SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

 X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934

                    For the fiscal year ended March 31, 1998

_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to __________

                        Commission File Number: 000-21605

                        HYPERION TELECOMMUNICATIONS, INC.

             (Exact name of registrant as specified in its charter)

           Delaware                                       25-1669404
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        Identification No.)

                 Main at Water Street
                    Coudersport, PA              16915
       (Address of principal executive offices)(Zip code)

                                  814-274-9830

               (Registrant's telephone number including area code)

        Securities registered pursuant to Section 12(b) of the Act: None.
           Securities registered pursuant to Section 12(g) of the Act:
                      Class A Common Stock, $0.01 par value


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____

Aggregate market value of outstanding Class A Common Stock, par value $0.01,
held by non-affiliates of the Registrant at June 24, 1998 was $235.5 million
based on the closing sale price as computed by the NASDAQ National Market system
as of that date. For purposes of this calculation only, affiliates are deemed to
be Adelphia Communications Corporation and directors and executive officers of
the Registrant.

At June 24, 1998, 21,605,896 shares of Class A Common Stock, par value $0.01,
and 33,007,007 shares of Class B Common Stock, par value $0.01, of the
registrant were outstanding.

Documents Incorporated by Reference: Portions of the Proxy Statement for the
1998 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.

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 the Form 10-K or any amendment to the
Form 10-K. X





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                                         HYPERION TELECOMMUNICATIONS, INC.

                                                 TABLE OF CONTENTS



PART I

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   ITEM 1.  BUSINESS.................................................................................  2

   ITEM 2.  PROPERTIES............................................................................... 32

   ITEM 3.  LEGAL PROCEEDINGS........................................................................ 33

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 33


PART II

   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 35

   ITEM 6.  SELECTED FINANCIAL DATA.................................................................. 37

   ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 40

   ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................... 46

   ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 46

   ITEM  9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE... 71


PART III

   ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 71

   ITEM 11.  EXECUTIVE COMPENSATION.................................................................. 71

   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 71

   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 71


PART IV

   ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................... 71

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PART I


ITEM 1.  BUSINESS

The Company

         Hyperion Telecommunications, Inc. ("Hyperion" or the "Company") is a
leading facilities-based provider of local telecommunications services with 
state-of-the-art fiber optic networks located in regionally clustered markets 
primarily  within the eastern half of the United States.  References in this 
Annual Report on Form 10-K to the "networks," the "Company's  networks" or the
"Operating Companies' networks" mean the 22 telecommunications networks in 46
cities in which the Company, as of March 31, 1998, had ownership interests  
through 20 Operating Companies.  As of March 31, 1998, ten of the networks  
were 50% or less owned by the Company.  As of March 31, 1998, Hyperion had 22
networks ("Existing  Networks"),  including four networks under construction.  
The Existing Networks serve 46 cities and include approximately 5,363 route
miles of fiber optic cable.  In addition, as of March 31, 1998, the Company's 18
networks in operation were connected to 1,909  buildings and the Company's
facilities were collocated in 113 local exchange carrier ("LEC") central 
offices.  Management believes that the Company's Existing Networks represent an 
addressable market opportunity of approximately 6.8 million business access 
lines or approximately $13.3 billion annually, substantially all of which is 
currently  serviced  by incumbent LECs and interexchange carriers ("IXCs").  
This addressable market estimate does not include the enhanced data services  
market which the Company has recently entered, or the Internet access market 
which it plans to enter in the near future.

         Over the next eighteen months, the Company plans to complete
development and construction of 14 new networks serving 29 additional cities
(the "New Networks") with the goal of expanding the Company's regionally focused
networks and further facilitating the regional interconnection of certain of its
markets. The Company believes that with the addition of these New Networks, it
will have a total addressable market opportunity of approximately 13.2 million
business access lines or approximately $26.0 billion annually. Once fully
constructed, management believes the networks will include at least 8,100 route
miles of fiber optic cable and will be connected to at least 210 LEC central
offices. The Company has installed in 17 of its Existing Networks, and will
install in all of its networks, a standard switching platform based on the
Lucent 5ESS switch technology. Management believes this consistent platform will
enable the Company to (i) deploy features and functions quickly in all of its
networks, (ii) expand switching capacity in a cost effective manner and (iii)
lower maintenance costs through reduced training and spare parts requirements.

         In early 1997, Hyperion began to implement a business strategy focused
on selling communications services directly to targeted end users in addition to
other telecommunications service providers. As part of this strategy, the
Company accelerated the installation of its Lucent 5ESS-based standard switching
platform in its Existing Networks and increased the size of its direct sales
force and customer service organization. In addition, the Company has begun to
use resold services and unbundled network elements to provide rapid market entry
and to develop its customer base in advance of capital deployment in its
Existing Networks and New Networks. The Company has experienced significant
growth in the sale of access lines from approximately 7,000 as of March 31, 1997
to approximately 41,500 as of March 31, 1998. Of the current access lines sold,
approximately 81% are provisioned using Company owned networks (which lines are
referred to as "on-net"), though this percentage will decline as the Company
continues to offer switched services on an unbundled network element and total
service resale basis. However, the Company believes it will provision a majority
of its access lines on its own networks for the foreseeable future. The Company
expects that through the delivery of switched services on-net it will be able to
provide faster, more reliable access line provisioning with higher operating
margins and more responsive customer service and monitoring.

         Hyperion intends to offer a complete range of telecommunications
services to its customers in all of its markets. The Company's current service
offerings include local switched dialtone, long distance, dedicated access and

<PAGE>

enhanced services such as frame relay, high speed Internet access and video
conferencing. The Company also plans to become an Internet Service Provider
("ISP") in all of its markets, and expects to provide such services in a
majority of its markets during 1998. The Company has begun selling its long
distance services pursuant to a resale agreement with IXC Communications, Inc.
("IXCC") and expects to begin offering facilities-based long distance services
through the regional interconnection of the Company's networks in the near
future. With 75% of all U.S. telecommunications intraLATA and interLATA toll
traffic terminating, on average, within 300 miles of its origination point, the
Company believes that the breadth of its networks, their regional clustering,
and the current and planned interconnection of the networks will enable the
Company to originate and terminate a significant proportion of its customers'
communications traffic over its own networks, rather than relying primarily on
the network of the incumbent LEC or IXC. Management believes that the Company
will benefit from lower operating costs once it is able to offer its various
services over its own networks.

         Hyperion's targeted customers include medium and large businesses,
governmental and educational end users, and other telecommunications service
providers, such as value added resellers ("VARs"), ISPs and IXCs. The Company
expects to increase its marketing efforts by doubling the size of its current
sales force during fiscal 1999. Management believes that a significant
competitive advantage over other competitive local exchange carriers ("CLECs")
is the Company's ability to utilize its broad geographic networks and extensive
network clusters to offer a single source solution for all of its customers'
telecommunications needs principally over its own regional network clusters.
Further, Hyperion believes it can continue to attract end user customers by
offering (i) high-capacity fiber optic network connection directly to
substantially all of a customer's premises, due to the breadth of the Company's
network coverage, (ii) high quality, solutions-oriented customer service, and
(iii) a single point of contact for a complete range of telecommunication
services. The Company also believes that a number of telecommunications service
providers such as VARs and IXCs will seek to offer their business customers an
integrated package of switched local and long distance services using the
networks of facilities-based CLECs such as Hyperion. The Company believes that
it is well positioned to capitalize on this opportunity since its networks
generally have broader geographic coverage than other CLECs in its markets.

         The Company operates in a single, domestic industry
segment--telecommunications services. Information about the amounts of revenues,
operating loss and identifiable assets of the Company as of March 31, 1997 and
1998 and for each of the three years in the period ended March 31, 1998, is set
forth in the Company's consolidated financial statements and notes thereto
included in Item 8.

         Hyperion's Existing Networks have typically been developed by
partnering with a Local Partner who generally owns or controls extensive
conduits and rights-of-way. In all but three of the Company's Existing Networks,
Hyperion retains a 50% or greater equity stake in the respective Operating
Companies. In all of its Operating Companies, Hyperion is responsible for the
design, management and operation of the Operating Companies' networks pursuant
to management agreements. Management believes that its partnering strategy
provides the Company with the following significant competitive advantages over
other CLECs: (i) by sharing the cost of construction and utilizing the
rights-of-way controlled by the Local Partner, the Company is able to build its
networks more quickly and at a lower cost and (ii) by partnering with Local
Partners that typically operate in a broad geographic region, Hyperion is
frequently able to expand its partnering agreements into multiple contiguous
markets, thereby supporting its clustering strategy. As of March 31, 1998, the
Company and its partners have invested $441.7 million in the gross property,
plant and equipment of the Company, its networks and the Company's Network
Operations and Control Center (the "NOCC"), including the Company's investment
in Telergy, Inc. The Company's proportionate share, based upon current
ownership, in its networks of this gross property, plant and equipment
investment was approximately $336.5 million. The Company believes that its large
upfront capital investment in its networks, coupled with the selective use of
unbundled network elements and total service resale, will provide higher
operating margins than can be achieved by other CLECs, which typically have a
lower percentage of on-net customers.

         The Company has increased, and intends to continue to increase, its
ownership interests in Operating Companies when it can do so on attractive
economic terms. To date, this goal has been facilitated by the substantial

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completion of a number of Hyperion's networks, along with the desire of certain
Local Partners to reduce their telecommunications investments and focus on their
core operations. For Operating Companies in which the Company does not own a
majority interest, partnership agreements generally provide for rights of first
refusal or buy/sell arrangements enabling the Company to have an opportunity to
acquire or sell additional equity interest in the network. Since September 1997,
the Company has increased its ownership interest to 100% in Operating Companies
in seven of its markets. As a result, since December 31, 1995, the Company's
weighted average ownership interest (based on gross property, plant and
equipment) in its Operating Companies has increased to 77% from 44%.

         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 10-K, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, is forward-looking, such as
information relating to the effects of future regulation, future capital
commitments, the effects of competition, future expansion, expected market
opportunities and product acceptance by customers. Such forward-looking
information involves important risks and uncertainties that could significantly
affect expected results in the future from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These "forward
looking statements" can be identified by the use of forward-looking terminology
such as "believes", "expects", "may", "will", "should", "intends" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
The risks and uncertainties include, but are not limited to, negative operating
cash flow and operating losses, capital requirements, new product acceptance,
expansion risk, substantial leverage, financing availability, uncertainties
relating to economic conditions, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and programming, technological developments, changes in the
competitive environment in which the Company operates. Persons reading this
Annual Report on Form 10-K are cautioned that forward-looking statements herein
are only predictions, that no assurance can be given that the future results
will be achieved, and that actual events or results may differ materially as a
result of the risk and uncertainties facing the Company.

Recent Developments

         Initial Public Offering of Class A Common Stock and Related
Transactions. On May 8, 1998, the Company issued and sold 12,500,000 shares of
Class A Common Stock at a price to the public of $16.00 per share (the "IPO").
Simultaneously with the closing of the IPO, the Company (i) issued and sold an
additional 3,324,001 shares of Class A Common Stock to Adelphia Communications
Corporation ("Adelphia") at a purchase price of $15.00 per share (or an
aggregate of approximately $49.9 million) and (ii) issued 3,642,666 shares of
Class A Common Stock to Adelphia in exchange for certain of the Company's
indebtedness and payables owed to Adelphia at a purchase price of $15.00 per
share (or an aggregate of $54.6 million) (together, the "Adelphia New Shares").
In a related transaction, on June 5, 1998, the Company issued and sold 350,000
shares of Class A Common Stock at the $16.00 IPO price pursuant to the
underwriters' over-allotment option in the IPO. These transactions increased
the Company's equity by approximately $285 million, while raising approximately
$243 million of net proceeds to continue the expansion of the Company's Existing
Markets and to build new markets.

         Increased Network Ownership. On September 12, 1997 and February 12,
1998, the Company consummated purchase agreements with former Local Partners,
Time Warner Entertainment Advance/Newhouse ("TWEAN"), Tele-Communications, Inc.
and Lenfest Telephony, Inc., thereby increasing the Company's ownership interest
in seven of its networks to 100% (collectively, the "Rollups"). As a result of
the Rollups, the Company's weighted average ownership in its networks, based
upon gross property, plant and equipment, increased to 77%. The Rollups are
consistent with the Company's goal to own at least 50% interest in each of its
Operating Companies and to dispose of its interests in those in which acquiring
a controlling interest is not economically attractive. The Company may consider
similar transactions from time to time in its other markets. The Company now
owns a minority interest in only three of its 22 Existing Networks.
<PAGE>

         Completed Strategic Agreements. The Company has recently completed a
number of strategic agreements that expand the number of markets served by the
Company. In April 1998, the Company entered into agreements with Metromedia
Fiber Network Services, Inc. to lease long haul fiber from Washington, D.C. to
Stamford, CT. On December 1, 1997, the Company entered into an agreement with
Allegheny Energy to provide communications services over networks to be
constructed in State College and Altoona, Pennsylvania. Also in December 1997,
the Company initiated service on three networks pursuant to an agreement with
Entergy Corporation ("Entergy") whereby the Company and Entergy each have a 50%
stake in networks located in Little Rock, Arkansas, Jackson, Mississippi, and
Baton Rouge, Louisiana. In addition, in June 1997, the Company entered into
agreements (collectively, the "MCI Preferred Provider Agreement") with MCImetro
Access Transmission Services, Inc. (together with its affiliate, MCI
Communications, Inc., "MCI") designating the Company as MCI's preferred provider
of end user dedicated access circuits for new MCI customers and of end users
dedicated access circuits resulting from conversions from the incumbent LEC in
the Company's markets. In addition, Hyperion has a right of first refusal to
provide MCI all new dedicated local network access circuits in the Company's
markets.

          In connection with the strategic agreement with MCI, the Company
granted certain warrants to MCI to purchase Class A Common Stock (the "MCI
Warrant") and rights to receive additional warrants in connection with an equity
offering (the "Additional MCI Warrants"). In connection with the IPO, the
Company, Adelphia and MCI entered into an agreement that provides as follows
with respect to the MCI Warrant and MCI's right to receive Additional MCI
Warrants: (i) the Additional MCI Warrants issued with respect to the shares sold
to the public in the IPO and with respect to the Adelphia New Shares had an
exercise price equal to the lower of $6.15 per share or the price per share to
the public in the IPO (the "IPO Price"), and (ii) Adelphia agreed to purchase
from MCI the MCI Warrant and the Additional MCI Warrants for a purchase price
equal to the number of Class A Common Stock shares issuable under the warrants
being purchased times the IPO Price minus the underwriting discount, less the
aggregate exercise price of such warrants. Furthermore, in consideration of the
obligations undertaken by Adelphia to facilitate the agreements between MCI and
Hyperion, Hyperion agreed to pay to Adelphia a fee of $500,000 and to issue to
Adelphia a warrant, which expires three years after its issuance, to purchase
200,000 shares of Class A Common Stock at an exercise price equal to the IPO
Price (the "Adelphia Warrant"). These agreements were consummated simultaneously
with the closing of the IPO.

         Completed Recent Financings. On October 9, 1997, Hyperion sold $200.0
million aggregate liquidation preference (the "Preferred Stock Offering") of 12
7/8% Senior Exchangeable Redeemable Preferred Stock due 2007 (the "Preferred
Stock") and on August 27, 1997, the Company sold $250.0 million aggregate
principal amount (the "Senior Secured Note Offering") of 12 1/4% Senior Secured
Notes due 2004 (the "Senior Secured Notes"). The combined net proceeds from
these offerings were approximately $438.7 million, with $83.4 million from the
Senior Secured Note Offering being placed in an escrow account to provide for
payment of the first six scheduled interest payments on the Senior Secured
Notes, and the remainder of the proceeds used to fund capital expenditures, the
acquisition of increased ownership interests in certain networks, the continued
expansion of its networks and for general corporate and working capital
purposes.

         On December 31, 1997, the Company consummated an agreement for a $24.5
million long term lease facility with AT&T Capital Corporation (the "AT&T Lease
Agreement"). The lease facility provides financing for certain of the Operating
Companies' switching equipment and includes the sale and leaseback of certain
switching equipment, for which the Company received $14.9 million.

         Participation in LMDS Auction. On March 24, 1998, the Federal
Communications Commission ("FCC") completed the auction of licenses for Local
Multipoint Distribution Service ("LMDS"). The Company, through a limited
partnership in which it is a 49.9% limited partner, was the successful bidder at
a net cost of $25.6 million for 232 31-GHz licenses, which cover approximately
38% of the nation's population - in excess of 90 million people in the eastern
half of the United States. The Company funded $10 million of such purchase in
January 1998, and is committed to provide further funding to consummate such
purchase upon the granting of such licenses by the FCC. LMDS is a fixed
broadband point-to-multipoint service which the FCC anticipates will be used for
the deployment of wireless local loop, high-speed data transfer and video
broadcasting services. The Company plans to use such spectrum for "last-mile"

<PAGE>

connectivity in certain of its markets, and believes the spectrum to be highly
complementary to its fiber-based systems. There can be no assurances that LMDS
spectrum will provide a cost-effective means to connect to end user locations.

 Growth Strategy

         Hyperion's objective is to be the leading local telecommunications
service provider to businesses, governmental and educational end users, VARs,
ISPs and IXCs within its markets. To achieve this objective, the Company has
pursued a regionalized facilities-based strategy to provide extensive, high
capacity network coverage and to broaden the range of telecommunications
products and services it offers to targeted customers. The principal elements of
the Company's growth strategy include the following:

         Focus on Telecommunications-Intensive Customers. The Company provides
its services to telecommunications-intensive customers which include medium and
large businesses, governmental and educational end users, and other
telecommunications providers. Management believes that its target customers are
a large and under-served universe who generally have no choice other than to buy
communications services from the incumbent LEC or IXC. These customers generally
seek reliability, high quality, broad geographic coverage, end-to-end service,
solutions-oriented customer service and timely introduction of new and
innovative services. The Company believes it has the resources to compete
effectively for end users by offering superior reliability, product diversity,
service and custom solutions to meet end user needs at competitive prices. The
Company also offers its local services to IXCs and has entered into national
service agreements with AT&T and MCI to be their preferred supplier of dedicated
access and switched access transport services.

         Increase Size and Scope of Network Clusters. Over the next eighteen
months, the Company plans to complete development and construction of 14 New
Networks serving 29 additional cities within the Company's current clusters, as
sole owner/operator or through partnerships or long-term fiber lease agreements.
The Company believes that the mature size and scope of its Existing Network
clusters, combined with changes in the legislative and regulatory environment,
enable the Company to build new networks on its own more efficiently. In
addition, where appropriate, the Company intends to continue to enter into
arrangements with Local Partners. The Company believes that this expansion
strategy permits it to (i) construct networks faster and at a lower cost than it
could on its own, (ii) provide broader network coverage than if the Company
installed its own fiber optic cable and (iii) capitalize on the existing
relationships the Local Partner has with business customers. The Company
believes that its partnering strategy combined with the interconnection of its
regional network clusters differentiates the Company from other CLECs and allows
a greater proportion of traffic to be carried on-net, which decreases
transmission costs and therefore increases cash flow margins. Management also
believes that the Company is an attractive partner for utility companies because
it can offer them a significant stake in its networks, while providing network
operations management expertise.

         Maximize On-Net Traffic Through Facilities-Based Services. By providing
switched voice, enhanced services and long distance access on its own fiber
optic networks, the Company believes it can better control the provisioning,
delivery and monitoring of its services as well as increase its operating
margins. On-net services improve the Company's ability to provide bundled
service offerings by reducing the Company's reliance upon incumbent LECs for
servicing and technological upgrades of leased dedicated transport or unbundled
network elements. The Company currently provides approximately 81% of its
switched services to customers on-net, though this percentage will decline as
the Company continues to offer switched services on an unbundled network element
and total service resale basis. However, the Company believes it will provision
a majority of its access lines on its own networks for the foreseeable future.

         Provide Bundled Package of Telecommunications Services. The Company
believes that a significant portion of business, governmental and educational
customers prefer a single-source telecommunications provider that delivers a
full range of efficient and cost effective solutions to meet their
telecommunications needs. Hyperion believes that offering a customized,

<PAGE>

integrated package of telecommunications services positions the Company to best
address the increasing telecommunications requirements of businesses within its
markets. As a facilities-based, single source provider of bundled
telecommunications services, the Company believes it is positioned to satisfy
the growing telecommunications demands of its customers on a more effective and
cost efficient basis than many of its competitors.

         Expand Solutions-Oriented Sales Effort. The Company provides an
integrated solutions approach to satisfy its end users' telecommunications
requirements through a team of direct sales and engineering support
professionals. In its marketing efforts, the Company emphasizes its extensive
fiber optic network, which provides the reach and capacity to address the needs
of its customers more effectively than many of its competitors who rely solely
upon leased facilities or who have limited network build-outs in their markets.
The Company intends to double the size of its current direct sales force of
approximately 128 professionals during fiscal 1999 as it increases the breadth
of its product offerings to satisfy the growing telecommunications needs of its
customers. Further, during fiscal 1999, the Company expects to initiate direct
marketing and sales of local telecommunications services on an unbundled loop
basis and total service resale to small business customers in all of its
markets.

Products and Services

         Hyperion's products and services are designed to appeal to the
sophisticated telecommunications needs of its business, governmental and
educational customers.

         Local Services. Hyperion provides local dial-tone services to
customers, which allows them to complete calls in their calling area and to
access a long distance calling area. Local services and long distance services
can be bundled together using the same transport facility. Hyperion's networks
are designed to allow a customer to easily increase or decrease capacity and
alter enhanced services as the telecommunications requirements of the business
change. In addition to its core local services, Hyperion also provides access to
third party directory assistance and operator services.

         Long Distance Services. Hyperion provides domestic and international
long distance services for completing intrastate, interstate and international
calls. Long distance service is offered as an additional service to Hyperion's
local exchange customers. Long distance calls which do not terminate on
Hyperion's networks (which are currently the bulk of such calls) are passed to
long distance carriers which route the remaining portion of the call.

         Enhanced Services. In addition to providing typical enhanced services
such as voicemail, call transfer and conference calling, Hyperion offers
additional value-added enhanced services to complement its core local and long
distance services. These enhanced service offerings include:

          Access to Internet Services--Enables customers to use their available
capacity for access to ISPs.

          Data Networking Services--The Company can provide high-speed,
          broadband services to use for data and Internet access such as
          Integrated Services Digital Network (ISDN) and Primary Rate Interface
          (PRI).

          Specialized Application Services--The Company can create products and
          services that are tailored for target industries with special
          telecommunications needs such as the hospitality industry. These
          services typically include non-measured rate local calling, expanded
          local calling area, discounted long distance rates and tailored
          trunking configurations.

Market Size

         The following table sets forth the Company's estimate, based upon an
analysis of industry sources including industry projections and FCC data, of the
potential market size of the Company's Existing Networks and New Networks. The
estimates, however, do not include the enhanced data services market which the

<PAGE>

Company has entered or the Internet access market which it plans to enter in the
near future. See "--Products and Services." There is currently limited direct
information relating to these markets and therefore a significant portion of the
information set forth below is based upon estimates and assumptions made by the
Company. Management believes that these estimates are based upon reliable
information and that its assumptions are reasonable. There can be no assurance,
however, that these estimates will not vary substantially from the actual market
data.

                             Traditional     Switched     Long-    Total Revenue
                          Access Services    Services    Distance    Potential
(Dollars in millions)
Northeast                $         94  $      2,009  $      1,052  $      3,155
Mid-Atlantic                      411         9,446         4,929        14,786
Mid-South                         179         3,508         1,843         5,530
Other Networks                     77         1,453           765         2,295
                         ------------  ------------  ------------  ------------
Total                    $        761  $     16,416  $      8,589  $     25,766
                         ============  ============  ============  ============

Ownership of the Company and the Operating Companies

Overview

         At March 31, 1998, Hyperion was a 79.2% owned subsidiary of Adelphia on
a fully diluted basis (66.0% after the consummation of the IPO and related
transactions including the issuance of the Adelphia New Shares, the purchase of
the MCI Warrant and Additional MCI Warrants by Adelphia and the issuance of the
Adelphia Warrant). Adelphia is the seventh largest cable television company in
the United States and, as of March 31, 1998, owned or managed cable television
systems that served approximately 1.98 million subscribers in 12 states. In
addition at March 31, 1998, senior executives of the Company owned 10.9% of the
Common Stock of the Company on a fully diluted basis (6.7% after the
consummation of the IPO and related transactions including the issuance of the
Adelphia New Shares, the purchase of the MCI Warrant and Additional MCI Warrants
by Adelphia and the issuance of the Adelphia Warrant). As of March 31, 1998, the
Company's 22 networks were owned through (i) eight partnerships or limited
liability companies with Local Partners (together with the entities described in
clause (iv) below, the "Operating Partnerships") encompassing nine networks,
(ii) 10 wholly owned subsidiaries of the Company encompassing 11 networks, (iii)
one corporation, encompassing one network, in which the Company is a minority
shareholder and (iv) one company, encompassing one network, in which the Company
is the majority equityholder (the entities described in clauses (ii) and (iii)
are collectively referred to as the "Operating Corporations," and the Operating
Corporations and the Operating Partnerships are collectively referred to as the
"Operating Companies"). The Company is responsible for the network design,
management, billing and operation of the Operating Companies, for which it
receives management fees.


<PAGE>


         The following is an overview of the Hyperion networks and respective
ownership interests as of March 31, 1998.

<TABLE>
<CAPTION>

                                        Actual or
                                      Expected Date        Hyperion
Company Networks                     of Operation(a)       Interest        Local
                                                                          Partner

       Northeast Cluster
<S>                                      <C>                 <C>    <C>
Vermont                                  11/94               100.0%          --
Syracuse, NY                             8/92                100.0           --
Buffalo, NY                              1/95                100.0           --
Albany, NY                               12/98               100.0           --

       Mid-Atlantic Cluster
Charlottesville, VA                      11/95               100.0           --
Scranton/Wilkes-Barre, PA                6/98                100.0           --
Harrisburg, PA                           4/95                100.0           --
Morristown, NJ                           7/96                100.0           --
New Brunswick, NJ                        11/95               100.0           --
Philadelphia, PA                         8/96                 50.0       PECO Energy
Allentown/Bethlehem/Easton/Reading, PA   6/98                 50.0       PECO Energy
York, PA                                 5/97                 50.0    Susquehanna Cable
State College/Altoona, PA                10/98                50.0    Allegheny Energy
Richmond, VA                             9/93                 37.0        MediaOne

       Mid-South Cluster
Lexington, KY                            6/97                100.0           --
Louisville, KY                           3/95                100.0           --
Nashville, TN                            11/94                95.0   InterMedia Partners
Baton Rouge, LA                          12/97                50.0         Entergy
Jackson, MS                              12/97                50.0         Entergy
Little Rock, AR                          12/97                50.0         Entergy

       Other Networks
Wichita, KS                              9/94                 49.9         Gannett
Jacksonville, FL                         9/92                 20.0        MediaOne

Weighted Average Ownership(b)           --                    77%            --
<FN>

(a)  Refers to the date on which (i) the network is connected to at least one
     IXC POP, (ii) the network is capable of accepting traffic from IXCs and end
     users, (iii) the Company's central office is fully functional and (iv) the
     initial network SONET fiber ring has been completed.

