SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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



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

                    from April 1, 1998 to December 31, 1998.

                        Commission File Number: 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 and
Class B Common Stock, par value $0.01, held by non-affiliates of the Registrant
at May 21, 1999 was $303.1 million based on the closing sale price of the Class
A Common Stock 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 May 21, 1999, 22,393,821 shares of Class A Common Stock, par value $0.01, and
32,300,041 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
1999 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





<PAGE>



                        HYPERION TELECOMMUNICATIONS, INC.

                                TABLE OF CONTENTS

<TABLE>


PART I

<S>         <C>                                                                                                  <C>
   ITEM 1.  BUSINESS............................................................................................ 2

   ITEM 2.  PROPERTIES..........................................................................................19

   ITEM 3.  LEGAL PROCEEDINGS...................................................................................20

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................20


PART II

   ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............................23

   ITEM 6.  SELECTED FINANCIAL DATA.............................................................................24

   ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............27

   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........................................37

   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................................38

   ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................63


PART III

   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................................63

   ITEM 11. EXECUTIVE COMPENSATION..............................................................................63

   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................63

   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................63


PART IV

   ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................63

</TABLE>



<PAGE>




PART I

ITEM 1.  BUSINESS

The Company

         Hyperion Telecommunications, Inc. ("Hyperion" or the "Company") is a
super-regional provider of communications services offering a full range of
communications services to customers that include businesses, governmental and
educational end users and other telecommunications service providers throughout
the eastern United States. The Company provides these customers with
communications services such as local switch dial tone, long distance service,
high-speed data, and Internet connectivity. The customer has a choice of
receiving these services individually or as part of a bundle of services, which
is typically priced at a discount when compared to the price of the individual
services. In order to take advantage of the improved economic returns from
providing services over the Company's own network system (having "on-net"
traffic), the Company is in the process of significantly expanding the reach of
its network system. This network system expansion includes the purchase, lease
or construction of fiber optic network facilities in more than 50 new markets
and the interconnection of all of the Company's existing and new markets with
the Company's own fiber optic network facilities, as well as implementing
various technologies including Dense Wave Division Multiplexing ("DWDM") to
provide greater bandwidth capacity on the Company's local and long-haul network
system.

         By the year 2001, Hyperion expects to serve most of the major cities in
the eastern half of the United States. The Company currently provides
communications services in 46 markets and plans to introduce services in more
than 50 new markets, expanding Hyperion's presence to approximately 30 states.
At December 31, 1998, the Company had installed 20 Lucent 5ESS switches or
remote switching modules and plans to put in operation during 1999 nine
additional regional switches (the "super switches"). Once fully installed, the
Company's fiber optic backbone will connect each of the Company's markets. This
fully redundant, 16,000 route mile network system will support Hyperion's full
line of communications service offerings. The Company has chosen the eastern
half of the United States as its overall target market because it presents an
opportunity for rapid growth. Once fully deployed, management believes that the
Company's network system will encompass over 26 million addressable business
access lines (approximately 34% of the nation's population), which currently
generate annual estimated communications services revenues of over $50 billion.

         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Transition 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 and the effects of competition. 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 "intends" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These risks and uncertainties include, but are not limited to, uncertainties
relating to economic conditions, acquisitions and divestitures, the cost of
availability of capital, government and regulatory policies, the pricing and
availability of equipment, materials, inventories and programming, Year 2000
issues, product acceptance, technological developments and changes in the
competitive environment in which the Company operates. Persons reading this
Transition 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 risks and uncertainties facing the Company.
<PAGE>

         Change of Year End. On March 30, 1999, the Board of Directors of
Hyperion approved a change in Hyperion's fiscal year from March 31 to December
31. The decision was made to conform to general industry practice and for
administrative purposes. The change became effective for the nine months ended
December 31, 1998.

Recent Developments

         Expansion of Fiber Network. Since April 1, 1998, Hyperion has entered
into agreements with Qwest Communications, Williams Communications, NorthEast
Optic Network, Inc. ("NEON"), Metromedia Fiber Network, Inc., e.spire
Communications, Inc., Telergy Inc. and Interpath Communications to acquire local
and long-haul fiber optic transmission infrastructure to provide
facilities-based services in a number of new markets throughout the eastern
United States and to interconnect Hyperion's existing markets and these new
markets. The agreements entitle the Company to a long-term lease or an
indefeasible right of use ("IRU") to approximately 9,000 route miles of local
and long-haul fiber for a total cost of approximately $126 million.

