RCN CORP /DE/, S-1/A, 1998-06-04

RCN CORP /DE/
S-1/A, 1998-06-04
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998

REGISTRATION NO. 333-53373
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1

TO
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 INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION 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
CAHILL GORDON & REINDEL
JULIA K. COWLES
DAVIS POLK & WARDWELL 80 PINE STREET
450 LEXINGTON AVENUE NEW YORK, NEW YORK 10005
NEW YORK, NEW YORK 10017
(212) 450-4000 (212) 701-3000

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

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. [_]

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

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.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JUNE 4, 1998
PROSPECTUS

11,235,955 SHARES
RCN CORPORATION LOGO
COMMON STOCK

----------

Of the 11,235,955 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"), 9,549,877 shares are being sold by the
Company and the balance of 1,686,078 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 June 3, 1998
the last reported sale price of the Common Stock on Nasdaq was $22.25 per
share.

Concurrently with the offering of the Common Stock being made hereby (the
"Offering"), the Company is offering, by means of a separate prospectus, $
million aggregate principal amount at maturity of % Senior Discount Notes due
2008 to yield gross proceeds of approximately $250 million (the "Concurrent
Notes Offering" and together with the Offering, the "Offerings"). The
consummation of the Offering is not conditioned upon the consummation of the
Concurrent Notes Offering and there can be no assurance that the Concurrent
Notes Offering will be consummated.

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.

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO SELLING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) STOCKHOLDERS(2) COMPANY(3)
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<S> <C> <C> <C> <C>
Per Share........ $ $ $ $
- -------------------------------------------------------------------------------
Total(4)......... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 1,685,393 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

----------

NATIONSBANC MONTGOMERY SECURITIES LLC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED

----------

The date of this Prospectus is , 1998.
<PAGE>

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."

i
<PAGE>

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 in 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.

1
<PAGE>

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 and has recently announced its
intention to develop advanced fiber optic networks in the western United
States. See "Recent Developments." The Company believes that its experience in
the Northeast will provide it with a key strategic advantage when it enters 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.

2
<PAGE>

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. In addition, RCN recently entered into an
agreement with Qwest Communications ("Qwest") under which it will lease fiber
lines from Qwest tying RCN's local networks from Boston to Washington, D.C.

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.

RECENT DEVELOPMENTS

On June 4, 1998 RCN announced its intention to commence developing advanced
fiber optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor. The Company is targeting selected markets in the
western United States which represent approximately 2% of the geography of the
U.S. but account for approximately 12% of the U.S. telecommunications market
based upon the number of telephone access lines. The Company expects that its
initial west coast network will be developed in the San Francisco Bay Area, a
market that benefits from high density, high per capita income and the highest
Internet usage in the United States. RCN has submitted an application for
competitive local exchange carrier ("CLEC") status in California, has
identified the areas which will be covered by its "open video system" ("OVS")
certification filing and has held initial meetings with several municipalities
in the San Francisco Bay Area to discuss network

3
<PAGE>

deployment. The Company also expects its expansion to include selected markets
in or near Southern California, Las Vegas and Phoenix. As is the case in its
existing markets, the Company intends to focus on high density markets with
favorable demographics, and to apply a subscriber-driven investment strategy,
in developing new markets. The Company believes that its experience in the
Northeast will provide it with a key strategic advantage. Subject to obtaining
requisite regulatory approvals, the Company expects to commence initial network
construction in the San Francisco Bay Area in 1999.

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 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 its target markets (including
the Boston to Washington, D.C. corridor and new markets in the western United
States), 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
expenditure requirements for the period from January 1, 1998 through 1999 will
be approximately $850 million, which represents 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 $550 million in 1999. Additional funds will be required to fund
operating losses during this period. As a result of more rapid deployment of
its fiber optic network, the Erols and UltraNet acquisitions, and the
anticipated development of new markets outside the Boston to Washington, D.C.
corridor, the Company's capital expenditure program is being accelerated. 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 Offerings, the Company will have approximately $1,368
million of cash and cash equivalents and approximately $64 million of
restricted cash. Such amounts are expected to provide sufficient liquidity to
meet the Company's capital requirements through mid-2000 (through early 2000 if
the Concurrent Notes Offering is not completed).

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. The proposed development of new
networks in selected markets in the western United States will substantially
increase the Company's capital requirements. The Company's initial network
development plan for expansion into its target markets in the western United
States will require funding of approximately $350 million (including operating
losses) through the year 2000; however, the actual timing and amount of capital
required may vary materially from the Company's initial estimates. See "Risk
Factors--Further Capital Requirements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

4
<PAGE>

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

<TABLE>
<C> <S>
Common Stock Offered by the Company................ 9,549,877
Common Stock Offered by Selling Stockholders....... 1,686,078
Common Stock Outstanding as of June 2, 1998........ 57,867,032
Common Stock to be Outstanding After the Offering.. 67,416,909
NASDAQ symbol...................................... RCNC
Use of Proceeds.................................... The net proceeds of the
Offering will be approxi-
mately $202 million (at an
assumed public offering
price of $22.25 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.
Notes Offering..................................... Concurrently with the
Offering being made
hereby, the Company is
offering, by means of a
separate prospectus, $
million aggregate
principal amount at
maturity of its %
Senior Discount Notes due
2008 (the "Notes") to
yield gross proceeds of
$250 million. The
consummation of the
Offering being made hereby
is not conditioned upon
the consummation of the
Concurrent Notes Offering
and there can be no
assurance that the
Concurrent Notes Offering
will be consummated.
</TABLE>

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.