(b)  Based upon gross property, plant and equipment of the Company and the
     Operating Companies as of March 31, 1998.

</FN>
</TABLE>



<PAGE>


Cluster Statistics(a)

<TABLE>



                                                 Route        Fiber      Buildings     LEC-COs
         Cluster                                 Miles        Miles       Connected   Collocated

<S>                                              <C>           <C>           <C>          <C>
         Northeast......................         1,530         65,712        356          17
         Mid-Atlantic...................         1,914         91,872        613          61
         Mid-South......................         1,142         54,792        589          21
         Other Networks.................           777         37,296        351          14
                                                 -----        -------      -----         ---
               Total....................         5,363        249,672      1,909         113
                                                 =====        =======      =====         ===
<FN>

(a)   Information is as of March 31, 1998 and includes networks under construction.
</FN>
</TABLE>

Operating Agreements

         Generally, subsidiaries of the Company have entered into partnership
agreements (or limited liability agreements) with Local Partners to take
advantage of the benefits of building networks in conjunction with local cable
television or utility operators. Typically Operating Partnerships have been
formed and operated pursuant to three key agreements: (i) a partnership or
limited liability company agreement between the Company or one of its wholly
owned subsidiaries and a cable operator or utility company (the "Local Partner
Agreement"); (ii) a fiber capacity lease agreement between the Local Partner and
the Operating Partnership (the "Fiber Lease Agreement"); and (iii) a management
agreement between the Operating Partnership and the Company or one of its
subsidiaries (the "Management Agreement"). As of March 31, 1998, 10 of the
Company's 22 Existing Networks were 50% or less owned by the Company.

Local Partner Agreements

         Each Local Partner Agreement establishes the structure of the
applicable Operating Partnership by determining, among other things, the
partner's capital contribution requirements, capital structure, purpose and
scope of business activities, transfer restrictions, dissolution procedures,
duration and competition restrictions, as well as the voting and buy/sell rights
and rights of first refusal of the partners of the Operating Partnership. The
following discussion applies to partnership and limited liability company
agreements.

         Ownership and Capital Contributions. The initial capital contributions
and percentage of ownership of the Operating Partnerships vary. Some of the
Local Partner Agreements establish maximum capital contributions such that each
partner's ultimate aggregate capital contribution is determined at the Operating
Partnership's inception. Capital contributions in excess of the initial capital
contribution may be required in several Local Partner Agreements, but generally
either must be initiated by the manager of the Operating Partnership or approved
by at least a majority vote of the management committee. Generally, the
percentage of ownership is also fixed at the Operating Partnership's inception.
Absent an agreement by the partners, generally, the only circumstances that
result in the dilution of such partner's ownership interest are a partner's
failure to make a capital contribution or its failure to exercise a right of
first refusal.

         Matters Requiring a Vote. Most partner or management committee votes of
an Operating Partnership require only a majority vote; however, a unanimous or
supermajority vote of the partners or management committee is generally required
for, among other things, expansion of the scope of the business activities in
the defined business area, admission of additional partners and merger or
consolidation with any other entity if the Operating Partnership is not the
surviving entity.

         Distributions. Generally, the Local Partner Agreements allow for
distributions to the partners; however, the Local Partner Agreements vary with
regard to the procedure for determining if, when and how much of a distribution
should be made. The partners or the partnership's managing committee makes such

<PAGE>

determinations by either majority approval or unanimous consent. All
distributions are required to be made in proportion to each partner's percentage
interest in the partnership.

         Transfer of Ownership. The Local Partner Agreements generally prohibit
the transfer of partnership interests, including most changes in control, or
impose restrictions that significantly limit a partner's ability to transfer its
partnership interest. Generally, transfers of entire partnership interests to
subsidiaries of a partner's parent corporation and the sale or disposition of
all or substantially all of the stock or assets of a partner's affiliates are
expressly permitted in the typical Local Partner Agreement.

         Rights of First Refusal; Buy/Sell Agreements. The partners of most of
the Operating Partnerships also retain certain rights of first refusal and
buy/sell rights. Generally, after a specified period of time, usually three to
six years after the inception of the Operating Partnership, either partner may
transfer its interest to an unrelated third party if such partner first offers
its interest to the other partner at the same terms and the other partner elects
not to purchase the interest. The right of first refusal usually requires that
the selling partner sell all, and not less than all, of its partnership interest
pursuant to an offer by a bona fide third party. The selling party must first
give the other partner the opportunity to purchase the interest at the same
price and under the same terms as the third party's offer.

         In addition, in most of the Operating Partnerships, either partner can,
after a specified period of time, usually five to eight years after the
inception of the partnership, make an offer to the other partner to sell its own
interest. Within 30 to 60 days of submitting a price which generally must be
based on a written third party valuation of the partnership interest, the other
partner must respond to the offer indicating its election to either accept the
offer to buy or sell at the offered price. A partner in one of the partnerships
has the right after a specified period of time to put its interest in the
respective partnership to the Company at an amount equal to the partner's
capital contributions plus interest less any distributions pursuant to the other
agreement.

         Term. Most of the Operating Partnerships were created in the last five
years and have a duration of 10 to 25 years unless earlier dissolved. One of the
Local Partner Agreements contain provisions whereby the respective Local Partner
can terminate its interest, at such Local Partner's sole discretion, prior to
2005. Generally, each partner and certain of its affiliates are restricted from
competing with the Operating Partnership in the defined business area so long as
the partner is a partner plus two or three years thereafter.

Fiber Lease Agreements

         Generally, the Operating Partnerships lease fiber optic capacity from
their Local Partners. In some instances, the Operating Partnerships lease
existing fiber optic capacity and in other instances, the Operating Partnerships
request the Local Partners to construct new fiber optic capacity. In many cases,
Local Partners upgrade the capacity of their cable or utility infrastructure,
and as a result, share construction costs with the Operating Partnership.
Monthly lease payments in both instances are based on the amortization of the
Operating Partnership's share of the Local Partner's cost of construction and
material costs over the term of the Fiber Lease Agreement. Because construction
and material costs are amortized over the then current term of the Fiber Lease
Agreement, it is possible for the amount of a monthly lease payment to be
significantly lower during a renewal term unless the construction of additional
fiber optic cable is scheduled for such renewal term. Typically, the amount of
the lease payments in a renewal period equals the amount of monthly maintenance
costs for the leased fiber optic cable.

         Substantially all of the Fiber Lease Agreements are in their initial
terms. Most of the initial terms vary from five to 25 years in length. The Fiber
Lease Agreements contain various renewal options. Generally, either party can
terminate the Fiber Lease Agreement at the end of the then current term if the
terminating party provides prior written notice to the other party. Several of
the Fiber Lease Agreements contain termination rights which provide the lessor
with the option to terminate the lease if the lessor becomes subject to
telecommunications regulation, an action is brought against the lessor
challenging or seeking to adversely modify the lessor's continued validity or
authority to operate, legal or regulatory determination renders it unlawful or
impossible for the lessor to satisfy its obligations under the lease or in case

<PAGE>

of an imposition of public utility or common carrier status on the lessor as a
result of its performance of the lease.

         Throughout the term of the Fiber Lease Agreements and thereafter, title
to the fiber optic cable remains with the Local Partner. Similarly, the
Operating Partnerships retain title to all of their own electronics and switches
that become a part of the network. A Local Partner cannot sell the fiber subject
to the Fiber Lease Agreement to a third party unless its obligations under the
Fiber Lease Agreement are assumed by the third party.

         The amount of the lease payments could be affected by the costs the
Local Partners incur for attachments to poles, or use of conduit, owned by
incumbent LECs or electric utilities. Various state public utilities commissions
("State PUCs") and the Federal Communication Commission ("FCC") are reviewing
whether use of Local Partner facilities for telecommunications purposes (as
occurs when the Operating Companies lease fiber optic capacity from Local
Partners) should entitle incumbent LECs and electric utilities to raise pole
attachment or conduit occupancy fees. Such increased fees could result in an
increase in the amount of the lease payments made by the Operating Companies to
the Local Partners. In some cases, State PUCs attempt to directly regulate the
fiber lease contracts between the Operating Companies and their Local Partners.

         In cases where the Company acquires 100% of the ownership interest of
an Operating Partnership by an acquisition of interests from the Local Partner,
the Fiber Lease Agreement typically is amended to provide for a 10 to 25 year
lease of fiber optic capacity from the former Local Partner that exited the
partnership.

         On February 20, 1997, the Company entered into several agreements with
Telergy, Inc. and certain of its affiliates regarding the lease of dark fiber in
New York state. Pursuant to these agreements and in consideration of a payment
of $20.0 million, the Company received (i) a $20 million senior secured note due
February 2002 from Telergy, Inc. (which, as amended, is due January 1999), and
(ii) a fully prepaid lease from a Telergy affiliate for at least 25 years (with
two additional ten-year extensions) for 24 strands of dark fiber installed or to
be installed in a New York fiber optic telecommunications backbone network. The
fiber optic backbone network will cover approximately 500 miles from Buffalo to
Syracuse to Albany to New York City, New York, and will provide interconnection
capability for the Company's operating networks in the state of New York.

Management Agreements

         Generally, the Company or a wholly owned subsidiary of the Company
provides the Operating Partnerships with the following services pursuant to the
Management Agreement for a fee based on the Company's cost of providing such
services: general management, monitoring, marketing, regulatory processing,
accounting, engineering, designing, planning, construction, maintenance,
operations, service ordering and billing. The term of the typical Management
Agreement is three or five years and automatically renews for continuous
one-year periods unless one party provides the other with written notice that it
intends to terminate the agreement.

Enhanced Data Services Agreements

         Four of the Operating Companies have entered into partnerships with
!NTERPRISE, a wholly owned subsidiary of U S WEST (the "!NTERPRISE
Partnerships"), in order to provide enhanced services such as frame relay, ATM
data transport, business video conferencing, private line data interconnect
service and LAN connection and monitoring services. The partners in the
!NTERPRISE Partnerships each have a 50% ownership interest and are required to
contribute equal amounts in order to retain their shares. The business area
serviced by the !NTERPRISE Partnerships is generally the same as that serviced
by the applicable Operating Company. The partners and their respective
affiliates are also prohibited from competing for as long as the partners are
partners plus two years thereafter. In addition, the partners have a right of
first refusal with regard to the sale of partnership interests and, under
certain circumstances, may put their interest to the !NTERPRISE Partnership.
Generally, the !NTERPRISE Partnerships have a 20-year duration. In addition, the

<PAGE>

Company has recently entered into master sales relationship agreements with
respect to three of its markets and is in discussions to expand its relationship
with !NTERPRISE to provide enhanced services pursuant to similar such agreements
in substantially all of the Company's markets.

AT&T Lease Agreement

         On December 31, 1997 the Company consummated an agreement for a $24.5
million long term lease facility from AT&T Capital Corporation (the "AT&T Lease
Agreement"). The AT&T Lease Agreement provides financing for certain of the
Operating Companies' switching equipment. Included in the AT&T Lease Agreement
is the sale and leaseback of certain switching equipment for which the Company
received $14.9 million. The terms of the switching equipment leases under the
AT&T Lease Agreement are seven and one half years, commencing December 31, 1997.
The AT&T Lease Agreement requires the Company to maintain and insure the leased
equipment and prohibits the Company from subleasing the equipment, except to
certain designated Company subsidiaries. Under the AT&T Lease Agreement, the
Company is required to indemnify AT&T Capital Corporation for certain claims
with respect to the leased equipment and for certain tax liabilities.

Sales and Marketing

         The Company targets its network sales and marketing activities to
medium and large businesses, government and educational end users and resellers,
including IXCs. The Company services its customers through a dedicated sales
force of approximately 128 professionals focused on selling the Company's
portfolio of service offerings, and currently has over 270 technicians, customer
service representatives and administrative support staff, enabling the Company
to provide its customers with continuous support and superior service. The
Company expects to increase its marketing efforts by doubling the size of its
current sales force during fiscal 1999 as it increases the breadth of its
product offerings to satisfy the growing telecommunications needs of its
customers. In addition, the Company has initiated direct marketing and sales of
local telecommunications services on an unbundled loop basis to or through total
service resale to small business customers in certain markets, generally
offering such services under either the Hyperion name or a co-branded name that
includes the name of the particular Local Partner. The Company's networks offer
their services in accordance with tariffs filed with the FCC for interstate
services and State PUCs for intrastate services. The Operating Companies are
classified as non-dominant carriers by the FCC and therefore have substantial
pricing flexibility and in many cases may enter into customer and product
specific agreements.

End Users

         The Company targets end users which include medium and large
businesses, governmental and educational institutions and other
telecommunications service providers. End users are currently marketed through
Company direct sales representatives in each market. The national sales
organization also provides support for the local sales groups and develops new
product offerings and customized telecommunications applications and solutions
which address the specific requirements of particular customers. In addition,
the Company markets the Operating Companies' products through advertisements,
media relations, direct mail and participation in trade conferences. End users
typically commit to a service agreement for a term of three to five years which
is either renegotiated or automatically converted to a month-to-month
arrangement at the end of the contract term. The Company believes it will be
able to continue to compete effectively for end users by offering superior
reliability, product diversity, service and custom solutions to end user needs
at competitive prices. A significant component of an Operating Company's
reliability will be its ability to offer customers end-to-end SONET ring
construction for many localized applications. The Operating Companies'
construction of SONET rings combined with the Company's large network size will
enable the Operating Companies to offer fiber optic coverage superior to the
incumbent LEC in its markets.

Resellers

         Resellers utilize the Operating Companies' services primarily as a
local component of their own service offerings to end users. The Company has
national supplier agreements with all of the major IXCs. The Company believes it

<PAGE>

can effectively provide IXCs with a full complement of traditional access
services as well as switched services. Factors that increase the value of the
Company's networks to IXCs include reliability, state-of-the-art technology,
route diversity, ease of ordering and customer service. The Company also
generally prices the services of an Operating Company at a discount relative to
the incumbent LEC. In order to further complement the services provided to the
IXCs, the Company integrates its networks with IXC networks to enable the IXC to
(i) access service, billing and other data directly from the Company and (ii)
electronically send automated service requests to the Company. In pursuing this
strategy, the Company has entered into the National Service Agreement with AT&T
pursuant to which the Company through its networks will be an AT&T preferred
supplier of dedicated special access and switched access transport services. The
National Service Agreement requires the Company to provide such services to AT&T
at a discount from the tariffed or published LEC rates. In addition, the Company
has entered into the MCI Preferred Provider Agreement pursuant to which the
Company is designated MCI's preferred provider of new end user dedicated access
circuits and of end user dedicated access circuits resulting from conversions
from the incumbent LEC in the Company's markets.

Special Purpose Networks

         The Company develops special purpose networks in conjunction with the
Operating Companies in order to meet specific customer network requirements. To
date, these special purpose networks have included construction of IXC backbone
networks, campus networks, private carriage networks and other similar network
applications. The terms and conditions for these special purpose networks are
generally specified in agreements with three to five year terms which
automatically renew on a month-to-month basis. In addition, special customer
networks are normally constructed with excess fiber bandwith capacity, which
allows the Company to make additional capacity available to other end users.

The Company's Networks

Network Development and Design

         Prior to any network construction in a particular market, the Company's
corporate development staff reviews the demographic, economic, competitive and
telecommunications demand characteristics of the market. These characteristics
generally include market location, the size of the telecommunications market,
the number and size of business, educational and government end users and the
economic prospects for the area. In addition, the Company also carefully
analyzes demand information provided by IXCs, including demand for end user
special access and volume of traffic from the LEC-CO and the IXC POPs. The
Company also analyzes market size utilizing a variety of data, including
available estimates of the number of interstate access and intrastate private
lines in the region, which is available from the FCC.

         If a particular market targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel, generally working in conjunction with the Company's Local
Partner, Adelphia, or one of Adelphia's affiliates, design a large regional
network targeted to provide access to the identified business, educational and
government end user revenue base and to the IXC POPs and the LEC-COs in the
geographic area covered by the proposed network. The actual network design is
influenced by a number of market, cost and technical factors including: (i)
availability and ease of fiber deployment; (ii) location of IXC POPs; (iii) the
Company's market information; and (iv) cost of construction.

         The objective of the network design is to maximize revenue derived from
service to IXC POPs, LEC-COs and important customers in consideration of network
construction costs. In most cases, the Local Partner bears the costs of
construction for the required fiber, retains ownership of the fiber and leases
the fiber to the Operating Company. The fiber lease costs are determined by
amortizing the Operating Company's portion of the Local Partner's cost of
construction over the term of the Fiber Lease Agreement at an assumed interest
rate. This structure generally allows the Operating Company to better match its
capital costs to cash flows.
<PAGE>

         An analysis of the estimated cost savings for the Company for one mile
of aerial construction is set forth in the following table.

                             With Local       With Local        Without
Costs                       Cable Partner   Utility Partner  Local Partner
                                         (Dollars in thousands)
Make Ready Costs               $   -- (a)     $  -- (b)      $  18.0(c)
Pole Attachment Costs              3.4(d)        -- (b)          5.0
Fiber Costs and Installation       8.0(e)       18.5(e)          8.0
Splicing Costs                     0.6(f)        0.6(f)          0.6
                               -------        ------         -------

Total                          $  12.0(g)     $  19.1(g)     $  31.6
                               =======        =======        =======


(a)  ssumes a fiber overlash of existing cable plant.
(b)  Assumes placing fiber in the space allocated for the local utility partner
     on the pole.
(c)  Assumes an average cost of $200 per pole, 40 poles per mile, to move the
     telephone and cable television wires in the space allocated for
     communications providers on the pole and the replacement of two poles per
     mile.
(d)  Assumes the payment of a pro rata portion (approximately 33%) of such costs
     by the Local Partner with respect to capacity to be available for such
     partner's use.
(e)  Represents the cost of the Operating Company's fiber and its installation
     on the pole.
(f)  Represents the cost of cutting and integrating new fiber components.
(g)  In the above analysis, this would be the amount amortized by an applicable
     fiber lease financing  between an Operating Company and its Local Partner.

Network Construction

         The Company's networks are constructed to cost-effectively access areas
of significant end user telecommunications traffic, as well as the POPs of most
IXCs and the majority of the Local Exchange Carriers Central Office ("LEC-COs").
The Company establishes with its Local Partner or Adelphia general requirements
for network design including engineering specifications, fiber type and amount,
construction timelines and quality control. The Company's engineering personnel
provide project management, including contract negotiation and overall
supervision of the construction, testing and certification of all facilities.
The construction period for a new network varies depending upon the number of
route miles to be installed, the initial number of buildings targeted for
connection to the network, the general deployment of the network and other
factors. Networks that the Company has installed to date have generally become
operational within six to ten months after the beginning of construction.

Network Operating Control Center

         In Coudersport, Pennsylvania, the Company has built the NOCC, which is
equipped with state-of-the-art system monitoring and control technology. The
NOCC is a single point interface for monitoring all of the Company's networks
and provisioning all services and systems necessary to operate the networks. The
NOCC supports all of the Company's networks including the management of 1,909
building connections, 17 switches or remote switching modules and 5,363 network
route miles as of March 31, 1998. The NOCC is designed to accommodate the
Company's anticipated growth.

         The NOCC is utilized for a variety of network management and control
functions including monitoring, managing and diagnosing the Company's SONET
networks, central office equipment, customer circuits and signals and the
Company's switches and associated equipment. The NOCC is also the location where
the Company provisions, coordinates, tests and accepts all orders for switched
and dedicated circuit orders. In addition, the NOCC maintains the database for
the Company's circuits and network availability. Network personnel at the NOCC
also develop and distribute a variety of software utilized to manage and
maintain the networks.

<PAGE>

Equipment Supply

         The Company and the Operating Companies purchase fiber optic
transmission and other electronic equipment from Lucent, Fujitsu, Tellabs, and
other suppliers at negotiated prices. The Company expects that fiber optic
cable, equipment and supplies for the construction and development of its
networks will continue to be readily available from Lucent, Fujitsu, Tellabs and
other suppliers as required. The Company has negotiated multi-year contracts for
equipment with Lucent, Fujitsu, and Tellabs. The Company and the Operating
Companies have deployed 15 Lucent switches and two Lucent remote switching
modules, which deliver full switching functionality, in 17 of their current
markets. The Company and the Operating Companies plan to deploy 5ESSs or remote
switching modules in all of its Existing Networks during 1998 and additional
5ESSs or remote switching modules in each of the Company's New Networks.

Connections to Customer Locations

         Office buildings are connected by network backbone extensions to one of
a number of physical rings of fiber optic cable, which originate and terminate
at the Operating Company's central office. Signals are sent simultaneously on
both primary and alternate protection paths through a network backbone to the
Operating Company's central office. Within each building, Operating
Company-owned internal wiring connects the Operating Company's fiber optic
terminal equipment to the customer premises. Customer equipment is connected to
Operating Company-provided electronic equipment generally located where customer
transmissions are digitized, combined and converted to an optical signal. The
traffic is then transmitted through the network backbone to the Operating
Company's central office where it can be reconfigured for routing to its
ultimate destination on the network.

         The Operating Company locates its fiber optic equipment in space
provided by the building owner or, more typically, on a customer's premises.
IXCs often enter into discussions with building owners to allow the Company to
serve the IXCs' customers. This network configuration enables the Company to
share electronic equipment among multiple customers, causes little interruption
for customers during installation and maintenance and allows the Company to
introduce new services rapidly and at low incremental cost.

Employees

         As of March 31, 1998, the Operating Companies and the Company,
respectively, employed 388 and 183 full-time and part-time employees. In support
of the Operating Companies' and the Company's operations, the Company also
regularly uses the services of its Local Partners, employees and contract
technicians for the installation and maintenance of its networks. None of the
Operating Companies' or the Company's employees is represented by a collective
bargaining agreement. The Company believes that the Operating Companies' and the
Company's relations with their respective employees are good.

Competition

         The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. In each of the
markets served by the Company's networks, the services offered by the Company
compete principally with the services offered by the incumbent LEC serving that
area. Incumbent LECs have long-standing relationships with their customers, have
far greater technical and financial resources and provide services that an
Operating Company may not currently be authorized by State PUCs to offer.
Following the enactment of the Telecommunications Act, there has been
significant merger activity among the RBOCs and among various other
telecommunication companies (such as AT&T Corp./Telecommunications, Inc. and
Worldcomm/MCI) which will result in competitors with even greater financial
resources and geographic scope than currently faced by the Company. In addition,
in many markets, the incumbent LEC currently is excused from paying license or
franchise fees or pays fees materially lower than those required to be paid by
the Operating Companies.
<PAGE>

         While new business opportunities will be made available to the Company
through the Telecommunications Act and other federal and state regulatory
initiatives, regulators are likely to provide the incumbent LECs with an
increased degree of flexibility with regard to pricing of their services as
competition increases. If the incumbent LECs elect to lower their rates and can
sustain lower rates over time, this may adversely affect the revenues of the
Operating Companies and the Company by placing downward pressure on the rates
the Operating Companies can charge. The Company believes this effect will be
offset by the increased revenues available by offering new services, but if
future regulatory decisions afford the incumbent LECs excessive pricing
flexibility or other regulatory relief, such decisions could have a material
adverse effect on the Company.

         Competition for the Company's and the Operating Companies' services is
based on price, quality, network reliability, service features, salesmanship and
responsiveness to customer needs. The Company believes that its management
expertise, coupled with its highly reliable, state-of-the-art digital networks
and back-office infrastructure, which offer significant transmission capacity at
competitive prices, will allow it to compete effectively with the incumbent
LECs, which may not yet have fully deployed fiber optic networks in many of the
Company's target markets. The Company believes that the Operating Companies
price their services at a modest discount compared to the prices of incumbent
LECs while providing a higher level of customer service. The Company's networks
provide diverse access routing and redundant electronics, design features not
widely deployed by the incumbent LEC networks at the present time. However, as
incumbent LECs continue to upgrade their networks, any competitive advantage
held by the Company due to the superiority of its facilities may diminish.

         Other current or potential competitors of the Company's networks
include other CLECs, IXCs, wireless telecommunications providers, microwave
carriers, satellite carriers, private networks built by large end users and
cable television operators or utilities in markets in which the Company has not
partnered with one or the other. Substantially all of the Company's markets are
served by one or more CLECs other than the Company. Furthermore, the three major
IXCs have in the past announced ambitious plans to enter the local exchange
market. If this occurs, there is no assurance that these IXCs will choose to
obtain local services from the Operating Companies in the Company's markets. In
addition, recent sweeping changes enacted by the Telecommunications Act
facilitate entry by such competitors into local exchange and exchange access
markets, including requirements that incumbent LECs make available
interconnection and unbundled network elements to any requesting
telecommunications carrier at cost-based rates, as well as requirements that
LECs offer their services for resale. Such requirements permit companies to
enter the market for local telecommunications services with little or no
investment in new facilities, thereby increasing the number of likely
competitors in any given market, and enable the IXCs to provide local services
by reselling the service of the incumbent LEC, or purchasing unbundled network
elements, rather than using services provided by the Company.

Regulation

Overview

         Telecommunications services provided by the Company and its networks
are subject to regulation by federal, state and local government agencies. At
the federal level, the FCC has jurisdiction over interstate and international
services. Jurisdictionally, interstate services, which constitute the majority
of the Operating Companies' current services, are communications that originate
in one state and terminate in another. Intrastate services are communications
that originate and terminate in a single state. State PUCs exercise jurisdiction
over intrastate services. Additionally, municipalities and other local
government agencies may regulate limited aspects of the Company's business, such
as use of rights-of-way. Many of the regulations issued by these regulatory
bodies may be subject to judicial review, the result of which the Company is
unable to predict. The networks are also subject to numerous local regulations
such as building codes, franchise and right-of-way licensing requirements.


<PAGE>


Telecommunications Act of 1996 ("The Telecommunications Act")

         On February 8, 1996, the Telecommunications Act was signed into law. It
is considered to be the most comprehensive reform of the nation's
telecommunications laws since the original enactment of the Communications Act
of 1934. The Telecommunications Act has and will continue to result in
substantial changes in the marketplace for voice, data and video services. These
changes include opening the local exchange market to competition and will result
in a substantial increase in the addressable market for the Company's networks.
Among its more significant provisions, the Telecommunications Act (i) removes
legal barriers to entry in local telephone markets, (ii) requires incumbent LECs
to "interconnect" with competitors, (iii) establishes procedures for incumbent
LEC entry into new markets, such as long distance and cable television, (iv)
relaxes regulation of telecommunications services provided by incumbent LECs and
all other telecommunications service providers, and (v) directs the FCC to
establish an explicit subsidy mechanism for the preservation of universal
service. As a component of the need for explicit subsidy mechanisms for
universal service, the FCC was also directed by Congress to revise and make
explicit subsidies inherent in the current access charge system.

