<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended ___________________

                                       OR

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

        For the transition period from April 1, 1998 to December 31, 1998

                        Commission File Number 333-47235
                                [OBJECT OMITTED]
                        21st CENTURY TELECOM GROUP, INC.
             (Exact name of registrant as specified in its charter)

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

                                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 27, 1999, 4,218,388.9 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.

<PAGE>
<TABLE>



                                                  TABLE OF CONTENTS

<CAPTION>
                                                       PART I
                                                                                                         Page
<S>                                                                                                       <C>
Item 1.       Business                                                                                     1
Item 2.       Properties                                                                                  10
Item 3.       Legal Proceedings                                                                           11
Item 4.       Submission of Matters to A Vote of Security Holders                                         11

                                                      PART II

Item 5.       Market For Registrant's Common Equity and Related Shareholder Matters                       12
Item 6.       Selected Financial Data                                                                     14
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations       15
Item 7a.      Quantitative & Qualitative Disclosures about Market Risk                                    19
Item 8.       Financial Statements and Supplementary Data                                                 19
Item 9.       Changes and Disagreements with Accountants On Accounting Financial Disclosure               19

                                                      PART III

Item 10.      Directors and Executive Officers of the Registrant                                          20
Item 11.      Executive Compensation                                                                      25
Item 12.      Security Ownership of Certain Beneficial Owners and Management                              29
Item 13.      Certain Relationships                                                                       32

                                                      PART IV

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K                             33

</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.

                                        i

<PAGE>


                                     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 has begun to install and activate an advanced  fiber optic network
that   employs   a   Distributed   Ring-Star   architecture   characterized   by
fiber-richness,  two-way  interactivity,  SONET,  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 also has secured pole attachment agreements with Commonwealth Edison
Company  ("Commonwealth  Edison")  and a  subsidiary  of  Ameritech  Corporation
("Ameritech") which provide 21st Century access to scarce pole space within Area
1 to  further  facilitate  deployment  of its  DRS  Network.  The  decentralized
configuration of the DRS Network, which includes distributed hubs and nodes that
act "intelligently" to route network traffic efficiently,  together with the CTA
and the pole attachment agreements, enables network construction to be driven in
large  part  by  market  demand  and  revenue   potential  in  contrast  to  the
conventional  approach  of  building  a system  from the  headend  outward  on a
block-by-block  basis. To fully exploit this advantage,  the Company's sales and
marketing strategy is coordinated with ongoing network  construction and focused
on securing bulk contracts with multiple  dwelling units  ("MDUs").  The Company
believes that this  strategy will help to identify the optimal  sequence of node
activation  on  the  DRS  Network  and  tie  capital  expenditures  directly  to
revenue-producing subscribers.

     21st Century's DRS Network currently provides  telephone,  video, audio and
data services.  These  services  include 111 analog video  channels,  59 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 24  specialty  audio  channels  (e.g.,  international  and
foreign language  programming,  BBC radio  broadcasts,  reading services for the
blind,  commercial-free music categories and select distant-market FM stations),
with significant  capacity for additional  broadband and narrowband products and
services.  The Company's  residential and home office data product is its 4 Mbps
(Megabits  per second)  cable modem  Internet  access  service (high speed cable
modem), which is delivered at symmetrical speeds more than 125 times faster than
the  prevalent  28.8 Kbps  (Kilobits  per second)  telephone  modem and 25 times
faster than an integrated  services  digital network ("ISDN") modem. The Company
is also hosting websites for commercial customers. The Company is also providing
switched,  facilities-based competitive local exchange carrier ("CLEC") services
with last mile connectivity and local dial tone to both commercial  accounts and
selected  residential  subscribers 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 both commercial accounts and selected residential subscribers, most
of whom currently have no  facilities-based  alternative to the service provided
over the network of the incumbent local exchange carrier  ("ILEC").  The Company
will be  co-locating  in 10 Ameritech  Central  offices in the second quarter of
1999 and will  have  immediate  access  to  telephone  customers  in Area 1. The
Company will offer  high-speed,  flexible  bandwidth access services  concurrent
with its build-out of the commercial district.


                                       1
<PAGE>


     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 23% of the estimated 350,000 Homes Passed in
its service  territory  and 18% of the planned 350 miles of plant  completed  by
December 31, 1998;  acquired,  installed and activated its telephone switch, and
began  to  offer  telephone  services  to  a  targeted  video  subscriber  base;
established  a  state-of-the  art customer  service call center;  initiated  its
focused outdoor  advertising  program;  acquired bulk service and right of entry
contracts to provide video services to over 400  residential  multiple  dwelling
unit  buildings  at December 31, 1998;  acquired  over 14,000  orders for video,
Internet and telephone  services at December 31, 1998;  activated  almost 10,500
video,  Internet and telephony  connections by December 31, 1998;  and, in early
1999 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. EnterAct
has  approximately 50 employees,  and is the highest rated Chicago Area Internet
Services  Provider  ("ISP")  by  Mindspring   Enterprise,   an  Internet  rating
association.  The majority of  EnterAct's  approximately  10,000  customers  are
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. EnterAct will become
the Company's business service division, developing,  marketing and selling data
and telephony services to the business community.

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  regardless  of  penetration  and usage levels,  (iii) a SONET 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  recently
adopted  strategy  of  co-locating  most of its  service  nodes  with  Ameritech
switches,  will also allow the Company to more  efficiently  utilize its capital
resources to sell bundled telephone, cable and Internet services so as to secure
larger MDU contracts.  Thus, more significant revenue streams should be realized
earlier  in  the  construction  buildout  plan  than  would  be  realized  by  a
conventional  coaxial cable system buildout.  For example,  after a large MDU is
activated for telephone services, the Company will then market 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.


                                       2
<PAGE>

      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
includes  cable modems that provide  access to the Internet at 4 Mbps,  which is
approximately  125 times faster than the prevalent 28.8 Kbps telephone modem and
25 times faster than an ISDN modem. Beginning in the second quarter of 1999, the
Company  expects to begin  marketing a broad range of telephony  services (e.g.,
local, long distance,  call waiting,  call forwarding,  caller ID, voicemail and
three-way  calling)  to more  than  500,000  potential  businesses  and  350,000
potential  residential  users in and  adjacent  to Area 1, most of whom,  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,  (ii)  the  attachment  agreement  negotiated  with the CTA and the pole
attachment arrangements negotiated with Commonwealth Edison and Ameritech, which
facilitate  the timely and  efficient  buildout of the DRS  Network  through the
utilization of scarce pole space and city infrastructure rights-of-way 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  new  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  buildout  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.


     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,  completing the northern
fiber transport ring of the DRS Network,  securing  necessary video  programming
content, initiating appropriate billing to support the Company's planned product
lines,  executing its newly adopted 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.

<PAGE>

     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 should allow the Company to become
aware  of  and  remedy   potential   problems  before  they  are  detectable  by
subscribers.  In  addition,  the  Company  is  building  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.

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 12,000  housing units per square mile (compared with a density for the entire
city of Chicago of 5,000 housing units per square mile),  (ii) more than 350,000
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  51,000 companies
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.


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 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 telephony subscribers.

<PAGE>

     The  Transport  Ring, 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 and also
provide a diagnostic function by trouble-shooting  potential problems on the DRS
Network.  The Campus  Rings are groups of  fiber-optic  cables that carry voice,
video,  Internet and high-speed  data signals between the Transport Hubs and the
Campus  Hubs.  The Campus Hubs  connect the Campus Rings and the lines that feed
the Service  Distribution Nodes and provide a diagnostic function similar to the
Transport  Hubs. 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 each  Service  Distribution  Node to the
subscribers.

     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  executed  an  agreement  for the
acquisition and installation of such equipment.

     Design Attributes.  The Company's DRS Network was conceived and designed by
the Company's  engineers and incorporates SONET 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 regardless of penetration
and usage levels, (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.


         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 RAM
     and flash  memory,  which will allow it to provide  subscribers  additional
     functions and features.  Among such functions and features are  interactive
     data  channel   capability,   impulse   pay-per-view,   fully  computerized
     addressability,  forward and return path capability,  bit-mapped  graphics,
     downloadable  software capability,  fully interactive  seven-day electronic
     program guide,  enhanced signal theft protection and dataport  connectivity
     to printers, faxes and personal computers.

<PAGE>

         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 111 analog video channel offering,  the DRS
     Network's large fiber capacity will allow the Company to upgrade  services,
     add  applications  and  develop  new  product   offerings  without  service
     interruption or  interference.  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 dual  connections to national ISPs are  maintained.  21st
     Century will store the most popular Web pages, along with local content, in
     servers  located in the DOC. By storing  these Web pages and local  content
     within  the DOC and  providing  cable  modem  access  to  these  resources,
     subscribers  can truly receive any of this  information at up to 4 Mbps, or
     approximately  125 times  faster  than the  prevalent  28.8 Kbps  telephone
     modem. As a further  benefit,  since the cable modem is connected  directly
     from the  subscriber's PC to the coaxial portion of the DRS Network,  there
     is no need for a second  telephone  line to access the  Internet,  no delay
     associated  with  dialing  into and  signing  onto a  typical  ISP's  modem
     service,  and no surcharge  for making a call into the DOC (as is typically
     the case with 128 Kbps ISDN service).

     As an integral  part of the DRS Network  design,  the Company has  reserved
fiber-optic  capacity  dedicated for providing a wide variety of high-speed data
services,  including high-speed (up to OC-12) private line quality access to the
Internet.  The use of multi-protocol  switching platforms in both the Campus and
Transport  hubs and the DRS Network's high fiber count will allow the Company to
offer private virtual  networks to link offices,  buildings and campuses located
in Area 1. Further,  the high-speed  data network will extend to both commercial
and residential areas and will support a host of other  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 111 analog video channels, 59
virtual information channels with local content and 24 specialty audio channels,
with significant  capacity for additional  broadband and narrowband products and
services.  The 111 analog video channels include a basic package of 88 channels,
one of the largest basic  packages in the United  States,  designed to appeal to
Chicago's  ethnic and  cultural  diversity.  Basic video  channels  for business
customers also include specialized business programming such as Bloomberg,  CNN,
CNN Financial,  and Knowledge TV.  Programming  for the Company's video offering
comes from national and local  networks,  including  most major networks such as
ESPN, HBO, Showtime,  Disney, CourtTV, and local Chicago affiliates of ABC, CBS,
NBC and Fox.  The video  offering  includes an  on-screen,  interactive  viewing
guide,  one-button VCR recording 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 59  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.