         The markets reached through these agreements are important to the
Company's network system expansion strategy. For example, fiber obtained through
the contract with NEON enables Hyperion to quickly enter markets throughout New
England including Boston, Massachusetts. The agreement with Metromedia Fiber
Network supplements an earlier agreement and provides Hyperion with broad
coverage in the New York metropolitan area, as well as new entry into Chicago,
Illinois, Washington, DC and northern Virginia. Hyperion will gain
cost-effective access to Atlanta, Georgia through the agreement with e.spire.
The agreement with Telergy will allow Hyperion to efficiently enter Manhattan,
New York along with interconnection from our upstate New York markets and the
agreement with Interpath Communications will allow us to enter the
Raleigh-Durham/Chapel Hill, North Carolina market. The long-haul agreements with
Qwest, Williams, Telergy and others provide the basis for the Company's
dedicated long-haul fiber network system, which in turn increases our
addressable market approximately 50%. This increased addressable market
opportunity, resulting from the signing of the agreements currently in place,
can be achieved without a proportionate increase in the number of switches
deployed through the use of super switches serving multiple markets in a
geographical region.

         On April 15, 1999, Hyperion entered into an agreement with e.spire
Communications, Inc. ("e.spire") to acquire an IRU for approximately 576 miles
of network fiber and construction services which allows the Company access to 14
new markets. In exchange, the Company granted e.spire an IRU to a 432-strand
fiber optic cable in south Florida that is currently under construction.

         Data Services Agreement. On February 9, 1999, Hyperion entered into a 3
year agreement with Intermedia Communications ("ICI") whereby it will purchase
from ICI wholesale frame relay and ATM services, which will be branded under the
Hyperion name. As the long-haul portions of Hyperion's network system become
operational and data switches are placed in the networks, we expect to migrate
customers to our network system. The agreement provides for a discount pricing
structure based upon volume purchases, and we believe that this market-entry
strategy provides a cost-effective, economical approach to creating market
presence and a customer base until our data networks are operational. Over time,
we expect most of our customers' data traffic will be carried on our own network
system.

          Partnership Rollups. During March 1999, Hyperion consummated purchase
agreements with subsidiaries of Multimedia, Inc. and MediaOne of Colorado Inc.
to acquire their respective interests in our jointly owned networks located in
the Wichita, KS, Jacksonville, FL and Richmond, VA markets for an aggregate of
approximately $90 million. The agreements increased the Company's ownership
interest in each of these networks to 100%. The consummated acquisitions are
collectively referred to as the "Roll-ups."

         In addition, on March 31, 1999, Hyperion entered into purchase
agreements with Entergy Corporation ("Entergy"), the parent of its local partner
in the Baton Rouge, LA, Little Rock, AR and Jackson, MS markets, whereby Entergy

<PAGE>

will receive $36 million in cash for Entergy's ownership interests in each of
these markets. Upon consummation of this transaction, which is subject to normal
closing conditions and regulatory approvals, the Company's ownership interest in
each of these networks will increase to 100%.

         LMDS Licenses. During 1998, through a partnership in which Hyperion is
a 49.9% limited partner, the Company was the successful bidder, at a cost of
approximately $45 million, all of which has been fully paid, for 195 31-GHz
licenses, which cover approximately 83 million people in the eastern United
States, representing coverage in most of Hyperion's network system territory.
The Company and its partner are currently in the process of dissolving the
partnership, and the licenses are to be transferred to the Company, at no
additional cost to the Company, upon the consent of such transfer by the Federal
Communications Commission (the "FCC"), which may not be unreasonably withheld.
Hyperion plans to use the local multipoint distribution service ("LMDS")
spectrum in most of its markets, and believes the spectrum to be highly
complementary to our fiber-based systems as an economical means to provide
"last-mile" connectivity for customers that otherwise could not be economically
addressed with broadband wireline connectivity.

         March 1999 Financing. On March 2, 1999 Hyperion issued $300 million of
12% Senior Subordinated Notes due 2007 (the "Subordinated Notes"). An entity
controlled by members of the Rigas family, controlling stockholders of Adelphia,
purchased $100 million of the Subordinated Notes directly from Hyperion at a
price equal to the aggregate principal amount less the discount to the initial
purchasers. The net proceeds of approximately $295 million were or will be used
to fund Hyperion's acquisition of interests held by local partners in certain of
its markets, and will be used to fund capital expenditures and investments in
its networks and for general corporate and working capital purposes.