Removal of Entry Barriers

         Prior to enactment of the Telecommunications Act, many states limited
the services that could be offered by a company competing with the incumbent
LEC. In these states, the incumbent LEC retained a monopoly over basic local
exchange services pursuant to state statute or regulatory policy. In states with
these legal barriers to entry, the Company had been limited to the provision of
dedicated telecommunications services, which constitutes only a small portion of
the local telephone market.

         The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers.

         This provision of the Telecommunications Act should enable the
Operating Companies to provide a full range of local telecommunications services
in any state. Although the Operating Companies will be required to obtain
certification from the State PUCs in almost all cases, the Telecommunications
Act should limit substantially the ability of a State PUC to deny a request for
certification filed by an Operating Company. While this provision of the
Telecommunications Act expands significantly the markets available to the
Operating Companies, it also reduces the barriers to entry by other potential
competitors and therefore increases the level of competition the Operating
Companies will likely face in all their markets. Delays in receiving regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a materially adverse effect upon the Operating Companies.

         Some State PUCs are currently considering actions to preserve universal
service and promote the public interest. The actions may impose conditions on
the certificate issued to an Operating Company which would require it to offer
service on a geographically widespread basis through (i) the construction of
facilities to serve all residents and business customers in such areas, (ii) the
acquisition from other carriers of network facilities required to provide such
service, or (iii) the resale of other carriers' services. The Company believes
that State PUCs have limited authority to impose such requirements under the
Telecommunications Act. The imposition of such conditions by State PUCs,
however, could increase the cost to the Operating Companies of providing local
exchange services, or could otherwise affect the Operating Companies'
flexibility to offer services.

Interconnection with LEC Facilities

         A company cannot compete effectively with the incumbent LEC in the
market for switched local telephone services unless it is able to connect its
facilities with the incumbent LEC and obtain access to certain essential

<PAGE>

services and resources under reasonable rates, terms and conditions. Incumbent
LECs historically have been reluctant to provide these services voluntarily and
generally have done so only when so ordered by State PUCs. The
Telecommunications Act imposes a number of access and interconnection
requirements on all local exchange providers, including CLECs, with additional
requirements imposed on non-rural incumbent LECs. These requirements will
provide access to certain networks under reasonable rates, terms and conditions.
Specifically, LECs must provide the following:

Telephone Number Portability

          Telephone number portability enables a customer to keep the same
telephone number when the customer switches local exchange carriers. New
entrants are at a competitive disadvantage without telephone number portability
because of inconvenience and costs to customers that must change numbers.

Dialing Parity

          All LECs must provide dialing parity, which means that a customer
calling to or from a CLEC network cannot be required to dial more digits than is
required for a comparable call originating and terminating on the LEC's network.

Reciprocal Compensation

          The duty to provide reciprocal compensation means that LECs must
terminate calls that originate on competing networks in exchange for a given
level of compensation and that they are entitled to termination of calls that
originate on their network for which they must pay a given level of
compensation.


Resale

          LECs generally may not prohibit or place unreasonable restrictions on
the resale of their services. In addition, incumbent LECs must offer bundled
local exchange services to resellers at a wholesale rate that is less than the
retail rate charged to end users.

Access to Rights-of-Way

         All incumbent LECs, CLECs and other utilities must provide access to
their poles, ducts, conduits and rights-of-way on a reasonable,
nondiscriminatory basis.

Unbundling of Network Elements

          Incumbent LECs must offer access to various unbundled elements of
their network. This requirement allows new entrants to purchase at cost-based
rates elements of an incumbent LEC's network that may be necessary to provide
service to customers not located in the areas served by new entrants' networks.

Dependence on RBOCs and incumbent LECs

         While the Telecommunications Act generally requires incumbent LECs,
including RBOCs, to offer interconnection, unbundled network elements and resold
services to CLECs, LEC-CLEC interconnection agreements may have short terms,
requiring the CLEC to continually renegotiate the agreements. LECs may not
provide timely provisioning or adequate service quality thereby impairing a
CLEC's reputation with customers who can easily switch back to the LEC. In
addition, the prices set in the agreements may be subject to significant rate
increases if state regulatory commissions establish prices designed to pass on
to the CLECs part of the cost of providing universal service.
<PAGE>

         On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to implement
Congress' statutory directive concerning number portability (the "Number
Portability Order"). The FCC ordered all LECs to begin phased development of a
long-term service provider portability method in the 100 largest Metropolitan
Statistical Areas ("MSAs") no later than October 1, 1997, and to complete
deployment in those MSAs by December 31, 1998. Number portability must be
provided in those areas by all LECs to all requesting telecommunications
carriers. After December 31, 1998, each LEC must make number portability
available within six months after receiving a specific request by another
telecommunications carrier in areas outside the 100 largest area MSAs in which
the requesting carrier is operating or plans to operate. Until long-term service
number portability is available, all LECs must provide currently available
number portability measures as soon as reasonably possible after a specific
request from another carrier. As new carriers are at a competitive disadvantage
without telephone number portability, the Number Portability Order should
enhance the Company's ability to offer service in competition with the incumbent
LECs, if these regulations are effective in promoting number portability. The
Number Portability Order sets interim criteria for number portability cost
recovery. The FCC deferred selecting a long term number portability cost
recovery scheme to a further rulemaking proceeding which is not expected to be
decided until later this year. Further, the Number Portability Order is subject
to Petitions for Reconsideration filed at the FCC. To the extent that the
outcome of the Petitions results in new rules that decrease the LEC obligation
to provide number portability or increase the CLEC obligation to pay for number
portability, changes to the Number Portability Order could decrease the
Company's ability to offer service in competition with the LECs.

         On August 8, 1996 the FCC released its First Report and Order, Second
Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection obligations of all telecommunications carriers, including
obligations of CLECs and LECs, and incumbent LEC pricing of interconnection and
unbundled elements (the "Local Competition Orders"). The Local Competition
Orders adopted a national framework for interconnection but left to the
individual states the task of implementing the FCC's rules. The Local
Competition Orders also established rules implementing the Telecommunications
Act requirements that LECs negotiate interconnection agreements, and provide
guidelines for review of such agreements by State PUCs.

         On July 18, 1997, the U.S. Court of Appeals for the Eighth Circuit
("Eighth Circuit") vacated certain portions of the Local Competition Orders,
including provisions establishing a methodology for pricing interconnection and
unbundled network elements, a rule permitting new entrants to "pick and choose"
among various provisions of existing interconnection agreements between LECs and
their competitors, and other provisions relating to the purchase of access to
unbundled network elements. The Operating Companies had negotiated and obtained
State PUCs approval of a number of interconnection agreements with incumbent
LECs prior to this Eighth Circuit decision. The Eighth Circuit decision has
created uncertainty about individual state rules governing pricing, terms, and
conditions of interconnection decisions, and could make negotiating and
enforcing such agreements in the future more difficult and protracted. It could
also require renegotiation of relevant portions of existing interconnection
agreements, or subject them to additional court and regulatory proceedings. It
remains to be seen whether the Operating Companies can continue to obtain and
maintain interconnection agreements on terms acceptable to them in every state,
though most states have already adopted pricing rules, if not interim prices,
which are for the most part consistent with the FCC's related pricing
provisions.

         On August 22, 1997, the Eighth Circuit issued an order vacating the
FCC's rules implementing the Telecommunications Act's dialing parity
requirement. On October 14, 1997, the Eighth Circuit issued an Order on
Rehearing of the ruling that incumbent LECs need not provide combinations of
network elements to CLECs, even when the incumbent LEC has already combined the
same elements within its own network. This Order broadened the restrictions
previously placed on combinations of network elements by the Eighth Circuit in
its July 18, 1997 opinion striking down many of the pricing and unbundling rules
issued by the FCC. In the July 18 opinion, the Eighth Circuit had held, among
other things, that incumbent LECs had no obligation under the Telecommunications
Act to combine network elements for CLECs, and that the incumbent LECs' only

<PAGE>

obligation with respect to unbundling was to provide CLECs with access to the
individual network elements, leaving each CLEC to combine those network elements
itself. Accordingly, the Eighth Circuit vacated Section 51.315 (c)-(f) of the
FCC's unbundling rules, which had required incumbent LECs to combine network
elements at the request of CLECs except where such combinations were technically
infeasible or would impair the quality of the network. On the Order on
Rehearing, the Eighth Circuit clarified that incumbent LECs can now separate
already combined network elements before handing them off to the CLEC to
recombine.

         The Supreme Court has agreed to review the various Eighth Circuit
decisions vacating major portions of the FCC's Local Competition Orders. In so
doing, the Court also granted several cross-petitions for review by incumbent
LECs challenging portions of the Eighth Circuit opinion that upheld certain FCC
determinations with respect to unbundled network elements. A decision by the
Supreme Court is not expected until early 1999.

         On February 9, 1998, the FCC released its Report and Order on Pole
Attachment Rates for Telecommunications Providers ("Pole Attachment Order"). In
light of the Telecommunication Act's requirement that the FCC prescribe
regulations to govern the charges for pole attachments used by
telecommunications carriers when parties fail to resolve a dispute over such
charges, the Pole Attachment Order addresses a number of factors that must be
considered in determining whether pole attachment rates are just, reasonable,
and nondiscriminatory.

         Although the Number Portability Order, the Local Competition Orders,
the Pole Attachment Order, and the underlying statutory requirements are
intended to benefit new entrants in the local exchange market, such as the
Operating Companies, it is uncertain how effective these requirements will be,
especially while the FCC's implementation of many such requirements has been
challenged. Ultimately the success of the Telecommunications Act to bring the
benefits of increased competition to consumers will depend in large part upon
State PUCs' implementation of the Telecommunications Act and the Local
Competition Orders, numerous state and federal rulemakings that in theory should
level the playing field between incumbent LECs and new entrants such as the
Company, and vigorous enforcement of Telecommunications Act requirements at the
state and federal levels. For example if CLECs are unable to obtain favorable
agreements with the incumbent LEC regarding call termination and resale of
incumbent LEC facilities and services through negotiation with the incumbent LEC
or arbitration at State PUCs, there is a diminished likelihood that an Operating
Company will be successful in its local exchange market. In addition, the
ability of CLECs to resell incumbent LEC services obtained at wholesale rates
may permit some CLECs to compete with the Operating Companies with little or no
investment in facilities.

         Telecommunications Act requirements place burdens on an Operating
Company when it provides switched local exchange services and may
disproportionately benefit potential competitors. In particular, the obligation
to offer services for resale means that a company can resell the Operating
Company's services with little or no investment in facilities, although unlike
incumbent LECs, the Operating Companies are not required to offer services for
resale at discounted rates. Similarly, the obligation of LECs to provide access
to rights-of-way is of limited benefit to most of the Operating Companies, which
already have such access through their Local Partners, but may benefit other
potential competitors to a greater degree.

         Finally, continuing challenges to state and federal rules and policies
implementing the Telecommunications Act, and individual actions by State PUCs
could cause the Company to incur substantial legal and administrative expenses.

LEC Entry into New Markets

         The Company's principal competitor in each market it enters is the
incumbent LEC. Prior to enactment of the Telecommunications Act, incumbent LECs
generally were prohibited from providing cable television service pursuant to
the "telco/cable cross-ownership prohibition" contained in the Communications
Act of 1934, although the prohibition had been stayed by several courts and was
not being enforced by the FCC. In addition, the RBOCs generally were prohibited
by the MFJ (as defined) from providing interLATA (i.e., long distance) services
within the region in which they provide local exchange service.
<PAGE>

         The Telecommunications Act repeals the telco/cable cross-ownership
prohibition and permits incumbent LECs to provide cable television service.
Prior to the Telecommunications Act repeal, some LECs were investing in fiber
optic networks on a limited basis through the FCC's "video dialtone" regulatory
regime. With the telco/cable cross ownership prohibition removed, LECs are more
likely to invest in fiber optic networks because those facilities will be able
to generate a revenue stream previously unavailable on a widespread basis to the
incumbent LECs. While LEC entry into the video market may be a motivating factor
for construction of new facilities, these facilities also can be used by an
incumbent LEC to provide services that compete with the Company's networks.

         The Telecommunications Act also eliminates the prospective effect of
the MFJ and establishes procedures under which an RBOC can enter the market for
interLATA services within its telephone service area. This is referred to as
"in-region" interLATA service. (RBOCs are currently permitted to provide
interLATA long distance services to customers outside of their local service
areas. This is referred to as "out-of-region" long distance service.) Before an
RBOC can provide in-region interLATA service, it must enter into a
state-approved interconnection agreement with a company that provides local
exchange service to business and residential customers predominantly over its
own facilities. Alternatively, if no such competitor requests interconnection
reasonably expected to lead to facilities-based competition in the residential
and business local exchange markets, the RBOC can request authority to provide
in-region interLATA services if it offers interconnection under state-approved
terms and conditions. The interconnection offered or provided by the RBOC must
comply with a "competitive checklist" that incorporates the interconnection
requirements discussed above.

         The ability of the RBOCs to provide interLATA services will enable them
to provide customers with a full range of local and long distance
telecommunications services. The provision of interLATA services by RBOCs is
expected to reduce the market share of the major long distance carriers, which
are the Company's networks' primary customers. Consequently, the entry of the
RBOCs into the long distance market may have adverse consequences on the ability
of CLECs both to generate access revenues from the IXCs and to compete in
offering a package of local and long distance services. To date FCC authority to
provide in-region interLATA service has been sought by Ameritech in Michigan,
Southwestern Bell in Oklahoma and BellSouth in South Carolina and Louisiana. The
Department of Justice opposed each of these requests, and the FCC denied them.
More RBOC requests to provide in-region interLATA service are expected to be
filed with the FCC in the near future.

         However, further FCC rulings on Section 271 applications were
complicated by a Texas Federal District Court ruling on December 31, 1997 that
Section 271 of the 1996 Act is unconstitutional. On February 11, 1998, this
court granted a request for stay of its decision pending the outcome of an
appeal on the merits to the U.S.
Court of Appeals for the Fifth Circuit.

         Several RBOCs have recently filed petitions at the FCC requesting a
waiver of certain obligations imposed on incumbent LECs in the
Telecommunications Act with respect to RBOC-provisioned high-speed data
services, including, among other things, the obligation to unbundle and offer
for resale such services. In addition, the RBOCs are seeking to provide
high-speed data services on an interLATA basis without complying with the market
opening provisions of the competitive checklist set forth in the
Telecommunications Act, which would be otherwise required of them. If the FCC
grants the RBOC petitions, such decision could have a material adverse effect on
the Company.

Relaxation of Regulation

         A long-term goal of the Telecommunications Act is to increase
competition for telecommunications services, thereby reducing the need for
regulation of these services. To this end, the Telecommunications Act requires
the FCC to streamline its regulation of incumbent LECs and permits the FCC to
forbear from regulating particular classes of telecommunications services or
providers. Since the Company is a non-dominant carrier and, therefore, is not
heavily regulated by the FCC, the potential for regulatory forbearance likely
will be more beneficial to the incumbent LECs than the Company in the long run.
<PAGE>

         In an exercise of its "forbearance authority," the FCC has ruled that
following a transition period nondominant IXCs will no longer be able to file
tariffs with the FCC concerning their interexchange long distance services (the
"IXC Detariffing Order"). The IXC Detariffing Order has been stayed pending
review in the U.S.
Court of Appeals for the District of Columbia.

         Pursuant to the forebearance provisions of the Telecommunications Act,
in March 1996, the Company filed a petition requesting that the FCC also forbear
from imposing tariff filing requirements on exchange access services provided by
carriers other than incumbent LECs. In June 1997, the FCC granted this request,
concluding that allowing providers of exchange access service the option of
tariffing or detariffing their services is in the public interest. In granting
the Company's petition, the FCC requested further comment on whether to mandate
the detariffing of exchange access services. This proceeding is pending, and
there can be no assurance how the FCC will rule on this issue, or what effect
any such ruling may have upon competition within the telecommunications industry
generally, or on the competitive position of the Company specifically.

         The Telecommunications Act eliminates the requirement that incumbent
LECs obtain FCC authorization before constructing new facilities for interstate
services. The Telecommunications Act also limits the FCC's ability to review LEC
tariff filings. These changes will increase the speed with which incumbent LECs
are able to introduce new service offerings and new pricing of existing
services, thereby increasing the incumbent LECs' ability to compete with the
Company.

Universal Service and Access Charge Reform

         One of the primary goals of the Communications Act of 1934 was to
extend telephone service to all the citizens of the United States. This goal has
been achieved largely by keeping the rates for basic local exchange service at a
reasonable level. It was traditionally thought that incumbent LECs were able to
keep basic residential rates reasonable by subsidizing them with revenues from
business and IXC customers, and by subsidizing rural service at the expense of
urban customers. The existence and level of these subsidies has been widely
disputed in recent years because they are so difficult to quantify.

         On May 8, 1997, the FCC issued an order to implement the provisions of
the Telecommunications Act relating to the preservation and advancement of
universal telephone service (the "Universal Service Order"). The Universal
Service Order affirmed the policy principles for universal telephone service set
forth in the Telecommunications Act, including quality service, affordable
rates, access to advanced services, access in rural and high-cost areas,
equitable and non-discriminatory contributions, specific and predictable support
mechanisms, and access to advanced telecommunications services for schools,
health care providers and libraries. The Universal Service Order added
"competitive neutrality" to the FCC's universal service principles by providing
that universal service support mechanisms and rules should not unfairly
advantage or disadvantage one provider over another, nor unfairly favor or
disfavor one technology over another. The Universal Service Order also requires
all telecommunications carriers providing interstate telecommunications
services, including the Company, to contribute to universal service support.
Also, the FCC's existing system for subsidizing universal service remains in
effect and only incumbent LECs are likely to be eligible to receive such
subsidies until such time as the FCC determines the new subsidy mechanism, even
though CLECs such as the Company may be obligated to provide universal service.

         In a related proceeding, on May 16, 1997, the FCC issued an order to
implement certain reforms to its access charge rules (the "Access Charge Reform
Order"). Access charges are charges imposed by LECs on long distance providers
for access to the local exchange network, and are designed to compensate the LEC
for its investment in the local network. The FCC regulates interstate access and
the states regulate intrastate access. The Access Charge Reform Order will
require incumbent LECs to substantially decrease over time the prices they
charge for switched and special access and change how access charges are
calculated. These changes are intended to reduce access charges paid by IXCs to
LECs and shift certain usage-based charges to flat-rated, monthly per-line
charges. To the extent that these rules begin to reduce access charges to
reflect the forward-looking cost of providing access, the Company's competitive

<PAGE>

advantage in providing customers with access services might decrease. In
addition, the FCC has determined that it will give incumbent LECs pricing
flexibility with respect to access charges. To the extent such pricing
flexibility is granted before substantial facilities-based competition develops,
such flexibility could be misused to the detriment of new entrants, including
the Company. Until the FCC adopts and releases rules detailing the extent and
timing of such pricing flexibility, the impact of these rules on the Company
cannot be determined.

         Two aspects of the FCC's Access Charge Reform Order create potential
competitive benefits for competitive access providers, including the Company.
First, the abolition of the unitary rate structure option for local transport
may have an adverse effect on some IXCs, making alternative access services
provided by the Company and others more attractive. Second, the FCC ruled that
incumbent LECs may no longer impose the transport interconnection charge on
competitive providers, such as the Company, that interconnect with the incumbent
LEC at the incumbent's end offices.

         Both the Universal Service and Access Charge Reform Orders are subject
to petitions seeking reconsideration by the FCC and petitions for review before
U.S. Courts of Appeals. Until the time when any such review proceeding or
appeals are decided, there can be no assurance of how the Universal Service
and/or Access Charge Reform Orders will be implemented or enforced, or what
effect the Orders will have on competition within the telecommunications
industry, generally, or on the competitive position of the Company,
specifically.

Federal Regulation Generally

         Through a series of regulatory proceedings, the FCC has established
different levels of regulation for "dominant carriers" and "non-dominant
carriers." Only incumbent LECs are classified as dominant; all other providers
of domestic interstate services, including the Operating Companies, are
classified as non-dominant carriers. As non-dominant carriers, the Operating
Companies are subject to relatively limited regulation by the FCC. The Operating
Companies must offer interstate services at just and reasonable rates in a
manner that is not unreasonably discriminatory, subject to the complaint
provisions of the Communications Act of 1934, as amended.

         Under the Telecommunications Act, the FCC has authority to forbear from
regulation (such as toll regulation) provided that such forbearance is
consistent with the public interest. In an exercise of its "forbearance
authority," the FCC has ruled that following a transition period, nondominant
interexchange carriers will no longer be able to file tariffs with the FCC
concerning their interstate long distance services (the "IXC Detariffing
Order"). The IXC Detariffing Order has been appealed to the U.S. Court of
Appeals for the District of Columbia and the provision requiring IXCs to
withdraw their tariffs was stayed by that court on February 13, 1997. That
appeal is pending. On March 21, 1996, the Company filed a petition requesting
that the FCC forbear from imposing tariff filing requirements on interstate
exchange access services provided by carriers other than LECs. In June 1997, the
FCC granted this request, concluding that allowing providers of exchange access
service the option of tariffing or detariffing their services is in the public
interest. In granting Hyperion's petition, the FCC requested further comment on
whether to mandate the detariffing of exchange access services. This proceeding
is pending, and there can be no assurance how the FCC will rule on this issue,
or what effect any such ruling may have upon competition within the
telecommunications industry generally, or on the competitive position of the
Company specifically.

         The FCC has adopted rules requiring incumbent LECs to provide
"collocation" to CAPs for the purpose of interconnecting their competing
networks. These rules enable the Operating Companies to carry a portion of a
customer's interstate traffic to an IXC even if the customer is not located on
the Company's network. The Company has requested collocation in some, but not
all, of its markets. The incumbent LECs have proposed collocation rates that are
being investigated by the FCC and State PUCs to determine whether they are
excessive. If the FCC or State PUCs order the incumbent LECs to reduce these
rates, collocation will be a more attractive option for CLECs. Under the rules
adopted by the Local Competition Orders, incumbent LECs will also be required to
provide both virtual collocation and physical collocation at their switching
offices.
<PAGE>

         Under the Telecommunications Act, an Operating Company may become
subject to additional federal regulatory obligations when it provides local
exchange service in a market. As discussed earlier, all LECs, including CLECs,
must make their services available for resale by other carriers, provide
nondiscriminatory access to rights-of-way, offer reciprocal compensation for
termination of traffic and provide dialing parity and telephone number
portability. In addition, the Telecommunications Act requires all
telecommunications carriers to contribute to the universal service mechanism
established by the FCC and to ensure that their services are accessible to and
usable by persons with disabilities. Moreover, the FCC is currently engaged in a
number of rulemakings in which it is considering regulatory implications of
various aspects of local exchange competition. Any or all of the proceedings may
negatively affect CLECs, including the Company. Most recently, the FCC has
determined to investigate whether or not to mandate operational support systems
reporting standards for the LECs, whether to regulate billing and collection
functions, and whether to assert jurisdiction over reciprocal compensation for
local calls made to ISPs.

         Because the states are in the process of implementing rules consistent
with the Telecommunications Act and rules adopted by the FCC pursuant to the
Act, it is uncertain how burdensome or beneficial such rules will be for the
Company and the Operating Companies. The obligation to provide services for
resale by others potentially limits any competitive advantage held by the
Company by virtue of its state-of-the-art facilities because other carriers,
including the incumbent LEC and the IXCs, can simply resell the Operating
Companies' services. Similarly, the obligation to provide access to
rights-of-way benefits certain competitors more than the Company, which already
has a significant amount of access through its networks owned with Local
Partners. Most of the other obligations impose costs on the Operating Companies
that also will be borne by competing carriers so the competitive implication of
these requirements should not be significant if they are implemented fairly.

         As part of its decision requiring incumbent LECs to provide virtual
collocation, the FCC also granted incumbent LECs flexibility to reduce their
rates for interstate access services in markets where a CAP is collocated. This
flexibility includes the ability to offer volume and term discounts and to
de-average access rates in different "zones" in a state based on the level of
traffic. In addition, the FCC has granted two incumbent LECs further flexibility
in their most competitive markets and the FCC could grant similar waivers in
markets served by the Operating Companies. With the passage of the
Telecommunications Act and the anticipated increase in the level of competition
faced by incumbent LECs, the FCC could grant incumbent LECs substantial pricing
flexibility with regard to interstate access services. The May 21, 1997 Order
reforming the FCC's price cap formula affords LECs greater flexibility in
establishing rates and provides additional incentives to foster efficiency. It
is also anticipated that the prices incumbent LECs charge for access services
will be reduced as a result of the FCC's reform of the access charge regime and
the adoption of universal service rules. To the extent these regulatory
initiatives enable or require incumbent LECs to offer selectively reduced rates
for access services, the rates the Operating Companies may charge for access
services will be constrained. The Operating Companies' rates also will be
constrained by the fact that competitors other than the incumbent LECs are
subject to the same streamlined regulatory regime as the Operating Companies and
can price their services to meet competition.

         To promote the development of the internet, the FCC has treated traffic
to ISPs terminated in the local exchange as local calls, for which end user
customers normally pay fixed monthly charges or low per-minute rates up to a
cap. Incumbent LECs contend that traffic routed to the internet is interstate in
nature and that the charge for such calls should be set at a different rate. If
the FCC changes its policy and requires a different payment arrangement for
internet calls routed through local ISPs, CLECs may no longer receive the
benefit of substantial call-termination revenue from LECs for CLEC ISP customers
whose traffic is mostly inbound (such that CLEC payments to the LEC for
terminating outbound calls are minimal).

State Regulation Generally

         Most State PUCs require companies that wish to provide intrastate
common carrier services to be certified to provide such services. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services in
a manner consistent with the public interest.
<PAGE>

         Operating Companies have been certificated or are otherwise authorized
to provide telecommunications services in Arkansas, Florida, Kansas, Kentucky,
Louisiana, Mississippi, New Jersey, New York, Pennsylvania, Tennessee, Vermont
and Virginia. The certificates or other authorizations permit the Operating
Companies to provide a full range of local telecommunications services,
including basic local exchange service. As the Company expands its operations
into other states, it may become subject to the jurisdiction of their respective
public utility commissions. In light of the Telecommunications Act, the
Operating Companies will request removal of any restrictions that now exist on
its certificates in the remaining states and anticipate that requests will be
granted. In addition, the Telecommunications Act will enable the Company to
enter new states providing a full range of local services upon certification. In
certain states, each of the Company, its subsidiaries and the Operating
Companies may be subject to additional state regulatory requirements, including
tariff filing requirements, to begin offering the telecommunications services
for which such entities have been certificated. Many states also may have
additional regulatory requirements such as reporting and customer service and
quality requirements, unbundling and universal service contributions. In
addition, in virtually every state, the Company's certificate or other
authorization is subject to the outcome of proceedings by the state commission
that address regulation of LECs and CLECs, competition, geographic build-out,
mandatory detariffing, and service requirements, and universal service issues.

