<PAGE>

                                   FORM 10-K

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

(X) ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For fiscal year ended  December 31, 1997
                      ------------------

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission File No. 0-17750
                                    MERCOM, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

            Delaware                                            38-2728175
--------------------------------                         -----------------------
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                           Identification No.)

105 Carnegie Center, Princeton, NJ                              08540-6215
----------------------------------                              ----------
(Address of principle executive offices)                        (Zip Code)


Registrant's telephone number including area code:              609-734-3737

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

Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $1.00 per share
                    ---------------------------------------
                               (Title of Class)

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 not 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 or any amendment to this
Form 10-K (X).

As of February 28, 1998, 4,787,060 shares of Common Stock were outstanding. The
aggregate market value of the shares held by non-affiliates of the registrant
(based upon the average of the bid and asked prices of these shares quoted by
the National Quotation Bureau, Inc. and the OTC Bulletin Board on February 28,
1998, of $9.75 per share) was approximately $17,772,463.

                  Documents Incorporated by Reference
                  -----------------------------------

1. Proxy Statement for 1998 Annual Meeting of Shareholders is incorporated by
   reference into Part III of this Form 10-K.

The Index to Exhibits is on Page 20.
<PAGE>

                               PART I
                               ------
ITEM 1.    BUSINESS.
-------    ---------

     Mercom, Inc. ("Mercom" or the "Company") is a cable television operator
with three cable systems in southern Michigan (the "Systems"). The Systems are
operated through Mercom's wholly-owned subsidiary, Communications and
Cablevision, Inc. ("CCV"). On July 1, 1997, Mercom sold its investment in Mercom
of Florida, Inc. ("Mercom of Florida"), which operated a cable system in Port
St. Lucie, Florida, approximately 90 miles north of Palm Beach. As of December
31, 1997, the Systems had 39,360 subscribers. The Systems provide cable service
to Monroe County, Allegan County and the Coldwater and Sturgis areas.

     Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100% of the
outstanding shares of common stock of its wholly owned subsidiaries, RCN
Corporation ("RCN") and Cable Michigan, Inc. ("Cable Michigan") to holders of
record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close
of business on September 19, 1997 in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among C-TEC, RCN, and Cable Michigan. Cable
Michigan, Inc. consists of C-TEC's Michigan cable operations, including its 62%
ownership in the Company.

     The following table indicates the development of the Company by
summarizing, as of December 31 of each of the last five years, the number of
homes passed by cable, the number of homes purchasing basic cable service
("basic subscribers"), the number of basic subscribers as a percentage of homes
passed, the number of homes purchasing basic cable service and tier cable
service ("tier subscribers"), the number of tier subscribers as a percentage of
basic subscribers, the number of premium service units, premium service units as
a percentage of basic subscribers ("pay-to-basic ratio"), and the average
revenue per subscriber for December of each year.

<TABLE>
<CAPTION>
                                                     As of  December 31
                                        1993      1994      1995      1996     1997
                                        ----      ----      ----      ----     ----
<S>                                   <C>       <C>       <C>       <C>       <C>
Homes Passed (1).....................  61,730    63,721    65,449    65,998    65,291
Basic subscribers (2)................  34,714    37,324    38,853    40,012    39,360
Basic subscribers as a
 percentage of homes passed..........   56.2%     58.6%     59.4%     60.6%     60.3%
Tier subscribers (3).................  32,945    34,789    36,120    36,989    37,923
Tier subscribers as a
 percentage of basic subs............   94.9%     93.2%     93.0%     92.4%     96.3%
Premium service units (4)............  12,816    14,312    17,834    15,493    15,857
Premium service units as a
percentage of basic subs.............   36.9%     38.3%     45.9%     38.7%     40.3%
Average revenue per sub for
 month of December (5)...............  $29.70    $29.36    $30.41    $32.72    $33.89
</TABLE>

 The table above includes Mercom of Florida information for 1993 through 1996.

(1) A home is deemed to be "passed" by cable if it can be connected to the
      distribution system without any further extension of the distribution
      plant.

(2) A home with one or more television sets connected to a cable television
      system is counted as one basic subscriber.


                                      -1-
<PAGE>


ITEM 1.    BUSINESS, Continued
-------    ---------

(3) A home with one or more television sets receiving both basic and tier
      service is counted as one tier subscriber. Tier service was not available
      in Mercom of Florida.

(4) A basic subscriber may purchase more than one premium service, each of
      which is counted as a separate premium service unit.  Hence, the pay-to-
      basic ratio can exceed 100%.  A premium service unit includes only single
      channel services offered for a monthly fee.

(5) Calculated by dividing total cable related revenues for the month of
      December by the number of basic subscribers at the end of the month.

     The Company derives the majority of its revenues from recurring
subscription services and generates additional revenues from non-subscription
services such as advertising, pay-per-view, installations and commissions from
electronic retailing. Monthly subscription rates and related charges vary
according to the type of service or equipment selected.

     The Company intends to maintain and enhance the value of its current cable
television systems through upgrading their networks as appropriate given the
characteristics of the particular service area. The Company also intends to
institute new services as they are developed and become economically viable. At
this stage, the Company's highest priority is to increase system capacity and
improve system reliability and picture quality. Such network improvements are
necessary to enable the Company to better withstand competition, expand channel
lineups (which would permit the Company to increase revenue) and facilitate new
services when economically viable. The Company's strategic plan calls for a
capital expenditure program intended to result in over 95% of the Company's
customers being served by systems with a capacity of 550 MHz or 750 MHz by the
end of 2001. The Company's systems include 5 headends and are currently built to
400-450 MHz.

     Capital expenditures for system extensions and upgrades and the development
of new services are subject to the availability of cash generated from
operations and debt or equity financing. The capital resources needed to
accomplish these strategies are expected to be provided by cash flow from
operations, existing cash on hand and the affiliate note payable. See Note 5
(Debt) of Notes to Consolidated Financial Statements. There can be no assurances
that the capital resources necessary to accomplish the Company's plans will be
available on terms and conditions acceptable to the Company, or at all.

     The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of 1996.
(See "Management's Discussion and Analysis -Regulatory Matters").

     The Company's performance is dependent to a large extent on its ability to
obtain and renew its franchise agreements from local government authorities on
acceptable terms. To date, all of the Company's franchises have been renewed or
extended, generally at or prior to their stated expirations and on acceptable
terms. During 1997, the Company completed negotiations with 3 communities
resulting in franchise renewals on terms which are acceptable to the Company.
The Company has 78 franchises, 25 of which are in the 3 year Federal
Communications Commission (the "FCC") franchise renewal window at December 31,
1997. No one franchise accounts for more than 12% of the Company's total
revenue.

                                      -2-
<PAGE>

ITEM 1.    BUSINESS, Continued
-------    ---------

     Competition for the Company's services traditionally has come from a
variety of providers including broadcast television, video cassette recorders,
overbuilders and home satellite dishes. Direct broadcast satellite (DBS) which
allows a consumer to receive cable programming for a fee once they purchase or
lease a receiving dish, has proved to be a viable competitor. These services are
generally available throughout the country, including areas in which the Company
operates. There are currently four DBS systems available in the United States.
The Company has eight franchises within its service areas where other cable
television providers have commenced cable programming operations. In addition,
in 1997, the Board of Public Utilities of a ninth franchised area has secured
revenue bonds to finance the construction of a municipal cable system. Although
the Company has experienced some erosion of its subscriber base in these
communities, the impact on its operations to date has not been material.

     The level of competition from other video providers may also increase due
to the passage of the Telecommunications Act of 1996, which is intended to
foster competition. The 1996 Act makes it easier for local exchange telephone
companies ("LECs") and others to provide a wide variety of video services
competitive with services provided by cable systems and to provide cable
services directly to subscribers. Various LECs currently are providing video
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire facilities
and the use of wireless transmission facilities. Ameritech has obtained cable
television franchises in eastern Michigan and has overbuilt some cable operators
thereby creating a competitive environment. To date, Ameritech has not applied
for cable franchises where the Company operates. The Company cannot predict the
likelihood of success of video service ventures by LECs or the impact on the
Company of such competitive ventures. Cable operators face additional
competition from private satellite master antenna television ("SMATV") systems
that serve condominiums, apartment and office complexes and private residential
developments. Cable television systems also compete with wireless program
distribution services such as multipoint multichannel distribution service
("MMDS") which use low-power microwave frequencies to transmit video programming
over-the-air to subscribers. It is not possible to quantify the potential impact
of future technological, competitive or regulatory developments on the cable
television industry in general or the Company in particular.

