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                                  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 December 31, 1999

                                       OR

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

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

                        COMMISSION FILE NUMBER 333-47235

                                     [LOGO]

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

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


                                350 NORTH ORLEANS
                                    SUITE 600
                             CHICAGO, ILLINOIS 60654
                                 (312) 955-2100
          (Address and telephone number of principal executive office)

        Securities registered pursuant to Section 12(b) of the Act: NONE

        Securities registered pursuant to Section 12(g) of the Act: NONE

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will 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.   [  ]

     On March 16, 2000, 4,262,519.72 shares of the Registrant's Common Stock
were outstanding. 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 of the Registrant.
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                                TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>

                                                                                                         PAGE
<S>          <C>                                                                                         <C>
Item 1.       Business                                                                                     1
Item 2.       Properties                                                                                  10
Item 3.       Legal Proceedings                                                                           10
Item 4.       Submission of Matters to A Vote of Security Holders                                         10

                                     PART II

Item 5.       Market For Registrant's Common Equity and Related Shareholder Matters                       11
Item 6.       Selected Financial Data                                                                     12
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations       13
Item 7a.      Quantitative & Qualitative Disclosures about Market Risk                                    17
Item 8.       Financial Statements and Supplementary Data                                                 17
Item 9.       Changes and Disagreements with Accountants On Accounting Financial Disclosure               17

                                    PART III

Item 10.      Directors and Executive Officers of the Registrant                                          19
Item 11.      Executive Compensation                                                                      28
Item 12.      Security Ownership of Certain Beneficial Owners and Management                              32
Item 13.      Certain Relationships                                                                       35

                                     PART IV

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K                             36
</TABLE>


When used in this Report, the words "intends," expects," "plans," "estimates,"
"projects," "believes," "anticipates," and similar expressions are intended to
identify forward-looking statements. Except for historical information contained
herein, the matters discussed and the statements made herein concerning the
Company's future prospects are "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. There
can be no assurance that future results will be achieved, and actual results
could differ materially from the forecast and estimates. Important factors that
could cause actual results to differ materially include, but are not limited to,
the Company's limited operating history, including a history of losses,
significant capital requirements, high leverage, debt service requirements and
restrictive covenants related to its outstanding securities, ability to complete
DRS Network construction, its dependence on key personnel and ability to manage
growth. The Company's future results may also be impacted by other risk factors
listed in its Registration Statement filed on Form S-4 (333-47235). In addition,
such forward-looking statements are necessarily based upon assumptions and
estimates that may be incorrect or imprecise and involve known and unknown risks
and other facts. Given these uncertainties, prospective investors are cautioned
not to place undue reliance upon such forward-looking statements. 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.


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                                     PART I


ITEM 1.  BUSINESS.

        21st Century Telecom Group,  Inc. ("21st  Century" or the "Company") 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 is constructing an advanced fiber optic network that employs a
Distributed Ring-Star architecture characterized by fiber-richness, two-way
interactivity, SONET, ATM, as well as broadband optical technologies, 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 reduced costly and time-consuming
"make-ready" and underground construction for the backbone portion of the DRS
Network and enabled the Company to install and activate the DRS Network backbone
rapidly and efficiently by taking advantage of access to the CTA's rail systems.
The Company has also 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 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 the network construction and focused on
securing bulk contracts with multiple dwelling units ("MDUs").

     21st Century's DRS Network currently provides telephone, video, audio and
data services. These services include 115 analog video channels, 41 virtual
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 16 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 home office data product is its high
speed cable modem product (27 Mbps downstream, 10 Mbps upstream shared by up to
400 users depending upon penetration in each node). The Company is also hosting
websites for commercial customers. The Company is also providing switched,
facilities-based competitive local exchange carrier ("CLEC") services (capable
of providing last mile connectivity) and local dial tone to selected residential
subscribers and will be expanding to more residential and commercial accounts
during the year. The Company offers a broad range of competitive telephony
services (e.g., local, long distance and enhanced services) to residential
subscribers, many of whom currently have no facilities-based alternative to the
service provided over the network of the incumbent local exchange carrier
("ILEC"). The Company has co-located in 12 Ameritech Central Offices and has
immediate access to all telephone customers in Area 1. During 2000, the Company
will expand to 23 Ameritech Central Offices, extending its ability to offer
telephone service to customers well beyond Area


                                       1
<PAGE>

1. 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. During this past year, the Company has
rapidly built its DRS Network, with 72% of the estimated 325,000 Homes Passed in
its service territory and 89% of the planned 300 miles of plant completed by
December 31, 1999; began to offer telephone services to a large portion of the
Area 1 residential market; expanded a state-of-the-art customer service call
center; expanded its focused advertising program; acquired bulk service and
right of entry contracts to provide video services to over 1,100 residential
multiple dwelling unit buildings at December 31, 1999; acquired over 50,000
orders for video, Internet and telephone services at December 31, 1999;
activated over 49,000 video, Internet (cable modem and dial up), telephony,
dedicated access, ISDN, DSL, web hosting and server co-location connections by
December 31, 1999; and completed a strategic acquisition to accelerate the
Company's commercial business plan.

     On February 26, 1999, the Company acquired EnterAct Corp. ("EnterAct"), a
Chicago-based provider of Internet access and commercial data services. At the
time of Acquisition, the majority of EnterAct's customers were residential dial
up Internet access customers; however, a significant portion of EnterAct's 1998
and 1999 calendar year revenues were derived from Internet, data and consulting
services provided to its business customer base. During 1999, EnterAct served as
the Company's business service division, developing, marketing and selling data
and telephony services to the business community. In January 2000, EnterAct was
fully integrated into the 21st Century organization and marketing and sales
activities were realigned around the company's products.

     On December 12, 1999, 21st Century entered into a definitive agreement to
merge with RCN Corporation. RCN will be the surviving corporation. The merger is
expected to be completed during the second quarter of 2000, once necessary
regulatory and shareholder approvals are obtained, the Company's Senior Discount
Notes and Subordinated Exchange Debentures (which were issued in February 2000
in exchange for the Company's' Senior Exchangeable Preferred Stock) are retired
or amended to accommodate the merger, and other conditions to close are
completed.

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's business plan
leverages upon the advantages of its innovative, internally-developed DRS
Network architecture in providing fully-integrated voice, video and high-speed
data services. 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 (iii) a SONET, ATM, and broadband optical technology-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
hybrid fiber-coaxial cable system from the headend outward on a block-by-block
basis. This DRS Network advantage, in conjunction with the Company's strategy of
co-locating with Ameritech switches, also allows the Company


                                       2
<PAGE>

to more efficiently utilize its capital resources to sell bundled telephone,
cable and Internet services so as to secure a larger number of MDU contracts and
expand quickly in the ROE market. Accordingly, significant revenue streams
should be realized earlier in the construction build-out plan than would be
realized by a conventional coaxial cable system build-out.  For example, after a
large MDU is activated for telephone services, the Company then markets its
premium cable and pay-per-view video services, as well as its high-speed
Internet services to the telephone customers in that MDU. For commercial
subscribers, the Company will seek initially to sell its services in Chicago's
dense central downtown area to (i) small to mid-sized commercial accounts and
communications-intensive businesses that will benefit from the Company's
telephone, 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 and within industry associations which the Company services.

      SUPERIOR PRODUCT OFFERINGS ON A BUNDLED BASIS. The Company believes that
its voice, video, high-speed Internet and data offering is 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 simple, convenient and attractively-priced packages. 21st
Century's fiber-rich DRS Network is designed with up to three broadband
amplifiers in cascade between its Network Operations Center ("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 capacity and accuracy. The Company's virtual 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
is its high speed cable modem product which operates at 27 Mbps downstream, 10
Mbps upstream shared by up to 400 users depending upon penetration in each node.
In the third quarter of 1999, the Company began marketing a broad range of
telephony services (e.g., local, long distance, call waiting, call forwarding,
caller ID, voicemail and three-way calling) to 325,000 potential residential
users in and adjacent to Area 1. Most of the residential customers, to the
Company's best knowledge, 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 package discounts, a single source for installation and service, the
option of "no waiting" customer self-installation and the ease of a single
monthly bill for all services. Bundling services allows the Company to reduce
its customer acquisition and installation costs.

     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 entirety of Chicago's
Area 1, as well as franchises to provide cable service in Skokie and Northbrook,
suburbs of Chicago, (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 build-out of the DRS
Network through the utilization of scarce pole space and city infrastructure
rights-of-way and (iii) CLEC certification from the Illinois Commerce
Commission. These assets are extremely important due to the fact that
right-of-way and utility pole attachment space are exhausted in Area 1 of
Chicago today. The Company, in many locations, secured the last available space
with its agreements. Each of these assets is a valuable and important component
of the Company's facilities-based business strategy and together would be very
difficult for another entrant to replicate.

     FIRST-TO-MARKET ADVANTAGES. The Company's telephone co-location strategy
allows the Company to get to market much faster with its telephone and Internet
services, sell its telephone and Internet services to customers outside its Area
1 cable TV franchise, and significantly improve its ability to "upsell" its
premium services behind its basic telephone services inside Area 1. The Company
believes that its co-location strategy, in conjunction with its accelerated
build-out of the DRS Network will enable it to quickly acquire a significant
customer base, and that its right-of-way and pole attachment agreements will
give it a future time-to-market and pricing advantage over other prospective
bundled and single-service providers attempting to enter the Chicago market.


                                       3
<PAGE>

     EXPERIENCED MANAGEMENT. The Company's management team has extensive and
diverse experience in the cable television, Internet, data and
telecommunications industries. The Company's senior management has demonstrated
its expertise by constructing and activating the NOC, compressing the initial
4-year build-out schedule for Area 1 to 30 months, securing necessary video
programming content, initiating appropriate billing to support the Company's
planned product lines, executing its co-location telephone strategy, and
building its own force to operate its own 24-hour Customer Service Support
Center, all which prove that the Company's management personnel understand their
markets and technologies.

     SUPERIOR CUSTOMER CARE. The Company is committed to providing superior
customer care to differentiate itself from its competitors. To accomplish this,
the Company has (i) contracted with a third party to provide a single billing
statement for its residential telephone, cable TV and Internet services, (which
facilitates bundled discounting for multiple services, permits customized
billing statements and enables monthly, transactional and metered billing to
support the Company's planned product lines), (ii) established a
state-of-the-art call center staffed with highly trained customer service
professionals and technical support specialists available 24 hours a day, seven
days a week and (iii) negotiated the purchase of a highly rated Internet service
provider to sell into and manage the Company's business operations. The Company
has provided a dedicated toll-free number to the call center for all subscriber
needs and continuously monitors call center performance measures. 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. The Company has also installed sophisticated status monitoring equipment
in the NOC and throughout its DRS Network, which allows the Company to become
aware of and remedy potential problems before they are detectable by
subscribers. In addition, the Company built an integrated network management
center to proactively monitor and maintain its voice, video, and Internet data
services.

     MARKET EXPANSION. The Company intends to expand its operations at the
appropriate time 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, and in March 1999
was awarded a franchise in the Village of Northbrook, both Chicago suburban
communities northwest of the Company's existing Area 1 franchise. Skokie's and
Northbrook's homes will be served by an extension of the Company's DRS Network.

     In June, 1999, the Company filed franchise applications with the Chicago
Cable Commission to provide cable television service in Chicago Areas 2, 3 and
4.

MARKET OVERVIEW

     The city of Chicago is the third largest urban market in the United States
and Area 1 is the densest section in the city, characterized by a high
concentration of MDU's and commercial office buildings. Area 1 has several
significant and attractive attributes, including (i) a relatively high density
of 10,500 housing units per square mile (compared with a density for the entire
city of Chicago of 5,000 housing units per square mile), (ii) more than 325,000
homes (many of which are located in the upscale, demographically attractive
lakefront neighborhoods), (iii) the lowest priced unbundled urban telephone
loops in the country, (iv) the nation's second largest business and financial
district, and (v) existing cable penetration (reportedly 37%) that the company
believes is significantly below the national average of urban areas. The Area
contains many ethnic enclaves, each with its own particular characteristics and,
therefore, marketing opportunities. There are approximately 56,000 companies
(based on companies within the city limits with more than 4 employees currently
paying unemployment insurance) employing more then 500,000 people in the city's
prominent business and financial district, which includes such business and
landmarks as the Chicago Mercantile Exchange, Sears Tower, Chicago Board of
Trade, Federal Reserve, Hancock Building, Merchandise Mart, Amoco Tower, major
banks and other premier businesses.


                                       4
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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
Service Distribution Nodes.

     The NOC processes voice, video and data signals before they are transported
to the rest of the system. An Internet Service Provider ("ISP") site and video
headend are located at the NOC together with a telephone switch. 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 network powering system status. The NOC also monitors
the activation of equipment at the premises of the Company's subscribers.

     The Transport Ring is a group of fiber-optic cables that 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. 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 Service
Distribution Nodes. The Service Distribution Nodes connect the subscribers to
the Campus Hubs via high-speed coaxial cable. The Service Distribution 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 "star distribution" of the DRS Network refers to the star-shaped
DRS Network components branching off the Campus Hub to each Service Distribution
Node.

     Delivery of telephony services over the DRS Network requires the
installation of switching and other ancillary equipment at the NOC and at the
building to be served, where the existing twisted-pair telephone wire will
connect to the DRS Network. The Company has acquired and installed such
equipment in key MDU's.

     DESIGN ATTRIBUTES. The Company's DRS Network was conceived and designed by
the Company's engineers and incorporates SONET, ATM, and broadband optics
technology, Ring and Star architectures as well as wave-division multiplexing
elements, and includes certain attributes of Hybrid Fiber Coax ("HFC")
technologies. Key attributes of the DRS Network include (i) an advanced
integrated network design built to 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,
(iii) a SONET-based redundancy and self-healing architecture with both circuit
and route diversity, (iv) a broadband AM fiber optic technology-based redundancy
and self-healing transport architecture with both circuit and route diversity,
(v) multiple layers of power redundancy to ensure network reliability and (vi) 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 up to three 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 reliability, a superior audio component and greater
data transmission capacity and accuracy.

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


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         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 Home Communications Terminal (set-top box) with 512K bytes
     of RAM and 256K 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 three-day
     electronic program guide, and enhanced signal theft protection.

         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 810MHz. 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 immediate future
     given the DRS Network's initial 115 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. The distributed nature of the architecture
     also allows containment of upgrades by hub area rather than requiring
     upgrades system wide.

         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 ISP
     functionalities (Domain Naming System, Mail, News, Proxy, etc.) are
     administered and quad connections to national ISPs are maintained. 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 telephone usage charges
     for making a call into the DOC (as is typically the case with dial-up
     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 applications, including
telecommuting, distance-learning, software distribution, site mirroring, bulk
data transfer and teleconferencing.

BROADBAND SERVICES

     The Company's service offering includes 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 provides customers with convenient
"one-stop shopping," attractive pricing through bundled discounts, a single
source for installation and service, and the ease of a single monthly bill.

     VIDEO AND AUDIO. The Company currently offers 115 analog video channels, 41
virtual information channels with local content and 16 specialty audio channels,
with significant capacity for additional broadband and narrowband products and
services. The 115 analog video channels include a basic package of 89 channels,
one of the largest basic packages in the United States, designed to appeal to
Chicago's


                                       6
<PAGE>

ethnic and cultural diversity. Basic video channels for business customers also
include specialized business programming such as Bloomberg, CNN, and CNN
Financial. Programming for the Company's video offering comes from national
and local networks, including most major networks such as ESPN, HBO, Showtime,
Disney, and local Chicago affiliates of ABC, CBS, NBC and Fox. The video
offering includes an on-screen, interactive viewing guide, and pay-per-view
movies, with start times every 30 minutes, 24 hours per day.

     Also included in the Company's basic video package are 41 interactive
information channels, which include local bus and train schedules, airline
schedules, restaurant menus, local news and sports scores, stock quotes,
personal ads, and other relevant local content. This server-delivered
information is accessed on the customer's television via a specialized universal
remote control.