         Hyperion IPO. In the June 30, 1998 quarter, Hyperion issued and sold
12,850,000 shares of Class A Common Stock at a price to the public of $16.00 per
share including the underwriters' over-allotment option. Simultaneously with the
closing of the IPO, Hyperion issued and sold 6,966,667 additional shares of
Class A Common Stock to Adelphia at a purchase price of $15.00 per share in
exchange for certain of Hyperion's indebtedness and payables owed to Adelphia
and for cash of $49.9 million. These transactions raised approximately $241
million of net proceeds to continue the expansion of Hyperion's existing markets
and to build new markets.

Growth Strategy

         The key components of the Company's strategy as a leading provider of
competitive telecommunications services are:

         Focus On Telecommunications-Intensive Customers. Hyperion provides
their services to telecommunications-intensive customers that include
businesses, governmental and educational end users, and other telecommunications
service providers. Hyperion believes that its target customers are a large and
under-served universe who generally have limited choices in their communications
services purchasing decisions. 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 offers dedicated access services on a wholesale basis to interchange or
long distance carriers ("IXCs") and has entered into national service agreements
with AT&T and MCI WorldCom to be their preferred supplier.

         Expansion of Sales and Customer Care Effort. Hyperion's goal is to
create better customer retention and become the principal and preferred
cost-effective alternative to the incumbent communications services provider. To
achieve this and to capitalize on the Company's expanded addressable market,
Hyperion has rapidly increased and intends to continue to increase its direct
sales and support team consisting of sales professionals and engineers. The
Company has expanded its sales force from 128 salespeople at December 31, 1997
to 251 salespeople at December 31, 1998 and expects to increase its sales force
to approximately 450 salespeople by December 31, 1999.

         In addition, Hyperion believes that the best way to care for a customer
is to provide local customer service after the sale. Each of Hyperion's markets

<PAGE>

has a dedicated team of trained customer care professionals committed to
ensuring that we meet or exceed our customers' expectations. At December 31,
1998, Hyperion had approximately 136 professionals committed to its customer
care effort which Hyperion expects will increase to approximately 250
professionals by December 31, 1999.

         Focus on Providing Bundled Packages of Communications Services. In
response to market demands and to maximize our selling efforts, the Company
offers a full suite of communications services to our customers. Hyperion offers
its services individually to suit specific customer needs or bundled together to
provide customers with a cost-effective and comprehensive communications
solution. In addition to the pricing benefits Hyperion's customers receive from
purchasing bundled communications services, the Company believes that bundled
services provide Hyperion with increased customer retention, higher operating
margins and a reduced cost of acquiring new customers.

         The Company's service offerings currently include a wide range of local
dial tone and long-distance services in all of its operating markets. In
addition, Hyperion has launched internet access services, frame relay and ATM
services in certain of our markets and plans to extend these services to all of
our markets during 1999. To accelerate its frame relay and ATM service
offerings, Hyperion recently entered into a wholesale provider agreement with
ICI, whereby it will use ICI's frame relay network and data switches to offer
data services to its customers and then move its customers' traffic onto its own
network system as it becomes operational. The Company believes this approach
provides an efficient market-entry strategy and allows it to build a market
presence under the Hyperion trade name, while providing better long-term
operating margins through the use of its own network system.

         Drive On-Net Traffic Over High Capacity Fiber Optic Network System. The
broad deployment of fiber optic cable in Hyperion's markets typically enables
connectivity among the Company, the incumbent local exchange carrier ("LEC")
central offices and the Company's customers. Hyperion expects this strategy to
result in a high proportion of traffic that is both originated and terminated on
its network system, which would provide the Company with higher long-term
operating margins. As of December 31, 1998, the Company has collocated in 123
incumbent LEC central offices, a figure which is expected to increase to over
300 during 1999. In addition, as of December 31, 1998, in Hyperion's six most
mature markets, 78% of the access lines in service have been provisioned
completely on its own network system. Overall the Company had 110,005 installed
access lines at December 31, 1998, approximately 63% of which are provisioned
completely on Hyperion's network system.

         In addition to the broad deployment of fiber optic cable in its
markets, Hyperion has been aggressively adding fiber over long distances to
create a fiber optic network system that connects its various markets. Once
fully deployed, this fiber optic backbone will enhance the Company's ability to
originate and terminate Hyperion's customers' communications traffic over our
networks. We believe long-term operating margins on Hyperion's long distance and
data transfer businesses will increase significantly as a result of connecting
these markets.

         As an alternative to fiber optic cable, Hyperion also plans to utilize
wireless technologies to deliver the "last mile" of communications services
where the use of fiber optic cable is not economical. Through the use of a fixed
wireless technology known as LMDS, the Company will be able to provide in most
of its markets an alternative means for establishing the connectivity that links
Hyperion's customers to its network system. See "Recent Developments--LMDS
Licenses." These customers might otherwise have limited access to a high speed
fiber optic network. Therefore, the Company expects LMDS to increase the amount
of on-net traffic we carry in the future.

