<PAGE>

                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION

                               WASHINGTON, D.C.  20549

                                      Form 10-K

                                      (Mark One)
             X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                           SECURITIES EXCHANGE ACT OF 1934

                       FOR THE FISCAL YEAR ENDED MARCH 31, 1998

                                          OR

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

               FOR THE TRANSITION PERIOD FROM __________ TO __________

                        Commission File Number:     _______

                          21ST CENTURY TELECOM GROUP, INC.
               (Exact Name of Registrant as specified in its charter)

                 ILLINOIS                             36-4076758
     (State or other jurisdiction of               (IRS employer
     incorporation or organization)              identification No.)

          WORLD TRADE CENTER
          350 NORTH ORLEANS
          SUITE 600
          CHICAGO, ILLINOIS                          60654
     (Address of principal executive office)       (Zip Code)
     

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (312) 470-2100

            SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                         NONE

            SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                          
                                         NONE

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such 


                                                               Page 1  

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shorter period that the Registrant was required to file such reports), and 
(2) has been subject to such filing requirements for the past 90 days.
Yes __No  X 

         Indicate by check mark if disclosure of delinquent filers pursuant 
to Item 405 of Regulation S-K is not contained herein, and will be contained, 
to the best of Registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-K [  ]
         
         The aggregate market value of the voting stock held by 
non-affiliates is not applicable as no established public trading market 
exists for the voting stock of the Registrant.
         
         The number of shares outstanding of the Registrant's Common Stock, 
as of  June 15, 1998 was 3,489,467.9 shares of Common Stock. 


                                                               Page 2  

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21ST CENTURY TELECOM GROUP, INC.                                 1998 FORM 10-K
--------------------------------------------------------------------------------


                                  TABLE OF CONTENTS

                                        PART I

<TABLE>
<CAPTION>

                                                                          PAGE
                                                                          ----
<S>                                                                       <C>

ITEM 1.        BUSINESS                                                     4
ITEM 2.        PROPERTIES                                                  14
ITEM 3.        LEGAL PROCEEDINGS                                           14
ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         14


                                       PART II

ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               SHAREHOLDER MATTERS                                         14
ITEM 6.        SELECTED FINANCIAL DATA                                     17
ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS                         19
ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES
               ABOUT MARKET RISK                        
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                 21
ITEM 9.        CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING FINANCIAL DISCLOSURE                             22

                                       PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT          22
ITEM 11.       EXECUTIVE COMPENSATION                                      26
ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT                                                  29
ITEM 13.       CERTAIN RELATIONSHIPS                                       32

                                       PART IV

ITEM 14.       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                  34

</TABLE>


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FORWARD-LOOKING STATEMENTS 

         IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW
THE RISKS DESCRIBED IN OTHER DOCUMENTS THE COMPANY HAS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, INCLUDING A REGISTRATION STATEMENT ON A FORM S-4.  
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THE
FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
THIS DOCUMENT. 


 
                                       PART I
                                          

ITEM 1.      BUSINESS 


     21st Century Telecom Group, Inc. ("21st Century" or the "Company") 
originally known as "21st Century Cable TV, Inc.", is a Chicago-based company 
incorporated in October, 1992.

        21st Century is an integrated, facilities-based communications 
company, which seeks to be the first provider of bundled voice, video and 
high-speed Internet and data services in selected midwestern markets 
beginning with Chicago's Area 1.  The City of Chicago has awarded the Company 
a 15-year renewable franchise for Area 1.  Area 1 stretches more than 16 
miles along Chicago's densely populated lakefront skyline and includes the 
affluent residential neighborhoods of the Gold Coast, Lincoln Park and 
Dearborn Park and the nation's second largest business and financial 
district. The Company has developed and has begun to install and activate an 
advanced fiber optic network that employs a Distributed Ring-Star 
architecture characterized by fiber-richness, two-way interactivity and 
SONET-based redundancy and self-healing attributes (the "DRS Network").  The 
DRS Network accommodates not only traditional voice and video applications, 
but also the rapidly growing demand for high-speed data services.  The 
Company believes that its DRS Network provides the Company with significant 
strategic advantages that differentiate 21st Century from its competitors, 
such as improved time-to-market, multiple revenue streams, enhanced service 
quality and reliability, and the provisioning of competitively-priced bundled 
services. 

     The Company has secured a 15-year renewable attachment agreement with 
the Chicago Transit Authority (the "CTA"), which reduces costly and 
time-consuming "make-ready" and underground construction for the DRS Network 
and enables the Company to install and activate the DRS Network rapidly and 
efficiently by taking advantage of access to the CTA's rail systems.  The 
Company also has secured pole attachment agreements with Commonwealth Edison 
Company ("Commonwealth Edison") and a subsidiary of Ameritech Corporation 
("Ameritech") which provide 21st Century access to scarce pole space within 
Area 1 to further facilitate deployment of its DRS Network.  The 
decentralized configuration of the DRS Network, which includes distributed 
hubs and nodes that act "intelligently" to route network traffic efficiently, 
together with the CTA and the pole attachment agreements, enables 




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network construction to be driven in large part by market demand and revenue 
potential in contrast to the conventional approach of building a system from 
the headend outward on a block-by-block basis. To fully exploit this 
advantage, the Company's sales and marketing strategy is coordinated with 
ongoing network construction and focused on securing bulk contracts with 
125-unit or larger multiple dwelling units ("MDUs"). The Company believes 
that this strategy will help to identify the optimal sequence of node 
activation on the DRS Network and tie capital expenditures directly to 
revenue-producing subscribers. 

     21st Century's DRS Network currently provides video, audio and data 
services. These services include 111 analog video channels, 59 interactive 
information channels with local content (e.g., train and airline schedules, 
restaurant menus, local news and sports scores, stock quotes and expressway 
traffic updates) and 24 specialty audio channels (e.g., international and 
foreign language programming, BBC radio broadcasts, reading services for the 
blind, commercial-free music categories and select distant-market FM 
stations), with significant capacity for additional broadband and narrowband 
products and services.  The Company's residential and small business data 
product is its shared-four Mbps (Megabits per second) cable modem Internet 
access service (high speed cable modem), which is delivered at symmetrical 
speeds more than 125 times faster than the prevalent 28.8 Kbps (Kilobits per 
second) telephone modem and 25 times faster than an integrated services 
digital network ("ISDN") modem.  The Company is also hosting websites for 
commercial customers. The Company will also provide switched, 
facilities-based competitive local exchange carrier ("CLEC") services with 
last mile connectivity and local dial tone to both commercial accounts and 
selected residential subscribers.  The Company currently provides telephony 
service on a test basis and plans to begin offering, in the third quarter of 
1998, a broad range of competitive telephony services (e.g., local, long 
distance and enhanced services) to both commercial accounts and selected 
residential subscribers, most of whom currently have no facilities-based 
alternative to the service provided over the network of the incumbent local 
exchange carrier ("ILEC").  The Company will offer high-speed, flexible 
bandwidth access services concurrent with its build-out of the commercial 
district.   

     21st Century has taken significant steps to implement its business plan 
and service offerings in Chicago's Area 1. In addition to securing the Area 1 
franchise, the CTA attachment agreement and the Commonwealth Edison and 
Ameritech pole attachment agreements, the Company has (i) constructed and 
activated its network operations center ("NOC"), which includes a video 
headend and a data operations center ("DOC"), (ii) completed the northern 
fiber transport ring of the DRS Network, extending from the downtown business 
district to the northern portions of the city bordering Evanston, (iii) 
completed tunnel construction under the Chicago River and begun its 
southbound fiber transport ring of the DRS network which will extend to 51st 
street, (iv) secured programming content for approximately 170 channels of 
video and interactive information programming, (v) constructed and activated 
portions of the outside fiber distribution network to reach selected MDUs, 
(vi) initiated installation processes, billing, call center and customer care 
services, (vii) secured contracts for more than 4,800 residential subscribers 
(which includes more than 3,000 new subscribers under 5-year bulk MDU 
agreements as well as subscribers acquired in early 1997 from an affiliated 
company) and (viii) passed with its initial distribution facilities more than 
11,900 additional potential subscribers. The Company has also entered into a 
letter of intent for the acquisition and installation of the switching and 
other ancillary equipment necessary for it to provide telephony services. 

BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES 

     The Company believes that it can utilize its innovative DRS Network, 
superior product offerings and other strategic assets to compete strongly in 
Chicago's Area 1 and other selected markets.  21st Century's strategy and 
competitive advantages include the following: 

     HIGH-CAPACITY, FULL-SERVICE DRS NETWORK.   21st Century intends to 
utilize the advantages of its innovative, internally-developed DRS Network 
architecture to provide fully integrated voice, video and high-speed data 
services. Key attributes of the DRS Network include (i) an advanced 
integrated network 



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design built to the rigorous Bellcore standards, (ii) the distribution of 
switching and traffic routing mechanics at specific locations out on the DRS 
Network (rather than being concentrated at one point as in conventional 
networks), allowing the Company to efficiently and economically route traffic 
regardless of penetration and usage levels, (iii) a SONET-based redundancy 
and self-healing architecture with both circuit and route diversity, (iv) 
multiple layers of power redundancy to ensure network reliability and (v) a 
large fiber capacity permitting delivery of advanced two-way, 
fully-interactive broadband services, as well as significant unutilized 
capacity to allow the Company to upgrade services, add applications and 
develop new product offerings without service interruption or interference. 

     COST-EFFECTIVENESS OF THE DRS NETWORK ON A REVENUE-DRIVEN BASIS.   The 
decentralized configuration of the DRS Network, combined with the CTA and 
pole attachment agreements, allows the Company to rapidly and efficiently 
deploy the DRS Network to accommodate market demand on a revenue-driven 
basis. This strategy contrasts sharply with the typical approach of building 
a conventional coaxial cable system from the headend outward on a 
block-by-block basis. This DRS Network advantage will also allow the Company 
to efficiently utilize its capital resources to secure larger MDU bulk video 
contracts which will be used as the basis for node activation; thus, more 
significant revenue streams should be realized earlier in the planned 3-4 
year construction buildout than would be realized by a conventional coaxial 
cable system buildout. After a large MDU is activated within a node, the 
Company will then market its premium cable and pay-per-view video services, 
as well as its high-speed Internet data and, when available, telephony 
services, to its cable subscribers in order to leverage MDU subscriber 
relationships. In addition, 21st Century will market its full range of voice, 
video and high-speed data services to adjacent homes passed. For commercial 
subscribers, the Company will seek initially to deploy the DRS Network in 
Chicago's dense central downtown area to (i) small to mid-sized commercial 
accounts and communications-intensive businesses that have an interest in the 
Company's high-speed data and Internet services and (ii) organizations such 
as the Building Owners Management Association and other facilities management 
companies that influence the selection of communications facilities at 
multiple buildings, as well as industry associations which the Company 
believes will encourage member companies to use the Company's services. 

      SUPERIOR PRODUCT OFFERINGS ON A BUNDLED BASIS.    The Company believes 
that its voice, video, high-speed Internet and data offering will be superior 
to competitive products currently available in Area 1 in terms of (i) the 
breadth and quality of the individual product offerings, (ii) the extent of 
the enhanced service features offered to the customer and (iii) the ability 
to bundle such product offerings into a simple, convenient and 
attractively-priced packages. The Company's current video offering includes 
111 analog video channels, 59 interactive information channels and 24 
specialty audio channels, with significant capacity for additional broadband 
and narrowband products and services. 21st Century's fiber-rich DRS Network 
is designed with only one to four amplifiers in cascade between its NOC and 
the subscriber (compared to up to 40 amplifiers used by conventional 
networks). This reduction in amplifiers significantly reduces signal 
degradation and results in higher video quality, increased reliability, 
superior audio, and greater data transmission accuracy. The Company's 
interactive information channels, which provide useful local content and 
information, are currently not available from any other single source in Area 
1. The Company's high-speed data offering includes cable modems that provide 
access to the Internet at 4 Mbps, which is approximately 125 times faster 
than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN 
modem. Beginning in the third quarter of  1998, the Company expects to begin 
marketing a broad range of  telephony services (e.g., local, long distance, 
call waiting, call forwarding, caller ID and three-way calling) to both 
commercial accounts and selected residential subscribers, most of whom 
currently have no facilities-based alternative to the service provided over 
the ILEC's network. The Company's bundled service offering will provide 
customers with convenient "one-stop shopping," attractive pricing through 
significant package discounts, a single source for installation and service, 
and the ease of a single monthly bill. 

     STRATEGIC ASSETS.   The Company's core strategic assets include (i) the 
15-year renewable franchise granted by the City of Chicago, which permits the 
construction and installation of a network serving the 


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entirety of Chicago's Area 1 and (ii) the attachment agreement negotiated 
with the CTA and the pole attachment arrangements negotiated with 
Commonwealth Edison and Ameritech, which facilitate the timely and efficient 
buildout of the DRS Network through the utilization of scarce pole space and 
city infrastructure rights-of-way. Each of these assets is a valuable and 
important component of the Company's facilities-based business strategy and 
together would be difficult for another entrant to replicate. 

     FIRST-TO-MARKET ADVANTAGES.   The Company seeks to be the 
first-to-market in offering bundled voice, video and high-speed data services 
in Chicago's Area 1 and other selected markets. The Company believes that the 
rapid buildout of the DRS Network will enable it to acquire a significant 
customer base and will give it a competitive advantage over other prospective 
bundled and single-service providers. 

     EXPERIENCED MANAGEMENT.   The Company's management team has extensive 
and diverse experience in the cable television, Internet, data and 
telecommunications industries. During the past year, the Company's senior 
management has demonstrated its expertise by constructing and activating the 
NOC, completing the northern fiber transport ring of the DRS Network, 
securing necessary programming content, and initiating services. The Company 
intends to continue to attract qualified senior-level management with 
demonstrated expertise from the various industries comprising the Company's 
service offering. 

     SUPERIOR CUSTOMER CARE.   The Company is committed to providing superior 
customer care to differentiate 21st Century from its competitors. To 
accomplish this, the Company has (i) contracted with a third party to provide 
a single billing statement for its voice, video, Internet and data services 
(which will facilitate bundled discounting for multiple services, permit 
customized billing statements and enable monthly, transactional and metered 
billing to support the Company's planned product lines) and (ii) established 
a relationship with a leading call center service provider to staff and 
operate a 24-hour call center. The Company has provided a dedicated toll-free 
number to the call center for all subscriber needs and has established call 
center performance parameters.  The Company believes that the quality and 
reliability of its services will result in fewer in-bound subscriber 
complaints, service requests and other non-revenue producing calls. In 
addition, the Company has installed sophisticated status monitoring equipment 
in the NOC and throughout its DRS Network, which should allow the Company to 
become aware of and remedy many potential problems before they are detectable 
by subscribers. 

     MARKET EXPANSION.   The Company intends to expand its operations to 
selected midwestern markets which have the size, demographics and 
geographical location suitable for its business strategy. Although the 
Company may consider stand-alone systems, the Company expects to focus on 
markets in which it can use its Chicago DRS Network and NOC to achieve 
synergies and economies of scale.  In March 1998, the Company was awarded a 
franchise to provide cable service to the Village of Skokie, a Chicago suburb 
northwest of the Company's existing Area 1 franchise.  Skokie's 23,000 homes 
will be served by an extension of the Company's DRS Network.  In addition, 
the Company has applied for franchises in a number of cities in suburban 
Chicago, central, south central and southwestern Michigan, and northern 
Indiana. 

MARKET OVERVIEW 

     The City of Chicago is the third largest urban market in the United 
States and Area 1 is the densest section of the city, characterized by a high 
concentration of MDUs and commercial office buildings. Area 1 has several 
significant and attractive attributes, including a relatively high density of 
12,000 housing units per square mile (compared with a density for the entire 
City of Chicago of 5,000 housing units per square mile); more than 300,000 
homes (many of which are located in upscale, demographically attractive 
lakefront neighborhoods); existing cable penetration that the Company 
believes is significantly below the national average for urban areas and 
approximately 51,000 employers in the City's prominent business and financial 
districts, which include such businesses and landmarks as the Chicago 
Mercantile Exchange, Sears Tower, 


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Chicago Board of Trade, Chicago Board of Options Exchange, Federal Reserve, 
Hancock Building, Merchandise Mart, Amoco Tower, major banks and other 
premier businesses. 

INTERACTIVE BROADBAND DRS NETWORK 

   DRS NETWORK COMPONENTS.   The DRS Network consists of six main components: 
the NOC, the Transport Ring, Transport Hubs, Campus Rings, Campus Hubs and 
Nodes. 
                                          
     The NOC processes voice, video and data signals before they are 
transported to the rest of the system. The DOC and a video headend are 
located at the NOC and, when the Company begins to offer telephony service, a 
telephone switch will also be located at the NOC. The NOC also functions as a 
gateway to other networks outside the DRS Network. The NOC monitors DRS 
Network activity and receives real-time information regarding DRS Network 
performance and power supply status. When the Company begins to offer 
telephony service, the NOC will monitor the activation of equipment at the 
premises of the Company's telephony subscribers. 

     The Transport Ring, a group of fiber-optic cables that run along the CTA 
right-of-way, carries voice, video, high-speed Internet and data signals 
between the NOC and the Transport Hubs. Transport Hubs connect the Transport 
Ring and the Campus Rings and also provide a diagnostic function by 
trouble-shooting potential problems on the DRS Network. The Campus Rings are 
groups of fiber-optic cables that carry voice, video, Internet and high-speed 
data signals between the Transport Hubs and the Campus Hubs. The Campus Hubs 
connect the Campus Rings and the lines that feed the Nodes and provide a 
diagnostic function similar to the Transport Hubs. The Nodes connect the 
subscribers to the Campus Hubs via coaxial cable. The Nodes represent the 
point in the DRS Network where light sent over the DRS Network via 
fiber-optic cable is translated into radio frequencies for delivery to the 
subscriber. The Nodes also monitor the DRS Network and detect potential 
problems. The "star distribution" of the DRS Network refers to the 
star-shaped DRS Network components branching off each Node to the 
subscribers. 

     Delivery of telephony services over the DRS Network will require the 
installation of switching and other ancillary equipment at the NOC and at the 
Nodes, where the existing twisted-pair telephone wire will connect to the DRS 
Network. The Company has executed an agreement for the acquisition and 
installation of such equipment. 

     DESIGN ATTRIBUTES.   The Company's DRS Network was conceived and 
designed by the Company's engineers and incorporates SONET, Ring and Star 
architectures as well as wave-division multi-plexing elements, and includes 
certain attributes of Hybrid Fiber Coax ("HFC"). Key attributes of the DRS 
Network include (i) an advanced integrated network design built to the 
rigorous Bellcore standards, (ii) the distribution of switching and traffic 
routing mechanics at specific locations out on the DRS Network (rather than 
being concentrated at one point as in conventional networks), allowing the 
Company to efficiently and economically route traffic regardless of 
penetration and usage levels, (iii) a SONET-based redundancy and self-healing 
architecture with both circuit and route diversity, (iv) multiple layers of 
power redundancy to ensure network reliability and (v) a large fiber capacity 
permitting delivery of advanced two-way, fully-interactive broadband 
services, as well as significant unutilized capacity to allow the Company to 
upgrade services, add applications and develop new product offerings without 
service interruption or interference. In addition, the DRS Network is 
designed with only one to four amplifiers in cascade between its NOC and the 
subscriber (compared to up to 40 amplifiers used by conventional networks). 
This reduction in amplifiers significantly reduces signal degradation and 
results in higher video quality and telephony reliability, a superior audio 
component and greater data transmission accuracy. 

     The DRS Network uses signal processing techniques to deliver 
communication services such as Internet access and high-speed data, Shared 
Tenant Services ("STS"), Small Business Services and Plain  Telephone 
Services, which the Company intends to provide directly or in conjunction 
with strategic 



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business partners. The DRS Network is able to separate data and voice signals 
from the video signals, which will enable it to provide higher reliability 
and the advanced network management necessary for residential and commercial 
data communications and telephony services. 

     DRS NETWORK ADVANTAGES.   The DRS Network has several advantages 
including (i) intelligent routing of network traffic, (ii) advanced 
functionality at subscribers' premises, (iii) efficient introduction of new 
switched and broadband services and (iv) dedicated, two-way, high-speed data 
connectivity. 

          INTELLIGENT ROUTING OF TRAFFIC.   The DRS Network routes traffic
     intelligently using grooming and hairpinning techniques. Grooming is a
     technique by which voice, video and data signals are kept on the DRS
     Network, thereby decreasing the reliance on and the costs incurred by using
     other companies' communications networks. Hairpinning, a type of grooming,
     is a technique that allows voice, video and data signals to be diverted
     away from the Company's NOC, where network traffic is likely to be heavy,
     and routed by Campus Hubs or Transport Hubs. 
     
          ADVANCED FUNCTIONALITY AT SUBSCRIBERS' PREMISES.   The Company uses an
     advanced analog set-top box with 512K RAM and flash memory, which will
     allow it to provide subscribers additional functions and features. Among
     such functions and features are interactive data channel capability,
     impulse pay-per-view, fully computerized addressability, forward and return
     path capability, bit-mapped graphics, downloadable software capability,
     fully interactive seven-day electronic program guide, enhanced signal theft
     protection and dataport connectivity to printers, faxes and personal
     computers. The Company believes this terminal is designed to readily
     convert to digital technology at a cost that is competitive with analog
     industry standards. 
     
          EFFICIENT INTRODUCTION OF NEW SWITCHED AND BROADBAND TECHNOLOGIES. 
     21st Century should be able to introduce most new switched and broadband
     technologies to its subscribers without causing service interruption or
     interference. The DRS Network's architecture has reserved bandwidth from
     750MHz to 860MHz. This bandwidth has been allocated for future digital
     video services representing approximately 90 to 100 channels. While the
     Company does not anticipate conversion to digital in the near future given
     the DRS Network's initial 111 analog video channel offering, the DRS
     Network's large fiber capacity will allow the Company to upgrade services,
     add applications and develop new product offerings without service
     interruption or interference. 
     