     The Company's 16 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, Chicago Reading Information
Services which offers 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 27 Mbps downstream and 10 Mbps upstream, shared by up to
400 users depending upon penetration in each node. 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
a full range of high-speed data transport services (ISDN, DSL, T-1, T-3, OC-3,
etc.) to enable customers to conduct video conferences, provide telephony over
Internet connections, conduct E-Commerce, apply distance learning concepts, and
otherwise take full advantage of the enormous bandwidth capabilities of the DRS
network.

     TELEPHONY. During the second quarter of 1999, the Company implemented its
strategy to include use of a concept known as "co-location". Co-location is the
act of placing the Company's access nodes in certain Ameritech switching centers
so they are co-located with, and have direct access to Ameritech's "last mile"
distribution cable pairs (unbundled loops). This allows the Company to reach
more customers faster by leasing Ameritech's "last mile" facilities and using
them to connect the Company's telephone switch to potential customers through
the Ameritech "last mile" loops. The Company offers a full range of local and
long distance telephone services and dial-accessed Internet services. The
co-location strategy allows the sale of these services to all Area 1 customers,
and to many outside of Area 1. Co-location accelerates and expands the Company's
telephone coverage considerably.

     The Company provides local, long distance, custom calling services, voice
mail, Operator services and enhanced services to customers in franchise Area 1
and some customers in adjacent franchise areas. Enhanced services range from the
basic offering, such as call waiting, call forwarding and three way calling, to
the more advanced offering, such as caller ID and caller ID with name and
automatic call back. These customers utilize the Company's DRS Network to access
leased "co-location" facilities. The Company's interconnection requirements with
other telephone companies have been met and the Company's current customers
enjoy complete telephone services including single source billing. The Company
plans to make available to business customers the full range of switched and
private line voice and data services.

     The Company is fully integrated with the public switched network (PSN) via
an interconnection agreement with Ameritech. On April 20, 1998, the Company
executed an interconnection agreement with


                                       7
<PAGE>

Ameritech, pursuant to the 1996 Telecommunications Act. The agreement has been
fully implemented and the Company has the same access to all local, national and
international customers as previously existing ILECs.

     The DRS Network provides the backbone for connecting the Company switch to
the ILEC central offices and access to the existing twisted pair network and for
connecting directly to customer premises.

     FUTURE BROADBAND SERVICES. The Company's 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, (iv) interactive energy
management services, which involve active monitoring by the customer of energy
usage and cost and (v) interactive television which will allow the Company to
leverage its subscriber base and generate additional revenue through targeted
advertising and commerce transactions. The Company may seek strategic
partnerships and alliances to provide a number of these services.

SALES AND MARKETING

     21st Century plans 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 focuses on establishing positive relationships with rental agents,
owners, and managers of MDU's and with single family homes. The Company expects
those relationships will pave the way for positive relationships with customers.
The Company expects to sell bundled services, leading with different services in
different market segments.

     BUSINESS (COMMERCIAL) MARKETING. In February, 1999, the Company purchased a
highly rated ISP that has established an excellent service reputation in the
Chicago area business community. The Company intends to use that ISP to sell
into and manage its Chicago business market operations. The Company intends to
market and sell all of its services to the Chicago business community, and to
establish specially priced bundled services to meet the business community
needs. The focus will be on business customers with server co-location, Internet
and data transport, e-business development needs and more than five telephone
lines. The Company also intends to sell its Internet and telephone services to
businesses outside Area 1. The Company intends to especially focus on large
business, work-at-home telecommuter needs, and on the small office/home office
market segments whose needs include all of the services in the Company's
portfolio.

     SALES PLAN. The Company's residential sales force is organized to address
the residential and small office market. As previously stated, the Company
recently acquired a business sales and management capability. The current
residential sales force will continue to focus on residential bulk,
right-of-entry, and single-family home sales. All sales personnel will sell
individual and bundled services according to its customers' wants and needs. The
Company currently uses its own direct sales force and a contract telemarketing
group. The Company intends to augment these sales channels with agency
agreements with building managers, owners, and rental agents.

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 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.


                                       8
<PAGE>

     BILLING. The Company has contracted with a third party to provide a single
billing statement for its residential 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
residential voice, video, Internet and data services.

     CUSTOMER SERVICE PROFESSIONALS. The Company's call center is currently
staffed with 84 full-time customer service professionals ("CSPs") trained to
handle calls 24 hours a day, seven days a week. Each CSP is highly trained and
has 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 continuously monitors call center performance measures.

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,
ISPs, 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 FRANCHISES

     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.

     In June, 1999, the Company filed franchise applications with the Chicago
Cable Commission to provide cable television services in Chicago Areas 2, 3 and
4.

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 20,000 homes, 2,800 businesses and 40,000 employees.

NORTHBROOK FRANCHISE

     In March of 1999, 21st Century was awarded a renewable franchise expiring
December 31, 2014 by the Village of Northbrook located just northwest of Skokie.
The Northbrook franchise area consists of 12,000 homes, 2,700 businesses and
36,000 employees. This franchise award is contingent upon the Company's securing
the funds necessary to build its Northbrook network.

     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 conditions in
its franchises in Chicago's Area 1, Skokie and Northbrook 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)


                                       9
<PAGE>

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
franchises to the issuing authority equal to 5% of gross revenues received from
the operation of its cable television system.

EMPLOYEES

         At December 31, 1999, the Company had 588 active 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 covers 40,397 square feet.

     The Company has also entered into various property leases for office and
warehouse space within the City of Chicago on terms it believes are appropriate
in the market. In addition, the Company leases office space in Orlando Florida
for it's software development division.

     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.


                                       10
<PAGE>

                                     PART II

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

COMMON STOCK

     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 December 31, 1999,
there were 4,241,863.52 shares of common stock outstanding and held of record by
approximately 149 shareholders and 18,182.2 shares reflected as common shares to
be issued related to a separation agreement. At December 31, 1999, options and
warrants to purchase an aggregate of 3,975,829.3 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 an 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 SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549, or by calling the SEC at
1-800-SEC-0330, or from the SEC's Internet web site at 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 12 1/4% Senior Discount Notes, the
Amended Articles and the terms of the Company's existing preferred stock.


                                       11
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.


<TABLE>
<CAPTION>
                        FOR THE YEAR          FOR THE NINE                        FOR THE YEAR ENDED AND AS OF MARCH 31,
                       ENDED AND AS OF    MONTHS ENDED AND AS OF      -----------------------------------------------------------
                      DECEMBER 31, 1999     DECEMBER 31, 1998              1998           1997            1996           1995
                      -----------------   ----------------------      -------------   -------------   -----------    ------------
<S>                   <C>                 <C>                         <C>             <C>             <C>            <C>
Operating revenues     $   11,320,134      $      873,898             $     189,023    $     27,480   $          -    $         -

Net loss               $  (65,071,616)     $  (32,788,712)            $ (15,030,544)   $ (2,817,292)  $ (1,026,609)   $  (779,314)

Net loss attributable
 to common shares      $  (78,135,081)     $  (41,717,419)            $ (19,265,007)   $ (3,296,273)  $ (1,026,609)   $  (779,314)

Basic and diluted
 loss per share        $       (18.93)     $       (11.94)            $       (7.37)   $      (1.66)  $      (0.64)   $     (0.52)

Total Assets           $  238,506,408      $  254,343,973             $ 262,732,604    $ 14,396,708   $  1,664,877    $   847,659

Long Term Debt         $  255,010,575      $  222,453,777             $ 203,549,069    $    185,227   $    149,884    $   625,243

Total redeemable
 preferred stock       $   61,666,268      $   52,617,006             $  46,492,812    $ 16,794,963   $          -    $         -

Total shareholders'
 equity                $ (104,498,439)     $  (33,907,034)            $   3,938,630    $ (2,960,337)  $ (1,744,556)   $(1,063,122)
</TABLE>


                                       12
<PAGE>

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

     The following is a discussion and analysis of the historical results of
operations and financial condition of 21st Century Telecom Group, Inc. (the
"Company") and factors affecting the Company's financial resources. The
discussion of the results of operations and financial condition for the year
ended December 31,1999 includes a comparative analysis to the nine months ended
December 31, 1998, and a comparison of the nine months ended December 31, 1998
to the year ended March 31, 1998. The Company believes the analysis of the three
periods to be comparable, due to the ramp-up nature of the Company's operations.
Furthermore, the Securities and Exchange Commission considers a nine month
period to be sufficiently equivalent to a year. This discussion should be read
in conjunction with the consolidated financial statements, including the notes
thereto, included elsewhere in this Report. This discussion contains
forward-looking statements which are qualified by reference to, and should be
read in conjunction with, the Company's discussion regarding forward-looking
statements as set forth in this Report.

GENERAL

     21st Century was awarded a franchise in 1996 by the City of Chicago that
allows for the construction of the Distributed Ring-Star ("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
telecommunications business in Chicago's Area 1. In June 1999, the Company
applied for franchises in Areas 2, 3, and 4 in the City of Chicago.

     In March 1998, the Company was awarded a franchise to provide cable service
to the Village of Skokie. The Company began construction of its DRS Network in
Skokie during the second quarter of 1999. In March of 1999, the Company was
awarded a renewable franchise expiring December 31, 2014 by the Village of
Northbrook, located just northwest of Skokie.

     On February 26, 1999 the Company acquired EnterAct, L.L.C. ("EnterAct"), a
Chicago based provider of Internet access and commercial data services. EnterAct
had approximately 50 employees at the time of acquisition. The majority of
EnterAct's approximate 10,000 customers were residential dial up Internet access
customers; however, a significant portion of EnterAct's 1998 calendar year
revenues were derived from Internet, data, and consulting services provided to
its business customer base. The Company refers to this area of its business as
the Business Services Group ("BSG").

      On December 12, 1999, the Company entered into a definitive agreement to
merge with RCN Corporation, a publicly traded company that provides video,
telephone and data connections to primarily residential subscribers through an
advanced broadband network.

     The Company has incurred net losses in each year since its inception, and
as of December 31, 1999, the Company had an accumulated deficit of $144,640,348.
The Company anticipates that it will continue to expand its operations and 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

   YEAR ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1998.

      REVENUES. The Company generated subscriber revenues of $11,320,134 for the
year ended December 31, 1999 and $873,898 for the nine months ended December 31,
1998. The increased subscriber revenues resulted from the installation of cable
video service, residential telephone service, and cable modem service into
contracted buildings on the new DRS Network and also increased subscriber
revenues through the acquisition of EnterAct, L.L.C and the expansion of that
data/internet subscriber base. EnterAct, renamed


                                       13
<PAGE>

the Business Services Group (BSG) contributed $5,690,945 of subscriber revenues
during the year. At December 31, 1999, the Company was providing service to
45,838 connections in 114 bulk Multiple Dwelling Units ("MDUs") and 616 right of
entry ("ROE") buildings with a backlog of 5,157 connection orders for bulk MDU
and ROE customers. In addition, the company's BSG division provided internet
services, including dial-up, to 3,199 subscribers at December 31, 1999.

      EXPENSES. The Company incurred total operating expenses that related to
the cable, Internet and telephony products and services of $54,704,421 and
$22,900,576 for the year ended December 31, 1999 and for the nine months ended
December 31, 1998, respectively. During the year ended December 31, 1999, the
company completed a major portion of its DRS Network within the Chicago Area 1
franchise and substantially expanded its efforts to solicit new subscribers and
to better service existing subscribers. During the year, a net total of almost
500 employees were added to the Company's workforce from its base of a little
over 100 at December 1998.

      Network operating expenses, direct costs associated with the delivery of
service to the customer and installation of service at the customer's location,
were $11,849,414 and $2,678,047 for the year ended December 31, 1999 and the
nine months ended December 31, 1998 respectively. The increase is the result of
increased direct costs in providing service to the larger subscriber base and
increased costs relating to the installation of services to new subscribers.

      Selling, general and administrative expenses were $30,882,202 and
$16,345,750 for the year ended December 31, 1999 and for the nine months ended
December 31, 1998, respectively. This increase reflects the Company's
acquisition and servicing of subscribers, promotion costs and the addition of
employees to support customer service functions established within the Company,
as well as certain key sales and marketing positions. Also impacting the
increase in selling expenses were increased marketing and advertising costs.
Additionally, the Company incurred general and administrative expenses for
one-time employment related costs for the separation of certain employees and
for the recruitment of certain key new hires. The company substantially expanded
the state-of-the art call center staffed with customer service professionals and
technical support specialists available 24 hours a day, seven days a week which
has contributed to the increase in general and administrative expenses.
Full-time call center personnel increased to 84 at December 31, 1999, up from 20
at December 31, 1998.

      Depreciation and amortization costs were $11,972,805 and $3,876,779 for
the year ended December 31, 1999 and for the nine months ended December 31,
1998, respectively. The increase in depreciation and amortization costs is
primarily attributable to the increase in plant placed into service as the
Company continues to buildout its network, investments in computer hardware and
software along with continued investments in leasehold improvements and office
furniture to accommodate the growing workforce.

      The acquisition of EnterAct in February 1999 was accounted for as a
purchase and resulted in goodwill amortization of $864,053 during the year ended
December 31, 1999.

      Interest expense increased from $18,232,959 to $25,893,790 due to interest
associated with the Senior Discount Notes issued in February 1998. Interest
income decreased from $8,670,695 to $5,851,369 due primarily to reductions in
investment balances necessary to provide the cash required to fund the
accelerated build out of the Network and operating activities. Amortization of
issuance costs on Senior Discount Notes increased from $1,199,770 to $1,591,667,
primarily resulting from three additional months of amortization during the year
ended December 31, 1999.

      NET LOSS. For the year ended December 31, 1999 and for the nine months
ended December 31, 1998, the Company incurred net losses amounting to
$65,071,616 and $32,788,712, respectively. The Company expects its net losses to
continue as it introduces new services and as the Company continues to build-out
the DRS Network and seeks to expand its business.


                                       14
<PAGE>

NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1998.

      REVENUES. The Company generated subscriber revenues of $873,898 for the
nine months ended December 31, 1998 and $189,023 for the year ended March 31,
1998. The increased subscriber revenues resulted from the installation of
service into contracted buildings on the DRS Network and sales efforts to
increase penetration of services into these buildings. At December 31, 1998, the
Company was providing service to 10,455 connections in 40 bulk Multiple Dwelling
Units ("MDUs") and 107 right of entry ("ROE") buildings. As of December 31,
1998, there were 3,690 backlogged connection orders for bulk MDU and ROE
customers.

      EXPENSES. The Company incurred operating expenses that represent network
operating costs related to the delivery of cable, Internet and telephony
services of $2,678,047 and $2,023,310 for the nine months ended December 31,
1998 and for the year ended March 31, 1998, respectively. This increase was the
result of the continued ramp-up in the design and construction of the network,
acquisition of video programming and the addition of employees. The increase was
also impacted by the start-up of the Company's telephony operations during the
nine months ended December 31, 1998. Telephony expenses included connection and
usage charges for testing the new switch and related consulting costs. Selling,
general and administrative expenses were $16,345,750 and $10,216,919 for the
nine months ended December 31, 1998 and for the year ended March 31, 1998,
respectively. This increase reflects the Company's acquisition and servicing of
subscribers, promotion costs and the addition of employees to support
Information Technology functions established within the Company, as well as
certain key sales and marketing positions. Also impacting the increase in
selling expenses were production, printing, and distribution costs for a new
marketing image program during the quarter ended December 31, 1998.
Additionally, the Company incurred general and administrative expenses for
one-time employment related costs for the separation of certain employees and
for the recruitment of certain key new hires. Also during the nine months ended
December 31, 1998, the Company established a state-of-the art call center
staffed with customer service professionals and technical support specialists
which contributed to the increase in general and administrative expenses.
Depreciation and amortization costs were $3,876,779 and $1,411,847 for the nine
months ended December 31, 1998 and for the year ended March 31, 1998,
respectively. The increase in depreciation and amortization costs were primarily
attributable to the increase in plant placed into service as the Company
continued to buildout its network. Effective July 1, 1998, the estimated service
lives for hub sites and outside plant were changed from 7 to 13 years. In
addition, the estimated service lives for certain software and furniture and
fixtures were changed from 5 to 7 years. These changes were made to correspond
to industry norms for these types of assets. The changes in depreciable lives
resulted in a reduction of depreciation expense of approximately $1,200,000.
Interest expense increased from $3,722,947 to $18,232,959 due to interest
associated with the Senior Discount Notes issued in February 1998. Interest
income increased from $2,373,867 to $8,670,695 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 increased from $218,411
to $1,199,770, as a result of the timing of the issuance and its subsequent
amortization.

