HYPERION TELECOMMUNICATIONS INC, 10-K, 1997-06-20

HYPERION TELECOMMUNICATIONS INC
10-K, 1997-06-20
CABLE & OTHER PAY TELEVISION SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

X Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the fiscal year ended March 31, 1997

_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________

Commission File Number: 0-21605

HYPERION TELECOMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Main at Water Street
P.O. Box 472
Coudersport, PA 16915
(Address of principal executive offices) (Zip code)

814-274-9830
(Registrant's telephone number including area code)

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

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

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

At June 20, 1997, 122,000 shares of Class A Common Stock, par value
$0.01, and 10,000,000 shares of Class B Common Stock, par value $0.01 per share,
of the registrant were outstanding and were all held by affiliates of the
registrant.
Documents Incorporated by Reference:
None

<PAGE>

HYPERION TELECOMMUNICATIONS, INC.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS.................................................... 2

ITEM 2. PROPERTIES.................................................. 37

ITEM 3. LEGAL PROCEEDINGS........................................... 38

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 38

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 38

ITEM 6. SELECTED FINANCIAL DATA..................................... 40

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 43

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.. 51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 51

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 75

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 75

ITEM 11. EXECUTIVE COMPENSATION..................................... 78

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 80

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 80

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K....................................... 82

<PAGE>

PART I

ITEM 1. BUSINESS

Introduction

Hyperion Telecommunications, Inc. ("Hyperion" or the "Company")
is an 88% owned subsidiary of Adelphia Communications Corporation ("Adelphia"),
the seventh largest cable television company in the United States which as of
March 31, 1997 owns or manages cable television systems that serve approximately
1.9 million subscribers in 12 states. The balance of the Company is currently
owned by senior management which has extensive experience in the
telecommunications field. The Company manages and operates 21 networks,
including six under construction. The Company owns these networks through (i)
partnerships or limited liability companies with Local Partners (the "Operating
Partnerships") and (ii) three wholly owned subsidiaries of the Company and (iii)
one corporation in which it is a majority shareholder (the "Operating
Corporations") (collectively, the Operating Partnerships and the Operating
Corporations are referred to herein as the "Operating Companies"). The Company
is responsible for the network design, construction, management and operation of
the Operating Companies, for which it receives management fees. Refer to the
glossary beginning on page 33 for definitions of many industry specific terms
used in this Annual Report on Form 10-K.

The Company is a leading provider of local telecommunications
services over state-of-the-art fiber optic networks in selected markets within
the United States. As of March 31, 1997, Hyperion's 15 operating networks served
33 cities with approximately 3,461 route miles of fiber optic cable connecting
1,270 buildings. The Company's 21 networks (which include six currently under
construction) have generally been developed by partnering with a local cable
operator or utility provider (the "Local Partner"). This approach has allowed
Hyperion to rapidly construct high-capacity networks which generally have
broader coverage of its markets than those of other competitive local exchange
carriers ("CLECs"). The Company believes that the breadth of its networks will
allow it to originate and terminate a significant proportion of its customers'
local telephone calls over its own network, instead of relying on the network of
the incumbent local exchange carrier ("LEC"). The Company also believes that
working with a Local Partner significantly reduces the cost of constructing its
fiber optic networks through the utilization of existing cable or utility
facilities and by sharing construction costs with its Local Partners, who
usually upgrade the capacity of their cable or utility infrastructure during
construction of the telecommunications network.

The Company's service offerings include dedicated access,
switched local dial tone, long-distance and enhanced data services including
frame relay, high speed internet access and video conferencing. Management
believes that its ability to offer a single source solution for all of its
customers' telecommunications needs provides significant advantages for its
customers. Hyperion believes it can attract end-user customers by offering (i)
lower prices than the incumbent LEC, (ii) a single point of contact for billing,
installation and service coordination, (iii) high-capacity fiber optic network
connection directly to substantially all of a customer's premises due to the
breadth of the Company's network coverage, and (iv) high quality customer
service. The Company also believes that major IXCs such as AT&T, MCI and Sprint
will seek to offer their business customers an integrated package of switched
local and long distance services. The Company believes that its networks are
attractive to these major IXCs because the Company's networks are 100% fiber
optic-based and generally offer the broadest market coverage (other than that of
the incumbent LEC).

<PAGE>

of revenue for the Company's networks. The Company currently offers enhanced
data services to its customers in four of its networks through !NTERPRISE, a
wholly owned subsidiary of U S WEST, and plans to offer such services in all of
its networks. Enhanced data services currently include frame relay, Asynchronous
Transfer Mode ("ATM") data transport, business video conferencing, private line
data interconnect service and LAN connection and monitoring services. These
services, along with the long distance services provided by IXCs, enable the
Company to provide an integrated telecommunications service offering to network
customers that is more reliable, has a superior level of service and is priced
lower relative to that of the incumbent LEC in markets served by the Company's
networks.

From the Company's inception in October 1991 through March 31,
1997, the Company and its partners have invested approximately $284 million to
build and develop the network infrastructure and to fund operations. As of March
31, 1997, the gross property, plant and equipment of the Company, its networks
and the Company's Network Operations and Control Center (the "NOCC"), including
the Company's investment in Telergy (see "Recent Developments"), was
approximately $237 million.

In the markets where the Company's 21 networks are currently
operating or under construction, the Company believes it has an addressable
market of approximately $5.2 billion annually, substantially all of which is
currently provided by the incumbent LECs. This addressable market estimate does
not include the markets for enhanced data services, wireless resale, internet
access, or long distance services, which the Company has the ability to enter at
its option.

Recent Developments

Preferred Provider Alliance with MCI. On June 13, 1997, the
Company entered into agreements with MCImetro Access Transmission Services, Inc.
(together with its affiliate, MCI Communications, "MCI") pursuant to which the
Company is designated as MCI's preferred provider of new end user dedicated
access circuits and of conversions of end user dedicated access circuits from
the incumbent LEC. In addition, Hyperion has a right of first refusal to provide
MCI all new dedicated local network access circuits such as POP-to-POP or
POP-to-LSO connections. These arrangements apply to virtually all of the
Company's current networks and the term of these arrangements is five years with
a five year renewal option. The agreements allow MCI to purchase local loop
transport services from Hyperion where Hyperion is collocated with the incumbent
LEC. The agreement also provides that the parties negotiate in good faith the
terms of a separate agreement for the utilization of the Company's local
switches and operating support systems to provide MCI branded local service. MCI
has been issued a warrant to purchase 281,040 shares of Class A Common Stock in
connection with the transaction and could receive additional warrants to
purchase Class A Common Stock with an exercise price equal to the fair market
value of the Class A Common Stock at the time of issuance if MCI meets certain
agreed upon purchase volume revenue thresholds. Collectively, the warrants would
entitle MCI to purchase Class A Common Stock of the Company representing between
2.5% and 8.5% of the Common Stock of the Company, with adjustments for future
issuances of Common Stock.

Entergy Agreement. On April 24, 1997, the Company and Entergy
Corporation ("Entergy") signed an agreement to form a 50%/50% joint venture to
offer competitive telecommunications services primarily to commercial customers
in the Little Rock, Arkansas, Jackson, Mississippi and Baton Rouge, Louisiana
metropolitan areas (the "Entergy Networks"). The Entergy-Hyperion joint venture
intends to offer a full range of local exchange services as well as access to
long distance carriers. The Company expects the networks for these three cities
to total approximately 350 route miles of fiber optic cable.

Fiber Interconnection of Northeast Cluster. In pursuit of the
Company's strategy of interconnecting all of its networks in the Northeast
Cluster, on February 20, 1997 the Company entered into several agreements
regarding the leasing of dark fiber in New York state. Pursuant to these
agreements and in consideration of a payment of $20 million, the Company
received (i) a $20 million Senior Secured Note due February 2002 from Telergy,
Inc. ("Telergy"), and (ii) a fully prepaid lease from a Telergy affiliate for at
least 25 years (with two additional ten-year

<PAGE>

extensions), as a preferred customer for 24 strands of dark fiber installed or
to be installed in a New York fiber optic telecommunications backbone network.
The fiber optic backbone network will cover approximately 500 miles from Buffalo
to Syracuse to Albany to New York City, and will provide the Company
interconnection capabilities necessary to provide a full range of
telecommunication services to its customers in the Northeast Cluster.
Construction of the New York fiber optic backbone network has commenced and is
scheduled to be completed in stages, with completion of Buffalo to Syracuse
expected by mid-1997, completion of Syracuse to Albany expected by the end of
1997, and final completion to New York City by the end of 1999.

Exchange of Ownership interests with TWEAN. On May 20, 1997, the
Company entered into an agreement with Time Warner Entertainment
Advance/Newhouse ("TWEAN") whereby the Company would consolidate its Operating
Companies' interests in the State of New York by (i) increasing its ownership
interest in the Buffalo network to 50% and in the Syracuse network to 100% and
(ii) eliminating its ownership interests in and management responsibility for
the Albany and Binghamton networks. In addition, the agreement provides that
neither party will be subject to the non-competition provisions contained in the
existing partnership agreements with respect to the markets from which they are
withdrawing. The transaction is subject to normal closing conditions and receipt
of regulatory approvals.

Increase in Network Ownership. To date, including the TWEAN
transaction described above, the Company has entered into arrangements to
increase its ownership interest in five of its Operating Companies. Pursuant to
such arrangements, the Company has: (i) increased its interest in the Nashville
Operating Partnership from 25% to 95%; (ii) increased its partnership ownership
interest in the networks located in Lexington and Louisville to 50%; and (iii)
entered into a nonbinding letter of intent to increase its interest in the
Harrisburg Network to 100%, subject to the negotiation and execution of
definitive agreements and obtaining necessary regulatory approvals. These
transactions are consistent with the Company's goal to own at least a 50%
interest in its Operating Companies in the future, and where appropriate the
Company may consider similar transactions from time to time in its other
markets.

Interconnection Activities. In addition to obtaining
certification, an Operating Company must negotiate terms of interconnection with
the incumbent LEC before it can begin providing switched services. Under the
Telecommunications Act, the FCC has adopted interconnection requirements,
certain portions of which have been stayed by the reviewing court. See
"--Telecommunications Act of 1996--Access and Interconnection with LEC
Facilities." These rules establish guidelines for the states to follow when
reviewing interconnection agreements and should greatly facilitate the
negotiation of interconnection agreements, although it is anticipated that some
incumbent LECs may remain reluctant to comply with interconnection requests,
thereby delaying an Operating Company's ability to provide switched services. To
date, the Operating Companies have negotiated interconnection agreements with
one or more incumbent LECs in Kansas, Kentucky, New Jersey, Pennsylvania,
Tennessee, Vermont, and Virginia. Of these interconnection agreements, state
commissions in Kentucky (BellSouth), Vermont (NYNEX), New Jersey (Bell Atlantic)
and Virginia (Bell Atlantic) have approved interconnection agreements. Other
interconnection agreements have been filed and are pending approval in Kansas,
Pennsylvania, Tennessee, and Virginia. In addition, two interconnection
agreements have been recently executed with GTE and will shortly be filed for
approval by state commissions in Kentucky and Pennsylvania. Finally, Operating
Companies in New York interconnect with NYNEX, pursuant to a NYNEX tariff on
file with the New York Public Service Commission, rather than through
interconnection agreements.

Market Potential

Deregulation, technological change and the increasingly
information intensive nature of the United States economy have significantly
expanded the role of telecommunications in business. In particular these changes
have accelerated the growth of certain aspects of the telecommunications market.
For example, industry sources estimate that voice traffic is growing at a rate
of approximately seven percent per year while data communications are growing at
three to five times that rate due to the increase in computerized transaction
processing and video

<PAGE>

applications, the movement to distributed data processing and the rise of
decentralized management structures, all of which require the transmission of
large amounts of information with speed, accuracy and reliability.

The present structure of the U.S. telecommunications market
resulted largely from the divestiture of the "Bell System" in 1984 (the
"Divestiture"). As part of the Divestiture, seven RBOCs were created to offer
services in geographically defined areas called LATAs. The RBOCs were separated
from the long distance provider, AT&T, resulting in the creation of two distinct
industries: local exchange and interexchange (commonly known as long distance).
The Divestiture facilitated direct, open competition in the long distance
segment of the telecommunications market; however, it did not promote
competition in the local telecommunications market. Nonetheless, several factors
have served to promote competition in the local telecommunications market and
the emergence of competitive access providers ("CAPs"), including (i) the
incumbent LECs' monopoly position and regulated pricing structure, which
provided little incentive for incumbent LECs to reduce prices, improve service
or upgrade their networks, (ii) customer demand for an alternative to the
incumbent LEC monopoly, which demand grew rapidly and was spurred in part by the
development of competitive activities in the long distance market and increasing
demand for high quality, reliable services, (iii) the advancement of fiber optic
and digital electronic technologies (such as ATM and SONET), which combined the
ability to transmit voice, data and video at high speeds with greatly increased
capacity and reliability as compared to the incumbent LECs' copper-based
networks and (iv) the significant fees, called "access charges," IXCs are
required to pay to incumbent LECs for originating and terminating calls on the
incumbent LEC networks.

Established in the mid 1980s, CAPs were among the first
competitors in the local telecommunications market. CAPs provided non-switched
services (i.e., dedicated special access and private line) by installing fiber
optic facilities connecting IXC POPs within a metropolitan area and, in some
cases, connecting end users (primarily large businesses and government agencies)
with IXCs. CAPs used the substantial capacity and economies of scale inherent in
fiber optic cable to offer customers service that was generally less expensive
and of a higher quality than could be obtained from incumbent LECs. In addition,
CAPs offered customers shorter installation and repair intervals and improved
service reliability in comparison to incumbent LECs.

In the markets where the Company's networks are currently
operating or are under construction, the Company believes it has an addressable
market of approximately $5.2 billion annually, substantially all of which is
currently provided by the incumbent LECs. This addressable market estimate does
not include the market for enhanced data services, wireless resale, internet
access, or long distance services, which the Company has the ability to enter at
its option.

The Company

The Company is a leading provider of local telecommunications
services over state-of-the-art fiber optic networks in selected markets within
the United States. As of March 31, 1997, Hyperion's 15 operating networks served
33 cities, with approximately 3,461 route miles connecting 1,270 buildings. The
Company's 21 networks (including six currently under construction) have
generally been developed by partnering with a Local Partner. This approach has
allowed Hyperion to rapidly construct high-capacity networks which generally
have broader coverage of its markets than those of other CLECs. The Company
believes that the breadth of its networks will allow it to originate and
terminate a significant proportion of its customers' local telephone calls over
its own network, instead of relying on the network of the incumbent LEC. The
Company also believes that working with a Local Partner significantly reduces
the cost of constructing its fiber optic networks through the utilization of
existing cable or utility facilities and by sharing construction costs with its
Local Partners, who usually upgrade the capacity of their cable or utility
infrastructure during construction of the telecommunications network.

The Company's service offerings include local switched, dedicated
access, long-distance and enhanced services. Management believes that its
ability to offer a single source solution for all of its customers
telecommunications needs provides significant advantages for its customers.
Hyperion believes it can attract end-user customers by offering (i) lower prices
than the incumbent LEC, (ii) a single point of contact for billing,
<PAGE>

installation and service coordination, (iii) high-capacity fiber optic network
connection directly to substantially all of a customer's premises due to the
breadth of the Company's network coverage, and (iv) high quality customer
service. The Company also believes that major IXCs such as AT&T, MCI and Sprint
will seek to offer their business customers an integrated package of switched
local and long distance services. The Company believes its networks are
attractive to these major IXCs because the Company's networks are 100% fiber
optic-based and generally offer the broadest market coverage (other than that of
the incumbent LEC).

The Company currently offers switched services, including local
dial tone, in four markets--Buffalo, Jacksonville, Richmond and Syracuse. The
Company expects to begin offering local dial tone in an additional 14 networks
by September 1997 and the remaining three by the end of 1997, and has already
installed switches or remote switching capability in seven of its networks.
According to industry data, revenues from switched services, including local
dial tone, represented 85% of local telecommunications revenues in the United
States in 1995. The Company also offers traditional access services to IXCs, and
large customers, which to date have represented the principal source of revenue
for the Company's networks. The Company currently offers enhanced data services
to its customers in four of its networks in a partnership with !NTERPRISE, a
wholly owned subsidiary of U S WEST, and plans to offer such services in all of
its networks. Enhanced data services currently include frame relay, ATM data
transport, business video conferencing, private line data interconnect service
and LAN connection and monitoring services. These services, along with resold
long distance services, enable the Company to provide an integrated
telecommunications service offering to network customers that is more reliable,
has a superior level of service and is priced lower relative to that of the
incumbent LEC in markets served by the Company's networks.

From the Company's inception in October 1991 through March 31,
1997, the Company and its partners have invested approximately $284 million to
build and develop the network infrastructure and to fund operations (excluding
the South Florida Partnership; see "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources"). As of March 31, 1997, the gross property, plant and equipment of
the Company, its networks and the NOCC, including the Company's investment in
Telergy, was approximately $237 million.

The Company operates in a single, domestic industry segment,
telecommunications services. Information about the amounts of revenues,
operating profit or loss and identifiable assets of the Company as of and for
each of the three years in the period ended March 31, 1997, is set forth in the
Company's consolidated financial statements included herein.

Company Strategy

The Company, through its networks, is a leading provider of
integrated local telecommunications services to small, medium and large
businesses, government and educational end users and resellers, including IXCs,
in its markets. By partnering with local cable television operators and utility
companies, the Company develops networks that will provide customers with
greater market coverage, lower costs and superior service. The Company's
networks leverage the IXCs' name recognition and reputation for quality and
reliability and existing customer base by becoming preferred suppliers for IXCs
of local telecommunications services in the Company's markets. The IXCs market
their long distance services in conjunction with the Company's local service
offerings to provide end users with a fully integrated telecommunications
service offering in all of the Company's operating markets. Principal elements
of the Company's network, market and customer strategies include:

Offer Bundled Package of Telecommunications Services. The
Company, through its networks and the use of resold long-distance, can provide
customers with an integrated, one-stop shopping approach for their
telecommunications needs. The Company targets its network sales and marketing
activities at end users which include medium and large businesses as well as
government and educational institutions and resellers, including IXCs. The
Company believes it will be able to compete for end users' business based upon
price, reliability, product diversity, service and custom solutions to end user
needs. The Company also offers its local services to IXCs and has entered into a
national service agreement with AT&T to be an AT&T preferred supplier of
dedicated access and
<PAGE>

switched access transport services to AT&T. The Company has recently entered
into an agreement with MCI whereby the Company would become a preferred provider
of dedicated access and switched access transport service to MCI in
substantially all of the Company's markets.

Expand through Development of Network Clusters. The Company's
networks are located primarily in the eastern half of the United States. The
Company expects to continue to focus on this region due to the location of the
Company's existing networks and the Company's NOCC and headquarters. The Company
also believes that the eastern half of the United States, particularly the
Northeast, has greater concentrations of large business, government and
educational end users and telecommunications traffic. The Company intends to
build on its extensive network size by expanding its existing networks into
nearby areas and establishing new networks in close proximity to existing ones.
Management believes that the broad reach of its networks and network clusters is
an important element in establishing Hyperion's local presence as a full service
telecommunications provider in its markets. Clustering also enables the Company
to (i) take advantage of economies of scale in management, construction, network
operations and sales and marketing, (ii) reduce capital expenditures by
optimizing the networks' switching capacity through the use of remote switch
capacity in nearby cities, (iii) cost-effectively offer services to smaller
markets which are adjacent to its networks and in which the Company's networks
are less likely to face strong competition from incumbent LECs and other CLECs
and (iv) increase the networks' ability to offer highly reliable, end-to-end
connectivity on a regional basis. The Company also believes that creating
regional networks will enable the Company to gain a greater share of high margin
long distance transport traffic.

Develop a Rapid Entry/Low Cost Approach with Local Partners. The
Company works with a Local Partner in order to significantly reduce the cost and
time to construct a fiber optic network, enable the Company to rapidly begin
offering services and lower the overhead associated with operating and
maintaining the Company's networks. Advantages of building the Company's
networks with Local Partners include (i) sharing the cost of building a fiber
optic network, which the Company believes reduces the cost of aerial fiber
construction by approximately 62% in the case of cable partners and 40% in the
case of utility partners, (ii) reducing the time and cost of obtaining access to
rights-of-way and building entrances and (iii) leveraging the Local Partners'
existing fiber optic network maintenance and installation infrastructure.
Through the partnerships, the Company has financed its expansion at a lower cost
relative to its competitors by utilizing pro rata equity investments and Local
Partner financings of a significant portion of fiber construction. Local
Partners generally provide funding for the fiber build in a network and lease
the fiber capacity back to the partnership under long-term agreements, while the
partnership funds other capital expenditures, including switching infrastructure
and electronics.
The Company estimates that approximately 70% of its network
construction will be aerial and in many cases, where conduit is available, the
Company can achieve similar savings in underground construction. These estimates
are based upon historical experience, and there can be no assurance that the
Company will be able to achieve similar results in future efforts. These cost
savings are achieved primarily through the sharing of pole attachment costs
("Pole Attachment Costs") and the elimination of costs of the engineering and
rearrangement of cables to prepare telephone poles for the attachment of new
fiber optic cable ("Make Ready Costs"). An analysis of the estimated cost
savings for the Company for one mile of aerial construction is set forth in the
following table.
<PAGE>

With Local With Local Without
Costs Cable Partner Utility Partner Local Partner
(Dollars in thousands)

<S> <C> <C> <C>
Make Ready Costs..............$ --(a) $ --(b) $18.0(c)
Pole Attachment Costs......... 3.4(d) --(b) 5.0
Fiber Costs and Installation.. 8.0(e) 18.5(e) 8.0
Splicing Costs................ 0.6(f) 0.6(f) 0.6
---------- ---------- -------
Total.............. $12.0(g) $19.1(g) $31.6
======== ======== =====
- - ------------
<FN>

(a) Assumes a fiber overlash of existing cable plant.

(b) Assumes placing fiber in the space allocated for the local utility partner on the pole.

(c) Assumes an average cost of $200 per pole, 40 poles per mile, to
move the telephone and cable television wires in the space
allocated for communications providers on the pole and the
replacement of two poles per mile.

(d) Assumes the payment of a pro rata portion (approximately 33%) of
such costs by the Local Partner with respect to capacity to be
available for such partner's use.

(e) Represents the cost of the Operating Company's fiber and its installation on the pole.

(f) Represents the cost of cutting and integrating new fiber components.

(g) In the above analysis, this would be the amount amortized by an
applicable fiber lease financing between an Operating Company
and its Local Partner.
</FN>
</TABLE>

Build Broad Network Coverage. The Company intends to build
substantially larger networks than the networks of the CLECs it competes with in
its markets. As of March 31, 1997, in all of the markets in which the Company
and its networks operate, management believes that the Company has the broadest
network coverage in terms of route miles of any of its CLEC competitors. The
Company believes that expanded network coverage will enable the Company to (i)
provide broader and more reliable coverage for network customers, (ii) carry a
greater amount of traffic on its own networks rather than on the networks of
other carriers thereby increasing the Company's revenues and profit margins,
(iii) increase the potential market available to the Company due to the greater
number of buildings, LEC-COs and customers that the Company's networks can
service, (iv) increase the attractiveness of the Company's networks to IXCs,
cellular providers and new telecommunications providers such as PCS operators
that need wide backbone coverage, (v) offer services in areas where there are
fewer potential CLECs with facilities and (vi) leverage the fixed cost structure
of the Company's networks, particularly with regard to network electronics such
as switches.

Create Additional Partnerships with Utility Companies. The
Company believes that a significant proportion of the networks the Company
constructs in the future will be through partnerships with utility companies.
Utility companies have a number of features which make them particularly
attractive as partners for the Company, including (i) contiguous and broad
geographic coverage with extensive conduits and rights-of-way in both business
and residential areas; (ii) significant access to capital; (iii) existing
relationships with business and residential customers; and (iv) a reputation for
reliability and quality customer service. The Company believes that it is an
attractive partner for utility companies because it builds large metropolitan
networks which are similar to those of the utility company and because it can
offer utility companies a significant stake in its networks, both from a
financial and operational perspective.

Expand Enhanced Service Offerings. The Company currently offers
enhanced data communications services, including frame relay, ATM data
transport, business video conferencing, private line data interconnect service
and LAN connection and monitoring services in four of its markets through its
relationship with !NTERPRISE. !NTERPRISE is a leading, nationwide network
integrator that designs, develops and deploys state-of-the-art data networks
(including both network services and equipment) to support and enhance their
customers'
<PAGE>

information systems. The Company believes that !NTERPRISE provides the
opportunity to offer network customers a full complement of enhanced services
more rapidly and without the Company incurring the cost and overhead of
establishing its own nationwide enhanced services marketing, sales and
installation effort. The Company is in discussions to expand its relationship
with !NTERPRISE, which is currently structured as partnerships in the four
markets in which the enhanced services are offered, to provide enhanced services
pursuant to a master sales relationship agreement in substantially all of the
Company's markets.

Company Services

The Company currently offers traditional access services to all
of its customers, and offers local dial tone in four markets. The Company has
installed seven switches or remote switching modules, and plans to offer
switched services, including dial tone, in all of its existing networks by
September 1997, and the remaining three networks by the end of 1997. The Company
currently offers enhanced data services in four networks, and plans to offer
these services in all of its networks.

Switched Services

Local Exchange Services. Switched services providing dial tone to
business customers including local calling and intraLATA toll calls. These local
services also provide the customer with operator and directory assistance
services, 911 service, enhanced local features, which include PBX trunks,
business access lines, and ISDN, and custom calling features such as call
waiting, call forwarding, and voice mail.

Long Distance Services. Switching and transport of interexchange
traffic, including voice, data and video billed on a minutes-of-use basis. Long
distance services include provision of local access services to IXCs for the
local origination and completion of long distance calls. The Company also plans
to offer a full range of long distance services, including "toll free" services.
The Company currently offers these services to its customers in conjunction with
IXCs.

Traditional Access Services

Special Access and Private Line Services. Non-switched dedicated
connections, including high capacity interconnections between (i) POPs of an
IXC, (ii) the POPs of different IXCs, (iii) large end users and their selected
IXCs and (iv) different locations of particular customers. These services are
billed at a flat, non-usage sensitive, monthly rate.

Collocated Special Access Services. A dedicated line carrying
switched transmissions from the IXC POP, through the LEC-CO to the end user.

Switched Access Transport Services. A dedicated line carrying
switched transmissions from the LEC-CO to an IXC POP.

Long Distance Transport Services. Non-switched, high capacity
intraLATA services sold on a wholesale basis to IXCs and cellular and PCS
operators.

Enhanced Data Services

The Company and the Operating Companies currently offer, or
intend to offer, their customers a broad array of high bandwidth, enhanced data
services, including frame relay, ATM transport services, business internet and
intranet access and high speed video conferencing. The Company currently offers,
or intends to offer, enhanced services to customers in all of its networks
through its partnership with !NTERPRISE, a wholly owned subsidiary of U S WEST.
<PAGE>

Market Size

The following table sets forth the Company's estimate, based upon
an analysis of industry sources including industry projections and FCC data, of
the total local telecommunications revenue for calendar year 1995 in the markets
where the Company's 21 networks are currently located. The estimates, however,
do not include estimates for enhanced data services, wireless resale, internet
access, or long distance services which the Company expects will provide
substantial revenue opportunities. See "--Company Services." There is currently
limited direct information relating to these markets and therefore a significant
portion of the information set forth below is based upon estimates and
assumptions made by the Company. Management believes that these estimates are
based upon reliable information and that its assumptions are reasonable. There
can be no assurance, however, that these estimates will not vary substantially
from the actual market data.