          DEDICATED, TWO-WAY, HIGH-SPEED DATA CONNECTIVITY.   The DOC allows
     true two-way (duplex), high-speed interactivity. At the DOC a redundant
     series of routers, servers and switches are installed, from which typical
     internet service provider ("ISP") functionalities (Domain Naming System,
     Mail, News, Proxy, etc.) are administered and dual connections to national
     ISPs are maintained. 21st Century will store the most popular Web pages,
     along with local content, in servers located in the DOC. By storing these
     Web pages and local content within the DOC and providing cable modem access
     to these resources, subscribers can receive any of this information at up
     to four Mbps, or approximately 125 times faster than the prevalent 28.8
     Kbps telephone modem. As a further benefit, since the cable modem is
     connected directly from the subscriber's PC to the coaxial portion of the
     DRS Network, there is no need for a second telephone line to access the
     Internet, no delay associated with dialing into and signing onto a typical
     ISP's modem service, and no surcharge for making a call into the DOC (as 
     is typically the case with 128 Kbps ISDN service). 
     
     As an integral part of the DRS Network design, the Company has reserved 
fiber-optic capacity dedicated for providing a wide variety of high-speed 
data services, including high-speed (up to OC-12) private line quality access 
to the Internet. The use of multi-protocol switching platforms in both the 
Campus and Transport hubs and the DRS Network's high fiber count will allow 
the Company to offer private virtual networks to link offices, buildings and 
campuses located in Area 1. Further, the high-speed data network will extend 
to both commercial and residential areas and will support a host of other 


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applications, including telecommuting, distance-learning, software 
distribution, site mirroring, bulk data transfer and teleconferencing. 

BROADBAND SERVICES 

     The Company's service offering will include a wide range of voice, video 
and high-speed data services that the Company expects to provide on a bundled 
basis. The Company's bundled service offering will provide customers with 
convenient "one-stop shopping," attractive pricing through significant 
bundled discounts, a single source for installation and service, and the ease 
of a single monthly bill. 

     VIDEO AND AUDIO.   The Company currently offers 111 analog video 
channels, 59 interactive information channels with local content and 24 
specialty audio channels, with significant capacity for additional broadband 
and narrowband products and services. The 111 analog video channels include a 
basic package of 88 channels, one of the largest basic packages in the United 
States, designed to appeal to Chicago's ethnic and cultural diversity. Basic 
video channels for business customers also include specialized business 
programming such as Bloomberg, CNN, CNN Financial, and Knowledge TV. This 
specialized business programming will be combined with downlink 
teleconferencing from the NOC. Programming for the Company's video offering 
comes from national and local networks, including most major networks such as 
ESPN, HBO, Showtime, Disney, CourtTV, and local Chicago affiliates of ABC, 
CBS, NBC and Fox. The video offering includes an on-screen, 7-day interactive 
program guide, one-button VCR recording and near-video-on-demand pay-per-view 
movies, with start times every 30 minutes, 24 hours per day. The Company also 
plans to offer a custom camera-monitored security channel for apartment and 
condominium buildings that execute master agreements with the Company. 

     Also included in the Company's basic video package are 59 interactive 
information channels, which include local bus and train schedules, airline 
schedules, employment ads, restaurant menus, local news and sports scores, 
stock quotes, expressway traffic updates, personal ads, and other relevant 
local content (including building-specific information for large MDU 
accounts). The Company plans to expand its interactive information offering 
to 100 channels during 1998. This server-delivered information is accessed on 
the customer's television via a specialized universal remote control. 

     The Company's 24 specialty audio channels include international and 
foreign language broadcasts (selected to appeal to concentrations of 
nationalities residing in Chicago's Area 1), BBC radio broadcasts, reading 
services for the blind, commercial-free music categories, and select 
distant-market FM stations. 

     HIGH-SPEED INTERNET AND DATA SERVICES.   The Company provides high-speed 
Internet access services using a high-speed cable modem in much the same way 
customers currently receive Internet services over a modem linked to the 
local telephone network. The cable modems presently being used with the 
Company's DRS Network will operate at 4 Mbps, which is approximately 25 times 
faster than ISDN modems, and more than 125 times faster than the prevalent 
28.8 Kbps analog modems. The customer's cable line (with cable modem) will be 
connected directly into the Internet. Because the cable modem connects 
through a cable line rather than through a telephone line, the Internet 
connection will always be active and there will be no need to dial up for 
access to the Internet or wait to connect through a port leased by an ISP. 
The Company is also hosting websites for commercial customers and expects to 
offer private virtual networks to link offices, buildings or campuses located 
throughout the franchise area. In addition to supporting cable modem services 
for Internet access, the DRS Network is capable of connecting computers or 
computer networks via a separate fiber connection. By connecting computers or 
computer networks at multiple locations, subscribers can establish virtual 
local area networks, over which they can transport data. The Company expects 
to offer such connections, which will enable subscribers to conduct video 
conferences, provide Internet-protocol telephony services, conduct electronic 
commerce, connect hospitals and universities for tele-medicine and 
distance-learning applications and access office networks with the same speed 
and functionality as office desktop computers. 

                                                               Page 10

<PAGE>


     TELEPHONY.   The DRS Network will allow the Company, after installation 
of the requisite telephony equipment and completion of a network 
interconnection with Ameritech, to act as a facilities-based CLEC offering 
telecommunications services with last mile connectivity and local dial tone. 
The Company anticipates that the necessary equipment and installation will 
cost approximately $40 million over five years, and that the installation 
necessary for the Company to begin providing telephony service will take 
approximately five to six months. The Company plans to begin offering, in the 
third quarter of 1998, a broad range of competitive telephony services (e.g., 
local, long distance and enhanced services) to both commercial accounts and 
selected residential subscribers, most of whom currently have no 
facilities-based alternative to the service provided over the ILEC's network. 
The selected residential customers to which the Company will offer telephony 
services initially will be limited to those residing in, or in close 
proximity to, MDUs containing 24 or more residences, but the Company expects 
that the threshold number of residences in MDUs to which this service can be 
viably offered will be reduced over time. The Company anticipates that its 
telecommunications service offerings will include local service, 
long-distance and enhanced service packages. Enhanced services will include 
custom calling features such as call waiting, call forwarding and three-way 
calling. The Company also expects to offer more advanced custom local area 
signaling services ("CLASS") features, such as caller ID and caller masking 
and plans to offer voice mail as an optional service. The Company expects to 
provide long-distance service on a resale basis from one or more national 
interexchange carriers. The Company also plans to make available to 
businesses Centrex services and PBX trunk provisioning. The Company 
anticipates that it will establish wireless and paging services on a resale 
basis. 

     The Company will be required to rely on local exchange carriers ("LECs") 
and interexchange carriers to provide communications capacity or 
interconnection for its local and long-distance telephone service. On April 
20, 1998, the Company executed an interconnection agreement with Ameritech, 
pursuant to the 1996 Telecom Act. The Company expects to obtain access to 
Ameritech's telephone network under this interconnection agreement which 
requires the approval of the Illinois Commerce Commission.  The terms of its 
interconnection agreement are similar to those contained in interconnection 
agreements between Ameritech and other telephony providers previously 
approved by the Illinois Commerce Commission. In addition, the 1996 Telecom 
Act established certain requirements and standards for interconnection 
arrangements, and the Company's interconnection agreement with Ameritech is 
based, in part, on such requirements.  However, these requirements and 
standards are still being developed and implemented by the FCC in conjunction 
with the states through a process of negotiation and arbitration. 

     The DRS Network is capable of providing telephony services, but will 
require the installation of switching and other ancillary equipment at the 
NOC and at the nodes, where the customer's existing twisted-pair telephone 
wire will connect to the DRS Network.  The Company has entered into an 
agreement with Northern Telecom Inc. ("Nortel") for the acquisition and 
installation of such equipment.

     FUTURE BROADBAND SERVICES.   The Company believes that the DRS Network 
will enable it to provide additional broadband services in the future, 
including (i) high-speed data transmission connecting homes and offices 
("extranets"), (ii) wholesale transport and interconnection (local loop) 
services to connect long-distance carriers to their customers, (iii) security 
services, including closed-circuit television security monitoring and alarm 
systems, and (iv) interactive energy management services, which involve 
active monitoring by the customer of energy usage and cost.  The Company 
plans to seek strategic partnerships and alliances to provide a number of 
these services. 

                                                               Page 11

<PAGE>


SALES AND MARKETING 

     21st Century seeks to capitalize on its position as a new communications 
company that brings competition, choice and innovative bundling of 
communications products to the residential and commercial markets covered by 
its DRS Network. 

     RESIDENTIAL MARKETING.   The Company's marketing plan for residential 
customers is initially focused on establishing relationships with the 
managers of residential rental properties, developers, and presidents of 
condominium associations which the Company expects will lead to long-term 
bulk bundled service contracts with the residents of targeted MDUs. Once the 
Company has entered into bulk MDU contracts and has connected its DRS Network 
to the buildings, the Company will then market its premium cable and 
pay-per-view video services, as well as its high-speed data and, when 
available, telephony services, to its cable subscribers in order to leverage 
its existing MDU subscriber relationships. In addition, the Company will 
utilize direct mail and personal sales calls to market its full range of 
voice, video, Internet and data services to homes passed. 

     COMMERCIAL MARKETING.   The Company's commercial marketing plan is 
initially focused on Chicago's central downtown "Loop"area due to the heavy 
concentration of potential commercial accounts. Further, the Company expects 
to focus on small to mid-sized commercial accounts (under 50 employees), a 
market the Company believes has been underserved by the incumbent providers 
and which has the potential for higher margins and greater interest in 
switching carriers for better pricing and customer care. Because the Company 
is not yet widely known, it will seek to acquire visibility and recognition 
by selling to well-known, communications-intensive accounts that have an 
interest in the Company's high-speed Internet and data services.  At the same 
time, the Company's sales staff will seek to develop relationships with 
organizations such as the Building Owners Management Association and other 
facilities management companies that influence the selection of 
communications facilities installed at multiple buildings, as well as 
industry associations which the Company believes will encourage member 
companies to use the Company's services. 

     The Company will also focus its marketing efforts on the commercial 
market outside of Chicago's central downtown area, which is made up primarily 
of small businesses operating in strip malls, commercial boulevards or 
small-office/home-office environments. This market has an expanding diversity 
of communications needs which 21st Century believes are well-suited to the 
bundled products offered by the Company. The Company plans to focus its 
marketing efforts to these subscribers on its high-speed data service 
capabilities, which the Company believes will be an attractive alternative to 
data connectivity via the lower-speed, twisted-pair copper lines that are 
currently available. 

     SALES AND MARKETING STAFF.   The Company's sales and marketing staff 
currently consists of 28 professionals. The Company expects to increase this 
staff to approximately 36 by the first quarter of 1999. The sales and 
marketing staff is comprised of a commercial division and a residential 
division, each headed by a manager who supervises various account executives. 
In addition, the Company has contracted with a third-party organization for 
sales support on an interim basis to assist the Company in marketing and 
selling its services to certain homes passed. The Company has selected its 
account executives for the collective diversity of their industry experience 
across cable television, telephony and data communications sectors. 

CUSTOMER CARE 

     The Company believes that customer care is an essential element of its 
operations and is committed to providing superior customer care to 
differentiate it from its competitors. The Company believes the quality and 
reliability of its services will result in fewer in-bound subscriber 
complaints, service requests and other 


                                                               Page 12 

<PAGE>



non-revenue producing calls. In addition, the Company has installed 
sophisticated status-monitoring and diagnostic equipment on both the NOC and 
its DRS Network, which should allow the Company to become aware of and remedy 
many potential problems before they are detectable by subscribers. 

     BILLING.   The Company has contracted with a third party to provide a 
single billing statement for its voice, video, Internet and data services.  
This technology will facilitate bundled discounting for multiple services, 
permit customized billing statements and permit monthly, transactional and 
metered billing to support the Company's planned product lines. The third 
party's billing and information management system is currently integrated for 
video, internet and data services, and is in the beta testing phase for 
integrated voice, video and Internet and data services. If an integrated 
billing and information management system for all services is not 
commercially available when the Company begins providing telephony service, 
the Company's customers will still receive a single billing statement, but 
such statement will be generated from two separate billing and information 
management systems. 

     CUSTOMER SERVICE REPRESENTATIVES.   The Company has established a 
relationship with a leading call-center services provider to outsource its 
customer service operations. The call center is currently staffed with six 
full-time customer service representatives ("CSRs") trained to handle calls 
24 hours per day, 365 days per year. An additional 20 CSRs have been trained 
and will be available to the Company as demand requires. Each CSR is required 
to have a thorough understanding of the Company's service offerings. The 
Company has provided a dedicated toll-free number to the call center for all 
subscriber needs and has established call center performance parameters.

COMPETITION  

     All of the Company's principal business activities are highly 
competitive. The Company's competitors include some of the nation's largest 
regional and independent local exchange carriers as well as cable television 
providers, Internet service providers, satellite-based companies, and 
long-distance carriers.  Many of these carriers have substantially greater 
access to capital than 21st Century, and significantly greater experience 
than the Company in providing voice, video, Internet and data services. 
      

CHICAGO FRANCHISE   

     21st Century was awarded a 15-year renewable franchise effective June 
1996 by the City of Chicago for the construction of a fiber cable network in 
Chicago's Area 1, representing one of the first second-provider franchise 
awards for a large urban area. Under this 15-year renewable franchise, the 
Company has been granted unrestricted access to the public right-of-way to 
construct, operate and maintain its DRS Network to all residential and 
commercial subscribers in the franchise area. The franchise requires that the 
Company provide ubiquitous service to all residential subscribers in the 
franchise area in accordance with a specified time schedule, and allows the 
Company to selectively provide service to the franchise area's business and 
financial districts. 

SKOKIE FRANCHISE

     In March of 1998, 21st Century was awarded a 15-year renewable franchise 
by the Village of Skokie.  The City boundaries of Skokie are contiguous with 
a portion of the Chicago Area 1 franchise (at the NW corner).  The Skokie 
franchise area consists of 23,000 homes, 2,800 businesses, and 38,000 
employees.

     Franchises typically contain many conditions, such as time limitations 
on commencement and completion of system construction, customer service 
standards, minimum number of channels and the provision of free service to 
schools and certain other public institutions. The Company believes that the 


                                                               Page 13 

<PAGE>


conditions in its franchises in Chicago's Area 1 and Skokie are fairly 
typical. The franchises obligate the Company to meet a number of local 
regulatory requirements, including (i) notices to subscribers of service and 
fee changes, (ii) system design, construction, maintenance and technical 
criteria that, among other things, require that the system be fully 
constructed within specified times, (iii) interconnection with other cable 
operators serving the municipalities for purposes of public, educational and 
governmental ("PEG") and leased access, (iv) various payments to the Chicago 
Access Corporation ("CAC") for PEG local access obligations, including an 
annual payment of one percent of annual gross revenues for PEG/I-Net, (v) 
preservation of channel capacity for PEG local access, (vi) equal employment 
and affirmative action requirements and (vii) development and fulfillment of 
standards for customer service and consumer complaints.  The Company is 
required to pay a fee for both the Chicago and Skokie franchise to the 
issuing authority equal to 5% of gross revenues received from the operation 
of its cable television system. 

EMPLOYEES   

     At March 31, 1998, the Company had 127 full-time employees.  The Company 
considers its relations with its employees to be satisfactory. The Company 
recruits from several major industries for employees with skills in voice, 
video, Internet, and data technologies. 

ITEM 2.     PROPERTIES  

     The Company entered into a 15-year lease, dated January 31, 1997 (the 
"Apparel Lease") for its headquarters and NOC, located at 350 N. Orleans, 
Suite 600, Chicago, IL 60654.  The Apparel Lease which covers 32,422 square 
feet, will be increased on July 1, 1998 to cover 40,397 square feet.

     The Company's principal physical assets consist of fiber optic network 
and equipment, located either at the equipment site or along the DRS Network. 
The Company's distribution equipment along the DRS Network is generally 
attached to utility poles under pole rental agreements with local public 
utilities, although in some areas the distribution cable is buried in 
underground ducts or trenches. The Company's franchise from the City of 
Chicago gives the Company rights of way for its DRS Network.  The physical 
components of the DRS Network require maintenance and periodic upgrading to 
keep pace with technology advances.  The Company believes its properties, 
taken as a whole, are in good operating condition and are suitable for the 
Company's business operations.

     
ITEM 3.     LEGAL PROCEEDINGS    

        The Company is not aware of any pending or threatened litigation that 
could have a material adverse effect on the Company's financial condition, 
results of operation, or cash flow.

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

     NONE.


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


Common Stock 

                                                               Page 14

<PAGE>


     There is no established public trading market for the Company's Common 
Stock, and accordingly, no high and low bid information or quotations are 
available with respect to the Company's Common Stock.  At March 31, 1998, 
there were 3,489,467.9 shares of Common Stock outstanding and held of record 
by approximately 60 shareholders. At March 31, 1998, options and warrants to 
purchase an aggregate of 3,298,563.5 shares of Common Stock were outstanding. 
All outstanding options and warrants provide for antidilution adjustments in 
the event of certain mergers, consolidations, reorganizations, 
recapitalizations, stock dividends, stock splits or other changes in the 
corporate structure of the Company. 

     The Company has filed with the Securities and Exchange Commission (the 
"Commission"), a Registration Statement on Form S-4 (including all amendments 
thereto the "Registration Statement") under the Securities Act of 1933, with 
respect to the New Notes and the New Exchangeable Preferred Stock (as defined 
in the Registration Statement) offered in connection with the exchange offer. 
 For further information with respect to the Company, the New Notes and New 
Exchangeable Preferred Stock offered in connection with the exchange offer, 
reference is made to the Registration Statement and the exhibits and 
schedules filed therewith.  The Registration Statement, including exhibits 
and schedules thereto, may be inspected without charge at the Commission's 
principal office in Washington, D.C., and copies of all or any part thereof 
may be obtained from such office after payment of fees prescribed by the 
Commission.  The Commission also maintains a Web site that contains such 
information.  The address of the Commission's Web site is http://www.sec.gov.

RIGHTS OF CLASS A CONVERTIBLE 8% CUMULATIVE PREFERRED STOCK SHAREHOLDERS

     The Class A Convertible 8% Cumulative Preferred Stock (the "Class A 
Preferred Stock") shareholders possess the right to require the sale of the 
Company.  This provision provides that at any time and from time to time 
after the fourth anniversary of the date of issuance of the senior discount 
notes and senior cumulative exchangeable preferred stock and ending on the 
earlier of the consummation of a qualified public offering and the seventh 
anniversary of the date of issuance of the senior discount notes, the Class A 
Preferred Stock shareholders have the right to require the sale of the 
Company.

     In addition, the holders of the Class A Preferred Stock are collectively 
in a position to control the taking of many significant corporate actions by 
the Company, including the making of any significant capital commitments, the 
incurrence of any significant indebtedness, merger and the payment of 
dividends on the common stock, pursuant to agreements which provide that 
prior to taking such actions, the Company will need to obtain the approval of 
the nominees to the Board of Directors of the holders of the Class A 
Preferred Stock.  These rights have been modified by the covenants related to 
the 12 1/4% Senior Discount Notes.

DIVIDEND POLICY 

     The Company has never declared or paid any cash dividends on its capital 
stock and does not anticipate paying cash dividends on its capital stock in 
the foreseeable future. It is the current policy of the Company's Board of 
Directors to retain earnings to finance the expansion of the Company's 
operations. Future declaration and payment of dividends, if any, will be 
determined in light of the then-current conditions, including the Company's 
earnings, operations, capital requirements, financial condition and other 
factors deemed relevant by the Board of Directors. In addition, the Company's 
ability to pay dividends is limited by the terms of the Indenture governing 
the New Notes, the Amended Articles and the terms of the Company's existing 
preferred stock.

RECENT SALES OF UNREGISTERED SECURITIES

     In September 1997, pursuant to a Purchase, Joinder and Waiver Agreement 
(the "Purchase Agreement"), the Company issued 63.3 shares of Class A 
Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share, 
and warrants to purchase up to 53,271 shares of Common Stock at a price of 
$.000001 per share to Consolidated Communications, whose President and Chief 
Executive Officer at such time was Mr. Currey, a Director of the Company at 
that time and currently the Company's President and Chief Operating Officer. 

     In November 1997, pursuant to a Purchase, Joinder and Waiver Agreement, 
the Company issued 9.5 shares of Class A Convertible 8% Cumulative Preferred 
Stock at a price of $15,793.84 per share, and warrants to purchase up to 
7,990.6 shares of Common Stock at a price of $.000001 per share to Mr. 
Webster, the Company's Chief Financial Officer. 

     In January 1998, the Company agreed to issue an aggregate of 550,362.2 
shares of Common Stock and an equal number of shares of non-voting Common 
Stock, for a total of 1,100,724.3 shares.  These shares are issuable in 
exchange for the initial and debt warrants, which arose from the purchase of 
Class A Convertible 8% Cumulative Preferred Stock and were assigned a value 
of $2,343,746.  The beneficial holders of such shares include Purnendu 
Chatterjee, JK&B Capital, William Farley, Boston Capital Ventures III, L.P., 
Thomas Neustaetter, Edward T. Joyce, David Kronfeld, Glenn W. Milligan and 
Charles E. Kaegi, M.D.

                                                               Page 15 

<PAGE>


     Also in January 1998, certain shareholders, including Messrs. Milligan, 
Joyce and Kaegi, purchased an additional 95.4 shares of Class A Convertible 
8% Cumulative Preferred Stock at a price of $15,793.84 per share.

     In February 1998, the Company sold in a private placement $200 million 
of 12-1/4% Senior Discount Notes Due 2008 ("the Senior Discount Notes"), and 
$50 million of Units, consisting of 13-3/4% Senior Cumulative Exchangeable 
Preferred Stock Due 2010 (the "Exchangeable Preferred Stock") and Warrants to 
purchase 438,870 shares of Common Stock.

