                                     --------      -------   -------
                                                                                      ($1,321)       ($504)    ($185)
                                                                                     ========                =======
 
     Reconciliation of US statutory income tax rate to effective income tax rate:
 
                                                                                         1997         1996      1995
                                                                                     --------      -------   -------
 
     US statutory income tax rate..................................................      34.0%        34.0%    (34.0%)
     Non-deductible goodwill and customer base.....................................       6.1          2.6       2.7
     Foreign income taxes, including
       valuation allowance.........................................................     (34.0)       (13.1)     44.6

</TABLE> 
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                                                       1997          1996      1995
                                                                                     ---------     --------  ---------
<S>                                                                                  <C>           <C>       <C>

     State tax benefit.............................................................        -            -       (2.4)
     Other.........................................................................      (1.7)        (3.4)     (2.7)
                                                                                     --------      -------   -------
     Effective income tax rate.....................................................       4.4%        20.1%      8.2%
                                                                                     ========                =======
</TABLE>

     Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.  At
December 31, 1997, the Company had unused tax benefits of approximately $4.6
million related to non-US net operating loss carryforwards totaling $10.3
million for income tax purposes, of which $2.5 million expire in 2000, $4.8
million expire in 2001, $0.9 million expire in 2002, and $2.1 million expire in
2004.  However, the Company has the ability to adjust certain depreciation and
amortization adjustments in Canada which may be used to extend its ability to
utilize certain net operating losses.  In addition, the Company had $.9 million
of deferred tax assets related to non-US temporary differences.  The valuation
allowance was decreased by $4.4 million to approximately $5.2 million to reflect
tax benefits recognized during 1997.  The remaining valuation allowance reflects
the uncertainty of realizing the benefit of the non-US loss carryforwards and
temporary differences.

     The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1997 and 1996 (amounts in
000s):

                                                            1997      1996   
                                                          --------  --------
 
     Deferred tax assets:
       Depreciation and amortization -- non-US..........  $    93   $   967
       Contingent interest..............................        -       459
       Severance costs..................................      227       568
       Other non-deductible reserves and accruals.......      916       528
       Non-US operating loss carryforwards..............    4,644     6,702
       Less -- valuation allowance for non-US deferred
          tax assets....................................   (3,309)   (7,669)
                                                          -------   -------
       Net deferred tax assets..........................    2,571     1,555
     Deferred tax liabilities:
       Depreciation and amortization....................   (1,888)   (2,767)
                                                          -------   -------
                                                          $   683   $(1,212)
                                                          =======   =======

5.   REDEEMABLE PREFERRED STOCK

     On May 22, 1995, the Company completed a $10.0 million private placement of
12% subordinated convertible debt to a group of investors.  The notes were
converted into 10,000 shares of cumulative, convertible Series A Preferred Stock
on September 1, 1995. The Series A Preferred Stock had a liquidation value of
$1,000 per share, and accrued cumulative dividends, compounded on the
accumulated and unpaid balance, as defined, at a rate of 12% annually. The
Series A Preferred Shares were converted into 937,500 shares of Class A Common
Stock at a conversion price of $10.67 per share in October 1996.  Pursuant to
the terms of the Series A Preferred Stock, the cumulative dividends were
forfeited, due to conversion by the investors.

     The Series A Preferred Stock contained terms of mandatory redemption, on
the seventh anniversary of the private placement, at a price per share equal to
the greater of (i) the liquidation value of $1,000 per share plus all accrued
and unpaid dividends; or (ii) the fair market value of the underlying Class A
Common Stock into which the Series A Preferred Stock was convertible.
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Concurrent with the private placement, warrants to purchase 150,000 shares
of the Company's Class A Common Stock were issued at an initial exercise price
of $10.67 per share.  These warrants were exercised in October 1996.  In
addition, the Company issued warrants to purchase Class A Common Stock that were
to become exercisable upon one or more optional repayments of the Series A
Preferred Stock at an exercise price of $10.67 per share, subject to
adjustments, as defined, and permitted each holder to acquire initially the same
number of shares of Class A Common Stock into which the Series A Preferred Stock
was convertible as of the relevant repayment date.  These warrants were
extinguished in October 1996, as a result of the conversion of the Series A
Preferred shares.  Upon conversion in October 1996, unamortized issuance costs
of approximately $1.1 million were reclassified into the appropriate equity
accounts.

6.   EQUITY

     During 1995, the Company's shareholders approved an amendment to the
Company's Certificate of Incorporation that authorized the creation of 2,000,000
shares of Series A Preferred Stock, par value $1.00 per share; authorized the
creation of 25,000,000 shares of Class B non-voting Common Stock, par value
$.015 per share; and redesignated the 50,000,000 shares of Common Stock, par
value $.015 per share, that were previously authorized, for issuance as
50,000,000 shares of Class A Common Stock.

     On June 14, 1996, the Company's Board of Directors authorized a three-for-
two stock split in the form of a stock dividend issued on August 8, 1996 of the
Company's Class A Common Stock to shareholders of record as of July 3, 1996.
Share and per share amounts in the accompanying financial statements and
footnotes have been adjusted for the split.

     A.  PUBLIC OFFERINGS:

     In May 1996, the Company completed a public offering of 3,018,750 shares of
its Class A Common Stock at a price of $22.50 per share. The offering raised net
proceeds of $63.1 million, after deduction of fees and expenses of approximately
$4.8 million.  The net proceeds were used to reduce all indebtedness under the
Company's credit facility, for working capital needs, and for capital
expenditures.

     In October 1996, the Company completed a public offering of 1,194,722
shares of its Class A Common Stock, on behalf of selling shareholders, at a
price of $45.00 per share.  937,500 of the shares resulted from the conversion
to Class A Common Stock of all of the outstanding Series A Preferred Stock (see
Note 5). Additionally, outstanding warrants and options to purchase the
Company's Class A Common Stock were exercised by the holders and the underlying
shares of Class A Common Stock were sold. The Company received the exercise
price of the warrants and options, approximately $2.1 million, and incurred fees
and expenses of approximately $270,000.

     B.  PRIVATE PLACEMENT:

     During 1995, the Company made an offshore sale of 1,237,000 shares of its
Class A Common Stock at an average price of $9.69 per share.  The sale raised
net proceeds of $11.1 million after deduction of fees and expenses of $0.9
million.  In conjunction with this transaction, warrants to purchase 123,750
shares of Class A Common Stock at an exercise price of $9.60 per share were
issued.  These warrants were exercised in 1995.

     C.  STOCK-BASED COMPENSATION:

     The Company has four stock-based compensation plans, which are described
below.  The Company accounts for these plans under APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for incentive stock
options, nonqualified stock options, and the employee stock purchase plan.  Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (amounts in 000s, except per share data):
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
                                                       1997     1996     1995
                                                       ----     ----     ----

Net income (loss)                        As reported  $10,391  $7,765  $(5,354)
                                         Pro forma    $ 2,866  $4,869  $(6,251)
 
Net income (loss) per share - basic      As reported  $  0.62  $ 0.37  $ (0.52)
                                         Pro forma    $  0.17  $ 0.17  $ (0.60)
 
Net income (loss) per share - diluted    As reported  $  0.59  $ 0.34  $ (0.52)
                                         Pro forma    $  0.16  $ 0.15  $ (0.60)
 

     Compensation cost for stock incentive right agreements recognized in the
statement of operations for the years ended December 31, 1997 and 1996 was
approximately $0.6 million and $0.1 million respectively.  Stock incentive
rights issued in 1997 and 1996 were 25,000 and 30,000 respectively.  The SFAS
No. 123 method of accounting has not been applied to options granted prior to
January 1, 1995, so the resulting pro forma compensation cost may not be
representative of that to be expected in future years.

     In connection with the merger with Teleport Communications Group Inc.
("TCG") all outstanding and unexercised options and SIRs will be converted to
options and SIRs of TCG upon the closing of the merger (See Note 10, "Mergers").

     EMPLOYEE LONG-TERM INCENTIVE PLAN:

     The Company has an Employee Long-Term Incentive Plan (the "Plan"), whereby
options to purchase shares of Class A Common Stock may be granted to officers
and key employees of the Company.  In July 1995, shareholders of the Company
approved an additional 750,000 shares of Class A Common Stock to be reserved for
issuance under this Plan, and authorized the issuance of stock incentive rights
("SIRs") thereunder.  In June 1996, the Company's shareholders approved an
additional 750,000 shares for issuance under the Plan.  In June 1997, the
Company's shareholders approved an additional 800,000 shares for issuance under
the Plan, bringing the total shares reserved for issuance to 5,300,000.  The
exercise price of the stock options must not be less than the market value per
share at the date of grant, and no options shall be exercisable after ten years
and one day from the date of grant.  Options generally become exercisable on a
pro-rata basis over a four-year period beginning on the date of grant and 25% on
each of the three anniversary dates thereafter.  SIRs represent the right to
receive shares of the Company's Class A Common Stock without any cash payment to
the Company, conditioned only on continued employment with the Company through a
specified incentive period of at least three years.  At December 31, 1997,  SIRs
for 55,000 shares had been awarded.  50% of the shares vest over a three-year
period beginning on the date of grant, and 25% on each of the two anniversary
dates thereafter.

