RCN CORP /DE/, S-1, 1998-05-22

RCN CORP /DE/
S-1, 1998-05-22
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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As filed with the Securities and Exchange Commission on May 21, 1998
Registration No. 333-

===============================================================================

Washington, D.C. 20549

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

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

RCN CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware 4813 22-3498533
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation Code Number)
or organization)

105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Bruce Godfrey

RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

Keith L. Kearney Jonathan A. Schaffzin
Davis Polk & Wardwell Cahill Gordon & Reindel
450 Lexington Avenue 80 Pine Street
New York, New York 10017 New York, New York 10005
(212) 450-4000 (212) 701-3782

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

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.

If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective

registration statement for the same offering. [ ] ____
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective

registration statement for the same offering. [ ] ____
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
<TABLE>
===========================================================================================================
Proposed Maximum
Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Price(1) Registration Fee
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $1.00 per share....................... $ 287,500,000 $84,812.50
</TABLE>

- ------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.

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

The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.

===============================================================================

PRELIMINARY PROSPECTUS [RCN LOGO]
10,989,010 Shares
RCN Corporation
Common Stock

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

Of the 10,989,010 shares of Common Stock, par value $1.00 per
share (the "Common Stock") of RCN Corporation, a Delaware corporation (the
"Company" or "RCN"), offered hereby (the "Offering"), 10,583,032 shares are
being sold by the Company and the balance of 405,978 shares is being sold by
the Selling Stockholders (as defined herein). See "Underwriting." The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.

The Company's authorized capital stock includes Common Stock and
Class B Non-voting Common Stock, par value $1.00 per share ("Class B Stock,"
together, the "Common Equity") and Preferred Stock, par value $1.00 per share
(the "Preferred Stock"). The economic rights of each class of Common Equity are
identical, but voting and conversion rights differ. Holders of Common Stock are
entitled to one vote per share and holders of Class B Stock are not entitled to
vote. Shares of Common Stock are convertible into shares of Class B Stock. See
"Description of Capital Stock." The Common Stock is included for quotation in
The Nasdaq National Market ("Nasdaq") under the symbol "RCNC." On May 20, 1998
the last reported sale price of the Common Stock on Nasdaq was $22 per share.

See "Risk Factors" beginning on page 9 for a discussion of
certain factors that should be considered by prospective purchasers of the
Common Stock offered hereby.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

===============================================================================
Underwriting Proceeds to Selling Proceeds to
Price to Public Discount(1) Stockholders(2) Company(3)
- -------------------------------------------------------------------------------
Per Share.. $ $ $ $
Total(4)... $ $ $ $
===============================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of $ payable by the Selling
Stockholders.
(3) Before deducting estimated expenses of $ payable by the Company.
(4) The Company has granted the Underwriters an option exercisable within 30
days after the date hereof to purchase up to 1,648,351 additional shares of
Common Stock, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be , and ,
respectively. See "Underwriting."

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

The shares of Common Stock are offered by the several
Underwriters, subject to prior sale, when, as and if issued or delivered to
and accepted by them, subject to approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about , 1998.

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

Merrill Lynch & Co. Salomon Smith Barney

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

[C]
NationsBanc Montgomery Securities LLC
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated

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

The date of this Prospectus is May , 1998.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.

FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "SUMMARY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," IN ADDITION TO CERTAIN STATEMENTS CONTAINED
ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE THUS
PROSPECTIVE. SUCH FORWARD LOOKING STATEMENTS INCLUDE, IN PARTICULAR, STATEMENTS
MADE AS TO PLANS TO DEVELOP NETWORKS AND UPGRADE FACILITIES, THE MARKET
OPPORTUNITY PRESENTED BY MARKETS TARGETED BY THE COMPANY, THE COMPANY'S
INTENTION TO CONNECT CERTAIN WIRELESS VIDEO, RESALE TELEPHONE AND INTERNET
SERVICE CUSTOMERS TO ITS ADVANCED FIBER OPTIC NETWORKS, THE DEVELOPMENT OF THE
COMPANY'S BUSINESSES, THE CURRENT AND FUTURE MARKETS FOR THE COMPANY'S SERVICES
AND PRODUCTS, THE COMPANY'S ANTICIPATED CAPITAL EXPENDITURES, THE COMPANY'S
ANTICIPATED SOURCES OF CAPITAL AND EFFECTS OF REGULATORY REFORM AND
COMPETITIVE AND TECHNOLOGICAL DEVELOPMENTS. NO ASSURANCE CAN BE GIVEN THAT THE
FUTURE RESULTS COVERED BY THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED.
SUCH STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH
RISKS, UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "RISK
FACTORS," BEGINNING ON PAGE 9 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS
ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THEIR
MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT
POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND
SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."

SUMMARY

The following summary is qualified in its entirety by the more
detailed information (including the financial statements and the notes thereto)
included elsewhere herein. Except as otherwise noted, all information in this
Prospectus assumes no exercise of the Underwriters' overallotment option. All
share and per share data, stock option data and market prices (including
historical trading prices) of RCN Common Stock have been restated to reflect the
one for one stock dividend (the "Stock Dividend") declared on March 9, 1998 and
paid on April 3, 1998. Unless the context indicates otherwise, "RCN" or the
"Company" means RCN Corporation and its subsidiaries and joint ventures
(including unconsolidated entities).

The Company

RCN is developing advanced fiber optic networks to provide a
wide range of telecommunications services including local and long distance
telephone, video programming and data services (including high speed Internet
access), primarily to residential customers in selected high density markets.
RCN believes that its capability to deliver multiple services (telephone,
video programming and Internet access) to any given customer on its networks
will provide it with competitive advantages over other competitors. RCN's
strategy is to become the leading single-source provider of voice, video and
data services to residential customers in each of its markets by offering
individual or bundled service options, superior customer service and
competitive prices. The Company believes that it is the only publicly-
traded facilities-based provider of bundled voice, video and data services
to focus on the residential market in the U.S., and believes that it will
be the first competitive provider to its target markets.

RCN's initial advanced fiber optic networks have been
established in selected markets in the Boston to Washington, D.C. corridor,
including New York City, Boston and its surrounding communities and in the
Washington, D.C. area. The region, one of the most densely populated in the
United States, represents approximately 4% of the geography of the U.S., but
accounts for over 26% of the telecommunications market based upon the number
of telephone access lines. In the Boston market RCN operates its advanced
fiber optic network through a joint venture with the Boston Edison Company
("BECO"). The venture is managed and 51% owned by RCN and is accounted for
on a consolidated basis. RCN and BECO are presently in discussions with
respect to the conversion of a portion of BECO's interest in the BECO joint
venture into RCN Common Stock. In the Washington, D.C. market RCN is
developing an advanced fiber optic network through a joint venture named
Starpower Communications, LLC ("Starpower") with Pepco Communications,
L.L.C. ("Pepco Communications"), an indirect wholly owned subsidiary of
Potomac Electric Power Company ("PEPCO"). Starpower is owned 50% by RCN
and 50% by Pepco Communications and is accounted for under the equity
method of accounting. RCN believes that these joint ventures provide it
with a number of important advantages including access to rights of way and
the use of existing fiber optic facilities, the ability to enter its target
markets quickly and efficiently and a reduction in the up-front capital
investment required to develop its networks. In addition, the Company's
joint venture partners provide access to additional assets, equity capital
and established customer bases. The Company also benefits from its
relationship with its largest shareholder, Level 3 Communications, Inc.
("Level 3"), and from the experience gained by certain of the Company's key
employees who participated in the development of MFS Communications
Company, Inc.

Because it delivers multiple services, RCN reports the total
number of its various service connections (for local telephone, video
programming and Internet access) rather than the number of customers. See
"Business--RCN Services--Connections." As of March 31, 1998, the Company had
approximately 658,600 connections which were delivered through a variety of
owned and leased facilities including hybrid fiber/coaxial cable systems, a
wireless video system and advanced fiber optic networks. The Company is
deploying advanced fiber optic networks specifically designed to provide high
speed, high capacity telecommunications services for all new network facilities.
RCN also intends to upgrade certain of its hybrid fiber/coaxial cable systems to
enable them to provide the same range of voice, video and data services,
including bundled service options. See "Business--Properties." At March 31,
1998, RCN had approximately 20,300 total connections attributable to customers
connected to advanced fiber optic networks ("on-net" connections) and had
approximately 638,200 connections attributable to customers served through other
facilities ("off-net" connections). Off-net connections consist of
approximately 227,500 connections attributable to the Company's hybrid
fiber/coaxial cable systems in the states of New York (outside New York City),
New Jersey and Pennsylvania, all within 75 miles of New York City, and
approximately 325,000 Internet service customers gained upon completion of the
acquisitions of UltraNet Communications, Inc. ("UltraNet") and Erols Internet,
Inc. ("Erols") in February 1998. As a result of the Erols and UltraNet
acquisitions, RCN is a leading Internet service provider ("ISP") in the Boston
to Washington, D.C. corridor.

RCN's extensive operating experience in both the telephone and
video industries and in the design and development of telecommunications
facilities provides it with expertise in systems operation and development, an
established infrastructure for customer service and billing for both voice and
video services and established relationships with providers of equipment and
video programming. In addition, the Company's management team and board of
directors benefit from experience gained in connection with the management of
Commonwealth Telephone Enterprises Inc. ("Commonwealth Telephone") (formerly
C-TEC Corporation ("C-TEC")), which prior to September 30, 1997 owned and
operated RCN. See "Business--Relationship Among Commonwealth Telephone, RCN
and Cable Michigan." C-TEC has 100 years of experience in the telephone
business and nearly 25 years of experience in the cable television business.
Both C-TEC and certain members of management also have extensive experience in
the design and development of advanced telecommunications facilities.

RCN seeks to exploit competitive opportunities in selected
markets where population density, favorable demographics and the aging
infrastructure of the incumbent service providers' network facilities combine
to create a particularly attractive opportunity to develop advanced fiber
optic networks. The Company continues to evaluate new market areas both
within and outside of the Boston to Washington, D.C. corridor. The Company
believes that its experience in the Northeast will provide it with a key
strategic advantage if it decides to enter new markets.

Business Strategy

The Company believes that the opportunity to deploy effectively
advanced fiber optic networks and to compete with incumbent telephone and
cable television service providers results from several key factors, including
the broad deregulation of the telecommunications industry pursuant to the
Telecommunications Act of 1996, the need for more advanced, higher capacity
networks to meet growing consumer demands for new communications products and
services and the superior technology of the Company's networks. In order to
achieve its goal of becoming the leading provider of telecommunications, video
and data services to residential customers in its target markets, RCN is
pursuing the following key strategies:

Developing Advanced Fiber Optic Networks. RCN's advanced fiber
optic networks are specifically designed to provide a single source for high
speed, high capacity voice, video programming and data services. The Company
expects that the substantial growth of the Internet and demand for high speed
data service will play an important role in the demand for its fiber optic
networks. RCN believes that its high capacity advanced fiber optic networks
provide RCN with certain competitive advantages such as increased capacity
(including the ability to offer bundled voice, video and data services) and
generally superior signal quality and network reliability relative to the
typical networks of the incumbent service providers. By using advanced fiber
optic networks capable of delivering multiple services, RCN is able to address a
larger number of potential subscriber connections in its target markets than
incumbent service providers which typically provide only single or limited
services.

Focusing on Residential Customers in High-Density Markets. RCN
seeks to be the first operator of an advanced fiber optic network providing
voice, video and data services to residential customers in each of its target
markets. RCN believes that it is unique in its markets in offering a wide range
of bundled voice, video and data services to customers in residential areas and
in striving to connect residential customers directly to its advanced fiber
optic networks. The Company estimates that RCN's loop lengths are a small
fraction of the incumbents. RCN also believes that residential customers will
be attracted to lower prices, broader service offerings, enhanced levels of
customer care and consumer choice. Although the Company's primary focus is on
residential customers, RCN also serves certain commercial accounts which are
located on or in close proximity to its networks.

Implementing Subscriber-Driven Investment Strategy. RCN
attempts to deploy efficiently its capital by tying facility development to
the procurement of customer connections. In order to promote its presence in
its markets and to develop a subscriber base for its advanced fiber optic
networks, the Company may provide selected services to customers located near
its advanced fiber networks utilizing existing facilities that are available
in advance of network construction. For example, RCN markets Internet
services and provides resold telephone services in advance of constructing or
extending its networks. RCN also provides wireless video services to
approximately 40,859 customers in New York City (as of March 31, 1998) with a
view to extending the advanced fiber optic network to service many of these
existing customers.

Utilizing Strategic Alliances and Existing Facilities to Speed
and Reduce Cost of Entry. By utilizing strategic alliances, RCN is able to
enter the market quickly and efficiently and to reduce the up-front capital
investment required to develop its networks. Through alliances with companies
such as BECO, Pepco Communications and MFS Communications Company, Inc.
("MFS/WorldCom") (which is now a subsidiary of WorldCom, Inc. ("WorldCom")),
which provide or are expected to provide RCN with extensive fiber optic
networks or other assets, by utilizing certain components of its own existing
cable television infrastructure, and through the strategic acquisitions of
UltraNet and Erols, RCN has been able to expedite and reduce the cost of
market entry and business development and has created the opportunity to
leverage existing customer relationships.

Offering Bundled Voice, Video and Data Services. RCN believes
that, as a full service voice, video and data programming provider, it will be
able to offer a single-source package of voice, video and data services,
individually or on a bundled basis, which is not yet generally available from
any incumbent telephone, cable or other service provider. In addition,
services provided over RCN's advanced fiber optic networks are generally
priced at competitive rates as compared to the incumbent service providers.

Providing Superior Customer Service. RCN seeks to provide
superior customer service as compared to incumbent service providers, with
service features such as a 24-hour-a-day call center and quality control
system, on-time service guarantees and bundled service offerings, providing
the consumer with added choice and convenience.

Network Development and Financing Plan

In developing its advanced fiber optic networks, the Company
undertakes a subscriber-driven capital expenditure strategy whereby it (i)
closely monitors development of its subscriber base in order to direct network
deployment in each target market, and (ii) seeks to establish a customer base in
advance of or concurrently with its network deployment. As part of this
development plan, RCN pre-markets its services by offering Internet and resale
telephone (and, in New York City, wireless video) services in areas targeted for
expansion of advanced fiber optic network facilities. Depending upon factors
such as subscriber density, proximity to the advanced fiber optic network and
development costs and the degree of success achieved in its initial markets, the
Company will determine whether building its advanced fiber optic network in
additional high density target markets in the Northeast or elsewhere can be
achieved on an attractive economic basis.

The Company expects that it will require a substantial amount of
capital to fund the network development and operations in the Boston to
Washington, D.C. corridor, including funding the development of its advanced
fiber optic networks, upgrading its hybrid fiber/coaxial plant and funding
operating losses and debt service requirements. The Company currently estimates
that its capital requirements for the period from January 1, 1998 through 1999
will be approximately $785 million, which includes capital expenditures
(including connection costs which will only be incurred as the Company obtains
revenue-generating customer connections) of approximately $300 million in 1998
and approximately $485 million through 1999. As a result of more rapid
deployment of its fiber optic network and the Erols and UltraNet acquisitions,
certain aspects of the Company's capital expenditure program have been
accelerated. The Company's planned capital expenditures will be used principally
to fund the buildout of the Company's fiber optic network in high density areas
in selected markets in the Boston to Washington, D.C. corridor and to upgrade
its hybrid fiber/coaxial cable systems. In addition to its own capital
requirements, the Company's joint venture partners are each expected to
contribute approximately $150 million in capital to the joint ventures from
September 1997 through 2000 in connection with development of the Boston and
Washington, D.C. mid-markets. Immediately following the consummation of the
Offering, the Company will have approximately $1,152 million of cash and cash
equivalents and approximately $63 million of restricted cash. Such amounts are
expected to provide sufficient liquidity to meet the Company's capital
requirements through mid-2000.

The Company will continue to require additional capital for
planned increases in network coverage and other capital expenditures, working
capital, debt service requirements and anticipated further operating losses.
Sources of funding for the Company's further financing requirements may include
vendor financing, public offerings or private placements of equity and/or debt
securities, and bank loans. There can be no assurance that additional financing
will be available to the Company or, if available, that it can be obtained on a
timely basis and on acceptable terms. Due to its subscriber driven investment
strategy, should the Company encounter a successful rollout in its initial
markets and/or decide to enter additional markets, the Company may accelerate
the rollout and/or extend the reach of its network; such acceleration could
increase the Company's capital requirements. In addition, the commencement of
operations and development of any new markets could substantially increase the
Company's capital requirements. See "Risk Factors--Further Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

The Distribution

Prior to September 30, 1997, the Company was operated as a
wholly-owned subsidiary of C-TEC. On September 30, 1997 (the "Distribution
Date"), C-TEC completed a spin-off transaction by distributing all of the
shares of its subsidiaries, RCN and Cable Michigan, Inc. ("Cable
Michigan"), to the holders of C-TEC Common Equity. The Company,
Commonwealth Telephone and Cable Michigan have entered into certain
agreements governing various ongoing relationships between the three
companies, including a distribution agreement and a tax sharing agreement.
See "Business--Relationship Among Commonwealth Telephone, RCN and Cable
Michigan."

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

The Company's principal executive offices are located at 105
Carnegie Center, Princeton, New Jersey, and its telephone number is (609)
734-3700. The Company maintains a web site at http://www.rcn.com where general
information about the Company is available. Reference to the website shall
not be deemed to incorporate the contents of the website into this Prospectus.

The Offering

Common Stock Offered by the
Company....................... 10,583,032

Common Stock Offered by Selling
Stockholders.................. 405,978

Common Stock Outstanding as of
May 19, 1998.................. 57,849,558

Common Stock to be Outstanding
After the Offering............ 68,432,590

NASDAQ symbol....................... RCNC

Use of Proceeds..................... The net proceeds of the Offering will
be approximately $229 million (at an
assumed public offering price of $22.75
per share), after deducting estimated
commissions and offering expenses. The
proceeds from the Offering of Common
Stock will be used to fund operating
losses and for general corporate
purposes. See "Use of Proceeds." The
Company will not receive any proceeds
from the sale of the shares of stock
offered by the Selling Stockholders.

RISK FACTORS

Prospective investors should carefully consider all of the
information in this Prospectus and, in particular, should evaluate the
specific risk factors set forth under "Risk Factors," beginning on page 9.

Summary Historical Consolidated Financial Data

The table below sets forth selected historical consolidated
financial data for RCN. Prior to September 30, 1997, the Company operated as
part of C-TEC. The table below sets forth selected historical consolidated
financial data for RCN. The historical financial data presented below reflect
periods during which the Company did not operate as an independent company and,
accordingly, certain assumptions were made in preparing such financial data.
Therefore, such data may not reflect the results of operations or the financial
condition which would have resulted if the Company had operated as a separate,
independent company during such periods, and are not necessarily indicative of
the Company's future results of operation or financial condition.

The selected historical consolidated financial data for the
years ended December 31, 1994 and 1993 and as of December 31, 1995, 1994 and
1993 are derived from the Company's unaudited historical consolidated financial
statements not included in this Prospectus. The selected historical
consolidated financial data of the Company for the years ended December 31,
1997, 1996 and 1995 and as of December 31, 1997 and 1996 are derived from and
should be read in conjunction with the Company's audited historical
consolidated financial statements (the "Financial Statements") and the
Company's unaudited pro forma consolidated financial statements included
elsewhere in this Prospectus. The selected historical consolidated financial
data for the three month periods ended March 31, 1998 and 1997 and as of March
31, 1998 are derived from and should be read in conjunction with the Company's
unaudited historical consolidated financial statements included elsewhere in
this Prospectus. In the opinion of the Company's management, these three month
consolidated historical financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the unaudited interim periods. The results for such interim
periods are not necessarily indicative of the results for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Consolidated Financial Statements" and the
Financial Statements.

<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------------------- ----------------------
1993 1994 1995(1) 1996 1997 1997 1998
-------- --------- -------- --------- ---------- -------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales.................................. $ 49,504 $ 59,500 $ 91,997 $104,910 $ 127,297 $ 29,677 $ 40,138
Costs and expenses, excluding
depreciation and amortization........ 30,821 49,747 75,003 79,107 134,967 25,524 48,455
-------- -------- -------- -------- ---------- -------- ----------
EBITDA before nonrecurring
charges(2)......................... 18,683 9,753 16,994 25,803 (7,670) 4,153 (8,317)
Nonrecurring charges(3)................ -- -- -- -- 10,000 10,000 44,700
Depreciation and amortization.......... 9,922 9,803 22,336 38,881 53,205 12,191 17,691
-------- -------- -------- -------- ---------- -------- ----------
Operating (loss) income................ 8,761 (50) (5,342) (13,078) (70,875) (18,038) (70,708)
Interest income........................ 17,882 21,547 29,001 25,602 22,824 5,153 12,815
Interest expense....................... (17,127) (16,669) (16,517) (16,046) (25,602) (3,431) (22,735)
Other (expense) income, net............ 1,195 1,343 (304) (546) 131 (33) (899)
(Benefit) provision for income taxes... 167 2,340 1,119 979 (20,849) (4,800) (11,682)
Equity in loss of unconsolidated
entities(4).......................... -- -- (3,461) (2,282) (3,804) (805) (1,493)
Minority interest in loss (income) of
consolidated entities(5)............. (85) (95) (144) 1,340 7,296 910 3,586
Extraordinary charge--debt prepayment
penalty, net of tax of $1,728(7)..... -- -- -- -- (3,210) -- --
Cumulative effect of changes in
accounting principles(6)............... 1,628 (83) -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ----------
Net (loss) income...................... $12,087 $3,653 $ 2,114 $ (5,989) $ (52,391) $(11,444) $ (67,752)
======== ======== ======== ======== ========== ======== ==========
Balance Sheet Data (at end of period):
Total assets........................... $291,634 $568,586 (8) $649,610 $628,085 $1,150,992 $592,697 $1,578,232
Long-term debt......................... 181,500 154,000 135,250 131,250 686,103 131,250 1,053,324
Shareholders' equity................... 74,329 372,847 (8) 394,069 390,765 356,584 362,449 362,283
</TABLE>

- ------------
(1) Certain of the Company's businesses were acquired by C-TEC and transferred
to the Company in connection with the Distribution. In May 1995, a
subsidiary of C-TEC acquired Twin County Trans Video, Inc. ("Twin County")
and accordingly Twin County is fully consolidated in the Company's financial
statements since the date of acquisition. See Note 4 to the Consolidated
Financial Statements of the Company.

(2) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period and
should not be considered as an alternative to cash flows from operating,
investing or financing activities as determined in accordance with U.S.
GAAP. EBITDA is not a measurement under U.S. GAAP and may not be comparable
with other similarly titled measures of other companies.

(3) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to the
Company's wireless video services, and in 1998 represent nonrecurring costs
of $44,700 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.

(4) Equity in loss of unconsolidated entities primarily consists of the
Company's proportionate share of income (losses) and amortization of excess
cost over net assets of Megacable, S.A. de C.V. ("Megacable"). The Company
purchased its 40% equity interest in Megacable in January 1995 and accounts
for its investment by the equity method of accounting.

(5) In 1997, the minority interest in (income) loss of consolidated entities
consists of minority losses of the RCN-BECOCOM, LLC joint venture of
$6,562, minority losses of Freedom New York, L.L.C. ("Freedom") through
March 1997 of $966 and minority income earned by a cable television
partnership of $(232). The minority interest in (income) loss of
consolidated entities primarily consists of the approximately 20% minority
interest in the loss of Freedom in 1996. Prior to 1996 the minority interest
represents minority income earned by a cable television partnership.

(6) The cumulative effect of changes in accounting principles reflects the
adoption of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" in 1993 and the accounting for benefits under Statement of
Financial Accounting Standards No. 112-- "Employers' Accounting for
Postemployment Benefits" in 1994.

(7) Extraordinary charge represents the fee, net of taxes, paid in connection
with the early prepayment of 9.65% Senior Secured Notes of C-TEC Cable
Systems, Inc. (the "Senior Secured Notes"). The Senior Secured Notes were
prepaid in connection with the Company's acquisition of a new $125,000
credit agreement comprised of a five year revolving credit facility in the
amount of $25,000 and a $100,000 term credit facility which is to be repaid
over six years in quarterly installments from September 30, 1997 through
June 30, 2005.

(8) During 1994, C-TEC transferred to the Company an equity contribution of
$298,759 primarily representing net proceeds from a C-TEC common stock
rights offering.

Summary Pro Forma Financial Data

The following unaudited summary pro forma financial data
include adjustments to the historical statements of operations of the Company
for three months ended March 30, 1998 and the year ended December 31, 1997 as
if the Distribution, borrowings of $110 million under the Credit Agreement,
the offering (the "1997 Notes Offering") of the 10% Senior Notes and the
11(1)/(8)% Senior Discount Notes, both due 2007 (the "10% Senior Notes" and
"11(1)/(8)% Senior Discount Notes," respectively, and together, the "1997
Notes"), the acquisition of Erols (the "Acquisition"), the issuance of the
9.80% Senior Discount Notes due 2008 (the "9.80% Senior Discount Notes" or the
"1998 Notes") and the issuance of the Common Stock in the Offering had
occurred on the first day of the respective periods. Such adjustments result
primarily from changes in the capital structure of the Company and accounting
for the Acquisition. See "Unaudited Pro Forma Consolidated Financial
Statements" and the notes thereto. The following unaudited pro forma financial
data for the respective periods are provided for information purposes only and
should not be construed to be indicative of the Company's results of
operations or financial condition had such transactions occurred on the dates
assumed, may not reflect the results of operations or financial condition
which would have resulted had the Company been operated as a separate,
independent Company during such period, and are not necessarily indicative of
the Company's future results of operations or financial condition.

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Sales....................................................................... $ 141,273 $ 43,467
Costs and expenses, excluding depreciation and amortization................. 154,032 51,664
Nonrecurring charges........................................................ 10,000 44,700
Depreciation and amortization............................................... 61,421 18,829
--------- --------
Operating (loss)............................................................ (84,180) (71,726)
Interest income............................................................. 14,138 12,815
Interest expense............................................................ 106,037 (26,290)
Other (expense) income, net................................................. 82 (904)
--------- --------
(Loss) before income taxes.................................................. (175,997) (86,105)
(Benefit) for income taxes.................................................. (61,794) (13,902)
--------- --------
Income (loss) before equity in unconsolidated entities and minority interest (114,203) (72,203)
Equity in loss of unconsolidated entities................................... (17,224) (3,195)
--------- --------
(Loss) before extraordinary charge and minority interest in loss
of consolidated entities.................................................. $(131,427) $(75,398)
========= ========
Other Data:
EBITDA before nonrecurring charges (1)................................. $ (12,759) $ (8,197)
Capital expenditures (including joint ventures)........................ $ 90,392 $ 30,798
Connections (at end of period)......................................... 593,646 658,615
Full Time Employees (at end of period)................................. 1,446 1,606
</TABLE>

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

(1) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period and
should not be considered as an alternative to cash flows from operating,
investing or financing activities as determined in accordance with U.S.
GAAP. EBITDA is not a measurement under U.S. GAAP and may not be comparable
with other similarly titled measures of other companies.

RISK FACTORS

In addition to the other information contained in this
Prospectus, prospective investors should carefully review the following
factors.

This Prospectus contains certain forward-looking statements
regarding the Company's operations, economic performance and financial
condition, including, in particular, statements made as to plans to develop
networks and upgrade facilities, the market opportunity presented by markets
targeted by the Company, the Company's intention to connect certain wireless
video and resale telephone customers to its advanced fiber optic networks, the
development of the Company's businesses, the current and future markets for
the Company's services and products, the Company's anticipated capital
expenditures, the Company's anticipated sources of capital and effects of
regulatory reform and competitive and technological developments. Such
forward-looking statements are subject to known and unknown risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this
Section and elsewhere in this Prospectus. Such risks include, but are not
limited to, the Company's ability to successfully market its services to
current and new customers, connect existing customers to its advanced fiber
optic networks, access markets, finance network development, design and
construct fiber optic networks, install or lease fiber optic cable and other
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,
judicial, competitive and technological developments that could cause actual
results to vary materially from the future results indicated, expressed or
implied, in such forward-looking statements.

Limited Operating History; Negative Cash Flow; Operating Losses

The Company has only recently begun operating a voice, video
and data services business and this business has only a limited operating
history upon which investors may base an evaluation of its performance. In
connection with entering this business, the Company has incurred operating and
net losses and negative cash flows to build its networks and pursue its
business plans and expects to continue to do so for the foreseeable future as
it expands its network and customer base. The extent to which the Company
continues to experience negative cash flow in the future will be affected by a
variety of factors, including the pace of its entry into new markets, the time
and expense required for building out its planned network, its success in
marketing its services, the intensity of the competition experienced by the
Company and the availability of additional capital to pursue its business
plans. The Company had operating losses after depreciation and amortization
and nonrecurring charges of $70,875,000, $13,078,000 and $5,342,000 for the
years ended December 31, 1997, 1996 and 1995 and $70,708,000 for the three
months ended March 31, 1998. On a pro forma basis, after giving effect to the
transactions described under "Unaudited Pro Forma Consolidated Financial
Statements," the Company had operating losses after depreciation and
amortization and nonrecurring charges of $84,180,000 for the year ended
December 31, 1997 and $71,726,000 for the three months ended March 31, 1998.
There can be no assurance that the Company will achieve or sustain
profitability or positive cash flows from operating activities in the future.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Further Capital Requirements

The Company expects that it will require a substantial amount of
capital to fund the development and operations of business in the Boston to
Washington, D.C. corridor, including to fund its advanced fiber optic networks,
the upgrade of hybrid fiber/coaxial plant, the funding of operating losses and
debt service requirements. The Company currently estimates that its capital
requirements for the period from January 1, 1998 through December 31, 1999 will
be approximately $785 million, which includes capital expenditures (including
connection costs which will only be incurred as the Company obtains revenue
generating customer connections) of approximately $300 million in 1998 and
approximately $485 million through 1999. These capital expenditures will be used
principally to fund the buildout of the Company's fiber optic network in high
density areas in the Boston, New York and Washington, D.C. markets and represent
only the Company's proportionate share of the funding requirements of the Boston
and Washington, D.C. joint ventures. The Company is obligated to fund its
portion of any capital contributions required by the joint ventures' annual
budget or capital contribution schedule. See "--Dependence on Strategic
Relationships; Terms of Joint Venture Arrangements." The Company expects that
its joint venture partners will each contribute approximately $150 million in
capital to the joint ventures in the period from September 30, 1997 through
2000 in order to fund capital expenditures at the joint venture company
level, of which approximately $50.9 million has been contributed. RCN expects
to contribute to Starpower, the joint venture with Pepco Communications, the
subscribers acquired in the acquisition of Erols located in the Washington, D.C.
area in which Starpower operates. On February 20, 1998, approximately 61% of
all of Erols' subscribers were located in the relevant Washington, D.C. area.
RCN anticipates that Pepco Communications will make a contribution equal to the
value of such subscribers. The joint venture partners of Starpower are
currently negotiating the terms of such contribution. Failure by its joint
venture partner(s) to make anticipated capital contributions could have a
material adverse effect on the Company.

The Company believes that it has sufficient liquidity to meet its
capital requirements through mid-2000. The actual timing and amount of capital
required for the rollout of the Company's network and to fund operating losses
may vary materially from the Company's estimates and additional funds will be
required in the event of significant departures from the current business plan,
unforeseen delays (including those associated with adverse weather conditions),
cost overruns, engineering design changes and other technological risks or to
meet other unanticipated expenses. The Company will continue to require
additional capital for planned increases in network coverage and other capital
expenditures, working capital, debt service requirements and anticipated further
operating losses. In addition, the commencement of operations and buildout in
new markets would substantially increase the Company's capital requirements.
Sources of funding for the Company's further financing requirements may include
vendor financing, public offerings or private placements of equity and/or debt
securities, and bank loans. The Company continually evaluates its capital
raising opportunities, and is considering, subject to market conditions, a
possible public offering or private placement of additional debt securities
during the second or third quarter of 1998. There can be no assurance that
additional financing will be available to the Company or, if available, that it
can be obtained on a timely basis and on acceptable terms. Failure to obtain
such financing could result in the delay or curtailment of the Company's
development and expansion plans and expenditures. Any of these events could
impair the Company's ability to meet its debt service requirements and could
have a material adverse effect on its business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Substantial Indebtedness; Effect of Financial Leverage

The Company has indebtedness that is substantial in relation to
its shareholders' equity and cash flow. As of March 31, 1998, on a pro forma
basis, after giving effect to the transactions described under "Unaudited Pro
Forma Consolidated Financial Statements," the Company had an aggregate of
approximately $1,053 million of indebtedness outstanding, representing 64.0%
o of total capitalization, and the ability to borrow up to an additional $22
million under the Credit Agreement. As a result of the substantial
indebtedness of the Company, the Company's fixed charges are expected to
exceed its earnings for the foreseeable future and there can be no assurance
that the Company's operating cash flow will be sufficient to pay interest on
the 1997 Notes or the 1998 Notes following February 15, 2003. In addition, the
Company will require substantial additional indebtedness, particularly in
connection with the buildout of the Company's networks and the introduction of
its telecommunications services to new markets. The leveraged nature of the
Company could limit its ability to effect future financings or may otherwise
restrict the Company's business activities.

The extent of the Company's leverage may have the following
consequences: (i) limit the ability of the Company to obtain necessary
financing in the future for working capital, capital expenditures, debt
service requirements or other purposes, (ii) require that a substantial
portion of the Company's cash flows from operations be dedicated to the
payment of principal and interest on its indebtedness and therefore not be
available for other purposes; (iii) limit the Company's flexibility in
planning for, or reacting to, changes in its business; (iv) place the Company
at a competitive disadvantage as compared with less leveraged competitors; and
(v) render the Company more vulnerable in the event of a downturn in its
business.

Ability to Manage Growth; Risks Related to Acquisitions

The expansion and development of the Company's operations
(including the construction and development of additional networks) will depend
on, among other things, the Company's ability to access markets, design fiber
optic network backbone routes, install or lease fiber optic cable and other
facilities, including switches, and obtain rights-of-way, building access rights
and any required government authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions. In
addition to markets presently being developed, RCN is continually evaluating
other potential markets, both within the Boston to Washington, D.C. corridor and
in non-contiguous areas, for possible network development. As is the case
in its present markets, the Company intends to evaluate potential markets
in terms of population density and favorable demographics, and to apply a
subscriber-driven investment strategy, in developing new markets. There
can be no assurance that the Company will be able to expand its existing
network or to identify and develop new markets. Furthermore, the Company's
ability to manage its expansion effectively will also require it to
continue to implement and improve its operating and administrative systems
and attract and retain qualified management and professional and technical
personnel. If the Company were not able to manage its planned expansion
effectively it could have a material adverse effect on the Company.

The Company has experienced significant growth through
acquisitions and will continue to consider acquisition opportunities that
arise from time to time. Such acquisitions may place a significant strain on
the Company's resources, and could subject the Company to additional expenses
during the integration process. Although the Company's acquisitions of Erols
and UltraNet were consummated in February, 1998, the process of integrating
the business of the ISPs into the Company may take a significant period of
time. In addition, RCN expects that it will need to upgrade the systems
and controls of the companies being acquired. As a result, there can be no
assurance that the Company will be able to successfully integrate these
ISPs successfully or in a timely manner. See "--Risks Relating to
Provision of Internet Services."

Rapid Technological Changes

The telecommunication 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 its
ability to acquire necessary technologies, the effect of technological changes
on the business of the Company cannot be predicted. There can be no assurance
that technological developments in telecommunications will not have a material
adverse effect on the Company.

Dependence on Strategic Relationships; Terms of Joint Venture Arrangements

The Company has entered into a number of strategic alliances
and relationships in order to provide it with early entry into the market for
telecommunications services. As the Company's network is further developed, it
will be dependent on these arrangements to provide the full range of its
telecommunication service offerings. The key strategic relationships include
(1) RCN's arrangements with MFS/WorldCom to, among other things, lease
portions of MFS/WorldCom's fiber optic network in New York City and Boston,
(2) RCN's joint venture with BECO under which the Company has access to BECO's
extensive fiber optic network in Greater Boston and (3) RCN's joint venture
with Pepco Communications, an indirect subsidiary of PEPCO, to develop an
advanced fiber optic network in the Washington, D.C. market. See
"Business--Strategic Relationships." The Company also has in place
arrangements to act as a reseller of Bell Atlantic local telephone services
and arrangements to lease Bell Atlantic unbundled local loop and T-1
facilities (including Bell Atlantic services previously provided by NYNEX).
Any disruption of these relationships or arrangements could have a material
adverse effect on the Company. The Company has also executed comprehensive
telephone service co-carrier interconnection agreements with Bell Atlantic and
Sprint, covering, along with the District of Columbia, ten states in the
Northeast and New England-Middle Atlantic corridor areas, which the Company
has targeted as its initial geographic markets. The Company may be required to
negotiate new interconnection agreements from time to time and as it enters
new markets in the future. There can be no assurance that the Company will
successfully negotiate such other agreements for interconnection with the
incumbent local exchange carrier ("LEC") or renewals of existing
interconnection agreements. The failure to negotiate or renew required
interconnection agreements could have a material adverse effect on the Company.

The agreements governing the Company's joint ventures with BECO
and Pepco Communications contain material provisions for the management,
governance and ownership of the Greater Boston and Washington, D. C.
businesses, respectively. The Boston Joint Venture Agreement (as defined under
"Business--Strategic Relationships") provides, among other things, that (1)
certain fundamental business actions, such as material capital expenditures,
debt incurrences and distributions to the Company and BECO, require the joint
approval of RCN and BECO; (2) neither RCN nor BECO may transfer their
interests in the joint venture for a period of three years without the other's
consent and, thereafter, may only do so while observing certain rights of
first offer and tag-along rights; (3) upon a change of control (as defined
below) of RCN Telecom Services of Massachusetts ("RCN Massachusetts") or
BECOCOM, Inc. ("BECOCOM"), the other party has the right to acquire all of the
equity interest in the joint venture for fair market value; (4) following
certain deadlock events (defined generally as an inability of RCN and BECO to
agree upon certain fundamental business actions requiring mutual consent),
either RCN or BECO may offer to buy the other's interest in the joint venture
or sell its own interest in the joint venture, which gives the offeree the
right to elect to buy or sell its interest; and (5) in the event of a default
by the Company in meeting a capital call, BECO may dilute the Company's
interest in the joint venture. The Amended and Restated Operating Agreement
(the "Starpower Operating Agreement") for Starpower provides, among other
things, that (1) so long as each partner maintains a 50% interest in the joint
venture, all business actions require the approval of the operating committee;
(2) subject to certain exceptions, neither RCN nor Pepco Communications may
sell any interest in Starpower within the first four years after the execution
of the Starpower Operating Agreement nor may they thereafter sell any interest
in Starpower without satisfying certain conditions; (3) upon a change of
control of RCN Telecom Services of Washington, D.C., Inc. ("RCN Washington")
or Pepco Communications, which the other party has reason to believe will have
a material adverse effect on Starpower, the other party may offer to buy out
the entity experiencing the change of control or to sell its own interest in
the joint venture, which gives the offeree the right to elect to buy or sell
its interest or accept the change of control; (4) after three years following
the execution of the agreement, upon certain deadlock events (defined
generally as an inability of the operating committee to agree upon any
business actions), either RCN Washington or Pepco Communications may offer to
buy the other's interest in the joint venture or sell its own interest in the
joint venture, which gives the offeree the obligation to elect to buy or sell
its interest; and (5) failure to make scheduled capital contributions or to
vote in favor of certain additional capital contributions may result in
dilution of equity interests. Accordingly, certain matters beyond the control
of the Company, such as a change of control of RCN or an inability to agree on
certain proposed actions, could result in it being forced to sell its interest
in the relevant joint venture or buy out the interest of the other joint
venturer. There can be no assurance that these provisions will not have a
material adverse effect upon the Company's liquidity or future prospects or
that, if necessary, the Company will be able to raise the necessary funds to
acquire the balance of the interests in the joint venture on a timely basis
and thereby maintain its interest in the venture in question. See
"Business--Strategic Relationships." In addition, although certain covenants
contained in the indentures applicable to the 1997 Notes and the 1998 Notes
(the "Indentures") are applicable to the joint venture companies, neither the
joint venture companies nor the Company's joint venture partners are parties
to the Indentures and accordingly are not bound to comply with the terms of
the Indentures. A disagreement with its joint venture partners over certain
business actions, including actions related to compliance with the Indentures,
could give rise to a deadlock event.

Competition

With respect to local telephone services, RCN competes with the
incumbent LECs, and alternative service providers including competitive local
exchange carriers ("CLECs") and cellular and other wireless telephone service
providers. With respect to long distance telephone services, RCN faces, and
expects to continue to face, significant competition from the interexchange
carriers ("IXCs"), including AT&T, Sprint and MCI, which account for the
majority of all long distance revenue. Certain of the IXCs, including AT&T,
MCI and Sprint, have announced their intention to offer local services in
major U.S. markets using their existing infrastructure in combination with
resale of incumbent LEC service, lease of unbundled local loops or other
providers' services.

All of the Company's video services face competition from
alternative methods of receiving and distributing television signals and from
other sources of news, information and entertainment. Among the alternative
video distribution technologies are home satellite dish earth stations,
private satellite master antenna television systems, direct broadcast
satellite services ("DBS") and wireless program distribution services such as
multi-channel multipoint distribution service systems. The Company expects
that its video programming service will face growing competition from current
and new DBS service providers.

RCN believes that among the existing competitors, the incumbent
LECs and the incumbent cable providers provide the most direct competition to
RCN in the delivery of "last mile" connections to residential consumers for
voice and video services. In each of its target markets for advanced fiber
optic networks, RCN faces, and expects to continue to face, significant
competition from the incumbent LECs (including Bell Atlantic in New York City
and Boston), which currently dominate their local telephone markets. RCN
competes with the incumbent LECs in its markets for local exchange services on
the basis of product offerings (including the ability to offer bundled voice
and video services), reliability, state-of-the-art technology and superior
customer service, as well as price. The incumbent LECs have begun to expand
the amount of fiber facilities in their networks and to prepare to re-enter
into the long distance telephone services market and, in addition, have
long-standing relationships with their customers. The Company expects that the
increased competition made possible by regulatory reform will result in
certain pricing and margin pressures in the telecommunications services
business. The recently announced merger between SBC Communications ("SBC") and
Ameritech Corporation ("Ameritech") may also potentially increase the
competitive environment in the Boston to Washington, D.C. corridor if SBC
continues to pursue a nationwide strategy.

The Telecommunications Act of 1996 (the "1996 Act") permits the
incumbent LECs and others to provide a wide variety of video services directly
to subscribers in competition with RCN. Various LECs currently are providing
video services within and outside their telephone service areas through a
variety of distribution methods, including both the deployment of broadband
wire facilities and the use of wireless transmission facilities. The Company
cannot predict the likelihood of success of video service ventures by LECs or
the impact on the Company of such competitive ventures.

Certain of RCN's video programming service businesses compete
with incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes with Time Warner Cable, Cablevision
Systems and Comcast. RCN's Pennsylvania hybrid fiber/coaxial cable television
system competes with an alternate service provider, Service Electric Cable TV,
which also holds a franchise for the relevant service area.

RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the markets in which RCN offers
its services. Other CLECs, such as Teleport Communications Group, compete for
local telephone services, although they have to date focused primarily on the
market for commercial customers. In addition, potential competitors capable of
offering private line and special access services also include other smaller
long distance carriers, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators and private networks
built by large end-users, including Winstar, Dualstar and New Vision.
Cellularvision, a provider of local multipoint distribution service ("LMDS"),
offers wireless Internet and video programming services in New York City and
has announced plans to offer telephone service in the future.

The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
accordingly competition in this market is expected to intensify. The Company
competes (or in the future may compete) directly or indirectly with (i)
national and regional ISPs; (ii) established online services; (iii) computer
software and technology companies; (iv) national telecommunications companies;
(v) LECs; (vi) cable operators; and (vii) nonprofit or educational ISPs, and
some of these present or potential future competitors have or can be expected
to have substantially greater market presence and financial, technical,
marketing and other resources than the Company. Certain of the Company's
online competitors, including America Online, Inc. ("America Online"), the
Microsoft Network and Prodigy, have introduced unlimited access to the
Internet and their proprietary content at flat rates, and certain of the LECs
have also introduced competitive flat-rate pricing for unlimited access
(without a set-up fee for at least some period of time). Bell Atlantic has
recently filed with the Federal Communications Commission (the "FCC") a
petition for an exemption from a regulation prohibiting it from building a
high-speed network. Bell Atlantic's petition requests that such network, which
would serve as an Internet backbone, not be subject to pricing and other
regulatory restriction. The network would span the states from Maine to
Virginia. There can be no assurance that competition will not lead to pricing
pressures in the Internet business. For additional information on the
competitive environment in which the Company operates, see
"Business--Competition."

Other new technologies may become competitive with services
that RCN offers. Advances in communications technology as well as changes in
the marketplace and the regulatory and legislative environment are constantly
occurring. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may also create significant new
competitors to RCN. The Company cannot predict whether competition from such
developing and future technologies or from such future competitors will have a
material impact on its operations.

Regulation

The telephone and video programming transmission services
offered by the Company are subject to federal, state, and local government
regulation. The 1996 Act, which became effective in February 1996, introduced
widespread changes in the regulation of the communications industry, including
the local telephone, long distance telephone, data services, and television
entertainment segments in which the Company operates.

The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses, preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations,
and sets basic standards for relationships between telecommunications
providers.

Among other things, the 1996 Act removes barriers to entry in
the local exchange telephone market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow Regional Bell
Operating Companies ("RBOCs") to enter the long distance market within their
own local service regions.

Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. Numerous parties appealed certain aspects of these
regulations, and the appeals were consolidated in the United States Court of
Appeals for the Eighth Circuit. On July 18, 1997, the Eighth Circuit found
constitutional challenges to certain practices implementing cost provisions of
the Telecommunications Act that were ordered by certain state public utility
commissions ("PUCs") to be premature; vacated significant portions of the
FCC's nationwide pricing rules; and confined the use of combined unbundled
network elements to instances where the requesting carrier itself would do the
combining. On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the cost
of obtaining the use of combinations of an incumbent LEC's unbundled network
elements. On January 26, 1998, the Supreme Court granted a writ of certiorari
under which it will review the July 18 Eighth Circuit decision; it is expected
(but not yet certain) that the Court will hear arguments on this case in the
fall of 1998. The Eighth Circuit decisions create uncertainty about the rules
governing pricing and terms and conditions of interconnection agreements, and
could make negotiating and enforcing such agreements more difficult and
protracted and may require renegotiation of existing agreements. Prior to the
Eighth Circuit decisions, the Company had entered into interconnection
agreements with Bell Atlantic, covering all of its target market area, that
are generally consistent with the FCC guidelines, and those agreements remain
in effect notwithstanding the reversal of the FCC rules. There can be no
assurance, however, that the Company will be able to obtain or enforce future
interconnection agreements, or obtain renewal of existing agreements, on terms
acceptable to the Company.

Certain RBOCs have also raised constitutional challenges to
restrictions in the 1996 Act preventing RBOCs from entering the long distance
market in their home region. On December 31, 1997, the U.S. District Court for
the Northern District of Texas issued a decision (the "SBC Decision") finding
that Sections 271 to 275 of the Telecommunications Act of 1996 are
unconstitutional. SBC Communications, Inc., et al. v. Federal Communications
Commission, et al., Civil Action No. 7:97-CV-163-X. These sections of the 1996
Act impose restrictions on the lines of business in which the RBOCs may
engage, including establishing the conditions they must satisfy before they
may provide in-region interLATA (local access and transport area)
telecommunications services. The District Court has stayed the SBC Decision
pending appeal. If the stay is lifted, the RBOCs (including Bell Atlantic,
which was permitted to intervene in the case) would be able to provide
interLATA services immediately without satisfying the statutory conditions.
Although the Company believes the factual assumptions and legal reasoning in
the SBC Decision are erroneous and therefore the decision will likely be
reversed on appeal, there can be no assurance of this outcome. If the SBC
Decision were upheld on appeal it may have an unfavorable effect on the
Company's business for at least two reasons. First, RBOCs currently have an
incentive to foster competition within their service areas so that they can
qualify to offer interLATA services. The SBC Decision removes this incentive
by allowing RBOCs to offer interLATA service without regard to their progress
in opening their local markets to competition. However, the SBC Decision would
not affect other provisions of the Act which create legal obligations for all
incumbent LECs to offer interconnection and network access, and therefore will
not impair the Company's ability to compete in local exchange markets. Second,
the Company is legally able to offer its customers both long distance and
local exchange services, which the RBOCs currently may not do. This ability to
offer "one-stop shopping" gives the Company a marketing advantage that it would
no longer enjoy if the SBC Decision were upheld on appeal. The Company cannot
predict either the outcome of these or future challenges to the 1996 Act, any
related appeal of regulation or court decision, or the eventual effect on its
business or the industry in general.

The 1996 Act also makes far-reaching changes in the regulation
of the video programming transmission services offered by RCN, including
changes to the regulations applicable to video operators, the elimination of
restrictions on telephone company entry into the video business, and the
establishment of a new "open video systems" ("OVS") regulatory structure for
telephone companies and others to offer such services. Under the 1996 Act,
local telephone companies, including both incumbent LECs such as Bell
Atlantic, and CLECs such as RCN, may provide service as traditional cable
television operators subject to municipal cable television franchises, or they
may opt to provide their programming over non-franchised open video systems
subject to certain conditions, including, but not limited to, making available
a portion of their channel capacity for use by unaffiliated program
distributors and satisfying certain other requirements, including providing
capacity for public, educational and government channels, and payment of a
gross receipts fee equivalent to the franchise fee paid by the incumbent cable
television operator. RCN is one of the first CLECs to provide television
programming over an advanced fiber optic network pursuant to the OVS
regulations implemented by the FCC under the 1996 Act. As discussed below, RCN
is currently providing OVS service in the City of Boston and the City of New
York, and has entered into an OVS agreement to allow it to provide OVS
services in a number of communities surrounding Boston. Starpower is
negotiating similar agreements in Washington and surrounding communities.

RCN's voice business is subject to regulation by the FCC at the
federal level with respect to interstate telephone services (i.e., those that
originate in one state and terminate in separate states). State regulatory
commissions have jurisdiction over intrastate communications (i.e., those that
originate and terminate in the same state). See
"Business--Regulation--Regulation of Voice Services." Municipalities also
regulate limited aspects of RCN's voice business by, for example, imposing
various zoning requirements and, in some instances, requiring
telecommunications licenses, franchise agreements and/or installation permits
for access to local streets and rights-of-way. In New York City, for example,
RCN will be required to obtain a telephone franchise in order to provide voice
services using its advanced fiber optic network facilities located in the
streets of New York City.

In February 1997, RCN subsidiaries were certified to operate
OVS networks in the five boroughs of New York City and, as part of a joint
venture with Boston Edison, in Boston and 47 surrounding communities.
Initiation of OVS services is subject to negotiation of certain agreements
with local governments. RCN executed an agreement with the City of Boston on
June 2, 1997, and initiated OVS service in the City on that day. Pursuant to
its agreement with the City of Boston, RCN will be required to pay a fee to
the City equal to 5% of video revenues. RCN has entered into similar OVS
agreements or is in the process of negotiating agreements with certain other
Boston-area municipalities, either to offer OVS services or franchised cable
television services. It executed an agreement with the City of New York on
December 29, 1997, and has initiated OVS service in the Borough of Manhattan
pursuant to that agreement.

In areas where it offers video programming services as an OVS
operator, RCN is required to hold a 90-day open enrollment period every three
years, during which times RCN will be required to offer capacity on its
network to other video programming providers ("VPPs"). Under the OVS
regulations, RCN must offer at least two-thirds of its capacity to
unaffiliated parties, if demand for such capacity exists during the open
enrollment period. In certain areas, RCN is in discussions with local
municipal authorities to explore the feasibility of obtaining a cable
franchise in lieu of an OVS agreement, and will consider providing RCN video
service pursuant to franchise agreements rather than OVS certification, if
franchise agreements can be obtained on terms and conditions acceptable to
RCN. RCN will consider the relative benefits of OVS certification versus local
franchise agreements, including the possible imposition of universal service
requirements, before making any such decisions. In addition, the current FCC
rules concerning OVS are subject to appeal in the United States Court of
Appeals for the Fifth Circuit; if certain aspects of the FCC's rules are
overturned on appeal, the determination of whether to operate as an OVS
provider versus as a franchised cable television operator may be affected.
Moreover, the incumbent cable television provider in Boston, Cablevision
Systems, has requested that the FCC permit it to obtain capacity on and
information about RCN's Boston area OVS network, and Time Warner, the
incumbent cable television provider in certain communities in the Boston area,
has made a similar filing at the FCC with respect to its request for capacity
on and information about the Boston OVS network. In a Memorandum Opinion
Order released on April 28, 1998, the FCC's Cable Services Bureau granted in
part and denied in part Time Warner's petition. RCN has notified the FCC that
it will seek review of certain aspects of this order. RCN will continue to
oppose these requests made to the FCC, but to the extent that the FCC were to
grant any such request(s), such a result would likely affect the Company's
determination as to whether to operate as an OVS provider versus as a
franchised cable television operator.

Prior to its certification as an OVS provider, RCN offered
limited video programming services using the video dialtone ("VDT") services
offered by MFS/WorldCom in Manhattan and the City of Boston. In February,
1997, the FCC held that MFS/WorldCom's facilities did not qualify as video
dialtone facilities entitled to an extension of time to comply with the
newly-adopted OVS rules; nonetheless, the FCC did not direct MFS/WorldCom and
RCN to cease video programming distribution operations over the MFS/WorldCom
platform. One of the incumbent cable television companies in New York City has
filed a complaint with the New York Public Service Commission challenging the
former (pre-OVS) operations of RCN and WorldCom under the VDT framework, which
remains pending before that commission.

RCN's 18 GHz wireless video services in New York City are
distributed using microwave facilities provided by Bartholdi Cable Company
("Bartholdi Cable") pursuant to temporary authorizations issued to Bartholdi
Cable by the FCC. Bartholdi Cable has agreed to provide transmission services
to RCN until RCN has either converted the wireless video subscribers to its
advanced fiber optic network facilities or has obtained FCC authority to
provide such services pursuant to its own wireless radio licenses. In
addition, Bartholdi Cable has agreed to transfer to RCN the transmission
equipment on demand. Bartholdi Cable's obligation to provide transmission
services is subject to Bartholdi Cable having licenses from the FCC to provide
such services. The qualifications of Bartholdi Cable to hold certain of the
licenses needed to provide transmission services to RCN are at issue in an FCC
proceeding in which an initial decision (the "Initial Decision") was released
on March 6, 1998. In the Initial Decision, the Administrative Law Judge found
Bartholdi Cable unqualified with respect to 15 such licenses. The
Administrative Law Judge declared that the Initial Decision would become
effective 50 days after its release unless Bartholdi Cable filed exceptions to
the Initial Decision within 30 days of its release or the FCC elected to
review the case on its own motion. Bartholdi Cable filed exceptions to the
Initial Decision on April 7, 1998. Because of the uncertainty as to Bartholdi
Cable's right in the future to offer transmission services to RCN, the Company
filed its own license applications at the FCC for all of the microwave
transmission paths which are currently being used by Bartholdi Cable to
provide transmission services to RCN and, in light of the increased
uncertainties resulting from the Initial Decision in the FCC proceeding
involving certain of Bartholdi Cable's licenses, the Company expects now
actively to pursue its license applications. While the Company expects to
receive authorizations to transmit over these microwave paths, there can be no
assurance that RCN will be able to offer wireless video services pursuant to
its own FCC licenses or that the FCC's investigation will be resolved
favorably. The failure to obtain such license or resolve such proceedings
would materially adversely affect the Company's wireless video operations in
New York City.