     In April 1998, pursuant to a Purchase, Joinder & Waiver Agreement, the 
Company agreed to issue 6.3316 shares of Class A Convertible 8% Cumulative 
Preferred Stock at a price of $15,793.84 per share and  warrants to purchase 
5,327.1 shares of Common Stock at a price of $.000001 per share to Wendy 
Dietze, Managing Director of Credit Suisse First Boston Corporation.  In 
addition 2,248.9 shares of voting common stock and 2,248.9 shares of 
non-voting common stock will be issued in conjunction with this sale.

                                                               Page 16

<PAGE>




                                      PART II

ITEM 6.     SELECTED FINANCIAL DATA  (1994 - 1998)
                                          
     The following table sets forth selected financial and operating data for 
the Company. The selected financial and operating data as of and for the 
periods ended March 31, 1998, 1997, 1996, and 1995 have been derived from the 
audited financial statements of the Company.  The selected financial and 
operating data as of and for the period ended March 31, 1994, has been 
derived from the unaudited financial statements of the Company and, in the 
opinion of the Company, include all adjustments, consisting of normal 
recurring accruals, necessary for a fair presentation of such information.  
The selected financial and operating data set forth below should be read in 
conjunction with "Management's Discussion and Analysis of Financial Condition 
and Results of Operations" and the Financial Statements included elsewhere in 
this Form 10-K. 

<TABLE>
<CAPTION>

                                                           YEAR ENDED MARCH 31,
     STATEMENT OF OPERATIONS DATA:               1998               1997              1996               1995              1994
<S>                                  <C>                <C>               <C>                 <C>              <C>
Subscriber revenues                     $        189,023   $         27,480  $            --    $            --    $            --  
Operating expenses                             2,023,310            200,911             9,617                --                 --  
Selling, general and
     administrative expenses                  10,216,919          2,337,534           694,122            624,963            253,205 
Depreciation and
     amortization                              1,411,847            170,108           108,182             38,923             11,770 
                                          ---------------    ---------------   ---------------      -------------      -------------
Operating loss                               (13,463,053)        (2,681,073)         (811,921)          (663,886)          (264,975)
Amortization of issuance costs on 
    senior discount notes                       (218,411)               --                --                 --                 --  
Interest income                                2,373,867            301,624               --                 --                 --  
Interest expense                              (3,722,947)          (437,843)         (214,688)          (115,428)         (  38,055)
                                          ---------------    ---------------   ---------------      -------------      -------------
Net loss                                     (15,030,544)        (2,817,292)       (1,026,609)          (779,314)          (303,030)
Preferred stock requirements                  (4,234,463)          (478,981)              --                 --                 --  
                                          ---------------    ---------------   ---------------      -------------      -------------
Net loss attributable to
     common shares                        $  (19,265,007)    $   (3,296,273)   $   (1,026,609)    $     (779,314)       $  (303,030)
                                          ---------------    ---------------   ---------------      -------------      -------------
                                          ---------------    ---------------   ---------------      -------------      -------------
Weighted average common
     shares outstanding                        2,615,061          1,988,365         1,609,129          1,508,000          1,470,288 
Basic and diluted 
     net loss per common share            $        (7.37)    $        (1.66)   $         (.64)    $         (.52)    $         (.21)
                                          ---------------    ---------------   ---------------      -------------      -------------
                                          ---------------    ---------------   ---------------      -------------      -------------
OTHER DATA:
Capital expenditures                      $   15,665,047       $    246,863    $          --      $          --      $          --  
Number of subscribers
     (end of period)                               4,814              1,734               --                 --                 --  
Deficiency in earnings to cover
    combined fixed charges                    19,265,007          3,296,273         1,026,609            779,314            303,030 
Deficiency in earnings to cover
    interest charge                           15,030,544          2,817,292         1,026,609            779,314            303,030 
Deficiency in earnings to cover
    preferred stock requirements              15,102,731          2,840,046              N/A                N/A                N/A


BALANCE SHEET DATA
     (END OF PERIOD):
Total assets                             $   262,732,604        $14,396,708      $  1,664,877         $  847,659         $  428,914 


</TABLE>

                                                               Page 17 

<PAGE>


<TABLE>
<CAPTION>


<S>                                  <C>                <C>               <C>                 <C>              <C>
Total liabilities                            212,301,162            562,082         3,409,433          1,910,781            726,450 
Total redeemable preferred
     stock                                    46,492,812         16,794,963               --                 --                 --  
Total shareholders' equity                     3,938,630         (2,960,337)       (1,744,556)        (1,063,122)          (297,536)

</TABLE>


                                                               Page 18 

<PAGE>



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

     21st Century was awarded a franchise in 1996 by the City of Chicago that 
allows for the construction of the DRS Network in Chicago's Area 1. Under 
this 15-year renewable license, the Company is granted unrestricted access to 
the public right-of-way to construct, operate and maintain its DRS Network to 
all residential and commercial subscribers.   Since inception, the Company's 
principal focus has been the development of its communications business in 
Chicago's Area 1. 

     The Company has incurred net losses in each year since its inception, 
and as of March 31, 1998, the Company had an accumulated deficit of 
$24,787,871.  As the Company anticipates that it will continue to expand its 
operations, it anticipates that it will continue to incur net losses during 
the next several years as a result of (i) substantially increased 
depreciation and amortization from the construction of networks, (ii) 
significantly increased operating expenses as it builds its subscriber base 
and (iii) interest charges associated with the Senior Discount Notes. There 
can be no assurance that growth in the Company's revenues or subscriber base 
will occur or that the Company will be able to achieve or sustain 
profitability or positive cash flow. 

RESULTS OF OPERATIONS 

     TWELVE MONTHS ENDED MARCH 31, 1998 COMPARED TO TWELVE MONTHS ENDED 
MARCH 31, 1997. 

     REVENUES.   The Company generated subscriber revenues of $189,023 for 
the twelve months ended March 31, 1998. Subscriber revenues for the twelve 
months ended March 31, 1997 were $27,480. The commencement and ramp up of 
subscriber revenues resulted principally from the purchase of 1,734 bulk 
subscribers from an affiliated entity during January 1997.  By the end of 
March 31, 1998, the Company was providing service to 3,052 subscribers in 14 
bulk MDUs and pursuant to certain right of entry ("ROE") contracts. As of 
March 31, 1998, there were 1,762 backlogged connection orders for both bulk 
MDU and ROE customers.

     EXPENSES.   The Company incurred operating expenses of $2,023,310 and 
$200,911 for the twelve months ended March 31, 1998 and 1997, respectively.  
The increase in operating expenses resulted from activities required to 
accelerate the network build-out, operate the franchise and deliver services. 
 The component of operating expenses that represents network operating costs 
related to the delivery of cable and telecommunications services increased 
from $12,653 for the twelve months ended March 31, 1997 to $1,345,921 for the 
twelve months ended March 31, 1998.  This increase is directly related to the 
continued ramp-up in the design and construction of the network as well as 
the addition of employees. The component of operating expenses that 
represents local access, origination programming fees and franchise fees 
increased from $188,258 for the twelve months ended March 31, 1997 to 
$677,389 for the twelve months ended March 31, 1998.  Programming fees for 
the upgraded channel lineup made possible by the fiber enriched network 
increased from zero dollars to more than $195,000. Public Educational and 
Government (PEG) access programming fees which are payable to the Chicago 
Access Corporation (CAC) amounted to over $250,000 as annual installment 
payments of  $100,000 for 1997 and 1998 were paid in fiscal 1998. Access costs 
required to offer Internet services paid to both wholesale ISPs and exchange 
carriers that lease transport to the wholesale ISPs added $125,000 to 1998 
expenses.  Depreciation and amortization costs were $1,411,847 and $170,108 
for the twelve months ended March 31, 1998 and March 31, 1997, respectively. 
The increase in depreciation and amortization costs is primarily attributable 
to the amortization of leasehold improvements upon the occupation of the 
space in the Apparel Center and the depreciation of the network equipment as 
it is placed into service.  Selling, general and administrative 


                                                               Page 19

<PAGE>


expenses were $10,216,919 and $2,337,534 for the twelve months ended March 
31, 1998 and March 31, 1997, respectively.  The increase in selling, general 
and administrative expenses reflects the Company's acquisition of 
subscribers, promotion costs, the addition of employees, and compensation 
expense related to stock options granted to certain officers and employees in 
October 1997.  Interest expense increased from $437,843 to $3,722,947 due 
primarily to the interest associated with the Senior Discount Notes issued in 
February 1998.  Interest income increased from $301,624 to $2,373,867 due 
primarily to interest earned on the increased level of cash held by the 
Company as a result of the issuance of the Senior Discount Notes and 
Exchangeable Preferred Stock in February 1998.  Amortization of issuance 
costs on Senior Discount Notes of $218,411 for the year ended March 31, 1998 
resulted from the issuance costs associated with the Senior Discount Notes 
issued in February 1998 and their subsequent amortization.
 
     NET LOSS.   For the twelve months ended March 31, 1998 and 1997, the 
Company incurred  net losses amounting to $15,030,544 and $2,817,292, 
respectively.  The Company expects its net losses to continue to increase as 
it introduces new services and as the Company continues to build-out the DRS 
Network and seeks to expand its business. 
     

     YEAR ENDED MARCH 31, 1997 COMPARED TO THE YEAR ENDED MARCH 31, 1996. 

     The Company's net loss of $2,817,292 in fiscal 1997 was an increase over 
the net loss of $1,026,609 in 1996.  The higher losses reflect primarily the 
additional activities undertaken to prepare for the initiation of services in 
1997. These activities accelerated in February 1997 with the close of the 
Company's initial private preferred stock offering. Operating expenses 
increased to $200,911 in fiscal 1997 from $9,617 in fiscal 1996 primarily due 
to local access and origination programming support as required by the 
franchise agreement. Selling, general and administrative expenses increased 
to $2,337,534 in fiscal 1997 from $694,122 in fiscal 1996. This increase was 
primarily due to higher payroll-related costs of $675,574, increased legal 
and professional fees of $561,167, higher bank fees of $130,706 and increased 
occupancy costs of $122,991. Interest expense increased by $223,155 due to 
the additional interest on the revolving credit note outstanding for most of 
fiscal 1997. Depreciation and amortization increased due to higher balances 
subject thereto.  Interest income was $301,624 for the year ended March 31, 
1997.  There was no interest income for the year ended March 31, 1996.  The 
increase in the interest income is the result primarily of two factors.  The 
first factor relates to the accrued interest associated with prepayment of 
the franchise fees in June and July 1996. This factor accounts for 
approximately $217,000 of the increase.  The second factor is the higher 
overall cash balance created by the infusion of cash associated with the 
preferred equity offering in January 1997.  This factor accounts for 
approximately $84,000 of the increase.  

LIQUIDITY AND CAPITAL RESOURCES 

     The cost of development, construction and start-up activities of the 
Company will require substantial capital. As of March 31, 1998, the Company 
had expended more than $3,800,000 related to the acquisition of the franchise 
for Chicago's Area 1, including $3,000,000 to the City of Chicago for prepaid 
franchise fees. The Company also purchased 1,734 bulk video subscribers from 
an affiliated entity in January 1997 for $3,381,300. 

     Net cash used in operating activities was $8,080,516 for the twelve 
months ended March 31, 1998, $6,910,766 for the year ended March 31, 1997, 
and $611,227 for the year ended March 31, 1996.  Net cash used in operating 
activities for the twelve months ended March 31, 1998 resulted principally 
from the Company's net loss from operations and purchases of inventory, 
offset by increases in accounts payable, amortization of the discount on the 
Senior Discount Notes, depreciation expense and the compensation expense 
recognized related to the stock option plan. Net cash used in operating 
activities for the year ended March 31, 1997 resulted from the net loss from 
operations and increases in prepayments consisting primarily of the 
$3,000,000 prepayment of franchise fees to the City of Chicago and decreases 
in various payables made 

                                                               Page 20

<PAGE>


possible by the equity infusion of approximately $20 million. Net cash 
required for operations in 1996 resulted primarily from net losses and 
increases in deferred legal costs offset by increases in various payables 
incurred during the acquisition of the Area 1 franchise. 

     Cash flow used in investing activities totaled $25,665,047 in the twelve 
months ended March 31, 1998 and $3,628,163 in the year ended March 31, 1997. 
Cash requirements in the twelve months ended March 31, 1998 consisted of the 
cost of building and equipping the NOC, facilitating the corporate 
headquarters and network construction.  In addition, $10 million was invested 
in a security which matures on December 7, 1998.  Cash requirements in the 
year ended March 31, 1997 consisted primarily of the purchase of 1,734 Area 1 
bulk subscribers for $3,381,300. 

     Cash flow from financing activities was $243,154,859 in the twelve 
months ended March 31, 1998, $18,768,915 in the year ended March 31, 1997, 
and $608,765 in the year ended March 31, 1996.  In the twelve months ended 
March 31, 1998, the private sale of $200 million in Senior Discount Notes; 
the sale of $50 million in Exchangeable Preferred Stock; and the sale of 
Class A Preferred Stock; generated a net of $192,113,175, $48,025,236, and 
$2,597,380, respectively. For the year ended March 31, 1997 approximately 
$20,000,000 of cash flow was generated through the private sale of preferred 
equity. In fiscal 1996, cash flow from financing activities was generated by 
the private sale of $342,000 in common stock to a small group of Chicago 
investors and the sale of $266,765 in convertible debentures to existing 
shareholders. 
     
     The Company estimates that its aggregate capital expenditure 
requirements related to DRS Network construction in Area 1 for the period 
ended March 31, 1998 and for the fiscal years 1999, 2000 and 2001, the time 
frame in which construction of the DRS Network in Area 1 is expected to be 
completed, will total approximately $270 million, of which between 
approximately $90 million to $120 million is expected to be spent during 
calendar year 1998. The Company will fund these expenditures from the net 
proceeds of the Senior Discount Notes and the Exchangeable Preferred Stock.  
In order to retain funds available to support its operations, the Company has 
no expectation of paying cash interest on the Notes or cash dividends on the 
Exchangeable Preferred Stock prior to February 15, 2003. The Company may 
require additional financing in the future if it begins to develop additional 
franchise areas or if the development of Area 1 in Chicago is delayed or 
requires costs in excess of current expectations. The Company has entered 
into a commitment letter with BankBoston, N.A. and Bank of America NT&SA for 
a $50 million bank revolving credit facility to provide supplemental 
financing. There can be no assurance that the Company will be able to obtain 
such proposed bank financing or any such additional debt or equity financing, 
or that the terms thereof will not be unfavorable to the Company or its 
existing creditors or investors. 

     While the Year 2000 considerations are not expected to materially impact 
the Company's internal operations, they may have an effect on some of its 
customers and suppliers, and thus indirectly affect the Company.  The Company 
is in contact with its major suppliers regarding this issue.  However, it is 
not possible to quantify the aggregate cost to the Company with respect to 
customers and suppliers with Year 2000 problems, although the Company does 
not anticipate it will have a material adverse affect on its business.

ITEM 7A.    QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
          
   Not applicable.


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements and supplementary data required
under Item 8 of Part II are set forth in Part IV, Items 14(a)(1) of this Form
10-K.


                                                            Page 21
<PAGE>

ITEM 9.    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

       During the two years preceding March 31, 1998, there has been neither a
change of accountants of the Registrant nor any disagreement on any matter of
accounting principles, practices, or financial statement disclosure.


                                      PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


     The current directors and executive officers of the Company are listed
below.  Directors and executive officers of the Company are elected to serve
until they resign or are removed, are otherwise disqualified to serve or until
their successors are elected and qualified.

<TABLE>
<CAPTION>
            NAME              AGE   POSITION(s) WITH COMPANY
    -----------------------   ---   -----------------------------------------
<S>                           <C>   <C>
     Glenn W. Milligan ....    50   Chairman of the Board and Chief Executive
                                    Officer
     Robert J. Currey .....    52   President, Chief Operating Officer and
                                    Director
     Ronald D. Webster ....    48   Chief Financial Officer
     Jay E. Carlson .......    36   Chief Technical Officer
     Stephen M. Lee .......    42   Senior Vice President of Internet and Data
                                    Services
     Susan R. Quandt ......    43   Senior Vice President of Corporate
                                    Marketing/Sales
     John Brouse ..........    49   Vice President of Network Operations
     Roxanne Jackson ......    33   Vice President of Human Resources
     Eric D. Kurtz ........    34   Vice President of Corporate Development
                                    and Regulatory Affairs
     Edward T. Joyce ......    56   Director
     Dr. Charles E. Kaegi .    48   Director
     David Kronfeld .......    50   Director
     James H. Lowry .......    58   Director
     Thomas M. Neustaetter     46   Director

</TABLE>

     GLENN W. MILLIGAN, the Company's founder, has been Chairman of the Board
and Chief Executive Officer of the Company since its inception in October 1992.
Prior to founding the Company, Mr. Milligan was President and Chief Executive
Officer of 21st Century Technology Group, Inc. from April 1986 to October 1992.
From July 1985 until March 1986, Mr. Milligan served as Regional Director for
the Walt Disney Company, where he was responsible for sales and marketing in
eight midwestern states. From March 1984 to March 1985, Mr. Milligan served as
Area Manager of the Midwest offices of Showtime Networks, Inc. and Regional
Sales Director of their North Central offices from March 1985 to June 1985. From
July 1979 to November 1983, Mr. Milligan was the Chief Executive Officer of
DAEOC, Inc., a diversified government contractor.

     ROBERT J. CURREY has served as a Director of the Company since February
1997 and was named President and Chief Operating Officer on March 1, 1998. Mr.
Currey served as Group President of Telecommunications Services for McLeod USA,
a wholly owned subsidiary of McLeod, Inc., from September 1997 through February
1998. Mr. Currey continues to serve on the board of directors of McLeod USA.
From March 1990 until September 1997, he served as President and Chief Executive
Officer of Consolidated Communications. From 1988 to 1990, Mr. Currey served as
Senior Vice President



                                                                        Page 22
<PAGE>

of Operations and Engineering at Citizens Utilities Company in Stanford,
Connecticut. From 1987 to 1988, Mr. Currey served as Executive Vice President at
US Sprint in Kansas City, Missouri.

     RONALD D. WEBSTER joined the Company as Chief Financial Officer in
September 1997. He was previously Vice President and Treasurer at Telephone Data
Systems, Inc., where he served from April 1988 until August 1997. Prior thereto,
he held executive positions with Ideal School Supply Corp. and Trans Union
Corporation.

     JAY E. CARLSON has served as the Company's Chief Technical Officer since
March 1997. From October 1989 to March 1997, Mr. Carlson was the Fund
Engineering Director for Jones Intercable, Inc. where he was responsible for
engineering operations in the Western region. He was also instrumental in the
design and construction of Jones Intercable's Alexandria, Virginia HFC broadband
network, which was one of the first platforms to simultaneously carry
residential and commercial telephony, video and data.

     STEPHEN M. LEE joined the Company in January 1997 as Senior Vice President
of Internet and Data Services. Mr. Lee was the Director of the Central Region
Sales for MFS Datanet, Inc. from October 1993 to April 1996. From April 1996 to
January 1997, Mr. Lee served as a technical consultant to the Company. From
October 1983 until October 1993, Mr. Lee held various managerial positions at
Graphnet, Inc. From January 1979 to October 1983, Mr. Lee was the Major Account
Manager/Systems Sales Engineer for ITT World Communications, Inc.

     SUSAN R. QUANDT has served as the Company's Senior Vice President of
Corporate Marketing/Sales since December 1997. From December 1994 to December
1997, Ms. Quandt served as Executive Vice President of Taylor-Winfield, an
information technology market consulting and executive recruiting firm. From
January 1992 to September 1994, Ms. Quandt served as Vice President of Marketing
and Product Development of Call-Net Enterprises Inc., a national long-distance
telephone company owned by Sprint Canada. From January 1989 to December 1991,
Ms. Quandt served as Vice President of Marketing for Schneider Communications,
Inc., a regional long-distance telephone company.

     JOHN BROUSE has served as the Company's Vice President of Network
Operations since April 1997. Prior to that time, Mr. Brouse was Operations
Engineering Director for Jones Intercable, Inc. from June 1988 to April 1997.
Mr. Brouse received the cable industry's prestigious Polaris Award in 1996.

     ROXANNE JACKSON has served as the Company's Vice President of Human
Resources since May 1996. Prior to that time, from January 1994 to May 1996, Ms.
Jackson was the Human Resources Director for Metz Baking Group. From August 1992
until January 1994, Ms. Jackson served as the Director of Human Resources for
Fox Television Stations, Inc.

     ERIC D. KURTZ has served as the Company's Vice President of Corporate
Development and Regulatory Affairs since March 1997. From April 1989 until July
1996, Mr. Kurtz was a General Manager with Time Warner's Milwaukee & Chicago
Divisions. During this time span he also served as a board member of the
Wisconsin Cable Communications Association and as its President from September
1994 to September 1996.

     EDWARD T. JOYCE has served as a Director of the Company since the Company's
inception in October 1992.  Mr. Joyce founded his own firm in 1971, now known as
Edward T. Joyce and Associates, P.C., a law firm dealing with commercial
litigation.

     DR. CHARLES E. KAEGI has served as a Director of the Company since the
Company's inception in October 1992. Dr. Kaegi has been in private practice of
medicine since July 1979. From November 1979 to present, Dr. Kaegi has held the
following positions at Ravenswood Hospital Medical Center: Attending Physician
(November 1979 to present); Medical Director, Alcohol & Drug Abuse Program (July
1994 to present); Medical Director, Community Mental Health Center (November
1994 to present); Medical


                                                                       Page 23
<PAGE>

Education (January 1980 to present); Secretary of the Department of Psychiatry
(January 1993-present); and Consultant to Community Mental Health Center (March
1980 to August 1985). Dr. Kaegi is the cousin of Mr. Glenn Milligan.

     DAVID KRONFELD has served as a Director of the Company since February 1997.
Mr. Kronfield founded JK&B Capital in January 1996 and has been its general
partner since that time. Before founding JK&B Capital, Mr. Kronfield was a
General Partner at Boston Capital Ventures from August 1989 to October 1995,
where he specialized in the telecommunications and software industries. From
October 1984 to August 1989, Mr. Kronfield served as Vice President of
Acquisitions and Venture Investments at Ameritech.