     For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997, 1996 and 1995:

                                              1997      1996      1995
                                              ----      ----      ---- 
 
Dividend yield                                0%        0%        0%
Expected volatility                           51%       43%       44%
Risk-free interest rate                       6.04%     5.60%     7.26%
Expected life                                 3 years   3 years   3 years
 
 Changes in the status of the Plan during 1997, 1996, and 1995
  are summarized as follows:

<TABLE> 
                                                                          1997                 1996                   1995
                                                                          ----                 ----                   ----
                                                                    Shares    Wtd. Avg.   Shares   Wtd. Avg     Shares    Wtd. Avg
                                                                    (000s)    Ex. Price   (000s)   Ex. Price   (000s)    Ex. Price
                                                                    -------   ---------   ------   ---------   -------   ---------
                                                                    <S>       <C>         <C>      <C>         <C>       <C> 
</TABLE> 
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE> 

<S>                                                                   <C>       <C>         <C>      <C>         <C>       <C> 
Outstanding at beginning of year                                      1,598      $13.97    1,606      $ 8.81     1,178      $ 9.02
Granted                                                               1,095       29.99      681       14.95       512       10.23
Exercised                                                              (573)      12.61     (588)       7.99       (50)       9.53
Forfeited                                                              (243)      27.84     (101)       8.72       (34)      10.42
                                                                     ------               ------                ------
Outstanding at end of year                                            1,877       21.98    1,598       13.97     1,606        8.81
                                                                     ======               ======                ======
Number of options at end of year:
Exercisable                                                             617       17.00      637       12.65       608        7.94
Available for grant                                                     843                  895                   725
Weighted average fair
value of options granted                                             $12.37               $ 7.09                 $3.69
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1997 (shares in thousands):

<TABLE>
<CAPTION>
                      Options Outstanding                           Options Exercisable
                      -------------------                           -------------------
                     Number          Wtd-Avg.              Number
Range of           Outstanding       Remaining            Wtd. Avg.       Exercisable  Weighted Avg.
Exer. Prices       at 12/31/97      Cont. Life           Exer. Price      at12/31/97   Exercise Price
-----------------  -----------  -------------------  -------------------  -----------  --------------
<S>                <C>          <C>                  <C>                  <C>          <C>
 
$0 to 9.50                 149                  7.6 years         $ 5.90           39          $ 9.25
$9.83 to 12.50             402                  6.9                10.69          285           10.84
$15.37                     304                  8.0                15.37          128           15.37
$17.50 to 23.00            130                  9.4                21.09            6           23.00
$28.83                      93                  8.5                28.83           43           28.83
$30.25 to 32.00            678                  9.1                30.57          104           30.53
$43.38                     121                  9.8                43.38           12           43.38
                         -----                                                    ---
$0 to 43.38              1,877                  8.1                21.98          617           17.00
                         =====                                                    ===
</TABLE>

     Employee Stock Purchase Plan:


     In October 1994, the Company's shareholders approved an employee stock
purchase plan which allows eligible employees to purchase shares of the
Company's Class A Common Stock at 85% of market value on the date on which the
annual offering period begins, or the last business day of each calendar quarter
in which shares are purchased during the offering period, whichever is lower.
In June 1997, the Company's shareholders approved an additional 200,000 shares
for issuance under the plan, bringing the total shares available for issuance to
950,000.  Class A Common Stock reserved for future employee purchases aggregated
847,748 shares at December 31, 1997.  There were 35,450 shares issued at an
average price of $8.37 per share during the year ended December 31, 1995; 19,341
shares issued at an average price of $17.69 per share during the year ended
December 31, 1996; and 28,339 shares issued at an average price of $24.24 per
share during the year ended December 31, 1997.  There have been no charges to
income in connection with this plan other than incidental expenses related to
the issuance of shares.  The weighted average fair value of shares offered in
1997 and 1996 were $14.82 and $3.80, respectively.  In connection with the
merger with Teleport Communications Group Inc., the employee stock purchase plan
has been discontinued effective January 1, 1998 (see Note 10, "Mergers").

     For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following  weighted-average assumptions used for
grants in 1997, 1996 and 1995:

                             1997       1996       1995
                             ----       ----       ----    
                             
Dividend yield               0%         0%         0%      
Expected volatility          57%        19%        18%
Risk-free interest rate      6.04%      5.77%      7.66%
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Expected life              3 months   3 months   3 months
 

     NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN:

     In June 1996, the Company's shareholders approved a Non-Employee Directors'
Stock Option Plan (the Directors' Stock Option Plan).  The Directors' Stock
Option Plan provides for grants of options to purchase 7,500 shares of Class A
Common Stock at an exercise price of 100% of the fair market value of the stock
on the date of grant, which options vest at the first anniversary of the date of
grant.  The maximum number of shares with respect to which options may be
granted under the Directors' Stock Option Plan is 375,000 shares, subject to
adjustment for stock splits, stock dividends, and the like.

     Each option shall be exercisable for ten years and one day after its date
of grant.  Any vested option is exercisable during the holder's term as a
director (in accordance with the option's terms) and remains exercisable for one
year following the date of termination as a director (unless the director is
removed for cause).  Exercise of the options would involve payment in cash,
securities, or a combination of cash and securities.

For purposes of the pro forma disclosure above, the fair value of each option
grant is estimated on the date of the grant using the Black-Scholes option-
pricing model with the following  weighted-average assumptions used for grants
in 1997, 1996 and 1995:

                             1997      1996    1995
                           --------  --------  ----
 
Dividend yield                   0%        0%     -
Expected volatility             54%       44%     -
Risk-free interest rate       6.36%     5.39%     -
Expected life              3 years   3 years      -
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Changes in the status of the Directors' Stock Option Plan during 1997 and 1996
are summarized as follows:

<TABLE>
<CAPTION>
                                                   1997                             1996        
                                                   ----                             ----         
                                         Shares       Weighted Average       Shares       Weighted Average
                                         (000s)        Exercise Price        (000s)        Exercise Price
                                     ---------------  ----------------  ----------------  ----------------
<S>                                  <C>              <C>               <C>               <C>
 
Outstanding at beginning of year           60             $22.08               --                 --       
Granted                                    45              17.50               60             $22.08       
Exercised                                  --                 --                                           
Forfeited                                   7              17.50               --                 --       
                                          ---                                 ---        
Outstanding at end of year                 98             $20.32               60             $22.08
Number of options at end of year:        
Exercisable                                60             $22.08               30             $15.33
Available for grant                       277                                 315
 
Range of prices:
   Granted during the year           $        17.50                     $15.33 - $28.83
   Outstanding at end of year        $15.33 - 28.83                     $15.33 - $28.83
   Exercised during the year         $  -                               $  -
Weighted average fair
 value of options granted            $         7.33                     $ 5.41

</TABLE>

The table summarizing information about stock options outstanding, required by
SFAS No. 123, is not included, as the impact of the application of this
statement would not be material.

     UNITED KINGDOM SHARESAVE SCHEME:

     In August 1996, the Executive Compensation Committee of the Board of
Directors approved the United Kingdom Sharesave Scheme whereby eligible
employees of ACC UK  are entitled to purchase shares of the Company's Class A
Common Stock at an exercise price equal to 85% of market value on the date that
the purchase period begins.  Employees contribute the purchase price through
monthly payroll deduction of a predetermined amount, not to exceed 250 pounds
sterling, over a three year period, at the end of which the shares are
purchased.  A total of 150,000 shares are reserved for issuance under this plan,
of which options for 17,160 shares at an exercise price of $32.08 were granted
in 1996, and options for 7,259 shares at an exercise price of $26.56 were
granted in 1997.  The weighted average fair value of options offered in 1997 and
1996 was $12.63 and $14.29.

     For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997, 1996 and 1995:

                             1997      1996    1995
                           --------  --------  ----
 
Dividend yield             0%        0%         -
Expected volatility        48%       40.8%      -
Risk-free interest rate    5.93%     6.45%      -
Expected life              3 years   3 years    -


The table summarizing information about stock options outstanding, required by
SFAS No. 123, is not included, as the impact of the application of this
statement would not be material.
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     D.  SHAREHOLDER RIGHTS PLAN:

     In October 1997, the Board of Directors adopted a Shareholder Rights Plan.
In connection with this plan, the Board of Directors declared a dividend of one
Preferred Stock Purchase Right (Right) on each outstanding share of ACC Common
Stock.  The dividend was distributed on October 15, 1997 to shareholders of
record on that date.  Subject to certain exceptions, the Rights would be
exercisable only if a person or group acquired 15% or more of ACC's Common Stock
or announced a tender or exchange offer which would result in ownership by a
person or group of 15% or more of the Common Stock.  The plan was amended in
November 1997 to reduce the threshold by which the Rights become exercisable
from 15% to 7.5%.  Any shareholder whose ownership exceeded 7.5% on November 6,
1997, and who did not acquire additional shares, was exempt from this amendment.
Each Right entitles its holder to buy one one-thousandth of a share of Series A
preferred stock at an exercise price of $150.00.  Each Right entitles its holder
(other than the acquiring person or group) to purchase, at the exercise price,
shares of the preferred stock or shares of the acquiring company having a market
value of twice such price.  The Company could redeem the rights for $.01 per
Right before the acquisition by a person or group of 7.5% or more of ACC's
Common Stock  and thereafter under certain circumstances.  In connection with
the merger with Teleport Communications Group Inc. ("TCG") (see Note 10,
"Mergers"), the Board of Directors amended the Shareholder Rights Plan to exempt
TCG from the 7.5% threshold by which the rights become exercisable.  The
amendment will remain in effect until December 31, 1998.

7.   COMMITMENTS AND CONTINGENCIES

     A.  OPERATING LEASES:

     The Company leases office space and other items under various agreements
expiring through 2004.  At December 31, 1997, the minimum aggregate payments
under non-cancelable operating leases are summarized as follows (amounts in
000s):

               Year                                      Amount
               ----                                      ------

               1998.................................    $ 6,373
               1999.................................      5,339
               2000.................................      4,991
               2001.................................      4,753
               2002.................................      4,665
               Thereafter...........................      6,916
                                                        -------
                                                        $33,037
                                                        =======

     Rent expense for the years ending December 31, 1997, 1996, and 1995 was
approximately $4,583,000, $4,006,000, and $1,965,000, respectively.