There can be no assurance that RCN will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities in order to convert its wireless video subscribers to an
advanced fiber optic network.

RCN's hybrid fiber/coaxial cable systems are subject to
regulation under the Cable Television Consumer Protection and Competition Act
of 1992, as amended (the "1992 Act"), which provides, among other things, for
rate regulation for cable services in communities that are not subject to
"effective competition." On September 8, 1997, the Company was notified by the
FCC that it has ruled that certain of the Company's upper levels of service
for its New Jersey systems are regulated levels of service and that the
Company's rates for such levels of service have exceeded the allowable rates
under the FCC rate regulation rules which have been effective since September
1993. The Company had treated these levels of service as unregulated. The
Company is contesting this decision. The Company does not believe that the
ultimate resolution of this matter will have a material impact on its results
of operations or financial condition. With the passage of the 1996 Act all
cable systems rates will be deregulated as effective competition is shown to
exist in the franchise area, or by March 31, 1999, whichever date is sooner.
RCN anticipates that the remaining provisions of the 1992 Act that do not
relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will remain in place and may serve to
reduce the future operating margins of RCN's hybrid fiber/coaxial cable
television businesses as video programming competition develops in its cable
television service markets. Federal requirements also impose certain broadcast
signal carriage requirements that allow local commercial television broadcast
stations to require a cable system to carry the station, and that require
cable operators to set aside certain channels for public, educational and
governmental access programming. Because a cable communications system uses
local streets and rights-of-way, such cable systems are generally subject to
state and local regulation, typically imposed through the franchising process.
The terms and conditions of state or local government franchises vary
materially from jurisdiction to jurisdiction and generally contain provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, customer service standards,
franchise renewal, sale or transfer of the franchise, territory of the
franchisee and use and occupancy of public streets and types of cable services
provided.

RCN's ability to provide franchised cable television services
is dependent on its ability to obtain and renew its franchise agreements from
local government authorities on generally acceptable terms. As at the date of
this Prospectus, RCN has 91 franchise agreements relating to the hybrid
fiber/coaxial cable systems' networks in New York (outside New York City), New
Jersey and Pennsylvania. These franchises typically contain many conditions,
such as time limitations on commencement and completion of construction,
conditions of service, including the number of channels, the provision of free
service to schools and certain other public institutions, and the maintenance
of insurance and indemnity bonds. These franchises provide for the payment of
fees to the issuing authorities and generally range from 3% to 5% of revenues.
The duration of these outstanding franchises presently varies up to the year
2011. To date, all of RCN's cable franchises have been renewed or extended,
generally at or prior to their stated expirations and on acceptable terms.
Approximately 39 of RCN's hybrid fiber/coaxial cable system's franchises are
due for renewal within the next three years. No assurances can be given that
RCN will be able to renew its franchises on acceptable terms. No one franchise
accounts for more than 7% of RCN's total revenue. RCN's five largest
franchises account for approximately 27% of RCN's total revenue.

The data services business, including Internet access, is
largely unregulated at this time (apart from Federal, state, and local laws
and regulations applicable to businesses in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
Some jurisdictions have sought to impose taxes and other burdens on providers
of data services, and to regulate content provided via the Internet and other
information services. RCN expects that proposals of this nature will continue
to be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
additional costs on providers of Internet access service and other data
services to the extent they use local exchange telephone network facilities for
access to their customers, similar proposals may well be considered by the FCC
or Congress in the future. See "--Potential Liabilities Associated with
Internet Businesses."

The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
telephone and video programming industries. Other existing federal
regulations, copyright licensing, and, in many jurisdictions, state and local
franchise requirements, are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in
varying degrees, the manner in which communications companies operate. The
ultimate outcome of these proceedings, and the ultimate impact of the 1996 Act
or any final regulations adopted pursuant to the new law on RCN or its
businesses cannot be determined at this time. For additional information on
the regulatory environment in which the Company operates, see
"Business--Regulation."

Need to Obtain and Maintain Permits, Building Access Agreements and
Rights-of-Way

In order to develop its networks, the Company must obtain local
franchises and other permits, as well as building access agreements and rights
to utilize underground conduit and pole space and other rights-of-way and
fiber capacity from entities such as incumbent LECs and other utilities,
railroads, long distance companies, state highway authorities, local
governments and transit authorities. There can be no assurance that the
Company will be able to maintain its existing franchises, permits and rights
or to obtain and maintain the other franchises, permits, building access
agreements and rights needed to implement its business plan on acceptable
terms. Although the Company does not believe that any of the existing
arrangements will be canceled or will not be renewed as needed in the near
future, cancellation or non-renewal of certain of such arrangements could
materially adversely affect the Company's business in the affected area. In
addition, the failure to enter into and maintain any such required
arrangements for a particular network, including a network which is already
under development, may affect the Company's ability to acquire or develop that
network.

Ability to Procure Programming Services

The Company's video programming services are dependent upon
management's ability to procure programming that is attractive to its
customers at reasonable commercial rates. The Company is dependent upon third
parties for the development and delivery of programming services. These
programming suppliers charge the Company for the right to distribute the
channels to the Company's customers. The costs to the Company for programming
services is determined through negotiations with these programming suppliers.
Management believes that the availability of sufficient programming on a
timely basis will be important to the Company's future success. There can be
no assurance that the Company will have access to programming services or that
management can secure rights to such programming on commercially acceptable
terms.

Liabilities for Unearned Revenues

Erols offers one-, two- and three-year subscriptions for
Internet access, which generally are paid for in advance. Such subscriptions
are subject to cancellation with a full refund for the first 30 days and to
cancellation with a pro-rated refund thereafter. Such revenues will be
recognized over the term of each such subscription, resulting in material
short- and long-term liabilities for unearned revenues. As of December 31,
1996, Erols had short- and long-term liabilities for unearned revenues of
approximately $12.9 million and $3.4 million, respectively and, as of 31,
1997, of approximately $25.6 million and $8.9 million, respectively.
Cancellation by a significant number of the subscribers under such contracts
could require cash payment of material sums.

Variability of Operating Results

As a result of factors such as the significant expenses
associated with the development of its networks and services, the Company
anticipates that its operating results could vary significantly from period to
period.

Risks Relating to Provision of Internet Services

Dependence on the Internet; Uncertain Acceptance of the
Internet as a Medium of Commerce and Communication. The Company's Internet
business will depend in part upon the continuing development and expansion of
the Internet and the market for Internet access. Important issues concerning
business and personal use of the Internet (including security, reliability,
cost, ease of use, access and quality of service) remain unresolved and may
significantly affect the growth of Internet use. Acceptance of the Internet
for commerce and communications generally requires that potential users accept
a new way of conducting business and exchanging information, industry
participants continue to provide new and compelling content and applications,
and the Internet provide a reliable and secure computer platform. A diminution
in the growth of demand for Internet services or an absolute decrease in such
demand could have a material adverse effect on the Company's Internet
business.

Evolving Industry Standards. New industry standards have the
potential to replace or provide lower-cost alternatives to existing services.
The adoption of such new industry standards could render the Company's existing
services obsolete and unmarketable or require reduction in the fees charged
therefor. For example, Erols' services currently rely on the widespread
commercial use of Transmission Control Protocol/Internet Protocol ("TCP/IP").
Alternative open and proprietary protocol standards that compete with TCP/IP,
including proprietary protocols developed by International Business Machines
Corporation ("IBM") and Novell, Inc., have been or are being developed.

ISPs participate in the Internet through contractual "peering
arrangements" with Internet companies. These contractual arrangements are not
subject to regulation and could be subject to revision in terms, conditions or
costs over time.

Constraints on Capacity and Supply of Equipment. The Company's
ability to provide Internet service will depend in part on its ability to
provide sufficient capacity, both at the level of particular point of presence
(each a "POP") (affecting only subscribers attempting to use that POP) and in
connection with system-wide services (such as e-mail and news services, which
can affect all subscribers). In addition, the Company will be dependent in
part on the availability of equipment such as modems, servers and other
equipment. Any shortage of such equipment or capacity of servers could result
in a strain on incoming access lines during peak times, causing busy signals
and/or delays for subscribers.

Reliance on Network Infrastructure; Risk of System Failure;
Security Risks. Internet network infrastructure is vulnerable to computer
viruses and other similar disruptive problems caused by its users, other
Internet users or other third parties. Computer viruses and other problems
could lead to interruptions of, delays in, or cessation of service, by the
Company, as well as corruption of the Company's or its subscribers' computer
systems. In addition, there can be no assurance that subscribers or others
will not assert claims of liability against the Company as a result of events
such as computer viruses, other inappropriate uses or security breaches.

The Company's interconnection agreements with Bell Atlantic and
other incumbent LECs entitle it, among other things, to collect reciprocal
compensation payments from the incumbent LECs for local telephone calls
terminating on the Company's facilities (as well as obligating the Company to
make similar payments for outbound local calls it delivers to the incumbent
LECs). However, Bell Atlantic and other incumbent LECs have challenged the
application of these reciprocal compensation provisions to calls terminating
at ISP points of presence, based on the argument that Internet traffic is
inherently interstate, not local, in nature. To date, 18 state PUCs have
issued final orders on this issue (some of which are subject to court
appeals), and every such order has affirmed (based on prior FCC decisions) that
local calls to ISPs are subject to reciprocal compensation. In the Bell
Atlantic region, the New York, Pennsylvania, Maryland, and Virginia PUCs have
issued such orders, and a similar case is pending in Massachusetts. However,
there can be no assurance that other state PUCs will not issue contrary
rulings, or that the FCC decisions on which the favorable rulings are based
will not be changed as a result of regulatory, legislative, or judicial
action. In addition, there can be no assurance that the current reciprocal
compensation arrangements will be renewed on their existing terms when they
expire (in most cases, in mid-1999).

Proprietary Rights; Risk of Infringement. The Company relies
on a combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its proprietary technology. However,
there can be no assurance that the Company's technology will not be
misappropriated or that equivalent or superior technologies will not be
developed. In addition, there can be no assurance that third parties will not
assert that the Company's services or its users' content infringe their
proprietary rights.

The Company has obtained authorization, typically in the form
of a license, to distribute third-party software incorporated in the Erols
access software product for Windows 3.1, Windows 95, Windows NT and Macintosh
platforms. The Company plans to maintain or negotiate renewals of existing
software licenses and authorizations. The Company may want or need to license
other applications in the future.

State and Local Taxes on Internet Services. The Company is
currently subject to certain state and local taxes on certain of its
telecommunications, data and Internet access services. The Company may become
subject to additional state and local taxes on such services as it continues
to expand and develop more services to customers throughout the United States
and as more state and local taxing authorities become familiar with such
services. Recognizing the problem of discriminatory and multiple state
taxation for telecommunication or Internet services, various federal
legislative proposals are currently pending before Congress that, if enacted,
would limit the ability of the state or local governments to impose, assess,
or attempt to collect any tax on such services. The most recent version of
the Internet Tax Freedom Act proposes to impose a three-year national
moratorium on certain state and local taxation of electronic and Internet
services and trade and to create a federally-led task force to develop
recommendations for a national solution to the problem of discriminatory and
multiple state taxation for on-line services. The National Governors'
Association has proposed that, among other things, a single statewide sales
tax rate be established on all taxable electronic commerce under the Internet
Development Act. The Company believes that either of these proposals, if
enacted, could reduce certain state or local taxes currently imposed on or may
later be imposed on the Company's telecommunications, data and Internet access
services. However, there can be no assurance as to whether or in what form
any legislation will be enacted. In addition, there can be no assurance as to
the extent that any such legislation, if enacted, would relieve the state or
local taxes currently imposed, or would reduce the future state or local taxes
that may be imposed, on the Company's telecommunication, data and Internet
access services.

Potential Liabilities Associated with Internet Businesses

Prior to the enactment of the Communications Decency Act of
1996 (the "CDA"), which is Title V of the 1996 Act, a federal district court
held that an online service provider could be found liable for defamation, on
the ground that the service provider exercised active editorial control over
postings to its service. The CDA contains a provision which, one court has
held, shields ISPs from such liability for material posted to the Internet by
their subscribers or other third parties. Other courts have held that online
service providers and ISPs may, under certain circumstances, be subject to
damages for copying or distributing copyrighted materials.

As enacted, the CDA imposed fines on any entity that (i) by
means of a telecommunications device, knowingly sends indecent or obscene
material to a minor; (ii) by means of an interactive computer service, sends
or displays indecent material to a minor; or (iii) permits any
telecommunications facility under such entity's control to be used for the
foregoing purposes. That provision, as applied to indecent materials, has been
declared unconstitutional by the United States Supreme Court. While the
Clinton Administration has announced that it will not seek passage of similar
legislation to replace this provision, action by Congress in this area remains
possible. At present, the Company intends to exercise editorial control over
Internet postings to the extent of blocking Web sites and Usenet News groups
when the Company becomes aware that such sites or groups offer child
pornography.

As the law in this area develops, the potential that liability
might be imposed on the Company for information carried on and disseminated
through its network could require the Company to implement measures to comply
with applicable law and reduce its exposure to such liability, which could
require the expenditure of substantial resources or the discontinuation or
modification of certain service offerings.

Reliance on Key Personnel

The Company believes that its continued success will depend in
large part on its ability to attract and retain highly skilled and qualified
personnel. The Company believes that the Distribution will, among other
things, permit the Company to offer equity-based compensation that is more
directly linked to the Company's performance, which the Company believes will
facilitate the attraction, retention and motivation of highly skilled and
qualified personnel. In this regard, the Company has implemented an Employee
Stock Ownership Plan ("ESOP") and makes available competitive employee benefit
programs providing benefits substantially comparable to benefits provided
immediately prior to the Distribution. There can be no assurance that the
Company will retain or, as necessary, attract qualified management personnel.

Dividend Policy

The Company anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to declare or pay cash dividends on the RCN
Common Stock in the foreseeable future. The declaration or payment of any
cash dividends in the future will be at the discretion of the Board of
Directors of RCN (the "Company Board"). The declaration of any dividends and
the amount thereof will depend on a number of factors, including the Company's
financial condition, capital requirements, funds from operations, future
business prospects, covenant restrictions and such other factors as the
Company Board may deem relevant. The Company is a holding company and its
ability to pay cash dividends is dependent on its ability to receive cash
dividends, advances and other payments from its subsidiaries. In addition,
the Credit Agreement (as defined below) into which certain of the Company's
subsidiaries have entered contains restrictions on the payment of dividends
by these subsidiaries. The Company has also issued the 1997 Notes and the
1998 Notes, all of which are governed by the Indentures, which restrict the
Company's and certain of its subsidiaries' ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Dividends."

Control by Level 3 Telecom Holdings, Inc.; Conflicts of Interest

Level 3 Telecom Holdings, Inc. ("Level 3 Telecom"), formerly
Kiewit Telecom Holdings, Inc., beneficially owns approximately 46% of the RCN
Common Stock. Consequently, Level 3 Telecom effectively has the power to elect
a majority of the Company's directors and to determine the outcome of
substantially all matters to be decided by a vote of shareholders. The
control of the Company by Level 3 Telecom may tend to deter non-negotiated
tender offers or other efforts to obtain control of the Company and thereby
deprive shareholders of opportunities to sell shares at prices higher than
those prevailing in the market. Moreover, a disposition by Level 3 Telecom of
a significant portion of its RCN Common Stock, or the perception that such a
disposition may occur, could affect the trading price of the RCN Common Stock
and could affect the control of the Company. The common stock of Level 3
Telecom is owned 90% by Level 3 and 10% by David C. McCourt, the Chairman and
Chief Executive Officer of the Company. Mr. McCourt is a member of the Board
of Directors of Level 3.

As a result of the Distribution, there exist relationships that
may lead to conflicts of interest. Level 3 Telecom effectively controls the
Company, Commonwealth Telephone and Cable Michigan. In addition, the majority
of the Company's named executive officers are also directors and/or executive
officers of Commonwealth Telephone or Cable Michigan. See "Management." In
particular, David C. McCourt, Chairman and Chief Executive Officer of the
Company, also serves as a director and Chairman and Chief Executive Officer of
Cable Michigan and as a director and Chairman and Chief Executive Officer of
Commonwealth Telephone. Mr. McCourt expects to devote approximately 70% of his
time to managing the affairs of the Company. In addition, Michael J. Mahoney,
who has been President and Chief Operating Officer, as well as a director, of
the Company since the Distribution, is also a director of Commonwealth
Telephone. Mr. Mahoney expects to devote approximately 85-90% of his time to
managing the affairs of the Company. The Company's other named executive
officers expect to devote the following approximate portions of their time to
managing the affairs of the Company: Mr. Godfrey (80%); Mr. Haverkate (75%)
and Mr. Adams (100%). In addition, Dennis Spina, Director and President of
Internet Services of RCN, is expected to devote approximately 85-90% of his
time to the affairs of RCN. The success of the Company may be affected by the
degree of involvement of its officers and directors in the Company's business
and the abilities of the Company's officers, directors and employees in
managing both the Company and the operations of Cable Michigan and/or
Commonwealth Telephone. Potential conflicts of interest will be dealt with on
a case-by-case basis taking into consideration relevant factors including the
requirements of NASDAQ and prevailing corporate practices.

In connection with the Distribution, Commonwealth Telephone has
agreed to provide or cause to be provided to the Company and to Cable Michigan
certain specified services for a transitional period after the Distribution.
The fees for such services will be an allocated portion (based on relative
usage) of the cost incurred by Commonwealth Telephone to provide such services
to the Company, Cable Michigan and Commonwealth Telephone. See
"Business--Relationship Among Commonwealth Telephone, RCN and Cable Michigan."
The aforementioned arrangements were not the result of arm's length
negotiation between unrelated parties as the Company and Commonwealth
Telephone have certain common officers and directors. Although the
transitional service arrangements in such agreements are designed to reflect
arrangements that would have been agreed upon by parties negotiating at arm's
length, there can be no assurance that the Company would not be able to obtain
better terms from unrelated third parties. Additional or modified agreements,
arrangements and transactions may be entered into between the Company and
either or both of Commonwealth Telephone and Cable Michigan, which will be
negotiated at arm's length.

Anti-Takeover Effects of Certain Statutory, Charter, Bylaw and Contractual
Provisions

Several provisions of the certificate of incorporation of RCN
("RCN Certificate of Incorporation") and the bylaws of RCN ("RCN Bylaws") and
the Delaware General Corporation Law (the "DGCL") could discourage potential
acquisition proposals and could deter or delay unsolicited changes in control
of the Company, including provisions of the RCN Certificate of Incorporation
and the RCN Bylaws creating a classified Board of Directors, limiting the
shareholders' powers to remove directors, and prohibiting the taking of action
by written consent in lieu of a shareholders' meeting. In addition, the
Company Board has the authority, without further action by the shareholders,
to fix the rights and preference of and to issue preferred stock. The
issuance of preferred stock could adversely affect the voting power of the
owners of RCN Common Stock, including the loss of voting control to some.

The Credit Agreement into which certain subsidiaries of the
Company have entered includes as an event of default certain changes in
control of the Company. The Indentures require the Company to purchase all of
the securities issued thereunder at a premium in the event of a change of
control of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Certain of the Company's
agreements with MFS/WorldCom permit MFS/WorldCom to terminate those agreements
on a change of control of RCN. BECO is entitled to purchase RCN's interest in
their joint venture upon change of control of RCN. In addition, upon a change
of control of RCN Washington, Pepco Communications has the right to sell to
RCN its interest, or to buy RCN's interest, in the joint venture between the
parties. See "Business--Strategic Relationships."

These provisions and others that could be adopted or entered
into in the future could discourage unsolicited acquisition proposals or delay
or prevent changes in control or management of the Company, including
transactions in which shareholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions could
limit the ability of shareholders to approve transactions that they may deem
to be in their best interests. See "Description of Capital Stock" and
"Certain Statutory, Charter and Bylaw Provisions."

Shares Eligible for Future Sale

Upon completion of the Offering, there will be 68,432,590
shares of Common Stock outstanding (70,486,919 shares assuming the exercise of
the Underwriters' overallotment option), of which shares are tradeable
without restriction by persons other than "affiliates" of RCN. The remaining
shares of Common Stock may be deemed "restricted" securities within the
meaning of the Securities Act, and, as such, may not be sold in the absence of
registration under the Securities Act or an exemption therefrom, including the
exemptions contained in Rule 144 under the Securities Act.

The Company, its directors and its executive officers and
certain shareholders, who hold as of the date of this Prospectus approximately
shares of common stock (or options to purchase Common Stock that are
currently exercisable or exercisable within 60 days), have agreed not to
offer, sell, contract to sell, file a registration statement pursuant to the
Securities Act (except for certain registration statements relating to the
issuance of stock and stock options to employees) or otherwise dispose of any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock (except for private transactions by the holders
of Common Stock where the transferee agrees to be bound by such restrictions),
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of the Underwriters (as defined herein), for a period
of 90 days after the date of this Prospectus. After such 90 day period,
approximately additional shares of Common Stock will become
immediately saleable subject to the manner of sale, volume, and information
requirements of Rule 144 under the Securities Act.

No assurance can be given that holders of the Common Stock will
not decide, based upon the prevailing market and other conditions, to dispose
of all or a portion of such stock pursuant to the provisions of Rule 144 under
the Securities Act or pursuant to demand registration rights or otherwise.
Certain holders of Common Stock that acquired such Common Stock in connection
with the Company's acquisitions of UltraNet and Erols have been granted
registration rights. No assurance can be given that holders of the
"restricted" shares of Common Stock will not decide to dispose of them
pursuant to the provisions of Rule 144 or otherwise. In addition, the Company
has filed a shelf registration statement covering 890,384 shares of Common
Stock acquired by certain holders in connection with the Company's acquisition
of UltraNet.

No predictions can be made about the effect, if any, that
market sales of shares of Common Stock or the availability of such shares for
sale would have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
market, or the perception that such sale could occur, may have an adverse
impact on the market price for the shares of Common Stock offered hereby or on
the ability of the Company to raise capital through a public offering of its
equity securities. See "Shares Eligible for Future Sale."

Substantial Dilution

Purchasers of the Common Stock offered hereby will incur
immediate and substantial dilution in pro forma net tangible book value per
share. See "Dilution."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock
are estimated to be approximately $229 million, based on an initial offering
price of $22.75 per share, (approximately $265 million if the Underwriters'
over-allotment option is exercised in full), after deducting the Underwriters'
discounts and commissions and estimated expenses payable by the Company. The
net proceeds from the sale of Common Stock will be used to fund operating losses
and for general corporate purposes. The Company will not receive any proceeds
from the sale of Common Stock offered by the Selling Stockholders.

DILUTION

As of March 31, 1998, the net tangible book value of RCN was
$ million, or $ per share of Common Stock. Net tangible book value per
share represents the Company's net worth less intangible assets of $
million divided by the total number of shares of Common Stock outstanding.
After giving effect to the sale by RCN of 10,583,032 shares of Common Stock
pursuant to the Offering (at an assumed offering price of $22.75 per share)
and deducting the underwriting discounts and estimated expenses to the
Company of the Offering, the pro forma net tangible book value of RCN as of
March 31, 1998 would have been $ million, or $ per share of Common Stock.
Such amount represents an immediate increase in pro forma net tangible book
value of $ to the Company's existing stockholders and immediate dilution to
new investors of $ per share based upon an assumed public offering price of
$22.75 per share of Common Stock. The following table illustrates the
dilution in pro forma net tangible book value per share to new investors:

<TABLE>
<CAPTION>
<S> <C> <C>
Public Offering price........................................................................ $ $
Net tangible book value before the Offering.................................................
Increase in net tangible book value attributable to net proceeds to the Company of the
Offering..................................................................................
Pro forma net tangible book value after the Offering......................................... ------- -------

Dilution of net tangible book value to new investors.........................................
======= =======
</TABLE>
DIVIDENDS

The Company anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to declare or pay cash dividends on the RCN
Common Stock in the foreseeable future. The declaration or payment of any
cash dividends in the future will be at the discretion of the Company Board.
The declaration of any dividends and the amount thereof will depend on a
number of factors, including the Company's financial condition, capital
requirements, funds from operations, future business prospects and such other
factors as the Company Board may deem relevant. The Company is a holding
company and its ability to pay cash dividends is dependent on its ability to
receive cash dividends, advances and other payments from its subsidiaries.
The Credit Agreement into which certain subsidiaries of the Company have
entered contains restrictions on the payment of dividends by those
subsidiaries. The Company has entered into the Indentures which restrict the
Company's and certain of its subsidiaries' ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of RCN."

CAPITALIZATION

The following table sets forth the capitalization of the
Company as of March 31, 1998, (i) on an unaudited historical basis and (ii) on
an as adjusted basis, giving effect to the consummation of the Offering. The
capitalization table below should be read in conjunction with the historical
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Unaudited Pro Forma Consolidated Statement of
Operations." The unaudited pro forma capitalization presented below is
provided for informational purposes only and should not be construed as
indicative of the Company's capitalization or financial condition had the
transactions reflected thereby been consummated on the date assumed, and
may not reflect the capitalization or financial condition which would have
resulted had the Company been operated as a separate, independent company
during such period, and are not necessarily indicative of the Company's
future capitalization or financial condition.

<TABLE>
<CAPTION>
March 31, 1998
------------------------------
Historical As Adjusted
----------- -------------
(dollars in thousands)
<S> <C> <C>
Cash, temporary cash investments and short-term investments.......... $ 923,000 $1,152,164
========== =========
Cash restricted for debt service..................................... 63,619 63,619
========== =========
Credit Agreement(1).................................................. 103,000 103,000
10% Senior Notes due 2007............................................ 225,000 225,000
11(1)/(8)% Senior Discount Notes due 2007(2)......................... 367,720 367,720
9.80% Senior Discount Notes due 2008(2).............................. 355,752 355,752
Capital lease obligations............................................ 1,852 1,852
---------- ----------
Total long-term debt................................................. 1,053,324 1,053,324
---------- ----------
Shareholders' equity................................................. 362,283 591,447
---------- ----------
Total capitalization................................................ $1,415,607 $1,644,771
========== ==========
</TABLE>

- ------------
(1) As of July 1, 1997, three of RCN's direct and indirect subsidiaries entered
into a credit agreement providing for an aggregate of $125,000 in
availability, comprised of a $25,000 revolving credit facility and a
$100,000 eight year term credit facility. As of March 31, 1998, $3,000 had
been borrowed thereunder. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(2) These notes were originally recorded at their initial issue price and the
amount reported represents such original issue price plus a ratable portion
of the accrual of the original issue discount.

MARKET PRICE AND DIVIDEND INFORMATION

The RCN Common Stock (symbol: RCNC) currently trades on the
NASDAQ.

The following table sets forth the high and low bid prices per
share of the RCN Common Stock on NASDAQ and cash dividends declared on the RCN
Common Stock since the Distribution Date:

<TABLE>
<CAPTION>
RCN Common Stock(1)

Market Price ($) Cash
------------------------ Dividends
High Low Declared ($)
--------- ------- ------------
<S> <C> <C> <C>
1997
Quarter ending September 30(2) 15 11/16 10 9/16 0
Quarter ending December 31 21 1/2 12 1/2 0
1998
Quarter ending March 31... 30 9/16 15 7/8 0
Through May 19............. 29 3/8 21 5/8 0
</TABLE>

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

(1) Because RCN Common Stock was distributed on September 30, 1997 to holders of
record of C-TEC Common Stock on September 19, 1997, market price and
dividend information have only been set forth for the quarters ending
September 30, 1997, December 31, 1997 and March 31, 1998. RCN Common Stock
information has been restated to reflect the Stock Dividend.

(2) The prices reflect the partial period between September 19, 1997 through
September 30, 1997. There was no market for RCN Common Stock prior to this
period.

The last reported sale price per share of RCN Common Stock on
May 20, 1998, the last practicable date prior to the filing of this
Prospectus, was $22.

On May 15, 1998, there were approximately 3,159 holders of RCN
Common Stock, no holders of Company Class B Stock and no holders of Company
Preferred Stock. On May 15, 1998, 57,849,558 shares of RCN Common Stock were
outstanding.

The prices at which the RCN Common Stock trades will be
determined by the marketplace and may be influenced by many factors,
including, among others, quarter to quarter variations in the actual or
anticipated financial results of the Company or other companies in the markets
served by the Company. In addition, the stock market has experienced extreme
price and volume fluctuations that have affected the market price of many
telecommunications stocks and that have often been unrelated or
disproportionate to the operating performance of individual companies. These
and other factors may adversely affect the market price of the RCN Common
Stock.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Prior to September 30, 1997, the Company was operated as part
of C-TEC. The following Unaudited Pro Forma Consolidated Statement of
Operations sets forth the historical statements of operations of the Company
for the year ended December 31, 1997 and the three months ended March 31, 1998
and as adjusted for the Distribution, the acquisition of the 19.9% minority
interest in Freedom, the 1997 Notes Offering, the Erols Acquisition, the 1998
Notes Offering and the Offering and the related transactions and events
described in the notes thereto, as if such transactions and events had been
consummated on the first day of each respective period.

Management believes that the assumptions used provide a
reasonable basis on which to present such Unaudited Pro Forma Statement of
Operations. The Unaudited Pro Forma Consolidated Statement of Operations
should be read in conjunction with the historical Financial Statements and
notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Unaudited Pro Forma Consolidated Statement of Operations are provided
for information purposes only and should not be construed to be indicative
of the Company's results of operations had the Distribution and the
transactions and events described above been consummated on the dates
assumed, may not reflect the results of operations or financial condition
which would have resulted had the Company been operated as a separate,
independent company during such period, and are not necessarily indicative
of the Company's future results of operations or financial condition.

RCN CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Year ended December 31, 1997

($ in thousands, except per share amounts and number of shares)

<TABLE>
<CAPTION>
Adjustments
for Issuance
Adjustments Liberty/Freedom of the 1997
RCN for Acquisition and 1998
Historical Distribution Adjustments Notes
---------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Sales.............................................. $ 127,297
Cost and expenses, excluding depreciation and
amortization..................................... 134,967
Nonrecurring charges............................... 10,000
Depreciation and amortization...................... 53,205 $ 1,250 (1)
----------- ------- -------- --------
Operating (loss) income............................ (70,875) (1,250)
Interest income.................................... 22,824 $(8,686)(2)
Interest expense................................... (25,602) (5,654)(3) $(85,179)(4)
10,460 (5)
Other (expense) income, net........................ 131
----------- ------- -------- --------
(Loss) income before income taxes.................. (73,522) (3,880) (1,250) (85,179)
(Benefit) for income taxes......................... (20,849) (1,358)(6) (437)(7) (29,812)(4)
----------- ------- -------- --------
(Loss) income before equity in unconsolidated
entities and minority interest.................. (52,673) (2,522) (813) (55,367)
Equity in (loss) of unconsolidated entities........ (3,804)
----------- ------- -------- --------
(Loss) income before extraordinary charge and
minority interest in loss of consolidated
entities......................................... $ (56,477) $(2,522) $ (813) $(55,367)
=========== ======= ======== ========
Unaudited pro forma (loss) before extraordinary
charge and minority interest per common share.... $ (1.03)
Weighted average number of common shares
and common stock equivalents outstanding......... 54,965,716

<CAPTION>
Acquisition Adjustments
Erols Adjustments for the
Historical(8) for Erols Offering Pro Forma
------------- ----------- ------------ ---------
<C> <C> <C> <C>
Sales.............................................. $ 36,528 $(22,552)(9) $ 141,273
Cost and expenses, excluding depreciation and
amortization..................................... 49,829 (30,764)(9) 154,032
Nonrecurring charges............................... 10,000
Depreciation and amortization...................... 6,360 606 (10) 61,421
--------- -------- ---------- ----------

Operating (loss) income............................ (19,661) 7,606 -- (84,180)
Interest income.................................... 14,138
Interest expense................................... (162) 100 (106,037)
Other (expense) income, net........................ (49) 82
-------- -------- ---------- ----------
(Loss) income before income taxes.................. (19,872) 7,706 -- (175,997)

(Benefit) for income taxes......................... (9,338)(11) (61,794)
-------- -------- ---------- ----------
(Loss) income before equity in unconsolidated
entities and minority interest................... (19,872) 17,044 -- (114,203)
Equity in (loss) of unconsolidated entities........ (13,420)(9) (17,224)
-------- -------- ---------- ----------
Loss) income before extraordinary charge and
minority interest in loss of consolidated
entities......................................... $(19,872) $ 3,624 -- $ (131,427)
======== ======== ========== ==========
Unaudited pro forma (loss) before extraordinary
charge and minority interest per common share.... $ (1.95)
Weighted average number of common shares
and common stock equivalents outstanding......... 1,730,648 (12) 10,583,032 (13) 67,279,396

</TABLE>

See Notes to Unaudited Pro Forma Statement Of Operations

RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Three months ended March 31, 1998
($ in thousands, except per share amounts and number of shares)

<TABLE>
<CAPTION>
Adjustments Erols
for Issuance Historical
RCN of the 1997 1/1/98-
Historical and 1998 Notes 2/28/98(8)
------------ -------------- ----------
<S> <C>
Sales......................................................... $ 40,138 $ 8,700
Cost and expenses, excluding depreciation and amortization.... 48,455 8,388
Nonrecurring acquisition costs: In-process technology......... 44,700 --
Depreciation and amortization................................. 17,691 1,478
----------- ------- --------
Operating (loss) income....................................... (70,708) (1,166)
Interest income............................................... 12,815 --
Interest expense.............................................. (22,735) $(3,492)(4) (164)
Other (expense), net.......................................... (899) (5)
----------- ------- --------
(Loss) income before income taxes............................. (81,527) (3,492) (1,335)
(Benefit) for income taxes.................................... (11,682) (1,222)(4) --
----------- ------- --------
(Loss) income before equity in unconsolidated entities
and minority interest....................................... (69,845) (2,270) (1,335)
Equity in (loss) of unconsolidated entities................... (1,493) --
----------- ------- --------
(Loss) before extraordinary charge and minority interest
in loss of consolidated entities............................ $ (71,338) $(2,270) $(1,335)
=========== ======= =======
Unaudited pro forma (loss) before extraordinary charge
and minority interest per common share...................... $ (1.27)
Weighted average number of common shares and common stock
equivalents outstanding..................................... 56,216,310

<CAPTION>
Acquisition Adjustments
Adjustments for the
for Erols Offering Pro Forma
------------- ----------- ------------
<S> <C> <C> <C>
Sales......................................................... $(5,371)(9) $ 43,467
Cost and expenses, excluding depreciation and amortization.... (5,179)(9) 51,664
Nonrecurring acquisition costs: In-process technology......... -- 44,700
Depreciation and amortization................................ (340)(10) -- 18,829
------- ---------- -----------
Operating (loss) income....................................... 148 (71,726)
Interest income............................................... -- 12,815
Interest expense.............................................. 101 (26,290)
Other (expense), net.......................................... -- -- (904)
------- ---------- -----------
(Loss) income before income taxes............................. 249 (86,105)
(Benefit) for income taxes.................................... (998)(11) (13,902)
------- ---------- -----------
(Loss) income before equity in unconsolidated entities
and minority interest....................................... 1,247 (72,203)
Equity in (loss) of unconsolidated entities................... (1,702)(9) -- (3,195)
------- ---------- -----------
(Loss) before extraordinary charge and minority interest
in loss of consolidated entities.............................. $ (455) $ (75,398)
======= ========== ===========
Unaudited pro forma (loss) before extraordinary charge
and minority interest per common share...................... $ (1.13)
Weighted average number of common shares and common stock
equivalents outstanding..................................... 10,583,032 (13) 66,799,342
</TABLE>

See Notes to Unaudited Pro Forma Statement of Operations

RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)

The Unaudited Pro Forma Consolidated Statement of Operations assumes that
the Company was an autonomous entity rather than a wholly owned subsidiary
of C-TEC for the periods shown. The Pro Forma adjustments, as described
below, are keyed to the corresponding amounts shown in the relevant
statement. All share and per share data of RCN Common Stock have been
restated to reflect the Stock Dividend.

(1) Adjustment to reflect the additional depreciation and
amortization of $1,250 in 1997 resulting from the acquisition of the minority
interest of Freedom in March 1997 and to present the information as if the
acquisition of the minority interest of Freedom had occurred at the beginning
of 1997. See Note 4 to the Consolidated Financial Statements in the Company's
Form 10-K for the year ended December 31, 1997.

(2) Adjustment to eliminate interest income of $8,686 for the
year ended December 31, 1997, net of income taxes of $(3,040) on outstanding
intercompany notes payable owed to the Company of which $110,000 was repaid and
the remaining balance was treated as capital contributions from the Company to
the borrower.

(3) Adjustment to reflect interest expense and amortization of
debt issuance costs of $5,654 for the year ended December 31, 1997, net of
income taxes of $(1,979) on new third party debt of $110,000 which was
incurred.

(4) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 1997 and 1998 Notes
aggregating $3,492 and $85,179 for the three months ended March 31, 1998 and
for the year ended December 31, 1997, respectively, net of income taxes of
$1,222 and $29,812 for the three months ended March 31, 1998 and for the year
ended December 31, 1997, respectively. Interest expense on the 1997 Notes is
already included in the Company's historical results for the entire three
months ended March 31, 1998, therefore the pro forma adjustment is
correspondingly lower than the ratable portion of the adjustment for the year
ended December 31, 1997.

(5) Adjustment to eliminate interest expense and amortization of
debt issuance costs of $10,460 for the year ended December 31, 1997 and
related income taxes of $3,661 on existing outstanding third party debt that
was repaid and on outstanding intercompany notes payable owned by the Company
which were treated as capital contributions to the Company from the borrower.

(6) Income tax effects for the distribution adjustments are
summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
------------
Benefit
(provision)
<S> <C>
Elimination of interest expense and amortization of debt issuance costs on existing outstanding third
party debt (see Note 5)................................................................................... $ 3,661
Incurrence of interest expense and amortization of debt issuance costs on new third party debt (see
Note 3)................................................................................................... (1,979)
Elimination of interest income on outstanding intercompany notes (see Note 2)............................... (3,040)
-------
Total..................................................................................................... $(1,358)
=======
</TABLE>

(7) Adjustments to income taxes of $(437) relating to additional
depreciation and amortization in 1997 due to the acquisition of a 19.9%
minority interest in Freedom in March 1997 (see Note 1).

(8) On February 20, 1998, the Company completed the acquisition
of Erols, Washington, D.C.'s largest Internet service provider, for $29,200 in
cash, 1,730,648 newly issued shares of RCN Common Stock plus the assumption and
repayment of $5,800 of debt (including payment of accrued interest).
Additionally, the Company is converting approximately 999,000 stock options
for Erols common stock into options to purchase 699,104 shares of RCN Common
Stock at an average exercise price of $3.424 per share. The Company accounted
for this transaction under the purchase method of accounting and accordingly,
the financial statements of Erols are not consolidated with the Company's
historical financial statements as of and for the year ended December 31,
1997. In 1998, the financial results of Erols also are not consolidated with
the Company's historical financial statements for the period prior to February
20, 1998. The financial information of Erols was provided by Erols.

(9) Such adjustments include a pro forma allocation of
historical operating results of Erols to the joint venture with PEPCO (see
below) based upon the relationship of the number of subscribers expected to be
contributed to the joint venture to the total number of subscribers acquired
in the merger. The Company's share of such operating results, including the
depreciation and amortization effects of the allocation of a portion of the
total purchase price to the joint venture, representing the assumed value of
the subscribers to be contributed to the joint venture, are included in the
adjustment for "equity in the loss of unconsolidated entities."

A subsidiary of the Company is a party to a joint venture with
a subsidiary of PEPCO, to provide the greater Washington, D.C. area residents
and businesses local and long-distance telephone, cable television, and
Internet services as a package from a single source. As a result of this
joint venture, the Company expects to contribute to the joint venture the
subscribers acquired in the merger with Erols which are located in the
relevant joint venture market. The joint venture partners of Starpower are
currently negotiating the terms of such contribution. The value of such
contribution for accounting purposes is estimated to be approximately $51,937.
The joint venture is accounted for under the equity method of accounting.
Additionally, the Company expects that Starpower will assume the liability for
the unearned revenue related to the subscribers contributed to Starpower.

(10) Such adjustment reflects the change in depreciation and
amortization for the effect of the fair value adjustment of the net assets of
Erols acquired. Amortization of such excess over a five year period has been
assumed, although a shorter life may result based on the study discussed
below. Also, as discussed below, at least $31,600 is expected to be allocated
to certain in-process technology projects which has resulted in a ratable
reduction of pro forma amortization expense. The Company allocated the
purchase price for Erols (see Note 8) on the basis of the fair market value of
the assets acquired and liabilities assumed. The Company has undertaken a
study to determine such fair market values, including in-process technology.
Such fair market values may differ from the allocations assumed in the pro
forma financial statements. The impact on deferred tax balances was included
in the above-referenced fair value adjustments. Erols' historical property,
plant and equipment has been adjusted to its estimated fair value based upon
its depreciated cost. The remaining excess of consideration over the
historical book value of Erols net assets acquired has been preliminarily
allocated to subscriber base, goodwill and other intangible assets. The
amounts preliminarily allocated to subscriber base, goodwill and other
intangible assets have been ratably reduced by the portion of the purchase
price preliminarily allocated to in-process technology of $31,600, which was
recognized as a charge for the quarter ended March 31, 1998. The final
allocation to in-process technology may differ from the preliminary estimate.

(11) Adjustment to reflect the tax effect of the pro forma
adjustments, including the tax effect of the historical results of operations
of Erols.

(12) Represents adjustment for shares to be issued in connection
with the acquisition of Erols. (See Note 8.)

(13) Represents adjustment for 10,583,032 additional shares from
the issuance of the Common Stock based upon assumed gross proceeds of $240,764
and using the closing price of the Company's Common Stock on May 19, 1998.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The table below sets forth selected historical consolidated
financial data for the Company. Prior to September 30, 1997, the Company and
the RCN Businesses were operated as part of C-TEC. The historical consolidated
financial data presented below reflect periods during which the Company did not
operate as an independent company and, accordingly, certain assumptions reflect
the results of operations or the financial condition which would have resulted
if the Company had operated as a separate, independent company during such
periods, and are not necessarily indicative of the Company's future results of
operation or financial condition.

The selected historical consolidated financial data for the
year ended December 31, 1994 and 1993 and as of December 31, 1995, 1994 and
1993 are derived from the Company's unaudited historical consolidated financial
statements not included in this Prospectus. The selected historical
consolidated financial data of the Company for the years ended December 31,
1997, 1996 and 1995 and as of December 31, 1997 and 1996 are derived from and
should be read in conjunction with the Company's audited historical
consolidated financial statements included elsewhere in this Prospectus. The
selected historical consolidated financial data for the three month periods
ended March 31, 1997 and 1998 and as of March 31, 1998 and 1997 are derived
from and should be read in conjunction with the Company's unaudited
historical consolidated financial statements included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements.

<TABLE>
<CAPTION>
Three Months ended
Year Ended December 31, March 31,
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales................................ $ 49,504 $ 59,500 $ 91,997 $104,910 $ 127,297 $ 29,677 $ 40,138
Costs and expenses, excluding
depreciation and amortization...... 30,821 49,747 75,003 79,107 134,967 25,524 48,455
-------- -------- -------- -------- ---------- -------- ----------
EBITDA before nonrecurring
charges(1)......................... 18,683 9,753 16,994 25,803 (7,670) 4,153 (8,317)
Nonrecurring charges(2).............. -- -- -- -- 10,000 10,000 44,700
Depreciation and amortization........ 9,922 9,803 22,336 38,881 53,205 12,191 17,691
-------- -------- -------- -------- ---------- -------- ----------
Operating (loss) income.............. 8,761 (50) (5,342) (13,078) (70,875) (18,038) (70,708)
Interest income...................... 17,882 21,547 29,001 25,602 22,824 5,153 12,815
Interest expense..................... (17,127) (16,669) (16,517) (16,046) (25,602) (3,431) (22,735)
Other (expense) income, net.......... 1,195 1,343 (304) (546) 131 (33) (899)
(Benefit) provision for income taxes. 167 2,340 1,119 979 (20,849) (4,800) (11,682)
Equity in loss of unconsolidated
entities........................... -- -- (3,461) (2,282) (3,804) (805) (1,493)
Minority interest in loss (income)
of consolidated entities........... (85) (95) (144) 1,340 7,296 910 3,586
Extraordinary charge--debt
prepayment penalty, net of tax
of $1,728.......................... -- -- -- -- (3,210) -- --
Cumulative effect of changes in
accounting principles.............. 1,628 (83) -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ----------
Net (loss) income.................... $ 12,087 $ 3,653 $ 2,114 $ (5,989) $ (52,391) $(11,444) $ (67,752)
======== ======== ======== ======== ========== ======== ==========
Balance Sheet Data (at end of
period):
Total assets......................... $291,634 $568,586 $649,610 $628,085 $1,150,992 $592,697 $1,578,232
Long-term debt....................... 181,500 154,000 135,250 131,250 686,103 131,250 1,053,324
Shareholders' equity................. 74,329 372,847 394,069 390,765 356,584 362,449 362,283
</TABLE>

- ------------
(1) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period and
should not be considered as an alternative to cash flows from operating,
investing or financing activities as determined in accordance with U.S.
GAAP. EBITDA is not a measurement under U.S. GAAP and may not be comparable
with other similarly titled measures of other companies.

(2) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to the
Company's wireless video services, and in 1998 represent nonrecurring costs
of $44,700 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data.)

Certain statements contained in this Prospectus are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are thus prospective. Such forward-looking
statements include, in particular, statements made as to plans to develop
networks and upgrade facilities, the market opportunity presented by markets
targeted by the Company, the Company's intention to connect certain wireless
video, resale telephone and Internet service customers to its advanced fiber
optic networks, the development of the Company's businesses, the markets for
the Company's services and products, the Company's anticipated capital
expenditures, the Company's anticipated sources of capital and effects of
regulatory reform and competitive and technological developments. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. Such statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements.

The following discussion should be read in conjunction with the
Company's historical Consolidated Financial Statements and Notes thereto:

General

The Company is developing networks that are capable of providing
a full range of high speed, high capacity telecommunications services, including
voice, video programming and data services including high speed Internet access.
The Company intends to provide these services individually or in bundled service
packages primarily to residential customers in high density areas and also seeks
to serve certain commercial accounts on or near its networks. In 1997, the
Company commenced providing service through advanced fiber optic network
facilities in New York City and Boston, and the Company is developing an
advanced fiber network in Washington, D.C. The Company also has hybrid
fiber/coaxial cable television operations in New York (outside New York City),
New Jersey and Pennsylvania, wireless video operations in New York City, and
certain other operations, including Internet as well as local and long distance
telephone.

The negative operating cash flow from the Company's advanced
fiber optic network business has resulted primarily from expenditures
associated with the development of the Company's operational infrastructure and
marketing expenses. The Company expects it will continue to experience
negative operating cash flow while it continues to invest in its networks and
until such time as revenue growth is sufficient to fund operating expenses.
The Company expects to achieve positive operating margins over time by (i)
increasing the number of customers it serves, (ii) increasing the number of
connections per customer by cross marketing its services and promoting bundled
service options and therefore increasing the revenue per customer, (iii)
lowering the costs associated with new subscriber additions and (iv) reducing
the cost of providing services by capturing economies of scale. The Company
expects its operating revenues will increase in 1998 through internal growth
of its current advanced fiber optic networks; however, the Company also
expects negative operating cash flow will increase for some period of time as
the Company initiates network development in Washington, D.C. and expands its
current networks. When the Company makes its initial investment in a new
market, the operating losses typically increase as the network and sales force
are expanded to facilitate growth. The Company's ability to generate positive
cash flow in the future will depend on the extent of capital expenditures in
current and additional markets, the ability of the joint ventures to generate
revenues and cash flow, competition in the Company's markets and any potential
adverse regulatory developments. The Company will be dependent on various
financing sources to fund its growth as well as continued losses from
operations. There can be no assurance that such funding will be available, or
available on terms acceptable to the Company. See "Liquidity and Capital
Resources."

The terms of the Company's joint ventures require the mutual
consent of the Company and its joint venture partner to distribute or advance
funds to the Company. The Company's debt agreements allow subsidiaries and
joint ventures to incur indebtedness for network buildout costs, which
indebtedness may contain limitations on the subsidiaries' and the joint
venture's ability to pay dividends and distributions to the Company. Although
the joint ventures have not had a significant impact on the Company's cash
flows in the periods presented, cash flows available to the Company in future
periods will be affected by the extent to which operations are conducted
through joint ventures. Due to the degree of control that the Company has in
the joint ventures, RCN accounts for the BECO joint venture on a consolidated
basis and Starpower under the equity method of accounting.

RCN Corporation is a holding company with limited assets that
conducts substantially all of its operations through subsidiaries and joint
ventures. Accordingly, RCN will be dependent on dividends and other
distributions from its subsidiaries and joint ventures to generate the funds
necessary to meet its obligations, including the payment of principal and
interest on the 1997 Notes and the 1998 Notes. The ability of RCN
Corporations's subsidiaries and joint ventures to pay dividends to RCN will be
subject to, among other things, the terms of any debt instruments and
applicable law. In addition, the terms of the Company's joint ventures
require the mutual consent of the Company and its joint venture partner to
distribute or advance funds to the Company. The Indentures allow subsidiaries
and joint ventures to incur indebtedness for network buildout costs, which
indebtedness may contain limitations on the subsidiaries' and joint ventures'
ability to pay dividends and distributions to RCN Corporation.

Prior to September 30, 1997, the Company was operated as part
of C-TEC. On September 30, 1997, C-TEC distributed 100% of the outstanding
shares of common stock of its wholly owned subsidiaries, RCN and Cable
Michigan, to holders of record of C-TEC's Common Stock and C-TEC's Class B
Common Stock as of the close of business on September 19, 1997 in accordance
with the terms of a Distribution Agreement dated September 5, 1997 among
C-TEC, RCN and Cable Michigan (the "Distribution Agreement"). RCN consists
primarily of C-TEC's bundled residential voice, video and Internet access
operations in the Boston to Washington, D.C. corridor, its existing New York,
New Jersey and Pennsylvania cable television operations, a portion of its long
distance operations and its international investment in Megacable.
Commonwealth Telephone, RCN and Cable Michigan have entered into certain
agreements providing for the Distribution, and governing various ongoing
relationships between the three companies, including a distribution agreement
and a tax-sharing agreement. The historical financial information presented
herein reflects periods during which the Company did not operate as an
independent company and accordingly, certain assumptions were made in
preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations or the financial condition of
the Company which would have resulted had the Company been an independent,
public company during the reporting periods, and are not necessarily
indicative of the Company's future operating results or financial condition.

Certain of the Company's businesses were acquired by C-TEC and
transferred to the Company in connection with the Distribution. On August 30,
1996, a subsidiary of C-TEC acquired an 80.1% interest in Freedom and all
related rights and liabilities from Level 3 Telecom. Freedom held the
wireless cable television business of Liberty Cable Television, Inc. ("Liberty
Cable"). The Company acquired the remaining minority interest in Freedom in
March 1997. The acquisition was accounted for as a purchase and is reflected
in the Company's consolidated financial statements since September 1996. On
May 15, 1995, C-TEC Cable Systems, Inc., a wholly owned subsidiary of C-TEC
("RCN Cable"), acquired 40% of the outstanding common stock of Twin County.
The remaining shares were subject to an escrow agreement, pending completion
of the merger, and were required to be voted under the direction of the
Company. As of May 15, 1995, the Company also assumed management of Twin
County. As a result, the Company had control of Twin County and accordingly
has fully consolidated Twin County in the Company's financial statements since
May 1995, the date of the original acquisition. The remaining outstanding
common stock of Twin County was acquired in September 1995. Goodwill relating
to this acquisition is being amortized over a period of approximately 10
years. In January 1995, RCN International Holdings, Inc. (formerly C-TEC
International, Inc.), a wholly owned subsidiary of C-TEC, purchased a 40%
equity position in Megacable, the second largest cable television provider in
Mexico. The Company accounts for its investment by the equity method of
accounting and is amortizing the original excess cost over the underlying
equity in the net assets on a straight-line basis over 15 years.

During the first quarter of 1998, the majority of the Company's advanced
fiber construction activity was concentrated in Somerville, MA, and, to a lesser
extent, New York City. The majority of such construction was scheduled to be
performed by crews of Boston Edison, the Company's joint venture partner in the
Boston market. During the first quarter of 1998, severe ice storms in nearby
territories diverted the crews of utilities such as Boston Edison as well as
most independent contractors in and around those territories from approximately
mid- January until mid-February in order to provide emergency services for power
restoration. The Company is not able to quantify the effect, if any, that this
construction delay will have on its connections and corresponding results of
operations for the immediately succeeding quarterly periods. The Company's
construction activities have expanded to multiple markets and multiple towns
within those markets, and as such, the Company is less susceptible to delays in
executing its operating plan resulting from weather, political or other external
influences; however, there can be no assurance that such delays will not occur.

Supplemental Unaudited Financial Data

RCN conducts portions of its business through joint ventures,
including its joint venture with BECO (which is consolidated in RCN's historical
results of operations) and Starpower (which is accounted for under the equity
method in RCN's historical results of operations). The supplemental unaudited
financial information set forth below presents RCN's results of operations as if
all domestic joint ventures were fully consolidated (hereinafter referred to as
"Pro Forma Total RCN"), and shows the ownership share of its domestic joint
venture partners as minority interests. The Company believes that this
supplemental unaudited financial data provides useful disclosure in analyzing
its business.

<TABLE>

Pro Forma Total RCN
Year Ended Pro Forma Total RCN
December 31, Quarter Ended March 31,
---------------------------------------------------------------------------
1995 1996 1997 1997 1998
---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales:
Voice................................... $237 $830 $4,007 431 3,515
Video................................... 65,699 87,470 103,371 24,596 26,707
Data.................................... -- 4 41 4 5,732
Commercial and other.................... 26,061 16,606 19,878 4,646 7,065
-------- -------- -------- -------- -------
Total sales............................... 91,997 104,910 127,297 29,677 43,019
Costs and expenses, excluding depreciation
and amortization:
Direct expenses............................. 39,604 35,226 51,757 11,287 18,837
Operating, selling, general and
administrative.......................... 35,399 43,881 83,422 14,237 33,815
-------- -------- -------- -------- -------
EBIDTA before nonrecurring charges........... 16,994 25,803 (7,882) 4,153 (9,633)
Depreciation and amortization................ 22,336 38,881 53,205 12,191 17,691
Nonrecurring charges......................... -- -- 10,000 10,000 44,700
-------- -------- -------- -------- -------
Operating (loss)............................. (5,342) (13,078) (71,087) (18,038) (72,024)
Interest income.............................. 29,001 25,602 22,824 5,153 13,046
Interest expense............................. (16,517) (16,046) (25,602) (3,431) (22,735)

Other income (expense), net.................. (304) (546) 131 (33) (1,381)
-------- -------- -------- -------- -------

(Loss) income before income taxes............ 6,838 (4,068) (73,734) (16,349) (83,094)
(Benefit) provision for income taxes......... 1,119 979 (20,849) (4,800) (11,682)
-------- -------- -------- -------- -------
(Loss) income before equity in
unconsolidated entities, minority interest
and extraordinary item...................... 5,719 (5,047) (52,885) (11,549) (71,412)
Equity in loss of unconsolidated entities.... (3,461) (2,282) (3,698) (805) (709)
Minority interest in loss (income) of
consolidated entities........................ (144) 1,340 7,402 910 4,369
-------- -------- -------- -------- -------
(Loss) income before extraordinary item...... 2,114 (5,989) (49,181) $(11,444) $(67,752)
Extraordinary charge -- debt prepayment
penalty...................................... -- -- (3,210) -- --
-------- -------- -------- -------- -------
Net (loss) income............................ $ 2,114 $(5,989) $(52,391) $(11,444) $(67,752)
======== ======== ======== ======== =======

<CAPTION>
Pro Forma Total RCN
At March 31,
--------------------------
1997 1998
---------- -----------
Balance sheet data:
Cash, temporary cash investments and short-
term investments............................. $53,137 $942,304
Property, plant and equipment................ $227,635 $373,587
Accumulated depreciation..................... $89,948 $119,040
Net property, plant and equipment............ $137,687 $254,547
Long-term debt............................... $131,250 $1,054,418
</TABLE>

Results of Operations

The Company has elected to adopt Statement of Financial
Accounting Standards No. 131 - "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131") in the first quarter of 1998. The Company's
operations involve developing an advanced fiber network to provide a bundled
service package of voice, video and data services to new customers in high
density markets and migrating as many customers as is economically justified
to the single source network, including customers which were served by the
Company's previously separate lines of business, for which profitability was
separately measurable and monitored. While the Company's chief decision makers
monitor the revenue streams of the various products, operations are managed
and financial performance is evaluated based upon the delivery of multiple
services to customers over a single network. This allows the Company to
leverage its network costs to maximum profitability. As a result, there are
many shared expenses generated by the various revenue streams; because
management believes that any allocation of the expenses incurred on a single
network to multiple revenue streams would be impractical and arbitrary,
management does not currently make such allocations internally. The chief
decision makers do, however, monitor financial performance in a way which is
different from that depicted in the historical general purpose financial
statements included in this Prospectus.