5
<PAGE>

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING 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 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. The
supplemental unaudited financial information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presents RCN's results of operations as if all domestic joint ventures were
fully consolidated, 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.
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>
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(6).............. -- -- -- -- (3,210) -- --
Cumulative effect of
changes in accounting
principles(7).......... 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>

6
<PAGE>

<TABLE>
<CAPTION>
AS OF
--------------------------------
6/30/97 9/30/97 12/31/97 3/31/98
SERVICE CONNECTIONS(9) ------- ------- -------- -------
<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(10):
Voice(11).................................... 4,672 10,953 24,900 40,447
Video(12).................................... 228,458 229,198 227,619 227,558
Data......................................... -- -- -- 370,271
------- ------- ------- -------
Subtotal Off-Net.............................. 233,130 240,151 252,519 638,276
------- ------- ------- -------
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) 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) 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.

(7) 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.

(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.

(9) 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.

(10) 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.

(11) 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.

(12) 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).

7
<PAGE>

SUMMARY PRO FORMA FINANCIAL AND OPERATING 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 31, 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"), the issuance of the Common Stock and the Notes in the Offerings 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 amor-
tization........................................... 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.................................... (131,787) (32,728)
Other (expense) income, net......................... 82 (904)
--------- --------
(Loss) before income taxes.......................... (201,747) (92,543)
(Benefit) for income taxes.......................... (61,794) (16,155)
--------- --------
(Loss) before equity in unconsolidated entities and
minority interest.................................. (139,953) (76,388)
Equity in loss of unconsolidated entities........... (17,224) (3,195)
--------- --------
(Loss) before extraordinary charge and minority in-
terest in loss of consolidated entities............ $(157,177) $(79,583)
========= ========
OTHER DATA:
EBITDA before nonrecurring charges(1)............... $ (12,759) $ (8,197)
Capital expenditures................................ $ 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.

8
<PAGE>

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

9
<PAGE>

Washington, D.C. corridor, the Company's capital expenditure program is being
accelerated. These capital expenditures do not include amounts to be funded by
the Company's joint venture partners in connection with 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 assuming completion of the Offerings, or through
early 2000 assuming completion of this Offering only. 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. The proposed
development of new networks in selected markets in the western United States
will substantially increase the Company's capital requirements. The Company's
initial network development plan for expansion into its target markets in the
western United States will require funding of approximately $350 million
(including operating losses) through the year 2000; however, the actual timing
and amount of capital required may vary materially from the Company's initial
estimates. 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. 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 $1,303 million of indebtedness outstanding, representing 69.8%
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 principal and
interest on the Company's various debt securities. 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.

10
<PAGE>

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.

RCN recently announced its intention to commence developing advanced fiber
optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor, initially in the San Francisco Bay Area. There can
be no assurance that the Company will be able to obtain the necessary
regulatory and other approvals (including rights-of-way) on a timely basis, or
at all. The proposed expansion into non-contiguous markets could place
additional strain on management resources. Furthermore, although the Company
believes that its experience in the Northeast will provide it with strategic
advantages in developing new markets, there can be no assurance that the
Company's experience in the Boston to Washington, D.C. corridor will be
replicated in the western United States.

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 telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future
these changes will neither materially affect the continued use of fiber optic
telecommunications networks nor materially hinder 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
telecommunications 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

11
<PAGE>

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, the 1998 Notes and the Notes (the
"Indentures") are applicable to the joint venture companies, neither the joint
venture companies nor the Company's joint venture partners are parties

12
<PAGE>

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 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. Sprint recently announced its intention to
construct a nationwide high speed voice and data network.

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
and SBC Communications ("SBC") in the western United States), 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 and Ameritech Corporation ("Ameritech") may also
potentially increase the competitive environment in the Company's target
markets 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. The Company is
expected to face significant competition from incumbent video programming
providers in the western United States. RCN's wireless video service in New

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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.

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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.

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<PAGE>

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, D.C. 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

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<PAGE>

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.

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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

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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 December 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

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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. For example, 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 online services.
The Company believes that such 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 telecommunications, 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

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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

21
<PAGE>

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

22
<PAGE>

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 67,416,909 shares of Common
Stock outstanding (69,102,302 shares assuming the exercise of the
Underwriters' overallotment option), of which 37,851,919 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
27,086,805 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.

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."

23
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock and the
Notes are estimated to be approximately $202 million, based on an initial
offering price of $22.25 per share, (approximately $238 million if the
Underwriters' over-allotment option is exercised in full) and $243 million,
respectively, 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. The consummation of the Concurrent
Notes Offering is not a condition to the Offering, and there can be no
assurance that the Company will complete both of the Offerings.