     JAMES H. LOWRY has served as a Director of the Company since February 1997.
Mr. Lowry serves as President and Chief Executive Officer of James H. Lowry &
Associates ("JHLA"), a consulting company established in 1975. Prior to
establishing JHLA, Mr. Lowry served as the Director of Public Service Practice
for McKinsey & Company from 1967 to 1975.

     THOMAS M. NEUSTAETTER has served as a Director of the Company since
February 1997. Mr. Neustaetter has been an officer of the Chatterjee Management
Group, a division of Chatterjee Management Company, since January 1996. From
January 1995 to January 1996, Mr. Neustaetter was the Managing Director for
Bancroft Capital Corporation in New York City, a company he founded. From August
1986 to December 1994, Mr. Neustaetter was employed at Chemical Banking
Corporation in New York City.


COMMITTEES OF THE BOARD OF DIRECTORS

     The Board currently has two committees, the Executive Committee and the
Compensation Committee. The Executive Committee makes recommendations to the
Board of Directors regarding issues such as finance, strategic planning and
long-range goals for the Company. The current members of the Executive Committee
are Glenn Milligan, Edward Joyce and David Kronfeld.

     The Compensation Committee reviews and recommends the compensation and
bonus arrangements for executive level management of the Company and administers
the Company's stock option plans. The current members of the Compensation
Committee are Glenn Milligan, Edward Joyce and Thomas Neustaetter.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     As stated above, the current members of the Compensation Committee are
Messrs. Milligan, Joyce and Neustaetter. Mr. Milligan is also the Chief
Executive Officer of the Company.

     In January 1998, the Company issued to Messrs. Milligan, Kaegi and Joyce
4.7, 6.3 and 31.7 shares of Class A Convertible 8% Cumulative Preferred Stock,
respectively, at a price of $15,793.84 per share, and warrants to purchase up to
3,995.3, 5,327.1 and 26,635.5 shares of Common Stock, respectively, at a price
of $.000001 per share.


DIRECTOR COMPENSATION

     Directors of the Company receive no directors' fees. Directors are
reimbursed for their reasonable out-of-pocket travel expenditures incurred in
connection with their service as directors.


                                                                        Page 24
<PAGE>

     COMPENSATION PLAN

     1997 STOCK OPTION PLAN.   The Company's Stock Option Plan (the "Stock
Option Plan") provides for the grant of options that are not intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), to key employees. The Compensation Committee of
the Board of Directors administers the Stock Option Plan and grants options to
purchase Common Stock thereunder.

     The aggregate number of shares of Common Stock that may be issued under
options under the Stock Option Plan may not exceed 728,667.7 shares. Reserved
shares may be either authorized but unissued shares or treasury shares, and will
be distributed at the discretion of the Board of Directors.

     The Compensation Committee has the exclusive authority to establish, amend
and rescind appropriate rules and regulations relating to the Stock Option Plan.
Each participant's option will expire as of the earliest of : (i) the date on
which it is forfeited under the provisions of the Stock Option Plan; (ii) ten
years from the option date; and (iii) the date on which it expires pursuant to
the relevant option agreement. The option price may be greater than, less than
or equal to the fair market value on the option date as determined in the sole
discretion of the Compensation Committee.

     An option participant may not exercise an option or any portion thereof
until such option or such portion thereof has become fully vested. Pursuant to
the Stock Option Plan, options generally vest 1/48th each month and are fully
vested after four years. All options become 100% vested and immediately
exercisable prior to a Change in Control (as such term is defined in the Stock
Option Plan).

     During October and December 1997, the compensation committee granted 
options to acquire an aggregate of 728,667.8 shares of common stock to 
executive officers of the company.  Messers Milligan, Wiegand-Moss, Webster 
and Carlson were awarded 131,160.3, 109,300.2, 109,300.2 and 91,083.5 shares 
respectively.  In March 1998 the options granted to Mr. Wiegand-Moss were 
reduced from 109,300.2 to 72,866.8 shares when he ceased to be the Chief 
Operating Officer and became Senior Vice President of Customer Operations.  
Each of such options vests at a rate of 1/48th per month from the optionee's 
date of employment with the company, even if such employment precedes the 
date of the grant.

     As of March 31, 1998, options to acquire 692,234.6 shares of Common Stock
were outstanding pursuant to the Stock Option Plan.


                                                                        Page 25
<PAGE>

ITEM 11.    EXECUTIVE COMPENSATION

                             SUMMARY COMPENSATION TABLE

     The following table sets forth information concerning compensation of (i)
the Company's Chief Executive Officer during the fiscal year ended March 31,
1998 and (ii) executive officer of the Company whose total annual salary and
bonus equaled or exceeded $100,000 in the fiscal year ended March 31, 1998
(collectively, the "Named Executive Officers"):


<TABLE>
<CAPTION>
                                                                                                       LONG-TERM COMPENSATION

                                                                                                              AWARDS
                                                                                                              ------

                                                 ANNUAL COMPENSATION                                           NUMBER
                                                                                                                   OF
                                                                                                           SECURITIES
                                                                                                           UNDERLYING
NAMED OFFICERS AND PRINCIPAL
POSITION                                YEAR         SALARY ($)        BONUS ($)       OTHER($)(1)            OPTIONS
--------                                ----         ----------        ---------       ------------           -------
<S>                                    <C>           <C>               <C>             <C>             <C>
Glenn W. Milligan                      1998           188,648           48,089             29,169           131,160.3
Chairman of the Board,                 1997           170,833            6,875              4,000
President and Chief
Executive Officer

Richard Wiegand-Moss (2)               1998           150,566            6,990             36,232            72,866.8  (3)
Former Chief Operating
Officer                                1997           117,709            5,729             13,750

Ronald D. Webster                      1998            92,308  (4)      50,000              3,462           109,300.2
Chief Financial Officer                1997

Jay E. Carlson                         1998           120,800            3,625             40,196            91,083.5
Chief Technical Officer                1997

Daniel O. Day                          1998           126,748  (5)       5,730             16,011                 0.0
Former Vice President of
Finance                                1997           116,041            5,208              2,500


</TABLE>

(1)  Includes automobile allowances and amounts reimbursed for relocation
     expenses and premiums on life insurance.  In the case of Mr. Milligan, the
     amount also includes an annual membership fee to a private club.
(2)  Mr. Wiegand-Moss was the Company's Chief Operating Officer from August 1996
     to March 1998.  Effective March 4, 1998, he ceased to be the Chief
     Operating Officer and became Senior Vice President of Customer Operations.
     Mr. Wiegand-Moss left the Company in May 1998.
(3)  In March 1998, the options granted to Mr. Wiegand-Moss were reduced from
     109,300.2 shares to 72,866.8 shares when he ceased to be the Chief
     Operating Officer and became Senior Vice President of Customer Operations.
     His options to purchase 36,433 shares of the Company's Common Stock were
     forfeited.
(4)  Mr. Webster joined the Company in September 1997.  His annual salary for
     fiscal 1998 would have been $160,000 if he were with the Company for the
     entire year.
(5)  Mr. Day was the Company's Chief Financial Officer from August 1996.
     Effective September 1997, Mr. Day ceased to be the Chief Financial Officer
     and became Vice President of Finance.  Mr. Day left the Company in February
     1998.  His annual salary for fiscal 1998 would have been $131,346 if he
     were with the Company for the entire year.

                                                                       Page 26
<PAGE>

The following table contains certain information concerning the stock option
grants made to each of the Named Executive Officers during the fiscal year ended
March 31, 1998.



<TABLE>
<CAPTION>
                                    OPTION GRANTS IN LAST FISCAL YEAR
                                                  INDIVIDUAL GRANTS
                       --------------------------------------------------------------------
                                              % OF TOTAL                                        POTENTIAL REALIZABLE VALUE AT
                          NUMBER OF             OPTIONS                                         ASSUMED ANNUAL RATES OF STOCK
                          SECURITIES          GRANTED TO      EXERCISE OR                     PRICE APPRECIATION FOR OPTION TERM (3)
                          UNDERLYING          EMPLOYEES IN    BASE PRICE                      -------------------------------------
                       OPTIONS GRANTED (1)    FISCAL YEAR      ($/Sh)        EXPIRATION DATE          5%                 10%
                       -------------------   ---------------  -----------    ---------------          --                 ---
<S>                    <C>                   <C>              <C>            <C>              <C>                   <C>
 NAME
 Glenn W. Milligan         131,160.3             18.0           1.12            11/01/02          $814,509          $ 1,383,983
 Richard Wiegand-Moss       72,866.8(2)          10.0           1.12            05/15/06          $452,500          $   768,870
 Ronald D. Webster         109,300.2             15.0           1.12            09/01/07          $678,757          $ 1,153,318
 Jay E. Carlson             91,083.5             12.5           1.12            02/17/07          $565,631          $   961,099
 Daniel O. Day                0                    0             0               0                  0                    0
</TABLE>

--------------------
*    Less than 1%.

(1)  Stock options vest 1/48th each month and are fully vested after four years;
     provided that such officer remains continuously employed by the Company.
(2)  In March 1998 the options granted to Mr. Wiegand-Moss were reduced from
     109,300.2 shares to 72,866.8 shares.
(3)  These amounts are based on compounded annual rates of stock price
     appreciation of five and ten percent over the 10-year term of the options,
     are mandated by rules of the Securities and Exchange Commission and are not
     indicative of expected stock performance. Actual gains, if any, on stock
     option exercises are dependent on future performance of the Common Stock,
     overall market conditions, as well as the option holders' continued
     employment throughout the vesting period. The amounts reflected in this
     table may not necessarily be achieved or may be exceeded. The indicated
     amounts are net of the option exercise price but before taxes that may be
     payable upon exercise.


     The following table sets forth certain information regarding options to
purchase Common Stock held as of March 31, 1998 by each of the Named Executive
Officers.  None of such Named Executive Officers exercised any options during
the year ended March 31, 1998



<TABLE>
<CAPTION>
                                    AGGREGATED FISCAL YEAR-END OPTION VALUES

                               NUMBER OF SECURITIES UNDERLYING                  VALUE OF UNEXERCISED IN-THE-
                                UNEXERCISED OPTIONS AT FISCAL                         MONEY OPTIONS AT
                                           YEAR END                                 FISCAL YEAR END (1)
                             ---------------------------------            -------------------------------------
 NAME                        EXERCISABLE         UNEXERCISABLE            EXERCISABLE             UNEXERCISABLE
 ----                        -----------         -------------            -----------             -------------
<S>                          <C>                 <C>                      <C>                     <C>
 Glenn W. Milligan             131,160.3                     0            $  443,322                         0
 Richard Wiegand-Moss           44,543.2              28,323.6(2)         $  150,556                  $ 95,733(2)
 Ronald D. Webster              15,796.2              93,504.0            $   53,391                  $316,043
 Jay E. Carlson                 25,982.8              65,100.7            $   87,822                  $220,104
 Daniel O. Day                         0                     0                     0                         0

</TABLE>

                                                                        Page 27
<PAGE>

______________
(1)  There was no public trading market for the Common Stock as of March 31,
1998.  Accordingly, these values have been calculated by determining the
difference between the estimated fair market value of the Company's Common Stock
underlying the option as of March 31, 1998 ($4.50 per share) and the exercise
price per share payable upon exercise of such options.  In determining the fair
market value of the Company's Common Stock, the Board of Directors considered
various factors, including the Company's financial condition and business
prospects, its operating results, and the absence of a market for its Common
Stock.
(2)  These options were forfeited in May 1998.

EMPLOYMENT AGREEMENTS

     GLENN W. MILLIGAN.   Mr. Milligan entered into an employment agreement with
the Company as of August 1996 for a five-year term, which will be automatically
renewed for consecutive five-year terms unless either party elects not to renew
the agreement. Pursuant to the employment agreement, Mr. Milligan is entitled to
an initial annual base salary of $165,000 which was increased to $200,000 on
February 1, 1997 upon the consummation of the Company's initial private
preferred stock offering and will increase by ten percent annually. In addition,
if the Company obtains a new franchise and finances its construction, Mr.
Milligan's annual base salary will be increased in an amount equal to $.20 times
the number of new homes passed by the Company in the new franchise area. Mr.
Milligan is entitled to an annual bonus, based upon a bonus plan approved by the
Board of Directors, in a minimum amount of 1/24th of his annual base salary.
Mr. Milligan is also entitled annually to receive shares of the Company's common
stock in an amount equal to 5,000 shares or such other number of shares as is
necessary to provide him with .261% of the outstanding shares of common stock
and to receive stock options covering such number of shares pursuant to a
separate agreement. Upon a termination of the employment agreement, Mr. Milligan
is generally entitled to severance benefits and stock options to which he would
have been entitled during the remaining contract term had the employment
agreement not been terminated and a lump-sum payment, the amount of which is
dependent upon the reason for termination. In addition, upon a termination of
the employment agreement for any reason, Mr. Milligan has the right to require
the Company to repurchase all shares of the Company's capital stock then
beneficially owned by him for their fair market value.  Certain elements of Mr.
Milligan's employment agreement are in the process of being renegotiated.

     RICHARD WIEGAND-MOSS.   Mr. Wiegand-Moss was employed by the Company as its
Chief Operating Officer pursuant to an employment agreement in August 1996 .  In
March 1998, he entered into another  employment agreement with the Company,
pursuant to which he ceased to be the Chief Operating Officer and became Senior
Vice President of Customer Operations effective March 4, 1998.  Pusuant to the
employment agreement in 1998, he was entittled to an initial annual base salary
of $150,000.  In May 1998, Mr. Wiegand-Moss resigned from the Company.  On May
5, 1998, Mr. Wiegand entered into a Seperation Agreement and General Release
with the Company.  Pursuant to the Separation Agreement, Mr. Wiegand-Moss
received a lump sum payment in the amount of $150,000, representing his base
salary for the most recent 12-month period.  He was also entitled to continue to
receive his base salary bi-monthly through September 8, 1998. Other severance
benefits include continuation of health benefits for him and his dependents for
18 months and outplacement services.  All unvested options were forfeited.

     RONALD D. WEBSTER.   Mr. Webster entered into an employment agreement with
the Company as of November 3, 1997.  The employment agreement will expire on
January 1, 2000. Pursuant to the employment agreement, Mr. Webster is entitled
to an initial annual base salary of $160,000 and a minimum annual bonus of
$50,000 on each of December 31, 1997, 1998, and 1999.  In addition, he is
entitled to receive stock options covering such number of shares pursuant to a
separate agreement.  Upon a termination of his employment agreement,  Mr.
Webster is generally entitled to severance benefits, and depending on the reason
for termination, he may be entitled to an amount equal to two times the annual
salary and bonus he would have received for the year during which such
termination occurs.


                                                                        Page 28
<PAGE>

     JAY E. CARLSON.   Mr. Carlson entered into an employment agreement with the
Company as of  November 3, 1997, for a term of three years.  Pursuant to the
employment agreement, Mr. Carlson is entitled to an initial annual base salary
of $128,400.  In addition, he is entitled to receive stock options covering such
number of shares pursuant to a separate agreement.  Upon a termination of his
employment agreement, Mr. Carlson is generally entitled to severance benefits,
and depending on the reason for termination, he may be entitled to an amount
equal to the annual salary he would have received for the year during which such
termination occurs.

     DANIEL O. DAY.   Mr. Day was employed by the Company as its Chief Financial
Officer pursuant to an employment agreement in August 1996.  Effective September
1997, Mr. Day ceased to be the Chief Financial Officer and became Vice President
of Finance.  Mr. Day resigned from the Company as of February 1998.  Terms of
his severance agreement are still being negotiated.


     All employment agreements contain confidentiality provisions and
non-compete provisions.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                                     MANAGEMENT

      The following table sets forth certain information at June 15, 1998,
regarding beneficial ownership of the capital stock of the Company by (i) each
person known by the Company to beneficially own more than 5% of the outstanding
capital stock of the Company, (ii) each director of the Company, (iii) each
Named Executive Officer of the Company and (iv) all directors and executive
officers as a group.


<TABLE>
<CAPTION>
                                                                         NUMBER OF SHARES
                                                                                OF
                                                     NUMBER OF SHARES        CLASS A
                                                            OF             CONVERTIBLE             PERCENT OF
          NAME OF BENEFICIAL OWNER                     COMMON STOCK       8% CUMULATIVE             AGGREGATE
          ------------------------                     BENEFICIALLY      PREFERRED STOCK        VOTING RIGHTS(3)
                                                         OWNED(1)          BENEFICIALLY         ----------------
                                                         --------            OWNED(2)
                                                                             --------
<S>                                                  <C>                 <C>                    <C>
Purnendu Chatterjee(4) .........................         757,600.3               633.2                 27.7%
JK&B Capital(5) ................................         378,800.2               316.6                 14.6
William Farley(6) ..............................         303,040.0               249.3                 11.7
Myron M. Cherry(7) .............................         269,625.3                12.7                  6.2
Boston Capital Ventures III, L.P.(8) ...........         151,520.1               126.6                  6.1
Elske Bolitho(9) ...............................         305,000.0                  --                  6.8
Thomas Neustaetter(4)(10) ......................         757,600.3               633.2                 27.7
Charles E. Kaegi, M.D.(11)(19) .................         932,480.0                 6.3                 19.3
Edward T. Joyce(12)(19) ........................         758,496.7                50.8                 16.7
David Kronfeld(13) .............................         530,320.3               443.2                 20.0
Glenn W. Milligan(14)(19) ......................         660,259.6                 4.7                 13.7
James H. Lowry(19) .............................          19,000.0                  --                    *
Robert Currey(19) ..............................                --                  --                    *
Ronald Webster(15)(19) .........................          48,557.6                 9.5                  1.0
Richard Weigand-Moss(16)(19) ...................          56,842.3                  --                  1.3
Daniel O. Day(17)(19) ..........................          16,673.6                  --                    *
Jay E. Carlson(18)(19) .........................          34,156.3                  --                    *
All executive officers and directors as a group
     (16 persons)(20) ..........................       3,892,414.5             1,147.8                 74.8
</TABLE>





* Less than 1%.


                                                                        Page 29
<PAGE>

     (1)  The persons named in this table have sole voting power with respect to
          all shares of Common Stock shown as beneficially owned by them,
          subject to community property laws where applicable and except as
          indicated in the other footnotes to this table. Beneficial ownership
          is determined in accordance with the rules of the SEC. In computing
          the number of shares beneficially owned by a person and the percentage
          ownership of that person, shares of Common Stock subject to options
          and warrants held by that person that are currently exercisable or
          exercisable within 60 days after January 15, 1998, are deemed
          outstanding. Such shares, however, are not deemed outstanding for the
          purpose of computing the percentage ownership of any other person.

     (2)  Each share of Class A Convertible 8% Cumulative Preferred Stock
          converts into one thousand shares of Common Stock at the option of the
          shareholder.

     (3)  Percent of Aggregate Voting Rights, for each beneficial owner, was
          determined based upon a fraction. The numerator of such fraction is
          the sum of (a) the number of outstanding shares of Common Stock
          beneficially owned by such owner, plus (b) the number of shares of
          Common Stock into which the number of shares of Class A Convertible 8%
          Cumulative Preferred Stock beneficially owned by such owner are
          convertible, plus (c) the number of shares of Common Stock issuable
          upon exercise of options and warrants beneficially owned by such owner
          and which are exercisable within 60 days of January 15, 1998. The
          denominator of such fraction is the sum of (a) the aggregate number of
          shares of Common Stock outstanding on January 15, 1998, plus (b) the
          number of shares of Common Stock into which the aggregate number of
          shares of Class A Convertible 8% Cumulative Preferred Stock
          outstanding on January 15, 1998 are convertible, plus (c) the
          aggregate number of shares of Common Stock issuable upon exercise of
          options and warrants beneficially owned by such owner and which are
          exercisable within 60 days of January 15, 1998.

     (4)  Represents 112,445.2 shares of Common Stock, 266,354.9 shares of
          Common Stock issuable upon exercise of warrants and 316.6 shares of
          Class A Convertible 8% Cumulative Preferred Stock held by Quantum
          Industrial Partners LDC ("QIP"). The address of QIP is c/o Curacao
          Corporation Company, Kaya Flamboyan 9, Willemstad, Curacao,
          Netherlands Antilles. Also includes 65,218.2 shares of Common Stock,
          154,485.9 shares of Common Stock issuable upon exercise of warrants
          and 183.6 shares of Class A Convertible 8% Cumulative Preferred Stock
          held by S-C Phoenix Holdings, L.L.C. ("S-C Phoenix"). The address of
          S-C Phoenix is c/o Chatterjee Management Company, 888 Seventh Avenue,
          New York, New York 10106. This total also includes 45.2 shares of
          Class A Convertible 8% Cumulative Preferred Stock, 16,069.8 shares of
          Common Stock and 38,035.5 shares of Common Stock issuable upon
          exercise of warrants held by Winston Partners II, LLC and 87.8 shares
          of Class A Convertible 8% Cumulative Preferred Stock, 31,157.2 shares
          of Common Stock and 73,833.6 shares of Common Stock issuable upon
          exercise of warrants held by Winston Partners II, LDC (Winston
          Partners II, LLC and Winston Partners II, LDC, collectively "Winston
          Partners"). The address of Winston Partners II, LLC is c/o Chatterjee
          Management Company, 888 Seventh Avenue, New York, New York 10106. The
          address of Winston Partners II, LDC is c/o Curacao Corporation
          Company, Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles.
          QIP, S-C Phoenix and Winston Partners are associated with Chatterjee
          Management Company. Chatterjee Management Company is managed and
          controlled by Purnendu Chatterjee. Dr. Chatterjee may be deemed to
          have the power to direct the voting and disposition of the shares
          owned by QIP, S-C Phoenix and Winston Partners. Dr. Chatterjee and Mr.
          George Soros may each be deemed to have the power to direct the voting
          and disposition of the shares owned by S-C Phoenix. In addition, Mr.
          Soros, Mr. Stanley F. Druckenmiller and Soros Fund Management LLC may
          be deemed to have the power to direct the voting and disposition of
          the shares owned by QIP. The Percent of Aggregate Voting Rights
          excludes 224,890.4 shares of non-voting Common Stock beneficially
          owned by Purnendu Chatterjee which the Company has agreed to issue.