The Company manages operations and evaluates operating
financial performance on a pro forma total RCN basis (shown in the table
captioned "Supplemental Unaudited Financial Data" above), which reflects the
consolidation of all domestic joint ventures, including those not consolidated
under generally accepted accounting principles. The same net loss results on
both a historical and pro forma total RCN basis since the outside ownership of
the joint venture, which is consolidated only in the pro forma total RCN
information, is reflected as minority interest in the pro forma total RCN
information. The discussion which follows addresses results on a pro forma
total RCN basis.

Pro Forma Total RCN Three Months ended March 31, 1998 Compared to
Three Months ended March 31, 1997

On a historical basis for the three months ended March 31, 1998
EBITDA before nonrecurring charge and in-process technology was $(8,317) as
compared to $4,153 for the same period in 1997. Sales increased 35.3% to
$40,138 for the quarter ended March 31, 1998 from $29,677 for the same period in
1997.

Sales. Video sales are comprised primarily of subscription fees
for basic, premium and pay-per-view cable television services; for both wireless
and hybrid fiber/coaxial cable customers in New York, New Jersey and
Pennsylvania which the Company expects to migrate to its advanced fiber networks
over time. Voice sales include both resold services and traffic over the
Company's own switches. Data sales represent Internet access fees billed at
contracted rates.

Total sales increased $13,342, or 45% to $43,019 for the quarter
ended March 31, 1998 from $29,677 for the quarter ended March 31, 1997. The
increase was fueled by higher total service connections which increased 191.3%
to approximately 660,000 at March 31, 1998 from approximately 226,000 at March
31, 1997. The increase in service connections resulted from expansion of the
Company's advanced fiber network, growth in resold connections and the
acquisitions of Erols and UltraNet, which provided approximately 370,000 data
connections. Advanced fiber units passed increased 698.3% to approximately
63,000 units at March 31, 1998 from approximately 8,000 units at March 31, 1997.

Voice revenues increased $3,084 to $3,515 for the quarter ended
March 31, 1998 from $431 for the quarter ended March 31, 1997 primarily, due
to an increase in off-net connections. Off-net connections were 40,447 and
2,315 at March 31, 1998 and 1997, respectively.

Video revenue increased $2,111 or 8.6% to $26,707 for the
quarter ended March 31, 1998 from $24,596 for the quarter ended March 31,
1997. The increase is primarily due to increases of approximately 5,800
average hybrid/fiber coaxial cable connections and approximately 15,600
advanced fiber video connections.

Data revenues increased $5,728 to $5,732 for the quarter ended
March 31, 1998 from $4 for the quarter ended March 31, 1997 primarily due to
the acquisitions of Erols and UltraNet on February 20, 1998 and February 27,
1998 respectively. At March 31, 1998, with the acquisitions of Erols and
UltraNet, the Company had 370,271 off-net data connections.

Commercial and other revenues increased $2,419, or 52.1% to
$7,065 for the quarter ended March 31, 1998 from $4,646 for the quarter ended
March 31, 1997. Commercial long distance revenues increased to approximately
$5,500 for the three moths ended March 31, 1998 from $4,646 for the same
period in 1997. The increase primarily results form terminating access
provided to Commonwealth Telecom Services, Inc. ("CTSI"), a subsidiary of
Commonwealth Telephone. CTSI is a CLEC which operates in areas adjacent to
the traditional service area of Commonwealth Telephone Company (also a wholly
owed subsidiary of Commonwealth Telephone). Additionally, commercial and
other revenues increased approximately $1,300 primarily due to a increase in
commercial local main access lines of approximately 8,600 over the same period
in 1997.

Costs and Expenses Excluding Depreciation and Amortization and
Nonrecurring Charges. Costs and expenses, excluding depreciation and
amortization and nonrecurring charges, are comprised of direct costs and
operating, selling, general and administrative expenses.

Direct expenses include direct costs of providing services,
primarily video programming and franchise costs, network access fees, and
video transmission licensing fees. Direct expenses increased 7,550, or 66.9%
to $18,837 for the quarter ended March 31, 1998 from $11,287 for the quarter
ended March 31, 1997. The increase was the result of both higher sales and a
charge in the overall revenue mix to a higher volume of resold voice, which
has a lower margin than the Company's other products. The resold voice
increase represents planned marketing in areas ahead of construction of the
advanced fiber network to build a customer base which is intended to be
migrated to the advanced fiber network. Additionally, direct expenses
increased as a result of higher video programming rates and channel launches.

Operating, selling, general and administrative expenses primarily
include customers service costs, advertising, sales and marketing expenses,
plant maintenance and repair ("technical expenses"), salaries and benefits, and
other corporate overhead. Operating, selling, general and administrative
expenses primarily include customers service costs, advertising, sales and
marketing expenses, plant maintenance and repair ("technical expenses"),
salaries and benefits, and other corporate overhead. Operating, selling,
general and administrative costs increased $19,578, or 137.5% to $33,815 for the
quarter ended March 31, 1998 from $14,237 for the quarter ended March 31, 1997.
Advertising costs increased approximately $6,300 for the quarter ended March 31,
1998 primarily due to an extensive high visibility multi-media campaign
primarily in New York City and Boston. Customer services costs increased
approximately $4,100 or 193.2% for the quarter ended March 31, 1998 primarily
due to increased staff required to support expanding markets and new service
offerings. Telephone expense to support higher call volumes related to
expansion of the customer base, billing costs for increased customers and
facilities expense for expanded staff comprise the remainder of the customer
service cost increase. Technical expense increased approximately $3,300, or
73%, for the quarter ended March 31, 1998. The increase was primarily due to
expenses associated with the commencement of telephony operations in the Lehigh
Valley, Pennsylvania market and engineering and construction headcount additions
made to plan and execute network expansion. Sales and marketing costs increased
approximately $3,500, or 126.1% for the quarter ended March 31, 1998. The
increase resulted from additional staff, and related commissions and benefits,
to cover the Company's expanding market. The remaining increase represents
higher telemarketing expenses, principally on the Lehigh Valley, Pennsylvania
market for campaigns related to the commencement of telephony services.

Depreciation and Amortization. Depreciation and amortization is
comprised principally of depreciation related to the Company's advanced fiber
network, its wireless network, and its hybrid fiber/coaxial cable systems; and
amortization of subscriber lists, building access rights and goodwill resulting
primarily from its acquisitions of Freedom, Twin County, Erols and UltraNet.

Depreciation and amortization was $17,691 for the three month
period ending March 31, 1998 and $12,191 for the three month period ending
March 31, 1997. The increase of $5,500, or 45.1% was the result of a higher
depreciable basis of plant resulting primarily from expansion of the Company's
advanced fiber network. The cost basis of property, plant and equipment on a
pro forma total RCN basis, at March 31, 1998 and 1997 was $373,587 and
$227,635, respectively. Additionally, higher intangible assets resulted from
the payment of $15,000 on March 21, 1997 of contingent consideration
applicable to the Company's original purchase of an 80.1% ownership interest
in Freedom and from the payment of an additional $15,000 on March 21, 1997 to
acquire the remaining 19.9% ownership in Freedom. The intangible assets
resulting from these payments were depreciable for the full quarter ended
March 31, 1998 but only from the date of payment for the quarter ended March
31, 1997. The basis of intangible assets, on a pro forma total RCN basis, was
$180,791 and $150,272 at March 31, 1998 and 1997, respectively.

Nonrecurring Charge--Acquisition Costs--In Process Technology.
Acquisition costs--In-process technology was $44,700 for the quarter ended March
31, 1998. In connection with the acquisitions of Erols and UltraNet, the Company
and an independent third party are conducting a study for the purpose of
allocating the purchase price paid for Erols and UltraNet. The preliminary
results of this study indicate that at least $44,700 will be allocable to
in-process technology.

The value of in-process technology constitutes that portion of
the purchase price representing future cash flows from those new and developing
technologies expected to displace the current approaches to serving customer
needs in the Internet service field.

Interest Income. Interest income was $13,046 and $5,153 for the
three month periods ended March 31, 1998 and 1997, respectively. The increase
of $7,893, or 153.2% results from higher cash, temporary cash investments and
short-term investments as compared to the same period in 1997. Cash, temporary
cash investments and short-term investments, on a pro forma total RCN basis,
were approximately $942,000 at March 31, 1998 and approximately $53,000 at March
31, 1997. Such increase was due to proceeds from the Company's borrowings
subsequent to March 31, 1997.

Interest Expense. Interest expense primarily represents
interest on the Company's $225,000 of 10% Senior Notes issued in October 1997,
its $601,045 of 11 (1)/(8)% Senior Discount Notes issued in October 1997, the
$25,000 revolving credit agreement and the $100,000 term credit facility of
certain of the Company's subsidiaries issued in August 1997, and the Company's
$567,000 of 9.8% Senior Discount Notes issued in February 1998, along with
amortization of debt acquisition costs related to these financing
arrangements. For the quarter ended March 31, 1998, interest expense was
$22,735 as compared to $3,431 for the quarter ended March 31, 1997. The
increase resulted from the financings placed subsequent to the first quarter
of 1997, described above, offset by a reduction due to the prepayment in
September 1997 of $131,250 of 9.65% Senior Secured Notes.

Other Expense. Other expense was $1,381 and $33 for the
quarterly periods ended March 31, 1998 and 1997, respectively. The primary
component of other expense for the quarter ended March 31, 1998 was the write
down of certain of the Company's information technology assets which the
Company intends to replace within the next several months with higher capacity
state of the art products in connection with an overall internal technology
upgrade.

Income Tax. The Company's effective income tax rate was a
benefit of 14.7% and 29.5% for the quarters ended March 31, 1998 and March 31,
1997, respectively. The primary reason for the difference was the charge for in
process technology for which a benefit is not realizable and correspondingly was
not recorded.

Minority Interest. On a pro forma total RCN basis, for the
first quarter of 1998 minority interest of $4,369 primarily represents the 49%
interest of BECO in the loss of RCN-BECOCOM of $3,645 and the 50% interest of
PCI in the loss of Starpower of $783. On a historical basis, Starpower is
accounted for under the equity method. In the first quarter of 1997, minority
interest primarily represents the 19.9% minority interest in the loss of
Freedom of $966. The Company purchased the remaining 19.9% ownership interest
in Freedom on March 21, 1997.

Equity in Loss of Unconsolidated Entities. On a pro forma
total RCN basis equity in the loss of unconsolidated entities primarily
represents the Company's share of the losses and amortization of excess cost
over net assets of Megacable. On a historical basis, for the first quarter of
1998, equity in the loss of unconsolidated entities also includes the
Company's 50% interest in the loss of Starpower of $784.

Pro Forma Total RCN Year Ended December 31, 1997 Compared to Year Ended December
31, 1996:

On a historical basis, for the year ended December 31, 1997,
operating income before depreciation and amortization and nonrecurring charge
was ($7,670) as compared to $25,803 for the year ended December 31, 1996.
Sales increased 21.3% to $127,297 for the year ended December 31, 1997 from
$104,910 for the same period in 1996.

Sales. For the year ended December 31, 1997, total sales were
$127,297, an increase of $22,387 or 21.3%, from $104,910 for the year ended
December 31, 1996, primarily due to higher total service connections which
increased 20.6% to approximately 268,000 at December 31, 1997 from
approximately 222,000 at December 31, 1996. The increase is due to the
commencement of service through advanced fiber optic network facilities as
well as growth in resold voice and off-net video connections.

Voice revenues increased $3,177 to $4,007 for the year ended
December 31, 1997 from $830 for the year ended December 31, 1996. The
increase was primarily due to an increase in off-net connections. Off-net
connections were 24,900 and 1,875 at December 31, 1997 and 1996, respectively.

Video revenue increased $15,901 or 18.2% to $103,371 for the
year ended December 31, 1997 from $87,470 for the year ended December 31,
1996. The increase was due to an increase in off-net video sales principally
resulting from higher basic service revenue resulting from approximately 4,850
additional average monthly subscribers over 1996, the effects of a rate
increase in the first quarter of 1997 and cash incentives related to the
launch of certain new channels. Additionally, other video sales increased
primarily due to the acquisition of Freedom on August 30, 1996 (the "Freedom
Acquisition"), which resulted in approximately 38,000 wireless video
connections for a full year in 1997 as compared to four months in 1996. The
Company also began providing video service over its advanced fiber network
during 1997 and had approximately 11,800 advanced fiber connections at
December 31, 1997.

Commercial and other revenues increased $3,272, or 19.7% to
$19,878 for the year ended December 31, 1997 from $16,606 for the year ended
December 31, 1996. The increase primarily results from terminating access
provided to CTSI. An increase in commercial main access lines of approximately
5,200 over 1996 accounted for approximately $1,100 of the increase in commercial
and other revenue.

Cost and Expenses, Excluding Depreciation and Amortization and
Nonrecurring Charges. For the year ended December 31, 1997, direct expenses
were $51,757, an increase of $16,531 or 46.9% as compared to direct expenses
of $35,226 in 1996. The increase is primarily attributable to higher sales
and a change in overall revenue mix to a higher volume of resold voice, which
has a lower margin than the Company's other products. The resold voice
increase represents planned marketing primarily in the Boston and New York
City markets ahead of construction of the advanced fiber network to build a
customer base which is intended to be migrated to the advanced fiber network.
Origination and programming costs increased approximately $7,200 primarily due
to higher video connections, rate increases and additional channels. The
remaining increase in direct costs and expenses is principally attributable to
higher commercial long distance network capacity in anticipation of volume
growth in the Company's markets resulting in higher recurring costs.

Operating, selling, general and administrative expenses
primarily include customer service costs, advertising, sales and marketing
expenses, plant maintenance and repair ("technical expenses"), salaries and
benefits, and other corporate overhead.

Operating, selling, general and administrative expenses increased
$39,541 or 90.1% to $83,422 for the year ended December 31, 1997 from $43,881
for the year ended December 31, 1996. Advertising costs increased
approximately $9,000 for the year ended December 31, 1997 primarily due to a
high visibility multi-media campaign to promote name recognition primarily in
New York City and Boston. Customer service costs increased approximately
$4,100, or 60.3% primarily related to headcount additions to support the
increase in the customer base and to meet the Company's objectives for world
class customer service. Technical expense increased approximately $8,300, or
75.1% for the year ended December 31, 1997. The increase is primarily related
to salaries and benefits associated with increased network engineering staff,
responsible for planning the development and construction of the advanced fiber
network, and increased installation and repair technicians. Sales and marketing
costs increased approximately $8,500, or 116.7%, for the year ended December 31,
1997. The increase relates to higher sales staff to increase penetration in the
Company's markets, higher marketing staff to monitor and coordinate the
Company's direct advertising efforts and plan sales promotions and to higher
telemarketing expenses. The remaining increase in operating, selling, general
and administrative expenses is attributable to several factors including costs
associated with the spin-off of the Company from C-TEC. Additionally, in
connection with the Distribution (Note 1), C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of RCN no longer accrued benefits under
the defined benefit pension plan, but became fully vested in their defined
pension benefits accrued through that date. C-TEC notified affected
participants in December 1996. In December 1996, C-TEC allocated pension plan
assets of $6,984 to a separate plan for employees who no longer accrue benefits
after December 31, 1996. The underlying liabilities were also allocated. The
allocation of assets and liabilities resulted in a curtailment/settlement gain
of $4,292. The Company's allocable share of this gain was $3,437. Such gain
did not recur in 1997.

Depreciation and Amortization. Depreciation and amortization
increased $14,324, or 36.8% to $53,205 for the year ended December 31, 1997 as
compared to $38,881 for 1996. The increase is principally due to the additional
depreciation and amortization resulting from the Freedom Acquisition and
depreciation related to the Company's advanced fiber optic networks in New
York City and Boston.

In future periods, depreciation and amortization are expected
to exceed amounts recorded in 1997 due to depreciation with respect to the
Company's advanced fiber optic networks in New York City and Boston and due to
depreciation and amortization with respect to the Company's acquisitions in
February 1998 of Erols and UltraNet (Note 19).

Nonrecurring Charges. Nonrecurring charges of $10,000 in 1997
represent costs incurred with respect to the termination of a marketing
services agreement held by Freedom.

Interest Income. For the year ended December 31, 1997,
interest income was $22,824, a decrease of $2,778, or 10.9% primarily due to
lower average cash balances and lower average notes receivable with related
parties. Average cash balances decreased principally as a result of the
Freedom Acquisition in August 1996 (as well as the acquisition in March 1997
of the remaining 19.9% ownership interest in Freedom) and capital
expenditures, partially offset by the proceeds of the Company's high yield
debt offering in October 1997 (Note 10).

Interest Expense. For the year ended December 31, 1997, interest
expense was $25,602, an increase of $9,556, or 59.6% primarily due to interest
expense on the Company's $225,000 of 10% Senior Notes and $601,045 aggregate
principal amount at maturity of 11 1/8% Senior Discount Notes placed in October
1997 (Note 10). This was partially offset by lower interest expense resulting
from the required principal payment in December 1996 of $18,750 on the 9.65%
Senior Secured Notes. Additionally, the Company paid $922 to Level 3 Telecom
Holdings, Inc. ("Level 3 Telecom") in 1996 in connection with the Company's
August 1996 acquisition of Level 3 Telecom's 80.1% interest in Freedom. This
portion of the consideration represents an amount to compensate Level 3 Telecom
for forgone interest on the amount which it had invested in Freedom.

Income Tax. Benefit for income taxes increased $21,828 primarily
due to the increase of $65,020 in loss after minority interest and equity in
consolidated entities before income taxes. For an analysis of the change in
income taxes, see the reconciliation of the effective income tax rate in Note 11
to the Consolidated Financial Statements.

Minority Interest. Minority interest in the loss of
consolidated entities increased $6,062 primarily as a result of the minority
share of the losses of the BECO joint venture (Note 7), which began operations
in June 1997. Additionally, the minority share of the losses of Freedom from
January 1 through March 21, at which time the Company acquired the remaining
19.9% ownership interest, was $966 and the minority share of the losses of the
PEPCO joint venture which began operations in 1997, and which is consolidated
in the pro forma total RCN statements but not the historical statements, was
$106.

Equity in loss of Unconsolidated Entities. The Company's equity
in the (loss) of unconsolidated entities was ($3,698) in 1997 and ($2,282) in
1996, and is comprised principally of the Company's share of the operating
results of Megacable. In January 1995, the Company purchased a forty percent
equity position in Megacable, a Mexican cable television provider, for cash of
$84,115. The Company is exposed to foreign currency translation adjustments
resulting from translation into U.S. dollars of the financial statements of
Megacable, which through December 1996 utilized the peso as the local and
functional currency. Such adjustments have historically been included as a
separate component of shareholders' equity. Effective January 1, 1997, since
the three year cumulative rate of inflation at December 31, 1996 exceeded 100% ,
Mexico is being treated for accounting purposes under Statement of Financial
Accounting Standards No. 52 - "Foreign Currency Translation" as having a highly
inflationary economy. As a result, the financial statements of Megacable are
remeasured as if the functional currency were the U.S. dollar. The
remeasurement of the Mexican peso into U.S. dollars creates translation
adjustments which are included in net income. The Company is also exposed to
foreign currency transaction losses resulting from transactions of Megacable
which are made in currencies different from Megacable's own. The Company's
proportionate share of transaction gains (losses) are included in income as they
occur. The Company does not hedge its foreign currency exchange risk and it is
not possible to determine what effect future currency fluctuations will have on
the Company's operating results. Exchange gains (losses) of ($12), $247, and
($932) in 1997, 1996, and 1995, respectively, including translation losses in
1997, are included in the respective statements of operations through the
Company's proportionate share of losses of Megacable.

In 1997, Megacable had sales of $30,441, operating income
before depreciation and amortization of $10,504 and net income of $6,653. In
1996, Megacable had sales of $23,225, operating income before depreciation and
amortization of $10,183 and net income of $10,226. Year end subscriber counts
were 211,627 at December 31, 1997 as compared to 178,664 at December 31, 1996.
In 1997 and 1996, the Company's share of the income of Megacable was $2,411
and $4,090, respectively, which includes the exchange gains (losses) as
discussed above. The Company's investment in Megacable exceeded its
underlying equity in the net assets of Megacable when acquired by
approximately $94,000, which goodwill is being amortized on a straight-line
basis over 15 years. In 1997 and 1996, amortization of the Company's excess
purchase price over the net assets of Megacable when acquired was $6,280 in
each year.

Extraordinary Charge. In September 1997, the Company prepaid
Senior Secured Notes with the proceeds of new credit facilities (Note 10).
The early extinguishment of the Senior Secured Notes resulted in an
extraordinary charge of $3,210, net of taxes.

Pro Forma Total RCN Year Ended December 31, 1996 Compared to Year Ended December
31, 1995

On a historical basis, for the year ended December 31, 1996,
operating income before depreciation and amortization was $25,803 as compared
to $16,994 for the year ended December 31, 1995. Sales increased 14.0% to
$104,910 for 1996 from $91,997 in 1995. The improvement in operating income
before depreciation and amortization of $8,809 was offset by higher
depreciation and amortization of $16,545, as discussed below, resulting in a
net loss of ($5,989) for the year ended December 31, 1996 as compared to net
income of $2,114 in 1995.

Sales. For the year ended December 31, 1996, total sales were
$104,910, an increase of $12,913 or 14.0% from $91,997 for the year ended
December 31, 1995. Video sales increased $21,771, or 33.1% to $87,470 in 1996
from $65,699 in 1995, primarily due to the acquisition of the Pennsylvania
cable system (formerly Twin County Trans Video, Inc.) in May 1995, which
resulted in $13,530 of the increase in sales in 1996. The Pennsylvania cable
system serves approximately 74,000 subscribers in the Greater Lehigh Valley
area of Pennsylvania. The remaining increase in video sales is due to higher
basic service revenues resulting from an increase in average subscribers of
4,995 or 5.3% and the full year impact, in 1996, of the 9.6% rate increase in
April 1995 and the impact of 5.9% rate increase in February 1996. The 14.0%
increase in total sales in 1996 was lower than the increase of 54.6% in 1995,
principally due to the consolidation of the Pennsylvania cable system for
seven months (from acquisition in May 1995). Since the Pennsylvania cable
system was consolidated for seven months in 1995, consolidation for a full
year in 1996 reflects only incremental five months revenue as compared to
incremental seven months revenue in 1995.

Commercial and other revenues decreased $9,455, or 36.3%, to
$16,606 in 1996 from $26,061 in 1995 principally as a result of termination of
AT&T Tariff 12 resale services in the second quarter of 1995.

Cost and Expenses, Excluding Depreciation and Amortization and
Nonrecurring Charges. For the year ended December 31, 1996, direct expenses
were $35,226, a decrease of $4,378 or 11.1% as compared to direct expenses
of $39,604 in 1995. Lower costs associated with the reduction in AT&T Tariff
12 resale services were partially offset primarily by higher origination,
programming and franchise costs principally resulting from the acquisition of
the Pennsylvania cable system, the Freedom Acquisition, other subscriber
growth, channel additions and programming fee increases.

Operating, selling, general and administrative expenses
increased $8,482 or 24.0% to $43,881 for the year ended December 31, 1996 from
$35,399 for the year ended December 31, 1995. Customer service costs increased
approximately $2,700 or 66.1% primarily due to increased staff to support the
start-up and expected growth of bundled service operations in New York City
and Boston. Technical expenses increased approximately $3,000 or 38.3%
primarily as a result of the Freedom Acquisition in August 1996.
Additionally, technical expense increased as a result of the acquisition of
the Pennsylvania cable system in May 1995, resulting in consolidation for
seven months in 1995 as compared to a full year in 1996. Sales and marketing
costs increased approximately $1,500 or 26.6% for the year ended December 31,
1996. The increase is primarily related to the Freedom Acquisition and the
start-up of sales and marketing efforts for the bundled service product in New
York City and Boston. The remaining increase in operating, selling, general
and administrative expenses is comprised of an increase of approximately $250
in advertising, the Company's allocable share of costs associated with
investigation of the feasibility of various restructuring alternatives of
C-TEC to enhance shareholder value, and other increases in general and
administrative expenses of approximately $3,900 resulting from the Freedom
Acquisition. These other increases were partially offset by the Company's
allocable share of the gain on the partial curtailment and settlement of
C-TEC's defined benefit pension plan of $3,437.

Depreciation and Amortization. For 1996, depreciation and
amortization expense was $38,881, an increase of $16,545 or 74.1% as compared
to 1995 primarily due to purchase accounting effects of the acquisition of the
Pennsylvania cable system in May 1995 and the Freedom Acquisition on August
30, 1996. (See Note 4 to the Consolidated Financial Statements.) In addition,
the Company incurred $3,756 in depreciation related to the Company's advanced
fiber optic networks in New York City and Boston.

Interest Income. For the year ended December 31, 1996,
interest income was $25,602, a decrease of $3,399, or 11.7% due primarily to a
reduction in average cash balances in 1996 as compared to 1995 and a decrease
in the average yield on invested cash, partially offset by interest income of
$2,222 accrued on a $13,088 note receivable acquired from Mazon Corporativo
S.A. de C.V. in January 1996. Average cash balances decreased in 1996
primarily due to cash used in the Freedom Acquisition and the purchase of the
loan receivable from Mazon Corporativo S. A. de C.V. Additionally, lower
balances on notes receivable-affiliates contributed to the decrease.

Interest Expense. Interest expense for 1996 was $16,046, a
decrease of $471, or 2.9% in 1996 as compared to 1995. This decrease is due
to lower average rates on outstanding debt and includes approximately $922
paid to Level 3 Telecom, the Company's controlling shareholder, in
connection with the Freedom Acquisition. This portion of the consideration
represents an amount to compensate Level 3 Telecom for forgone interest on
the amount invested in Freedom.

Income Taxes. The Company's effective income tax rate was
(19.5%) in 1996 and 34.6% in 1995. For an analysis of the change in income
taxes, see the reconciliation of the effective income tax rate in Note 11 to
the Consolidated Financial Statements.

Minority Interest. As a result of the Freedom Acquisition,
Freedom's financial results are consolidated with the Company since August 30,
1996, the date of acquisition. This resulted in minority interest in the loss
of Freedom of $1,546 for 1996. Additionally, the 20% minority interest in the
income of HomeLink Limited Partnership, a Hybrid Fiber/Coaxial subsidiary, was
($206) in 1996 as compared to ($144) in 1995.

Equity in loss of Unconsolidated Entities. In 1996, Megacable
had sales of $23,225, operating income before depreciation and amortization of
$10,183 and net income of $10,226. In 1995, Megacable had sales of $20,841,
operating income before depreciation and amortization of $8,154 and net income
of $5,802. Year end subscriber counts were 178,664 at December 31, 1996 as
compared to 177,317 at December 31, 1995. In 1996 and 1995, the Company's
share of the income of Megacable was $4,090 and $2,696, respectively, which
includes foreign currency transaction losses as noted in the 1997 discussion.
In 1996 and 1995, amortization of the Company's excess purchase price over the
net assets of Megacable when acquired was $6,280 and $5,757, respectively.

Liquidity and Capital Resources

The Company expects that it will require a substantial amount of
capital to fund the network development and operations in the Boston to
Washington, D.C. corridor, including funding the development of its advanced
fiber optic networks, upgrading its Hybrid Fiber/Coaxial plant, funding
operating losses and debt service requirements. The Company currently estimates
that its capital requirements for the period from January 1, 1998 through 1999
will be approximately $785,000, which includes capital expenditures (including
connection costs which will only be incurred as the Company obtains
revenue-generating customer connections) of approximately $300,000 in 1998 and
approximately $485,000 in 1999. The Company's capital expenditure plan has been
accelerated due to more rapid deployment of its network development plan, in
part due to the Erols and UltraNet acquisitions. These capital expenditures will
be used principally to fund the buildout of the Company's fiber optic network
in high density areas in the Boston, New York and Washington, D.C. markets and
to upgrade its Hybrid Fiber/Coaxial cable systems. To build out these areas on
an efficient basis, the Company undertakes a subscriber-driven capital
expenditure strategy whereby it (i) closely monitors development of its
subscriber base in order to direct network deployment in each target market, and
(ii) seeks to establish a customer base in advance of or concurrently with its
network deployment. For example, the Company offers Internet and resale
telephone services on an interim basis to customers located near its advanced
fiber optic networks. Depending upon factors such as subscriber density,
proximity to the advanced fiber optic network and development costs and the
degree of success achieved in its initial markets, the Company will determine
whether extending its advanced fiber optic network to additional high density
target markets can be achieved on an attractive economic basis. In addition to
its own capital requirements, the Company's joint venture partners are each
expected to contribute approximately $150,000 in capital to the joint ventures
in connection with development of the Boston and Washington, D.C. markets from
September 1997 through 2000 of which approximately $50,900 has been contributed.

The Company expects to have sufficient liquidity to meet its
capital requirements through mid-2000. The Company will continue to require
additional capital for planned increases in network coverage and other capital
expenditures, working capital, debt service requirements, and anticipated
further operating losses. The actual timing and amount of capital required to
roll out the Company's network and to fund operating losses may vary materially
from the Company's estimates and additional funds will be required in the event
of significant departures from the current business plan, unforeseen delays,
cost overruns, engineering design changes and other technological risks or other
unanticipated expenses. Due to its subscriber-driven investment strategy,
should the Company encounter a successful rollout in its initial markets, and/or
decide to enter new markets, the Company may accelerate the rollout and/or
extend the reach of its network; such acceleration could increase the Company's
capital requirements. In addition, the commencement of operations and buildout
in new markets would substantially increase the Company's capital requirements.
Conversely, should the Company be less successful than anticipated, the
operating losses associated with the installed network may be higher than
anticipated. The Company presently intends to judge the success of its initial
rollout in deciding whether to undertake additional capital expenditures to
rollout the network to additional areas. Since the Company anticipates that, if
it is successful, it will continue to extend its network coverage into
additional areas within and potentially beyond the Boston-Washington, D.C.
corridor, it expects to continue to experience losses and negative cash flow on
an aggregate basis for an extended period of time.

The Company's current joint venture agreements reduce the
amount of expenditures required by RCN to develop the network due both to
access to the joint venture partners' existing facilities and to the
anticipated joint venture partners' equity contributions. However, the joint
venture arrangements will also reduce the potential cash flows to be realized
from operation of the networks in the markets in which the joint ventures
operate and restrict the Company's access to cash flow generated by the joint
ventures (which will be paid in the form of dividends). The Company may enter
into additional joint ventures in the future as the Company begins to develop
new markets. RCN and BECO are presently in discussions with respect to the
conversion of a portion of BECO's interest in the BECO joint venture into RCN
Common Stock.

Sources of funding for the Company's further financing
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, and bank loans. The Company
continually evaluates its capital raising opportunities, and is considering,
subject to market conditions, a possible public offering or private placement
of additional debt securities during the second or third quarter of 1998.
There can be no assurance that additional financing will be available to the
Company or, if available, that it can be obtained on a timely basis and on
acceptable terms. Failure to obtain such financing could result in the delay
or curtailment of the Company's development and expansion plans and
expenditures. Any of these events could impair the Company's ability to meet
its debt service requirements and could have a material adverse effect on its
business.

In October 1997, the Company raised $575,000 in gross proceeds
from an offering of two tranches of debt securities. The offering was
comprised of $225,000 principal amount of 10% Senior Notes and $601,000
principal amount at maturity of 11(1)/(8)% Senior Discount Notes, both due in
2007. The proceeds include $61,045 of restricted cash to be used to fund the
Escrow Account to pay interest on the 10% Senior Notes for three years. In
February 1998, the Company raised $350,587 in gross proceeds from an offering
of $567,000 principal amount at maturity of 9.80% Senior Discount Notes, due
in 2008. The Indentures which govern the 1997 Notes and the 1998 Notes contain
similar provisions. The Chase Manhattan Bank acts as Trustee for each of the
Indentures. The 1997 Notes and the 1998 Notes are general senior unsecured
obligations of RCN. The 9.80% Senior Discount Notes will mature on February
15, 2008. The 9.80% Senior Discount Notes will not bear cash interest prior to
February 15, 2003. The 1997 Notes will mature on October 15, 2007. Interest
on the 10% Senior Notes are payable in cash at a rate of 10% per annum
semi-annually in arrears on each April 15 and October 15, commencing April 15,
1998. The 11(1)/(8)% Senior Discount Notes will not bear cash interest prior
to October 15, 2002.

The 9.80% Senior Discount Notes are redeemable, in whole or in
part, at any time on or after February 15, 2003 at the option of RCN. The
9.80% Senior Discount Notes may be redeemed at redemption prices starting at
104.900% of the principal amount at maturity and declining to 100% of the
principal amount at maturity, plus any accrued and unpaid interest. The 1997
Notes are redeemable, in whole or in part, at any time on or after October 15,
2002 at the option of RCN. The 10% Senior Notes may be redeemed at redemption
prices starting at 105% of the principal amount and declining to 100% of the
principal amount, plus any accrued and unpaid interest. The 11(1)/(8)% Senior
Discount Notes may be redeemed at redemption prices starting at 105.562% of
the principal amount at maturity and declining to 100% of the principal amount
at maturity, plus any accrued and unpaid interest.

RCN may, at its option, use the net proceeds of certain
offerings of RCN Common Stock to redeem up to an aggregate of 35% of the
aggregate principal amount at maturity of the debt securities issued under the
Indentures at a certain premium. Upon the occurrence of a change of control,
RCN must make an offer to purchase all of the debt securities issued under the
Indentures then outstanding at a premium.

The Indentures contain certain covenants that, among other
things, limit the ability of RCN and its subsidiaries to incur indebtedness,
pay dividends, prepay subordinated indebtedness, repurchase capital stock,
engage in transactions with stockholders and affiliates, create liens, sell
assets and engage in mergers and consolidations.

RCN Cable and certain of its subsidiaries have in place secured
credit facilities comprised of a five-year revolving credit facility in the
amount of $25,000 (the "Revolving Credit Facility") and an eight-year term
credit facility in the amount of $100,000 (the "Term Credit Facility"), both of
which facilities are governed by a single credit agreement dated as of July 1,
1997 (the "Credit Agreement"). As of March 31, 1998, $100,000 of the Term
Credit Facility was outstanding. The term loan must be repaid over six years in
quarterly installments, at the end of September, December, March and June of
each year from September 30, 1999 through June 30, 2005. As of March 31, 1998,
$3,000 principal was outstanding under the Revolving Credit Facility. Revolving
loans may be repaid and reborrowed from time to time. All borrowings under the
Credit Agreement will be pari passu and will be secured under a common
collateral package.

The interest rate on the Credit Agreement is, at the election
of the Borrowers, based on either a LIBOR or a Base Rate option (each as
defined in the Credit Agreement). In the case of the LIBOR option, the
interest rate includes a spread that varies, based on RCN Cable's Leverage
Ratio (defined as the ratio of Total Debt at the last day of the most recently
ended fiscal quarter to Operating Cash Flow for the four fiscal quarters then
ended), from 50 basis points to 125 basis points. In the case of the Revolving
Credit Facility, a fee of 20 basis points on the unused revolving commitment
accrues and is payable quarterly in arrears.

The Credit Agreement contains customary covenants for
facilities of this nature, including covenants limiting debt, liens,
investments, consolidations, mergers, acquisitions and sales of assets,
payment of dividends and other distributions, making of capital expenditures
and transactions with affiliates. In addition, the Borrowers are subject to
a prohibition on granting negative pledges and the Borrowers must apply
certain cash proceeds realized from certain asset sales, certain payments
under insurance policies and certain incurrences of additional debt to repay
the Revolving Credit Facility. The Credit Agreement requires the Borrowers to
maintain the following financial ratios: (i) the ratio of Total Debt at any
fiscal quarter end to Operating Cash Flow for the trailing four fiscal
quarters is not to exceed 5.0:1 initially, adjusting over time to 4.0:1; (ii)
the ratio of Operating Cash Flow to Interest Expense for any four consecutive
fiscal quarters is not to fall below 2.75:1 for periods ending during the
first 3 years after the Closing Date, adjusting to 3.0:1 thereafter; and (iii)
the ratio of Operating Cash Flow (minus certain capital expenditures, cash
taxes and cash dividends) to Fixed Charges (defined as scheduled principal
payments and interest expense) for any four consecutive quarters is not to
fall below 1.0:1 for periods ending on or before December 31, 2000 and
adjusting to 1.05:1 thereafter. The Credit Agreement also includes customary
events of default.

The Company has indebtedness that is substantial in relation to
its shareholders' equity and cash flow. At March 31, 1998, the Company had an
aggregate of approximately $1,053,000 of indebtedness outstanding, and the
ability to borrow up to an additional $22,000 under the Credit Agreement. As a
result of the substantial indebtedness of the Company, the Company's fixed
charges are expected to exceed its earnings for the foreseeable future. In
addition, the Company will require substantial additional indebtedness
particularly in connection with the buildout of the Company's networks and the
introduction of its telecommunications services to new markets. The leveraged
nature of the Company could limit its ability to effect future financing or may
otherwise restrict the Company's business activities.

The extent of the Company's leverage may have the following
consequences: (i) limit the ability of the Company to obtain necessary
financing in the future for working capital, capital expenditures, debt
service requirements or other purposes; (ii) require that a substantial
portion of the Company's cash flows from operations be dedicated to the
payment of principal and interest on its indebtedness and therefore not be
available for other purposes; (iii) limit the Company's flexibility in
planning for, or reacting to, changes in its business; (iv) place the Company
at a competitive disadvantage as compared with less leveraged competitors; and
(v) render the Company more vulnerable in the event of a downturn in its
business.

On a historical basis, for the three months ended March 31, 1998,
the Company's net cash provided by operating activities was $8,227 comprised
primarily of a net loss of $(67,752) adjusted by non-cash depreciation and
amortization of $17,691, other non-cash items totaling $46,310, working capital
changes of $8,592 and changes in long-term unearned revenue of $2,248. Net cash
used in investing activities of $(76,279) consisted primarily of purchase of
short-term investments of $77,614, additions to property, plant and equipment of
$28,064, an investment in an unconsolidated joint venture of $12,500 and
acquisitions of $40,717 (primarily the acquisitions of Erols and UltraNet),
partially offset by sales and maturities of short-term investments of $82,014.
Net cash provided by financing activities of $356,854 consisted primarily of the
issuance of long-term debt of $350,588 and contributions from a minority
interest partner of $11,025, partially offset by payments made for debt
financing costs of $5,652.

On a historical basis, for the year ended December 31, 1997, the
Company's net cash provided by operating activities was $1,661, comprised
primarily of a net loss of ($52,391) adjusted by non-cash depreciation and
amortization of $53,205, other non-cash items totaling ($611) , working capital
changes of $377 and changes in other deferred expenses of $1,081. Net cash used
in investing activities of $475,860 consisted primarily of purchases of
short-term investments of $445,137, additions to property, plant and equipment
of $79,042 and acquisitions of $30,490 (primarily acquisition of the minority
interest of Freedom) partially offset by sales and maturities of short-term
investments of $76,923. Net cash provided by financing activities of $635,266
consisted primarily of issuance of long-term debt of $688,000, change in
affiliate notes of $97,624 and transfers from C-TEC of $89,324 partially offset
by redemption of long-term debt of $141,250, transfers to C-TEC of $23,474,
payments made for debt financing costs of $19,743 and an increase related to
cash restricted for debt service of $61,250.

On a historical basis, for the year ended December 31, 1996, the
Company's net cash provided by operating activities was $23,831 comprised
primarily of a net loss of $5,989 adjusted by non-cash depreciation and
amortization of $38,881 and other non-cash items totaling ($7,184). Net cash
used in investing activities of $9,377 consisted primarily of additions to
property, plant and equipment of $38,548, the purchase of a loan receivable of
$13,088 and acquisitions of $30,090 (primarily the Freedom Acquisition),
partially offset by net sales and maturities of short-term investments of
$73,995. Net cash provided by financing activities of $9,391 included the
issuance of long-term debt of $19,000 and change in affiliate notes of $32,802
partially offset by the redemption of long-term debt of $44,750.

Impact of the Year 2000 Issue

The Company has certain financial, administrative and
operational systems which are subject to Year 2000 exposures. The Company has
performed a study to identify those specific systems which require remediation
and developed a plan to correct such situations in a timely fashion. The
Company's plan is proceeding on target. The plan includes ensuring that those
systems for which the Company is dependent on external vendors, such as
certain billing systems, will be Year 2000 compliant by the end of 1999 based
on the status of external vendors' remediation efforts. For those internal
systems that require corrective action, the Company has contracted with its
information systems services provider to rewrite the relevant programming
code. Finally, the Company is well along on a conversion of its suite of
financial systems to a state-of-the-art Oracle system. Such system is
expected to ensure Year 2000 compliance in financial applications, enable the
Company to process and report its financial transactions more efficiently and
provide a greater level of detailed information to facilitate management's
analysis which is critical to its business decisions.

The Company is employing a team approach across its management
information systems, financial and operational groups in addressing the above
issues, as well as utilizing the assistance of external consultants in the case
of the Oracle implementation. Such team approach facilitates a consistent
progress along plans without disruption of other areas of the business.

There is no assurance that the Company's plans will continue to
progress as intended. The Company estimates that its cost of Year 2000
remediation will not be material.

BUSINESS

Overview

RCN's initial advanced fiber optic networks have been
established in selected markets in the Boston to Washington, D.C. corridor,
including New York City, Boston and its surrounding communities and in the
Washington, D.C. area. The region, one of the most densely populated in the
United States, represents approximately 4% of the geography of the U.S., but
accounts for over 26% of the telecommunications market based upon the number of
telephone access lines. In the Boston market RCN operates its advanced fiber
optic network through a joint venture with BECO. The venture is managed and
51% owned by RCN and is accounted for on a consolidated basis. RCN
and BECO are presently in discussions with respect to the conversion of a
portion of BECO's interest in the BECO joint venture into RCN Common Stock.
In the Washington, D.C. market RCN is developing an advanced fiber optic
network through a joint venture named Starpower with Pepco Communications, an
indirect wholly owned subsidiary of PEPCO. Starpower is owned 50% by RCN and
50% by Pepco Communications and is accounted for under the equity method of
accounting. RCN believes that these joint ventures provide it with a number
of important advantages including access to rights of way and the use of
existing fiber optic facilities, the ability to enter its target markets
quickly and efficiently and a reduction in the up-front capital investment
required to develop its networks. In addition, the Company's joint venture
partners provide access to additional assets, equity capital and established
customer bases. The Company also benefits from its relationship with its
largest shareholder, Level 3, and from the experience gained by certain of the
Company's key employees who participated in the development of MFS
Communications Company, Inc.

Because it delivers multiple services, RCN reports the total
number of its various service connections (for local telephone, video
programming and Internet access) rather than the number of customers. See
"Business--RCN Services--Connections." As of March 31, 1998, the Company had
approximately 658,600 connections which were delivered through a variety of
owned and leased facilities including hybrid fiber/coaxial cable systems, a
wireless video system and advanced fiber optic networks. The Company is
deploying advanced fiber optic networks specifically designed to provide high
speed, high capacity telecommunications services for all new network facilities.
RCN also intends to upgrade certain of its hybrid fiber/coaxial cable systems to
enable them to provide the same range of voice, video and data services,
including bundled service options. See "Business--Properties." At March 31,
1998, RCN had approximately 20,300 total connections attributable to customers
connected to advanced fiber optic networks ("on-net" connections) and had
approximately 638,200 connections attributable to customers served through other
facilities ("off-net" connections). Off-net corrections consist of
approximately 227,500 connections attributable to the Company's fiber/coaxial
cable systems in the states of New York (outside New York City), New Jersey and
Pennsylvania, all within 75 miles of New York City, and approximately 325,000
Internet service customers gained upon completion of the acquisitions of
UltraNet and Erols in February 1998. As a result of the Erols and UltraNet
acquisitions, RCN is a leading ISP in the Boston to Washington, D.C. corridor.

RCN's extensive operating experience in both the telephone and
video industries and in the design and development of telecommunications
facilities provides it with expertise in systems operation and development, an
established infrastructure for customer service and billing for both voice and
video services and established relationships with providers of equipment and
video programming. In addition, the Company's management team and board of
directors benefit from experience gained in connection with the management of
C-TEC, which prior to September 30, 1997 owned and operated RCN. See
"--Relationship Among Commonwealth Telephone, RCN and Cable Michigan." C-TEC
has 100 years of experience in the telephone business and nearly 25 years of
experience in the cable television business. Both C-TEC and certain members of
management also have extensive experience in the design and development of
advanced telecommunications facilities.

Business Strategy

Focusing on Residential Customers in High-Density Markets.
RCN seeks to be the first operator of an advanced fiber optic network
providing voice, video and data services to residential customers in each of
its target markets. RCN believes that it is unique in its markets in offering
a wide range of bundled voice, video and data services to customers in
residential areas and in striving to connect residential customers directly to
its advanced fiber optic networks. The Company estimates that RCN's loop
lengths are approximately ten times shorter than that of the incumbents. RCN
also believes that residential customers will be attracted to lower prices,
broader service offerings, enhanced levels of customer care and consumer
choice. Although the Company's primary focus is on residential customers, RCN
also serves certain commercial accounts which are located on or in close
proximity to its networks.

Implementing Subscriber-Driven Investment Strategy. RCN
attempts to deploy efficiently its capital by tying facility development to
the procurement of customer connections. In order to promote its presence in
its markets and to develop a subscriber base for its advanced fiber optic
networks, the Company may provide selected services to customers located near
its advanced fiber networks utilizing existing facilities that are available
in advance of network construction. For example, RCN markets Internet services
and provides resold telephone services in advance of constructing or extending
its networks. RCN also provides wireless video services to approximately
40,859 customers in New York City (as of March 31, 1998) with a view to
extending the advanced fiber optic network to service many of these existing
customers.

Utilizing Strategic Alliances and Existing Facilities to Speed
and Reduce Cost of Entry. By utilizing strategic alliances, RCN is able to
enter the market quickly and efficiently and to reduce the up-front capital
investment required to develop its networks. Through alliances with companies
such as BECO, Pepco Communications and MFS/WorldCom, which provide or are
expected to provide RCN with extensive fiber optic networks or other assets,
by utilizing certain components of its own existing cable television
infrastructure, and through the strategic acquisitions of UltraNet and Erols,
RCN has been able to expedite and reduce the cost of market entry and business
development and has created the opportunity to leverage existing customer
relationships.

Network Development and Financing Plan

The Company expects that it will require a substantial amount of
capital to fund the network development and operations in the Boston to
Washington, D.C. corridor, including funding the development of its advanced
fiber optic networks, upgrading its hybrid fiber/coaxial plant and funding
operating losses and debt service requirements. The Company currently estimates
that its capital requirements for the period from January 1, 1998 through 1999
will be approximately $785 million, which includes capital expenditures
(including connection costs which will only be incurred as the Company obtains
revenue-generating customer connections) of approximately $300 million in 1998
and approximately $485 million through 1999. As a result of more rapid
deployment of its fiber optic network and the Erols and UltraNet acquisitions,
certain aspects of the Company's capital expenditure program have been
accelerated. The Company's planned capital expenditures will be used
principally to fund the buildout of the Company's fiber optic network in high
density areas in selected markets in the Boston to Washington, D.C. corridor and
to upgrade its hybrid fiber/coaxial cable systems. In addition to its own
capital requirements, the Company's joint venture partners are each expected to
contribute approximately $150 million in capital to the joint ventures from
September 1997 through 2000 in connection with development of the Boston and
Washington, D.C. markets. Immediately following the consummation of the
Offering, the Company will have approximately $1,152 million of cash and cash
equivalents and approximately $63 million of restricted cash. Such amounts are
expected to provide sufficient liquidity to meet the Company's capital
requirements through mid-2000.

The Company will continue to require additional capital for
planned increases in network coverage and other capital expenditures, working
capital, debt service requirements and anticipated further operating losses.
Sources of funding for the Company's further financing requirements may include
vendor financing, public offerings or private placements of equity and/or debt
securities, and bank loans. The Company continually evaluates its capital
raising opportunities, and is considering, subject to market conditions, a
possible public offering or private placement of additional debt securities
during the second or third quarter of 1998. There can be no assurance that
additional financing will be available to the Company or, if available, that it
can be obtained on a timely basis and on acceptable terms. Due to its
subscriber driven investment strategy, should the Company encounter a successful
rollout in its initial markets and/or decide to enter additional markets, the
Company may accelerate the rollout and/or extend the reach of its network; such
acceleration could increase the Company's capital requirements. In addition,
the commencement of operations and development of any new markets would
substantially increase the Company's capital requirements. See "Risk
Factors--Further Capital Requirements" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

RCN Services

RCN provides a wide range of local and long distance telephone,
video programming and data services, both individually and in bundled service
options.

RCN provides these services through a range of facilities
including its advanced fiber optic networks in New York City and Boston, a
wireless video system in New York City, its hybrid fiber/coaxial cable systems
in the states of New York (outside New York City), New Jersey and
Pennsylvania, and resale local and long distance telephony services.

Connections. The following table summarizes the development
of RCN's subscriber base:

<TABLE>
<CAPTION>
As of
-----------------------------------------
Service Connections(1) 6/30/97 9/30/97 12/31/97 3/31/98
------- ------- -------- -------
<S> <C> <C> <C> <C>
Advanced Fiber:
Voice...................... 370 1,909 3,214 4,473
Video...................... 1,060 4,870 11,784 15,599
Data....................... 81 326 150 267
------- ------- ------- -------
Subtotal On-Net............. 1,511 7,105 15,148 20,339
------- ------- ------- -------
Other(2):
Voice(3)................... 4,672 10,953 24,900 40,447
Video(4)................... 228,458 229,198 227,619 227,558
Data....................... -- -- -- 370,271
------- ------- ------- -------
Subtotal Off-Net............ 233,130 240,151 252,519 632,276
------- ------- ------- -------
Total Service Connections... 234,641 247,256 267,667 658,615
======= ======= ======= =======
Advanced Fiber Units Passed. 7,940 26,083 44,045 63,386
</TABLE>

- -----------
(1) Because RCN delivers multiple services, the Company accounts for its
customer activity by the number of individual local telephone, video
programming or Internet access services, or "connections," purchased.
Consequently, a single customer purchasing local telephone, video
programming and Internet access constitutes three connections.

(2) RCN classifies connections within the "Other" category until the relevant
network is capable of providing voice, video and data services, including
local telephone service through an RCN switch.

(3) In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in the Lehigh Valley area.

(4) Includes approximately 40,859 wireless connections. "Other" also includes,
among other things, wireline video connections serving the University of
Delaware (4,000 connections at March 31, 1998).

Set forth below is a brief description of RCN's services:

Voice. RCN offers full-featured local exchange telephone
service, including standard dial tone access, enhanced 911 access, operator
services and directory assistance in competition with the incumbent local
exchange providers and CLECs. In addition, RCN offers a wide range of
value-added services, including call forwarding, call waiting, conference
calling, speed dial, calling card, 800-numbers and voice mail. RCN also
provides Centrex service and associated features. RCN's local telephone rates
are generally competitive with the rates charged by the incumbent providers.
At March 31, 1998, RCN had approximately 4,473 telephone service connections
on its advanced fiber optic networks and approximately 40,447 customers for
resold telephone service.

RCN Long Distance Company provides long distance telephone
services, including outbound, inbound, calling card and operator services.
These services are offered to residential and business customers. As of March
31, 1998, RCN Long Distance Company had approximately 13,100 customers. In
the future RCN intends to offer long distance telephone service predominantly
to customers whom it expects will eventually be connected to its own
facilities.

Video Services. RCN offers a diverse line-up of high quality
basic, premium and pay-per-view video programming. Depending on the system,
RCN offers from 61 to 110 channels. RCN's basic video programming package
provides extensive channel selection featuring all major cable and broadcast
networks. RCN's premium services include HBO, Cinemax, Showtime and The Movie
Channel, as well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2.
RCN's StarCinema, available on the Company's advanced fiber optic networks,
utilizes the latest "impulse" technology allowing convenient impulse
pay-per-view ordering of the latest hit movies and special events instantly
from the customer's remote. RCN's "Music Choice" offers 30 different
commercial-free music channels delivered to the customer's stereo in digital
CD quality sound.

As of March 31, 1998, RCN had approximately 15,599 subscribers
for its video programming services provided over advanced fiber optic
networks. As of such date, RCN also had approximately 40,859 connections
attributable to the wireless video system and approximately 187,000
connections attributable to the hybrid fiber/coaxial cable systems.

Internet Access and Data Transmission. RCN's StarPass Internet
service provides access for personal computers to RCN's advanced fiber optic
network for a reliable high speed connection to provide access to electronic
mail, World Wide Web, Internet chat lines and newsgroups and remote access and
file transfer services. RCN provides data transmission services over its
advanced fiber optic network either via two-way dial-up modem over traditional
telephone lines or via cable modem utilizing RCN's high capacity network. RCN
expects to commence offering a high-speed Internet access service in certain
markets during the second quarter of 1998. RCN also offers private line
point-to-point data transmission services such as DS-1 and DS-3 with the
capability to provide higher speed connections as well. Following the recent
Erols and UltraNet acquisitions, RCN believes it is the largest regional
provider of Internet services in the Northeast. As of March 31, 1998, RCN had
approximately 370,271 Internet subscribers.

Migration of Customers to Advanced Fiber Networks

RCN provides wireless video services to customers located near
its advanced fiber optic network in New York City and provides internet
services and resale telephone service with a view to extending the advanced
fiber optic network and fully activating RCN's own telephone switches to
service many of those customers. As RCN's advanced fiber optic network is
extended into these areas or buildings, customers receiving wireless video
service in New York City will be switched to the advanced fiber optic network
from the wireless video network, and the wireless video equipment will be used
to provide service to other customers in off-network premises. Similarly, as
the advanced fiber optic network is developed and switches are deployed, voice
customers will be switched to the advanced fiber optic network from resale
accounts, thereby allowing RCN to gain additional revenue (and larger margins)
from originating and terminating access fees and to control the related
services and service quality.