<PAGE>

     The Company's 24 specialty audio channels include international and foreign
language  broadcasts  (selected  to appeal to  concentrations  of  nationalities
residing in Chicago's Area 1), BBC radio broadcasts, 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 4 Mbps, which is approximately 25 times faster than ISDN
modems,  and more than 125 times  faster  than the  prevalent  28.8 Kbps  analog
modems.  The customer's cable line (with cable modem) will be connected directly
into the Internet.  Because the cable modem connects through a cable line rather
than through a telephone line, the Internet connection will always be active and
there will be no need to dial up for access to the  Internet  or wait to connect
through a port  leased by an ISP.  The  Company  is also  hosting  websites  for
commercial  customers  and  expects to offer  private  virtual  networks to link
offices,  buildings  or campuses  located  throughout  the  franchise  area.  In
addition to supporting cable modem services for Internet access, the DRS Network
is capable of  connecting  computers or computer  networks via a separate  fiber
connection.  By connecting computers or computer networks at multiple locations,
subscribers  can  establish  virtual  local area  networks,  over which they can
transport  data.  The Company  expects to offer a full range of high-speed  data
transport  services  (ISDN,  DSL, T-1, OC1,  2,3,  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 fourth  quarter of 1998,  the Company  modified  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.  This strategy  modification  also allows the
Company to sell dial accessed Internet services at reasonable rates. The Company
intends to sell a full range of local and long distance  telephone  services and
dial  accessed  Internet  services to many of its  customers  beginning in April
1999. The  co-location  strategy will allow sale of these services to all Area 1
customers, and to many outside Area 1, by July 1999. Co-location accelerates and
expands the Company's  telephone coverage  considerably.  Cable modem high-speed
Internet access service will continue to be limited to Area 1.

     The Company provides local, long distance,  custom calling services,  voice
mail,  Operator  services  and enhanced  services to customers in certain  cable
franchise  neighborhoods today. 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 use the Company's DRS Network exclusively,  and do not use
the leased  "co-location"  facilities in any way. 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
anticipates that it will provide wireless and paging services in the future on a
resale basis.
<PAGE>


     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  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,  and (iv) interactive energy
management  services,  which involve active monitoring by the customer of energy
usage and cost.  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 more than five  telephone
lines,  and  Internet  and data  transport  services  will be  stressed to those
customers.  The Company also intends to sell its telephone  and Internet  dialed
services to businesses  outside Area 1, and to offer special service features to
Chicago  companies  with  offices in other  locations.  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,  a contract  telemarketing
group,  and a contract  door-to-door  sales group to sell services.  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.

     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.
<PAGE>


     Customer  Service  Professionals.  The  Company's  call center is currently
staffed with 20 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 Franchise

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


Skokie Franchise

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

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 11,000 homes. This franchise award is
contingent  upon the  Company's  securing  the  funds  necessary  to  build  its
Northbrook network by September 10, 1999.
<PAGE>

     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)   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, 1998, the Company had 195 full-time employees.  The Company
considers  its  relations  with its  employees to be  satisfactory.  The Company
recruits  from several  major  industries  for  employees  with skills in voice,
video, Internet, and data technologies.

Item 2.     Properties.

     The  Company  entered  into a 15-year  lease,  dated  January 31, 1997 (the
"Apparel Lease") for its headquarters and NOC, located at 350 N. Orleans,  Suite
600, Chicago, IL 60654. The Apparel Lease covers 40,397 square feet.

     The Company  entered into a lease,  dated July 15, 1998 (the "1998  Lease")
for its warehouse, located at 1401 South Jefferson Street, Chicago, IL. The 1998
Lease which covers 17,265 square feet, will expire on September 15, 2003.

     The  Company  entered  into a lease,  dated  October  1,  1998  (the  "1998
Sublease") for its warehouse, located at 2640 W. Bradley Place, Chicago, IL. The
1998 Sublease which covers 48,000 square feet, will expire on April 30, 2006.

     On February 26, 1999, the Company assumed a five year lease,  dated June 1,
1998 (the  "Premises"),  located at 407 South Dearborn Street,  IL. The Premises
which covers 18,430 square feet, will expire on May 31, 2003.

     On February 26, 1999, the Company assumed a two year lease, dated March 14,
1997  (the"Complex"),  located at 600 South  Federal,  Chicago,  IL. The Complex
which covers 2,308 square feet, will expire on May 13, 1999.

     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.


<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, 1998,
there were 3,493,965.7  shares of common stock outstanding and held of record by
approximately  60 shareholders and 27,429.2 shares reflected as common shares to
be issued related to a separation  agreement.  At December 31, 1998, options and
warrants to purchase an  aggregate  of  3,591,827.5  shares of common stock were
outstanding.  All  outstanding  options and  warrants  provide for  antidilution
adjustments in the event of certain  mergers,  consolidations,  reorganizations,
recapitalizations,  stock  dividends,  stock  splits  or  other  changes  in the
corporate structure of the Company.

     The Company has filed with the  Securities  and  Exchange  Commission  (the
"Commission"),  a  Registration  Statement on Form S-4 (including all amendments
thereto the  "Registration  Statement")  under the Securities Act of 1933,  with
respect to the New Notes and the New Exchangeable Preferred Stock (as defined in
the  Registration  Statement)  offered in connection with 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.

<PAGE>

Recent Sales of Unregistered Securities

     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.

     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 on 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, 1998, as common stock to be issued.

   Recent Developments

     On February 26, 1999, the Company issued 696,994 shares of its no par value
common stock to certain  officers of EnterAct Corp.  EnterAct is a Chicago-based
provider of Internet access and commercial data services,  which was acquired by
the Company.


                                       12
<PAGE>


Item 6.  Selected Consolidated Financial Data.

<TABLE>
<CAPTION>


                                 
                                    For the Nine                           For the Year Ended and as of March 31,
                                 Months Ended and as of  -----------------------------------------------------------------------
                                  December 31, 1998          1998            1997          1996           1995          1994
                                 -------------------     --------------  -------------  ------------  -------------  -----------
<S>                                   <C>                <C>            <C>            <C>             <C>            <C>       
Operating revenues                    $     873,898      $    189,023   $     27,480   $         -     $        -     $       -

Net loss                              $ (32,788,712)     $(15,030,544)  $ (2,817,292)  $(1,026,609)    $ (779,314)    $(303,030)

Net loss attributable to
 common shares                        $ (41,717,419)     $(19,265,007)  $ (3,296,273)  $(1,026,609)    $ (779,314)    $(303,030)

Basic and diluted
 loss per share                       $      (11.94)          $ (7.37)       $ (1.66)  $     (0.64)    $    (0.52)    $   (0.21)

Total Assets                          $ 254,343,973      $262,732,604   $ 14,396,708   $ 1,664,877     $ 847,659      $ 428,914

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

Total shareholders' equity            $ (33,907,034)     $  3,938,630   $ (2,960,337)  $(1,744,556)    $(1,063,122)   $(297,536)


</TABLE>




<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 nine
months ended  December 31, 1998,  includes a comparative  analysis to the twelve
months  ended March 31,  1998.  The  Company  believes  the  analysis of the two
periods to be comparable,  due to the ramp-up nature of the Company's operations
during the twelve months ended March 31, 1998.  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 DRS Network in Chicago's Area 1. Under this
15-year renewable  license,  the Company is granted  unrestricted  access to the
public  right-of-way  to construct,  operate and maintain its DRS Network to all
residential and commercial subscribers. Since inception, the Company's principal
focus has been the development of its communications  business in Chicago's Area
1.

     The Company has incurred net losses in each year since its  inception,  and
as of December 31, 1998, the Company had an accumulated  deficit of $66,505,268.
As the Company  anticipates  that it will continue to expand its operations,  it
anticipates  that it will  continue to incur net losses  during the next several
years as a result of (i) substantially  increased  depreciation and amortization
from the  construction  of  networks,  (ii)  significantly  increased  operating
expenses as it builds its subscriber base and (iii) interest charges  associated
with the Senior  Discount  Notes.  There can be no assurance  that growth in the
Company's  revenues or  subscriber  base will occur or that the Company  will be
able to achieve or sustain profitability or positive cash flow.

Results of Operations

   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 twelve  months ended
March 31, 1998. The increased subscriber revenues resulted from the installation
of service into contracted  buildings on the new Distributed  Ring-Star  ("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 twelve months ended March 31, 1998, respectively. This increase
is 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 twelve
months 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

<PAGE>

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 available 24 hours a day, seven days a week which has 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 twelve months ended March 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.  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.  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 twelve
months  ended March 31,  1998,  the Company  incurred  net losses  amounting  to
$32,788,712 and $15,030,544, respectively. The Company expects its net losses to
continue to increase as it introduces new services and as the Company  continues
to build-out the DRS Network and seeks to expand its business.

   Twelve  Months Ended March 31, 1998 Compared to Twelve Months Ended March 31,
1997.