      NET LOSS. For the nine months ended December 31, 1998 and for the year
ended March 31, 1998, the Company incurred net losses amounting to $32,788,712
and $15,030,544, respectively.


LIQUIDITY AND CAPITAL RESOURCES

     Net cash used in operating activities was $25,693,317, $17,518,151, and
$8,080,516 for the year ended December 31, 1999, the nine months ended December
31, 1998 and the year ended March 31, 1998, respectively. Net cash used in the
operating activities for the year ended December 31, 1999, resulted principally
from the Company's net loss, increased levels of inventory to accommodate the
accelerated build out of the DRS Network and conversion of homes passed into
marketable homes, and a net increase in noncurrent assets and liabilities. This
use of cash was partially offset by amortization of the discount on the 12 1/4%
Senior Discount Notes, depreciation and amortization, amortization of debt
issuance costs and an


                                       15
<PAGE>

increase in accounts payable which reflects the overall increase in the
activities of the business as a whole. Net cash used in operating activities
for the nine months ended December 31, 1998 resulted principally from the
Company's net loss from operations and an increase in inventory levels. These
items were partially offset by amortization of the discount on the 12 1/4%
Senior Discount Notes, amortization of debt issuance costs, depreciation expense
and stock compensation expenses. Net cash used in operating activities for the
year 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.

     Cash flow used in investing activities totaled $39,523,132,
$126,770,357, and $25,665,047 for the year ended December 31, 1999, nine
months ended December 31, 1998, and the year ended March 31,1998,
respectively. Cash requirements in the year ended December 31, 1999 consisted
primarily of costs for the construction of the DRS Network and creation of
marketable homes and the acquisition of EnterAct, offset partially by net
liquidation of investments of the funds obtained from issuance of the 12 1/4%
Senior Discount Notes and the 13 1/4% Senior Preferred Stock. Cash
requirements in the nine months ended December 31, 1998, consisted of costs
for the continued deployment of the network in the Area 1 franchise and
installing and facilitating the telephone switching equipment in the
Telephone Operations Center ("TOC"), which is located at corporate
headquarters. Also contributing to the increase in cash used for investing
activities was an increase in short term investments which reflected an
effort to improve returns on monies previously classified as cash. Cash
requirements in the year ended March 31, 1998, consisted of the cost of
building and equipping the NOC and facilitating the corporate headquarters
and network construction. In addition, $10 million was invested in a
security, which matured on December 7, 1998.

     Cash flow from financing activities was $2,647,213 for the year ended
December 31, 1999, a negative $450,108 for the nine months ended December 31,
1998 and $243,154,859 for the year ended March 31,1998. Cash flow from
investing activities for the year ended December 31,1999 primarily reflects
the acquisition of service vehicles through lease financing. For the nine
months ended December 31, 1998, the sale of Class A Preferred Stock generated
$100,000 which was offset by $131,040 payment on debentures plus accrued
interest and the settlement of a bank payable for $419,068. In the year 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.

     The cost of network development, construction and start-up activities of
the Company has required and will continue to require substantial capital.
The Company estimates that its aggregate capital expenditure requirements
related to DRS Network construction in Area 1 will total approximately $250
million. As of December 31, 1999, the company has spent a total of
$181,251,682. Capital expenditures for calendar year 1999 were $117,678,927,
and $54 million for the calendar year 1998. The Company expects to complete
the construction of the DRS Network in Chicago Area 1 during the next fiscal
year. The Company has spent a total of approximately $10 million on the DRS
Network for the Village of Skokie as of December 31, 1999. Substantially all
of the construction spent in Skokie occurred in 1999. The Company has funded
these expenditures primarily from the net proceeds of the sale of the 12 1/4%
Senior Discount Notes and the 13 3/4% Senior Cumulative Exchangeable
Preferred Stock and operating revenues. In order to retain funds available to
support its operations, the Company has no expectation of paying cash
interest on the Senior Discount Notes or cash dividends on the Exchangeable
Preferred Stock prior to February 15, 2003. The Company may require
additional financing in the future as 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. There can be no assurance
that the Company will be able to obtain any additional debt or equity
financing, or that the terms thereof will be favorable to the Company or its
existing creditors or investors. On August 5, 1998, the Company entered into
a $40 million bank revolving credit facility with a number of banks to
provide supplemental financing. As of December 31,1999, no borrowings have
been made under this facility. The Company has entered into additional
amendments since the original agreement to its bank revolving credit
facility, which adjusted certain operating covenants.

                                       16
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. Management believes that
this statement will not have a material effect on results of operations and
financial position.

     Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is
effective beginning in the first quarter of 2000.  SAB No. 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements.  Management believes that this statement will not have a material
effect on results of operations and financial position of the Company.

IMPACT OF YEAR 2000

     Starting in 1998, the Company initiated an awareness program to address
the Year 2000 issue. The Company initiated a formal Year 2000 program that
included a project office. The Company completed a comprehensive inventory
and assessment of Information Technology (IT) and non-IT related systems and
equipment that may be affected by Year 2000 issues. The Company contracted
with a third party to assist with its Year 2000 assessment. Replacement,
remediation, and  certification of vendors for identified, critical IT and
non-IT systems and equipment was implemented prior to December 31, 1999. No
problems have been encountered in 2000. The total cost of the Year 2000
project incurred through December 31, 1999 did not have a material effect on
the results of operations. In 2000 the Company will continue to monitor
critical IT and non-IT systems and equipment and relationships with third
parties. The Company does not expect costs related to Year 2000 efforts in
2000 to have a material effect on the results of operations. Contingency
plans have been developed to address potential disruptions that may result
from Year 2000 issues.

ITEM 7a.  QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Other than the Company's exposure to interest rate risk on its debt, the
Company has determined that it does not have a material exposure to market risk.
(See Note 5 to the financial statements).

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, Item 14 of this Form 10-K.

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.


                                       17
<PAGE>

                                    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>
     Edward T. Joyce               57        Chairman of the Board
     Robert J. Currey              54        President, Chief Executive Officer and Director
     Ronald D. Webster             50        Chief Financial Officer and Treasurer
     John A. Brouse                51        Vice President Engineering
     David Jacobs                  36        Vice President of Customer Operations
     Roxanne Jackson               34        Vice President of Human Resources
     Eric D. Kurtz                 35        Vice President of Operations and Assistant Secretary
     Dennis Parker                 62        Vice President of Marketing and Planning (Separated on
                                             January, 7, 2000)
     Susan R. Quandt               45        Vice President of Sales (Separated on December 1, 1999)
     Christopher Young             44        Vice President and Chief Information Officer
     Michael Cloran                31        Vice President of Sales and Service
     Tracy Snell                   37        Vice President of Off-site Development
     Howard Kitchen                57        Vice President of Telephony
     Marcus Miller                 45        Vice President of Marketing Management
     William Farley                57        Director
     Elzie Higginbottom            58        Director
     Dr. Charles E. Kaegi          49        Director
     David Kronfeld                52        Director
     James H. Lowry                59        Director
     Glenn W. Milligan             52        Director
     Thomas M. Neustaetter         48        Director
</TABLE>


     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. Mr. Joyce became Chairman of the Board of the Company as of January
1, 1999.

     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. On
August 13, 1998 Mr. Currey was named the President and Chief Executive Officer
of the company. Prior to joining the company, 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 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 and was named Treasurer of the company on October 13, 1998. He
was previously Vice President and Treasurer at Telephone Data Systems, Inc.,
where he served from July 1983 until May 1987 and from April 1988 until August
1997. Prior thereto, he held executive positions with Ideal School Supply Corp.
and Trans Union Corporation.

     JOHN A. BROUSE has served as the Company's Vice President of Engineering
since August 1998. From April 1997 until August 1998, Mr. Brouse served as Vice
President of Network Operations. Prior to that


                                       18
<PAGE>

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.

     DAVID L. JACOBS has served as the Company's Vice President of Customer
Operations since July 1998. Prior to that time Mr. Jacobs was Senior Director of
Engineering and Technology for Ameritech New Media and was also Ameritech's New
Media Director of Technical Support and New Product Development. He held various
positions with Illinois Bell prior to his appointment at Ameritech.

     ROXANNE  JACKSON has served as the Company's Vice President of Human
Resources since May 1996. 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 Operations
since February 1999. Previously Mr. Kurtz served as 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 he also served as a board member of the Wisconsin
Cable Communications Association and as its President from September 1994 to
September 1996.

     DENNIS D. PARKER served as the Company's Vice President of Marketing and
Planning from November 1998 to December 1999. Mr. Parker served as President and
CEO of Prairie Systems from 1995 until 1998; President and CEO of ITN
(Illuminet) from 1989 until 1995, and was President and Managing Director of the
Princeton Institute from 1985 until 1989. Prior to that, Mr. Parker was in
planning and operations for AT&T Information Systems Division.

     SUSAN R. QUANDT has served as the Company's Vice President of Sales from
December 1997 to December 1999. 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.

      CHRISTOPHER YOUNG has served as the Company's Vice President and Chief
Information Officer since August of 1998. He previously held the position of CIO
at Mercury Marine from 1997 until 1998. He was CIO for Siemens Electromechanical
Components, Inc., from 1995 until 1997 and served as Director of Information
Technology for Consolidated Communications Directories from 1990 until 1995.

     MICHAEL CLORAN has served as the Company's Vice President Sales & Service
since February 1999 when EnterAct, L.L.C. was acquired by the Company. From 1995
to 1999, Mr. Cloran served as CEO of EnterAct. From 1992 to 1995, Mr. Cloran was
an object-oriented systems consultant developing systems including a bond
trading system, medical instruments, and multimedia training systems. Prior to
1992, Mr. Cloran worked for Andersen Consulting on the Ameritech Service Center
of Tomorrow project.

     TRACY SNELL has served as the Company's Vice President of Off-site
Development since February 1999 when EnterAct, L.L.C. was acquired by the
Company. From 1995 to 1999, Mr. Snell served as President of EnterAct. From 1991
to 1995, Mr. Snell developed systems for the aviation industry, HBOC, BellSouth,
IBM, and multimedia training systems. Prior to 1991, Mr. Snell ran a service
company and was a partner in a robotics venture.

     HOWARD KITCHEN has served as the Company's Vice President of Telephony
since May 1999. Mr. Kitchen served as Director of Program Implementation from
1998 to 1999 at 21st Century. From 1997 to 1998, Mr. Kitchen served at Director
of Vendor Relations at McLeod. From 1996 to 1997, Mr. Kitchen served as Director
of New Business Development at Consolidated Communication. Prior to that, Mr.
Kitchen was with Michigan Bell/Ameritech in numerous operations and staff
positions.


                                       19
<PAGE>

     MARCUS C. MILLER has served as the Company's Vice President of Marketing
Management since August 1998. From 1997 to 1998, Mr. Miller served as Vice
President of Sales and Marketing for MD Consult, an internet based information
service for doctors. From 1995 to 1997, Mr. Miller served as Executive Vice
President of Marketing for Spyglass. Prior to that, Mr. Miller was Vice
President and General Manager of Advanced Media Products at NEC Technologies,
Inc.

     WILLIAM F. FARLEY has served as a Director of the Company since September
1998. Mr. Farley is Chairman of the Board and CEO of Farley, Inc. From 1985 to
1999, Mr. Farley was Chairman of the Board, President and CEO of Fruit of the
Loom, Inc. Mr. Farley sits on various educational, civic and cultural boards
including, The Horatio Alger Association Board of Directors, The Chicago Council
on Foreign Relations, American Textile Manufacturers Institute, Rush Hospital
Heart Institute, Lyric Opera, among others.

     ELZIE L. HIGGINBOTTOM has served as a Director of the Company since
September 1998. Mr. Higginbottom has been involved in real estate development,
management, and construction of single and multi-family and commercial real
estate for more than two decades. East Lake Management and Development
Corporation, a firm he founded, has become one of the largest minority-owned
real estate services firms in the Midwestern United States under his management.
Mr. Higginbottom currently serves on the governing board of the Housing
Authority of Cook County, Illinois, and the Board of Directors of Cole Taylor
Bank.

     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
psychiatry since July 1979. He has held Medical Director positions at Ravenswood
Hospital Medical Center in the Community Mental Health Center, Alcohol and Drug
Abuse Program, Dual Diagnosis Program, and Partial Hospital Program. He is an
Assistant Clinical Professor of Psychiatry at the University of Illinois Medical
School, and in the past was an Assistant Clinical Professor of Psychiatry at
Rush Medical School and a Lecturer at the Chicago Medical School.

     DAVID KRONFELD has served as a Director of the Company since February 1997.
Mr. Kronfeld founded JK&B Capital in January 1996 and has been its Manager since
that time. Mr. Kronfeld is a General Partner at Boston Capital Ventures where he
specializes in the telecommunications and software industries. From October 1984
to August 1989, Mr. Kronfeld 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.

     GLENN W. MILLIGAN, the Company's founder, served as Chairman of the Board
until January 1, 1999 and until August 13, 1998 had been the Chief Executive
Officer of the Company since its inception in October 1992.  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.  Mr. Milligan served as
Area Manager for Showtime Networks, Inc. from March 1984 to June 1985. From July
1979 to November 1983, Mr. Milligan was the Chief Executive Officer of DAEOC,
Inc., a diversified government contractor.

     THOMAS M. NEUSTAETTER  has served as a Director of the Company  since
February 1997. Since March 1999, Mr Neustaetter has been an Executive Member of
JK&B Capital, a venture capital firm. Prior to joining JK&B Capital, Mr.
Neustaetter was a Partner of the Chatterjee Group, an affiliate of Soros Fund
Management, from January 1996 to February 1999. Prior to working at the
Chatterjee Group, Mr. Neustaetter was the President and founder of Bancroft
Capital, a general consulting firm, from December 1994 to December 1995. Mr.
Neustaetter serves on the boards of directors of MGC Communications,


                                       20
<PAGE>

Selectica, Inc., Gloss.com,  emWare, Inc., and Vertex Holdings.  Mr. Neustaetter
earned his B.A. Phi Beta Kappa in Philosophy from the University of California,
Berkeley, and his M.B.A. and M.S. in Information Science from University of
California, Los Angeles.

COMMITTEES OF THE BOARD OF DIRECTORS

     The Board currently has four committees, the Executive Committee and the
Compensation Committee and the Audit Committee and the Special 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.

     The Audit Committee examines and considers matters relating to the
financial affairs of the Company including reviewing the Company's annual
financial statements, the scope of the independent annual audit and the
independent auditor's letter to management concerning the effectiveness of the
Company's internal financial and accounting controls. The current members of the
Audit Committee are Edward T. Joyce and Thomas Neustaetter.

     The Special Committee is authorized to negotiate and execute on behalf of
the Company any and all definitive agreements relating to merger with RCN
Corporation. The current members are Robert J. Currey and Ronald D.
Webster.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     As stated above, the current members of the Compensation Committee are
Messrs. Milligan, Joyce and Neustaetter.  Mr. Milligan also served as the Chief
Executive Officer of the Company from April 1, 1998 until December 31, 1998.

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.

COMPENSATION PLAN

     1998 EMPLOYEE STOCK OPTION PLAN. The Company's 1998 Employee Stock Option
Plan (the "1998 Employee 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 employees of
the Company. The Compensation Committee of the Board of Directors administers
the 1998 Employee Stock Option Plan and grants options to purchase Common Stock
thereunder.

     On April 14, 1998, the Company's Board of Directors approved the 1998
Employee Stock Option Plan for a total of 50,000 shares of common stock to be
awarded to employees of the Company. The Board of Directors allocated
ungranted options from other plans during 1999 to the 1998 employee stock
option plan.