         Expand Market Roll-out Throughout Eastern United States. The Company
recently announced that it is expanding the scope of its business plan to add 50
new markets to the existing 46 markets, expanding its presence to approximately
30 states throughout the eastern United States. These 96 markets will provide
Hyperion with a market opportunity of more than 26 million addressable business
access lines (approximately 34% of the nation's population), which currently

<PAGE>

generate over $50 billion of annual communications services revenues. Hyperion
plans to roll out service in these new markets by installing nine new super
switches that, together with remote switch modules, will serve several markets
in geographic proximity to each super switch. Each of these markets will be
connected to the system network by inter-city fiber that has been or will be
purchased or leased from a number of fiber optic transmission providers.


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 its 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 its available
          capacity for access to Internet Service Providers ("ISP"s).

          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.

Ownership of the Company and the Operating Companies

         As of December 31, 1998, Hyperion was a 64.7% owned subsidiary, on a
fully diluted basis, of Adelphia. In addition, senior executives of the Company
owned 4.6% of the common stock of the Company. Unless the context otherwise
requires, references to the "networks" or the "Company's networks" mean the (a)
22 telecommunications networks (serving 46 markets) in operation or under
construction (the "Existing Networks") and (b) additional networks under
development (the "New Networks"). The Company's 22 Existing Networks were owned
by ten wholly owned subsidiaries (through which the Company has an interest in
11 networks), one partnership (through which the Company has an interest in one
network) in which it is the majority owner and nine joint venture investments
(through which the Company has an interest in 10 networks) in which the Company
owns at least 50%. The Company is responsible for the network design,
management, billing and operation of the operating companies, for which it
receives management fees.

The following is an overview of Hyperion's networks and respective ownership
interests as of December 31, 1998.
<PAGE>

<TABLE>

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

               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                                             6/99       100.0

             Mid-Atlantic Cluster
Charlottesville, VA                                    1/95       100.0
Scranton/Wilkes-Barre, PA                              5/98       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                 5/98        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       100.0(b)
               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       100.0(b)
Jackson, MS                                           12/97       100.0(b)
Little Rock, AR                                       12/97       100.0(b)

                Other Networks
Wichita, KS                                            9/94       100.0(b)
Jacksonville, FL                                       9/92       100.0(b)

Weighted Average Ownership                             ---         90 %(c)

<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)  Gives effect to the Rollups and the pending purchase of the Entergy network
     interests as if such events occurred December 31, 1998.

(c)  Based upon gross property, plant and equipment of the Company and the
     networks as of December 31, 1998, as adjusted for the purchase of certain
     partners' interests pursuant to the Rollups.
</FN>
</TABLE>


<PAGE>



Operating Agreements

         Generally, subsidiaries of the Company historically 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 December 31, 1998, 10 of the
Company's 22 Existing Networks were 50% or less owned by the Company, excluding
the effect of the rollups and the Entergy acquisition.

Local Partner Agreements

         As part of its business development strategy, Hyperion has purchased
its local partners' interests or entered into agreements to purchase these
interests in most of its Existing Networks. Upon completion of these
acquisitions, the original Local Partner Agreements are terminated. For the
remaining Local Partnership Agreements, the summary below provides a brief
description of the general terms and provisions.

         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
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

<PAGE>

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. 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 or former local partners. In some instances, the operating
partnerships lease existing fiber optic capacity and in other instances, the
operating partnerships request the local partners or former local partners to
construct new fiber optic capacity. In many cases, local partners or former
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
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 or former local
partners. Similarly, the operating partnerships retain title to all of their own
electronics and switches that become a part of the network. A local partner or

<PAGE>

former 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 or former 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 FCC are reviewing whether use of
local partner or former local partners facilities for telecommunications
purposes (as occurs when the operating companies lease fiber optic capacity from
local partners or former 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 or former local partners.
In some cases, State PUCs attempt to directly regulate the fiber lease contracts
between the operating companies and their local partners or former 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 million, the Company received (i) a $20 million senior secured note from
Telergy, Inc., 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.

IRU Agreements

         The Company has entered into several agreements that entitle the
Company to a long-term lease or an IRU to approximately 9,000 route miles of
local and long-haul dark fiber. Generally each agreement requires Hyperion to
pay an aggregate price consisting of an initial payment, followed by
installments during the construction period based upon achieving certain
milestones (e.g., commencement of construction, conduit installation and fiber
installation). The final payment for each segment will be made at the time of
acceptance.