     B.  EMPLOYMENT AND OTHER AGREEMENTS:

     On December 5, 1997 the Company's Chairman and Chief Executive Officer died
unexpectedly.  As an interim measure, the Board of Directors created an Office
of the Chief Executive, electing each of Christopher Bantoft (President of
European Operations), Steve Dubnik (President and Chief Operating Officer of
North American Operations), and Michael Daley (Executive Vice President and
Chief Financial Officer) to this office.  The Company has employment agreements
with each of Messrs. Bantoft, Dubnik and Daley, which provides for continuation
of salary and benefits in the event each is terminated without cause or in the
event of a change in control of the Company.  At December 31, 1997, the
Company's maximum potential liability for each of these individuals separately
is approximately $350,000.

     The Company had a contract with a former Chairman which provided for an
annual base salary, including an annual bonus and other benefits during his
employment term, and also for a payment of $1.0 million, payable over a three
year term, in the event that he resigned or was terminated without cause. During
1996, the Chairman of the Board resigned his position as Chairman of the
Company.  At December 31, 1996, under this agreement, the Company had accrued
the entire $1.0 million, and a payment of $0.3 million was made in each of
January 1997 and January 1998.  In consideration 
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

for a non-compete agreement which has a three-year term beginning in January
1997, the former Chairman received a payment of $750,000, which was expensed in
1995.

     The Company has entered into employee continuation incentive agreements
with certain other key management personnel.  These agreements provide for
continued compensation and continued vesting of options previously granted under
the Company's Employee Long-Term Incentive Plan for a period of up to one year
in the event of termination without cause or in the event of termination after a
change in control of the Company.  At December 31, 1997, the Company's estimated
maximum potential liability under these agreements totaled approximately $3.7
million (excluding the Office of the Chief Executive).

     C.  PURCHASE COMMITMENTS:

     At December 31, 1997, the Company had outstanding purchase commitments
totaling approximately $7.5 million primarily related to the purchase of local
exchange switches for the US business, the purchase of a microwave for the UK
operation and other capital expenditures.

     In 1993, ACC Long Distance Ltd., a subsidiary of ACC TelEnterprises Ltd.,
entered into an agreement with one of its vendors to lease long distance
facilities totaling a minimum of Cdn. $1.0 million per month for seven years.
The Company currently leases more than Cdn. $1.0 million per month of such
facilities from this vendor.  This commitment allows the Company to receive up
to a 60% discount on certain monthly charges from this vendor.

     D.  DEFINED CONTRIBUTION PLANS:

     The Company provides a defined contribution 401(k) plan to substantially
all US employees.  Amounts contributed to this plan by the Company were
approximately $314,000, $240,000, and $183,000 in 1997, 1996, and 1995,
respectively.  The Company's Canadian subsidiary provides a registered
retirement savings plan to substantially all Canadian employees.  Amounts
contributed to this plan by the Company were Cdn. $229,000, Cdn. $186,000, and
Cdn. $106,000 in 1997, 1996, and 1995, respectively.  In 1997, the Company's UK
subsidiary established a group retirement plan available to substantially all UK
employees.  Amounts contributed to this plan in 1997 were 37,400 pounds
sterling.

     E.  ANNUAL INCENTIVE PLAN:

     During 1997, no incentive bonuses were authorized, as performance criteria
specified under the incentive plan were not met.  During 1996, the Company's
Board of Directors authorized incentive bonuses based upon the Company's sales,
gross margin, operating expenses, and operating income.  Prior to 1995,
incentive bonuses were discretionary as determined by the Company's management
and approved by the Board of Directors.  The amounts included in operations for
these incentive bonuses were approximately $0, $2.6 million, and  $1.4 million
for the years ended December 31, 1997, 1996, and 1995, respectively.

     F.  LEGAL MATTERS:

     The Company is subject to litigation from time to time in the ordinary
course of business.  Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management, such liability as
of December 31, 1997 will not have a material adverse effect on the Company's
financial condition or results of operations.

8.    GEOGRAPHIC AREA INFORMATION (AMOUNTS IN 000S)
Year ended December 31, 1997:

<TABLE>
<CAPTION>
                                   United                       United
                                   States        Canada        Kingdom       Germany       Eliminations      Consolidated
                                   ------        ------        -------       -------       ------------      ------------  
<S>                             <C>           <C>            <C>           <C>           <C>                <C>
Revenue from unaffiliated
   customers                        $120,627      $116,638       $132,151      $ 3,197   $                         $372,613
Intercompany revenue                  43,460         3,875          7,377            -            (54,712)                -
                                    --------      --------       --------      -------          ---------          --------
</TABLE> 
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>

<S>                             <C>           <C>            <C>           <C>           <C>                <C>
Total revenue                       $164,087      $120,513       $139,528      $ 3,197          $ (54,712)         $372,613
                                    --------      --------       --------      -------          ---------          --------
Income (loss)  from operations
   before income taxes              $  8,254      $ (1,079)      $  6,654      $(2,962)  $             -           $ 10,867
                                    --------      --------       --------      -------          ---------          --------
Identifiable assets at
   December 31, 1997                $258,390      $ 96,679       $ 90,649      $12,929          $(142,335)         $316,312
                                    --------      --------       --------      -------          ---------          --------
</TABLE>

YEAR ENDED DECEMBER 31, 1996:

<TABLE>
<CAPTION>
                                   United                      United
                                   States        Canada       Kingdom       Germany      Eliminations      Consolidated
                                ------------  ------------  ------------  -----------  -----------------  ---------------
<S>                             <C>           <C>           <C>           <C>          <C>                <C>
Revenue from unaffiliated
   customers                        $ 99,461      $117,168       $92,138  $        -   $             -           $308,767
Intercompany revenue                  35,060         2,917         3,519           -            (41,496)              -
                                    --------      --------       -------  -----------         ---------          --------
Total revenue                       $134,521      $120,085       $95,657  $        -          $ (41,496)         $308,767
                                    --------      --------       -------  -----------         ---------          --------
Income (loss)  from operations
   before income taxes              $  6,676      $  3,452       $   731  $        -   $              -          $ 10,859
                                    --------      --------       -------  -----------         ---------          --------
Identifiable assets at
   December 31, 1996                $182,435      $ 94,165       $49,667  $        -          $(122,236)         $204,031
                                    --------      --------       -------  -----------         ---------          --------
</TABLE>



Year ended December 31, 1995:

<TABLE>
<CAPTION>
                                 United                      United
                                 States        Canada        Kingdom       Germany      Eliminations      Consolidated
                              ------------  ------------  -------------  -----------  ----------------  ----------------
<S>                           <C>           <C>           <C>            <C>          <C>               <C>
Revenue from unaffiliated
   customers                      $ 65,975       $84,421       $38,470   $      -     $           -            $188,866
Intercompany revenue                15,256         4,071         1,143          -            (20,470)                 -
                                  --------       -------       -------   -----------         --------          --------
Total revenue                     $ 81,231       $88,492       $39,613   $      -            $(20,470)         $188,866
                                  --------       -------       -------   -----------         --------          --------
Income (loss)  from
 operations
   before income taxes            $  1,512       $   456       $(6,793)  $      -     $            -           $ (4,825)
                                  --------       -------       -------   -----------         --------          --------
Identifiable assets at
   December 31, 1995              $105,995       $43,775       $31,593   $      -            $(57,379)         $123,984
                                  --------       -------       -------   -----------         --------          --------
</TABLE>

     Intercompany revenue is recognized when calls are originated in one country
and terminated in another country over the Company's leased network.  This
revenue is recognized at rates similar to those charged by unaffiliated
companies.  Income from operations before income taxes of the Canadian, United
Kingdom and German operations includes corporate charges for general corporate
expenses and interest.

     Corporate general and administrative expenses are allocated to subsidiaries
based on time dedicated to each subsidiary by members of corporate management
and staff.

9.   RELATED PARTY TRANSACTIONS

     The Company's headquarters is in a building owned by a partnership in which
the Company's former chairman of the board has a 50% ownership interest.  A
Special Committee of the Company's Board of Directors reviewed the lease to
ensure that the terms and conditions were commercially reasonable and fair to
the Company prior to approval of the plan in February 1994.  Minimum monthly
lease payments for this space range from $44,000 to $60,000 over the ten-year
term of the lease, which began on May 1, 1994.  The Company also pays a pro-rata
share of maintenance costs.  
<PAGE>
 
                           ACC. CORP AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Total rent and maintenance payments under this lease were approximately
$0.8 million, $0.8 million, and $0.6 million during 1997, 1996, and 1995,
respectively.

     During 1994 and early 1995, the Company initiated efforts to obtain new
telecommunications software programs from a software development company.  The
Company's former chairman of the board and chief executive officer was a
controlling shareholder of the software development company during such period.
In May 1995, anticipating material agreements with the software development
company, all of the common shares owned by the Company's former chairman of the
board were placed in escrow under the direction of a Special Committee of the
Company's Board of Directors.  The Special Committee, its outside consultants,
and the Company's management then proceeded to review and evaluate the software
technology and the terms and conditions of the proposed transactions.

     In 1996, the Special Committee approved a software license agreement
between the Company and a newly formed company (the purchaser of the software
development company's intellectual property and other assets and an affiliate of
such company).  Immediately prior to entering into the agreement, the shares of
the software development company held in escrow were returned to such company
and the related party nature of the Company's relationship with the software
development company was thereby extinguished.  Total amounts accrued at December
31, 1997, 1996, and 1995 relating to this vendor were $0, $0 and $44,000,
respectively.  For an aggregate consideration of $1.8 million, paid in 1996, the
Company received a perpetual right to use the telecommunications software
programs.  Approximately $0.2 million was paid to the vendor in 1996 and was
expensed prior to entering into the agreement.  During 1995, the Company paid
the software development company $1.2 million, of which $772,000, relating to
the purchase of certain hardware and acquisition of certain software licenses,
was capitalized and recorded on the balance sheet as a component of property,
plant, and equipment and $500,000 relating to software development was expensed.

     The Company had notes receivable from two officers which totaled $370,000
as of December 31, 1996.  These notes were paid in full in 1997.