Traditional Total Revenue
Cluster Access Services Switched Services Potential
(Dollars in millions)

Northeast ............... $ 47.8 $ 1,387.5 $ 1,435.3
Mid-Atlantic ............ 109.7 2,332.3 2,442.0
Mid-South ............... 32.9 726.5 759.4
Other Networks .......... 24.7 505.1 529.8
Total ................... $ 215.1 $ 4,951.4 $ 5,166.5

The Company's Markets

Overview

The Company currently has 21 networks (including six under
construction). The networks are owned by the Operating Companies, thirteen of
which are Operating Partnerships (including three Entergy-Hyperion limited
liability companies) and four of which are Operating Corporations. Three of the
Operating Corporations are wholly owned subsidiaries of the Company. The Company
manages and operates these networks through a combination of local management,
the Company's headquarters and NOCC in Coudersport, Pennsylvania, and the
Company's marketing offices in Pittsburgh, Pennsylvania. The following table
describes the Company's current networks:

<PAGE>

Actual or
Expected Date Hyperion
Company Networks of Operation(b) Interest Local Partner(s)
Northeast Cluster
<S> <C> <C> <C>
Albany, NY(a) .......................... 2/95 50.0% Time Warner/Advance(c)
Binghamton, NY(a) ...................... 3/95 20.0 Time Warner/Advance(c)
Buffalo, NY(a) ......................... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Advance(d)
Syracuse, NY(a) ........................ 8/92 50.0 Time Warner/Advance(c)(d)
Vermont ................................ 11/94 100.0 (d)

Mid-Atlantic Cluster
Charlottesville, VA .................... 11/95 100.0 (d)
Harrisburg, PA(a) ...................... 4/95 50.0 Lenfest Telephony
Morristown, NJ ......................... 7/96 19.7 Tele-Communications, Inc.(e)
New Brunswick, NJ ...................... 11/95 19.7 Tele-Communications, Inc.(e)
Philadelphia, PA ....................... 8/96 50.0 PECO Energy
Richmond, VA ........................... 9/93 37.0 Media One
Scranton/Wilkes-Barre, PA .............. mid-1997 100.0 (d)
York, PA ............................... 5/97 50.0 Susquehanna Cable

Mid-South Cluster
Baton Rouge, LA ........................ 12/97 50.0 Entergy
Jackson, MS ............................ 12/97 50.0 Entergy
Lexington, KY .......................... 6/97 50.0 Tele-Communications, Inc.(f)
Little Rock, AR ........................ 12/97 50.0 Entergy
Louisville, KY ......................... 3/95 50.0 Tele-Communications, Inc.(f)
Nashville, TN .......................... 11/94 95.0 InterMedia Partners

Other Networks
Jacksonville, FL ....................... 9/92 20.0 Media One
Wichita, KS ............................ 9/94 49.9 Gannet

<FN>

(a) The Company has entered into a definitive agreement with Time Warner to
increase its ownership interest in the Buffalo network to 50% and in the
Syracuse network to 100%, and to eliminate its ownership interests in and
management responsibility for the Albany and Binghamton networks. The
Company has also entered into a nonbinding letter of intent to increase its
ownership interests in the Harrisburg network to 100%.

(b) Refers to the date on which (i) the network is connected to at least one IXC
POP; (ii) the network is capable of accepting traffic from IXCs and end
users; (iii) the Company's central office is fully functional; and (iv) the
initial
network SONET fiber ring has been completed.

(d) Adelphia or its affiliates lease fiber capacity to the Operating Companies
in these networks.

(e) The interests in the Morristown and New Brunswick networks are owned by one
Operating Company. Sutton Capital Associates also owns a minority interest
in the Operating Company.

(f) The interests in the Lexington and Louisville networks are owned by one
Operating Company.
</FN>
</TABLE>

<PAGE>

Cluster Statistics(a)

Fiscal Year
Ended
March 31,
Route Fiber Buildings 1997
Cluster Miles Miles Connected VGEs(b) Revenues
(Dollars in thousands)

Northeast .......... 1,126 54,060 336 122,472 $ 5,553
Mid-Atlantic ....... 1,093 52,455 370 144,792 2,227
Mid-South .......... 484 23,232 229 47,400 1,264
Other Networks ..... 758 36,384 335 151,392 6,179
Total .............. 3,461 166,131 1,270 466,056 $15,223

(a) Non-financial information is as of March 31, 1997 and does not include
networks under construction.
(b) Voice grade equivalents circuits.

Operating Agreements

Generally, subsidiaries of the Company enter into partnership
agreements with Local Partners to take advantage of the benefits of building
networks in conjunction with local cable television or utility operators.
Typically Operating Partnerships are formed and operated pursuant to three key
agreements: (i) a partnership agreement between the Company or one of its wholly
owned subsidiaries and a cable operator or utility company (the "Local Partner
Agreement"); (ii) a fiber capacity lease agreement between the Local Partner and
the Operating Partnership (the "Fiber Lease Agreement"); and (iii) a management
agreement between the Operating Partnership and the Company or one of its
subsidiaries (the "Management Agreement").

Local Partner Agreements

Each Local Partner Agreement establishes the structure of the
applicable Operating Partnership by determining, among other things, the
partner's capital contribution requirements, capital structure, purpose and
scope of business activities, transfer restrictions, dissolution procedures,
duration and competition restrictions, as well as the voting and buy/sell rights
and rights of first refusal of the partners of the Operating Partnership.

Ownership and Capital Contributions. The initial capital
contributions and percentage of ownership of the Operating Partnerships vary.
Some of the Local Partner Agreements establish maximum capital contributions
such that each partner's ultimate aggregate capital contribution is determined
at the Operating Partnership's inception. Initial capital contributions are
generally paid on an installment basis as determined by the management committee
of the Operating Partnership, which is comprised of representatives of each
partner. Additional capital contributions in excess of the initial capital
contribution may be required in several Local Partner Agreements, but generally
either must be initiated by the manager of the Operating Partnership or approved
by at least a majority vote of the management committee. Generally, the
percentage of ownership is also fixed at the Operating Partnership's inception.
Absent an agreement by the partners, generally, the only circumstances that
result in the dilution of such partner's ownership interest are a partner's
failure to make a capital contribution or its failure to exercise a right of
first refusal.

Matters Requiring a Vote. Most partner votes of an Operating
Partnership require only a majority vote; however, a unanimous or supermajority
vote of the partners is required for, among other things, expansion of the scope
of the business activities in the defined business area, admission of additional
partners and merger or consolidation with any other entity if the Operating
Partnership is not the surviving entity.
<PAGE>

Distributions. Generally, the Local Partner Agreements allow for
distributions to the partners; however, the Local Partner Agreements vary with
regard to the procedure for determining if, when and how much of a distribution
should be made. In one Local Partner Agreement, the Company, through its
affiliate, controls such determinations. In the remaining Local Partner
Agreements, the partners or the partnership's managing committee makes such
determinations by either majority approval or unanimous consent. All
distributions are required to be made in proportion to each partner's percentage
interest in the partnership.

Transfer of Ownership. The Local Partner Agreements generally
prohibit the transfer of partnership interests, including most changes in
control. Generally, transfers of entire partnership interests to subsidiaries of
a partner's parent corporation and the sale or disposition of all or
substantially all of the stock or assets of a partner's parent are expressly
permitted in the typical Local Partner Agreement.

Rights of First Refusal; Buy/Sell Agreements. The partners of
most of the Operating Partnerships also retain certain rights of first refusal
and buy/sell rights. Generally, after a specified period of time, usually three
to six years after the inception of the Operating Partnership, either partner
may transfer its interest to an unrelated third party if such partner first
offers its interest to the other partner at the same terms and the other partner
elects not to purchase the interest. The right of first refusal usually requires
that the selling partner sell all, and not less than all, of its partnership
interest pursuant to an offer by a bona fide third party. The selling party must
first give the other partners the opportunity to purchase (on a pro rata basis)
the interest at the same price and under the same terms as the third party's
offer.

Several of the Local Partner Agreements set forth rights of first
refusal in connection with the sale of cable television systems. These
provisions give partners the right to sell all of their partnership interests in
conjunction with the sale of all or substantially all of the assets of, or
controlling interest in, the cable television systems operated by the selling
partner or its affiliates in the defined business area, on any terms and
conditions agreed to among the selling partners, its affiliates and the
purchaser; provided, however, that if a partner elects to sell its interest in
the partnership to an entity that, at the time of the potential sale, is engaged
in a competitive business in the business area, the remaining partner generally
has a right of first refusal to purchase the selling partner's interest at a
price and terms comparable to the offer made by the competitor. In addition, in
most of the Operating Partnerships, either partner can, after a specified period
of time, usually five years after the inception of the partnership, make an
offer to the other partner(s) to sell its own interest. Within 30 days of
submitting a price which generally must be based on a written third party
valuation of the partnership interest, the other partner must respond to the
offer indicating its election to either accept the offer to buy or sell at the
offered price. Certain partners in two of the partnerships have the right after
a specified period of time to put their interest in the respective partnership
(i) to the other partners at an amount equal to the fair market value of such
partner's interest pursuant to one agreement and (ii) to the Company at an
amount equal to the partner's capital contributions plus interest less any
distributions pursuant to the other agreement.

Term. Most of the Operating Partnerships were created in the last
five years and have a duration of 10 to 25 years unless earlier dissolved. Two
of the Local Partner Agreements contain provisions whereby the respective Local
Partner can terminate its interest, at such Local Partner's sole discretion,
prior to 2003. Generally, each partner and certain of its affiliates are
restricted from competing with the Operating Partnership in the defined business
area so long as the partner is a partner plus two or three years thereafter.

Fiber Lease Agreements

Generally, the Operating Partnerships lease fiber optic capacity
from their Local Partners. In some instances, the Operating Partnerships lease
existing fiber optic capacity and in other instances, the Operating Partnerships
request the Local Partners to construct new fiber optic capacity, which is then
leased by the Operating Partnership. In many cases, Local Partners upgrade the
capacity of their cable or utility infrastructure, and as a result, share
construction costs with the Operating Partnership. Monthly lease payments in
both instances are based on the amortization of the Operating Partnership's
share of the Local Partner's cost of construction and material
<PAGE>

costs over the term of the Fiber Lease Agreement. Because construction and
material costs are amortized over the then current term of the Fiber Lease
Agreement, it is possible for the amount of a monthly lease payment to be
significantly lower during a renewal term unless the construction of additional
fiber optic cable is scheduled for such renewal term. Typically, the amount of
the lease payments in a renewal period equals the amount of monthly maintenance
costs for the leased fiber optic cable.

Each of the Fiber Lease Agreements is in its initial term. The
initial terms vary from five to 25 years in length. The Fiber Lease Agreements
contain various renewal options. Generally, either party can terminate the Fiber
Lease Agreement at the end of the then current term if the terminating party
provides prior written notice to the other party. Several of the Fiber Lease
Agreements contain termination rights which provide the lessor with the option
to terminate the lease if the lessor becomes subject to telecommunications
regulation, an action is brought against the lessor challenging or seeking to
adversely modify the lessor's continued validity or authority to operate, legal
or regulatory determination renders it unlawful or impossible for the lessor to
satisfy its obligations under the lease or in case of an imposition of public
utility or common carrier status on the lessor as a result of its performance of
the lease.

Throughout the term of the Fiber Lease Agreements and thereafter,
title to the fiber optic cable remains with the Local Partner. Similarly, the
Operating Partnerships retain title to all of their own electronics and switches
that become a part of the network. A Local Partner cannot sell the fiber subject
to the Fiber Lease Agreement to a third party unless its obligations under the
Fiber Lease Agreement are assumed by the third party.

The amount of the lease payments could be affected by the costs
the Local Partners incur for attachments to poles, or use of conduit, owned by
incumbent LECs or electric utilities. Various State PUCs and the FCC are
reviewing whether use of Local Partner facilities for telecommunications
purposes (as occurs when the Operating Companies lease fiber optic capacity from
Local Partners) should entitle incumbent LECs and electric utilities to higher
pole attachment or conduit occupancy fees. Such increased fees could result in
an increase in the amount of the lease payments made by the Operating Companies
to the Local Partners. In some cases, State PUCs attempt to directly regulate
the fiber lease contracts between the Operating Companies and their local
partners.

Management Agreements

Generally, the Company or a wholly owned subsidiary of the
Company provides the Operating Partnerships with the following services pursuant
to the Management Agreement for a fee based on the Company's cost of providing
such services: general management, monitoring, marketing, regulatory processing,
accounting, engineering, designing, planning, construction, maintenance,
operations, service ordering and billing. The term of the typical Management
Agreement is three or five years and automatically renews for continuous
one-year periods unless one party provides the other with written notice that it
intends to terminate the agreement.

Enhanced Data Services Agreements

Four of the Operating Companies have entered into partnerships
with !NTERPRISE, a wholly owned subsidiary of U S WEST (the "!NTERPRISE
Partnerships"), in order to provide enhanced services such as frame relay, ATM
data transport, business video conferencing, private line data interconnect
service and LAN connection and monitoring services. The partners in the
!NTERPRISE Partnerships each have a 50% ownership interest and are required to
contribute equal amounts in order to retain their shares. The business area
serviced by the !NTERPRISE Partnerships is generally the same as that serviced
by the applicable Operating Company. The partners and their respective
affiliates are also prohibited from competing for as long as the partners are
partners plus two years thereafter. In addition, the partners have a right of
first refusal with regard to the sale of partnership interests and, under
certain circumstances, may put their interest to the !NTERPRISE Partnership.
Generally, the !NTERPRISE Partnerships have a 20-year duration. The Company is
in discussions to expand its relationship with !NTERPRISE to provide enhanced
services pursuant to a master sales relationship agreement in substantially all
of the Company's markets.
<PAGE>

AT&T Certification

AT&T has established a certification process called Operational
Readiness Testing ("ORT") in order to determine whether a supplier's network,
systems and processes are capable of providing a level of service which meets
AT&T standards. ORT is a lengthy process comprised of the following components:
(i) Operational Readiness Assessment ("ORA"), (ii) Network Validation Testing
("NVT") and (iii) Switch Network Validation Testing ("SNVT"). CLECs must pass
AT&T's ORT for access services in order to provide access services to AT&T and
AT&T's ORT for switched services in order to provide switched services to AT&T.
The Company has passed AT&T's ORA, NVT and SNVT.

Sales and Marketing

The Company targets its network sales and marketing activities at
business, government, educational end users and resellers, including IXCs. By
the end of 1997, the Company and the Operating Companies expect to have 115
local sales representatives and 25 national account representatives. The
Company's networks offer their services in accordance with tariffs filed with
the FCC for interstate services and state regulatory authorities for intrastate
services. The Operating Companies are classified as non-dominant carriers by the
FCC and therefore have substantial pricing flexibility and in many cases may
enter into customer and product specific agreements.

End Users

The Company targets end users which include medium and large
businesses as well as government and educational institutions. End users are
currently marketed through Company direct sales representatives in each market.
The national sales organization also provides support for the local sales groups
and develops new product offerings and customized telecommunications
applications and solutions which address the specific requirements of particular
customers. In addition, the Company markets the Operating Companies' products
through advertisements, media relations, direct mail and participation in trade
conferences. End users typically commit to a service agreement for a term of
three to five years which is either renegotiated or automatically converted to a
month-to-month arrangement at the end of the contract term. The Company believes
the networks will be able to compete for end users' needs based upon price,
reliability, product diversity, service and custom solutions to end user needs.
A significant component of an Operating Company's reliability will be its
ability to offer customers end-to-end SONET ring construction for many localized
applications. The Operating Companies' construction of SONET rings combined with
the Company's large network size will enable the Operating Companies to offer
fiber optic coverage superior to the incumbent LEC in its markets.

Resellers

Resellers utilize the Operating Companies' services primarily as
a local component of their own service offerings to end users. The Company has
national supplier agreements with all of the major IXCs. The Company believes it
can effectively provide IXCs with a full complement of traditional access
services as well as switched services. Factors that increase the value of the
Company's networks to IXCs include reliability, state-of-the-art technology,
route diversity, ease of ordering and customer service. The Company also
generally prices the services of an Operating Company at a discount relative to
the incumbent LEC. In order to further complement the services provided to the
IXCs, the Company integrates its networks with IXC networks to enable the IXC to
(i) access service, billing and other data directly from the Company and (ii)
electronically send automated service requests to the Company. In pursuing this
strategy, the Company has entered into the National Service Agreement with AT&T
pursuant to which the Company through its networks will be an AT&T preferred
supplier of dedicated special access and switched access transport services. The
National Service Agreement requires the Company to provide such services to AT&T
at a discount from the tariffed or published LEC rates. In addition, the Company
has entered into an agreement to be a preferred provider of new end user
dedicated access circuits for MCI.
<PAGE>

Special Purpose Networks

The Company develops special purpose networks in conjunction with
the Operating Companies in order to meet specific customer network requirements.
To date, these special purpose networks have included construction of IXC
backbone networks, campus networks, private carriage networks and other similar
network applications. The terms and conditions for these special purpose
networks are generally specified in agreements with three to five year terms
which automatically renew on a month-to-month basis. In addition, special
customer networks are normally constructed with excess fiber bandwith capacity,
which allows the Company to make additional capacity available to other end
users.

Network Development and Design

Prior to any network construction in a particular market, the
Company's corporate development staff reviews the demographic, economic,
competitive and telecommunications demand characteristics of the market. These
characteristics generally include market location, the size of the
telecommunications market, the number and size of business, educational and
government end users and the economic prospects for the area. In addition, the
Company also carefully analyzes demand information provided by IXCs, including
demand for end user special access and volume of traffic from the LEC-CO and the
IXC POPs. The Company also analyzes market size utilizing a variety of data,
including available estimates of the number of interstate access and intrastate
private lines in the region, which is available from the FCC.

If a particular market targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel, working in conjunction with the Company's Local Partner,
Adelphia, or one of Adelphia's affiliates, design a large regional network
targeted to provide access to the identified business, educational and
government end user revenue base and to the IXC POPs and the LEC-COs in the
geographic area covered by the proposed network.

The actual network design is influenced by a number of market,
cost and technical factors including:

Availability and ease of fiber deployment
Location of IXC POPs
Density of telecommunications revenue based upon IXC
information The Company's market information Cost of
construction

The objective of the network design is to maximize revenue
derived from service to IXC POPs, LEC-COs and important customers in
consideration of network construction costs. In most cases, the Local Partner
bears the costs of construction for the required fiber, retains ownership of the
fiber and leases the fiber to the Operating Company. The fiber lease costs are
determined by amortizing the Operating Company's portion of the Local Partner's
cost of construction over the term of the Fiber Lease Agreement at an assumed
interest rate. This structure generally allows the Operating Company to better
match its capital costs to cash flows.

Network Construction

The Company's networks are constructed to cost-effectively access
areas of significant end user telecommunications traffic, as well as the POPs of
most IXCs and the majority of the LEC-COs. The Company establishes with its
Local Partner or Adelphia general requirements for network design including,
engineering specifications, fiber type and amount, construction timelines and
quality control. The Company's engineering personnel provide project management,
including contract negotiation and overall supervision of the construction,
testing and certification of all facilities. The construction period for a new
network varies depending upon the number of route miles to be installed, the
initial number of buildings targeted for connection to the network, the

<PAGE>

general deployment of the network and other factors. Networks that the Company
has installed to date have generally become operational within six to ten months
after the beginning of construction.

Network Operating Control Center

In Coudersport, Pennsylvania, the Company has built a NOCC that
is equipped with state-of-the-art system monitoring and control technology. The
NOCC is a single point interface for monitoring all of the Company's networks
and provisioning all services and systems necessary to operate the networks. The
NOCC currently supports all of the Company's networks including the management
of approximately 1,270 building connections, seven switches or remote switching
modules and approximately 3,461 network route miles as of March 31, 1997. The
NOCC is designed to accommodate the Company's anticipated growth.

The NOCC is utilized for a variety of network management and
control functions including monitoring, managing and diagnosing the Company's
SONET networks, central office equipment, customer circuits and signals and the
Company's switches and associated equipment. The NOCC is also the location where
the Company provisions, coordinates, tests and accepts all orders for switched
and dedicated circuit orders. In addition, the NOCC maintains the database for
the Company's circuits and network availability. Network personnel at the NOCC
also develop and distribute a variety of software utilized to manage and
maintain the networks.

Equipment Supply

The Company and the Operating Companies purchase fiber optic
transmission and other electronic equipment from Lucent, Fujitsu, Tellabs, and
other suppliers at negotiated prices. The Company expects that fiber optic
cable, equipment and supplies for the construction and development of its
networks will continue to be readily available from Lucent, Fujitsu and other
suppliers as required. The Company has negotiated multi-year contracts for
equipment with Lucent, Fujitsu, and Tellabs. The Company and the Operating
Companies have deployed four Lucent 5ESS Switches ("5ESSs") and three Lucent
remote switching modules, which deliver full switching functionality, in seven
of their current markets. The Company and the Operating Companies plan to deploy
5ESSs or remote switching modules in all of its existing networks by September
1997 (late 1997 as to the Entergy Networks) and additional 5ESSs or remote
switching modules in each of the Company's future networks.

Connections to Customer Locations

Office buildings are connected by network backbone extensions to
one of a number of physical rings of fiber optic cable, which originate and
terminate at the Operating Company's central office. Signals are sent
simultaneously on both primary and alternate protection paths through a network
backbone to the Operating Company's central office. Within each building,
Operating Company-owned internal wiring connects the Operating Company's fiber
optic terminal equipment to the customer premises. Customer equipment is
connected to Operating Company-provided electronic equipment generally located
where customer transmissions are digitized, combined and converted to an optical
signal. The traffic is then transmitted through the network backbone to the
Operating Company's central office where it can be reconfigured for routing to
its ultimate destination on the network.

The Operating Company locates its fiber optic equipment in space
provided by the building owner or, more typically, on a customer's premises.
IXCs often enter into discussions with building owners to allow the Company to
serve the IXCs' customers. This network configuration enables the Company to
share electronic equipment among multiple customers, causes little interruption
for customers during installation and maintenance and allows the Company to
introduce new services rapidly and at low incremental cost.

Employees

As of March 31, 1997, the Operating Companies and the Company
employed a total of 144 and 117 full-time employees, respectively, in support of
the Operating Companies' and the Company's operations. The Company

<PAGE>

also regularly uses the services of its Local Partners, employees
and contract technicians for the installation and maintenance of its networks.
None of the Operating Companies' or the Company's employees is represented by a
collective bargaining agreement. The Company believes that the Operating
Companies' and the Company's relations with their respective employees are good.

COMPETITION

The Company operates in a highly competitive environment and has
no significant market share in any market in which it operates. In each of the
areas served by an Operating Company, services similar to those offered by the
Operating Company are offered by the incumbent LEC serving that area. Incumbent
LECs have long-standing relationships with their customers, have far greater
technical and financial resources and provide services that an Operating Company
may not currently be authorized by state regulators to offer. See
"Regulation--State Regulation." Following the enactment of the
Telecommunications Act of 1996 (the "Telecommunications Act"), there has been
significant merger activity among the RBOCs which will result in competitors
with even greater financial resources and geographic scope than currently faced
by the Company. In addition, in many markets, the incumbent LEC currently is
excused from paying license or franchise fees or pays fees materially lower than
those required to be paid by the Operating Companies.

While new business opportunities will be made available to the
Company through the Telecommunications Act and other federal and state
regulatory initiatives, regulators are likely to provide the incumbent LECs with
an increased degree of flexibility with regard to pricing of their services as
competition increases. If the incumbent LECs elect to lower their rates and can
sustain lower rates over time, this may adversely affect the revenues of the
Operating Companies and the Company by placing downward pressure on the rates
the Operating Companies can charge. The Company believes this effect will be
offset by the increased revenues available by offering new services, but if
future regulatory decisions afford the incumbent LECs excessive pricing
flexibility or other regulatory relief, such decisions could have a material
adverse effect on the Company.

Competition for the Company's and the Operating Companies'
services is based on price, quality, network reliability, service features and
responsiveness to customer needs. The Company believes that its management
expertise, coupled with its highly reliable, state-of-the-art digital networks
and back-office infrastructure, which offer significant transmission capacity at
competitive prices, will allow it to compete effectively with the incumbent
LECs, which may not yet have fully deployed fiber optic networks in many of the
Company's target markets. The Company believes that the Operating Companies
price their services at a modest discount compared to the prices of incumbent
LECs while providing a higher level of customer service. The Company's networks
provide diverse access routing and redundant electronics, design features not
widely deployed by the incumbent LEC networks at the present time. However, as
incumbent LECs continue to upgrade their networks, any competitive advantage
held by the Company due to the superiority of its facilities may diminish.

Other current or potential competitors of the Company's networks include other
CLECs, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, private networks built by large end users and cable
television operators or utilities in markets in which the Company has not
partnered with one or the other. In many markets served by the Company, one or
more CLECs already are providing service. Furthermore, the three major IXCs have
announced ambitious plans to enter the local exchange market. There is no
assurance that these IXCs will choose to obtain local services from the
Operating Companies in the Company's markets. In addition, recent sweeping
changes enacted by the Telecommunications Act facilitate entry by such
competitors into local exchange and exchange access markets, including
requirements that incumbent LECs make available interconnection and unbundled
network elements to any requesting telecommunications carrier at cost-based
rates, as well as requirements that LECs offer their services for resale. See
"Regulation--Telecommunications Act of 1996." Such requirements permit companies
to enter the market for local telecommunications services without investing in
new facilities, thereby increasing the number of likely competitors in any given
market, and enables the IXCs to provide local services by reselling the service
of the incumbent LEC, or purchasing unbundled network elements, rather than
using services provided by the Company.
<PAGE>

REGULATION

Overview

Telecommunications services provided by the Company and its
networks are subject to regulation by federal, state and local government
agencies. At the federal level, the FCC has jurisdiction over interstate
services, which constitute a majority of the Operating Companies' current
services. Interstate services, for the purpose of determining FCC jurisdiction,
are communications that originate in one state and terminate in another state or
foreign country. State regulatory commissions exercise jurisdiction over
intrastate services. Intrastate services are communications that originate and
terminate in the same state. Additionally, municipalities and other local
government agencies may regulate limited aspects of the Company's business, such
as use of rights-of-way.

Telecommunications Act of 1996

On February 8, 1996, the Telecommunications Act was signed into
law and is considered to be the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The
Telecommunications Act will result in substantial changes in the marketplace for
voice, data and video services. These changes are opening the local exchange
market to competition and will result in a substantial increase in the
addressable market for the Company's networks. Among its more significant
provisions, the Telecommunications Act (i) removes legal barriers to entry in
local telephone markets, (ii) requires incumbent LECs to "interconnect" with
competitors, (iii) establishes procedures for incumbent LEC entry into new
markets, such as long distance and cable television, (iv) relaxes regulation of
telecommunications services provided by incumbent LECs and all other
telecommunications service providers, and (v) directs the FCC to establish an
explicit subsidy mechanism for the preservation of universal service. As a
component of the need for explicit subsidy mechanism for universal service, the
FCC was also directed to revise and make explicit subsidies inherent in the
current access change system.

Removal of Entry Barriers

Prior to enactment of the Telecommunications Act, many states
limited the services that could be offered by a company competing with the
incumbent LEC. See "--State Regulation." In these states, the incumbent LEC
retained a monopoly over basic local exchange services pursuant to state statute
or regulatory policy. In states with these legal barriers to entry, the Company
had been limited to the provision of dedicated telecommunications services,
which constitutes only a small portion of the local telephone market.

The Telecommunications Act prohibits state and local governments
from enforcing any law, rule or legal requirement that prohibits or has the
effect of prohibiting any person from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers.