Strategic Relationships

RCN has developed a number of strategic alliances and
relationships in order to provide it with early entry and to reduce the cost
of entry into the market for telecommunications services. RCN expects to
continue to pursue opportunities that may be afforded by entering into
strategic alliances to facilitate network expansion and entry into new markets.

Fiber Agreements with MFS/WorldCom. RCN, through its
affiliates, has entered into Fiber Agreements (the "Fiber Agreements"), each
dated May 8, 1997, with MFS/WorldCom, which owns or has the right to use
certain fiber optic network facilities (the "Fiber Optic Facilities") in the
Boston, Massachusetts and Borough of Manhattan, New York, New York markets
(the "Service Areas"). Pursuant to the Fiber Agreements, MFS/WorldCom (i) will
construct and provide extensions connecting the Fiber Optic Facilities to
buildings designated by RCN (the "Extensions") and (ii) has granted to RCN the
right to use certain dedicated fibers in the Fiber Optic Facilities and the
Extensions, except that RCN may not use such facilities to deliver telephone
services to commercial customers in the Service Areas. In return, RCN has
reimbursed MFS/WorldCom for the costs MFS/WorldCom incurred to install,
construct and acquire the Fiber Optic Facilities constructed prior to March
31, 1997. RCN has further agreed to pay all of the costs MFS/WorldCom incurs
to (i) install, construct and acquire the Fiber Optic Facilities constructed
between March 31, 1997 and May 8, 1998 and the Extensions, and (ii) maintain,
and support RCN's use of, the Fiber Optic Facilities and the Extensions.
Unless earlier terminated upon the occurrence of certain events set forth
therein, including a change of control of RCN, the Fiber Agreements terminate
by their terms on January 1, 2007, provided that (i) at such time the parties
may agree to extend the Fiber Agreements for up to 10 years or enter into
other alternative arrangements, and (ii) under certain circumstances,
MFS/WorldCom is required to transfer the Extensions to RCN.

BECO Joint Venture

In September 1996, RCN and BECO, through wholly owned
subsidiaries, entered into a letter of intent to form a joint venture to utilize
126 fiber miles of BECO's fiber optic network to deliver RCN's comprehensive
communications package in Greater Boston. The venture, in the form of an
unregulated entity with a term expiring in the year 2060, was formed pursuant to
a joint venture agreement dated December 23, 1996 (the "Boston Joint Venture
Agreement") providing for the organization and operation of RCN-BECOCOM, LLC
("RCN-BECOCOM"). RCN-BECOCOM is a Massachusetts limited liability company
organized to own and operate an advanced fiber optic telecommunications network
(the "Network") and to provide, in the market in and around Boston,
Massachusetts (the "Boston Market"), voice, video and data services, as well as
the communications support component of energy related customer services offered
by BECO (collectively, the "Boston Services"). RCN, through RCN Massachusetts,
owns 51% of the equity interest in RCN-BECOCOM and BECO, through a subsidiary,
owns the remaining 49% interest. This joint venture with BECO is reflected on
RCN's financial statements on a consolidated basis.

The closing of the transactions contemplated by the Boston
Joint Venture Agreement occurred on June 17, 1997. At the closing, (i) RCN
transferred to RCN-BECOCOM its business of providing Boston Services; (ii) BECO
transferred to RCN-BECOCOM access to and use of certain existing BECO
facilities; (iii) RCN and BECO made initial cash capital contributions to
RCN-BECOCOM; and (iv) the parties and/or their affiliates executed and
delivered (a) the Amended and Restated Operating Agreement of RCN-BECOCOM (the
"BECO Operating Agreement"); (b) the Construction and Indefeasible Right of
Use Agreement (the "IRU Agreement"); (c) the Management Agreement (the
"Management Agreement"); (d) the Exchange Agreement (the "Exchange
Agreement"); and (e) the Joint Investment and Noncompetition Agreement (the
"Joint Investment Agreement").

Pursuant to the BECO Operating Agreement, RCN and BECO are
required to make any additional capital contributions required by RCN-BECOCOM's
annual budget on a 51%/49% basis. The annual budget will be prepared by RCN and
is subject to review by each member of RCN-BECOCOM. RCN will manage the
business of RCN-BECOCOM; however, certain extraordinary actions require the
consent of both parties. In addition, the BECO Operating Agreement provides
that if a deadlock arises relating to a merger, reorganization, issuances of
equity, liquidation or bankruptcy, amendments to the organizational documents or
an expansion of operations of RCN-BECOCOM beyond those contemplated by the BECO
Operating Agreement, the disputing party will either sell its interest to the
other party or purchase the other party's interest in the joint venture. In the
event of a deadlock relating to other fundamental business actions or relating
to the annual budget, the matter will be submitted to arbitration. Neither RCN
nor BECO may transfer its interest in RCN-BECOCOM until June 17, 2000 without
the other's written consent. After such date, each party has the right to
purchase the interest proposed to be sold by the other party. If a party
proposes to sell more than 33% of its interest, the other party has "tag-along"
rights to sell a proportionate share of its interest. In the event a member's
interest becomes less than 25%, the other members have the option to purchase
such interest at fair market value. Upon a change in control of either RCN
Massachusetts or BECOCOM, the other party has the right to purchase all of the
equity interest in RCN-BECOCOM for fair market value, as determined by an
appraisal proceeding.

RCN will manage the business of RCN-BECOCOM pursuant to the terms
of the Management Agreement and, in consideration therefor, will receive
reimbursement for its reasonable costs, and a performance-based fee (based on
factors including the number of subscribers and operating cash flow) to be
determined by agreement of RCN and RCN-BECOCOM. The initial term of the
agreement expires on December 31, 2001. The agreement provides for automatic
successive three-year renewal periods, unless notice is given ninety days before
the end of the period.

Pursuant to the IRU Agreement, BECO will, for certain agreed
upon fees, (i) provide construction services to build out the Network, (ii)
make available to RCN-BECOCOM (a) all of the available capacity of BECO's
existing fiber backbone, and (b) the ability to use BECO's real estate, poles,
easements and other interests for the construction and operation of the
Network and (iii) maintain the Network. BECO's construction obligations expire
on June 17, 2007 and the term of the IRU Agreement generally expires on
December 31, 2060. One year before each respective expiration date, BECO
agrees to commence good-faith negotiations to extend construction obligations
beyond June 17, 2007 and to allow continued use of BECO's facilities beyond
December 31, 2060.

Under the Joint Investment Agreement, BECO will have the right
to acquire up to a 20% equity interest in any joint venture between RCN and an
electric utility company formed to provide any services similar to the Boston
Services in New England outside the Boston Market. BECO's joint investment
right shall terminate (i) upon BECO's stake in RCN-BECOCOM dropping below a
(1)/3 interest and (ii) on the later to occur of (a) June 17, 2002 or (b) two
years after RCN's stake in RCN-BECOCOM falls below a (1)/3 interest. The
agreement also provides that neither RCN, BECO nor their affiliates will be
permitted to be involved in any other enterprise providing services similar to
the Boston Services in the Boston Market. This covenant not to compete will
survive for a period of two years after either party is no longer a member of
RCN-BECOCOM.

Pursuant to the Exchange Agreement, BECO had the right at the
time of the Distribution, and has the right every two years thereafter, to
convert its ownership interest in RCN-BECOCOM into the Common Stock of RCN
pursuant to specific terms and conditions, including exercise periods,
appraisal procedures and restrictions specifically set forth in the Exchange
Agreement. Although BECO exercised its conversion right, BECO remains
obligated to make 49% of all cash contributions by the parties and any cash
contributions made after conversion will result in it owning a portion of
RCN-BECOCOM based on the value of RCN-BECOCOM at the time of the contribution.
BECO may exercise its conversion rights in whole or in part from time to time.
BECO has notified RCN that it has elected to exercise its option to the full
extent permitted by the Exchange Agreement with respect to 1997. RCN and BECO
are presently in discussions with respect to the calculation of the agreed
upon value for the exercise of such option. BECO's right to convert its joint
venture interest into Company Common Stock is subject to certain limitations
designed to ensure that the conversion does not jeopardize the tax free nature
of the Distribution. In the event BECO is unable to convert any portion of its
interest as a result of such limitations, BECO has the right to require RCN to
purchase such portion. Subject to certain restrictions set forth in the
Exchange Agreement, BECO will also be entitled, upon exchanging its investment
interest in RCN-BECOCOM for Company Common Stock, to customary registration
rights with respect to such shares.

RCN expects to benefit from the ability to utilize BECO's large
fiber optic network, its focus on innovative technology, its sales and
marketing expertise and its reach into the market. In the future, the venture
may expand into energy management and property monitoring services. Starting
in Boston, the joint venture partners will consider further expansion into
surrounding markets. RCN anticipates that as a result of its access to the
extensive BECO network, RCN's reliance on and utilization of MFS/WorldCom
facilities in Boston will be reduced significantly.

Starpower Joint Venture

On August 1, 1997, RCN Telecom Services, Inc., a subsidiary of
RCN, and Potomac Capital Investment Corporation ("PCI"), a wholly owned
subsidiary of PEPCO, entered into a letter of intent (the "Letter of Intent")
to form a joint venture which will own and operate a communications network to
provide voice, video, data and other communications services to residential
and commercial customers in the greater Washington, D.C., Virginia and
Maryland area (the "Washington, D.C. Market"). Starpower, an unregulated
limited liability company with a perpetual term, was formed on October 28,
1997 by RCN Washington and Pepco Communications. Starpower was formed to
construct, own, lease, operate and market a network for the selling of voice,
video, data and other telecommunications services (the "Relevant Business") to
all potential commercial and residential customers in the Washington, D.C.
Market. RCN, through RCN Washington, owns 50% of the equity interest in
Starpower and PCI, through Pepco Communications, owns the remaining 50%
interest. Starpower is accounted for under the equity method of accounting.

The closing (the "Starpower Closing") of the Starpower joint
venture occurred on December 19, 1997. At the Starpower Closing, RCN
Washington transferred to Starpower all its right, title and interest in and
to (i) all customer accounts of RCN Long Distance in the Washington, D.C.
Market, (ii) its business plan in the Washington, D.C. Market and experience
with respect to the Relevant Business, (iii) all building access agreements
covering any property located in the Washington, D.C. Market, (iv) the Support
Services Agreement (as described below) and (v) the benefit of certain
agreements pursuant to the Assignment of Benefits Agreement (as described
below). The documents signed at the Starpower Closing were the Starpower
Operating Agreement, Fiber Use Agreement dated as of December 18, 1997 between
PEPCO and Starpower ("Fiber Use Agreement"), Agency Agreement dated as of
December 18, 1997 by and between RCN Washington, RCN Telecom Services of
Maryland, Inc., RCN Telecom Services of Virginia, Inc. and Starpower ("Agency
Agreement"), Non-competition Agreement dated as of December 18, 1997 by and
among RCN Telecom Services, Inc., PCI and Starpower ("Non-competition
Agreement"), Assignment of Benefits Agreement dated as of December 18, 1997 by
and between RCN Washington and Starpower ("Assignment of Benefits Agreement"),
Support Services Agreement dated as of December 18, 1997 by and between RCN
Operating Services, Inc. and Starpower ("Support Services Agreement"),
Guarantee dated as of December 18, 1997 by PCI on behalf of Pepco
Communications in favor of Starpower, Guarantee dated as of December 18, 1997
by RCN on behalf of RCN Washington and other RCN obligors in favor of
Starpower and Contribution Agreement dated as of December 18, 1997 by and
between RCN Washington and Starpower ("Contribution Agreement"). RCN
Washington and Pepco Communications also each paid $12.5 million in cash in
January 1998 as their initial capital contributions.

Pursuant to the Starpower Operating Agreement, RCN Washington
and Pepco Communications are each required to make additional capital
contributions in accordance with a schedule set forth in such agreement on a
50%/50% basis. Failure of either RCN Washington or Pepco Communications to
make a scheduled capital contribution or to vote in favor of certain
additional capital contributions may result in the recalculation of equity
interests. The business and affairs of Starpower is to be managed by RCN
Washington and Pepco Communications. So long as RCN Washington and Pepco
Communications maintain a 50%/50% equity interest in the joint venture, each
of RCN Washington and Pepco Communications will appoint three members to the
operating committee, the approval of which is required for any business
action. Certain fundamental business actions, such as mergers, acquisitions,
sales of substantially all of the assets, liquidation and amendments to the
certificate of organization or any agreement signed at the Starpower Closing,
require the unanimous approval of the operating committee regardless of
whether the parties continue to maintain a 50%/50% ownership interest. Failure
to reach agreement may trigger a deadlock event. In the event a deadlock
arises within the first three years of the joint venture, the proposed action
shall be deemed rejected. If the deadlock arises thereafter, the disputing
party may give a notice to the other party offering to sell its membership or
to purchase all membership interests from the other party; the offeree has the
obligation to elect to buy or sell its interest. Subject to certain
exceptions, neither RCN Washington nor Pepco Communications may sell any
interest in Starpower for four years. Thereafter, RCN Washington or Pepco
Communications may sell any of its membership interests with the written
consent of the other subject to a right of first offer by the other party. RCN
Washington shall be restricted from transferring its interest if Pepco
Communications can demonstrate that such assignment would have a material
adverse impact on Starpower's business. Upon a change of control of RCN
Washington or Pepco Communications, which the other party has reason to
believe will have a material adverse effect on Starpower, the other party may
offer to sell its membership interests to the other party or to acquire such
party's membership interests or accept the change of control. The offeree has
the right to elect to buy or sell its interest. If a party proposes to sell its
interest to a third party, the other party has "tag-along" rights to sell a
proportionate share of its interest. Both RCN Washington and Pepco
Communications may transfer their membership interests to certain affiliates.

Under the Fiber Use Agreement, PEPCO agreed, for certain agreed
upon fees, (i) to provide construction services to develop a network and (ii)
to grant Starpower an indefeasible right of use of certain facilities and an
irrevocable right to install, maintain, use and operate its strand fiber
connections to leased facilities. Starpower has the right, at the end of the
term, to purchase not less than the whole network at the fair market value
less the amount previously paid by Starpower with respect to such facilities.
The initial term is ten years and the agreement may be renewed four times.

Under the Support Services Agreement, a subsidiary of RCN will
provide support services including customer service, billing, marketing, and
certain administrative, accounting and technical support services, each of
which shall be provided at cost. The Support Services Agreement also contains
certain indemnity provisions.

Under the Non-competition Agreement, for so long as either RCN
Washington or Pepco Communications owns an interest in Starpower, neither
party nor any of their affiliates may compete with any Relevant Business in the
Washington, D.C. Market. Neither RCN Washington nor Pepco Communications shall
attempt to solicit, divert or accept business from the customers of Starpower
for any Relevant Business in the Washington, D.C. Market or solicit any
individual who is employed by Starpower.

Starpower agreed, in the Agency Agreement, to serve as RCN
Washington's exclusive agent for the provision of telephony services in the
Washington, D.C. Market until Starpower receives sufficient authorization for
it to provide telephony services in the Washington, D.C. Market. All revenues
and customers under this Agency Agreement belong to Starpower. Starpower must
indemnify RCN Washington for any tax liability resulting from its obligations
under this Agency Agreement. The Agency Agreement also contains certain other
indemnity provisions.

Pursuant to the Assignment of Benefits Agreement, RCN
Washington assigned the benefits of all of the agreements (the "Assigned
Agreements") with suppliers of programming and entertainment, voice, video and
data services, telecommunications equipment and other products and services
useful in the conduct of the Relevant Business in the Washington, D.C. Market
to Starpower. RCN Washington may not transfer or assign its interest in the
Assigned Agreements if doing so would have a material adverse effect on
Starpower's ability to conduct the Relevant Business in the Washington, D.C.
Market. In addition, RCN Washington may not amend, modify or assign the
Assigned Agreements without the prior written consent of Starpower and
Starpower has the right to terminate any agreement amended, modified or
assigned without its consent. RCN Washington has agreed to take all reasonable
steps necessary to obtain consent for Starpower to use programming agreements
prior to the date Starpower begins offering OVS services. The Assignment of
Benefits Agreement expires on December 19, 1998 and Starpower has certain
renewal rights. Starpower may terminate the Assignment of Benefits Agreement
on 60 days' notice.

RCN has agreed to unconditionally guarantee the due and
punctual performance and discharge all of its affiliates' material covenants,
warranties, undertakings and other obligations under the agreements signed at
the Starpower Closing. PCI has agreed to unconditionally guarantee the due and
punctual performance and discharge by Pepco Communications of all its material
covenants, warranties, undertakings and other obligations under the Starpower
Operating Agreement.

Recent Acquisition Transactions

Merger with Erols Internet, Inc.

Erols is a leading regional ISP serving residential and
business subscribers in targeted markets, including New York City,
Philadelphia, Washington, D.C. and Boston. At the date of the Erol's
Acquisition Erols had approximately 293,000 subscribers. Erols currently
operates 57 POPs throughout its geographic markets, and also currently
utilizes 32 "Virtual POPs," which permit subscribers located adjacent to,
but outside of the local calling areas of, physical POPs to dial into the
Erols network on a local basis through arrangements with the relevant LEC.
Erols offers a broad range of Internet-based services, including (i)
Global Trader[SM], Erols' turn-key e-commerce product for small businesses,
(ii) Internet security services, including security consulting and virtual
private networks, and (iii) Web hosting, design and development services.

On January 21, 1998, RCN entered into the Agreement and Plan of
Merger (the "Erols Merger Agreement") among RCN, Erols, Erol Onaran, Gold &
Appel Transfer, S.A., a British Virgin Islands corporation ("Gold & Appel"),
and ENET Holding, Inc., a Delaware corporation and a wholly owned subsidiary
of RCN ("ENET"), to acquire all of the outstanding shares of common stock of
Erols. On February 20, 1998, Erols merged with and into ENET (the "Erols
Merger"), with ENET as the surviving corporation. The transaction was
completed in February 1998. The approximate total Erols Merger consideration
was $29.2 million in cash, 1,730,648 shares of RCN Common Stock plus the
assumption and repayment of approximately $5.8 million of debt (including
payment of accrued interest). Additionally, the Company is converting
approximately 999,000 stock options to stock options to purchase approximately
699,000 shares of RCN Common Stock with an average exercise price of $3.424
per share.

The Erols Merger Agreement contains customary representations,
warranties, and covenants by each party, which representations and warranties
will survive until March 31, 1999, except for certain specified
representations and warranties which will survive indefinitely or until the
expiration of the applicable statute of limitations. Pursuant to the Erols
Merger Agreement, each party has agreed to provide indemnification from
damages arising out of any misrepresentation or breach of warranty, covenant
or agreement made or to be performed by such party pursuant to the Erols
Merger Agreement. In addition, Erol Onaran has agreed to provide
indemnification from damages arising out of any misrepresentation or breach of
warranty, covenant or agreement made or to be performed by Erols on or before
the consummation of the Erols Merger, subject to certain thresholds and
limitations, and arising from certain matters set forth in the Erols Merger
Agreement.

Pursuant to the Erols Merger Agreement, at the effective time
of the Erols Merger both an escrow agreement (the "Erols Escrow Agreement")
and a registration rights agreement (the "Erols Registration Rights
Agreement") were executed and delivered. Under the terms of the Erols Escrow
Agreement, RCN delivered to the Erols Escrow Agent an aggregate of
approximately $5.84 million in cash and 93,210 shares of RCN Common Stock to
be held, invested and distributed by the Erols Escrow Agent pursuant to the
Erols Escrow Agreement. Under the terms of the Erols Registration Rights
Agreement, Erol Onaran and Gold & Appel each received customary demand and
piggy-back registration rights, subject to certain limitations as set forth in
the Erols Registration Rights Agreement.

RCN expects to contribute to Starpower, the joint venture with
Pepco Communications, the subscribers acquired in the acquisition of Erols
located in the Washington, D.C. area in which Starpower operates. On February
20, 1998, approximately 61% of all of Erols' subscribers were located in the
relevant Washington, D.C. area. RCN anticipates that Pepco Communications will
make a contribution equal to the value of such subscribers. The joint venture
partners of Starpower are currently negotiating the terms of such
contribution.

Merger With UltraNet Communications, Inc.

UltraNet is a leading ISP in the Boston area serving
residential and business customers in New England. At the date of RCN's
acquisition of UltraNet, UltraNet had approximately 32,000 subscribers.
UltraNet provides Internet service to over 500 schools, and is presently
building a network which will provide access throughout New Hampshire's
universities and colleges. UltraNet has a wide network of 42 POPs.
Services UltraNet offers to subscribers include (i) virtual hosting, which
gives customers a corporate presence on the Internet, (ii) firewall
security, which provides high quality control in monitoring access to
documents and visitors to the customer's websites, and (iii) UltraFax,
which allows customers to send faxes from their desktops. UltraNet also
offers its customers access to its network via an 800 number which allows
access from every major city in the world.

On January 21, 1998, RCN, Holding and UltraNet entered into the
UltraNet Merger Agreement. The transaction was completed in February 1998.
The total consideration for the acquisition was approximately $7.9 million in
cash, approximately 890,384 shares of RCN Common Stock and $3 million in
deferred compensation. Additionally, the Company is converting approximately
63,500 UltraNet stock options to stock options to purchase 117,052 shares of
RCN Common Stock at an average exercise price of $1.825 per share.

RCN also agreed to indemnify UltraNet and its directors,
officers and stockholders from and against liabilities or expenses incurred
(i) in connection with the severance benefits under any severance arrangement
applying to any former employee of UltraNet employed by RCN after the UltraNet
Merger is consummated, (ii) relating to a former employee's employment and/or
termination by RCN after the UltraNet Merger is consummated and (iii) incurred
by an indemnified person with respect thereto.

Pursuant to the UltraNet Merger Agreement, on February 27,
1998, the UltraNet Registration Rights Agreement was executed and delivered.
Under the terms of the UltraNet Registration Rights Agreement, certain former
shareholders of UltraNet received registration rights, subject to certain
limitations as set forth in the UltraNet Registration Rights Agreement.

RCN contributed to its joint venture with BECO the subscribers
acquired in the acquisition of UltraNet located in the Boston area as well as
1.36% (or all of Erols' subscribers located in the relevant Boston area) of
the subscribers acquired in the acquisition of Erols. On February 27, 1998,
approximately 27% of all of UltraNet's subscribers were located in the
relevant Boston area. BECO has made a corresponding contribution to the joint
venture in the form of a note in the principal amount of (49)/(51) of the
agreed value of the subscribers contributed by RCN.

Indemnification and Noncompetition Agreement

Certain stockholders holding at least 95% of the UltraNet
common stock, Series A Preferred Stock and Series B Preferred Stock executed
an Indemnification and Noncompetition Agreement (the "Indemnification
Agreement") which provides that certain representations and warranties
included in the UltraNet Merger Agreement will survive the consummation of the
merger. Such stockholders agree to indemnify RCN, severally and on a pro rata
basis, and RCN agrees to indemnify the stockholders against all losses
incurred by any of them arising out of any breach of any tax representation in
the UltraNet Merger Agreement insofar as such breach causes the merger not to
qualify as a reorganization or any material failure to perform any of its
covenants or agreements contained in the UltraNet Merger Agreement. The
maximum amount of indemnification by the stockholders on the one hand and by
RCN on the other hand is $7.5 million plus certain amounts up to $2.5 million
with respect to breach of tax representations.

The Indemnification Agreement provides that the stockholders
will not knowingly take any action which would cause the merger not to qualify
as a reorganization. Certain employees also agree not to engage in any
activity which would compete with UltraNet in the geographic region identified
as the "Boston-Washington" corridor for a period ending the earlier of five
years after the consummation of the merger or one year after his or her
termination (or two years in the case of termination for cause or voluntary
termination).

Merger With Lancit Media Entertainment, Ltd.

On February 27, 1998, RCN entered into an Agreement and Plan of
Merger ("Lancit Merger Agreement") with Lancit Media Entertainment, Ltd., a
New York corporation ("Lancit"), and LME Acquisition Corporation, a New York
corporation and a wholly owned subsidiary of RCN ("LME"). Pursuant to the
Lancit Merger Agreement, LME will merge with and into Lancit, with Lancit
surviving the merger and becoming a wholly owned subsidiary of RCN (the
"Lancit Merger"). Lancit is a producer of high-quality children's
programming, for which it has won 11 Emmy Awards. The consummation of the
Lancit Merger is subject to customary conditions, including the approval by
Lancit shareholders of the Lancit Merger.

Hybrid Fiber/Coaxial Cable Systems

RCN's hybrid fiber/coaxial cable systems were operated by C-TEC
prior to the Distribution. The following table summarizes the development of
the hybrid fiber/coaxial cable systems over the last five years:

<TABLE>
<CAPTION>
Three
Months
Ended
As of December 31, March 31,
1993 1994 1995 1996 1997 1998
-------- --------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Homes Passed................................ 118,216 119,761 282,836 283,940 290,612 293,146
Basic Subscribers........................... 87,660 92,140 176,131 179,932 184,938 186,699
</TABLE>

The service areas for these cable television networks enjoy
favorable customer demographics. The New York and New Jersey systems primarily
serve affluent bedroom communities in suburban New York City. The system in New
York State serves ten municipalities in Duchess, Putnam and Westchester
Counties, approximately 45 miles north of New York City. The New Jersey system
serves 31 contiguous municipalities in Hunterdon, Mercer, Morris and Somerset
Counties, approximately 50 miles west of Manhattan. The Pennsylvania system,
which is the largest competitive cable television system in the United States,
serves Pennsylvania's Lehigh Valley area including the cities of Allentown,
Bethlehem and Easton, and virtually all of Lehigh and Northampton Counties, and
is located less than 10 miles west of the Company's New Jersey system. Certain
of the Company's Hybrid Fiber/Coaxial Cable systems are being upgraded to enable
such networks to provide voice, video and data services, including local
telephone service, through an RCN switch. When such conversion is completed,
customers served by such networks will be included within the "on-net
connections" catagtory. In August 1997, RCN commenced offering resold local
phone service, long distance and Internet access to customers in the area served
by its Hybrid Fiber/Coaxial Cable System in the Lehigh Valley area. The Company
expects that certain customers served by such system will be migrated to
"on-net" connections over time.

Interconnection

Because access to the public switched telephone network is an
essential component of any regional or national telecommunications network,
interconnection is critical to RCN's ability to provide voice and data
services. Bell Atlantic and the other incumbent LECs and independent telephone
companies are required to provide interconnection to CLECs such as RCN
pursuant to the facilities-based interconnection requirements of Section 251
of the 1996 Act. Under the 1996 Act, the RBOC's ability to offer interLATA
long distance service is contingent upon their ability to create an
environment allowing economically-efficient competition in their local markets
for both business and residential services.

RCN has achieved interconnection through comprehensive
telephone service co-carrier interconnection agreements with Bell Atlantic and
Sprint-New Jersey covering their service areas in ten states and the District
of Columbia in the Northeast and New England-Middle Atlantic corridor areas.
These agreements will remain in effect regardless of the outcome of the
proceedings regarding the FCC's Section 251 regulations. RCN's interconnection
agreements with Bell Atlantic cover its service areas in the states of
Massachusetts, New York, Vermont, New Hampshire, Maine, Rhode Island,
Delaware, Maryland, New Jersey, Pennsylvania and Virginia and the District of
Columbia. The agreement with Sprint-New Jersey covers its service area in the
State of New Jersey. All of these agreements have been approved by the state
regulatory commissions pursuant to Section 252 of the Communications Act of
1934, as amended by the 1996 Act (the "Communications Act"). RCN believes it
has more interconnection agreements with incumbent LECs than any other company
focused primarily on the residential telecommunications market.

The terms of RCN's interconnection agreements with the
incumbent LECs include the following provisions: (i) interconnection at any
technically feasible point within their networks, equal in quality to what the
incumbent LEC provides to itself or to affiliates, (ii) exchange of all local
traffic at a fully reciprocal and identical rate; (iii) receipt by RCN of
access charges for long distance calls made to and from its customers,
including full "pass through" to RCN of such compensation on number
portability; (iv) interim number portability arrangements to allow customers
to keep their telephone numbers when they switch carriers; (v) unbundled
network elements, including local loop transmission from the incumbent LEC's
central offices to the customer's premises distinct from local switching or
other services; (vi) nondiscriminatory access to 911 and emergency 911
services; directory assistance services to allow RCN's customers to obtain
telephone numbers; operator call completion services and white pages directory
listings for RCN's customers; and (vii) access to the poles, ducts, conduits
and rights-of-way owned or controlled by the incumbent LEC at
nondiscriminatory rates. The interconnection agreements generally have an
initial term of three years and are cancellable thereafter at 90 days' notice.

Resale Arrangements

Resale of Bell Atlantic Local Telephone Services

RCN provides local telephone service on a resale basis to
customers not connected to the advanced fiber optic facilities. As of March
31, 1998, RCN had 40,447 customers for local telephone services provided
through agreements to act as a reseller of Bell Atlantic local telephone
services. RCN offers its resale customers competitive telephone rates and
RCN's superior customer service. Resale customers are billed by RCN and RCN
personnel provision customer service requests by coordinating with the
incumbent LECs on the customers' behalf.

RCN has entered into agreements to act as a reseller of Bell
Atlantic local telephone services, which enable RCN to grow its subscriber
base by offering telephone services in advance of connecting the customers to
an advanced fiber optic network. RCN's agreements with Bell Atlantic allow RCN
to purchase at a "wholesale" discount (the amount of which is determined by
regulatory commissions in each state) any telephone services that those
companies offer to their end users, such as local exchange services, vertical
features including Caller ID, Call Waiting, etc., and regional toll calls. The
agreements provide that RCN will be entitled to the most favorable terms and
conditions, including wholesale discounts, available to any telecommunications
carrier reselling similar services.

Long Distance Resale

RCN Long Distance Company provides long distance telephone
services, including private line, operator and calling card services, to
residential and business customers throughout the United States. Such services
are provided through an owned and leased switching network utilizing leased
interconnection facilities and long distance resale. RCN provides on network
origination and termination of long distance telephone services throughout the
Mid-Atlantic and New England states. For call origination and completion
throughout the rest of the country, RCN has various resale agreements.
Specifically, RCN has contracted with Level 3 for 800/888 origination,
Frontier for off network origination of outbound calling and various carriers
for terminating calls.

DirecTV

In October 1996, RCN signed an agreement with DirecTV to
deliver DirecTV's high-power direct broadcast satellite service to MDUs in New
York City. DirecTV allows RCN to offer an additional 175 channels of
programming including exclusive sports programming.

Customer Service and Billing

RCN has implemented a flexible, customer-service oriented
approach which RCN believes differentiates it from the mass-market strategy of
the incumbent providers. RCN provides customer service 24 hours a day, seven
days a week from established central call centers. The facilities utilize
state of the art technology which allows communication with subscribers, field
technicians and the Company's field offices. The largest of these facilities
is located in Dallas, Pennsylvania and handles the majority of the customer
service calls.

RCN's advanced fiber optic network is continuously monitored
for quality control and capacity issues, pursuant to a control system
featuring 16 alarm monitor points per hub site and automated housekeeping
alarms.

Billing services for video are provided by CableData while RCN
telephony billing services are provided by Consolidated Communications Systems
and Services. At the present time, RCN customers receive separate billing
statements for video and telephone service although RCN intends to offer a
single billing option in the future.

Account piracy is monitored by ongoing field audits and, in
RCN's advanced fiber optic networks, through use of state of the art
scrambling systems. Potential new customers are generally screened for credit
history before being authorized for service. RCN employs a full-time credit
and collection staff as well as a group that seeks to minimize toll fraud by
detecting and monitoring suspicious calling patterns.

Programming and Suppliers

RCN has secured license arrangements with all of its desired
programming suppliers, some of which provide volume discount pricing
structures and/or offer marketing support to the Company. Many of these
arrangements are extensions of long-standing agreements entered into by or on
behalf of the Company's hybrid fiber/coaxial cable systems, and some are newly
negotiated based upon RCN's OVS certifications. RCN has generally obtained
these license arrangements on terms and conditions that it considers
favorable.

RCN's programming arrangements include arrangements for basic
video channels, premium channels including multi-plexing, pay-per-view movies
and events, adult entertainment, electronic program guide services and digital
music services, as well as retransmission arrangements for relevant network
broadcasters.

The Company generally pays a monthly fee per subscriber per
channel for programming purchased from its suppliers. Programming costs
increase in the ordinary course of the Company's business as a result of
increases in the number of subscribers, expansion of the number of channels
provided to customers and contractual rate increases from programming
suppliers. The Company anticipates that future contract renewals for video
providers such as the Company will result in programming costs exceeding
current levels, particularly for sports programming.

A wide range of national manufacturers are the primary sources
of supplies, equipment and materials utilized in the development and
enhancement of the Company's networks. RCN has entered into Master Purchase
Agreements with certain equipment suppliers which enable it to purchase video
and switching equipment on terms which it considers favorable. The Company
anticipates that the costs for these supplies, equipment and materials will be
significant in future periods. The amount of such costs will depend on
numerous factors, many of which are beyond the Company's control.

RCN Long Distance Company

RCN Long Distance Company, a wholly owned subsidiary of RCN,
provides switched-based resale long distance services to customers on the
advanced fiber optic network as well as other customers. RCN Long Distance
Company operates the long distance business formerly operated by C-TEC, except
within the territory serviced by Commonwealth Telephone. During 1996, RCN
obtained certification in forty-seven states. RCN Long Distance Company also
provides local telephone service to commercial customers. As of March 31,
1998, RCN Long Distance Company had approximately 13,100 long distance
customers.

International

The Company owns a 40% interest in Megacable, the second
largest cable television provider in Mexico. Megacable owns 22 wireline cable
systems, and one multi-channel multipoint distribution service ("MMDS") cable
system, in Mexico, principally on the Pacific and Gulf coasts and including
Guadalajara, the second largest city in Mexico, Hermosillo, the largest city
in the state of Sonora and Veracruz, the largest city in the state of
Veracruz. At March 31, 1998 their wireline systems passed approximately 64,000
homes and served approximately 202,400 subscribers. Megacable had revenues of
$30.4 million and $23.2 million for the years ended December 31, 1997 and
1996, respectively and $9.2 million for the three months ended March 31, 1998.

Additionally, Megacable presently holds a 99% interest in
Megacable Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license
from the Mexican government to allow it to build a fiber optic network in
Mexico City, Monterrey and Guadalajara. MCM intends to use this network to
provide local voice and high-speed data service in these cities, principally
to commercial customers in Mexico City.

Relationship Among Commonwealth Telephone, RCN and Cable Michigan

The Distribution Agreement defines certain aspects of the
relationship among Commonwealth Telephone, RCN and Cable Michigan and provides
for the allocation of certain assets and liabilities among Commonwealth
Telephone, RCN and Cable Michigan. Commonwealth Telephone, RCN and Cable
Michigan have also entered into a Tax Sharing Agreement dated as of September
5, 1997 (the "Tax Sharing Agreement" and together with the Distribution
Agreement, the "Distribution Documents") to define certain aspects of their
relationship with respect to taxes and to provide for the allocation of tax
assets and liabilities.

Indemnification

Commonwealth Telephone, RCN and Cable Michigan have agreed to
indemnify one another against certain liabilities. RCN has agreed to
indemnify Commonwealth Telephone and its subsidiaries at the time of the
Distribution (collectively, the "Commonwealth Telephone Group") and the
respective directors, officers, employees and affiliates of each person in the
Commonwealth Telephone Group (collectively, the "Commonwealth Telephone
Indemnitees") and Cable Michigan and its subsidiaries at the time of the
Distribution (collectively, the "Cable Michigan Group") and the respective
directors, officers, employees and affiliates of each person in the Cable
Michigan Group (collectively, the "Cable Michigan Indemnitees") from and
against any and all damage, loss, liability and expense ("Losses") incurred
or suffered by any of the Commonwealth Telephone Indemnitees or the Cable
Michigan Indemnitees, respectively, (i) arising out of, or due to the failure
of RCN or any of its subsidiaries at the time of the Distribution
(collectively, the "RCN Group") to pay, perform or otherwise discharge any of
the RCN Liabilities (as defined below), (ii) arising out of the breach by any
member of the RCN Group of any obligation under the Distribution Agreement or
any of the other Distribution Documents and (iii) in the case of the
Commonwealth Telephone Indemnitees, arising out of the provision by the
Commonwealth Telephone Group of the services described below to the RCN Group
except to the extent that such Losses result from the gross negligence or
willful misconduct of a Commonwealth Telephone Indemnitee. "RCN Liabilities"
refers to (i) all liabilities of the RCN Group under the Distribution
Agreement or any of the other distribution documents, (ii) all other
liabilities of Commonwealth Telephone, RCN or Cable Michigan (or their
respective subsidiaries), except as specifically provided in the Distribution
Agreement or any of the other Distribution Documents and whether arising
before, on or after the Distribution Date, to the extent such liabilities
arise primarily from or relate primarily to the management or conduct of the
RCN Businesses prior to the effective time of the Distribution (the
liabilities in clauses (i) and (ii) collectively, the "True RCN Liabilities")
and (iii) 30% of the Shared Liabilities (as defined below).

Cable Michigan has agreed to indemnify the RCN Group and the
respective directors, officers, employees and affiliates of each person in the
RCN Group (collectively, the "RCN Indemnitees") and the Commonwealth Telephone
Indemnitees from and against any and all Losses incurred or suffered by any of
the RCN Indemnitees or the Commonwealth Telephone Indemnitees, respectively,
(i) arising out of, or due to the failure of any person in the Cable Michigan
Group to pay, perform or otherwise discharge any of the Cable Michigan
Liabilities (as defined below), (ii) arising out of the breach by any member
of the Cable Michigan Group of any obligation under the Distribution Agreement
or any of the other distribution documents, (iii) in the case of the
Commonwealth Telephone Indemnitees, arising out of the provision by the
Commonwealth Telephone Group of services to the Cable Michigan Group except
to the extent that such Losses result from the gross negligence or willful
misconduct of a Commonwealth Telephone Indemnitee and (iv) in the case of the
RCN Indemnitees, arising out of the provision by RCN of the services described
below to the Cable Michigan Group except to the extent that such Losses result
from the gross negligence or willful misconduct of an RCN Indemnitee. "Cable
Michigan Liabilities" refers to (i) all liabilities of the Cable Michigan Group
under the Distribution Agreement or any of the other distribution documents,
(ii) all other liabilities of the Cable Michigan, RCN or Commonwealth
Telephone (or their respective subsidiaries), except as specifically provided
in the Distribution Agreement or any of the other Distribution Documents and
whether arising before, on or after the Distribution Date, to the extent such
liabilities arise primarily from or relate primarily to the management or
conduct of the business of the Cable Michigan Group prior to the effective
time of the Distribution (the liabilities in clauses (i) and (ii)
collectively, the "True Cable Michigan Liabilities") and (iii) 20% of the
Shared Liabilities (as defined below).

Commonwealth Telephone has agreed to indemnify the Cable
Michigan Indemnitees and the RCN Indemnitees from and against any and all
Losses incurred or suffered by any of the Cable Michigan Indemnitees or the RCN
Indemnitees, respectively, (i) arising out of, or due to the failure of any
person in the Commonwealth Telephone Group to pay, perform or otherwise
discharge any of the Commonwealth Telephone Liabilities (as defined below),
(ii) arising out of the breach by any member of the Commonwealth Telephone
Group of any obligation under the Distribution Agreement or any of the other
Distribution Documents and (iii) in the case of the RCN Indemnitees, arising
out of the provision by RCN of the services described below to the
Commonwealth Telephone Group except to the extent that such Losses result from
the gross negligence or willful misconduct of an RCN Indemnitee.
"Commonwealth Telephone Liabilities" refers to (i) all liabilities of the
Commonwealth Telephone Group under the Distribution Agreement or any of the
other distribution documents, (ii) all other liabilities of Cable Michigan,
RCN or Commonwealth Telephone (or their respective subsidiaries), except as
specifically provided in the Distribution Agreement or any of the other
Distribution Documents and whether arising before, on or after the
Distribution Date, to the extent such liabilities arise primarily from or
relate primarily to the management or conduct of the business of the
Commonwealth Telephone Group prior to the effective time of the Distribution
(the liabilities in clauses (i) and (ii) collectively, the "True Commonwealth
Telephone Liabilities") and (iii) 50% of the Shared Liabilities (as defined
below).

"Shared Liability" means any liability (whether arising before,
on or after the Distribution Date) of Commonwealth Telephone, RCN or Cable
Michigan or their respective subsidiaries which (i)(a) arises from the conduct
of the corporate overhead function with respect to Commonwealth Telephone and
its subsidiaries prior to the effective time of the Distribution with certain
exceptions or (b) is one of certain fees and expenses incurred in connection
with the Restructuring and (ii) is not a True Commonwealth Telephone
Liability, a True RCN Liability or a True Cable Michigan Liability.

RCN, Cable Michigan and Commonwealth Telephone have also
generally agreed to indemnify each other and each other's affiliates and
controlling persons from certain liabilities under the securities laws in
connection with certain information provided to shareholders in connection
with the Distribution.

The Distribution Agreement also includes procedures for notice
and payment of indemnification claims and provides that the indemnifying party
may assume the defense of claims or suits brought by third parties for
non-Shared Liabilities and may participate in the defense of claims or suits
brought by third parties for Shared Liabilities. RCN is entitled to assume
the defense of claims or suits brought by third parties for Shared
Liabilities. Any indemnification paid under the foregoing indemnities is to
be paid net of the amount of any insurance or other amounts that would be
payable by any third party to the indemnified party in the absence of such
indemnity.

The Company does not believe that any of the foregoing
indemnities will have a material adverse effect on the business, financial
condition or results of operations of the Company.

Employee Matters

Under the Distribution Agreement, RCN, Cable Michigan and
Commonwealth Telephone agreed generally to assume employee benefits-related
liabilities with respect to its current and, in some cases, former employees.
Each of RCN, Cable Michigan and Commonwealth Telephone also agreed to an
allocation of employee-related liabilities arising out of certain shared
operations prior to the Distribution on the same basis as Shared Liabilities
are allocated.

Services and Other Arrangements

RCN has agreed to provide or cause to be provided to the
Commonwealth Telephone Group the following services: (i) accounting, (ii)
payroll, (iii) management supervision, (iv) cash management, (v) human
resources and benefit plan administration, (vi) insurance administration,
(vii) legal, (viii) tax, (ix) internal audit, (x) investor and public
relations and (xi) other miscellaneous administrative services. The fee per
year for these services will be 3.5% of the first $175 million of revenue of
the Commonwealth Telephone Group and 1.75% of any additional revenue. The fee
for 1997 was $8,332,000.

RCN has also agreed to provide or cause to be provided to the
Cable Michigan Group certain specified services for a transitional period
after the Distribution. The transitional services to be provided are the
following: (i) customer service, (ii) marketing, (iii) accounting, (iv)
payroll, (v) management supervision, (vi) cash management, (vii) human
resources and benefit plan administration, (viii) insurance administration,
(ix) legal, (x) tax, (xi) internal audit, (xii) programming administration,
(xiii) billing, (xiv) monthly cable guides, (xv) investor and public
relations, (xvi) provision of third party programming, and (xvii) other
miscellaneous administrative services. Subject to certain limitations, the
fee per year for services listed in items (ii)-(xiii), (xv) and (xvii) will be
4.0% of the revenues of the Cable Michigan Group plus a direct allocation of
certain consolidated cable administration functions. The fee for customer
service listed in item (i) along with the billing service listed in item
(xiii) will be a pro rata share (based on the relative number of subscribers)
of the fees and expenses incurred by RCN to provide such customer billing
services and fees to the RCN Group and the Cable Michigan Group. The total
charge to Cable Michigan for such services rendered in 1997 was $6,740,000.
The third party expense incurred by RCN to obtain third party programming and
monthly cable guides for Cable Michigan referred to in items (xiv) and (xvi)
above, are reimbursed to RCN by Cable Michigan and no additional fee is
charged with respect thereto.

Commonwealth Telephone has agreed to provide or cause to be
provided to the RCN Group and the Cable Michigan Group financial data
processing applications, lockbox services, storage facilities, LAN and WAN
support services, building maintenance and other miscellaneous administrative
services for a transitional period after the Distribution. The fees for such
services and arrangements will be an allocated portion (based on relative
usage) of the cost incurred by Commonwealth Telephone to provide such services
and arrangements to all three groups.

The services will terminate upon 60 days notice by either the
service provider or the relevant service recipient, except that the billing,
customer service, programming administration and provision of third party
programming services provided by RCN to Cable Michigan may not be terminated
by RCN on less than one year advance notice to Cable Michigan. A service
recipient may also terminate individual services by giving 60 days notice to
the applicable service provider.

The aforementioned arrangements are not the result of arm's
length negotiation between unrelated parties as Cable Michigan, Commonwealth
Telephone and RCN have certain common officers and directors. Although the
transitional service arrangements in such agreements are designed to reflect
arrangements that would have been agreed upon by parties negotiating at arm's
length, there can be no assurance that Cable Michigan would not be able to
obtain similar services at a lower cost from unrelated third parties.
Additional or modified agreements, arrangements and transactions may be
entered into between the Cable Michigan and either or both of Commonwealth
Telephone and RCN after the Distribution, which will be negotiated at arm's
length.

Miscellaneous

The Distribution Agreement also contains provisions concerning
access to information and records and rights to technology, software,
intellectual property, know-how or other proprietary rights owned, licensed or
held for use by the respective Groups. The Distribution Agreement provides
that any dispute arising out of or in connection with the Distribution
Agreement will be submitted to arbitration in accordance with the procedures
described in the Agreement.

There exist relationships among Commonwealth Telephone, RCN and
Cable Michigan that may lead to conflicts of interest. Each of Commonwealth
Telephone, RCN and Cable Michigan is effectively controlled by Level 3 Telecom.
In addition, the majority of the Company's named executive officers will also be
acting as directors and/or executive officers of one or more group companies.
See "Risk Factors -- Control by Level 3 Telecom Holding, Inc.; Conflicts of
Interest." The success of the Company may be affected by the degree of
involvement of its officers and directors in the Company's business and the
abilities of the Company's officers, directors and employees in managing both
the Company and the operations of other group companies. Potential conflicts of
interest will be dealt with on a case-by-case basis taking into consideration
relevant factors including the requirements of NASDAQ and prevailing corporate
practices.

Tax Sharing Agreement

The Tax Sharing Agreement governs contingent tax liabilities
and benefits, tax contests and other tax matters with respect to tax returns
filed with respect to tax periods, in the case of Cable Michigan, ending or
deemed to end on or before the Distribution Date. Under the Tax Sharing
Agreement, Adjustments (as defined in the Tax Sharing Agreement) to taxes that
are clearly attributable to the Cable Michigan Group, the RCN Group, or the
Commonwealth Telephone Group will be allocated solely to such group.
Adjustments to all other tax liabilities will generally be allocated 50% to
Commonwealth Telephone, 20% to Cable Michigan and 30% to RCN.

Competition

Overview

RCN competes with a wide range of service providers for each of
the services that it provides. Virtually all markets for voice and video
services are extremely competitive, and RCN expects that competition will
intensify in the future. In each of the markets in which it offers voice and
video programming services, RCN faces significant competition often from
larger, better-financed incumbent local telephone carriers and cable
companies, and RCN often competes directly with incumbent providers which have
historically dominated their respective local telephone and cable television
markets. These incumbents presently have numerous advantages as a result of
their historic monopoly control of their respective markets. However, RCN
believes that most existing and potential competitors will, at least initially,
provide narrower service offerings over limited delivery platforms as compared
to the wide range of voice, video and data services that will be provided over
RCN's fiber-based networks, thereby providing RCN with an opportunity to
achieve important market penetration.

With respect to local telephone services, RCN competes with the
incumbent LECs, and alternative service providers including CLECs. Commercial
mobile radio services providers, including cellular carriers (such as Bell
Atlantic Mobile Services), personal communications services ("PCS") carriers
(such as Sprint Spectrum), and enhanced specialized mobile radio services
("ESMRS") providers (such as NexTel), may also become a source of competitive
local and long distance telephone service. However, RCN believes these
operators may primarily use competitive access services to transport their
calls among their radio transmitter/receiver sites through networks that avoid
the incumbent LECs with whom they compete.

With respect to long distance telephone services, RCN faces,
and expects to continue to face, significant competition from the IXCs,
including AT&T, Sprint and MCI, which account for the majority of all long
distance revenue. The major long distance service providers benefit from
established market share and from established trade names brought about by
nationwide advertising. RCN, however, regards its long-distance service as a
complementary service rather than a principal source of revenue. Certain IXCs,
including AT&T, MCI and Sprint, have also announced their intention to offer
local services in major U.S. markets using their existing infrastructure in
combination with resale of incumbent LEC service, lease of unbundled local
loops or other providers' services.

All of the Company's video services face competition from
alternative methods of receiving and distributing television signals and from
other sources of news, information and entertainment such as off-air
television broadcast programming, newspapers, movie theaters, live sporting
events, interactive online computer services and home video products,
including videotape cassette recorders. Among the alternative video
distribution technologies are home satellite dish earth stations ("HSDs")
which enable individual households to receive many of the satellite-delivered
program services formerly available only to cable subscribers. Furthermore,
the 1992 Act contains provisions, which the FCC has implemented with
regulations, to enhance the ability of cable competitors to purchase and make
available to HSD owners certain satellite-delivered cable programming at
competitive costs. RCN faces additional competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. The FCC and
Congress have adopted policies providing a more favorable operating
environment for new and existing technologies that provide, or have the
potential to provide, substantial competition to the Company's various video
distribution systems. These technologies include, among others, DBS service
whereby signals are transmitted by satellite to receiving facilities located
on customer premises. The Company expects that its video programming services
will face growing competition from current and new DBS service providers. RCN
also competes with wireless program distribution services such as MMDS which
use low-power microwave frequencies to transmit video programming over-the-air
to subscribers. The Company is unable to predict whether wireless video
services will have a material impact on its operations.

Other new technologies, including Internet-based services, may
become competitive with services that RCN can offer. Advances in
communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. Thus, it is
not possible to predict the effect that ongoing or future developments might
have on the voice, video and data industries or on the operations of the
Company.

RCN believes that among the existing competitors, the incumbent
LECs, incumbent cable providers and the CLECs provide the most direct
competition to RCN in the delivery of "last mile" connections for voice and
video services.

Incumbent LECs

In each of its target markets for advanced fiber optic
networks, RCN faces, and expects to continue to face, significant competition
from the incumbent LECs (including Bell Atlantic in New York City and Boston),
which currently dominate their local telephone markets. RCN competes with the
incumbent LECs in its markets for local exchange services on the basis of
product offerings (including the ability to offer bundled voice and video
services), reliability, state-of-the-art technology and superior customer
service, as well as price. RCN believes that its advanced fiber optic networks
provide superior technology for delivering high-speed, high-capacity voice,
video and data services as compared to the primarily copper wire based
networks of the incumbent LECs. However, the incumbent LECs (which have
long-standing relationships with their customers) have begun to expand the
amount of fiber facilities in their networks and to prepare to re-enter the
long distance telephone service market. The recently announced merger between
SBC and Ameritech may also potentially increase the competitive environment in
the Boston and Washington, D.C. corridor if SBC continues to pursue a
nationwide strategy.

In addition, under the 1996 Act, and ensuing federal and state
regulatory initiatives, barriers to local exchange competition are being
removed. The introduction of such competition, however, also establishes the
predicate for the incumbent RBOCs, such as Bell Atlantic, to provide in-region
interexchange long distance services. The incumbent RBOCs are currently
allowed to offer "incidental" long distance service in-region and to offer
out-of-region long distance service. Once the incumbent RBOCs are allowed to
offer in-region long distance services, they will also be in a position to
offer single source local and long distance service similar to that offered by
RCN and proposed by the three largest IXCs (AT&T, MCI and Sprint). The Company
expects that the increased competition made possible by regulatory reform will
result in certain pricing and margin pressures in the telecommunications
services business.

RCN has sought, and will continue to seek, to provide a full
range of local voice services in competition with incumbent LECs in its
service areas. The Company expects that competition for local telephone
services will be based primarily on quality, capacity and reliability of
network facilities, customer service, response to customer needs, service
features and price, and will not be based on any proprietary technology. As a
result of the comparatively recent installation of RCN's advanced fiber optic
networks, its dual path architecture and the state-of-the-art technology used
in its networks, RCN may have capital cost and service quality advantages over
some currently available local networks relied upon by the incumbent LECs, as
well as the competitive advantage provided by the ability to deliver a bundled
voice and video service.

The 1996 Act permits the incumbent LECs and others to provide a
wide variety of video services directly to subscribers in competition with
RCN. Various LECs currently are providing video services within and outside
their telephone service areas through a variety of distribution methods,
including both the deployment of broadband wire facilities and the use of
wireless transmission facilities. The Company cannot predict the likelihood of
success of video service ventures by LECs or the impact on the Company of such
competitive ventures.

Incumbent Cable Television Service Providers

Certain of RCN's video service businesses compete with
incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time-Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes primarily with Time-Warner Cable. RCN
believes that the expanded capacity and fiber-to-node architecture of its
advanced fiber optic networks in New York City and Boston make it better
equipped to provide high-capacity communications services than coaxial cable
based networks utilizing "tree and branch" architecture. RCN's Pennsylvania
hybrid fiber/coaxial cable television system competes with an alternate
service provider, Service Electric, which also holds a franchise for the
relevant service area.

Since cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis, and the 1992 Act prohibits
franchising authorities from unreasonably denying requests for additional
franchises and permits franchising authorities to operate cable systems,
well-financed businesses from outside the cable industry (such as the public
utilities that own certain of the poles on which cable is attached) may become
competitors for franchises or providers of competing services.

CLECs and Other Competitors

RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the markets in which RCN offers
its services. Other CLECs, such as Teleport Communications Group, compete for
local telephone services, although they have to date focused primarily on the
market for commercial customers rather than residential customers. In
addition, potential competitors capable of offering private line and special
access services also include other smaller long distance carriers, cable
television companies, electric utilities, microwave carriers, wireless
telephone system operators and private networks built by large end-users,
including Winstar, Dualstar and New Vision. However, RCN believes that, at
least initially, it is relatively unique in its markets in offering bundled
voice, video and data services to customers in residential areas, and in
striving to connect residential customers directly to its advanced fiber optic
network.

Internet Services

The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
accordingly competition in this market is expected to intensify. The Company
competes (or in the future may compete) directly or indirectly with (i)
national and regional ISPs; (ii) established online services; (iii) computer
software and technology companies; (iv) national telecommunications companies;
(v) LECs; (vi) cable operators; and (vii) nonprofit or educational ISPs, and
some of these present or potential future competitors have or can be expected
to have substantially greater market presence and financial, technical,
marketing and other resources than the Company. Certain of the Company's
online competitors, including America Online, the Microsoft Network and
Prodigy, have introduced unlimited access to the Internet and their
proprietary content at flat rates, and certain of the LECs have also
introduced competitive flat-rate pricing for unlimited access (without a
set-up fee for at least some period of time). Bell Atlantic has recently filed
with the FCC a petition for an exemption from a regulation prohibiting it from
building a high-speed network. Bell Atlantic's petition requests that such
network, which would serve as an Internet backbone, not be subject to pricing
and other regulatory restriction. The network would span the states from Maine
to Virginia. There can be no assurance that competition will not lead to
pricing pressures in the Internet business. For additional information on the
competitive environment in which the Company operates, see
"Business--Competition."

Other new technologies may become competitive with services
that RCN can offer. Cellularvision, a provider of LMDS, recently began
offering wireless Internet and video programming services in New York City and
has announced plans to offer telephone service in the future. Advances in
communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. In addition,
a continuing trend toward business combinations and alliances in the
telecommunications industry may also create significant new competitors to
RCN. The Company cannot predict whether competition from such developing and
future technologies or from such future competitors will have a material
impact on its operations.