10.  MERGERS

     On October 28, 1997, the Company entered into an agreement and plan merger
with US WATS Inc. ("USW"), a switch-based long distance provider based in Bala
Cynwyd, Pennsylvania.  Upon consummation of the merger, USW was to become a
wholly owned subsidiary of ACC, and the shares of USW common stock that were
issued and outstanding at the effective of the USW merger, other than the shares
held by shareholders who perfected their statutory dissenters' rights, would
have been converted automatically into the right to receive a number of shares
of ACC stock determined pursuant to the merger agreement.

     On March 11, 1998, ACC and USW agreed to a mutual termination of the
agreement and plan of merger, by and among USW and ACC.

     In November 1997, the Company signed a definitive agreement to be acquired
by Teleport Communications Group Inc. ("TCG"), the largest competitive local
exchange carrier in the US, in a stock for stock merger.  Under the agreement,
ACC shareholders will receive $50 in value of TCG Class A common stock for each
share of ACC stock, based upon the average closing price of TCG stock for a ten
trading day period preceding the date of merger.  The total value of the
transaction would be approximately $1 billion.  However, if TCG's average
closing price during the ten day trading period prior to closing is below $45 or
above $55, the exchange ratios will be fixed at 1.11111 shares of TCG stock or
0.90909 shares of TCG stock, respectively.  It is anticipated that the merger
will be treated as a tax-free exchange.  The merger is subject to the approval
of the holders of a majority of the outstanding shares of ACC and to other
conditions, including various regulatory consents in the US and certain foreign
jurisdictions.

     In connection with the proposed mergers with USW and TCG, the Company has
incurred costs for certain investment advisory, legal, accounting and other
professional services.  The Company has recorded $5.0 million of such costs
(reflected in the consolidated statements of operations as "merger costs")  in
1997, of which $1.3 million as been paid through December 31, 1997 and the
remaining $3.7 million is accrued and expected to be paid during 1998.
<PAGE>
 
     (b) The following Financial Statements for ACC Corp. Employee Stock
Purchase Plan are included herewith as follows:

     Report of Independent Public Accountants

     Statements of Financial Condition, December 31, 1997 and 1996

     Statements of Changes in Participants' Equity for the years ended December
     31, 1997, 1996 and 1995

     Notes to Financial Statements
<PAGE>
 
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Plan Administrator of the ACC Corp. Employee Stock Purchase Plan:

     We have audited the accompanying statements of financial condition of the
ACC Corp. Employee Stock Purchase Plan as of December 31, 1997 and 1996, and the
related statements of changes in participants' equity for each of the three
years ended December 31, 1997.  These financial statements are the
responsibility of the Plan's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial condition of the Plan as of December 31,
1997 and 1996, and the results of its changes in participants' equity for each
of the three years ended December 31, 1997 in conformity with generally accepted
accounting principles.

                              /s/ Arthur Andersen LLP

Rochester, New York
March 13, 1998
<PAGE>
 
                                   ACC Corp.
                          Employee Stock Purchase Plan
                       Statements of Financial Condition
                           December 31, 1997 and 1996
 
 
ASSETS:                                        1997          1996  
                                              ------        ------ 
                                                                   
     Receivable from ACC Corp.                $2,361        $1,627 
                                              ------        ------ 
TOTAL ASSETS                                  $2,361        $1,627 
                                              ======        ======  
                                                                    

LIABILITIES AND PARTICIPANTS' EQUITY:

     Participants' equity                     $2,361        $1,627
                                               -----         -----
                                                            
TOTAL LIABILITIES AND PARTICIPANTS' EQUITY    $2,361        $1,627
                                               =====        ======



The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
 
                                   ACC Corp.
                          Employee Stock Purchase Plan
                 Statements of Changes in Participants' Equity
              For the Years Ended December 31, 1997, 1996 and 1995
 
 
ADDITIONS:                                            1997      1996      1995
                                                    --------  --------  --------

     Employee contributions                         $595,062  $356,514  $331,256
                                                    --------  --------  --------
DEDUCTIONS:                                  
     Stock purchased                                 583,349   343,870   297,027
     Employee withdrawals                             10,979    11,700    34,103
                                                    --------  --------  --------
     Total deductions                                594,328   355,570   331,130
                                                    --------  --------  --------
NET INCREASE IN PARTICIPANTS' EQUITY                     734       944       126
PARTICIPANTS' EQUITY, BEGINNING OF PERIOD              1,627       683       557
                                                    --------  --------  --------
PARTICIPANTS' EQUITY, END OF PERIOD                 $  2,361  $  1,627  $    683
                                                    ========  ========  ========
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
 
                                   ACC Corp.
                          Employee Stock Purchase Plan
                         Notes to Financial Statements


1.   PLAN DESCRIPTION:

     The ACC Corp. Employee Stock Purchase Plan (the "Plan") was adopted by the
Board of Directors on February 8, 1994 and was ratified by the shareholders on
October 13, 1994.  The first offering period began July 1, 1994.  Officers did
not participate until the ratification by the shareholders occurred.  The Plan
was established to provide employees with increased employment and performance
incentives and to enhance ACC Corp.'s (the "Company") efforts to attract and
retain employees of outstanding ability.  The Plan permits eligible Company
employees to make periodic purchases of shares of the Company's Class A Common
Stock through payroll deductions at prices below then-prevailing market prices.
As of December 31, 1997, 651,692 shares of the Company's Class A Common Stock
(which may be treasury shares, authorized and unissued shares, or a combination
thereof at the Company's discretion) are reserved for future issuance under the
Plan.  The Plan is administered by the Executive Compensation Committee of the
Board of Directors of ACC Corp. (the "Committee").  None of the members of the
Committee is eligible to participate in the Plan.  Reference should be made to
the Plan for more complete information.

     Any employee of the Company or any of its subsidiaries who is employed at
least 20 hours per week is eligible to participate in the Plan.  Participants
may enroll in the Plan prior to an offering commencement date.  Employees may
authorize payroll deductions of up to 15% of their then-current straight-time
earnings during the term of an offering, which will be applied to the purchase
of shares under the Plan.  These payroll deductions will begin on that offering
commencement date and will end on the last purchase date applicable to any
offering in which he/she holds any options to purchase shares of the Company's
Class A Common Stock, or if sooner, on the effective date of his/her termination
of participation in the Plan.  Newly hired employees hired subsequent to an
offering commencement date may begin participation in the Plan at the beginning
of the next calendar quarter following their date of hire.

     Payroll deductions will be held by the Company as part of its general funds
for the credit of the participants and will not accrue interest pending the
periodic purchase of shares under the Plan.  On the last business day of each
calendar quarter during the term of an offering, a participant will
automatically be deemed to have exercised his/her options to purchase, at the
applicable purchase price, the maximum number of full shares that can be
purchased with the amounts deducted from the participant's pay during that
quarter, together with any excess funds from preceding quarters.  The purchase
price at which shares may be purchased under the Plan is 85% of the closing
price of the Company's Class A Common Stock in Nasdaq trading on either a) the
offering commencement date (or, in the case of interim participation by newly
hired employees, the date on which they are permitted to begin participation in
that offering) or b) the date on which shares are purchased through the
automatic exercise of an option to purchase shares under the Plan, whichever is
lower.  The maximum number of shares that a participant will be permitted to
purchase in any single offering is subject to certain limitations, as set forth
in the plan document.

     A participant may, at any time and for any reason, withdraw from further
participation in any offering or from the Plan by giving written notice.  In
such event, the participant's payroll deductions which have been credited to
his/her plan account and not already expended to purchase shares under the Plan
will be refunded without interest.  No further payroll deductions will be made
from his/her pay during the term of that offering.  No withdrawing participant
will be permitted to re-commence his/her participation in an offering, however,
termination of participation in an offering or in the Plan will not have any
effect upon subsequent eligibility to participate in the Plan.  A participant's
retirement, death or other termination of employment will be treated as a
permanent withdrawal from participation.  In the event of a participant's death,
his/her estate or designated beneficiary shall have the right to elect, no later
than 60 days following his/her date of death, to receive either the accumulated
payroll deductions in the deceased participant's plan account or to exercise, on
the next subsequent purchase date, the deceased participant's options to
purchase the number of full shares of Class A Common Stock that can be purchased
with the balance in the decedent's plan account as of his/her date of death,
together with the return of any excess cash, without interest.

     In connection with the merger with Teleport Communications Group Inc. the
Plan has been discontinued effective January 1, 1998.
<PAGE>
 
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     The financial statements are prepared using the accrual basis of
accounting.  The Company pays all of the Plan's administrative expenses.

3.   INCOME TAX STATUS:

     The Plan is intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code.  In order for favorable tax treatment
to be available to the participant, the participant cannot dispose of any shares
acquired under the Plan within two years following the date the option to
purchase was granted, nor within one year following the date the shares were
actually purchased.

4.   STOCK PURCHASES:

     Stock purchases by offering period are as follows:

                                            Purchase price     Number of
Offering Period          Valuation Date       per share     shares purchased
---------------------  -------------------  --------------  ----------------

January 1, 1995 -      December 31, 1994        $ 9.83           26,903    
  December 31, 1995    March 31, 1995*          $11.17              105    
                       June 30, 1995*           $ 9.83              101    
                       September 30, 1995*      $11.00               77    
                                                                           
July 1, 1995 -         June 30, 1995            $ 9.83            7,746    
 December 31, 1995     September 30, 1995*      $11.00              519    
                                                                           
January 1, 1996 -      December 30, 1995        $15.37           12,544    
 June 30, 1996         March 31, 1996*          $19.75              158    
                                                                           
July 1, 1996 -         June 30, 1996            $32.42            2,834    
 December 31, 1996     December 31, 1996        $30.25            3,806    
                                                                           
January 1, 1997 -      March 31, 1997           $18.91            6,784    
 June 30, 1997         March 31, 1997           $18.91              584    
                       December 31, 1996        $25.71            5,458    
                                                                           
July 1, 1997-          June 30, 1997            $26.25            5,494    
 December 31, 1997     September 30, 1997       $26.25            6,075     

     *For those employees who began participation during the offering period.