DILUTION

As of March 31, 1998, the net tangible book value of RCN was $242 million,
or $4.18 per share of Common Stock. Net tangible book value per share
represents the Company's net worth less intangible assets of $121 million
divided by the total number of shares of Common Stock outstanding (as adjusted
for the stock dividend). After giving effect to the sale by RCN of 9,549,877
shares of Common Stock pursuant to the Offering (at an assumed offering price
of $22.25 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 $444 million, or $6.59 per share
of Common Stock. Such amount represents an immediate increase in pro forma net
tangible book value of $2.41 per share to the Company's existing stockholders
and immediate dilution to new investors of $15.66 per share based upon an
assumed offering price of $22.25 per share of Common Stock. The following
table illustrates the dilution in pro forma net tangible book value per share
to new investors:

<TABLE>
<S> <C> <C>
Public Offering price............................................. $ $22.25
Net tangible book value before the Offering..................... $4.18
Increase in net tangible book value attributable to net proceeds
to the Company of the Offering................................. 2.41
----- ------
Pro forma net tangible book value after the Offering.............. 6.59
------
Dilution of net tangible book value to new investors.............. $15.66
===== ======
</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."

24
<PAGE>

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 Offerings. 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(/1/)
---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, temporary cash investments and short-term
investments...................................... $ 923,000 $1,367,785
========== ==========
Cash restricted for debt service.................. 63,619 63,619
========== ==========
Credit Agreement(2)............................... 103,000 103,000
10% Senior Notes due 2007......................... 225,000 225,000
11 1/8% Senior Discount Notes due 2007(3)......... 367,720 367,720
9.80% Senior Discount Notes due 2008(3)........... 355,752 355,752
% Senior Discount Notes due 2008.............. -- 250,000
Capital lease obligations......................... 1,852 1,852
---------- ----------
Total long-term debt.............................. 1,053,324 1,303,324
---------- ----------
Shareholders' equity.............................. 362,283 564,568
---------- ----------
Total capitalization............................ $1,415,607 $1,867,892
========== ==========
</TABLE>
- --------

(1) The consummation of the Concurrent Notes Offering for gross proceeds of
$250 million is not a condition to the closing of the Offering, and there
can be no assurance that the Concurrent Notes Offering will be completed.

(2) 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, $100,000
had been borrowed under the term credit facility and $3,000 had been
borrowed under the revolving credit facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

(3) 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.

25
<PAGE>

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 June 2................... 29 3/8 20 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 June 3, 1998,
the last practicable date prior to the filing of this Prospectus, was $22.25.

On June 2, 1998, there were approximately 2,710 holders of RCN Common Stock,
no holders of Company Class B Stock and no holders of Company Preferred Stock.
On June 2, 1998, 57,867,032 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.

26
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

Prior to September 30, 1997, the Company was operated as part of C-TEC. The
following Unaudited Pro Forma Consolidated Statements of Operations set 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, the Offering and the Concurrent Notes 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 Statements of Operations. The
Unaudited Pro Forma Statements 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 STATEMENTS 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.

27
<PAGE>

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
LIBERTY/ FOR ISSUANCE ADJUSTMENTS
ADJUSTMENTS FREEDOM OF THE 1997 ACQUISITION FOR THE
RCN FOR ACQUISITION AND 1998 EROLS ADJUSTMENTS OFFERING OF NOTES AND
HISTORICAL DISTRIBUTION ADJUSTMENTS NOTES HISTORICAL(8) FOR EROLS COMMON STOCK
----------- ------------ ----------- ------------ ------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........... $ 127,297 $ 36,528 $ (22,552)(9)
Cost and ex-
penses, exclud-
ing depreciation
and
amortization.... 134,967 49,829 (30,764)(9)
Nonrecurring
charges......... 10,000
Depreciation and
amortization.... 53,205 $ 1,250 (1) 6,360 606 (10)
----------- ------- ------- -------- -------- ---------- ----------
Operating (loss)
income.......... (70,875) (1,250) (19,661) 7,606 --
Interest in-
come............ 22,824 $(8,686)(2)
Interest ex-
pense........... (25,602) (5,654)(3) $(85,179)(4) (162) 100 $ (25,750)(14)
10,460 (5)
Other (expense)
income, net..... 131 (49)
----------- ------- ------- -------- -------- ---------- ----------
(Loss) income
before income
taxes........... (73,522) (3,880) (1,250) (85,179) (19,872) 7,706 (25,750)
(Benefit) for
income taxes.... (20,849) (1,358)(6) (437)(7) (29,812)(4) (9,338)(11)
----------- ------- ------- -------- -------- ---------- ----------
(Loss) income
before equity in
unconsolidated
entities and mi-
nority inter-
est............. (52,673) (2,522) (813) (55,367) (19,872) 17,044 (25,750)
Equity in (loss)
of unconsoli-
dated entities.. (3,804) (13,420)(9)
----------- ------- ------- -------- -------- ---------- ----------
(Loss) income
before extraor-
dinary charge
and minority in-
terest in loss
of consolidated
entities........ $ (56,477) $(2,522) $ (813) $(55,367) $(19,872) $ 3,624 $ (25,750)
=========== ======= ======= ======== ======== ========== ==========
Unaudited pro
forma (loss) be-
fore extraordi-
nary charge and
minority inter-
est per common
share........... $ (1.03)
Weighted average
number of common
shares and com-
mon stock equiv-
alents outstand-
ing............. 54,965,716 1,730,648 (12) 9,549,877 (13)
<CAPTION>
PRO FORMA
------------
<S> <C>
Sales........... $ 141,273
Cost and ex-
penses, exclud-
ing depreciation
and
amortization.... 154,032
Nonrecurring
charges......... 10,000
Depreciation and
amortization.... 61,421
------------
Operating (loss)
income.......... (84,180)
Interest in-
come............ 14,138
Interest ex-
pense........... (131,787)
Other (expense)
income, net..... 82
------------
(Loss) income
before income
taxes........... (201,747)
(Benefit) for
income taxes.... (61,794)
------------
(Loss) income
before equity in
unconsolidated
entities and mi-
nority inter-
est............. (139,953)
Equity in (loss)
of unconsoli-
dated entities.. (17,224)
------------
(Loss) income
before extraor-
dinary charge
and minority in-
terest in loss
of consolidated
entities........ $ (157,177)
============
Unaudited pro
forma (loss) be-
fore extraordi-
nary charge and
minority inter-
est per common
share........... $ (2.37)
Weighted average
number of common
shares and com-
mon stock equiv-
alents outstand-
ing............. 66,246,241
</TABLE>