EMPLOYEES

     As of December 31, 1997, Mercom had 52 full-time employees, none of whom
were represented by collective bargaining units. Management believes that the
Company's relationship with its employees is satisfactory.

ITEM 2.    PROPERTIES.
-------    -----------

     The principal assets of the Company include headends, distribution systems
and subscriber connection equipment. Mercom owns five headends, each including a
tower, antennas, earth stations for the reception of satellite signals, and
electronic equipment necessary for the reception, amplification and modulation
of signals. In addition to these headends, the Company owns ten microwave
receive sites, each including a tower, microwave dish and electronic equipment
necessary for their reception of microwave signals. The distribution system
consists of approximately 1,339 miles of coaxial cable plus related electronic
equipment. Subscriber connection equipment consists of house or apartment drop
equipment and decoding converters. The physical components of the Systems
require regular maintenance and periodic upgrading in order to keep pace with
technological advances and to comply with regulatory standards. The Company's
management believes that substantially all of its physical assets are in good
condition.

     Mercom owns one small parcel of real property used as a headend site, and
it owns most of the buildings which contain headend equipment for the Systems.
The remainder of Mercom's facilities are leased.

                                      -3-
<PAGE>

ITEM 3.    LEGAL PROCEEDINGS.
-------    ------------------

     On May 13, 1997, Mercom shareholders, Moise Katz, filed a purported class
action suit on behalf of the Mercom's public shareholders against Mercom and
C-TEC, among others. Plaintiff alleges that the proposal to exchange the
approximately 38% of Mercom common stock that is publicly held for 8.75% of the
common stock of Cable Michigan undervalues Mercom's shares and is therefore
unlawful. This lawsuit has been dormant since Cable Michigan announced that the
discussions on the exchange transactions have been suspended.

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

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

     The Annual Meeting of Shareholders was held on October 16, 1997.  Matters
submitted to and approved by Shareholders included:

1)  The election of the following Directors to serve for a term of one year:

     Nominee
     -------

     Bruce C. Godfrey
     Clifford L. Jones
     Michael J. Mahoney
     David C. McCourt
     Raymond B. Ostroski
     Harold J. Rose, Jr.
     George C. Stephenson

2)  The ratification of the selection of Coopers & Lybrand L.L.P. as the
Company's independent auditors for the year ending December 31, 1997.

          For            Against             Abstain
          ---            -------             -------

          4,329,659      3,158               2,765

                                      -4-
<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT
                      ------------------------------------

  Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Securities and
Exchange Commission (the "Commission") pursuant to section 14 (A) of the
Securities Exchange Act of 1934 (the "1934 Act").  Information with respect to
Executive Officers who are also Directors is set forth in Part III Item 10 of
this Form 10-K.

                        Age as of              Office and Date Held Since:
 Name                 March 1, 1998               Other Positions Held
 ----                 -------------            ---------------------------

Timothy J. Stoklosa        37         Executive Vice President and Chief
                                      Financial Officer of the Company since
                                      October 1997; Senior Vice President and
                                      Treasurer of Cable Michigan and RCN
                                      Corporation ("RCN") and Director of Cable
                                      Michigan since September 1997; Senior Vice
                                      President of Finance of Commonwealth
                                      Telephone Enterprises since February 1997;
                                      Treasurer of Commonwealth Telephone
                                      Enterprises since August 1994 and Vice
                                      President and Treasurer of Mercom since
                                      October 1996; Manager of Mergers and
                                      Acquisitions at Peter Kiewit Sons, Inc.
                                      from October 1991 to August 1994 and
                                      Senior Financial Analyst of Corporate
                                      Development at Citizens Utilities Co. from
                                      February 1990 to October 1991.

Mark Haverkate             43         President and Chief Operating Officer of
                                      the Company since October 1997; President
                                      and Chief Operating Officer and Director
                                      of Cable Michigan since September 1997;
                                      Executive Vice President, Business
                                      Development of RCN; President of RCN
                                      Development (a division of RCN) from June
                                      1997 to September 1997 and Executive Vice
                                      President of Business Development of
                                      Commonwealth Telephone Enterprises from
                                      May 1997 to September 1997; President for
                                      Business Operations of RCN Telecom
                                      Services, Inc. (a wholly owned subsidiary
                                      of RCN) from August 1996 to November 1996;
                                      Executive Vice President of Commonwealth
                                      Telephone Enterprise's Cable Television
                                      Group from July 1995 to August 1996;
                                      Executive Vice President of Development
                                      for Commonwealth Telephone Enterprises
                                      from February 1995 to July 1995; Executive
                                      Vice President for Development at Mercom
                                      from November 1995 to February 1996; Vice
                                      President of Development for Commonwealth
                                      Telephone Enterprises from December 1993
                                      to February 1995 and Vice President of
                                      Commonwealth Telephone Enterprise's Cable
                                      Television Group from October 1989 to
                                      December 1993.

                                      -5-
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT, continued
-------------------------------------

                        Age as of              Office and Date Held Since:
 Name                 March 1, 1998               Other Positions Held
 ----                 -------------            ---------------------------

John J. Gdovin             40        Executive Vice President of Operations of
                                     Mercom since August 1996; Executive Vice
                                     President of Cable Michigan since September
                                     1997; Executive Vice President of
                                     Commonwealth Telephone Enterprise's Cable
                                     Television Group from August 1996 to
                                     September 1997; Senior Vice President of
                                     RCN Telecom Services, Inc. since February
                                     1997; Vice President of Commonwealth
                                     Telephone Enterprises's Cable Television
                                     Group from August 1995 to August 1996;
                                     Director of Operations of Commonwealth
                                     Telephone Enterprise's Cable Television
                                     Group from February 1992 to August 1995.

John D. Filipowicz         39        Senior Vice President, Assistant General
                                     Counsel and Assistant Secretary of Mercom
                                     since October 1997; Senior Vice President,
                                     Assistant General Counsel and Assistant
                                     Secretary of RCN and Cable Michigan since
                                     September 1997; Vice President, Assistant
                                     General Counsel and Assistant Secretary of
                                     Commonwealth Telephone Enterprises from
                                     February 1995 to September 1997, Vice
                                     President from February 1995 to September
                                     1997, Assistant Corporate Secretary since
                                     December 1994; Corporate Counsel from
                                     December 1990; Corporate Secretary of
                                     Mercom from December 1996 to October 1997,
                                     Assistant Secretary since October 1997,
                                     Vice President, Assistant General Counsel
                                     and Assistant Secretary from May 1995 to
                                     December 1996.

                                      -6-
<PAGE>

                                    PART II
                                    -------

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
--------------------------------------------------------------
          STOCKHOLDERS
          ------------

There were approximately 1,674 holders of the Company's Common Stock on February
28, 1998.

<TABLE>
<CAPTION>
                                      1997                1996
                                   BID PRICES          BID PRICES
                                   ----------          ----------
                                 HIGH      LOW       HIGH       LOW
                                  $         $         $         $
            <S>                 <C>        <C>       <C>       <C>
            Quarter Ended:
              March 31          6-1/2      5-1/4     8-1/2     6
              June 30           6-1/4      5-1/2     8-1/2     5-1/4
              September 30      7-7/8      6-1/4     6-1/2     5-1/2
              December 31       9-1/4      7-3/4     6-3/4     6
</TABLE>

     The Company's Common Stock is traded on the over-the-counter market. The
bid and ask prices are quoted by the National Quotation Bureau, Inc. and the OTC
Bulletin Board under the symbol "MEEO." The 1997 and 1996 bid prices listed
above represent the high and low bid prices reported by the National Quotation
Bureau, Inc. Prices listed above represent inter-dealer quotations without
adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Trading in the Company's Common
Stock, has been limited and sporadic and thus does not constitute an established
public trading market.