     The valuation date is the date during the offering period, as defined, on
which the stock price was the lowest, therefore becoming the base for the
calculation of shares to be purchased.
<PAGE>
 
          (2) FINANCIAL STATEMENT SCHEDULES.  The following Financial Statement
              -----------------------------                                    
Schedules and the accountant's report thereon are included herewith as follows:

          Report of Independent Public Accountants

     II             Consolidated Valuation and Qualifying Accounts for the years
          ended December 31, 1997, 1996 and 1995

All other schedules are not submitted because they are not applicable, not
required or because the required information is included in the consolidated
financial statements or notes thereto.

          (3) EXHIBITS.  The following constitutes the list of exhibits required
              --------                                                          
to be filed as a part of this Report pursuant to Item 601 of Regulation S-K:
<PAGE>
 
                                LIST OF EXHIBITS


<TABLE> 

EXHIBIT NUMBER      Description                                         Location
--------------      -----------                                         --------                                       

<C>                 <S>                                                  <C>
 3-1                First Restated Certificate of Incorporation of ACC   Incorporated by Reference to Exhibit 3 to the
                    Corp.                                                Company's Quarterly Report on Form 10-Q for 
                                                                         its Quarter Ended September 30, 1995        
                                                                         ("September 30, 1995 10-Q")                 
                                                                                                                     
 3-2                Certificate of Designation of the Voting Powers,     Incorporated by Reference from Exhibit 1 to 
                    Designation, Preferences and Relative,               the Company's Registration Statement on Form
                    Participating, Optional or other Special Rights      8-A dated October 3, 1997 (as amended on Form
                    and Qualifications, Limitations and Restrictions     8-A/A dated December 10, 1997).             
                    of the Series A Preferred Stock of ACC Corp.                                                     
                                                                                                                     
 3-3                Bylaws of ACC Corp., as amended on May 21, 1996      Incorporated by Reference to Exhibit 99.5 to
                                                                         the Company's Current Report on Form 8-K    
                                                                         filed on September 17, 1996 ("September 17, 
                                                                         1996 8-K")                                   

 4-1                Form of ACC Corp. Class A Common Stock Certificate   Incorporated by Reference to Exhibit 4-1 to    
                                                                         the Company's Registration Statement on Form   
                                                                         S-3, No. 333-01157 declared effective May 2,   
                                                                         1996                                           
                                                                                                                        
 4-2                Form of Warrant to purchase 7,500 Shares of Class    Incorporated by Reference to Exhibit 99.4 to   
                    A Common Stock dated October 30, 1995                the Company's Current Report on Form 8-K       
                                                                         filed on February 22, 1996 8-K ("February 22,  
                                                                         1996 8-K")                                     
                                                                                                                        
 4-5                Form of Rights Agreement, dated as of October 3,     Incorporated by Reference from Exhibit 1 to    
                    1997, between ACC Corp. and First Union National     the Company's Registration Statement on Form   
                    Bank, as Rights Agent, which includes as Exhibit     8-A dated October 3, 1997 (as amended on Form  
                    A-Form of Rights Certificate; Exhibit B-Summary of   8-A/A dated December 10, 1997).                
                    Rights to Purchase Preferred Stock; and Exhibit                                                     
                    C-Certificate of Designation                                                                         

10-1                Form of Employment Continuation Incentive            Incorporated by Reference to Exhibit 99.3 to 
                    Agreement between ACC Corp. and certain of its Key   the Company's February 22, 1996 8-K          
                    Employees                                                                                         
                                                                                                                      
10-2                ACC Corp. Employee Long Term Incentive Plan, as      Incorporated by Reference to Exhibit 4-1 to  
                    amended through February 5, 1996                     the Company's Registration Statement on Form 
                                                                         S-8, No. 333-01219, effective February 26,   
                                                                         1996                                          
                                                                             
10-3                Form of ACC Corp. Indemnification Agreement with     Incorporated by Reference to Exhibit 10-29 to
                    its Directors and certain of its Executive Officers  the Company's Report on Form 10-K for its
                                                                         year ended December 31, 1987
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION> 

<C>                 <S>                                                  <C>
10-4                ACC Corp. Employee Stock Purchase Plan               Incorporated by Reference to Exhibit 4-4 to   
                                                                         the Company's Registration Statement on Form  
                                                                         S-8, No. 33-75558, effective February 22, 1994
                                                                                                                       
10-5                Employment Agreement between ACC Corp. and David     Incorporated by Reference to Exhibit 10-2 to  
                    K. Laniak, dated October 6, 1995                     the Company's September 30, 1995 10-Q          

10-6                Salary Continuation and Deferred Compensation        Incorporated by Reference to Exhibit 10-3 to    
                    Agreement between ACC Corp. and Richard T. Aab,      the Company's September 30, 1995 10-Q           
                    dated October 6, 1995                                                                                
                                                                                                                         
10-7                Non-Competition Agreement between ACC Corp. and      Incorporated by Reference to Exhibit 10-4 to    
                    Richard T. Aab, dated October 6, 1995                the Company's September 30, 1995 10-Q           
                                                                                                                         
10-8                Release and Settlement Agreement between ACC Corp.   Incorporated by Reference to Exhibit 99.2 to    
                    and Francis Coleman, dated December 29, 1995         the Company's February 22, 1996 8-K             
                                                                                                                         
10-9                Software License Agreement dated March 30, 1995 by   Incorporated by Reference to Exhibit 99.5 to    
                    and between AMBIX Systems Corp. and ACC Corp.        the Company's February 22, 1996 8-K              

10-10               Software License Agreement dated February 21, 1996   Incorporated by Reference to Exhibit 99.6 to     
                    between AMBIX Acquisition Corp. and ACC Corp.        the Company's February 22, 1996 8-K 
                                                                                                                          
10-11               Bill of Sale from AMBIX Systems Corp. to ACC Corp.   Incorporated by Reference to Exhibit 99.7 to     
                    dated February 6, 1996                               the Company's February 22, 1996 8-K              
                                                                                                                          
10-12               Letter Agreement dated April 27, 1995 between the    Incorporated by Reference to Exhibit 99.8 to     
                    Special Committee of the Board of Directors of ACC   the Company's February 22, 1996 8-K              
                    Corp. and Richard T. Aab                                                                              
                                                                                                                          
10-13               Lease dated January 25, 1994 between the Hague       Incorporated by Reference to Exhibit 99.9 to     
                    Corporation and ACC Corp., as modified by a Lease    the Company's February 22, 1996 8-K              
                    Modification Agreement No. 1 dated May 31, 1994                                                       
                    and a Lease Modification Agreement No. 2 dated May                                                    
                    31, 1994, relating to the leased premises located                                                     
                    at 400 West Avenue, Rochester, New York                                                                

10-14               Amended and Restated Lease Agreement dated March     Incorporated by Reference to Exhibit 99.10 to     
                    1, 1994 between ACC Long Distance                    the Company's February 22, 1996 8-K               
                    Inc./Interurbains ACC Inc. and Coopers & Lybrand                                                       
                    relating to the leased premises located at 5343                                                        
                    Dundas Street West, Etobicoke, Ontario, Canada                                                         
                                                                                                                           
10-15               Underlease Agreement dated December 23, 1993         Incorporated by Reference to Exhibit 99.11 to     
                    between ACC Long Distance UK Limited, IBM United     the Company's February 22, 1996 8-K               
                    Kingdom Limited, and ACC Corp. relating to the                                                         
                    leased premises located on the tenth floor at The                                                      
                    Chiswick Centre 414 Chiswick High Road, London,                                                        
                    England                                                                                                 
</TABLE>
<PAGE>
 
<TABLE>

<C>                 <S>                                                  <C>
10-16               Underlease Agreement dated June 6, 1995 between      Incorporated by Reference to Exhibit 99.12 to    
                    ACC Long Distance UK Limited, IBM United Kingdom     the Company's February 22, 1996 8-K              
                    Limited, and ACC Corp. relating to the leased                                                         
                    premises located on the first floor at The                                                            
                    Chiswick Centre 414 Chiswick High Road, London,                                                       
                    England                                                                                               
                                                                                                                          
10-17               Supplemental Lease Agreement dated June 3, 1994      Incorporated by Reference to Exhibit 99.13 to    
                    between ACC Long Distance UK Limited, IBM United     the Company's February 22, 1996 8-K              
                    Kingdom Limited, and ACC Corp. relating to the                                                        
                    leased premises located on the ninth floor at The                                                     
                    Chiswick Centre 414 Chiswick High Road, London,                                                       
                    England                                                                                                

10-18               Second Amended and Restated Credit Agreement,        Filed herewith                               
                    dated as of December 19, 1997, by and among ACC                                                   
                    Corp. and certain Subsidiaries as Borrowers, ACC                                                  
                    Corp. as Guarantor, First Union National Bank of                                                  
                    North Carolina as Managing Agent and                                                              
                    Administrative Agent, and Fleet National Bank, as                                                 
                    Managing Agent and Documentation Agent                                                            
                                                                                                                      
10-19               Leasehold Mortgage dated July 21, 1995 between ACC   Incorporated by Reference to Exhibit 99.16 to
                    Corp. and First Union National Bank of North         the Company's February 22, 1996 8-K          
                    Carolina relating to the leased premises located                                                  
                    at 400 West Avenue, Rochester, New York                                                           
                    ("Rochester Leasehold Mortgage")                                                                   