See Notes to Unaudited Pro Forma Statement of Operations

28
<PAGE>

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
ADJUSTMENTS EROLS FOR THE
FOR ISSUANCE HISTORICAL ACQUISITION OFFERING OF NOTES
RCN OF THE 1997 1/1/98- ADJUSTMENTS AND COMMON
HISTORICAL AND 1998 NOTES 2/28/98(8) FOR EROLS STOCK PRO FORMA
----------- -------------- ---------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales................... $ 40,138 $ 8,700 $(5,371)(9) $ 43,467
Cost and expenses, ex-
cluding depreciation and
amortization............ 48,455 8,388 (5,179)(9) 51,664
Nonrecurring acquisition
costs: In-process tech-
nology.................. 44,700 -- -- 44,700
Depreciation and amorti-
zation.................. 17,691 1,478 (340)(10) 18,829
----------- ------- ------- ------- ---------- -----------
Operating (loss) in-
come.................... (70,708) (1,166) 148 -- (71,726)
Interest income......... 12,815 -- -- 12,815
Interest expense........ (22,735) $(3,492)(4) (164) 101 $ (6,438)(14) (32,728)
Other (expense), net.... (899) (5) -- (904)
----------- ------- ------- ------- ---------- -----------
(Loss) income before in-
come taxes.............. (81,527) (3,492) (1,335) 249 (6,438) (92,543)
(Benefit) for income
taxes................... (11,682) (1,222)(4) -- (998)(11) (2,253)(14) (16,155)
----------- ------- ------- ------- ---------- -----------
(Loss) income before eq-
uity in unconsolidated
entities and minority
interest................ (69,845) (2,270) (1,335) 1,247 (4,185) (76,388)
Equity in (loss) of un-
consolidated entities... (1,493) -- (1,702)(9) (3,195)
----------- ------- ------- ------- ---------- -----------
(Loss) before minority
interest in loss of con-
solidated entities...... $ (71,338) $(2,270) $(1,335) $ (455) $ (4,185) $ (79,583)
=========== ======= ======= ======= ========== ===========
Unaudited pro forma
(loss) before minority
interest per common
share................... $ (1.27) $ (1.21)
Weighted average number
of common shares and
common stock equiva-
lents outstanding....... 56,216,310 9,549,877 (13) 65,766,187
</TABLE>

See Notes to Unaudited Pro Forma Statement of Operations

29
<PAGE>

RCN CORPORATION

NOTES TO UNAUDITED PRO FORMA 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 issu-
ance costs on existing outstanding third party debt (see Note
5)........................................................... $ 3,661
Incurrence of interest expense and amortization of debt issu-
ance 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

30
<PAGE>

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 9,549,877 additional shares from the issuance
of the Common Stock based upon assumed gross proceeds of $212,485 and using
the closing price of the Company's Common Stock on June 3, 1998.

(14) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the Notes aggregating $6,438 and
$25,750 for the three months ended March 31, 1998 and for the year ended
December 31, 1997, respectively, and related income taxes of ($2,253) for the
three months ended March 31, 1998. No tax benefit was assumed for the year
ended December 31, 1997 since such benefit would result in a material pro
forma net deferred tax asset, the realization of which would be uncertain.

31
<PAGE>

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. The
supplemental unaudited financial information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presents RCN's results of operations as if all domestic joint ventures were
fully consolidated, 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. 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.