Regulation

The telephone and video programming transmission services
offered by the Company are subject to federal, state and local government
regulation. The 1996 Act, which became effective in February 1996, introduced
widespread changes in the regulation of the communications industry, including
the local telephone, long distance telephone, data services, and television
entertainment segments in which the Company operates. The 1996 Act was
intended to promote competition and decrease regulation of these segments of
the industry. The law delegates to both the FCC and the states broad
regulatory and administrative authority to implement the 1996 Act.

Telecommunications Act of 1996

Among other things, the 1996 Act removes barriers to entry in
the local exchange telephone market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow incumbent RBOCs
to enter the long distance market within their own local service regions.

Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations, and the appeals were consolidated in the United States Court of
Appeals for the Eighth Circuit. On July 18, 1997, the Eighth Circuit found
constitutional challenges to certain practices implementing cost provisions of
the Telecommunications Act that were ordered by certain state PUCs to be
premature; vacated significant portions of the FCC's nationwide pricing rules;
and confined the use of combined unbundled network elements to instances where
the requesting carrier itself would do the combining. On October 14, 1997, the
Eighth Circuit issued a decision vacating additional FCC rules that will
likely have the effect of increasing the cost of obtaining the use of
combinations of an incumbent LEC's unbundled network elements. On January 26,
1998, the Supreme Court granted a writ of certiorari under which it will
review the July 18 Eighth Circuit decision; it is expected (but not yet
certain) that the Court will hear arguments on this case in the fall of 1998.
The Eighth Circuit decisions create uncertainty about the rules governing
pricing and terms and conditions of interconnection agreements, and could make
negotiating and enforcing such agreements more difficult and protracted and
may require renegotiation of existing agreements. Prior to the Eighth Circuit
decisions, the Company had entered into interconnection agreements with Bell
Atlantic, covering all of its target market area, that are generally
consistent with the FCC guidelines, and those agreements remain in effect
notwithstanding the reversal of the FCC rules. There can be no assurance,
however, that the Company will be able to obtain or enforce future
interconnection agreements, or obtain renewal of existing agreements, on terms
acceptable to the Company.

Certain RBOCs have also raised constitutional challenges to
restrictions in the 1996 Act preventing BOCs from entering the long distance
market in their home region. On December 31, 1997, the U.S. District Court for
the Northern District of Texas issued the SBC Decision finding that Sections
271 to 275 of the 1996 Act are unconstitutional. These sections of the Act
impose restrictions on the lines of business in which the RBOCs may engage,
including establishing the conditions they must satisfy before they may
provide in-region interLATA telecommunications services. The District Court
has stayed the SBC Decision pending appeal. If the stay is lifted, the RBOCs
(including Bell Atlantic, which was permitted to intervene in the case) would
be able to provide interLATA services immediately without satisfying the
statutory conditions. Although the Company believes the factual assumptions
and legal reasoning in the SBC Decision are erroneous and therefore the
decision will likely be reversed on appeal, there can be no assurance of this
outcome. If the SBC Decision were upheld on appeal it may have an unfavorable
effect on the Company's business for at least two reasons. First, RBOCs
currently have an incentive to foster competition within their service areas so
that they can qualify to offer interLATA services. The SBC Decision removes
this incentive by allowing RBOCs to offer interLATA service without regard to
their progress in opening their local markets to competition. However, the SBC
Decision would not affect other provisions of the Act which create legal
obligations for all incumbent LECs to offer interconnection and network
access, and therefore will not impair the Company's ability to compete in local
exchange markets. Second, the Company is legally able to offer its customers
both long distance and local exchange services, which the RBOCs currently may
not do. This ability to offer "one-stop shopping" gives the Company a
marketing advantage that it would no longer enjoy if the SBC Decision were
upheld on appeal. The Company cannot predict either the outcome of these or
future challenges to the 1996 Act, any related appeal of regulation or court
decision, or the eventual effect on its business or the industry in general.

The 1996 Act also makes far-reaching changes in the regulation
of the video programming transmission services offered by RCN, including
changes to the regulations applicable to video operators, the elimination of
restrictions on telephone company entry into the video business, and the
establishment of a new OVS regulatory structure for telephone companies and
others to offer such services. Under the 1996 Act, local telephone companies,
including both incumbent LECs such as Bell Atlantic, and CLECs such as RCN,
may provide service as traditional cable television operators subject to
municipal cable television franchises, or they may opt to provide their
programming over non-franchised open video systems subject to certain
conditions, including, but not limited to, making available a portion of their
channel capacity for use by unaffiliated program distributors and satisfying
certain other requirements, including providing capacity for public,
educational and government channels, and payment of a gross receipts fee
equivalent to the franchise fee paid by the incumbent cable television
operator. RCN is one of the first CLECs to provide television programming over
an advanced fiber optic network pursuant to the OVS regulations implemented by
the FCC under the 1996 Act. As discussed below, RCN is currently providing OVS
service in the City of Boston, in the City of New York and in a number of
communities surrounding Boston. Starpower is negotiating similar agreements in
Washington and surrounding communities.

Regulation of Voice Services

State Regulation of Intrastate Local and Long Distance
Telephone Services. RCN's intrastate telephone services are regulated by the
public service commissions or comparable agencies of the various states in
which these services are offered. RCN subsidiaries have received either
permanent or interim authority to offer intrastate telephone services,
including local exchange service, in Massachusetts, New York, Pennsylvania,
Maryland, the District of Columbia, and Virginia (as well as in some
neighboring jurisdictions where the Company does not currently operate but may
expand in the future) and RCN has applied for authority to offer such services
in New Hampshire. Starpower has separately obtained similar authority in
Maryland, Virginia and the District of Columbia. RCN's resale agreements with
Bell Atlantic have been approved, pursuant to Section 252 of the
Communications Act, by state regulatory commissions in Delaware, the District
of Columbia, Maine, Maryland, Massachusetts, New York, New Jersey, New
Hampshire, Pennsylvania, Rhode Island, Vermont, and Virginia.

RCN Long Distance Company is authorized to offer intrastate
long distance services in Pennsylvania, New York, Massachusetts and 45 other
states nationwide. Pursuant to such authorizations, RCN Long Distance Company
is permitted to resell intrastate long distance services both to other
carriers, including RCN's local operating subsidiaries and Starpower for
resale to their end user subscribers, and to its own end user customers.

FCC Regulation of Interstate and International Telephone
Services. RCN, through several of its subsidiaries, including RCN Long
Distance Company, may also provide domestic interstate telephone services
nationwide pursuant to tariffs on file at the FCC, and has been authorized by
the FCC under Section 214 of the 1996 Act to offer worldwide international
services as well.

Local Regulation of Telephone Services. Municipalities also
regulate limited aspects of RCN's voice business by, for example, imposing
various zoning requirements and, in some instances, requiring
telecommunications licenses, franchise agreements and/or installation permits
for access to local streets and rights-of-way. In New York City, for example,
RCN will be required to obtain a telephone franchise in order to provide voice
services using its advanced fiber optic network facilities located in the
streets of New York City (although services may be provided over certain
leased or resold facilities pending receipt of a franchise).

Regulation of Video Services

Open Video Systems. In February 1997, RCN subsidiaries were
certified to operate OVS networks in the five boroughs of New York City and,
as part of the BECO joint venture, in Boston and 47 surrounding communities.
Initiation of OVS services is subject to completion of an open enrollment
period for non-affiliated video programmers to seek capacity on the systems
and upon negotiation of certain agreements with local governments. The initial
open enrollment period for both the New York City and Boston area systems has
expired. RCN executed an agreement with the City of Boston on June 2, 1997,
and initiated OVS service in the City on that day. Pursuant to its agreement
with the City of Boston, RCN will be required to pay a fee to the City equal
to 5% of video revenues. RCN has entered into similar OVS agreements or is in
the process of negotiating agreements with certain other Boston-area
municipalities, either to offer OVS services or franchised cable television
services. RCN executed an agreement with the City of New York on December 29,
1997 and has initiated OVS service in the Borough of Manhattan pursuant to
that agreement.

In areas where it offers video programming services as an OVS
operator, RCN is required to hold a 90-day open enrollment period every three
years, during which times RCN will be required to offer capacity on its
network to other VPPs. Under the OVS regulations, RCN must offer at least
two-thirds of its capacity to unaffiliated parties, if demand for such
capacity exists during the open enrollment period. In certain areas, RCN is in
discussions with local municipal authorities to explore the feasibility of
obtaining a cable franchise in lieu of an OVS agreement, and will consider
providing RCN video service pursuant to franchise agreements rather than OVS
certification, if franchise agreements can be obtained on terms and conditions
acceptable to RCN. The Company will consider the relative benefits of OVS
certification versus local franchise agreements, including the possible
imposition of universal service requirements, before making any such
decisions. In addition, the current FCC rules concerning OVS are subject to
appeal in the United States Court of Appeals for the Fifth Circuit; if certain
aspects of the FCC's rules are overturned on appeal, the determination of
whether to operate as an OVS provider versus as a franchised cable television
operator may be affected. Moreover, the incumbent cable television provider in
Boston, Cablevision Systems, has requested that the FCC permit it to obtain
capacity on and information about RCN's Boston area OVS network, and Time
Warner, the incumbent cable television provider in certain communities in the
Boston area, has made a similar filing at the FCC with respect to its request
for capacity on and information about the Boston OVS network. In a Memorandum
Opinion Order released on April 28, 1998, the FCC's Cable Services Bureau
granted in part and denied in part Time Warner's petition. RCN has notified
the FCC that it will seek review of certain aspects of this order. RCN will
continue to oppose these requests, but to the extent that the FCC were to
grant any such request(s), such a result would likely affect the Company's
determination as to whether to operate as an OVS provider versus as a
franchised cable television operator.

Prior to its certification as an OVS provider, RCN offered
limited video programming services using the VDT services offered by
MFS/WorldCom in Manhattan and the City of Boston. In February 1997, the FCC
held that MFS/WorldCom's facilities did not qualify as video dialtone
facilities entitled to an extension of time to comply with the newly adopted
OVS rules; nonetheless, the FCC did not direct MFS/WorldCom and RCN to cease
video programming distribution operations over the MFS/WorldCom platform. One
of the incumbent cable television companies in New York City has filed a
complaint with the New York Public Service Commission challenging the former
(pre-OVS) operations of RCN and WorldCom under the VDT framework, which
remains pending before that commission.

Wireless Video Services. RCN's 18 GHz wireless video services
in New York City are distributed using microwave facilities provided by
Bartholdi Cable pursuant to temporary authorizations issued to Bartholdi Cable
by the FCC. Bartholdi Cable has agreed to provide transmission services to RCN
until RCN has either converted the wireless video subscribers to its advanced
fiber optic network facilities or has obtained FCC authority to provide such
services pursuant to its own wireless radio licenses. In addition, Bartholdi
Cable has agreed to transfer to RCN the transmission equipment on demand.
Bartholdi Cable's obligation to provide transmission services is subject to
Bartholdi Cable having licenses from the FCC to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are at issue in an FCC proceeding in
which an Initial Decision was released on March 6, 1998. In the Initial
Decision, the Administrative Law Judge found Bartholdi Cable unqualified with
respect to 15 such licenses. The Administrative Law Judge declared that the
Initial Decision would become effective 50 days after its release unless
Bartholdi Cable filed exceptions to the Initial Decision within 30 days of its
release or the FCC elected to review the case on its own motion. Bartholdi
Cable filed exceptions to the Initial Decision on April 7, 1998. Because of
the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to RCN, the Company filed its own license applications
at the FCC for all of the microwave transmission paths which are currently
being used by Bartholdi Cable to provide transmission services to RCN and, in
light of the increased uncertainties resulting from the Initial Decision in
the FCC proceeding involving certain of Bartholdi Cable's licenses, the
Company expects now actively to pursue its license applications. While the
Company expects to receive authorizations to transmit over these microwave
paths, there can be no assurance that RCN will be able to offer wireless video
services pursuant to its own FCC licenses or that the FCC's investigation will
be resolved favorably. The failure to obtain such license or resolve such
proceedings would materially adversely affect the Company's wireless video
operations in New York City.

There can be no assurance that RCN will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities, to convert its wireless video subscribers to an advanced
fiber optic network or to offer wireless video services pursuant to its own
FCC licenses.

Hybrid Fiber/Coaxial Cable. RCN's hybrid fiber/coaxial cable
systems are subject to regulation under the 1992 Act, which provides, among
other things, for rate regulation for cable services in communities that are
not subject to "effective competition," certain programming requirements, and
broadcast signal carriage requirements that allow local commercial television
broadcast stations to require a cable system to carry the station. Local
commercial television broadcast stations may elect once every three years to
require a cable system to carry the station ("must-carry"), subject to certain
exceptions, or to withhold consent and negotiate the terms of carriage
("retransmission consent"). A cable system generally is required to devote up
to one-third of its activated channel capacity for the carriage of local
commercial television stations whether pursuant to the mandatory carriage or
retransmission consent requirements of the 1992 Act. Local non-commercial
television stations are also given mandatory carriage rights. The FCC recently
issued rules establishing standards for digital television ("DTV"). Among
other provisions, the FCC's rules require television stations to simulcast
their NTSC and DTV signals for a period of years. During this simulcast
period, it is unclear whether must-carry rules will apply to DTV signals. The
Communications Act permits franchising authorities to require cable operators
to set aside certain channels for public, educational and governmental access
programming. Cable systems with 36 or more channels must designate a portion
of their channel capacity for commercial leased access by third parties to
provide programming that may compete with services offered by the cable
operator.

On September 8, 1997, the Company was notified by the FCC that
it has ruled that certain of the Company's upper levels of service for its New
Jersey systems are regulated levels of service and that the Company's rates
for such levels of service have exceeded the allowable rates under the FCC
rate regulation rules which have been effective since September 1993. The
Company had treated these levels of service as unregulated. The Company
intends to contest this decision. The Company does not believe that the
ultimate resolution of this matter will have a material impact on its results
of operations or financial condition.

Because a cable communications system uses local streets and
rights-of-way, such cable systems are generally subject to state and local
regulation, typically imposed through the franchising process. The terms and
conditions of state or local government franchises vary materially from
jurisdiction to jurisdiction and generally contain provisions governing cable
service rates, franchise fees, franchise term, system construction and
maintenance obligations, customer service standards, franchise renewal, sale
or transfer of the franchise, territory of the franchisee and use and occupancy
of public streets and types of cable services provided. Local franchising
authorities (state or local, depending on the practice in individual states)
may award one or more franchises within their jurisdictions and prohibit
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The Communications Act also provides that in granting or
renewing franchises, local authorities may establish requirements for
cable-related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications Act
limits the payment of franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to obtain modification of franchise
requirements by the franchise authority or judicial action if warranted by
changed circumstances.

RCN's ability to provide franchised cable television services
is dependent to a large extent on its ability to obtain and renew its
franchise agreements from local government authorities on generally acceptable
terms. RCN currently has 91 franchise agreements relating to the hybrid
fiber/coaxial cable systems in New York (outside New York City), New Jersey
and Pennsylvania. These franchises typically contain many conditions, such as
time limitations on commencement and completion of construction, conditions of
service, including the number of channels, the provision of free service to
schools and certain other public institutions, and the maintenance of
insurance and indemnity bonds. These franchises provide for the payment of
fees to the issuing authorities and generally range from 3% to 5% of revenues.
The duration of these outstanding franchises presently varies up to the year
2011. To date, all of RCN's cable franchises have been renewed or extended,
generally at or prior to their stated expirations and on acceptable terms.
Approximately 39 of RCN's hybrid fiber/coaxial cable systems' franchises are
due for renewal within the next three years. No assurance can be given that
RCN will be able to renew its franchises on acceptable terms. No one franchise
accounts for more than 7% of RCN's total revenue. RCN's five largest
franchises account for approximately 27% of RCN's total revenue.

The hybrid fiber/coaxial cable systems are also subject to
certain service quality standards and other obligations imposed by the FCC
and, where effective competition has not been demonstrated to exist, to rate
regulation by the FCC as well. RCN's cable television system in Pennsylvania
has been operating in a competitive cable environment for almost 30 years,
with approximately 80% of the homes passed having access to an alternate cable
operator, Service Electric Cable TV. As a result, the Company's Pennsylvania
cable system is exempt from many FCC cable television regulations, including
rate regulation. Its other cable television systems in New York State and New
Jersey currently remain subject to FCC rate regulation. With the passage of
the 1996 Act, however, all cable systems rates will be deregulated as
effective competition is shown to exist in the franchise area, or by March 31,
1999, whichever date is sooner. RCN anticipates that the remaining provisions
of the 1992 Act that do not relate to rate regulation, such as the provisions
relating to retransmission consent and customer service standards, will remain
in place and may serve to reduce the future operating margins of RCN's hybrid
fiber/coaxial cable television businesses as video programming competition
develops in its cable television service markets.

The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services. The FCC concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of service
provided over the equipment attached to the utility's pole. The 1996 Act and
the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain
providers of telecommunications services to rely upon the protections of the
current law and by requiring that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility. The FCC has recently adopted new
regulations to govern the charges for pole attachments used by companies
provided telecommunications services, including cable operators. These new
pole attachment rate regulations will become effective five years after
enactment of the 1996 Act, and any increase in attachment rates resulting from
the FCC's new regulations will be phased in equal annual increments over a
period of five years beginning on the effective date of the new FCC
regulations. The ultimate outcome of these rulemakings and the ultimate impact
of any revised FCC rate formula or of any new pole attachment rate regulations
on the Company or its businesses cannot be determined at this time.

The 1992 Act, the 1996 Act and FCC regulations preclude any
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to its subscribers, from favoring
an affiliated company over competitors and require such programmers to sell
their programming to other multichannel video distributors. These provisions
limit the ability of program suppliers affiliated with cable companies or with
common carriers providing satellite delivered video programming directly to
their subscribers to offer exclusive programming arrangements to their
affiliates. The Communications Act also includes provisions, among others,
concerning horizontal and vertical ownership of cable systems, customer
service, subscriber privacy, marketing practices, equal employment
opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.

In addition to the FCC regulations noted above, there are other
FCC regulations covering such areas as equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration
of cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, sponsorship identification,
antenna structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast children's
programming, consumer protection and customer service, ownership of home
wiring, indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and closed captioning. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.

Other bills and administrative proposals pertaining to cable
television have previously been introduced in Congress or considered by other
governmental bodies over the past several years. It is probable that there
will be legislative proposals in the future by Congress and other governmental
bodies relating to the regulation of communications services.

Cable television systems are subject to federal compulsory
copyright licensing covering the retransmission of television and radio
broadcast signals. In exchange for filing certain reports and contributing a
percentage of their basic revenues to a federal copyright royalty pool, cable
operators can obtain blanket licenses to retransmit the copyrighted material
on broadcast signals.

Employees

As of March 31, 1998, the Company had 1,606 full-time employees
including general office and administrative personnel. The Company considers
relations with its employees to be good.

Properties

Overview of Advanced Fiber Optic Networks

RCN's advanced fiber optic networks in Boston and New York City
are, and RCN expects that its future networks will be, designed to support
voice, video and data services via a switched, fiber-rich network
architecture. The Company's full service advanced fiber optic networks in
Boston and New York City consist of owned or leased fiber optic cables, local
and long distance digital switches, video headends, video and voice
transmission and distribution equipment and associated wiring and network
termination equipment. The Company's local telephone switching network
(consisting of Lucent 5ESS-2000 switches) is installed and fully operational
in Boston and in New York City. The networks' leased fiber optic cables make
up the fiber backbone, which acts as the common signal transport medium for
both digital signals (voice and data) and analog signals (video). In both New
York City and Boston, the digital backbone transmission network utilizes
synchronous optical network ("SONET") self-healing rings that provide high
speed, redundant connections for the delivery of RCN's voice and data
services. Facility connections from the backbone network to individual
buildings or service areas are provided by either leased facilities provided
by MFS/WorldCom, BECO or the incumbent LEC, or through RCN-owned fiber. This
fiber backbone includes over 5,267 fiber miles in New York City and over 9,347
fiber miles in Boston. RCN owns two switches (one in Boston and one in New York
City) and two General Instrument video headends that are installed and in
service in both Boston and New York City. As of December 31, 1997, RCN had
connected 493 buildings (424 in NYC and 69 in Boston) to its facilities.

Fiber optic systems are suitable for transmission of digitized
voice, data, video or a combination of these types of information. The main
benefits of deploying fiber in place of traditional coaxial cable or copper
wire result from its greater capacity, increased functionality, smaller size
and decreased requirements for periodic amplification of the signal. These
factors contribute to lower installation and maintenance costs and increase
the variety and quality of the service offerings. The inherent bandwidth
limitations of twisted pair copper wire historically used in telephone networks
present a substantial obstacle to the use of existing telephone networks to
provide video programming services. Although coaxial cable provides
substantially greater bandwidth than twisted pair copper wire, fiber optic
cable provides substantially greater bandwidth than coaxial cable.
Consequently, newly constructed fiber networks such as RCN's provide a
superior platform for delivering high speed, high capacity voice, video and
data services as compared to systems based on copper wire or coaxial cable
networks.

The fiber cable utilized by RCN's networks has the increased
capacity and bandwidth necessary for complex data and video transmission. The
fiber optic cable typically contains between 12 and 288 fiber strands, each of
which is capable of providing many telecommunications channels or "circuits."
Depending on transmission electronics, a single pair of glass fibers on RCN's
networks currently can transmit tens of thousands of simultaneous voice
conversations, whereas even with multiplexing equipment a typical pair of
copper wires can carry a maximum of 24 simultaneous conversations. Although
the LECs commonly use copper wire in their networks, they are currently
deploying fiber optic cable to upgrade portions of their copper based network,
particularly in areas served by RCN. RCN expects that continuing development
in communications equipment will increase the capacity of each optical fiber,
thereby providing even more capacity at relatively low incremental cost.

As the Company's network is further developed, it will be
dependent on certain strategic alliances and other arrangements in order to
provide the full range of its telecommunication service offerings. These
relationships include RCN's arrangements with MFS/WorldCom to lease portions
of MFS/WorldCom's fiber optic network in New York City and Boston, RCN's joint
venture with BECO under which the Company has access to BECO's extensive fiber
optic network in Greater Boston, the Starpower joint venture with Pepco
Communications, a subsidiary of PEPCO, and RCN's arrangements to lease Bell
Atlantic unbundled local loop and T-1 facilities. See "--Strategic
Relationships" and "--Voice Services-- Advanced Fiber Optic Networks." Any
disruption of these arrangements and relationships could have a material
adverse effect on the Company.

Voice Services

Advanced Fiber Optic Networks. The Company's advanced fiber
optic networks in New York City and Boston utilize a voice network that
supports both switched and non-switched (private line) services. Individual
buildings are connected to the network backbone via fiber extensions that are
generally terminated on SONET equipment, which provide redundant and fail-safe
interconnection between the building and the RCN central office or switch
location. In situations where fiber extensions are not yet available, interim
facility connections can be provided by leasing special access facilities
through a leasing arrangement with MFS/WorldCom or the incumbent LEC. In this
regard, RCN has in place arrangements which allow it to lease certain
facilities owned by the incumbent LECs (unbundled local loops and T-1
facilities) to provide voice services. This enables RCN to provide voice and
data services to off-net subscribers who are not physically connected to RCN's
advanced fiber optic network. As RCN's network expands to reach more areas
within a target market, subscribers served by these temporary connections will
be migrated to RCN's advanced fiber optic network. Within a building (or small
grouping of buildings) a voice service hub is established by installing an
Integrated Digital Loop Carrier ("IDLC") device, which acts as the point of
interface between the SONET backbone facility and the intra-building wiring.
Each IDLC is installed with a standby power system and is capable of serving
up to 672 lines. The IDLC is capable of supporting a wide range of both
non-switched services (DS-1, digital data) and switched voice services and
features including ISDN, Custom Calling and CLASS features. Within each
building, internal wiring (twisted pair copper cable) connects the IDLC to the
customer premises and the customer-owned telephone equipment. In certain
instances, voice service is extended to other buildings in the building group
or cluster via either fiber optic cable or twisted pair copper cable. At the
time of initial wiring, RCN generally installs wiring in excess of its initial
requirements, in order to meet future subscriber demand.

Video Programming

Advanced Fiber Optic Networks. There are presently two video
headend locations within RCN's advanced fiber optic networks in New York City
and Boston. The video headends consist of optical transmitters, optical
receivers, satellite receivers, signal processors, modulators, encoding
equipment and network status monitoring and automated tape distribution
equipment. From the headend, the video signal is distributed to individual
fiber nodes or receivers via the same fiber cable backbone used to deliver the
voice and data service. The fiber cable terminates in a fiber optic receiver
within an individual building or service area. From the fiber node, coaxial
cable and related distribution equipment is used to distribute the video
signals to the customer premises. The bandwidth of the video distribution is
a minimum of 750 MHZ, which is capable of supporting a minimum of 110 video
channels. This distribution plant is specifically designed to be predominantly
fiber-based, which increases the reliability and improves the quality of the
services delivered compared to traditional cable television distribution
architectures.

Wireless Video. RCN also owns and operates a "wireless video"
television system (which was formerly operated as Liberty Cable Television of
New York, the operations of which were acquired by RCN in 1996) using
point-to-point 18GHz microwave technology. RCN is utilizing this system in New
York City as an alternate platform for delivering television programming to
buildings that are not yet connected to the advanced fiber optic network. RCN
expects that the majority of the buildings currently served by the wireless
service will ultimately be connected to the network, to the extent that
connection is feasible. As buildings are connected to the RCN network, RCN
will reuse the microwave equipment to provide service to other customers in
off-network premises. The transmission equipment and microwave services used
to provide RCN's wireless service are provided by Bartholdi Cable, which
formerly operated Liberty Cable Television of New York. Bartholdi Cable has
agreed to provide transmission services to RCN until RCN has either converted
the subscribers to its advanced fiber optic network or has obtained FCC
authority to provide such services pursuant to its own licenses. In addition,
Bartholdi Cable has agreed to transfer to RCN the transmission equipment on
demand. Bartholdi Cable's obligation to provide transmission services is
subject to Bartholdi Cable having authority to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are at issue in an FCC proceeding in
which an Initial Decision was released on March 6, 1998. In the Initial
Decision, the Administrative Law Judge found Bartholdi Cable unqualified with
respect to 15 such licenses. The Administrative Law Judge declared that the
Initial Decision would become effective 50 days after its release unless
Bartholdi Cable filed exceptions to the Initial Decision within 30 days of its
release or the FCC elected to review the case on its own motion. Bartholdi
Cable filed exceptions to the Initial Decision on April 7, 1998. Because of
the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to RCN, the Company filed its own license applications
at the FCC for all of the microwave transmission paths which are currently
being used by Bartholdi Cable to provide transmission services to RCN and, in
light of the increased uncertainties resulting from the Initial Decision in
the FCC proceeding involving certain of Bartholdi Cable's licenses, the Company
expects now actively to pursue its license applications. There can be no
assurance that RCN will be able to obtain its own FCC license.

Hybrid Fiber/Coaxial Cable Systems. RCN owns and operates
hybrid fiber/coaxial cable television networks in Pennsylvania, New Jersey and
New York State (outside of New York City), all within 75 miles of New York
City. These networks offer expanded bandwidth and a platform for two-way
services, and have an aggregate of 658 route miles of fiber optic cable,
including separate high capacity fiber optic rings with a minimum 84 fibers in
Pennsylvania (covering approximately 69 route miles) designed and constructed
as competitive telephony networks. The New York system includes 211 route
miles of fiber optic cable serving 98 nodes from one head-end. Approximately
70% of the New York system is two-way active 750 MHZ plant with 84 active
channels of programming. The New Jersey system has deployed 144 route miles of
fiber optic cable (over 30 miles of which is two-way active) from two
head-ends, and generally operates a 400/450 MHZ plant providing 62 channels of
video programming. The Pennsylvania system operates 2,649 miles of coaxial
cable and over 234 route miles of fiber with 43 nodes from one headend,
operating at 550 MHZ with 84 active channels. All of the Company's hybrid
fiber/coaxial cable systems are 100% one-way addressable.

These fiber-rich networks provide a basic fiber optic platform
capable of enhancement for supporting two-way services, such as high-speed
Internet services, in the future. RCN is presently expanding the fiber
capacity of certain of these fiber/coaxial cable television networks so that
they will be capable of delivering switched two-way services in the future. In
August 1997, RCN commenced offering resold local phone service, long distance
and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in Pennsylvania.

Data Services

RCN's Internet access and data transmission services are
currently provided over the advanced fiber optic network via dial-up modems
facilitated through the RCN voice network in on-net subscriber applications.
In off-net situations, subscribers use conventional dial-up modems through the
incumbent LEC network to access RCN's Internet transmission network. RCN is
beginning to offer Internet and data transmission services via cable modems.
Cable modems, which utilize the broadband coaxial plant, offer higher speed
access for data transmission than the speeds achieved by conventional
telephone dial-up technology.

Erols provides high quality Internet access services to
businesses by utilizing high-speed access via ISDN, frame relay, fractional
T-1, T-1 and T-3 circuits. Erols' network infrastructure currently supports
modems with dial-access speeds of up to 56 Kbps. Erols provides new
dial-access subscribers with its easy-to-install proprietary access software
package, which incorporates a telephone dialer, an e-mail platform, a Web
browser (either Netscape Communication Corporation's ("Netscape") Navigator (a
registered trademark of Netscape) or Microsoft Corp.'s Microsoft[Registered]
Internet Explorer) and SurfWatch(TM) software for parental control over
Internet content access. This software package permits simplified access to
the Internet through a "point and click" graphical user interface. After
installation, the subscriber has a direct connection to the Internet using
Point-to-Point Protocol and access to all of the Internet's resources,
including e-mail, the World Wide Web, Usenet News service and Internet Relay
Chat. Access software automatically displays the Erols World Wide Web site
each time a subscriber logs on, providing Erols with the opportunity to
communicate with its subscribers at the start of each session. Erols maintains
"24 x 7" subscriber and technical support 365 days a year.

UltraNet utilizes K56Flex protocol to support its POPs, a
result of a major mid-1997 upgrade in UltraNet transmission equipment. This
advancement has empowered users to gain access to two to four times more
quickly to equipment that is also more reliable. The new infrastructure takes
advantage of Rockwell technology that supports the K56Flex modems (speeds up
to 56 Kbps) and ISDN (speeds up to 128 Kbps). By connecting users to the
Internet faster, downloading time is decreased, and in turn, telephone costs
and time online.

RCN intends to extend its network to cover most of the areas
currently served by Erols and UltraNet and ultimately to migrate most of those
customers to RCN's advanced fiber optic network, subject to certain regulatory
approvals and the approval of RCN's joint venture partners.

Legal Proceedings

On September 30, 1997, the Yee Family Trusts, as holders of
C-TEC's Preferred Stock Series A and Preferred Stock Series B, filed an action
against the Company, Commonwealth Telephone and Cable Michigan in the Superior
Court of New Jersey, Chancery Division. The complaint alleges that
Commonwealth Telephone's distribution of the common stock of RCN and Cable
Michigan in connection with the Distribution (1) constituted a fraudulent
conveyance; (2) breached the terms of a contract between plaintiffs and
Commonwealth; (3) breached the covenant of good faith and fair dealing
allegedly owed plaintiffs; and (4) breached fiduciary duties allegedly owed
plaintiffs. On December 1, 1997, the complaint was amended to allege that
Commonwealth Telephone's distribution of the common stock of RCN and Cable
Michigan was an unlawful distribution in violation of 15 Pa.C.S. 1551(b)(2).
The plaintiffs are seeking to set aside the alleged fraudulent conveyance and
unspecified monetary damages alleged to be in excess of $52 million. The
Company believes this lawsuit is without merit and intends to contest this
action vigorously. On January 9, 1998, the defendants, including RCN, filed a
Motion to Dismiss, or in the Alternative, for Summary Judgment. Plaintiffs
filed their response on March 9, 1998 and defendants filed their reply on
April 6, 1998. The New Jersey court has not yet scheduled argument on the
motion.

In the normal course of business, there are various legal
proceedings outstanding, including both commercial and regulatory litigation.
In the opinion of management, these proceedings will not have a material
adverse effect on the results of operations or financial condition of the
Company.

MANAGEMENT

Structure of RCN's Board of Directors

The Company Board is divided into three classes of directors
and currently consists of 13 directors. The term of office of Class I
Directors will expire at the 2001 annual meeting, the term of office of Class
II Directors will expire at the 1999 annual meeting and the term of office of
Class III Directors will expire at the 2000 annual meeting. At each annual
meeting of stockholders held after September 30, 1997, a class of directors
will be elected for a three year term to replace the class whose term has then
expired.

The Company Board has established an executive committee which
will, among other things, have all the powers of the Company Board in the
management of the business and affairs of the Company at all times when the
Company Board is not in session. Members are Messrs. McCourt (Chairman),
Scott, Mahoney and Crowe.

The Company Board has established a compensation pension
committee which will make recommendations to the Company Board on matters
related to employee compensation and plans concerning the orderly succession of
officers and key management personnel. Members are Messrs. Roth (Chairman),
Yanney and Fasola.

The Company Board has also established an audit committee which
will, among other things, consider the overall scope and approach of the
annual audit and recommendations from the audit performed by the independent
accountants; recommend the appointment of the independent accountants;
consider significant accounting methods adopted or proposed to be adopted; and
consider procedures for internal controls. Members are Messrs. Fasola
(Chairman), O'Neill, May and Graham.

Executive Officers and Directors

The following table sets forth certain information as of May
18, 1998 concerning the directors and executive officers of RCN:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David C. McCourt................... 41 Director (Class III), Chairman and Chief Executive Officer
Michael J. Mahoney................. 47 Director (Class I), President and Chief Operating Officer
Bruce C. Godfrey................... 42 Director (Class II), Executive Vice President and Chief
Financial Officer
Mark Haverkate..................... 43 Executive Vice President, Business Development
Michael A. Adams................... 40 President, Technology and Network Development Group, and
Executive Vice President
Dennis J. Spina.................... 53 Director (Class I), Vice Chairman and President, Internet
Services
James Q. Crowe..................... 48 Director (Class III)
Alfred Fasola...................... 48 Director (Class II)
Stuart E. Graham................... 52 Director (Class I)
Richard R. Jaros................... 46 Director (Class II)
Thomas J. May...................... 50 Director (Class I)
Thomas P. O'Neill, III............. 53 Director (Class I)
Eugene Roth........................ 62 Director (Class III)
Walter Scott, Jr................... 66 Director (Class III)
Michael B. Yanney.................. 64 Director (Class II)
Ralph S. Hromisin.................. 37 Vice President and Chief Accounting Officer
Kenneth R. Knudsen................. 51 Senior Vice President, Sales and Marketing
Salvatore M. Quadrino.............. 51 Chief Administrative Officer
Paul E. Sigmund.................... 33 Executive Vice President
Timothy J. Stoklosa................ 37 Senior Vice President and Treasurer
</TABLE>

David C. McCourt, 41, has been the Chairman and Chief Executive
Officer of the Company as well as a Director since September 1997. Mr. McCourt
has served as a Director, Chairman and Chief Executive Officer of Cable
Michigan since September 1997. In addition, he is a Director, Chairman and
Chief Executive Officer of Commonwealth Telephone, positions he has held since
October 1993. Mr. McCourt has also been President and, a Director of Level 3
Telecom. He has also been Chairman and Chief Executive Officer, as well as a
Director, of Mercom since October 1993, Director of MFS/WorldCom from July
1990 to December 1996, President and a Director of Metropolitan Fiber
Systems/McCourt, Inc., a subsidiary of MFS Telecom, Inc., since 1988, a
Director of Cable Satellite Public Affairs Network ("C-SPAN") since June 1995,
a Director of WorldCom from December 1996 to March 1998 and a Director of
Level 3 since January 1998.

Michael J. Mahoney, 47, has been the President and Chief
Operating Officer, as well as a Director, of the Company since September 1997.
Mr. Mahoney is also a Director of Commonwealth Telephone, a position he has
held since May 1995. Mr. Mahoney was President and Chief Operating Officer of
Commonwealth Telephone from February 1994 to September 1997, President and
Chief Operating Officer of Mercom from February 1994 to September 1997 and a
Director of Mercom since January 1994. In addition, he was Executive Vice
President of Commonwealth Telephone's Cable Television Group from June 1991 to
February 1994, and Executive Vice President of Mercom from December 1991 to
February 1994.

Bruce C. Godfrey, 42, has been the Executive Vice President,
Chief Financial Officer, Corporate Secretary and a Director of the Company
since September 1997. Mr. Godfrey has also been a Director of Cable Michigan
as well as its Secretary since such date. Mr. Godfrey has been a Director of
Commonwealth Telephone since 1995 and has been Executive Vice President and
Chief Financial Officer of Commonwealth Telephone since April 1994 and
Corporate Secretary since September 1997. He has also been Executive Vice
President and Chief Financial Officer of Mercom from April 1994 to October
1997 and a Director of Mercom since May 1994 and Corporate Secretary of Mercom
since October 1997. Mr. Godfrey was also Senior Vice President and Principal
of Daniels and Associates from January 1984 to April 1994.

Mark Haverkate, 43, has been the Executive Vice President,
Business Development of the Company since September, 1997. Mr. Haverkate has
also been President and Chief Operating Officer and a director of Cable
Michigan since such date. He was the President of RCN Development from June
1997 to September 1997 and Executive Vice President of Business Development at
Commonwealth Telephone from May 1997 to September 1997. Previously, he was
President for Business Operations at RCN Telecom Services, Inc. from November
1996 to June 1997, Executive Vice President of RCN Telecom Services, Inc. from
August 1996 to November 1996, Executive Vice President of Commonwealth
Telephone's Cable Television Group from July 1995 to August 1996, Executive
Vice President of Development for Commonwealth Telephone from February 1995 to
July 1995, Executive Vice President for Development at Mercom from November
1995 to February 1996, Vice President of Development for Commonwealth
Telephone from December 1993 to February 1995, Vice President of Development
at Mercom from December 1993 to February 1995, Vice President of Commonwealth
Telephone's Cable Television Group from October 1989 to December 1993.

Michael A. Adams, 40, has been the President, Technology and
Network Development Group of the Company and Executive Vice President of the
Company since September, 1997. Mr. Adams held the corresponding position at
Commonwealth Telephone from November 1996 to September 1997. Prior to that
date, Mr. Adams held the following positions: Executive Vice President of
Technology and Strategic Development of Commonwealth Telephone from August
1996 to November 1996, Executive Vice President of the Communications Services
Group from September 1994 to June 1996, Vice President of Technology from
November 1993 to September 1994 and Vice President of Engineering for RCN
Telecom Services from September 1992 to October 1993.

Dennis J. Spina, 53, has served as Director, Vice-Chairman and
President of Internet Services of the Company since February 1998.
Previously, he served as Chief Executive Officer of Erols from August 1996 to
February 1998. From January 1996 until July 1996, he worked as an independent
consultant in the service and distribution industry. From November 1994 to
December 1995, he served as President and Chief Executive Officer of
International Service Systems, a company engaged in the business of janitorial
and energy management. From August 1990 to October 1994, he served as
President and Chief Executive Officer of Suburban Propane, Inc. ("Suburban
Propane"), a division of Hanson PLC. He was hired in a turnaround capacity
and also served as President and Chief Executive Officer of Petrolane, Inc.
("Petrolane"), a propane distribution company managed by Suburban Propane,
from August 1990 until its sale in July 1993. From 1973 to 1990, he worked at
Federal Express Corporation, ultimately serving as Vice President and Officer.

James Q. Crowe, 48, has been a Director of the Company since
September 1997. Mr. Crowe has been the President and Chief Executive Officer
of Level 3 since August 1997 and a Director of Level 3 since June 1993. Mr.
Crowe is also a Director of Commonwealth Telephone, a position he has held
since 1993. Mr. Crowe has served as Chairman of the Board of Directors of
MFS/WorldCom from 1992 to 1996 and President and Chief Executive Officer of
MFS/WorldCom from June 1993 to June 1997. Mr. Crowe has been a Director of
Inacom Communications, Inc. since 1997. Mr. Crowe was Chairman of the Board
of Directors of WorldCom from December 1996 to June 1997.

Alfred Fasola, 48, has been a Director of the Company since
September 1997. Mr. Fasola has served as Chairman and Chief Executive Officer
of Hot Spots, LLC since 1995 and served as Chief Operating Officer of
Purolater Courier Corp. from 1986 to 1987, Mr. Fasola was Chief Executive
Officer of Pilot Freight Carriers, Inc., from 1987 to 1989, Chairman and Chief
Executive Officer of Circle Express/Internet from 1990 to 1992 and Chief
Executive Officer of Herman's Sporting Goods from 1992 to 1995.

Stuart E. Graham, 52, has been a Director of the Company since
September 1997. Mr. Graham is also a Director of Commonwealth Telephone, a
position he has held since 1990. Mr. Graham has been President of Skanska USA
Inc. since 1994. Previously he was Chief Executive Officer of several Skanska
USA subsidiaries including Sordoni Skanska, Slattery Skanska and Skanska E & C.

Richard R. Jaros, 46, has been a Director of the Company since
September 1997. Mr. Jaros is a member of the Board of Directors of WorldCom,
Level 3, CalEnergy Company, Inc. ("CECI") and Commonwealth Telephone. From
1980 to 1992 and from 1994 to 1997, Mr. Jaros served as President of Kiewit
Diversified Group and Executive Vice President and Chief Financial Officer of
Old PKS. He served as Chairman of CECI from 1993 to 1994 and as President from
1992 to 1993.

Thomas J. May, 50, has been a Director of the Company since
September 1997. Mr. May has been Chairman, President and Chief Executive
Officer of BECO since 1994. Previously, Mr. May served as President and Chief
Operating Officer of BECO from 1993 to 1994 and as an Executive Vice President
from 1990 to 1993.

Thomas P. O'Neill, III, 53, has been a Director of the Company
since September 1997. Mr. O'Neill is the Chairman and founder of
McDermott/O'Neill & Associates. Prior to forming McDermott/O'Neill in 1991,
Mr. O'Neill founded Bay State Investors, Inc. in 1983.

Eugene Roth, 62, has been a Director of the Company since
September 1997. Mr. Roth is also a Director of Commonwealth Telephone, a
position he has held since October 1993. Mr. Roth has been a Senior Partner
at Rosenn, Jenkins and Greenwald L.L.P. since 1964 and is also a Director of
the Pennsylvania Regional Board of Directors of First Union National Bank.

Walter Scott, Jr., 66, has been a Director of the Company since
September 1997. Mr. Scott is also a Director of Commonwealth Telephone, a
position he has held since 1979. Mr. Scott has been Chairman of the Board of
Directors and Chief Executive Officer of Old PKS for over nineteen years,
Chairman of Level 3 since 1979 and Director since 1964. He is also a Director
of Berkshire Hathaway Inc., Burlington Resources, Inc., CECI, ConAgra, Inc.,
US Bancorp, and Valmont Industries, Inc., and Level 3 Telecom. Mr. Scott was a
Director of WorldCom from December 1996 to July 1997.

Michael B. Yanney, 64, has been a Director of the Company since
September 1997. Mr. Yanney has been Chairman and Chief Executive Officer of
America First Companies, L.L.C. since 1984 and is also a Director of
Burlington Northern Santa Fe Corporation, Lozier Corporation, Forest Oil
Corporation, Freedom, Mid-America Apartment Communities, PKS Information
Services, Inc. and Level 3. Mr. Yanney was a Director of WorldCom from
December 1996 to July 1997 and Commonwealth Telephone from August 1996 to
September 1997.

Ralph S. Hromisin, 37, has been Vice President and Chief
Accounting Officer of the Company since September 1997. He has also been Vice
President and Chief Accounting Officer of Cable Michigan since September 1997
and of Commonwealth Telephone since August 1994. Mr. Hromisin has been Vice
President and Corporate Controller for Mercom since October 1996, Director of
Corporate Accounting for Commonwealth Telephone from March 1992 to August
1994. He also held various positions, most recently Audit Manager for Parente,
Randolph, Orlando, Carey & Associates, CPA's from November 1982 to March 1992.

Kenneth R. Knudsen, 51, has been Senior Vice President of Sales
& Marketing of the Company since June 1997 and Vice President of Sales and
General Manager of RCN Telecom Services, Inc. from January 1996 to May 1997.
Previously, Mr. Knudsen served as Chief Executive Officer and Partner of KCI
Consulting, Inc. from 1994 to January 1996 and Senior Vice President of Ryan
Management Group from 1993 to 1994. From 1970 to 1988 he also held Officer and
Senior Management positions at Nabisco, Ocean Spray Cranberries, Frito-lay,
Inc. and Procter and Gamble Company.

Salvatore M. Quadrino, 51, has been Chief Administrative
Officer of the Company since February 1998. Previously he served as Vice
President, Treasurer and Chief Financial Officer of Erols from September 1997
to February 1998. From October 1996 to August 1997, he worked as an
independent financial consultant in the service and distribution industry.
From October 1994 to September 1996, he served as President and Chief
Executive Officer of Suburban Propane, a division of Hanson PLC, which
conducted its initial public offering in March 1996, and from March to October
1996 he served as a member of Suburban Propane's Board of Supervisors. Mr.
Quadrino initially was hired in a turn around capacity, served as Vice
President and Chief Financial Officer of Suburban Propane from October 1990 to
September 1994 and as Vice President, Chief Financial Officer and Treasurer of
Petrolane from August 1990 until its sale in July 1993.

Paul E. Sigmund, 33, has been Executive Vice President of the
Company since September 1997 and Executive Vice President of RCN International
Holdings, Inc. since 1996. Previously, Mr. Sigmund was a Vice President at
Smith Barney, Inc. from 1994 to 1996, an Associate at the law firm of Skadden,
Arps, Slate, Meagher & Flom from 1993 to 1994 and an Investment Associate at
the International Finance Corporation/World Bank from 1986 to 1989.

Timothy J. Stoklosa, 37, has been the Senior Vice President and
Treasurer of the Company since September 1997. He has also served as Executive
Vice President and Chief Financial Officer and a Director of Cable Michigan
since such date. Mr. Stoklosa has been Senior Vice President of Finance of
Commonwealth Telephone since February 1997, Treasurer of Commonwealth
Telephone since August 1994 and Executive Vice President and Chief Financial
Officer of Mercom since October 1997. Previously, Mr. Stoklosa was Vice
President of Finance of Commonwealth Telephone from May 1995 to February 1997,
Manager of Mergers and Acquisitions at Old PKS from October 1991 to August
1994 and Senior Financial Analyst of Corporate Development at Citizens
Utilities Co. from February 1990 to October 1991.

Executive Compensation

The following table sets forth certain information regarding
the compensation paid for the periods indicated to the Chief Executive Officer
of RCN and the four other most highly compensated executive officers of RCN
(collectively, the "Named Executive Officers"). As previously stated, all
share and per share data, stock option data and market prices (including
historical trading prices) of RCN Common Stock have been restated to reflect
the Stock Dividend.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation
--------------------------------
Other
Annual
Compensation
Name and Principal Position Year Salary($)(1) Bonus($) ($)(1)
- --------------------------- ---- ------------ ---------- ------------
<S> <C> <C> <C> <C>
David C. McCourt............. 1997 $500,000 $1,400,000 --
Chairman and Chief 1996 491,154 700,000 --
Executive Officer 1995 397,885 700,000 --

Michael J. Mahoney........... 1997 $248,654 $500,000 --
President and Chief 1996 235,027 175,000 --
Operating Officer 1995 222,462 100,000 --

Bruce C. Godfrey............. 1997 $243,077 $500,000 --
Executive Vice President and 1996 221,462 165,000 --
Chief Financial Officer 1995 183,731 150,000 --

Mark Haverkate............... 1997 $205,192 $100,000 --
Executive Vice President, 1996 158,231 135,000 --
Business Development 1995 137,952 100,000 --

Michael A. Adams............. 1997 $203,269 $150,000 --
President, Technology and 1996 138,673 155,000 --
Network Development 1995 122,885 46,000 --

Long-Term Compensation
-----------------------------------------
Awards Payouts Total
---------- ----------
Restricted Securities All Other
Stock Underlying LTIP Compensation
Awards($)(2) Options(#) Payouts($) ($)(3)
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
David C. McCourt............. $380,000 1,000,000 -- $2,703 $1,902,703
Chairman and Chief 238,333 -- -- 5,478 1,196,632
Executive Officer 220,000 500,000 -- 5,612 1,103,497

Michael J. Mahoney........... $149,731 400,000 -- $5,871 $754,525
President and Chief 67,017 -- -- 5,478 415,505
Operating Officer 65,000 -- -- 5,952 328,414

Bruce C. Godfrey............. $148,615 400,000 -- $5,763 $748,840
Executive Vice President and 74,333 -- -- 4,965 391,427
Chief Financial Officer 67,000 -- -- 4,790 338,521

Mark Haverkate............... $61,038 80,000 -- $16,045 $308,177
Executive Vice President, 51,667 -- -- 3,641 296,872
Business Development 48,000 70,000 -- 5,058 243,010

Michael A. Adams............. $70,654 230,000 -- $16,045 $369,314
President, Technology and 36,950 -- -- 3,853 297,526
Network Development 34,200 40,000 -- 3,991 172,876
</TABLE>

- ------------
(1) The only type other Annual Compensation for each of the Named Executive
Officers was in the form of perquisites and was less than the level required
for reporting.

(2) Represents the market value on the date of grant of restricted stock awards.
In connection with the Distribution, shares of restricted C-TEC Common Stock
purchased under the C-TEC Executive Stock Purchase Plan ("C-TEC ESPP") and
share units awarded under the C-TEC ESPP that relate to C-TEC Common Stock
were adjusted so that following the Distribution, each such participant was
credited with an aggregate equivalent value of restricted shares of common
stock of Commonwealth Telephone, RCN and Cable Michigan. After the
Distribution RCN created its own Executive Stock Purchase Plan ("ESPP")
which has terms substantially similar to the C-TEC ESPP.

(3) Includes the following amounts for the last fiscal year: (i) David McCourt:
$486 - Company paid life insurance; $2,217 - 401(k) Company match; (ii)
Bruce Godfrey: $486 - Company paid life insurance; $5,277 - 401(k) Company
match; (iii) Michael Mahoney: $486 - Company paid life insurance; $5,385 -
401(k) Company match; (iv) Mark Haverkate: $486 - Company paid life
insurance; $2,499 - 401(k) Company match; (v) Michael Adams: $483 - Company
paid life insurance; $3,675 - 401(k) Company match; $11,887 - Relocation
costs.

The following amounts are for 1996 fiscal year: (i) David McCourt: $396 -
Company paid life insurance; $5,082 - 401(k) Company match; (ii) Bruce
Godfrey: $396 - Company paid life insurance; $4,569 - 401(k) Company match;
(iii) Michael Mahoney: $396 - Company paid life insurance; $5,082 - 401(k)
Company match; (iv) Mark Haverkate: $392 - Company paid life insurance;
$3,249 - 401(k) Company match; (v) Michael Adams: $363 - Company paid life
insurance; $3,490 - 401(k) Company match.

The following amounts are for 1995 fiscal year: (i) David McCourt: $530 -
Company paid life insurance; $5,082 - 401(k) Company match; (ii) Bruce
Godfrey: $510 - Company paid life insurance; $4,280 - 401(k) Company match;
(iii) Michael Mahoney: $870 - Company paid life insurance; $5,082 - 401(k)
Company match; (iv) Mark Haverkate: $861 - Company paid life insurance;
$4,197 - 401(k) Company match; (v) Michael Adams: $253 - Company paid life
insurance; $3,738 - 401(k) Company match.

Does not include amounts paid to certain senior offices listed for
relocation expenses incurred in moving said senior officers and their
families to the Company's new executive offices in Princeton, New Jersey.

As of December 31, 1997, the aggregate holdings and value of restricted
stock awards for RCN Common Stock were as follows:

<TABLE>
<CAPTION>
RCN
Corporation Shares Aggregate Value
------------------ ---------------
<S> <C> <C>
David C. McCourt........ 50,249.00 $851,242
Michael J. Mahoney...... 17,586.00 $301,155
Bruce C. Godfrey........ 18,065.00 $309,359
Mark Haverkate.......... 9,496.00 $162,615
Michael Adams........... 8,960.00 $153,442
</TABLE>

Vesting of restricted shares is accelerated upon a change in control of the
Company. Dividends, if any, are paid on restricted shares. Subject to
continued employment, restricted share units credited to participants'
accounts vest in three calendar years following the date on which the share
units were initially credited to the participant's account.

RCN Options/SAR Grants in Fiscal Year 1997

<TABLE>
<CAPTION>
Number % of Options
Securities Granted to Potential Realizable Value at
Underlying Employees in Total Exercise Assumed Annual Rates of
Options Fiscal Year or Base Price Expiration Stock Price Appreciation for
Name Granted(#) 1997 ($/sh) Date Option Term
- ---- ---------- ------------ -------------- ---------- -----------------------------
5%($) 10%($)
----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David C. McCourt... 1,000,000 20.86% 15.315 10/30/2007 $9,627,500 $24,402,500
Michael J. Mahoney. 400,000 8.34% 15.315 10/30/2007 $3,851,000 $9,761,000
Bruce C. Godfrey... 400,000 8.34% 15.315 10/30/2007 $3,851,000 $9,761,000
Mark Haverkate..... 20,000 0.42% 8.360 2/12/2007 $105,910 $266,490
Mark Haverkate..... 60,000 1.25% 15.315 10/30/2007 $577,650 $1,464,150
Michael A. Adams... 30,000 0.63% 8.360 2/21/2007 $157,785 $399,735
Michael A. Adams... 200,000 4.17% 15.315 10/30/2007 $1,925,500 $4,880,500
</TABLE>

The following table sets forth the fiscal year-end value of
unexercised options held by each Named Executive Officer.

Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values(1)

<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at December Money Options at December 31,
31, 1997(2) 1997(2)(3)
------------------------------------ -------------------------------------
Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
David C. McCourt......... 500,000 1,500,000 $5,116,300 $6,971,950
Michael J. Mahoney....... 120,000 1,200,000 1,207,200 1,529,800
Bruce C. Godfrey......... 84,000 456,000 845,040 1,288,360
Mark Haverkate........... 58,000 282,000 578,128 1,140,527
Michael A. Adams......... 58,000 142,000 574,114 893,711
</TABLE>

- ------------
(1) No RCN stock options were exercised by the Named Executive Officers during
the fiscal year ended December 31, 1997.

(2) Denominated in shares of RCN Common Stock.

(3) The fair market value of RCN Common Stock at December 31, 1997 was $17.125
per share.

Effect of Distribution on Equity-Related Benefits

In connection with the Distribution, each C-TEC option held by
the Named Executive Officers and all other holders of such options was
adjusted so that each such executive officer and other holder currently holds
options to purchase shares of Commonwealth Telephone Common Stock, RCN Common
Stock and Cable Michigan Common Stock, respectively. The number of shares
subject to, and the exercise price of, such options were adjusted to take into
account the Distribution and to ensure that the aggregate intrinsic value of
the resulting RCN, Cable Michigan and Commonwealth Telephone options
immediately after the Distribution was equal to the aggregate intrinsic value
of the C-TEC options immediately prior to the Distribution. Shares of
restricted C-TEC Common Stock awarded under the C-TEC ESPP and share units
awarded under the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so
that following the Distribution, each such participant was credited with an
aggregate equivalent value of restricted shares of common stock of
Commonwealth Telephone, the Company and Cable Michigan. See Note (4) to
"Security Ownership of Certain Beneficial Owners and Management."