                                                                        Page 30
<PAGE>

     (5)  Represents 221.6 shares of Class A Convertible 8% Cumulative Preferred
          Stock, 78,711.6 shares of Common Stock and 186,448.5 shares of Common
          Stock issuable upon exercise of warrants held by JK&B Capital, L.P.
          and 95.0 shares of Class A Convertible 8% Cumulative Preferred Stock,
          33,733.6 shares of Common Stock and 79,906.5 shares of Common Stock
          issuable upon exercise of warrants held by JK&B Capital II, L.P. (JK&B
          Capital, L.P. and JK&B Capital II, L.P., collectively "JK&B Capital").
          The address of JK&B Capital is 205 North Michigan, Suite 800, Chicago,
          IL 60601. The Percent of Aggregate Voting Rights excludes up to
          112,445.2 shares of non-voting Common Stock beneficially owned by JK&B
          Capital which the Company has agreed to issue.

     (6)  Represents the following securities held by the following entities,
          all of which are beneficially owned by Mr. Farley: 73.9 shares of
          Class A Convertible 8% Cumulative Preferred Stock, 26,237.2 shares of
          Common Stock and 62,149.4 shares of Common Stock issuable upon
          exercise of warrants held by Farley, Inc. of which Mr. Farley is the
          sole owner, and 101.5 shares of Class A Convertible 8% Cumulative
          Preferred Stock, 37,481.7 shares of Common Stock and 88,785.0 shares
          of Common Stock issuable upon exercise of warrants held by The
          Retirement Program of Farley, Inc. of which Mr. Farley is the sole
          member of the Pension Investment Committee of the Retirement Program
          of Farley, Inc. Also includes 42.2 shares of Class A Convertible 8%
          Cumulative Preferred Stock, 14,992.7 shares of Common Stock and 35,514
          shares of Common Stock issuable upon exercise of warrants held by FTL
          Investments Inc. of which Mr. Farley is Chairman and Chief Executive
          Officer, and 31.7 shares of Class A Convertible 8% Cumulative
          Preferred Stock, 11,244.5 shares of Common Stock and 26,635.5 shares
          of Common Stock issuable upon exercise of warrants held by Union
          Underwear Pension Plan of which Mr. Farley is the sole member of the
          Pension Investment Committee of the Fruit of the Loom Board of
          Directors. The address of Mr. Farley is 233 South Wacker Drive,
          Chicago, Illinois, 60606. The Percent of Aggregate Voting Rights
          excludes 89,956.1 shares of non-voting Common Stock beneficially owned
          by Mr. Farley which the Company has agreed to issue.

     (7)  Includes 72,223.3 shares of Common Stock issuable upon exercise of
          options. The address of Mr. Cherry is 30 North LaSalle, #2300,
          Chicago, Illinois 60602. The Percent of Aggregate Voting Rights
          excludes 4,497.8 shares of non-voting Common Stock beneficially owned
          by Mr. Cherry which the Company has agreed to issue.

     (8)  Includes 106,542.0 shares of Common Stock issuable upon exercise of
          warrants. The address of Boston Capital Ventures III, L.P. is Old City
          Hall, 45 School Street, Boston, MA 02108. The Percent of Aggregate
          Voting Rights excludes 44,978.1 shares of non-voting Common Stock
          beneficially owned by Boston Capital Ventures III, L.P. which the
          Company has agreed to issue.

     (9)  Represents 153,000 shares of Common Stock held by Elske Bolitho,
          Trustee of Robert W. Bolitho Trust, and 152,000 shares of Common Stock
          held by Elske Bolitho, Trustee of Elske Bolitho Trust. The address of
          Ms. Bolitho is 13376 185th Place N, Jupiter, Florida 33478.

     (10) All of such shares are beneficially owned by Purnendu Chatterjee. Mr.
          Neustaetter is an officer of the Chatterjee Management Group, a
          division of Chatterjee Management Company. Mr. Neustaetter is an
          officer of Chatterjee Management Company. Mr. Neustaetter disclaims
          beneficial ownership of these shares, over which he does not have
          dispositive or voting control. The business address of Mr. Neustaetter
          is c/o Chatterjee Management Company, 888 Seventh Avenue, New York, NY
          10106.

     (11) Includes 172,202.2 shares of Common Stock and 376,721.8 shares of
          Common Stock issuable upon exercise of options held by Charles E.
          Kaegi, M.D., S.C., Defined Contribution Pension Plan and Trust,
          26,990.0 shares of Common Stock held by Charles E. Kaegi, M.D., S.C.,
          Defined Benefit Pension Plan and Trust, 1,700.0 shares of Common Stock
          held by Charles E. Kaegi, M.D., S.C. Profit Sharing Pension Plan and
          Trust, 321,240.0 shares of Common Stock held jointly with Mr. Kaegi's
          wife, and 17,470.0 shares of non-voting Common Stock owned by Mr.
          Kaegi's wife. The


                                                                        Page 31
<PAGE>

          Percent of Aggregate Voting Rights excludes 2,248.9 shares of
          non-voting Common Stock held by Mr. Kaegi which the Company has agreed
          to issue.

     (12) Includes 269,516.5 shares of Common Stock issuable upon exercise of
          options held by Mr. Joyce, 96,620.0 shares of Common Stock and
          52,291.5 shares of Common Stock issuable upon exercise of options held
          by Mr. Joyce's wife, 28,500 shares of Common Stock issuable upon
          exercise of warrants held by Mr. Joyce, 12.9 shares of Class A
          Convertible 8% Cumulative Preferred Stock and 10,867.3 shares of
          Common Stock issuable upon exercise of warrants held by Edward T.
          Joyce, as Trustee of the Edward T. Joyce Ltd. Employees' Profit
          Sharing Plan, and 4.1 shares of Convertible Class A Preferred Stock
          and 3,409.3 shares of Common Stock issuable upon exercise of warrants
          held by Edward T. Joyce, as Trustee of the Individual Retirement
          Account for Edward T. Joyce. The Percent of Aggregate Voting Rights
          excludes 18,058.7 shares of non-voting Common Stock beneficially owned
          by Mr. Joyce which the Company has agreed to issue.

     (13) All such shares are held of record by JK&B Capital and Boston Capital
          Ventures III, L.P. Mr. Kronfeld is a Manager of JK&B Management,
          L.L.C. and General Partner of JK&B Capital, L.P. and JK&B Capital II,
          L.P. The business address of Mr. Kronfeld is c/o JK&B Capital, 205
          North Michigan, Suite 800, Chicago, IL 60601.

     (14) Includes 316,060.3 shares of Common Stock issuable upon exercise of
          options held by Mr. Milligan, and 93,750.0 shares of Common Stock and
          61,225.5 shares of Common Stock issuable upon exercise of options held
          by Mr. Milligan's wife. The Percent of Aggregate Voting Rights
          excludes 1,686.7 shares of non-voting Common Stock beneficially owned
          by Mr. Milligan which the Company has agreed to issue.

     (15) Includes 37,193.7 shares of Common Stock issuable upon exercise of 
          options and 7,990.6 shares of Common Stock issuable upon exercise of
          Warrants.  Also includes 3,165.5 shares of Common Stock and 8.9 shares
          of Class A Convertivle 8% Cumulative Preferred Stock held by LaSalle 
          National Bank, as custodian for Ron Webster IRA Rollover.  The Percent
          of Aggregate Voting Rights excludes 3,165.5 shares of non-voting 
          Common Stock which the compnay has agreed to issue. 

     (16) Includes 51,847.4 shares of Common Stock issuable upon exercise of
          options.

     (17) Includes 3,527.2 shares of Common Stock issuable upon exercise of
          options.

     (18) Includes 34,156.3 shares of Common Stock issuable upon exercise of
          options.

     (19) The address of each such person is c/o the Company, 350 N. Orleans
          Street, Suite 600, Chicago, IL 60654.

     (20) Includes the aggregate of 1,280,567.9 shares of Common Stock issuable
          upon exercise of options and 965,696.5 shares of Common Stock issuable
          upon exercise of warrants. See notes 10, 11, 12, 13, 14, 15, 16, 17 
          and 18 above. The Percent of Aggregate Voting Rights excludes 
          407,682.6 shares of non-voting Common Stock which the Company has 
          agreed to issue.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


TRANSACTION WITH JAMES LOWRY & ASSOCIATES

     On December 9, 1997 the Board of Directors of the Company authorized the
Company to enter into a contract whereby James Lowry & Associates would assist
the Company in the development of a plan to


                                                                        Page 32
<PAGE>

meet Chicago's Minority Business Enterprise/Women Business Enterprise
certification requirements. The contract calls for payment for services rendered
on an hourly basis, but not to exceed $200,000 per annum. Mr. Lowry, who became
a Director of the Company in February 1997, is the President and Chief Executive
Officer and the sole beneficial owner of James Lowry & Associates.


SALE OF CAPITAL STOCK

     In September 1997, pursuant to a Purchase, Joinder and Waiver Agreement
(the "Purchase Agreement"), the Company issued 63.3 shares of Class A
Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share,
and warrants to purchase up to 53,271 shares of Common Stock at a price of
$.000001 per share to Consolidated Communications, whose President and Chief
Executive Officer at such time was Mr. Currey, a Director of the Company at that
time and currently the Company's President and Chief Operating Officer.

     In November 1997, pursuant to a Purchase, Joinder and Waiver Agreement, the
Company issued 9.5 shares of Class A Convertible 8% Cumulative Preferred Stock
at a price of $15,793.84 per share, and warrants to purchase up to 7,990.6
shares of Common Stock at a price of $.000001 per share to Mr. Webster, the
Company's Chief Financial Officer.

     In January 1998, the Company agreed to issue an aggregate of 550,362.2 
shares of Common Stock and an equal number of shares of non-voting Common 
Stock, for a total of 1,100,724.3 shares. These shares are issuable in 
exchange for the initial and debt warrants, which arose from the purchase of 
Class A Convertible 8% Cumulative Preferred Stock and have an assigned value 
of $2,343,746.  The beneficial holder of such shares include Purnendu 
Chatterjee, JK&B Capital, William Farley, Boston Capital Ventures III, L.P., 
Thomas Neustaetter, Edward T. Joyce, David Kronfeld, Glenn W. Milligan and 
Charles E. Kaegi, M.D.

     Also in January 1998, certain shareholders, including Messrs. Milligan,
Joyce and Kaegi purchased an additional 95.4 shares of Class A Convertible 8%
Cumulative Preferred Stock at a price of $15,793.84 per share.

     The Company believes that all transactions set forth above were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties. The Company has adopted a policy whereby all future
transactions between the Company and its officers, directors and affiliates will
be on terms no less favorable to the Company than could be obtained from
unrelated third parties and will be approved by a majority of the disinterested
members of the Board of Directors.


                                                                       Page 33
<PAGE>


                                      PART IV




ITEM 14.    EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND
                                REPORTS ON FORM 10-K



<TABLE>
<CAPTION>
                                                                                                                  PAGE
<S>                                                                                                               <C>
 14. (a)(1)            AUDITED FINANCIAL STATEMENTS
     Report of Independent Public Accountants..................................................................... 35
     Consolidated Balance Sheets as of March 31, 1998 and 1997.................................................... 36
     Consolidated Statements of Income for the years ended March 31, 1998, 1997, and 1996......................... 38
     Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 1998, 1997 and
        1996 ..................................................................................................... 39
     Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996...................... 40
     Notes to Consolidated Financial Statements for the years ended March 31, 1998, 1997 and 1996................. 41
</TABLE>


                                                                        Page 34
<PAGE>


                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
21st Century Telecom Group, Inc.:

     We have audited the accompanying consolidated balance sheets of 21st
Century Telecom Group, Inc. (an Illinois corporation) and subsidiaries as of
March 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1998.  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 financial position of 21st Century
Telecom Group, Inc. and subsidiaries as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles.


                                            Arthur Andersen LLP

Chicago, Illinois
May 15, 1998


                                                                        Page 35
<PAGE>


                          21ST CENTURY TELECOM GROUP, INC.
                            CONSOLIDATED BALANCE SHEETS
                           AS OF MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                             1998                  1997
                                                                                        --------------         -------------
<S>                                                                                     <C>                    <C>
                                          ASSETS
CURRENT ASSETS:
    Cash and cash equivalents.......................................................    $  217,640,238         $   8,230,942
    Accounts receivable from shareholders...........................................                --                86,000
    Accounts receivable from subscribers............................................            10,359                27,480
    Short term investments..........................................................        10,000,000                    --
    Prepayments.....................................................................           168,152               149,250
    Inventory.......................................................................         1,991,690                    --
                                                                                        --------------         -------------
              Total current assets..................................................       229,810,439             8,493,672
PROPERTY, PLANT AND EQUIPMENT:
     Leasehold improvements.........................................................         4,010,868               177,526
     Other property, plant and equipment............................................        16,588,094                69,337
     Less--Accumulated depreciation.................................................        (1,193,236)               (6,934)
                                                                                        --------------         -------------
               Net property, plant and equipment....................................        19,405,726               239,929
OTHER ASSETS:
     Restricted cash collateral reserve.............................................         1,796,880             1,796,880
     Prepaid franchise fees.........................................................         3,505,706             3,216,575
     Debt issuance costs, net of amortization of $218,411...........................         7,668,414                    --
     Deferred franchise costs, net of amortization of $489,093 and $309,641,
          respectively..............................................................           463,989               587,615
     Deferred mapping and design, net of amortization of $58,501 and $12,407,
          respectively..............................................................            79,450                62,037
     Other deferred costs...........................................................             2,000                    --
                                                                                        --------------         -------------
               Total other assets...................................................        13,516,439             5,663,107
                                                                                        --------------         -------------
               Total  Assets........................................................    $  262,732,604         $  14,396,708
                                                                                        --------------         -------------
                                                                                        --------------         -------------

                   LIABILITIES AND PREFERRED AND COMMON EQUITY

CURRENT LIABILITIES:
     Accounts payable...............................................................    $    6,691,683         $     238,775
     Other current liabilities......................................................         1,756,916                    --
     Debentures payable.............................................................            52,702                    --
     Interest payable...............................................................           112,712                    --
     Accounts payable to associated company.........................................           138,080               138,080
                                                                                        --------------         -------------
               Total current liabilities............................................         8,752,093               376,855
NONCURRENT LIABILITIES:
     Debentures payable.............................................................            28,849                81,551
     Interest payable...............................................................            42,203               103,676
     Senior discount notes, net of discount of $159,656,983.........................       203,478,017                    --
                                                                                        --------------         -------------
               Total noncurrent liabilities.........................................       203,549,069               185,227
                                                                                        --------------         -------------
               Total Liabilities....................................................       212,301,162               562,082
REDEEMABLE PREFERRED STOCK:
     Class A convertible 8% cumulative preferred stock, no par value,
         1,380.3 shares outstanding ................................................                --            16,794,963
     13 3/4% senior cumulative exchangeable preferred stock, .01 par value,
        50,000 shares outstanding...................................................        46,492,812                    --
                                                                                        --------------         -------------
               Total................................................................        46,492,812            16,794,963
SHAREHOLDERS' EQUITY:


                                                                        Page 36
<PAGE>

     Class A convertible 8% cumulative preferred stock, no par value,
          1,548.5 shares outstanding................................................        21,751,665                    --

     Voting common stock, no par value, 2,939,105.7, issued and outstanding,
         550,362.2 shares of non-voting common stock issued and outstanding
         and 1,741,738.9 secondary common share warrants outstanding at
         March 31, 1998 and 2,374,343.6 shares of voting common stock outstanding,
         1,161,307.6 secondary common share warrants outstanding and 1,000,966.8
         initial and debt common share warrants (converted to voting and non-voting
         common stock in 1998) at March 31, 1997 ...................................        10,356,136             5,946,904
     Deficit........................................................................       (24,787,871)           (5,522,830)
     Related party purchase, in excess of cost......................................        (3,381,300)           (3,381,300)
     Unearned compensation..........................................................              --                  (3,111)
                                                                                        --------------         -------------
              Total Shareholders' Equity............................................         3,938,630            (2,960,337)
                                                                                        --------------         -------------
              Total Liabilities and Equity..........................................    $  262,732,604         $  14,396,708
                                                                                        --------------         -------------
                                                                                        --------------         -------------
</TABLE>


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

                                                                        Page 37
<PAGE>

                         21ST CENTURY TELECOM GROUP, INC.
                         CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                            YEAR ENDED        YEAR ENDED        YEAR ENDED
                                          MARCH 31, 1998    MARCH 31, 1997    MARCH 31, 1996
                                          --------------    --------------    --------------
<S>                                       <C>               <C>               <C>
Subscriber revenues.....................    $    189,023        $   27,480       $       --
Operating expenses......................       2,023,310           200,911             9,617
Selling, general and administrative
  expenses..............................      10,216,919         2,337,534           694,122
Depreciation and amortization...........       1,411,847           170,108           108,182
                                          --------------    --------------    --------------
     Operating loss.....................     (13,463,053)       (2,681,073)         (811,921)
Amortization of issuance costs on senior
   discount notes.......................        (218,411)               --                --
Interest income.........................       2,373,867           301,624                --
Interest expense........................      (3,722,947)         (437,843)         (214,688)
                                          --------------    --------------    --------------
NET LOSS................................     (15,030,544)       (2,817,292)       (1,026,609)
Preferred stock requirements............      (4,234,463)         (478,981)               --
                                          --------------    --------------    --------------
NET LOSS ATTRIBUTABLE to COMMON
     SHARES.............................    $(19,265,007)      $(3,296,273)      $(1,026,609)
                                          --------------    --------------    --------------
                                          --------------    --------------    --------------
Weighted average common shares
  outstanding...........................       2,615,061         1,988,365         1,609,129
BASIC AND DILUTED LOSS PER WEIGHTED
     AVERAGE SHARE......................    $      (7.37)      $     (1.66)      $      (.64)
                                          --------------    --------------    --------------
                                          --------------    --------------    --------------

</TABLE>






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

                                                                        Page 38
<PAGE>

                         21ST CENTURY TELECOM GROUP, INC.
            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
                                                            CLASS A                    RELATED
                                            COMMON         PREFERRED                    PARTY
                               TOTAL         STOCK           STOCK       DEFICIT       PURCHASE
                             -----------     ------          -----       -------       --------
<S>                          <C>           <C>          <C>           <C>            <C>
BALANCES, MARCH 31, 1995.... $(1,063,121)    $ 138,001     $      --   $(1,199,948)   $        --
Net loss....................  (1,026,609)           --            --    (1,026,609)            --
Stock issuances.............     350,000       350,000            --            --             --
Unearned compensation.......      (8,000)           --            --            --             --
Amortization of unearned
   compensation.............       3,174            --            --            --             --
                             -----------     ------          -----       -------       --------
BALANCES, MARCH 31, 1996....  (1,744,556)      488,001            --    (2,226,557)            --
Net loss....................  (2,817,292)           --            --    (2,817,292)            --
Stock issuances.............   1,421,281     1,421,281            --            --             --
Accrued preferred stock
  dividends.................    (280,795)           --            --      (280,795)            --
Class A preferred stock
  proceeds allocated to
  related common share
  warrants..................   4,324,549     4,324,549            --            --             --
Class A preferred stock
  issuance costs allocated
  to related common shares
  warrants..................    (286,927)     (286,927)           --            --             --
Preferred stock accretion...    (198,186)           --            --      (198,186)            --
Amortization of unearned
  compensation..............       2,889            --            --            --             --
Related party purchase, in
  excess of cost............  (3,381,300)           --            --            --     (3,381,300)
                             -----------  ------------  ------------  ------------   ------------
BALANCES, MARCH 31, 1997....  (2,960,337)    5,946,904            --    (5,522,830)    (3,381,300)
Net loss                     (15,030,544)           --            --   (15,030,544)            --
Reclassification of
  Class  A preferred stock
  to permanent equity.......  16,794,963            --    16,794,963            --             --
Stock issuances.............   2,597,380            --     2,597,380            --             --
Exchange of initial and
  debt warrants for voting
  and non-voting common
  shares....................          --            --            --            --             --
Accrued preferred stock
  dividends.................    (973,958)           --     1,872,892    (2,846,850)            --
Preferrred stock
  accretion.................     (87,014)           --     1,300,633    (1,387,647)            --
Class A preferred stock
  proceeds allocated to
  related common share
  warrants..................          --       825,037      (825,037)           --             --
Class A preferred stock
  issuance costs allocated
  to related common share
  warrants..................          --       (10,834)       10,834            --             --
Exchangeable preferred
  stock proceeds allocated
  to related  common shares
  warrants..................   2,700,000     2,700,000            --            --             --
Exchangeable preferred
  stock issuance costs
  allocated to related
  common share Warrants.....    (106,636)     (106,636)           --            --             --
Stock option accrual........     972,865       972,865            --            --             --
Stock compensation..........      28,800        28,800            --            --             --
Amortization of unearned
  compensation..............       3,111            --            --            --             --
                             -----------  ------------  ------------  ------------   ------------

BALANCES, MARCH 31, 1998.... $ 3,938,630  $ 10,356,136  $ 21,751,665  $(24,787,871)  $ (3,381,300)
                             -----------  ------------  ------------  ------------   ------------
                             -----------  ------------  ------------  ------------   ------------
</TABLE>