10-20               Modification to Rochester Leasehold Mortgage dated   Incorporated by Reference to Exhibit 10-20 to 
                    January 14, 1997                                     the Company's Annual Report on Form 10-K for  
                                                                         the Year Ended December 31, 1996              
10-21               Leasehold Mortgage dated July 21, 1995 between ACC   Incorporated by Reference to Exhibit 99.16 to 
                    Corp. and First Union National Bank of North         the Company's February 22, 1996 8-K           
                    Carolina relating to the leased premises located                                                   
                    at Suite 206, State Tower Building, 109 South                                                      
                    Warren Street, Syracuse, New York ("Syracuse                                                       
                    Leasehold Mortgage")                                                                               
10-22               Modification to Syracuse Leasehold Mortgage dated    Incorporated by Reference to Exhibit 10-22 to 
                    January 14, 1997                                     the Company's Annual Report on Form 10-K for  
                                                                         the Year Ended December 31, 1996               

10-23               Leasehold Mortgage dated July 21, 1995 between ACC   Incorporated by Reference to Exhibit 99.17 to  
                    Corp. and First Union National Bank of North         the Company's February 22, 1996 8-K            
                    Carolina relating to the leased premises located                                                    
                    at Suite 2200, Suite 204 and Suite 205, State                                                       
                    Tower Building, 109 South Warren Street, Syracuse,                                                  
                    New York ("Additional Syracuse Leasehold Mortgage")                                                  

</TABLE> 
<PAGE>
 
<TABLE> 

<C>                <S>                                                  <C> 

10-24               Modification to Additional Syracuse Leasehold        Incorporated by Reference to Exhibit 10-24 to
                    Mortgage dated January 14, 1997                      the Company's Annual Report on Form 10-K for
                                                                         the Year Ended December 31, 1996

10-25               Mortgage of Leasehold Interest, dated as of          Incorporated by Reference to Exhibit 10-25 to     
                    January 14, 1997, between ACC TelEnterprises         the Company's Annual Report on Form 10-K for      
                    Ltd./TelEnterprises ACC LTEE and First Union         the Year Ended December 31, 1996                  
                    National Bank of North Carolina, as Agent,                                                             
                    relating to the leased premises located at One                                                         
                    Toronto Street, Toronto, Ontario, Canada                                                               

10-26               Mortgage of Leasehold Interest, dated as of          Incorporated by Reference to Exhibit 10-26 to     
                    January 14, 1997, between ACC TelEnterprises         the Company's Annual Report on Form 10-K for      
                    Ltd./TelEnterprises ACC LTEE and First Union         the Year Ended December 31, 1996                  
                    National Bank of North Carolina, as Agent,                                                             
                    relating to the leased premises located at 5343                                                        
                    Dundas Street West, Etobicoke, Ontario, Canada                                                         

10-27               Second Amended and Restated Pledge Agreement dated   Filed herewith                                    
                    as of December 19, 1997 by ACC Corp. in favor of                                                       
                    First Union National Bank of North Carolina as                                                         
                    Administrative Agent                                                                                    
 
10-28               Amended and Restated Pledge Agreement dated as of    Incorporated by Reference to Exhibit 10-28 to    
                    January 14, 1997 by ACC National Long Distance       the Company's Annual Report on Form 10-K for     
                    Corp. in favor of First Union National Bank of       the Year Ended December 31, 1996                 
                    North Carolina as Administrative Agent                                                                

10-29               Seconded Amended and Restated Security Agreement     Filed herewith                                   
                    dated as of December 19, 1997 between ACC Corp.,                                                      
                    certain Domestic Subsidiaries of the Company and                                                      
                    First Union National Bank of North Carolina as                                                        
                    Administrative Agent                                                                                  

10-30               Amended and Restated Trademark Security Agreement    Incorporated by Reference to Exhibit 10-30 to    
                    dated as of January 14, 1997 between ACC Corp. and   the Company's Annual Report on Form 10-K for     
                    First Union National Bank of North Carolina as       the Year Ended December 31, 1996                 
                    Administrative Agent                                                                                  

10-31               License Agreement dated July 1, 1993 between         Incorporated by Reference to Exhibit 99.23 to    
                    Hudson's Bay Company and ACC Long Distance Inc.      the Company's February 22, 1996 8-K               


10-32               Employment Agreement between Christopher Bantoft     Incorporated by Reference to Exhibit 10-29 of 
                    and ACC Long Distance UK Ltd. dated November 16,     the Company's Report on Form 10-K for its     
                    1993, as amended                                     year ended December 31, 1995 ("December 31,   
                                                                         1995 10-K")                                   
                                                                                                                       
10-33               Employment Agreement between Steve M. Dubnik and     Incorporated by Reference to Exhibit 10-30 of 
                    ACC TelEnterprises Ltd. Dated August 4, 1994         the Company's December 31, 1995 10-K           

</TABLE>
<PAGE>
 
<TABLE>

<C>                 <S>                                                  <C>

10-34               ACC Corp. Non-Employee Directors' Stock Option Plan  Incorporated by Reference to Exhibit 99.6 to  
                                                                         the Company's September 17, 1996 8-K          
                                                                                                                       
10-35               Rules of the ACC Corp. 1996 UK Sharesave Scheme      Incorporated by Reference to Exhibit 10-35 to 
                    dated August 5, 1996                                 the Company's Annual Report on Form 10-K for  
                                                                         the Year Ended December 31, 1996              
                                                                                                                       
10-36               Net Settlement Agreement dated September 9, 1996     Incorporated by Reference to Exhibit 99.6 to  
                    between Teletek, Inc. and ACC Long Distance Corp.    the Company's September 17, 1996 8-K          
                                                                                                                       
10-37               License Agreement between EDS of Canada Ltd. And     Incorporated by Reference to Exhibit 99.7 to  
                    ACC TelEnterprises Ltd. Dated June 24, 1996          the Company's September 17, 1996 8-K          
                                                                                                                       
10-38               Amendment to Salary Continuation and Deferred        Incorporated by Reference to Exhibit 99.8 to  
                    Compensation Agreement between ACC Corp. and         the Company's September 17, 1996 8-K          
                    Richard T. Aab dated September 13, 1996                                                             

10-39               License Granted by the Secretary of State for        Incorporated by Reference to Exhibit 10-39 to 
                    Trade and Industry to ACC Long Distance UK Ltd.      the Company's Annual Report on Form 10-K for  
                    Under Section 7 of the Telecommunications Act 1984   the Year Ended December 31, 1996              
                                                                                                                       
10-40               Leasehold Mortgage dated as of January 14, 1997 by   Incorporated by Reference to Exhibit 10-40 to 
                    and among ACC National Telecom Corp. and First       the Company's Annual Report on Form 10-K for  
                    Union National Bank of North Carolina as             the Year Ended December 31, 1996              
                    Administrative Agent relating to the leased                                                        
                    premises located at One Commerce Plaza, Albany,                                                    
                    New York                                                                                           
                                                                                                                       
10-41               Leasehold Mortgage dated as of January 14, 1997 by   Incorporated by Reference to Exhibit 10-41 to 
                    and among ACC Long Distance Corp. and First Union    the Company's Annual Report on Form 10-K for  
                    National Bank of North Carolina as Administrative    the Year Ended December 31, 1996              
                    Agent relating to the leased premises located at                                                   
                    69 Delaware Avenue, Buffalo, New York                                                               

10-42               Leasehold Mortgage dated as of January 14, 1997 by   Incorporated by Reference to Exhibit 10-42 to 
                    and among ACC National Telecom Corp. and First       the Company's Annual Report on Form 10-K for  
                    Union National Bank of North Carolina as             the Year Ended December 31, 1996              
                    Administrative Agent relating to the leased                                                        
                    premises located at 32 Old Slip, New York, New York                                                
                                                                                                                       
10-43               Mortgage of Leasehold Interest, dated as of          Incorporated by Reference to Exhibit 10-43 to 
                    January 14, 1997, between ACC TelEnterprises         the Company's Annual Report on Form 10-K for  
                    Ltd./TelEnterprises ACC LTEE and First Union         the Year Ended December 31, 1996              
                    National Bank of North Carolina as Administrative                                                  
                    Agent relating to the leased premises located in                                                   
                    Vancouver, British Columbia, Canada                                                                 
</TABLE>
<PAGE>
 
<TABLE>

<C>                 <S>                                                  <C>
10-44               Agreement for Lease, dated October 9, 1997, among    Filed herewith  
                    ACC Long distance U.K. Limited, ACC Corp. and                        
                    Lasmo (ULX) Limited relating to leased premises at                   
                    626 Chiswick High Road, London, England                               

11                  Statement re: Computation of Per Share Earnings      See Note 1 to the Notes to the Consolidated
                                                                         Financial Statements filed herewith        
                                                                                                                    
21                  Subsidiaries of ACC Corp.                            Filed herewith                             
                                                                                                                    
23                  Accountant's Consent                                 Filed herewith                             
                                                                                                                    
27                  Financial Data Schedule                              Filed only with EDGAR filing, per Reg. S-K,
                                                                         Rule 601(c)(1)(v)                          

27-1                Restated Financial Data Schedules                    Filed only with EDGAR filing, per Reg. S-K,
                                                                         Rule 601(c)(1)(v)
</TABLE>
<PAGE>
 
     (b) REPORTS ON FORM 8-K.  The following Reports on Form 8-K were filed for
         -------------------                                                   
the quarter ended December 31, 1997.

         Form 8-K dated October 3, 1997

         Form 8-K dated November 26, 1997

     (c) EXHIBITS.  See Exhibit Index.
         -----------------------------

     (d) FINANCIAL STATEMENT SCHEDULES.  Financial Statement Schedules, along
         -----------------------------                                       
with the report of the independent public accountants thereon, are as follows:

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To ACC Corp.:

     We have audited in accordance with generally accepted auditing standards,
the financial statements of ACC Corp. included in this Form 10-K and have issued
our report thereon dated February 3, 1998.  Our audit was made for the purpose
of forming an opinion on those statements taken as a whole.  The schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements.  The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.