32
<PAGE>

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 has also
recently announced its intention to develop advanced fiber optic networks in
the western United States. 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 the western
United States 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

33
<PAGE>

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
Company's various debt securities. 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.

34
<PAGE>

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>
<CAPTION>
PRO FORMA TOTAL RCN PRO FORMA TOTAL RCN
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
---------------------------- -----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <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
-------- -------- -------- -------- --------
EBITDA 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)
======== ======== ======== ======== ========
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA TOTAL RCN YEAR PRO FORMA TOTAL RCN
ENDED DECEMBER 31, AT MARCH 31,
-------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, temporary cash
investments and short-term
investments................... $158,485 $108,674 $638,513 $ 53,137 $ 942,304
Property, plant and equipment.. $173,373 $220,357 $307,920 $227,635 $ 373,587
Accumulated depreciation....... $ 71,293 $ 84,529 $107,419 $ 89,948 $ 119,040
Net property, plant and
equipment..................... $102,080 $135,828 $200,501 $137,687 $ 254,547
Long-term debt (including
current portion).............. $161,000 $131,250 $686,103 $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 local telephone service fees consisting primarily of
monthly line charges, local toll and special features and long distance
telephone service fees, based on minutes of traffic and tariffed rates or
contracted fees. 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 voice connections and the
acquisitions of Erols and UltraNet, which provided approximately 370,000 data

36
<PAGE>

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 months ended March 31, 1998 from $4,646 for the same period in 1997. The
increase primarily results from 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 owned subsidiary of Commonwealth
Telephone). Additionally, commercial and other revenues increased
approximately $1,300 primarily due to an 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 change 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 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 service 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.

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The remaining increase represents higher telemarketing expenses, principally
in 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.

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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

39
<PAGE>

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 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).

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<PAGE>

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
unconsolidated 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.

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<PAGE>

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.

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<PAGE>

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 its target markets (including
markets in the Boston to Washington, D.C. corridor and new markets in the
western United States), 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 expenditure requirements for the period from
January 1, 1998 through 1999 will be approximately $850 million, which
represents 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 $550 million in 1999.
Additional funds will be required to fund operating losses during the period.
As a result of more rapid deployment of its fiber optic network, the Erols and
UltraNet acquisitions, and the anticipated development of new markets outside
the Boston to Washington, D.C. corridor, the Company's capital expenditure
program is being accelerated. To build out its target markets 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

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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, assuming completion of the Offerings, or
through early 2000 assuming completion of this Offering only. 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.
The proposed development of new networks in selected markets in the western
United States will substantially increase the Company's capital requirements.
The Company's initial network development plan for expansion into its target
markets in the western United States will require funding of approximately
$350 million (including operating losses) through the year 2000; however, the
actual timing and amount of capital required may vary materially from the
Company's initial estimates. 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, 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. 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 $601,045 principal amount at
maturity of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds
include $61,000 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 $350,588 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.

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<PAGE>

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.

The Notes (if issued) will have terms substantially identical to the 9.80%
Senior Discount Notes. The Notes will be redeemable, in whole or in part on or
after , 2003 at the option of RCN. The Notes may be redeemed at redemption
prices starting at % of the principal amount at maturity and declining to
100% of the principal amount at maturity, plus any accrued and unpaid
interest. The Notes will not bear cash interest prior to , 2003.

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.

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<PAGE>

The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At March 31, 1998, after giving effect to
the Concurrent Notes Offering, the Company had an aggregate of approximately
$1,303,000 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 quarter ended March 31, 1998, the Company's
net cash provided by operating activities was $8,277 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.

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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.

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<PAGE>

BUSINESS

OVERVIEW

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 in 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 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.

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<PAGE>

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.

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
when it enters 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 demand for 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 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.

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<PAGE>

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. In
addition, RCN recently entered into an agreement with Qwest under which it
will lease fiber lines from Qwest tying RCN's local networks from Boston to
Washington, D.C.

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.

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............................... 233,130 240,151 252,519 638,276
------- ------- ------- -------
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).

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<PAGE>

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.

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<PAGE>

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

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<PAGE>

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.

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<PAGE>

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.

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<PAGE>

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.

55
<PAGE>

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 Erols 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 TraderSM, 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.

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<PAGE>

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).

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<PAGE>

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.

Acquisition of Interport Communications Inc.

On June 1, 1998 RCN announced that it has signed a definitive agreement to
acquire New York City's largest independent Internet service provider,
Interport Communications Inc., for $11 million in RCN stock and $871,000 in
cash. The acquisition of Interport Communications brings RCN more than 10,000
dial-up accounts and 500 dedicated line and web hosting customers.

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
AS OF DECEMBER 31, ENDED
--------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ---------
<S> <C> <C> <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" category. 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.

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<PAGE>

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.

59
<PAGE>

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

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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).

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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

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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

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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.

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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

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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

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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

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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.

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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.

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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.

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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.

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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

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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,

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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.

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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

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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(R) 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;

76
<PAGE>

(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.