     The Company has not paid dividends in the preceding two years. The Company
does not anticipate paying cash dividends on its shares of Common Stock in the
foreseeable future. See Note 5 (Debt) of Notes to Consolidated Financial
Statements.

                                      -7-
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA.
-------   ------------------------

     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


     The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER  31,         1997       1996       1995      1994       1993
                                          ----       ----       ----      ----       ----
<S>                                       <C>        <C>        <C>       <C>        <C>
Sales                                     $16,439    $15,570    $13,939   $12,927    $12,606
Net income (loss)                         $ 4,198    $ 1,472    $   549   $  (658)   $  (236)
Basic and diluted earnings (loss)
   per average common share               $  0.88    $  0.31    $  0.16   $ (0.27)   $ (0.10)
Total assets                              $20,719    $19,851    $20,390   $19,823    $22,244
Debt                                      $14,151    $17,430    $18,930   $25,926    $28,184
</TABLE>

     In July 1997, the sale of the Company's stock in Mercom of Florida,
     generated proceeds of $3,496. As a result, the Company was required to make
     an additional principal payment of $1,912 on its debt and net income
     increased over 1996 by approximately $2,600.

     In August 1995, a Common Stock rights offering was concluded. The Company's
     shareholders purchased 2,393,530 of its shares of Common Stock for $3.60
     per share. The rights offering provided the Company with approximately
     $8,200 after payment of fees and expenses. The Company used the proceeds to
     repay $5,070 of outstanding indebtedness to its bank, $2,287 of outstanding
     indebtedness to C-TEC Corporation, its controlling shareholder at that
     time, under two demand notes and the remaining balance was used for general
     corporate purposes, including capital expenditures.

                                      -8-
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
report is forward looking, such as information relating to future capital
expenditures, the effect of rate increases and the effects of future regulation
and competition. Such forward looking information involves important risks and
uncertainties that could significantly affect expected results in the future
differently than expressed in any forward-looking statements made by, or on
behalf of, Mercom. These risks and uncertainties include, but are not limited
to, uncertainties relating to economic conditions, government and regulatory
policies, the pricing and availability of equipment, materials, inventories and
programming, technological developments and changes in the competitive
environment in which the Company operates.

     The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto:

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

<TABLE>
<CAPTION>

     LIQUIDITY AND CAPITAL RESOURCES
     -------------------------------
                                                         1997        1996    1995
                                                         ----        ----    ----
     <S>                                               <C>          <C>      <C>
     Investing Activities:
         Additions to property, plant and equipment    $ 2,614      $1,585   $1,701
         Proceeds from sale of Mercom of Florida        (3,496)          -        -
         Other                                              (3)         (3)     (12)
                                                        ------      ------   ------
         Net cash (provided by) used in
             investing activities                       $ (885)     $1,582   $1,689
                                                        ======      ======   ======

     Net cash provided by operating activities          $4,169      $4,103   $2,366
                                                        ======      ======  =======
</TABLE>

     Net cash provided by operating activities represented 159.7%, 259.4% and
140.1% of investing activities for capital expenditures for 1997, 1996 and 1995,
respectively. The Company's construction budget is estimated to be $8,393 in
1998 as compared to actual expenditures of $2,614, $1,585 and $1,701 in 1997,
1996 and 1995, respectively. The 1998 construction budget includes capital
expenditures necessary to upgrade system capacity and network reliability. The
Company estimates that its aggregate capital requirements for planned system
upgrades for the years 1998 through 2000 will be approximately $15,400. Capital
expenditures for plant maintenance for the years 1998 through 2000 are expected
to aggregate approximately $4,800.

                                      -9-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES, Continued
-------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     The sale of the Company's investment in Mercom of Florida generated
proceeds of $3,496. Mercom of Florida generated cash flow from operations of
approximately $106, $158 and $135 in 1997, 1996 and 1995, respectively,
therefore the sale of this system is not expected to have a material adverse
effect on the Company's future cash flow, liquidity and results of operations.

     The Company expects to be able to continue to manage its costs and increase
its revenues through the offering of new products, the expansion of its
territories and when appropriate, rate increases. Although operating expenses
continued to rise, the Company was unable to raise its rates due to a "Rate
Freeze" ordered by the FCC. The "Rate Freeze" delayed the Company's
implementation of any rate increases from September 1992 until April 1995. At
that time, the Company instituted a basic rate increase according to the rules
and regulations established by the FCC. In December 1995 and 1996, the Company
commenced basic rate increase notifications to all of its Michigan subscribers
for rate increases which were implemented in the first quarters of 1996 and
1997, respectively. The 1997 rate increase provided approximately $700 in
additional annual revenues, subject to the final decision by the FCC with
respect to these rate increases, of which no assurances can be given. In March
1998, the Company commenced basic rate increase notifications to all subscribers
for rate increases which will be implemented in the second quarter of 1998. The
1998 rate increase is expected to provide an estimated additional $775 in
annualized revenues based on the average number of subscribers budgeted for
1998. All rate increases are implemented according to the rules and regulations
established by the FCC.

     In September 1997, Cable Michigan assumed all of the bank's interest in the
Company's Credit Agreement (Note 5). Immediately after the assumption of the
Credit Agreement by Cable Michigan, the Note Payable was amended and restated.
The Note Payable contains the same pricing and collateral provisions as were
previously in place with the Credit Agreement. The amendments to the Note
Payable provides for less restrictive financial covenants and the elimination of
mandatory principal repayments prior to December 31, 2002. The Note Payable to
Cable Michigan matures with a balloon payment on December 31, 2002.

     The Note Payable provides for increased borrowing capacity as the Company
continues to invest in the upgrade of its facilities. Cable Michigan has the
ability, under Cable Michigan's Credit Agreement, to lend additional funds,
approximately $6,000, up to an aggregate of $20,000, to the Company. The Company
believes its cash on hand, cash generated from operations and credit
availability will be sufficient to meet its liquidity requirements, prior to
maturity of the Note Payable, but there are no assurances in this regard.

                                      -10-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES, Continued
-------------------------------  ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     The Company is in compliance with all covenants associated with the Note
Payable at December 31, 1997. The Company has not paid dividends in recent years
and does not expect to pay dividends in the foreseeable future.

RESULTS OF OPERATIONS
---------------------
1997 COMPARED WITH 1996

     The Company's net income in 1997 increased $2,726 or $0.57 per average
common share. The Company had net income in 1997 of $4,198 or $0.88 per
average common share compared to a net income of $1,472 or $0.31 per average
common share in 1996. The increase from 1996 is primarily attributable to a gain
of approximately $2,600 recorded from the sale of the investment of Mercom of
Florida and an increase in operating income before depreciation and amortization
of $456.

     The Company had operating income before depreciation and amortization of
$6,099 in 1997 compared to $5,643 in 1996. This represents an increase of $456
(8.1%) from 1996 to 1997. Management believes that operating income before
depreciation and amortization is a useful measure in assessing the degree to
which resources are available to meet debt service requirements and to replace
and modernize plant in order to offer new services to customers and to improve
the quality of service.

     Sales increased in 1997 by $869 (5.6%) from the previous year. This
increase is primarily due to increased basic service revenue of approximately
$937. Approximately $716 of the increase is a result of the rate increase
implemented in February 1997. The remaining $221 of the basic service revenue
increase is due to approximately 744 additional average basic subscribers per
month in 1997 over the prior year. Contributing to the increase in 1997 was
approximately $129 in premium, advertising and miscellaneous revenue. These
increases are partially offset by a decrease in sales of $163 from 1996, due to
the sale of Mercom of Florida.

     Programming, franchise and other variable costs increased by $463 (10.7%)
from 1996. This increase is directly related to costs associated with subscriber
growth, increased programming rates on existing channels and new basic channels
added during the year. Operating, marketing and other fixed system costs
increased by $142 (3.7%) in 1997.