     The Compensation Committee has the exclusive authority to establish,
amend and rescind appropriate rules and regulations relating to the Employee
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
Employee Stock Option


                                       21
<PAGE>

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 25% each year on July 1st and are
fully vested after four years.

     As of December 31, 1999, there were 144,298 options to acquire shares of
Common Stock outstanding pursuant to the 1998 Employee Stock Option Plan, of
which 7,639 were vested.

     1998 KEY MANAGEMENT STOCK OPTION PLAN. The Company's 1998 Stock Option Plan
(the "1998 Key Management 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 1998 Key
Management Stock Option Plan and grants options to purchase Common Stock
thereunder.

     On April 14, 1998, the Company's Board of Directors approved the 1998 Key
Management Stock Option Plan for a total of 150,000 shares of common stock to be
awarded to key management employees. On June 18, 1999 the Board of Directors
voted to suspend this stock option plan. No further awards were granted and the
balance of shares not awarded was allocated to one or more existing plans. The
Plan shall remain in effect with respect to all outstanding awards until such
time as those outstanding awards are exercised, canceled, or otherwise
terminated.

     The Compensation Committee has the exclusive authority to establish,
amend and rescind appropriate rules and regulations relating to the Key
Management 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 Key Management 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 Key Management Stock Option Plan, options generally vest 25% each July
1st and are fully vested after four years.

     As of December 31, 1999, options to acquire 140,375 shares of Common
Stock were outstanding pursuant to the 1998 Key Management Stock Option Plan,
of which 56,375 were vested.

     1998 STOCK OPTION AGREEMENT. The Company's 1998 Stock Option Agreement
("the Agreement") 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 employees of the Company.
The Compensation Committee of the Board of Directors administers "the
Agreement" and grants options to purchase Common Stock thereunder.

     On April 14, 1998, the Company's Board of Directors approved the 1998
Stock Option Agreement for a total of 331,200 shares of common stock to be
awarded to two named executive officers of the Company.

     The Compensation Committee has the exclusive authority to establish,
amend and rescind appropriate rules and regulations relating to the
Agreement. Each participant's option will expire as of the earliest of: (i)
the date on which it is forfeited under the provisions of the 1988 Stock
Option Agreement; (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.


                                       22
<PAGE>

     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, 139,100 options were vested immediately on August 28,
1998 and the remaining future vesting options generally vest 1/48th each month
retroactive to the date of hire and are fully vested after four years. All
options have the right to become 100% vested and immediately exercisable prior
to a Change in Control (as such term is defined in the Agreement).

     As of December 31, 1998, options to acquire 331,200 shares of Common Stock
were outstanding pursuant to the 1998 Stock Option Agreement, of which 233,770
were vested.

     1997 STOCK OPTION PLAN. The Company's 1997 Stock Option Plan (the "1997
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.

     On January 30, 1997, the Company's Board of Directors approved a stock
option plan. The original, aggregate number of shares of Common Stock that may
be issued under the 1997 Stock Option Plan would 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. On June 18,
1999 the Board of Directors voted to suspend this stock option plan. No further
awards were granted and the balance of shares not awarded was allocated to one
or more existing plans. The Plan shall remain in effect with respect to all
outstanding awards until such time as those outstanding awards are exercised,
canceled, or otherwise terminated.

     The Compensation Committee has the exclusive authority to establish, amend
and rescind appropriate rules and regulations relating to the 1997 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).

     As of December 31, 1999, options to acquire 575,759 shares of Common Stock
were outstanding pursuant to the Stock Option Plan, of which 423,683 were
vested.

     ISP EMPLOYEE STOCK OPTION PLAN. The Company's ISP Employee 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 ISP Employee Stock Option Plan and grants
options to purchase Common Stock thereunder.

     Effective February 26, 1999, the Company's Board of Directors approved the
stock option plan. The aggregate number of shares of Common Stock that may be
issued under options under the ISP Employee Stock Option Plan may not exceed
98,703 shares. The ISP Employee Stock Option Plan was created by the Company as
a substitute for EnterAct's previous option plan.

     On February 26, 1999, 98,703 shares available under the 1999 ISP Employee
Stock Option Plan were awarded at an exercise price of $4.50 which is equal to
the $4.50 fair market value determined by the Board of Directors at the time of
grant.


                                       23
<PAGE>

     The Compensation Committee has the exclusive authority to establish, amend
and rescind appropriate rules and regulations relating to the ISP Employee 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 ISP Employee 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. All options
vest at 50% on the first anniversary of the original grant date, an additional
25% on the second anniversary of the original grant date, and the remaining 25%
on the third anniversary of the original grant date. Certain of the grant dates
are deemed to be the original grant date under the original EnterAct option
plan. Depending upon the reason for termination of employment, there are
specific provisions that allow the employee to exercise vested shares within 60
days of termination of employment. Options expire after ten years from the date
of grant.

     As of December 31, 1999,  options to acquire  97,830 shares of Common Stock
were outstanding; 77,572 options were vested.

      1999 STOCK INCENTIVE PLAN. The Company's 1999 Stock Incentive 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 1999 Stock Incentive Plan and grants options to
purchase Common Stock thereunder.

     Under the 1999 Stock Incentive Plan 60,000 options are available for grant
primarily to specifically named former employees of EnterAct. Options granted
have an exercise price of $4.50, which was equal to the $4.50 fair market value
determined by the Board of Directors at the time of grant.

     On February 26, 1999, 50,100 of the shares available under the 1999 Stock
Incentive Plan were awarded to such employees with an additional 4,205 options
awarded to newly hired employees of the Company in March 1999 and 2,935 options
awarded to newly hired employees of the Company in April 1999.

     The Compensation Committee has the exclusive authority to establish, amend
and rescind appropriate rules and regulations relating to the ISP Employee 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. All options
vest 50% on the first anniversary (February 26, 2000) of the original grant
date, an additional 25% on the second anniversary of the original grant date and
an additional 25% on the third anniversary of the original grant date and are
therefore fully vested in three years. Depending upon the reason for termination
of employment, there are specific provisions that allow the employee to exercise
vested shares within 60 days of termination of employment. Options expire after
ten years from the date of grant.

     As of December 31, 1999, options to acquire 53,640 shares of Common Stock
were outstanding pursuant to the Stock Option Plan, of which none were vested.


                                       24
<PAGE>

     1999 ISP STOCK PLAN. The Company's 1999 Stock Incentive 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 employees of the Company. The Compensation Committee of the Board of
Directors administers the 1999 ISP Stock Plan and grants options to purchase
Common Stock thereunder.

     On February 26, 1999, the Company's Board of Directors approved the 1999
ISP Stock Plan. The aggregate number of shares of Common Stock that may be
issued under the Plan were 599,958. On February 26, 1999, 599,958 shares
available were awarded to employees of EnterAct at various exercise prices with
vesting status deternined by the respective measurement dates. The series "A"
option price is $35.25 that is subject to a measurement date of the second
anniversary date of the grant and expires on the seventh anniversary date of the
grant. The series "B" option price is $45.33 that is subject to a measurement
date of the second anniversary date of the grant and expires on the seventh
anniversary date of the grant. The series "C" option price is $65.49 that is
subject to a measurement date of the third anniversary date of the grant and
expires on the eighth anniversary date of the grant. Unless terminated, all
options vest at 100% on the measurement date provided the fair market value per
share of the stock is equal to or greater than the exercise price per share on
the measurement date. If on the measurement date the fair market value per share
of the stock is less than the exercise price per share, the option shall
terminate in its entirety. Depending upon the reason and timing for termination
of employment, there are specific provisions that allow the employee to exercise
vested shares for a period up to one year after termination of employment.
Specific vesting guidelines related to change of Company control or death or
disability of the employee could result in 100% vesting of options prior to the
measurement dates previously stated.

     The Compensation Committee has the exclusive authority to establish, amend
and rescind appropriate rules and regulations relating to the 1999 ISP Stock
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 1999 ISP Stock 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.

     As of December 31, 1999, options to acquire 599,219 shares of Common Stock
were outstanding pursuant to this Plan, of which none were vested.

     ROBERT CURREY OPTION PLAN 1999. The Company's Robert Currey 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 employees of the Company. The Compensation Committee of
the Board of Directors administers the Robert Currey Stock Option Plan and
grants options to purchase Common Stock thereunder.

     On November 24, 1999, the Company's Board of Directors approved the stock
option plan. The aggregate number of shares of Common Stock that may be issued
under the Plan were 322,000. On November 24, 1999, 322,000 shares available were
awarded at an exercise price of $10.00 which is equal to the $10.00 fair market
value determined by the Board of Directors at the time of grant. Of the 322,000
shares awarded, 161,000 vested immediately.

     The Compensation Committee has the exclusive authority to establish, amend
and rescind appropriate rules and regulations relating to the Employee 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 Employee 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 1/48 per month starting the month
after grant date. All options become 100% vested in four years.


                                       25
<PAGE>

     As of December 31, 1999, options to acquire 322,000 shares of Common Stock
were outstanding pursuant to this Plan, of which 161,000 were vested.


                                       26
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

                           SUMMARY COMPENSATION TABLE

     The following table sets forth information concerning compensation of the
Company's Chief Executive Officer and each executive officer of the Company
whose total annual salary and bonus equaled or exceeded $100,000 in the fiscal
year (FY) ended December 31, 1999 (collectively, the "Named Executive
Officers"); Compensation information for the nine month transition year (TY)
ended December 31, 1998 and fiscal year (FY) ended March 31, 1998 are also
included:

<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>
Robert J. Currey                     FY-1999      181,000      175,000        4,681           322,000
President and Chief Executive        TY-1998       65,133      441,346       84,418           278,200
  Officer                            FY-1998       92,780            0            0                 0

Glenn W. Milligan,                   FY-1999      268,862            0       44,111                 0
  Chairman of  the Board  until      TY-1998      179,779       25,000        6,488            27,492.2 (2)
  January 1, 1999                    FY-1998      188,648       48,089       29,169           131,160.3

Ronald D. Webster                    FY-1999      166,000      184,231            0            50,000
Chief Financial Officer              TY-1998      113,003       50,000        3,692            53,000
                                     FY-1998       92,308       50,000        3,462           109,300.2

David Jacobs                         FY-1999      147,969       35,815          277                 0
Vice President of Customer           TY-1998       62,289            0            0            45,000
  Operations and Planning            FY-1998            0            0            0                 0

Christopher Young                    FY-1999      150,000       10,815            0            15,000
Vice President and Chief             TY-1998       63,462            0        8,137            30,000
  Information Officer                FY-1998

Dennis Parker                        FY-1999      150,000       10,815        3,853                 0 (3)
Vice President of Marketing and      TY-1998       22,500            0            0            30,000
  Planning until January 7, 2000     FY-1998            0            0            0                 0

</TABLE>

(1)  Includes amounts reimbursed for relocation expenses; and in the case of Mr.
     Milligan, the amount includes an annual membership fee to a private club.

(2)  On December 31, 1998, the Company entered into an agreement with Glen
     Milligan, a Director of the Company and Chairman of the Company's Board of
     Directors, whereby the Company will issue 27,492.2 common shares to Mr.
     Milligan over a period of three years beginning August 21, 1999, or such
     other number of shares as is necessary to provide Mr. Milligan with .261%
     of the Company's common stock outstanding at August 21st of each year for
     the next three years. During 1999, 9,247 shares were issued to Mr. Milligan
     under this agreement.

(3)  Mr. Parker was the Company's Vice President of Marketing and Planning from
     November 1998 to January 2000. Mr. Parker left the Company in January 2000.


                                       27
<PAGE>

     The following table contains certain information concerning the stock
option grants made to each of the Named Executive Officers during the year ended
December 31, 1999.

<TABLE>
<CAPTION>

                        OPTION GRANTS IN LAST FISCAL YEAR
                                INDIVIDUAL GRANTS
                        ---------------------------------

                      NUMBER OF      % OF TOTAL                                                 POTENTIAL REALIZABLE VALUE
                      SECURITIES      OPTIONS                                                   AT ASSUMED ANNUAL RATES OF
                      UNDERLYING     GRANTED TO    EXERCISE OR    MARKET PRICE                 STOCK PRICE APPRECIATION FOR
                       OPTIONS       EMPLOYEES IN  BASE PRICE      AT DATE OF    EXPIRATION         OPTION TERM (3)
NAME                   GRANTED       FISCAL YEAR     ($/SH)       GRANT ($/SH)       DATE             5%              10%
----                   -------       -----------     ------       ------------       ----             --              ---
<S>                     <C>            <C>           <C>              <C>           <C>            <C>           <C>
Robert J. Currey        322,000        24.33%        $10.00           $10.00        11/24/09       $5,020,253    $8,351,851
Ronald D. Webster        50,000         3.78%        $ 4.50           $ 4.50         6/18/09       $  350,794    $  583,592
Christopher Young        15,000         1.13%        $ 4.50           $ 4.50        10/01/09       $  105,238    $  272,961

</TABLE>

(1)    Stock options vest 1/48th each month (Currey, Milligan, and Webster) or
       1/4 each year (Young) and are fully vested after four years; provided
       that such officer remains continuously employed by the Company.

(2)    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, and 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 December 31, 1999 by each of the Named
Executive Officers. None of such Named Executive Officers exercised any options
during the year ended December 31, 1999.

<TABLE>
<CAPTION>

                                AGGREGATED FISCAL YEAR-END OPTION VALUES


                                NUMBER OF SECURITIES UNDERLYING     VALUE OF UNEXERCISED IN-THE-MONEY
                                 UNEXERCISED OPTIONS AT FISCAL                  OPTIONS AT
                                         YEAR END                        FISCAL YEAR END (1)
                                -------------------------------     ---------------------------------
NAME                            EXERCISABLE       UNEXERCISABLE      EXERCISABLE       UNEXERCISABLE
----                            -----------       -------------      -----------       -------------
<S>                                 <C>               <C>              <C>                 <C>
Robert J. Currey                    363,853           236,436          $3,984,464          $2,087,152
Glenn W. Milligan                   131,160              -             $1,951,661              -
Ronald D. Webster                   120,523            91,777          $1,593,822          $1,217,064
Christopher Young                    15,000            30,000          $  172,500          $  345,000
David Jacobs                         18,750            26,250          $  215,625          $  301,875
Dennis Parker                        15,000              -             $  172,500              -

</TABLE>

(1)  There was no public trading market for the Common Stock as of December 31,
     1999. 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 December 31, 1999 ($16.00 per


                                       28
<PAGE>

     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, the absence of a market for its Common Stock, and the pending
     merger with RCN Corporation.

EMPLOYMENT AGREEMENTS

     GLENN W. MILLIGAN. Mr. Milligan entered into an agreement with the Company
as of January 1, 1999 with a term that ends on August 21, 2001. As of August 31,
1998, Mr. Milligan ceased to be the Chief Executive Officer of the Company and
on January 1, 1999 ceased to be the Chairman of the Board. However, pursuant to
the agreement, Mr. Milligan continues to be entitled to an annual base salary of
$170,000 and an annual bonus of $100,000. Mr. Milligan is also entitled to
receive annually the lesser of 20,000 shares of the Company's common stock or
such other number of shares as is necessary to provide him with .261% of the
outstanding shares of common stock as of August 21 of each year through August
21, 2001. Mr. Milligan can also receive stock options covering such number of
shares pursuant to any separate agreement. Mr. Milligan is generally entitled to
the standard executive benefits provided by the Company. In the event of his
death Mr. Milligan's spouse, or his designated beneficiary, is entitled to
continue to receive the benefits to which Mr. Milligan would have been entitled
to under the agreement for the remainder of the term.

     ROBERT J. CURREY. Mr. Currey was employed by the Company as its President
and Chief Executive Officer pursuant to an employment agreement dated March 6,
1998. Pursuant to the employment agreement Mr. Currey is entitled to an annual
base salary of at least $181,000 and an annual bonus of at least $175,000. Mr.
Currey is eligible for an annual review and at the discretion of the Board of
Directors his salary can be increased but not decreased. Mr. Currey's stock
option agreement dated November 24, 1999 entitled him to receive stock options
for 322,000 shares of the Company's common stock, 50% of which vested
immediately with the remaining "later vesting stock" to be vested over four
years from the date of execution of the agreement. All options become 100%
vested and immediately exercisable upon a change of control. The Board may also
award a special bonus to Mr. Currey. Upon a termination of his employment
agreement, Mr. Currey is generally entitled to specific severance benefits, and
depending on the reason for termination, he may be entitled to $350,000 either
in lump sum or over a one year period . In addition , if prior to three years
from effective date then employee receives either: (i) $750,000 less the
$350,000 paid above or (ii) retain vested stock options.