Pension Benefits

C-TEC completed a comprehensive study of its employee benefit
plans in 1996. As a result of this study, effective after December 31, 1996,
in general, employees other than those of the Commonwealth Telephone Group (as
defined below) no longer accrue benefits under the C-TEC defined benefit
pension plan, but became fully vested in their benefits accrued through that
date. Such benefits, for the Named Executive Officers affected by this event,
computed as the present value at July 31, 1997 of a life annuity beginning at
age 65, are as follows: Mr. McCourt, $11,679; Mr. Mahoney, $29,124; Mr.
Godfrey, $10,874; Mr. Haverkate, $41,894; and Mr. Adams, $7,249.

Directors' Compensation

Non-employee Directors of the Company will receive a retainer of
$900 per month and will be paid $1,000 for each board meeting attended. The
Committee Chairmen and other committee members will be paid $1,500 and $1,000,
respectively, for each committee meeting attended. Pursuant to the RCN
Corporation 1997 Stock Plan for Non-Employee Directors, the retainer will be
paid in shares of RCN Common Stock and each non-employee director will receive
an annual grant of a non-qualified option covering 4,000 shares of RCN Common
Stock.

Compensation Committee Interlocks and Insider Participation

The Company has established a Compensation Committee, all the
members of which are non-employee directors.

One of the members, Eugene Roth, Esq., is a partner at Rosen,
Jenkins and Greenwald, which serves as counsel to RCN from time to time.

Transactions with Management and Certain Concerns

David C. McCourt, Chairman, Chief Executive Officer and
Director of RCN, is a director of C-SPAN. In 1997, paid $236,563 to C-SPAN
for programming services.

David C. McCourt served as a Director of MFS/WorldCom from
December 1996 to March 1998. In 1997, RCN paid $2,959,306 to MFS/WorldCom for
telephone usage, circuit charges and network access charges. RCN earned
$519,485 in revenue from MFS/WorldCom, primarily for engineering and
construction management services.

In September 1996, RCN and BECO, through wholly owned
subsidiaries, entered into a joint venture to utilize 126 fiber miles of
BECO's fiber optic network to deliver RCN's comprehensive communications
package in Greater Boston. In 1997, RCN paid $91,674 to BECO for utility
expenses.

Each of Commonwealth Telephone, RCN and Cable Michigan is
effectively controlled by Level 3. In addition, the majority of RCN's
directors and executive officers are also directors and/or executive officers
of Commonwealth Telephone and/or Cable Michigan. RCN provides certain
services to Commonwealth Telephone and Cable Michigan. See "Business --
Relationship Among Commonwealth Telephone, RCN and Cable Michigan."

SHARES ELIGIBLE FOR FUTURE SALE

In general, under Rule 144 as currently in effect, a person (or
persons whose shares are required to be aggregated) who has been deemed to
have beneficially owned shares of an issuer for at least one year, including
an "affiliate," is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1% of the then outstanding
number of shares of such class or the average weekly trading volume in
composite trading in all national securities exchanges during the four
calendar weeks preceding the filing of the required notice of such sale,
provided that such issuer has been a reporting company for at least ninety
days. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are required
to be aggregated) who is not deemed an affiliate of an issuer and who has
beneficially owned shares for at least two years is entitled to sell such
shares under Rule 144 without regard to the volume limitations described
above. Affiliates continue to be subject to such limitations. As defined in
Rule 144, an "affiliate" of an issuer is a person that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is under
common control with, such issuer.

Under Rule 145 of the Securities and Exchange Commission's (the
"Commission") rules and regulations, for one year after the consummation of
the merger, persons that were affiliates of Erols or UltraNet prior to the
Company's acquisition of such companies (and are not affiliates of RCN after
such acquisition) may sell RCN Common Stock subject to the limitations of Rule
144. During the period between the first and second years after the
consummation of the relevant merger, such persons are subject only to the Rule
144 requirement as to current public information regarding RCN. After two
years, such persons may sell their shares of RCN Common Stock without
compliance with Rules 145 and 144. Persons who were affiliates of UltraNet or
Erols prior to the relevant transaction and are affiliates of RCN after the
UltraNet Merger may sell RCN Common Stock only pursuant to an effective
registration statement, Rule 144 or another exemption from registration.

Subject to the Erols Registration Rights Agreement dated
February 20, 1998 and the UltraNet Registration Rights Agreement dated
February 27, 1998, certain holders of Common Stock that acquired such Common
Stock in connection with the Company's acquisition of Erols and UltraNet may
require the Company to register shares of Common Stock held by them under
certain circumstances. Both the Erols Registration Rights Agreement and the
UltraNet Registration Rights Agreement provide for "piggy-back" registration
rights, obliging the Company, in the event that it files a registration
statement, such as in this Offering, to notify and, on demand, include the
holders party to the Registration Statements in the registration.

Pursuant to the UltraNet Registration Rights Agreement, the
Company has filed a registration statement for shares of Common Stock to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act (the "Shelf Registration Statement"), which registration
statement has been declared effective. Of the 890,384 shares of Common Stock
included in the Shelf Registration Statement, 385,027 shares are subject to
lockup provisions that will remain in effect until the first anniversary of
the UltraNet Registration Rights Agreement. The UltraNet Registration Rights
Agreement also contains holdback provisions effective after June 13, 1998
restricting the sale of shares of Common Stock during the 10-day period prior
to, and during the 80-day period beginning on the closing date of an
underwritten offerings, if requested by the underwriter of such offering.

Pursuant to the Erols Registration Rights Agreement, the
holders party to such agreement can demand registration of up to 1,730,648
shares of Common Stock beginning 270 days after the effectiveness of the Erols
Registration Rights Agreement, provided, that (i) no demand may be made
within 180 days after the end of the effective period in respect of a demand
registration of the other shareholder, (ii) the Company is not obligated to
effect a registration on demand on more than one occasion for each shareholder
and (iii) each registration demand must be in respect of Common Stock to be
registered with a fair market value in excess of $3,000,000 (or if the Company
is eligible to file a form S-3 under the Securities Act, in excess of
$1,000,000). The Erols Registration Right Agreement also contains holdback
provisions restricting the sale of shares of Common Stock during the 14 days
prior to, and during the 180-day period beginning on the effective date of any
registration statement.

Under the Exchange Agreement entered into in connection with
the BECO joint venture, BECO has a right to convert a portion of its joint
venture interest into Company Common Stock. BECO has notified RCN that it has
elected to exercise its option to the full extent permitted by the Exchange
Agreement with respect to 1997. Subject to certain restrictions set forth in
the Exchange Agreement, BECO will also be entitled, upon exchanging its
investment interest in RCN-BECOCOM for Company Common Stock, to customary
registration rights with respect to such shares.

The Company, its directors and its executive officers and
certain shareholders, who hold as of the date of this Prospectus approximately
shares of common stock (or options to purchase Common Stock that are
currently exercisable or exercisable within 60 days), have agreed not to
offer, sell, contract to sell, file a registration statement pursuant to the
Securities Act (except for certain registration statements relating to the
issuance of stock and stock options to employees) or otherwise dispose of any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock (except for private transactions by the holders
of Common Stock where the transferee agrees to be bound by such restrictions),
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of the Underwriters (as defined herein), for a period
of 90 days after the date of this Prospectus. After such 90 day period,
approximately shares of Common Stock will become immediately saleable
subject to the notice of sale, volume, notice and information requirements of
Rule 144 under the Securities Act.

No prediction can be made about the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale
would have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, may have an adverse impact on the
market price for the shares of Common Stock offered hereby or on the ability
of the Company to raise capital through a public offering of its equity
securities. See "Risk Factors--Shares Eligible for Future Sale."

SECURITY OWNERSHIP OF MANAGEMENT, PRINCIPAL STOCKHOLDERS
AND SELLING STOCKHOLDERS

Set forth in the table below is information as of April 1, 1998
with respect to the number of shares of RCN Common Stock beneficially owned by
(i) each person or entity known by the Company to own more than five percent
of the outstanding RCN Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers of the Company, (iv) all directors and
executive officers of the Company as a group and (v) each Selling Stockholder.
To the Company's knowledge, unless otherwise indicated, each person or entity
has sole voting and investment power with respect to the shares set forth
opposite the person's or entity's name. As previously stated, all share, per
share and stock option data of RCN Common Stock have been restated to reflect
the Stock Dividend.

<TABLE>
<CAPTION>
RCN Common Stock
Number of Number of
Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding
Owned Prior Shares Prior Shares Being Owned Shares After
Name of Beneficial Owner to Offering(1) to Offering(1) Offered After Offering Offering
- ------------------------ -------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Directors and Named Executive Officers
Michael A. Adams (2).......................... 23,578 * 23,578 *
James Q. Crowe................................ 1,464 * 1,464 *
Alfred Fasola................................. 798 * 798 *
Bruce C. Godfrey (2).......................... 54,832 * 54,832 *
Stuart E. Graham.............................. 10,806 * 10,806 *
Mark Haverkate (2)............................ 66,708 * 66,708 *
Richard R. Jaros.............................. 6,638 * 6,638 *
Michael J. Mahoney (2)........................ 63,180 * 63,180 *
Thomas J. May................................. 2,798 * 2,798 *
David C. McCourt (2)(3)....................... 186,204 * 186,204 *
Thomas P. O'Neill, III........................ 2,798 * 2,798 *
Eugene Roth................................... 14,240 * 14,240 *
Walter Scott, Jr.............................. 1,464 * 1,464 *
Dennis Spina.................................. -- -- -- --
Michael B. Yanney............................. 5,520 * 5,520 *
All Directors and Executive Officers as
a Group (20 persons)(2)(3)................... 445,835 * 445,835 *
5% Stockholders
Level 3 Telecom Holdings, Inc.(4)............. 26,640,970 46 26,640,970 46
Selling Stockholders
Commonwealth Telephone Enterprises Inc.
Employees' Retirement Plan................... 375,816 * 375,816 -- *
Robert A. Lanford............................. 24,272 * 12,000 12,272 *
John A. Taverna............................... 12,134 * 2,612 9,522 *
Christopher W. Walsh.......................... 31,182 * 15,550 15,632 *
</TABLE>

- ------------
* Less than 1% of outstanding shares.

(1) Includes shares of Company Common Stock acquired in respect of Matching
Shares (defined below) but excludes RCN Share Units (defined below).

(2) Under the ESPP, participating executive officers who forgo current
compensation are credited with "Share Units," the value of which is based on
the value of a share of Company Common Stock. ESPP participants who elect to
receive Share Units in lieu of current compensation are also credited with
restricted "Matching Shares," which vest over a period of 3 years from the
grant date, subject to continued employment. Matching Shares, unless
forfeited, have voting and dividend rights. In connection with the
Distribution, Share Units and Matching Shares were adjusted in an equitable
manner so that participants were credited with an aggregate equivalent value
of restricted shares of Commonwealth Telephone, RCN and Cable Michigan
Common Stock. The holdings indicated include Share Units and Matching
Shares.

The table below shows in respect of each Named Executive Officer the number
of shares of RCN Common Stock purchased outright, Share Units relating to
RCN Common Stock acquired by each such Named Executive Officer in lieu of
current compensation, and the forfeitable Matching Shares of RCN Common
Stock held by each such Named Executive Officer:

<TABLE>
<CAPTION>
Share Unit Total Purchased
Acquired Under and Acquired
Shares the ESPP in Total Shares Restricted and Restricted
Purchased Lieu of Current Purchased and Matching Matching
Outright Compensation Acquired Shares Shares
--------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Adams........ 1,834 10,872 12,706 10,872 23,578
Bruce C. Godfrey........ 14,636 20,098 34,734 20,098 54,832
David C. McCourt........ 76,788 54,708 131,496 54,708 186,204
Michael J. Mahoney...... 23,732 19,724 43,456 19,724 63,180
Mark Haverkate.......... 46,416 10,146 56,562 10,146 66,708
</TABLE>

(3) Includes 450 shares of Company Common Stock which are owned by Mr. McCourt's
wife. Mr. McCourt disclaims beneficial ownership of such shares.

(4) Level 3 owns 90% of the common stock and all of the preferred stock of Level
3 Telecom. Level 3 is the successor to an entity known as Peter Kiewit
Sons' Inc. See "Level 3 Communications, Inc." below. David C. McCourt,
Chairman and Chief Executive Officer of Commonwealth Telephone and RCN, owns
the remaining 10% of the common stock of Level 3 Telecom. The address for
Level 3 Telecom and Level 3 is 1000 Kiewit Plaza, Omaha, Nebraska 68131.

The information set forth above does not give effect to the
ownership of Company securities by Level 3 Telecom. Certain executive
officers or directors of the Company are directly or indirectly affiliated
with Level 3 Telecom. For information with respect to the beneficial
ownership of securities by Level 3 Telecom, see "Security of Ownership Certain
Beneficial Owners and Management."

Level 3 Communications, Inc.

Set forth below is certain information regarding the beneficial
ownership of equity securities of Level 3 as of April 1, 1998, by each
director, the Named Executive Officers and by all persons, as a group, who are
currently directors or executive officers of the Company. On March 31, 1998,
the entity known as Peter Kiewit Sons' Inc. ("Old PKS") prior to such date
separated its construction and mining management business ("Construction
Group") from its other businesses (the "PKS Split-Off"). In conjunction with
the PKS Split-Off, Level 3 merged into Old PKS which changed its name to Level
3 Communications, Inc. As a result of the PKS Split-Off, Level 3 no longer
owns any interest in the Construction Group whose business is now held in a
company which changed its name to Peter Kiewit Sons' Inc. ("New PKS").

<TABLE>
Name of Beneficial Owner Number of Percent of
Shares Shares
--------- ----------
<S> <C> <C>
Michael A. Adams................................ -- --
James Q. Crowe.................................. 5,666,360 3.9%
Alfred Fasola................................... -- --
Bruce C. Godfrey................................ -- --
Stuart E. Graham................................ -- --
Mark Haverkate.................................. -- --
Richard R. Jaros................................ 748,749(1) *
Michael J. Mahoney.............................. 1,000 --
Thomas J. May................................... -- --
David C. McCourt................................ 57,500 *
Thomas P. O'Neill, III.......................... -- --
Eugene Roth..................................... -- --
Walter Scott, Jr................................ 17,636,397 12.0%
Dennis Spina.................................... -- --
Michael B. Yanney............................... 50,000 --
All Directors and Executive Officers as a Group
(20 persons).............................. 24,162,161 16.4%
</TABLE>

- ------------
* Less than 1% of the outstanding of the class.

(1) Includes 185,000 shares in the Jaros Family Limited Partnership.

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company
is based upon the RCN Certificate of Incorporation and the RCN Bylaws and by
applicable provisions of law. The following description is qualified in its
entirety by reference to such RCN Certificate of Incorporation and RCN Bylaws,
which are filed as exhibits to the Registration Statement on Form S-1 (the
"Registration Statement") of which this Prospectus is a part.

Certain provisions of the DGCL, the RCN Certificate of
Incorporation and the RCN Bylaws summarized in the following paragraphs may be
deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders.

Authorized Capital Stock

The RCN Certificate of Incorporation authorizes the issuance of
200 million shares of RCN Common Stock, par value $1.00 per share, 400 million
shares of RCN Class B Stock, par value $1.00 per share, and 25 million shares
of RCN Preferred Stock par value $1.00 per share.

RCN Common Stock

Subject to the rights of the holders of any RCN Preferred Stock
which may be outstanding, each holder of RCN Common Stock on the applicable
record date is entitled to receive such dividends as may declared by the
Company Board out of funds legally available therefor, and, in the event of
liquidation, to share pro rata in any distribution of the Company's assets
after payment or providing for the payment of liabilities and the liquidation
preference of any outstanding RCN Preferred Stock. Each holder of RCN Common
Stock is entitled to one vote for each share held of record on the applicable
record date on all matters presented to a vote of shareholders, including the
election of directors. Holders of RCN Common Stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities and there are no conversion rights or redemption or sinking fund
provisions with respect to such stock. On May 15, 1998, there were 57,849,558
shares of RCN Common Stock issued and outstanding (when adjusted for the Stock
Dividend). On March 9, 1998, the RCN declared a one for one stock dividend.
The record date for the Stock Dividend was March 20, 1998. Shareholders of
record at the market close on that date received an additional share of RCN
Common Stock for each share held. The distribution date for the Stock Dividend
was April 3, 1998. All share and per share data, stock option data, and
market prices (including historical trading prices) of RCN Common Stock have
been restated to reflect this stock dividend. The RCN Common Stock is admitted
for trading on the NASDAQ.

The RCN Certificate of Incorporation contains no restrictions
on the alienability of the RCN Common Stock. Except as disclosed in the
section entitled "Certain Statutory, Charter and Bylaw Provisions," no
provision of the RCN Certificate of Incorporation or RCN Bylaws and no
provision of any agreement or plan involving the Company is in effect that
would discriminate against any existing or prospective holder of such
securities as a result of such security holder owning a substantial amount of
securities.

RCN Class B Stock

The RCN Class B Stock is in all material respects identical to
the RCN Common Stock except that (i) the RCN Class B Stock is generally
non-voting, (ii) the RCN Common Stock is convertible at the option of the
holder into RCN Class B Stock and (iii) in certain mergers, distributions and
other transactions in which the holders of RCN Common Equity are entitled to
receive equity interests of one or more corporations (including the Company),
the equity interests distributed in respect of the RCN Common Stock and the
RCN Class B Stock may have rights and privileges that are substantially
equivalent to the rights and privileges of the RCN Common Stock and the RCN
Class B Stock, respectively. As of the date hereof, there are no outstanding
shares of RCN Class B Stock and the Company does not have any current plan or
intention to issue any RCN Class B Stock.

Preferred Stock

Under the RCN Certificate of Incorporation, the Company Board
has the authority to create one or more series of preferred stock, to issue
shares of preferred stock in such series up to the maximum number of shares of
preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of Company Preferred Stock, as well as
authorized but unissued shares of RCN Common Equity, are available for
issuance without further action by the Company's shareholders, unless
shareholder action is required by applicable law or by the rules of a stock
exchange or quotation system on which any series of the Company's stock may
then be listed or quoted.

Charter and Bylaw Provisions

Classified Board of Directors; Removal of Directors. The RCN
Certificate of Incorporation and the RCN Bylaws provide for the Company Board
to be divided into three classes of directors. The term of office of the
first class expires at the 2001 annual meeting, the term of office of the
second class expires at the 1999 annual meeting, and the term of office of the
third class expires at the 2000 annual meeting. At each annual meeting held
thereafter, a class of directors will be elected to replace the class whose
term has then expired. As a result, approximately one-third of the members
of the Company Board will be elected each year and, except as described above,
each of the directors serves a staggered three-year term. See
"Management--Executive Officers and Directors." Moreover, as is permitted
under the DGCL only in the case of a corporation having a classified board,
the RCN Certificate of Incorporation and the RCN Bylaws provide that directors
may be removed only for cause.

These provisions could prevent a shareholder (or group of
shareholders) having majority voting power from obtaining control of the
Company Board until the second annual shareholders' meeting following the date
the acquirer obtains such voting power. Accordingly, these provisions could
have the effect of discouraging a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company.

Shareholder Action by Written Consent; Special Meetings. The
RCN Certificate of Incorporation and the RCN Bylaws provide that no action
required or permitted to be taken at an annual or special meeting of
shareholders may be taken without a meeting, and that no action may be taken
by the written consent of shareholders in lieu of a meeting. The RCN
Certificate of Incorporation and the RCN Bylaws also provide that special
meetings of the Company's shareholders may be called only by the Company
Board, the Chairman of the Company Board or the Chief Executive Officer of the
Company. These provisions may make it more difficult for shareholders to take
action opposed by the Company Board.

Advance Notice Provisions. The RCN Bylaws establish an advance
written notice procedure for shareholders seeking to nominate candidates for
election as directors at an annual meeting of shareholders or to bring
business before an annual meeting of shareholders of the Company. The RCN
Bylaws provide that only persons who are nominated by or at the direction of
the Company Board, or by a shareholder who has given timely written notice to
the Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. The RCN
Bylaws also provide that at any meeting of shareholders only such business may
be conducted as has been brought before the meeting by or at the direction of
the Company Board or, in the case of an annual meeting of shareholders, by a
shareholder who has given timely written notice to the Secretary of the
Company of such shareholder's intention to bring such business before such
meeting. Under the RCN Bylaws, for any such shareholder notice to be timely,
such notice must be received at the principal executive offices of the Company
in writing not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder must be received not later than the close of
business on the 10th day following the day on which such notice or public
disclosure was given or made. Under the RCN Bylaws, a shareholder's notice
must also contain certain information specified in the RCN Bylaws. These
provisions may preclude or deter some shareholders from bringing matters
before, or making nominations for directors at, an annual meeting.

Preferred Stock. Under the RCN Certificate of Incorporation,
the Company Board will have the authority, without further shareholder
approval, to create one or more series of preferred stock, to issue shares of
preferred stock in such series up to the maximum number of shares of preferred
stock authorized, and to determine the preferences, rights, privileges and
restrictions of any series, including the dividend rights, voting rights,
rights and terms of redemption, liquidation preferences, the number of shares
constituting any such series and the designation of such series. Pursuant to
this authority, the Company Board could create and issue a series of preferred
stock with rights, privileges or restrictions having the effect of
discriminating against an existing or prospective holder of such securities as
a result of such security holder beneficially owning or commencing a tender
offer for a substantial amount of RCN Common Stock. One of the effects of
authorized but unissued and unreserved shares of capital stock may be to
render more difficult or discourage an attempt by a potential acquirer to
obtain control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of the Company's
management. The issuance of such shares of capital stock may have the effect
of delaying, deferring or preventing a change in control of the Company
without any further action by the shareholders of the Company.

Amendment of Certain Charter and Bylaw Provisions. The RCN
Certificate of Incorporation provides that the Company Board may adopt, amend
or repeal any provision of the RCN Bylaws. The RCN Certificate of
Incorporation and the RCN Bylaws also provide that RCN Bylaw provisions may be
adopted, amended or repealed by the affirmative vote of shareholders holding
not less than 66(2)/(3)% of the total number of votes entitled to be cast in
the election of directors.

Any amendment, modification or repeal of the provisions of the
RCN Certificate of Incorporation relating to the election and removal of
directors, the right to call special meetings, the prohibition on action by
written consent, amendment of the RCN Bylaws and the limitation of liability
and indemnification of officers and directors will require approval by the
affirmative vote of shareholders holding at least 66(2)/(3)% of the total
number of votes entitled to vote generally in the election of directors.

Delaware Takeover Statute

The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested shareholder" for a period of three years following the date that
such shareholder became an interested shareholder, unless (i) prior to such
date either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for purposes of
determining the number of shares outstanding, shares owned by (A) persons who
are both directors and officers and (B) employee stock plans in certain
circumstances), or (iii) on or after such date the business combination is
approved by the board and authorized at an annual or special meeting of
shareholders, and not by written consent, by the affirmative vote of at least
66(2)/(3)% of the outstanding voting stock which is not owned by the
interested shareholder. A "business combination" includes a merger,
consolidation, asset sale, or other transaction resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. The
restrictions imposed by Section 203 will not apply to a corporation if, among
other things, (i) the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203 or
(ii) 12 months have passed after the corporation, by action of its
shareholders holding a majority of the outstanding stock, adopts an amendment
to its certificate of incorporation or Bylaws expressly electing not to be
governed by Section 203. The Company has not elected out of Section 203 and,
therefore, the restrictions imposed by Section 203 will apply to the Company.
Prior to the Distribution, the Company Board approved of Level 3 Telecom
becoming an interested shareholder and, consequently, Section 203 would not
apply to any business combination with Level 3 Telecom.

Liability and Indemnification of Directors and Officers

Certain provisions of the DGCL and the RCN Certificate of
Incorporation and the RCN Bylaws relate to the limitation of liability and
indemnification of directors and officers of the Company. These various
provisions are described below.

The RCN Certificate of Incorporation provides that the
Company's directors are not personally liable to the Company or its
shareholders for monetary damages for breach of their fiduciary duties as a
director to the fullest extent permitted by the DGCL. Under the DGCL,
directors would not be personally liable to the Company or its shareholders
for monetary damages for breach of their fiduciary duties as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) any transaction
from which the director derived improper personal benefit or (iv) the unlawful
payment of dividends or unlawful stock repurchases or redemptions. This
exculpation provision may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter
shareholders or the Company from bringing a lawsuit against directors of the
Company for breach of their fiduciary duties as directors. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission.

The RCN Certificate of Incorporation also provides that each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or officer of the Company or is or was serving at
the request of the Company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified
and held harmless by the Corporation to the fullest extent permitted by the
DGCL. This right to indemnification shall also include the right to be paid
by the Company the expenses incurred in connection with any such proceeding in
advance of its final disposition to the fullest extent authorized by the DGCL.
This right to indemnification shall be a contract right. The Company may, by
action of the Company Board, provide indemnification to such of the employees
and agents of the Company to such extent and to such effect as the Company
Board determines to be appropriate and authorized by the DGCL.

The Company purchases and maintains insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company, or
is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted
against him or her and incurred by him or her in any such capacity, or arising
out of his or her status as such, whether or not the Company would have the
power or the obligation to indemnify him or her against such liability under
the provisions of the RCN Certificate of Incorporation.

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), Salomon Brothers Inc, NationsBanc Montgomery Securities LLC, Donaldson,
Lufkin & Jenrette Securities Corporation and Prudential Securities Incorporated
are acting as representatives (the "Representatives") of each of the
Underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in a purchase agreement (the "Purchase Agreement") among
the Company, the Selling Stockholders and the Underwriters, the Company and the
Selling Stockholders have agreed to sell to the Underwriters, and each of the
Underwriters severally and not jointly has agreed to purchase from the Company,
and the Selling Stockholders the number of shares of Common Stock set forth
opposite its name below.

<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................
Smith Barney Inc............................................
NationsBanc Montgomery Securities LLC.......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Prudential Securities Incorporated..........................
-----------
Total...................................................
===========
</TABLE>

In the Purchase Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to such agreement if any of the
shares of Common Stock being sold pursuant to such agreement are purchased.
Under certain circumstances, under the Purchase Agreement the commitments of
non-defaulting Underwriters may be increased.

The Representatives have advised the Company and the Selling
Stockholders that the Underwriters propose initially to offer the shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share of Common Stock. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.

The Company has granted an option to the Underwriters,
exercisable in whole or in part for 30 days after the date of this Prospectus,
to purchase up to an aggregate of 1,648,351 additional shares of Common Stock
at the initial public offering price set forth on the cover page of this
Prospectus, less the underwriting discount. The Underwriters may exercise
this option solely to cover over-allotments, if any, made on the sale of the
shares of Common Stock offered hereby. To the extent that the Underwriters
exercise this option, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial amount reflected in the foregoing
table.

The Company, its directors and executive officers and certain
shareholders have agreed, subject to certain exceptions, not to directly or
indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of or otherwise dispose of or transfer
any shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or thereafter acquired by the
person executing the agreement or with respect to which the person executing
the agreement thereafter acquires the power of disposition, or file a
registration statement under the Securities Act with respect to the foregoing
or (ii) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the Common Stock, whether any
such swap or transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the Underwriters for a period of 90 days after the date of
this Prospectus.

The Company and the Selling Stockholders have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.

Until the distribution of the Common Stock is completed, rules
of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.

If the Underwriters create a short position in the Common Stock
in connection with the Offering, i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Common Stock in
the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.

The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
offering made hereby.

In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases. The
imposition of a penalty bid might also have an effect on the price of the
Common Stock to the extent that it discourages resales of the Common Stock.

Neither the Company, the Selling Stockholders nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.

In connection with the Offering, the Underwriters and
certain selling group members may engage in passive market making
transactions in the Common Stock on the Nasdaq/NMS in accordance with
Regulation M under the Exchange Act during a period before the commencement
of offers or sales of Common Stock hereunder.

Certain of the Representatives and their affiliates have provided
and are currently providing investment banking and related services to the
Company and its affiliates, for which they have received or are receiving
customary compensation, and may continue to do so in the future. Each of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc., an affiliate
of Smith Barney Inc. and NationsBanc Montgomery Securities LLC acted as initial
purchasers in the offering of the 1997 Notes and the 1998 Notes and received
customary discounts and commissions in connection therewith.

LEGAL MATTERS

The validity of the shares of Common Stock in respect of which
this Prospectus is being delivered will be passed on for the Company by Davis
Polk & Wardwell, New York, New York. Certain legal matters relating to the
offering made hereby will be passed upon for the Underwriters by Cahill Gordon
& Reindel (a partnership including a professional corporation), New York, New
York.

EXPERTS

The consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, appearing in this Prospectus and Registration Statement (defined
below) have been audited by Coopers & Lybrand L.L.P., independent accountants,
as set forth in their report thereon appearing elsewhere herein and in the
Registration Statement and have been so included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.

The financial statements of Erols Internet, Inc. at December
31, 1996 and 1997 and for the period from August 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration
Statement on Form S-1 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act, with respect to the Shares
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Shares, reference
is hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference.

The Company is subject to the informational requirements of the
Exchange Act, and, in accordance therewith is required to file reports and
other information with the Commission. The Registration Statement, as well as
such reports and other information filed by the Company with the Commission,
may be inspected without charge at the public reference facilities maintained
by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
and at the Commission's regional offices located at Seven World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained by mail from the Commission's Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission. In addition, such
reports and other information concerning the Company may also be inspected at
the offices of the National Association of Securities Dealers Automated
Quotation at 1735 K Street, N.W., Washington, D.C. 20006.

INDEX TO FINANCIAL STATEMENTS

RCN Corporation

Report of Independent Accountants..........................................F-1
Consolidated Statements of Operations for the three years ended
December 31, 1997, 1996 and 1995.........................................F-2
Consolidated Balance Sheets at December 31, 1997 and 1996..................F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995.........................................F-4
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............................F-7
Notes to Consolidated Financial Statements.................................F-8
Condensed Consolidated Statements of Operations--Quarters Ended
March 31, 1998 and 1997.................................................F-32
Condensed Consolidated Balance Sheets March 31, 1998 and
December 31, 1997.......................................................F-33
Condensed Consolidated Statements of Cash Flows--Quarters Ended
March 31, 1998 and 1997...................................................F-34
Notes to Condensed Consolidated Financial Statements......................F-35

Erols Internet, Inc.

Report of Ernst & Young LLP, Independent Auditors.........................F-41
Balance Sheets as of December 31, 1996 and 1997...........................F-42
Statements of Operations for the period from August 1, 1995 (inception) to
December 31, 1995 and the years ended December 31, 1996
and 1997................................................................F-43
Statements of Stockholders' Deficit for the period from August 1, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996
and 1997................................................................F-44
Statements of Cash Flows for the period from August 1, 1995 (inception)
to December 31, 1995 and the years ended December 31, 1996 and
1997....................................................................F-45
Notes to Financial Statements.............................................F-46

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of RCN Corporation:

We have audited the accompanying consolidated balance sheets of
RCN Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

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

/s/ Cooper & Lybrand L.L.P.

Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
(except Note 2, as to which
the date is May 20, 1998)

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)

<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales.................................................................. $ 127,297 $ 104,910 $ 91,997
Costs and expenses, excluding depreciation and amortization............ 134,967 79,107 75,003
Nonrecurring charges................................................... 10,000 -- --
Depreciation and amortization.......................................... 53,205 38,881 22,336
---------- ---------- ----------

Operating (loss)....................................................... (70,875) (13,078) (5,342)
Interest income........................................................ 22,824 25,602 29,001
Interest expense....................................................... (25,602) (16,046) (16,517)
Other income (expense), net............................................ 131 (546) (304)
---------- ---------- ----------
(Loss) income before income taxes...................................... (73,522) (4,068) 6,838
(Benefit) provision for income taxes................................... (20,849) 979 1,119
---------- ---------- ----------
(Loss) income before minority interest and equity in unconsolidated
entities............................................................... (52,673) (5,047) 5,719
Minority interest in loss (income) of consolidated entities............ 7,296 1,340 (144)
Equity in (loss) of unconsolidated entities............................ (3,804) (2,282) (3,461)
---------- ---------- ----------
(Loss) income before extraordinary item................................ (49,181) (5,989) 2,114
Extraordinary charge - debt prepayment penalty, net of tax of $1,728... (3,210) -- --
---------- ---------- ----------
Net (loss) income...................................................... $ (52,391) $ (5,989) $ 2,114
========== ========== ==========

Basic earnings per average common share:
Income (loss) before extraordinary charge.............................. $ (0.89) $ (0.11) $ (0.04)
Extraordinary charge - debt prepayment penalty......................... $ (0.06) -- --
Net income (loss) to shareholders...................................... $ (0.95) $ (0.11) $ (0.04)
Weighted average shares outstanding.................................... 54,965,716 54,918,394 54,890,334

Diluted earnings per average common share:
Income (loss) before extraordinary charge.............................. $ (0.89) $ (0.11) $(0.04)
Extraordinary charge - debt prepayment penalty......................... $ (0.06) -- --
Net income (loss) to shareholders...................................... $ (0.95) $ (0.11) $(0.04)
Weighted average shares and common stock equivalents outstanding 54,965,716 54,918,394 54,890,334

See accompanying notes to Consolidated Financial Statements.
</TABLE>

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments......................................................... $ 222,910 $61,843
Short-term investments...................................................................... 415,603 46,831
Accounts receivable from related parties.................................................... 9,829 12,614
Accounts receivables, net of reserve for doubtful accounts of $2,134 in 1997 and $861
in 1996................................................................................... 17,815 10,413
Unbilled revenues........................................................................... 1,695 844
Material and supply inventory, at average cost.............................................. 2,745 1,140
Prepayments and other....................................................................... 5,314 4,556
Deferred income taxes....................................................................... 4,821 4,371
Investments restricted for debt service..................................................... 22,500 --
--------- -------
Total current assets 703,232 142,612
--------- -------
Notes receivable - affiliates................................................................ -- 155,481
Property, plant and equipment, net of accumulated depreciation of $107,419 in 1997
and $84,529 in 1996......................................................................... 200,340 135,828
Investments restricted for debt service...................................................... 39,411 --
Investments.................................................................................. 70,424 76,547
Intangible assets, net....................................................................... 96,547 93,471
Deferred charges and other assets............................................................ 41,038 24,146
--------- -------
Total assets................................................................................. $1,150,992 $628,085
========= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable to related parties......................................................... $ 3,748 $ 4,880
Accounts payable............................................................................ 24,835 13,642
Advance billings and customer deposits...................................................... 7,318 6,859
Accrued taxes............................................................................... 488 1,950
Accrued interest............................................................................ 5,549 5,041
Accrued contract settlements................................................................ 3,126 3,565
Accrued cable programming expense........................................................... 3,498 3,188
Accrued expenses............................................................................ 21,143 18,167
--------- -------
Total current liabilities.................................................................... 69,705 57,292
--------- -------
Long-term debt............................................................................... 686,103 131,250
Notes payable - affiliates................................................................... -- 11,554
Deferred income taxes........................................................................ 19,612 28,245
Other deferred credits....................................................................... 2,596 3,290
Minority interest............................................................................ 16,392 5,389
Commitments and contingencies................................................................
Preferred stock.............................................................................. -- --
Common shareholders' equity.................................................................. 356,584 390,765
--------- -------
Total liabilities and shareholders' equity................................................... $1,150,992 $628,085
========= =======

See accompanying notes to Consolidated Financial Statements.
</TABLE>

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from operating activities
Net income (loss)........................................................... $(52,391) $(5,989) $2,114
Gain on pension curtailment/settlement...................................... -- (3,437) --
Accretion of discounted debt................................................ 8,103 -- --
Gain on sale of partnership interest........................................ (661) -- --
Extraordinary item - debt prepayment penalty................................ 3,210 -- --
Depreciation and amortization............................................... 53,205 38,881 22,336
Deferred income taxes and investment tax credits, net....................... (10,503) (6,477) 6,696
Provision for losses on accounts receivable................................. 2,732 1,788 614
Equity in loss of unconsolidated entities................................... 3,804 2,282 3,461
Minority interest........................................................... (7,296) (1,340) 144
Net change in certain assets and liabilities, net of business acquisitions:
Accounts receivable and unbilled revenues................................. (14,979) (3,780) (5,550)
Material and supply inventory............................................. (1,605) (814) 777
Accounts payable.......................................................... 11,193 2,954 3,983
Accrued expenses.......................................................... 3,353 4,283 2,783
Accounts receivable from related parties.................................. 3,180 1,572 11,860
Accounts payable to related parties....................................... (1,132) (5,448) (419)
Other, net................................................................ 367 597 529
Other....................................................................... 1,081 (1,241) (769)
------- ------- -------
Net cash provided by operating activities.................................... 1,661 23,831 48,559
------- ------- -------

Cash flows from investing activities:
Additions to property, plant and equipment.................................. (79,042) (38,548) (29,854)
Purchase of short-term investments.......................................... (445,137) (75,091) (238,257)
Sales and maturities of short-term investments.............................. 76,923 149,086 245,112
Acquisitions, net of cash acquired.......................................... (30,490) (30,090) (121,147)
Purchase of loan receivable................................................. -- (13,088) --
Proceeds from sale of partnership interest.................................. 1,990 -- --
Other....................................................................... (14) (1,646) (2,057)
------- ------- -------
Net cash used in investing activities........................................ 475,860 9,377 (146,203)
------- ------- -------

See accompanying notes to Consolidated Financial Statements.
</TABLE>

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)

<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities
Redemption of long-term debt................................................ (141,250) (44,750) (28,741)
Issuance of long-term debt.................................................. 688,000 19,000 19,300
Change in affiliate notes, net.............................................. 97,624 32,802 (6,130)
Extraordinary item - debt prepayment penalty................................ (3,210) -- --
Payments made for debt financing costs...................................... (19,743) -- --
Cash contribution from joint venture partner................................ 9,016 -- --
(Increase) related to investments restricted for debt service............... (61,250) -- --
Proceeds from issuance of stock............................................. 230 -- --
Transfers from C-TEC........................................................ 89,323 78,550 132,707
Transfers (to) C-TEC........................................................ (23,474) (76,211) (148,339)
-------- ------- -------
Net cash provided by (used in) financing activities.......................... 635,266 9,391 (31,203)
-------- ------- -------
Net increase (decrease) in cash and temporary cash investments............... 161,067 23,845 (128,847)
Cash and temporary cash investments at beginning of year..................... 61,843 37,998 166,845
-------- ------- -------
Cash and temporary cash investments at end of year........................... $ 222,910 $ 61,843 $ 37,998
======== ======= =======

Supplemental disclosures of cash flow information
Cash paid during the periods for:
Income taxes................................................................ $ 1,090 $ 549 $ 497
======== ======= =======
Interest (net of amounts capitalized)....................................... $ 16,536 $ 16,046 $ 16,404
======== ======= =======

</TABLE>

<TABLE>
<CAPTION>
<S> <C>
Supplemental Schedule of Non-Cash Investing and Financing Activities

In March 1997, the Company acquired the portion of Freedom which it did not already own. The transaction was
accounted for as a purchase. A summary of the transaction is as follows:
Cash paid....................................................................................... $40,000
Non-capitalizable costs ........................................................................ (10,000)
Reduction of minority interest.................................................................. (3,812)
------
Fair value of assets acquired................................................................... $26,188
======

In 1996, C-TEC acquired an 80.1% interest in Freedom New York, L.L.C. The acquisition was accounted for as a
purchase. A summary of the acquisition is as follows:
Cash paid........................................................................................ $28,906
Liabilities assumed.............................................................................. 7,621
Deferred tax asset recognized.................................................................... (167)
Minority interest recognized..................................................................... 6,188
------
Fair value of assets acquired.................................................................... $42,548
======

See accompanying notes to Consolidated Financial Statements.
</TABLE>

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)

<TABLE>
<CAPTION>
<S> <C>
In 1995, C-TEC acquired all the outstanding Common Stock of Twin County Trans Video, Inc. and a related covenant
not to compete. The consideration for the acquisition was as follows:

Cash paid (including $1,000 deposit in 1994)..................................................... $37,313
Issuance of 5% Promissory Note................................................................... 4,000
Capital contribution by stockholder.............................................................. 39,493
Liabilities assumed.............................................................................. 16,364
Deferred tax liability incurred.................................................................. 33,797
-------
Fair value of assets acquired.................................................................... $130,967
=======

In 1996, the $4,000 promissory note was canceled and the Company paid cash of $500 in settlement of certain
purchase price adjustments.

Certain intercompany accounts receivable and payable and intercompany note balances were transferred to
Shareholders' Net Investment in connection with the Distribution.

BECO's contribution of the IRU to the RCN-BECOCOM joint venture (Note 7(a)) is reflected as "Advanced Fiber
Plant" as its fair value.

See accompanying notes to Consolidated Financial Statements.
</TABLE>

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)

<TABLE>
<CAPTION>
Common Shares
Issued and Additional Paid
Outstanding Common Stock in Capital Deficit
------------- ------------ --------------- -------
<S> <C> <C> <C> <C>
Balance December 31, 1994 1,400 $ 1 $ $ --
Net Income.......................
Transfers from C-TEC.............
Cumulative translation adjustment
----------- ------ ------- ------
Balance, December 31, 1995 1,400 1 -- --
Net loss.........................
Transfers from C-TEC.............
Cumulative translation adjustment
----------- ------ ------- ------
Balance, December 31, 1996 1,400 1 -- --
Net loss from 1/1/97 through
9/30/97........................
Net loss from 10/1/97 through
12/31/97....................... (17,116)
Transfers from C-TEC.............
Common stock issued in connection
with the distribution.......... 54,967,952 54,968 321,556
Issuance of common stock......... 20,518 20 210
----------- ------ ------- ------
Balance, December 31, 1997 54,989,870 $54,989 $321,766 $(17,116)
=========== ====== ======= ======

<CAPTION>
Cumulative Total
Shareholder's Translation Shareholder's
Net Investment Adjustment Equity
-------------- ----------- -------------
<S> <C> <C> <C>
Balance December 31, 1994 $ 372,846 $ -- $ 372,847
Net Income....................... 2,114 2,114
Transfers from C-TEC............. 21,714 21,714
Cumulative translation adjustment (2,606) (2,606)
--------- ----- -------
Balance, December 31, 1995 396,674 (2,606) 394,069
Net loss......................... (5,989) (5,989)
Transfers from C-TEC............. 3,134 3,134
Cumulative translation adjustment (449) (449)
--------- ----- -------
Balance, December 31, 1996 393,819 (3,055) 390,765
Net loss from 1/1/97 through
9/30/97........................ (35,275) 35,275
Net loss from 10/1/97 through
12/31/97....................... (17,116)
Transfers from C-TEC............. 17,980 17,980
Common stock issued in connection
with the distribution.......... (376,524) --
Issuance of common stock......... 230
--------- ----- -------
Balance, December 31, 1997 $ -- $(3,055) $356,584
========= ===== =======

See accompanying notes to Consolidated Financial Statements.
</TABLE>

RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Per Share Data)

1. BACKGROUND AND BASIS OF PRESENTATION

Prior to September 30, 1997, RCN Corporation (the "Company" or
"RCN") was operated as part of C-TEC Corporation ("C-TEC"). On September 30,
1997, C-TEC distributed 100 percent of the outstanding shares of common stock
of its wholly owned subsidiaries, RCN Corporation ("RCN") and Cable Michigan,
Inc. ("Cable Michigan") to holders of record of C-TEC's Common Stock and
C-TEC's Class B Common Stock as of the close of business on September 19, 1997
(the "Distribution") in accordance with the terms of a Distribution Agreement
dated September 5, 1997 among C-TEC, RCN and Cable Michigan. RCN consists
primarily of C-TEC's bundled residential voice, video and Internet access
operations in the Boston to Washington, D.C. corridor, its existing New York,
New Jersey and Pennsylvania cable television operations, a portion of its long
distance operations and its international investment in Megacable, S.A. de
C.V.("Megacable") Cable Michigan, Inc. consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc.. In connection with
the Distribution, C-TEC changed its name to Commonwealth Telephone
Enterprises, Inc. ("CTE").

The consolidated financial statements have been prepared using
the historical basis of assets and liabilities and historical results of
operations of all wholly and majority owned subsidiaries. However, the
historical financial information presented herein reflects periods during
which the Company did not operate as an independent company and accordingly,
certain assumptions were made in preparing such financial information. Such
information, therefore, may not necessarily reflect the results of operations,
financial condition or cash flows of the Company in the future or what they
would have been had the Company been an independent, public company during the
reporting periods. All material intercompany transactions and balances have
been eliminated. Investments accounted for by the equity method include a 40%
interest in Megacable, a Mexican cable television system operator. Joint
ventures which the Company controls and in which the minority investors do not
possess significant veto rights are consolidated. Other joint ventures are
accounted for by the equity method.

C-TEC's corporate services group has historically provided
substantial support services such as finance, cash management, legal, human
resources, insurance and risk management and its financial statements are
included in the consolidated financial statements of the Company. Prior to
the Distribution, the corporate office allocated the cost for these services
pro rata among the business units supported primarily based on assets;
contribution to consolidated earnings before interest, depreciation,
amortization, and income taxes; and number of employees. In the opinion of
management, the method of allocating these costs is reasonable; however, the
costs of these services remaining with the Company after allocation to C-TEC's
other business units are not necessarily indicative of the costs that would
have been incurred by the Company on a stand-alone basis. Also included in
the Company's consolidated financial statements are the financial statements
of the corporate financial services company which invests excess cash of, and
advances funds to the Company and prior to the Distribution, C-TEC. The
financial services company charges interest expense on outstanding advances
and pays interest income on excess cash invested for affiliates.

CTE, RCN and Cable Michigan have entered into certain
agreements providing for the Distribution, and governing various ongoing
relationships, including the provision of support services, between the three
companies, including a distribution agreement and a tax-sharing agreement.

2. SEGMENT INFORMATION

The Company has elected to adopt Statement of Financial
Accounting Standards No. 131-- "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131") in the first quarter of 1998 and has
retroactively restated its segment disclosures.

The Company's operations involve developing an advanced fiber
network to provide a bundled service package of voice, video and data services
to new customers in high density markets and migrating as many customers as is
economically justified to the single source network, including customers which
were served by the Company's previously separate lines of business for which
profitability was separately measurable and monitored. While the Company's
chief decision makers monitor the revenue streams of the various products,
operations are managed and financial performance is evaluated based upon the
delivery of multiple services to customers over a single network. This allows
the Company to leverage its network costs to maximum profitability. As a
result, there are many shared expenses generated by the various revenue
streams; because management believes that any allocation of the expenses
incurred on a single network to multiple revenue streams would be impractical
and arbitrary, management does not currently make such allocations internally.
The chief decision makers do, however, monitor financial performance in a way
which is different from that depicted in the Company's historical general
purpose financial statements.

The Company manages operations and evaluates operating
financial performance on a pro forma total RCN basis, which reflects the
consolidation of all domestic joint ventures, including those not consolidated
under generally accepted accounting principles. The same net loss results on
both a historical and pro forma total RCN basis since the outside ownership of
the joint venture, which is consolidated only in the pro forma total RCN
information, is reflected as minority interest in the pro forma total RCN
information. Such results are as follows:

<TABLE>
<CAPTION>
Pro Forma Total RCN
Year Ended
December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales:
Voice........................................................................ $ 4,007 $ 830 $ 237
Video........................................................................ 103,371 87,470 65,699
Data......................................................................... 41 4 --
Commercial and other......................................................... 19,878 16,606 26,061
------- ------- -------
Total Sales................................................................... 127,297 104,910 91,997
Costs and expenses, excluding depreciation and amortization:
Direct expenses.............................................................. 51,757 35,226 39,604
Operating, selling, general and administrative............................... 83,422 43,881 35,399
------- ------- -------
EBITDA before nonrecurring charge............................................. (7,882) 25,803 16,994
Depreciation and amortization................................................. 53,205 38,881 22,336
Nonrecurring charge........................................................... 10,000 -- --
------- ------- -------
Operating loss................................................................ (71,087) (13,078) (5,342)
Interest income............................................................... 22,824 25,602 29,001
Interest expense.............................................................. (25,602) (16,046) (16,517)
Other income (expense), net................................................... 131 (546) (304)
------- ------- -------
(Loss) income before income taxes............................................. (73,734) (4,068) 6,838
(Benefit) provision for income taxes.......................................... (20,849) 979 1,119
------- ------- -------
(Loss) income before equity in unconsolidated entities, minority interest
and extraordinary item....................................................... (52,885) (5,047) 5,719
Equity in loss of unconsolidated entities..................................... (3,698) (2,282) (3,461)
Minority interest in loss (income) of consolidated entity..................... 7,402 1,340 (144)
------- ------- -------
(Loss) income before extraordinary item....................................... (49,181) (5,989) 2,114
Extraordinary charge -- debt prepayment penalty............................... (3,210) -- --
------- ------- -------
Net (loss) income............................................................. $ (52,391) $ (5,989) $ 2,114
======= ======= =======
</TABLE>

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash and Temporary Cash Investments - For purposes of reporting
cash flows, the Company considers all highly liquid investments purchased with
an original maturity of three months or less to be temporary cash investments.
Temporary cash investments are stated at cost which approximates market.

Short Term Investments and Investments Restricted for Debt
Service - Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
reevaluates such determination at each balance sheet date in accordance with
Statement of Financial Accounting Standards No. 115 -- "Accounting for Certain
Investments in Debt and Equity Securities." At December 31, 1997 and 1996,
marketable debt and equity securities have been categorized as available for
sale. The Company states its short term investments at cost, which
approximates market. Investments restricted for debt service have been
categorized as held to maturity.

Property, Plant and Equipment and Depreciation - Property,
plant and equipment reflects the original cost of acquisition or construction,
including payroll and related costs such as taxes, pensions and other fringe
benefits, and certain general administrative costs.

Depreciation is provided on the straight-line method based on
the useful lives of the various classes of depreciable property. The average
estimated lives of depreciable property, plant and equipment are:

Lives
-------------
Hybrid fiber/coaxial plant 5-22 years

Advanced fiber plant 10-15 years

Wireless & other plant 5 years

Buildings and leasehold improvements 5-45 years

Furniture, fixtures and vehicles 3-10 years

Other 3 years

Repairs of all property, plant and equipment and minor
replacements and renewals are charged to expense as incurred. Major
replacements and betterments are capitalized. Gain or loss is recognized on
major retirements and dispositions.

Intangible Assets - Intangible assets are amortized on a
straight-line basis over the expected period of benefit ranging from 2 to 15
years.

Accounting for Impairments - The Company follows the provisions
of Statement of Financial Accounting Standards No. 121 -- "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of "
("SFAS 121"). SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected net future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.

No impairment losses have been recognized by the Company
pursuant to SFAS 121.

Revenue Recognition - Local telephone service revenue is
recorded as earned based on tariffed rates. Long distance telephone service
revenue is recorded based on minutes of traffic processed and tariffed rates
or contracted fees. Revenues from cable programming services are recorded in
the month the service is provided. Internet access service revenues are
recorded based on contracted fees.

Advertising Expense - Advertising costs are expensed as
incurred. Advertising expense charged to operations was $12,203, $1,441 and
$862 in 1997, 1996 and 1995, respectively.

Stock Based Compensation - The Company applies Accounting
Principles Board Opinion No. 25 -- "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its stock plans. The Company has adopted the
disclosure - only provisions of Statement of Financial Accounting Standards
No. 123 -- "Accounting for Stock-Based Compensation" ("SFAS 123").

Earnings (loss) per share - The Company has adopted statement
of Financial Accounting Standards No. 128 -- "Earnings Per Share" ("SFAS
128"). Basic earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period.

Diluted earnings (loss) per share is computed based on net
income (loss) divided by the weighted average number of shares of common stock
outstanding during the period after giving effect to convertible securities
considered to be dilutive common stock equivalents. The conversion of stock
options during periods in which the Company incurs a loss from continuing
operations is not assumed since the effect is anti-dilutive. The number of
stock options which would have been converted in 1997 and have a dilutive
effect if the Company had income from continuing operations is 517,506.

For periods prior to October 1, 1997, during which the Company
was a wholly owned subsidiary of C-TEC, earnings (loss) per share was
calculated by dividing net income (loss) by the number of average common
shares of C-TEC outstanding, based upon a distribution ratio of one share of
Company common equity for each share of C-TEC common equity owned.

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before extraordinary charge.............. $ 49,181 $ (5,989) $ 2,114
=========== =========== ===========

Basic earnings per average common share:
Average shares outstanding............................. 54,965,716 54,918,394 54,890,334
(Loss) income per average common share................. $ (0.89) $ (0.11) $ (0.04)
Diluted earnings per average common share:
Average shares outstanding............................. 54,965,716 54,918,394 54,890,334
Dilutive shares resulting from stock options........... -- -- --
----------- ---------- ----------
54,965,716 54,918,394 54,890,334
=========== ========== ==========
(Loss) income per average common share................. $ (0.89) $ (0.11) $ (0.04)
</TABLE>

Income Taxes - The Company and its subsidiaries report income
for federal tax purposes on a consolidated basis.. Prior to the Distribution,
the Company and its subsidiaries were included in the consolidated federal
income tax return of C-TEC. Income tax expense is allocated to subsidiaries
on a separate return basis except that the Company's subsidiaries receive
benefit for the utilization of net operating losses and investment tax credits
included in the consolidated return even if such losses and credits could not
have been used on a separate return basis. The Company accounts for income
taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting
for Income Taxes." The statement requires the use of an asset and liability
approach for financial reporting purposes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between financial
reporting basis and tax basis of assets and liabilities. If it is more likely
than not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized.

Investment tax credits ("ITC") for the Company have been
deferred in prior years and are being amortized over the average lives of the
applicable property.

Foreign Currency Translation - The Company has a 40% interest
in Megacable. For purposes of determining its equity in the earnings of
Megacable, the Company translates the revenues and expenses of Megacable into
U.S. dollars at the average exchange rates that prevailed during the period.
Assets and liabilities are translated into U.S. dollars at the rates in effect
at the end of the fiscal period. Prior to 1997, the Company's share of the
gains or losses that result from this process are shown in the cumulative
translation adjustment account in the common shareholders' equity section of
the balance sheet. Effective January 1, 1997, since the three-year cumulative
rate of inflation at December 31, 1996 exceeded 100%, Mexico is treated for
accounting purposes as having a highly inflationary economy. As a result, the
financial statements of Megacable are remeasured as if the functional currency
were the U.S. dollar. The remeasurement of the Mexican peso into U.S. dollars
creates translation adjustments which are included in net income. The
Company's proportionate share of gains and losses resulting from transactions
of Megacable, which are made in currencies different from its own, are
included in income as they occur.

4. BUSINESS COMBINATIONS

The following business combinations were transacted by wholly
owned subsidiaries of C-TEC. The acquired businesses were transferred to the
Company in connection with the Distribution.

On August 30, 1996, FNY Holding Company, Inc., formerly a
wholly owned subsidiary of C-TEC ("FNY") acquired from Kiewit Telecom
Holdings, C-TEC's controlling shareholder at the time, an 80.1% interest in
Freedom New York, LLC and all related rights and liabilities ("Freedom") for
cash consideration of approximately $29,000. In addition, FNY assumed
liabilities of approximately $7,600. (In March 1996, Freedom had acquired the
wireless cable television business of Liberty Cable Television). The
acquisition was accounted for as a purchase, and accordingly, Freedom is
included in the Company's consolidated financial statements since September
1996. The full fair value of assets acquired and liabilities assumed has been
reflected in the Company's financial statements with minority interest
reflecting the separate 19.9% ownership.

FNY allocated the purchase price paid on the basis of the fair
value of property, plant and equipment and identifiable intangible assets
acquired and liabilities assumed. There was no excess cost over fair value of
net assets acquired.