         Certain of the states where the Operating Companies operate have
adopted specific universal service funding obligations. For example, in
Pennsylvania, pending the issuance of final rules, the Operating Company will be
required to make a universal service contribution based on an "assessment rate"
derived from dividing the Operating Company's gross intrastate operating
revenues into the statewide intrastate revenues generated by all other carriers.
The Operating Company's contribution to the Pennsylvania universal service fund
will be phased in over four years with 25% of the assessment rate collected in
the first year and equal increments added to the payment in the second, third
and fourth years. Vermont imposes a universal service fund surcharge to finance
state lifeline, relay and E-911 programs, and potentially affordable service in
high cost areas, and also imposes a gross revenues tax, like many other states.
In Kansas, the state regulatory commission has ordered telecommunications
companies to pay approximately 9% of their intrastate retail revenues to the
Kansas Universal Service Fund, beginning March 1, 1997. Proceedings to adopt
universal service funding obligation rules are pending or contemplated in the
other states in which the Operating Companies conduct business.

         In addition to obtaining certification, an Operating Company must
negotiate terms of interconnection with the incumbent LEC before it can begin
providing switched services. Under the Telecommunications Act, the FCC has
adopted interconnection requirements, certain portions of which have been
overturned by the Eighth Circuit. To date, many of the Operating Companies have
negotiated interconnection agreements with one or more of the incumbent LECs.
Specifically, state commissions have approved interconnection agreements in
Arkansas (Southwestern Bell), Kentucky (BellSouth; GTE), Louisiana (BellSouth),
Mississippi (BellSouth), New Jersey (Bell Atlantic), New York (Bell Atlantic),
Tennessee (BellSouth), Vermont (NYNEX (now Bell Atlantic)), and Virginia (Bell
Atlantic; Sprint-Centel). In addition, two interconnection agreements have been
approved by operation of law in Pennsylvania (Bell Atlantic; GTE).

         The Operating Companies are not presently subject to price regulation
or rate of return regulation in any state, although there can be no assurance
this will not change when the Operating Companies begin providing switched
services in some states. In most states, an Operating Company is required to
file tariffs setting forth the terms, conditions and prices for intrastate
services. In some states, an Operating Company's tariff lists a rate range or
sets prices on an individual case basis.

         Several states have allowed incumbent LECs rate, special contract
(selective discounting) and tariff flexibility, particularly for services deemed
subject to competition. This pricing flexibility increases the ability of the
incumbent LEC to compete with an Operating Company and constrains the rates an
Operating Company may charge for its services. In light of the additional
competition that is expected to result from the Telecommunications Act, states
may grant incumbent LECs additional pricing flexibility. At the same time, some
incumbent LECs may request increases in local exchange rates to offset revenue
losses due to competition.
<PAGE>

         An investor who acquires as little as ten percent of the Company's
outstanding voting securities may have to obtain approval of certain state
public utility commissions before acquiring such an interest, because, among
other reasons, such ownership might be deemed to constitute an indirect
controlling interest in the state Operating Company.

         Several northeastern states have required NYNEX to comply with the
Telecommunications Act's requirements for in-region interLATA service as a
condition to approval of its merger with Bell Atlantic. Such requirements may
serve to expedite NYNEX-Bell Atlantic's entry into this market and may also
reduce the incentive these RBOCs now have to negotiate and renegotiate
interconnection agreements with the Operating Companies since the existence of
such agreements is a prerequisite to such entry.

Local Government Authorizations

         An Operating Company may be required to obtain from municipal
authorities street opening and construction permits, or operating franchises, to
install and expand its fiber optic networks in certain cities. In some cities,
the Local Partners or subcontractors may already possess the requisite
authorizations to construct or expand the Company's networks. An Operating
Company or its Local Partners also may be required to obtain a license to attach
facilities to utility poles in order to build and expand facilities. Because
utilities that are owned by a cooperative or municipality are not subject to
federal pole attachment regulation, there are no assurances that an Operating
Company or its Local Partners will be able to obtain pole attachments from these
utilities at reasonable rates, terms and conditions.

         In some of the areas where the Operating Companies provide service,
their Local Partners pay license or franchise fees based on a percent of fiber
lease payment revenues. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Operating Company may be required
to pay such fees. There are no assurances that certain municipalities that do
not currently impose fees will not seek to impose fees in the future, nor is
there any assurance that, following the expiration of existing franchises, fees
will remain at their current levels. In many markets, other companies providing
local telecommunications services, particularly the incumbent LECs, currently
are excused from paying license or franchise fees or pay fees that are
materially lower than those required to be paid by the Operating Company or
Local Partner. The Telecommunications Act requires municipalities to charge
nondiscriminatory fees to all telecommunications providers, but it is uncertain
how quickly this requirement will be implemented by particular municipalities in
which the Company operates or plans to operate or whether it will be implemented
without a legal challenge initiated by the Company or another CLEC.

         If any of the existing Local Partner Agreements or Fiber Lease  
Agreements held by a Local Partner or an Operating Company for a particular  
market were terminated prior to its expiration date and the Local Partner or
Operating Company were forced to remove its fiber optic cables from the streets 
or abandon its network in place, even with compensation, such termination could 
have a material adverse effect on the Company.

Glossary

         Access Charges--The fees paid by long distance carriers to LECs for
originating and terminating long distance calls over the LECs' local networks.

         Access Line Equivalents--The number of access lines represented by a
trunk line, estimated for purposes of this Form 10-K as six access lines per
trunk line.

         ATM (Asynchronous Transfer Mode)--A recently commercialized switching
and transmission technology that is one of a general class of packet
technologies that relay traffic by way of an address contained within the first
five bits of a standard fifty-three bit-long packet or cell. ATM-based packet
transport was specifically developed to allow switching and transmission of
mixed voice, data and video (sometimes referred to as "multi-media" information)

<PAGE>

at varying rates. The ATM format can be used by many different information
systems, including LANs.

         Broadband--Broadband communications systems can transmit large
quantities of voice, data and video by way of digital or analog signals.
Examples of broadband communication systems include DS-3 fiber optic systems,
which can transmit 672 simultaneous voice conversations, or a broadcast
television station signal, that transmits high resolution audio and video
signals into the home. Broadband connectivity is also an essential element for
interactive multimedia applications.

         CAP (Competitive Access Provider)--A company that provides its
customers with an alternative to the incumbent local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs), metropolitan area
network providers (MANs) and alternative access vendors (AAVs).

         Central Offices or LEC-COs--The switching centers or central switching
facilities of the LECs or CLECs.

         Centrex--Centrex is a service that offers features similar to those of
a Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the customer. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value-added
service that LECs and CLECs can provide to a wide range of customers who do not
have the size or the funds to support their own on-site PBX.

         CLEC (Competitive Local Exchange Carrier)--A CAP that also provides
switched local telecommunications services.

         Collocation--The ability of a CAP, IXC or end user to connect its
network to a LEC-COs. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC-COs. Virtual collocation is an alternative
to physical collocation pursuant to which the LEC permits a CAP to connect its
network to the LEC-COs on comparable terms, even though the CAP's network
connection equipment is not physically located inside the central offices.

         Dedicated Lines--Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the public switched network).

         Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.

         Dialing Parity--Dialing parity exists when a customer calling to or
from the network of a CLEC is not required to dial any more digits than for a
comparable call originating and terminating on the incumbent LEC's network.

         Diverse Access Routing--A telecommunications network configuration in
which signals are transported simultaneously along two different paths so that
if one cable is cut, traffic can continue in the other direction without
interruption to its destination. The Company's networks generally provide
diverse access routing.

         DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0

<PAGE>

and 1) transmitted per second). DS-0 service has a bit rate of up to 64 kilobits
per second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.

         FCC--Federal Communications Commission

         Fiber Mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.

         Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet is said to have more bandwidth capacity
than copper cable the size of a telephone pole.

         Fiber Optic Ring Network--Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture known as SONET.

         Frame Relay--Frame relay is a high speed data packet switching service
used to transmit data between computers. Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits to 1.5 megabits. This
service is appropriate for connecting LANs, but is not appropriate for voice and
video applications due to the variable delays which can occur. Frame relay was
designed to operate at higher speeds on modern fiber optic networks.

         Frame Relay Service--Data communications service that functions as a
fast packet transport service of variable length data packets between customer
designated locations and supports the establishment of software defined logical
connections and circuits that act as private facilities on a public platform.

         Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.

         Interconnection Decisions--Rulings by the FCC announced in September
1992 and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC-COs to any CAP, IXC or end user seeking such
interconnection for the provision of interstate special access and switched
access transport services.

         InterLATA Calls--InterLATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls. The
Telecommunications Act establishes procedures under which the RBOCs can receive
authority to provide interLATA services.

         IntraLATA Calls--IntraLATA calls, also known as short haul calls, are
those calls that originate and terminate within the same LATA. All states allow
intraLATA competition, but dialing parity still does not exist in most states
and very little LEC intraLATA revenue has been won by competitors.

         IXC (Interexchange or Long Distance Carriers)-- Usually referred to as
long distance carriers. There are many facilities-based IXCs, including AT&T,
MCI, WorldCom and Sprint, as well as a few CAPs that provide interexchange
service.

         Kilobit--One thousand bits of information.  The information-carrying 
capacity (i.e., bandwidth of a circuit may be measured in "kilobits per 
second.")
<PAGE>

         LANs (Local Area Networks)--The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.

         LATAs--The geographically defined Local Access and Transport Areas in
which LECs are authorized by the MFJ to provide local exchange services. These
LATAs roughly reflect the population density of their respective states (for
example California has 11 LATAs while Wyoming has one). There are 164 LATAs in
the United States.

         LEC (Local Exchange Carrier)--A company providing local telephone
services.

         LEC-CO--Local Exchange Carrier's Central Office.

         Local Exchange Areas--A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.

         LSO--Local Serving Office of the incumbent LEC.

         Megabit--One million bits of information.  The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per 
second."

         MFJ (Modified Final Judgment)--The MFJ was a consent decree entered
into in 1982 between AT&T and the Department of Justice which forced the breakup
of the old Bell System through the divestiture of the seven separate Regional
Bell Operating Companies (RBOCs) from AT&T. Divestiture resulted in two distinct
segments of the telecommunications service market: local and long distance. This
laid the groundwork for intense competition in the long distance industry, but
essentially created seven separate regionally-based local exchange service
monopolies. The Telecommunications Act removes most MFJ restrictions on a
prospective basis from AT&T and the RBOCs.

         Network Systems Integration--Involves the creation of a turnkey
telecommunications network including (i) route and site selection and obtaining
rights of way and legal authorizations to install the network; (ii) design and
engineering of the system, including technology and vendor assessment and
selection, determining fiber optic circuit capacity, and establishing
reliability/flexibility standards; and (iii) project and construction
management, including contract negotiations, purchasing and logistics,
installation as well as testing and construction management.

         Number Portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.

         Off-Net--A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.

         On-Net--A customer that is physically connected to one of the Company's
networks.

         Overlash--An aerial cable construction technique that involves the
attachment of a new cable to an existing cable by placing the new cable beside
the existing cable, and lashing (or binding) the two cables together by means of
a lashing wire that is wrapped around both cables. This technique allows for the
addition of new cable facilities utilizing existing pole attachments without the
requirement for additional space on the pole.

         PCS (Personal Communications Service)--A type of wireless telephone
system that uses light, inexpensive handheld sets and communicates via low power
antennas.
<PAGE>

         PBX--A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the individual
or through a central number. A PBX also allows for calling within an office by
way of four digit extensions. Centrex is a service which can simulate this
service from an outside switching source, thereby eliminating the need for a
large capital expenditure on a PBX.

         Physical  Collocation--Physical Collocation occurs when a CAP places 
its own network connection equipment inside the LEC-CO.  The Telecommunications
Act gives the FCC authority to mandate physical collocation.  See Virtual 
Collocation.

         POPs (Points of Presence)--Locations where an IXC has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that IXC.

         Private Line--A private, dedicated telecommunications connection
between different end user locations (excluding IXC POPs).

         Private Line Data Interconnect Service--A data transport service
utilizing data products and private line facilities that are packaged together
with data products.

         Public Switched Network--That portion of a LEC's network available to
all users generally on a shared basis (i.e., not dedicated to a particular
user).

         Public Utility Commission--A state regulatory body which regulates
utilities, including telephone companies providing intrastate services. In some
states this regulatory body may have a different name, such as public service
commission.

         RBOCs (Regional Bell Operating Companies)--The seven local telephone
companies established by the MFJ. The RBOCs were prohibited from providing
interLATA services and from manufacturing telecommunications equipment under the
MFJ, but the Telecommunications Act of 1996 establishes procedures for lifting
these restrictions.

         Reciprocal Compensation--The compensation paid by a local carrier for
termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of the
first carrier. Reciprocal compensation is distinct from the one way access
charges by which the IXCs compensate LEC's for originating or terminating
traffic.

         Redundant Electronics--A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one device
malfunctions, the signal may continue without interruption.

         Remote Modules (or Remote Switching Modules)--Telephone switching units
that are attached to a host switch (usually via DS1 lines) in a different
geographic location. Remote modules provide the capability of offering switching
functionality to areas that will not economically support a host switch.

         Rights of Way--Rights of certain entities (usually utility, cable TV or
telephone companies and local government agencies) to "pass over" or place
facilities on, over, or underneath property. This includes the ability to place
cable on poles, in conduit, and to bury cable underground.

         Route Miles--The number of miles of the telecommunications path in
which fiber optic cables are installed as it would appear on a network map.

         Second and Third Tier Markets--Metropolitan markets in the United
States with population bases ranging from 250,000 to two million.
<PAGE>

         Special Access Services--The lease of private, dedicated
telecommunications lines or "circuits" along the network of a LEC or a CAP,
which lines or circuits run to or from the IXC POPs. Examples of special access
services are telecommunications lines running between POPs of a single IXC, from
one IXC POP to the POP of another IXC or from an end user to its IXC POP.
Special access services do not require the use of switches.

         SONET (Synchronous Optical Network)--SONET is the electronics and
network architecture which enable transmission of voice, video and data
(multimedia) at very high speeds. This state-of-the-art self-healing ring
network offers advantages over older linear networks in that a cut line or
equipment failure can be overcome by re-routing calls within the network. If the
line is cut, the traffic is simply reversed and sent to its destination around
the other side of the ring.

         Switch--A sophisticated computer that accepts instructions from a
caller in the form of a telephone number. Like an address on an envelope, the
numbers tell the switch where to route the call. The switch opens or closes
circuits or selects the paths or circuits to be used for transmission of
information. Switching is a process of interconnecting circuits to form a
transmission path between users. Switches allow local telecommunications service
providers to connect calls directly to their destination, while providing
advanced features and recording connection information for future billing.

         Switched Access Transport Services--Transportation of switched traffic
along dedicated lines between the LEC central offices and IXC POPs.

         Switched Services--Services which utilize a switch, as opposed to
dedicated services which are non-switched. These services are the greatest
source of revenue for carriers.

         Switched Traffic--Telecommunications traffic along a switched network.

         Virtual Collocation--Virtual collocation is an alternative to physical
collocation in which the CAPs connect their equipment to the LECs facilities
from a remote location and request that the LEC install the necessary
electronics in its central office which is then leased by the LEC to the CAP for
charges which are generally higher than the charges for physical collocation.
However, the CAP avoids payment of the initial capital costs for the leased
facilities which the CAP must incur under physical collocation.

         Voice Grade Equivalent Circuit--One DS-0. One voice grade equivalent
circuit is equal to 64 kilobits of bandwidth per second.

ITEM 2.  PROPERTIES

         The Company leases its principal executive offices from Adelphia in
Coudersport, Pennsylvania and leases its offices in Pittsburgh, Pennsylvania.
Additionally, the Company owns its NOCC facilities.

         All of the fiber optic cable, fiber optic telecommunications equipment
and other properties and equipment used in the networks, are owned or leased by
the applicable Operating Company. Fiber optic cable plant used in providing
service is primarily on or under public roads, highways or streets, with the
remainder being on or under private property. As of March 31, 1998, the
Company's total telecommunications equipment in service consists of fiber optic
telecommunications equipment, fiber optic cable, switches, furniture and
fixtures, leasehold improvements and construction in progress. Such properties
do not lend themselves to description by character and location of principal
units.

         Substantially all of the fiber optic telecommunications equipment used
in the Company's networks is housed in multiple leased facilities in various
locations throughout the metropolitan areas served by the Company. The Company
believes that its properties and those of its Operating Companies are adequate
and suitable for their intended purpose.
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not a party to any material pending legal proceedings
except for claims, lawsuits or proceedings arising in the normal course of
business. The Company does not believe that these claims or lawsuits will have a
material adverse effect on the Company's financial condition or results of
operations.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1998.

Executive Officers of the Registrant

         The executive officers of the Company are:
<TABLE>
<CAPTION>

Name                                        Age     Position
Executive Officers
<S>                                          <C>    <C>
John J. Rigas...........................     73     Chairman and Director
James P. Rigas..........................     40     Vice Chairman, Chief Executive Officer and Director
Michael J. Rigas........................     44     Vice Chairman and Director
Timothy J. Rigas........................     42     Vice Chairman, Chief Financial Officer, Treasurer and Director
Daniel R. Milliard......................     50     President, Chief Operating Officer, Secretary and Director
Charles R. Drenning.....................     53     Senior Vice President, Engineering Operations and Director
Paul D. Fajerski........................     49     Senior Vice President, Marketing and Sales and Director
Randolph S. Fowler......................     46     Senior Vice President, Business Development and Regulatory
                                                    Affairs and Director
Other Officers
Edward E. Babcock, Jr...................     35     Vice President, Finance
Thomas W. Cady..........................     43     Vice President, Sales and Marketing
Theodore A. Huf.........................     56     Vice President, Engineering
John D. Lasater.........................     45     Vice President, National Accounts
</TABLE>

Executive Officers

         John J. Rigas is the Chairman of the Board of the Company. He also is
the founder, Chairman, Chief Executive Officer and President of Adelphia. Mr.
Rigas has owned and operated cable television systems since 1952. Among his
business and community service activities, Mr. Rigas is Chairman of the Board of
Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania and a member
of the Board of Directors of the Charles Cole Memorial Hospital. He is a
director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.

         John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and 
James P. Rigas, each of whom currently serves as a director and executive 
officer of the Company.

         James P. Rigas is Vice Chairman, Chief Executive Officer and a Director
of the Company, Executive Vice President, Strategic Planning and a Director of
Adelphia and a Vice President and Director of Adelphia's other subsidiaries. He
has been with Adelphia since 1986. Mr. Rigas graduated from Harvard University
(magna cum laude) in 1980 and received a Juris Doctor degree and an M.A. degree
in Economics from Stanford University in 1984. From June 1984 to February 1986,
he was a consultant with Bain & Co., a management consulting firm.
<PAGE>

         Michael J. Rigas is Vice Chairman and a Director of the Company,
Executive Vice President, Operations and a Director of Adelphia and a Vice
President and Director of Adelphia's other subsidiaries. He has been with
Adelphia since 1981. From 1979 to 1981, he worked for Webster, Chamberlain &
Bean, a Washington, D.C. law firm. Mr. Rigas graduated from Harvard University
(magna cum laude) in 1976 and received his Juris Doctor degree from Harvard Law
School in 1979.

         Timothy J. Rigas is Vice Chairman, Chief Financial Officer, Treasurer
and a Director of the Company, Executive Vice President, Chief Accounting
Officer, Treasurer and a Director of Adelphia, and a Vice President and Director
of Adelphia's other subsidiaries. He has been with Adelphia since 1979. Mr.
Rigas graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.

         Daniel R. Milliard is President, Chief Operating Officer, Secretary and
a Director of the Company, and Senior Vice President and Secretary and a
Director of Adelphia and its other subsidiaries. Mr. Milliard currently spends
substantially all of his time on concerns of the Company. He has been with
Adelphia since 1982. He served as outside general counsel to Adelphia's
predecessors from 1979 to 1982. Mr. Milliard graduated from American University
in 1970 with a B.S. degree in Business Administration. He received an M.A.
degree in Business from Central Missouri State University in 1971, where he was
an Instructor in the Department of Finance, School of Business and Economics,
from 1971-73, and received his Juris Doctor degree from the University of Tulsa
School of Law in 1976. He is a member of the Board of Directors of Citizens Bank
Corp., Inc. in Coudersport, Pennsylvania and is President of the Board of
Directors of the Charles Cole Memorial Hospital.

         Charles R. Drenning has served as Senior Vice President, Engineering
Operations effective October 1996, and has been a Director of the Company since
October 1991. Prior to joining Hyperion as Vice President, Engineering
Operations in October 1991, Mr. Drenning was a District Sales manager for Penn
Access Corporation. In addition, he has over 22 years experience with AT&T and
the Bell System, where he served in a number of executive level positions in
sales and marketing, accounting, data processing, research and development, and
strategic planning. Mr. Drenning began his career with AT&T as a member of the
technical staff of Bell Laboratories in Columbus, Ohio. His seven years of
research work at the laboratories included both hardware and software
development for central office switching equipment. Mr. Drenning holds a B.S. in
Electrical Engineering and an M.S. in Computer Information Science from Ohio
State University. He is a member of the Pennsylvania Technical Institute and
IEEE.

         Paul D. Fajerski has served as Senior Vice President, Marketing and
Sales effective October 1996, and has been a Director of the Company since
October 1991. Prior to joining Hyperion as Vice President, Marketing and Sales
in October 1991, Mr. Fajerski was a District Sales Manager for Penn Access
Corporation, a competitive access provider in Pittsburgh, Pennsylvania. In
addition, he has over 13 years experience with AT&T and the Bell System where he
served in a number of executive level positions in sales and marketing. Mr.
Fajerski holds a B.S. in Business Administration from the College of 
Steubenville.

         Randolph S. Fowler has served as Senior Vice President, Business
Development and Regulatory Affairs effective October 1996, and has been a
Director of the Company since October 1991. Prior to joining Hyperion as Vice
President, Business Development and Regulatory Affairs in October 1991, Mr.
Fowler was Vice President of Marketing for Penn Access Corporation, a
competitive access provider in Pittsburgh, Pennsylvania. He previously served
for four years as Director of Technology Transfer and Commercial Use of Space in
two NASA-sponsored technology transfer programs. In addition, he has over 17
years experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, operations, human resources,
business controls, and strategy development. Mr. Fowler holds a B.S. in Business
Administration from the University of Pittsburgh. He has developed and taught
courses in Marketing, Network Management, and Regulation for the University of
Pittsburgh's Graduate Program in Telecommunications.
<PAGE>

Other Officers

     Edward E. Babcock, Jr., CPA, is Vice President, Finance of Hyperion.  Mr. 
Babcock joined Adelphia in May 1995 and previously held the position of Director
of Financial Administration and Chief Accounting Officer of Adelphia.  Prior to 
joining Adelphia, Mr. Babcock was the Vice President of Finance and 
Administration of Pure Industries.  Before joining Pure Industries, Mr. Babcock 
spent eight years with the Pittsburgh office of Deloitte & Touche LLP. Mr. 
Babcock received his B.S. degree in Accounting from The Pennsylvania State 
University in 1984.

     Thomas W. Cady, Vice President of Sales and Marketing, joined  Hyperion in 
March 1998. His  responsibilities include the development of marketing and sales
programs for all of Hyperion's end user products and services.  Prior to joining
Hyperion, Mr.Cady spent seven years with Xerox, five years with IBM/ROLM and two
years with Sprint/Telenet in a variety of sales, marketing and management 
positions.  Most recently, Mr. Cady held the position of Senior Vice President 
of Marketing and Business Development for Cadmus Communications.  Mr. Cady
graduated from Virginia Tech with a B.S. in Business Administration in 1977, and
received an MBA from the University of Richmond in 1984.

     Theodore A. Huf, has served as Vice President of Engineering since March
1998, with responsibilities for both network and switch engineering. Mr. Huf
previously served as Director of Operations and Engineering for Hyperion since
December 1991, and was responsible for all city operations and network
engineering. Prior to joining Hyperion, Mr. Huf worked for Adelphia since 1971
in various engineering and operations management positions.

     John D. Lasater, Vice President of National Accounts, joined Hyperion in
January 1998 and is responsible for national account marketing and sales. Mr.
Lasater joined MCI in 1991 as Manager of Major Accounts for Nashville,
Tennessee. In 1993 he was appointed Executive Manager, National Accounts for
MCI, managing the national account sales and marketing organization for
Tennessee and Kentucky. Prior to joining MCI, Mr. Lasater held sales and
marketing positions with South Central Bell and AT&T Information Systems. Mr.
Lasater is a 1975 summa cum laude graduate of Belmont University.

PART II


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

Market Information

         The Company's Class A Common Stock is listed for trading on the
National Association of Securities Dealers Automated Quotations System National
Market System (NASDAQ-NMS). Hyperion's NASDAQ-NMS symbol is "HYPT". There was no
established public trading market for the Company's Class A Common Stock until
the completion of its initial public offering in May 1998.

          As of June 24, 1998, there were 39 holders of record of the Company's
Class A Common Stock, par value $0.01 per share and 35 holders of record of the
Company's Class B Common Stock, par value $0.01 per share.

Dividends

         The Company has never declared any cash dividends on any of its
respective equity securities. Covenants in the indenture pursuant to which the
Company's Senior Discount Notes and Senior Secured Notes were issued restrict
the ability of the Company to pay cash dividends on its capital stock.



<PAGE>


Sales of Unregistered Securities

         On April 1, 1998, the Company issued 58,500 shares of Class A Common
Stock to Daniel R. Milliard pursuant to his employment agreement with the
Company. This issuance was made under the Company's 1996 Long-Term Incentive
Compensation Plan, in reliance upon exemptions from registration contained in
Section 4(2) of the Securities Act of 1933, as Amended (the "Act").

         On February 12, 1998, the Company issued a warrant for 731,624 shares
of Class A Common Stock to Lenfest Telephony, Inc. ("Lenfest") in exchange for
its 50% partnership interest in Hyperion of Harrisburg. This issuance was made
in reliance upon the exemption from registration contained in Section 4(2) of
the Act. This warrant, which was exercisable for no additional consideration,
was exercised by Lenfest on May 15, 1998.

