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IRU Capacity Agreement - AT&T Corp. and Tel-Save Inc.

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                             IRU CAPACITY AGREEMENT

     This  IRU  Capacity  Agreement  (the  "Agreement")  is  entered  into as of
December 31, 1998 (the "Effective Date") between AT&T Corp. ("AT&T"), a New York
corporation  with offices at 295 North Maple Avenue,  Basking Ridge,  New Jersey
07920, and Tel-Save, Inc. ("Tel-Save"),  a Pennsylvania corporation with offices
at 8805 Route 202, New Hope, Pennsylvania 18938.

                                   BACKGROUND

     This Agreement is made with reference to the following facts:

     A.  AT&T  operates  a  fiber  optic  communications  system (as such system
exists now, and as it is modified from time to time, the "AT&T Network").

     B.   AT&T   desires   to  provide,  and  Tel-Save  desires  to  obtain,  an
indefeasible  right to use optical fibers and dedicated circuit capacity derived
with network electronics and circuit electronics on the AT&T Network.

                               TERMS OF AGREEMENT

     1. Definitions

        1.1 "Tel-Save  Backbone  Network"  shall mean, at any date, the Tel-Save
Routes as of that date.

        1.2  "Capacity"  shall mean the DS-3  Capacity on the Tel-Save  Backbone
Network  including  both  (a) the  circuit  capacity,  as  measured  in terms of
transmission  and (b) a portion  of the  relevant  fiber  strands  necessary  to
transport such capacity.

        1.3 "DS-3 Capacity" shall mean DS-3  transmission  capacity between AT&T
Central  Offices,  meeting  the  specifications  set forth in  AT&T's  Technical
Reference 54014 and its addenda, as revised from time to time.

        1.4 "DS-3  Electronics"  shall mean the technology  and components  that
enable DS-3 testing, multiplexing, and transmission,  meeting the specifications
set forth in AT&T's Technical  Reference 54014 and its addenda,  as revised from
time to time.

        1.5  "Indefeasible  Right to Use" or  "IRU"  shall  mean the  exclusive,
unrestricted,  and indefeasible right to use the relevant Capacity for any legal
purpose.  The granting of such IRU does not convey  title or legal  ownership of
any fibers or equipment on the AT&T Network. Notwithstanding the occurrence of a
breach by the  receiving  party of any legal duty or  obligation  imposed by any
contract,  by the law of torts  (including  simple or gross  negligence,  strict
liability  or  willful  misconduct),   or  by  federal  or  state  laws,  rules,
regulations,  orders,  standards or  ordinances,  during the Term,  the granting
party  shall have no right to revoke or  restrict in any manner or to any degree
whatsoever,  through injunctive relief or otherwise,  the use of the IRU granted
to the receiving party. The parties mutually  understand and agree that any such
breach shall be compensable, if at all, by a remedy at law and not at equity.
<PAGE>
                                                                          Page 2

        1.6 "Specifications" shall mean, the service specifications set forth in
AT&T Technical Reference 54014, as revised from time to time.

        1.7 "Tel-Save Routes" shall mean the routes between AT&T Central Offices
over  which  Tel-Save  obtains  rights to use  capacity  under  this  Agreement,
including the routes listed in Attachment A.

        1.8 "Total interruption" means any situation in which Tel-Save suffers a
total loss of connectivity in one or more Tel-Save  Routes,  lasting two or more
hours,  which loss is not caused by Tel-Save,  and that does not occur within or
as a result of equipment connections that Tel-Save provides.

     2.  Indefeasible  Right to Use. AT&T hereby grants to Tel-Save for the Term
of this  Agreement an IRU in the  Capacity,  contingent  upon timely  receipt of
payment as specified in Section 5 of this Agreement.

     3.  Term. This Agreement is binding on the parties as of the Effective Date
and,  subject  to  the termination provisions of this Agreement, shall remain in
effect until December 31, 2023 (such period is referred to as the "Term").

     4.  Implementation.  AT&T  and Tel-Save shall work together, in good faith,
to  develop  a  mutually  agreeable  implementation  schedule for furnishing the
Capacity  and  associated  DS-3  Electronics,  and  the  parties  agree  to work
together,  in  good  faith,  in  the  future to develop necessary implementation
schedules, as appropriate.

     5.  Payment.  In  consideration  for  the  IRU  granted  hereunder  in  the
Capacity,  Tel-Save shall pay an IRU Fee to AT&T of $1,500,000.00, to be paid on
or before March 1, 1999.