77
<PAGE>

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, among other
things, has 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
makes 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, among other
things, considers the overall scope and approach of the annual audit and
recommendations from the audit performed by the independent accountants;
recommends the appointment of the independent accountants; considers
significant accounting methods adopted or proposed to be adopted; and
considers 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........... 54 Director (Class I), Vice Chairman and President,
Internet Services
James Q. Crowe............ 48 Director (Class III)
Alfred Fasola............. 49 Director (Class II)
Stuart E. Graham.......... 52 Director (Class I)
Richard R. Jaros.......... 46 Director (Class II)
Thomas J. May............. 51 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........ 52 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>

78
<PAGE>

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 of C-TEC International, Inc. (now RCN International
Holdings Inc.) from November 1995 to February 1996, 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, 54, 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

79
<PAGE>

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, 49, has been a Director of the Company since September 1997.
Mr. Fasola has served as Chairman and Chief Executive Officer of Hot Sports,
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 Inc. 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, 51, 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

80
<PAGE>

Burlington Northern Santa Fe Corporation, Lozier Corporation, Forest Oil
Corporation, Freedom Communications, Inc., 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, 52, 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.

81
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- ------------------------------------
AWARDS PAYOUTS
OTHER ------------ ----------
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPENSATION STOCK UNDERLYING LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) ($)(1) AWARDS($)(2) OPTIONS(#) PAYOUTS($) ($)(3) TOTAL
- --------------------------- ---- ------------ ---------- ------------ ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
David C.
McCourt........ 1997 $500,000 $1,400,000 -- $380,000 1,000,000 -- $ 2,703 $1,902,703
Chairman and
Chief 1996 491,154 700,000 -- 238,333 -- -- 5,478 1,196,632
Executive
Officer 1995 397,885 700,000 -- 220,000 500,000 -- 5,612 1,103,497
Michael J.
Mahoney........ 1997 $248,654 $ 500,000 -- $149,731 400,000 -- $ 5,871 $ 754,525
President and
Chief 1996 235,027 175,000 -- 67,017 -- -- 5,478 415,505
Operating
Officer 1995 222,462 100,000 -- 65,000 -- -- 5,952 328,414
Bruce C.
Godfrey........ 1997 $243,077 $ 500,000 -- $148,615 400,000 -- $ 5,763 $ 748,840
Executive Vice
President 1996 221,462 165,000 -- 74,333 -- -- 4,965 391,427
and Chief
Financial
Officer 1995 183,731 150,000 -- 67,000 -- -- 4,790 338,521
Mark Haverkate.. 1997 $205,192 $ 100,000 -- $ 61,038 80,000 -- $ 2,985 $ 308,177
Executive Vice
President, 1996 158,231 135,000 -- 51,667 -- -- 3,641 296,872
Business
Development 1995 137,952 100,000 -- 48,000 70,000 -- 5,058 243,010
Michael A.
Adams.......... 1997 $203,269 $ 150,000 -- $ 70,654 230,000 -- $16,045 $ 369,314
President,
Technology 1996 138,673 155,000 -- 36,950 -- -- 3,853 297,526
and Network
Development 1995 122,885 46,000 -- 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.

82
<PAGE>

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>
POTENTIAL REALIZABLE VALUE AT
NUMBER % OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN TOTAL EXERCISE OPTION TERM
OPTIONS FISCAL YEAR OR BASE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) 1997 ($/SH) DATE 10%($)
- ---- ---------- ------------ -------------- ---------- 5%($) ---------------
<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
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(2) DECEMBER 31, 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...... 120,000 480,000 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.

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<PAGE>

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 senior partner at Rosenn,
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."

84
<PAGE>

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

85
<PAGE>

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.

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."

86
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT, PRINCIPAL STOCKHOLDERS
AND SELLING STOCKHOLDERS

Set forth in the table below is information as of May 18, 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)..... 25,304 * 25,304 *
James Q. Crowe.......... 1,464 * 1,464 *
Alfred Fasola........... 798 * 798 *
Bruce C. Godfrey(2)..... 57,630 * 57,630 *
Stuart E. Graham........ 10,806 * 10,806 *
Mark Haverkate(2)....... 67,512 * 67,512 *
Richard R. Jaros........ 6,638 * 6,638 *
Michael J. Mahoney(2)... 65,972 * 65,972 *
Thomas J. May........... 2,798 * 2,798 *
David C. McCourt(2)(3).. 192,104 * 192,104 *
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 39
SELLING STOCKHOLDERS
Commonwealth Telephone
Enterprises Inc.
Employees' Retirement
Plan................... 375,816 * 375,816 -- *
Gold & Appel Transfer,
S.A.................... 1,264,594 2 1,264,594 -- *
Robert A. Lanford....... 24,272 * 12,000 12,272 *
William F. Penney....... 33,098 * 15,506 17,592 *
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,

87
<PAGE>

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 AND RESTRICTED
PURCHASED LIEU OF CURRENT PURCHASED AND RESTRICTED MATCHING
OUTRIGHT COMPENSATION ACQUIRED MATCHING SHARES SHARES
--------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Adams........ 1,834 11,735 15,569 11,735 25,304
Bruce C. Godfrey........ 14,636 21,497 36,133 21,497 57,630
David C. McCourt........ 76,788 57,658 134,446 57,658 192,104
Michael J. Mahoney...... 23,732 21,120 44,852 21,120 65,972
Mark Haverkate.......... 46,416 10,548 56,964 10,548 67,512
</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."