     Other expenses, including interest, decreased by $2,783 (247.4%). The
decrease is due primarily to a gain of approximately $2,600 from the sale of the
stock in Mercom of Florida.

     Higher average cash balances in 1997 resulted in higher interest income of
$68.

                                      -11-
<PAGE>

RESULTS OF OPERATIONS, Continued
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     Interest expense decreased by $171 (13.9%) in 1997. A decrease in the
average outstanding debt of approximately $2,798 was the primary reason for the
decrease in interest expense. Partially offsetting this reduction in debt, was
an increase in the annual weighted average effective interest rate from 6.5% in
1996 to 6.7% in 1997. The Company's future interest expense is subject to
fluctuations in the market rate of interest and, therefore, there is no
assurance that the Company's current level of interest expense is indicative of
future trends.

     The Company does not expect inflation to have a significant impact on its
future operations.

1996 COMPARED WITH 1995

     The Company's net income in 1996 increased $923 or $0.15 per average common
share. The Company recorded net income in 1996 of $1,472 or $0.31 per average
common share compared to a net income of $549 or $0.16 per average common share
in 1995. The increase from 1995 is primarily attributable to an increase in
operating income before depreciation and amortization of $452 and a decline in
interest expense of $673.

     The Company had operating income before depreciation and amortization of
$5,643 in 1996 compared to $5,191 in 1995. This represents an increase of $452
(8.7%) from 1995 to 1996.

     Sales increased in 1996 by $1,631 (11.7%) from the previous year. This
increase is primarily due to increased basic service revenue of approximately
$1,500. Approximately $1,000 of the increase is a result of the rate increase
implemented in February 1996. The remaining $500 of the basic service revenue
increase is due to approximately 1,845 additional average basic subscribers per
month in 1996 over the prior year.

     Programming, franchise and other variable costs increased by $775 (21.7%)
from 1995. This increase is directly related to costs associated with subscriber
growth, increased programming rates on existing channels and new basic channels
added during the year. Operating, marketing and other fixed system costs
increased by $423 (12.2%) in 1996. The increase is primarily due to salaries and
benefits, costs associated with maintaining a larger subscriber base and a
concentration on customer service initiatives.

     Other expenses, including interest, decreased by $497 (30.6%). The decrease
is due primarily to a reduction in interest expense as described below partially
offset by the effect of the reversal in 1995 of a restructuring accrual from
prior years.

     Higher average cash balances in 1996 resulted in higher interest income of
$44.

     Interest expense decreased by $673 (35.4%) in 1996. The decrease from 1995
in the average outstanding debt of approximately $5,060 was the primary reason
for the decrease in interest expense. In addition, a reduction in the annual
weighted average effective interest rate from 7.8% in 1995 to 6.5% in 1996
contributed to the reduction in interest expense.

                                      -12-
<PAGE>

RESULTS OF OPERATIONS, Continued
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


     FINANCIAL CONDITION
     -------------------

     Cash and temporary cash investments were $4,829 at December 31, 1997, as
compared to $3,054 at December 31, 1996, an increase of $1,775. The increase in
cash and temporary cash investments at December 31, 1997, as compared to the
prior year end, is attributed to proceeds of $3,496 from the sale of the
investment in Mercom of Florida, cash of $1,558 generated by operations in
excess of capital expenditures offset by the net repayment of bank loans of
$3,279.

     REGULATORY MATTERS
     ------------------

     The Company, like other operators of cable television systems, is subject
to regulation at the federal, state and local levels. No assurances can be given
at this time that the following matters will not have a material adverse effect
on the Company's business and results of operations in the future. Also, no
assurance can be given as to what other future actions Congress, the FCC or
other regulatory authorities may take or the effects thereof on the cable
industry in general or the Company in particular.

     CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992

     On October 5, 1992, Congress passed the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act") which regulated certain
subscriber rates and a number of other matters in the cable industry, such as
mandatory carriage of local broadcast stations and retransmission consent, and
which will increase the administrative costs of complying with such regulations.
The most significant provision of the 1992 Act requires the FCC to establish
rules to ensure that rates for basic services are reasonable for subscribers in
areas without effective competition as defined in the 1992 Act. Few
municipalities served by the Company are subject to effective competition.

     TELECOMMUNICATIONS ACT OF 1996

     In early February 1996, Congress passed and the President signed the
Telecommunications Act of 1996 (the "1996 Act"). The new law is intended to
provide a pro-competitive, de-regulatory national policy framework designed to
accelerate rapid private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition. The FCC has adopted regulations to
implement the requirements of the 1996 Act and the intent of Congress. With the
passage of the 1996 Act, all cable systems cable programming service tier rates
are deregulated as effective competition enters the franchise area, or by March
31, 1999, whichever occurs first.

     IMPACT TO COMPANY

     The rate regulation provisions of the 1992 Act have not had a material
adverse effect on the Company's financial condition and results of operations
through December 31, 1997. Certain provisions of the 1992 Act that do not relate
to rate regulation, such as the provisions relating to retransmission consent
and customer service standards, have the effect of reducing operating margins of
the Company.

                                      -13-
<PAGE>

REGULATORY MATTERS, Continued
-------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     Over the last several years the Company has received complaints related to
its FCC rate filings.  Although the Company believes its rates are justified
according to the rules and regulations established by the FCC, the Company
believes it has adequately reserved for any exposure related to these rate
proceedings.

     IMPACT OF THE YEAR 2000 ISSUE
     -----------------------------

     The Company has certain financial, administrative and operational systems
which are not Year 2000 compliant. The Company has performed a study to identify
those specific systems which require remediation and developed a plan to correct
such situations in a timely fashion. The Company's plan is proceeding on target.
The plan includes ensuring that those systems for which the Company is dependent
on external vendors, such as certain billing systems, will be Year 2000
compliant by the end of 1999 based on the status of external vendors'
remediation efforts. For those internal systems that require corrective action,
the Company has contracted with its information systems services provider to
rewrite the relevant programming code. Finally, the Company is well along on a
conversion of its suite of financial systems to a state-of-the-art Oracle
system. Such system is expected to ensure Year 2000 compliance in financial
applications, enable the Company to process and report its financial
transactions more efficiently and provide a greater level of detailed
information to facilitate management's analysis which is critical to its
business decisions.

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

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

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 (a)(1) and (a)(2) of this
Form 10-K.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------   -----------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

     During the two years preceding December 31, 1997, there has been neither a
change of accountants of the Registrant nor any disagreements on any matter of
accounting principles, practices or financial statement disclosure.

                                      -14-
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------  --------------------------------------------------

     The information required under Item 10 of Part III with respect to the
Directors of Registrant is set forth in the definitive proxy statement relating
to Registrant's Annual Meeting of Shareholders to be filed by the Registrant
with the Commission pursuant to Section 14 (A) of the 1934 Act, and is hereby
specifically incorporated herein by reference thereto.

     The information required under Item 10 of Part III with respect to the
executive officers of the Registrant is set forth at the end of Part I thereof.

ITEM 11.  EXECUTIVE COMPENSATION
--------  ----------------------

     The information required under Item 11 of Part III is set forth in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14 (A) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------  --------------------------------------------------------------

     The information required under Item 12 of Part III is included in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14 (A) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------  ----------------------------------------------

     The information required under Item 13 of Part III is included in the
definitive proxy statement to Registrant's Annual Meeting of Shareholders to be
filed by the Registrant with the Commission pursuant to Section 14 (A) of the
1934 Act, and is hereby specifically incorporated herein by reference thereto.