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

     Expenses.  The  Company  incurred  operating  expenses  of  $2,023,310  and
$200,911 for the twelve months ended March 31, 1998 and 1997, respectively.  The
increase in operating  expenses resulted from activities  required to accelerate
the network build-out, operate the franchise and deliver services. The component
of operating  expenses that  represents  network  operating costs related to the
delivery of cable and telecommunications services increased from $12,653 for the
twelve  months ended March 31, 1997 to  $1,345,921  for the twelve  months ended
March 31, 1998.  This increase is directly  related to the continued  ramp-up in
the  design  and  construction  of the  network,  as  well  as the  addition  of
employees.  The component of operating  expenses that  represents  local access,
origination  programming fees and franchise fees increased from $188,258 for the
twelve  months  ended March 31, 1997,  to $677,389  for the twelve  months ended
March 31, 1998.  Programming  fees for the upgraded channel lineup made possible
by the fiber enriched network increased from zero dollars to more than $195,000.
Public  Educational and Government access  programming fees which are payable to
the Chicago Access Corporation amounted to over $250,000,  as annual installment
payments of $100,000  for 1997 and 1998 were paid in fiscal  1998.  Access costs
required to offer  Internet  services paid to both  wholesale  ISPs and exchange
carriers  that lease  transport  to the  wholesale  ISPs added  $125,000 to 1998
expenses.  Depreciation and amortization  costs were $1,411,847 and $170,108 for
the twelve months ended March 31, 1998 and 1997,  respectively.  The increase in
depreciation   and   amortization   costs  is  primarily   attributable  to  the
amortization of leasehold  improvements  upon the occupation of the space in the
Apparel  Center and the  depreciation  of the network  equipment as it is placed
into service.  Selling, general and administrative expenses were $10,216,919 and
$2,337,534  for the twelve  months ended March 31, 1998 and 1997,  respectively.
The  increase  in selling,  general and  administrative  expenses  reflects  the
Company's   acquisition  of  subscribers,   promotion  costs,  the  addition  of
employees,  and compensation expense related to stock options granted to certain
officers and employees in October 1997. Interest expense increased from $437,843
to $3,722,947 due primarily to the interest  associated with the Senior Discount
Notes  issued in February  1998.  Interest  income  increased  from  $301,624 to
$2,373,867 due primarily to interest  earned on the increased level of cash held
by the  Company as a result of the  issuance  of the Senior  Discount  Notes and
Exchangeable Preferred Stock in February 1998. Amortization of issuance costs on
Senior  Discount  Notes of $218,411 for the year ended March 31, 1998,  resulted
from the issuance  costs  associated  with the Senior  Discount  Notes issued in
February 1998 and their subsequent amortization.
<PAGE>

     Net Loss.  For the twelve months ended March 31, 1998 and 1997, the Company
incurred net losses amounting to $15,030,544 and $2,817,292, respectively.
 
Liquidity and Capital Resources

     Net cash used in  operating  activities  was  $17,518,151,  $8,080,516  and
$6,910,766 for the nine months ended December 31, 1998 and for the twelve months
ended  March  31,  1998  and  1997,  respectively.  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
due to the planned  accelerated  build-out of the DRS Network.  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 twelve
months ended March 31, 1998,  resulted  principally  from the Company's net loss
from  operations  and  purchases of  inventory,  offset by increases in accounts
payable, amortization of the discount on the Senior Discount Notes, depreciation
expense and the  compensation  expense  recognized  related to the stock  option
plan.  Net cash used in operating  activities for the year ended March 31, 1997,
resulted  from  the net  loss  from  operations  and  increases  in  prepayments
consisting primarily of the $3,000,000  prepayment of franchise fees to the City
of  Chicago  and  decreases  in various  payables  made  possible  by the equity
infusion of approximately $20 million.

     Cash flow used in investing  activities totaled  $126,770,357,  $25,665,047
and  $3,628,163  for the nine months ended  December 31, 1998 and for the twelve
months ended March 31, 1998 and 1997,  respectively.  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  reflects an effort to improve  returns on monies  previously
classified as cash. Cash requirements in the twelve months 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  requirements in
the year ended March 31, 1997, consisted primarily of the purchase of 1,734 Area
1 bulk subscribers for $3,381,300.

     Cash flow used in  financing  activities  was  $450,108 for the nine months
ended December 31, 1998. In 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.  Cash flow from financing  activities was $243,154,859 and $18,768,915
for the twelve months ended March 31, 1998 and 1997, respectively. In the twelve
months ended March 31, 1998, the private sale of $200 million in Senior Discount
Notes; the sale of $50 million in Exchangeable  Preferred Stock; and the sale of
Class A Preferred  Stock;  generated  a net of  $192,113,175,  $48,025,236,  and
$2,597,380,  respectively.  For the year  ended  March 31,  1997,  approximately
$20,000,000  of cash flow was  generated  through the private  sale of preferred
equity.

     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 for the nine months ended December 31, 1998
and for the fiscal years 1999 and 2000, the time frame in which  construction of
the DRS Network in Area 1 is expected to be completed,  will total approximately
$250 million,  of which approximately $54 million was spent during calendar year
1998. The Company will fund these expenditures 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. 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 if
it begins to develop additional  franchise areas or if the development of Area 1
in Chicago is delayed or requires costs in excess of current expectations. 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 31,1998, no borrowings have been
made  under this  facility.  On October  30,  1998,  the  Company  entered  into
Amendment No. 1 to its bank revolving  credit  facility  which adjusted  certain
operating covenants.

<PAGE>
 
Impact of Year 2000

     The Company has been actively and aggressively  working to ensure Year 2000
compliance  which included an awareness  program started in the third quarter of
1998.  The Company has initiated a formal program to address the Year 2000 issue
that  includes a project  office.  The  Company  has  substantially  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  has  contracted  with a third  party  to  assist  with  its  Year  2000
assessment.  Management does not anticipate any significant future expenditures,
apart from approximately $70,000 in fees charged by this third party and certain
system components not covered by service maintenance agreements,  in conjunction
with the Year 2000 issue.  The  Company has  completed  the  replacement  of all
financial  systems  to  meet  Year  2000  compliance.  Substantially  all of the
remaining  critical  business  systems have been  certified by the vendors to be
Year 2000 compliant. The Company's testing plan may include unit testing as well
as regression analysis. The replacement and remediation of IT and non-IT systems
is  expected to be  substantially  complete  in the third  quarter of 1999.  The
Company  is  assessing  the Year 2000  readiness  of its  critical  vendors  and
suppliers and has sent letters inquiring as to their status regarding their Year
2000 readiness.  The Company will perform additional  procedures as necessary to
evaluate risks  associated with third parties and will consider these risks when
establishing  contingency plans. The Company is developing  contingency plans to
mitigate the potential  disruptions that may result from Year 2000 issues. These
plans  may  include  securing  alternative  sources  for  critical  vendors  and
suppliers,  as well as other measures  considered  appropriate by management and
are anticipated to be completed in the third quarter of 1999.

     While the Company believes its efforts to avoid any material adverse effect
on the Company's operations or financial condition will be successful, given the
complexity  and  risks,  there  can  be  no  assurance  these  efforts  will  be
successful.  Risks  include,  but are not limited to, the  readiness of vendors,
suppliers,  and remediation  projects.  However, the Company does not anticipate
any  disruptions in the ability to provide our products and services  subsequent
to December 31, 1999. The Company has not incurred incremental costs to date and
believes the total cost of the Year 2000 project will not have a material effect
on its results of operations.

   Recent Developments

     On February 26, 1999, the Company acquired EnterAct Corp.  ("EnterAct"),  a
Chicago-based provider of Internet access and commercial data services. EnterAct
has  approximately 50 employees,  and is the highest rated Chicago Area Internet
Services  Provider  by Mind  Spring  Enterprises.  The  majority  of  EnterAct's
approximately   10,000   customers  are  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. In connection  with this  transaction,  the Company
issued  696,994  shares of its no par value common stock 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,  one half due on
the first  anniversary date and one half due on the second  anniversary date. In
addition,  a stock  option plan was approved and options were awarded to certain
employees of  EnterAct.  EnterAct  will become the  Company's  business  service
division,  developing,  marketing and selling data and telephony services to the
business community.

     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. This franchise award is contingent upon the Company's securing the funds
necessary to build its Northbrook network by September 10, 1999.

<PAGE>


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.
<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.

                                  
      Name            Age      Position(s) with Company
     ------           ----     ------------------------
 Edward T. Joyce       56   Chairman of the Board
 Robert J. Currey      53   President, Chief Executive Officer and Director
 Ronald D. Webster     49   Chief Financial Officer and Treasurer
 John A. Brouse        50   Vice President Engineering
 David Jacobs          35   Vice President of Customer Operations
 Roxanne Jackson       34   Vice President of Human Resources
 Eric D. Kurtz         34   Vice President of Operations and Assistant Secretary
 Dennis Parker         61   Vice President of Marketing and Planning
 Susan R. Quandt       44   Vice President of Sales
 Christopher Young     43   Vice President and Chief Information Officer
 William Farley        56   Director
 Elzie Higginbottom    57   Director
 Dr. Charles E. Kaegi  48   Director
 David Kronfeld        51   Director
 James H. Lowry        58   Director
 Glenn W. Milligan     50   Director (Chairman of the Board until January 1, 
                               1999 and Chief Executive Officer until August 
                               13, 1998)
 Thomas M. Neustaetter 47   Director

     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 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 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.
<PAGE>

     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 has served as the Company's  Vice  President of Marketing
and Planning  since  November  1998.  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 since
December  1997.  From  December  1994 to December  1997,  Ms.  Quandt  served as
Executive Vice President of  Taylor-Winfield,  an information  technology market
consulting and executive  recruiting  firm. From January 1992 to September 1994,
Ms. Quandt  served as Vice  President of Marketing  and Product  Development  of
Call-Net Enterprises Inc., a national  long-distance  telephone company owned by
Sprint  Canada.  From January 1989 to December  1991,  Ms. Quandt served as Vice
President  of  Marketing   for  Schneider   Communications,   Inc.,  a  regional
long-distance telephone company.

     Christopher  Young has  served  as Vice  President  and  Chief  Information
Officer for the Company 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.

     William F. Farley has served as a Director of the Company  since  September
1998.  Mr. Farley has been Chairman and CEO of Fruit of the Loom,  Inc. since he
acquired the company in 1985. 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,
American Apparel Manufacturers  Association,  and Rush Hospital Heart Institute,
among others.

     Elzie L.  Higgenbottom  has  served  as a  Director  of the  Company  since
September 1998. Mr.  Higgenbottom 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.  Higgenbottom  currently  serves  on the  governing  board  of  the  Housing
Authority  of Cook County,  Illinois,  and the Board of Directors of Cole Taylor
Bank and Mercy Hospital.