         On May 8, 1998 and June 5, 1998, the Company issued warrants to MCI to
purchase in the aggregate 499,146 shares and 8,975 shares, respectively, of
Class A Common Stock at $6.15 per share. On May 8, 1998, the Company issued
warrants to Adelphia to purchase 200,000 shares of Class A Common Stock at
$16.00 per share. All of these warrants were issued in reliance upon the
exemption from registration under Section 4(2) of the Act. See Item 1 - Recent
Developments.








<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

     The following selected consolidated financial data as of and for each of
the five years in the period ended March 31, 1998 have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. These data should be read in conjunction with the consolidated
financial statements and related notes thereto for each of the three years in
the period ended March 31, 1998 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Annual
Report on Form 10-K. The balance sheet data as of March 31, 1994, 1995 and 1996
and the statement of operations data and the other Company data with respect to
the fiscal years ended March 31, 1994 and 1995 have been derived from audited
consolidated financial statements of the Company not included herein.

<TABLE>
<CAPTION>

                                                               Year Ended March 31,
                                           ------------------------------------------------------------                  
                                               1994        1995        1996          1997       1998
                                           ----------  -----------  -----------  -----------  ---------
 Statement of Operations Data (a):                          (Dollars in thousands)

<S>                                       <C>          <C>          <C>          <C>          <C>
Revenues                                  $     417    $   1,729    $   3,322    $   5,088    $  13,510


Operating expenses:
Network operations                              330        1,382        2,690        3,432        7,804
Selling, general and administrative           2,045        2,524        3,084        6,780       14,314
Depreciation and amortization                   189          463        1,184        3,945       11,477
                                          ---------    ---------    ---------    ---------    ---------
Operating loss                               (2,147)      (2,640)      (3,636)      (9,069)     (20,085)
Gain on sale of investment                       --           --           --        8,405           --
Interest income                                  17           39          199        5,976       13,304
Interest expense and fees                    (2,164)      (3,321)      (6,088)     (28,377)     (49,334)
Equity in net loss of joint ventures           (528)      (1,799)      (4,292)      (7,223)     (12,967)
Net loss                                     (4,725)      (7,692)     (13,620)     (30,547)     (69,082)
Dividend requirements applicable to
preferred stock                                  --           --           --           --      (12,409)
Net loss applicable to common
stockholders                                 (4,725)      (7,692)     (13,620)     (30,547)     (81,491)
Basic and diluted net loss per weighted
average share of common stock             $   (0.15)   $   (0.24)       (0.42)       (0.89)       (2.33)
Common stock dividends                           --           --           --           --           --

Other Company Data (a):
EBITDA (b)                                $  (1,958)   $  (2,177)   $  (2,452)   $  (5,124)   $  (8,608)
Capital expenditures and Company              8,607       10,376       18,899       79,396      132,889
investments (c)
Cash used in operating activities            (2,121)      (2,130)        (833)      (4,823)      (6,333)
Cash used in investing activities            (8,607)     (10,376)     (18,899)     (72,818)    (266,604)
Cash provided by financing activities        10,609       12,506       19,732      137,455      443,873

                                                                  As of March 31,
                                           ------------------------------------------------------------                  
                                             1994          1995        1996         1997         1998
                                           ----------  -----------  -----------  -----------  ---------
                                                              (Dollars in thousands)
       Balance Sheet Data (a):
Cash and cash equivalents                 $      --    $      --    $      --    $  59,814    $ 230,750
Total assets                                 14,765       23,212       35,269      174,601      634,893
Long term debt and exchangeable redeemable
preferred stock                              19,968       35,541       50,855      215,675      735,980
Common stock and other stockholders' equity
(deficiency)                                 (6,011)     (13,703)     (27,323)     (50,254)    (118,991)

<FN>

(a)  The data presented represents financial information for the Company and its
     consolidated subsidiaries. As of March 31, 1998, 10 of the Company's
     networks were owned by joint ventures in which it owned an interest of 50%
     or less, and for which the Company reports its interest pursuant to the
     equity method of accounting consistent with generally accepted accounting
     principles.
(b)  Earnings before interest expense,  income taxes,  depreciation and
     amortization, other non-cash charges, gain on sale of investment, interest
     income and equity in net loss of joint ventures ( "EBITDA ") and similar
     measurements of cash flow are commonly used in the telecommunications
     industry to analyze and compare telecommunications companies on the basis
     of operating performance, leverage, and liquidity. While EBITDA is not an
     alternative to operating income as an indicator of operating performance or
     an alternative to cash flows from operating activities as a measure of
     liquidity, all as defined by generally accepted accounting principles, and
     while EBITDA may not be comparable to other similarly titled measures of
     other companies, the Company's management believes EBITDA is a meaningful
     measure of performance.

(c)  For the fiscal years ended March 31, 1994, 1995, 1996 1997 and 1998 the
     Company's capital expenditures (including capital expenditures relating to
     its wholly owned Operating Companies) were $3.1, $2.9, $6.1, $24.6, and
     $68.6 million, respectively, and the Company's investments in its less than
     wholly owned Operating Companies were $5.5, $7.5, $12.8, $34.8, and $64.3
     million, respectively, for the same periods. Furthermore, during the fiscal
     year ended March 31, 1997, the Company invested $20.0 million in fiber
     assets and a senior secured note.
</FN>
</TABLE>


<PAGE>


Supplemental Proportionate Share Operating Company Financial and Operating Data

     The following supplemental unaudited financial results and network
operating data of Hyperion and its Operating Companies is derived from Company
information. All financial results are presented on a proportionate share basis
(see note (a) below). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Supplementary Operating Company Financial
Analysis." The Company reports its interest in its 50% or less owned networks
pursuant to the equity method of accounting consistent with generally accepted
accounting principles. As a result, the financial information set forth below is
not indicative of the Company's overall financial position or results of
operations.

OPERATING COMPANY PROPORTIONATE SHARE FINANCIAL DATA
(unaudited)(a):
<TABLE>
<CAPTION>

                                                                              Fiscal Year Ended March 31,
                                                                      ---------------------------------------
                                                                           1996          1997         1998
                                                                      -----------    -----------  -----------
                                                                                (Dollars in thousands)

<S>                                                                   <C>            <C>          <C>
Operating Revenue                                                     $     4,149    $     7,760  $    17,498

Direct operating expenses                                                   3,081          4,494        9,119
                                                                      -----------    -----------  -----------
Gross margin                                                                1,068          3,266        8,379

Selling, general and administrative expenses                                5,369         11,003       23,664
Depreciation and amortization expense                                       4,545         10,829       22,434
                                                                      -----------    -----------  -----------

Operating loss                                                             (8,846)       (18,566)     (37,719)
Interest income                                                               286          6,005       13,313
Interest expense                                                           (7,362)       (30,428)     (53,012)
Other (expense) income                                                       (160)         8,706           10
                                                                      -----------    -----------  -----------
Net loss                                                                  (16,082)       (34,283)     (77,408)
Dividend requirements applicable to preferred stock                            --             --      (12,409)
                                                                      -----------    -----------  -----------

Net loss applicable to common stockholders                            $   (16,082)   $   (34,283) $   (89,817)
                                                                      ===========    ===========  =========== 

Basic and diluted net loss per weighted average share
of common stock                                                       $     (0.49)   $     (1.00) $     (2.57)
                                                                      ===========    ===========  =========== 
Weighted average shares of common stock outstanding (in thousands)         32,500         34,421       34,986
                                                                      ===========    ===========  =========== 
Other Operating Data:
EBITDA (b)                                                            $    (4,301)   $    (7,737) $   (15,285)
Capital Expenditures                                                  $    30,581    $    99,751  $   137,901


                                                                                    As of March 31,
                                                                            1996         1997          1998
                                                                      -------------  -----------  -----------  
                                                                                 (Dollars in thousands)
Asset and Liability Data:
Gross property, plant & equipment (c)                                 $    61,209    $   145,522  $   336,473
Capital lease obligations (d)                                              11,076         32,646       49,691


Other Network Data:
Networks (e)                                                                   17             21           22
Cities served (f)                                                              19             33           46
Route miles (f)                                                             2,210          3,461        5,363
Fiber miles (f)                                                           106,080        166,131      249,672
Buildings connected                                                           822          1,270        1,909
LEC central offices collocated                                                 44            104          113
Access lines sold                                                               0          7,000       41,500
Access lines installed                                                          0          1,450       23,200
Switches installed (g)                                                          5              7           17
Employees (h)                                                                 155            261          571

<FN>


<PAGE>



(a) Unless otherwise stated, the proportionate share financial data presented
    represents the collective sum of Hyperion and Hyperion's economic interest
    in each of the Operating Companies it owns and manages at Hyperion's
    ownership percentage as of March 31, 1998. All historical results of
    operations are presented as if Hyperion's current ownership percentage of
    its Operating Companies were in place during the entire period presented.
    While this presentation format is not in accordance with generally accepted
    accounting principles ("GAAP"), management of Hyperion believes that this
    format depicts the operational progress, and the associated economic effect
    on Hyperion, of the Company's results of operations. Network Data is derived
    from the Operating Companies' records and presents information for the
    Company's networks, but does not include information for the South Florida
    Partnership in which the Company sold its investment during fiscal 1997.
(b) Earnings before interest expense, income taxes, depreciation and
    amortization, other non-cash charges, gain on sale of investment, interest
    income and equity in net loss of joint ventures ("EBITDA") and similar
    measurements of cash flow are commonly used in the telecommunications
    industry to analyze and compare telecommunications companies on the basis of
    operating performance, leverage, and liquidity. While EBITDA is not an
    alternative to operating income as an indicator of operating performance or
    an alternative to cash flows from operating activities as a measure of
    liquidity, all as defined by generally accepted accounting principles, and
    while EBITDA may not be comparable to other similarly titled measures of
    other companies, the Company's management believes EBITDA is a meaningful
    measure of performance.
(c) Represents proportionate share property, plant and equipment (before
    accumulated depreciation) of the networks, the NOCC and the Company based
    upon Hyperion's ownership percentage as of March 31, 1998 in the Operating
    Companies.
(d) Represents fiber lease financings with the respective Local Partners for
    each network and other capital leases.
(e) Includes networks under construction.
(f) Data as of March 31, 1996 and 1997 excludes  networks  under  construction. 
    Data as of March 31, 1998 includes networks under construction.
(g) Represents Lucent 5ESS switches or remote switch modules which deliver full
    switch functionality. (h) Employees includes employees of both the Operating
    Companies and the Company.

</FN>
</TABLE>









<PAGE>


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

Overview

         The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent LECs in
its markets. Since its inception in October 1991 through March 31, 1998, the
Company experienced substantial growth, building from its original two
partnerships covering two networks to 20 Operating Companies and 22 networks. At
March 31, 1998, 18 of these 22 networks were operational. The Operating
Companies' customers are principally small, medium and large businesses and
government and educational end users and resellers, including IXCs and ISPs. The
Company believes that its strategy of utilizing Local Partners to develop its
networks has allowed the Company to build networks with greater coverage, lower
upfront and ongoing costs and superior service and reliability.

         As of March 31, 1998, the Company's Operating Companies were made up of
ten wholly owned subsidiaries (through which the Company has an interest in 11
networks), one majority-owned company and 9 joint ventures (through which the
Company has an interest in 10 networks) where the Company owns 50% or less of
the aggregate equity interests in such Operating Companies. Results of
majority-owned subsidiaries are consolidated into the Company's financial
statements. The Company's pro rata share of the results of the Operating
Companies where the Company owns 50% or less are recorded under the caption
"Equity in net loss of joint ventures" in the Company's Consolidated Financial
Statements utilizing the equity method of accounting. Correspondingly, the
Company's initial investments in these Operating Companies are carried at cost
and are subsequently adjusted for the Company's pro rata share of the Operating
Companies' net losses, additional capital contributions to the Operating
Companies and distributions from the Operating Companies to the Company. The
Company is responsible for the design, construction, management and operation of
the networks owned by all of the Operating Companies and receives management
fees from the Operating Companies for its management and network monitoring
services. Management fees, which are generally based on the Company's costs of
providing such services, are determined by Local Partner Agreements and vary
depending upon the market. Management fees from non-consolidated subsidiaries
are accounted for as revenues of the Company.

         Since its inception, the Company, in conjunction with its Local
Partners, has made substantial investments in designing, constructing and
enhancing the Operating Companies' fiber optic networks. As of March 31, 1998,
the Company's networks had approximately 5,363 route miles, approximately
249,672 fiber miles and were connected to approximately 1,909 buildings in 18
operating networks. As of March 31, 1998, the Operating Companies had installed
17 switches or remote modules, all of which were operational at March 31, 1998.
The Company expects to offer switched services in all of its markets during
1998. The Company's NOCC in Coudersport, Pennsylvania provides for remote
control, monitoring and diagnosis of all Operating Company networks. Funding for
the development of the Operating Companies has come from investments by the
Company and the Local Partners as well as from Fiber Lease Financings which
enable the Company to finance the building of fiber optic plant through
long-term leases. Due to savings achieved in the construction of fiber optic
networks by working with Local Partners, the Company believes that building a
comparable level of network infrastructure without Local Partners would have
required a substantially greater level of capital investment.

         In the markets where the Company's Existing Networks are currently
operating or are under construction, the Company believes it has an addressable
market of approximately $13.3 billion annually, substantially all of which is
currently provided by the incumbent LECs. This addressable market estimate does
not include the market for enhanced data services, wireless resale, internet
access or long distance services, which the Company has the ability to enter at
its option.

         Over the next eighteen months, the Company plans to complete the
development and construction of 14 new networks serving 29 additional cities
(the "New Networks") through a continuation of partnerships with Local Partners
and the construction of its own networks, generally utilizing established rights
of way of local electric utility providers. These New Networks will generally
expand the Company's regionally focused clustering strategy and will, in certain
cases, further facilitate the regional interconnection of its markets.
Management believes that with the addition of these New Networks, its
addressable market opportunity will be approximately $26.0 billion annually.
<PAGE>

Results of Operations

Fiscal 1998 in comparison with Fiscal 1997

         Revenues increased 166% to $13.5 million for the fiscal year ended
March 31, 1998 ("Fiscal 1998") from $5.1 million in the prior fiscal year.
Growth in revenues of $8.4 million resulted primarily from majority and
wholly-owned Operating Companies' revenues which increased approximately $6.8
million as compared to the prior fiscal year due to increases in the customer
base and the impact of consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg Operating Companies. Management fees for
non-consolidated Operating Companies increased $1.6 million over the prior
fiscal year due to a full year of operations in Philadelphia and the
commencement of operations in the markets served in partnership with Entergy.

         Network operations expense increased 127% to $7.8 million in Fiscal
1998 from $3.4 million in the prior fiscal year. The increase was attributable
to the expansion of operations at the NOCC, the increased number and size of the
Operating Companies which resulted in increased employee related costs and
equipment maintenance costs and the impact of consolidation of the Buffalo,
Syracuse, New Jersey, Louisville, Lexington and Harrisburg Operating Companies.

         Selling, general and administrative expense increased 111% to $14.3
million in Fiscal 1998 from $6.8 million in the prior fiscal year. The increase
was due to an increase in the sales force required to support the existing
networks, corporate and NOCC overhead cost increases to accommodate the growth
in the number and size of the Operating Companies and the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg Operating
Companies.

         Depreciation and amortization expense increased 191% to $11.5 million
during Fiscal 1998 from $3.9 million in the prior fiscal year primarily as a
result of increased depreciation resulting from higher capital expenditures at
the NOCC and the consolidated Operating Companies and the amortization of costs
incurred in connection with the issuance of the 12 1/4% Senior Secured Notes.

          Gain on sale of investment for Fiscal 1997 was due to the sale of the
Company's 15.7% partnership interest in TCG of South Florida to Teleport 
Communications Group Inc. on May 16, 1996 for an aggregate sale price of 
approximately $11.6 million.  This sale resulted in a gain of $8.4 million. No 
such sale occurred during Fiscal 1998.

          Interest income for Fiscal 1998 increased to $13.3 million from $6.0
million in the prior fiscal year as a result of interest income earned on
investment of the proceeds of the 12 1/4% Senior Secured Notes and the 12 7/8%
Senior Exchangeable Redeemable Preferred Stock.

         Interest expense and fees increased 74% to $49.3 million during Fiscal
1998 from $28.4 million in the prior fiscal year. The increase was attributable
to incremental non-cash interest expense associated with the 13% Senior Discount
Notes and interest expense associated with the 12 1/4% Senior Secured Notes.

         Equity in net loss of joint ventures increased by 80% to $13.0 million
during Fiscal 1998 from $7.2 million in the prior fiscal year as more
nonconsolidated Operating Companies began operations. The net losses of the
nonconsolidated Operating Companies for Fiscal 1998 were primarily the result of
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the nonconsolidated Operating Companies, and the effect of the typical lag
time between the incurrence of such costs and expenses and the subsequent
generation of revenues by a network.

         The number of nonconsolidated networks paying management fees to the
Company decreased from 12 at March 31, 1997 to 8 at March 31, 1998. These
networks paid management and monitoring fees to the Company, which are included
in revenues, aggregating approximately $4.8 million for Fiscal 1998, an increase
of approximately $1.6 million over the prior fiscal year. The nonconsolidated
networks' net losses, including networks under construction, for Fiscal 1998
aggregated approximately $19.9 million.
<PAGE>

         Dividend requirements applicable to preferred stock during the year
ended March 31, 1998 resulted from the 12 7/8% Senior Exchangeable Redeemable
Preferred Stock issued in October 1997.

Fiscal 1997 in comparison with Fiscal 1996

         Revenues increased 53% to $5.1 million for the fiscal year ended March
31, 1997 ("Fiscal 1997") from $3.3 million in the prior fiscal year. Growth in
revenues of $1.8 million resulted primarily from continued expansion in the
number and size of Operating Companies and the resultant increase in management
fees of $0.8 million over the prior fiscal year. Revenues from majority and
wholly-owned Operating Companies also increased approximately $1.0 million as
compared to the prior fiscal year due to increases in the customer base and the
impact of consolidation of the Nashville Operating Company.

         Network operations expense increased 28% to $3.4 million in Fiscal 1997
from $2.7 million in the prior fiscal year. Substantially all of the increase
was attributable to the expansion of operations at the NOCC, as well as the
increased number and size of the Operating Companies which resulted in increased
employee related costs and equipment maintenance costs.

         Selling, general and administrative expense increased 120% to $6.8
million in Fiscal 1997 from $3.1 million in the prior fiscal year. Approximately
$0.8 million of the $3.7 million increase was due to an increase in the amount
of allocated costs from Adelphia. These costs include charges for office space,
senior management support and shared services such as finance activities,
information systems, computer services, investor relation activities, payroll
and taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs that would be incurred if the Company was to secure
such services on its own. In addition, $0.7 million of the increase was due to a
write off of costs in connection with the postponement of the Company's
contemplated initial public offering in November 1996. The remainder of the
increase was due to increased administrative and sales and marketing efforts as
well as corporate and NOCC overhead cost increases due to growth in the number
of Operating Companies managed and monitored by the Company.

         Depreciation and amortization expense increased 233% to $3.9 million
during Fiscal 1997 from $1.2 million in the prior fiscal year primarily as a
result of the amortization of costs incurred in connection with the issuance of
the 13% Senior Discount Notes and increased depreciation resulting from higher 
capital expenditures at the NOCC and the majority and wholly owned Operating 
Companies.

         Gain on sale of investment is due to the sale of the Company's 15.7%
partnership interest in TCG of South Florida to Teleport Communications Group
Inc. on May 16, 1996 for an aggregate sales price of approximately $11.6
million. This sale resulted in a gain of $8.4 million.

         Interest income for Fiscal 1997 increased to $6.0 million from $0.2
million in the prior fiscal year as a result of interest income earned on
investment of the proceeds of the 13% Senior Discount Notes and Warrants.

         Interest expense and fees increased 366% to $28.4 million during Fiscal
1997 from $6.1 million in the prior fiscal year. The increase was attributable
to $23.5 million of non-cash interest expense associated with the 13% Senior
Discount Notes partially reduced by lower affiliate interest expense due to
decreased borrowings from Adelphia.

         Equity in net loss of joint ventures increased by 68% to $7.2 million
during Fiscal 1997 from $4.3 million in the prior fiscal year as more
nonconsolidated Operating Companies began operations. The net losses of the
nonconsolidated Operating Companies for Fiscal 1997 were primarily the result of
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the nonconsolidated Operating Companies, and the effect of the typical lag
time between the incurrence of such costs and expenses and the subsequent
generation of revenues by a network.
<PAGE>

         The number of nonconsolidated networks paying management fees to the
Company increased from 11 at March 31, 1996 to 12 at March 31, 1997. These
networks paid management and monitoring fees to the Company, which are included
in revenues, aggregating approximately $3.2 million for Fiscal 1997, an increase
of approximately $0.8 million over the prior fiscal year. The nonconsolidated
networks' net losses, including networks under construction, for Fiscal 1997
aggregated approximately $17.1 million.

Supplementary Proportionate Share Operating Company Financial Analysis

         The Company believes that working with Local Partners to develop
markets enables the Company to build larger networks in a rapid and cost
effective manner. In pursuit of this strategy, the Company currently has joint
ventures with Local Partners where the Company owns 50% or less of each
partnership or corporation. As a result of the Company's ownership position in
these joint ventures, a substantial portion of the Operating Companies' results
are reported by the Company on the equity method of accounting for investments
which only reflects the Company's pro rata share of net income or loss of the
Operating Companies. Because all of the assets, liabilities and results of
operations of the Operating Companies are not presented in the Company's
consolidated financial statements, financial analysis of these Operating
Companies based upon the Company's results does not represent a complete measure
of the growth or operations of the Operating Companies.

         In order to provide an additional measure of the growth and performance
of the Company and its Operating Companies, management of the Company analyzes
financial information of the Operating Companies on a proportionate share
presentation basis. Proportionate share presentation reflects the collective sum
of Hyperion and Hyperion's economic interest in each of the Operating Companies
at Hyperion's current ownership percentage as of March 31, 1998. All historical
results of operations are presented as if Hyperion's current ownership
percentage as of March 31, 1998 of its Operating Companies were in place during
the entire period presented. While this presentation format is not in accordance
with generally accepted accounting principles ("GAAP"), management of Hyperion
believes that this format better depicts the operational progress, and the
associated economic effect on Hyperion, of the Company's results of operations
during the period. This financial information, however, is not indicative of the
Company's overall financial position or results of operations.

         For the Fiscal 1998, proportionate revenue increased 125% to $17.5
million as compared to $7.8 million in the prior fiscal year. The increase in
revenues for the fiscal year resulted primarily from increases in the customer
base, five new markets becoming operational during fiscal 1998 and the
commencement of switched services in the current fiscal year. During Fiscal
1998, the Company successfully launched switched services in 13 of its markets,
bringing the total number of markets offering switched services to 17 at the end
of Fiscal 1998. During Fiscal 1998, the Operating Companies sold 34,500
additional access lines, bringing total sales to 41,500 access lines as of March
31, 1998.

         Fiscal 1998 proportionate EBITDA (earnings before interest expense,
income taxes, depreciation and amortization, other non-cash charges, gain on
sale of investment, interest income and equity in net loss of joint ventures)
loss was $15.3 million as compared to $7.7 million for the prior fiscal year.
EBITDA and similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications companies
on the basis of operating performance, leverage, and liquidity. While EBITDA is
not an alternative to operating income as an indicator of operating performance
or an alternative to cash flows from operating activities as a measure of
liquidity, all as defined by generally accepted accounting principles, and while
EBITDA may not be comparable to other similarly titled measures of other
companies, the Company's management believes EBITDA is a meaningful measure of
performance. The increase in proportionate EBITDA loss for Fiscal 1998 was due
primarily to increased selling, general, and administrative expenses as a result
of the ramp up in direct sales and marketing distribution channels as the
Company has aggressively moved to an end-user strategy over the past year,
focusing on medium to large business customers, governmental and educational
end-user and other telecommunications service providers. As of March 31, 1998,
the Company had a direct sales force of 128 professionals focused on selling the
Company's portfolio of service offerings, up from approximately 35 sales
professionals one year ago.
<PAGE>

         Fiscal 1998 proportionate net loss applicable to common stockholders
was $89.8 million as compared to $34.3 million for the prior fiscal year. The
increase in proportionate net loss applicable to common stockholders for Fiscal
1998 was due primarily to the above mentioned increase in selling, general and
administrative expenses, increased depreciation and amortization and increased
interest expense and preferred stock dividends associated with the Company's
financing activities. Also, in Fiscal 1997 the Company recognized a one time
gain of approximately $8.4 million associated with the sale of its
partnership interest in a network in South Florida.

         During Fiscal 1998, the Company and its Operating Companies invested
$176.4 million in capital expenditures, of which Hyperion's proportionate share
was $137.9 million. As of March 31, 1998, total gross property plant and
equipment of the Company and its Operating Companies was $441.7 million, of
which Hyperion's proportionate share is $336.5 million.


 Liquidity and Capital Resources

         The development of the Company's business and the installation and
expansion of the Operating Companies' networks, combined with the construction
of the Company's NOCC, have resulted in substantial capital expenditures and
investments during the past several years. Capital expenditures by the Company
were $6.1 million, $24.6 million and $68.6 million for Fiscal 1996, Fiscal 1997
and Fiscal 1998, respectively. Further, investments made by the Company in the 
its nonconsolidated Operating Companies, the South Florida Partnership and the
partnerships included in the Rollups were $12.8 million, $34.8 million and $64.3
million in Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Also, during
Fiscal 1997, the Company invested $20.0 million in fiber assets and a senior
secured note in furtherance of its strategy to interconnect its networks in the
northeastern United States. The Company expects that it will continue to have
substantial capital and investment requirements. The Company also expects to
have to continue to fund operating losses as the Company develops and grows its
business.

         On September 12, 1997 and February 12, 1998, the Company consummated
the Rollups with various of its Local Partners, thereby increasing the Company's
ownership interest in seven of its networks to 100% for an aggregate cash
purchase price of $52 million and certain other consideration. As a result of
these transactions, the Company's weighted average ownership in its networks,
based upon gross property plant and equipment, increased to 77% as of March 31,
1998. These transactions are consistent with the Company's goal to own at least
a 50% interest in each of its Operating Companies and to dispose of its
interests in those in which acquiring a controlling interest is not economically
attractive. The Company may consider similar transactions from time to time in
its other markets.

         During Fiscal 1998, the Company issued $250 million aggregate
principal amount of 12 1/4% Senior Secured Notes due 2004 and $200 million
aggregate liquidation preference 12 7/8% Senior Exchangeable Redeemable
Preferred Stock due 2007. In addition, during May 1998, the Company successfully
completed the IPO. (See Item 1 -- Recent Developments and Item 8 -- Notes 1 and
5 to the Consolidated Financial Statements.)