                                      -15-
<PAGE>

                              PART IV
                              -------

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

<TABLE>
<CAPTION>
          DESCRIPTION                                                      PAGE
          -----------                                                      ----
<S>                                                                        <C>
(a)(1)    Financial Statements:
          ---------------------

          Consolidated Statements of Operations for the Years Ended
           December 31, 1997, 1996 and 1995                                F-1
          Consolidated Statements of Cash Flows for the Years Ended
           December 31, 1997, 1996 and 1995                                F-2
          Consolidated Balance Sheets -
           December 31, 1997 and 1996                                      F-3
          Consolidated Statements of Changes in
           Shareholders' Capital Equity for the Years Ended
           December 31, 1997, 1996 and 1995                                F-4
          Notes to Consolidated Financial Statements                       F-5
          Report of Independent Accountants                                F-14

(a)(2)    Financial Statement Schedules:
          ------------------------------

          Valuation and Qualifying Accounts and Reserves
            for the Years Ended December 31, 1997, 1996
            and 1995 (Schedule II)                                         F-15
</TABLE>

All other financial statement schedules not listed have been omitted since the
required information is included in the consolidated financial statements or the
notes thereto, or are not applicable or required.

(a)(3)    Exhibits
          --------

          Exhibits marked with an asterisk are filed herewith and are listed in
          the index to exhibits on page 20 of this Form 10-K. The remainder of
          the exhibits have been filed with the Commission and are incorporated
          herein by reference.

Exhibit No.
-----------

     2.1  Agreement and Plan of Merger dated as of December 30, 1988, between
          UtiliCorp United, Inc. and Michigan Energy Resources Company, and
          Amendment No. 1 dated as of March 8, 1989. (Incorporated by reference
          to the Form 10 of the Registrant dated May 11, 1989, File No. 0-
          17750.)

    2.2   Agreement and Plan of Merger dated June 1, 1992, between Mercom, Inc.,
          a Michigan corporation, and Mercom, Inc., a Delaware corporation.
          (Incorporated by reference to the Form 8-K of the Registrant dated
          June 29, 1992, File No. 0-17750.)

    3.1   Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
          of the Form 10-Q of the Registrant dated June 30, 1992, File No. 0-
          17750.)


                                      -16-
<PAGE>

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

  3.2     By-laws of Registrant, as amended through June 1, 1992. (Incorporated
          by reference to Exhibit 3.2 of the Form 10-K of the Registrant dated
          December 31, 1994, File No. 0-17750.)

  10.1    Form of Indemnification Agreement between Registrant and UtiliCorp
          United, Inc. (Incorporated by reference to Exhibit 10.6 of the Form 10
          of the Registrant dated May 11, 1989, File No. 0-17750.)

  10.2    Asset Purchase Agreement dated August 14, 1989, between Registrant and
          C4 Media Cable Investors Limited Partnership and Communications and
          Cablevision, Inc. (Incorporated by reference to the Form 10-Q of the
          Registrant for the quarter ended September 30, 1989, File No. 0-
          17750.)

  10.3    Settlement Agreement and Mutual Release dated April 19, 1995, by and
          between Communications and Cablevision, Inc. and Mercom, Inc. and
          Kenneth E. Lahey. (Incorporated by reference to Exhibit 10.12 of the
          Form 8-K of the Registrant dated May 4, 1995, File No. 0-17750.)

  10.4    Management Agreement dated January 1, 1997, by and between Registrant
          and C-TEC Cable Systems of Michigan, Inc. (Incorporated by reference
          to Exhibit 10.9 of the Form 10-K of the Registrant dated December 31,
          1996, File No. 0-17750.)

  10.5    Assignment and Assumption Agreement dated September 29, 1997, by and
          between Cable Michigan, Inc. and Morgan Guaranty Trust Company of New
          York. (Incorporated by reference to Exhibit 10.10 of the Form 10-Q of
          the Registrant for the quarter ended September 30, 1997, File No.
          0-17750.)

  10.6    Amended and Restated Credit Agreement dated September 29, 1997, to
          Credit Agreement dated as of November 26, 1989 and further amended and
          restated as of August 16, 1995, by and between Registrant and Cable
          Michigan, Inc. (Incorporated by reference to Exhibit 10.11 of the Form
          10-Q of the Registrant for the quarter ended September 30, 1997, File
          No. 0-17750.)

  *22.    Subsidiaries of Registrant.

  *24.    Directors' Powers of Attorney.

  *27.    Financial Data Schedule.

Item 14.(b)  Reports on Form 8-K:
             --------------------

             No report on Form 8-K has been filed by the Registrant during the
             last quarter of the period covered by this report on Form 10-K.

                                      -17-
<PAGE>

                                   SIGNATURES
                                   ----------

Pursuant to the requirements of 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.

                                        MERCOM, INC.


Date:  March 31, 1998                   By /s/ David C. McCourt
                                          -------------------------------
                                               David C. McCourt, Chairman
                                               Chief Executive Officer

     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.

     Signature               Title                          Date
     ---------               -----                          ----

/s/ David C. McCourt         Chairman                       March 31, 1998
-----------------------      Chief Executive Officer
    David C. McCourt

/s/ Mark Haverkate           President                      March 31, 1998
-----------------------      Chief Operating Officer
    Mark Haverkate

                             Executive Vice President,
/s/ Timothy J. Stoklosa      Chief Financial Officer and    March 31, 1998
-----------------------      Treasurer
    Timothy J. Stoklosa      (Principal Financial Officer)


                                     -18-
<PAGE>

DIRECTORS:

     /s/ David C. McCourt               March 31, 1998
------------------------------
         David C. McCourt

     /s/ Michael J. Mahoney             March 31, 1998
------------------------------
         Michael J. Mahoney

     /s/ Bruce C. Godfrey               March 31, 1998
------------------------------
         Bruce C. Godfrey

     /s/ Clifford L. Jones              March 31, 1998
------------------------------
         Clifford L. Jones

     /s/ Harold J. Rose, Jr.            March 31, 1998
------------------------------
         Harold J. Rose, Jr.

     /s/ George C. Stephenson           March 31, 1998
------------------------------
         George C. Stephenson

     /s/ Raymond B. Ostroski            March 31, 1998
------------------------------
         Raymond B. Ostroski

                                     -19-
<PAGE>

                                   FORM 10-K
                               INDEX TO EXHIBITS
                               -----------------

Certain exhibits to this report on Form 10-K have been incorporated by
reference. For a list of these and all exhibits, see Item 14 (a)(3) hereof.

The following exhibits are being filed herewith.

Exhibit No.
-----------

22.  Subsidiaries of Registrant.

24.  Directors' Powers of Attorney.

27.  Financial Data Schedule.

                                     -20-
<PAGE>

MERCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                   1997              1996              1995
                                                              ----------        ----------        ----------
<S>                                                           <C>               <C>               <C>
SALES                                                         $   16,439        $   15,570        $   13,939
                                                              ----------        ----------        ----------
OPERATING EXPENSES:
   Programming, franchise and other variable costs                 4,803             4,340             3,565
   Operating, marketing and other fixed system costs               4,020             3,878             3,455
   Other general and administrative expenses                       1,517             1,709             1,728
   Depreciation and amortization                                   2,894             3,018             3,022
                                                              ----------        ----------        ----------
       Total operating expenses                                   13,234            12,945            11,770
                                                              ----------        ----------        ----------
       Operating income                                            3,205             2,625             2,169
                                                              ----------        ----------        ----------
OTHER (INCOME) EXPENSES:
   Litigation costs                                                    -               (12)             (188)
   Interest income                                                  (195)             (127)              (83)
   Interest expense                                                1,056             1,227             1,900
   Loss (income) from asset disposal                                  13                37                (7)
   Gain on sale of Mercom of Florida, Inc.                        (2,571)                -                 -
   Other expenses, net                                                39                 -                 -
                                                              ----------        ----------        ----------
       Total other (income) expenses, net                         (1,658)            1,125             1,622
                                                              ----------        ----------        ----------
       Income before income taxes                                  4,863             1,500               547
                                                              ----------        ----------        ----------
INCOME TAX EXPENSE (BENEFITS)                                        665                28                (2)
                                                              ----------        ----------        ----------
       Net income                                             $    4,198        $    1,472        $      549
                                                              ==========        ==========        ==========
BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE:

       Net income                                             $     0.88        $     0.31        $     0.16
                                                              ==========        ==========        ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands)          4,787             4,787             3,338
                                                              ==========        ==========        ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-1
<PAGE>

MERCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           1997              1996              1995
                                                                       ------------      ------------      ------------
<S>                                                                    <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