     RONALD D. WEBSTER. Mr. Webster entered into an employment agreement with
the Company as of September 1, 1998. The employment agreement will expire on
January 1, 2002. Pursuant to the employment agreement, Mr. Webster is entitled
to an annual base salary of $166,000 and an annual bonus of $50,000 on January
1, 2000. The agreement provides for Mr. Webster to receive bonus payments of
$100,000 for the remaining years. 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.

     TRACY SNELL. Mr. Snell entered into an employment agreement with the
Company as of February 26, 1999. The employment agreement will expire on
February 26, 2002. Pursuant to the employment agreement, Mr. Snell is entitled
to an annual base salary of $150,000 and is entitled to participate in any
performance based bonus plan provided by the employer. 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, depending on the
reason for termination, Mr. Snell is generally entitled to severance benefits,
and he may be entitled to an amount equal to one times the annual salary and
bonus he would have received for the year during which such termination occurs.

     MICHAEL CLORAN. Mr. Cloran entered into an employment agreement with the
Company as of February 26, 1999. The employment agreement will expire on
February 26, 2002. Pursuant to the employment


                                       29
<PAGE>

agreement, Mr. Cloran is entitled to an annual base salary of $150,000 and is
entitled to participate in any performance based bonus plan provided by the
employer. 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, depending on the reason for termination, Mr. Cloran is generally
entitled to severance benefits, and he may be entitled to an amount equal to one
times the annual salary and bonus he would have received for the year during
which such termination occurs.

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


                                       30
<PAGE>

ITEM 12.    PRINCIPAL SHAREHOLDERS.

     The following table sets forth certain information at December 31, 1999,
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 CONVERTIBLE
                                                     OF COMMON STOCK         8% CUMULATIVE
                                                       BENEFICIALLY         PREFERRED STOCK         PERCENT OF AGGREGATE
NAME OF BENEFICIAL OWNER                                OWNED(1)         BENEFICIALLY OWNED(2)       VOTING RIGHTS(3)
------------------------                             ----------------     ---------------------       ----------------

<S>                                                     <C>                     <C>                         <C>
Purnendu Chatterjee(4)                                   757,600.3                633.2                     26.0%
JK&B Capital(5)                                          378,800.2                316.6                     13.2
William Farley(6)                                        303,040.0                253.3                     10.4
Myron M. Cherry(7)                                       269,625.3                 12.7                      5.3
Boston Capital Ventures III, L.P.(8)                     151,520.1                126.6                      5.3
Elske Bolitho(9)                                         305,000.0                                           5.8
Thomas Neustaetter(4)(10)                                757,600.3                633.2                     26.0
Charles E. Kaegi, M.D.(11)                               932,480.0                  6.3                     17.1
Edward T. Joyce(12)                                      758,496.7                 50.8                     14.7
David Kronfeld(13)                                       530,320.3                443.2                     18.5
Glenn W. Milligan(14)                                   700,685.58                  4.7                     13.1
James H. Lowry                                            19,000.0                                             *
Elzie Higginbottom(15)                                    62,816.7                                           1.2
Robert Currey(16)(22)                                      318,450                                           6.0
Ronald Webster(17)(22)                                  147,138.89                  9.5                      3.0
Michael Cloran(18)(22)                                     309,104                                           5.9
Tracy Snell(19)(22)                                        311,504                                           5.9
David Jacobs(20)(22)                                        18,750                                             *
Christopher Young(21)(22)                                   20,000                                             *
Dennis Parker(22)                                                0                                             *
All executive officers and directors as a group (23)     3,296,338              62,5080                     20.1

</TABLE>

* Less than 1%.

  (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 March 15, 2000, 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


                                       31
<PAGE>

       exercise of options and warrants beneficially owned by such owner and
       which are exercisable within 60 days of March 15, 2000. The denominator
       of such fraction is the sum of (a) the aggregate number of shares of
       Common Stock outstanding on March 15, 2000, 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
       March 15, 2000 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 March 15, 2000.

  (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, 16,057.2 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, 31,169.8 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.

  (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 808, 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.

  (6)  The Percent of Aggregate Voting Rights excludes 89,956.1 shares of
       non-voting Common Stock. Mr. Farley disclaims beneficial ownership of all
       shares of non-voting common stock except 26,237.2 shares. The address of
       Mr. Farley is 233 South Wacker Drive, 5000 Sears Tower, Chicago,
       Illinois, 60606.

  (7)  Includes 90,000 shares of Common Stock owned by Patricia M. Cherry,
       Trustee, Cherry Family Trust UTA May 11, 1995. Also 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.

  (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


                                       32
<PAGE>

       of Aggregate Voting Rights excludes 44,978.1 shares of non-voting Common
       Stock beneficially owned by Boston Capital Ventures III, L.P.

 (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 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, 115,754.5 shares
       of Common Stock, 3.2 shares of Class A Convertible 8% Cumulative
       Preferred Stock and 2,663.5 shares of Common Stock issuable upon exercise
       of warrants held by Charles E. Kaegi, MD Declaration of Trust dated
       11-22-97 and 2,570.0 shares of Common Stock held by Charles E. Kaegi IRA.
       Also includes 104,000.0 shares of Common Stock and 376,721.8 shares of
       common stock issuable upon exercise of options held jointly with Mr.
       Kaegi's wife, and 109.744.5 shares of Common Stock and 3.2 shares of
       Class A Convertible 8% Cumulative Preferred Stock held by Wendy L. Kaegi
       Declaration of Trust dated 11-22-97 and 17,470 shares of Common Stock
       held by Wendy L. Kaegi, IRA. The Percent of Aggregate Voting Rights
       excludes 2,248.9 shares of non-voting Common Stock held by Mr. Kaegi and
       1,124.5 shares of non-voting stock held by Wendy L. Kaegi Declaration of
       Trust dated 11-22-97.

(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, 4.587 shares of Common Stock, 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 1,439.3 shares of Common Stock 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.

(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. a
       General Partner of JK&B Capital, L.P. and JK&B Capital II, L.P. Mr.
       Kronfeld is General Partner of Boston Ventures III, LP. The business
       address of Mr. Kronfeld is c/o JK&B Capital, 205 North Michigan, Suite
       808, Chicago, IL 60601.

(14)   Includes 316,160.3 shares of Common Stock issuable upon exercise of
       options and 3995.3 shares of Common Stock issuable upon exercise of
       Warrants held by Mr. Milligan. Also includes 243,750 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.

(15)   Includes 24,816.7 shares of Common Stock issuable upon exercise of
       options.

(16)   Includes 318,450 of Common Stock issuable upon exercise of options.

(17)   Includes 142,606.33 Common Stock issuable upon exercise of options and
       7990.6 shares of Common Stock issuable upon exercise of Warrants. Also
       includes 3165.5 shares of Common Stock and 8.9


                                       33
<PAGE>

       shares of Class A Convertible 8% Cumulative Preferred Stock held by
       LaSalle National Bank, as custodian for Ron Webster IRA Rollover. The
       Percent of Aggregate Voting Rights excludes 3165.5 shares of non-voting
       Common Stock.

(18)   Includes 152,248.0 shares of Common Stock held by Mr. Cloran's wife and
       3,750 shares of Common Stock issuable upon exercise of options held by
       Mr. Cloran.

(19)   Includes 154,448.0 shares of Common Stock held by Mr. Snell's wife and
       3,750 shares of Common Stock issuable upon exercise of options held by
       Mr. Snell.

(20)   Includes 18,750 shares of Common Stock issuable upon exercise of options.

(21)   Includes 20,000 shares of Common Stock issuable upon exercise of options.

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

(23)   Includes the aggregate of 1,289,688.3 shares of Common Stock issuable
       upon exercise of options and 20,302.995 shares of Common Stock issuable
       upon exercise of warrants. See notes 10, 11, 12, 13, 14,15, 16, 17, 18,
       19, 20 and 21 above. The Percent of Aggregate Voting Rights excludes
       407,682.6 shares of non-voting Common Stock.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

SALE OF CAPITAL STOCK

     In April 1998, pursuant to a Purchase, Joinder & Waiver Agreement, the
Company issued 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 an investor. In addition,
2,248.9 shares of voting common stock and 2,248.9 shares of non-voting common
stock were issued in conjunction with this sale.

     The Company believes that the transaction set forth above was 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 were approved by a majority of the disinterested members of the
Board of Directors.


                                       34
<PAGE>

                                     PART IV

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

(a)      Financial Exhibits, Financial Statement Schedule and Exhibits:

         1.       Financial Statements

                  -   Report of Independent Public Accountants
                  -   Consolidated Balance Sheets as of December 31, 1999 and
                      December 31, 1998.
                  -   Consolidated Statements of Income for the year ended
                      December 31, 1999, the nine months ended December 31,
                      1998, and the year ended March 31, 1998.
                  -   Consolidated Statements of Changes in Shareholders' Equity
                      for the twelve months ended December 31, 1999, the nine
                      months ended December 31, 1998, and the twelve months
                      ended March 31, 1998.
                  -   Consolidated Statements of Cash Flows for the twelve
                      months ended December 31, 1999, the nine months ended
                      December 31, 1998, and the twelve months ended March 31,
                      1998.
                  -   Notes to Consolidated Financial Statements

         2.       Financial Statement Schedule

                  The following schedule, for which provision is made in the
                  applicable accounting regulations of the Securities Exchange
                  Commission and is thereby required is filed herewith:

                  Schedule II - 21st Century Telecom Group, Inc. - Consolidated
                  Valuation and Qualifying Accounts for the years ended December
                  31, 1999 and 1998.

                  All other schedules are omitted because they are not
                  applicable, immaterial or the required information is included
                  in the Consolidated Financial Statements on notes thereto.

(b)      Reports on Form 8-K:

         On Current Report Form 8-K, dated December 12, 1999, under "Item 5.
         Other Events." and "Item 7. Financial Statements and Exhibits", the
         Company announced a definitive merger agreement with RCN Corporation
         and filed a copy of the Merger Agreement in its most recent filing with
         the Securities and Exchange Commission (SEC).

         1.       Exhibits

         Exhibits listed in the Exhibit Index are filed with this report or
incorporated by reference therein.


                                       35
<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. (the "Company") (an Illinois corporation) and
subsidiaries as of December 31, 1999 and December 31, 1998, and the related
consolidated statements of operations, cash flows and shareholders' equity for
the year ended December 31, 1999, the nine months ended December 31, 1998, and
the twelve months 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 auditing standards generally
accepted in the United States. 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 for the year ended December 31, 1999, the
nine months ended December 31, 1998, and the twelve months ended March 31, 1998,
in conformity with accounting principles generally accepted in the United
States.

         The accompanying statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has experienced recurring losses from
operations and has a net capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 13. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

         Our audits are made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule included
in Item 14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

                                         Arthur Andersen LLP

Chicago, Illinois
March 14, 2000


                                       36
<PAGE>

                        21st CENTURY TELECOM GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>


                                                                                                 December 31,      December 31,
                                                                                                    1999              1998
                                                                                                -------------      -------------
                                     ASSETS
<S>                                  ------                                                    <C>                <C>
CURRENT ASSETS
Cash and cash equivalents                                                                       $  10,332,386      $  72,901,622
Accounts receivable, less allowances of $472,188 and $1,376, respectively                           1,220,929            157,082
Short term investments                                                                             17,655,227         98,464,936
Inventory                                                                                          19,303,501         10,385,575
Prepaid expenses and other                                                                            770,709            598,878
                                                                                                -------------      -------------
    Total current assets                                                                           49,282,752        182,508,093

PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements                                                                             10,515,653          5,647,709
Property, plant and equipment                                                                     170,736,029         57,475,153
Less: accumulated depreciation                                                                    (15,659,781)        (4,814,143)
                                                                                                -------------      -------------
    Property, plant and equipment, net                                                            165,591,901         58,308,719

OTHER ASSETS
Restricted cash collateral reserve                                                                  4,089,496          1,796,880
Prepaid franchise fees                                                                              3,715,807          3,685,961
Debt issuance costs, net of amortization of $2,966,311 and $1,386,138, respectively                 5,020,932          6,601,105
Deferred franchise costs, net of amortization of $811,065 and $623,681, respectively                  258,066            350,144
Bank commitment fee, net of amortization of $285,904 and $78,604, respectively                        691,002            898,302
Deferred mapping and design, net of amortization of $149,226 and $93,071, respectively                 83,122             44,880
Goodwill, net of amortization of $864,053                                                           9,603,603                -
Other deferred costs                                                                                  169,727            149,889
                                                                                                -------------      -------------
    Total other assets                                                                             23,631,755         13,527,161
                                                                                                -------------      -------------
         Total assets                                                                           $ 238,506,408      $ 254,343,973
                                                                                                =============      =============

                                                  LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES                               ------------------------------------
Accounts payable                                                                                $  20,703,909      $  10,688,242
Accrued severance                                                                                   1,277,072          1,230,000
Notes payable                                                                                       2,000,000                -
Accrued expenses and other                                                                          2,347,023          1,261,982
                                                                                                -------------      -------------
    Total current liabilities                                                                      26,328,004         13,180,224

Senior discount notes, net of discount of $112,597,267 and $140,681,223, respectively             250,537,733        222,453,777
Notes payable                                                                                       2,000,000                -
Other long term obligations                                                                         2,472,842                -
                                                                                                -------------      -------------
    Total noncurrent liabilities                                                                  255,010,575        222,453,777
                                                                                                -------------      -------------
         Total liabilities                                                                        281,338,579        235,634,001

REDEEMABLE PREFERRED STOCK
13 3/4% senior cumulative exchangeable preferred stock, $.01 par value
     63,485.88 and 55,458.12 shares outstanding, respectively                                      61,666,268         52,617,006

SHAREHOLDERS' EQUITY
Class A convertible 8% cumulative preferred stock, no par value                                    28,626,168         24,611,966
Voting and non-voting common stock                                                                 11,433,920          7,862,836
Common shares to be issued                                                                             81,821            123,432
Retained deficit                                                                                 (144,640,348)       (66,505,268)
                                                                                                -------------      -------------
    Total shareholders' equity                                                                   (104,498,439)       (33,907,034)
                                                                                                -------------      -------------
         Total liabilities and shareholders' equity                                             $ 238,506,408      $ 254,343,973
                                                                                                =============      =============

</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       37
<PAGE>


                        21st CENTURY TELECOM GROUP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                             FOR THE YEAR ENDED   FOR THE NINE MONTHS ENDED  FOR THE YEAR ENDED
                                             DECEMBER 31, 1999       DECEMBER 31, 1998         MARCH 31, 1998
                                             ------------------   -------------------------  ------------------
<S>                                             <C>                    <C>                    <C>
OPERATING REVENUES                              $ 11,320,134           $    873,898           $    189,023
                                                ------------           ------------           ------------

OPERATING EXPENSES
Network operations                                11,849,414              2,678,047              2,023,310
Sales and marketing                                9,923,165              3,533,731              2,213,723
General and administrative                        20,959,037             12,812,019              8,003,196
Depreciation and amortization                     11,972,805              3,876,779              1,411,847
                                                ------------           ------------           ------------
     Total operating expenses                   $ 54,704,421           $ 22,900,576           $ 13,652,076
                                                ------------           ------------           ------------

OPERATING LOSS                                   (43,384,287)           (22,026,678)           (13,463,053)


OTHER (INCOME) EXPENSE
Interest expense                                  25,893,790             18,232,959              3,722,947
Interest income                                   (5,851,369)            (8,670,695)            (2,373,867)
Amortization of debt issuance costs                1,591,667              1,199,770                218,411
Other (income) expense                                53,241                    -                      -
                                                ------------           ------------           ------------
     Total other (income) expense               $ 21,687,329           $ 10,762,034           $  1,567,491
                                                ------------           ------------           ------------