This provision of the Telecommunications Act should enable the
Operating Companies to provide a full range of local telecommunications services
in any state. The Operating Companies will continue their policy of not
providing long distance services that compete with the major IXCs in order to
enable the Company to work with IXCs to provide an integrated local and long
distance service offering to end users. Although the Operating Companies will be
required to obtain certification from the state regulatory commission in almost
all cases, the Telecommunications Act should limit substantially the ability of
a state commission to deny a request for certification filed by an Operating
Company. While this provision of the Telecommunications Act expands
significantly the markets available to the Operating Companies, it also reduces
the barriers to entry by other potential competitors and therefore increases the
level of competition the Operating Companies will face in all their markets. See
"Competition."
<PAGE>

Some state commissions are currently considering actions to
preserve universal service and protect the public safety and welfare. The
actions may impose conditions on the certificate issued to an Operating Company
which would require it to offer service on a geographically widespread basis
through the construction of facilities to serve all residents and business
customers in such areas, the acquisition from other carriers of network
facilities required to provide such service, or the resale of other carriers'
services. The Company believes that state commissions have limited authority to
impose such requirements under the Telecommunications Act. The imposition of
such conditions by state commissions could increase the cost to the Operating
Companies to provide local exchange services.

Access and Interconnection with LEC Facilities

A company cannot compete effectively with the incumbent LEC in
the market for switched local telephone services unless it is able to connect
its facilities with the incumbent LEC and obtain access to certain essential
services and resources under reasonable rates, terms and conditions. Incumbent
LECs historically have been reluctant to provide these services voluntarily and
generally have done so only when ordered to by state regulatory commissions.

The Telecommunications Act imposes a number of access and
interconnection requirements on all local exchange providers, including CLECs,
with additional requirements imposed on incumbent LECs. These requirements will
provide access to certain networks under reasonable rates, terms and conditions.
Specifically, LECs must provide the following:

Telephone Number Portability. Telephone number portability
enables a customer to keep the same telephone number when the customer switches
local exchange carriers. New entrants are at a competitive disadvantage without
telephone number portability because of inconvenience and costs to customers
that must change numbers.

Dialing Parity. All LECs must provide dialing parity, which means
that a customer calling to or from a CLEC network cannot be required to dial
more digits than is required for a comparable call originating and terminating
on the LEC's network.

Reciprocal Compensation. The duty to provide reciprocal
compensation means that LECs must terminate calls that originate on competing
networks in exchange for a given level of compensation and that they are
entitled to termination of calls that originate on their network for which they
must pay a given level of compensation.

Resale. A LEC may not prohibit or place unreasonable restrictions
on the resale of its services. In addition, incumbent LECs must offer bundled
local exchange services to resellers at a wholesale rate that is less than the
retail rate charged to end users.

Access to Rights-of-Way. A LEC must provide access to its poles,
ducts, conduits and rights-of-way on a reasonable, nondiscriminatory basis.

Unbundling of Network Elements. Incumbent LECs must offer access
to various unbundled elements of their network. This requirement allows new
entrants to purchase at cost-based rates, elements of an incumbent LEC's network
that may be necessary to provide service to customers not located in the new
entrants' networks.

"Number Portability Order"). The FCC ordered all LECs to begin phased
development of a long-term service provider portability method in the 100
largest Metropolitan Statistical Areas ("MSAs") no later than October 1, 1997,
and to complete deployment in those MSAs by December 31, 1998. Number
portability must be provided in those areas by all LECs to all requesting
telecommunications carriers. After December 31, 1998, each LEC must
<PAGE>

make number portability available within six months after receiving a specific
request by another telecommunications carrier in areas outside the 100 largest
area MSAs in which the requesting carrier is operating or plans to operate.
Until long-term service portability is available, all LECs must provide
currently available number portability measures as soon as reasonably possible
after a specific request from another carrier. As new carriers are at a
competitive disadvantage without telephone number portability, the Number
Portability Order should enhance the Company's ability to offer service in
competition with the incumbent LECs, if these regulations are effective in
promoting number portability. The Number Portability Order sets interim criteria
for number portability cost recovery. The FCC deferred selecting a long-term
number portability cost recovery scheme to a further rulemaking proceeding which
is not expected to be decided until later this year. Further, the Number
Portability Order is subject to Petitions for Reconsideration filed at the FCC.
To the extent that the outcome of the Petitions results in new rules that
decrease the LEC obligation to provide number portability or increase the CLEC
obligation to pay for number portability, changes to the Number Portability
Order could decrease the Company's ability to offer service in competition with
the incumbent LECs.

On August 8, 1996 the FCC released its First Report and Order and
Second Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection obligations of all telecommunications carriers, including
obligations of CLEC and incumbent LEC networks and incumbent LEC pricing of
interconnection and unbundled elements (the "Local Competition Orders"). The
Local Competition Orders adopt a national framework for interconnection but
leave to the individual states the task of implementing the FCC's rules. Because
implementation of the Local Competition Orders will be at the state level, it is
uncertain how these new requirements will affect the Company. To the extent that
the Local Competition Orders reduce the ability of incumbent LECs to impose
non-cost-based access charges on IXCs, the Company's competitive advantage in
providing customers with access services will decrease. However, to the extent
that CLECs are able to interconnect with incumbent LEC networks on favorable
terms, the Company's ability to provide competitive local exchange services will
increase. The Local Competition Orders are subject to Petitions for
Reconsideration filed at the FCC and Petitions for Review filed at the United
States Court of Appeals. Additionally, the Eighth Circuit has granted a stay of
the pricing and "most favored nation" provisions of the First Report and Order.
The pricing provisions establish price ceilings and default prices for
interconnection and bundled elements, and the "most favored nation" provision
allows carriers to request the incumbent LEC to make available to them on the
same terms and conditions, any interconnection, service or network element
contained in an approved agreement to which the incumbent LEC is a party. The
stay is limited to certain FCC rules. None of the provisions of the underlying
Telecommunications Act has been stayed. On November 1, 1996, the Eighth Circuit
modified the stay to exclude certain non-pricing portions of the rules that
primarily relate to wireless telecommunications providers. The court heard oral
argument on January 17, 1997, and a decision is not likely until later this
year. To the extent that the outcome of these petitions results in new rules,
the Company's ability to provide competitive local exchange services could be
affected.

Although the Number Portability Order, the Local Competition
Orders and the underlying statutory requirements are intended to benefit new
entrants in the local exchange market, such as the Operating Companies, it is
uncertain how effective these requirements will be. Ultimately the success of
the Telecommunications Act to bring the benefits of increased competition to
consumers will depend in large part upon state regulators' implementation of the
Telecommunications Act and the Local Competition Orders as well as numerous
rulemakings that should level the playing field between incumbent LECs and new
entrants such as the Company. For example, if CLECs are unable to obtain
favorable agreements with the incumbent LEC regarding call termination and
resale of incumbent LEC facilities and services through negotiation with the
incumbent LEC or arbitration at state public utility commissions, there is a
diminished likelihood that an Operating Company will be successful in its local
exchange market. In addition, the ability of CLECs to resell incumbent LEC
services obtained at wholesale rates may permit some CLECs to compete with the
Operating Companies without investing in facilities.

Moreover, these requirements place burdens on an Operating
Company when it provides switched local exchange services that will benefit
potential competitors. In particular, the obligation to offer services for
resale means that a company can resell the Operating Company's services without
investing in facilities, although unlike
<PAGE>

incumbent LECs, the Operating Companies
are not required to offer services for resale at discounted rates. Similarly,
the obligation to provide access to rights-of-way is of limited benefit to the
Operating Companies, which already have such access through their Local
Partners, but benefits other potential competitors to a greater degree.

LEC Entry into New Markets

The Company's principal competitor in each market it enters is
the incumbent LEC. See "Competition." Prior to enactment of the
Telecommunications Act, incumbent LECs generally were prohibited from providing
cable television service pursuant to the "telco/cable cross-ownership
prohibition" contained in the Communications Act of 1934, although the
prohibition had been stayed by several courts and was not being enforced by the
FCC. In addition, the RBOCs generally were prohibited by the MFJ (as defined)
from providing interLATA (i.e., long distance) services within the region in
which they provide local exchange service.

The Telecommunications Act repeals the telco/cable
cross-ownership prohibition and permits incumbent LECs to provide cable
television service. Prior to the Telecommunications Act repeal, some LECs were
investing in fiber optic networks on a limited basis through the FCCs "video
dialtone" regulatory regime. With the telco/cable cross ownership prohibition
removed, incumbent LECs are more likely to invest in fiber optic networks
because those facilities will be able to generate a revenue stream previously
unavailable on a widespread basis to the incumbent LECs. While incumbent LEC
entry into the video market may be a motivating factor for construction of new
facilities, these facilities also can be used by an incumbent LEC to provide
services that compete with the Company's networks.

The Telecommunications Act also eliminates the prospective effect
of the MFJ and establishes procedures under which an RBOC can enter the market
for interLATA services within its telephone service area. This is referred to as
"in-region" interLATA service. (RBOCs are currently permitted to provide
interLATA long distance services to customers outside of their local service
areas. This is referred to as "out-of-region" long distance service.) Before an
RBOC can provide in-region interLATA service, it must enter into a
state-approved interconnection agreement with a company that provides local
exchange service to business and residential customers predominantly over its
own facilities. Alternatively, if no such competitor requests interconnection,
the RBOC can request authority to provide in-region interLATA services if it
offers interconnection under state-approved terms and conditions. The
interconnection offered or provided by the RBOC must comply with a "competitive
checklist" that is comparable to the interconnection requirements discussed
above. See "--Access and Interconnection with LEC Facilities."

The ability of the RBOCs to provide interLATA services enables
them to provide customers with a full range of local and long distance
telecommunications services. The provision of interLATA services by RBOCs is
expected to reduce the market share of the major long distance carriers, who are
the Company's networks' primary customers. Consequently, the entry of the RBOCs
into the long distance market may have adverse consequences on the ability to
generate revenues from the IXCs. To date Ameritech has sought authority from the
FCC to provide in-region interLATA service in Michigan, and Southwestern Bell
Telephone Company ("SWBT") has sought similar authority in Oklahoma. The
Department of Justice has opposed SWBT's request in Oklahoma. It is unclear
whether Justice will oppose Ameritech's request. More RBOC requests to provide
in-region interLATA service are expected to be filed with the FCC shortly.

Relaxation of Regulation

A long-term goal of the Telecommunications Act is to increase
competition for telecommunications services, thereby reducing the need for
regulation of these services. To this end, the Telecommunications Act requires
the FCC to streamline its regulation of incumbent LECs and permits the FCC to
forbear from regulating
particular classes of telecommunications services or
providers. Since the Company is a non-dominant carrier and, therefore, is not
heavily regulated by the FCC, the potential for regulatory forbearance likely
will be more beneficial to the incumbent LECs than the Company in the long run.
<PAGE>

In an exercise of its "forbearance authority," the FCC has ruled
that following a transition period nondominant carriers will no longer be able
to file tariffs with the FCC concerning their interstate long distance services
(the "Detariffing Order"). The FCC's Detariffing Order has been appealed to the
U.S. Court of Appeals for the District of Columbia. A portion of the FCC's
Detariffing Order has been stayed and the appeal is still pending. Pursuant to
the forbearance provisions of the Telecommunications Act, the Company has filed
a petition requesting that the FCC reinstate its forbearance policy with regard
to tariff filing requirements for competitive providers of interstate access
services, such as the Company. See "--Federal Regulation." This would relieve
the Company of its biggest existing federal regulatory burden. The FCC has not
set a timetable for action on the Company's petition.

The Telecommunications Act eliminates the requirement that
incumbent LECs obtain FCC authorization before constructing new facilities for
interstate services. The Telecommunications Act also limits the FCC's ability to
review LEC tariff filings. These changes will increase the speed with which
incumbent LECs are able to introduce new service offerings and new pricing of
existing services, thereby increasing the incumbent LECs' ability to compete
with the Company.

Universal Service and Access Charge Reform

One of the primary goals of the original Communications Act of
1934 was to extend telephone service to all the citizens of the United States.
This goal has been achieved largely by keeping the rates for basic local
exchange service at a reasonable level. It was traditionally thought that
incumbent LECs were able to keep basic residential rates reasonable by
subsidizing them with revenues from business and IXC customers, and by
subsidizing rural service at the expense of urban customers. The existence and
level of these subsidies has been widely disputed in recent years because they
are so difficult to quantify.

On May 8, 1997, the FCC issued an order to implement the
provisions of the Telecommunications 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
service 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 FCC'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 interstate and international
end-user telecommunications revenues.

In a related proceeding on May 16, 1997, the FCC issued an order
to implement certain reforms to its access charge rules (the "Access Charge
Reform Order"). Access charges are charges imposed by LECs on long distance
providers for access to the local exchange network and are designed to
compensate the LEC for its investment in the local network. The FCC regulates
interstate access and the states regulate intrastate access. The Access Charge
Reform Order will require incumbent LECs to substantially decrease over time the
prices they charge for switched and special 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
flat-rated, monthly per-line charges. To the extent that these rules begin to
reduce access 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.
<PAGE>

Two aspects of the FCC's Access Charge Reform Order create
potential competitive benefits for alternative access providers, including the
Company. First, the abolition of the unitary rate structure option for local
transport may have an adverse effect on some interexchange carriers, making
competitive access services provided by the Company and others more attractive.
Second, the FCC ruled that incumbent LECs may no longer impose the transport
interconnection charge on competitive providers, such as the Company, that
interconnect with the incumbent LEC at the incumbent's end offices.

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.

Federal Regulation

Through a series of regulatory proceedings, the FCC has
established different levels of regulation for "dominant carriers" and
"non-dominant carriers." Only incumbent LECs are classified as dominant; all
other providers of domestic interstate services, including the Operating
Companies, are classified as non-dominant carriers. As non-dominant carriers,
the Operating Companies are subject to relatively limited regulation by the FCC.
The Operating Companies must offer interstate services at just and reasonable
rates in a manner that is not unreasonably discriminatory, subject to the
complaint provisions of the Communications Act of 1934, as amended.

Presently, the Operating Companies are required to file tariffs
listing the terms, conditions and rates for their services. Under the
Telecommunications Act, the FCC has authority to forbear from regulation (such
as toll regulation) provided that such forbearance is consistent with the public
interest. In an exercise of its "forbearance authority," the FCC has ruled that
following a transition period nondominant carriers will no longer be able to
file tariffs with the FCC concerning their interstate long distance services
(the Detariffing Order"). The FCC's Detariffing Order has been appealed to the
U.S. Court of Appeals for the District of Columbia and the provision requiring
interexchange carriers to withdraw their tariffs was stayed by that court on
February 13, 1997. That appeal is still pending. On March 21, 1996 the Company
filed a forbearance petition requesting the FCC to take this action with regard
to competitive providers of interstate access services, but there can be no
assurance that it will do so. Under the Communications Act, the Company's
petition will be deemed to be granted unless the FCC acts to deny the petition
by June 19, 1997.

The FCC has adopted rules requiring incumbent LECs to provide
"collocation" to CAPs for the purpose of interconnecting their competing
networks. These rules enable the Operating Companies to carry a portion of a
customer's interstate traffic to an IXC even if the customer is not located on
the Company's network. The Company has requested collocation in some, but not
all, of its markets. The incumbent LECs have proposed collocation rates that are
being investigated by the FCC to determine whether they are excessive. If the
FCC orders the incumbent LECs to reduce these rates, collocation will be a more
attractive option for CLECs. Under the Local Competition Order, incumbent LECs
will be required to provide both virtual collocation and actual collocation at
their switching offices.

Under the Telecommunications Act, an Operating Company may become subject to
additional federal regulatory obligations when it provides local exchange
service in a market. All LECs, including CLECs, must make their services
available for resale by other carriers, provide nondiscriminatory access to
rights-of-way, offer reciprocal compensation for termination of traffic and
provide dialing parity and telephone number portability. In addition, the
Telecommunications Act requires all telecommunications carriers to contribute to
the universal service mechanism established by the FCC and to ensure that their
services are accessible to and usable by persons with disabilities.
<PAGE>

Because the states are in the process of implementing rules
consistent with the Telecommunications Act and rules adopted by the FCC pursuant
to the Act, it is uncertain how burdensome or beneficial such rules will be for
the Company and the Operating Companies. The obligation to provide services for
resale by others potentially limits any competitive advantage held by the
Company by virtue of its state-of-the-art facilities because other carriers,
including the incumbent LEC and the IXCs, can simply resell the Operating
Companies' services. Similarly, the obligation to provide access to
rights-of-way benefits certain competitors more than the Company, which already
has such access through its Local Partners. Most of the other obligations impose
costs on the Operating Companies that also will be borne by competing carriers
so the competitive implication of these requirements should not be significant
if they are implemented fairly.

As part of its decision requiring incumbent LECs to provide
virtual collocation, the FCC also granted incumbent LECs flexibility to reduce
their rates for interstate access services in markets where a CAP is collocated.
This flexibility includes the ability to offer volume and term discounts and to
de-average access rates in different "zones" in a state based on the level of
traffic. In addition, the FCC has granted two incumbent LECs further flexibility
in their most competitive markets and the FCC could grant similar waivers in
markets served by the Operating Companies. The FCC also is considering granting
incumbent LECs additional pricing flexibility in its pending proceeding
regarding incumbent LEC price caps. With the passage of the Telecommunications
Act and the anticipated increase in the level of competition faced by incumbent
LECs, the FCC could grant incumbent LECs substantial pricing flexibility with
regard to interstate access services. It is also anticipated that the prices
incumbent LECs charge for access services will be reduced as a result of the
FCC's reform of the access charge regime and the adoption of universal service
rules. To the extent these regulatory initiatives enable or require incumbent
LECs to offer selectively reduced rates for access services, the rates the
Operating Companies may charge for access services will be constrained. The
Operating Companies' rates also will be constrained by the fact that competitors
other than the incumbent LECs are subject to the same streamlined regulatory
regime as the Operating Companies and can price their services to meet
competition.

State Regulation

Most state public utility commissions require companies that wish
to provide intrastate common carrier services to be certified to provide such
services. These certifications generally require a showing that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest.

Operating Companies have been certificated or are otherwise
authorized to provide telecommunications services in Florida, Kansas, Kentucky,
New Jersey, New York, Pennsylvania, Tennessee, Vermont and Virginia. The
certificates in New York, Florida, Vermont, Virginia and Tennessee permit the
Operating Companies to provide a full range of local telecommunications
services, including basic local exchange service. The Operating Companies have
interim authority to provide a full range of local telecommunications services
in Pennsylvania, and an application for a permanent certificate is pending in
that state. In light of the Telecommunications Act, the Operating Companies will
request removal of any restrictions that now exist on its certificates in the
remaining states and anticipate that requests will be granted. See
"--Telecommunications Act of 1996--Removal of Entry Barriers." In addition, the
Telecommunications Act will enable the Company to enter new states providing a
full range of local services upon certification. In certain states, each of the
Company, its subsidiaries and the Operating Companies may be subject to
additional state regulatory requirements, including tariff filing requirements,
to begin offering the telecommunications services for which such entities have
been certificated. Many states also may have additional regulatory requirements
such as reporting and customer service requirements, unbundling and universal
service contributions. In addition, in virtually every state, the Company's
certificate or other authorization is subject to the outcome of proceedings by
the state commission that address regulation of LECs and CLECs, competition,
geographic build-out and service requirements and universal service issues.

Certain of the states where the Operating Companies operate have
adopted specific service funding obligations. For example, in Kentucky, the
Operating Company is required to put into escrow, pending the issuance
<PAGE>

of final Kentucky universal service rules, an amount equal to six percent of
gross receipts from the provision of intrastate service in Kentucky once it
begins providing intraexchange service. In Pennsylvania, pending the issuance of
final rules, the Operating Company will be required to make a universal service
contribution based on an "assessment rate" derived from dividing the Operating
Company's gross intrastate operating revenues into the statewide intrastate
revenues generated by all other carriers. The Operating Company's contribution
to the Pennsylvania universal service fund will be phased in over four years
with 25 percent of the assessment rate collected in the first year and equal
increments added to the payment in the second, third and fourth years. Vermont
imposes a universal service fund surcharge to state lifeline, relay and E-911
programs, and potentially affordable service in high cost areas, and also
imposes a gross revenues tax, like many other states. In Kansas, the state
regulatory commission has ordered telecommunications companies to pay
approximately 9% of their intrastate retail revenues to the Kansas Universal
Service Fund, beginning March 1, 1997. Proceedings to adopt universal service
funding obligation rules are pending or contemplated in the other states in
which the Operating Companies conduct business.

In addition to obtaining certification, an Operating Company must
negotiate terms of interconnection with the incumbent LEC before it can begin
providing switched services. Under the Telecommunications Act, the FCC has
adopted interconnection requirements, certain portions of which have been stayed
by the reviewing court. See "--Telecommunications Act of 1996--Access and
Interconnection with LEC Facilities." These rules establish guidelines for the
states to follow when reviewing interconnection agreements and should greatly
facilitate the negotiation of interconnection agreements, although it is
anticipated that some incumbent LECs may remain reluctant to comply with
interconnection requests, thereby delaying an Operating Company's ability to
provide switched services. To date, the Operating Companies have negotiated
interconnection agreements with one or more incumbent LECs in Kansas, Kentucky,
New Jersey, Pennsylvania, Tennessee, Vermont, and Virginia. Of these
interconnection agreements, state commissions in Kentucky (BellSouth), Vermont
(NYNEX), New Jersey (Bell Atlantic) and Virginia (Bell Atlantic) have approved
interconnection agreements. Other interconnection agreements have been filed and
are pending approval in Kansas, Pennsylvania, Tennessee, and Virginia. In
addition, two interconnection agreements have been recently executed with GTE
and will shortly be filed for approval by state commissions in Kentucky and
Pennsylvania. Finally, Operating Companies in New York interconnect with NYNEX,
pursuant to a NYNEX tariff on file with the New York Public Service Commission,
rather than through interconnection agreements.

The Operating Companies are not presently subject to price
regulation or rate of return regulation in any state, although there can be no
assurance this will not change when the Operating Companies begin providing
switched services in some states. In most states, an Operating Company is
required to file tariffs setting forth the terms, conditions and prices for
intrastate services. In some states, an Operating Company's tariff lists a rate
range or sets prices on an individual case basis.

Several states have allowed incumbent LECs rate and tariff
flexibility, particularly for services deemed subject to competition. This
pricing flexibility increases the ability of the incumbent LEC to compete with
an Operating Company and constrains the rates an Operating Company may charge
for its services. In light of the additional competition that is expected to
result from the Telecommunications Act, states may grant incumbent LECs
additional pricing flexibility. At the same time, some incumbent LECs may
request increases in local exchange rates to offset revenue losses due to
competition.

An investor who acquires as little as ten percent of the
Company's outstanding voting securities may have to obtain approval of certain
state public utility commissions before acquiring such an interest, because such
ownership might be deemed to constitute an indirect controlling interest in the
state Operating Company.

Local Government Authorizations

An Operating Company may be required to obtain from municipal
authorities street opening and construction permits, or operating franchises, to
install and expand its fiber optic networks in certain cities. In some
<PAGE>

cities, the Local Partners or subcontractors may already possess the requisite
authorizations to construct or expand the Company's networks. An Operating
Company or its Local Partners also must obtain a license to attach facilities to
utility poles in order to build and expand facilities. Because utilities that
are owned by a cooperative or municipality are not subject to federal pole
attachment regulation, there are no assurances that an Operating Company or its
Local Partners will be able to obtain pole attachments from these utilities at
reasonable rates, terms and conditions.

In some of the areas where the Operating Companies provide
service, their Local Partners pay license or franchise fees based on a percent
of gross revenue. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Operating Company may be required
to pay such fees. There are no assurances that certain municipalities that do
not currently impose fees will not seek to impose fees in the future, nor is
there any assurance that, following the expiration of existing franchises, fees
will remain at their current levels. In many markets, other companies providing
local telecommunications services, particularly the incumbent LECs, currently
are excused from paying license or franchise fees or pay fees that are
materially lower than those required to be paid by the Operating Company or
Local Partner. The Telecommunications Act requires municipalities to charge
nondiscriminatory fees to all telecommunications providers, but it is uncertain
how quickly this requirement will be implemented by particular municipalities in
which the Company operates or plans to operate or whether it will be implemented
without a legal challenge initiated by the Company or another CLEC.

If any of the existing Local Partner Agreements or Fiber Lease
Agreements held by a Local Partner or an Operating Company for a particular
market were terminated prior to its expiration date and the Local Partner or
Operating Company were forced to remove its fiber optic cables from the streets
or abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company.

Risk Factors

Cautionary Statements. The statements contained in this Form 10-K
that are not historical facts are "forward looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "intends" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. Management
cautions the reader that these forward-looking statements, such as the Company's
plans to build and acquire networks in new areas, the market opportunity
presented by larger metropolitan areas, its anticipated installation of local
exchange service line and revenues from designated markets during 1997, and
statements regarding the development of the Company's business, the markets for
the other statements contained above and herein in this Form 10-K regarding
matters that are not historical facts, are only predictions. No assurance can be
given that the future results will be achieved; actual events or results may
differ materially as a result of risks facing the Company. Such risks include,
but are not limited to, the Company's ability to successfully market its
services to current and new customers, access markets, identify, finance and
complete suitable acquisitions, design and construct fiber optic networks,
install cable and facilities, including switching electronics, and obtain
rights-of-way, building access rights and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to vary
materially from the future results indicated, expressed or implied, in such
forward-looking statements. In particular, these risks include, among others,
the following important factors.

Negative Cash Flow and Operating Losses; Limited History of Operations. The
Company has experienced significant losses since its inception, with operating
losses of approximately $2.6 million, $3.6 million and $9.1 million for the
fiscal years ended March 31, 1995, 1996 and 1997, respectively. The Company
expects to continue to incur substantial operating losses in the foreseeable
future as it pursues its plans to expand its networks, service offerings and
customer base. There can be no assurance that such losses will not continue
indefinitely. The Company currently accounts for its ownership interests in the
Operating Companies in which it does not have majority ownership interest using
the equity method and, therefore, the Company's consolidated financial
statements
<PAGE>

include only the Company's pro rata share of such Operating Companies' and the
South Florida Partnership's net losses as equity in net losses of joint
ventures.

The Company was formed in October 1991 and, as of March 31, 1997,
only 10 of its 21 networks had been in operation for more than 24 months and six
networks are not yet in operation. The development of the Company's businesses
and the installation and expansion of its networks require significant
expenditures, a substantial portion of which are made before any revenues may be
realized. Certain of the expenditures, including marketing, sales and general
and administrative costs, are expensed as incurred, while certain other
expenditures, including network design and construction, negotiation of
rights-of-way and costs to obtain legal and regulatory approval, are deferred
until the applicable network is operational. The Company will continue to incur
significant expenditures in connection with the construction, acquisition,
development and expansion of the Company's and Operating Companies' networks,
services and customer base.

In light of the Company's limited operating history, its history
of significant operating losses and its expectation that it will continue to
incur significant expenses and operating losses for the foreseeable future,
there can be no assurance that the Company will be able to implement its growth
strategy or achieve or sustain profitability.

Substantial Leverage. As of March 31, 1997, the Company's total
amount of debt outstanding was $215.7 million and the Company had a
stockholders' deficiency of $50.3 million. In addition, in each year since its
inception, despite increasing revenues, the Company's earnings have been
inadequate to cover its fixed charges by a substantial and increasing margin. In
addition, the Company anticipates that earnings will be insufficient to cover
fixed charges for the foreseeable future.

The degree to which the Company is leveraged could have important
consequences to the Company, including the following: (i) a substantial portion
of the Company's cash flow from operations will be dedicated to payment of the
principal and interest on its indebtedness, thereby reducing funds available for
other purposes; (ii) the Company's significant degree of leverage could increase
its vulnerability to changes in general economic conditions or increases in
prevailing interest rates; (iii) the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes could be impaired; and (iv) the Company may
be more leveraged than certain of its competitors, which may be a competitive
disadvantage.