      Net income                                                         $    4,198        $    1,472        $      549
      Depreciation                                                            2,603             2,731             2,713
      Amortization                                                              291               287               309
      Deferred income taxes                                                     417                 -                 -
      Loss (income) from asset disposal                                          13                37                (7)
      Net change in certain assets and liabilities:
        Accounts receivable, trade and other, net                              (120)                8                74
        Accounts payable, trade and other                                       (81)              198               582
        Gain on sale of Mercom of Florida, Inc.                              (2,571)                -                 -
        Other assets and liabilities                                           (581)             (630)           (1,854)
                                                                       ------------      ------------      ------------
          Net cash provided by operating activities                           4,169             4,103             2,366
                                                                       ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:

      Expansion, improvements and other                                      (2,614)           (1,585)           (1,701)
      Proceeds from sale of Mercom of Florida, Inc.                           3,496                 -                 -
      Proceeds from asset disposal                                                3                 3                12
                                                                       ------------      ------------      ------------
          Net cash provided by (used in) investing activities                   885            (1,582)           (1,689)
                                                                       ------------      ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:

      Repayment of bank loans                                               (17,430)           (1,500)           (6,996)
      Note payable, affiliate                                                14,151                 -                 -
      Net proceeds from the issuance of common stock                              -                 -             8,256
                                                                       ------------      ------------      ------------
          Net cash (used in) provided by financing activities                (3,279)           (1,500)            1,260
                                                                       ------------      ------------      ------------

NET INCREASE IN CASH & TEMPORARY CASH INVESTMENTS                             1,775             1,021             1,937

CASH & TEMPORARY CASH INVESTMENTS, JANUARY 1                                  3,054             2,033                96
                                                                       ------------      ------------      ------------

CASH & TEMPORARY CASH INVESTMENTS, DECEMBER 31                           $    4,829        $    3,054        $    2,033
                                                                       ============      ============      ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
      Cash paid during the year for:
      Interest                                                           $    1,079        $    1,247        $    2,044
      Taxes                                                              $      120        $       29        $        -
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>

MERCOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS                                                               1997                  1996
                                                                 ------------          ------------
<S>                                                              <C>                   <C>
CASH & TEMPORARY CASH INVESTMENTS                                $    4,829            $    3,054

ACCOUNTS RECEIVABLE:
   Trade, net of reserve for doubtful
     accounts of $49 in 1997 and $36 in 1996                            365                   309
   Other                                                                 93                    60

PREPAID EXPENSES AND OTHER                                              134                   101

DEFERRED INCOME TAXES                                                   341                    --

PROPERTY, PLANT AND EQUIPMENT:
   Cable television distribution plant                               39,730                39,309
   Buildings and land                                                   571                   549
   Furniture, fixtures and vehicles                                   1,911                 1,785
                                                               ------------          ------------
      Total property, plant and equipment                            42,212                41,643
   Accumulated depreciation                                          28,998                27,395
                                                               ------------          ------------
      Net property, plant and equipment                              13,214                14,248
                                                               ------------          ------------
INTANGIBLE ASSETS, NET                                                1,743                 2,079
                                                               ------------          ------------
TOTAL ASSETS                                                     $   20,719            $   19,851
                                                               ============          ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

LIABILITIES:
   Accounts payable, trade                                       $      980            $      828
   Accounts payable, affiliate and related parties                      539                   784
   Other liabilities                                                  1,694                 1,578
   Accrued litigation costs                                           1,450                 2,150
   Deferred income taxes                                                626                    --
   Debt:
    Note payable, affiliate                                          14,151                    --
    Term credit agreement                                                --                17,430
                                                               ------------          ------------
      Total liabilities                                              19,440                22,770
                                                               ------------          ------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT):
   Preferred stock, $100 par value, 150,000 shares authorized,
     none issued and outstanding at December 31, 1997 and 1996
   Common stock, $1 par value, 5,000,000 shares authorized,
     4,787,060, issued and outstanding at December 31,
     1997 and 1996                                                    4,787                 4,787
   Additional paid-in capital                                        11,374                11,374
   Accumulated deficit                                              (14,882)              (19,080)
                                                               ------------          ------------

      Total shareholders' equity (deficit)                            1,279                (2,919)
                                                               ------------          ------------

TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)               $   20,719            $   19,851
                                                               ============          ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

MERCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                              Common Stock
                                   ------------------------------    Additional                     Total
                                       Issued &                        Paid-in     Accumulated   Shareholders'
                                     Outstanding       Par Value       Capital       Deficit   Equity (Deficit)
                                   --------------   -------------     ---------    ----------- ---------------
<S>                                <C>              <C>               <C>          <C>           <C>
BALANCE AT JANUARY 1, 1995                  2,393    $      2,393     $   5,512    $  (21,101)   $    (13,196)

        Net income                              -               -             -           549             549

        Stock rights offering               2,394           2,394         5,862             -           8,256
                                   --------------   -------------     ---------    ----------   -------------
BALANCE AT DECEMBER 31, 1995                4,787           4,787        11,374       (20,552)         (4,391)

        Net income                              -               -             -         1,472           1,472
                                   --------------   -------------     ---------    ----------   -------------
BALANCE AT DECEMBER 31, 1996                4,787           4,787        11,374       (19,080)         (2,919)

        Net income                              -               -             -         4,198           4,198
                                   --------------   -------------     ---------    ----------   -------------
BALANCE AT DECEMBER 31, 1997                4,787    $      4,787     $  11,374    $  (14,882)   $      1,279
                                   ==============   =============     =========    ==========   =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

MERCOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


1.   ORGANIZATION

     Mercom, Inc. (the "Company"), is a cable television operator which provides
     basic, premium and pay-per-view cable programming services to subscribers
     in three cable systems in southern Michigan. The Michigan systems are
     operated through Mercom's wholly-owned subsidiary, Communications and
     Cablevision, Inc. ("CCV"). On July 1, 1997, the Company sold its investment
     in Mercom of Florida, Inc. ("Mercom of Florida"), which operates a cable
     system in Port St. Lucie, Florida, approximately 90 miles north of Palm
     Beach.

     CCV, through its wholly-owned subsidiaries, operates cable television
     systems serving approximately 39,400 subscribers in Monroe County, Allegan
     County, Coldwater and Sturgis areas of Michigan. CCV and its subsidiaries
     have 78 franchise agreements with expiration dates between 1998 and 2015.

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The principal accounting policies of the Company and its subsidiaries are
     summarized below:

     Principles of Consolidation - The consolidated financial statements include
     ---------------------------
     the accounts of the Company and its wholly-owned subsidiary, CCV.  All
     significant intercompany accounts and transactions have been eliminated in
     consolidation.

     Preparation of Financial Statements - 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 reported
     amounts of revenues and expenses during the reporting period.  Actual
     results could differ from those estimates.

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


                                      F-5
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     Property, Plant and Equipment and Depreciation - Property, plant and
     ----------------------------------------------
     equipment are recorded at cost. Depreciation is provided over the estimated
     useful lives of the assets using the straight-line method. The estimated
     useful life of the property, plant and equipment is 12 years except for
     vehicles, which have an estimated useful life of 5 years. Maintenance and
     repair costs are charged to expense as incurred. Major replacements and
     betterments are capitalized. Gain or loss is recognized on retirements and
     dispositions.

     Intangible Assets - The purchase price in excess of the fair market value
     -----------------
     of net assets of cable television systems acquired and franchise rights and
     costs are being amortized on a straight line basis over the expected period
     of benefit ranging from 11 years to 15 years.

     Accounting for Impairments - The Company follows the provisions of
     ---------------------------
     Statement of Financial Accounting Standards No. 121 - "Accounting for the
     Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
     of" ("SFAS 121").

     SFAS 121 requires that long-lived assets and certain identifiable
     intangibles to be held and used by an entity be reviewed for impairment
     whenever events or changes in circumstances indicate that the carrying
     amount of an asset may not be recoverable.  In performing the review for
     recoverability, the Company estimates the net future cash flows expected to
     result from the use of the asset and its eventual disposition.  If the sum
     of the expected net future cash flows (undiscounted and without interest
     charges) is less than the carrying amount of the asset, an impairment loss
     is recognized.  Measurement of an impairment loss for long-lived assets and
     identifiable intangibles expected to be held and used is based on the fair
     value of the asset.