         The Company has experienced substantial negative operating cash flow
since its inception. A combination of operating losses, the substantial capital
investments required to build the Company's wholly owned networks and its
state-of-the-art NOCC, and incremental investments in the Operating Companies
has resulted in substantial negative cash flow. For the fiscal years ended March
31, 1996, 1997 and 1998 cash used in operating activities totaled $0.8 million,
$4.8 million, and $6.3 million respectively, cash used in investing activities
totaled $18.9 million, $72.8 million and $266.6 million respectively, and cash
provided by financing activities totaled $19.7 million, $137.5 million and
$443.9 million respectively. Prior to April 15, 1996, funding of the Company's
cash flow deficiency was principally accomplished through additional borrowings
from Adelphia. Prior to April 15, 1996, interest and fees on this unsecured
credit facility were based upon the weighted average cost of unsecured
borrowings of Adelphia. The average interest rate charged for all periods was
11.3% through April 15, 1996 (excluding fees charged which were based on the
amount borrowed) and 16.5% for the period since April 16, 1996.
<PAGE>

         The competitive local telecommunication service business is a
capital-intensive business. The Company's operations have required and will
continue to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the expansion
and improvement of the Company's NOCC and Existing Networks, (iii) the design,
construction and development of additional networks, including the New Networks
and (iv) the acquisition of additional ownership interests in Existing Networks
or New Networks. The Company estimates that it will require approximately $420
million to fund anticipated capital expenditures, working capital requirements
and operating losses of the Company and investments in its existing and its
planned new Operating Companies through the end of 2000. Expansion of the
Company's networks will include the geographic expansion of the Company's
Existing Networks and the construction of New Networks over the next eighteen
months. The Company expects to build these New Networks in additional markets,
which in some cases will include additional partnerships with utility partners.
Also, in the future, the Company may increase its ownership interests in
Existing Networks. The Company currently expects that the net proceeds from the
IPO, together with its existing cash balance and internally generated funds
balance, will be sufficient to fund the Company's capital expenditures, working
capital requirements, operating losses and pro rata investments in the Operating
Companies through mid-2000. In addition to the foregoing, the Company will use
funds for the purchase of LMDS spectrum in the LMDS Auction and to construct and
develop associated facilities. The Company is in the process of defining its
plans for utilization of the LMDS Spectrum, which could involve substantial
additional funds. There can be no assurance, however, as to the availability of
funds from internal cash flow, Local Partner investments or from the private or
public equity or debt markets. Also, the indentures relating to the Senior Notes
and the Senior Secured Notes and the Certificate of Designation for the
Preferred Stock both provide certain restrictions upon the Company's ability to
incur additional indebtedness. The Company's inability to fund pro rata
investments required for the Operating Companies could result in a dilution of
the Company's interest in the individual Operating Companies or could otherwise
have a material adverse effect upon the Company and/or the Operating Companies.
In addition, the expectations of required future capital expenditures are based
on the Company's current estimate. There can be no assurance that actual
expenditures will not significantly exceed current estimates, that the Company
will not accelerate its capital expenditures program, or that the application of
existing cash and net proceeds from the IPO will not otherwise vary
significantly from the Company's plans. 

Recent Accounting Pronouncements

         Statement of Financial Accounting Standards ("SFAS") No. 130, 
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," have been issued and are effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 defines
comprehensive income and outlines certain reporting and disclosure requirements
related to comprehensive income. SFAS No. 131 requires certain disclosures about
business segments of an enterprise, if applicable. The adoption of SFAS No. 130
and SFAS No. 131 is not expected to have any effect on the Company's financial
statements or disclosures.

         SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", has been issued and is effective for fiscal quarters beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," has been issued and is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start up costs and organization costs. It requires such costs to be expensed as
incurred.
Management of the Company has not evaluated the impact of SFAS 133 or SOP 98-5.

Year 2000 Issues

         The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in

<PAGE>

a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

         The Company has recently completed the planning stage of a project that
addresses the Year 2000 data processing issues relating to modifications of its
mainframe computer applications. Internal and external resources are being used
to make the required modifications and perform the necessary tests, all of which
is expected to be completed by June 1999. The financial impact of these
modifications is not expected to be significant to the Company's financial
statements.

         In addition, the Company has begun communicating with others whom it
does significant business with to determine their Year 2000 compliance readiness
and the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.

Impact of Inflation

         The Company does not believe that inflation has had a significant
impact on the Company's consolidated operations or on the operations of the
Operating Companies over the past three fiscal years.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         Not applicable.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements and related notes thereto and
independent auditors report follow.



<PAGE>


<TABLE>
<CAPTION>

                                HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<S>                                                                                                 <C>
Independent Auditors' Report.....................................................................    48
Consolidated Balance Sheets, March 31, 1997 and 1998.............................................    49
Consolidated Statements of Operations, Years Ended March 31, 1996, 1997 and 1998.................    50
Consolidated Statements of Common Stock and Other Stockholders' Equity (Deficiency),
        Years Ended March 31, 1996, 1997 and 1998................................................    51
Consolidated Statements of Cash Flows, Years Ended March 31, 1996, 1997 and 1998.................    52
Notes to Consolidated Financial Statements.......................................................    53
</TABLE>



<PAGE>





                                                       
INDEPENDENT AUDITORS' REPORT

Hyperion Telecommunications, Inc.:

         We have audited the accompanying consolidated balance sheets of
Hyperion Telecommunications, Inc. and subsidiaries as of March 31, 1997 and 
1998, and the related consolidated statements of operations, of common stock and
otherstockholders' equity (deficiency) and of cash flows for each of the three 
years in the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Hyperion Telecommunications,
Inc. and subsidiaries at March 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP


Pittsburgh, Pennsylvania
June 10, 1998


<PAGE>


<TABLE>
<CAPTION>

                                HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS

                                  (Dollars in thousands except per share amounts)

                                                                                      March 31,
                                                                                  1997        1998
                                                                                  ----        ----
ASSETS:
Current assets:
<S>                                                                         <C>          <C>
Cash and cash equivalents                                                   $    59,814  $   230,750
Other current assets                                                                768        4,434
                                                                            -----------  -----------
Total current assets                                                             60,582      235,184

U.S. government securities - pledged                                                 --       70,535
Investments                                                                      44,685       50,116
Property, plant and equipment--net                                               53,921      250,633
Other assets--net                                                                15,413       28,425
                                                                            -----------  -----------
Total                                                                       $   174,601  $   634,893
                                                                            ===========  ===========

LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(DEFICIENCY):
Current liabilities:
Accounts payable                                                            $     2,342  $    11,775
Due to affiliates--net                                                            6,081        1,442
Other current liabilities                                                           757        4,687
                                                                            -----------  -----------
Total current liabilities                                                         9,180       17,904

13% Senior Discount Notes due 2003                                              187,173      215,213
12 1/4% Senior Secured Notes due 2004                                                --      250,000
Note payable--Adelphia                                                           25,855       35,876
Other debt                                                                        2,647       27,687
                                                                            -----------  -----------
Total liabilities                                                               224,855      546,680
                                                                            -----------  -----------
12 7/8% Senior Exchangeable Redeemable Preferred Stock                               --      207,204
                                                                            -----------  -----------
Commitments and contingencies (Note 7)

Common stock and other stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value, 300,000,000 shares authorized,
338,000 and 396,500 shares outstanding, respectively                                  3            4
Class B Common Stock, $0.01 par value, 150,000,000 shares authorized and
32,500,000 shares outstanding                                                       325          325
Additional paid in capital                                                          153          179
Class A Common Stock Warrant                                                         --       13,000
Class B Common Stock Warrants                                                    11,087       11,087
Loans to stockholders                                                            (3,000)      (3,000)
Accumulated deficit                                                             (58,822)    (140,586)
                                                                            -----------  -----------
Total common stock and other stockholders' equity (deficiency)                  (50,254)    (118,991)
                                                                            -----------  -----------
Total                                                                       $   174,601  $   634,893
                                                                            ===========  ===========


                         See notes to consolidated financial statements.
</TABLE>



<PAGE>


<TABLE>
<CAPTION>

                                HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (Amounts in thousands except per share amounts)

                                                                             Year Ended March 31,
                                                                        1996         1997       1998
<S>                                                                  <C>         <C>         <C>
Revenues                                                             $  3,322    $  5,088    $ 13,510
                                                                     --------    --------    --------
Operating expenses:
Network operations                                                      2,690       3,432       7,804
Selling, general and administrative                                     3,084       6,780      14,314
Depreciation and amortization                                           1,184       3,945      11,477
                                                                     --------    --------    --------
Total                                                                   6,958      14,157      33,595
                                                                     --------    --------    --------
Operating loss                                                         (3,636)     (9,069)    (20,085)

Other income (expense):
Gain on sale of investment                                                 --       8,405          --
Interest income                                                           199       5,976      13,304
Interest expense and fees                                              (6,088)    (28,377)    (49,334)
                                                                     --------    --------    --------
Loss before income taxes and equity in net loss of joint ventures      (9,525)    (23,065)    (56,115)
Income tax benefit (expense)                                              197        (259)         --
                                                                     --------    --------    --------
Loss before equity in net loss of joint ventures                       (9,328)    (23,324)    (56,115)
Equity in net loss of joint ventures                                   (4,292)     (7,223)    (12,967)
                                                                     --------    --------    --------
Net loss                                                              (13,620)    (30,547)    (69,082)
Dividend requirements applicable to preferred stock                        --          --     (12,409)
                                                                     --------    --------    --------
Net loss applicable to common stockholders                           $(13,620)   $(30,547)   $(81,491)
                                                                     ========    ========    ======== 
Basic and diluted net loss per weighted average share of common      $  (0.42)   $  (0.89)   $  (2.33)
                                                                     ========    ========    ========
Weighted average shares of common stock outstanding                    32,500      34,421      34,986
                                                                     ========    ========    ========




                        See notes to consolidated financial statements.

</TABLE>
<PAGE>







<TABLE>
<CAPTION>




                                HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)

                                  (Dollars in thousands except per share amounts)


                                                                  Class A     Class B
                                Class A     Class B  Additional   Common      Common
                                Common      Common     Paid-in     Stock       Stock      Loans to   Accumulated
                                Stock       Stock      Capital    Warrants    Warrants   Stockholders  Deficit      Total

<S>                         <C>         <C>         <C>         <C>         <C>         <C>          <C>          <C>
Balance, March 31, 1995     $      --   $     325   $      --   $      --   $      --   $      --    $ (14,028)   $ (13,703)
 
Net loss                           --          --          --          --          --          --      (13,620)     (13,620)
                            ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
Balance, March 31, 1996            --         325          --          --          --          --      (27,648)     (27,323)
Proceeds from issuance of
Class B Common stock
Warrants                           --          --          --          --      11,087          --           --       11,087
Loans to stockholders              --          --          --          --          --      (3,000)          --       (3,000)
Excess of purchase price
of acquired assets
over related party
predecessor owner's
carrying value                     --          --          --          --          --          --         (627)        (627)
Issuance of Class A
Common Stock
bonus                               3          --         153          --          --          --           --          156
Net loss                           --          --          --          --          --          --      (30,547)     (30,547)
                            ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
Balance, March 31, 1997             3         325         153          --      11,087      (3,000)     (58,822)     (50,254)
Issuance of Class A
Common Stock                       
Warrant                            --          --          --      13,000          --          --           --       13,000
Dividend requirements
applicable to preferred
stock                              --          --          --          --          --          --      (12,409)     (12,409)
Other                              --          --          --          --          --          --         (273)        (273)
Issuance of Class A
Common Stock                        1          --          26          --          --          --           --           27
bonus
Net loss                           --          --          --          --          --          --      (69,082)     (69,082)
                            ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
Balance, March 31, 1998     $       4   $     325   $     179   $  13,000   $  11,087   $  (3,000)   $(140,586)   $(118,991)
                            =========   =========   =========   =========   =========   =========    =========    ========= 







                         See notes to consolidated financial statements.
</TABLE>



<PAGE>



<TABLE>
<CAPTION>

                                HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               (Dollars in thousands)
                                                                          Year Ended March 31,
                                                                     1996          1997          1998
Cash flows from operating activities:
<S>                                                               <C>          <C>          <C>
Net loss                                                          $ (13,620)   $ (30,547)   $ (69,082)
                                                                  ---------    ---------    --------- 
Adjustments to reconcile net loss to net cash used in 
operating activities:
Depreciation                                                          1,061        2,604        9,038
Amortization                                                            123        1,341        2,439
Equity in net loss of joint ventures                                  4,292        7,223       12,967
Non-cash interest expense                                             6,088       23,467       34,038
Deferred income taxes                                                  (206)         257           --
Gain on sale of investment                                               --       (8,405)          --
Issuance of Class A Common Stock bonus                                   --          156           27
Changes in operating assets and liabilities, net of effects 
of acquisitions:
Other assets--net                                                      (227)        (624)      (5,302)
Accounts payable and other liabilities - net                          1,656         (295)       9,542
                                                                  ---------    ---------    ---------
Net cash used in operating activities                                  (833)      (4,823)      (6,333)
                                                                  ---------    ---------    ---------

Cash flows from investing activities:
Net cash used for acquisitions                                           --       (5,040)     (65,968)
Expenditures for property, plant and equipment                       (6,084)     (24,627)     (68,629)
Investment in fiber asset and senior secured note                        --      (20,000)          --
Proceeds from sale of investment                                         --       11,618           --
Investments in joint ventures                                       (12,815)     (34,769)     (64,260)
Investments in U.S. government securities - pledged                      --           --      (83,400)
Sale of U.S. government securities - pledged                             --           --       15,653
                                                                  ---------    ---------    ---------
Net cash used in investing activities                               (18,899)     (72,818)    (266,604)
                                                                  ---------    ---------    ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock                                --           --      194,522
Proceeds from sale and leaseback of equipment                            --           --       14,876
Proceeds from debt                                                       --      163,705      250,000
Repayments of debt                                                       --           --       (2,326)
Proceeds from issuance of Class B Common Stock warrants                  --       11,087           --
Costs associated with debt financing                                     --       (6,555)     (12,664)
Loans to stockholders                                                    --       (3,000)          --
Borrowings on (repayment of) note payable--Adelphia                   9,226      (25,000)          --
Advances from (to) affiliates                                        10,506       (2,782)        (535)
                                                                  ---------    ---------    ---------
Net cash provided by financing activities                            19,732      137,455      443,873
                                                                  ---------    ---------    ---------
Net increase in cash and cash equivalents                                --       59,814      170,936
Cash and cash equivalents, beginning of year                             --           --       59,814
                                                                  ---------    ---------    ---------
Cash and cash equivalents, end of year                            $      --    $  59,814    $ 230,750
                                                                  =========    =========    =========


                                      See notes to consolidated financial statements.
</TABLE>
<PAGE>



               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
                   1998 (Dollars in thousands except per share
                                    amounts)

(1)  The Company and Summary of Significant Accounting Policies

Organization and Business

         The consolidated financial statements include the accounts of Hyperion
Telecommunications, Inc. and its wholly and majority owned subsidiaries
("Hyperion" or the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company was formed in
1991 and based on outstanding common stock as of March 31, 1998, was an 88%
owned subsidiary of Adelphia Communications Corporation ("Adelphia"). The
remaining 12% outstanding on March 31, 1998 was owned by certain key Company
officers.

         On May 8, 1998, the Company issued and sold 12,500,000 shares of Class
A Common Stock at a price to the public of $16.00 per share (the "IPO").
Simultaneously with the closing of the IPO, the Company issued and sold an
additional 3,324,001 shares of Class A Common Stock to Adelphia at a purchase
price of $15.00 per share (or an aggregate of approximately $49,900). In
addition, at such closing, the Company issued 3,642,666 shares of Class A Common
Stock to Adelphia in exchange for certain of the Company's indebtedness and
payables owed to Adelphia at a purchase price of $15.00 per share (or an
aggregate of $54,600). In addition, on June 5, 1998, the Company issued and sold
350,000 shares of Class A Common Stock at the $16.00 IPO price pursuant to the
underwriters' over-allotment option in the IPO. Subsequent to the IPO and
related transactions, Adelphia owns approximately 66% of the Hyperion
outstanding common stock and approximately 85% of the total voting power.

         The Company provides telecommunications service through its
subsidiaries and joint ventures, in which it has less than a majority ownership
interest. The Company's efforts have been directed primarily toward becoming an
owner and manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company generally
partners with a local cable television or utility company, whose fiber
facilities are located in the market areas, to build competitive access fiber
optic networks. The Company then operates the networks for a management fee.
Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and management
fees from its unconsolidated joint ventures.

         Joint ventures in which the Company does not have a majority interest
are accounted for under the equity method of accounting.

Cash and cash equivalents

         Cash and cash equivalents consist of highly liquid instruments with an
initial maturity date of three months or less.

U.S. Government Securities - Pledged

         U.S. Government Securities - Pledged consist of highly liquid
investments which will be used to pay the first six semi-annual interest
payments of the 12 1/4% Senior Secured Notes. Such investments are classified as
held-to-maturity and the carrying value approximates market value.

Property, Plant and Equipment

         Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with network
engineering, design and construction.

<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.

         The estimated useful lives of the Company's principal classes of
property, plant and equipment are as follows:

      Telecommunications networks                  10-20.years
      Network monitoring and switching equipment    5-10 years
      Other                                         3-10.years

Revenue Recognition

         The Company recognizes revenues related to management and network
monitoring of the joint ventures in the month that the related services are
provided. The Company recognizes revenue from telecommunications services in the
month the related service is provided. Revenues on billings to customers for
services in advance of providing such services are deferred and recognized when
earned.

Significant Customers

         During Fiscal 1998, sales to Hyperion's two largest customers, AT&T and
MCI, represented 18.3% and 14.5% of total revenues, respectively.

Net Loss Per Weighted Average Share of Common Stock

         The computation of basic net loss per weighted average share of common
stock is based upon the weighted average number of common shares and warrants
outstanding during the year. Diluted net loss per common share is equal to basic
net loss per common share because the MCI Warrant discussed in Note 6 had an
antidilutive effect for the periods presented; however, the MCI Warrant could
have a dilutive effort on earnings per share in future periods. A warrant to
purchase 731,624 shares of Class A Common Stock and Class B Common Stock
Warrants to purchase 1,993,638 shares of Class B Common Stock have been included
as shares outstanding for purposes of the calculation of both basic and diluted
loss per share. All references in the accompanying consolidated financial
statements to the number of shares of common stock have been retroactively
restated to reflect the stock split (See Note 6).

Income Taxes

         Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets to the net amount that management believes will more
likely than not be realized.

Other Assets

         Costs incurred in developing new networks or expanding existing
networks, including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs, included in other assets, represent certain nondevelopment
costs incurred during the pre-operating phase of a newly constructed network and
are amortized over five-year periods commencing with the start of operations.
Deferred debt financing costs, included in other assets, are amortized over the
term of the related debt. The unamortized amounts of deferred debt financing
costs at March 31, 1997 and 1998 were $6,033 and $16,566, respectively. Also
included in other assets at March 31, 1997 and 1998 is a Senior Secured Note
(See Note 3).
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

Asset Impairments

     The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.

Financial Instruments

     Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts receivable.
Concentration of credit risk with respect to accounts receivable is limited due
to the dispersion of the Company's customer base among different customers and
geographic areas.

         The Company's financial instruments include cash and cash equivalents,
Note payable--Adelphia, Senior Secured Notes, Senior Discount Notes and
Redeemable Preferred Stock. The carrying value of the Note payable--Adelphia
approximated its fair value at March 31, 1997. The fair value of the Note
payable - Adelphia exceeded the carrying value by $11,443 at March 31, 1998. The
fair value of the Senior Secured Notes exceeded carrying value by approximately
$31,250 at March 31, 1998. The fair value of the Redeemable Preferred Stock
exceeded the carrying value by approximately $15,688 at March 31, 1998. The fair
value of the Senior Discount Notes exceeded the carrying value by approximately
$3,647 and $35,649 at March 31, 1997 and 1998, respectively. The fair value of
the Note payable--Adelphia was estimated based upon the terms in comparison with
other similar instruments. The fair value of the Senior Discount Notes, the
Senior Secured Notes and the Redeemable Preferred Stock were based upon quoted
market prices.

Non-cash Financing and Investing Activities

          Capital leases entered into during the fiscal year ended March 31,
1998 totaled $24,500 (See Note 5). Dividend requirements applicable to preferred
stock were satisfied by the issuance of an additional 6,860 shares of such
preferred stock in January 1998 (See Note 5). See Note 4 for discussion of
non-cash investing activities.

Use of Estimates in the 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

     Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," have been issued and are effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 defines
comprehensive income and outlines certain reporting and disclosure requirements
related to comprehensive income. SFAS No. 131 requires certain disclosures about
business segments of an enterprise, if applicable. The adoption of SFAS No. 130
and SFAS No. 131 is not expected to have any effect on the Company's financial
statements or disclosures.
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)



         SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," has been issued and is effective for fiscal quarters beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities", has been issued and is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start up costs and organization costs. It requires such costs to be expensed as
incurred.
Management of the Company has not evaluated the impact of SFAS 133 or SOP 98-5.

Reclassification

         For the fiscal years ended March 31, 1996 and 1997, certain amounts
have been reclassified to conform with the March 31, 1998 presentation.

(2)  Property, Plant and Equipment

         Property, plant and equipment consists of the following:
                                                     March 31,
                                                 1997         1998
Telecommunications networks                  $  12,236    $  50,421
Network monitoring and switching equipment      19,301      130,283
Fiber asset under construction (Note 3)         11,500       11,500
Construction in process                         14,978       66,075
Other
                                                 1,131        6,605
                                                59,146      264,884
Less accumulated depreciation                   (5,225)     (14,251)
Total                                        $  53,921    $ 250,633

(3)  Investment in Fiber Asset and Senior Secured Note

         On February 20, 1997, the Company entered into several agreements
regarding the leasing of dark fiber in New York state in furtherance of its
strategy to interconnect its networks in the northeastern United States.
Pursuant to these agreements and in consideration of a payment of $20,000, the
Company received a $20,000 Senior Secured Note bearing interest at 22 1/2%
(subject to reduction upon early repayment of principal) due February 2002
(subject to early redemption options), from Telergy, Inc. ("Telergy") and a
fully prepaid lease from a Telergy affiliate for an initial lease term of 25
years (with two additional ten-year extensions) for 24 strands of dark fiber
installed or to be installed in a New York fiber optic telecommunications
backbone network. The Company has included $11,500 and $8,500 in Property, Plant
and Equipment and Other Assets, respectively, as the allocation of the $20,000
payment between the fiber asset and the Senior Secured Note. The allocation
reflects the Company's estimate of the relative fair values of the assets
acquired.

         During Fiscal 1998, construction of the fiber has continued and no
repayments have been received on the Senior Secured Note. On April 16, 1998, the
Senior Secured Note was amended to mature on January 20, 1999.
<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

(4)  Investments

         The equity method of accounting is used to account for investments in
joint ventures in which the Company owns less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or loss of
its joint ventures. Dividends or other distributions are recorded as a reduction
of the Company's investment. Investments in joint ventures accounted for using
the equity method reflect the Company's equity in their underlying net assets.
<TABLE>
<CAPTION>

         The Company's nonconsolidated investments are as follows:
                                                     Ownership               March 31,
                                                     Percentage           1997      1998

<S>                                                      <C>         <C>        <C>
MediaOne Fiber Technologies (Jacksonville)               20.0%       $   7,330  $  7,979
Multimedia Hyperion Telecommunications (Wichita)         49.9%           3,306     3,900
Louisville Lightwave                                    100.0%(1)        4,683        --
NewChannels Hyperion Telecommunications (Albany)          ---%(2)          924        --
NewChannels Hyperion Telecommunications (Binghamton)      ---%(2)          504        --
NHT Partnership (Buffalo)                               100.0%(1)(3)     4,717        --
NewChannels Hyperion Telecommunications (Syracuse)      100.0%(4)        4,215        --
Hyperion of Harrisburg                                  100.0%(1)        5,246        --
MediaOne of Virginia (Richmond)                          37.0%           7,018     7,212
New Jersey Fiber Technologies (New Brunswick)           100.0%(1)        3,340        --
PECO-Hyperion (Philadelphia)                             50.0%          10,750    21,150
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading)    50.0%              --     1,750
Lexington Lightwave                                     100.0%           2,311        --
Hyperion of York                                         50.0%           1,402     3,500
Entergy Hyperion Telecommunications of Louisiana         50.0%              --     3,000
Entergy Hyperion Telecommunications of Mississippi       50.0%              --     3,275
Entergy Hyperion Telecommunications of Arkansas          50.0%              --     3,550
Baker Creek Communications                               49.9%(5)           --    10,009
Other                                                   Various            949     1,323
                                                                     ---------  --------
                                                                        56,695    66,648
Cumulative equity in net losses                                        (12,010)  (16,532)
                                                                     ---------  --------
Total Investments                                                    $  44,685  $ 50,116
                                                                     =========  ========

<FN>

 (1)   As discussed below, the Company consummated agreements on Feburary 12, 
       1998 which increased its ownership to 100% in these networks.
 (2)   As discussed below, the Company consummated an agreement effective
       September 12, 1997 which eliminated its interest in these networks. The
       previous ownership percentages in the Albany and Binghamton networks were
       50% and 20% respectively.
 (3)   As discussed below, the Company consummated an agreement which increased
       its ownership in the Buffalo network to 60% from 40% and accordingly has
       consolidated this investment effective September 12, 1997.
 (4)   As discussed below, the Company consummated an agreement which increased
       its ownership in the Syracuse network to 100% from 50% and accordingly
       has consolidated this investment effective September 12, 1997.
 (5)   On March 24, 1998, the Federal Communications Commission ("FCC")
       completed the auction of licenses for Local Multipoint Distribution
       Service. The Company, through Baker Creek Communications, was the
       successful bidder at a net cost of $25,600 for 232 31-GHz licenses, which
       cover approximately 38% of the nation's population - in excess of 90
       million people in the eastern half of the United States. The Company
       funded $10,000 of such purchase in January 1998, and is committed to
       provide further funding to consummate such purchase upon the granting of
       such licenses by the FCC. 
</FN>
</TABLE>

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         Summarized unaudited combined financial information for the Company's
investments accounted for using the equity method of accounting, excluding the
entities involved in the acquisition of the Company's partners' interests in the
Louisville, Buffalo, Syracuse, Harrisburg, New Jersey and Lexington networks and
the elimination of the Company's interest in the Albany and Binghamton networks
described below as of and for the periods presented, is as follows:

                                                March 31,
                                           1997          1998

      Current assets                    $  3,442    $   7,476
      PP&E-net                            95,372      153,495
      Non-current assets                   1,851       13,454
      Current liabilities                  3,668       13,422
      Non-current liabilities             30,584       58,004

                                         Year Ended March 31,
                                     1996        1997        1998

      Revenues                   $   3,279   $  7,251   $   11,999
      Net loss                      (4,238)    (9,881)     (19,923)

         On May 16, 1996, the Company sold its 15.7% interest in TCG of South
Florida for approximately $11,618 resulting in a pre-tax gain of $8,405. Amounts
related to TCG of South Florida included in the Company's equity in net loss of
joint ventures for the years ended March 31, 1996 and 1997 were $778 and $221,
respectively.