Rochester, New York
February 3, 1998



                                    /s/ Arthur Andersen LLP
<PAGE>
 
                                  SCHEDULE II

                           ACC CORP AND SUBSIDIARIES

                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

               For the Years Ended December 31, 1997, 1996, 1995
                                    (000's)
<TABLE>
<CAPTION>
 
 
                                                Balance    Charged                   Net     Balance
                                                  at      to Costs     Charged    Accounts     at
                                               Beginning     and      to Other     Written   End of
                                               of Period  Expenses    Accounts       Off     Period
                                               ---------  ---------  -----------  ---------  -------

<S>                                            <C>        <C>        <C>          <C>        <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts                  $ 3,795  $  3,810            -    ($2,314)  $ 5,291
Valuation allowance for deferred tax assets      $ 7,669   ($4,360)           -          -   $ 3,309
 
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts                  $ 2,085  $  5,143            -    ($3,433)  $ 3,795
Valuation allowance for deferred tax assets      $10,938   ($3,269)           -          -   $ 7,669

YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts                  $ 1,035  $  3,284            -    ($2,234)  $ 2,085
Valuation allowance for deferred tax assets      $ 7,454  $  2,223   $1,261  (1)         -   $10,938

</TABLE>
-----------------------------------
(1)  Represents valuation allowance associated with loss carryforwards of
     Metrowide Communications which was purchased by ACC Canada on August 1,
     1995.

All other schedules are not submitted because they are not applicable, not
required or because the required information is included in the consolidated
financial statements or notes thereto.
<PAGE>
 
                                   SIGNATURES

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

                                         ACC CORP.


Dated:  March 25, 1998                   By:   /s/Michael R. Daley
                                            ------------------------------------
                                                        Michael R. Daley
                                                    Executive Vice President
                                                       and Chief Financial
                                                            Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons, on behalf of the Company and in
the capacities and on the dates indicated.

Dated:  March 25, 1998                   By:     /s/Michael R. Daley
                                            ------------------------------------
                                                        Michael R. Daley,
                                                    Executive Vice President
                                                      and Chief Financial 
                                                      Officer (Principal 
                                                      Executive Officer and 
                                                      Principal Financing and 
                                                       Accounting Officer)


Dated:  March 25, 1998                   By:     /s/Steve M. Dubnik
                                            ------------------------------------
                                                        Steve M. Dubnik,
                                                    Executive Vice President
                                                      (Principal Executive
                                                            Officer)


Dated:  March 25, 1998                   By:     /s/Christopher B. Bantoft
                                            ------------------------------------
                                                      Christopher Bantoft,
                                                    Executive Vice President
                                                      (Principal Executive
                                                           Officer)


Dated:  March 25, 1998                   By:     /s/Hugh F. Bennett
                                            ------------------------------------
                                                        Hugh F. Bennett,
Director


Dated:  March 25, 1998                   By:     /s/Arunas A. Chesonis
                                            ------------------------------------
                                                      Arunas A. Chesonis,
                                                    President and a Director


Dated:  March 25, 1998                   By: /s/    Willard Z. Estey, Director
                                            ------------------------------------
                                                    Willard Z. Estey, Director
                        

Dated:  March 25, 1998                   By:     /s/   Leslie D. Shroyer
                                            ------------------------------------
                                                       Leslie D. Shroyer,
Director
<PAGE>
 
Dated:  March   , 1998                  By:
             __                             ------------------------------------
                                                   Daniel D. Tessoni, Director


Dated:  March 25, 1998                   By:    /s/Robert M. Van Degna
                                            ------------------------------------
                                                   Robert M. Van Degna, Director
<PAGE>
 
                                LIST OF EXHIBITS


<TABLE>
<CAPTION>

Exhibit Number      Description                                         Location
--------------      -----------                                         --------
 
<S>                 <C>                                                  <C>
3-1                 First Restated Certificate of Incorporation of ACC   Incorporated by Reference to Exhibit 3 to the
                    Corp.                                                Company's Quarterly Report on Form 10-Q for
                                                                         its Quarter Ended September 30, 1995
                                                                         ("September 30, 1995 10-Q")
 
3-2                 Certificate of Designation of the Voting Powers,     Incorporated by Reference from Exhibit 1 to
                    Designation, Preferences and Relative,               the Company's Registration Statement on Form
                    Participating, Optional or other Special Rights      8-A/A dated October 3, 1997 (as amended on
                    and Qualifications, Limitations and Restrictions     Form 8-A/A dated December 10, 1997)
                    of the Series A Preferred Stock of ACC Corp.
 
3-3                 Bylaws of ACC Corp., as amended on May 21, 1996      Incorporated by Reference to Exhibit 99.5 to
                                                                         the Company's Current Report on Form 8-K
                                                                         filed on September 17, 1996 ("September 17,
                                                                         1996 8-K")
 
4-1                 Form of ACC Corp. Class A Common Stock Certificate   Incorporated by Reference to Exhibit 4-1 to
                                                                         the Company's Registration Statement on Form
                                                                         S-3, No. 333-01157 declared effective May 2,
                                                                         1996
 
4-2                 Form of Warrant to purchase 7,500 Shares of Class    Incorporated by Reference to Exhibit 99.4 to
                    A Common Stock dated October 30, 1995                the Company's Current Report on Form 8-K
                                                                         filed on February 22, 1996 8-K ("February 22,
                                                                         1996 8-K")
 
4-5                 Form of Rights Agreement, dated as of October 3,     Incorporated by Reference from Exhibit 1 to
                    1997, between ACC Corp. and First Union National     the Company's Registration Statement on Form
                    Bank, as Rights Agent, which includes as Exhibit A   8-A/A dated October 3, 1997 (as amended on
                    Form of Rights Certificate; Exhibit B  Summary of    Form 8-A/A dated December 10, 1997)
                    Rights to Purchase Preferred Stock; and Exhibit C
                    Certificate of Designation
 
10-1                Form of Employment Continuation Incentive            Incorporated by Reference to Exhibit 99.3 to
                    Agreement between ACC Corp. and certain of its Key   the Company's February 22, 1996 8-K
                    Employees
 
10-2                ACC Corp. Employee Long Term Incentive Plan, as      Incorporated by Reference to Exhibit 4-1 to
                    amended through February 5, 1996                     the Company's Registration Statement on Form
                                                                         S-8, No. 333-01219, effective February 26,
                                                                         1996
 
10-3                Form of ACC Corp. Indemnification Agreement with     Incorporated by Reference to Exhibit 10-29 to
                    its Directors and certain of its Executive Officers  the Company's Report on Form 10-K for its
                                                                         year ended December 31, 1987
 
</TABLE> 
<PAGE>
 
<TABLE> 

<C>                 <S>                                                  <C> 
10-4                ACC Corp. Employee Stock Purchase Plan               Incorporated by Reference to Exhibit 4-4 to
                                                                         the Company's Registration Statement on Form
                                                                         S-8, No. 33-75558, effective February 22, 1994
 
10-5                Employment Agreement between ACC Corp. and David     Incorporated by Reference to Exhibit 10-2 to
                    K. Laniak, dated October 6, 1995                     the Company's September 30, 1995 10-Q
 
10-6                Salary Continuation and Deferred Compensation        Incorporated by Reference to Exhibit 10-3 to
                    Agreement between ACC Corp. and Richard T. Aab,      the Company's September 30, 1995 10-Q
                    dated October 6, 1995
 
10-7                Non-Competition Agreement between ACC Corp. and      Incorporated by Reference to Exhibit 10-4 to
                    Richard T. Aab, dated October 6, 1995                the Company's September 30, 1995 10-Q
 
10-8                Release and Settlement Agreement between ACC Corp.   Incorporated by Reference to Exhibit 99.2 to
                    and Francis Coleman, dated December 29, 1995         the Company's February 22, 1996 8-K
 
10-9                Software License Agreement dated March 30, 1995 by   Incorporated by Reference to Exhibit 99.5 to
                    and between AMBIX Systems Corp. and ACC Corp.        the Company's February 22, 1996 8-K
 
10-10               Software License Agreement dated February 21, 1996   Incorporated by Reference to Exhibit 99.6 to
                    between AMBIX Acquisition Corp. and ACC Corp.        the Company's February 22, 1996 8-K
 
10-11               Bill of Sale from AMBIX Systems Corp. to ACC Corp.   Incorporated by Reference to Exhibit 99.7 to
                    dated February 6, 1996                               the Company's February 22, 1996 8-K
 
10-12               Letter Agreement dated April 27, 1995 between the    Incorporated by Reference to Exhibit 99.8 to
                    Special Committee of the Board of Directors of ACC   the Company's February 22, 1996 8-K
                    Corp. and Richard T. Aab
 
10-13               Lease dated January 25, 1994 between the Hague       Incorporated by Reference to Exhibit 99.9 to
                    Corporation and ACC Corp., as modified by a Lease    the Company's February 22, 1996 8-K
                    Modification Agreement No. 1 dated May 31, 1994
                    and a Lease Modification Agreement No. 2 dated May
                    31, 1994, relating to the leased premises located
                    at 400 West Avenue, Rochester, New York
 
10-14               Amended and Restated Lease Agreement dated March     Incorporated by Reference to Exhibit 99.10 to
                    1, 1994 between ACC Long Distance                    the Company's February 22, 1996 8-K
                    Inc./Interurbains ACC Inc. and Coopers & Lybrand
                    relating to the leased premises located at 5343
                    Dundas Street West, Etobicoke, Ontario, Canada
 

10-15               Underlease Agreement dated December 23, 1993         Incorporated by Reference to Exhibit 99.11 to
                    between ACC Long Distance UK Limited, IBM United     the Company's February 22, 1996 8-K
                    Kingdom Limited, and ACC Corp. relating to the
                    leased premises located on the tenth floor at The
                    Chiswick Centre 414 Chiswick High Road, London,
                    England
 
</TABLE> 
<PAGE>
 
<TABLE> 
<C>                 <S>                                                  <C> 

10-16               Underlease Agreement dated June 6, 1995 between      Incorporated by Reference to Exhibit 99.12 to
                    ACC Long Distance UK Limited, IBM United Kingdom     the Company's February 22, 1996 8-K
                    Limited, and ACC Corp. relating to the leased
                    premises located on the first floor at The
                    Chiswick Centre 414 Chiswick High Road, London,
                    England
 