NET LOSS                                         (65,071,616)           (32,788,712)           (15,030,544)

Preferred stock requirements                     (13,063,465)            (8,928,707)            (4,234,463)
                                                ------------           ------------           ------------

NET LOSS ATTRIBUTABLE TO COMMON SHARES          $(78,135,081)          $(41,717,419)          $(19,265,007)
                                                ============           ============           ============

Weighted average common
    shares outstanding                           4,126,826.1            3,493,836.5            2,615,061.0

BASIC AND DILUTED LOSS PER SHARE                $     (18.93)          $     (11.94)          $      (7.37)
                                                ============           ============           ============

</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       38
<PAGE>

                        21st CENTURY TELECOM GROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                      FOR THE YEAR              FOR THE NINE           FOR THE YEAR
                                                                          ENDED                 MONTHS ENDED             ENDED
                                                                   DECEMBER 31, 1999         DECEMBER 31, 1998       MARCH 31, 1998
                                                                   -----------------         -----------------       --------------
<S>                                                                  <C>                     <C>                     <C>
OPERATING ACTIVITIES
Net loss                                                             $ (65,071,616)          $ (32,788,712)          $ (15,030,544)

Adjustments to reconcile net loss to net
  cash used for operating activities:
     Depreciation and amortization                                      11,972,805               3,876,779               1,411,847

     Amortization of debt discount                                      28,083,956              18,975,760               3,478,017

     Amortization of debt issuance costs                                 1,591,668               1,199,770                 218,411

     Stock compensation                                                    422,322                 843,789               1,004,776

     Common stock to be issued                                                 -                   123,432                     -

     Changes in operating assets and liabilities:
        Receivables, net                                                  (720,105)               (146,723)                103,121

        Other current assets                                            (9,079,768)             (8,982,612)             (2,299,723)

        Accounts payable                                                10,135,573                (274,621)              3,154,912

        Accrued expenses and other
            current liabilities                                            264,238                 963,330                     -

        Noncurrent assets and liabilities, net                          (3,292,390)             (1,308,343)               (121,333)
                                                                     -------------           -------------           -------------
NET CASH USED FOR OPERATING ACTIVITIES                               $ (25,693,317)          $ (17,518,151)          $  (8,080,516)
                                                                     -------------           -------------           -------------

INVESTING ACTIVITIES
(Purchases) sales/maturities of short term investments, net             80,809,709             (88,464,936)            (10,000,000)
Acquisition, net of cash acquired                                       (2,653,914)                    -                       -
Capital expenditures                                                  (117,678,927)            (38,305,421)            (15,665,047)
                                                                     -------------           -------------           -------------
NET CASH USED FOR INVESTING ACTIVITIES                               $ (39,523,132)          $(126,770,357)          $ (25,665,047)
                                                                     -------------           -------------           -------------

FINANCING ACTIVITIES
Payable to bank                                                                -                  (419,068)                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
Payments on debentures                                                         -                  (131,040)                    -
Proceeds from issuance of class A preferred stock,
     net of issuance costs                                                     -                   100,000               2,597,380
Issuance of common stock                                                   151,341                     -                       -
Repurchase of Options                                                     (183,194)                    -                       -
Proceeds from Leases                                                     2,679,066                     -                       -
                                                                     -------------           -------------           -------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES                 $   2,647,213           $    (450,108)          $ 243,154,859
                                                                     -------------           -------------           -------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       (62,569,236)           (144,738,616)            209,409,296
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                        72,901,622             217,640,238               8,230,942
                                                                     -------------           -------------           -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $  10,332,386           $  72,901,622           $ 217,640,238
                                                                     =============           =============           =============
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       39
<PAGE>

                        21ST CENTURY TELECOM GROUP, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999, NINE MONTHS ENDED DECEMBER 31,
                1998, AND THE TWELVE MONTHS ENDED MARCH 31, 1998


<TABLE>
<CAPTION>
                                                                                                COMMON
                                                                                              SHARES TO BE            CLASS A
                                                    TOTAL               COMMON STOCK            ISSUED            PREFERRED STOCK
                                                --------------         -------------         -------------        ----------------
<S>                                             <C>                     <C>                    <C>                 <C>
BALANCES, MARCH 31, 1997                        $  (2,960,337)          $  2,565,604           $                   $
Net loss                                          (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

Preferred stock accretion                             (87,014)                                                         1,300,633

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              6,974,836                                  21,751,665
Net loss                                          (32,788,712)
Stock issuances                                       223,432                 44,211              123,432                 55,789
Accrued preferred stock dividends                  (5,437,332)                                                         1,620,938
Preferred stock accretion                            (686,841)                                                         1,183,574
Stock options                                         843,789                843,789
                                                -------------           ------------           ----------          -------------
BALANCES, DECEMBER 31, 1998                       (33,907,034)             7,862,836              123,432             24,611,966
Net loss                                          (65,071,616)
Stock Issued for EnterAct acquisition               3,136,473              3,136,473
Stock issuances                                       153,872                153,872
Accrued preferred stock dividends                  (8,165,748)                                                         2,311,890
Preferred stock accretion                            (883,514)                                                         1,702,312
Issuance of shares to be issued                                               41,611              (41,611)
Stock options                                         422,322                422,322
Repurchase of options                                (183,194)              (183,194)
                                                -------------           ------------           ----------          -------------
BALANCES, DECEMBER 31, 1999                     $(104,498,439)          $ 11,433,920           $   81,821          $  28,626,168
                                                =============           ============           ==========          =============


<CAPTION>
                                                                                               COMMON        COMMON      CLASS A
                                                                  UNEARNED       COMMON      SHARES TO BE      SHARE     PREFERRED
                                            RETAINED DEFICIT     COMPENSATION    SHARES         ISSUED       WARRANTS      SHARES
                                            ----------------     ------------    ------      -------------   --------    ---------
<S>                                         <C>                  <C>         <C>                <C>       <C>            <C>
BALANCES, MARCH 31, 1997                    $   (5,522,830)       $ (3,111)   2,374,343.6        $         1,161,307.6    $
Net loss                                       (15,030,544)
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               (2,846,850)

Preferred stock accretion                       (1,387,647)

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                                                                                      438,870.0

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                       (24,787,871)                -   3,489,467.9           -      1,741,738.9     1,548.5
Net loss                                       (32,788,712)
Stock issuances                                                                    4,497.8      27,429.2        5,327.1         6.3
Accrued preferred stock dividends               (7,058,270)
Preferred stock accretion                       (1,870,415)
Stock options
                                            --------------          --------   -----------      --------    -----------    --------
Balances, December 31, 1998                    (66,505,268)                -   3,493,965.7      27,429.2    1,747,066.0     1,554.8
Net loss                                       (65,071,616)
Stock Issued for EnterAct acquisition                                            696,994.0
Stock issuances                                                                   41,656.8
Accrued preferred stock dividends              (10,477,638)
Preferred stock accretion                       (2,585,826)
Issuance of shares to be issued                                                    9,247.0      (9,247.0)
Stock options
Repurchase of options
                                            --------------         ---------   -----------      --------    -----------    --------
Balances, December 31, 1999                 $ (144,640,348)        $       -   4,241,863.5      18,182.2    1,747,066.0     1,554.8
                                            ==============         =========   ===========      ========    ===========    ========

</TABLE>


        See accompanying Notes to the Consolidated Financial Statements.


                                       40
<PAGE>

                        21ST CENTURY TELECOM GROUP, INC.
                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF  SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF CONSOLIDATION AND PRESENTATION

     21st Century Telecom Group, Inc. ("21st Century" or the "Company") 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 including the nation's second largest business
and financial district.

     It is management's belief that the Company operates as one reportable
operating segment that contains many shared expenses generated by the Company's
various revenue streams. Any segment allocation of shared expenses incurred on
a single network to multiple revenue streams would be impractical and
arbitrary; furthermore, the Company currently does not make such allocations
internally.

     The Company's accounting and reporting principles conform to generally
accepted accounting principles. The consolidated financial statements include
all wholly-owned subsidiaries. There have been no significant intercompany
billing transactions or activities within or between these subsidiaries through
December 31, 1999.

   CASH AND CASH EQUIVALENTS

     Cash and cash equivalents at December 31, 1999 and December 31, 1998
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 December 31, 1999 and December 31, 1998, short
term investments consisted of time deposit accounts, certificates of deposit
and money market deposits, with fixed rates of interest all with maturities of
less than one year. These investments were purchased in accordance with debt
restrictions.

   INVENTORIES

     Inventory consists primarily of converters, modems and materials that will
be requisitioned for use in constructing the Company's network and is stated at
the lower of average cost or market.

   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are stated at cost including labor and
overhead costs associated with construction. Cost includes capitalized interest
on funds borrowed to finance construction. Capitalized interest for the twelve
months ended December 31, 1999 and the nine months ended December 31, 1998 was
$2,207,147 and $780,680, respectively. Depreciation on property, plant and
equipment was computed by applying the straight-line method over the estimated
service lives for depreciable plant and equipment.


                                       41
<PAGE>

Repairs of all property, plant and equipment and minor replacements and renewals
are charged to expense as incurred. Major replacements and betterments are
capitalized. Leasehold improvements are depreciated on a straight-line basis
over the term of the respect lease.

     The lives of depreciable property, plant and equipment range from 3 to 15
years. Effective July 1, 1998, the estimated service lives for hub sites and
outside plant were changed from 7 to 13 years. In addition, the estimated
service lives for certain software and furniture and fixtures were changed from
5 to 7 years. These changes were made to correspond to industry norms for these
types of assets. These changes in depreciable lives resulted in a reduction of
depreciation expense of approximately $1,200,000 for the nine months ended
December 31, 1998.

   DEFERRED FRANCHISE COSTS

     The Company has deferred franchise costs, including legal costs, associated
with obtaining the franchises from the City of Chicago and the Villages of
Skokie and Northbrook. Deferred franchise costs for the City of Chicago and the
Village of Skokie 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 and the Village of
Skokie region. 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 5) have been capitalized and are being amortized using the effective
interest rate method.

   ADVERTISING COSTS

     The Company expenses the cost of advertising as incurred. Advertising
expense for the year ended December 31, 1999 and the nine months ended December
31, 1998 was $2,533,140 and $1,270,592, respectively. The Company did not incur
significant advertising costs for year ended March 31, 1998.

   REVENUE RECOGNITION

     The Company recognizes voice, video, Internet and data revenues as services
are provided to subscribers.

   ACCOUNTING FOR STOCK-BASED COMPENSATION

     The Company adopted Statement of Financial Accounting Standards ("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." See
Note 9 for the disclosures required by SFAS No. 123.

   COMPREHENSIVE INCOME

     The Company has no items that are subject to SFAS No. 130, "Reporting
Comprehensive Income".

   GOODWILL

     As a result of the February 26, 1999 acquisition of EnterAct, the Company
recognized $10,467,656 of goodwill. Goodwill is being amortized over ten years.


                                       42
<PAGE>

   EARNINGS PER SHARE

     Basic per share amounts were based on weighted average common shares
outstanding, excluding common stock equivalents, of 4,126,826.1for the year
ended December 31, 1999, 3,493,836.5 for the nine months ended December 31,
1998, and 2,615,061.0 for the year ended March 31, 1998. Given the anti-dilutive
effect of including common stock equivalents in the calculation, diluted
earnings per share amounts are not presented.

     At December 31, 1999, common stock equivalents included: (1) 1,308,196
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) 959,768.6 vested employee stock
options, and (5) 18,994.7 common share warrants issued to a financial advisor.
The net loss attributable to common shares on which the basic earning 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 December 31, 1998, common stock equivalents included: (1) 1,308,196
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) 575,766.8 vested employee stock
options, and (5) 18,994.7 common share warrants issued to a financial advisor.
The net loss attributable to common shares on which the basic earning 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, 1998, these common stock equivalents 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, 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.

   CASH FLOW INFORMATION

     For the year ended December 31, 1999, the nine months ended December 31,
1998, and the year ended March 31,1998, the Company has not paid any federal or
state income taxes. For the year ended December 31, 1999, the nine months ended
December 31, 1998, and the year ended March 31,1998, the Company paid $88,562,
$131,040 and $193,922, respectively, in interest.

   USE OF ESTIMATES

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

   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


                                       43
<PAGE>

the impairment is permanent, a loss is recognized. No impairment losses have
been recognized by the Company.

   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 amount reported in the
balance sheets for the 12 1/4% Senior Discount Notes approximates fair value.

   RECLASSIFICATIONS

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

2. PROPERTY, PLANT AND EQUIPMENT

   The components of property, plant and equipment follow:


<TABLE>
<CAPTION>

                                                         DECEMBER 31,             DECEMBER 31,        ESTIMATED LIFE
                                                            1999                       1998              (YEARS)
                                                         -------------           ------------           --------
<S>                                                      <C>                     <C>                    <C>
Transmission and distribution systems                    $ 142,519,864           $ 40,831,723           3 - 13
Leasehold improvements                                      10,515,653              5,647,709             15
Furniture and fixtures / Other Equipment                     9,158,050              6,000,386           3 - 7
Capitalized Leases                                           3,298,071                    -              2-4
Construction in progress                                    15,760,044             10,643,044            N/A
                                                         -------------           ------------
Property, plant and equipment, at cost                   $ 181,251,682           $ 63,122,862
      Less: accumulated depreciation                       (15,659,781)            (4,814,143)
                                                         -------------           ------------
Net property, plant and equipment                        $ 165,591,901           $ 58,308,719
                                                         =============           ============

</TABLE>

       Depreciation expense charged to operations for the twelve months ended
December 31, 1999, nine months ended December 31, 1998 and twelve months ended
March 31, 1998 was $11,108,752, $3,629,017 and $1,186,302, respectively.
Pertaining to capitalized leases, accumulated depreciation at December 31, 1999
was $846,628.

3.   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 year ended December 31,
1999, nine months ended December 31, 1998 and the year ended March 31, 1998
amounted to $300,000, $226,027 and $299,994, respectively. These prepaid
franchise fees are reduced as revenues are billed to customers.

4.   ACQUISITION OF BUSINESS

     On February 26, 1999, the Company acquired EnterAct, L.L.C. ("EnterAct"), a
Chicago-based provider of Internet access and commercial data services. EnterAct
had approximately 50 employees. The majority of EnterAct's approximately 10,000
customers were residential dial up Internet access customers; however, a
significant portion of EnterAct's 1998 calendar year revenues were derived from
Internet, data and consulting services provided to its business customer base.
The Company issued 696,944 shares of its no par value common stock valued by the
Company at $4.50 per share to certain officers of EnterAct and agreed to pay an
additional $6,500,000. The Company paid $2,500,000 at the closing and issued two
non-interest bearing notes totaling $4 million. The notes are payable to
executives of EnterAct over two years,


                                       44
<PAGE>

one half due on the first anniversary date and one half due on the second
anniversary date. This acquisition was accounted for as a purchase and
accordingly the purchased assets and assumed liabilities have been recorded at
their fair market values at the date of acquisition. The purchase price exceeded
the estimated fair market value of the net assets acquired resulting in goodwill
in the amount of $10,467,656, which is being amortized using the straight line
method over 10 years. In addition, stock option plans were approved and options
were awarded to certain employees of EnterAct. EnterAct became the Company's
Business Services Group, developing, marketing and selling data and telephony
services to the business community.

     Since the acquisition of EnterAct was accounted for as a purchase its
results of operations have been included with the Company's since the date of
acquisition. Had the Company reflected the acquisition as of the beginning of
each applicable period, its revenues would have increased approximately
$710,000, $2,185,000, and $1,458,000 for the period ended December 31, 1999, the
nine months ended December 31, 1998, and the year ended March 31, 1998. All
other reportable supplemental pro forma information would not be materially
different than the reported amounts.