     6.  Testing.  Prior to making any Capacity available to Tel-Save under this
Agreement,  AT&T  shall  test  the  Capacity on a route-specific basis to ensure
that  the  Capacity  is  in  conformity  with the Specifications. If any testing
establishes  that  the  Capacity  does  not  conform to the Specifications, AT&T
promptly  shall  correct such nonconformity and conduct additional testing prior
to making the Capacity available to Tel-Save.

     7.  Outage  Credits.  In  the  event  of a Total interruption in a specific
Tel-Save  Route  that  is  due to circumstances within AT&T's reasonable control
(fiber  cuts  shall  not  be  deemed  to  be  within AT&T's reasonable control),
Tel-Save  shall  be  entitled  to  an outage credit. For each two hour period of
such  Total  Interruption.  Tel-Save shall receive an outage credit at a rate of
$20.00  for  each  such  period  of a Total Interruption for each Tel-Save Route
where  the  Total Interruption occurs. The duration of such a Total Interruption
will  be  measured from the time of notice to AT&T's network control center that
a  Total Interruption has occurred to the time of restoration of the Service. No
credit  will  be  provided for any scheduled Interruption. An outage credit will
be  applied  against  other amounts due to AT&T from Tel-Save, or, to the extent
such sums are not due to AT&T, provided as a refund.

     8.  Chronic  Failure.  If  there  shall  occur,  within  any  period  of 12
consecutive  months, more than four Total Interruptions caused by factors within
AT&T's  reasonable  control,  AT&T will demonstrate to Tel-Save actions taken by
AT&T  to  reduce  such  Interruptions.  If  there  shall  occur  more  than  two
additional Total Interruptions due to factors within AT&T's

<PAGE>
                                                                          Page 3

reasonable  control  within the  subsequent  three month  period.  This shall be
deemed a Chronic Failure for purposes of this Agreement.

     9.  Interference.  In the  event  that AT&T  believes  in good  faith  that
Tel-Save's use of the Tel-Save Backbone Network is interfering unreasonably with
the use of AT&T service by others or the operation of the AT&T Network, AT&T may
immediately  restrict or suspend the Capacity,  without liability on the part of
AT&T, and then notify  Tel-Save of the action that AT&T has taken and the reason
for such action.  For purposes of the  foregoing  sentence,  the normal usage by
Tel-Save of all or any part of the Capacity shall be deemed to be reasonable. To
the  extent  doing so does  not  interfere  with its  ability  to  prevent  such
interference.  AT&T will attempt to limit any  restriction  or suspension  under
this Section to the Capacity that are causing such interference.

     10. Relocation.  Unless the circumstances  make such notice  impracticable,
AT&T shall give Tel-Save at least 90 days prior written  notice of any scheduled
relocation of any portion of the Tel-Save  Backbone  Network and as much advance
notice as possible of any unscheduled  relocation.  AT&T shall have the right to
direct any relocation of any portion of the Tel-Save Backbone Network, including
but not  limited  to the right to  determine  the  extent and timing of, and the
methods to be used for such relocation; provided, however, that unless otherwise
agreed,  any such relocation,  (i) shall be constructed and tested in accordance
with the Specifications, and (ii) shall not result in any interruption in excess
of two hours or degradation of the Capacity. In the event an AT&T Central Office
is  relocated  or replaced by a new site,  AT&T shall  relocate  the  applicable
Tel-Save  Capacity.  Any  such  relocation  shall  be  undertaken  at no cost to
Tel-Save,  except in cases where relocation is accompanied by additions or other
work to benefit Tel-Save and for which Tel-Save agrees in writing to pay.

     11. Use of the Capacity  and  Restriction  on Resale.  Tel-Save may use the
Capacity for any lawful  purpose and Tel-Save  represents  and warrants that its
use of the  Capacity and its  offering of services  using the Tel-Save  Backbone
Network will comply with all  applicable  government  codes,  ordinances,  laws,
rules,  regulations and/or restrictions.  Tel-Save may sell, trade,  exchange or
otherwise make  available to any person or entity any service  provided over the
Tel-Save Backbone Network.