<TABLE>
<CAPTION>
                                                           COMMON
                                UNEARNED       COMMON       SHARE      PREFERRED
                              COMPENSATION     SHARES      WARRANTS      SHARES
                              ------------     ------      --------      ------
<S>                           <C>            <C>         <C>           <C>
BALANCES, MARCH 31, 1995....       $(1,174)   1,508,000            --        --
Net loss....................            --           --            --        --
Stock issuances.............            --      175,000            --        --
Unearned compensation.......        (8,000)          --            --        --
Amortization of unearned
   compensation.............         3,174           --            --        --
                              ------------     ------      --------      ------
BALANCES, MARCH 31, 1996....        (6,000)   1,683,000            --        --
Net loss....................            --           --            --        --
Stock issuances.............            --    691,343.6            --        --
Accrued preferred stock
  dividends.................            --           --            --        --
Class A preferred stock
  proceeds allocated to
  related common share
  warrants..................            --           --   1,161,307.6        --
Class A preferred stock
  issuance costs allocated
  to related common shares
  warrants..................            --           --            --        --
Preferred stock accretion...            --           --            --        --
Amortization of unearned
  compensation..............         2,889           --            --        --
Related party purchase, in
  excess of cost............            --           --            --        --
                                    ------  -----------   -----------   -------
BALANCES, MARCH 31, 1997....        (3,111) 2,374,343.6   1,161,307.6        --
Net loss                                --           --            --        --
Reclassification of
  Class  A preferred stock
  to permanent equity.......            --           --            --   1,380.3
Stock issuances.............            --           --            --     168.2
Exchange of initial and
  debt warrants for voting
  and non-voting common
  shares....................            --  1,100,724.4            --        --
Accrued preferred stock
  dividends.................            --           --            --        --
Preferrred stock
  accretion.................            --           --            --        --
Class A preferred stock
  proceeds allocated to
  related common share
  warrants..................            --           --     141,561.3        --
Class A preferred stock
  issuance costs allocated
  to related common share
  warrants..................            --           --            --        --
Exchangeable preferred
  stock proceeds allocated
  to related  common shares
  warrants..................            --           --       438,870        --
Exchangeable preferred
  stock issuance costs
  allocated to related
  common share Warrants.....            --           --            --        --
Stock option accrual........            --           --            --        --
Stock compensation..........            --     14,399.9            --        --
Amortization of unearned
  compensation..............         3,111           --            --        --
                                    ------  -----------   -----------   -------

BALANCES, MARCH 31, 1998....            --  3,489,467.9   1,741,738.9   1,548.5
                                    ------  -----------   -----------   -------
                                    ------  -----------   -----------   -------
</TABLE>

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

                                                                        Page 39
<PAGE>

                          21ST CENTURY TELECOM GROUP, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                             YEAR ENDED       YEAR ENDED       YEAR ENDED
                                                                           MARCH 31, 1998   MARCH 31, 1997   MARCH 31, 1996
                                                                           --------------   --------------   --------------
<S>                                                                        <C>              <C>              <C>
Net loss ................................................................. $ (15,030,544)   $ (2,817,292)    $ (1,026,609)
Adjustments to reconcile net loss to net cash
  Provided by operating activities--
   Depreciation and amortization .........................................     1,411,847         170,108          108,182
   Amortization of debt discount .........................................     3,478,017              --               --
   Amortization of issuance costs on senior discount notes................       218,411              --               --
   Stock compensation ....................................................     1,004,776          44,190               --
   Interest expense related to debenture
     conversions..........................................................            --         147,533          168,762
   Decrease/(Increase) in accounts receivable ............................       103,121         (27,480)              --
   Decrease/(Increase) in prepayments ....................................       (18,902)       (149,250)              --
   Decrease/(Increase) in inventory, .....................................    (1,991,690)             --               --
   (Increase) in prepaid franchise fees ..................................      (289,131)     (3,216,575)              --
   (Increase) in deferred charges.........................................      (121,333)       (361,287)        (338,887)
   Change in intercompany receivable and
     payable,net .........................................................            --        (372,819)         114,964
   Increase in interest payable ..........................................        51,240          15,612           45,926
   (Decrease)/Increase in accounts payable and other accrued liabilities..     3,103,672        (119,707)         201,926
   (Decrease)/Increase in notes payable ..................................            --        (226,930)         111,961
   Other .................................................................            --           3,131            2,548
                                                                           --------------   --------------   --------------
Net cash used in operating activities ....................................    (8,080,516)     (6,910,766)        (611,227)
Cash flows from investing activities--
   Purchase of held-to-maturity securities ...............................   (10,000,000)             --               --
   Purchase of subscribers from affiliate ................................            --      (3,381,300)              --
   Capital expenditures ..................................................   (15,665,047)       (246,863)              --
                                                                           --------------   --------------   --------------
Net cash used by investing activities ..................................     (25,665,047)     (3,628,163)              --
Cash flows from financing activities--
   Payable to bank .....................................................         419,068              --               --
   Proceeds from senior discount notes .................................     200,000,000              --               --
   Issuance costs related to senior discount notes .....................      (7,886,825)             --               --
   Proceeds from issuance of exchangeable preferred stock, net of
     issuance costs ....................................................      48,025,236              --               --
   Cash paid for letters of credit .....................................              --      (1,796,880)              --
   Proceeds from issuance of debentures ................................              --         153,660          266,765
   Proceeds from issuance of Class A preferred stock,
     net of issuance costs .............................................       2,597,380      20,267,604               --
   Proceeds from issuance of common stock...............................              --         144,531          342,000
                                                                           --------------   --------------   --------------
Net cash provided by financing activities...............................     243,154,859      18,768,915          608,765
                                                                           --------------   --------------   --------------
Net increase/(decrease) in cash ........................................     209,409,296       8,229,986           (2,462)
Cash at beginning of period ............................................       8,230,942             956            3,418
                                                                           --------------   --------------   --------------
Cash at end of period ..................................................    $217,640,238     $ 8,230,942       $      956
                                                                           --------------   --------------   --------------
                                                                           --------------   --------------   --------------
</TABLE>

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


                                                                        Page 40
<PAGE>
                 21ST CENTURY TELECOM GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

        FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996 

1.   DESCRIPTION OF BUSINESS: 

     21st Century Telecom Group, Inc. ("21st Century" or the "Company") 
originally known as "21st Century Cable TV, Inc.", is a Chicago-based company 
incorporated in October 1992.  For the year ended March 31, 1998 the Company 
is no longer considered to be in the development stage.

        21st Century is an integrated, facilities-based communications company,
which seeks to be the first provider of bundled voice, video and high-speed
Internet and data services in selected midwestern markets beginning with
Chicago's Area 1.  The City of Chicago has awarded the Company a 15-year
renewable franchise for Area 1.  Area 1 stretches more than 16 miles along
Chicago's densely populated lakefront skyline and includes the affluent
residential neighborhoods of the Gold Coast, Lincoln Park and Dearborn Park and
the nation's second largest business and financial district. The Company has
developed (and has begun to install and activate) an advanced fiber optic
network that employs a Distributed Ring-Star architecture characterized by
fiber-richness, two-way interactivity and SONET-based redundancy and
self-healing attributes (the "DRS Network").  The DRS Network accommodates not
only traditional voice and video applications, but also the rapidly growing
demand for high-speed data services.  The Company believes that its DRS Network
provides the Company with significant strategic advantages that differentiate
21st Century from its competitors, such as improved time-to-market, multiple
revenue streams, enhanced service quality and reliability, and the provisioning
of competitively-priced bundled services. 

     The Company has secured a 15-year renewable attachment agreement with the
Chicago Transit Authority (the "CTA"), which reduces costly and time-consuming
"make-ready" and underground construction for the DRS Network and enables the
Company to install and activate the DRS Network rapidly and efficiently by
taking advantage of access to the CTA's rail systems.  The Company also has
secured pole attachment agreements with Commonwealth Edison Company (the
"Commonwealth Edison") and a subsidiary of Ameritech Corporation ("Ameritech")
which provide 21st Century access to scarce pole space within Area 1 to further
facilitate deployment of its DRS Network.  The decentralized configuration of
the DRS Network, which includes distributed hubs and nodes that act
"intelligently" to route network traffic efficiently, together with the CTA and
the pole attachment agreements, enables network construction to be driven in
large part by market demand and revenue potential in contrast to the
conventional approach of building a system from the headend outward on a
block-by-block basis. To fully exploit this advantage, the Company's sales and
marketing strategy is coordinated with ongoing network construction and focused
on securing bulk contracts with 125-unit or larger multiple dwelling units
("MDUs"). The Company believes that this strategy will help to identify the
optimal sequence of node activation on the DRS Network and tie capital
expenditures directly to revenue-producing subscribers. 

     21st Century has taken significant steps to implement its business plan and
service offerings in Chicago's Area 1. In addition to securing the Area 1
franchise, the CTA attachment agreement and the Commonwealth Edison and
Ameritech pole attachment agreements, the Company has (i) constructed and
activated its network operations center ("NOC"), which includes a video headend
and a data operations center ("DOC"), (ii) completed the northern fiber
transport ring of the DRS Network, extending from the downtown business district
to the northern portions of the city bordering Evanston, (iii) completed tunnel
construction under the Chicago River and begun its southbound fiber transport
ring of the DRS network which will extend to 51st street, (iv) secured
programming content for approximately 170 channels of video and interactive
information programming, (v) constructed and activated portions of the outside
fiber distribution network to reach selected MDUs, (vi) initiated installation
processes, billing, call center and customer care services, (vii) secured
contracts for more than 4,800 residential subscribers (which includes 

                                                                   Page 41
<PAGE>

more than 3,000 new subscribers under 5-year bulk MDU agreements as well as 
subscribers acquired in early 1997 from an affiliated company) and (viii) 
passed with its initial distribution facilities more than 11,900 additional 
potential subscribers. The Company has also entered into a letter of intent 
for the acquisition and installation of the switching and other ancillary 
equipment necessary for it to provide telephony services. 

     The company has been awarded a fifteen year renewable franchise by the
Village of Skokie, Illinois.  The city boundaries of Skokie are contiguous with
a portion of the Chicago area 1 franchise and includes 23,000 homes, 2,800
businesses with 38,000 employees.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 

     The Company's accounting and reporting principles conform to generally
accepted accounting principles.  

     CONSOLIDATION

     The consolidated financial statements include two wholly-owned 
subsidiaries. There have been no significant intercompany transactions or 
activities within or between these subsidiaries through March 31, 1998.

     CASH AND CASH EQUIVALENTS 

    Cash and cash equivalents at March 31,1998 and March 31, 1997, consist of 
cash on hand at certain banks as well as investments with maturities of 90 
days or less.  The investments are stated at cost, which approximates market 
value.  All investments were purchased in accordance with debt restrictions.

    RECEIVABLES 

    Receivables are reflected at their net realizable value. 

    SHORT TERM INVESTMENTS  

    Short term investments are held to maturity and are stated at cost which 
approximates market value.  At March 31, 1998, short term investments consist 
of a bank note with a fixed rate of interest that matures in December 1998.  
This investment was purchased in accordance with debt restrictions.

    INVENTORIES 

    Inventories are stated at the lower of cost or market.  Cost is 
determined using the first-in, first-out method.  Inventory consists 
primarily of converters and modems.  

     PROPERTY, PLANT AND EQUIPMENT 

     Property, plant and equipment are stated at original cost of acquisition or
construction. Costs capitalized for constructed assets consist of direct
materials and labor.  Interest incurred during construction has not been
capitalized, due to the short term nature of the construction projects.

     Repairs of all property, plant and equipment and minor replacements and 
renewals are charged to expense as incurred.  Major replacements and 
betterments are capitalized. 

                                                                   Page 42
<PAGE>

        Property, plant and equipment depreciation is computed on a straight
line basis using estimated useful lives of three to seven years.
 
     During fiscal 1998, leasehold improvements were depreciated on a
straight-line basis over the term of the lease, fifteen years. The Company began
to depreciate leasehold improvements in September 1997.

    DEFERRED FRANCHISE COSTS 

     The Company has deferred franchise costs, including legal costs, associated
with the organization of its business and obtaining the franchises from the City
of Chicago and the Village of Skokie. Deferred franchise costs are being
amortized over five years. 

    DEFERRED MAPPING AND DESIGN COSTS 

     The Company has deferred certain mapping and design costs associated with
strand mapping the Area 1 region within the City of Chicago.  Deferred mapping
and design costs are being amortized over three years. 
   

    DEBT ISSUANCE COSTS

     Costs associated with the issuance of the Company's debt securities (see
Note 6) have been capitalized and are being amortized over five years, using the
effective interest rate method. 
    

    REVENUE RECOGNITION

     The Company recognizes cable television revenues as services are provided
to subscribers.

     OPERATING EXPENSES OTHER THAN INTEREST AND AMORTIZATION 

        From inception to March 31, 1996, operating expenses, except interest
and amortization, had been allocated from a related party through some common
ownership and common management, based on estimates of time spent by management
and employees of the related party on Company activities. The Company's Board of
Directors approved these allocations.  The related party's Board of Directors
did not formally approve these allocations. However, at the time the allocations
were made, the Company's and the related company's Boards contained
substantially the same individuals.  For the year ended March 31, 1996, the
Company also recognized 100% of expenses paid by the related party on behalf of
the Company, as well as 100% of expenses incurred by the Company. Effective
April 1, 1996, the Company began recognizing and paying substantially all of its
own expenses. Therefore, for the years ended March 31, 1998 and 1997, there were
no allocations.

     ACCOUNTING FOR STOCK-BASED COMPENSATION 

         The Company adopted Statement of Financial Accounting Standard (SFAS)
No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. 
However, it continues to recognize compensation cost based on Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 
The fair value disclosures required by SFAS No.123 are shown in Note 11.

                                                                   Page 43
<PAGE>

     EARNINGS PER SHARE 

     For the twelve months ended March 31, 1998, 1997 and 1996, per share
amounts were based on weighted average common shares outstanding of 2,615,061,
1,988,365 and 1,609,129 shares, respectively. 

     Effective for the twelve months ended March 31, 1998, the Company adopted
FAS No. 128, "Earnings per Share".  The retroactive adoption of this standard
for March 31, 1998, 1997 and 1996 did not have an impact on the denominator of
the basic loss per common share given the anti-dilutive effects of including
potential common shares in the denominator of the diluted earnings per share
calculation.  At March 31, 1998, these potential common shares included the
following: (1) 1,302,868.9 common share warrants related to the Class A
Convertible 8% Cumulative Preferred Stock, (2) 438,870 common share warrants
related to 13 3/4% Senior Cumulative Exchangeable Preferred Stock,  (3)
1,250,000 options issued in connection with certain Directors' guarantee of a
loan, (4) 287,829.9 employee vested stock options, (see Note 11), and (5)
18,994.7 common share warrants issued to a financial advisor. The net loss
attributable to common shares on which the basic earnings per share calculation
is based, reflects the net loss increased by the amount of preferred dividends
and accretion related to the Class A Convertible 8% Cumulative Preferred Stock
and 13 3/4% Senior Cumulative Exchangeable Preferred Stock.

     At March 31, 1997, these potential common shares included the following: 
(1) 1,161,307.6 common share warrants related to the Class A Convertible 8% 
Cumulative Preferred Stock, (2) 1,000,966.8 shares of voting and non-voting 
common stock which replaced the initial and debt warrants associated with the 
Class A Convertible 8% Cumulative Preferred Stock as discussed in Note 4, (3) 
1,250,000 options issued in connection with certain Directors' guarantee of a 
loan, and (4) 18,994.7 stock warrants issued to a financial advisor.  At 
March 31, 1996, these potential common shares included 627,199.5 shares 
related to convertible debentures.  The net loss attributabe to common shares 
on which the basic earnngs per share calculation is based for the year ended 
March 31, 1997, reflects the net loss increased by the amount of preferred 
dividends and accretion related to the Class A Convertible 8% Cumulative 
Preferred Stock. 

     CASH FLOW INFORMATION 

     For the periods ending March 31, 1998, 1997 and 1996, the Company has not
paid any income taxes. For the years ending March 31, 1998 and 1997, the Company
paid $193,922 and $274,993, respectively, in interest. For the period ending
March 31, 1996, no interest was paid.    

    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 expenses during the reporting period.
Actual results could differ from those estimates.

    LONG-LIVED ASSETS

        The Company periodically reviews the values assigned to long-lived
assets such as property, plant and equipment and identifiable intangibles to
determine whether any impairments are other than temporary.  If the impairment
is permanent, a loss is recognized.  No impairment losses have been recognized
by the Company.

                                                                   Page 44
<PAGE>

    DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying amount reported in the balance sheets for cash and cash 
equivalents, accounts receivable, short term investments, accounts payable 
and other current liabilities approximates fair value because of the 
short-term maturity of these financial instruments.  The carrying amounts 
reported in the balance sheet for the 12 1/4% Senior Discount Notes and 13 
3/4% Senior Cumulative Exchangeable Preferred Stock approximate fair value 
given the issuance of the debt  and preferred stock in close proximity to the 
balance sheet date. 

    RECLASSIFICATIONS

        Certain prior year balances have been reclassified to conform with the
current year presentation. 


3.   PROPERTY PLANT AND EQUIPMENT

        The components of property, plant and equipment follow:

<TABLE>
<CAPTION>
                                                                   ESTIMATED LIFE
                                            1998         1997          (YEARS)
--------------------------------------------------------------------------------
<S>                                       <C>            <C>       <C>
Transmission and Distribution Systems     $14,994,770    $    -       3 - 7
Leasehold Improvements                      4,010,868     177,526       15
Other Equipment                               641,825      69,337     3 - 5
Furniture and Fixtures                        403,702         -       3 - 5
Construction in Progress                      547,797         -        N/A
                                          -----------    --------
Property, Plant and Equipment, at cost     20,598,962     246,863
      Less Accumulated Depreciation       (1,193,236)     (6,934)
                                          -----------    --------
Net Property Plant and Equipment          $19,405,726    $239,929
                                          -----------    --------
                                          -----------    --------
</TABLE>

      Depreciation and amortization expense related to property, plant and
equipment for March 31, 1998, 1997 and 1996 was $1,186,302, $6,934, and zero,
respectively.

4.   PREPAID FRANCHISE FEES: 

      The Company was required to prepay $3,000,000 of franchise fees within
120 days of being awarded the franchise by the City of Chicago. In accordance
with the franchise agreement, the prepaid franchise fees earn interest for the
period outstanding at a rate equal to the Company's cost of borrowed funds. The
borrowing rate of the Company, at the time of the prepayment, was 10%.  The
interest accrued on the prepaid franchise fees for the years ended March 31,
1998 and 1997, amounted to $299,994 and $216,575, respectively.  These prepaid
franchise fees are reduced as revenues are billed to customers.

5.   RELATED-PARTY TRANSACTIONS: 

                                                                   Page 45
<PAGE>

      The Company is related through some common ownership and common
management to 21st Century Technology Group, Inc.  (Technology). 

      Activities pertaining to the Company's development from its inception
date to March 31, 1996, have, for the most part, been intermingled with the
activities of Technology. As discussed in Note 2, from inception to March 31,
1996, operating expenses, except interest and amortization, have been allocated
to the Company based on estimates of time spent on the Company's activities by
employees of Technology.  The net related affiliate payable to Technology was
$138,080 at March 31, 1998 and 1997.

      In January 1997, the Company purchased Technology's Area 1 subscriber
base and related equipment for $3,381,300. As this is considered to be a related
party transaction, the Company could only capitalize Technology's book value of
the purchased subscribers and the related equipment. As Technology's book value
was zero at the time of purchase, the entire purchase price is shown as a
reduction to shareholders' equity. 

      In January 1997, the Company paid approximately $459,000 of accrued legal
fees to one of its directors, either individually or to entities controlled by
him, for legal services rendered by him to the Company in connection with the
Company's cable service offering and its obtaining the Chicago franchise.

6.   DEBT: 

      A summary of debt outstanding at March 31, 1998 and 1997, is as follows: 

<TABLE>
<CAPTION>

                                                                                  MARCH 31,      MARCH 31,
                                                                                    1998           1997
                                                                               -------------   -----------
     <S>                                                                       <C>             <C>
     Convertible Subordinated Debentures, Series 1, 25%, due 1998 ............ $      52,702   $    52,702
     Convertible Subordinated Debentures, Series 2, 25%, due 1999 ............        28,849        28,849
     12 1/4% Senior Discount Notes Due 2008 ..................................   203,478,017            --
                                                                               -------------   -----------
        Total................................................................. $ 203,559,568   $    81,551
                                                                               -------------   -----------
                                                                               -------------   -----------

</TABLE>

      CONVERTIBLE SUBORDINATED DEBENTURES
                                                     
      Prior to February 1,1997, all subordinated debentures were convertible 
to common stock based on a conversion ratio of $2 to 1 share of common stock. 

      Conversion of $147,298 of the Series 1 convertible debentures occurred 
on May 17, 1996. Conversion of $111,151 of the Series 2 convertible 
debentures occurred on April 28, 1996. Conversion of $150,000 of the Series 3 
convertible debentures occurred on November 14, 1996. Conversion of $200,000 
of the Series 4 convertible debentures and $196,854 of the Series 5 
convertible debentures occurred on January 31, 1997. 

      Total debenture conversions to common stock for Series 1 through 5 
convertible debentures resulted in the issuance of 616,280 additional shares 
of common stock between April 1996 and January 1997. (See "Common Shares" 
footnote for conversion effects on common shares outstanding.)  Subsequent to 
January 31,1997, these debentures are no longer convertible.
                                                     

      12 1/4% SENIOR DISCOUNT NOTES DUE 2008

                                                                   Page 46
<PAGE>

      On February 9, 1998, the Company issued $363,135,000 of 12 1/4% Senior 
Discount Notes due 2008.  The proceeds from the issue were $200,000,000 which 
represent a yield to maturity on the Notes of 12 1/4% (computed on a 
semi-annual bond equivalent basis).  The discount and issuance costs are 
being amortized through February 15, 2003, using the effective interest rate 
method.  Thereafter, cash interest accrues until the notes mature in 2008.   
For the year ending March 31, 1998, the amortized discount totalled 
$3,478,017.  Issuance costs for the transaction totalled $7,886,825.  The 
amount of amortization recognized in the year ended March 31, 1998 was 
$218,411.  The notes are unsecured obligations.