On April 15, 1996, the Company issued $329.0 million of 13%
Senior Discount Notes ("the Senior Notes"). Because the Company currently has,
and anticipates that it will continue to have, a substantial consolidated cash
flow deficit, its ability to make cash interest payments on the Senior Notes
commencing on October 15, 2001 and to repay its obligations on the Senior Notes
at maturity, will be dependent on developing one or more sources of cash flow
prior to the date on which such cash payment obligations arise. To accomplish
this the Company may seek to (i) refinance all or a portion of the Senior Notes,
(ii) sell all or a portion of its interests in one or more of the Operating
Companies, (iii) negotiate with its current Local Partners to permit any excess
cash generated by its Operating Companies to be distributed to partners rather
than invested in the businesses of such Operating Companies and/or (iv) invest
in companies that will make substantial cash distributions. There can be no
assurance that (i) there will be a market for the debt or equity securities of
the Company in the future, (ii) the Company will be able to sell assets in a
timely manner or on commercially reasonable terms or in an amount that will be
sufficient to make cash interest or dividend payments and to repay the Senior
Notes when due, (iii) the Company will be able to persuade its Local Partners
that cash generated by the operations of the Operating Companies should be
distributed to partners, members or shareholders or (iv) the Company will be
able to locate and invest in companies that will be mature enough to make
substantial cash contributions to the Company prior to the time such payments
are due.

Significant Future Capital Requirements. Expansion of the
Company's existing networks and services and the development of new networks and
services require significant capital expenditures. The Company's operations have
required and will continue to require substantial capital investment for (i) the
installation of electronics for
<PAGE>

switched services in the Company's networks, (ii) the expansion and improvement
of the Company's NOCC and existing networks and (iii) the design, construction
and development of additional networks. The Company plans to make substantial
capital investments and investments in Operating Companies in connection with
the installation of 5ESS switches or remote switching modules in all of its
existing operating markets by September 1997 (late 1997 as to the Entergy
Networks) and additional 5ESSs or remote switching modules in each of the
Company's future operational markets. In addition, expansion of the Company's
networks will include the geographic expansion of the Company's existing
clusters and the development of new markets. The Company expects to continue to
build networks in additional markets which the Company anticipates will include
additional networks with cable and utility partners that have broader geographic
coverage and require higher capital outlays than those with cable partners in
the past.

The Company also has funded the purchase of certain partnership
interests in the Louisville Operating Partnership and the Nashville Operating
Partnership and may be required, or may desire, to raise capital to purchase the
partnership interests of other Local Partners.

The Company expects to fund its capital requirements through
existing resources, credit facilities and vendor financings at the Company and
Operating Company levels, internally generated funds, equity invested by Local
Partners in Operating Companies and additional debt or equity financings, as
appropriate, and expects to fund its repurchase of partnership interests of
Local Partners through existing resources, internally generated funds and
additional debt or equity financings, as appropriate. There can be no assurance,
however, that the Company will be successful in generating sufficient cash flow
or in raising sufficient debt or equity capital on terms that it will consider
acceptable, or at all.

The expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not significantly exceed current estimates or that the Company
will not accelerate its capital expenditure spending.

Holding Company Structure; Inability to Access Cash Flow. The
Company is a holding company with substantially all of its operations conducted
through the Operating Companies, and the Company expects that it could develop
new networks and operations in the future through joint ventures in which the
Company will own less than 50% of the equity interests. Accordingly, the
Company's cash flow and, consequently, its ability to service its debt,
including the Senior Notes and any other indebtedness, and other cash
obligations is dependent on its pro rata share of the cash flow of the Operating
Companies and the payment of funds by those Operating Companies in the form of
management fees, loans, dividends, distributions or otherwise. The Operating
Companies are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Senior Notes or
to make any funds available therefor, whether in the form of loans, dividends,
distributions or otherwise. Furthermore, the Company may be unable to access the
cash flow of certain of the Operating Companies because it holds a 50% or less
ownership interest in certain of such entities and, therefore, does not have the
requisite control to cause such entities to make distributions or pay dividends
(as applicable) to the partners or equity holders (as applicable). In addition,
such entities will be permitted to incur indebtedness that may severely restrict
or prohibit the making of distributions, the payment of dividends (as
applicable) or the making of loans.

Risks Associated with Joint Ventures. Most of the Operating Companies' Local
Partner Agreements (as defined) contain mandatory buy/sell provisions that,
after a certain number of years, can be initiated by either partner and result
in one partner purchasing all of the other partner's interests. Accordingly,
there can be no assurance that the Company and its subsidiaries will continue to
be in partnership with their current Local Partner, or any other partner, in
each of their respective markets, or that the Company or its subsidiaries will
have sufficient funds to purchase the partnership interest of such other
partner. In addition, if a partner triggers such buy/sell provisions and the
Company is unable to purchase the initiating partner's interests, the Company
will be forced to sell its interests to the partner, thereby terminating the
partnership, which could result in a material adverse effect on the future cash
flow of the Company.
<PAGE>

The bankruptcy or insolvency of a Local Partner or an Operating
Company could result in the termination of the respective Local Partner
Agreement and the related Fiber Lease Agreement (as defined). The effect of such
terminations could be materially adverse to the Company and the respective
Operating Company. Similarly, all of the Management Agreements (as defined), two
of the Local Partner Agreements and five of the Fiber Lease Agreements can be
terminated by the respective Local Partner at various times during the next
seven years. While the Company believes such agreements will be renewed, there
can be no assurance that the Local Partner will not seek to terminate the
agreements. Accordingly, the failure to renew such agreements could materially
adversely affect the Company and the respective Operating Companies. In
addition, the failure of a Local Partner to make required capital contributions
could have a material adverse effect on the Company and the respective Operating
Company.

The indenture with respect to the Senior Notes restricts the
amount of indebtedness that can be incurred by Operating Companies in which the
Company owns a less than 45% interest. Accordingly, the Company's ability to
access the cash flow and assets of such Operating Companies may be severely
limited.

Competition. In each of the markets served by the Company's
networks, the services offered by the Company compete principally with the
services offered by the incumbent LEC serving that area. Incumbent LECs have
long-standing relationships with their customers, have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act, federal and state regulatory initiatives will provide
increased business opportunities to CLECs such as the Company, but regulators
are likely to provide incumbent LECs with increased pricing flexibility for
their services as competition increases. If incumbent LECs are allowed by
regulators to lower their rates substantially, engage in excessive volume and
term discount pricing practices for their customers, or charge CLECs excessive
fees for interconnection to the incumbent LECs' networks, the net income and
cash flow of CLECs, including the Operating Companies, could be materially
adversely affected.

The Telecommunications Act also establishes procedures under
which the RBOCs can obtain authority to provide long distance services if they
comply with certain interconnection requirements. There have been indications
that some of the RBOCs in the markets served by the Company will file for such
authority in 1997. There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market. If RBOCs are permitted to
provide such services, they will ultimately be in a position to offer single
source service. This could result in decreased market share for the major IXCs,
which are the Company networks' major customers. Such a result could have an
adverse effect on the Company.

The Company also faces, and will continue to face, competition
from other current and potential market entrants, including other CLECs, AT&T,
MCI, Sprint and other IXCs, cable television companies, electric utilities,
microwave carriers, wireless telecommunications providers and private networks
built by large end users. The Telecommunications Act facilitates such entry by
requiring incumbent LECs to allow new entrants to acquire local services at
wholesale prices for resale, and to purchase unbundled networks at cost-based
rates. A number of markets served by the Company already are served by one or
more CLECs. In addition, all three major IXCs are expected to enter the market
for local telecommunications services. Both AT&T and MCI have announced that
they have begun to offer local telephone services in some areas of the country,
and AT&T recently announced a new wireless technology for providing local
telephone service. Although the Company has good relationships with the IXCs,
there are no assurances that any of these IXCs will not build their own
facilities or resell the services of other carriers rather than use the
Company's services when entering the market for local exchange services.

The Company also competes with equipment vendors and installers,
and telecommunications management companies with respect to certain portions of
its business.

Many of the Company's current and potential competitors,
particularly incumbent LECs, have financial, personnel and other resources
substantially greater than those of the Company, as well as other competitive
advantages over the Company.
<PAGE>

Regulation and Risks of the Telecommunications Act. The Company
is subject to varying degrees of federal, state and local regulation. The
Company is not currently subject to price cap or rate of return regulation by
the FCC, nor is it currently required to obtain FCC authorization for the
installation, acquisition or operation of its network facilities. However, the
FCC has determined that nondominant carriers, such as the Company and the
Operating Companies, are required to file interstate tariffs on an ongoing
basis. While the FCC has adopted rules permitting detariffing for many carriers,
these rules do not apply to all services, and are subject to pending legal
challenges. The Telecommunications Act also requires the FCC to establish a
subsidy mechanism for universal telephone service to which the Company will be
required to contribute. The Operating Companies that provide intrastate services
are also generally subject to certification and tariff filing requirements by
state regulators and may also be subject to state reporting, customer service
unbundling and universal service requirements. Challenges to these tariffs and
certificates by third parties or independent action by state public service
commissions could cause the Company to incur substantial legal and
administrative expenses. In addition, under the Telecommunications Act,
provision of switched services by the Company could be subject to new universal
service and other federal regulatory requirements.

Although the Telecommunications Act eliminates legal barriers to
entry, no assurance can be given that changes in current or future regulations
adopted by the FCC or state regulators or other legislative or judicial
initiatives relating to the telecommunications industry would not have a
material adverse effect on the Company. In particular, the Company's belief that
the entire $97 billion local exchange market may ultimately be open to CLEC
competition depends upon favorable interpretation of the Telecommunications Act,
and the ability of the Company and the Operating Companies to compete in these
new market segments may be adversely affected if incumbent LECs are granted
greater pricing flexibility and other regulatory relief that enables them to
impose costs on potential competitors or otherwise restrict the Company's
ability to serve its customers and attract new customers. In addition, the
Telecommunications Act removes entry barriers for all companies and could
increase substantially the number of competitors offering comparable services in
the Company's markets.

Control by Principal Stockholder. Adelphia currently has
approximately 88% of the combined voting power of both classes of Common Stock.
Accordingly, Adelphia will be able to control the vote on corporate matters
requiring stockholder approval, including, but not limited to, electing
directors, amending the Company's Certificate of Incorporation and approving
mergers or sales of substantially all of the Company's assets. In addition,
pursuant to agreements between the Company, Adelphia and certain of the
Company's senior management, Adelphia has the power to control certain corporate
transactions of the Company, including its ability to enter into joint ventures
and other business relationships. As a result, the Company may be subject to the
effect of possible conflicts of interest arising from the relationship with
Adelphia in connection with the pursuit of business opportunities in the
telecommunications industry. Although directors of the Company who are also
directors of Adelphia have certain fiduciary obligations to the Company under
Delaware law, such directors are in positions that may create conflicts of
interest. There can be no assurance that any such conflict will be resolved in
favor of the Company. Three directors of Adelphia serve on the Special
Nominating Committee of the Board of Directors of the Company, which is
empowered to expand the number of seats on the Company's Board of Directors up
to twelve and to fill the vacancies created thereby. In addition, Adelphia has
agreed to vote its shares of the Common Stock of the Company to elect the
Management Stockholders (as defined herein) to the Company's Board of Directors.

Dependence on Key Personnel. The success of the Company and its
growth strategy depends in large part on the Company's ability to attract and
retain key management, marketing and operations personnel. Currently, the
Company's businesses are managed by a small number of management and operating
personnel with certain other services, including financial and certain
accounting services, provided by Adelphia. There can be no assurance that the
Company will attract and retain the qualified personnel needed to manage,
operate and further develop its business. In addition, the loss of the services
of any one or more members of the Company's senior management team could have a
material adverse effect on the Company.

Expansion Risk. The Company is experiencing a period of rapid
expansion. The operating complexity of the Company, as well as the level of
responsibility for management personnel, has increased as a result of this
<PAGE>

expansion. The Company's ability to manage such growth effectively will require
it to continue to expand and improve its operational and financial systems and
to expand, train and manage its employee base.

Dependence on Business from IXCs. For the fiscal year ended March
31, 1997, approximately 61% of the Operating Companies' combined revenues were
attributable to access services provided to MCI, AT&T and other IXCs. The loss
of access revenues from IXCs in general or the loss of MCI or AT&T as a customer
could have a material adverse effect on the Company's business.

The Company's growth strategy assumes increased revenues from
IXCs and end users following the deployment of switches in the Company's
networks and the provision of switched access origination and termination
services. In addition, the Company competes in its markets with other CLECs for
IXC business. Accordingly, there is no assurance that the IXCs will continue to
increase their utilization of the Company's services, or will not reduce or
cease their utilization of the Company's services, either of which could have a
material adverse effect on the Company.

Furthermore, the Telecommunications Act establishes procedures
under which RBOCs can obtain authority to compete with the IXCs in the long
distance market. Due to the Operating Companies' dependence on business from
IXCs, any loss of market share by the IXCs could have a material adverse effect
on the Company.

Need to Obtain and Maintain Permits and Rights-of-Way. There can
be no assurance that the Company or the Operating Companies, through Local
Partners, Adelphia or their own efforts, will be able to maintain existing
permits and rights-of-way or to obtain and maintain the other permits and
rights-of-way needed to develop and operate existing and future networks. In
addition, the Company and the Operating Companies may require pole attachment or
conduit use agreements with incumbent LECs, utilities or other LECs to operate
existing and future networks, and there can be no assurance that such agreements
will be obtained or will be obtainable on reasonable terms. Failure to obtain or
maintain such permits, rights-of-way and agreements could have a material
adverse effect on the Company's ability to operate and expand its networks.

The amount of lease payments could be affected by the costs the
Local Partners incur for attachments to poles, or use of conduit, owned by
incumbent LECs or electric utilities. Various state public utility commissions
("State PUCs"), and the FCC are reviewing whether use of Local Partner
facilities for telecommunications purposes (as occurs when the Operating
Companies lease fiber optic capacity from Local Partners) should entitle
incumbent LECs and electric utilities to higher pole attachment or conduit
occupancy fees. Such increased fees could result in an increase in the amount of
the lease payments made by the Operating Companies to the Local Partners and
could have a significant impact on the profitability of the Operating Companies.

Rapid Technological Changes. The telecommunications industry is
subject to rapid and significant changes in technology. While the Company
believes that for the foreseeable future these changes will neither materially
affect the continued use of fiber optic telecommunications networks nor
materially hinder the Company's ability to acquire necessary technologies, the
effect of technological changes on the businesses of the Company cannot be
predicted. Thus, there can be no assurance that technological developments will
not have a material adverse effect on the Company.

Lack of Dividend History. The Company has never declared or paid
any cash dividends on its Common Stock and does not expect to declare any such
dividends in the foreseeable future. Payment of any future dividends will depend
upon earnings and capital requirements of the Company, the Company's debt
facilities and other factors the Board of Directors considers appropriate. The
Company intends to retain its earnings, if any, to finance the development
and expansion of its business, and therefore does not anticipate paying any
dividends in the foreseeable future. The Company's ability to declare dividends
on its Common Stock is affected by certain covenants in the Indenture.
<PAGE>

Glossary

Access Charges--The fees paid by long distance carriers to LECs
for originating and terminating long distance calls over the LECs' local
networks.

Access Line Equivalents--The number of access lines represented
by a trunk line, estimated for purposes of this Form 10-K as six access lines
per trunk line.

ATM (Asynchronous Transfer Mode)--A recently commercialized
switching and transmission technology that is one of a general class of packet
technologies that relay traffic by way of an address contained within the first
five bits of a standard fifty-three bit-long packet or cell. ATM-based packet
transport was specifically developed to allow switching and transmission of
mixed voice, data and video (sometimes referred to as "multi-media" information)
at varying rates. The ATM format can be used by many different information
systems, including LANs.

Broadband--Broadband communications systems can transmit large
quantities of voice, data and video by way of digital or analog signals.
Examples of broadband communication systems include DS-3 fiber optic systems,
which can transmit 672 simultaneous voice conversations, or a broadcast
television station signal, that transmits high resolution audio and video
signals into the home. Broadband connectivity is also an essential element for
interactive multimedia applications.

CAP (Competitive Access Provider)--A company that provides its
customers with an alternative to the incumbent local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs), metropolitan area
network providers (MANs) and alternative access vendors (AAVs).

Central Offices or LEC-COs--The switching centers or central
switching facilities of the LECs or CLECs.

Centrex--Centrex is a service that offers features similar to
those of a Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the customer. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value-added
service that LECs and CLECs can provide to a wide range of customers who do not
have the size or the funds to support their own on-site PBX.

CLEC (Competitive Local Exchange Carrier)--A CAP that also
provides switched local telecommunications services.

Collocation--The ability of a CAP, IXC or end user to connect its
network to a LEC-COs. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC-COs. Virtual collocation is an alternative
to physical collocation pursuant to which the LEC permits a CAP to connect its
network to the LEC-COs on comparable terms, even though the CAP's network
connection equipment is not physically located inside the central offices.

Dedicated Lines--Telecommunications lines dedicated or reserved
for use exclusively by particular customers along predetermined routes (in
contrast to telecommunications lines within the public switched network).

Digital--A method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary code digits 0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to represent information as
opposed to the continuously variable analog signal. Digital transmission and
switching technologies offer a threefold improvement in speed and capacity over
analog techniques, allowing much more efficient and cost-effective transmission
of voice, video and data.
<PAGE>

Dialing Parity--Dialing parity exists when a customer calling to
or from the network of a CLEC is not required to dial any more digits than for a
comparable call originating and terminating on the incumbent LEC's network.

Diverse Access Routing--A telecommunications network
configuration in which signals are transported simultaneously along two
different paths so that if one cable is cut, traffic can continue in the other
direction without interruption to its destination. The Company's networks
generally provide diverse access routing.

DS-0, DS-1, DS-3--Standard telecommunications industry digital
signal formats, which are distinguishable by bit rate (the number of binary
digits (0 and 1) transmitted per second). DS-0 service has a bit rate of up to
64 kilobits per second. DS-1 service has a bit rate of 1.544 megabits per second
and DS-3 service has a bit rate of 45 megabits per second.

FCC--Federal Communications Commission

Fiber Mile--The number of route miles installed (excluding
pending installations) along a telecommunications path multiplied by the number
of fibers along that path. See the definition of "route mile" below.

Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet is said to have more bandwidth capacity
than copper cable the size of a telephone pole.

Fiber Optic Ring Network--Most CAPs have built their networks in
ring configurations in order to ensure that, if one segment of a network is
damaged or cut, the traffic is simply re-routed and sent to its destination in
the opposite direction. The Company uses a "self-healing" optical fiber ring
architecture known as SONET.

Frame Relay--Frame relay is a high speed data packet switching
service used to transmit data between computers. Frame relay supports data units
of variable lengths at access speeds ranging from 56 kilobits to 1.5 megabits.
This service is appropriate for connecting LANs, but is not appropriate for
voice and video applications due to the variable delays which can occur. Frame
relay was designed to operate at higher speeds on modern fiber optic networks.

Frame Relay Service--Data communications service that functions
as a fast packet transport service of variable length data packets between
customer designated locations and supports the establishment of software defined
logical connections and circuits that act as private facilities on a public
platform.

Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.

Interconnection Decisions--Rulings by the FCC announced in
September 1992 and August 1993, which require the RBOCs and most other LECs to
provide interconnection in LEC-COs to any CAP, IXC or end user seeking such
interconnection for the provision of interstate special access and switched
access transport services.

InterLATA Calls--InterLATA calls are calls that pass from one
LATA to another. Typically, these calls are referred to as long distance calls.
The Telecommunications Act establishes procedures under which the RBOCs can
receive authority to provide interLATA services.
<PAGE>

IntraLATA Calls--IntraLATA calls, also known as short haul calls,
are those calls that originate and terminate within the same LATA. All states
allow intraLATA competition, but dialing parity still does not exist in most
states and very little LEC intraLATA revenue has been won by competitors.

IXC (Interexchange or Long Distance Carriers)-- Usually referred
to as long distance carriers. There are many facilities-based IXCs, including
AT&T, MCI, WorldCom and Sprint, as well as a few CAPs that provide interexchange
service.

Kilobit--One thousand bits of information. The
information-carrying capacity (i.e., bandwidth of a circuit may be measured in
"kilobits per second.")

LANs (Local Area Networks)--The interconnection of computers for
the purpose of sharing files, programs and various devices such as work
stations, printers and high-speed modems. LANs may include dedicated computers
or file servers that provide a centralized source of shared files and programs.

LATAs--The geographically defined Local Access and Transport
Areas in which LECs are authorized by the MFJ to provide local exchange
services. These LATAs roughly reflect the population density of their respective
states (for example California has 11 LATAs while Wyoming has one). There are
164 LATAs in the United States.

LEC (Local Exchange Carrier)--A company providing local telephone
services.

LEC-CO--Local Exchange Carrier's Central Office.

Local Exchange Areas--A geographic area determined by the
appropriate state regulatory authority in which local calls generally are
transmitted without toll charges to the calling or called party.

LSO--Local Serving Office of the incumbent LEC.

Megabit--One million bits of information. The
information-carrying capacity (i.e., bandwidth) of a circuit may be measured in
"megabits per second."

MFJ (Modified Final Judgment)--The MFJ was a consent decree
entered into in 1982 between AT&T and the Department of Justice which forced the
breakup of the old Bell System through the divestiture of the seven separate
Regional Bell Operating Companies (RBOCs) from AT&T. Divestiture resulted in two
distinct segments of the telecommunications service market: local and long
distance. This laid the groundwork for intense competition in the long distance
industry, but essentially created seven separate regionally-based local exchange
service monopolies. The Telecommunications Act removes most MFJ restrictions on
a prospective basis from AT&T and the RBOCs.

Network Systems Integration--Involves the creation of a turnkey
telecommunications network including (i) route and site selection and obtaining
rights of way and legal authorizations to install the network; (ii) design and
engineering of the system, including technology and vendor assessment and
selection, determining fiber optic circuit capacity, and establishing
reliability/flexibility standards; and (iii) project and construction
management, including contract negotiations, purchasing and logistics,
installation as well as testing and construction management.

Number Portability--The ability of an end user to change local
exchange carriers while retaining the same telephone number.

Off-Net--A customer that is not physically connected to one of
the Company's networks but who is accessed through interconnection with a LEC
network.
<PAGE>

On-Net--A customer that is physically connected to one of the
Company's networks.

Overlash--An aerial cable construction technique that involves
the attachment of a new cable to an existing cable by placing the new cable
beside the existing cable, and lashing (or binding) the two cables together by
means of a lashing wire that is wrapped around both cables. This technique
allows for the addition of new cable facilities utilizing existing pole
attachments without the requirement for additional space on the pole.

PCS (Personal Communications Service)--A type of wireless
telephone system that uses light, inexpensive handheld sets and communicates via
low power antennas.

PBX--A Private Branch Exchange is a switching system within an
office building which allows calls from outside to be routed directly to the
individual or through a central number. A PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.

Physical Collocation--Physical Collocation occurs when a CAP
places its own network connection equipment inside the LEC-CO. The
Telecommunications Act gives the FCC authority to mandate physical collocation.
See Virtual Collocation.

POPs (Points of Presence)--Locations where an IXC has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that IXC.

Private Line--A private, dedicated telecommunications connection
between different end user locations (excluding IXC POPs).

Private Line Data Interconnect Service--A data transport service
utilizing data products and private line facilities that are packaged together
with data products.

Public Switched Network--That portion of a LEC's network
available to all users generally on a shared basis (i.e., not dedicated to a
particular user).

Public Utility Commission--A state regulatory body which
regulates utilities, including telephone companies providing intrastate
services. In some states this regulatory body may have a different name, such as
public service commission.

RBOCs (Regional Bell Operating Companies)--The seven local
telephone companies established by the MFJ. The RBOCs were prohibited from
providing interLATA services and from manufacturing telecommunications equipment
under the MFJ, but the Telecommunications Act of 1996 establishes procedures for
lifting these restrictions.

Reciprocal Compensation--The compensation paid by a local carrier
for termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of the
first carrier. Reciprocal compensation is distinct from the one way access
charges by which the IXCs compensate LEC's for originating or terminating
traffic.

Redundant Electronics--A telecommunications facility using two
separate electronic devices to transmit a telecommunications signal so that if
one device malfunctions, the signal may continue without interruption.

Remote Modules (or Remote Switching Modules)--Telephone switching
units that are attached to a host switch (usually via DS1 lines) in a different
geographic location. Remote modules provide the capability of offering switching
functionality to areas that will not economically support a host switch.
<PAGE>

Rights of Way--Rights of certain entities (usually utility, cable
TV or telephone companies and local government agencies) to "pass over" or place
facilities on, over, or underneath property. This includes the ability to place
cable on poles, in conduit, and to bury cable underground.

Route Miles--The number of miles of the telecommunications path
in which fiber optic cables are installed as it would appear on a network map.

Second and Third Tier Markets--Metropolitan markets in the United
States with population bases ranging from 250,000 to two million.

Special Access Services--The lease of private, dedicated
telecommunications lines or "circuits" along the network of a LEC or a CAP,
which lines or circuits run to or from the IXC POPs. Examples of special access
services are telecommunications lines running between POPs of a single IXC, from
one IXC POP to the POP of another IXC or from an end user to its IXC POP.
Special access services do not require the use of switches.

SONET (Synchronous Optical Network)--SONET is the electronics and
network architecture which enable transmission of voice, video and data
(multimedia) at very high speeds. This state-of-the-art self-healing ring
network offers advantages over older linear networks in that a cut line or
equipment failure can be overcome by re-routing calls within the network. If the
line is cut, the traffic is simply reversed and sent to its destination around
the other side of the ring.

Switch--A sophisticated computer that accepts instructions from a
caller in the form of a telephone number. Like an address on an envelope, the
numbers tell the switch where to route the call. The switch opens or closes
circuits or selects the paths or circuits to be used for transmission of
information. Switching is a process of interconnecting circuits to form a
transmission path between users. Switches allow local telecommunications service
providers to connect calls directly to their destination, while providing
advanced features and recording connection information for future billing.

Switched Access Transport Services--Transportation of switched
traffic along dedicated lines between the LEC central offices and IXC POPs.

Switched Services--Services which utilize a switch, as opposed to
dedicated services which are non-switched. These services are the greatest
source of revenue for carriers.

Switched Traffic--Telecommunications traffic along a switched
network.

Virtual Collocation--Virtual collocation is an alternative to
physical collocation in which the CAPs connect their equipment to the LECs
facilities from a remote location and request that the LEC install the necessary
electronics in its central office which is then leased by the LEC to the CAP for
charges which are generally higher than the charges for physical collocation.
However, the CAP avoids payment of the initial capital costs for the leased
facilities which the CAP must incur under physical collocation.

Voice Grade Equivalent Circuit--One DS-0. One voice grade
equivalent circuit is equal to 64 kilobits of bandwidth per second.

ITEM 2. PROPERTIES

The Company leases its principal executive offices from Adelphia
in Coudersport, Pennsylvania and leases its offices in Pittsburgh, Pennsylvania.
Additionally, the Company owns its NOCC facilities.

All of the fiber optic cable, fiber optic telecommunications
equipment and other properties and equipment used in the networks, are owned or
leased by the applicable Operating Company. See "--The Company's Markets."

<PAGE>

Fiber optic cable plant used in providing service is primarily on or under
public roads, highways or streets, with the remainder being on or under private
property. As of March 31, 1997, the Company's total telecommunications equipment
in service consists of fiber optic telecommunications equipment, fiber optic
cable, furniture and fixtures, leasehold improvements and construction in
progress. Such properties do not lend themselves to description by character and
location of principal units.