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

     Subscriber Revenue - Revenues from cable programming services are recorded
     ------------------
     in the month the service is provided.

     Advertising Expense - The Company expenses advertising costs as incurred.
     -------------------
     Advertising expense charged to operations was $138, $113 and $123 in 1997,
     1996 and 1995, respectively.

     Income Taxes - The Company accounts for income taxes using Statement of
     ------------
     Financial Accounting Standards No. 109 -"Accounting for Income Taxes". The
     statement requires the use of an asset and liability approach for financial
     reporting for income taxes. The asset and liability approach requires the
     recognition of deferred tax assets and liabilities for the expected future
     tax consequences of temporary differences between financial reporting basis
     and tax basis of assets and liabilities. If it is more likely than not that
     some portion or all of a deferred tax asset will not be realized, a
     valuation allowance is recognized.

                                      F-6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,  Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

     Diluted earnings (loss) per share amounts are computed based on net income
     (loss) divided by the weighted average number of shares of common stock
     outstanding during the period after giving effect to convertible securities
     considered to be dilutive common stock equivalents. The Company does not
     currently have any convertible securities.

3.   INTANGIBLE ASSETS

     Intangible assets consist of the following at December 31:

<TABLE>
<CAPTION>
                                                   1997    1996
                                                  ------  ------
             <S>                                  <C>     <C>
             Goodwill                             $1,577  $1,589
             Franchise rights and costs            1,632   1,768
             Other                                   853     856
                                                  ------  ------
                Total                              4,062   4,213
             Less accumulated amortization         2,319   2,134
                                                  ------  ------

                Total                             $1,743  $2,079
                                                  ======  ======
</TABLE>

     Amortization expense charged to operations in 1997, 1996 and 1995 was $291,
     $287 and $309, respectively.

     During 1997, due to the sale of its investment in Mercom of Florida,
     intangible assets which had an original cost of $147 and associated
     accumulated amortization of $75 were removed from the Company's balance
     sheet.

4.   INCOME TAXES

     The income tax provision (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                     1997       1996       1995
     <S>                                           <C>         <C>       <C>
     Current-
          Federal                                  $  248      $  28     $  (2)
          State                                         -          -         -
                                                   ------      -----     -------
               Total                               $  248      $  28     $  (2)
                                                   ------      -----     ------
     Deferred-
          Federal                                  $  417      $   -     $    -
          State                                         -          -          -
                                                   ------      -----     -------
               Total                               $  417      $   -     $    -
                                                   ------      -----     -------
     Total provision (benefit) for income taxes    $  665      $  28     $   (2)
                                                   ======      =====     =======
</TABLE>

                                      F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,  Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

<TABLE>
<CAPTION>
                                            1997          1996
                                            ----          ----
     <S>                                   <C>           <C>
     Net operating loss carryforwards      $ 1,588       $ 3,532
     Alternative minimum tax credits           141            39
     Reserves                                  275           330
     Other, net                                 66            63
                                            ------        ------
        Total deferred assets                2,070         3,964
                                            ------        ------

     Property, plant and equipment          (2,233)       (2,597)
     Intangible assets                        (122)         (105)
                                            -------       -------
        Total deferred liabilities          (2,355)       (2,702)
                                            -------       -------

             Subtotal                         (285)        1,262
     Valuation allowance                       -          (1,262)
                                            -------       -------
     Total deferred taxes                  $  (285)      $   -
                                            =======       =======
</TABLE>

     In the opinion of management, based on the future turnaround of existing
     temporary differences, primarily depreciation, and its expectations of
     future operating results, the Company will more likely than not, be able to
     realize all of its deferred tax assets.

     Due to the sale of its investment in Mercom of Florida, the Company's
     deferred tax liabilities decreased by $132.

     The net change in the valuation allowance for deferred tax assets during
     1997 was a decrease of $1,262, of which $72 related to Mercom of Florida.

     The provision (benefit) for income taxes is different from the amounts
     computed by applying the U.S. statutory federal tax rate of 34%. The
     differences are as follows:

<TABLE>
<CAPTION>
                                                    1997        1996         1995
                                                    ----        ----         ----
     <S>                                         <C>          <C>           <C>
     Income before provision
       (benefit) for income taxes                $ 4,863      $1,500        $ 547
                                                 =======      ======        =====

     Federal tax provision                        $1,653      $  510        $ 186

     Reduction due to:

     Goodwill                                         36          36           37
     Decrease in valuation allowance              (1,190)       (518)        (256)
     Adjustment to prior years
        amortization                                   -           -           28
     Non-deductible expense                          147           -            -
     Other, net                                       19           -            3
                                                  ------      -------       ------
     Provision (benefit) for income taxes         $  665      $   28        $  (2)
                                                  ======      =======       ======
</TABLE>

                                      F-8
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


     The Company has the following federal net operating loss carryforwards
     available:

<TABLE>
<CAPTION>
                               TAX NET
                              OPERATING         EXPIRATION
               YEAR            LOSSES              DATE
               ----            ------              ----
               <S>            <C>               <C>
               1991            $  329              2006
               1992            $1,628              2007
               1995            $2,713              2010
</TABLE>

     In the current year, the Company was liable for Federal Alternative Minimum
     Tax (AMT). At December 31, 1997 the cumulative minimum tax credits are
     $141. This amount can be carried forward indefinitely to reduce regular tax
     liabilities that exceed the AMT in future years.

5.   DEBT

     Debt consists of the following:

<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                          ------------
                                        1997        1996
                                        ----        ----
       <S>                            <C>         <C>
       Note Payable, Affiliate        $14,151     $    -
       Term Credit Agreement               -       17,430
                                      -------     -------
          Total Debt                  $14,151     $17,430
                                      =======     =======
</TABLE>

In November 1989, the Company entered into a term credit agreement with a bank.
In addition, the Company entered into a revolving credit facility in August 1995
of $2,000 with an initial maturity of August 1996, which was amended and
extended to August 1997. In August 1997, the revolving credit agreement expired.
The Company had no borrowings under the revolving credit agreement in 1996 and
1997.

The term credit agreement was amended several times in order to, among other
things, increase borrowings thereunder and to restructure the amortization
schedule of the principal repayments.

On September 29, 1997, Cable Michigan purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder. As of such
date, $14,151 of principal was outstanding. Immediately after the purchase, the
term credit agreement was amended in order to, among other things, provide for
less restrictive financial covenants, eliminate mandatory amortization of
principal and provide for a bullet maturity of principal on December 31, 2002,
and remove the change of control event of default. The Company's borrowings
under the term credit agreement contain pricing and security provisions
substantially the same as those in place prior to the purchase of the loan. The
borrowings are secured by a pledge of the stock of the Company's subsidiaries
and a first lien on certain of the assets of the Company and its subsidiaries,
including inventory, equipment and receivables.

                                      F-9
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

     Cable Michigan has the ability, under Cable Michigan's Credit Agreement to
     lend additional funds, approximately $6,000 up to an aggregate of $20,000,
     to the Company to meet additional investment and liquidity needs. At
     December 31, 1997, the Company was in compliance with all covenants
     associated with the Note Payable.

     The weighted average effective interest rates for all debt at December 31,
     1997, and 1996, were 6.7% and 6.5%, respectively. Interest on the Note
     Payable is paid based on LIBOR plus 1%.

6.   COMMON STOCK

     On August 10, 1995, the Company completed the issuance of 2,393,530 shares
     of Common Stock through a rights offering, resulting in net proceeds, after
     deducting issuance costs, of approximately $8,200. Shareholders of record
     at the close of business on July 20, 1995 were entitled to one non-
     transferable right for every share of Common Stock held. Right holders were
     able to purchase for a price of $3.60 per share, one share of Common Stock
     for each right held.