10-17               Supplemental Lease Agreement dated June 3, 1994      Incorporated by Reference to Exhibit 99.13 to
                    between ACC Long Distance UK Limited, IBM United     the Company's February 22, 1996 8-K
                    Kingdom Limited, and ACC Corp. relating to the
                    leased premises located on the ninth floor at The
                    Chiswick Centre 414 Chiswick High Road, London,
                    England
 
10-18               Second Amended and Restated Credit Agreement,        Filed herewith
                    dated as of December 19, 1997, by and among ACC
                    Corp. and certain Subsidiaries as Borrowers, ACC
                    Corp. as Guarantor, First Union National Bank of
                    North Carolina as Managing Agent and
                    Administrative Agent, and Fleet National Bank, as
                    Managing Agent and Documentation Agent
 
10-19               Leasehold Mortgage dated July 21, 1995 between ACC   Incorporated by Reference to Exhibit 99.16 to
                    Corp. and First Union National Bank of North         the Company's February 22, 1996 8-K
                    Carolina relating to the leased premises located
                    at 400 West Avenue, Rochester, New York
                    ("Rochester Leasehold Mortgage")
 
10-20               Modification to Rochester Leasehold Mortgage dated   Incorporated by Reference to Exhibit 10-20 to
                    January 14, 1997                                     the Company's Annual Report on Form 10-K for
                                                                         the Year Ended December 31, 1996
 
10-21               Leasehold Mortgage dated July 21, 1995 between ACC   Incorporated by Reference to Exhibit 99.16 to
                    Corp. and First Union National Bank of North         the Company's February 22, 1996 8-K
                    Carolina relating to the leased premises located
                    at Suite 206, State Tower Building, 109 South
                    Warren Street, Syracuse, New York ("Syracuse
                    Leasehold Mortgage")
 
10-22               Modification to Syracuse Leasehold Mortgage dated    Incorporated by Reference to Exhibit 10-22 to
                    January 14, 1997                                     the Company's Annual Report on Form 10-K for
                                                                         the Year Ended December 31, 1996
 
10-23               Leasehold Mortgage dated July 21, 1995 between ACC   Incorporated by Reference to Exhibit 99.17 to
                    Corp. and First Union National Bank of North         the Company's February 22, 1996 8-K
                    Carolina relating to the leased premises located
                    at Suite 2200, Suite 204 and Suite 205, State
                    Tower Building, 109 South Warren Street, Syracuse,
                    New York ("Additional Syracuse Leasehold Mortgage")
 
</TABLE> 
<PAGE>
 
<TABLE> 

<C>                <S>                                                   <C> 
10-24               Modification to Additional Syracuse Leasehold        Incorporated by Reference to Exhibit 10-24 to
                    Mortgage dated January 14, 1997                      the Company's Annual Report on Form 10-K for
                                                                         the Year Ended December 31, 1996
 
10-25               Mortgage of Leasehold Interest, dated as of          Incorporated by Reference to Exhibit 10-25 to
                    January 14, 1997, between ACC TelEnterprises         the Company's Annual Report on Form 10-K for
                    Ltd./TelEnterprises ACC LTEE and First Union         the Year Ended December 31, 1996
                    National Bank of North Carolina, as Agent,
                    relating to the leased premises located at One
                    Toronto Street, Toronto, Ontario, Canada
 
10-26               Mortgage of Leasehold Interest, dated as of          Incorporated by Reference to Exhibit 10-26 to
                    January 14, 1997, between ACC TelEnterprises         the Company's Annual Report on Form 10-K for
                    Ltd./TelEnterprises ACC LTEE and First Union         the Year Ended December 31, 1996
                    National Bank of North Carolina, as Agent,
                    relating to the leased premises located at 5343
                    Dundas Street West, Etobicoke, Ontario, Canada
 
10-27               Second Amended and Restated Pledge Agreement dated   Filed herewith
                    as of December 19, 1997 by ACC Corp. in favor of
                    First Union National Bank of North Carolina as
                    Administrative Agent
 
10-28               Amended and Restated Pledge Agreement dated as of    Incorporated by Reference to Exhibit 10-28 to
                    January 14, 1997 by ACC National Long Distance       the Company's Annual Report on Form 10-K for
                    Corp. in favor of First Union National Bank of       the Year Ended December 31, 1996
                    North Carolina as Administrative Agent
 
10-29               Seconded Amended and Restated Security Agreement     Filed herewith
                    dated as of December 19, 1997 between ACC Corp.,
                    certain Domestic Subsidiaries of the Company and
                    First Union National Bank of North Carolina as
                    Administrative Agent
 
10-30               Amended and Restated Trademark Security Agreement    Incorporated by Reference to Exhibit 10-30 to
                    dated as of January 14, 1997 between ACC Corp. and   the Company's Annual Report on Form 10-K for
                    First Union National Bank of North Carolina as       the Year Ended December 31, 1996
                    Administrative Agent
 
10-31               License Agreement dated July 1, 1993 between         Incorporated by Reference to Exhibit 99.23 to
                    Hudson's Bay Company and ACC Long Distance Inc.      the Company's February 22, 1996 8-K
 
10-32               Employment Agreement between Christopher Bantoft     Incorporated by Reference to Exhibit 10-29 of
                    and ACC Long Distance UK Ltd. dated November 16,     the Company's Report on Form 10-K for its
                    1993, as amended                                     year ended December 31, 1995 ("December 31,
                                                                         1995 10-K")
 
10-33               Employment Agreement between Steve M. Dubnik and     Incorporated by Reference to Exhibit 10-30 of
                    ACC TelEnterprises Ltd. dated August 4, 1994         the Company's December 31, 1995 10-K
</TABLE> 
<PAGE>
 
<TABLE> 

<C>                 <S>                                                  <C> 
10-34               ACC Corp. Non-Employee Directors' Stock Option Plan  Incorporated by Reference to Exhibit 99.6 to
                                                                         the Company's September 17, 1996 8-K
 
10-35               Rules of the ACC Corp. 1996 UK Sharesave Scheme      Incorporated by Reference to Exhibit 10-35 to
                    dated August 5, 1996                                 the Company's Annual Report on Form 10-K for
                                                                         the Year Ended December 31, 1996
 
10-36               Net Settlement Agreement dated September 9, 1996     Incorporated by Reference to Exhibit 99.6 to
                    between Teletek, Inc. and ACC Long Distance Corp.    the Company's September 17, 1996 8-K
 
10-37               License Agreement between EDS of Canada Ltd. and     Incorporated by Reference to Exhibit 99.7 to
                    ACC TelEnterprises Ltd. Dated June 24, 1996          the Company's September 17, 1996 8-K
 
10-38               Amendment to Salary Continuation and Deferred        Incorporated by Reference to Exhibit 99.8 to
                    Compensation Agreement between ACC Corp. and         the Company's September 17, 1996 8-K
                    Richard T. Aab dated September 13, 1996
 
10-39               License Granted by the Secretary of State for        Incorporated by Reference to Exhibit 10-39 to
                    Trade and Industry to ACC Long Distance UK Ltd.      the Company's Annual Report on Form 10-K for
                    Under Section 7 of the Telecommunications Act 1984   the Year Ended December 31, 1996
 
10-40               Leasehold Mortgage dated as of January 14, 1997 by   Incorporated by Reference to Exhibit 10-40 to
                    and among ACC National Telecom Corp. and First       the Company's Annual Report on Form 10-K for
                    Union National Bank of North Carolina as             the Year Ended December 31, 1996
                    Administrative Agent relating to the leased
                    premises located at One Commerce Plaza, Albany,
                    New York
 
10-41               Leasehold Mortgage dated as of January 14, 1997 by   Incorporated by Reference to Exhibit 10-41 to
                    and among ACC Long Distance Corp. and First Union    the Company's Annual Report on Form 10-K for
                    National Bank of North Carolina as Administrative    the Year Ended December 31, 1996
                    Agent relating to the leased premises located at
                    69 Delaware Avenue, Buffalo, New York
 
10-42               Leasehold Mortgage dated as of January 14, 1997 by   Incorporated by Reference to Exhibit 10-42 to
                    and among ACC National Telecom Corp. and First       the Company's Annual Report on Form 10-K for
                    Union National Bank of North Carolina as             the Year Ended December 31, 1996
                    Administrative Agent relating to the leased
                    premises located at 32 Old Slip, New York, New York
 
10-43               Mortgage of Leasehold Interest, dated as of          Incorporated by Reference to Exhibit 10-43 to
                    January 14, 1997, between ACC TelEnterprises         the Company's Annual Report on Form 10-K for
                    Ltd./TelEnterprises ACC LTEE and First Union         the Year Ended December 31, 1996
                    National Bank of North Carolina as Administrative
                    Agent relating to the leased premises located in
                    Vancouver, British Columbia, Canada
 
</TABLE> 
<PAGE>
 
<TABLE> 

<C>                 <S>                                                  <C> 
10-44               Agreement for Lease, dated October 9, 1997, among    Filed herewith
                    ACC Long distance U.K. Limited, ACC Corp. and
                    Lasmo (ULX) Limited relating to leased premises at
                    626 Chiswick High Road, London, England
 
11                  Statement re: Computation of Per Share Earnings      See Note 1 to the Notes to the Consolidated
                                                                         Financial Statements filed herewith
 
21                  Subsidiaries of ACC Corp.                            Filed herewith
 
23                  Accountant's Consent re: Incorporation by Reference  Filed herewith
 
27                  Financial Data Schedule                              Filed only with EDGAR filing, per Reg. S-K,
                                                                         Rule 601(c)(1)(v)
27-1                Restated Financial Data Schedules                    Filed only with EDGAR filing, per Reg. S-K,
                                                                         Rule 601(c)(1)(v)
</TABLE>