Substantially all of the fiber optic telecommunications equipment
used in the Company's networks is housed in multiple leased facilities in
various locations throughout the metropolitan areas served by the Company. The
Company believes that its properties and those of its Operating Companies are
adequate and suitable for their intended purpose.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material pending legal
proceedings except for claims, lawsuits or proceedings arising in the normal
course of business. The Company does not believe that these claims or lawsuits
will have a material adverse effect on the Company's financial condition or
results of operations.

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

No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 1997.

PART II

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

Market Information

There is no public trading market for the Company's common
equity. In addition there is no public trading market for the Company's
outstanding Warrants to purchase Class B Common Stock of the Company. As of June
1, 1997, there was one holder of record of the Company's Class A Common Stock,
par value $.01 per share, 4 holders of record of the Company's Class B Common
Stock, par value $.01 per share and one holder of record of the Company's
Warrants to purchase Class B Common Stock (which is a registered clearing agency
holding such warrants on behalf of its participants).

Dividends

The Company has never declared any cash dividends on any of its
respective equity securities. Covenants in the indenture pursuant to which the
Company's Senior Notes were issued restrict the ability of the Company to pay
cash dividends on its capital stock.

Sales of Unregistered Securities

On April 15, 1996, the Company issued 329,000 Units consisting of
an aggregate of $329.0 million of 13% Senior Discount Notes and 329,000 Class B
Warrants to purchase an aggregate of 613,427 shares of its Class B Common Stock.
Gross proceeds from the offering were approximately $174.8 million. Proceeds to
the Company, net of discounts, commissions and other transaction costs were
approximately $168.6 million. The Units were initially sold in a private
placement to Bear, Stearns & Co. Inc., Chase Securities Inc. and NationsBanc
Capital Markets, Inc., the Initial Purchasers, who resold such Units to
qualified institutional investors, in reliance upon exemptions from registration
contained in Section 4(2) of the Securities Act of 1933, as amended (the "Act")
and
<PAGE>

Rule 144A thereunder. The Class B Warrants are exercisable at $.01 per share
of Class B Common Stock, effective May 1, 1997, and expire on April 1, 2001.

On March 4, 1997 and April 1, 1997, the Company issued 104,000
shares and 18,000 shares, respectively, of Class A Common Stock to Daniel R.
Milliard pursuant to his employment agreement with the Company. Both issuances
were made under the Company's 1996 Long-Term Incentive Compensation Plan, in
reliance upon exemptions from registration contained in Section 4(2) of the Act.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands, except per share amounts)

The following selected consolidated financial data (except the
unaudited information for the fiscal year ended March 31, 1993) are derived
from, and should be read in conjunction with, the audited Consolidated Financial
Statements of the Company and the related Notes thereto contained elsewhere
herein. The unaudited information for the fiscal year ended March 31, 1993 is
derived from other Company information. All of the following information should
be read in conjunction with the Company's Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Form 10-K.
<TABLE>
<CAPTION>

COMPANY DATA (a):
Fiscal Year Ended March 31,
1993 1994 1995 1996 1997
(Dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Telecommunications service and management fee revenue $ 89 $ 417 $ 1,729 $ 3,322 $ 5,088
Operating expenses:
Network operations 19 330 1,382 2,690 3,432
Selling, general and administrative 921 2,045 2,524 3,084 6,780
Depreciation and amortization 30 189 463 1,184 3,945
Operating loss (881) (2,147) (2,640) (3,636) (9,069)
Gain on sale of investment -- -- -- -- 8,405
Interest income -- 17 39 199 5,976
Interest expense and fees -- (2,164) (3,321) (6,088) (28,377)
Equity in net loss of joint ventures (194) (528) (1,799) (4,292) (7,223)
Net loss (1,075) (4,725) (7,692) (13,620) (30,547)
Net loss per weighted average share of common stock $ (0.11) $ (0.47) $ (0.77) $ (1.36) $ (2.88)
Other Company Data:
EBITDA(b) $ (851) $ (1,958) $ (2,177) $ (2,452) $ (5,124)
Capital expenditures and Company investments(c) 3,891 8,607 10,376 18,899 79,396
Cash used in operating activities (725) (2,121) (2,130) (833) (4,823)
Cash used in investing activities (3,806) (8,607) (10,376) (18,899) (72,818)
Cash provided by financing activities 4,645 10,609 12,506 19,732 137,455

As of March 31,
---------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)

Balance Sheet Data:
Cash and cash equivalents $ 118 $ -- $ -- $ -- $ 59,814
Total assets 4,316 14,765 23,212 35,269 174,601
Long term debt 4,814 19,968 35,541 50,855 215,675
Stockholders' equity(deficiency) (1,286) (6,011) (13,703) (27,323) (50,254)
- - ----------------------------
<FN>
(a) Financial Information for the Company and its consolidated Subsidiaries.
As of March 31, 1997, 17 of the Company's networks were owned by joint
ventures in which it owns an interest of 50% or less, and for which the
Company reports its interest pursuant to the equity method of accounting
consistent with generally accepted accounting principles.

(b) Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment,
interest income and equity in net loss of joint ventures ("EBITDA") and
similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and
liquidity. While EBITDA is not an alternative indicator of operating
performance to operating income or an alternative to cash flows from
operating activities as a measure of liquidity as defined by generally
accepted accounting principles, and while EBITDA may not be comparable
to other similarly titled measures of other companies, the Company's
management believes EBITDA is a meaningful measure of performance.

<PAGE>

(c) For the fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997,
the Company's capital expenditures (including capital expenditures
relating to its wholly owned Operating Companies) were $2.0, $3.1, $2.9,
$6.1 and $24.6 million, respectively, and the Company's investments in
its less than wholly owned Operating Companies and the South Florida
Partnership (as defined) were $1.9, $5.5, $7.5, $12.8 and $34.8 million,
respectively, for the same periods. Furthermore, during the fiscal year
ended March 31, 1997, the Company invested $20.0 million in fiber assets
and a senior secured note. See the Company's Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-K.
</FN>
</TABLE>

Summary Operating Data

The following summary operating data is unaudited information
that represents data for 100% of the Operating Companies' networks and is
derived from Company information. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Supplementary Operating Company
Financial Analysis." As of March 31, 1997, 17 of the Company's networks were 50%
or less owned by the Company. The Company reports its interest in such 50% or
less owned networks pursuant to the equity method of accounting consistent with
generally accepted accounting principles. As a result, the financial information
set forth below is not indicative of the Company's overall financial position
and investors should not place undue reliance on such information.
<TABLE>
<CAPTION>

NETWORK DATA (unaudited)(a):
Fiscal Year Ended March 31,
1993 1994 1995 1996 1997
(Dollars in thousands)

Operations Data:
<S> <C> <C> <C> <C> <C>
Network revenues ........................ $ 195 $ 962 $ 3,056 $ 7,763 $ 15,223
Operating expenses:
Network operations ...................... 504 789 1,946 4,871 8,069
Selling, general and administrative ..... 353 1,145 2,439 5,316 8,827
Depreciation and amortization ........... 207 839 2,467 6,137 14,305
Operating loss .......................... (869) (1,811) (3,796) (8,561) (15,978)
Net loss ................................ (948) (2,077) (4,569) (11,285) (20,547)

Other Operating Data:
EBITDA (b) .............................. $ (662) $ (972) $ (1,329) $ (2,424) $ (1,673)
Capital expenditures .................... 4,947 13,790 24,658 45,177 128,270

As of March 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)

Asset and Liability Data:
Gross property, plant & equipment (c) ... $ 6,952 $ 21,907 $ 49,107 $ 97,318 $ 228,384
Capital lease obligations (d) ........... 1,244 3,291 11,166 18,163 47,423

As of March 31,
1996 1997
Other Network Data:
Networks in operation .................. 13 15
Cities served (e) ...................... 19 33
Networks under construction ............ 4 6
Route miles (e) ........................ 2,210 3,461
Fiber miles (e) ........................ 106,080 166,131
Buildings connected .................... 822 1,270
LEC-COs collocated (f) ................. 44 104
Voice grade equivalent circuits ........ 186,292 466,056
Switches installed (g) ................. 5 7
Employees (h) .......................... 155 261

<FN>
(a) Unless otherwise stated, the data presented represent the summation of all
of the networks' financial and operating information for each of the
categories presented. Network Data is derived from the Operating Companies'
records and presents information for the Company's networks, but does not
include information for the South Florida Partnership.

<PAGE>

telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative indicator of operating performance to
operating income or an alternative to cash flows from operating activities
as a measure of liquidity as defined by generally accepted accounting
principles, and while EBITDA may not be comparable to other similarly
titled measures of other companies, the Company's management believes
EBITDA is a meaningful measure of performance.

(c) Represents total property, plant and equipment (before accumulated
depreciation) of the networks, the NOCC and the Company.

(d) Represents fiber lease financings with the respective Local Partners for
each network.

(e) Excludes networks under construction.

(f) LEC-CO collocated means that the Company has interconnected its network at the LEC-CO.

(g) Represents Lucent 5ESS switches or remote switch modules which deliver full
switch functionality.

(h) Employees includes combined employees of the Operating Companies and the Company.
</FN>
</TABLE>

<PAGE>

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

The Company, through its Operating Companies, provides a
competitive alternative to the telecommunications services offered by the
incumbent LECs in its markets. Since its inception in October 1991 through March
31, 1997, the Company experienced substantial growth, building from its original
two partnerships covering two networks to 17 Operating Companies and 21
networks. At March 31, 1997, 15 of these 21 networks were operational. The
Operating Companies' customers are principally small, medium and large
businesses and government and educational end users and resellers, including
IXCs. The Company believes that its strategy of utilizing Local Partners to
develop its networks has allowed the Company to build networks with greater
coverage, lower upfront and ongoing costs and superior service and reliability.

As of March 31, 1997, the Company's Operating Companies were made
up of three wholly owned subsidiaries, one majority-owned company and 13 joint
ventures (through which the Company has an interest in 17 networks) where the
Company owns 50% or less of the aggregate equity interests in such Operating
Companies. Results of majority-owned subsidiaries are consolidated into the
Company's financial statements. The Company's pro rata share of the results of
the Operating Companies where the Company owns 50% or less and the Company's
ownership interest in TCG of South Florida (the "South Florida Partnership"),
until it was sold on May 16, 1996, are recorded under the caption "Equity in net
loss of joint ventures" in the Company's Consolidated Financial Statements
utilizing the equity method of accounting. Correspondingly, the Company's
initial investments in these Operating Companies and the South Florida
Partnership are carried at cost and are subsequently adjusted for the Company's
pro rata share of the Operating Companies' and the South Florida Partnership's
net losses, additional capital contributions to the Operating Companies and the
South Florida Partnership, and distributions from the Operating Companies and
the South Florida Partnership to the Company. The Company is responsible for the
design, construction, management and operation of the networks owned by all of
the Operating Companies and receives management fees from the Operating
Companies for its management and network monitoring services. Management fees,
which are generally based on the Company's costs of providing such services, are
determined by Local Partner Agreements and vary depending upon the market.
Management fees are accounted for as revenues of the Company. To date, the
Company's principal source of revenues has been derived through management fees
from its Operating Companies, although in the future the Company expects that
majority-owned Operating Companies revenues will represent an increasing
proportion of the Company's revenue.

Since its inception, the Company, in conjunction with its Local
Partners, has made substantial investments in designing, constructing and
enhancing the Operating Companies' fiber optic networks. As of March 31, 1997,
the Company's networks had approximately 3,461 route miles, approximately
166,131 fiber miles and were connected to approximately 1,270 buildings in 15
operating networks. As of March 31, 1997, the Operating Companies had installed
seven switches or remote modules, four of which were operational at March 31,
1997. The Company expects to offer switched services in all of its markets
during 1997. The Company's NOCC in Coudersport, Pennsylvania provides for remote
control, monitoring and diagnosis of all Operating Company networks. Funding for
the development of the Operating Companies has come from investments by the
Company and the Local Partners as well as from Fiber Lease Financings which
enable the Company to finance the building of fiber optic plant through
long-term leases. Excluding investments in the South Florida Partnership, which
was sold on May 16, 1996, the combined capital invested by the Company and the
local partners through March 31, 1997 in the Operating Companies' networks, the
NOCC and other activities totaled approximately $284 million. Due to savings
achieved in the construction of fiber optic networks by working with Local
Partners, the Company believes that building a comparable level of network
infrastructure without Local Partners would require a substantially greater
level of capital investment.

enhanced data services, wireless resale, internet
access or long distance services, which the Company has the ability to enter at
its option.

Results of Operations

Fiscal 1997 in comparison with Fiscal 1996

Revenues increased 53% to $5.1 million for the fiscal year ended
March 31, 1997 ("Fiscal 1997") from $3.3 million in the prior fiscal year.
Growth in revenues of $1.8 million resulted primarily from continued expansion
in the number and size of Operating Companies and the resultant increase in
management fees of $0.8 million over the prior fiscal year. Revenues from
majority and wholly-owned Operating Companies also increased approximately $1.0
million as compared to the prior fiscal year due to increases in the customer
base and the impact of consolidation of the Nashville Operating Company.

Network operations expense increased 28% to $3.4 million in
Fiscal 1997 from $2.7 million in the prior fiscal year. Substantially all of the
increase was attributable to the expansion of operations at the NOCC, as well as
the increased number and size of the Operating Companies which resulted in
increased employee related costs and equipment maintenance costs.

Selling, general and administrative expense increased 120% to
$6.8 million in Fiscal 1997 from $3.1 million in the prior fiscal year.
Approximately $0.9 million of the $3.7 million increase was due to an increase
in the amount of allocated costs from Adelphia. These costs include charges for
office space, senior management support and shared services such as finance
activities, information systems, computer services, investor relation
activities, payroll and taxation. Such costs were estimated by Adelphia and do
not necessarily represent the actual costs that would be incurred if the Company
was to secure such services on its own. In addition, $0.7 million of the
increase was due to a write off of costs in connection with the postponement of
the Company's contemplated initial public offering in November 1996. The
remainder of the increase was due to increased administrative and sales and
marketing efforts as well as corporate and NOCC overhead cost increases due to
growth in the number of Operating Companies managed and monitored by the
Company.

Depreciation and amortization expense increased 233% to $3.9
million during Fiscal 1997 from $1.2 million in the prior fiscal year primarily
as a result of the amortization of $1.0 million of costs incurred in connection
with the issuance of the 13% Senior Discount Notes and increased depreciation
resulting from higher capital expenditures at the NOCC and the majority and
wholly owned Operating Companies.

Gain on sale of investment is due to the sale of the Company's
15.7% partnership interest in TCG of South Florida to Teleport Communications
Group Inc. on May 16, 1996 for an aggregate sales price of approximately $11.6
million. This sale resulted in a gain of $8.4 million.

Interest income for Fiscal 1997 increased to $6.0 million from
$0.2 million in the prior fiscal year as a result of interest income earned on
investment of the proceeds of the 13% Senior Discount Notes and Warrants.

Interest expense and fees increased 366% to $28.4 million during
Fiscal 1997 from $6.1 million in the prior fiscal year. The increase was
attributable to $23.5 million of non-cash interest expense associated with the
13% Senior Discount Notes partially reduced by lower affiliate interest expense
due to decreased borrowings from Adelphia.

Equity in net loss of joint ventures increased by 68% to $7.2
million during Fiscal 1997 from $4.3 million in the prior fiscal year as more
nonconsolidated Operating Companies began operations. The net losses of the
Operating Companies for Fiscal 1997 were primarily the result of revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks of the

<PAGE>

Operating
Companies, and the effect of the typical lag time between the incurrence of such
costs and expenses and the subsequent generation of revenues by a network.

The number of nonconsolidated networks paying management fees to
the Company increased from 13 at March 31, 1996 to 14 at March 31, 1997. These
networks paid management and monitoring fees to the Company, which are included
in revenues, aggregating approximately $3.2 million for Fiscal 1997, an increase
of approximately $0.8 million over the prior fiscal year. The nonconsolidated
networks' net losses, including networks under construction, for Fiscal 1997
aggregated approximately $17.1 million.

Net loss increased by 124% to $30.5 million during fiscal 1997
from $13.6 million in the prior fiscal year. The increase was primarily
attributable to greater interest expense associated with the 13% Senior Discount
Notes, increased equity in the net losses of the Company's joint ventures,
increased depreciation and amortization, and increased selling, general, and
administrative expenses partially offset by higher interest income and the gain
recognized on the sale of the Company's investment in TCG of South Florida.

Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") decreased 109% to
($5.1) million in Fiscal 1997 from ($2.5) million for the prior fiscal year.
Increased revenues from management fees and the majority and wholly owned
Operating Companies were more than offset by increased operating costs. EBITDA
and similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications companies
on the basis of operating performance, leverage, and liquidity. While EBITDA is
not an alternative indicator of operating performance to operating income or an
alternative to cash flows from operating activities as a measure of liquidity as
defined by generally accepted accounting principles, and while EBITDA may not be
comparable to other similarly titled measures of other companies, the Company's
management believes EBITDA is a meaningful measure of performance.

Fiscal 1996 in comparison with Fiscal 1995

Revenues increased 92.1% to $3.3 million for the year ended March
31, 1996 ("Fiscal 1996") from $1.7 million for the prior fiscal year.
Approximately $1.0 million of the increase resulted from continued expansion in
the number and size of Operating Companies and the resulting increase in
management fees, and $0.6 million of the increase resulted from the Vermont
Operating Company generating revenues during the entire fiscal year.

Network operations expense increased 94.6% to $2.7 million in
Fiscal 1996 from $1.4 million for the prior fiscal year. Approximately $0.8
million of the increase was attributable to the Vermont Operating Company
reporting expenses relating to its operations for the entire fiscal year and
$0.4 million was attributable to the expansion of operations at the NOCC,
including systems upgrades.

Selling, general and administrative expense increased 22% to $3.1
million in Fiscal 1996 from $2.5 million for the prior fiscal year. Of the
increase, approximately $0.4 million was attributable to corporate overhead
increases to accommodate the growth in the number of Operating Companies managed
by the Company, and $0.1 million was attributable to the full twelve-months of
operations at the Vermont Operating Company.

Depreciation and amortization expense increased 156% to $1.2
million in Fiscal 1996 from $0.5 million for the prior fiscal year primarily as
a result of increased capital expenditures at the Vermont Operating Company and
the NOCC.

Interest expense and fees increased 83% to $6.1 million in Fiscal
1996 from $3.3 million for the prior fiscal year. The increase was directly
attributable to increased borrowings from Adelphia which were used to fund
investments in Operating Companies and the South Florida Partnership, capital
expenditures and the Company's operations. All of the Company's interest expense
was non-cash and was added to amounts due to Adelphia.
<PAGE>

Equity in net loss of joint ventures increased by 139% to $4.3
million in Fiscal 1996 from $1.8 million for the prior fiscal year as two more
nonconsolidated Operating Companies began operations. The net loss for the
nonconsolidated Operating Companies and the South Florida Partnership for the
year ended March 31, 1996 aggregated approximately $14.5 million. The net losses
of the Operating Companies for the year ended March 31, 1996 were primarily the
result of revenues only partially offsetting startup and other costs and
expenses associated with the design, construction, operation and management of
the networks of the Operating Companies, and the effect of the typical lag time
between the incurrence of such costs and expenses and the subsequent generation
of revenues by a network.

The number of nonconsolidated networks paying management fees to
the Company increased from 9 at March 31, 1995 to 13 at March 31, 1996. Such 13
networks paid management and monitoring fees to the Company aggregating
approximately $2.4 million for Fiscal 1996, an increase of approximately $1.0
million over Fiscal 1995.

Net loss increased to $13.6 million for Fiscal 1996 from $7.7
million for Fiscal 1995. The increase was primarily attributable to greater
interest expense, increased equity in the net losses of the Company's joint
ventures, and increased depreciation and amortization.

EBITDA decreased 13% to ($2.5) million in Fiscal 1996 from ($2.2)
million for the prior fiscal year. Increased revenues from management fees and
the Vermont Operating Company were more than offset by increased operating
costs.

Supplementary Operating Company Financial Analysis

The Company believes that working with Local Partners to develop
markets enables the Company to build larger networks in a rapid and cost
effective manner. In pursuit of this strategy, the Company currently has joint
ventures with Local Partners where the Company owns 50% or less of each
partnership or corporation. As a result of the Company's ownership position in
these joint ventures, a substantial portion of the Operating Companies' results
are reported by the Company on the equity method of accounting for investments
which only reflects the Company's pro rata share of net income or loss of the
Operating Companies. Because all of the assets, liabilities and results of
operations of the Operating Companies are not presented in the Company's
consolidated financial statements, financial analysis of these Operating
Companies based upon the Company's results does not represent a complete measure
of the growth or operations of the Operating Companies.

In order to provide an additional measure of the growth and
performance of all of the Company's networks, management of the Company analyzes
a variety of financial information including revenues, EBITDA and capital
expenditures. Revenues and EBITDA of the Operating Companies indicate the level
of activity in the Company's networks. Capital expenditures of the Operating
Companies along with network construction statistics, such as route miles and
buildings connected, indicate the extensiveness of the Company's construction
and expansion efforts in those markets. The financial information set forth
below, however, is not indicative of the Company's overall financial position.

The Operating Companies have shown substantial growth in revenues
since the Company's inception in October 1991. Total combined revenues for the
Operating Companies have doubled each year since the Company's inception.

Revenues during Fiscal 1997 of $15.2 million were $7.5 million or
96% higher than Fiscal 1996 primarily due to the Buffalo, Vermont, Richmond,
Louisville, Jacksonville and Wichita markets. Revenues during Fiscal 1996 of
$7.8 million were $4.7 million or 154% higher than during Fiscal 1995 due to the
expansion of the existing networks and the initial generation of revenues in the
Buffalo and Louisville networks.
<PAGE>

There can be no assurance that the Operating Companies will
continue to experience revenue growth at this rate, or at all. Furthermore,
there can be no assurance that the Company will be able to benefit from such
growth in revenues if such growth occurs.

EBITDA increased for Fiscal 1997 by $0.8 to ($1.7) million, as
compared to Fiscal 1996. The increase was due to higher revenues in most of the
networks which had commenced operations in the prior fiscal year, offset by
increased operating expenses in those networks, and start up costs in several
new networks, particularly Philadelphia and New Jersey. Excluding the start up
losses in the Philadelphia and New Jersey markets, EBITDA would have been $1.4
million for Fiscal 1997. For Fiscal 1996, EBITDA decreased by $1.1 million to
($2.4) million from ($1.3) million in Fiscal 1995. The decrease was primarily
due to increases in operating expenses in several networks, including Vermont,
Buffalo, New Jersey, Harrisburg, Charlottesville and Louisville, offset somewhat
by increased EBITDA in the Syracuse, Richmond, Nashville and Wichita networks.

The Operating Companies' capital expenditures for Fiscal 1996 and
Fiscal 1997 have grown consistently, reflecting the addition of new networks and
the expansion and growth of existing networks. There can be no assurance,
however, that the Company and Operating Companies will continue to be able to
fund the Company's significant requirements for future capital expenditures of
the Operating Companies.

Supplementary Operating Company Financial Information by Cluster (unaudited)

Revenues
Fiscal Fiscal Fiscal
1995 1996 1997
---- ---- ----
(Dollars in thousands)

Northeast .......... $ 1,393 $ 3,991 $ 5,553
Mid-Atlantic ....... 267 735 2,227
Mid-South .......... 44 473 1,264
Other Networks ..... 1,352 2,564 6,179
Total .............. $ 3,056 $ 7,763 $ 15,223

EBITDA
Fiscal Fiscal Fiscal
1995 1996 1997
(Dollars in thousands)

Northeast .......... $ (183) $ (765) $ 594
Mid-Atlantic ....... (308) (766) (3,681)
Mid-South .......... (605) (878) (503)
Other Networks ..... (233) (15) 1,917
Total .............. $ (1,329) $ (2,424) $ (1,673)

Capital Expenditures
Fiscal Fiscal Fiscal
1995 1996 1997
(Dollars in thousands)

Northeast .......... $ 8,167 $ 6,978 $ 28,654
Mid-Atlantic ....... 3,923 14,351 67,892
Mid-South .......... 4,002 7,321 19,455
Other Networks ..... 8,566 16,527 12,269
Total .............. $ 24,658 $ 45,177 $ 128,270
<PAGE>

Liquidity and Capital Resources

The development of the Company's business and the installation
and expansion of the Operating Companies' networks, combined with the
construction of the Company's NOCC, have resulted in substantial capital
expenditures and investments during the past several years. Capital expenditures
by the Company were $2.9 million, $6.1 million and $24.6 million for Fiscal
1995, Fiscal 1996 and Fiscal 1997, respectively. Further, investments made in
the Company's nonconsolidated Operating Companies and the South Florida
Partnership by the Company were $7.5 million, $12.8 million and $34.8 million in
Fiscal 1995, Fiscal 1996 and Fiscal 1997, respectively. Also, during Fiscal
1997, the Company invested $20.0 million in fiber assets and a senior secured
note in furtherance of its strategy to interconnect its networks in the
northeastern United States. The Company expects that it will continue to have
substantial capital and investment requirements. The Company also expects to
have to continue to fund operating losses as the Company develops and grows its
business.

Through March 31, 1997, Adelphia had made loans and advances
totaling approximately $68.3 million, including accrued interest, to the Company
and leased $2.6 million in fiber network construction to certain Operating
Companies. During April 1996, the Company repaid $37.8 million of such loans and
advances. In addition, Local Partners have invested approximately $81.5 million
as their pro rata investment in those networks through March 31, 1997. These
amounts exclude previous investments in the South Florida Partnership which were
sold on May 16, 1996. These partners have also provided additional capital of
$50.1 million for the construction of the Company's networks through the
partnership agreements by funding the fiber construction of the network and
leasing the fiber to the partnership under long-term, renewable agreements. In
addition, the Company used $81.6 million to fund its pro rata investment in the
networks, capital expenditures and operations. Collectively, these investments
and the Fiber Lease Financings have totaled $284.1 million from the Company's
inception through March 31, 1997.

The Company has experienced substantial negative cash flow since
its inception. A combination of operating losses, the substantial capital
investments required to build the Company's wholly owned networks and its
state-of-the-art NOCC, and incremental investments in the Operating Companies
has resulted in substantial negative cash flow. For the fiscal years ended March
31, 1995, 1996 and 1997, cash used in operating activities totaled $2.1 million,
$0.8 million and $4.8 million, respectively, cash used in investing activities
totaled $10.4 million, $18.9 million and $72.8 million, respectively, and cash
provided by financing activities totaled $12.5 million, $19.7 million and $137.5
million, respectively. Prior to April 15, 1996, funding of the Company's cash
flow deficiency was principally accomplished through additional borrowings from
Adelphia. Prior to April 15, 1996, interest and fees on this unsecured credit
facility were based upon the weighted average cost of unsecured borrowings of
Adelphia. The average interest rate charged for all periods was 11.3% through
April 15, 1996 (excluding fees charged which were based on the amount borrowed)
and 16.5% for the period since April 16, 1996.