     Dr.  Charles E. Kaegi has served as a  Director  of the  Company  since the
Company's  inception in October 1992. Dr. Kaegi has been in private  practice of
medicine  since July 1979.  From  November  1979 to present,  Dr. Kaegi has held
positions  at  Ravenswood   Hospital  Medical  Center  as:  Attending  Physician
(November 1979 to present); Medical Director, Alcohol & Drug Abuse Program (July
1994 to present);  Medical  Director,  Community  Mental Health Center (November
1994 to present); Medical Education (January 1980 to present);  Secretary of the
Department of Psychiatry  (January  1993-present);  and  Consultant to Community
Mental Health Center (March 1980 to August 1985). Dr. Kaegi is the cousin of Mr.
Glenn Milligan.

<PAGE>

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

Committees of the Board of Directors

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

<PAGE>

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

     As of December 31,  1998,  there were 27,325  options to acquire  shares of
Common Stock outstanding pursuant to the 1998 Employee Stock Option Plan.

     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.

     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 year and
are fully vested after four years.

<PAGE>

     As of December 31, 1998,  options to acquire 139,500 shares of Common Stock
were outstanding pursuant to the 1998 Key Management Stock Option Plan.

     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 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,  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  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.

     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 aggregate  number of shares of Common Stock that may be issued
under options under the 1997 Stock Option Plan may not exceed 728,667.7  shares.
Reserved shares may be either authorized but unissued shares or treasury shares,
and will be distributed at the discretion of the Board of Directors.

     The Compensation Committee has the exclusive authority to establish,  amend
and rescind appropriate rules and regulations  relating to the 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,  1998,  options to 591,324  shares of Common Stock were
outstanding pursuant to the Stock Option Plan.

<PAGE>

Item 11.    Executive Compensation.

                           Summary Compensation Table

     The following table sets forth information  concerning  compensation of (i)
the Company's Chief Executive Officer during the nine month transition year (TY)
ended  December 31, 1998 and (ii) each  executive  officer of the Company  whose
total annual  salary and bonus  equaled or exceeded  $100,000 in the fiscal year
ended  December  31,  1998  (collectively,   the  "Named  Executive  Officers");
Compensation information for the fiscal years (FY) ended March 31, 1998 and 1997
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>                        
Glenn W. Milligan, Chairman          TY-1998      179,779       25,000        6,488         158,589.5 (2)
 of  the Board  until January 1,     FY-1998      188,648       48,089       29,169         131,160.3
 1999 And Chief Executive Officer    FY-1997      170,833        6,875        4,000
 until August 31, 1998

Robert J. Currey                     TY-1998       65,133      441,346       84,418           278,200
President and Chief Executive        FY-1998       92,780            0            0
Officer                              FY-1997            0            0            0

Ronald D. Webster                    TY-1998      113,003       50,000        3,692         162,300.2
Chief Financial Officer              FY-1998       92,308       50,000        3,462         109,300.2
                                     FY-1997            0            0            0

John A. Brouse                       TY-1998       98,941        6,500       16,799          36,443.4
Vice President Engineering           FY-1998       92,780        3,807       41,218          36,443.4
                                     FY-1997            0            0            0

Susan R. Quandt                      TY-1998      112,782            0        9,481          72,866.8
Vice President Sales                 FY-1998       25,823            0        3,023          72,866.8
                                     FY-1997            0            0            0

Richard Wiegand-Moss (3)             TY-1998       73,042            0      198,095          51,874.4 (4)
Former Chief Operating Officer       FY-1998      150,566        6,990       36,232          72,866.8 (4)
                                     FY-1997      117,709        5,729       13,750

Jay E. Carlson (5)                   TY-1998       70,330       10,000       82,040            37,000 (6)
 Former Chief Technical Officer      FY-1998      120,800        3,625       40,196          91,083.5
                                     FY-1997            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;
     and in the case of Mr. Carlson and Mr. Moss, the amount includes  severance
     payments.
(2)  On December  31, 1998,  Mr.  Milligan  was granted  27,429.2  shares of the
     Company's  common stock,  representing  the lesser of 20,000 shares or such
     other number as to provide Mr. Milligan with .261% of the Company's  common
     shares outstanding.
(3)  Mr. Wiegand-Moss was the Company's Chief Operating Officer from August 1996
     to March 1998. Effective March 4, 1998, he ceased to be the Chief Operating
     Officer  and became  Senior Vice  President  of  Customer  Operations.  Mr.
     Wiegand-Moss left the Company in May 1998.
(4)  In March 1998, the options  granted to Mr.  Wiegand-Moss  were reduced from
     109,300.2  shares  to  72,866.8  shares  when  he  ceased  to be the  Chief
     Operating Officer and became Senior Vice President of Customer  Operations.
     Unvested shares  totaling  57,425.8 were forfeited when he left the Company
     in May of 1998.
(5)  Mr. Carlson was the Company's Chief Technical Officer from November 3, 1997
     to August 1998. Mr. Carlson left the Company in August 1998.
(6)  In March 1999 in  conjunction  with a settlement and general  release,  the
     options  granted to Mr. Carlson were reduced from 91,083.5 shares to 37,000
     shares, representing the shares fully vested when he ceased to be the Chief
     Technical Officer.

<PAGE>

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

<TABLE>

                        Option Grants in Last Fiscal Year
                                Individual Grants
                  -------------- ------------- ----------------
<CAPTION>

                                              % of Total                                                
                                Number of       Options                                                 
                               Securities     granted to                                                 Potential Realizable Value 
                               Underlying    Employees in                                                at Assumed Annual Rates of 
Name                             Options     Fiscal Year     Exercise or   Market Price    Expiration   Stock Price Appreciation for
                                                ------        Base Price    at Date of     -----------          Option Term (3)     
                                 Granted                       ($/Sh)      Grant ($/Sh)       Date          5%            10%       
                                 -------                       ------         ------          ----          --            ---       
<S>                            <C>               <C>            <C>           <C>              <C>       <C>             <C>        
Glenn W. Milligan               27,429.2(1)       5.3           0.00          4.50             N/A       $ 201,057       $  320,149
Robert J. Currey                 278,200(2)      53.2           1.12          4.50            03/06/08   $1,727,629      $2,935,522
Ronald D. Webster                 53,000(2)      10.2           4.50          4.50            04/14/08   $ 149,991       $  380,108
John A. Brouse                        --          --             --            --               --           --              --
Susan R. Quandt                       --          --             --            --               --           --              --
Richard Wiegand-Moss                  --          --             --            --               --           --              --
Jay E. Carlson                        --          --             --            --               --           --              --


</TABLE>


(1)  On December  31, 1998,  Mr.  Milligan  was granted  27,429.2  shares of the
     Company's  common stock,  representing  the lesser of 20,000 shares or such
     other number as to provide Mr. Milligan with .261% of the Company's  common
     shares outstanding.

(2)  Stock options vest 1/48th each month and are fully vested after four years;
     provided that such officer remains continuously employed by the Company.

(3)  These  amounts  are  based  on  compounded  annual  rates  of  stock  price
     appreciation  of five and ten percent over the 10-year term of the options,
     are mandated by rules of the Securities and Exchange Commission and are not
     indicative of expected stock  performance.  Actual gains,  if any, on stock
     option  exercises are dependent on future  performance of the Common Stock,
     overall  market  conditions,  as  well  as the  option  holders'  continued
     employment  throughout the vesting  period.  The amounts  reflected in this
     table may not  necessarily  be achieved or may be exceeded.  The  indicated
     amounts are net of the option  exercise  price but before taxes that may be
     payable upon exercise.

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


<PAGE>


<TABLE>

                    Aggregated Fiscal Year-End Option Values
<CAPTION>

                                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>                   
Glenn W. Milligan                131,160.3          27,429.2          $443,322       $123,431
Robert J. Currey                 168,079.0         110,121.0          $568,107       $372,209
Ronald D. Webster                 54,050.4         108,249.8          $122,977       $405,458
John A. Brouse                     15,097.3         21,336.0          $ 51,029       $ 72,116
Susan R. Quandt                    18,466.0         54,400.8          $ 62,415       $183,875
Richard Wiegand-Moss               51,847.4             --            $175,244       $175,244
Jay E. Carlson                     37,000.0             --            $125,060       $125,060

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

</TABLE>


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

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 until 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  contract
entitled him to receive stock options for 278,000 shares of the Company's common
stock, 50% of which vested  immediately with the remaining "later vesting stock"
to be vested  over a period  ending  February  2002.  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  an  amount  equal  to
approximately two times the annual salary and bonus stated in the contract.

<PAGE>

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

     John A. Brouse.  Mr. Brouse  entered into an employment  agreement with the
Company as of November 3, 1997. The  employment  agreement will expire on August
3, 2001.  Pursuant to the  employment  agreement,  Mr.  Brouse is entitled to an
initial  annual base salary of $117,200  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. Brouse is generally entitled to severance benefits,
and 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.

     Susan R. Quandt.  Ms. Quandt entered into an employment  agreement with the
Company as of  December  26,  1997.  The  employment  agreement  will  expire on
December 26, 1999. Pursuant to the employment agreement,  Ms. Quandt is entitled
to an initial  annual base salary of $125,000 and is entitled to  participate in
any performance based bonus plan provided by the employer.  In addition,  she is
entitled to receive stock options  covering such number of shares  pursuant to a
separate  agreement.  Upon a  termination  of her  employment,  depending on the
reason for termination,  Ms. Quandt is generally entitled to severance benefits,
and she may be  entitled to an amount  equal to one times the annual  salary and
bonus she would have received for the year during which such termination occurs.

     Richard  Wiegand-Moss.  Mr. Wiegand-Moss was employed by the Company as its
Chief Operating Officer pursuant to an employment  agreement in August 1996. In
March 1998,  he entered  into  another  employment  agreement  with the Company,
pursuant to which he ceased to be the Chief Operating  Officer and became Senior
Vice President of Customer  Operations  effective March 4, 1998. Pursuant to the
employment  agreement in 1998, he was entitled to an initial  annual base salary
of $150,000.  In May 1998, Mr. Wiegand-Moss resigned from the Company. On May 5,
1998, Mr. Wiegand  entered into a Separation  Agreement and General Release with
the Company.
All unvested options were forfeited.