     The Company utilized a portion of the proceeds received from the Rights
     Offering to repay $5,070 of outstanding indebtedness to its lender and
     repay $2,287 of outstanding indebtedness to C-TEC under two demand notes.
     The remaining proceeds were used for general corporate purposes, including
     capital expenditures.

7.   EMPLOYEE BENEFIT PLANS

     The Company adopted a 401(k) savings plan on January 1, 1995 covering
     substantially all employees. Contributions made by the Company to the
     401(k) plan are based on a specified percentage of employee contributions.
     Contributions charged to expense were $39 and $26 in 1997 and 1996,
     respectively.

     Beginning in 1996, the Company provides short-term disability salary
     continuance benefits to former or inactive employees who are not retirees.
     The Company accounts for these benefits under Statement of Financial
     Accounting Standards No. 112 - "Employers Accounting for Postemployment
     Benefits" ("SFAS 112"). SFAS 112 requires the Company to accrue the cost of
     postemployment benefits over employees' service lives. The Company uses the
     services of an enrolled actuary to calculate the expense. The net periodic
     cost for postemployment benefits was $34 and $36 in 1997 and 1996,
     respectively.

                                      F-10
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

8.   COMMITMENTS AND CONTINGENCIES

a.   Total rental expense, primarily office space and pole rental, was $283,
     $248 and $250 for 1997, 1996 and 1995, respectively.  At December 31, 1997,
     rental commitments under noncancelable leases, excluding annual pole rental
     commitments of approximately $181 that are expected to continue
     indefinitely, are as follows:

                1998                              $91
                1999                               78
                2000                               78
                2001                               23
                2002                               13
                Thereafter                        252



b.   The Company is subject to the provisions of the Cable Television Consumer
     Protection and Competition Act of 1992 and the Telecommunications Act of
     1996. The Company has either settled challenges or accrued for anticipated
     exposures related to rate regulation; however, there is no assurance that
     there will not be further additional challenges to its rates. The statement
     of operations for 1997 and 1996 included charges totaling approximately $17
     and $170, respectively, relating to cable rate regulation exposures.

c.   The Company entered into a management agreement dated January 1, 1997
     with Cable Michigan pursuant to which Cable Michigan operates and manages
     the Company's cable properties. The Management Agreement provides that the
     Company will pay Cable Michigan: (a) an annual fee equal to the greater of:
     (i) $500 or (ii) a percentage of the Company's annual revenues (ranging
     from 5% of $10,000 of revenues, as defined, to 4% of revenues in excess
     of $20,000); and (b) an annual incentive bonus equal to twenty-five
     percent (25%) of the Company's earnings before interest, taxes,
     depreciation and amortization ("EBITDA") as adjusted, during the applicable
     fiscal year less the base EBITDA of $5,000. See Note 9 (Affiliate and
     Related Party Transactions) of Notes to Consolidated Financial Statements.

                                      F-11
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


9.   AFFILIATE AND RELATED PARTY TRANSACTIONS

     The Company entered into a management agreement in 1992 with C-TEC Cable
     Systems, Inc. ("CCS"), pursuant to which CCS would manage the Company's
     cable television systems' operations through 1996. The Company was charged
     $1,398 and $1,204 for this management service in 1996 and 1995,
     respectively. In 1995, the Company incurred interest of $29 on outstanding
     management fee obligations owed to C-TEC. Effective January 1, 1997, the
     Company entered into a management agreement with Cable Michigan. The
     Company was charged $1,204 in 1997 based on the agreement approved by
     the Board of Directors. RCN and its subsidiaries also supplied other
     services not covered by the management agreements for approximately $27,
     $92 and $121 in 1997, 1996 and 1995, respectively.

     In the first quarter of 1995, C-TEC loaned $887 to the Company to enable it
     to make a principal payment on its Credit Agreement of $887 scheduled for
     March 31, 1995. C-TEC also loaned the Company $1,400 in June 1995 to meet
     its scheduled payment under the Lahey settlement agreement. The Company
     paid interest in 1995 of $39 to C-TEC in connection with these two demand
     notes. These demand notes were repaid in August 1995.

     The Company sold approximately $81 and $2 of inventory to a C-TEC
     subsidiary in 1996 and 1995, respectively.

     The Company had accounts payable to RCN of $18 and $783 (primarily
     management fees) at December 31, 1997 and 1996, respectively.

     The Company had accounts payable to Cable Michigan of $521 (primarily
     management fees) and $1 at December 31, 1997 and 1996, respectively.

     On September 29, 1997, Cable Michigan assumed all of the bank's interest in
     the Term Credit Agreement as discussed in Note 5 (Debt).


10.  OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

     The Company places its cash and temporary cash investments with high credit
     quality financial institutions. The Company does, however, maintain
     unsecured cash and temporary cash investment balances in excess of
     federally insured limits.

     Concentrations of credit risk with respect to receivables are limited due
     to a large customer base throughout Michigan.

                                      F-12
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


11.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
     of each class of financial instruments for which it is practicable to
     estimate that value:

a.   Cash and temporary cash investments
     The carrying amount approximates fair value because of the short maturity
     of these instruments.

b.   Long-term debt
     The fair value of floating rate long-term debt is considered to be equal to
     carrying value since the debt reprices at least every six months and the
     Company believes that its credit risk has not changed from the time the
     floating rate debt was borrowed and therefore, it would obtain similar
     rates in the current market.

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

<TABLE>
<CAPTION>
                                                1997                1996
                                                ----                ----
                                        CARRYING    FAIR     CARRYING     FAIR
                                         AMOUNT    VALUE      AMOUNT     VALUE
                                         ------    -----      ------     -----
     <S>                               <C>        <C>       <C>         <C>
     Financial assets:
       Cash and temporary cash
        investments                    $ 4,829    $ 4,829   $ 3,054     $ 3,054

     Financial liabilities:
       Floating rate long-term debt:
        Note Payable, Affiliate        $14,151    $14,151   $    -      $    -
        Term Credit Agreement          $    -     $    -    $17,430     $17,430

</TABLE>

                                      F-13
<PAGE>

                     [LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]

                            REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Mercom, Inc.:

We have audited the consolidated financial statements and financial statement
schedule of Mercom, Inc. and Subsidiaries listed in Item 14(a) of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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
amounts and disclosures in the financial statements. An audit also includes
assessing the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mercom,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
period ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.

/s/ COOPERS & LYBRAND L.L.P.
----------------------------
    Coopers & Lybrand L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
                                      F-14
<PAGE>

                         MERCOM, INC. AND SUBSIDIARIES               SCHEDULE II
                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COLUMN A                                              COLUMN B           COLUMN C           COLUMN D    COLUMN E
--------                                              --------           --------           --------    --------

                                                                         ADDITIONS
                                                                         ---------

                                                     BALANCE AT      CHARGED      CHARGED               BALANCE AT
                                                    BEGINNING OF    TO COSTS     TO OTHER                 END OF
DESCRIPTION                                            PERIOD      AND EXPENSE   ACCOUNTS   DEDUCTIONS    PERIOD
-----------                                            ------      -----------   --------   ----------    ------
<S>                                                 <C>            <C>           <C>        <C>         <C>
ALLOWANCE FOR DEFERRED TAX ASSETS -
 DEDUCTED FROM DEFERRED TAX ASSETS
 IN THE CONSOLIDATED BALANCE SHEETS.

               1997                                    $1,262            $0         $0        $1,262           $0
               1996                                    $1,780            $0         $0          $518       $1,262
               1995                                    $2,036            $0         $0          $256       $1,780

NON-DEDUCTIBLE EXPENSE - INCLUDED IN LIABILITIES:
 DEFERRED INCOME TAXES IN THE CONSOLIDATED
 BALANCE SHEETS.

               1997                                        $0          $147         $0            $0       $  147
               1996                                        $0            $0         $0            $0           $0
               1995                                        $0            $0         $0            $0           $0

RESERVE FOR DOUBTFUL ACCOUNTS

               1997                                       $36          $147         $0          $134          $49
               1996                                       $25          $177         $0          $166          $36
               1995                                       $23          $107         $0          $105          $25
</TABLE>

                                      F-15