      The notes are redeemable at the Company's option in whole or part, on 
February 15, 2003, 2004 and 2005, at a redemption price of 106.1250, 104.0833 
and 102.0417, respectively and at the principal amount thereafter.  The 
redemption price would also include accrued interest earned through the date 
of redemption. 

      Upon a Change of Control, each holder of Notes may require the Company 
to purchase all or any portion of such holder's Notes at a purchase price 
equal to 101% of the Accreted Value thereof plus accrued and unpaid interest, 
if any, to the date of purchase.  Accreted value means, as of any date, the 
amount for each $1,000 principal amount at maturity of the Senior Discount  
Notes as specified in the terms of the Notes.

      The notes include certain restrictive covenants relating to, among 
other things, limitations on additional indebtedness, payment of dividends, 
investment options, asset sales, liens on assets and mergers and 
consolidations.  The Company is in compliance with the covenants at March 31, 
1998.

      OTHER

      During the period August 1994 to March 1996, the Company signed a 
series of promissory notes aggregating $226,930 at March 31, 1996, with 
Kubasiak, Cremieux, Flystra & Reigers, P.C. (Kubasiak). These notes accrued 
interest at a rate of 9% and were due between February 1, 1995, and September 
1, 1996.  On July 1, 1996, Kubasiak canceled its notes that were outstanding 
as of March 31, 1996, along with additional notes issued through June 1996, 
and consolidated them into a single note, due January 2, 1997. This new note 
was paid in full on December 31, 1996. 

7.   CLASS A CONVERTIBLE 8% CUMULATIVE PREFERRED STOCK: 

<TABLE>
<CAPTION>

                                                  PREFERRED              
                                                    SHARES             AMOUNT      
                                                  -----------       -----------
     <S>                                          <C>               <C>
     March 31, 1996.....................                  --                -- 
     January 30, 1997                                        
               Proceeds.................              1,380.3       $17,475,451
               Issuance costs...........                  --         (1,159,469)
               Accrued dividends........                  --            280,795
               Accretion................                  --            198,186 
                                                  -----------       -----------
     March 31, 1997.....................              1,380.3        16,794,963

     September 23, 1997
               Proceeds.................                 63.3           819,439
               Issuance costs...........                  --            (49,166)
     November 20, 1997                                       
               Proceeds.................                  9.5           121,842
     January 20, 1998                                        

                                                                   Page 47
<PAGE>

               Proceeds.................                 95.4           891,062
     Accrued dividends..................                  --          1,872,892
     Accretion..........................                  --          1,300,633 
                                                  -----------       -----------
     March 31, 1998.....................              1,548.5       $21,751,665 
                                                  -----------       -----------
                                                  -----------       -----------

</TABLE>

   On January 30, 1997 several investors contracted with the Company to purchase
1,380.3 shares of the Company's Class A Convertible 8% Cumulative Preferred
Stock and initial, secondary and debt warrants for a purchase price of
$15,793.84 per share, totaling $21.8 million. A portion of the initial purchase
price was allocated to the common share warrants.  The allocation was based on
the market value of the common stock at the date of the sale of the Class A
Convertible 8% Cumulative Preferred Stock and the number of related secondary
warrants, initial warrants and debt warrants associated with such preferred
stock.  The fair market value of the common stock at the date of the sale was
estimated to be $2 per share.  The number of secondary warrants associated with
the initial purchase amounted to 1,161,307.6.  The number of initial and debt
warrants associated with the initial purchase was based on the number of voting
and non-voting common shares that these warrants were replaced with as a result
of a subsequent amendment to the related stock purchase agreement as discussed
below.  These initial and debt warrants were replaced with 1,000,966.8 shares of
voting and non-voting common stock.  This allocation resulted in $4,324,549 and
$17,475,451 being recorded as common stock and redeemable preferred stock,
respectively, at March 31, 1997.  Issuance costs of $1,446,396 were incurred in
conjunction with the sale of the Class A Convertible 8% Cumulative Preferred
Stock. These issuance costs were allocated between the Class A Convertible 8%
Cumulative Preferred Stock and the related warrants based on the relative
portions of the proceeds allocated to each.  The carrying value of the Class A
Convertible 8% Cumulative Preferred Stock is being accreted to its redemption
value (using the effective interest method) over the four year period from the
date of the original preferred stock purchase agreement to the date the stock
became mandatorily redeemable under the original agreement or the date at which
the Class A preferred shareholders can compel sale of the Company under the
amended agreement, both dates being January 30, 2001.  The Class A convertible
8% Cumulative Preferred Stock is recorded on the balance sheet at the allocated
portion of the purchase price paid by investors, less the allocated portion of
the issuance costs, plus accrued and unpaid preferred stock dividends, plus
accretion.  At March 31, 1997, certain of the provisions of the agreement were
as follows:
 
      - Each preferred share is convertible into one thousand common shares. 

      - Dividends accrue daily on the aggregate amount paid at an 
        annual rate of 8%. Unpaid dividends compound on a semi-annual basis 
        on June 30 and December 31. At the consummation of a qualified 
        public offering, all accrued and unpaid dividends would be 
        converted into common stock without the issuance of additional 
        shares. A qualified public offering is one in which (1) the public 
        purchases at least $25 million of common stock, (2) the price per 
        share paid is at least twice the liquidation value per share of the 
        Class A Convertible 8% Cumulative Preferred Stock, (3) the common 
        stock is traded on a national exchange or The Nasdaq Stock Market, 
        and (4) the shares issued and sold represent at least 20% of the 
        common stock outstanding after the public offering. 
         
      - Upon consummation of a qualified public offering, all 
        preferred shares are required to be converted into common shares. 

      - At any time after the fourth anniversary of the date of the 
        purchase and before the earlier of the date of the consummation of 
        a qualified public offering or the seventh anniversary of the date 
        of the purchase, each holder of the stock has the right from time 
        to time to require the Company to repurchase all, but not less than 
        all, of their shares held (the put arrangement). The shares would 
        be repurchased by the Company for the greater of: (1) the purchase 
        price paid by the holder of the stock, plus all accrued and unpaid 
        dividends, or (2) the market value of the shares. 

                                                                   Page 48

<PAGE>

      - "Initial Warrants" were granted to the investors who may 
        increase their ownership percentage up to another 12%. 
        These warrants expire on May 31, 2008. The warrants are exercisable at 
        $.000001 per share of common stock only if the Company does not 
        meet certain pre-established performance indicators. The Company 
        has until May 31, 1998 to meet these performance indicators. 

      - "Secondary Warrants" to purchase up to 1,331,774.8 shares 
        of common stock at $.000001 per share of common stock were also 
        granted to the investors. These secondary warrants expire on 
        January 30, 2007. 

      - "Debt Warrants", in addition to the initial and secondary 
        warrants discussed above, will vest to the new investors if the 
        Company does not receive Board of Director approval by July 31, 
        1997, for a $50 million senior debt financing arrangement. Under 
        this provision the Company is to issue warrants to purchase shares 
        representing 2% of the outstanding common stock on the first day of 
        each month until the definitive document with respect to such debt 
        is in place. Any such warrants issued would expire ten years from 
        the date of issue. Any debt warrants would also be exercisable at 
        $.000001 per share of common stock. 

       During December 1997, the Company and its Class A Convertible 8%
Cumulative Preferred Stock shareholders negotiated a number of changes to the
original Stock Purchase Agreement. These changes were formally ratified on
January 8 and 14, 1998.  The original put arrangement as discussed above was
removed and was replaced by the right of the Class A preferred shareholders to
require the sale of the Company. The new provision provides that at any time and
from time to time after the fourth anniversary of the date of issuance of the
senior discount notes and senior cumulative exchangeable preferred stock and
ending on the earlier to occur of the consummation of a qualified public
offering and the seventh anniversary of the date of issuance of the senior
discount notes, the Class A preferred shareholders have the right to require the
sale of the Company. The liquidation value of the preferred stock is the sum of
the original cost plus any accrued and unpaid dividends. The right to obtain
additional common shares under the initial warrant and debt warrant provisions
as discussed above was removed and was replaced by an agreement to increase the
Class A preferred shareholders ownership on a fully diluted basis by an
additional 8% by issuing additional common stock. One-half of this additional
stock is voting and the other half is non-voting.   A portion of the proceeds
and issuance costs associated with the sale of the Class A Convertible 8%
Cumulative Preferred stock were allocated to the initial and debt warrants and
reflected in common stock at March 31, 1997. 
   
      In addition, the holders of the Class A preferred stock are collectively
in a position to control the taking of many significant corporate actions by the
Company, including the making of any significant capital commitments, the
incurrence of any significant indebtedness, merger and the payment of dividends
on the common stock, pursuant to agreements which provide that prior to taking
such actions, the Company will need to obtain the approval of the nominees to
the Board of Directors of the holders of the Class A preferred stock. These
rights have been modified by the covenants related to the 12 1/4% Senior
Discount Notes (see Note 6).

      Of the $21.8 million for the related January 30, 1997 sale, $21.7 million
was received by March 31, 1997, with the remainder received by April 22, 1997.
The purchase resulted in the preferred shareholders having an approximate 37%
ownership interest in the Company on a fully diluted basis excluding the
contingently issuable common shares from the exercise of the initial warrants
and the debt warrants. The proceeds from this preferred stock offering were used
to (1) repay a $5 million revolving credit note to LaSalle Northwest National
Bank, (2) purchase the subscriber base of a related party located in the Chicago
franchise area for $3,381,300, (3) retire existing Company debt and accounts
payable in the amount of $541,166, and (4) pay transaction costs of $1,446,396.
The balance of the proceeds were used 

                                                                   Page 49
<PAGE>

for working capital and capital expenditures to build the network, operating 
center and network infrastructure. 

      On  September 23 and November 20, 1997 and January 20, 1998,  several 
investors contracted with the Company to purchase 63.3, 9.5 and 95.4 shares, 
respectively, of the Company's Class A Convertible 8% Cumulative Preferred 
Stock and initial, secondary and debt warrants for a purchase price of 
$15,793.84 per share, totaling approximately $2.6 million.  A portion of the 
initial purchase price was allocated to the common share warrants.  The 
allocation was based on the market value of the common stock at the date of 
the sale of the Class A Convertible 8% Cumulative Preferred Stock and the 
number of related secondary initial and debt warrants associated with such 
preferred stock. The fair market value of the common stock at the date of the 
sale was estimated to be $2 per share for the September 23 and November 20, 
1997 sales and $4.50 per share for the January 20, 1998 sale.  The number of 
secondary warrants associated with the three purchases amounted to 53,271, 
7,990, and 80,300 respectively.  The number of initial and debt warrants 
associated with the three purchases was based on the number of voting and 
non-voting common shares that these warrants were replaced with as a result 
of the amendment to the related stock purchase agreement as discussed above.  
These initial and debt warrants were replaced with 37,009, 6,089 and 56,660 
shares of voting and non-voting common stock respectively.  This allocation 
resulted in $180,561, $28,158 and $616,318 being recorded as common stock on 
the three sales dates respectively and $819,439, $121,842 and $891,062 being 
recorded as class A preferred stock on the three sales dates, respectively.  
Issuance costs of $60,000 were incurred in conjunction with the sale of the 
Class A Convertible 8% Cumulative Preferred Stock on September 23, 1997.  
These issuance costs were allocated between the Class A Convertible 8% 
Cumulative Preferred Stock and the related warrants based on the relative 
portions of the proceeds allocated each.  The purchases were based on the 
same terms as those previously mentoned for the $21.8 million preferred stock 
issuance.

8.    13 3/4%  SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK

<TABLE>
<CAPTION>
                                                    PREFERRED
                                                      SHARES           AMOUNT
                                                    ---------       -----------
     <S>                                            <C>             <C>
     February 9, 1998
           Proceeds ...........................        50,000       $47,300,000
           Issuance costs .....................           --         (1,868,126)
     Accrued dividends ........................           --            973,924
     Accretion ................................           --             87,014
                                                    ---------       -----------
     March 31, 1998 ...........................        50,000       $46,492,812
                                                    ---------       -----------
                                                    ---------       -----------
</TABLE>

   On February 9, 1998, 50,000 shares of 13 3/4% Senior Cumulative Exchangeable
Preferred Stock Due 2010 and related common share warrants were issued.  The net
proceeds received were $48,025,236.  The Exchangeable Preferred Stock will rank
senior to all other classes of equity securities of the Company.
   
   The value of the 438,870 common stock warrants issued, $2,605,000, has been
allocated to common shareholders' equity (see Note 9).  
   
   The carrying value of  the 13 3/4% Senior Cumulative Exchangeable 
Preferred Stock is being accreted to its redemption value (using the 
effective interest method) over the five year period from the date of issue 
to the date the stock first becomes redeemable, February 15, 2003.  The 13 
3/4% Senior Cumulative Exchangeable Preferred Stock is recorded on the 
balance sheet at the allocated portion of the purchase price paid by 
investors, less the allocated portion of the issuance costs, plus accrued and 
unpaid dividends, plus accretion.
   
   On or prior to February 15, 2001, the Company may redeem in whole but not 
in part, the outstanding Exchangeable Preferred Stock at a redemption price 
of 113 3/4% of the liquidation preference ($1,000 per share) plus accumulated 
unpaid dividends to date of redemption with the net proceeds of an Equity 
Offering.  An equity offering means either (a) an underwritten primary public 
offering of common stock of the Company pursuant to an effective registration 
statement under the Securities Act or (b) a primary 

                                                                   Page 50
<PAGE>

offering of capital stock (other than disqualified stock) of the Company to 
one or more persons primarily engaged in related business.  On February 15, 
2003, 2004, 2005 and 2006 (and thereafter), at a redemption price of 
106.8750%, 104.5833%,102.2917% and 100%, respectively, of the liquidation 
preference ($1,000 per share) plus accumulated unpaid dividends, the 
Exchangeable Preferred Stock may be redeemed in whole, or in part, at the 
Company's option.  On February 15, 2010, the Exchangeable Preferred Stock is 
mandatorily redeemable.

         In the event of a change of control, the Company shall offer to
purchase all outstanding shares of Exchangeable Preferred Stock, in whole or in
part, at a purchase price equal to 101% of the aggregate liquidation preference
($1,000 per share) thereof, plus accumulated and unpaid dividends, if any to the
date of purchase.
   
   Dividends are payable quarterly on February 15, May 15, August 15 and
November 15.  Dividends are payable in cash except that on or prior to February
15, 2003, dividends may be paid by the issuance of additional shares of
Exchangeable Preferred Stock at the Company's option.
   
   The restrictive covenants are similar to those indicated for the 12 1/4%
Senior Debenture Notes in Note 6 apply to the Exchangeable Preferred Stock.  The
Company is in compliance with these covenants at March 31, 1998. 

9.   COMMON SHARES 

      On January 9, 1998, the common shareholders approved an amendment to the
Articles of Incorporation to increase the number of authorized common shares to
50,000,000 from 1,000,000. On the same date, the directors of the Company
declared a 1,000 for 1 share split of the Company's issued and outstanding
common shares. All common share amounts and per share amounts have been restated
to reflect this amendment and related split. 

      On January 9, 1998, the Company obtained the approval of the common
shareholders for an amendment to the Articles of Incorporation to authorize
1,000,000 shares of non-voting common stock.

      At March 31, 1998 and 1997, the Company had 50,000,000 shares of no par
common stock authorized, of which 3,489,467.9 and 2,374,343.6 are issued and
outstanding, respectively. 

      Changes in the Company's common shares and related amounts during the
three years ended March 31, 1998, are as follows: 

<TABLE>
<CAPTION>

                                               COMMON 
                                               SHARES                 AMOUNT
                                              --------             -----------
     <S>                                      <C>                  <C>

               March 31, 1995.......         1,508,000.0           $   138,001
     September 20, 1995.............           171,000.0               342,000
     October 17, 1995...............             4,000.0                 8,000
                                              --------             -----------
               March 31, 1996.......         1,683,000.0               488,001
     April 28, 1996.................            84,490.0               168,980
     May 17, 1996...................           146,540.0               293,080
     November 14, 1996..............           115,410.0               230,820
     January 28, 1997...............            75,063.6               188,721
     January 30, 1997...............              --                 4,037,622


                                                                   Page 51
<PAGE>

     January 31, 1997...............         269,840.0                 539,680
                                           -----------             -----------
         March 31, 1997.............       2,374,343.6               5,946,904
     September 23, 1997.............              --                   169,727
     November 20, 1997..............              --                    28,158
     January 20, 1997...............       1,100,724.4                      --
     January 20, 1998...............              --                   616,318
     February 9, 1998...............              --                 2,593,364
     February 9, 1998...............          14,399.9                  28,800
     Compensation expense related 
      to stock option plan                        --                   972,865
                                           -----------             -----------
        March 31, 1998..............       3,489,467.9             $10,356,136
                                           -----------             -----------
                                           -----------             -----------
</TABLE>

      On September 20, 1995, the Company sold 171,000 shares of common stock to
various third-party investors for $342,000 at an estimated fair value of $2 per
share. On October 17, 1995, the Company issued 4,000 shares of restricted stock,
to an officer of the Company, at an estimated fair value of $2 per share. 

   As discussed earlier, Series 1 through 5 of the Company's convertible
debentures were converted to common stock throughout the year ended March 31,
1997. On April 28, 1996, debenture conversions of $111,151 in principal and
$57,829 in related interest resulted in the issuance of 84,490 shares of common
stock. On May 17, 1996, debenture conversions of $147,298 in principal and
$145,782 in related interest resulted in the issuance of 146,540 shares of
common stock. On November 14, 1996, debenture conversions of $150,000 in
principal and $80,820 in related interest resulted in the issuance of 115,410
shares of common stock. On January 31, 1997, debenture conversions of $396,854
in principal and $142,826 in related interest resulted in the issuance of
269,840 shares of common stock. The impacts of these noncash financing
activities are not included in the net cash provided or used by operating or
financing activities in the statements of cash flows. 

      The Company also had an arrangement with a law firm to compensate it for
its professional services by issuing 2,797.9 shares of common stock to it at a
per share price of $15.79, which was based upon the offering price of the
Company's preferred stock offering discussed below. The shares were issued on
January 28, 1997. 

      Also on January 28, 1997, certain shareholders of a related party were
allowed to purchase shares of the Company's common stock with the proceeds from
their loan repayment from the related party. This transaction resulted in the
issuance of 72,265.7 shares of additional common stock, at $2 per share. 

      As discussed in Note 7, portions of the proceeds and issuance costs
associated with the January 30, 1997 sale of Class A Convertible 8% Cumulative
Preferred Stock were allocated to the related common share warrants.  This
allocation resulted in a net amount of $4,037,622 being recorded as common
equity at March 31, 1997 (see Note 7 for additional discussion related to the
allocation of the proceeds and issuance costs).  Certain of the common stock
warrants were replaced with voting and non-voting common stock.  These shares
were reflected as outstanding on January 20, 1998.

      In order to prepay the City's franchise fees, mentioned above, the
Company requested and received a $5 million Loan and Security Agreement on June
21, 1996, with LaSalle Northwest National Bank which expired on January 1, 1997.
The Company paid the loan including interest on January 31, 1997. Certain
members of the Company's Board of Directors had individually guaranteed the full
line of credit. The Company, in return for the Directors' guarantees, issued to
the Directors options to acquire 1,250,000 


                                                                   Page 52
<PAGE>

additional common shares of the Company, at a price of $4 per share, 
exercisable until the expiration date of June 30, 2006. As of March 31, 1998, 
all options are outstanding. 

      In February 1997, the Company issued stock warrants representing 
18,994.7 shares to its financial advisor at an exercise price of $15.79, 
aggregating $300,000. The exercise price was based upon the offering price of 
the Company's preferred stock offering previously discussed. As of March 31, 
1997, all warrants are outstanding. 

      Also discussed in Note 7, portions of the proceeds and issuance costs 
associated with the September 23 and November 20, 1997 and January 20, 1998 
sales of Class A Convertible 8% Cumulative Preferred Stock were allocated to 
the related common share warrants.  These allocations resulted in net amounts 
of $169,727, $28,158 and $616,318 being recorded as common equity on 
September 23 and November 20, 1997 and January 20, 1998 respectively (see 
Note 7 for additional discussion related to the allocation of the proceeds 
and issuance costs).  Certain of the common stock warrants were replaced with 
voting and non-voting commom stock.  These shares were reflected as outstanding
on January 20, 1998.

      On January 20, 1998, as a  result of the amended Class A Convertible 8% 
Cumulative Preferred Stock purchase agreement (formally ratified in January 
1998 and discussed in Note 7)  550,362.2 voting and 550,362.2 non-voting 
shares were effectively issued.  These shares replaced the initial and debt 
warrants associated with the Class A Preferred Stock.  The value associated 
with these warrants was recorded on the related purchase dates of the 
Preferred Stock: January 30, September 23, and November 20, 1997, and January 
20, 1998.

      On February 9, 1998, certain Company officers received common shares as
part of their compensation.  Total shares issued were 14,399.9 at $2 per
share.  Also on February 9, 1998, as discussed in Note 8, portions of the
proceeds and issuance costs from the sale of 13 3/4% Exchangeable Preferred
Stock were allocated to the related common share warrants.

      During 1998, as a result of the stock based compensation plan (see Note
11) 287,829.9 shares were vested to certain officers.  Compensation expense
recognized per option was $3.38.

10.  RESTRICTED STOCK AWARDS: 

      The Company awarded restricted stock to certain officers. The restricted
shares vest over a 33-month period. Vested shares were subject to certain
transfer restrictions and forfeiture under certain circumstances. Unearned
compensation, representing the fair value of the stock on the date of award
(estimated at $2 by management), was amortized to salary expense over the
vesting period. During the period from inception to March 31, 1994, 8,000 shares
of restricted stock were issued and were fully vested on March 31, 1996. In
October 1995, an additional 4,000 shares of restricted stock were awarded. 
During year ended March 31, 1998, the awarded unvested shares were forfeited.   