     Jay E. Carlson.  Mr. Carlson entered into an employment  agreement with the
Company as of November 3, 1997. Mr. Carlson  resigned from the Company on August
31, 1998. Mr. Carlson  entered into a Separation  Agreement and General  Release
with the Company on March 5, 1999,  Terms of this agreement a lump sum amount of
$150,000, which is equal to his annual salary for the most recent year. Pursuant
to the agreement, Mr. Carlson retained the 37,000 shares of Company common stock
which  represent  the amount that had fully  vested as of August 31,  1998.  The
agreement  included the  forgiveness  of a loan of $53,000 which Mr. Carlson had
received from the Company.

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

<PAGE>

Item 12.    Principal Shareholders.

     The  following  table sets forth  certain  information  at March 15,  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 of   Class A Convertible 
                                                  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                     24.3%
JK&B Capital(5)                                     378,800.2                316.6                     12.7
William Farley(6)                                   303,040.0                253.3                     10.3
Myron M. Cherry(7)                                  269,625.3                 12.7                      5.4
Boston Capital Ventures III, L.P.(8)                151,520.1                126.6                      5.2
Elske Bolitho(9)                                    305,000.0                   --                      5.9
Thomas Neustaetter(4)(10)                           757,600.3                633.2                     24.3

Charles E. Kaegi, M.D.(11)(16)                      932,480.0                  6.3                     16.8
Edward T. Joyce(12)(16)                             758,496.7                 50.8                     14.5
David Kronfeld(13)                                  530,320.3                443.2                     17.5
Glenn W. Milligan(14)(16)                           687,684.8                  4.7                     12.4
James H. Lowry(16)                                   19,000.0                   --                        *
Robert Currey(16)                                    63,754.1                   --                      1.2
Ronald Webster(15)(16)                               48,557.6                  9.5                      1.2
All executive officers and directors as a group   3,777,300.0              1,147.7                     67.4

* Less than 1%.

</TABLE>


(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, 1999,  are deemed  outstanding.  Such shares,  however,  are not deemed
     outstanding  for the purpose of computing the  percentage  ownership of any
     other person.

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

(3)  Percent  of  Aggregate  Voting  Rights,  for  each  beneficial  owner,  was
     determined based upon a fraction. The numerator of such fraction is the sum
     of (a) the number of outstanding  shares of Common Stock beneficially owned
     by such owner, plus (b) the number of shares of Common Stock into which the
     number of shares  of Class A  Convertible  8%  Cumulative  Preferred  Stock
     beneficially  owned by such owner are  convertible,  plus (c) the number of
     shares of Common  Stock  issuable  upon  exercise of options  and  warrants
     beneficially  owned by such owner and which are exercisable  within 60 days
     of March 15, 1999.  The  denominator of such fraction is the sum of (a) the
     aggregate  number of shares of Common Stock  outstanding on March 15, 1999,
     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,  1999 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, 1999.

<PAGE>

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

  (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)  Represents the following  securities  held by the following  entities:
          116.1 shares of Class A  Convertible  8% Cumulative  Preferred  Stock,
          41,229.9  shares of Common Stock and  97,663.4  shares of Common Stock
          issuable upon exercise of warrants held by Velocity Capital, L.L.C. of
          which Mr. Farley is a member,  and 105.5 shares of Class A Convertible
          8% Cumulative  Preferred  Stock,  37,481.7  shares of Common Stock and
          88,785.0  shares of Common Stock  issuable  upon  exercise of warrants
          held by The Retirement Program of Farley,  Inc. of which Mr. Farley is
          the sole member of the Pension Investment Committee and 31.7 shares of
          Class A Convertible 8% Cumulative Preferred Stock,  11,244.5 shares of
          Common  Stock  and  26,635.5  shares  of Common  Stock  issuable  upon
          exercise of warrants held by Union Underwear Pension Plan of which Mr.
          Farley is the sole member of the  Pension  Investment  Committee.  Mr.
          Farley  disclaims  beneficial  ownership of all shares except for 73.9
          shares of class A Convertible 8% Cumulative Preferred Stock,  26,237.2
          shares of common stock,  and 62,149.4  shares of Common Stock issuable
          upon exercise of warrants held by Velocity  Capital,  L.L.C., of which
          Mr.  Farley is a member.  The  percentage  of 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
          for  26,237.2  shares.  The address of Mr.  Farley is 233 South Wacker
          Drive,  5000 Sears Tower,  Chicago,  Illinois,  60606.  The Percent of
          Aggregate Voting Rights excludes  89,956.1 shares of non-voting Common
          Stock beneficially owned by Mr. Farley.

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

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

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

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

(11)   Includes  172,202.2 shares of Common Stock and 376,721.8 shares of Common
       Stock  issuable upon exercise of options held by Charles E. Kaegi,  M.D.,
       S.C.,  Defined  Contribution  Pension Plan and Trust,  26,990.0 shares of
       Common  Stock held by Charles  E.  Kaegi,  M.D.,  S.C.,  Defined  Benefit
       Pension Plan and Trust, 1,700.0 shares of Common Stock held by Charles E.
       Kaegi, M.D., S.C. Profit Sharing Pension Plan and Trust, 321,240.0 shares
       of Common Stock held jointly with Mr. Kaegi's wife,  and 17,470.0  shares
       of  non-voting  Common Stock owned by Mr.  Kaegi's  wife.  The Percent of
       Aggregate  Voting Rights  excludes  2,248.9  shares of non-voting  Common
       Stock held by Mr. Kaegi.

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

(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 held by Mr.  Milligan,  and  93,750.0  shares of Common Stock and
       61,225.5 shares of Common Stock issuable upon exercise of options held by
       Mr.  Milligan's  wife.  The Percent of Aggregate  Voting Rights  excludes
       1,686.7  shares of  non-voting  Common  Stock  beneficially  owned by Mr.
       Milligan.

(15)   Includes  44,025.04  shares of 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 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.

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

(17)   Includes the  aggregate of  1,183,694.8  shares of Common Stock  issuable
       upon  exercise of options and 965,696.5  shares of Common Stock  issuable
       upon exercise of warrants. See notes 10, 11, 12, 13, 14 and 15 above. The
       Percent  of  Aggregate   Voting  Rights  excludes   407,682.6  shares  of
       non-voting Common Stock.

<PAGE>

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.


<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, 1998 and March 31, 1998.
     -   Consolidated Statements of Income for the nine months ended December 
           31, 1998 and for the years ended  March 31, 1998 and 1997
     -   Consolidated  Statements of Changes in  Shareholders'  Equity for the
           nine months  ended  December 31, 1998 and for the years ended March 
           31, 1998 and 1997
     -   Consolidated Statements of Cash Flows for the nine months ended 
           December 31, 1998 and for the years ended March 31, 1998 and 1997
     -   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 nine months ended December 31, 1998 and
         for the years ended March 31, 1998 and 1997.

         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 21, 1998, under "Item 8. Change
      in Fiscal Year," the Company announced to change the fiscal year from that
      used in its most recent filing with the Securities and Exchange Commission
      (SEC). The Company's new fiscal year-end is December 31.

1.       Exhibits

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




<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,  1998 and March  31,  1998,  and the  related
consolidated  statements of operations,  cash flows and shareholders' equity for
the nine  months  ended  December  31, 1998 and for each of the two years in the
period ended March 31, 1998. These financial  statements are the  responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the financial position of 21st Century
Telecom Group, Inc. and subsidiaries as of December 31, 1998 and March 31, 1998,
and the  results of their  operations  and their cash flows for the nine  months
ended  December 31, 1998 for each of the two years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.

     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
February 5, 1999


<PAGE>


<TABLE>
                                                     21st CENTURY TELECOM GROUP, INC.
                                                       CONSOLIDATED BALANCE SHEETS

<CAPTION>


                                                                                       December 31,         March 31,
                                       ASSETS                                             1998                1998
                                       ------                                                                     
                                                                                    ---------------      --------------
<S>                                                                                <C>                 <C>
Current Assets
Cash and cash equivalents                                                          $     72,901,622    $    217,640,238
Accounts receivable, less allowances of $1,376 and $0, respectively                         157,082              10,359
Short term investments                                                                   98,464,936          10,000,000
Inventory                                                                                10,385,575           1,991,690
Prepaid expenses and other                                                                  598,878             168,152
                                                                                   -----------------   -----------------
    Total current assets                                                                182,508,093         229,810,439

Property, Plant and Equipment
Leasehold improvements                                                                    5,647,709           4,010,868
Other property, plant and equipment                                                      57,475,153          16,588,094
Less: accumulated depreciation                                                           (4,814,143)         (1,193,236)
                                                                                   -----------------   -----------------
    Property, plant and equipment, net                                                   58,308,719          19,405,726

Other Assets
Restricted cash collateral reserve                                                        1,796,880           1,796,880
Prepaid franchise fees                                                                    3,685,961           3,505,706
Debt issuance costs, net of amortization of $1,386,138 and $218,411, respectively         6,601,105           7,668,414
Deferred franchise costs, net of amortization of $623,681 and $489,093, respectively        350,144             463,989
Bank commitment fee, net of amortization of $78,604                                         898,302                   -
Deferred mapping and design, net of amortization of $93,071 and $58,501, respectively        44,880              79,450
Other deferred costs                                                                        149,889               2,000
                                                                                   -----------------   -----------------
    Total other assets                                                                   13,527,161          13,516,439
                                                                                   -----------------   -----------------
         Total assets                                                              $    254,343,973    $    262,732,604
                                                                                   =================   =================

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable                                                                   $     10,688,242    $      6,691,683
Accrued severance                                                                         1,230,000             200,000
Accrued expenses and other                                                                1,261,982           1,860,410
                                                                                   -----------------   -----------------
    Total current liabilities                                                            13,180,224           8,752,093

Noncurrent Liabilities
Debentures payable                                                                                -              28,849
Interest payable                                                                                  -              42,203
Senior discount notes, net of discount of $140,681,223 and $159,656,983, respectively   222,453,777         203,478,017
                                                                                   -----------------   -----------------
    Total noncurrent liabilities                                                        222,453,777         203,549,069
                                                                                   -----------------   -----------------
         Total liabilities                                                              235,634,001         212,301,162

Redeemable Preferred Stock
13 3/4% senior cumulative exchangeable preferred stock, $.01 par value,
     55,458.12 and 50,000 shares outstanding, respectively                               52,617,006          46,492,812
Shareholders' Equity
Class A convertible 8% cumulative preferred stock, no par value,
     1,554.8 shares outstanding                                                          24,611,966          21,751,665
Voting and non-voting common stock (no par value; issued and outstanding shares,
     3,493,965.7  at  December  31,  1998 and  3,489,467.9  at March  31,  1998;
     secondary common share warrants outstanding, 1,747,066 at December 31, 1998
     and 1,741,738.9 at March 31, 1998)                                                   7,862,836           6,974,836
Common shares to be issued (no par value; 27,429.2 shares)                                  123,432                   -
Retained deficit                                                                        (66,505,268)        (24,787,871)
                                                                                   -----------------   -----------------
    Total shareholders' equity                                                          (33,907,034)          3,938,630
                                                                                   -----------------   -----------------
         Total liabilities and shareholders' equity                                $    254,343,973    $    262,732,604
                                                                                   =================   =================


                               See accompanying Notes to the Consolidated Financial Statements.