<PAGE>

                                                                          Page 4

     12.  Limitation of Liability.  AT&T'S  LIABILITY,  IF ANY, FOR ANY CLAIM OR
SUIT  BY  TEL-SAVE  OR  ITS   AFFILIATES,   FOR  DAMAGES   ASSOCIATED  WITH  THE
INSTALLATION,  PROVISION, TERMINATION, MAINTENANCE, REPAIR OR RESTORATION OF ANY
OF THE  CAPACITY  SHALL NOT EXCEED AN AMOUNT  EQUAL TO THE  PRORATED  PORTION OF
CHARGES FOR THE AFFECTED  CAPACITY FOR THE PERIOD DURING WHICH THAT CAPACITY WAS
AFFECTED.  IN NO EVENT SHALL AT&T OR TEL-SAVE BE LIABLE IN  CONNECTION  WITH THE
PROVISION,   USE  OR  RESALE  OF  THE   CAPACITY   FOR   INDIRECT,   INCIDENTAL,
CONSEQUENTIAL, RELIANCE OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION DAMAGES
FOR LOST PROFITS OR DIMINISHED BUSINESS VALUE,  REGARDLESS OF THE FORM OF ACTION
WHETHER IN CONTRACT,  INDEMNITY  WARRANTY,  STRICT LIABILITY OR TORT,  INCLUDING
WITHOUT  LIMITATION  NEGLIGENCE OF ANY KIND WHETHER ACTIVE OR PASSIVE,  PROVIDED
THAT (A) NOTHING IN THIS SECTION SHALL LIMIT THE PARTIES'  RESPECTIVE RIGHTS AND
OBLIGATIONS  UNDER  SECTION  7.2   ("INDEMNIFICATION")  OF  THE  MASTER  CARRIER
AGREEMENT  ENTERED INTO BETWEEN TEL-SAVE AND AT&T ON APRIL 22, 1998 (THE "MCA");
(B) THE  LIMITATIONS  OF LIABILITY  DESCRIBED  IN THIS SECTION  SHALL NOT RENDER
INAPPLICABLE  ANY CHARGES OR OTHER  LIABILITIES  FOR WHICH A PARTICULAR  AMOUNT,
FORMULA  OR  OTHER  METHOD  OF  CALCULATION  IS  SPECIFICALLY  PROVIDED  IN THIS
AGREEMENT;  AND (C)  NOTHING  IN  THIS  AGREEMENT  SHALL  LIMIT  EITHER  PARTY'S
LIABILITY IN TORT FOR (1) THAT PARTY'S WILLFUL OR INTENTIONAL  MISCONDUCT OR (2)
DAMAGES TO INDIVIDUALS  OR THEIR ESTATES FOR BODILY INJURY OR DEATH  PROXIMATELY
CAUSED BY THAT PARTY'S NEGLIGENCE.

     13. Termination.

         13.1  Upon the  expiration  of the Term of this  Agreement,  use of the
Capacity   shall   terminate   and  Tel-Save   shall  owe  AT&T  no   additional
consideration.

         13.2 In the event Tel-Save  abandons or otherwise  relinquishes  use of
any of the  Capacity  subsequent  to the start of the term  ("Abandonment")  and
notifies AT&T of that Abandonment,  Tel-Save shall be entitled to a reuse credit
dependent  on the time of Notice as follows:  (1)  Abandonment  during years one
through  three of the Term,  an amount equal to 1/10th of 1% of the pro-rata IRU
fee regarding the abandoned  facilities for each remaining  month of the Term of
the Commitment;  (2)  Abandonment  during years four through six of the Term, an
amount  equal to 1/12th of 1% of the pro-rata IRU fee  regarding  the  abandoned
facilities for each remaining  month of the of the Term of the  Commitment;  (3)
Abandonment  during  years  seven  through ten of the Term,  an amount  equal to
1/15th of 1% of the pro-rata IRU fee regarding the abandoned facilities for each
remaining  month of the of the Term  Commitment;  (4)  Abandonment  during years
eleven  through  fifteen  of the Term,  an  amount  equal to 1/18th of 1% of the
pro-rata IRU fee regarding the abandoned  facilities for each remaining month of
the Term of the Commitment;  (5) Abandonment during years sixteen through twenty
of the Term,  an amount equal to 1/36th of 1% of the pro-rata IRU fee  regarding
the abandoned facilities for each remaining month of the Term of the Commitment;
and (6) Abandonment during years twenty-one through  twenty-five of the Term, an
amount  equal to 1/72nd of 1% of the pro-rata IRU fee  regarding  the  abandoned
facilities for each remaining month of the Term of the  Commitment.  Upon notice
of  Abandonment,  AT&T shall be entitled to reuse the facilities for its own use
or in the provision of capacity or services the others.

     14. Default.
<PAGE>

                                                                          Page 5

         14.1 AT&T has the right to terminate  this  Agreement upon thirty days'
prior  written  Notice of Default in the event  Tel-Save  fails to make full and
timely  payment of the IRU Fee as  specified  in Section 5. In the event of such
termination, AT&T shall be entitled not only to revoke the IRU granted, which is
contingent  upon timely  payment of the IRU Fee,  but also to collect the sum of
$500,000 as liquidated  damages for the failure to pay the IRU Fee. In the event
that AT&T is  required to  institute  collection  procedures,  AT&T will also be
entitled to the reasonable  attorneys'  fees  necessary to effect  collection of
that amount.