On April 15, 1996, the Company issued $329.0 million of 13%
Senior Notes and 329,000 Class B Warrants to purchase an aggregate of 613,427
shares of its common stock. Proceeds to the Company, net of discounts,
commissions, and other transaction costs were approximately $168.6 million. Such
net proceeds were used to fund the Company's capital expenditures, working
capital requirements, operating losses and its pro-rata investments in joint
ventures, to pay $25.0 million of indebtedness owing to Adelphia and to make
loans of $3.0 million to certain key members of management. Proceeds from the
Senior Notes and Class B Warrants were also used to repay amounts related to
capital expenditures, working capital requirements, operating losses and
pro-rata investments in joint ventures totaling $12.8 million incurred during
the period from January 1, 1996 to April 15, 1996. These amounts had been funded
during the same time period through advances from Adelphia. As of April 15,
1996, approximately $25.9 million of outstanding indebtedness owed to Adelphia
was evidenced by an unsecured subordinated note due April 16, 2003 (the
"Adelphia Note"), that accrues interest at 16.5% and is subordinated to the
Senior Notes. Interest on the Adelphia Note is payable quarterly in cash,
through the issuance of identical subordinated notes, or in any combination
thereof, at the option of the Company. Interest accrued on the Adelphia Note was
$4.7 million as of March 31, 1997.
<PAGE>

On May 16, 1996, the Company completed the sale of its 15.7%
partnership interest in the South Florida Partnership to Teleport Communications
Group Inc. for an aggregate sales price of approximately $11.6 million resulting
in a pre-tax gain of approximately $8.4 million. Amounts related to the South
Florida Partnership included in the Company's investments and equity in net loss
of joint ventures as of the sale date and for the year ended March 31, 1997 were
approximately $3.2 million and ($0.2) million, respectively. As part of the
transaction, the Company was released from its covenant not to compete with
respect to the South Florida market. The Company plans to use the proceeds from
the sale to continue to expand and develop its existing markets, complete new
networks under construction and enter additional markets.

Pursuant to an agreement dated July 25, 1996, the Company
purchased general and limited partnership interests in the Nashville, Tennessee
Operating Partnership from InterMedia and Robin Media on August 1, 1996. The
aggregate purchase price was $5.0 million. As a result of this acquisition, the
Company's ownership interest in this partnership was increased to 95%.

During the year ended March 31, 1997, the Company purchased
approximately 341 miles of SONET ring fiber backbone used by the Vermont
Operating Company from Adelphia for $6.5 million, Adelphia's historical cost for
such assets. Prior to such purchase, the Company had been leasing such fiber
backbone in the Vermont network from Adelphia at an annual rate of approximately
$1.0 million.

On February 20, 1997, the Company entered into several agreements
regarding the lease of dark fiber in New York State. Pursuant to these
agreements and in consideration of a payment of $20.0 million, the Company
received (i) a $20 million Senior Secured Note due February 2002 from Telergy,
Inc., and (ii) a fully prepaid lease from a Telergy affiliate for at least 25
years (with two additional ten-year extensions), as a preferred customer, for 24
strands of dark fiber installed or to be installed in a New York fiber optic
telecommunications backbone network. The fiber optic backbone network will cover
approximately 500 miles from Buffalo to Syracuse to Albany to New York City, New
York, and will provide interconnection capability for the Company's operating
networks in the State of New York.

On April 24, 1997, the Company and Entergy Corporation
("Entergy") signed an agreement to form a 50%/50% joint venture to offer
competitive telecommunications services primarily to commercial customers in the
Little Rock, Arkansas, Jackson, Mississippi and Baton Rouge, Louisiana
metropolitan areas (the "Entergy Networks"). The Entergy-Hyperion joint venture
intends to offer a full range of local exchange services as well as access to
long distance carriers. The Company expects the networks for these three cities
to total approximately 350 route miles of fiber optic cable.

On May 20, 1997, the Company entered into an agreement with Time
Warner Entertainment Advance/Newhouse ("TWEAN") whereby the Company would
consolidate its Operating Companies' interests in the State of New York by (i)
increasing its ownership interest in the Buffalo network to 50% and in the
Syracuse network to 100% and (ii) eliminating its ownership interests in and
management responsibility for the Albany and Binghamton networks. In addition,
the agreement provides that neither party will be subject to the non-competition
provisions contained in the existing partnership agreements with respect to the
markets from which they are withdrawing. The transaction is subject to normal
closing conditions and receipt of regulatory approvals.

On June 13, 1997, the Company entered into agreements with
MCImetro Access Transmission Services, Inc. (together with its affiliate, MCI
Communications, "MCI") pursuant to which the Company is designated as MCI's
preferred provider of new end user dedicated access circuits and of conversions
of end user dedicated access circuits from the incumbent LEC. In addition,
Hyperion has a right of first refusal to provide MCI all new dedicated local
network access circuits such as POP-to-POP or POP-to-LSO connections. These
arrangements apply to virtually all of the Company's current networks and the
term of these arrangements is five years with a five year renewal option. The
agreements allow MCI to purchase local loop transport services from Hyperion
where Hyperion is collocated with the incumbent LEC. The agreements also provide
that the parties negotiate in good faith the terms of a separate agreement for
the utilization of the Company's local switches and operating support systems to
<PAGE>

provide MCI branded local service. MCI has been issued a warrant to purchase
281,040 shares of Class A Common Stock in connection with the transaction and
could receive additional warrants to purchase Class A Common Stock with an
exercise price equal to the fair market value of the Class A Common Stock at the
time of issuance if MCI meets certain agreed upon purchase volume revenue
thresholds. Collectively, the warrants will entitle MCI to purchase Class A
Common Stock of the Company representing between 2.5% and 8.5% of the Common
Stock of the Company, with adjustments for future issuances of common stock.

To date, including the TWEAN transaction described above, the
Company has entered into arrangements to increase its ownership interest in its
Operating Companies. Pursuant to such arrangements, the Company has: (i)
increased its interest in the Nashville Operating Partnership from 25% to 95%;
(ii) increased its interest in the networks located in Lexington and Louisville
to 50%; and (iii) entered into a nonbinding letter of intent to increase its
interest in the Harrisburg network to 100%, subject to the negotiation and
execution of definitive agreements and obtaining necessary regulatory approvals.
These transactions are consistent with the Company's goal to own at least a 50%
interest in its Operating Companies in the future, and where appropriate the
Company may consider similar transactions from time to time in its other
markets.

The competitive local telecommunication service business is a
capital-intensive business. The Company's operations have required and will
continue to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the expansion
and improvement of the Company's NOCC and existing networks and (iii) the
design, construction and development of additional networks. The Company plans
to make substantial capital investments and investments in Operating Companies
in connection with the deployment of switches in all of its operating markets by
mid-1997 (late 1997 as to the Entergy networks). The Company estimates that it
will require approximately $150 million to $175 million to fund anticipated
capital expenditures, working capital requirements and operating losses of the
Company and to make investments in its existing Operating Companies through the
fiscal year ended March 31, 1999. In addition, expansion of the Company's
networks will include the geographic expansion of the Company's existing
clusters and the development of new markets. The Company expects to continue to
build new networks in additional markets, which the Company anticipates will
include additional networks with utility partners and, in the future, the
Company may increase its ownership in the Operating Companies and acquire
existing networks. The Company expects that it will have adequate resources to
fund such expenditures through the proceeds from the offering of the Senior
Notes and Class B Warrants, anticipated bank and/or vendor financings by the
Operating Companies, internal sources of funds, including cash flow from
operations generated by the Company, and additional debt or equity financings,
as appropriate. There can be no assurance, however, as to the availability of
funds from internal cash flow or from the private or public equity or debt
markets. In addition, the expectations of required future capital expenditures
are based on the Company's current estimate. There can be no assurance that
actual expenditures will not significantly exceed current estimates or that the
Company will not accelerate its capital expenditures program.

In addition, the Company expects that pro rata investments by the
Company and its Local Partners as well as Fiber Lease Financings and anticipated
bank or vendor financings will be adequate to fund the requirements of the
Operating Companies for capital expenditures, operating losses and working
capital for existing networks, networks currently under construction and certain
of the Company's planned additional markets during calendar years 1997 and 1998.
There can be no assurance as to the availability of funds from internal cash
flow, the Local Partners or other external sources or as to the terms of such
financings. In addition, the Senior Notes Indenture provides certain
restrictions upon the Company's ability to incur additional indebtedness. The
Company's inability to fund pro rata investments required for the Operating
Companies could result in a dilution of the Company's interest in the individual
Operating Companies or could otherwise have a material adverse effect upon the
Company and/or the Operating Companies.

Impact of Inflation

The Company does not believe that inflation has had a significant
impact on the Company's consolidated operations or on the operations of the
Operating Companies over the past three fiscal years.
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related notes thereto
and independent auditors report follow.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report............................................... 53
Consolidated Balance Sheets, March 31, 1996 and 1997....................... 54
Consolidated Statements of Operations, Years Ended March 31,
1995, 1996 and 1997............................................... 55
Consolidated Statements of Stockholders' Equity (Deficiency),
Years Ended March 31, 1995, 1996 and 1997......................... 56
Consolidated Statements of Cash Flows, Years Ended March 31,
1995, 1996 and 1997.............................................. 57
Notes to Consolidated Financial Statements................................ 58

<PAGE>

INDEPENDENT AUDITORS' REPORT

Hyperion Telecommunications, Inc.:

We have audited the accompanying consolidated balance sheets of Hyperion
Telecommunications, Inc. and subsidiaries as of March 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended March 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Hyperion Telecommunications,
Inc. and subsidiaries at March 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
June 13, 1997

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share amounts)

March 31,
1996 1997
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents .............................................. $ -- $ 59,814
Other current assets ................................................... 282 768
----------- -----------
Total current assets ................................................... 282 60,582

Investments ............................................................ 21,087 44,685
Property, plant and equipment--net ...................................... 12,561 53,921
Other assets--net ....................................................... 1,045 15,376
Deferred income taxes--net .............................................. 294 37
----------- -----------
Total .................................................................. $ 35,269 $ 174,601
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable ....................................................... $ 2,529 $ 2,342
Due to affiliates--net .................................................. 8,707 6,081
Other current liabilities .............................................. 501 757
----------- -----------
Total current liabilities .............................................. 11,737 9,180

13% Senior Discount Notes due 2003 ..................................... -- 187,173
Note payable--Adelphia .................................................. 50,855 25,855
Other debt ............................................................. -- 2,647
----------- -----------
Total liabilities ...................................................... 62,592 224,855
----------- -----------
Commitments and contingencies (Note 7)

Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value, 300,000,000 shares authorized and
104,000 shares outstanding ............................................. -- 1
Class B Common Stock, $0.01 par value, 150,000,000 shares authorized and
10,000,000 shares outstanding .......................................... 100 100
Additional paid in capital ............................................. -- 155
Class B Common Stock Warrants .......................................... -- 11,087
Loans to Stockholders .................................................. -- (3,000)
Accumulated deficit .................................................... (27,423) (58,597)
----------- -----------
Total stockholders' equity (deficiency) ................................ (27,323) (50,254)
----------- -----------
Total .................................................................. $ 35,269 $ 174,601
=========== ===========
</TABLE>

See notes to consolidated financial statements.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

Year Ended March 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues ........................................................... $ 1,729 $ 3,322 $ 5,088

Operating expenses:
Network operations ................................................. 1,382 2,690 3,432
Selling, general and administrative ................................ 2,524 3,084 6,780
Depreciation and amortization ...................................... 463 1,184 3,945
---------- ---------- ----------
Total .............................................................. 4,369 6,958 14,157
---------- ---------- ----------
Operating loss ..................................................... (2,640) (3,636) (9,069)

Other income (expense):
Gain on sale of investment ......................................... -- -- 8,405
Interest income .................................................... 39 199 5,976
Interest expense and fees .......................................... (3,321) (6,088) (28,377)
---------- ---------- ----------
Loss before income taxes and equity in net loss of joint ventures .. (5,922) (9,525) (23,065)
---------- ---------- ----------
Income tax benefit (expense) ....................................... 29 197 (259)
Loss before equity in net loss of joint ventures ................... (5,893) (9,328) (23,324)
---------- ---------- ----------
Equity in net loss of joint ventures ............................... (1,799) (4,292) (7,223)
---------- ---------- ----------
Net loss ........................................................... $ (7,692) $ (13,620) $ (30,547)
========== ========== ==========

Net loss per weighted average share of common stock ................ $ (0.77) $ (1.36) $ (2.88)
========== ========== ==========
Weighted average shares of common stock outstanding ................ 10,000 10,000 10,591
========== ========== ==========
</TABLE>

See notes to consolidated financial statements.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands except per share amounts)

Class B
Class A Class B Additional Common Stockholders'
Common Common Paid-in Stock Loans to Accumulated Equity
Stock Stock Capital Warrants Stockholders Deficit (Deficiency)

<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,1994 ............ $ -- $ 100 $ -- $ -- $ -- $ (6,111) $ (6,011)
Net loss .......................... -- -- -- -- (7.692) (7,692)
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, March 31, 1995 ........... -- 100 -- -- -- (13,803) (13,703)
Net loss .......................... -- -- -- -- -- (13,620) (13,620)
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, March 31, 1996 ........... -- 100 -- -- -- (27,423) (27,323)
Proceeds from issuance of
Class B Common Stock
warrants .......................... -- -- -- 11,087 -- -- 11,087
Loans to stockholders ............. -- -- -- -- (3,000) -- (3,000)
Excess of purchase price
of acquired assets
over related party
predecessor owner's
carrying value .................... -- -- -- -- -- (627) (627)
Issuance of Class A
Common Stock bonus ................ 1 -- 155 -- -- -- 156
Net loss .......................... -- -- -- -- -- (30,547) (30,547)
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, March 31, 1997 ........... $ 1 $ 100 $ 155 $ 11,087 $ (3,000) $ (58,597) $ (50,254)
========== ========== ========== ========== ========== ========== ==========

</TABLE>

See notes to consolidated financial statements.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands except per share amounts)

Year Ended March 31,
1995 1996 1997
----- ----- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss .............................................. $ (7,692) $ (13,620) $ (30,547)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .......................................... 397 1,061 2,604
Amortization .......................................... 66 123 1,341
Equity in net loss of joint ventures .................. 1,799 4,292 7,223
Non-cash interest expense ............................. 3,321 6,088 23,467
Deferred income taxes ................................. (37) (206) 257
Gain on sale of investment ............................ -- -- (8,405)
Issuance of Class A Common Stock bonus ................ -- -- 156
Changes in operating assets and liabilities, net of
effects of acquisition:
Other assets--net ...................................... (550) (227) (624)
Accounts payable ....................................... 499 1,360 (551)
Other liabilities--net ................................. 67 296 256
------------ ------------ ------------
Net cash used in operating activities ................. (2,130) (833) (4,823)

Cash flows from investing activities:
Net cash used for acquisition ......................... -- -- (5,040)
Expenditures for property, plant and equipment ........ (2,850) (6,084) (24,627)
Investment in fiber asset and senior secured note ..... -- -- (20,000)
Proceeds from sale of investment ...................... -- -- 11,618
Investments in joint ventures ......................... (7,526) (12,815) (34,769)
------------ ------------ ------------
Net cash used in investing activities ................. (10,376) (18,899) (72,818)

Cash flows from financing activities:
Proceeds from Senior Discount Notes ................... -- -- 163,705
Proceeds from issuance of Class B Common Stock warrants -- -- 11,087
Costs associated with debt financing .................. -- -- (6,555)
Loans to stockholders ................................. -- -- (3,000)
Borrowings on (repayment of) Note payable--Adelphia .... 12,252 9,226 (25,000)
Advances from (to) affiliates ......................... 254 10,506 (2,782)
------------ ------------ ------------
Net cash provided by financing activities ............. 12,506 19,732 137,455
------------ ------------ ------------
Net increase in cash and cash equivalents ............. -- -- 59,814
Cash and cash equivalents, beginning of year .......... -- -- --
Cash and cash equivalents, end of year ................ $ -- $ -- $ 59,814
============ ============ ============
</TABLE>

See notes to consolidated financial statements

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(1) The Company and Summary of Significant Accounting Policies

Organization and Business

The consolidated financial statements include the accounts of Hyperion
Telecommunications, Inc. and its wholly and majority owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company was formed in 1991 and is an 88% owned
subsidiary of Adelphia Communications Corporation ("Adelphia"). The remaining
12% is owned by certain key Company officers.

The Company provides telecommunications service through its subsidiaries
and joint ventures, in which it has less than a majority ownership interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company generally
partners with a local cable television or utility company, whose fiber
facilities are located in the market areas, to build competitive access fiber
optic networks. The Company then operates the networks for a management fee.
Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and management
fees from its unconsolidated joint ventures.

Joint ventures in which the Company does not have a majority interest
are accounted for under the equity method of accounting.

Cash and cash equivalents

Cash and cash equivalents consist of highly liquid instruments with an
initial maturity date of three months or less.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with network
engineering, design and construction.

Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(1) The Company and Summary of Significant Accounting Policies, continued

The estimated useful lives of the Company's principal classes of
property, plant and equipment are as follows:

Telecommunications networks................... 10-20 years
Network monitoring and switching equipment.... 5-10 years
Other.......................................... 3-10 years

Revenue Recognition

The Company recognizes revenues related to management and network
monitoring of the joint ventures in the month that the related services are
provided. The Company recognizes revenue from telecommunications services in the
month the related service is provided. Revenues on billings to customers for
services in advance of providing such services are deferred and recognized when
earned.

Net Loss Per Weighted Average Share of Common Stock

The computation of net loss per weighted average share of common stock
is based upon the weighted average number of common shares and warrants
outstanding during the year. All references in the accompanying consolidated
financial statements to the number of shares of common stock have been
retroactively restated to reflect the stock split (See Note 6).

Income Taxes

Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets to the net amount that management believes will more
likely than not be realized.

Other Assets

Costs incurred in developing new networks or expanding existing
networks, including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs, included in other assets, represent certain nondevelopment
costs incurred during the pre-operating phase of a newly constructed network and
are amortized over five-year periods commencing with the start of operations.
Deferred debt financing costs, included in other assets, are amortized over the
term of the related debt. The unamortized amounts at March 31, 1996 and 1997
were $0 and $6,033, respectively. Also included in other assets at March 31,
1997 is a Senior Secured Note (See Note 3).

Asset Impairments

The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(1) The Company and Summary of Significant Accounting Policies, continued

Financial Instruments

Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts receivable.
Concentration of credit risk with respect to accounts receivable is limited due
to the dispersion of the Company's customer base among different customers and
geographic areas.

The Company's financial instruments include cash and cash
equivalents, Note payable--Adelphia, Senior Secured Note, and Senior Discount
Notes. The carrying values of the Note payable--Adelphia and the Senior Secured
Note approximated their fair values at March 31, 1996 and 1997. The carrying
value of the Senior Discount Notes exceeded fair value by approximately $5,400
at March 31, 1997. The fair values of the Note payable--Adelphia and the Senior
Secured Note were estimated based upon the terms in comparison with other
similar instruments. The fair value of the Senior Discount Notes was based upon
quoted market prices.

Use of Estimates in the Preparation of Financial Statements

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.

Earnings per Share

Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128") has been issued and is effective for periods ending
after December 15, 1997, with early application not permitted. The general
requirements of SFAS No. 128 are designed to simplify the computation of
earnings per share. The new statement requires a calculation of basic and
diluted earnings per share. The adoption of SFAS No. 128 is not expected to have
any effect on the Company's calculation of earnings per share.

Reclassification

For the fiscal years ended March 31, 1995 and 1996, certain amounts have
been reclassified to conform with the March 31, 1997 presentation.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(2) Property, Plant and Equipment

Property, plant and equipment consists of the following:

March 31,
1996 1997

Telecommunications networks ........................$ 6,312 $ 12,236
Network monitoring and switching equipment ......... 5,267 19,301
Fiber asset under construction (Note 3) ............ -- 11,500
Construction in process ............................ 2,245 14,978
Other .............................................. 388 1,131
---------- ----------
14,212 59,146
Less accumulated depreciation ...................... (1,651) (5,225)
---------- ----------
Total ..............................................$ 12,561 $ 53,921
========== ==========

(3) Investment in Fiber Asset and Senior Secured Note

On February 20, 1997, the Company entered into several agreements
regarding the leasing of dark fiber in New York state in furtherance of its
strategy to interconnect its networks in the northeastern United States.
Pursuant to these agreements and in consideration of a payment of $20,000, the
Company received a $20,000 Senior Secured Note bearing interest at 22 1/2%
(subject to reduction upon early repayment of principal) due February 2002
(subject to early redemption options), from Telergy, Inc. ("Telergy") and a
fully prepaid lease from a Telergy affiliate for an initial lease term of 25
years (with two additional ten-year extensions) for 24 strands of dark fiber
installed or to be installed in a New York fiber optic telecommunications
backbone network. The Company has included $11,500 and $8,500 in Property, Plant
and Equipment and Other Assets, respectively, as the allocation of the $20,000
payment between the fiber asset and the Senior Secured Note. The allocation
reflects the Company's estimate of the relative fair values of the assets
acquired.

(4) Investments

The equity method of accounting is used to account for investments in
joint ventures in which the Company owns less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or loss of
its joint ventures. Dividends or other distributions are recorded as a reduction
of the Company's investment. Investments in joint ventures accounted for using
the equity method reflect the Company's equity in their underlying net assets.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(4) Investments, continued
<TABLE>
<CAPTION>

The Company's nonconsolidated investments are as follows:
Ownership March 31,
Percentage 1996 1997
---------- ---- ----
<S> <C> <C> <C>
Continental Fiber Technologies (Jacksonville).......... 20.0% $ 4,701 $ 7,330
Multimedia Hyperion Telecommunications (Wichita)....... 49.9% 2,620 3,306
Louisville Lightwave................................... 50.0%(1) 996 4,683
NewChannels Hyperion Telecommunications (Albany)....... 50.0%(2) 999 924
NewChannels Hyperion Telecommunications (Binghamton)... 20.0%(2) 504 504
NHT Partnership (Buffalo).............................. 40.0%(2) 2,457 4,717
NewChannels Hyperion Telecommunications (Syracuse)..... 50.0%(2) 3,140 4,215
Hyperion of Harrisburg................................. 50.0%(3) 1,600 5,246
Hyperion of Tennessee (Nashville)...................... 25.0%(4) 1,345 --
Alternet of Virginia (Richmond)........................ 37.0% 3,406 7,018
New Jersey Fiber Technologies (New Brunswick).......... 19.7% 956 3,340
TCG of South Florida................................... 15.7%(5) 4,679 --
PECO-Hyperion (Philadelphia) .......................... 50.0% -- 10,750
Lexington Lightwave.................................... 50.0% -- 2,311
Hyperion of York....................................... 50.0% -- 1,402
Other.................................................. Various 497 949
27,900 56,695
Cumulative equity in net losses........................ (6,813) (12,010)
Total Investments...................................... $ 21,087 $ 44,685

<FN>

(1) The Company increased its ownership in this partnership on May 8, 1996 from 20% to 50%.

(2) As discussed in Note 11, the Company has entered into an agreement, subject
to normal closing conditions and receipt of regulatory approval, to
exchange its interests in these networks.

(3) As discussed in Note 11, the Company has entered into an agreement, subject
to normal closing conditions, to increase its ownership to 100% in exchange
for shares of Class A Common Stock of the Company.

(4) As discussed below, the Company increased its ownership in this partnership
on August 1, 1996 to 95%, and accordingly, has consolidated this investment
effective August 1, 1996.

(5) As discussed below, the Company sold its interest in TCG of South Florida on May 16, 1996.
</FN>
</TABLE>

Summarized unaudited combined financial information for the Company's
investments being accounted for using the equity method of accounting, excluding
TCG of South Florida and Hyperion of Tennessee as of and for the periods
presented, is as follows:

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)
(4) Investments, continued

March 31,
1996 1997
----- ----
Current assets............... $ 3,262 $ 5,684
Non-current assets........... 74,055 154,950
Current liabilities.......... 6,043 6,797
Non-current liabilities ..... 17,718 48,069

Year Ended March 31,
1995 1996 1997
---- ---- ----
Revenues................... $ 2,818 $ 6,497 $ 12,357
Net loss................... (3,454) (8,414) (17,052)

On May 16, 1996, the Company sold its 15.7% interest in TCG of South
Florida for approximately $11,618 resulting in a pre-tax gain of approximately
$8,400. Amounts related to TCG of South Florida included in the Company's
investments and equity in net loss of joint ventures as of and for the year
ended March 31, 1996 were $3,422 and $778, respectively. The Company's equity in
net loss of joint ventures included a loss of $221 for TCG of South Florida for
the fiscal year ended March 31, 1997.

On August 1, 1996, the Company purchased additional general and
limited partnership interests in Hyperion of Tennessee for approximately $5,000,
which increased the Company's ownership of Hyperion of Tennessee to 95%. The
following unaudited financial information of the Company assumes that this
acquisition had occurred on April 1, 1995

Year Ended March 31,
1996 1997
---- ----
Revenues............................... $ 3,963 $ 5,303
Net loss............................... 15,239 31,002
Net loss per weighted average share of
common stock.......................... $ 1.52 $ 2.93

(5) Financing Arrangements

Note Payable -- Adelphia

The Company has an unsecured credit arrangement with Adelphia
which had no repayment terms prior to April 15, 1996. On April 15, 1996, $25,000
of the proceeds from the sale of the 13% Senior Discount Notes (the "Senior
Notes") and Class B Common Stock Warrants discussed below were used to repay a
portion of this obligation. Interest expense and fees on this credit arrangement
were based upon the weighted average cost of unsecured borrowings of Adelphia
during the corresponding periods. Interest at 11.28% per annum plus fees was
charged on the Note payable--Adelphia for the years ended March 31, 1995 and
1996. The total amount of interest converted to note principal through April 15,
1996 was $9,007.

Effective April 15, 1996, the remaining balance due on the Note
payable--Adelphia is evidenced by an unsecured subordinated note due April 16,
2003. This obligation bears interest at 16.5% per annum with interest payable
quarterly in cash; by issuing additional subordinated notes; or a combination of
cash and additional subordinated notes, all of which is at the Company's option.
Interest accrued through March 31, 1997 on the amount outstanding to Adelphia
totaled $4,664 and is included in due to affiliates--net.
<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(5) Financing Arrangements, continued

13% Senior Discount Notes and Class B Common Stock Warrants

On April 15, 1996, the Company issued $329,000 of 13% Senior Discount
Notes due April 15, 2003 and 329,000 warrants to purchase an aggregate of
613,427 shares of its Class B Common Stock. Proceeds to the Company, net of
discounts, commissions, and other transaction costs were approximately $168,600.
Such net proceeds were used to pay $25,000 of the Note payable--Adelphia
discussed above, to make loans of $3,000 to certain key Company officers (see
Note 6) and to fund the Company's capital expenditures, working capital
requirements, operating losses and its pro-rata investments in joint ventures.
Use of proceeds from the Senior Notes also included the repayment of amounts
related to capital expenditures, working capital requirements, operating losses
and pro-rata investments in joint ventures totaling $12,800 incurred during the
period from January 1, 1996 to April 15, 1996. These amounts had been funded
during the same time period through advances from Adelphia.

Prior to April 15, 2001, interest on the Senior Notes is not payable in
cash, but is added to principal. Thereafter, interest is payable semi-annually
commencing October 15, 2001. The Senior Notes are unsecured and are senior to
the Note payable--Adelphia and all future subordinated indebtedness. On or
before April 15, 1999 and subject to certain restrictions, the Company may
redeem, at its option, up to 25% of the aggregate principal amount of the Senior
Notes at a price of 113% of the Accreted Value (as defined in the Indenture). On
or after April 15, 2001, the Company may redeem, at its option, all or a portion
of the Senior Notes at 106.5% which declines to par in 2002, plus accrued
interest.

The holders of the Senior Notes may put the Senior Notes to the Company
at any time at a price of 101% of accreted principal upon the occurrence of a
Change of Control (as defined in the Indenture). In addition, the Company will
be required to offer to purchase Senior Notes at a price of 100% with the
proceeds of certain asset sales (as defined in the Indenture).

The Indenture stipulates, among other things, limitations on additional
borrowings, issuance of equity instruments, payment of dividends and other
distributions, repurchase of equity interests or subordinated debt,
sale--leaseback transactions, liens, transactions with affiliates, sales of
Company assets, mergers and consolidations.