5.   DEBT

     A summary of debt outstanding at December 31, 1999 and December 31, 1998,
is as follows:

<TABLE>
<CAPTION>

                                                                           DECEMBER 31,          DECEMBER 31,
                                                                              1999                    1998
                                                                         -------------           -------------

<S>                                                                      <C>                     <C>
Notes Payable pursuant to EnterAct Acquisition, due 2000                 $   2,000,000                       -
Notes Payable pursuant to EnterAct Acquisition, due 2001                     2,000,000
Capitalized Leases and Other Long-term Debt                                  2,472,842                       -
Convertible Subordinated Debentures, Series 2, 25%, due 1999                         -                  28,849
12 1/4% Senior Discount Notes Due 2008                                     250,537,733             222,453,777
                                                                         -------------           -------------
Total Debt                                                               $ 257,010,575           $ 222,482,626
Less: Current Portion                                                       (2,000,000)                (28,849)
                                                                         -------------           -------------
Total Long Term Debt                                                     $ 255,010,575           $ 222,453,777
                                                                         =============           =============

</TABLE>


   CAPITALIZED LEASES

     Starting in 1999, the Company entered into capital leases to purchase
vehicles for its fleet. The terms of the leases vary from two to four years. At
December 31, 1999, the Company owed principle payments of $2,120,596. The
company acquired certain leases for computer equipment through the acquisition
of EnterAct. The leases come due at various times in 2,000 and 2,001. At
December 31, 1999, the Company owed $352,246 pertaining to these leases.

   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.

     During the three months ended September 30, 1998, the convertible
subordinated debentures, Series 1, at 25% interest, due 1998 in the amount of
$52,702 plus accrued interest was paid. In addition, the convertible
subordinated debentures, Series 2, at 25% interest, due 1999 in the amount of
$28,849 was reclassed from long term debt to short term debt and is included in
accrued expenses and other in the Consolidated Balance Sheet at December 31,
1998.

                                       45
<PAGE>

     12 1/4% SENIOR DISCOUNT NOTES DUE 2008

     On February 9, 1998, the Company issued $363,135,000 of 12 1/4% Senior
Discount Notes due 2008 (the "Notes"). 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 ended December 31, 1999 and the nine months ended December 31,
1998, the amortized discount totaled $28,083,956 and $18,975,760, respectively.
Issuance costs for the transaction totaled $7,886,825. The amount of
amortization recognized for the year ended December 31, 1999, the nine months
ended December 31, 1998, and the year ended March 31, 1998 wer $1,591,667,
$1,199,770, and $218,411 respectively. 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. In addition,
the Company has the right to redeem up to 1/3 of the Notes with the proceeds of
an initial public offering. 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 December 31, 1999.

   BANK REVOLVING CREDIT FACILITY

     On August 5, 1998, the Company entered into a revolving credit facility
with a number of banks for an aggregate amount of $40,000,000. As of December
31, 1999, no borrowings have been made under this facility. In connection with
the initiation of its bank revolving credit facility, as of December 31, 1998,
the Company incurred $976,906 in bank commitment fees and other related costs,
which are being amortized on a straight-line basis over its five year term.

     The credit facility contains general and financial covenants that place
certain restrictions on the Company. On October 30, 1998 and November 3, 1999,
the Company entered into Amendment No. 1 and Amendment No. 2 respectively, to
its bank revolving credit facility which adjusted certain operating covenants.
The Company is limited with respect to: the incurrence of certain liens; the
sale of assets under certain circumstances; permitting any subsidiary
distribution restrictions; certain consolidations; mergers and transfers; and
the use of loan proceeds.


                                       46
<PAGE>

6.   CLASS A CONVERTIBLE 8% CUMULATIVE PREFERRED STOCK

<TABLE>
<CAPTION>

                                          PREFERRED
                                            SHARES           AMOUNT
                                          ----------       -----------
          <S>                               <C>            <C>
          March 31, 1997                     1,380.3       $16,794,963
               Stock issuance                  168.2         1,783,177
               Accrued dividends                             1,872,892
               Accretion                                     1,300,633
                                          ----------       -----------
          March 31, 1998                     1,548.5       $21,751,665
               Stock issuance                    6.3            55,789
               Accrued dividends                  --         1,620,938
               Accretion                          --         1,183,574
                                          ----------       -----------
          December 31, 1998                  1,554.8       $24,611,966
               Accrued dividends                  --         2,311,890
               Accretion                          --         1,702,312
                                          ----------       -----------
          December 31, 1999                  1,554.8       $28,626,168
                                          ----------       -----------
                                          ----------       -----------

</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
becomes 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.


                                       47
<PAGE>

     -   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.

     -   "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 had 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 5).

     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


                                       48
<PAGE>

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

     On September 23, 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 to each. The purchases were based on the same
terms as those previously mentioned for the $21.8 million preferred stock
issuance.

     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 an investor.

7.   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
            Accrued dividends                         --            5,437,353
            Accretion                                 --              686,841
            Stock dividends                     5,458.12                   --
                                             ------------    -----------------
          December 31, 1998                    55,458.12         $ 52,617,006
            Accrued Dividends                         --            8,165,748
            Accretion                                 --              883,514
            Stock dividends                     8,027.76                   --
                                             ------------    -----------------
          December 31, 1999                    63,485.88         $ 61,666,268
                                             ------------    -----------------
                                             ------------    -----------------
</TABLE>


                                       49
<PAGE>

     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 8).

     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 offering of capital stock
(other than disqualified stock) of the Company to one or more persons primarily
engaged in a 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.

     On February 15, May 17, August 16, and October 12, 1999 the Company issued
1,906.37, 1,971.9, 2,039.69, 2,109.8 respectively, of additional shares of
Exchangeable Preferred Stock as the quarterly dividends on the 13 3/4% Senior
Cumulative Preferred Stock due 2010. On May 15, August 17, and November 16,
1998, the Company issued 1,833.3, 1,781.8 and 1,843.02, respectively, of
additional shares of Exchangeable Preferred Stock as the quarterly dividends on
the 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010.

     The restrictive covenants related to the Exchangeable Preferred Stock are
similar to those indicated for the 12 1/4% Senior Debenture Notes as discussed
in Note 5. The Company is in compliance with these covenants at December 31,
1999.

8.   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.


                                       50
<PAGE>

     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 December 31, 1999 and December 31, 1998 the Company had 50,000,000
shares of no par common stock authorized, of which 4,241,863.5 and 3,493,965.7
are issued and outstanding, respectively.

     Changes in the Company's common shares and related amounts for the year
ended December 31, 1999, nine months ended December 31, 1998 and year ended
March 31, 1998, are as follows:

<TABLE>
<CAPTION>
                                           COMMON
                                           SHARES              AMOUNT
                                      -----------------   -----------------
<S>                                    <C>                   <C>
  March 31, 1997                          2,374,343.6           $  2,565,604
  September 23, 1997                               --                169,727
  November 20, 1997                                --                 28,158
  January 20, 1998                        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           $  6,974,836
  April 14, 1998                              4,497.8                 44,211
         Compensation expense related
         to stock option plan                      --                843,789
                                    -----------------      -----------------
  December 31, 1998                       3,493,965.7           $  7,862,836
  February 26, 1999                           696,994              3,136,473
    Acquisition of EnterAct, LLC
  April 1, 1999
    Repurchase Stock Options                       --               (183,194)
  May 21, 1999                                2,562.1                 11,530
  June 4, 1999                                    500                  2,250
  June 9,1999                                 9,118.7                 41,034
  June 18, 1999                                   100                    450
  July 2, 1999                                    312                  1,404
  Issuance of `To Be Issued Shares'

  August 1, 1999                                9,247                 41,611
  August 9, 1999                                3,746                 16,857
  August 16, 1999                                 802                  3,609
  August 30, 1999                                 578                  2,601
  September 10, 1999                           15,472                 36,040
  October 29, 1999                              8,466                 38,097
         Compensation expense related
         to stock option plan                      --                422,322
                                    -----------------      -----------------
  December 31, 1999                       4,241,863.5          $  11,433,920
                                    -----------------      -----------------
                                    -----------------      -----------------
</TABLE>


     As discussed in Note 6, 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 6 for
additional discussion related to the allocation of


                                       51
<PAGE>

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.

     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 6) 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 7, 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.

     In April 1998, pursuant to a Purchase, Joinder & Waiver Agreement, the
Company issued 2,248.9 shares of voting common stock and 2,248.9 shares of
non-voting common stock and warrants to purchase 5,327.1 shares of Common Stock
at a price of $.000001 per share to an investor.

     On December 31, 1998, the Company entered into an agreement with Glen
Milligan, a Director of the Company and Chairman of the Company's Board of
Directors, whereby the Company will issue 27,429.2 common shares to Mr. Milligan
over a period of three years, beginning August 21, 1999, or such other number of
shares as is necessary to provide Mr. Milligan with .261% of the Company's
common stock outstanding at August 21 of each year for the next three years.
These shares have been reflected on the Consolidated Balance Sheet at December
31, 1999 and December 31, 1998 as common shares to be issued.

9.   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. Options to
purchase 728,667.8 shares of the Company's stock were originally granted under
the plan of which 575,758 were outstanding as of December 31, 1999. Options vest
over 48 months from the date of employment and expire after ten years. Options
vested under this plan as of December 31, 1999 totaled 423,682. During the nine
months ended December 31, 1998, an executive participant in this plan separated
from the Company. This executive was originally granted 91,083.5 shares of which
54,083.5 shares were forfeited as of December 31, 1998. During 1999, additional
shares totaling 52,719 were forfeited as a result of the separation of various
officers. In addition, the company purchased 51,847 of vested options from a
separated officer at $4.50 per share. The purchase price and the fair market
value as determined by the Board of Directors was $4.50 at the time of
purchase; the exercise price was $1.12. The Company reallocated the purchased
options among existing option plans.

     Effective June 18, 1999, the Board of Directors voted to suspend the common
stock option plan. No further awards will be granted. The Plan remains in effect
with respect to all outstanding awards until such time as those outstanding
awards are exercised, canceled, or otherwise terminated. The balance of shares
reserved for the plan was allocated to one or more existing plans.

     Effective April 14, 1998, the Company established three new additional
stock option plans: the Executive Plan, the Key Management Plan, and the
Employee Plan.

     Under the Executive Plan, 331,200 options are available for grant to two
executive officers of the Company. As of December 31, 1999, all 331,200 shares
available under the Executive Plan were awarded. Effective March 6, 1998,
278,200 options were awarded to an executive officer. The exercise price of the
278,200 shares was established at $1.12 per share which is less than the $4.50
per share fair market value determined by the Board of Directors. One half of
the 278,200 options awarded on March 6, 1998 or 139,100 shares vested
immediately and a total of $470,158 was recorded as compensation expense as a
result of the vesting of the 139,100 options. On April 14, 1998, an executive
officer was awarded 53,000


                                       52
<PAGE>

options under the Executive Plan at an exercise price of $4.50 per share, which
was determined by the Board of Directors to be the fair market value of the
underlying common stock at the time of grant. All remaining options vest over 48
months from the date of employment and expire after ten years. At December 31,
1999, 233,770 options were vested under the Executive Plan.

     Under the Key Management Plan and the Employee Plan, 158,000 and 159,657.7
options, respectively, were available for grant. As of December 31, 1999, a
total of 140,375 options were granted under the Key Management Plan, 56,375 of
which are vested. As of December 31, 1999, a total of 144,298 options were
granted under the Employee Plan, of which 7,638 are vested. The exercise price
of options under both plans, which was determined by the Board of Directors to
be the fair market value of the underlying common stock, is $4.50 per share. All
options under these plans vest over four years beginning July 1, 1999 and expire
10 years from date of grant.

     Effective February 26, 1999, the Company established three new additional
stock option plans related to the former employees of EnterAct. The Company
acquired EnterAct on February 26, 1999. The plans are the 21st Century Telecom
Group, Inc. 1999 Stock Incentive Plan (the "1999 Stock Incentive Plan") and the
21st Century Telecom Group, Inc. ISP Employee Stock Option Plan (the "ISP
Employee Stock Option Plan").

     Under the 1999 Stock Incentive Plan 60,000 options are available for grant
primarily to specifically named former employees of EnterAct. On February 26,
1999, 50,100 of the shares available under the 1999 Stock Incentive Plan were
awarded to such employees with an additional 4,205 options awarded to newly
hired employees of the Company in March 1999 and 2,935 options awarded to newly
hired employees of the Company in April 1999. Options related to both awards
have an exercise price of $4.50, which is equal to the $4.50 fair market value
determined by the Board of Directors. All options vest at 25% of the total
shares subject to the option, so that the option is fully vested on the fourth
anniversary of the grant date. As of December 31, 1999, 53,640 options remain
outstanding of which none are vested.

     Under the ISP Employee Stock Option Plan 98,703 options were available for
grant to specifically named former employees of EnterAct. The ISP Employee Stock
Option Plan was created by the Company as a substitute for EnterAct's previous
stock option plan. On February 26, 1999, 97,911 shares available under the 1999
ISP Employee Stock Option Plan were awarded at an exercise price of $4.50 which
is equal to the $4.50 fair market value determined by the Board of Directors.
For purposes of vesting, certain of the grant dates are deemed to be the
original grant date under the original EnterAct option plan. All options vest at
50% on the first anniversary of the original grant date, an additional 25% on
the second anniversary of the original grant date, and an the final 25% on the
third anniversary of the original grant date. Depending upon the reason for
termination of employment, there are specific provisions that allow the employee
to exercise vested shares within 60 days of termination of employment. Options
expire after ten years from the date of grant. As of December 31, 1999, 97,830
options remain outstanding of which 77,572 are vested.

     Under the 1999 ISP Stock Plan 599,916 options are available for grant to
specifically named former employees of EnterAct. On February 26, 1999, all
599,916 shares available under the 1999 ISP Stock Plan were awarded at various
exercise prices with the vesting status determined by the respective measurement
dates. Under the 1999 ISP Stock Plan, three series of options have been issued.
The series "A" option price is $35.25 that is subject to a measurement date of
the second anniversary date of the grant and expires on the seventh anniversary
date of the grant. The series "B" option price is $45.33 that is subject to a
measurement date of the second anniversary date of the grant and expires on the
seventh anniversary date of the grant. The series "C" option price is $65.49
that is subject to a measurement date of the third anniversary date of the grant
and expires on the eighth anniversary date of the grant. Unless terminated, all
options vest at 100% on the measurement date provided the fair market value per
share of the stock is equal to or greater than the exercise price per share on
the measurement date. If on the measurement date the fair market value per share
of the stock is less than the exercise price per share the option shall
terminate in its entirety. Depending upon the reason and timing for termination
of employment, there are specific provisions that allow the employee to exercise
vested shares for a period up to one year after termination of


                                       53
<PAGE>

employment. Specific vesting guidelines related to change of Company control or
death or disability of the employee could result in 100% vesting of options
prior to the measurement dates previously stated. At December 31, 1999, there
were no options vested.

     On November 24, 1999, the Company's Board of Directors approved the Robert
Currey Option Plan 1999. The aggregate number of shares of Common Stock that may
be issued under the Plan were 322,000. On November 24, 1999, all 322,000 shares
available were awarded to an executive officer at an exercise price of $10.00
which is equal to the $10.00 fair market value determined by the Board of
Directors at the time of grant. At the time of the award, 161,000 shares vested
immediately. The remaining shares vest at 1/48 per month. As of December 31,
1999, 322,000 remain outstanding of which 164,354.2 shares are vested.