</TABLE>
<PAGE>


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

<CAPTION>
                                                                                          For the Year
                                                   For the Nine                          Ended March 31,
                                                   Months Ended         -----------------------------------------------
                                                 December 31, 1998               1998                      1997
                                               ---------------------    ----------------------    ---------------------
<S>                                            <C>                      <C>                       <C>
Operating revenues                             $            873,898     $             189,023     $             27,480

Operating expenses
Network operations                                        2,678,047                 2,023,310                  200,911
Sales and marketing                                       3,533,731                 2,213,723                        -
General and administrative                               12,812,019                 8,003,196                2,337,534
Depreciation and amortization                             3,876,779                 1,411,847                  170,108
                                               ---------------------    ----------------------    ---------------------

     Total operating expenses                            22,900,576                13,652,076                2,708,553
                                               ---------------------    ----------------------    ---------------------

Operating loss                                          (22,026,678)              (13,463,053)              (2,681,073)
Interest expense                                        (18,232,959)               (3,722,947)                (437,843)
Interest income                                           8,670,695                 2,373,867                  301,624
Amortization of issuance costs                           (1,199,770)                 (218,411)                       -
                                               ---------------------    ----------------------    ---------------------

Net loss                                                (32,788,712)              (15,030,544)              (2,817,292)

Preferred stock requirements                             (8,928,707)               (4,234,463)                (478,981)
                                               ---------------------    ----------------------    ---------------------

Net loss attributable to common shares         $        (41,717,419)    $         (19,265,007)    $         (3,296,273)
                                               =====================    ======================    =====================
                                               
Weighted average common
    shares outstanding                                  3,493,836.5               2,615,061.0              1,988,365.0

Basic and diluted loss per share               $             (11.94)    $               (7.37)    $              (1.66)
                                               =====================    ======================    =====================


                              See accompanying Notes to the Consolidated Financial Statements.
</TABLE>
<PAGE>


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

<CAPTION>

                                                                                              For the Year
                                                            For the Nine                     Ended March 31,
                                                            Months Ended        -------------------------------------------
                                                          December 31, 1998             1998                   1997
                                                         -------------------    -------------------    --------------------
<S>                                                      <C>                    <C>                    <C>
Operating Activities
Net loss                                                 $      (32,788,712)    $      (15,030,544)    $        (2,817,292)
Adjustments to reconcile net loss to net
  cash used for operating activities:
     Depreciation and amortization                                3,876,779              1,411,847                 170,108
     Amortization of debt discount                               18,975,760              3,478,017
     Amortization of debt issuance costs                          1,199,770                218,411
     Stock compensation                                             843,789              1,004,776                  44,190
     Common stock to be issued                                      123,432                      -                       -
     Changes in operating assets and liabilities:
        Affiliate receivable and payable                                  -                      -                (372,819)
        Receivables, net                                           (146,723)               103,121                 (27,480)
        Other current assets                                     (8,982,612)            (2,299,723)             (3,365,825)
        Accounts payable                                           (274,621)             3,154,912                (331,025)
        Accrued expenses and other
            current liabilities                                     963,330                      -                 147,533
        Noncurrent assets and liabilities, net                   (1,308,343)              (121,333)               (358,156)
                                                         -------------------    -------------------    --------------------
                                                         
Net Cash Used for Operating Activities                          (17,518,151)            (8,080,516)             (6,910,766)
                                                         -------------------    -------------------    --------------------
                                                         
Investing Activities                                                                                       
Purchase of held-to-maturity securities                         (88,464,936)           (10,000,000)                      -
Purchase of subscribers from affiliate                                    -                      -              (3,381,300)
Capital expenditures                                            (38,305,421)           (15,665,047)               (246,863)
                                                         -------------------    -------------------    --------------------
                                                         
Net Cash Used for Investing Activities                         (126,770,357)           (25,665,047)             (3,628,163)
                                                         -------------------    -------------------    --------------------
                                                         
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                       -
Cash paid for letters of credit                                           -                      -              (1,796,880)
Proceeds from (payments on) debentures                             (131,040)                     -                 153,660
Proceeds from issuance of class A preferred stock,
     net of issuance costs                                          100,000              2,597,380              20,267,604
Issuance of common stock                                                  -                      -                 144,531
                                                         -------------------    -------------------    --------------------

Net Cash Provided by (Used For) Financing Activities               (450,108)           243,154,859              18,768,915
                                                         -------------------    -------------------    --------------------
                                                         
Increase (Decrease) in Cash and Cash Equivalents               (144,738,616)           209,409,296               8,229,986
Cash and Cash Equivalents at Beginning of Period                217,640,238              8,230,942                     956
                                                         -------------------    -------------------    --------------------
                                                         
Cash and Cash Equivalents at End of Period               $       72,901,622     $      217,640,238     $         8,230,942
                                                         ===================    ===================    ====================


                                   See accompanying Notes to the Consolidated Financial Statements.

</TABLE>
<PAGE>
 
<TABLE>
                                                          21ST CENTURY TELECOM GROUP, INC.
                                             CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                               FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

<CAPTION>

                                                                          Common       Class A                                      
                                                                        Shares to     Preferred     Retained       Unearned         
                                             Total       Common Stock   be Issued       Stock        Deficit     Compensation  
                                         -------------  -------------  -----------  ------------  -------------  ------------  
<S>                                      <C>             <C>            <C>         <C>            <C>            <C>               
Balances, March 31, 1996                 $ (1,744,556)   $    488,001   $           $              $(2,226,557)   $  (6,000)   
Net loss                                   (2,817,292)                                              (2,817,292)
Stock issuances                             1,421,281       1,421,281                                                          
Accrued preferred stock dividends            (280,795)                                                (280,795)
Class A preferred stock proceeds
  allocated to related common share
  warrants                                  4,324,549       4,324,549                                                          
Class A preferred stock issuance
  costs allocated to related common
  share warrants                             (286,927)       (286,927)
Preferred stock accretion                    (198,186)                                                (198,186)
Amortization of unearned
  compensation                                  2,889                                                                 2,889
Related party purchase, in excess
  of cost                                  (3,381,300)     (3,381,300)
                                         -------------  -------------  -----------  ------------  ------------- -------------  
Balances, March 31, 1997                   (2,960,337)      2,565,604                               (5,522,830)      (3,111)   
Net loss                                  (15,030,544)                                             (15,030,544)
Reclassification of  Class A preferred
  stock to permanent equity                16,794,963                                 16,794,963                               
Stock issuances                             2,597,380                                  2,597,380                               
Exchange of initial and debt warrants
  for voting  and non voting common
  shares                                                                                                                       
Accrued preferred stock dividends            (973,958)                                 1,872,892    (2,846,850)
Preferred stock accretion                     (87,014)                                 1,300,633    (1,387,647)
Class A preferred stock proceeds
  allocated to related common share
  warrants                                                    825,037                   (825,037)                              
Class A preferred stock issuance
  costs allocated to related common
  share warrants                                              (10,834)                    10,834
Exchangeable Preferred Stock
  proceeds allocated to related
  common shares warrants                    2,700,000       2,700,000                                                          
Exchangeable Preferred stock
  issuance costs allocated to related
  common share warrants                     (106,636)        (106,636)
Stock option accrual                         972,865          972,865
Stock compensation                            28,800           28,800                                                          
Amortization of unearned
  compensation                                 3,111                                                                  3,111
                                         -------------  -------------  -----------  ------------  ------------- -------------  
Balances, March 31, 1998                   3,938,630        6,974,836                 21,751,665   (24,787,871)                
Net loss                                 (32,788,712)                                              (32,788,712)
Stock issuances                              223,432           44,211     123,432         55,789                               
Accrued preferred stock dividends         (5,437,332)                                  1,620,938    (7,058,270)
Preferred stock accretion                   (686,841)                                  1,183,574    (1,870,415)
Stock options                                843,789          843,789
                                         -------------  -------------  -----------  ------------  ------------- -------------  
Balances, December 31, 1998              $(33,907,034)   $  7,862,836   $ 123,432   $ 24,611,966  $(66,505,268)      $ -       
                                         =============  =============  ===========  ============  ============= ============= 

 
                                                            Common        Common      Class A 
                                                           Shares to      Share      Preferred
                                         Common Shares     be Issued      Warrants     Shares
                                         --------------  ------------  -----------  -----------
<S>                                        <C>            <C>          <C>           <C>                              
Balances, March 31, 1996                   1,683,000.0                                                 
Net loss                                                                                               
Stock issuances                              691,343.6                                                   
Accrued preferred stock dividends                                                                      
Class A preferred stock proceeds                                                                       
  allocated to related common share                                                                    
  warrants                                                             1,161,307.6                         
Class A preferred stock issuance                                                                       
  costs allocated to related common                                                                    
  share warrants                                                                                       
Preferred stock accretion                                                                              
Amortization of unearned                                                                               
  compensation                                                                                         
Related party purchase, in excess                                                                      
  of cost                                                                                              
                                         --------------  ------------  -----------  -----------          
Balances, March 31, 1997                   2,374,343.6                 1,161,307.6            
Net loss                                                                                               
Reclassification of  Class A preferred                                                                 
  stock to permanent equity                                                            1,380.3          
Stock issuances                                                                          168.2          
Exchange of initial and debt warrants                                                                  
  for voting  and non voting common                                                                    
  shares                                   1,100,724.4                                                  
Accrued preferred stock dividends                                                                      
Preferred stock accretion                                                                              
Class A preferred stock proceeds                                                                       
  allocated to related common share                                                                    
  warrants                                                               141,561.3                      
Class A preferred stock issuance                                                                       
  costs allocated to related common                                                                    
  share warrants                                                                                       
Exchangeable Preferred Stock                                                                           
  proceeds allocated to related                                                                        
  common shares warrants                                                 438,870                  
Exchangeable Preferred stock                                                                           
  issuance costs allocated to related                                                                  
  common share warrants                                                                                
Stock option accrual                                                                                   
Stock compensation                            14,399.9                                            
Amortization of unearned                                                                               
  compensation                                                                                         
                                         --------------  ------------  -----------  -----------          
Balances, March 31, 1998                   3,489,467.9                 1,741,738.9     1,548.5           
Net loss                                                                                               
Stock issuances                                4,497.8      27,429.2       5,327.1         6.3          
Accrued preferred stock dividends                                                                      
Preferred stock accretion                                                                              
Stock options                                                                                          
                                         --------------  ------------  -----------  -----------          
Balances, December 31, 1998                3,493,965.7      27,429.2   1,747,066.0     1,554.8           
                                         ==============  ============  ===========  ===========          
                                                                                                       
</TABLE>
                                         
<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. At December 31,
1998,  management  believes the Company operates in only one reportable segment.
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.