In accordance with a registration rights agreement, the Company filed a
registration statement offering to exchange the Senior Notes for Series B Senior
Discount Notes registered under the Securities Act of 1933, as amended (the
"Securities Act"). Terms of the Series B Senior Discount Notes are substantially
the same as the Senior Notes. The above exchange was consummated within the time
periods stipulated in the agreement.

The Class B Common Stock Warrants are exercisable at $.01 per share,
upon the earlier of May 1, 1997 or a Change of Control. Unless exercised, the
Class B Common Stock Warrants expire on April 1, 2001. The number of shares and
the exercise price for which a warrant is exercisable are subject to adjustment
under certain circumstances. In accordance with a registration rights agreement,
the Company filed a shelf registration statement under the Securities Act
covering the Warrant Shares.

If the Senior Notes and Class B Common Stock Warrants had been issued on
April 1, 1995, interest expense would have been approximately $27,796 for the
year ended March 31, 1996.
<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(5) Financing Arrangements, continued

Other debt consists primarily of capital leases entered into in
connection with the acquisition of fiber leases for use in the
telecommunications networks. The interest rates on such debt range from 11.25%
to 15%.

Maturities of debt for the five years after March 31, 1997 are as follows:

1998................................... $489
1999................................... 554
2000................................... 529
2001................................... 382
2002................................... 324

(6) Stockholders' Equity

The Class B Common Stock of the Company held by Adelphia and certain key
Company officers (the "Officers") is subject to sale and transfer restriction
provisions. These provisions state that none of the Officers may transfer any
shares unless they have offered to sell such shares to Adelphia (or the other
remaining Officers if Adelphia declines) at a price per share equal to the terms
of the proposed third party sale or exchange.

In accordance with a shareholder agreement, upon termination of
employment or at any time after October 7, 1996, the Officers could have
required Adelphia to purchase all their outstanding Class B shares (the
"Officers' Option"). At any time after October 7, 2001, Adelphia could have
required the Officers to sell all of their outstanding Class B shares to
Adelphia (the "Adelphia Option"). The price per share shall be equal to the fair
market value of the shares as determined by a nationally recognized financial
advisor selected by Adelphia and the Officers.

On March 19, 1996, such shareholder agreement was amended primarily to
(i) grant the Officers certain registration rights regarding their Class B
Common Stock; (ii) extend the Officers' Option date until after October 7, 1998;
(iii) extend the Adelphia Option date until after October 7, 2003 and (iv)
provide for aggregate loans to the Officers of $3,000 from the proceeds received
from the sale of the Senior Notes and Class B Common Stock Warrants discussed in
Note 5. Such loans, including accrued interest at a rate equal to the rate which
the Company is able to invest cash on a short-term basis, are secured by a
pledge of each Officer's Class B Common Stock in the Company and are payable to
the Company on the earlier of October 8, 1998 or the date of the registration of
an equity security of the Company as described below. Also, an amount equal to
the interest that accrues on such loans from the date six months after the date
the loans are made until due and payable will be satisfied through additional
compensation to the Officers. The shareholder agreement is terminated upon the
registration of an equity security of the Company under the Securities Act or
the Securities Exchange Act of 1934, as amended, which equity security is of the
same class as the equity security held by the Officers.

On March 19, 1996, the Board of Directors of the Company approved a ten
thousand-for-one stock split of its Class B Common Stock and the reduction of
the par value from $1.00 per share to $.01 per share. In addition, on March 19,
1996, the Board of Directors approved charter amendments to increase the
Company's authorized shares of Class B Common Stock from 1,000 shares to
30,000,000 shares and authorized 5,000,000 shares of preferred stock with terms
of such preferred stock to be determined by the Board of Directors of the
Company. No preferred stock has been issued by the Company.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(6) Stockholders' Equity, continued

On October 3, 1996, the Board of Directors of the Company approved
charter amendments to (i) increase the Company's authorized shares from
30,000,000 shares of Common Stock to 150,000,000 shares of Class B Common Stock,
(ii) authorize 300,000,000 shares of a second class of common stock (Class A
Common Stock), and (iii) reclassify each previously authorized and outstanding
share of Common Stock as Class B Common Stock. Holders of the Class A Common
Stock and Class B Common Stock vote as a single class on all matters submitted
to a vote of the stockholders, with each share of Class A Common Stock entitled
to one vote and each share of Class B Common Stock entitled to ten votes. In
addition, each share of Class B Common Stock is automatically convertible into
one share of Class A Common Stock. In the event a cash dividend is paid, the
holders of the Class A Common Stock and the Class B Common Stock will be paid an
equal amount.

All references in the accompanying consolidated financial statements to
the number of shares of common stock and the par value have been retroactively
restated to reflect the stock split, the par value reduction and the other
actions taken by the Board of Directors on March 19 and October 3, 1996.

On October 3, 1996, the Board of Directors and stockholders of the
Company approved the Company's 1996 Long-Term Incentive Compensation Plan (the
"1996 Plan"). The 1996 Plan provides for the grant of (i) options which qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (ii) options which do not so qualify, (iii)
share awards (with or without restrictions on vesting), (iv) stock appreciation
rights and (v) stock equivalent or phantom units. The number of shares of Class
A Common Stock available for issuance initially will be 1,750,000. Such number
is to increase each year by 1% of outstanding shares of all classes of the
Company's Common Stock, up to a maximum of 2,500,000 shares. Options, awards and
units may be granted under the 1996 Plan to directors, officers, employees and
consultants. The 1996 Plan provides that incentive stock options must be granted
with an exercise price of not less than the fair market value of the underlying
Common Stock on the date of grant. Options outstanding under the Plan may be
exercised by paying the exercise price per share through various alternative
settlement methods. On March 4, 1997 and April 1, 1997, the Company issued
104,000 shares and 18,000 shares, respectively, of Class A Common Stock to
Daniel R. Milliard pursuant to his employment agreement with the Company. No
other stock options, stock awards, stock appreciation rights or phantom stock
units have been granted under the Plan.

(7) Commitments and Contingencies

The Company rents office space, node space and fiber under leases with
terms which are generally less than one year or under agreements that are
generally cancelable on short notice. Total rental expense under all operating
leases aggregated $478, $1,210 and $1,103 for the years ended March 31, 1995,
1996 and 1997, respectively.

The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1997 are approximately:

Period ending March 31,
------------------------
1998................................... $553
1999................................... 524
2000................................... 507
2001................................... 521
2002................................... 462
Thereafter............................. 113
<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(7) Commitments and Contingencies, continued

Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at March 31, 1997 was approximately
$3,646. The sales price under the second agreement is equal to the fair market
value of such investor's interest.

The Company has entered into employment agreements with certain key
Company officers, the terms of which expire on October 20, 1998, as amended. The
employment agreements provide for base salary, benefits and bonuses payable if
specified management goals are attained. In addition, the employment agreements
contain noncompetition and nondisclosure provisions.

The Company has entered into an employment agreement with the President
of the Company, the terms of which expire on March 31, 2001, unless extended by
the Company for additional one year periods. The employment agreement provides
for base salary, benefits, stock options or stock grants and cash and stock
bonuses payable if specified management goals are attained as established
annually by the Board of Directors. In addition, the employment agreement
contains noncompetition and nondisclosure provisions.

The Company's operations and the operations of its joint ventures may be
adversely affected by changes and developments in governmental regulation,
competitive forces and technology. The telecommunications industry is subject to
extensive regulation at the federal, state and local levels. On February 8,
1996, President Clinton signed the Telecommunications Act of 1996 (the
"Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934.

The more significant provisions of the Telecommunications Act and
certain of its possible effects are as follows:

The Telecommunications Act removes legal barriers of entry in local
telephone markets. This provision should enable the Company to provide a
full range of services in any state while potentially increasing the
level of competition the Company faces in all its markets.

The Telecommunications Act requires incumbent Local Exchange Company's
("LECs") to "interconnect" with competitors which will provide access to
certain networks under reasonable rates, terms and conditions.

The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance and
cable television service.

By allowing the BOCs to enter the long distance market, this may reduce
the market share of the major long distance carriers (the Company's
joint ventures' primary customers) and have adverse consequences on the
Company's joint ventures' ability to generate revenues from the long
distance carriers.

The Telecommunications Act eliminates the requirement that LECs obtain
FCC authorization before constructing new facilities for interstate
services and limits the FCC's ability to review LEC tariff filings. The
changes will increase the speed with which the LECs are able to
introduce new service offerings and new pricing of existing services,
thereby increasing the LEC's ability to compete with the Company.
<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(7) Commitments and Contingencies, continued

On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to
implement Congress' statutory directive concerning number portability
(the "Number Portability Order"). The FCC ordered all LECs to begin
phased development of a long-term service provider portability method in
the 100 largest Metropolitan Statistical Areas ("MSAs") no later than
October 1, 1997, and to complete deployment in those MSAs by December
31, 1998. Number portability must be provided in those areas by all LECs
to all requesting telecommunications carriers. As new carriers are at a
competitive disadvantage without telephone number portability, the
Company believes the Number Portability Order should enhance the
Company's ability to offer service in competition with the incumbent
LECs, but it is uncertain how effective these regulations will be in
promoting number portability. The Number Portability Order sets interim
criteria for number portability cost recovery. The FCC deferred
selecting a long term number portability cost recovery scheme to a
further rulemaking proceeding which is expected to be decided later in
1997.

On August 8, 1996 the FCC released its First Report and Order and
Second Report and Order and Memorandum Opinion and Order promulgating
rules and regulations to implement Congress' statutory directive
concerning the interconnection obligations of all telecommunications
carriers, including obligations of CLEC and incumbent LEC networks and
incumbent LEC pricing of interconnection and unbundled elements (the
"Local Competition Orders"). The Local Competition Orders adopt a
national framework for interconnection but leave to the individual
states the task of implementing the FCC's rules. Because implementation
of the Local Competition Orders is occurring at the state level, it is
uncertain how these new requirements will affect the Company. To the
extent that CLECs are able to interconnect with incumbent LEC networks
on favorable terms, the Company believes its ability to provide
competitive local exchange services will increase. On May 8, 1997, the
FCC issued an order to implement the provisions of the
Teleocmmunicaitons Act relating to the preservation and advancement of
universal telephone service (the "Universal Service Order"). The
Universal Service Order requires all telecommunications carriers
providing interstate telecommunications services, including the
Company, to contribute to universal service support. Such contributions
will be assessed based on interstate and international end-user
telecommunications revenues. Universal service support will be
distributed to all carriers designated as "eligible carriers" by state
commissions. This could be advantageous to the Company or it could be
beneficial to the Company's competitors depending on the geographic
areas for which subsidies are available.

In a related proceeding, on May 16, 1997, the FCC issued an order to
implement certain reforms to its access charge rules (the "Access Charge
Reform Order"). To the extent that the Access Charge Reform Order
requires incumbent LECs to impose lower, cost-based access charges on
Interexchange or Long Distance Carriers ("IXCs"), the Company's
potential margins in providing customers with access services may
decrease.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(8) Related Party Transactions

The following table summarizes the Company's transactions with related parties:

March 31,
1995 1996 1997
---- ---- ----
Revenues:
Management fees .......... $ 1,045 $ 1,950 $ 2,600
Network monitoring fees... 217 446 604
Special access fees....... 189 651 540
--- --- ---
Total.................... $ 1,451 $ 3,047 $ 3,744
======= ======= =======
Expenses:
Interest expense and fees. $ 3,321 $ 6,088 $4,731
Allocated corporate costs. 511 417 1,199
Fiber leases.............. 303 1,022 738
--- ----- ---
Total.................... $ 4,135 $ 7,527 $ 6,668
======= ======= =======

Management fees from related parties represent fees received by the
Company from its unconsolidated joint ventures for the performance of financial,
legal, regulatory, network design, construction and other administrative
services.

Network monitoring fees represent fees received by the Company for
technical support for the monitoring of each individual joint venture's
telecommunications system.

Special access fees represent amounts charged to joint ventures for use
of the network of a wholly owned subsidiary of the Company.

Interest income charged on certain affiliate receivable balances with
joint ventures was $65, $199 and $230 for the periods ended March 31, 1995,
1996, and 1997 respectively.

Interest expense and fees relate to the Note Payable--Adelphia (See Note
5).

Allocated corporate costs represent costs incurred by Adelphia on behalf
of the Company for the administration and operation of the Company. These costs
include charges for office space, corporate aircraft and shared services such as
finance activities, information systems, computer services, human resources, and
taxation. Such costs were estimated by Adelphia and do not necessarily represent
the actual costs that would be incurred if the Company was to secure such
services on its own.

Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for development
and operation of the consolidated operating networks.

During the year ended March 31, 1997, the Company purchased from
Adelphia for approximately $6,485, Adelphia's historic cost to acquire the
assets, certain fiber that had previously been leased from Adelphia. Because the
entities involved in the transaction are under the common control of Adelphia,
the excess of the purchase price of the assets over the predecessor owner's net
book value was charged to accumulated deficit.
<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(9) Income Taxes

Adelphia and its corporate subsidiaries (including the Company) file a
consolidated federal income tax return. For financial reporting purposes,
current and deferred income tax assets and liabilities are computed on a
separate company basis. The net operating loss carryforwards and the valuation
allowance are adjusted for the effects of filing a consolidated income tax
return, similar to provisions of the Internal Revenue Code. At March 31, 1997,
the Company had net operating loss carryforwards for federal income tax purposes
of $30,478 expiring through 2012.

Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (b)
operating loss carryforwards.

The Company's net deferred tax asset is comprised of the following:

<TABLE>
<CAPTION>
March 31,
1996 1997
Deferred tax assets:
<S> <C> <C>
Differences between book and tax basis of intangible assets . $ 119 $ 197
Net operating loss carryforwards ............................ 9,302 11,539
Investment in Partnerships .................................. 1,401 2,793
Other ....................................................... 134 50
Total ....................................................... 10,956 14,579
Valuation allowance ......................................... (10,459) (12,356)
Total ....................................................... 497 2 ,223
Deferred tax liabilities:
Differences between book and tax basis of property, plant and
equipment ................................................... 203 2,186
Net deferred tax asset ...................................... $ 294 $ 37
</TABLE>

The net change in the valuation allowance for the years ended March 31, 1996 and
1997 was an increase of $5,164 and $1,897, respectively.

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(9) Income Taxes, continued

Income tax benefit (expense) for the years ended March 31, 1995, 1996
and 1997 is as follows:

March 31,
1995 1996 1997
---- ---- ----
Current ...................... $ (8) $ (9) $ (2)
Deferred ..................... 37 206 (257)
Total ........................ $ 29 $ 197 $ (259)

A reconciliation of the statutory federal income tax rate and the
Company's effective income tax rate is as follows:

March 31,
1995 1996 1997
---- ---- ----
Statutory federal income tax rate ........... 35.0% 35.0% 35.0%
Change in valuation allowance ............... (39.0) (34.6) (34.6)
State taxes, net of federal benefit and other 4.4 (1.2)
1.0
Income tax benefit (expense) ................ 0.4% 1.4% (0.8)%

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(10) Quarterly Financial Data (unaudited)

The following tables summarize the financial results of the Company for
each of the quarters in the years ended March 31, 1996 and 1997:

<TABLE>
<CAPTION>
Three Months Ended
June 30, September 30, December 31, March 31,
1995 1995 1995 1996

<S> <C> <C> <C> <C>
Revenues .......................................... $ 686 $ 612 $ 1,198 $ 826
Operating expenses:
Network operations ................................ 628 613 637 812
Selling, general and administrative ............... 831 534 1,010 709
Depreciation and amortization ..................... 250 278 333 323
Total ............................................. 1,709 1,425 1,980 1,844

Operating loss .................................... (1,023) (813) (782) (1,018)

Other income (expense):
Interest income ................................... 16 10 -- 173
Interest expense and fees ......................... (1,328) (1,372) (1,478) (1,910)

Loss before income taxes and equity in net loss
of joint ventures ................................. (2,335) (2,175) (2,260) (2,755)

Income tax benefit (expense) ...................... 19 59 (20) 139
Loss before equity in net loss of joint ventures .. (2,316) (2,116) (2,280) (2,616)

Equity in net loss of joint ventures .............. (797) (845) (1,509) (1,141)
Net loss .......................................... $ (3,113)$ (2,961)$ (3,789)$ (3,757)

Net loss per weighted average share of common stock $ (0.31)$ (0.30)$ (0.38)$ (0.38)

Weighted average shares of common stock
outstanding (in thousands) ........................ 10,000 10,000 10,000 10,000
</TABLE>

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>

(10) Quarterly Financial Data (unaudited), continued

Three Months Ended
June 30, September 30, December 31, March 31,
1996 1996 1996 1997

<S> <C> <C> <C> <C>
Revenues ................................................ $ 1,102 $ 1,175 $ 1,334 $ 1,477

Operating expenses:
Network operations ...................................... 859 728 752 1,093
Selling, general and administrative ..................... 1,027 1,164 2,545 2,044
Depreciation and amortization ........................... 695 886 1,002 1,362
Total ................................................... 2,581 2,778 4,299 4,499

Operating loss .......................................... (1,479) (1,603) (2,965) (3,022)

Other income (expense):
Gain on sale of investment .............................. 8,405 -- -- --
Interest income ......................................... 1,433 1,696 1,190 1,657
Interest expense and fees ............................... (6,169) (7,108) (7,482) (7,618)

Income (loss) before income taxes and equity in net loss
of joint ventures ....................................... 2,190 (7,015) (9,257) (8,983)

Income tax (expense) benefit ............................ (3) 120 63 (437)
Income (loss) before equity in net loss of joint ventures 2,187 (6,895) (9,194) (9,420)

Equity in net loss of joint ventures .................... (1,636) (1,362) 2,145) (2,080)
Net income (loss) ....................................... $ 551 $ (8,257)$ (11,339)$ (11,500)

Net income (loss) per weighted average share of common
stock ................................................... $ 0.05 $ (0.78)$ (1.07)$ (1.08)

Weighted average shares of common stock
outstanding (in thousands) .............................. 10,525 10,613 10,613 10,613
</TABLE>

(11) Subsequent Events

On June 13, 1997, the Company entered into agreements with MCImetro
Access Transmission Services, Inc. ("MCI") pursuant to which the Company is
designated as MCI's preferred provider for new end user dedicated access
services in virtually all of the markets that the Company currently serves.
Hyperion also has certain rights of first refusal to provide MCI with certain
telecommunications services. Under this arrangement, the Company issued a
warrant to purchase 281,040 shares of Class A Common Stock warrants to MCI
representing 2 1/2% of the Common Stock of the Company on a fully diluted basis.
MCI can receive additional warrants to purchase up to an additional 6% of the
shares of the

<PAGE>

HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended March 31, 1995, 1996 and 1997
(Dollars in thousands except per share amounts)

(11) Subsequent Events, continued

Company's Class A Common Stock, on a fully diluted basis, at fair value, if MCI
meets certain purchase volume thresholds over the term of the agreement.

On May 20, 1997, the Company entered into an agreement with Time Warner
Entertainment-Advance/Newhouse ("TWEAN") to exchange interests in four New York
CLEC networks. As a result of the transaction, Hyperion will pay TWEAN $6,000
and increase its ownership in the networks serving Buffalo and Syracuse, New
York to 50% and 100%, respectively, and will eliminate its interest in the
Albany and Binghamton networks which will be wholly owned by TWEAN. The
transaction is subject to normal closing conditions and receipt of regulatory
approvals.

<PAGE>

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

The directors and executive officers of the Company are:
<TABLE>
<CAPTION>

Name Age Position
- - ---- --- --------
<S> <C> <C>
John J. Rigas....................... 72 Chairman and Director
James P. Rigas..................... 39 Vice Chairman, Chief Executive Officer and Director
Michael J. Rigas................... 43 Vice Chairman and Director
Timothy J. Rigas................... 40 Vice Chairman, Chief Financial Officer, Treasurer and Director
Daniel R. Milliard................. 49 President, Chief Operating Officer, Secretary and Director
Charles R. Drenning................ 51 Senior Vice President, Engineering Operations and Director
Paul D. Fajerski.................. 48 Senior Vice President, Marketing and Sales and Director
Randolph S. Fowler................ 45 Senior Vice President, Business Development and Regulatory Affairs and Director
Pete J. Metros.................... 57 Director
James L. Gray..................... 62 Director

</TABLE>

John J. Rigas is the Chairman of the Board of the Company. He
also is the founder, Chairman, Chief Executive Officer and President of
Adelphia. Mr. Rigas has owned and operated cable television systems since 1952.
Among his business and community service activities, Mr. Rigas is Chairman of
the Board of Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania
and a member of the Board of Directors of the Charles Cole Memorial Hospital. He
is a director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.

John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas
and James P. Rigas, each of whom currently serves as a director and executive
officer of the Company.

James P. Rigas is Vice Chairman, Chief Executive Officer and a
Director of the Company, Executive Vice President, Strategic Planning and a
Director of Adelphia and a Vice President and Director of Adelphia's other
subsidiaries. He has been with Adelphia since 1986. Mr. Rigas graduated from
Harvard University (magna cum laude) in 1980 and received a Juris Doctor degree
and an M.A. degree in Economics from Stanford University in 1984. From June 1984
to February 1986, he was a consultant with Bain & Co., a management consulting
firm.

Michael J. Rigas is Vice Chairman and a Director of the Company,
Executive Vice President, Operations and a Director of Adelphia and a Vice
President and Director of Adelphia's other subsidiaries. He has been with
Adelphia since 1981. From 1979 to 1981, he worked for Webster, Chamberlain &
Bean, a Washington, D.C. law firm. Mr. Rigas graduated from Harvard University
(magna cum laude) in 1976 and received his Juris Doctor degree from Harvard Law
School in 1979.
<PAGE>

Timothy J. Rigas is Vice Chairman, Chief Financial Officer,
Treasurer and a Director of the Company, Executive Vice President, Chief
Accounting Officer, Treasurer and a Director of Adelphia, and a Vice President
and Director of Adelphia's other subsidiaries. He has been with Adelphia since
1979. Mr. Rigas graduated from the University of Pennsylvania, Wharton School,
with a B.S. degree in Economics (cum laude) in 1978.

Daniel R. Milliard is President, Chief Operating Officer,
Secretary and a Director of the Company, and Senior Vice President and Secretary
and a Director of Adelphia and its other subsidiaries. Mr. Milliard currently
spends substantially all of his time on concerns of the Company. He has been
with Adelphia since 1982. He served as outside general counsel to Adelphia's
predecessors from 1979 to 1982. Mr. Milliard graduated from American University
in 1970 with a B.S. degree in Business Administration. He received an M.A.
degree in Business from Central Missouri State University in 1971, where he was
an Instructor in the Department of Finance, School of Business and Economics,
from 1971-73, and received his Juris Doctor degree from the University of Tulsa
School of Law in 1976. He is a member of the Board of Directors of Citizens Bank
Corp., Inc. in Coudersport, Pennsylvania and is President of the Board of
Directors of the Charles Cole Memorial Hospital.

Charles R. Drenning has served as Senior Vice President,
Engineering Operations effective October 1996, and has been a Director of the
Company since October 1991. Prior to joining Hyperion as Vice President,
Engineering Operations in October 1991, Mr. Drenning was a District Sales
manager for Penn Access Corporation. In addition, he has over 22 years
experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, accounting, data processing,
research and development, and strategic planning. Mr. Drenning began his career
with AT&T as a member of the technical staff of Bell Laboratories in Columbus,
Ohio. His seven years of research work at the laboratories included both
hardware and software development for central office switching equipment. Mr.
Drenning holds a B.S. in Electrical Engineering and an M.S. in Computer
Information Science from Ohio State University. He is a member of the
Pennsylvania Technical Institute and IEEE.

Paul D. Fajerski has served as Senior Vice President, Marketing
and Sales effective October 1996, and has been a Director of the Company since
October 1991. Prior to joining Hyperion as Vice President, Marketing and Sales
in October 1991, Mr. Fajerski was a District Sales Manager for Penn Access
Corporation, a competitive access provider in Pittsburgh, Pennsylvania. In
addition, he has over 13 years experience with AT&T and the Bell System where he
served in a number of executive level positions in sales and marketing. Mr.
Fajerski holds a B.S. in Business Administration from the College of
Steubenville.

Randolph S. Fowler has served as Senior Vice President, Business
Development and Regulatory Affairs effective October 1996, and has been a
Director of the Company since October 1991. Prior to joining Hyperion as Vice
President, Business Development and Regulatory Affairs in October 1991, Mr.
Fowler was Vice President of Marketing for Penn Access Corporation, a
competitive access provider in Pittsburgh, Pennsylvania. He previously served
for four years as Director of Technology Transfer and Commercial Use of Space in
two NASA-sponsored technology transfer programs. In addition, he has over 17
years experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, operations, human resources,
business controls, and strategy development. Mr. Fowler holds a B.S. in Business
Administration from the University of Pittsburgh. He has developed and taught
courses in Marketing, Network Management, and Regulation for the University of
Pittsburgh's Graduate Program in Telecommunications.

Pete J. Metros became a director of Hyperion on April 1, 1997.
Mr. Metros has been President and a member of the Board of Directors of Rapistan
Demag Corporation, a subsidiary of Mannesmann AG, since December 1991. From
August 1987 to December 1991, he was President of Rapistan Corp., the
predecessor of Rapistan Demag Corporation, and of Truck Products Corp., both of
which were major subsidiaries of Lear Siegler Holdings Corp. From 1980 to August
1987, Mr. Metros was President of the Steam Turbine, Motor & Generator Division
of Dresser-Rand Company. From 1964 to 1980, he held various positions at the
General Electric Company, the last of which was Manager--Manufacturing for the
Large Gas Turbine Division. Mr. Metros is also on the Board of Directors of
Borroughs Corporation of Kalamazoo, Michigan. Mr. Metros is a director of
Adelphia Communications Corporation since 1986 and received a BS degree from the
Georgia Institute of Technology in 1962.

<PAGE>

James L. Gray became a director of Hyperion on April 1, 1997. Mr.
Gray has been chairman & CEO of PRIMESTAR Partners since January 1995. Mr. Gray
has more than 20 years of experience in the telecommunications, cable and
satellite industries. He joined Warner Cable in 1974, and advanced through
several division operating posts prior to being named president of Warner Cable
in 1986. In 1992, after the merger of Time Inc. and Warner Communications, Mr.
Gray was appointed vice chairman of Time Warner Cable where he served until his
retirement in 1993. Mr. Gray has served on the boards of several
telecommunications companies and associations, including the National Cable
Television Association, where he served as a director from 1986 to 1992, and
Turner Broadcasting System, where he served as a director from 1987 to 1991. He
also served as chairman of the executive committee and director of C-SPAN and as
a director of E! Entertainment Television, Cable in the Classroom and the Walter
Kaitz Foundation. Beginning in 1992, Mr. Gray began serving on PRIMESTAR's board
of directors. Mr. Gray received a bachelor's degree from Kent State University
in Kent, Ohio and a master's degree in business administration (MBA) from the
State University of New York at Buffalo.

In addition to the above, Edward E. Babcock, an officer and Vice
President, Finance of the Company, serves as Chief Accounting Officer.

Board Committees

The Special Nominating Committee of the Board of Directors was
established in October 1996 and consists of the following members: John J.
Rigas, Michael J. Rigas and Daniel R. Milliard (with Timothy J. Rigas and James
P. Rigas as alternates). The Special Nominating Committee is empowered to expand
the number of seats on the Board of Directors up to 12 at any time prior to the
next annual meeting of the stockholders of the Company, and to fill the
vacancies created thereby. In addition on April 15, 1997, the Special Nominating
Committee expanded the number of seats on the Board of Directors by two and
filled the vacancies created thereby with independent persons who are not
employees of the Company or its subsidiaries. The new members of the board are
James L. Gray and Pete J. Metros.