     The Company accounts for the plans under APB Opinion No. 25, under which
$422,322, $843,789, and $972,865 of compensation expense relating to stock
option awards to employees was recognized for the year ended December 31, 1999,
the nine months ended December 31,1998, and the year ended March 31, 1998
respectively. 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>
                                                                  NINE MONTHS
                                                                     ENDED            YEAR ENDED
                                              YEAR ENDED          DECEMBER 31,         MARCH 31,
                                           DECEMBER 31, 1999          1998                1998
                                           -----------------   -----------------   ---------------
<S>                       <C>                 <C>               <C>                  <C>
Net loss                    As reported       ($65,071,616)     ($32,788,712)        ($15,030,544)
                            Pro forma         ($65,714,692)     ($33,001,845)        ($15,102,676)

Net loss attributable       As reported       ($78,135,081)     ($41,717,419)        ($19,265,007)
   to common shares         Pro forma         ($78,778,157)     ($42,930,552)        ($19,337,139)

Basic and diluted           As Reported            ($18.93)          ($11.94)              ($7.37)
   loss per share           Pro forma              ($19.09)          ($12.00)              ($7.39)
</TABLE>

     A summary of the status of the Company's stock option plans for the year
ended December 31, 1999, the nine months ended December 31, 1998, and the year
ended March 31, 1998 changes during the respective periods is presented in the
table and narrative below:
<TABLE>
<CAPTION>
                                      TWELVE MONTHS ENDED          NINE MONTHS ENDED             TWELVE MONTHS ENDED
                                       DECEMBER 31, 1999           DECEMBER 31, 1998               MARCH 31, 1998
                                     ---------------------       ---------------------        ------------------------
                                       Shares      Wtd Avg        Shares      Wtd Avg          Shares        Wtd Avg
                                       (000)      Ex Price        (000)       Ex Price         (000)         Ex Price
                                     ---------   ---------       --------    ---------        ------        ----------
<S>                                    <C>            <C>           <C>          <C>         <C>            <C>
Outstanding at beginning of year       1,085.9        1.79          692.3         1.12                --            --
Granted                                1,323.6       26.05          494.5         2.60             728.7          1.12
Exercised                                (14.8)       4.50             --           --                --            --
Forfeited                                (78.4)       2.74         (100.9)        1.12             (36.4)         1.12
Expired                                   (0.2)       4.50             --           --                --            --
Canceled                                 (51.8)       4.50             --           --                --            --
                                      ---------     ------        -------       ------           -------         -----
Outstanding at end of year             2,264.3       16.29        1,085.9         1.79             692.3          1.12
                                      ---------     ------        -------       ------           -------         -----
                                      ---------     ------        -------       ------           -------         -----

Exercisable end of year                  960.0                      575.8                          287.8
                                      ---------                   -------                        -------
                                      ---------                   -------                        -------
Weighted average fair value of
   Options granted                                    1.69                        2.99                            3.91
                                                      ----                        ----                            ----
                                                      ----                        ----                            ----
</TABLE>


                                       54
<PAGE>

     The 2,264,320 options outstanding at December 31, 1999 have the following
range of exercise prices; $1.12, $4.50, $10.00, $35.26, $45.33, and $65.48 with
a weighted average exercise price of $16.29 and a weighted average remaining
contractual life of 8.50 years.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for the option grants in the year ended December 31, 1999:
risk-free interest rate of 5.59 percent; expected dividend yields of zero
percent; expected life of 10 years; and expected volatility of zero percent.

10.   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 December
31, 1999 and December 31, 1998, are as follows:

<TABLE>
<CAPTION>
                                                DECEMBER 31,1999    DECEMBER 31, 1998
                                                  DEFERRED TAX         DEFERRED TAX
                                                ASSET/(LIABILITY)   ASSET/(LIABILITY)
                                                -----------------   -----------------
<S>                                               <C>                <C>
         Employee related                             $ 1,435,306         $ 1,235,194
         Property, plant and equipment
           depreciation expense                        (9,066,523)         (2,072,079)
         Accretion of discount on senior
           discount notes                              19,979,330           8,876,819
         Amortization of debt issuance costs
           related to senior discount notes               686,991             275,091
         Other                                            366,113              67,016
         Net operating loss carryforward               33,344,729          12,330,877
         Valuation allowance                          (46,745,946)        (20,712,918)
                                                     ------------        ------------
                                                      $        --         $        --
                                                     ------------        ------------
                                                     ------------        ------------
</TABLE>


The provision (credit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>

                                   YEAR ENDED     NINE MONTHS ENDED    YEAR ENDED
                               DECEMBER 31, 1999  DECEMBER 31, 1998  MARCH 31, 1998
                               ------------------ ------------------ --------------
<S>                                <C>               <C>               <C>
  Current income tax expense
     Federal                        $         --      $         --      $        --
     State                                    --                --               --
  Deferred income tax expense
     Federal                         (22,730,176)      (11,435,581)      (4,850,473)
     State                            (4,662,780)       (2,345,790)      (1,092,854)
                                    -------------     -------------     ------------
                                    $(27,392,956)     $(13,781,371)     $(5,943,327)
  Valuation allowance                 27,392,956        13,781,371        5,943,327
                                    -------------     -------------     ------------
                                    $         --      $         --      $        --
                                    -------------     -------------     ------------
                                    -------------     -------------     ------------
</TABLE>


                                       55
<PAGE>

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

<TABLE>
<CAPTION>
                                             YEAR ENDED        NINE MONTHS ENDED     YEAR ENDED
                                         DECEMBER 31, 1999     DECEMBER 31, 1998   MARCH 31, 1998
                                         -----------------     -----------------   --------------
<S>                                      <C>                   <C>                <C>
     Income tax provision (credit) at
        statutory rate                    $ (22,775,066)        $ (11,476,049)     $ (5,260,690)
     Meals and entertainment                      4,358                15,338            14,993
     Disallowed portion of original
        issue discount on senior

        discount notes                           49,894                33,570             5,799
     State income taxes                      (4,672,142)           (2,354,230)         (703,429)
     Valuation allowance                     27,392,956            13,781,371         5,943,327
                                          --------------        --------------     -------------
     Income tax provision (credit) as
        reported                          $          --         $          --      $         --
                                          ---------------       --------------     -------------
                                          ---------------       --------------     -------------
</TABLE>

     At December 31, 1999, the Company had cumulative tax net operating loss
carryforwards aggregating approximately $83,992,000 expiring between 2008 and
2020. At December 31, 1999, the Company had recorded a valuation allowance
related to its net deferred tax assets aggregating approximately $46,746,000.

11. COMMITMENTS AND CONTINGENCIES

   LITIGATION

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

   LEASES AND OTHER

     The Company obtained four letters of credit totaling $3,896,880. The first
letter, for $500,000, was obtained as part of the Chicago franchise agreement.
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. The third letter is for the benefit of the Village of Skokie totaling
$100,000 pursuant to the franchise agreement. The fourth letter of credit
totaling $2,000,000 is for the benefit of former owners of EnterAct and secures
the $2,000,000 of long-term debt incurred as part of the transaction. 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 or certificates of deposit. For the year ended December
31, 1999, the nine months ended December 31, 1998, and for the year ended March
31, 1998, commercial paper investments earned $72,880, $71,920 and $95,505,
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 initially
covered 32,422 square feet, and was increased on July 1, 1998 to cover 40,397
square feet.


                                       56
<PAGE>

     As of December 31, 1999, the aggregate minimum rental commitments under
this and other operating lease agreements were as follows:

<TABLE>
               <S>                    <C>
                  2000                  $1,810,918
                  2001                   1,892,248
                  2002                   1,792,739
                  2003                   1,583,237
                  2004                   1,320,919
                  Thereafter             9,227,382
                                       -----------
                      Total            $17,627,443
                                       -----------
                                       -----------
</TABLE>

     Rent expense under operating leases was $1,556,164, $1,499,097, and
$662,753 for the year ended December 31, 1999, the nine months ended December
31, 1998, and the year ended March 31, 1998, respectively.

     The Company has entered into capitalized lease agreements pertaining to
certain vehicles and computer hardware. As of December 31, 1999, the aggregate
minimum rental commitments under these capitalized lease agreements were as
follows:
<TABLE>
               <S>                     <C>
                  2000                  $1,005,962
                  2001                     785,457
                  2002                     571,300
                  2003                     507,680
                  Less Interest           (397,557)
                                     --------------
                      Total             $2,472,842
                                     --------------
                                     --------------
</TABLE>

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

     On June 30, 1999, the Company entered into a three-year master equipment
lease with Cisco Systems Capital Corporation under which the Company may lease
computer equipment as needed. This lease is effectively a financing arrangement
that allows the Company to finance up to $3 million in equipment. Total lease
payments are dependent upon the types and quantities of equipment needed. As of
September 30, 1999, no equipment had been leased.

12. MERGER AGREEMENT

     On December 12, 1999, 21st Century entered into a definitive agreement
to merge with RCN Corporation in a transaction worth $212 million plus debt.
RCN will be the surviving corporation. The merger is expected to be completed
during the second quarter of 2000, once necessary regulatory and shareholder
approvals are obtained, the Company's Senior Discount Notes and Subordinated
Exchange Debentures (which were issued in February 2000 in exchange for the
Company's Senior Exchangeable Preferred Stock) are retired or amended to
accommodate the merger, and other conditions to close are completed.

     The transaction, if approved by regulators and completed, will constitute a
change in control of the Company. Stock options granted to employees, certain
change in control agreements, and employee severance plans become operative.
Direct merger-related costs have been expensed as incurred.

13. GOING CONCERN

     The Company has incurred net losses in each year since its inception, and
as of December 31, 1999, the Company had an accumulated deficit of $144,640,348.
The Company anticipates that it will continue to expand its operations and
continue to incur net losses during the next several years as a result of (i)


                                       57
<PAGE>

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.

     On December 12, 1999, the Company entered into a definitive agreement to
merge with RCN Corporation, a publicly traded company that provides video,
telephone and data connections to primarily residential subscribers through an
advanced broadband network.

     As of December 31, 1999, the Company had approximately $28,000,000 of cash
and short-term investments and $40,000,000 available on its line of credit. The
Company's fiscal 2000 business plan anticipates negative cash flow from
operations and capital spending well in excess of these amounts. Management is
highly confident that the pending merger will be consummated and RCN Corporation
will be able to both fund and execute its fiscal 2000 business plan. If the
merger were not to occur, management believes that sufficient funding could be
arranged to continue operating through the end of fiscal 2000; however, such
funding sources are not currently in place.

14. RECENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. Management believes that
this statement will not have a material effect on results of operations and
financial position.

     Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is
effective beginning in the first quarter of 2000. SAB No. 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements. Management believes that this statement will not have a material
effect on results of operations and financial position of the Company.

15. SUBSEQUENT EVENTS

     On December 10, 1999, the Company declared a quarterly dividend of .034375
share of 13 3/4% Senior Cumulative Exchangeable Preferred Stock per each share
of Exchangeable Preferred Stock outstanding as of February 1, 2000, payable on
February 15, 2000. On February 15, 2000, the company issued 2,182.3274 shares as
payment of the declared dividend.

     On February 9, 2000 the Company terminated the 1999 ISP Stock Plan. On
that date, no options were vested.

     On February 15, 2000, the Company exchanged all of the 13 3/4% Senior
Cumulative Exchangeable Preferred Stock into 13 3/4% Exchange Debentures due
2010 with a face value of $65,668,000.

     On March 7, 2000, the Company entered into Amendment No. 3 to its bank
revolving credit facility which waived compliance with certain financial and
operating covenants through September 30, 2000, and converted the revolving
credit facility into a term loan with the same maturity, covenants, and other
terms as were provided in the revolving credit agreement. On March 7, 2000, the
Company borrowed $40 million under the new term loan facility.


                                       58
<PAGE>

                            QUARTERLY FINANCIAL DATA
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         FOR THE THREE MONTHS ENDED
                                            -------------------------------------------------------------------------------
                                            DECEMBER 31, 1999    SEPTEMBER 30, 1999    JUNE 30, 1999         MARCH 31, 1999
                                            -----------------    ------------------    -------------         --------------
<S>                                           <C>                  <C>                  <C>                  <C>
Operating revenues                            $  4,376,256         $  3,150,238         $  2,668,239         $  1,125,401

Operating loss                                $(15,394,813)        $(11,206,772)        $ (9,701,146)        $ (7,081,556)

Net loss attributable to common shares        $(25,170,978)        $(19,782,687)        $(18,111,391)        $(15,070,024)

Basic and diluted loss per share              $      (5.91)        $      (4.68)        $      (4.29)        $      (3.98)

<CAPTION>

                                                                         FOR THE THREE MONTHS ENDED
                                            -------------------------------------------------------------------------------
                                            DECEMBER 31, 1998    SEPTEMBER 30, 1998    JUNE 30, 1998         MARCH 31, 1998
                                            -----------------    ------------------    -------------         --------------
<S>                                           <C>                  <C>                  <C>                  <C>
Operating revenues                            $    453,861         $    280,159         $    139,878         $     65,491

Operating loss                                $ (8,847,454)        $ (7,293,150)        $ (5,886,074)        $ (5,252,740)

Net loss attributable to common shares        $(15,514,946)        $(13,978,871)        $(12,223,602)        $ (9,132,218)

Basic and diluted loss per share              $      (4.44)        $      (4.00)        $      (3.50)        $      (2.74)

<CAPTION>

                                                                         FOR THE THREE MONTHS ENDED
                                          -----------------------------------------------------------------------------
                                          DECEMBER 31, 1997    SEPTEMBER 30, 1997    JUNE 30, 1997       MARCH 31, 1997
                                          -----------------    ------------------    -------------       --------------
<S>                                           <C>                 <C>                 <C>                 <C>
Operating revenue                             $    43,877         $    37,158         $    42,497         $    27,480

Operating loss                                $(4,816,430)        $(2,190,282)        $(1,203,601)        $  (802,586)

Net loss attributable to common shares        $(5,573,193)        $(2,638,655)        $(1,920,941)        $(1,183,561)

Basic and diluted loss per share              $     (2.34)        $     (1.11)        $     (0.81)        $     (0.52)
</TABLE>

Quarterly loss per share amounts may not total loss per share amounts for the
year due to changes in the number of shares outstanding.


                                       59
<PAGE>

                        21st CENTURY TELECOM GROUP, INC.

           SCHEDULE II-CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                                                   ADDITIONS
                                                        --------------------------------
                                        BALANCE                           CHARGED TO                          BALANCE
                                     BEGINNING OF        CHARGED TO          OTHER            OTHER            END OF
ALLOWANCE FOR UNCOLLECTIBLES            PERIOD             INCOME          ACCOUNTS         DEDUCTIONS         PERIOD
                                    ----------------    -------------   ----------------  ---------------   -------------
<S>                                   <C>                <C>                 <C>               <C>           <C>
Nine months ended Decmber 31,1998      $     - (1)        $   1,376           $ -               $ -           $   1,376
Year ended December 31, 1999           $ 1,376            $ 470,812           $ -               $ -           $ 472,188


</TABLE>

--------------------
 (1)  An allowance for uncollectibles was not recorded in the year ended
      March 31, 1998


                                       60
<PAGE>

                                   SIGNATURES

    PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                               21st CENTURY TELECOM GROUP, INC.

                                       /s/ Ronald D. Webster
                               ----------------------------------------------
                               By: Ronald D. Webster, Chief Financial Officer


                                      /s/ James K. Nugent
                               ----------------------------------------------
                               By: James K. Nugent, 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>

   /s/ Edward T. Joyce           Chairman of the Board of Directors       March 16, 2000
----------------------------
Edward T. Joyce

   /s/ Robert J. Currey          President, Chief Executive Officer       March 16, 2000
-----------------------------    and Director
Robert J. Currey

   /s/ Ronald D. Webster         Chief Financial Officer                  March 16, 2000
----------------------------
Ronald D. Webster

   /s/ William Farley            Director                                 March 16, 2000
----------------------------
William Farley

  /s/ Elzie Higginbottom         Director                                 March 16, 2000
----------------------------
Elzie Higginbottom

  /s/ Dr. Charles E. Kaegi       Director                                 March 16, 2000
----------------------------
Dr. Charles E. Kaegi


                                       61
<PAGE>

  /s/ James H. Lowry             Director                                 March 16, 2000
--------------------------
James H. Lowry

  /s/ Glenn W. Milligan          Director                                 March 16, 2000
--------------------------
 Glenn W. Milligan

  /s/ David Kronfeld             Director                                 March 16, 2000
---------------------
David Kronfeld

 /s/ Thomas Neustaetter          Director                                 March 16, 2000
---------------------------
Thomas Neustaetter

 /s/ James K. Nugent             Controller                               March 16, 2000
------------------------
James K. Nugent

</TABLE>


                                         62
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
---------------- --------------------------------------------------------------------------------------
Exhibit No.      Description of Exhibits
---------------- --------------------------------------------------------------------------------------
<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 of 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 LLP 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).

                                       63