         The Company's  accounting and reporting principles conform to generally
accepted accounting  principles.  The consolidated  financial statements include
two  wholly-owned  subsidiaries.  There  have been no  significant  intercompany
transactions or activities within or between these subsidiaries through December
31,  1998.  On December  21,  1998 the Company  changed its fiscal year end from
March 31 to December 31.

   Cash and Cash Equivalents

     Cash and cash equivalents at December  31,1998 and March 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, 1998 and March 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 cost (principally the first-in, first-out method) or market.

   Property, Plant and Equipment

     Property,  plant  and  equipment  are  stated at cost  including  labor and
overhead  expenses  associated  with  construction.  Cost  includes  capitalized
interest on funds borrowed to finance construction. Capitalized interest for the
nine months ended  December  31, 1998 was  $780,680.  Depreciation  on property,
plant and equipment was computed by applying the  straight-line  method over the
estimated  service lives for  depreciable  plant and  equipment.  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 were depreciated on a straight-line  basis over the term
of  the  lease,  fifteen  years.  The  Company  began  to  depreciate  leasehold
improvements in September 1997.

     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.

<PAGE>

   Deferred Franchise Costs

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

   Deferred Mapping and Design Costs

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

   Debt Issuance Costs

     Costs  associated  with the issuance of the Company's debt  securities (see
Note 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 nine months ended December 31, 1998 was $1,270,592.  The Company
did not incur significant advertising costs prior to April 1, 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.

   Earnings Per Share

     Basic per share  amounts  were  based on  weighted  average  common  shares
outstanding, excluding common stock equivalents, of 3,493,836.5, 2,615,061.0 and
1,988,365.0  for the nine  months  ended  December  31,  1998 and for the twelve
months  ended March 31,  1998 and 1997,  respectively.  Given the  anti-dilutive
effect  of  including  common  stock  equivalents  in the  calculation,  diluted
earnings per share amounts are not presented.

     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.

     At March 31, 1997, these common stock  equivalents  included the following:
(1)  1,161,307.6  common share  warrants  related to the Class A Convertible  8%
Cumulative  Preferred  Stock,  (2)  1,000,966.8  shares of voting and non-voting
common stock which  replaced the initial and debt warrants  associated  with the
Class A Convertible  8% Cumulative  Preferred  Stock as discussed in Note 9, (3)
1,250,000  options issued in connection with certain  Directors'  guarantee of a
loan, and (4) 18,994.7 stock warrants issued to a financial advisor.

<PAGE>

   Cash Flow Information

     For the nine months  ended  December 31, 1998 and for the years ended March
31,  1998 and 1997,  the  Company  has not paid any income  taxes.  For the nine
months ended  December 31, 1998 and for the years ended March 31, 1998 and 1997,
the Company paid $131,040, $193,922 and $274,993, 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  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,            March 31,             Estimated life
                                                         1998                  1998                   (years)
                                                   ------------------    ------------------       -----------------
<S>                                                     <C>                   <C>                     <C>      
Transmission and distribution systems                   $40,831,723           $14,994,770             3 - 13
Leasehold improvements                                    5,647,709             4,010,868               15
Other equipment                                           5,272,864               641,825             3 - 7
Furniture and fixtures                                      727,522               403,702             3 - 7
Construction in progress                                 10,643,044               547,797              N/A
                                                   ------------------    ------------------
                                                   
Property, plant and equipment, at cost                   63,122,862            20,598,962
      Less: accumulated depreciation                     (4,814,143)           (1,193,236)
                                                   ------------------    ------------------
                                                   
Net property, plant and equipment                       $58,308,719           $19,405,726
                                                   ==================    ==================

</TABLE>


       Depreciation  expense  charged to  operations  for the nine months  ended
December  31,  1998  and for the  years  ended  March  31,  1998  and  1997  was
$3,629,017, $1,186,302 and $6,934, respectively.

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 nine  months  ended
December  31, 1998 and for the years  ended March 31, 1998 and 1997  amounted to
$226,027, $299,994, and $216,575, respectively. These prepaid franchise fees are
reduced as revenues are billed to customers.

<PAGE>

4.   Related Party Transactions

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

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

5.   Debt

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

<TABLE>
<CAPTION>


                                                                             December 31,           March 31,
                                                                                 1998                  1998
                                                                          -------------------   -------------------
     <S>                                                                  <C>                        <C>
     Convertible Subordinated Debentures, Series 1, 25%, due 1998         $              -           $      52,702
     Convertible Subordinated Debentures, Series 2, 25%, due 1999                     28,849                28,849
     12 1/4% Senior Discount Notes Due 2008                                        222,453,777          203,478,017
                                                                          -------------------   -------------------
                                                                          
          Total                                                           $      222,482,626         $ 203,559,568
                                                                          ===================   ===================

</TABLE>

   Convertible Subordinated Debentures

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

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

     Total  debenture  conversions  to  common  stock  for  Series 1  through  5
convertible  debentures resulted in the issuance of 616,280 additional shares of
common stock  between April 1996 and January  1997.  (See Note 8 for  conversion
effects on common shares  outstanding.)  Subsequent  to January 31, 1997,  these
debentures were no longer convertible.

     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.

   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 nine  months  ended  December  31, 1998 and for the year ended March 31,
1998, the amortized discount totaled  $18,975,760 and $3,478,017,  respectively.
Issuance  costs  for  the  transaction   totaled   $7,886,825.   The  amount  of
amortization recognized for the nine months ended December 31, 1998 and the year
ended March 31, 1998 was  $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.

<PAGE>

     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, 1998.

   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, 1998, 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, the Company entered
into  Amendment  No. 1 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.

6.   Class A Convertible 8% Cumulative Preferred Stock

                                          Preferred                    
                                           Shares          Amount
                                         ------------  ----------------
                                        
          March 31, 1996                          --               --
          January 30, 1997                              
               Proceeds                      1,380.3      $17,475,451
               Issuance costs                     --       (1,159,469)
               Accrued dividends                  --          280,795
               Accretion                          --          198,186
                                         ------------  ----------------
          March 31, 1997                     1,380.3       16,794,963 
          September 23, 1997
               Proceeds                         63.3          819,439 
               Issuance costs                      --         (49,166)
          November 20, 1997
               Proceeds                          9.5          121,842 
          January 20, 1998
               Proceeds                         95.4          891,062 
               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
                                         ============  ================

     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

<PAGE>

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.

     - 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.

<PAGE>

     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
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

                                        Preferred           
                                         Shares             Amount
                                       ------------    -----------------
                                       
          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
                                       ============    =================
<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 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,
1998.

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.

     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, 1998 and March 31, 1998, the Company had 50,000,000  shares
of no par common stock  authorized,  of which  3,493,965.7  and  3,489,467.9 are
issued and outstanding, respectively.

<PAGE>

     Changes in the Company's  common shares and related amounts during the nine
months ended  December 31, 1998 and the years ended March 31, 1998 and 1997, are
as follows:
                                           Common
                                           Shares              Amount
                                      -----------------   -----------------
               March 31, 1996              1,683,000.0         $  488,001
          April 28, 1996                      84,490.0            168,980
          May 17, 1996                       146,540.0            293,080
          November 14, 1996                  115,410.0            230,820
          January, 1997                             --         (3,381,300)
          January 28, 1997                    75,063.6            188,721
          January 30, 1997                          --          4,037,622
          January 31, 1997                   269,840.0            539,680
                                      -----------------   -----------------
                                      
               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
                                      =================   =================
                                  
     In January 1997, the Company purchased  Technology's Area 1 subscriber base
and related  equipment  for  $3,381,300.  As this is  considered to be a related
party transaction,  the Company could only capitalize Technology's book value of
the purchased subscribers and the related equipment.  As Technology's book value
was  zero at the  time of  purchase,  the  entire  purchase  price is shown as a
reduction  to  shareholders'  equity and is  included  in voting and  non-voting
common stock on the Consolidated Balance Sheets.

     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 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.

<PAGE>

     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, 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 591,324 were outstanding as of December 31, 1998. Options vest
over 48 months from the date of employment  and expire after ten years.  Options
vested  under this plan as of December 31, 1998  totaled  367,521.1.  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.

     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, 1998, 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 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, 1998,  185,745.7  options were vested under the
Executive Plan.

<PAGE>

     Under the Key  Management  Plan and the Employee  Plan,  150,000 and 50,000
options,  respectively,  were  available  for grant.  As of December 31, 1998, a
total of 137,500 options were granted under the Key Management  Plan,  22,500 of
which vested  immediately.  A total of 25,925  options  were  granted  under the
Employee  Plan.  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 at the time of grant, is $4.50 per share. All remaining
options under these plans vest over four years beginning July 1, 1999 and expire
10 years from date of grant.