                                                                   Page 53
<PAGE>

11.   STOCK BASED COMPENSATION PLANS

      Effective January 30, 1997, the Company established a common stock option
plan.  No options were granted under the plan until October 14, 1997.  728,667.8
options were originally granted under the terms of the plan.  The options vest
over 48 months and expire after ten years. The vesting period starts from the
date of employment with the beginning vesting dates ranging from November 11,
1992 to December 26, 1997. The Company accounts for the plans under APB Opinion
No. 25, under which $972,865 of compensation expense was recognized in the year
ended March 31, 1998 relating to stock option awards to employees.  Had
compensation cost for such stock option awards under the plan been determined
consistent with  SFAS No. 123, the Company's net loss, net loss attributable to
common shares and basic and diluted loss per share would have been increased to
the following pro forma amounts:

<TABLE>
<CAPTION>
                                                       1998
                                                       -----
     <S>                           <C>             <C>
     Net Loss:                     As Reported     ($15,030,544)
                                   Pro Forma       ($15,102,676)

     Net Loss Attributable to      As Reported     ($19,265,007)
     Common Shares:                Pro Forma       ($19,337,139)

     Basic and Diluted             As Reported           ($7.37)
     Loss per Share:               Pro Forma             ($7.39)

</TABLE>

     A summary of the status of the Company's stock option plan at March 31,
1998 and changes during the year is presented below:           

<TABLE>
<CAPTION>

                                          
                                                      1998
                                                      ------
                                                           Wtd Avg.        Wtd Avg
                                            Shares         Ex Price      Fair Value
                                           ---------       ---------     ----------
  <S>                                      <C>             <C>           <C>
  Outstanding at beginning of year             --             --              -- 
  Granted                                  728,667.8           1.12          4.50
  Exercised                                    --             --              -- 
  Forfeited                                 36,433.2           1.12          4.50
  Expired                                      --             --              -- 
  Canceled                                     --             --              -- 
                                           ---------
         Outstanding at end of year        692,234.6                
                                           ---------
         Exercisable end of year           287,829.9                

</TABLE>

                                                                   Page 54
<PAGE>

     The 728,667.8 options granted in fiscal year 1998 have an exercise price 
of $1.12, with a weighted average remaining contractual life of 9.6 years. At 
March 31, 1998, 287,829.9 options were exercisable.
                                          
     The fair value of each option grant is estimated at the beginning of the 
vesting period (date of employment) using the Minimum Value option pricing 
model with the following weighted-average assumptions used for the option 
grants in 1998:  risk-free interest rate of 6.4 percent; expected dividend 
yields of zero percent; expected life of ten years; expected volatility of 
zero percent.  Zero percent volatility is used as the company's common stock 
is not publicly traded.
                                          
12.  INCOME TAXES:  
                                          
     The Company uses an asset and liability approach to account for income 
taxes. Deferred income taxes (credit) reflect the impact of temporary 
differences between amounts of assets and liabilities for financial reporting 
purposes and such amounts as measured by tax laws. These temporary 
differences are determined in accordance with Statement of Financial 
Accounting Standards (FAS) No. 109, "Accounting for Income Taxes." The 
temporary differences and net operating loss carryforward, which give rise to 
deferred tax assets at March 31, 1998 and 1997, are as follows: 

<TABLE>
<CAPTION>


                                                  MARCH 31, 1998     MARCH 31, 1997 
                                                    DEFERRED TAX      DEFERRED TAX
                                                 ASSET/(LIABILITY)  ASSET/(LIABILITY)
                                                 -----------------  ---------------
       <S>                                       <C>                <C>
       Accrued vacation......................        $      77,357   $        -- 
       Stock option expense..................              386,227            -- 
       Property, plant and equipment                               
         depreciation expense................             (588,411)           -- 
       Accretion of discount on senior                             
         discount notes......................            1,374,974            -- 
       Amortization of debt issuance costs                         
         related to senior discount                                
         notes...............................               43,297            -- 
       Net operating loss carryforward ......            6,619,846      1,969,962
       Valuation allowance ..................           (7,913,290)    (1,969,962)
                                                 -----------------  ---------------
                                                     $          --   $         --
                                                 -----------------  ---------------
                                                 -----------------  ---------------
</TABLE>

     The provision (credit) for income taxes is summarized as follows: 

<TABLE>
<CAPTION>

                                     YEAR ENDED      YEAR ENDED       YEAR ENDED 
                                  MARCH 31, 1998  MARCH 31, 1997   MARCH 31, 1996 
                                  --------------  --------------   ---------------
             <S>                  <C>             <C>              <C>
             Current--
                 Federal ......     $        --     $        --      $        -- 
                 State ........              --              --               -- 
             Deferred--
                 Federal ......      (4,850,473)        (896,666)        (327,033)
                 State ........      (1,092,854)        (202,026)         (73,683)
                                  --------------  --------------   ---------------
                                     (5,943,327)      (1,098,692)        (400,716)
       Valuation allowance ....       5,943,327        1,098,692          400,716 
                                  --------------  --------------   ---------------
                                    $        --     $         --     $         --
                                  --------------  --------------   ---------------
                                  --------------  --------------   ---------------
</TABLE>

                                                                   Page 55
<PAGE>

     The income tax provision (credit) differs from amounts at the statutory 
federal income tax rate as follows: 

<TABLE>

                                           YEAR ENDED    YEAR ENDED       YEAR ENDED
                                        MARCH 31, 1998  MARCH 31, 1997  MARCH 31, 1996
                                        --------------  -------------- ----------------
       <S>                              <C>             <C>            <C>
       Income tax provision (credit) at                               
         statutory rate ..............   $  (5,260,690) $   (986,052)  $  (359,313)
       Meals and entertainment ........         14,993        19,210         6,642
       Disallowed portion of original                               
         issue discount on senior                                    
         discount notes.................        5,799           --            -- 
       State income taxes .............      (703,429)     (131,850)      (48,045)
       Valuation allowance ............     5,943,327     1,098,692       400,716
                                        --------------  -------------- ----------------
       Income tax provision (credit) as
         reported ....................    $        --    $       --     $      --
                                        --------------  -------------- ----------------
                                        --------------  -------------- ----------------

</TABLE>

     At March 31, 1998, the Company had cumulative tax net operating loss 
carryforwards aggregating $19,835,995 expiring between 2009 and 2013. At March 
31, 1998, the Company had recorded a valuation allowance related to its net 
deferred tax assets aggregating $7,913,289.
                                         
13.  COMMITMENTS AND CONTINGENCIES: 
                                          
     The Company obtained two letters of credit totaling $1,796,880. The 
first letter, for $500,000, was obtained as part of the Chicago franchise 
agreement mentioned earlier.  The second letter is for the benefit of the 
Merchandise Mart totaling $1,296,880 and was obtained in place of a security 
deposit related to the Merchandise Mart lease. These letters of credit are 
fully collateralized by cash, which is reflected as a restricted cash 
collateral reserve on the balance sheet. The Company invests the cash in 
commercial paper which matures daily. As of March 31, 1998 and 1997, the 
commercial paper investments had earned $95,505 and $11,411, respectively, in 
interest income. 
                                          
     The Company entered into a 15-year lease, dated January 31, 1997 (the 
"Apparel Lease") for its headquarters and NOC. The Apparel Lease which covers 
32,422 square feet, will be increased on July 1, 1998 to cover 40,397 square 
feet.
                                          
     As of March 31, 1998, the aggregate minimum rental commitments under 
this and other lease agreements were as follows:

<TABLE>
<CAPTION>

                                                                                                                              TOTAL
    DESCRIPTION OF LEASE           1999         2000           2001         2002        2003       THEREAFTER       COMMITMENTS
    <S>                          <C>          <C>            <C>          <C>         <C>          <C>
    Facilities Lease             $626,729     $676,662       $735,152     $789,388    $870,454      $9,763,046      $13,461,431
    Equipment Leases              172,397      172,397        114,604            -           -               -          459,398
    Hub Site Leases                22,898       23,552         24,268       17,603      10,272          70,805          169,398
    Pole Leases                    21,040       21,040         21,040       21,040      21,040          21,040          126,240
    Office Equipment               16,615       15,829          9,443            -           -               -           41,887
                                 --------     --------       --------     --------    --------      ----------      -----------
         Totals                  $859,679     $909,480       $904,507     $828,031    $901,766      $9,854,891      $14,258,354
                                 --------     --------       --------     --------    --------      ----------      -----------
                                 --------     --------       --------     --------    --------      ----------      -----------
</TABLE>


                                                                   Page 56
<PAGE>

     Rent expense under operating leases was $662,753, $55,152 and $34,266 
for the years ended March 31 1998, 1997 and 1996 respectively. 

     In March 1998, the Company signed a purchase agreement with Nortel for
telecommunication equipment.  This agreement covers three years and the 
purchase of a minimum of $25,000,000 of equipment during the three year 
period.

14.  SUBSEQUENT EVENTS: 
                                              
      After March 31, 1998, certain officers of the Company forfeited 
48,489.1 common shares options.
                                          
     On April 14, 1998, the Company's Board of Directors approved a stock 
option plan for a total of 531,200 shares of common stock.  The plan 
specifies 331,200 shares for two named executive officers, 150,000 shares to 
be awared to key management employees and 50,000 shares for all employees.
                                          
     On April 16, 1998, the Company paid an initial fee of $500,000 as part 
of the negotiation for a $50,000,000 revolving credit facility.
                                          
     In April 1998, pursuant to a Purchase, Joinder & Waiver Agreement, the 
Company agreed to issue 6.3316 shares of Class A Convertible 8% Cumulative 
Preferred Stock at a price of $15,793.84 per share and warrants to purchase 
5,327.1 shares of Common Stock at a price of $.000001 per share to Wendy 
Dietze, Managing Director of Credit Suisse First Boston Corporation. In 
addition, 2,248.9 shares of voting common stock and 2,248.9 shares of 
non-voting common stock will be issued in conjunction with this sale.
                                          
     On May 15, 1998, the Company issued 1,833.33 additional shares of 
Exchangeable Preferred Stock as the quarterly dividends on the 13 3/4% Senior 
Cumulative Exchangeable Preferred Stock Due 2010.  
                                          

                                                                   Page 57
<PAGE>
                                          
15.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     
                                      YEAR ENDING MARCH 31, 1998
                                      ---------------------------
                              1ST QTR     2ND QTR          3RD QTR      4TH QTR
--------------------------------------------------------------------------------
<S>                       <C>           <C>             <C>           <C>
Subscriber Revenues       $    42,497   $    37,158     $    43,877   $    65,491

Operating Loss            $(1,203,601)  $(2,190,282)    $(4,816,430)  $(5,252,740)

Net Loss Attributable 
  to Common Shares        $(1,920,941)  $(2,638,655)    $(5,573,193)  $(9,132,218)

Basic and Diluted Net Loss 
  per Weighted 
  Average Share           $     (0.81)  $     (1.11)    $     (2.33)  $     (2.74)

</TABLE>

<TABLE>
<CAPTION>
                                        YEAR ENDING MARCH 31, 1997
                                        --------------------------
                              1ST QTR     2ND QTR          3RD QTR      4TH QTR
--------------------------------------------------------------------------------
<S>                       <C>           <C>             <C>           <C>
                                                                     
Subscriber Revenues       $        -    $       -       $        -    $    27,480

Operating Loss              (336,403)     (485,593)      (1,056,491)     (802,586)

Net Loss Attributable 
  to Common Shares        $ (424,169)   $( 530,115)     $(1,158,428)  $(1,183,561)

Basic and Diluted Net Loss 
  per Weighted 
  Average Share           $    (0.23)   $    (0.28)     $     (0.59)  $     (0.52)

</TABLE>


     Quarterly EPS figures may not total EPS for the year due to the changes 
in the number of shares outstanding.

                                                                   Page 58
<PAGE>

16.  NEW ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE:
                                          
     In June 1997, the Financial Accounting Standards Board (FASB) issued 
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, 
"Disclosures about Segments of an Enterprise and Related Information," 
effective for periods beginnng after December 15, 1997.  These statements do 
not affect the accounting recognition or measurement of transactions, but 
rather require expanded disclosures regarding  financial results.  The 
Company will adopt these standards in 1998 as required by FASB.

                                                                   Page 59

<PAGE>

ITEM 14(a)(3)   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                         
Exhibit No.                        Document
-------------------------------------------------------------------------------
<S>                                <C>
 3.1*                              Amended Articles of Incorporation 
-------------------------------------------------------------------------------
 3.2*                              By-laws
-------------------------------------------------------------------------------
 4.1*                              Indenture dated February 15, 1998 between
                                   the Company, as Issuer, and State Street
                                   Bank and Trust, as Trustee, with respect to
                                   the 12 1/4 Senior Discount Notes Due 2008
-------------------------------------------------------------------------------
 4.2*                              Form of the 12 1/4 Senior Discount Notes Due
                                   2008
-------------------------------------------------------------------------------
 4.3*                              Indenture dated as of February 15, 1998
                                   between the Company and IBJ Stirred Bank &
                                   Trust Company, as Trustee, with respect to
                                   the Exchange Debenture
-------------------------------------------------------------------------------
 4.4*                              Form of the 13 3/4 Senior Cumulative
                                   Exchangeable Preferred Stock Due 2010
-------------------------------------------------------------------------------
 4.5*                              Registration Rights Agreement dated as of
                                   February 2, 1998 by and among the Company
                                   and Credit Suisse First Boston Corporation,
                                   BancAmerica Robertson Stephens and
                                   BancBoston Securities, Inc., as Initial
                                   Purchasers*
-------------------------------------------------------------------------------
10.1*                              Franchise Agreement dated as of June 24,
                                   1996 by and among the City of Chicago and
                                   the Company
-------------------------------------------------------------------------------
10.2*                              License Agreement dated as of October 27,
                                   1994 by and among the Chicago Transit
                                   Authority and the Company
-------------------------------------------------------------------------------
10.3*                              CSG Master Subscriber Management System
                                   Agreement dated as of May 28, 1997 by and
                                   among CSG Systems, Inc. and the Company
-------------------------------------------------------------------------------
10.4*                              Telemarketing Consultation Agreement dated
                                   as of August 5, 1997 by and among the
                                   Company and ITI Marketing Services, Inc.
-------------------------------------------------------------------------------
10.5*                              Pole Attachment Agreement dated as of April
                                   3, 1996 by and among the Company and
                                   Commonwealth Edison Company
-------------------------------------------------------------------------------
10.6*                              Pole Attachment Agreement dated as of
                                   November 14, 1998 by and among the Company
                                   and Ameritech--Illinois
-------------------------------------------------------------------------------
10.7*                              Office Lease dated January 31, 1997 by and
                                   among the Company and LaSalle National Bank
-------------------------------------------------------------------------------
10.8*                              Franchise Agreement dated as of March 16,
                                   1998 by and between the Village of Skokie,
                                   Illinois and 21st Century Cable TV of
                                   Illinois, Inc.
-------------------------------------------------------------------------------
10.9*                              Interconnection Agreement dated as if May
                                   5, 1997 by and between Ameritech
                                   Information Industry Services and 21st
                                   Century Telecom of Illinois, Inc.
-------------------------------------------------------------------------------
10.10*                             Network Products Purchase Agreement by and
                                   between Northern Telecom Inc. and the
                                   Company
-------------------------------------------------------------------------------
12.1                               Statement regarding Computation of Earnings
                                   Ratio to Fixed Charges
-------------------------------------------------------------------------------
21.1*                              Subsidiaries of the Company
-------------------------------------------------------------------------------


                                                                       Page 60
<PAGE>

-------------------------------------------------------------------------------
23.1                               Consent of Arthur Andersen with Respect to
                                   the Company
-------------------------------------------------------------------------------
27.1                               Financial Data Schedule
-------------------------------------------------------------------------------
</TABLE>
  *  Incorporated herein by reference to the Company's S-4 Registration 
     Statement, filed on March 3, 1998, (Commission File No. 333-47235)


                                                                       Page 61

<PAGE>

                                     SIGNATURES
 
    PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934, THE REGISTRANT HAS FULY CAUSED THIS REPORT TO BE SIGNED 
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
                                          
                                  21st CENTURY TELECOM GROUP, INC.
                                          
                                             
                                  /s/      Ronald D. Webster            
                                  ----------------------------------------------
                                  By: Ronald D. Webster, Chief Financial Officer

                                                     
                                  /s/     Byron E. Hill                        
                                  ----------------------------------------------
                                  By: Byron E. Hill, Corporate Controller
                                                    
                                          
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. 
                                          
                    PRINCIPAL EXECUTIVES AND ACCOUNTING OFFICERS

<TABLE>
<CAPTION>

                  SIGNATURE         TITLE                          DATE
                  ---------         ------                         ----
         <S>                        <C>                            <C>
                                    Chief Executive Officer and   
                                    Chairman of the Board of       June 29, 1998
           /s/ Glenn W. Milligan    Directors (Principal 
         -----------------------    Executive Officer)
         Glenn W. Milligan      


                                    President, Chief Operating    
           /s/ Robert J. Currey     Officer and Director          June 29, 1998
         -----------------------
         Robert J. Currey


          /s/ Ronald D. Webster     Chief Financial Officer       June 29, 1998
         -----------------------
         Ronald D. Webster                 


          /s/ Jay E. Carlson        Chief Technical Officer       June 29, 1998
         -----------------------      
         Jay E. Carlson


                                          
          /s/ Edward T. Joyce       Director                      June 29, 1998
          ----------------------
          Edward T. Joyce


                                                                  Page 62
<PAGE>
                                          

          /s/ Dr. Charles E. Kaegi    Director                      June 29, 1998
          ------------------------
          Dr. Charles E. Kaegi


                                          
          /s/ James H. Lowry          Director                      June 29, 1998
          ------------------------
          James H. Lowry


          /s/ David Kronfeld          Director                      June  29, 1998
          ------------------------
          David Kronfeld              


                                          
          /s/ Thomas Neustaetter      Director                      June 29, 1998
          ------------------------
          Thomas Neustaetter

                                            
          /s/ Byron E. Hill           Controller                    June 29, 1998
          ------------------------
          Byron Hill


</TABLE>

                                                                   Page 63

<PAGE>

                                      FORM 10K
                                          
                                 INDEX TO EXHIBITS
                                          
           Certain exhibits to this report on Form 10-K have been 
incorporated by reference.  For a list of these and all exhibits, see Item 
14(a)(3) hereof.  The following exhibits are being filed herewith.

<TABLE>
<CAPTION>
                                         
Exhibit No.                        Document
-------------------------------------------------------------------------------
<S>                                <C>
 3.1*                              Amended Articles of Incorporation 
-------------------------------------------------------------------------------
 3.2*                              By-laws
-------------------------------------------------------------------------------
 4.1*                              Indenture dated February 15, 1998 between
                                   the Company, as Issuer, and State Street
                                   Bank and Trust, as Trustee, with respect to
                                   the 12 1/4 Senior Discount Notes Due 2008
-------------------------------------------------------------------------------
 4.2*                              Form of the 12 1/4 Senior Discount Notes Due
                                   2008
-------------------------------------------------------------------------------
 4.3*                              Indenture dated as of February 15, 1998
                                   between the Company and IBJ Stirred Bank &
                                   Trust Company, as Trustee, with respect to
                                   the Exchange Debenture
-------------------------------------------------------------------------------
 4.4*                              Form of the 13 3/4 Senior Cumulative
                                   Exchangeable Preferred Stock Due 2010
-------------------------------------------------------------------------------
 4.5*                              Registration Rights Agreement dated as of
                                   February 2, 1998 by and among the Company
                                   and Credit Suisse First Boston Corporation,
                                   BancAmerica Robertson Stephens and
                                   BancBoston Securities, Inc., as Initial
                                   Purchasers
-------------------------------------------------------------------------------
10.1*                              Franchise Agreement dated as of June 24,
                                   1996 by and among the City of Chicago and
                                   the Company
-------------------------------------------------------------------------------
10.2*                              License Agreement dated as of October 27,
                                   1994 by and among the Chicago Transit
                                   Authority and the Company
-------------------------------------------------------------------------------
10.3*                              CSG Master Subscriber Management System
                                   Agreement dated as of May 28, 1997 by and
                                   among CSG Systems, Inc. and the Company
-------------------------------------------------------------------------------
10.4*                              Telemarketing Consultation Agreement dated
                                   as of August 5, 1997 by and among the
                                   Company and ITI Marketing Services, Inc.
-------------------------------------------------------------------------------
10.5*                              Pole Attachment Agreement dated as of April
                                   3, 1996 by and among the Company and
                                   Commonwealth Edison Company
-------------------------------------------------------------------------------
10.6*                               Pole Attachment Agreement dated as of
                                    November 14, 1998 by and among the Company
                                    and Ameritech--Illinois
-------------------------------------------------------------------------------
10.7*                              Office Lease dated January 31, 1997 by and
                                   among the Company and LaSalle National Bank
-------------------------------------------------------------------------------
10.8*                              Franchise Agreement dated as of March 16,
                                   1998 by and between the Village of Skokie,
                                   Illinois and 21st Century Cable TV of
                                   Illinois, Inc.
-------------------------------------------------------------------------------

                                                                   Page 64

<PAGE>

-------------------------------------------------------------------------------
10.9*                              Interconnection Agreement dated as if May
                                   5, 1997 by and between Ameritech
                                   Information Industry Services and 21st
                                   Century Telecom of Illinois, Inc.
-------------------------------------------------------------------------------
10.10*                             Network Products Purchase Agreement by and
                                   between Northern Telecom Inc. and the
                                   Company
-------------------------------------------------------------------------------
12.1                               Statement regarding Computation of Earnings
                                   Ratio to Fixed Charges
-------------------------------------------------------------------------------
21.1*                              Subsidiaries of the Company
-------------------------------------------------------------------------------
23.1                               Consent of Arthur Andersen with Respect to
                                   the Company
-------------------------------------------------------------------------------
27.1                               Financial Data Schedule
-------------------------------------------------------------------------------
</TABLE>
  *  Incorporated herein by reference to the Company's S-4 Registration 
     Statement, filed on March 3, 1998, (Commission File No. 333-47235)

                                                                   Page 65