         14.2 Tel-Save has the right to terminate  this Agreement with regard to
a specific  Tel-Save  Route upon thirty days' prior written Notice of Default in
the event of a Chronic  Failure (as defined in Section 8 of this  Agreement)  on
that route. In the event of such termination, the IRU with respect to such Route
shall be  terminated  and Tel-Save  shall be entitled (in addition to any outage
credits specified in Section 7 above) to liquidated damages in the amount of the
pro-rata share of the IRU that the remaining term of the specific Tel-Save Route
represents.  In the event that  Tel-Save  is required  to  institute  collection
procedures,  Tel-Save will also be entitled to the  reasonable  attorneys'  fees
necessary to effect collection of that amount.

    15. Incorporation of Terms by Reference. The following provisions of the MCA
are  incorporated  by reference and made part of this  Agreement as if fully set
forth. As used in these provisions as incorporated,  the term "Agreement"  shall
be read as a reference to this Agreement, the term "Services" shall be read as a
reference to Capacity under this Agreement, and the capitalized terms used shall
have the meanings set forth in the MCA.

        Indemnification. ((Section)7.2)
        Force Majeure. ((Section)7.3.)
        Limitation of Actions. ((Section)7.4.)
        Disclaimer of Warranties. ((Section)7.5.)
        Exclusive Remedies. ((Section)7.6).
        Restrictions   Against   Use   of   Name   and   Brand   Identification.
        ((Section)8.1.)
        Inconsistent Use. ((Section)8.2.)
        No Patent or Software License. ((Section)8.3.)
        Taxes to be Billed by AT&T. ((Section)9.1.)
        Taxes Not To be Billed by AT&T. ((Section)9.2.)
        Gross Receipts Tax. ((Section)9.3.)
        Confidential Information. ((Section)11.1.)
        Protection of Confidentiality. ((Section)11.2.)
        Disclosure to or by Affiliates or Subcontractors. ((Section)11.3.)
        Return or Destruction of Confidential Information. ((Section)11.4.)
        Disclosure to Consultants. ((Section)11.5.)
        Required Disclosure. ((Section)11.6.)
        Injunctive Remedy. ((Section)11.7.)
        Assignment. ((Section)13.3.)
        Third-Party Beneficiaries; Affiliates. ((Section)13.4.)
        Relationship of the Parties. ((Section)13.5.)
        Acknowledgment of Right to Compete. ((Section)13.6.)
        Network Equipment. ((Section)13.7.)
        Removal of Property. ((Section)13.8.)
        Notices. ((Section)13.9.)
        Compliance with Laws. ((Section)13.11.)

<PAGE>

                                                                          Page 6

     Export Regulation Compliance. ((Section)13.12.)
     Choice of Law. ((Section)13.13.)
     Severability. ((Section)13.14.)
     Construction. ((Section)13.16.)
     Descriptive Headings. ((Section)13.17.)
     Survival of Terms. ((Section)13.18.)
     Modification And Waiver. ((Section)13.19.)
     Execution in Counterparts. ((Section)13.21.)

     16. Entire  Agreement  Amendment. This Agreement constitutes the entire and
final  agreement  and  understanding  between  the  parties  with respect to the
subject  matter  hereof,  the granting of IRU Capacity, and supersedes all prior
agreements  relating to the subject matter hereof, which are of no further force
or  effect.  The  Exhibits  referred to herein are integral parts hereof and are
hereby  made  a  part  of this Agreement. This Agreement may only be modified or
supplemented  by  an  instrument  in  writing  executed  by  a  duly  authorized
representative of each party.

     IN  WITNESS  WHEREOF,  in  confirmation  of  their consent to the terms and
conditions  contained  in  this  Agreement  and  intending  to  be legally bound
thereby,  the  parties  have  executed  this IRU Capacity Agreement on the dates
shown below but effective for all purposes as of the Effective Date.


<TABLE>
<S>                                          <C>          
AT&T Corp.                                   Tel-Save Inc.

By:    [SIG]                                 By:    /s/ EDWARD DEMAO
      ---------------------------                  -------------------------
Title:  President                            Title: COO   
      ---------------------------                  -------------------------
Date:  Dec. 11, 1998                         Date:  12/31/98
      ---------------------------                  -------------------------
</TABLE>                                    


REVIEWED AND APPROVED AS TO FORM
AT&T LAW DIVISION
BY: [SIG]
     ---------------------------


<PAGE>
                                                                          Page 1

                                   EXHIBIT A


                      DS-3 CAPACITY CIRCUIT IDENTIFICATION

                                      ***