     The Company  accounts  for the plans under APB Opinion No. 25,  under which
$843,789 and $972,865 of compensation expense was recognized for the nine months
ended  December  31, 1998 and for the year ended March 31,  1998,  respectively,
relating to stock option awards to  employees.  Had  compensation  cost for such
stock option awards under the plan been determined consistent with SFAS No. 123,
the Company's  net loss,  net loss  attributable  to common shares and basic and
diluted  loss per share would have been  increased  to the  following  pro forma
amounts:

<TABLE>
<CAPTION>


                                           Nine Months Ended           Twelve Months Ended
                                           December 31, 1998              March 31, 1998
                                        ------------------------    ---------------------------
<S>                                           <C>                          <C>                
Net loss                 As reported          ($32,788,712)                ($15,030,544)
                         Pro forma            ($33,001,845)                ($15,102,676)

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

Basic and diluted        As Reported               ($11.94)                      ($7.37)
   loss per share        Pro forma                 ($12.00)                      ($7.39)

</TABLE>

<PAGE>

     A summary of the status of the  Company's  stock  option plans for the nine
months ended  December  31, 1998 and the twelve  months ended March 31, 1998 and
changes  during the  respective  periods is presented in the table and narrative
below:

<TABLE>
<CAPTION>


                                         Nine Months Ended            Twelve Months Ended
                                           December 31, 1998              March 31, 1998  
                                      ------------------------      ------------------------
                                       Shares       Wtd Avg          Shares         Wtd Avg 
                                       (000)        Ex Price         (000)         Ex Price 
<S>                                      <C>           <C>              <C>           <C>                 
Outstanding at beginning of year         692.3         1.12 
Granted                                  493.8         2.60             728.7         1.12
Exercised
Forfeited                                100.9         1.12              36.4         1.12
Expired
Canceled                                ______                         ______
Outstanding at end of year             1,085.2         1.79             692.3         1.12

Exercisable end of year                  575.8                          287.8
Weighted average fair value of
   options granted                                     2.99                           3.91

</TABLE>


     The 493,825 options granted in the nine months ended December 31, 1998 have
an exercise price between $1.12 and $4.50 with a weighted average exercise price
of $1.79 and a weighted average remaining contractual life of 8.75 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 nine months  ended  December 31,
1998:  risk-free  interest rate of 5.51 percent;  expected  dividend yields of 0
percent; expected life of 10 years; and expected volatility of 0 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, 1998 and March 31, 1998, are as follows:

                                                               
                                          December 31, 1998      March 31, 1998 
                                              Deferred Tax        Deferred Tax  
                                          Asset/(Liability)    Asset/(Liability)
                                          -----------------    -----------------
   Employee related                            $ 1,235,194          $  463,584
   Property, plant and equipment                            
     depreciation expense                       (2,072,079)           (588,411)
   Accretion of discount on senior                          
     discount notes                              8,876,819           1,374,974
   Amortization of debt issuance costs                      
     related to senior discount notes              275,091              43,297
   Other                                            67,016                  --  
   Net operating loss carryforward              12,330,877           6,619,846
   Valuation allowance                         (20,712,918)         (7,913,290)
                                             ---------------        -----------
                                               $        --         $        --
                                             ===============       ============

<PAGE>

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

                                 For the nine
                                 months ended      Year Ended      Year Ended
                               December 31, 1998  March 31, 1998  March 31, 1997
Current income tax expense
     Federal                           $    --         $    --          $   --  
     State                                  --              --              --  
Deferred income tax expense
     Federal                        (11,435,581)    (4,850,473)        (896,666)
     State                           (2,345,790)    (1,092,854)        (202,026)
                                  --------------  --------------   -------------
                                    (13,781,371)     (5,943,327)     (1,098,692)
Valuation allowance                  13,781,371       5,943,327       1,098,692
                                  --------------  --------------   -------------

                                       $    --         $    --          $   --
                                  ==============  ==============   =============


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

<TABLE>
<CAPTION>

                                            For the nine
                                            months ended        Year Ended         Year Ended
                                         December 31, 1998    March 31, 1998     March 31, 1997
                                         -----------------    ---------------    --------------
     <S>                                   <C>                   <C>                <C>                  
     Income tax provision (credit) at                       
        statutory rate                     $ (11,476,049)        $ (5,260,690)      $ (986,052)
     Meals and entertainment                      15,338               14,993           19,210 
     Disallowed portion of original                         
        issue discount on senior                                        5,799              --  
        discount notes                            33,570
     State income taxes                       (2,354,230)            (703,429)        (131,850)
     Valuation allowance                      13,781,371            5,943,327        1,098,692
                                         -----------------     --------------    ---------------
     Income tax provision (credit) as
        reported                           $       --            $     --           $      --
                                         =================     ==============    ===============

</TABLE>

     At December 31, 1998,  the Company had  cumulative  tax net operating  loss
carryforwards  aggregating  approximately  $31,060,000 expiring between 2008 and
2019.  At December  31,  1998,  the Company had  recorded a valuation  allowance
related to its net deferred tax assets aggregating approximately $20,713,000.

<PAGE>

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.

   Operating Leases and Other

     The Company obtained two letters of credit totaling  $1,796,880.  The first
letter,  for $500,000,  was obtained as part of the Chicago franchise  agreement
mentioned earlier.  The second letter is for the benefit of the Merchandise Mart
totaling  $1,296,880 and was obtained in place of a security  deposit related to
the Merchandise Mart lease. These letters of credit are fully  collateralized by
cash, which is reflected as a restricted cash collateral  reserve on the balance
sheet. The Company invests the cash in commercial paper which matures daily. For
the nine months  ended  December 31, 1998 and for the years ended March 31, 1998
and 1997, the  commercial  paper  investments  had earned  $71,920,  $95,505 and
$11,411, respectively, in interest income.

     The  Company  entered  into a 15-year  lease,  dated  January 31, 1997 (the
"Apparel  Lease") for its  headquarters  and NOC.  The Apparel  Lease  initially
covered  32,422  square feet,  and was increased on July 1, 1998 to cover 40,397
square feet.

     As of December 31, 1998,  the aggregate  minimum rental  commitments  under
this and other lease agreements were as follows:

          1999                  $1,509,497
          2000                   1,569,007
          2001                   1,568,549
          2002                   1,426,606
          2003                   1,369,391
          Thereafter            10,757,262
                               -----------
               Total           $18,200,312

     Rent expense under operating  leases was  $1,499,097,  $662,753 and $55,152
for the nine months  ended  December  31, 1998 and for the years ended March 31,
1998 and 1997 respectively.

     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.

12.      Subsequent Events

     On February 15, 1999,  the Company  issued  1,906.37  additional  shares of
Exchangeable  Preferred  Stock as the quarterly  dividends on the 13 3/4% Senior
Cumulative Exchangeable Preferred Stock Due 2010.

     On February 26, 1999, the Company acquired EnterAct Corp.  ("EnterAct"),  a
Chicago-based provider of Internet access and commercial data services. EnterAct
has approximately 50 employees.  The majority of EnterAct's approximately 10,000
customers  are  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.
In connection with this transaction, the Company issued 696,994 shares of its no
par value  common  stock 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,  one half due on the first  anniversary
date and one half due on the  second  anniversary  date.  In  addition,  a stock
option  plan was  approved  and options  were  awarded to certain  employees  of
EnterAct.  EnterAct will become 21st Century's commercial division,  developing,
marketing and selling data and telephony services to the business community.


<PAGE>

<TABLE>


                                                          Quarterly Financial Data

                                                               (Unaudited)

<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)


                                                                          For the Three Months Ended
                                             ---------------------------------------------------------------------------------
                                             December 31, 1997    September 30, 1997         June 30, 1997       March 31, 199
                                             ---------------------------------------------------------------------------------
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.

<PAGE>
<TABLE>

                                         21st CENTURY TELECOM GROUP, INC.

                            SCHEDULE II-CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

                                   For the Nine Months Ended December 31, 1998

<CAPTION>

                                                           Additions
                                                    -------------------------------
                                     Balance                         Charged to                         Balance
                                  Beginning of       Charged to         Other            Other           End of
                                     Period            Income         Accounts         Deductions        Period
                                 ---------------    -------------  ----------------  ---------------  -------------
<S>                                <C>                <C>            <C>               <C>             <C>                
1998
Allowance for uncollectibles       $       -    (1)   $    1,376     $      -          $      -        $    1,376


</TABLE>

    (1) An allowance for  uncollectibles was not recorded in the two years ended
           March 31, 1998 and 1997.


<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/        Byron E. Hill                 
                                  ---------------------------------------
                                  By: Byron E. Hill, Corporate Controller




         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.


                  PRINCIPAL EXECUTIVES AND ACCOUNTING OFFICERS


         Signature                     Title                          Date


/s/    Edward T. Joyce     Chairman of the Board of Directors    March 27, 1999
-----------------------
Edward T. Joyce

/s/ Robert J. Currey       President, Chief Executive Officer    March 27, 1999
-----------------------       and Director
Robert J. Currey

/s/ Ronald D. Webster      Chief Financial Officer               March 27, 1999
-----------------------
Ronald D. Webster

/s/ William Farley         Director                              March 27, 1999
------------------------
William Farley

/s/ Elzie Higginbottom     Director                              March 27, 1999
----------------------
Elzie Higginbottom

/s/ Dr. Charles E. Kaegi   Director                              March 27, 1999
-----------------------
Dr. Charles E. Kaegi

/s/ James H.Lowry          Director                              March 27, 1999
-----------------------
James H. Lowry

/s/ Glenn W. Milligan      Director                              March 27, 1999
-----------------------
Glenn W. Milligan

/s/ David Kronfeld         Director                              March 27, 1999
-----------------------
David Kronfeld

/s/ Thomas Neustaetter     Director                              March 27, 1999
-----------------------
Thomas Neustaetter

/s/ Byron E.Hill           Controller                            March 27, 1999
-----------------------
Byron Hill


<PAGE>


                             EXHIBIT INDEX

Exhibit No.      Description of Exhibits

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 1/4Senior 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 3/4Senior 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 with Respect to the Company

27.1   Financial Data Schedule

*  Incorporated herein by reference to the Company's S-4 Registration Statement
   filed on March 3, 1998 (Commission File No. 333-47235).