Contingent consideration of $15,000 was payable in cash and was
to be based upon the number of net eligible subscribers, as defined in the
Acquisition Agreement, in excess of 16,563 delivered to the Company. The
contingent consideration is not included in the acquisition cost total above
but was to have been recorded when and if the future delivery of subscribers
occurred. In addition, FNY paid $922 to Kiewit Telecom Holdings which
represents compensation for foregone interest on the amount invested by Kiewit
Telecom Holdings in Freedom. This amount has been charged to operations.

On March 21, 1997, the Company paid $15,000 in full
satisfaction of contingent consideration payable for the original acquisition
of Freedom. Additionally, pursuant to the terms of the Freedom Operating
Agreement, the assets of RCN Telecom Services of New York, Inc., a
wholly-owned subsidiary of RCN, were contributed to Freedom, in which the
Company had an 80.1% ownership interest prior to such contribution.
Subsequent to this contribution, the Company paid $15,000 to acquire the
minority ownership of Freedom. These amounts were primarily allocated to
excess cost over fair value of net assets acquired and are being amortized
over a period of approximately six years. The Company also paid $10,000 to
terminate a marketing services agreement between Freedom and an entity
controlled by Freedom's former minority owners. The Company charged this
amount to operations for the quarter ended March 31, 1997.

On May 15, 1995, C-TEC Cable Systems, Inc, ("RCN Cable")
formerly a wholly owned subsidiary of C-TEC, acquired 40% of the
outstanding common stock of Twin County Trans Video, Inc. ("Twin County")
in exchange for cash of approximately $26,300, including a $1,000 deposit
made in 1994, and a $4,000, 5% promissory note of RCN Cable. In addition,
RCN Cable paid $11,000 in consideration of a noncompete agreement and
assumed liabilities of approximately $16,400. The remaining shares were
subject to an escrow agreement, pending completion of the merger, and were
required to be voted under the direction of RCN Cable. As of May 15, 1995,
RCN Cable also assumed management of Twin County. As a result, RCN Cable
had control of Twin County and accordingly Twin County is consolidated in
the Company's financial statements since May 1995, the date of the original
acquisition. The remaining outstanding common stock of Twin County was
acquired in September 1995 in exchange for $52,000 stated value redeemable
convertible preferred stock of C-TEC. The preferred stock has a stated
dividend rate of 5%, beginning January 1, 1996. The fair value of the
preferred stock, as determined by an independent appraiser was $39,500
which was recorded as additional paid-in capital to the Company. In 1996,
the $4,000 promissory note was canceled and RCN Cable paid cash of $500 in
settlement of certain purchase price adjustments.

RCN Cable has allocated the purchase price paid for Twin County
on the basis of the fair value of property, plant and equipment and
identifiable intangible assets acquired and liabilities assumed. The excess
of the consideration for the acquisition over the fair value of the net assets
acquired of approximately $16,700 has been allocated to goodwill and is being
amortized over a period of approximately 10 years.

In January 1995, RCN International Holdings, Inc. (formerly
C-TEC International, Inc.), formerly a wholly owned subsidiary of C-TEC,
purchased a 40% equity position in Megacable. The aggregate consideration
for the purchase was cash of $84,115. The Company accounts for its investment
by the equity method of accounting. The original excess cost over the
underlying equity in the net assets acquired is approximately $94,000, which
is being amortized on a straight-line basis over 15 years.

In January 1995, RCN Cable purchased the assets of Higgins
Lake Cable, Inc. for cash of approximately $4,750.

In June 1995, C-TEC invested approximately $2,220 for a
one-third interest in a partnership which intends to provide alternative
access telephone service to commercial subscribers. C-TEC transferred this
investment to RCN Cable in 1996 at net book value of $1,977. The Company
disposed of its investment in 1997 and realized a gain of $661.

In November 1995, the Company purchased the assets used in the
provision of residential telephone services in New York by RealCom Office
Communications, Inc. for cash of approximately $1,050.

The following unaudited pro forma summary presents information
as if the acquisitions of Freedom and Twin County had occurred at the
beginning of 1996. The pro forma information is provided for information
purposes only. It is based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations of the consolidated entities.

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Sales.................................................................... $ 127,297 $ 110,116
(Loss) from continuing operations before extraordinary items............. $ (72,245) $ (20,189)
Net (loss)............................................................... $ (53,831) $ (16,807)
Pro Forma Earnings Per Share:
(Loss) from continuing operations before extraordinary items............. $ (1.31) $ (0.37)
Net (loss)............................................................... $ (0.98) $ (0.31)
</TABLE>

5. SHORT-TERM INVESTMENTS

Short-term investments, stated at cost, include the following
at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Federal Agency notes................ $110,966 $ --
Commercial Paper.................... 43,859 8,823
Corporate debt securities........... 222,785 38,008
Certificates of deposit............. 37,993 --
------- -------

Total............................... $415,603 $ 46,831
======= =======
</TABLE>

At December 31, 1997, short term investments with an amortized
cost of $329,714 have contractual maturities of one to three years. All
remaining short term investments have contractual maturities under one year.

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at
December 31,

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Hybrid fiber/coaxial plant.................... $157,652 $148,172
Advanced fiber plant.......................... 76,572 29,226
Wireless & other plant........................ 4,771 4,245
Buildings, leasehold improvements and land.... 16,607 10,989
Furniture, fixtures and vehicles.............. 23,399 18,119
Construction in process....................... 28,195 9,013
Other......................................... 563 593
------- -------

Total property, plant and equipment........... 307,759 220,357
Less accumulated depreciation................. (107,419) (84,529)
------- -------

Property, plant and equipment, net............ $200,340 $135,828
======= =======
</TABLE>

Depreciation expense was $24,257, $19,372 and $13,236 for the
years ended December 31, 1997, 1996 and 1995, respectively.

7. INVESTMENTS AND JOINT VENTURES

Investments at December 31, are as follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Megacable..................... $70,363 $74,232
Partnership................... -- --
Other......................... 61 --
------ ------
Total Investments............. $70,424 $76,547
====== ======
</TABLE>

Investments carried on the equity method consist of the
following at December 31:

<TABLE>
<CAPTION>
Percentage Owned
1997 1996
-------- --------
<S> <C> <C>
Megacable........................ 40.00% 40.00%
Partnership Interest............. -- 33.33%
Starpower Communications, LLC.... 50.00% --
</TABLE>

a. In September 1996, RCN and Boston Edison Company ("BECO"),
through wholly owned subsidiaries, entered into a letter of intent to form a
joint venture to utilize 126 fiber miles of BECO's fiber optic network to
deliver RCN's comprehensive communications package in Greater Boston. The
venture, in the form of an unregulated entity with a term expiring in the year
2060, was formed pursuant to a joint venture agreement dated December 23, 1996
(the "Boston Joint Venture Agreement") providing for the organization and
operation of RCN-BECOCOM, LLC ("RCN-BECOCOM"). RCN-BECOCOM was organized
to own and operate an advanced fiber optic telecommunications network and
to provide, in the market in and around Boston, Massachusetts , voice,
video and data services, as well as the communications support component of
energy related customer services offered by BECO. RCN owns 51% of the
equity interest in RCN-BECOCOM and BECO, owns the remaining 49% interest.
Future capital contributions are required to be made on a 51% and 49% basis
for RCN and BECO, respectively.

The closing of the transactions contemplated by the Boston
Joint Venture Agreement occurred on June 17, 1997. RCN will manage the
business of RCN-BECOCOM pursuant to the terms of the Management Agreement and,
in consideration therefor, will receive reimbursement for its reasonable
costs, and a performance-based fee (based on factors including the number of
subscribers and operating cash flow) to be determined by agreement of RCN and
RCN-BECOCOM. The initial term of the agreement expires on December 31, 2001.
The agreement provides for automatic successive three-year renewal periods,
unless notice is given ninety days before the end of the period. As a result
of its ownership, management and control, this joint venture with BECO is
consolidated in RCN's financial statements.

Pursuant to an Indefeasible Right of Use Agreement ("IRU
Agreement") , BECO will, for certain agreed upon fees, (i) provide
construction services to build out the Network, (ii) make available to
RCN-BECOCOM (a) all of the available capacity of BECO's existing fiber
backbone, and (b) the ability to use BECO's real estate, poles, easements and
other interests for the construction and operation of the Network and (iii)
maintain the Network. BECO's construction obligations expire on June 17, 2007
and the term of the IRU Agreement expires on December 31, 2060. One year
before each respective expiration date, BECO agrees to commence good-faith
negotiations to extend construction obligations beyond June 17, 2007 and to
allow continued use of BECO's facilities beyond December 31, 2060. The fair
value of the IRU transferred by BECO to the joint venture is reflected as
"Advanced Fiber Plant" in property, plant and equipment.

BECO will have the right at the time of the Distribution and
every two years thereafter to convert its ownership interest in RCN-BECOCOM
into the Common Stock of RCN pursuant to specific terms and conditions. If
BECO exercises its conversion rights, BECO will remain obligated to make 49%
of all cash contributions by the parties and any cash contributions made after
conversion will result in it owning a portion of RCN-BECOCOM based on the
value of RCN-BECOCOM at the time of the contribution. BECO may exercise its
conversion rights in whole or in part from time to time. In January 1998,
BECO notified RCN that it has elected to exercise its option to the full
extent permitted by the Exchange Agreement with respect to 1997. RCN and BECO
are presently in discussions with respect to the calculation of the agreed
upon value for the exercise of such option.

b. On August 1, 1997, RCN and Potomac Capital Investment
Corporation ("PCI"), a wholly owned subsidiary of PEPCO, entered into a letter
of intent (the "Letter of Intent") to form a joint venture which will own and
operate a communications network to provide voice, video, data and other
communications services to residential and commercial customers in the greater
Washington, D.C., Virginia and Maryland area (the "Washington, D.C. Market").
Starpower, an unregulated limited liability company with a perpetual term, was
formed on October 28, 1997 to construct, own, lease, operate and market a
network for the selling of voice, video, data and other telecommunications
services to all potential commercial and residential customers in the
Washington, D.C. Market. RCN, owns 50% of the equity interest in Starpower
and PCI, owns the remaining 50% interest.

The closing of the Starpower joint venture (the "Starpower
Closing") occurred on December 19, 1997.

Pursuant to the Amended and Restated Operating Agreement, RCN
and Pepco Communications are each required to make additional capital
contributions in accordance with a schedule set forth in such agreement on a
50%/50% basis. Failure of either RCN or Pepco Communications to make a
scheduled capital contribution or to vote in favor of certain additional
capital contributions may result in the recalculation of equity interests. The
business and affairs of Starpower is to be managed by RCN and Pepco
Communications. So long as RCN and Pepco Communications maintain a 50%/50%
equity interest in the joint venture, each of RCN and Pepco Communications
will appoint three members to the operating committee, the approval of which
is required for any business action. Certain fundamental business actions,
such as mergers, acquisitions, sales of substantially all of the assets,
liquidation and amendments to the certificate of organization or any agreement
signed at the Starpower Closing, require the unanimous approval of the
operating committee regardless of whether the parties continue to maintain a
50%/50% ownership interest. As a result of the joint control, Starpower is
accounted for under the equity method of accounting.

A subsidiary of RCN will provide support services including
customer service, billing, marketing and certain administrative, accounting
and technical support services, each of which shall be provided at cost.

c. The basis of the Company's investment in Megacable exceeded
its underlying equity in the net assets of Megacable when acquired by
approximately $94,000 which excess is being amortized on a straight-line basis
over 15 years. At December 31, 1997, the unamortized excess over the
underlying equity in the net assets was $75,886. The Company recorded its
proportionate share of (losses) and amortization of excess cost over net
assets of ($3,869), ($2,190) and ($3,061) in 1997, 1996 and 1995, respectively.

Effective January 1, 1997, since the three-year cumulative rate
of inflation at December 31, 1996 exceeded 100%, Mexico is being treated for
accounting purposes under Statement of Financial Accounting Standards No. 52
- -- "Foreign Currency Translation", as having a highly inflationary economy.
As a result, the financial statements of Megacable are remeasured as if the
functional currency were the U.S. dollar. The remeasurement of the Mexican
peso into U.S. dollars creates translation adjustments which are included in
net income. Exchange gains (losses) of $(12), $247, and $(932) in 1997, 1996,
and 1995, respectively, including translation losses in 1997, are included in
the respective statements of operations through the Company's proportionate
share of losses of Megacable.

The following table reflects the summarized financial position
and results of operations of Megacable as of and for the years ended December
31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Assets.......................................... 76,323 67,672
Liabilities..................................... 8,347 6,455
Stockholders' equity............................ 67,976 61,217
Sales........................................... 30,441 23,225
Costs and expenses.............................. 23,389 15,689
Foreign currency transaction gains (losses)..... (31) 618
Net income...................................... 6,653 10,226
</TABLE>

8. INTANGIBLE ASSETS

Intangible assets consist of the following at December 31,

<TABLE>
<CAPTION>
Amortization
Period 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Franchises and subscriber lists.. 2-10.5 years $ 79,273 $ 78,720
Noncompete agreements............ 5-8 years 11,209 11,209
Goodwill......................... 5-10 years 42,787 16,830
Building access rights........... 3-4 years 15,197 14,920
Other intangible assets.......... 5-15 years 1,469 520
------- -------
Total intangible assets.......... 149,935 122,199
Less accumulated amortization.... (53,388) (28,728)
------- -------
Intangible assets, net........... $ 96,547 $ 93,471
======= =======
</TABLE>

Amortization expense charged to operations in 1997, 1996 and
1995 was $28,948, $19,509 and $9,100, respectively.

9. DEFERRED CHARGES AND OTHER ASSETS

Deferred charges and other assets consist of the following at
December 31:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note and interest receivable - Mazon Corporativo, S.A. de C.V................. $17,682 $15,310
Debt issuance costs........................................................... 19,743 309
Prepaid pension costs......................................................... -- 2,967
Prepaid professional services................................................. 938 3,439
Other......................................................................... 2,675 2,121
------ ------
Total......................................................................... $41,038 $24,146
====== ======
</TABLE>

10. DEBT

a. Long-term debt

Long-term debt outstanding at December 31 is as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Senior Secured Notes 9.65% due 1999........... $ -- $131,250
Revolving Credit Agreement.................... 3,000 --
Term Credit Agreement......................... 100,000 --
Senior Notes 10% due 2007..................... 225,000 --
Senior Discount Notes 11 1/8% due 2007........ 358,103 --
------- -------
Total......................................... 686,103 131,250

Due within one year........................... -- --
------- -------

Total Long-Term Debt.......................... $686,103 $131,250
======= =======
</TABLE>

In October 1997, pursuant to Rule 144A of the Securities
Exchange Act of 1933, the Company completed an offering of 10% Senior Notes
with an aggregate principal amount of $225,000 and 11 1/8% Senior Discount
Notes with an aggregate principal amount at maturity of $601,045, both due
2007, to qualified institutional buyers as defined in Rule 144A. The
Senior Discount Notes were issued at a discount and generated gross
proceeds to the Company of $350,000. In December 1997, the Company
commenced an SEC registered Exchange Offer of its 10% Senior Notes due
2007, Series B for any and all outstanding 10% Senior Notes due 2007,
Series A and its 11 1/8% Senior Discount Notes due 2007, Series B for any
and all outstanding 11 1/8% Senior Discount Notes due 2007 Series A. The
Exchange Offer closed in January of 1998. All outstanding notes were
exchanged.

The 10% Senior Notes were issued under an indenture dated
October 17, 1997 (the "10% Indenture") between the Company and The Chase
Manhattan Bank, as Trustee. The 10% Senior Notes are general senior
obligations of the Company which mature on October 15, 2007 and are
collateralized by a pledge of the Escrow Account which contains approximately
$61,000 of the net proceeds from the sale of the 10% Senior Notes plus
approximately $1,000 of aggregate interest, representing funds that, together
with the future proceeds from the investment thereof, will be sufficient to
pay interest on the 10% Senior Notes for six scheduled interest payments.
Interest on the 10% Senior Notes is payable in cash semi-annually in arrears
on each April 15 and October 15, commencing April 15, 1998.

The 10% Indenture contains certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, engage in transactions with stockholders and affiliates, create
liens, sell assets and engage in mergers and consolidations.

The 10% Senior Notes are redeemable, in whole or in part, at
any time on or after October 15, 2002 at the option of the Company. The 10%
Senior Notes have redemption prices starting at 105% of the principal amount
and declining to 100% of the principal amount, plus any accrued interest.

The 11 1/8% Senior Discount Notes were issued under an
indenture dated October 17, 1997 (the "11 1/8% Indenture")between the
Company and The Chase Manhattan Bank, as Trustee. The 11 1/8% Senior
Discount Notes are general senior obligations of the Company, limited to
$601,045 aggregate principal amount at maturity and will mature on October 15,
2007. The 11 1/8% Senior Discount Notes were issued at a discount to yield
gross proceeds of $350,000. The 11 1/8% Senior Discount Notes will not
bear cash interest prior to October 15, 2002.

The 11 1/8% Indenture contains certain covenants that, among
other things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, engage in transactions with stockholders and affiliates, create
liens, sell assets and engage in mergers and consolidations.

The 11 1/8% Senior Discount Notes are redeemable, in whole
or in part, at any time on or after October 15, 2002 at the option of the
Company. The 11 1/8% Senior Discount Notes have redemption prices starting
at 105.562% of the principal amount at maturity and declining to 100% of
the principal amount at maturity, plus any accrued interest.

Certain subsidiaries of the Company, including RCN Cable, have
in place a $125,000 credit agreement comprised of two credit facilities. The
first is a five year revolving credit facility in the amount of $25,000 which
provides credit availability through June 30, 2002. Revolving loans may be
repaid and reborrowed from time to time. The second is a term credit facility
in the amount of $100,000 which is to be repaid over six years in quarterly
installments from September 30, 1999 through June 30, 2005. Interest only is
due through June 30, 1999. The interest rate is based on either a LIBOR or
Base Rate option, at the election of the Company (6.82% at December 31, 1997).
The credit agreement is collateralized by a pledge by the Company of its stock
in RCN Cable and may, in the future, be secured by pledges of stock of
subsidiaries of the Company. At December 31, 1997, the entire $100,000 term
credit facility is outstanding and $3,000 of the revolving credit facility is
outstanding. RCN Cable used a portion of its initial Borrowings under the
credit facilities to prepay higher priced Senior Secured Notes. The early
extinguishment of the Senior Secured Notes resulted in an extraordinary charge
of $3,210, net of taxes of $1,728. The credit agreement contains restrictive
covenants which, among other things, require the Company to maintain certain
debt to cash flow and interest coverage ratios and place certain limitations on
additional debt and investments. The Company does not believe that these
covenants will materially restrict its activities.

In 1989, in order to complete the August 29, 1989 Michigan
Cable Television acquisition, RCN Cable entered into a private placement of
Senior Secured Notes for $150,000 and a $70,000 Revolving Secured Credit
Agreement, which was voluntarily reduced to $60,000 in 1990 and which, in
accordance with its terms, reduced on a quarterly basis, through original
scheduled maturity in September 1996. In August 1996, RCN Cable obtained an
amendment and waiver related to this Revolving Secured Credit Agreement which
extended final maturity to December 1996 and increased the amount of available
Borrowings. Additionally, the restrictive covenant relating to limitations on
the amount of capital expenditures was waived for the year ending December 31,
1996. The Senior Secured Notes were collateralized by the stock of certain
cable subsidiaries of the Company. On September 1, 1996 and on each September
1 thereafter, a mandatory principal repayment was required on the Senior
Secured Notes. The Senior Secured Notes contained restrictive covenants
which, among other things, required maintenance of a specified debt to cash
flow ratio. These notes were prepaid in 1997 as discussed above. The Senior
Secured Notes were classified as long-term at December 31, 1996 since the
Company had the intent and the ability to refinance this obligation on a
long-term basis through the above credit facilities.

In connection with the acquisition of Twin County Trans Video,
Inc., RCN Cable issued a $4,000 promissory note at 5% due in May 2003. The
note was unsecured. In September 1996, the note was canceled in settlement of
certain purchase price adjustments.

Contractual maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
Year Ending December 31, Aggregate Amounts
- ----------------------------------------- -------------------
<S> <C>
1998..................................... $ --
1999..................................... $ 3,750
2000..................................... $ 11,250
2001..................................... $ 16,250
2002..................................... $ 20,500
</TABLE>

b. Short-term debt

At December 31, 1997, the Company had unused lines of credit
for $5,500 at prime (8.50% at December 31, 1997). Short-term unsecured
Borrowings may be made under these lines of credit. The amounts available
under these lines of credit are reduced by outstanding letters of credit
($3,060 at December 31,1997). All unused lines of credit are cancellable at
the option of the banks. There are no commitment or facility fees associated
with maintaining availability of the above-mentioned lines of credit.

11. INCOME TAXES

The (benefit) provision for income taxes is reflected in the
Consolidated Statements of Operations as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................... $(11,795) $5,730 $(5,713)
State..................................... 1,449 1,102 375
------ ----- ------
Total Current.............................. (10,346) 6,832 (5,338)
------ ----- ------
Deferred:
Federal................................... (10,161) (4,751) 7,016
State..................................... (342) (1,000) (377)
------ ----- ------
Total Deferred............................. (10,503) (5,751) 6,639
------ ----- ------
Amortization of ITC........................ -- (102) (182)
------ ----- ------
Provision (benefit) for income taxes:
Before extraordinary item................. (20,849) 979 1,119
Extraordinary item........................ (1,728) -- --
------ ----- ------
Total (benefit) provision for income taxes. $(22,577) $ 979 $ 1,119
====== ===== ======
</TABLE>

At December 31, 1997 and 1995, the Company had tax related
balances due from affiliates of $3,186 and $501, respectively. At December
31, 1996, the Company had tax related balances due to affiliates of $817.

Temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at December 31, are as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net operating loss carryforwards.......................................... $ 10,078 $ 2,130
Alternative minimum tax credits........................................... 167 219
Employee benefit plans.................................................... 1,031 882
Reserve for bad debt...................................................... 844 693
Start-up costs............................................................ 586 959
Investment in unconsolidated entity....................................... 3,985 4,771
Accruals for nonrecurring charges and contract settlements................ 2,368 2,299
Other, net................................................................ 1,823 1,888
------ ------

Total deferred tax assets................................................. 20,882 13,841
------ ------

Property, plant and equipment............................................. (14,759) (15,019)
Intangible assets......................................................... (11,253) (17,776)
All other................................................................. (1,257) (1,229)
------ ------

Total deferred liabilities................................................ (27,269) (34,024)
------ ------

Subtotal.................................................................. (6,387) (20,183)
Valuation allowance....................................................... (8,404) (3,691)
------ ------
Total deferred taxes...................................................... $(14,791) $(23,874)
====== ======
</TABLE>

In the opinion of management, based on the future turnaround of
existing temporary differences for the consolidated taxpaying group, primarily
depreciation, the Company will more likely than not be able to realize
substantially all of its deferred tax assets.

A valuation allowance has been provided for the portion of
deferred tax assets which, in the opinion of management is uncertain as to
their realization. The valuation allowance relates primarily to state net
operating loss carryforwards generated by certain subsidiaries.

The net change in the valuation allowance for deferred tax
assets during 1997 was an increase of $4,713.

Net operating losses will expire as follows:

<TABLE>
<CAPTION>
Federal State
--------- ---------
<S> <C> <C>
1999.................. $ 2,793
2000.................. 3,087
2001.................. 14,532
2002.................. 3,141
2003.................. 10,244
2004.................. 3,767
2011.................. 38,116
2012.................. 8,028
2017.................. $8,218 --
----- ------
Total................. $8,218 $83,708
===== ======
</TABLE>

The provision (benefit) for income taxes is different from the
amounts computed by applying the U.S. statutory federal tax rate of 35%. The
differences are as follows:

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(Loss) income before (benefit) provision for the income taxes and
extraordinary item.................................................... $(70,030) $(5,010) $3,233
====== ====== =====
Federal income tax benefit at statutory rate.......................... $(24,511) $(1,753) $1,131
State income taxes net of federal income tax benefit.................. 719 66 (33)
Investment tax credits amortized...................................... -- (102) (50)
Amortization of goodwill.............................................. 830 779 388
Estimated nondeductible expenses...................................... 1,913 1,564 (93)
Adjustment to prior year accrual...................................... (197) 421 (161)
Other, net............................................................ 397 4 (63)
------ ------ -----
Total (benefit) provision for income taxes............................ $(20,849) $ 979 $1,119
====== ====== =====
</TABLE>

In 1995, C-TEC received official notification of final
settlement from the Internal Revenue Service relating to the examination of
C-TEC's consolidated federal income tax returns for 1989, 1990 and 1991. The
most significant adjustment relates to the disallowance of the claimed
amortization of certain intangible assets. As a result of the disallowance,
the Company's taxes payable for prior years increased approximately $580. The
amount accrued in previous years was sufficient to satisfy the above
adjustment. No additional accrual during 1995 was required.

In 1997 and 1996, estimated non-deductible expenses relate
primarily to charges in connection with the restructuring of the Company.

12. STOCKHOLDERS' EQUITY AND STOCK PLANS

The Company has authorized 100,000,000 shares of $1 par value
common stock and 200,000,000 shares of $1 par value Class B nonvoting
common stock. The Company also has authorized 25,000,000 shares of $1 par
value preferred stock. At December 31, 1997, 54,989,870 shares of common
stock are issued and outstanding.

In March 1998, the Company's Board of Directors approved a
two-for-one stock split, payable in the form of a 100% stock dividend. The
record date for the stock split is March 20, 1998. Stockholders of record at
the market close on that date will receive an additional share of RCN common
stock for each share held. The distribution date for the stock dividend will
be April 3, 1998. All share and per share data, stock option data, and market
prices of the Company's common stock have been restated to reflect this stock
split.

In connection with the Distribution, the Company Board adopted
the 1997 RCN Corporation Stock Option Plan ("the 1997 Plan"), designed to
provide equity based compensation opportunities to key employees when
shareholders of the Company have received a corresponding benefit through
appreciation in the value of RCN Common Stock.

The 1997 Plan contemplates the issuance of incentive stock
options, as well as stock options that are not designated as incentive stock
options, performance-based stock options, stock appreciation rights,
performance share units, restricted stock, phantom stock units and other
stock-based awards (collectively, "Awards"). Up to 5,000,000 shares of Common
Stock, plus 3,040,100 shares of Common Stock issuable in connection with the
Distribution related option adjustments, may be issued pursuant to Awards
granted under the 1997 Plan.

Unless earlier terminated by the Company Board, the 1997 Plan
will expire on the tenth anniversary of the Distribution. The Company Board
or the Compensation Committee may, at any time, or from time to time, amend
or suspend and, if suspended, reinstate, the 1997 Plan in whole or in part.

Prior to the Distribution, certain employees of RCN were
granted stock option awards under C-TEC's stock option plans. In connection
with the Distribution 3,040,100 options covering Common Stock were issued.
Each C-TEC option was adjusted so that each holder would currently hold
options to purchase shares of CTE Common Stock, RCN Common Stock and Cable
Michigan Common Stock. The number of shares subject to, and the exercise
price of, such options were adjusted to take into account the Distribution
and to ensure that the aggregate intrinsic value of the resulting RCN,
Cable Michigan and CTE options immediately after the Distribution was equal
to the aggregate intrinsic value of the C-TEC options immediately prior to
the Distribution.

Information relating to stock options is as follows:

<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding December 31, 1994.......... 1,431,000
Granted............................... 1,257,000
Exercised............................. --
Canceled.............................. 280,000
---------
Outstanding December 31, 1995.......... 2,408,000
Granted............................... 190,000
Exercised............................. 58,000
Canceled.............................. 272,000
---------
Outstanding December 31, 1996.......... 2,268,000 $ 7.10
Granted............................... 4,862,100 $ 14.31
Exercised............................. 20,000 $ 8.07
Canceled.............................. 3,000 $ 8.36
--------- -------
Outstanding December 31, 1997.......... 7,107,100 $ 14.31
========= =======
Shares exercisable December 31, 1997... 1,221,000 $ 7.05
</TABLE>

The following table summarizes stock options outstanding and
exercisable at December 31, 1997:

<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
-------------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Exercise Average Exercise
Exercise Prices Shares Contractual Life Price Shares Price
- ------------------ ------------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$6.24 to $8.40 3,017,100 7.5 years $7.36 1,221,000 $7.05
$15.32 to $16.82 4,090,000 9.8 years 15.33 -- --
--------- ---------

Total 7,107,100 1,221,000
========= =========
</TABLE>

No compensation expense related to stock option grants was
recorded in 1997 as the option exercise prices were equal to fair market value
on the date granted.

Pro forma information regarding net income and earnings per
share is required by SFAS 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a Black
Scholes option pricing model with weighted average assumptions for dividend
yield of 0% for 1997, 1996 and 1995; expected volatility of 38.6% prior to the
Distribution and 49.8% subsequent to the Distribution for 1997, 39.5% for
1996, and 35.9% for 1995; risk-free interest rate of 6.52%, 5.95% and 6.32%
for 1997, 1996 and 1995, respectively; and expected lives of 5 years for 1997,
1996 and 1995.

The weighted-average fair value of options granted during 1997
was $7.46.

For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. The
Company's pro forma net earnings and earnings per share were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net earnings - as reported............... $ (52,391) $ (5,989) $ 2,114
Net earnings - pro forma................. $ (54,419) $ (6,612) $ 1,695

Basic earnings per share - as reported... $ (0.95) $ (0.11) $ 0.04
Basic earnings per share - pro forma..... $ (0.99) $ (0.12) $ 0.03
Diluted earnings per share - as reported. $ (0.95) $ (0.11) $ 0.04
Diluted earnings per share - pro forma... $ (0.99) $ (0.12) $ 0.03
</TABLE>

In November 1996, the C-TEC shareholders approved a stock
purchase plan for certain key executives (the C-TEC "Executive Stock
Purchase Plan" or "C-TEC ESPP"). Under the C-TEC ESPP, participants may
purchase shares of C-TEC Common Stock in an amount of between 1% and 20% of
their annual base compensation and between 1% and 100% of their annual
bonus compensation provided, however, that in no event shall the
participant's total contribution exceed 20% of the sum of their annual
compensation, as defined by the C-TEC ESPP. Participant's accounts are
credited with the number of share units derived by dividing the amount of
the participant's contribution by the average price of a share of C-TEC
Common Stock at approximately the time such contribution is made. The
share units credited to a participant's account do not give such
participant any rights as a shareholder with respect to, or any rights as a
holder or record owner of, any shares of C-TEC Common Stock. Amounts
representing share units that have been credited to a participant's account
will be distributed, either in a lump sum or in installments, as elected by
the participant, following the earlier of the participant's termination of
employment or three calendar years following the date on which the share
units were initially credited to the participant's account. It is
anticipated that, at the time of distribution, a participant will receive
one share of C-TEC Common Stock for each share unit being distributed.

Following the crediting of each share unit to a participant's
account, a matching share of Common Stock is issued in the participant's
name. Each matching share is subject to forfeiture as provided in the C-TEC
ESPP. The issuance of matching shares will be subject to the participant's
execution of an escrow agreement. A participant will be deemed to be the
holder of, and may exercise all the rights of a record owner of, the matching
shares issued to such participant while such matching shares are held in
escrow.

Shares of restricted C-TEC Common Stock awarded under the C-TEC
Executive Stock Purchase Plan and share units awarded under the C-TEC ESPP
that relate to C-TEC Common Stock were adjusted so that following the
Distribution, each such participant was credited with an aggregate equivalent
value of restricted shares of common stock of Commonwealth Telephone
Enterprises, the Company and Cable Michigan. In 1997, the Company's Board of
Directors approved the RCN Corporation Executive Stock Purchase Plan (the "RCN
ESPP"), with terms substantially the same as the C-TEC ESPP. The number of
shares which may be distributed under the RCN ESPP as matching shares or in
payment of share units is 250,000. At December 31, 1997, 61,412 matching
shares have been issued under the RCN ESPP, none of which are vested. The
Company recognizes the cost of the matching shares over the vesting period.
Expense recognized in 1997 and 1996 was $80 and $145, respectively.

13. PENSIONS AND EMPLOYEE BENEFITS

Prior to the Distribution, the Company's financial statements
reflect the costs experienced for its employees and retirees while included in
the C-TEC plans.

Through December 31, 1996, substantially all employees of the
Company were included in a trusteed noncontributory defined benefit pension
plan, maintained by C-TEC. Upon retirement, employees are provided a monthly
pension based on length of service and compensation. C-TEC funds pension
costs to the extent necessary to meet the minimum funding requirements of
ERISA. Substantially, all employees of C-TEC's Pennsylvania cable television
operations (formerly Twin County Trans Video, Inc.) were covered by an
underfunded plan which was merged into C-TEC's overfunded plan on February 28,
1996.

The information that follows relates to the entire C-TEC
noncontributory defined benefit plan. The components of C-TEC's pension cost
are as follows:

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Benefits earned during the year (service cost)... $ 2,365 $ 1,656
Interest cost on projected benefit obligation.... 3,412 3,083
Actual return on plan assets..................... (3,880) (12,897)
Other components - net........................... (1,456) 8,482
----- ------
Net periodic pension cost........................ $ 441 $ 324
===== ======
</TABLE>

The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost:

<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Discount rate............................................................ 7.5% 7.0%
Expected long-term rate of return on plan assets......................... 8.0% 8.0%
Weighted average long-term rate of compensation increases................ 6.0% 6.0%
</TABLE>

The Company's allocable share of the consolidated net periodic
pension costs, based on the Company's proportionate share of consolidated
annualized salaries as of the valuation date, was approximately $158 and $251
for 1996 and 1995, respectively. These amounts are reflected in operating
expenses. As discussed below, no pension cost (credit) was recognized in 1997.

In connection with the restructuring, C-TEC completed a
comprehensive study of its employee benefit plans in 1996. As a result of
this study, effective December 31, 1996, in general, employees of the Company
no longer accrue benefits under the defined benefit pension plans and became
fully vested in their benefit accrued through that date. C-TEC notified
affected participants in December 1996. In December 1996, C-TEC allocated
pension plan assets of $6,984 and the related liabilities to a separate plan
for employees who no longer accrue benefits after lump sum distributions. The
allocation of assets and liabilities resulted in a curtailment/settlement gain
of $4,292. The Company's allocable share of this gain was $3,437. This gain
results primarily from the reduction of the related projected benefit
obligation. The curtailed plan has assets in excess of the projected benefit
obligation. Such excess amounts to $3,917 which, along with unrecognized
items of $1,148 results in prepaid pension cost of $2,769, which is included
in "Prepayments and other" in the accompanying 1997 and 1996 consolidated
balance sheets.

The following table sets forth the plans' funded status and
amounts recognized in C-TEC's balance sheet at December 31, 1996:

<TABLE>
<CAPTION>
<S> <C>
Plan assets at fair value......................................... $55,325

Actuarial present value of benefit obligations:

Accumulated benefit obligations:
Vested............................................................ 32,372
Nonvested......................................................... 1,704
------

Total............................................................. 34,076
Effect of increases in compensation............................... 6,042
------

Plan assets in excess of (less than) projected benefit obligation. 15,207
Unrecognized transition asset..................................... (3,463)
Unrecognized prior service cost................................... 2,438
Unrecognized net gain............................................. (11,215)
------

Prepaid pension cost.............................................. $2,967
=====
</TABLE>

C-TEC's pension plan has assets in excess of the accumulated
benefit obligation. Plan assets include cash, equity, fixed income securities
and pooled funds under management by an insurance company. Plan assets include
common stock of C-TEC with a fair value of approximately $5,835 at December
31, 1996.

Prepaid pension cost is included in "Deferred Charges and Other
Assets" in the accompanying 1996 consolidated balance sheet. The prepaid
pension asset was transferred to CTE in connection with the Distribution in
1997.

C-TEC sponsors a 401(k) savings plan covering substantially all
employees of the Company who are not covered by collective bargaining
agreements. Contributions made by the Company to the 401(k) plan are based on
a specific percentage of employees contributions. Contributions charged to
expense were $354 and $268 in 1996 and 1995, respectively. Contributions
charged to expense in 1997 prior to the Distribution were $515.

In connection with the Distribution, RCN established a
qualified savings plan under Section 401(k) of the Code that will also qualify
as an ESOP under Sections 401(a) and 4975(e)(7) of the Code (the "ESOP").
Eligible active employees under the ESOP, employees of the Company Businesses
who make Section 401(k) contributions and certain other employees will be
allocated shares of Company Common Stock. Contributions charged to expense in
1997 were $306.

The Company provides certain postemployment benefits to former
or inactive employees of the Company who are not retirees. These benefits are
primarily short-term disability salary continuance. The Company accrues the
cost of postemployment benefits over employees' service lives. The Company
uses the services of an enrolled actuary to calculate the expense. Prior to
the Distribution, C-TEC allocated the cost of these benefits to the Company
based on the Company's proportionate share of consolidated annualized
salaries. The Company reimbursed C-TEC for its allocable share of the
consolidated postemployment benefit cost. The net periodic postemployment
benefit cost (credit) was approximately $458, $539 and ($106) in 1997, 1996
and 1995, respectively.

14. COMMITMENTS AND CONTINGENCIES

a. The Company had various purchase commitments at December
31, 1997 related to its 1998 construction budget.

b. Total rental expense, primarily for office space and pole
rentals, was $3,505, $3,632 and $2,846 for 1997, 1996 and 1995, respectively.
At December 31, 1997, rental commitments under noncancellable leases, excluding
annual pole rental commitments of approximately $794 that are expected to
continue indefinitely, are as follows:

<TABLE>
Aggregate
Year Amounts
- --- ---------
<S> <C>
1998.................................. $3,725
1999.................................. $3,314
2000.................................. $2,939
2001.................................. $2,826
2002.................................. $2,848
Thereafter............................ $8,501
</TABLE>

c. The Company has outstanding letters of credit aggregating
$3,060 at December 31, 1997.

d. The Company has entered into various noncancellable
contracts for network services. Future obligations under these agreements are
as follows:

<TABLE>
Network
Year Services
- ---- --------
<S> <C>
1998................................... $3,026
1999................................... $3,064
2000................................... $3,012
2001................................... $2,762
2002................................... $ 12
Thereafter............................. $ 14
</TABLE>

e. The Company is subject to the provisions of the Cable
Television Consumer Protection and Competition Act of 1992, as amended, and
the Telecommunications Act of 1996. The Company has either settled challenges
or accrued for anticipated exposures related to rate regulation. However,
there is no assurance that there will not be additional challenges to its
rates.

f. In the normal course of business, there are various legal
proceedings outstanding. In the opinion of management, these proceedings will
not have a material adverse effect on the financial position or results of
operations or liquidity of the Company.

g. The Company has agreed to indemnify Cable Michigan and CTE
and their respective subsidiaries against any and all liabilities which arise
primarily from or relate primarily to the management or conduct of the business
of the Company prior to the effective time of the Distribution. The Company
has also agreed to indemnify Cable Michigan and CTE and their respective
subsidiaries against 30% of any liability which arises from or relates to the
management or conduct prior to the effective time of the Distribution of the
businesses of C-TEC and its subsidiaries and which is not a true CTE
liability, a true Cable Michigan liability or a true Company liability.

The Tax Sharing Agreement, by and among the Company, Cable
Michigan and CTE (the "Tax Sharing Agreement"), governs contingent tax
liabilities and benefits, tax contests and other tax matters with respect to
tax returns filed with respect to tax periods, in the case of the Company,
ending or deemed to end on or before the Distribution Date. Under the Tax
Sharing Agreement, Adjustments (as defined in the Tax Sharing Agreement) to
taxes that are clearly attributable to the Company Group, the Cable Michigan
Group, or the CTE Group will be borne solely by such group. Adjustments to
all other tax liabilities will be borne 50% by CTE, 30% by the Company and 20%
by Cable Michigan.

Notwithstanding the above, if as a result of the acquisition of
all or a portion of the Capital stock or assets of the Company, the
Distribution fails to qualify as a tax-free distribution under Section 355 of
the Code, then the Company will be liable for any and all increases in tax
attributable thereto.

h. Under the Starpower Amended and Restated Operating
Agreement, the Company is committed to make quarterly capital contributions
aggregating the following in the years ended December 31:

i. If, within five years after the Distribution, the ESOP
portion of the 401(k) Plan does not hold shares representing at least 3% of
the number of shares of Company Common Stock outstanding immediately after the
Distribution as increased by the number of shares issuable to BECO pursuant to
the Exchange Agreement (collectively, "Outstanding Company Common Stock") with
a market value at such time of not less than $24,000, RCN will issue to the
ESOP, in exchange for a note from the ESOP (the "ESOP Note"), the amount of
Company Common Stock necessary to increase the ESOP's holdings of Company
Common Stock to that level, provided, however, that RCN is not obligated to
issue shares to the ESOP in excess of 5% of the number of shares of
Outstanding Company Common Stock.

15. AFFILIATE AND RELATED PARTY TRANSACTIONS

The Company had the following transactions with affiliates
during the years ended December 31, 1997, 1996 and 1995:

<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Corporate office costs allocated to affiliates............................ $12,091 $12,362 $10,009
Cable staff and customer service costs allocated to Cable Michigan........ 3,489 3,577 2,952
Interest income on affiliate notes........................................ 8,688 15,119 17,340
Interest expense on affiliate notes....................................... 537 354 279
Long-distance terminating access charge expense from CTE.................. 1,312 728 862
Royalty fees charged by CTE............................................... 669 859 533
Revenue from engineering services......................................... -- 296 2,169
Other affiliate revenues.................................................. 1,576 -- 6
Other affiliate expenses.................................................. 2,199 1,980 2,090
</TABLE>

At December 31, 1997 and 1996, the Company has accounts
receivable from related parties of $9,829 and $12,614, respectively, for these
transactions. At December 31, 1997 and 1996, the Company has accounts payable
to related parties of $3,748 and $4,880, respectively, for these transactions.

The Company had notes receivable of $7,914 in 1996 from
advances by the Company's corporate financial services company to CTE. The
Company also had notes receivable of $147,567 at December 31, 1996, from Cable
Michigan, Inc. primarily related to the acquisition of the Michigan cable
operations and subsequent operations. All intercompany notes receivable were
settled in connection with the Distribution.

The Company had notes payable of $11,854 in 1996 from excess
cash advanced by CTE to the Company's corporate financial services company for
investment. All intercompany notes payable were settled in connection with
the Distribution.

16. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

Certain financial instruments potentially subject the Company
to concentrations of credit risk. These financial instruments consist
primarily of trade receivables, cash and temporary cash investments, and
short-term investments.

The Company places its cash and temporary investments with high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.

The Company's trade receivables reflect a customer base
primarily centered in the Boston to Washington, D.C. corridor of the United
States. The Company routinely assesses the financial strength of its
customers. As a consequence, concentrations of credit risk are limited.

17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

a. Cash and temporary cash investments

The carrying amount approximates fair value because of the
short maturity of these instruments.

b. Short-term investments

Short-term investments consist of commercial paper, corporate
debt securities, certificates of deposit and federal agency notes. Short-term
investments are carried at amortized cost which approximates fair value due to
the short period of time to maturity.

c. Long-term investments

Long-term investments consist of investments accounted for
under the equity method for which disclosure of fair value is not required.
The note and interest receivable are carried at cost plus accrued interest
which management believes approximates fair value.

d. Investments restricted for debt service

Investments restricted for debt service consists of an amount
placed in escrow from the proceeds of the 10% Senior Notes which, together
with the proceeds from the investment thereof, will be sufficient to pay
interest on the 10% Senior Notes for six scheduled interest payments.
Investments restricted for debt service are carried at amortized cost.

e. Long-term debt

The fair value of fixed rate long-term debt was estimated based
on the Company's current incremental borrowing rate for debt of the same
remaining maturities. The fair value of floating rate debt is considered to be
equal to the carrying value since the debt reprices at least every six months
and the Company believes that its credit risk has not changed from the time
the floating rate debt was borrowed and therefore, it would obtain similar
rates in the current market.

f. Letter of credit

The contract amount of letters of credit represents a
reasonable estimate of their value since such instruments reflect fair value
as a condition of their underlying purpose and are subject to fees
competitively determined in the marketplace.

The estimated carrying fair value of the Company's financial
instruments are as follows at December 31:

<TABLE>
1997 1996
------------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and temporary cash investments........... $222,910 $222,910 $ 61,843 $ 61,843
Short-term investments........................ $415,603 $415,603 $ 46,831 $ 46,831
Note and interest receivable.................. $ 17,682 $ 17,682 $ 15,310 $ 15,310
Investments restricted for debt service....... $ 61,911 $ 61,911 -- --
Financial Liabilities
Fixed rate long-term debt:
Senior Secured Notes........................ -- -- $131,250 $137,459
Senior Notes 10%............................ $225,000 $233,438 -- --
Senior Discount Notes 11.125%............... $358,103 $377,156 -- --
Floating rate long-term debt:
Revolving Credit Agreement.................. $ 3,000 $ 3,000 -- --
Term Credit Agreement....................... $100,000 $100,000 -- --
Unrecognized financial instruments:
Letters of credit........................... $ 3,060 $ 3,060 $ 3,060 $ 3,060
</TABLE>

18. QUARTERLY INFORMATION (Unaudited)
<TABLE>
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales........................................... $ 29,677 $ 31,029 $ 31,148 $ 35,443
Operating income (loss) before depreciation,
amortization and nonrecurring charges......... $ 4,153 $ 850 $ (4,332) ($8,341)
Operating (loss)................................ $(18,037) $(12,416) $(18,011) $(22,411)
Loss before extraordinary charge................ N/A N/A N/A $(17,116)
Loss before extraordinary charge per average
average share................................. N/A N/A N/A $ (0.31)
Common Stock closing price
High............................................ N/A N/A $ 16.63 $ 21.63
Low............................................. N/A N/A $ 12.44 $ 12.50

<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales........................................... $24,165 $24,852 $26,746 $29,147
Operating income before depreciation
and amortization.............................. $ 4,199 $ 7,777 $ 9,188 $ 4,639
Operating (loss)................................ $(4,621) $(1,233) $ (19) $(7,205)
</TABLE>

19. SUBSEQUENT EVENTS

a. In February 1998, the Company completed an offering of 9.8%
Senior Discount Notes with an aggregate principal amount at maturity of
$567,000, due February 2008. The 9.8% Senior Discount Notes were issued at a
discount and generated gross proceeds to the Company of $350,587.

The 9.8% Senior Discount Notes are general senior obligations
of the Company, limited to $567,000 aggregate principal amount at maturity and
will mature on February 15, 2008. The 9.8% Senior Discount Notes were issued
at a discount to yield gross proceeds of $350,587. The 9.8% Senior Discount
Notes will not pay cash interest prior to February 15, 2003. The yield to
maturity of the 9.8% Senior Discount Notes, determined on a semi-annual bond
equivalent basis, will be 9.8% per annum.

The 9.8% Indenture contains certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, prepay subordinate indebtedness, repurchase
capital stock, engage in transactions with stockholders and affiliates, create
liens, sell assets and engage in mergers and consolidations.

The 9.8% Senior Discount Notes are redeemable, in whole or in
part, at any time on or after February 15, 2003 at the option of the Company.
The 9.8% Senior Discount Notes may be redeemed at redemption prices starting at
104.9% of the principal amount at maturity and declining to 100% of the
principal amount at maturity, plus any accrued and unpaid interest.

b. On January 21, 1998, RCN entered into the Agreement and
Plan of Merger (the "Erols Merger Agreement") among RCN, Erols Internet, Inc.
("Erols"), Erol Onaran, Gold & Appel Transfer, S.A., a British Virgin Islands
corporation ("Gold & Appel"), and ENET Holdings, Inc., a Delaware corporation
and a wholly owned subsidiary of RCN ("ENET"), to acquire all of the
outstanding shares of common stock of Erols. The merger was consummated on
February 20, 1998. Erols merged with and into ENET (the "Erols Merger"), with
ENET as the surviving corporation. The approximate total Erols Merger
consideration was $29,200 in cash, 1,730,648 shares of RCN common stock plus
the assumption and repayment of $5,800 of debt. Additionally, the Company is
converting approximately 999,000 Erols stock options to 699,104 RCN stock
options at an average exercise price of $3.424 per share. The transaction
was accounted for under the purchase method of accounting.

RCN expects to contribute to Starpower approximately 60% of the
subscribers acquired in the acquisition of Erols.

c. On January 21, 1998, RCN, UNET Holdings, Inc., a wholly
owned subsidiary of RCN, and Ultranet Communications, Inc. ("Ultranet")
entered into an Agreement and Plan of Merger (the "Ultranet Merger
Agreement"). The total consideration for the acquisition was 7,368 in cash,
890,384 shares of RCN common stock, and $3,000 in deferred compensation.
Additionally, the Company is converting 63,500 Ultranet stock options to
117,052 RCN stock options at an average exercise price of $1.825 per share and
making cash payments aggregating approximately $503 to certain other holders
of Ultranet stock options. The transaction was consummated on February 27,
1998. The transaction was accounted for under the purchase method of
accounting.

RCN expects to contribute to RCN-BECOCOM approximately 30% of
the subscribers acquired in the acquisition of Ultranet.

d. RCN paid $12,500 in cash in January 1998 as its initial
capital contribution to Starpower.

e. In January 1998, BECO notified RCN that it has elected to
exercise its option to the full extent permitted by the Exchange Agreement
(Note 7) with respect to 1997. RCN and BECO are presently in discussions with
respect to the calculation of the agreed upon value for the exercise of such
option.

f. On February 27, 1998, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Lancit Media Entertainment,
Ltd. ("Lancit") and LME Acquisition Corporation ("MergerSub"), a wholly owned
subsidiary of RCN. Pursuant to the terms of the Merger Agreement, MergerSub
will be merged with and into Lancit (the "Merger") such that immediately
following the Merger, Lancit will be a wholly-owned subsidiary of RCN. The
consummation of the Merger is subject to customary conditions, including the
adoption and approval of the Merger and the Merger Agreement by the
stockholders of Lancit in accordance with the provisions of applicable law
and the filing and effectiveness of a registration statement of RCN. There is
no assurance that this transaction will be consummated.

<TABLE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(Dollars in Thousands, Except Per Share)
(Unaudited)

Quarter Ended
March 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales........................................................................ $ 40,138 $ 29,677
Costs and expenses, excluding depreciation and amortization.................. 48,455 25,524
Depreciation and amortization................................................ 17,691 12,191
Nonrecurring acquisition Costs: In-process technology........................ 44,700 --
Other nonrecurring charges................................................... -- 10,000
----------- -----------
Operating (loss)............................................................. (70,708) (18,038)
Interest income.............................................................. 12,815 5,153
Interest expense............................................................. (22,735) (3,431)
Other (expense), net......................................................... (899) (33)
----------- -----------
(Loss) before income taxes.................................................. (81,527) (16,349)
(Benefit) for income taxes.................................................. (11,682) (4,800)
----------- -----------
(Loss) before equity in unconsolidated entities and minority interest........ (69,845) (11,549)
Equity in (loss) of unconsolidated entities.................................. (1,493) (805)
Minority interest in loss of consolidated entities........................... 3,586 910
----------- -----------
Net (loss)................................................................. $ (67,752) $ (11,444)
=========== ===========

Basic and Diluted (loss) per average common share:
Net loss to shareholders................................................... $ (1.21) $ (0.21)
=========== ===========
Weighted average shares outstanding........................................ 56,216,310 54,950,914

See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>

<TABLE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(Dollars in Thousands)
(Unaudited)

March 31, March 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments........................................ $ 511,762 $ 222,910
Short-term investments..................................................... 411,238 415,603
Accounts receivable from related parties................................... 4,120 9,829
Accounts receivable, net of reserve for doubtful accounts of $3,427
at March 31, 1998 and $2,134 at December 31, 1997....................... 24,567 19,510
Material and supply inventory, at average cost............................. 2,613 2,745
Prepayments and other...................................................... 7,489 5,314
Deferred income taxes...................................................... 4,913 4,821
Investments restricted for debt service.................................... 22,500 22,500
---------- ----------
Total current assets..................................................... 989,202 703,232
Property, plant and equipment, net of accumulated depreciation of
$119,039 at March 31, 1998 and $107,419 at December 31, 1997............. 247,118 200,340
Investments restricted for debt service...................................... 41,119 39,411
Investments.................................................................. 133,384 70,424
Intangible assets, net....................................................... 120,720 96,547
Deferred charges and other assets............................................ 46,689 41,038
---------- ----------
Total assets............................................................. $1,578,232 $1,150,992
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt....................................... $ 1,094 $ --
Accounts payable........................................................... 36,872 24,835
Accounts payable to related parties........................................ 867 3,748
Advance billings and customer deposits..................................... 18,999 7,318
Accrued taxes.............................................................. -- 488
Accrued interest........................................................... 10,970 5,549
Accrued contract settlements............................................... 3,029 3,126
Accrued cable programming expense.......................................... 3,908 3,498
Accrued expenses........................................................... 30,767 21,143
---------- ----------
Total current liabilities................................................ 106,506 69,705
Long-term debt............................................................... 1,053,324 686,103
Deferred income taxes........................................................ 22,985 19,612
Other deferred credits....................................................... 9,358 2,596
Minority interest............................................................ 23,776 16,392
Commitments and contingencies................................................
Preferred stock.............................................................. -- --
Common shareholders' equity:
Common stock............................................................... 57,811 54,989
Additional paid-in capital................................................. 392,148 321,766
Cumulative translation adjustments......................................... (3,055) (3,055)
Unrealized appreciation on investments..................................... 502 --
Treasury stock............................................................. (255) --
Retained earnings.......................................................... (84,868) (17,116)
---------- ----------
Total common shareholders' equity........................................ 362,283 356,584
---------- ----------
Total liabilities and shareholders' equity............................... $1,578,232 $1,150,992
========== ==========

See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>

<TABLE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(Dollars in Thousands)
(Unaudited)

Quarter Ended March 31,
------------------------
1998 1997
-------- -------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................ $ 8,277 $(1,107)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment.................................. (28,064) (7,459)
Investment in unconsolidated joint venture................................ (12,500) --
Purchase of short-term investments........................................ (77,614) --
Sales and maturities of short-term investments............................ 82,014 33,925
Acquisitions.............................................................. (40,717) (30,079)
Other..................................................................... 602 (1,142)
-------- -------
Net cash used in investing activities................................... (76,279) (4,755)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt................................................ 350,588 --
Redemption of long-term debt.............................................. (122) --
Purchase of treasury stock................................................ (255) --
Payments made for debt financing costs.................................... (5,652) --
Contribution from minority interest partner............................... 11,025 --
Proceeds from the exercise of stock options............................... 1,270 --
Transfer to CTE........................................................... -- (16,418)
Change in affiliate notes................................................. -- 567
-------- -------
Net cash provided by (used in) financing activities....................... 356,854 (15,851)
-------- -------
Net increase (decrease) in cash and temporary cash investments............ 288,852 (21,713)
Cash and temporary cash investments at beginning of year.................. 222,910 61,843
-------- -------
Cash and temporary cash investments at March 31........................... $511,762 $40,130
======== =======
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized)................................... $ 16,711 $ 7,363
======== =======
Income taxes............................................................ $ 75 $ 25
======== =======

See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>

RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

Supplemental Schedule of Non-Cash Investing and Financing Activities

On February 20, 1998, the Merger with Erols was consummated.
The transaction was accounted for under the purchase method of accounting.

A summary of the transaction is as follows:

Cash paid............................................ $ 35,931
Fair value of RCN stock issued....................... 44,672
Liabilities assumed.................................. 58,664
Deferred tax liability incurred...................... 14,626
Acquisition cost--In-process technology.............. (31,600)
--------
Fair value of assets acquired........................ $122,293
========

On February 27, 1998, the Merger with Ultranet was consummated.
The transaction was accounted for under the purchase method of accounting.