88
<PAGE>

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>
<CAPTION>
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER 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.

89
<PAGE>

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 June 2, 1998, there were 57,867,032 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.

90
<PAGE>

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

91
<PAGE>

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.

92
<PAGE>

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.

93
<PAGE>

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Smith
Barney 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
UNDERWRITER 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 1,685,393 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.

94
<PAGE>

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. In addition, each
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc,
Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery
Securities LLC are acting as managing underwriters in connection with the
Concurrent Notes Offering and will receive 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.

95
<PAGE>

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.

96
<PAGE>

INDEX TO FINANCIAL STATEMENTS

RCN CORPORATION

<TABLE>
<S> <C>
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-6
Notes to Consolidated Financial Statements............................... F-7
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-36

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
</TABLE>

F-i
<PAGE>

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/ Coopers & 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

F-1
<PAGE>

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
</TABLE>

See accompanying notes to Consolidated Financial Statements.

F-2
<PAGE>

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 receivable, 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................................. -- 11,854
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
========== ========
</TABLE>

See accompanying notes to Consolidated Financial Statements.

F-3
<PAGE>

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............................... 1,900 -- --
Other................................... (14) (1,646) (2,057)
----------- ---------- -----------
Net cash used in investing activities..... (475,860) (9,377) (146,203)
----------- ---------- -----------
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>

See accompanying notes to Consolidated Financial Statements.

F-4
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)

(THOUSANDS OF DOLLARS)

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:

<TABLE>
<S> <C>
Cash paid.......................................................... $ 40,000
Non-capitalizable costs............................................ (10,000)
Reduction of minority interest..................................... (3,812)
--------
Fair value of assets acquired...................................... $ 26,188
========
</TABLE>

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:

<TABLE>
<S> <C>
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
=======
</TABLE>

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:

<TABLE>
<S> <C>
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
========
</TABLE>

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" at its fair value.

See accompanying notes to Consolidated Financial Statements.

F-5
<PAGE>

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 ADDITIONAL CUMULATIVE TOTAL
ISSUED AND PAID IN SHAREHOLDER'S TRANSLATION SHAREHOLDERS'
OUTSTANDING COMMON STOCK CAPITAL DEFICIT NET INVESTMENT ADJUSTMENT EQUITY
----------- ------------ ---------- -------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 1,400 $ 1 $ -- $ -- $ 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................... 1,400 1 -- -- 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................... 1,400 1 -- -- 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) (17,116)
Transfers from C-TEC.. 17,980 17,980
Common stock issued in
connection with the
distribution......... 54,967,952 54,968 321,556 (376,524) --
Stock plan
transactions......... 20,518 20 210 230
---------- ------- -------- -------- --------- ------- --------
Balance, December 31,
1997................... 54,989,870 $54,989 $321,766 $(17,116) $ -- $(3,055) $356,584
========== ======= ======== ======== ========= ======= ========
</TABLE>

See accompanying notes to Consolidated Financial Statements.

F-6
<PAGE>

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

F-7
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>

F-8
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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:

<TABLE>
<CAPTION>
LIVES
-----------
<S> <C>
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
</TABLE>

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.

F-9
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

F-10
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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,

F-11
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-12
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-13
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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................................................ -- 2,315
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.

F-14
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

F-15
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>

F-16
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-17
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-18
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-19
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>

F-20
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-21
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 $11.95
=========
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

F-22
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-23
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-24
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

<TABLE>
<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 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.

F-25
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>
<CAPTION>
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>
<CAPTION>
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

F-26
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>
<CAPTION>
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.

F-27
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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-28
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>
<CAPTION>
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>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
----
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 common
share...................... N/A N/A N/A $ (0.31)
Common Stock
High........................ N/A N/A $ 16.63 $ 21.63
Low......................... N/A N/A $ 12.44 $ 12.50
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
----
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>

F-29
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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-30
<PAGE>

RCN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-31
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
(UNAUDITED)

<TABLE>
<CAPTION>
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 technolo-
gy................................................. 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
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

F-32
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 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
========== ==========
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

F-33
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
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
=========== ===========
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

F-34
<PAGE>

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:

<TABLE>
<S> <C>
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
========
</TABLE>

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:

<TABLE>
<S> <C>
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
========
</TABLE>

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 preliminarily estimated
to be $51,937 and the related unearned revenue was preliminarily estimated to
be $25,523.

See accompanying notes to Condensed Consolidated Financial Statements.

F-35
<PAGE>

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:

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Assets...................................................... $76,449 $70,575
Liabilities................................................. 6,150 7,185
Shareholders' equity........................................ 70,299 63,390
Sales....................................................... 9,219 6,764
Costs and expenses.......................................... 6,085 4,530
Foreign currency transaction losses......................... 104 --
Net income.................................................. $ 2,638 $ 2,144
</TABLE>

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.