         On August 1, 1996, the Company purchased additional general and limited
partnership interests in Hyperion of Tennessee for approximately $5,000, which
increased the Company's ownership of Hyperion of Tennessee to 95%.

         On September 12, 1997, the Company consummated an agreement with Time
Warner Entertainment - Advance/Newhouse ("TWEAN") to exchange interests in four
New York CLEC networks. As a result of the transaction, the Company paid TWEAN
$7,638 and increased its ownership in the networks serving Buffalo and Syracuse,
New York to 60% and 100%, respectively, and eliminated its interest in the
Albany and Binghamton networks, which became wholly owned by TWEAN.

         On February 12, 1998, the Company purchased additional partnership
interests in Louisville Lightwave (Louisville and Lexington), NHT Partnership
(Buffalo), New Jersey Fiber Technologies and Hyperion of Harrisburg. As a
result, the Company's ownership in these networks increased to 100%. The
aggregate purchase price was comprised of approximately $45,000 in cash and a
warrant for 731,624 shares of the Company's Class A Common Stock. (See Note 6.)
In addition, Hyperion paid certain amounts related to fiber lease financings
upon consummation of the purchase of the additional partnership interests.

         All of the acquisitions described above were accounted for using the
purchase method. Accordingly, the financial results of each acquisition have
been included in the Company's consolidated financial statements from the date
acquired.


<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         The following unaudited financial information of the Company assumes
that the August 1, 1996, September 12, 1997 and February 12, 1998 transactions
had occurred on April 1, 1995.

                                                    Year Ended March 31,
                                                1996       1997       1998

Revenues                                     $  5,701   $  8,495   $ 17,919
Net loss                                      (20,579)   (38,744)   (80,004)
Net loss applicable to common stockholders    (20,579)   (38,744)   (92,413)
Net loss per weighted average share
  of common stock                               (0.62)     (1.10)     (2.59)

         On December 1, 1997, the Company announced that it had entered into a
partnership agreement with Allegheny Energy to provide CLEC services. Allegheny
Energy has agreed to construct fiber optic networks for the Company through one
of its affiliates which will partner with the Company in most, if not all, of
the contemplated networks. Allegheny Energy is an investor owned utility
providing electricity in portions of Maryland, Ohio, Pennsylvania, Virginia and
West Virginia.

(5)   Financing Arrangements

Note payable - Adelphia

         The Company has an unsecured credit arrangement with Adelphia which had
no repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes (the "Senior Discount
Notes") and Class B Common Stock Warrants discussed below were used to repay a
portion of this obligation. Interest expense and fees on this credit arrangement
were based upon the weighted average cost of unsecured borrowings of Adelphia
during the corresponding periods. Interest at 11.28% per annum plus fees was
charged on the Note payable-Adelphia for the years ended March 31, 1995 and
1996. The total amount of interest converted to note principal through April 15,
1996 was $9,007.

         Effective April 15, 1996, the remaining balance due on the Note
payable-Adelphia is evidenced by an unsecured subordinated note due April 16,
2003. This obligation bears interest at 16.5% per annum with interest payable
quarterly in cash; by issuing additional subordinated notes; or a combination of
cash and additional subordinated notes, all of which is at the Company's option.
Interest accrued through March 31, 1998 on the amount outstanding to Adelphia
totaled $10,020 and is included in due to affiliates--net. On May 8, 1998, the
Note payable - Adelphia and all accrued interest was converted into shares of
Class A Common Stock simultaneously with the closing of the IPO (See Note 1).

13% Senior Discount Notes and Class B Common Stock Warrants

         On April 15, 1996, the Company issued $329,000 of 13% Senior Discount
Notes due April 15, 2003 and 329,000 warrants to purchase an aggregate of
1,993,638 shares of its Class B Common Stock. Proceeds to the Company, net of
discounts, commissions, and other transaction costs were approximately $168,600.
Such net proceeds were used to pay $25,000 of the Note payable--Adelphia
discussed above, to make loans of $3,000 to certain key Company officers (see
Note 6) and to fund the Company's capital expenditures, working capital
requirements, operating losses and its pro-rata investments in joint ventures.
Use of proceeds from the Senior Discount Notes also included the repayment of
amounts related to capital expenditures, working capital requirements, operating
losses and pro-rata investments in joint ventures totaling $12,800 incurred
during the period from January 1, 1996 to April 15, 1996. These amounts had
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

been funded during the same time period through advances from Adelphia.

         Prior to April 15, 2001, interest on the Senior Discount Notes is not
payable in cash, but is added to principal. Thereafter, interest is payable
semi-annually commencing October 15, 2001. The Senior Discount Notes are
unsecured and are senior to the Note payable--Adelphia and all future
subordinated indebtedness. On or before April 15, 1999 and subject to certain
restrictions, the Company may redeem, at its option, up to 25% of the aggregate
principal amount of the Senior Discount Notes at a price of 113% of the Accreted
Value (as defined in the Indenture). On or after April 15, 2001, the Company may
redeem, at its option, all or a portion of the Senior Discount Notes at 106.5%
which declines to par in 2002, plus accrued interest.

         The holders of the Senior Discount Notes may put the Senior Discount
Notes to the Company at any time at a price of 101% of accreted principal upon
the occurrence of a Change of Control (as defined in the Indenture). In
addition, the Company will be required to offer to purchase Senior Discount
Notes at a price of 100% with the proceeds of certain asset sales (as defined in
the Indenture).

         The Indenture stipulates, among other things, limitations on additional
borrowings, issuance of equity instruments, payment of dividends and other
distributions, repurchase of equity interests or subordinated debt,
sale--leaseback transactions, liens, transactions with affiliates, sales of
Company assets, mergers and consolidations.

         The Class B Common Stock Warrants are exercisable at $0.00308 per
share, upon the earlier of May 1, 1997 or a Change of Control. Unless exercised,
the Class B Common Stock Warrants expire on April 1, 2001. The number of shares
and the exercise price for which a warrant is exercisable are subject to
adjustment under certain circumstances. As of March 31, 1998, no warrants have
been exercised.

         If the Senior Discount Notes had been issued on April 1, 1995, interest
expense would have been approximately $27,796 for the year ended March 31, 1996.

12 1/4% Senior Secured Notes

         On August 27, 1997, the Company issued $250,000 aggregate principal
amount of 12 1/4% Senior Secured Notes due September 1, 2004 (the "Senior
Secured Notes"). The Senior Secured Notes are collateralized through the pledge
of the common stock of certain of its wholly-owned subsidiaries. Of the proceeds
to the Company of approximately $244,000, net of commission and other
transaction costs, $83,400 was invested in U.S. government securities and placed
in an escrow account for payment in full when due of the first six scheduled
semi-annual interest payments on the Senior Secured Notes as required by the
Indenture. The remainder of such proceeds will be used to fund the acquisition
of increased ownership interests in certain of its networks, for capital
expenditures, including the construction and expansion of new and existing
networks, and for general corporate and working capital purposes.

     Interest is payable semi-annually commencing March 1, 1998. The Senior
Secured notes rank pari passu in right of payment with all existing and future
senior Indebtedness (as defined in the Indenture) of the Company and will rank
senior in right of payment to future subordinated Indebtedness of the Company.
On or before September 1, 2000 and subject to certain restrictions, the Company
may redeem, at its option, up to 25% of the aggregate principal amount of the
Senior Secured Notes at a price of 112.25% of principal with the net proceeds of
one or more Qualified Equity Offerings (as defined in the Indenture). On or
after September 1, 2001, the Company may redeem, at its option, all or a portion
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

of the Senior Secured Notes at 106.125% of principal which declines to par in 
2003, plus accrued interest.

         The holders of the Senior Secured Notes may put them to the Company at
any time at a price of 101% of principal upon the occurrence of a Change of
Control (as defined in the Indenture). The Indenture stipulates, among other
things, limitations on additional borrowing, payment of dividends and other
distributions, repurchase of equity interests, transactions with affiliates and
the sale of assets.

         If the Senior Secured Notes had been issued on April 1, 1996, interest
expense would have been approximately $59,002 and $61,754 for the years ended
March 31, 1997 and 1998, respectively.

12 7/8% Senior Exchangeable Redeemable Preferred Stock

         On October 9, 1997, the Company issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due October
15, 2007 (the "Preferred Stock"). Proceeds to the Company, net of commissions
and other transaction costs, were approximately $194,500. Such proceeds will be
used to fund the acquisition of increased ownership interests in certain of its
networks, for capital expenditures, including the construction and expansion of
new and existing networks, and for general corporate and working capital
purposes.

         Dividends are payable quarterly commencing January 15, 1998 at 12 7/8%
of the liquidation preference of outstanding Preferred Stock. Through October
15, 2002, dividends are payable in cash or additional shares of Preferred Stock
at the Company's option. Subsequent to October 15, 2002, dividends are payable
in cash. The Preferred Stock ranks junior in right of payment to all
indebtedness and other obligations of the Company, its subsidiaries and joint
ventures. On or before October 15, 2000, and subject to certain restrictions,
the Company may redeem, at its option, up to 35% of the initial aggregate
liquidation preference of the Preferred Stock originally issued with the net
cash proceeds of one or more Qualified Equity Offerings (as defined in the
Certificate of Designation) at a redemption price equal to 112.875% of the
liquidation preference per share of the Preferred Stock, plus, without
duplication, accumulated and unpaid dividends to the date of redemption;
provided that, after any such redemption, there are remaining outstanding shares
of Preferred Stock having an aggregate liquidation preference of at least 65% of
the initial aggregate liquidation preference of the Preferred Stock originally
issued. On or after October 15, 2002, the Company may redeem, at its option, all
or a portion of the Preferred Stock at 106.438% of the liquidation preference
thereof declining to 100% of the liquidation preference in 2005, plus accrued
interest. The Company is required to redeem all of the shares of Preferred Stock
outstanding on October 15, 2007 at a redemption price equal to 100% of the
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the date of redemption.

         The holders of the Preferred Stock may put the Preferred Stock to the
Company at any time at a price of 101% of the liquidation preference thereof
upon the occurrence of a Change of Control (as defined in the Certification of
Designation). The Certificate of Designation stipulates, among other things,
limitations on additional borrowings, payment of dividends and other
distributions, transactions with affiliates and the sale of assets.

         The Company may, at its option, on any dividend payment date, exchange
in whole, but not in part, the then outstanding shares of Preferred Stock for 12
7/8% Senior Subordinated Debentures due October 15, 2007 (the "Exchange
Debentures"). Interest, redemption and registration rights provisions of the
Exchange Debentures are consistent with the provisions of the Preferred Stock.
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         If the Preferred Stock had been issued on April 1, 1996, dividend
requirements applicable to preferred stock would have been approximately $27,000
and $30,671 for the years ended March 31, 1997 and 1998, respectively.

Long Term Lease Facility

         On December 31, 1997, the Company consummated an agreement for a
$24,500 long term lease facility with AT&T Capital Corporation. The lease
facility provides financing for certain of the Operating Companies' switching
equipment. Included in the lease facility is the sale and leaseback of certain
switch equipment for which the Company received $14,876.

Other Debt

         Other debt consists primarily of capital leases entered into in
connection with the acquisition of fiber leases for use in the
telecommunications networks and the long term lease facility described above.
The interest rate on such debt ranges from 7.5% to 15.0%.

     Maturities of debt for the five years after March 31, 1998 are as follows:

        1999.....................................         $ 2,599
        2000.....................................           2,980
        2001.....................................           2,922
        2002.....................................           2,142
        2003.....................................           3,459
(6)  Common Stock and Other Stockholders' Equity

         Hyperion's authorized capital stock consists of 300,000,000 shares of
Class A Common Stock, par value $0.01 per share, 150,000,000 shares of Class B
Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. On May 8, 1998, Hyperion completed the IPO
(See Note 1).

Common Stock

         Shares of Class A Common Stock and Class B Common Stock are
substantially identical, except that holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to 10 votes per share on all matters submitted to a vote of stockholders. The
Class B Common Stock is convertible into one share of Class A Common Stock. In
the event a cash dividend is paid, the holders of the Class A and the Class B
Common Stock will be paid an equal amount.

         Prior to the IPO, certain key company officers (the "Officers") were
parties to a stockholder agreement, as amended (the "Stockholder Agreement")
with Adelphia. The Stockholder Agreement provided, among other things, (i) that
upon the earlier of (a) the termination of employment of any of the officers or
(b) after October 7, 1998, such officers may put their shares to Adelphia for
fair market value, unless such put rights are terminated as a result of the
registration of the Company's Common Stock under the Securities Act of 1933 (the
"Securities Act") and (ii) for certain buy/sell and termination rights and
duties among Adelphia and the Officers. The Stockholder Agreement terminates
automatically upon the date when the Company's Common Stock is registered under
the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Adelphia also agreed to vote its shares in the Company to elect
each officer to the Board of Directors of the Company as long as such person is
both an employee and a stockholder of the Company.
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         The Company also entered into Term Loan and Stock Pledge Agreements
("Loan Agreements") with each of the Officers. Pursuant to the Loan Agreements,
each Officer borrowed $1.0 million from the Company. Each of these loans accrued
interest at the average rate at which the Company could invest cash on a
short-term basis, was secured by a pledge of the borrower's Common Stock in the
Company, and would mature upon the earlier of (i) October 8, 1998 or (ii) the
date when the Company's Common Stock is registered under the Securities Act and
the Officers have the right to sell at least $1.0 million worth of their shares.
Each Loan Agreement also provided that any interest accruing on a loan from the
date six months after the date of such loan would be offset by a bonus payment
when principal and interest thereon are due and which would include additional
amounts to pay income taxes applicable to such bonus payment.

         Pursuant to agreements among the Company, Adelphia and the Officers,
simultaneous with the consummation of the IPO, (i) the Stockholder Agreement and
Loan Agreements terminated, (ii) the Officers each repaid the $1 million
borrowed from the Company pursuant to the Loan Agreements plus accrued interest
thereon by each selling 66,667 shares of Class B Common Stock to Adelphia and
using the proceeds therefrom to repay such loans and (iii) the Company has paid
or will pay to the Management Stockholders bonus payments in the amount of
interest accruing on the Loans from the date six months after the date of the
Loan Agreements and any additional amounts necessary to pay income taxes
applicable to such bonus payments.

         On April 8, 1998, the Board of Directors of the Company approved a
3.25-for-one stock split of its Class A and Class B Common Stock payable to
stockholders of record on April 28, 1998. The stock split was effected in the
form of a dividend of 2.25 shares for every outstanding share of common stock.

         All references in the accompanying consolidated financial statements to
the number of shares of common stock and the par value have been retroactively
restated to reflect the stock split on April 28, 1998.

Warrants

Class A Common Stock Warrant

         On February 12, 1998, the Company consummated an agreement with Lenfest
Telephony, Inc. ("Lenfest") whereby Lenfest received a warrant to obtain 731,624
shares of Class A Common Stock of the Company (the "Lenfest Warrant") in
exchange for its partnership interest in the Harrisburg, Pennsylvania network.
The Lenfest Warrant was exercised during May 1998 for no additional
consideration.

Class B Common Stock Warrants

         The Class B Common Stock warrants were issued on April 15, 1996 in
connection with the issuance of the Senior Discount Notes (See Note 5).

MCI Warrant

     On June 13, 1997, the Company entered into agreements with MCImetro Access
Transmission Services, Inc. (together with its affiliate, MCI Communications,
"MCI"). Pursuant to this agreement the Company is designated MCI's preferred
provider for new end user dedicated access circuits and of conversions of end
user dedicated access circuits as a result of conversions from the incumbent LEC
in the Company's markets. Hyperion also has certain rights of first refusal to
provide MCI with certain telecommunications services. Under this arrangement,
the Company issued a warrant to purchase 913,380 shares of Class A Common Stock
for $6.15 per share to MCI (the "MCI Warrant") representing 2 1/2% of the Common
Stock of the Company on a fully diluted basis. MCI could receive additional
warrants to purchase up to an additional 6% of the shares of the Company's Class
A Common Stock, on a fully diluted basis, at fair value, if MCI meets certain
purchase volume thresholds over the term of the agreement.
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         In connection with the IPO and the related over-allotment option, the
Company and MCI entered into an agreement that provides as follows with respect
to the MCI Warrant and MCI's right to receive additional MCI warrants as a
result of the IPO (the "Additional MCI Warrants"): (i) the Additional MCI
Warrants issued with respect to the shares sold to the public in the IPO, the
over-allotment option and with respect to the Adelphia Shares will have an
exercise price equal to the lower of $6.15 per share or the price per share to
the public in the IPO (the "IPO Price"), and (ii) Adelphia has agreed to
purchase from MCI the MCI Warrant and the Additional MCI Warrants for a purchase
price equal to the number of Class A Common Stock shares issuable under the
warrants being purchased times the IPO Price minus the underwriting discount,
less the aggregate exercise price of such warrants. Furthermore, in
consideration of the obligations undertaken by Adelphia to facilitate the
agreements between MCI and Hyperion, Hyperion has agreed to pay to Adelphia a
fee of $500,000 and the Adelphia Warrant, which expires three years after its
issuance, to purchase 200,000 shares of Class A Common Stock at an exercise
price equal to the IPO Price.

Long-Term Incentive Compensation Plan

         On October 3, 1996, the Board of Directors and stockholders of the
Company approved the Company's 1996 Long-Term Incentive Compensation Plan (the
"1996 Plan"). The 1996 Plan provides for the grant of (i) options which qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (ii) options which do not so qualify, (iii)
share awards (with or without restrictions on vesting), (iv) stock appreciation
rights and (v) stock equivalent or phantom units. The number of shares of Class
A Common Stock available for issuance initially was 5,687,500. Such number is to
increase each year by 1% of outstanding shares of all classes of the Company's
Common Stock, up to a maximum of 8,125,000 shares. Options, awards and units may
be granted under the 1996 Plan to directors, officers, employees and
consultants. The 1996 Plan provides that incentive stock options must be granted
with an exercise price of not less than the fair market value of the underlying
Common Stock on the date of grant. Options outstanding under the Plan may be
exercised by paying the exercise price per share through various alternative
settlement methods. On March 4, 1997, April 1, 1997 and April 1, 1998, the
Company issued 338,000 shares, 58,500 shares and 58,500, respectively, of Class
A Common Stock to Daniel R. Milliard pursuant to his employment agreement with
the Company. As of March 31, 1998, no other stock options, stock awards, stock
appreciation rights or phantom stock units have been granted under the Plan.

         In April 1998 and in recognition for valuable past service to the
Company and as an incentive for future services, the Company authorized the
issuance under the 1996 Plan to each of John J. Rigas, Michael J. Rigas, Timothy
J. Rigas and James P. Rigas of (i) stock options (the "Rigas Options") covering
100,000 shares of Class A Common Stock, which options will vest in equal
one-third amounts on the third, fourth and fifth year anniversaries of grant
(vesting conditioned on continued service as an employee or director) and which
shall be exercisable at the IPO price and (ii) phantom stock awards (the "Rigas
Grants") covering 100,000 shares of Class A Common Stock, which phantom awards
will vest in equal one-third amounts on the third, fourth and fifth year
anniversaries of grant (vesting conditioned on continued service as an employee
or director). Also in April 1998, pursuant to the then existing Stockholder
Agreement, the Company authorized the issuance under the 1996 Plan to the
Officers of stock options (the "Management Stockholder Options") covering 13,047
shares of Class A Common Stock with exercise price and vesting terms identical
to the Rigas Options. In addition to the Rigas Options, the Rigas Grants, the
Management Stockholder Options and the stock options or share awards to be
issued to Daniel R. Milliard under his employment agreement, the Company
currently expects to issue under the 1996 Plan stock options, restrictive stock
grants, phantom stock awards or other awards to other 1996 Plan participants
covering up to a total of 325,000 shares of Class A Common Stock during fiscal
1999.

<PAGE>
               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)


(7)  Commitments and Contingencies

         The Company rents office space, node space and fiber under leases with
terms which are generally less than one year or under agreements that are
generally cancelable on short notice. Total rental expense under all operating
leases aggregated $1,210, $1,103, and $1,236 for the years ended March 31, 1996,
1997 and 1998, respectively.

     The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1998 are approximately:

                   Period ending March 31,

   1999.......................................... $  112
   2000..........................................     60
   2001..........................................     23
   2002..........................................     11
   2003..........................................      2
Thereafter.......................................     --

     Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at March 31, 1998 was approximately
$4,252. The sales price under the second agreement is equal to the fair market
value of such investor's interest.

         The Company has entered into employment agreements with certain key
Company officers, the terms of which expire on October 20, 1998, as amended. The
employment agreements provide for base salary, benefits and bonuses payable if
specified management goals are attained. In addition, the employment agreements
contain noncompetition and nondisclosure provisions.

     The Company has entered into an employment agreement with the President of
the Company, the terms of which expire on March 31, 2001, unless extended by the
Company for additional one year periods. The employment agreement provides for
base salary, benefits, stock options or stock grants and cash and stock bonuses
payable if specified management goals are attained as established annually by
the Board of Directors. In addition, the employment agreement contains
noncompetition and nondisclosure provisions.

     The telecommunications industry and Hyperion are subject to extensive
regulation at the federal, state and local levels. On February 8, 1996,
President Clinton signed the Telecommunications Act of 1996 (the
"Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. Management of
Hyperion is unable to predict the effect that the Telecommunications Act,
related rulemaking proceedings or other future rulemaking proceedings will have
on its business and results of operations in future periods.





<PAGE>
               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          For the years ended March 31, 1996, 1997 and 1998 (Dollars in
                       thousands except per share amounts)

(8)  Related Party Transactions

 The following table summarizes the Company's transactions with related parties:

                                                          March 31,
                                                1996        1997          1998
      Revenues:
           Management fees                   $  1,950    $  2,600     $  3,809
           Network monitoring fees                446         604          977
           Special access fees                    651         540          500
                                             --------    --------    ---------
           Total                             $  3,047    $  3,744    $   5,286
                                             ========    ========    =========

      Expenses:
           Interest expense and fees         $  6,088    $  4,731     $  5,997
           Allocated corporate costs              417       1,199        1,656
           Fiber leases                         1,022         738           47
                                             --------    --------    ---------
           Total                             $  7,527    $  6,668     $  7,700
                                             ========    ========     ========

     Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial, legal,
regulatory, network design, construction and other administrative services.

     Network monitoring fees represent fees received by the Company for
technical support for the monitoring of each individual joint venture's
telecommunications system.

     Special access fees represent amounts charged to joint ventures for use of
the network of a wholly owned subsidiary of the Company.

         Interest income charged on certain affiliate receivable balances with
joint ventures was $199, $230 and $617 for the periods ended March 31, 1996,
1997, and 1998 respectively.

     Interest expense and fees relate to the Note payable--Adelphia (See Note
5).

         Allocated corporate costs represent costs incurred by Adelphia on
behalf of the Company for the administration and operation of the Company. These
costs include charges for office space, corporate aircraft and shared services
such as finance activities, information systems, computer services, human
resources, and taxation. Such costs were estimated by Adelphia and do not
necessarily represent the actual costs that would be incurred if the Company was
to secure such services on its own.

         Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for development
and operation of the consolidated operating networks.

         During the year ended March 31, 1997, the Company purchased from
Adelphia for approximately $6,485, Adelphia's historical cost to acquire the
assets, certain fiber that had previously been leased from Adelphia. Because the
entities involved in the transaction are under the common control of Adelphia,
the excess of the purchase price of the assets over the predecessor owner's net
book value was charged to accumulated deficit.


<PAGE>

              HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

(9)  Income Taxes

     Adelphia and its corporate subsidiaries (including the Company) file a
consolidated federal income tax return. For financial reporting purposes,
current and deferred income tax assets and liabilities are computed on a
separate company basis. The net operating loss carryforwards and the valuation
allowance are adjusted for the effects of filing a consolidated income tax
return, similar to provisions of the Internal Revenue Code. At March 31, 1998,
the Company had net operating loss carryforwards for federal income tax purposes
of $86,177 expiring through 2013.

     Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (b)
operating loss carryforwards.

     The Company's net deferred tax asset included in other assets - net is 
comprised of the following:
<TABLE>
<CAPTION>

                                                                        March 31,
                                                                    1997       1998
Deferred tax assets:
<S>                                                             <C>         <C>
Differences between book and tax basis of intangible assets     $    197    $    188
Net operating loss carryforwards                                  11,539      33,918
Investment in partnerships                                         2,793          --
Other                                                                 50          77
                                                                --------    --------
Total                                                             14,579      34,183

Valuation allowance                                              (12,356)    (17,379)
                                                                --------    --------
Total                                                              2,223      16,804
                                                                --------    --------
Deferred tax liabilities:
Differences between book and tax basis of property, plant and
equipment                                                          2,186      12,959
Investment in partnerships                                            --       3,808
                                                                --------    --------
Total                                                              2,186      16,767
                                                                --------    --------
Net deferred tax asset                                          $     37    $     37
                                                                ========    ========
</TABLE>

    The net change in the valuation allowance for the years ended March 31, 1997
and 1998 was an increase of $1,897 and $5,023, respectively.