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information regarding
compensation paid by the Company for services rendered during the Company's last
three fiscal years ending March 31, 1997 to the Company's President and the
other most highly compensated executive officers whose total annual salary and
bonus exceeds $100,000.
<TABLE>
<CAPTION>

Annual Compensation
Long Term
Compensation
Fiscal Year Restricted Stock All Other
Name and Principal Position(a) Salary Bonus Awards Compensation

<S> <C> <C> <C> <C> <C>
Daniel R. Milliard(b) 1997 $ 238,863 $ 75,000 $ 156,000 $ 5,340(d)
President, Chief Operating Officer and Secretary 1996 207,474 -- -- 5,250(d)
1995 187,412 -- -- 5,350(d)

Charles R. Drenning 1997 $ 167,712 $ 12,500 -- --
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --

Paul D. Fajerski 1997 $ 167,712 $ 12,500 -- --
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --

Randolph S. Fowler 1997 $ 167,712 $ 12,500 -- --
Senior Vice President 1996 139,982 25,000 -- --
1995 128,254 17,345 -- --
<FN>
----------
(a) James P. Rigas, Michael J. Rigas and Timothy J. Rigas are not employed
by the Company, and the Company does not reimburse Adelphia for any
services they provide to the Company.

(b) During the periods presented except for March 1997, Daniel R. Milliard
was not employed by the Company, but was compensated by Adelphia for
his services to the Company pursuant to an employment agreement with
Adelphia. During such periods, the Company reimbursed Adelphia for Mr.
Milliard's base salary, insurance premium payments and other benefits
paid by Adelphia. During March 1997, the Company entered into an
employment agreement with Mr. Milliard. See "--Employment Contracts."

(c) Mr. Milliard was granted a restricted stock bonus award under the 1996
plan for 104,000 shares of Class A Common Stock pursuant to his
employment agreement on March 4, 1997. The 104,000 shares are not
subject to vesting, will participate in any dividends, and had a value
of approximately $156,000 as of March 4, 1997.

(d) Fiscal 1997, 1996 and 1995 amounts include (i) life insurance premiums
paid during each respective fiscal year pursuant to the employment
agreement of Daniel R. Milliard with Adelphia, in the premium payment
amounts of $4,590 during Fiscal 1997, $4,600 during Fiscal 1996, and
$4,500, during Fiscal 1995, on policies owned by Mr. Milliard and (ii)
$750 in matching contributions for Mr. Milliard under Adelphia's 401(k)
savings plan for each of Fiscal 1997, 1996 and 1995.
</FN>
</TABLE>

Director Compensation

The directors do not currently receive any compensation for
services rendered to the Company in their capacities as directors.

Long-Term Incentive Compensation Plan

The Company's 1996 Long-Term Incentive Compensation Plan (the
"1996 Plan") provides for the grant of options which qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), options which do not so qualify, share awards (with or
without restrictions on vesting), stock appreciation rights and stock equivalent
or phantom units. The number of shares of Class A Common Stock available for the
issuance of such options, awards, rights and phantom stock units under the 1996
Plan initially will be 1,750,000. Such number is to increase each year by a
number of shares equal to one percent (1%) of outstanding shares of all classes
of Common Stock, up to a maximum of 2,500,000 shares. Options, awards
<PAGE>

and units may be granted under the 1996 Plan to directors, officers, employees
and consultants. The purposes of the 1996 Plan are to encourage ownership of the
Class A Common Stock by directors, executive officers, employees and
consultants; to induce them to remain employed or involved with the Company; and
to provide additional incentive for such persons to promote the success of the
Company. Any shares subject to the Plan in excess of 1,000,000 shares will
require the consent of the Management Stockholders (as defined below) under the
Plan. No stock options, stock awards, stock appreciation rights or phantom stock
units have been granted under the Plan, except for 122,000 shares of Class A
Common Stock issued to Mr. Milliard pursuant to his employment agreement
discussed below, of which 104,000 shares were issued on March 4, 1997 and 18,000
shares were issued on April 1, 1997 as stock bonuses pursuant to such agreement.

Employment Contracts

The Company and Mr. Milliard have entered into an employment
agreement which provides for his employment as President and Chief Operating
Officer of the Company. The agreement includes the following provisions: (i) a
base salary of at least $230,000, to be increased from time to time to be
comparable to salaries paid by comparable companies for comparable positions,
(ii) an annual cash bonus, subject to achievement of certain benchmarks, of up
to 50% of base salary, (iii) a stock bonus of 104,000 shares of Class A Common
Stock, stock options to purchase 25,000 shares of Class A Common Stock at fair
market value of the Class A Common Stock on the date of issuance of such
options, such options to be granted on the first day of each of the next four
fiscal years, commencing April 1, 1997 and the ability to receive, upon
attainment of certain benchmarks, stock options to purchase 25,000 shares of
Class A Common Stock with an exercise price equal to the fair market value of
the Class A Common Stock on the date of issuance of such options, such options
to be granted during fiscal 1997 and each of the next four fiscal years;
provided, that until an initial public offering of the Class A Common Stock is
completed, the Company shall grant stock bonuses in lieu of any stock options
required to be granted under the employment agreement, such stock bonuses to be
in an amount equal to 72% of the shares of Class A Common Stock that would have
been covered by said options, (iv) a cash bonus of $75,000, a portion of which
will be used to repay outstanding loans to Adelphia, and (v) certain employee
benefits. It is expected that all such stock options will be granted under the
1996 Plan. The initial term of the proposed employment agreement expires on
March 31, 2001, unless terminated earlier for cause (as defined therein) or due
to death or disability. The agreement also provides that upon a
change-in-control (as defined therein) of the Company, the obligations under the
agreement, if not assumed, would be canceled in exchange for a payment by the
Company equal to the remaining base salary and options required to be granted
under the initial term of the agreement. The employment agreement also contains
provisions with respect to confidentiality, non-competition and non-solicitation
of customers, suppliers and employees. Mr. Milliard will continue to serve as a
director, senior vice president and secretary of Adelphia, although he will
receive no additional compensation for serving in such capacities.

Each of Messrs. Drenning, Fajerski and Fowler (the "Management
Stockholders") have employment agreements with the Company which expire on
October 20, 1998. The employment agreements provide for base salary, bonuses and
benefits, and contain noncompetition and nondisclosure provisions. The
employment agreements also provide for base pay and bonuses to be paid to each
Management Stockholder that are comparable to industry average base pay and
bonuses paid by comparable companies for comparable positions.

Compensation Committee Interlocks and Insider Participation

The Company's Board of Directors currently does not, and during
Fiscal 1997 did not, have a Compensation Committee. Consequently, all Directors
have participated in deliberations concerning executive officer compensation,
including decisions relative to their own compensation. See "Certain
Relationships and Transactions."

<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the
Company's Class A Common Stock and Class B Common Stock as of June 1, 1997 by
(i) each person known by the Company to be a beneficial owner of more than 5% of
either the Class A Common Stock or Class B Common Stock, (ii) the directors and
executive officers and (iii) all directors and executive officers as a group.

<TABLE>
<CAPTION>
Total
Class A Class B Common Stock
Common Stock Common Stock (%)
Adelphia Communications
<S> <C> <C> <C>
Corporation (a)(b) ................................................... (b) 8,900,020 87.93
Daniel R. Milliard ................................................... 122,000 0 1.21
Charles R. Drenning (c) .............................................. (b) 366,660 3.62
Paul D. Fajerski (c) ................................................. (b) 366,660 3.62
Randolph S. Fowler (c) ............................................... (b) 366,660 3.62
All executive officers and directors as a group (eight persons)(a) ... 122,000 10,000,000(d) 100.00
<FN>

------------
(a) The business address of Adelphia Communications Corporation is the same as
that of the Company. In their capacity as executive officers of Adelphia,
the following persons share or may be deemed to share voting and
dispositive power over the shares of Common Stock owned by Adelphia,
subject to the discretion of the Board of Directors of Adelphia: John J.
Rigas, Michael J. Rigas, Timothy J.
Rigas, James P. Rigas and Daniel R. Milliard.

(b) Each share of Class B Common Stock is convertible at any time at the option
of the holder into an equal number of shares of Class A Common Stock.
Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to 10 votes per share on all
matters submitted to a vote of stockholders.

(c) The business address of each such holder is 2570 Boyce Plaza, Pittsburgh,
Pennsylvania 15241. Includes with respect to (i) Mr. Drenning, an aggregate
of 80,000 shares of Class B Common Stock held in trust for the benefit of
Mr. Drenning's children for which his spouse serves as co-trustee and as to
which shares Mr. Drenning has neither the power to dispose nor the power to
vote; and (ii) Mr. Fajerski, an aggregate of 80,000 shares held in trust
for the benefit of Mr. Fajerski's children for which his spouse serves as
co-trustee and as to which shares Mr. Fajerski has neither the power to
dispose nor the power to vote.

(d) Includes 8,900,020 shares of Class B Common Stock held by Adelphia, for
which the following executive officers and directors of the Company share or may
be deemed to share voting and dispositive power over the shares, subject to the
discretion of the Board of Directors of Adelphia: John J. Rigas, Michael J.
Rigas, Timothy J. Rigas, James P. Rigas and Daniel R. Milliard.
</FN>
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was founded in October 1991. From the Company's
inception through March 31, 1997, Adelphia, which owns 88% of the Company's
outstanding Common Stock provided all the equity capital to the Company and also
made loans and advances totaling approximately $50.9 million. The Company repaid
$25 million of such indebtedness to Adelphia from the proceeds of the offering
of Senior Notes and Warrants on April 15, 1996, on which date the remaining
$25.9 million, including accrued interest and fees of approximately $1.2 million
for the period January 1, 1996 through April 15, 1996, was evidenced by the
Adelphia Note, an unsecured subordinated note due April 16, 2003 that accrues
interest at an annual rate of 16.5% and is subordinated to the Senior Notes.
Interest on the Adelphia Note is payable quarterly in cash, through the issuance
of identical subordinated notes or in any combination thereof, at the option of
the Company. Interest (excluding fees relating to amounts borrowed) accrued on
the indebtedness to Adelphia at an annual rate of 11.3% prior to April 15, 1996.
Proceeds from the Senior Notes and Warrants were also used to repay amounts
related to capital expenditures, working capital requirements, operating losses
and pro-rata investments in joint ventures totaling $12.8 million incurred
during the period from January 1, 1996 to April 15, 1996. These amounts had been
funded during the same time period through advances from Adelphia.

Messrs. Drenning, Fajerski and Fowler together hold 11% of the
Company's outstanding Common Stock prior to the Offering, and are parties to a
shareholder agreement, as amended ("Shareholder Agreement") with Adelphia. The
Shareholder Agreement provides, among other things, (i) that upon the earlier of
(a) the termination of employment of any Management Stockholder or (b) after
October 7, 1998, such Management Stockholder may
<PAGE>

put his shares to Adelphia for fair market value, unless such put rights are
terminated as a result of the registration of the Company's Common Stock under
the Securities Act; (ii) for Adelphia to vote its shares in the Company to elect
each Management Stockholder to the Board of Directors of the Company; and (iii)
for certain buy/sell and termination rights and duties among Adelphia and the
Management Stockholders. The Shareholder Agreement terminates automatically upon
the date when the Company's Common Stock is registered under the 1933 Act or
1934 Act and the Management Stockholders have the opportunity to sell their
shares pursuant to the registration rights agreement discussed below.

The Company has also entered into Term Loan and Stock Pledge
Agreements ("Loan Agreements") with each of the Management Stockholders.
Pursuant to the Loan Agreements, each Management Stockholder has borrowed $1
million from the Company. Each of these loans accrues interest at the average
rate at which the Company can invest cash on a short-term basis, is secured by a
pledge of the borrower's Common Stock in the Company, and matures upon the
earlier of (i) October 8, 1998 or (ii) the date when the Company's Common Stock
is registered under the 1933 Act and the Management Stockholders have the right
to sell their shares pursuant to the registration rights agreement discussed
below. Each Loan Agreement also provides that any interest accruing on a loan
from the date six months after the date of such loan shall be offset by a bonus
payment which shall be paid when principal and interest thereon are due and
which shall include additional amounts to pay income taxes applicable to such
bonus payment.

The Company and the Management Stockholders have entered into a
registration rights agreement, as amended whereby the Company has agreed to
provide the Management Stockholders with one collective demand registration
right relating to the Common Stock owned by them or certain permitted
transferees. Such demand registration right may be exercised beginning six
months after the completion of the Company's initial public offering and
terminated upon the earlier of (i) the sale or disposition of all of such Common
Stock or (ii) the date on which all such shares of Common Stock become freely
tradable pursuant to Rule 144.

The Company and Adelphia have entered into a registration rights
agreement whereby the Company has agreed to provide Adelphia and certain
permitted transferees with two demand registration rights per year under certain
conditions, including that any such demand be with respect to shares with a
minimum of $10 million in market value, and with certain piggyback registration
rights in future public offerings of the Common Stock. Adelphia's demand
registration rights terminate at such time as Adelphia ceases to hold at least
$10 million in market value of Common Stock.

The Company, Adelphia and the Management Stockholders have agreed
generally, effective until October 7, 1998, that upon or following the
consummation of an initial public offering of the Common Stock of the Company,
(i) the Shareholder Agreement and Loan Agreements will terminate, (ii) the
Management Stockholders will each repay the $1 million borrowed from the Company
pursuant to the Loan Agreements with the proceeds from such offering or from
margin loans secured by Common Stock owned by such Management Stockholders, and
(iii) the Company will pay to the Management Stockholders bonus payments in the
amount of interest accruing on the margin loans for certain periods following
such public offering and any additional amounts necessary to pay income taxes
applicable to such bonus payments.

During Fiscal 1995, 1996 and 1997, the Company incurred charges
from Adelphia of $0.5, $0.4 and $1.2 million, respectively, for the provision to
the Company of shared corporate overhead services in areas such as personnel,
payroll, management information services, shared use of office, aircraft and
network facilities and support equipment. The Company expects that charges for
the provision of similar services by Adelphia to the Company, or by the Company
to Adelphia, will continue to be incurred or charged by the Company in the
future. The transactions related to the provision of these services have been
based on allocation of Adelphia's costs incurred for these services, and do not
necessarily represent the actual costs that would be incurred if the Company was
to secure such services on its own. During Fiscal 1995, 1996 and 1997, the
Company paid Adelphia or certain of Adelphia's affiliates, fiber lease payments
of $0.3, $1.0 and $0.7 million, respectively.
<PAGE>

During the year ended March 31, 1997, the Vermont Operating
Company purchased from Adelphia approximately 341 miles of SONET ring fiber
backbone presently used by the Vermont Operating Company for $6.5 million,
Adelphia's historical cost for such assets.

PART IV

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

Financial Statements, schedules and exhibits not listed have been
omitted where the required information is included in the consolidated financial
statements or notes thereto, or is not applicable or required.

(a)(1) A listing of the consolidated financial statements, notes
and independent auditors' report required by Item 8 are
listed on page 52 of this Annual Report on Form 10-K.

(2) Financial Statement Schedules: None

(3) Exhibits
<TABLE>
<CAPTION>

EXHIBIT NO. DESCRIPTION

<S> <C>
2.1 Purchase Agreement effective as of May 13, 1996 between Teleport
Communications Group Inc. and Hyperion Telecommunications of Florida, Inc.
(Incorporated herein by reference is Exhibit 2.1 to Registration Statement No.
333-06957 on Form S-4.)

3.1 Certificate of Incorporation of Registrant, together with all amendments
thereto. (Incorporated herein by reference is Exhibit 3.1 to Registration
Statement No. 333-12619 on Form S-1.)

3.2 Bylaws of Registrant. (Incorporated herein by reference is Exhibit 3.2 to
Registration Statement No. 333-12619 on Form S-1.)

4.1 Indenture, dated as of April 15, 1996, between the Registrant and Bank of
Montreal Trust Company. (Incorporated herein by reference is Exhibit 4.1 to
Registration Statement No. 333-06957 on Form S-4.)

4.2 First Supplemental Indenture, dated as of September 11, 1996, between, the
Registrant and Bank of Montreal Trust Company. (Incorporated herein by reference
is Exhibit 4.2 to Registration Statement No. 333-12619 on Form S-4.)

4.3 Form of 13% Senior Discount Note. (Incorporated herein by reference is
Exhibit 4.3 to Registration Statement No. 333-12619 on Form S-4.)

4.4 Registration Rights Agreement dated as of April 15, 1996, between the
Registrant and the Initial Purchasers. (Incorporated herein by reference is
Exhibit 4.3 to Registration Statement No. 333-06957 on Form S-4.)

4.5 Subordinated Note dated April 15, 1996 by the Company in favor of Adelphia.
(Incorporated herein by reference is Exhibit 4.3 to Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 0-21605).)

4.6 Form of Class A Common Stock Certificate. (Incorporated herein by reference
is Exhibit 4.1 to Registrant's Registration Statement on Form 8-A, dated October
23, 1996.)

10.1 Purchase Agreement dated as of April 10, 1996 between the Registrant and
Bear, Stearns & Co. Inc., Chase Securities Inc. and NationsBanc Capital Markets,
Inc. (collectively, the "Initial Purchasers"). (Incorporated herein by reference
is Exhibit 1.1 to Registration Statement No. 333-06957 on Form S-4.)
<PAGE>

10.2* Employment Agreement between the Registrant and Charles R. Drenning.
(Incorporated herein by reference is Exhibit 10.1 to Registration Statement
No. 333-06957 on Form S-4.)

10.3* Employment Agreement between the Registrant and Paul D. Fajerski.
(Incorporated herein by reference is Exhibit 10.2 to Registration Statement
No. 333-06957 on Form S-4.)

10.4* Employment Agreement between the Registrant and Randolph S. Fowler.
(Incorporated herein by reference is Exhibit 10.3 to Registration Statement
No. 333-06957 on Form S-4.)

10.5 Pre-Incorporation and Shareholder Restrictive Agreement between Adelphia,
Paul D. Fajerski, Charles R. Drenning and Randolph S. Fowler. (Incorporated
herein by reference is Exhibit 10.5 to Registration Statement No. 333-06957 on
Form S-4.)

10.6 Term Loan Note dated May 10, 1996 between Charles R. Drenning in favor of
Registrant in the amount of $1,000,000. (Incorporated herein by reference is
Exhibit 10.6 to Registration Statement No. 333-06957 on Form S-4.)

10.7 Term Loan Note dated May 10, 1996 between Paul D. Fajerski in favor of
Registrant in the amount of $1,000,000. (Incorporated herein by reference is
Exhibit 10.7 to Registration Statement No. 333-06957 on Form S-4.)

10.8 Term Loan Note dated May 10, 1996 between Randolph S. Fowler in favor of
Registrant in the amount of $1,000,000. (Incorporated herein by reference is
Exhibit 10.8 to Registration Statement No. 333-06957 on Form S-4.)

10.9 Term Loan and Stock Pledge Agreement dated May 10, 1996 between the
Registrant and Charles R. Drenning. (Incorporated herein by reference is Exhibit
10.9 to Registration Statement No. 333-06957 on Form S-4.)

10.10 Term Loan and Stock Pledge Agreement dated May 10, 1996 between the
Registrant and Paul D. Fajerski. (Incorporated herein by reference is Exhibit
10.10 to Registration Statement No. 333-06957 on Form S-4.)

10.11 Term Loan and Stock Pledge Agreement dated May 10, 1996 between the
Registrant and Randolph S. Fowler. (Incorporated herein by reference is Exhibit
10.11 to Registration Statement No. 333-06957 on Form S-4.)

10.12 Letter Agreement dated March 19, 1996 between the Registrant, Charles R.
Drenning, Paul D. Fajerski, Randolph S. Fowler and Adelphia. (Incorporated
herein by reference is Exhibit 10.12 to Registration Statement No. 333-06957 on
Form S-4.)

10.13 Warrant Agreement dated as of April 15, 1996, by and among Hyperion
Telecommunications, Inc. and Bank of Montreal Trust Company. (Incorporated
herein by reference is Exhibit 10.13 to Registration Statement No. 333-06957 on
Form S-4.)

10.14 Warrant Registration Rights Agreement dated as of April 15, 1996, by and
among Hyperion Telecommunications, Inc. and the Initial Purchasers.
(Incorporated herein by reference is Exhibit 10.14 to Registration Statement
No. 333-06957 on Form S-4.)

10.15 Form of Management Agreement. (Incorporated herein by reference is Exhibit
10.15 to Registration Statement No. 333-06957 on Form S-4.)

10.16* Employment Agreement between Hyperion Telecommunications, Inc. and Daniel
R. Milliard dated as of March 4, 1997. (Incorporated herein by reference is
Exhibit 10.03 to Current Report on Form 8-K of Adelphia Communications
Corporation dated May 1, 1997 (File Number 0-16014).)

10.17* 1996 Long-Term Incentive Compensation Plan. (Incorporated herein by
reference is Exhibit 10.17 to Registration Statement No. 333-13663 on Form S-1.)
<PAGE>

10.18 Registration Rights Agreement among Charles R. Drenning, Paul D. Fajerski,
Randolph S. Fowler, Adelphia Communications Corporation and the Company.
(Incorporated herein by reference is Exhibit 10.18 to Registration Statement No.
333-13663 on Form S-1.)

10.19 Registration Rights Agreement between Adelphia Communications Corporation
and the Company. (Incorporated herein by reference is Exhibit 10.19 to
Registration Statement No. 333-13663 on Form S-1.)

10.20 Extension Agreement dated as of January 8, 1997, among Hyperion
Telecommunications, Inc., Adelphia Communications Corporation, Charles R.
Drenning, Paul D. Fajerski, Randolph S. Fowler, and six Trusts named therein.
(Incorporated herein by reference is Exhibit 10.04 to Current Report on Form 8-K
of Adelphia Communications Corporation dated May 1, 1997 (File Number 0-16014).)

21.1 Subsidiaries of the Registrant. (Filed herewith.)

27.1 Financial Data Schedule.
- - ----------------------
<FN>

* Denotes management contracts and compensatory plans and arrangements required to be
identified by Item 14(a)(3).

The Registrant will furnish to the Commission upon request copies
of instruments not filed herewith which authorize the issuance of long-term
obligations of Registrant not in excess of 10% of the Registrant's total assets
on a consolidated basis.

(b) The Registrant did not file any Form 8-K reports during the
three months ended March 31, 1997, except for Forms 8-K dated March 17, 1997
(covering Items 5 and 7) and February 13, 1997 (covering Items 5 and 7).
No financial statements were filed therewith.

(c) The Company hereby files as exhibits to this Form 10-K the
exhibits set forth in Item 14(a)(3) hereof which are not incorporated by
reference.

(d) The Company hereby files as financial statement schedules to
this Form 10-K the financial statement schedules set forth in Item 14(a)(2)
hereof.
</FN>
</TABLE>

<PAGE>

SIGNATURES

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

HYPERION TELECOMMUNICATIONS, INC.

June 20, 1997 By: /s/ Daniel R. Milliard
-----------------------
Daniel R. Milliard,
President and Chief Operating 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 registrant and in the capacities and on the dates indicated.

June 20, 1997 /s/ John J. Rigas
------------------
John J. Rigas,
Chairman and Director

June 20, 1997 /s/ Timothy J. Rigas
--------------------
Timothy J. Rigas,
Vice Chairman, Treasurer, Chief Financial
Officer and Director

June 20, 1997 /s/ Michael J. Rigas
--------------------
Michael J. Rigas,
Vice Chairman and Director

June 20, 1997 /s/ James P. Rigas
James P. Rigas,
Vice Chairman, Chief Executive Officer and
Director

June 20, 1997 /s/ Daniel R. Milliard
----------------------
Daniel R. Milliard,
President, Secretary, Chief Operating
Officer and Director

June 20, 1997 /s/ Charles R. Drenning
-----------------------
Charles R. Drenning
Senior Vice President and Director

June 20, 1997 /s/ Paul D. Fajerski
--------------------
Paul D. Fajerski
Senior Vice President and Director

June 20, 1997 /s/ Randolph S. Fowler
----------------------
Randolph S. Fowler
Senior Vice President and Director

June 20, 1997 __________________
Pete J. Metros,
Director

June 20, 1997 /s/ James L. Gray
-----------------
James L. Gray,
Director
<PAGE>

June 20, 1997 /s/ Edward E. Babcock Jr.
-------------------------
Edward E. Babcock, Jr.
Chief Accounting Officer

<PAGE>

EXHIBIT INDEX

Exhibit No. Description

21.1 Subsidiaries of the Registrant.

27.1 Financial Data Schedule.
<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT

Hyperion Enhanced Networks of Virginia, Inc. (Delaware corporation)

Hyperion Telecommunications of Arkansas, Inc. (Delaware corporation)

Entergy Hyperion Telecommunications of Arkansas, L.L.C.
(50% owned) (an Arkansas limited liability company)

Hyperion Telecommunications of Florida, Inc. (Florida corporation)

Continental Fiber Technologies, Inc. (20% owned) (Florida
corporation)

Hyperion Telecommunications of Kansas, Inc. (Delaware corporation)

Multimedia Hyperion Telecommunications (49.9% owned)
(Kansas general partnership)

Hyperion Telecommunications of Kentucky, Inc. (Delaware corporation)

Louisville Lightwave (50% owned) (New Jersey general partnership)

Hyperion Telecommunications of Louisiana, Inc. (Delaware corporation)

Entergy Hyperion Telecommunications of Louisiana, L.L.C.
(50% owned) (an Arkansas limited liability company)

Hyperion Telecommunications of Mississippi, Inc. (Delaware corporation)

Entergy Hyperion Telecommunications of Mississippi, L.L.C.
(50% owned) (an Arkansas limited liability company)

Hyperion Telecommunications of New Jersey, Inc. (Delaware corporation)

New Jersey Fiber Technologies (19.7% owned) (New Jersey general
partnership)

Hyperion Telecommunications of New York, Inc. (Delaware corporation)

NHT Partnership (40% owned) (New York general partnership)

NewChannels Hyperion Telecommunications (50% owned) (New York
general partnership)

Hyperion Telecommunications of Pennsylvania, Inc. (Delaware corporation)

PECO Hyperion Telecommunications (50% owned) (Pennsylvania
general partnership)

Hyperion Telecommunications of Harrisburg (50% owned)
(Pennsylvania general partnership)

Hyperion Susquehanna Telecommunications (50% owned)
(Pennsylvania general partnership)

<PAGE>

Hyperion Telecommunications of Tennessee, Inc. (Delaware corporation)

AVR of Tennessee, L.P. d/b/a Hyperion of Tennessee, L.P.
(95% owned) (California limited partnership)

Hyperion Telecommunications of Vermont, Inc. (Delaware corporation)

Hyperion Telecommunications of Virginia, Inc. (Virginia corporation)

Alternet of Virginia (37% owned) (Virginia general partnership)

<ARTICLE> 5
<LEGEND>
Financial Data Statement for Hyperion Telecommunications, Inc
for the Year ended March 31, 1997
</LEGEND>
<CIK> 0001017648
<NAME> HYPERION TELECOMMUNICATIONS, INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 59,814
<SECURITIES> 0
<RECEIVABLES> 768<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 60,582
<PP&E> 53,921<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 174,601
<CURRENT-LIABILITIES> 9,180
<BONDS> 213,028
0
0
<COMMON> 101
<OTHER-SE> (50,355)
<TOTAL-LIABILITY-AND-EQUITY> 174,601
<SALES> 0
<TOTAL-REVENUES> 5,088
<CGS> 0
<TOTAL-COSTS> 14,157
<OTHER-EXPENSES> (7,158)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,377
<INCOME-PRETAX> (30,288)
<INCOME-TAX> 259
<INCOME-CONTINUING> (30,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,547)
<EPS-PRIMARY> (2.88)
<EPS-DILUTED> (2.88)
<FN>
<F1>Receivables net of Allowance
<F2>PP&E net of Depreciation
</FN>

</TABLE>