F-36
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 plaintiffs 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.

F-37
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

F-38
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

F-39
<PAGE>

RCN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
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
Costs 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), net................................... (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 (including current portion)............. $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.

F-40
<PAGE>

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

F-41
<PAGE>

EROLS INTERNET, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
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
=========== ===========
</TABLE>

See accompanying notes

F-42
<PAGE>

EROLS INTERNET, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
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)
=========== ============ ============
</TABLE>

See accompanying notes

F-43
<PAGE>

EROLS INTERNET, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TOTAL
----------------- 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)
========= ====== ========== ========= ============ ============
</TABLE>

See accompanying notes

F-44
<PAGE>

EROLS INTERNET, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
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
=========== ============ ============
</TABLE>

See accompanying notes

F-45
<PAGE>

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,

F-46
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

F-47
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

F-48
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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>
<CAPTION>
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 1/2per 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.

F-49
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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>

F-50
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

F-51
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

F-52
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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>
<CAPTION>
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>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AT AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 LIFE PRICE 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>
<CAPTION>
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

F-53
<PAGE>

EROLS INTERNET, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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>
<CAPTION>
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.

F-54
<PAGE>

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TION 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 HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PRO-
SPECTUS 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 OF-
FER 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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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 of Operations...... 27
Selected Historical Consolidated Financial Data.......................... 32
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 48
Management............................................................... 78
Shares Eligible for Future Sale.......................................... 85
Security Ownership of Management, Principal Stockholders and Selling
Stockholders............................................................ 87
Description of Capital Stock............................................. 90
Underwriting............................................................. 94
Legal Matters............................................................ 95
Experts.................................................................. 96
Additional Information................................................... 96
Index to Financial Statements............................................ F-i
</TABLE>

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

11,235,955 SHARES
LOGO

RCN CORPORATION

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.

SALOMON SMITH BARNEY

NATIONSBANC MONTGOMERY SECURITIES LLC

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

PRUDENTIAL SECURITIES INCORPORATED

JUNE , 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

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>
<CAPTION>
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 filed 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.

II-1
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
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)
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)
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
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)
4.8* Indenture dated as of , 1998 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the %
Senior Discount Notes due 2008
4.9* Form of the % Senior Discount Notes due 2008 (included as an
exhibit to 4.8)
5.1* Opinion re legality
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** (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"))
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
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)
</TABLE>
- --------
* To be filed by amendment.
** Exhibits and schedules which have not been filed with Exhibit 10.13 will be
provided to the Commission by the Registrant upon request.

*** Previously filed.

(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.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, NEW YORK, ON THIS 4TH DAY OF JUNE, 1998.

RCN Corporation

/s/ Bruce C. Godfrey
By: _________________________________
BRUCE C. GODFREY
EXECUTIVE VICE PRESIDENT ANDCHIEF
FINANCIAL OFFICER

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 Executive June 4, 1998
DAVID C. MCCOURT Officer

/s/ Michael J. Mahoney Director, President
- ------------------------------------- and Chief Operating June 4, 1998
MICHAEL J. MAHONEY Officer

/s/ Bruce C. Godfrey Director, Executive
- ------------------------------------- Vice President and June 4, 1998
BRUCE C. GODFREY Chief Financial
Officer

/s/ Dennis Spina Director, Vice
- ------------------------------------- Chairman and June 4, 1998
DENNIS SPINA President Internet
Services

/s/ James Q. Crowe Director
- ------------------------------------- June 4, 1998
JAMES Q. CROWE

II-5
<PAGE>

SIGNATURE TITLE DATE

/s/ Alfred Fasola Director
- ------------------------------------- June 4, 1998
ALFRED FASOLA

/s/ Stuart E. Graham Director
- ------------------------------------- June 4, 1998
STUART E. GRAHAM

/s/ Richard R. Jaros Director
- ------------------------------------- June 4, 1998
RICHARD R. JAROS

/s/ Thomas May Director
- ------------------------------------- June 4, 1998
THOMAS MAY

/s/ Thomas P. O'Neill, III Director
- ------------------------------------- June 4, 1998
THOMAS P. O'NEILL, III

/s/ Eugene Roth Director
- ------------------------------------- June 4, 1998
EUGENE ROTH

/s/ Walter Scott, Jr. Director
- ------------------------------------- June 4, 1998
WALTER SCOTT, JR.

/s/ Michael B. Yanney Director
- ------------------------------------- June 4, 1998
MICHAEL B. YANNEY

/s/ Ralph Hromisin Vice President and
- ------------------------------------- Chief Accounting June 4, 1998
RALPH HROMISIN Officer

II-6

<PAGE>
EXHIBIT 23.1

COOPERS
&LYBRAND

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this Registration Statement of RCN Corporation
on Form S-1 and the related Prospectus of RCN Corporation for the registration
of Common Stock, of our report dated March 13, 1998, except for Note 2 as to
which the date is May 20, 1998, on our audits of 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. We also consent to the reference to
our Firm under the caption "Experts".

/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
June 3, 1998

Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a Swiss
limited liability association.