     Income tax benefit (expense) for the years ended March 31, 1996, 1997 and
1998 is as follows:

                                                       March 31,
                                                1996      1997      1998

Current                                       $   (9)  $    (2)  $  ---
Deferred                                         206      (257)     ---
                                              ------   -------   ------      
Total                                         $  197   $  (259)  $  ---
                                              ======   =======   ======



<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

         A reconciliation of the statutory federal income tax rate and the
Company's effective income tax rate is as follows:

                                    March 31,
                                 1996 1997 1998
     Statutory federal income tax rate               35.0%     35.0%    35.0%
     Change in valuation allowance                  (34.6)    (34.6)   (35.0)
     State taxes, net of federal benefit and other    1.0      (1.2)     ---
                                                     ----      ----     ----
     Income tax benefit (expense)                     1.4%     (0.8)%    --%
                                                     ====      ====     ====



<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

(10) Quarterly Financial Data (unaudited)

         The following tables summarize the financial results of the Company for
each of the quarters in the years ended March 31, 1997 and 1998:

<TABLE>
<CAPTION>


                                                                         Three Months Ended
                                                              June 30   September 30 December 31, March 31,
                                                                1996        1996        1996       1997

<S>                                                          <C>         <C>         <C>         <C>
Revenues                                                     $  1,102    $  1,175    $  1,334    $  1,477
                                                             --------    --------    --------    --------
Operating expenses:
Network operations                                                859         728         752       1,093
Selling, general and administrative                             1,027       1,164       2,545       2,044
Depreciation and amortization                                     695         886       1,002       1,362
                                                             --------    --------    --------    --------     
Total                                                           2,581       2,778       4,299       4,499
                                                             --------    --------    --------    --------
Operating loss                                                 (1,479)     (1,603)     (2,965)     (3,022)

Other income (expense):
Gain on sale of investment                                      8,405          --          --          --
Interest income                                                 1,433       1,696       1,190       1,657
Interest expense and fees                                      (6,169)     (7,108)     (7,482)     (7,618)
                                                             --------    --------    --------    --------
Income (loss) before income taxes and equity in net loss
of joint ventures                                               2,190      (7,015)     (9,257)     (8,983)

Income tax (expense) benefit                                       (3)        120          63        (437)
                                                             --------    --------    --------    --------
Income (loss) before equity in net loss of joint ventures.      2,187      (6,895)     (9,194)     (9,420)

Equity in net loss of joint ventures                           (1,636)     (1,362)     (2,145)     (2,080)
                                                             --------    --------    --------    --------
Net income (loss)                                            $    551    $ (8,257)   $(11,339)   $(11,500)
                                                             ========    ========    ========    ======== 
Basic and diluted net loss per weighted average share
of common stock                                              $   0.02    $  (0.24)   $  (0.33)   $  (0.33)
                                                             ========    ========    ========    ========
Weighted average shares of common stock
outstanding (in thousands)                                     34,206      34,492      34,492      34,492
                                                             ========    ========    ========    ========
</TABLE>



<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  For the years ended March 31, 1996, 1997 and
              1998 (Dollars in thousands except per share amounts)

(10) Quarterly Financial Data (unaudited), continued
<TABLE>
<CAPTION>

                                                                           Three Months Ended
                                                             June 30,  September 30, December 31,  March 31,
                                                               1997        1997         1997        1998

<S>                                                     <C>             <C>             <C>              <C>
Revenues                                                     $  1,520    $  2,187    $  4,983    $  4,820
                                                             --------    --------    --------    --------
Operating expenses:
Network operations                                              1,180       1,426       2,657       2,541
Selling, general and administrative                             2,380       2,879       3,840       5,215
Depreciation and amortization                                   1,372       2,311       3,344       4,450
                                                             --------    --------    --------    --------
Total                                                           4,932       6,616       9,841      12,206
                                                             --------    --------    --------    --------
Operating loss                                                 (3,412)     (4,429)     (4,858)     (7,386)

Other income (expense):
Interest income                                                   763       1,463       5,725       5,353
Interest expense and fees                                      (8,077)    (11,087)    (16,770)    (13,400)
                                                             --------    --------    --------    --------
Loss before income taxes and equity in net loss
of joint ventures                                             (10,726)    (14,053)    (15,903)    (15,433)

Income tax expense                                                 --          --          --          --
                                                             --------    --------    --------    --------
Loss before equity in net loss of joint ventures              (10,726)    (14,053)    (15,903)    (15,433)

Equity in net loss of joint ventures                           (2,540)     (3,886)     (2,858)     (3,683)
                                                             --------    --------    --------    --------
Net loss                                                      (13,266)    (17,939)    (18,761)    (19,116)

Dividend requirements applicable to preferred
stock                                                              --          --      (5,794)     (6,615)
                                                             --------    --------    --------    --------
Net loss applicable to common stockholders                   $(13,266)   $(17,939)   $(24,555)   $(25,731)
                                                             ========    ========    ========    ======== 
Basic and diluted net loss per weighted average
share of common stock                                        $  (0.38)   $  (0.51)   $  (0.70)   $  (0.73)
                                                             ========    ========    ========    ======== 
Weighted average shares of common stock
outstanding (in thousands)                                     34,890      34,890      34,890      35,272
                                                             ========    ========    ========    ======== 
</TABLE>



<PAGE>


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

      Not applicable.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information set forth above in Part 1 under the caption "Executive
Officers of the Registrant" is incorporated herein by reference. The other
information required by this item is incorporated herein by reference to the
information set forth under the caption "Election of Directors" and the
information, if any, under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance," in the Company's definitive proxy statement for the 1998
Annual Meeting of Stockholders filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, or by reference to a filing
amending this Annual Report on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this item is incorporated herein by reference
to the information set forth under the caption "Executive Compensation" in the
Company's definitive proxy statement for the 1998 Annual Meeting of Stockholders
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, or by reference to a filing amending this Annual Report on Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this item is incorporated herein by reference
to the information set forth under the caption "Principal Stockholders" in the
Company's definitive proxy statement for the 1998 Annual Meeting of Stockholders
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, or by reference to a filing amending this Annual Report of Form 10-K.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is incorporated herein by reference
to the information set forth under the caption "Certain Transactions" in the
Company's definitive proxy statement for the 1998 Annual Meeting of Stockholders
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, or by reference to a filing amending this Annual Report on Form 10-K.

PART IV

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

      Financial Statements, schedules and exhibits not listed have been omitted
where the required information is included in the consolidated financial
statements or notes thereto, or is not applicable or required.

         (a)(1)   A listing of the consolidated financial statements, notes and
                  independent auditors' report required by Item 8 are listed on
                  page 48 of this Annual Report on Form 10-K.

            (2)  Financial Statement Schedules: None

            (3)  Exhibits
<PAGE>
EXHIBIT NO.     DESCRIPTION


   3.1          Certificate of Incorporation of Registrant, together with all
                amendments thereto. (Incorporated herein by reference is Exhibit
                3.01 to Registrant's Current Report on Form 8-K for the event
                dated October 9, 1997.)

   3.2          Bylaws of Registrant. (Incorporated herein by reference is 
                Exhibit 3.2 to Registration Statement No. 333-12619 on Form
                S-1.)

   4.1          Indenture, dated as of April 15, 1996, between the Registrant 
                and Bank of Montreal Trust Company. (Incorporated herein by
                reference is Exhibit 4.1 to Registration Statement No. 333-06957
                on Form S-4.)

   4.2          First Supplemental Indenture, dated as of September 11, 1996,
                between, the Registrant and Bank of Montreal Trust Company.
                (Incorporated herein by reference is Exhibit 4.2 to Statement
                No.
                333-12619 on Form S-4.)

   4.3          Form of 13% Senior Discount Note. (Incorporated herein reference
                is Exhibit 4.3 to Registration Statement No. 333-12619 on Form
                S-4.)

   4.4          Form of Class A Common Stock Certificate. (Incorporated herein 
                by reference is Exhibit 4.1 to Registrant's Registration
                Statement on Form 8-A, dated October 23, 1996.)

   4.5          Indenture, dated as of August 27, 1997, with respect to the
                Registrant's 12 1/4% Senior Secured Notes due 2004, between the
                Registrant and the Bank of Montreal Trust Company. (Incorporated
                herein by reference is Exhibit 4.01 to Form 8-K dated August 27,
                1997.) (File No. 0-21605)

   4.6          Form of 12 1/4% Senior Secured Note due 2004 (contained in 
                Exhibit 4.5).

   4.7          Pledge Agreement between the Registrant and the Bank of Montreal
                Trust Company as Collateral Agent, dated as of August 27, 1997.
                (Incorporated herein by reference is Exhibit 4.03 to Form 8-K
                dated August 27, 1997.) (File No. 0-21605)

   4.8          Registration Rights Agreement between the Registrant and the
                Initial Purchasers, dated August 27, 1997, regarding the 12 1/4%
                Senior Secured Notes due 2004. (Incorporated herein by reference
                is Exhibit 4.04 to Form 8-K dated August 27, 1997.) (File No.
                0-21605)

   4.9          Pledge, Escrow and Disbursement Agreement, between the 
                Registrant and the Bank of Montreal Trust Company, dated as of
                August 27, 1997. (Incorporated herein by reference is Exhibit
                4.05 to Form 8-K dated August 27, 1997.) (File No. 0-21605)

  4.10          Second Supplemental Indenture, dated as of August 27, 1997, 
                between the Registrant and the Bank of Montreal Trust Company,
                regarding the Registrant's 13% Senior Discount Notes due 2003.
                (Incorporated herein by reference is Exhibit 4.06 to Form 8-K
                dated August 27, 1997.) (File No. 0-21605)

  4.11          Certificate of Designation for 12 7/8% Series A and Series B
                Senior Exchangeable Redeemable Preferred Stock due 2007.
                (Contained in Exhibit 3.01 to Registrant's Current Report on
                Form 8-K for the event dated October 9, 1997 which is
                incorporated herein by reference.) (File No. 0-21605)

  4.12          Form of Certificate for 12 7/8% Senior Exchangeable Redeemable 
                Preferred Stock due 2007. (Incorporated herein by reference is
                Exhibit 4.02 to the Registrant's Current Report on Form 8-K the
                event dated October 9, 1997.) (File No. 0-21605)
<PAGE>
  4.13          Form of Indenture, with respect to the Registrant's 12 7/8% 
                Senior Subordinated Exchange Debentures due 2007. (Contained as
                Annex A in Exhibit 3.01 to Registrant's Current Report on Form
                8-K for the event dated October 9, 1997 which is incorporated
                herein by reference.) (File No. 0-21605)

  4.14          Registration Rights Agreement between the Registrant and the 
                Initial Purchaser dated October 9, 1997, regarding the 12 7/8%
                Senior Exchangeable Redeemable Preferred Stock due 2007.
                (Incorporated herein by reference is Exhibit 4.04 to the
                Registrant's Current Report on Form 8-K for the event dated
                October 9, 1997.) (File No. 0-21605)

  10.1          Purchase Agreement dated as of April 10, 1996 between Registrant
                and Bear, Stearns & Co. Inc., Chase Securities Inc. and
                NationsBanc Capital Markets, Inc. (collectively, the "Initial
                Purchasers"). (Incorporated herein by reference is Exhibit 1.1
                to Registration Statement No. 333-06957 on Form S-4.)

  10.2*         Employment Agreement between the Registrant and Charles R. 
                Drenning. (Incorporated herein by reference is Exhibit 10.1 to
                Registration Statement No. 333-06957 on Form S-4.)

  10.3*         Employment Agreement between the Registrant and Paul D. 
                Fajerski. (Incorporated herein by reference is Exhibit 10.2 to
                Registration Statement No. 333-06957 on Form S-4.)

  10.4*         Employment Agreement between the Registrant and Randolph S. 
                Fowler. (Incorporated herein by reference is Exhibit 10.3 to
                Registration Statement No. 333-06957 on Form S-4.)

  10.5          Pre-Incorporation and Shareholder Restrictive Agreement between 
                Adelphia, Paul D. Fajerski, Charles R. Drenning and Randolph S.
                Fowler. (Incorporated herein by reference is Exhibit 10.5 to
                Registration Statement No. 333-06957 on Form S-4.)

  10.6          Term Loan Note dated May 10, 1996 between Charles R. Drenning in
                favor of Registrant in the amount of $1,000,000. (Incorporated
                herein by reference is Exhibit 10.6 to Registration Statement
                No.
                333-06957 on Form S-4.)

  10.7          Term Loan Note dated May 10, 1996 between Paul D. Fajerski in
                favor of Registrant in the amount of $1,000,000. (Incorporated
                herein by reference is Exhibit 10.7 to Registration Statement
                No.
                333-06957 on Form S-4.)

  10.8          Term Loan Note dated May 10, 1996 between Randolph S. Fowler in
                favor of Registrant in the amount of $1,000,000. (Incorporated
                herein by reference is Exhibit 10.8 to Registration Statement
                No.
                333-06957 on Form S-4.)

  10.9          Term Loan and Stock Pledge Agreement dated May 10, 1996 between
                the Registrant and Charles R. Drenning. (Incorporated herein by
                reference is Exhibit 10.9 to Registration Statement No.
                333-06957 on Form S-4.)

  10.10         Term Loan and Stock Pledge Agreement dated May 10, 1996 between
                the Registrant and Paul D. Fajerski. (Incorporated herein by
                reference is Exhibit 10.10 to Registration Statement No.
                333-06957 on Form S-4.)

  10.11         Term Loan and Stock Pledge Agreement dated May 10, 1996 between
                the Registrant and Randolph S. Fowler. (Incorporated herein by
                reference is Exhibit 10.11 to Registration Statement No.
                333-06957 on Form S-4.)
<PAGE>
  10.12         Letter Agreement dated March 19, 1996 between the Registrant, 
                Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler and
                Adelphia. (Incorporated herein by reference is Exhibit 10.12 to
                Registration Statement No. 333-06957 on Form S-4.)

  10.13         Warrant Agreement dated as of April 15, 1996, by and among 
                Hyperion Telecommunications, Inc. and Bank of Montreal Trust
                Company. (Incorporated herein by reference is Exhibit 10.13 to
                Registration Statement No. 333-06957 on Form S-4.)

  10.14         Warrant Registration Rights Agreement dated as of April 15,
                1996, by and among Hyperion Telecommunications, Inc. and the
                Initial Purchasers. (Incorporated herein by reference is Exhibit
                10.14 to Registration Statement No. 333-06957 on Form S-4.)

  10.15         Form of Management Agreement. (Incorporated herein by reference 
                is Exhibit 10.15 to Registration Statement No. 333-06957 on Form
                S-4.)

  10.16*        Employment Agreement between Hyperion Telecommunications, Inc. 
                and Daniel R. Milliard dated as of March 4, 1997. (Incorporated
                herein by reference is Exhibit 10.03 to Current Report on Form
                8-K of Adelphia Communications Corporation dated May 1, 1997.)
                (File Number 0-16014)

  10.17*        1996 Long-Term Incentive Compensation Plan. (Incorporated herein
                by reference is Exhibit 10.17 to Registration Statement No.
                333-13663 on Form S-1.)

  10.18         Registration Rights Agreement among Charles R. Drenning, Paul D.
                Fajerski, Randolph S. Fowler, Adelphia Communications
                Corporation and the Company. (Incorporated herein by reference
                is Exhibit 10.18 to Registration Statement No. 333-13663 on Form
                S-1.)

  10.19         Registration Rights Agreement between Adelphia Communications 
                Corporation and the Company. (Incorporated herein by reference
                is Exhibit 10.19 to Registration Statement No. 333-13663 on Form
                S-1.)

  10.20         Extension Agreement dated as of January 8, 1997, among Hyperion 
                Telecommunications, Inc., Adelphia Communications Corporation,
                Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler, and
                six Trusts named therein. (Incorporated herein by reference is
                Exhibit 10.04 to Current Report on Form 8-K of Adelphia
                Communications Corporation dated May 1, 1997.) (File Number
                0-16014)

  10.21         Purchase Agreement among the Registrant, Bear Stearns & Co.
                Inc., Chase Securities Inc., TD Securities (USA) Inc., CIBC Wood
                Gundy Securities Corp., and Scotia Capital Markets (the "Initial
                Purchasers") dated August 21, 1997. (Incorporated herein by
                reference is Exhibit 10.01 to Form 8-K dated August 27, 1997.)
                (File No. 0-21605)

  10.22         Purchase Agreement among the Registrant and Bear Stearns & Co. 
                Inc. (the "Initial Purchaser") dated October 1, 1997 regarding
                the 12 7/8% Senior Exchangeable Redeemable Preferred Stock due
                2007. (Incorporated by reference is Exhibit 10.01 to the
                Registrant's Current Report on Form 8-K for the event dated
                October 9, 1997.) (File No. 0-21605)

  10.23*        Management Services Agreement dated as of April 10, 1998,
                between Adelphia Communications Corporation and the Registrant
                (Incorporated herein by reference is Exhibit 10.23 to
                Registration Statement No. 333-48209 on Form S-1).

  10.24         Letter Agreement dated April 10, 1998, among the Registrant,
                Adelphia Communications Corporation and MCImetro Access
                Transmission Services, Inc. (Incorporated herein by reference is
                Exhibit 10.24 to Registration Statement No. 333-48209 on Form
                S-1).
<PAGE>
  10.25         Amendment to Registration Rights Agreement dated as of April 15,
                1998, between the Registrant and Adelphia Communications
                Corporation (Incorporated herein by reference is Exhibit 10.25
                to Registration Statement No. 333-48209 on Form S-1).

  10.26         Letter Agreement dated as of April 9, 1998, between the
                Registrant and Adelphia Communications Corporation regarding the
                purchase of Class A Common Stock (Incorporated herein by
                reference is Exhibit 10.26 to Registration Statement No.
                333-48209 on Form S-1).

  10.27         U.S. Underwriting Agreement dated May 4, 1998 among the Company
                and the Representatives named therein (Incorporated herein by
                reference is Exhibit 10.01 to the Registrant's Current Report on
                Form 8-K dated June 24, 1998.) (File No. 0-21605)

  10.28         International Underwriting Agreement dated May 4, 1998 among the
                Company and the Representatives named therein (Incorporated
                herein by reference is Exhibit 10.02 to the Registrant's Current
                Report on Form 8-K dated June 24, 1998.) (File No. 0-21605)

  10.29         Warrant issued to MCI dated May 8, 1998 (Incorporated herein by 
                reference is Exhibit 10.03 to the Registrant's Current Report on
                Form 8-K dated June 24, 1998.) (File No. 0-21605)

  10.30         Warrant issued in favor of Adelphia Communications Corporation 
                dated June 5, 1998 (Incorporated herein by reference is Exhibit
                10.04 to the Registrant's Current Report on Form 8-K dated June
                24, 1998.) (File No. 0-21605)

  21.1          Subsidiaries of the Registrant

  23.1          Consent of Deloitte & Touche LLP

  27.1          Financial Data Schedule

  99.1          "Schedule E - Form of Financial Information and Operating Data 
                of the Subsidiaries and the Joint Ventures Presented by
                Cluster".

  99.2          "Schedule F - Form of Financial Information and Operating Data 
                of the Pledged Subsidiaries and the Joint Ventures.

  99.3          Press Release Dated June 24, 1998

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

*        Denotes  management  contracts and compensatory  plans and arrangements
required to be identified by Item 14(a)(3).




<PAGE>


         The Registrant will furnish to the Commission upon request copies of
instruments not filed herewith which authorize the issuance of long-term
obligations of Registrant not in excess of 10% of the Registrant's total assets
on a consolidated basis.

         (b) The Registrant did not file any Form 8-K reports during the three
months ended March 31, 1998.

         (c) The Company hereby files as exhibits to this Form 10-K the exhibits
set forth in Item 14(a)(3) hereof which are not incorporated by reference.

         (d) The Company hereby files as financial statement schedules to this
Form 10-K the financial statement schedules set forth in Item 14(a)(2) hereof.



<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.

                                   HYPERION TELECOMMUNICATIONS, INC.

June 26, 1998                   By:    /s/ Daniel R. Milliard
                                       Daniel R. Milliard,
                                       President and Chief Operating 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.

June 26, 1998                          /s/ John J. Rigas
                                       John J. Rigas,
                                       Chairman and Director

June 26, 1998                          /s/ Timothy J. Rigas
                                       Timothy J. Rigas,
                                       Vice Chairman, Treasurer, Chief Financial
                                       Officer and Director

June 26, 1998                          /s/ Michael J. Rigas
                                       Michael J. Rigas,
                                       Vice Chairman and Director

June 26, 1998                          /s/ James P. Rigas
                                       James P. Rigas,
                                       Vice Chairman, Chief Executive Officer
                                       and Director

June 26, 1998                          /s/ Daniel R. Milliard
                                       Daniel R. Milliard,
                                       President, Secretary, Chief Operating
                                       Officer and Director

June 26, 1998                          /s/ Charles R. Drenning
                                       Charles R. Drenning
                                       Senior Vice President and Director

June 26, 1998                          /s/ Paul D. Fajerski
                                       Paul D. Fajerski
                                       Senior Vice President and Director

June 26, 1998                          /s/ Randolph S. Fowler
                                       Randolph S. Fowler
                                       Senior Vice President and Director

June 26, 1998                          /s/ Peter J. Metros
                                       Pete J. Metros,
                                       Director

June 26, 1998                          /s/ James L. Gray
                                       James L. Gray,
                                       Director

June 26, 1998                          /s/ Edward E. Babcock Jr.
                                       Edward E. Babcock, Jr.
                                       Chief Accounting Officer



<PAGE>





<TABLE>
<CAPTION>

                                                        EXHIBIT A

                               Hyperion Telecommunications, Inc. and its Operating Companies
                                         Proportionate Share Operating Results (a)

                                                                                    Unaudited

                                                             Three Months Ended                  Twelve Months Ended
                                                                  March 31,                           March 31,
                                                            1997             1998               1997             1998

<S>                                             <C>             <C>             <C>             <C>
Operating Revenue                               $  2,520,000    $  6,022,000    $  7,760,000    $ 17,498,000

Direct Operating Expenses                          1,582,000       2,645,000       4,494,000       9,119,000
                                                ------------    ------------    ------------    ------------

Gross Margin                                         938,000       3,377,000       3,266,000       8,379,000

Sales, General & Administrative Expenses           3,376,000       7,857,000      11,003,000      23,664,000
                                                ------------    ------------    ------------    ------------             
EBITDA (b)                                        (2,438,000)     (4,480,000)     (7,737,000)    (15,285,000)

Depreciation & Amortization Expense                3,296,000       7,307,000      10,829,000      22,434,000
                                                ------------    ------------    ------------    ------------                    
Operating Income                                  (5,734,000)    (11,787,000)    (18,566,000)    (37,719,000)

Interest Income                                    1,673,000       5,321,000       6,005,000      13,313,000
Interest Expense                                  (8,128,000)    (14,273,000)    (30,428,000)    (53,012,000)
Other Income/Expense                                  90,000           7,000       8,706,000          10,000
                                                ------------    ------------    ------------    ------------
Net Loss                                         (12,099,000)    (20,732,000)    (34,283,000)    (77,408,000)
                                                ------------    ------------    ------------    ------------
Preferred Stock Dividends                                 --      (6,615,000)             --     (12,409,000)
                                                ------------    ------------    ------------    ------------
Net Loss Applicable to Common Stockholders      $(12,099,000)   $(27,347,000)   $(34,283,000)   $(89,817,000)
                                                ============    ============    ============    ============

Weighted Average Shares of Common Outstanding     34,492,000      35,272,000      34,421,000      34,986,000


Net Loss per Weighted Average Share of Common
Stock                                           $      (0.35)   $      (0.78)   $      (1.00)   $      (2.57)
<FN>


(a)  Proportionate share presentation reflects the collective sum of Hyperion's
     economic interest in each of the Operating Companies it owns and manages at
     Hyperion's current ownership percentage as of March 31, 1998. All
     historical results of operations are presented as if Hyperion's current
     ownership percentage as of March 31, 1998 of its Operating Companies was in
     place for the entire period presented. While this presentation is not in
     accordance with generally accepted accounting principles ("GAAP"),
     management of Hyperion believes that this format better depicts the
     operational progress, and the associated economic effect on Hyperion, of
     the Company's results of operations during the period.

(b)  Earnings before interest, income taxes, depreciation and amortization and
     other income/expense ("EBITDA") and similar measures of cash flow are
     commonly used in the telecommunications industry to analyze and compare
     telecommunications companies on the basis of operating performance,
     leverage, and liquidity. While EBITDA is not an alternative indicator of
     operating performance or an alternative to cash flows from operating
     activities as a measure of liquidity as defined by GAAP, and while EBITDA
     may not be comparable to other similarly titled measures of other
     companies, management of the Company believes that EBITDA is a meaningful
     measure of performance.

</FN>
</TABLE>


<PAGE>



<TABLE>
<CAPTION>

                                                           EXHIBIT B

                                      Hyperion Telecommunications, Inc. and Subsidiaries
                                        Condensed Consolidated Statements of Operations

                                                       Three Months Ended             Twelve Months Ended
                                                             March 31,                        March 31,
                                                       1997             1998            1997            1998

<S>                                                <C>             <C>             <C>             <C>
Revenues                                           $  1,477,000    $  4,820,000    $  5,088,000    $ 13,510,000

Operating Expenses
Network Operations                                    1,093,000       2,541,000       3,432,000       7,804,000
Selling, General & Administrative                     2,044,000       5,215,000       6,780,000      14,314,000
Depreciation & Amortization Expense                   1,362,000       4,450,000       3,945,000      11,477,000
                                                   ------------    ------------    ------------    ------------
Total                                                 4,499,000      12,206,000      14,157,000      33,595,000
                                                   ------------    ------------    ------------    ------------
Operating Loss                                       (3,022,000)     (7,386,000)     (9,069,000)    (20,085,000)

Other Income (Expense)
Gain on Sale of Investment                                   --              --       8,405,000              --
Interest Income                                       1,657,000       5,353,000       5,976,000      13,304,000
Interest Expense and Fees                            (7,618,000)     13,400,000     (28,377,000)    (49,334,000)
                                                   ------------    ------------    ------------    ------------
Loss Before Income Taxes and Equity in Net Loss
of Joint Ventures                                    (8,983,000)    (15,433,000)    (23,065,000)    (56,115,000)
Income Tax Expense                                     (437,000)             --        (259,000)             --
                                                   ------------    ------------    ------------    ------------
Loss Before Equity in Net Loss of Joint Ventures     (9,420,000)    (15,433,000)    (23,324,000)    (56,115,000)

Equity in Net Loss of Joint Ventures                 (2,080,000)     (3,683,000)     (7,223,000)    (12,967,000)
                                                   ------------    ------------    ------------    ------------
Net Loss                                            (11,500,000)    (19,116,000)    (30,547,000)    (69,082,000)
                                                   ------------    ------------    ------------    ------------

Preferred Stock Dividends                                    --      (6,615,000)             --     (12,409,000)
                                                   ------------    ------------    ------------    ------------

Net Loss Applicable to Common Stockholders         $(11,500,000)   $(25,731,000)   $(30,547,000)   $(81,491,000)
                                                   ============    ============    ============    ============ 

Weighted Average Shares of Common
Stock Outstanding                                    34,492,000      35,272,000      34,421,000      34,986,000

Basic and Diluted Net Loss per Weighted Average
 Share of Common Stock                             $      (0.33)   $      (0.73)   $      (0.89)   $      (2.33)
<FN>


(a)   Earnings before interest, income taxes, depreciation and amortization and
      other income/expense ("EBITDA") and similar measures of cash flow are
      commonly used in the telecommunications industry to analyze and compare
      telecommunications companies on the basis of operating performance,
      leverage, and liquidity. While EBITDA is not an alternative indicator of
      operating performance or an alternative to cash flows from operating
      activities as a measure of liquidity as defined by GAAP, and while EBITDA
      may not be comparable to other similarly titled measures of other
      companies, management of the Company believes that EBITDA is a meaningful
      measure of performance.


</FN>
</TABLE>