A summary of the transaction is as follows:

Cash paid............................................ $ 7,608
Fair value of RCN stock issued....................... 26,155
Liabilities assumed.................................. 5,688
Deferred tax liability incurred...................... 683
Acquisition cost--In-process technology.............. (13,100)
--------
Fair value of assets acquired........................ $ 27,034
========

The company transferred approximately 60% of the subscribers
acquired in the Merger with Erols, and related unearned revenue to the
Starpower joint venture. The value of the subscriber contribution was
preliminary estimated to be $51,937 and the related unearned revenue was
preliminary estimated to be $25,523.

See accompanying notes to Condensed Consolidated Financial Statements.

RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. The Condensed Consolidated Financial Statements included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, in the opinion of
the Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1997.

2. Prior to September 30, 1997, the Company was operated as
part of C-TEC Corporation ("C-TEC"). RCN consists primarily of C-TEC's high
growth, bundled residential voice, video and Internet access operations in the
Boston to Washington, D.C. corridor, its existing New York, New Jersey and
Pennsylvania cable television operations, a portion of its long-distance
operations and its international investment in Megacable, S.A. de C.V.
("Megacable"). In connection with the Distribution, C-TEC changed its name to
Commonwealth Telephone Enterprises, Inc. ("CTE").

The historical financial information presented herein reflects
periods during which the Company did not operate as an independent company and
accordingly, certain assumptions were made in preparing such financial
information. Such information, therefore, may not necessarily reflect the
results of operations or the financial condition of the Company which would
have resulted had the Company been an independent, public company during the
reporting periods, and are not necessarily indicative of the Company's future
operating results or financial condition.

3. The Company owns a 40% equity interest in Megacable. For the
quarters ended March 31, 1998 and 1997, the Company recorded equity in the
earnings of Megacable which consists of its proportionate share of income and
amortization of excess cost over equity in net assets of $709 and $712,
respectively.

Summarized information for the financial position and results
of operations of Megacable, as of and for the three months ended March 31,
1998 and 1997, is as follows:

1998 1997
------- -------
Assets.................................... $76,449 $70,575
Liabilities............................... 6,150 7,185
Shareholders' equity...................... 70,299 63,390
Sales..................................... 9,219 6,764
Cost and expenses......................... 6,085 4,530
Foreign currency transaction losses....... 104 --
Net income................................ $ 2,638 $ 2,144

Effective January 1, 1997, since the three-year cumulative rate
of inflation at December 31, 1996 exceeded 100%, Mexico is being treated for
accounting purposes as having a highly inflationary economy. Therefore, the
U.S. dollar is treated as the functional currency and translation adjustments
are included in income. The Company's proportionate share of such adjustments
were losses of $(41), for the three month period ended March 31, 1998.

4. During the first quarter of 1998, approximately 1,180,000
options were granted, approximately 227,000 were exercised yielding cash
proceeds of $1,270 and approximately 48,000 options were canceled. At March 31,
1998, there are approximately 8,012,000 options outstanding at exercise prices
ranging from $1.30 to $25.75 under RCN's 1997 Plan.

5. On September 30, 1997, the Yee Family Trusts, as holders of
CTE's Preferred Stock Series A and Preferred Stock Series B, filed an action
against the Company, CTE and Cable Michigan in the Superior Court of New
Jersey. The complaint alleges that CTE's distribution of the Common Stock of
RCN and Cable Michigan in connection with the Distribution constitutes a
fraudulent conveyance. The plaintiff further allege breaches of contract and
fiduciary duties in connection with the Distribution. On December 1, 1997, the
complaint was amended to allege that CTE's distribution of the common stock of
RCN and Cable Michigan was an unlawful distribution in violation of Pa. C.S.
1551 (b)(2). The plaintiffs have asked the Court to set aside the alleged
fraudulent conveyance and are seeking unspecified monetary damages alleged to
be in excess of $52,000. The Company believes that this lawsuit is without
merit and is contesting this action vigorously. On January 9, 1998, the
defendants, including RCN, filed a Motion to Dismiss, or in the Alternative,
for Summary Judgement ("the Motion"). Response and Reply Briefs have also been
filed. At this writing, the Court has not scheduled oral argument on the
Motion.

6. Basic earnings per share is computed based on net (loss)
income divided by the weighted average number of shares of common stock
outstanding during the period.

Diluted earnings per share is computed based on net (loss)
income divided by the weighted average number of shares of common stock
outstanding during the period after giving effect to convertible securities
considered to be dilutive common stock equivalents. The conversion of stock
options during the periods in which the Company incurs a loss from continuing
operations is not assumed since the effect is anti-dilutive. The number of
stock options which would have been converted in the first quarter of 1998 and
have a dilutive effect if the Company had income from continuing operations is
4,041,754.

For periods prior to October 1, 1997, during which the Company
was a wholly-owned subsidiary of C-TEC, earnings per share was calculated by
dividing net (loss) income by the number of average common shares of C-TEC
outstanding, based upon a distribution ratio of one share of Company common
equity for each share of C-TEC common equity owned.

<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net (loss).................................................................. (67,752) (11,444)
Basic earnings per average common share:
Weighted average shares outstanding....................................... 56,216,310 54,950,914
Loss per average common share............................................. $ (1.21) $ (.21)
Diluted earnings per average common share:
Weighted average shares outstanding....................................... 56,216,310 54,950,914
Dilutive shares resulting from stock options.............................. -- --
----------- -----------
Weighted average shares and common stock equivalents outstanding.......... 56,216,310 54,950,914
Loss per average common share............................................. $ (1.21) $ (.21)
=========== ===========
</TABLE>

7. In August 1997, RCN and Potomac Electric Power Company
("PEPCO"), through wholly-owned subsidiaries, entered into a letter of intent
to form a joint venture to own and operate a communications network to provide
voice, video, data and other communications services to residential and
commercial customers in the Greater Washington, D.C., Virginia and Maryland
area. The venture in the form of an unregulated entity with a perpetual term,
was formed pursuant to a joint venture agreement providing for the
organization and operation of Starpower Communications, LLC ("Starpower").

RCN owns 50% of the equity interest in Starpower and PEPCO owns
the remaining 50% interest.

RCN paid $12,500 in cash in January 1998 as its initial capital
contribution to Starpower.

8. On January 21, 1998, RCN entered into the Agreement and Plan
of Merger (the "Erols Merger Agreement") among RCN, Erols Internet, Inc.
("Erols"), Erol Onaran, Gold & Appel Transfer, S.A., a British Virgin Islands
corporation ("Gold & Appel"), and ENET Holdings, Inc., a Delaware corporation
and a wholly-owned subsidiary of RCN ("ENET"), to acquire all of the
outstanding shares of common stock of Erols. The merger was consummated on
February 20, 1998. Erols merged with and into ENET (the "Erols Merger"), with
ENET as the surviving corporation. The approximate total Erols Merger
consideration was $29,200 in cash, 1,730,648 shares of RCN Common Stock plus
the assumption and repayment of $5,800 of debt. Additionally, the Company is
converting approximately 999,000 of Erols stock options to 699,104 of RCN
stock options at an average exercise price of $3.424 per share. The
transaction was accounted for under the purchase method of accounting. In
connection with the acquisition of Erols, the Company and an independent third
party are conducting a study for the purpose of allocating the purchase price
paid for Erols. The preliminary results of this study indicate that at least
$31,600 will be allocated to in-process technology, which the Company recorded
as a charge in the first quarter of 1998.

RCN expects to contribute to Starpower approximately 60% of the
subscribers acquired in the acquisition of Erols.

9. On January 21, 1998, RCN, UNET Holdings, Inc., a
wholly-owned subsidiary of RCN, and Ultranet Communications, Inc. ("Ultranet")
entered into an Agreement and Plan of Merger (the "Ultranet Merger
Agreement"). The total consideration for the acquisition was $7,368 in cash,
890,384 shares of RCN Common Stock, and $3,000 in deferred compensation.
Additionally, the Company is converting 63,500 of Ultranet stock options to
117,052 of RCN stock options at an average exercise price of $1.825 per share
and making cash payments aggregating approximately $503 to certain holders of
Ultranet stock options. The transaction was consummated on February 27, 1998.
The transaction was accounted for under the purchase method of accounting. In
connection with the acquisition of Ultranet, the Company and an independent
third party are conducting a study for the purpose of allocating the purchase
price paid for Ultranet. The preliminary results of this study indicate that
at least $13,100 will be allocated to in-process technology, which the Company
recorded as a charge in the first quarter of 1998.

RCN expects to contribute to RCN-BECOCOM approximately 30% of
the subscribers acquired in the acquisition of Ultranet.

10. In January 1998, Boston Edison Company ("BECO") notified
RCN that it has elected to exercise its option to the full extent permitted by
the Exchange Agreement with respect to 1997. RCN and BECO are presently in
discussions with respect to the calculation of the agreed upon value for the
exercise of such option.

11. On February 27, 1998, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Lancit Media Entertainment,
Ltd. ("Lancit") and LME Acquisition Corporation ("Merger Sub"), a wholly-owned
subsidiary of RCN. Pursuant to the terms of the Merger Agreement, Merger Sub
will be merged with and into Lancit (the "Merger") such that immediately
following the Merger, Lancit will be a wholly-owned subsidiary of RCN. The
consummation of the Merger is subject to customary conditions, including the
adoption and approval of the Merger and the Merger Agreement by the
stockholders of Lancit in accordance with the provisions of applicable law and
the filing and effectiveness of a registration statement of RCN. There is no
assurance that this transaction will be consummated.

12. In February 1998, the Company completed an offering of 9.8%
Senior Discount Notes with an aggregate principal amount at maturity of
$567,000, due February 2008. The 9.8% Senior Discount Notes were issued at a
discount and generated gross proceeds to the Company of $350,588. The 9.8%
Senior Discount Notes are general senior obligations of the Company. The 9.8%
Senior Discount Notes will not pay cash interest prior to February 15, 2003.
The yield to maturity of the 9.8% Senior Discount Notes, determined on a
semi-annual bond equivalent basis, will be 9.8% per annum. The 9.8% Indenture
contains certain covenants that, among other things, limit the ability to the
Company and its subsidiaries to incur indebtedness, pay dividends, prepay
subordinate indebtedness, repurchase capital stock, engage in transactions
with stockholders and affiliates, create liens, sell assets and engage in
mergers and consolidations. The 9.8% Senior Discount Notes are redeemable, in
whole or in part, at any time on or after February 15, 2003 at the option of
the Company. The 9.8% Senior Discount Notes may be redeemed at redemption
prices starting at 104.9% of the principal amount at maturity and declining to
100% of the principal amount at maturity, plus any accrued and unpaid interest.

13. The Company has elected to adopt Statement of Financial
Accounting Standard No. 131--"Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company's operations involve developing
an advanced fiber network to provide a bundled service package of voice, video
and data services to new customers in high density markets and migrating as
many customers as is economically justified to the single source network,
including customers which were served by the Company's previously separate
lines of business, for which profitability was separately measurable and
monitored. While the Company's chief decision makers monitor the revenue
streams of the various products, operations are managed and financial
performance is evaluated based upon the delivery of multiple services to
customers over a single network. This allows the Company to leverage its
network costs to maximum profitability. As a result, there are many shared
expenses generated by the various revenue streams; because management believes
that any allocation of the expenses incurred on a single network to multiple
revenue streams would be impractical and arbitrary, management does not
currently make such allocations internally. The chief decision makers do,
however, monitor financial performance in a way which is different from that
depicted in the Company's historical general purpose financial statements.

<TABLE>
Pro Forma
Total RCN Quarter
Ended March 31,
------------------------
1998 1997
---------- --------
<S> <C> <C>
Sales:
Voice..................................................................... $ 3,515 $ 431
Video..................................................................... 26,707 24,596
Data...................................................................... 5,732 4
Commercial & other........................................................ 7,065 4,646
---------- --------
Total................................................................... 43,019 29,677
Cost and expenses, excluding depreciation and amortization:
Direct expenses....................................................... 18,837 11,287
Operating, selling, general and administrative........................ 33,815 14,237
---------- --------
EBITDA before nonrecurring charges.................................... (9,633) 4,153
Depreciation and amortization............................................. 17,691 12,191
Nonrecurring charge....................................................... -- 10,000
Nonrecurring acquisition costs:
In-process technology................................................... 44,700 --
---------- --------
Operating (loss).......................................................... (72,024) (18,038)
Interest income........................................................... 13,046 5,153
Interest expense.......................................................... (22,735) (3,431)
Other expense............................................................. (1,381) (33)
---------- --------
(Loss) before income taxes................................................ (83,094) (16,349)
(Benefit) for income taxes................................................ (11,682) (4,800)
---------- --------
(Loss) before equity in unconsolidated entities and minority interest..... (71,412) (11,549)
Equity in loss of unconsolidated entities................................. (709) (805)
Minority interest in loss of consolidated entities........................ 4,369 910
---------- --------
Net (loss)................................................................ $ (67,752) $(11,444)
========== ========
BALANCE SHEET DATA (AT MARCH 31):
Cash, temporary cash investments and short-term investments............... $ 942,304 $ 53,137
Property, plant and equipment............................................. $ 373,587 $227,635
Accumulated depreciation.................................................. 119,040 89,948
---------- --------
Net property, plant and equipment......................................... $ 254,547 $137,687
Long-term debt............................................................ $1,054,418 $131,250
</TABLE>

14. In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No. 130--"Reporting
Comprehensive Income" ("SFAS 130"). This statement, which establishes
standards for reporting and disclosure of comprehensive income, is effective
for interim and annual periods beginning after December 15, 1997. The Company
does not currently have any material items subject to disclosure pursuant to
SFAS 130.

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors
Erols Internet, Inc.

We have audited the accompanying balance sheets of Erols
Internet, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the period from August
1, 1995 (inception) to December 31, 1995 and for the years ended December 31,
1996 and 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.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Erols
Internet, Inc. at December 31, 1996 and 1997, and the results of its
operations and its cash flows for the period from August 1, 1995 (inception)
to December 31, 1995 and years ended December 31, 1996 and 1997, in conformity
with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Vienna, Virginia
January 15, 1998, except for Note 10,
as to which the date is February 20, 1998

<TABLE>
EROLS INTERNET, INC.

BALANCE SHEETS

December 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 2,540,857 $ 103,718
Accounts receivable, less allowance of $42,000 and $161,000 at
December 31, 1996 and 1997, respectively................................ 233,508 544,051
Restricted cash........................................................... -- 150,000
Note receivable from related parties...................................... 350,000 370,572
Prepaid expenses and other current assets................................. 21,815 19,953
----------- -----------
Total current assets........................................................ 3,146,180 1,188,294
Property and equipment, net................................................. 10,499,332 17,840,969
Restricted cash............................................................. 850,166 743,353
Deposits.................................................................... 63,321 395,711
----------- -----------
Total assets................................................................ $14,558,999 $20,168,327
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................................... $ 9,973,259 $ 8,651,104
Accrued expenses.......................................................... 586,874 1,404,170
Current portion of unearned revenues...................................... 12,916,864 25,582,996
Notes payable............................................................. 700,000 700,000
Current portion of capital lease obligations.............................. 613,506 1,466,701
Current portion of deferred gain.......................................... 42,444 66,079
----------- -----------
Total current liabilities................................................... 24,832,947 37,871,050
----------- -----------
Long-term portion of unearned revenues...................................... 3,440,928 8,906,491
Note payable to stockholder................................................. -- 5,000,000
Long-term portion of capital lease obligations.............................. 994,343 1,852,026
Long-term portion of deferred gain.......................................... 60,722 66,580
Deferred rent............................................................... 120,611 134,376
Commitments................................................................. -- --
Stockholders' deficit:
Preferred Stock, $.001 par value; 10,000,000 shares authorized............ -- --
Common Stock, $.001 par value; 50,000,000 shares authorized; 5,586,492
and 5,836,779 shares issued and outstanding at December 31, 1996 and
1997, respectively...................................................... 5,586 5,837
Additional paid-in capital................................................ 3,127,239 4,066,088
Deferred stock compensation............................................... (364,250) (202,361)
Accumulated deficit....................................................... (17,659,127) (37,531,760)
----------- -----------
Total stockholders' deficit................................................. (14,890,552) (33,662,196)
----------- -----------
Total liabilities and stockholders' deficit................................. $14,558,999 $20,168,327
=========== ===========
See accompanying notes
</TABLE>

<TABLE>
EROLS INTERNET, INC.

STATEMENTS OF OPERATIONS

Period from
August 1, 1995 Year ended December 31,
(inception) to -------------------------------
December 31, 1995 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Net revenues:
Dial access revenues..................... $ 125,752 $ 10,948,863 $ 33,588,925
Other revenues........................... -- -- 2,939,215
----------- ------------ ------------
Total net revenues......................... 125,752 10,948,863 36,528,140
----------- ------------ ------------
Costs and expenses:
Cost of dial access revenues............. 63,030 6,002,155 13,338,452
Cost of other revenues................... -- -- 1,198,837
Operations and customer support.......... 125,095 6,227,011 9,930,114
Sales and marketing...................... 188,314 9,475,585 19,777,437
General and administrative............... 90,880 2,092,421 5,584,224
Depreciation and amortization............ 16,741 2,013,967 6,360,573
----------- ------------ ------------
Total costs and expenses................... 484,060 25,811,139 56,189,637
Loss from operations....................... (358,308) (14,862,276) (19,661,497)
Other income (expense):
Other expense, net....................... (658,421) (1,628,201) (49,157)
Interest expense, net.................... (1,545) (150,376) (161,979)
----------- ------------ ------------
Net loss................................... $(1,018,274) $(16,640,853) $(19,872,633)
=========== ============ ============

See accompanying notes
</TABLE>

<TABLE>
EROLS INTERNET, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT

Additional Deferred Total
Common Stock Paid-in Stock Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Deficit
--------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995............. -- $ -- $ -- $ -- $ -- $ --

Net loss............................ -- -- -- -- (1,018,274) (1,018,274)
--------- ------ ---------- --------- ------------ ------------
Balance at December 31, 1995.......... -- -- -- -- (1,018,274) (1,018,274)

Contribution of divisional equity
to Erols Internet, Inc. (Note 1).. 424 -- 1,000 -- -- 1,000

Recapitalization of Erols
Internet, Inc. (Note 1):
Retirement of Common Stock
of Erols Computer, Inc.......... (424) -- (1,000) -- -- (1,000)
Issuance of Common Stock
of Erols Internet, Inc.......... 4,272,023 4,272 5,803 -- -- 10,075

Issuance of Common Stock............ 1,314,469 1,314 2,757,186 -- -- 2,758,500

Compensatory stock options.......... -- -- 364,250 (364,250) -- --

Net loss............................ -- -- -- -- (16,640,853) (16,640,853)
--------- ------ ---------- --------- ------------ ------------
Balance at December 31, 1996.......... 5,586,492 5,586 3,127,239 (364,250) (17,659,127) (14,890,552)

Issuance of Common Stock............ 250,287 251 938,849 -- -- 939,100

Compensatory stock options.......... -- -- -- 161,889 -- 161,889

Net loss............................ -- -- -- -- (19,872,633) (19,872,633)
--------- ------ ---------- --------- ------------ ------------

Balance at December 31, 1997.......... 5,836,779 $5,837 $4,066,088 $(202,361) $(37,531,760) $(33,662,196)
========= ====== ========== ========= ============ ============

See accompanying notes
</TABLE>

<TABLE>
EROLS INTERNET, INC.

STATEMENTS OF CASH FLOWS

Period from
August 1, 1995
(inception) to Year ended December 31,
December 31, -------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................... $(1,018,274) $(16,640,853) $(19,872,633)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization................................. 16,741 2,013,967 6,360,573
Allowance for doubtful accounts............................... -- 42,000 119,000
Gain related to sale-leaseback transactions................... (42,444)
Stock and stock option compensation expense................... -- -- 161,889
Changes in operating assets and liabilities:
Accounts receivable......................................... (14,764) (260,744) (450,115)
Prepaid expenses and other current assets................... -- (21,815) 1,862
Restricted cash............................................. -- (850,166) (43,187)
Deposits.................................................... -- (63,321) (332,390)
Accounts payable............................................ 92,400 9,880,859 (1,322,155)
Accrued expenses............................................ 29,241 557,633 817,296
Unearned revenues........................................... 743,496 15,614,296 18,131,695
Deferred rent............................................... 68,105 52,506 13,765
----------- ------------ ------------
Net cash (used in) provided by operating activities............... (83,055) 10,324,362 3,543,156
INVESTING ACTIVITIES
Purchases of property and equipment............................... (416,945) (10,174,143) (11,350,440)
Proceeds from disposal of property and equipment.................. -- -- 12,172
Advance under note receivable from related parties................ -- (350,000) --
----------- ------------ ------------
Net cash used in investing activities............................. (416,945) (10,524,143) (11,338,268)
FINANCING ACTIVITIES
Proceeds from notes payable to bank............................... 500,000 700,000 600,000
Proceeds from notes payable to related party...................... -- -- 5,000,000
Payments of notes payable to bank................................. -- (500,000) (600,000)
Payments on obligations under capital leases...................... -- (227,937) (581,127)
Net proceeds from issuance of Common Stock........................ -- 2,768,575 939,100
----------- ------------ ------------
Net cash provided by financing activities......................... 500,000 2,740,638 5,357,973
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.............. -- 2,540,857 (2,437,139)
Cash and cash equivalents at beginning of period.................. -- -- 2,540,857
----------- ------------ ------------
Cash and cash equivalents at end of period........................ $ -- $ 2,540,857 $ 103,718
========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid..................................................... $ 1,545 $ 159,196 $ 281,085
=========== ============ ============
See accompanying notes
</TABLE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization

Erols Internet, Inc. (the "Company") began operations on August
1, 1995 as a division of OEO, Inc., which changed its name to Erols Internet,
Inc. on December 2, 1996. The Company is an Internet service provider ("ISP"),
offering a combination of low priced, high quality Internet access in targeted
markets located throughout the corridor stretching from Massachusetts to
Virginia.

From its inception on August 1, 1995 through December 2, 1996,
the Company operated as a division of OEO, Inc., a company that had two
divisions consisting of the Company's ISP operations and a computer,
television and video cassette recorder repair division. On December 2, 1996,
OEO, Inc. reincorporated in the State of Delaware and changed its name to
Erols Internet, Inc. Shortly thereafter, on December 28, 1996, the assets and
liabilities of the computer, television and video cassette recorder repair
division were spun-off to a newly formed Virginia corporation named Erol's
Computer & TV/VCR, Inc.

The financial statements of Erols Internet, Inc. as of and for
the five month period ended December 31, 1995 have been prepared on the basis
that Erols Internet, Inc. operated as a division of OEO, Inc. and accordingly,
there are no equity accounts such as common stock or paid in capital related
to the Internet division. The financial statements of Erols Internet, Inc. as
of December 31, 1996 have been prepared on the basis that Erols Internet, Inc.
operated as a separately incorporated company and accordingly, reflect the
shares of Common Stock issued to the former stockholder of OEO, Inc. as a
result of the reincorporation and recapitalization of Erols Internet, Inc.
Additionally, the statements of operations for the period from August 1, 1995
(inception) to December 31, 1995 and for the period from January 1, 1996 to
December 28, 1996 have been prepared from the historical books and records of
the Internet division and include all amounts directly attributable and
identifiable to the Internet business as well as indirect expenses, such as
physical operating costs and management salaries. The physical operating
costs and management salaries were charged based on square feet and hours
attributable to the Internet business, respectively.

The Company has experienced operating losses since its
inception as a result of efforts to build its network infrastructure, increase
internal staffing, develop its systems and expand into new markets. The
Company expects to continue to focus on increasing its subscriber base and
geographic coverage. Accordingly, the Company expects its cost and operating
expenses and capital expenditures to continue to increase significantly, all
of which will have a negative impact on short-term operating results. The
online services and Internet markets are highly competitive. The Company
believes that existing competitors, Internet-based services, Internet service
providers, Internet directory services and telecommunication companies are
likely to enhance their service offerings resulting in greater competition for
the Company. The competitive conditions could have the following effects:
require additional pricing programs, increase spending on marketing, limit the
Company's ability to expand its subscriber base and result in increase
attrition in the existing subscriber base. There can be no assurance that
growth in the Company's revenues or subscriber base will continue or that the
Company will be able to achieve or sustain profitability or positive cash flow.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of the 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.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or
less at the time of purchase to be cash equivalents. On December 31, 1997, the
Company had purchased $5,125,000 of U.S. Government securities under
agreements to resell on January 1, 1998. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
held by the Company's asset managers. The market value of the securities
approximated the carrying amount at December 31, 1997.

Restricted Cash

Certain capital lease agreements generally require the Company
to maintain restricted cash deposit accounts with a bank which amounted to
$850,166 and $893,353 as of December 31, 1996 and 1997, respectively.

Impairment of Long-Lived Assets

At each balance sheet date, management determines whether any
property and equipment or any other assets have been impaired based on the
criteria established in Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." The Company made no adjustments to the
carrying values of the assets during the period from August 1, 1995
(inception) to December 31, 1995 and during the years ended December 31, 1996
and 1997.

Stock Compensation

The Company accounts for its stock-based compensation in
accordance with APB No. 25 "Accounting for Stock Issued to Employees" ("APB
25") using the intrinsic value method. The Company has made pro forma
disclosures required by SFAS No. 123 "Accounting for Stock Based Compensation"
("SFAS 123") using the fair value method.

Revenue Recognition

The Company recognizes Internet access revenue when the
services are provided. During the period from August 1, 1995 (inception) to
December 31, 1995 and the years ended December 31, 1996 and 1997, the Company
offered one, two and three year contracts for Internet access that are
generally paid for in advance by customers. The Company has deferred
recognizing revenue on these advance payments and amortizes the amounts to
revenue on a straight-line basis as the services are provided.

The Company allows for cancellations of up to thirty days after
service is initiated for a full refund. Any cancellations in the period
subsequent to the first thirty days of service are refunded on a pro-rata
schedule. The Company reviews its history of cancellations periodically and,
when appropriate, records a reserve for estimated amount of returns.

The Company recognizes web page hosting revenues when the
services are rendered. During the year ended 1997, the Company offered
monthly and one year contracts to host customers' web pages. The revenues
related to these contracts were recognized on the straight line basis over the
term of the contract. Revenues from internet classes and product sales are
recognized as the service is performed or product shipped.

Costs of Revenues

Cost of dial access revenues primarily consists of
telecommunication expenses inherent in the network infrastructure. Cost of
dial access revenues also includes fees paid for lease of the Company's
backbone, as well as license fees for Web browser software based on a per
user charge, other license fees paid to third-party software vendors, product
costs, and contractor fees for distribution of software to new subscribers.

Advertising Costs

All advertising and promotion costs are expensed as incurred.
During the period from August 1, 1995 (inception) to December 31, 1995 and for
the years ended December 31, 1996 and 1997, the Company expensed $121,451,
$6,530,877 and $12,267,445, respectively, as advertising costs.

Income Taxes

Prior to December 28, 1996, the Internet Business operated as a
division of OEO, Inc. and accordingly, a consolidated tax return for OEO, Inc.
was filed. Since OEO, Inc. generated consolidated net losses for the period
from August 1, 1995 to December 28, 1996, no provision for income taxes would
have been recorded for the consolidated company and, as such, no additional
disclosure has been made as to the Internet division's portion of the net
losses for tax purposes. In connection with the reincorporation of OEO, Inc.
and the spin-off of Erol's Computer & TV/VCR, Inc., the provision for income
taxes and the resulting deferred tax asset (see Note 8) for the Company using
the liability method was calculated for the period December 2, 1996 through
December 31, 1996. There was no provision for income taxes required for this
period.

Financial Instruments and Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, restricted cash and
accounts receivable. The cash and restricted cash are held by a high credit
quality financial institution. For accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for credit losses,
and such losses have been within management's expectations. The concentration
of credit risk is mitigated by the large customer base. The carrying amount
of the receivables approximates their fair value.

Sources of Supplies

The Company relies on local telephone companies and other
companies to provide data communications. Although management feels
alternative telecommunications facilities could be found in a timely manner,
any disruption of these services could have an adverse effect on operating
results. Although the Company attempts to maintain multiple vendors for each
required product, its modems, terminal servers, and high-performance routers,
which are important components of its network, are currently acquired from two
sources. In addition, some of the Company's suppliers have limited resources
and production capacity. If the suppliers are unable to meet the Company's
needs as it builds out its network infrastructure, then delays and increased
costs in the expansion of the Company's network infrastructure could result,
which would affect operating results adversely.

Recent Pronouncements

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Comprehensive Income", which is required to be adopted for the year ended
December 31, 1998. SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in the financial statements and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the Statements of
Stockholders' Deficit. The Company will be required to restate earlier
periods provided for comparative purposes. The disclosure for comprehensive
income is not expected to be material.

3. Property and Equipment

Property and equipment, including leasehold improvements, are
stated at cost. Depreciation is calculated using the straight-line method
over estimated useful lives ranging between three and seven years. Leasehold
improvements are amortized over the lesser of the related lease term or the
useful life.

Property and equipment consisted of the following:

<TABLE>
December 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Computer equipment.......................... $11,570,218 $24,517,954
Furniture, fixtures, and office equipment... 721,218 1,378,768
Leasehold improvements...................... 238,604 335,528
----------- -----------
12,530,040 26,232,250
Less accumulated depreciation............... 2,030,708 8,391,281
----------- -----------
$10,499,332 $17,840,969
=========== ===========
</TABLE>

4. Notes Payable

Pursuant to a promissory note agreement dated December 20,
1995, the Company owed $500,000 to a financial institution as of December 31,
1995. The loan bore interest at an annual rate of 1.5% plus prime rate (10%
at December 31, 1995). Prior to the repayment of the loan balance, the loan
was collateralized by certain assets of the Company and was guaranteed by an
officer and stockholder of the Company. During 1996, the Company repaid the
balance of the note plus unpaid interest totaling $16,131.

As of December 31, 1996 and 1997, the Company had a short-term
line of credit arrangement with a bank which allowed for aggregate borrowings
up to $700,000. As of December 31, 1996 and 1997, $700,000 was outstanding
under this arrangement. The line of credit bears interest at the bank prime
rate plus 1 1/2 % per annum (10% as of December 31, 1997). As of December
31, 1996 and 1997, the Company has accrued $2,051 and $7,158, respectively, of
interest related to this line of credit. The note is due on September 25,
1998. The line of credit is personally guaranteed by an officer and
stockholder of the Company. See Note 6.

During December 1997, the Company entered into a subordinated
revolving line of credit agreement, with a maximum borrowing amount of
$5,000,000, and a $5,000,000 subordinated note payable agreement with a
stockholder. The Company received the proceeds from the $5,000,000 note
payable in December 1997 and utilized the proceeds to repay certain accounts
payable. The subordinated revolving line of credit and note payable bear
interest at a fluctuating rate equal to the greater of 11% per annum or 4 1/2
per annum over the prime rate. The subordinated revolving line of credit
agreement provides for an unused facility fee equal to 1/2% of the difference
between the average daily balance outstanding and the $5,000,000 maximum
borrowing amount, payable quarterly. The revolving line of credit and the
note payable are secured by certain assets of the Company. The balance of the
note payable, as well as any outstanding borrowings under the line of credit
facility, are due upon the acquisition of more than 50% of the Company's
outstanding Common Stock or the sale in an underwritten public offering of debt
or equity securities issued by the Company.

5. Commitments

Operating Leases

The Company leases office space and various office and computer
equipment under non-cancelable operating lease agreements. The leases
generally provide for renewal terms and the Company is required to pay a
portion of the common areas' expenses including maintenance, real estate taxes
and other expenses. Rent expense for the period from August 1, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997, was $12,601, $843,615 and $2,236,183, respectively. The Company is also
required to pay additional rent based on certain percentages of revenues
recorded by the various stores (kiosks) when the revenues exceed certain
predetermined amounts. The Company has not incurred any significant
additional rent charges to date.

As of December 31, 1997, payments due under non-cancelable
operating leases are as follows:

Capital Leases

The Company leases certain office and computer equipment as a
result of sales-leaseback agreements, which will be accounted for as capital
leases. The Company recorded approximately $192,000 of deferred gain related to
the difference between the sale price of the equipment and present value of
the minimum lease payments. The Company will amortize the deferred gain to
other income over the lease term. Computer equipment held under capital
leases at December 31, 1996 and 1997 amounted to $1,956,407 and $4,320,349,
respectively. Accumulated amortization related to this equipment amounted to
$480,384 and $1,329,551 at December 31, 1996 and 1997, respectively.
Amortization related to capital leased equipment is included in depreciation
and amortization expense. The non-cash portion of these transactions has been
excluded from the Statements of Cash Flows.

As of December 31, 1997, future minimum lease payments under
the capital leases are as follows:

<TABLE>
<S> <C>
1998............................................... $1,805,933
1999............................................... 1,487,236
2000............................................... 536,826
----------
3,829,995
Less interest...................................... (511,268)
----------
Present value of net minimum payments.............. 3,318,727
Less current portion............................... 1,466,701
----------
$1,852,026
==========
</TABLE>

Letters of Credit

During 1996 and 1997, in connection with capital lease
agreements, the Company obtained several letters of credit with a financial
institution in the amounts of the lease obligations. As collateral for these
letters of credit, the financial institution required that the Company invest
certain amounts in certificate of deposits at the financial institution. The
total amount of cash restricted in connection with these letters of credit is
approximately $905,000 and $837,000 at December 31, 1996 and 1997,
respectively. The certificates of deposit bear interest at a rate of 4.7%,
mature in one year and are renewable at the option of the financial
institution. The letters of credit expire in 1998 and will be automatically
renewed, subject to certain withdrawal privileges by the Company, by the
financial institution for an additional one year period for each year under
which the capital lease obligations are outstanding.

Employment Agreements

During 1996 and 1997, the Company executed employment
agreements with certain key executives under which the Company is required to
pay the following base salaries annually over the next two years:

Other Commitments

Effective January 31, 1997, the Company entered into an ISP
License Agreement with a vendor. The Company agreed to license a minimum of
1,000,000 software mailbox products in exchange for $3,000,000, which is to be
paid in quarterly installments over the next three years. After exceeding the
1,000,000 software mail box products, the Company may license additional
mailbox products for a fee of $3.00 per mailbox.

6. Related Party Transactions

Since inception, the Company has shared common facilities and
operating costs such as executive management salaries, accounting, supplies,
marketing, etc., with Erol's Computer & TV/VCR, Inc. (the "Affiliated Company")
which shares common ownership with the Company. During the period from August
1, 1995 (inception) to December 31, 1995 and the years ended December 31, 1996
and 1997, $11,530, $721,557 and $0 were charged to operations related to
shared facilities and operating costs, respectively.

The Company executed a promissory note agreement with an
Individual (the "Individual"), an officer and stockholder of the Company, and
the Affiliated Company, whereby the Company agreed to loan $350,000 to the
Individual and the Affiliated Company. The note bears annual interest at a
rate equivalent to the federal rate, defined by the Internal Revenue Code.
The balance of the note plus compounded interest will become due to the
Company three weeks after the date on which the short-term line of credit
arrangement expires and the Individual has been released as a guarantor of the
line of credit arrangement with the bank.

Since inception in August 1995 through December 31, 1996, Erols
Internet paid certain expenses related to the Affiliated Company on behalf of
the Affiliated Company. These expenses amounted to $658,422 and $1,645,511
during the period from August 1, 1995 (inception) to December 31, 1995 and
during the year ended December 31, 1996, respectively. Since there is no
intention to repay these amounts to the Company, the Company has written off
the receivable and has included the amount in other expense in the Statements
of Operations.

Effective January 1, 1997, the Company entered into a five year
management agreement with Erol's Computer & VCR (the "Affiliated Company").
Pursuant to this agreement, the Company will provide office space, general and
administrative services, sales services and print advertising services to the
Affiliated Company in exchange for a management fee. The management fee is
based on actual direct labor charges to the Affiliated Company and an
allocation of facilities costs based on square feet used by the Affiliated
Company. During the year ended December 31, 1997, the management fee amounted
to $58,784. The $58,784 is included in accounts receivable as of December 31,
1997. During December 1997, the parties agreed to terminate the agreement
effective December 31, 1997.

The Company purchased computer equipment for resale and
internal use from the Affiliated Company. During the year ended December 31,
1997, purchases amounted to $532,714.

7. Stockholders' Deficit

Equity transactions

During 1995, the Company operated as a division of OEO, Inc.
and accordingly, had no Common Stock outstanding. During 1996, as a part of
the reorganization, the sole common stockholder was issued 4,272,023 shares of
voting Common Stock, par value $0.001 in Erols Internet, Inc.

In December 1996, the Company completed a private placement to
raise total proceeds of approximately $3,000,000 from an outside investor (the
"Minority Stockholder"). The Company sold 1,314,469 shares of voting Common
Stock at $2.29 per share.

In May 1997, the Company completed a private placement to raise
total proceeds of approximately $500,000 from the Minority Stockholder. The
Company sold 131,447 shares of voting Common Stock at $3.80 per share.

In September 1997, the Company completed a private placement to
raise total proceeds of approximately $500,000 from the Minority Stockholder.
The Company sold 114,600 shares of voting Common Stock at $4.36 per share.

On December 4, 1997, the Board of Directors and stockholders of
the Company approved a 1 for 2.3583672 reverse stock split of the Company's
$0.001 par value voting Common Stock, which became effective on December 5,
1997. In addition, the Company eliminated the authorized non-voting Common
Stock. All references in the accompanying financial statements to the number
of shares of Common Stock and per-share amounts have been restated to reflect
these transactions.

Stock Option Plan

During 1996, the Company adopted a stock option plan (the
"Option Plan") which permits the Company to grant up to 657,234 voting Common
Stock options to employees, board members and others who contribute materially
to the success of the Company. During 1997, the Company increased the number
of options available for grant under the plan to 826,843. Stock options are
generally granted at prices which the Company's Board of Directors believes
approximates the fair market value of its Common Stock at the date of grant.
Individual grants generally become exercisable ratably over a period of three
years from the date of hire. The contractual term of the options is ten years
from the date of grant.

In December 1996, the Company issued 328,617 options to a
certain officer at an exercise price of $1.18 which was considered to be below
fair market value at the time of the option grant. Accordingly, the Company
recorded deferred stock compensation of $364,250 which will be amortized to
expense over the vesting period of three years beginning in January 1997, of
which $161,889 was recognized as expense during 1997.

Common stock option activity was as follows:

<TABLE>
Year ended December 31,
1996 1997
--------------------------- --------------------------
Weighted Weighted-
Number of Average Average
Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... - $ - 455,823 $1.49
Options granted....................... 455,823 1.49 675,611 3.04
Options exercised..................... - - (4,240) 3.32
Options canceled or expired........... - - (75,333) 2.29
------- ----- --------- -----
Outstanding at end of year............ 455,823 $1.49 1,051,861 $2.42
======= ===== ========= =====
Exercisable at year-end............... - $ - 264,278 $1.91
======= ===== ========= =====
</TABLE>

As of December 31, 1997, there were 95,119 options available
for future grants under the Option Plan.

The following table summarizes information about fixed-price
stock options outstanding at December 31, 1997:

<TABLE>

Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable Average
December 31, Contractual Exercise at December Exercise
Range of Exercise Prices 1997 Life Price 31, 1997 Price
- ------------------------ -------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Less than $2.30............. 784,238 9.0 $1.82 253,332 $1.81
$2.30 - $4.75............... 267,623 9.0 4.18 10,946 4.17
--------- ----- ------- -----
$1.18 - $4.55............... 1,051,861 2.42 264,278 1.91
========= ===== ======= =====
</TABLE>

Had compensation expense related to the stock option plan been
determined based on the fair value at the grant date for options granted
during the period from August 1, 1995 to December 31, 1995 and for the years
ended December 31, 1996 and 1997 consistent with the provisions of SFAS 123,
the Company's net loss would have been as follows:

<TABLE>
Period from
August 1, 1995
(inception) to Years Ended December 31,
December 31, -------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Net loss--pro forma.... $(1,018,274) $(16,690,399) $(20,086,156)
=========== ============ ============
</TABLE>

The effect of applying SFAS 123 on 1995, 1996 and 1997 pro
forma net loss as stated above is not necessarily representative of the
effects on reported net loss for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years.

The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing fair value model with the
following weighted-average assumptions used for grants in 1996 and 1997:
dividend yield of 0%, expected volatility of 70%; risk-free interest rate of
6.5%; and expected terms from 3 to 4 years. The weighted average fair values
of the options granted in 1996 and 1997 with a stock price equal to the
exercise price is $1.31 and $1.79, respectively. The weighted average fair
value of the options granted in 1996 with a stock price greater than the
exercise price in 1996 is $0.38.

Reserve for Issuance

As of December 31, 1997, the Company had reserved 11,151,220,
respectively, shares of non-voting common stock, preferred stock and voting
Common Stock options.

8. Income Taxes

Net deferred income tax assets are as follows:

<TABLE>
December 31,
-----------------------------
1996 1997
----------- ------------
<S> <C> <C>
Unearned revenue $ 1,307,553 $ 7,766,210
Operating loss carryforwards 1,913,864 2,793,213
Provision for bad debts 15,960 61,305
Accrued vacation -- 50,005
Deferred rent -- 51,009
Stock options -- 61,452
Depreciation (228,000) (267,131)
----------- ------------
Deferred tax assets 3,009,377 10,516,063
Valuation allowance (3,009,377) (10,516,063)
----------- ------------
Net deferred tax assets $ -- $ --
=========== ============
</TABLE>

At December 31, 1997, the Company has net operating loss
carryforwards amounting to approximately $7,358,305. Operating loss
carryforwards expire in 2010 and 2011.

9. Contingencies

On September 1, 1997, a motion for judgment was filed against
the Company in Virginia state court by the Company's former Vice President,
Marketing. The motion for judgment alleges breach of contract and wrongful
termination and seeks punitive and compensatory damages of approximately
$1,000,000. Additionally, the Company's former Vice President, Marketing
seeks to exercise certain stock options. Discovery has just been initiated
and, therefore, it is premature to reach an opinion on liability or the extent
of exposure. However, the Company believes that it has a meritorious defense
and is conducting a vigorous defense. The Company doesn't believe that the
conclusion of this matter will materially affect the Company's financial
position or results of operations.

10. Subsequent Event

On January 21, 1998, the Company entered into an Agreement and
Plan of Merger with RCN Corporation ("RCN"). In the transaction, RCN will
issue common stock and replacement stock options valued at $48,500,000 and pay
$35,000,000 in cash, including the assumption and repayment of the $5,700,000
note payable, in exchange for all of the outstanding equity securities of
Erols Internet, Inc. The Agreement and Plan of Merger was closed on February
20, 1998.

In conjunction with the merger agreement with RCN, certain
outstanding options held by two employees of the Company became fully vested.
Additionally, all outstanding options held by non-employees will fully vest and
be repurchased by the Company at a price equal to the difference between $14
and the option exercise price multiplied by the number of outstanding options.

===============================================================================
No person has been authorized to give any information or make any
representations, other than those contained in this Prospectus, in connection
with the offering made hereby, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company,
or any other person. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities offered hereby by anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation.

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

TABLE OF CONTENTS
Page
----

Summary........................................... 1
Risk Factors...................................... 9
Use of Proceeds................................... 24
Dilution.......................................... 24
Dividends......................................... 24
Capitalization.................................... 25
Market Price and Dividend Information............. 26
Unaudited Pro Forma Consolidated Financial
Statements...................................... 27
Selected Historical Consolidated Financial
Data............................................ 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................... 33
Business.......................................... 47
Management........................................ 77
Shares Eligible for Future Sale................... 84
Security Ownership of Management,
Principal Stockholders and Selling
Stockholders.................................... 86
Description of Capital Stock...................... 89
Underwriting...................................... 93
Legal Matters..................................... 94
Experts........................................... 94
Additional Information............................ 95
Index to Financial Statements..................... F-i

RCN
The live wire of communications.[TM]

10,989,010 Shares

RCN Corporation

Common Stock

---------------
PROSPECTUS
---------------

Merrill Lynch & Co.

Salomon Smith Barney

NationsBanc Montgomery
Securities LLC

Donaldson, Lufkin & Jenrette
Securities Corporation

Prudential Securities Incorporated

May , 1998

===============================================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses payable
by the Company in connection with the sale of the securities being registered
hereby. All amounts are estimates except the Registration Fee.

<TABLE>
Amount to be Paid
-----------------
<S> <C>
Registration fee...................... $84,812.50
NASD fee.............................. $29,250.00
Printing.............................. $ *
Legal fees and expenses............... $ *
Accounting fees and expenses.......... $ *
Miscellaneous......................... $ *
----------
TOTAL............................. $ *
==========
</TABLE>

* To be held by amendment.Item 14. Indemnification of Directors and Officers

Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or it stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
the unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.

Section 145 of the DGCL empowers the Company to indemnify,
subject to the standards set forth therein, any person in connection with any
action, suit or proceeding brought before or threatened by reason of the fact
that the person was a director, officer, employee or agent of such company, or
is or was serving as such with respect to another entity at the request of
such company. The DGCL also provides that the Company may purchase insurance
on behalf of any such director, officer, employee or agent.

The Company's Amended and Restated Articles of Incorporation
provides in effect for the elimination of the personal liability of RCN
directors for breaches of fiduciary duty and for the indemnification by the
Company of each director and officer of the Company, in each case, to the
fullest extent permitted by applicable law.

Item 15. Recent Sales of Unregistered Securities

1. Issuance of Notes. On October 10, 1997, RCN issued
$225,000,000 aggregate principal amount of 10% Senior Notes due 2007 and
$601,045,000 aggregate principal amount at maturity of 11(1)/(8)% Senior
Discount Notes due 2007. On February 6, 1998, RCN issued $567,000,000
aggregate principal amount at maturity of 9.80% Senior Discount Notes due
2008. The underwriters for each of the issuances were Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities LLC. The notes were sold under Rule 144A under the Securities Act
to qualified institutional buyers.

<TABLE>
========================================================================================================
Principal
Amount at Offering Underwriting
Title of Notes Maturity Price Commission
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10% Senior Notes due 2007.......................... $225,000,000 $225,000,000 $ 6,750,000
- --------------------------------------------------------------------------------------------------------
11 1/8% Senior Discount Notes due 2007............. $601,045,000 $350,000,524 $12,250,018
- --------------------------------------------------------------------------------------------------------
9.80% Senior Discount Notes due 2008............... $567,000,000 $350,587,440 $ 5,732,370
========================================================================================================
</TABLE>

2. Issuance of Common Stock. On February 20, 1998, RCN issued
1,730,648 shares of RCN Common Stock in connection the merger of Erols
Internet, Inc. with and into a wholly owned subsidiary of RCN. On February 27,
1998, RCN issued 890,384 shares of RCN Common Stock in connection with the
merger of UltraNet Communications, Inc. with and into a wholly owned
subsidiary of RCN. Both of these issuances were made pursuant to the exemption
from registration under Section 4(2) of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
Exhibit No. Document
- ----------- --------
<S> <C>
1.1* Form of Underwriting Agreement

2.1 Form of Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and RCN
Corporation (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to the Company's
Information Statement on Form 10/A ("Form 10A") filed on September 5, 1997)

2.2 Agreement and Plan of Merger dated as of January 21, 1998 among Erols Internet, Inc., Erol
Onaran, Gold & Appel Transfer, S.A., RCN Corporation and ENET Holding, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K ("Form 8-K") filed on
March 6, 1998)

2.3 Amendment No. 1 to Agreement and Plan of Merger dated as of January 21, 1998 among Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., RCN Corporation and ENET Holding,
Inc. (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K)

3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to the Company's Form 10A)

3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form 10A)

- ------------
*To be filed by amendment.

4.1 Indenture dated as of February 6, 1998 between the Company, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 9.80% Senior Discount Notes due 2008 (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 ("1998 Form S-4")
filed on March 23, 1998)

4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.2 to the Company's 1998 Form S-4)

4.3 Indenture dated as of October 17, 1997 between the Company, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 10% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-4 ("Form S-4") filed on November
26, 1997)

4.4 Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4) (incorporated by
reference to Exhibit 4.2 to the Company's Form S-4)

4.5 Indenture dated as of October 17, 1997 between the Company, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 11 1/8% Senior Discount Notes due 2007 (incorporated by
reference to Exhibit 4.3 to the Company's Form S-4)

4.6 Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included in Exhibit 4.6)
(incorporated by reference to Exhibit 4.4 to the Company's Form S-4)

4.7 Escrow Agreement dated as of October 17, 1997 among The Chase Manhattan Bank, as escrow
agent, The Chase Manhattan Bank, as Trustee under the Indenture (as defined therein), and the
Company (incorporated by reference to Exhibit 4.6 to the Company's Form S-4)

10.1 Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan, Inc. and the
Registrant (incorporated by reference to Exhibit 10.1 to the Company's Form 10A)

10.2 Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber Systems/McCourt,
Inc. and RCN Telecom Services of Massachusetts, Inc. (incorporated by reference to Exhibit 10.2
to the Company's Form 10A)

10.3 Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber Systems of New
York, Inc. and RCN Telecom Services of New York, Inc. (incorporated by reference to Exhibit 10.3
to the Company's Form 10A)

10.4 Telephone Service to Reseller Agreement for Boston among Metropolitan Fiber Systems/McCourt,
Inc. and RCN Telecom Services of Massachusetts, Inc. (incorporated by reference to Exhibit 10.4
to the Company's Form 10A)

10.5 Telephone Service to Reseller Agreement for New York among Metropolitan Fiber Systems of New
York, Inc. and RCN Telecom Services of New York, Inc. (incorporated by reference to Exhibit 10.5
to the Company's Form 10A)

10.6 OVS Agreement dated May 8, 1997 between RCN Telecom Services, Inc. and MFS
Communication Company, Inc. (incorporated by reference to Exhibit 10.6 of the Company's Form
10A)

10.7 Joint Venture Agreement dated as of December 23, 1996 between RCN Telecom Services, Inc. and
Boston Energy Technology Group, Inc. (incorporated by reference to Exhibit 10.7 to the
Company's Form 10A)

10.8 Amended and Restated Operating Agreement of RCN-BECOCOM, LLC dated as of June 17, 1997
(incorporated by reference to Exhibit 10.8 to the Company's Form 10A)

10.9 Management Agreement dated as of June 17, 1997 among RCN Operating Services, Inc. and
BECOCOM, Inc. (incorporated by reference to Exhibit 10.9 to the Company's Form 10A)

10.10 Construction and Indefeasible Right of Use Agreement dated as of June 17, 1997 between
BECOCOM, Inc. and RCN-BECOCOM, LLC (incorporated by reference to Exhibit 10.10 to the
Company's Form 10A)

10.11 License Agreement dated as of June 17, 1997 between Boston Edison Company and BECOCOM,
Inc. (incorporated by reference to Exhibit 10.11 to the Company's Form 10A)

10.12 Joint Investment and Non-Competition Agreement dated as of June 17, 1997 among RCN Telecom
Services of Massachusetts, Inc., BECOCOM, Inc. and RCN-BECOCOM, LLC (incorporated by
reference to Exhibit 10.12 to the Company's Form 10A)

10.13 Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems, Inc., ComVideo Systems,
Inc., C-TEC Cable Systems of New York, Inc. and First Union National Bank, as agent<F2>
(incorporated by reference to Exhibit 4.1 to the Company's Information Statement on Form 10
("Form 10") filed on July 9, 1997)

10.14 Amended and Restated Operating Agreement of Starpower Communications, LLC dated as of
December 18, 1997 by and between Pepco Communications, L.L.C. and RCN Telecom Services
of Washington, D.C., Inc. (incorporated by reference to Exhibit 10.M to RCN's Annual Report on
Form 10-K filed on March 31, 1998 ("10-K"))

11.1 Statement regarding Computation of Per Share Earnings (included in the Notes to the Consolidated
Financial Statements)

21.1 Subsidiaries (incorporated by reference to Exhibit 21 to the Company's 10-K)

23.1 Consent of Coopers & Lybrand L.L.P. with respect to RCN Corporation

23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to Erols Internet, Inc.

24.1 Power of Attorney (included on the signature page of the Registration Statement)

99.1 Financial Statement Schedule -- Schedule I: Condensed Financial Information of RCN for the Year
Ended December 31, 1997 (incorporated by reference to Item 14(a)(2) to RCN's 10-K)

99.2 Financial Statement Schedule -- Schedule II: Valuation and Qualifying Accounts and Reserves for
the Years Ended December 31, 1997, 1996 and 1995 (incorporated by reference to Item 14(a)(2)
to RCN's 10-K)

- ------------
*Exhibits and schedules which have not been filed with Exhibit 10.13 will be
provided to the Commission by the Registrant upon request.
</TABLE>

(b) Financial Statement Schedules

Description

Condensed Financial Information of RCN for the Year Ended December 31, 1997
(Schedule I) (incorporated by reference to Item 14(a)(2) to RCN's 10-K)

Valuation and Qualifying Accounts and Reserves for the Years Ended December
31, 997, 1996 and 1995 (Schedule II) (incorporated by reference to Item
14(a)(2) to RCN's 10-K)

Item 17. Undertakings

(a) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrants pursuant to the foregoing provisions, or otherwise,
the registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York, on this 21th day of May, 1998.

RCN CORPORATION

By: /s/ Bruce C. Godfrey
----------------------------------------------------
Bruce C. Godfrey
Executive Vice President and Chief Financial Officer

The registrant and each person whose signature appears below
constitutes and appoints Michael J. Mahoney and Bruce Godfrey his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign and file any and all amendments (including post-effective
amendments) to this registration statement and any supplemental registration
statement filed pursuant to rule 462(b) under the Securities Act of 1933, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, the
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date

/s/ David C. McCourt Director, Chairman and Chief May 21, 1998
- ---------------------------
David C. McCourt Executive Officer

/s/ Michael J. Mahoney Director, President and Chief May 21, 1998
- ---------------------------
Michael J. Mahoney Operating Officer

/s/ Bruce C. Godfrey Director, Executive Vice President May 21, 1998
- --------------------------- and Chief Financial Officer
Bruce C. Godfrey

/s/ Dennis Spina Director, Vice Chairman and May 21, 1998
- ---------------------------
Dennis Spina President Internet Services

/s/ James Q. Crowe Director May 21, 1998
- ---------------------------
James Q. Crowe

/s/ Alfred Fasola Director May 21, 1998
- ---------------------------
Alfred Fasola

/s/ Stuart E. Graham Director May 21, 1998
- ---------------------------
Stuart E. Graham

/s/ Richard R. Jaros Director May 21, 1998
- ---------------------------
Richard R. Jaros

/s/ Thomas May Director May 21, 1998
- ---------------------------
Thomas May

/s/ Thomas P. O'Neill, III Director May 21, 1998
- ---------------------------
Thomas P. O'Neill, III

/s/ Eugene Roth Director May 21, 1998
- ---------------------------
Eugene Roth

/s/ Walter Scott, Jr. Director May 21, 1998
- ---------------------------
Walter Scott, Jr.

/s/ Michael B. Yanney Director May 21, 1998
- ---------------------------
Michael B. Yanney

/s/ Ralph Hromisin Vice President and Chief May 21, 1998
- --------------------------- Accounting Officer
Ralph Hromisin

<TABLE>
EXHIBIT INDEX
-------------

Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C> <C>
1.1* Form of Underwriting Agreement

3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to the Company's Form 10A)

3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form 10A)

4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.2 to the Company's 1998 Form S-4)

4.4 Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4) (incorporated by
reference to Exhibit 4.2 to the Company's Form S-4)

4.6 Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included in Exhibit 4.6)
(incorporated by reference to Exhibit 4.4 to the Company's Form S-4)

5.1* Opinion re legality