         Each agreement provides for the sharing of certain maintenance and
operating costs. The agreements establish anticipated delivery dates for
construction and delivery of segments along the route of Hyperion's networks.
The agreements provide for penalties in the event of delay of segments and, in
certain circumstances, allow Hyperion to terminate non-delivered segments of the
contracts.

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.

<PAGE>

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.

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 251 professionals at December 31, 1998 focused on selling the Company's
portfolio of service offerings, and currently has over 136 technicians, customer
service representatives and administrative support staff at December 31, 1998,
enabling the Company to provide its customers with continuous support and
superior service. The Company expects to increase its marketing efforts by
increasing the size of its current sales force during 1999 to approximately 450
professionals 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
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, and 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

<PAGE>

strategy, the Company has entered into the National Service Agreement with AT&T
pursuant to which the Company through its networks is 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 MCIWorldCom Preferred Provider Agreement pursuant to which the
Company is designated MCIWorldCom'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 band width 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 Local Exchange Carriers Central Office ("LEC-CO") access line
demographic data. 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 LEC-COs and IXC
POPs; (iii) the Company's market information; and (iv) cost of construction.

Network Construction

         The Company's networks are constructed to cost-effectively access areas
of significant end user telecommunications traffic, as well as the majority of
the LEC-COs, POPs and most of the IXCs. 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.
<PAGE>

Network Operating Control Center

         In Coudersport, Pennsylvania, the Company has built the Network
Operating Control Center ("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 1,748 building connections, 20
switches or remote switching modules and 15,005 network route miles as of
December 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.

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 17 Lucent switches and three Lucent remote switching
modules, which deliver full switching functionality, in 20 of its current
markets. The Company plans to deploy an additional nine regional super switches
during 1999.

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 December 31, 1998, the operating companies and the Company
employed 969 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.
<PAGE>

Competition

         The Company faces competition from many competitors with significantly
greater financial resources, well-established brand names and large, existing
installed customer bases. Moreover, we expect the level of competition to
intensify in the future.

         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 the potential to subsidize competitive services from
monopoly service revenues, and benefit from favorable state and federal
regulations. In light of the passage of the Telecommunications Act of 1996 (the
"Telecommunications Act"), federal and state regulatory initiatives will provide
increased business opportunities to competitive local exchange carriers
("CLECs") such as the Company, but regulators are likely to provide incumbent
LECs with increased pricing flexibility for their services as competition
increases. Further, if a Regional Bell Operating Company ("RBOC") is authorized
to provide in region long distance service in one or more states by fulfilling
the market operating provisions of the Telecommunications Act, the RBOC may be
able to offer "one stop shopping" that would be competitive with the Company's
offerings. To date, each request for such authority has been denied by the FCC.
An approval could result in decreased market share for the major IXCs, which are
among the operating companies' significant customers. Any of these results could
have an adverse effect on the Company.

         There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market, including the completed
merger of Bell Atlantic and NYNEX, whose combined territory covers a substantial
portion of the Company's markets. Other combinations have occurred in the
industry, which may have an effect on the Company, such as the combination of
AT&T Corp. and Teleport Communications Group Inc. ("TCG") and the pending
combination of Bell Atlantic and GTE. The effects of these combinations are
unknown at this time. The Company believes that combinations of RBOCs and others
will also affect the Company's strategy of originating and terminating a
significant proportion of its customers' communications traffic over its own
networks, rather than relying on the network of the incumbent LEC.

         The Company also faces, and will continue to face, competition from
other current and potential market entrants, including other CLECs, incumbent
LECs which are not subject to RBOC restrictions on long distance, AT&T,
MCIWorldCom, Sprint and other IXCs, cable television companies, electric
utilities, microwave carriers, wireless telecommunications providers and private
networks built by large end users. In addition, new carriers, such as Williams,
Qwest Communications International and Level 3 Communications are building and
managing nationwide networks which, in some cases, are designed to provide local
services. Further, AT&T's acquisition of TCI and MediaOne will exploit
ubiquitous local cable infrastructure for telecommunications and other services
provided by the operating companies. Finally, although the Company has generally
good relationships with the other existing IXCs, there are no assurances that
any of these IXCs will not build their own facilities, purchase other carriers
or their facilities, or resell the services of other carriers rather than use
the Company's services when entering the market for local exchange services.

Regulation

Government Overview

         A significant portion of the services provided by the Company and its
networks are subject to regulation by federal, state and local government
agencies. Future federal or state regulations and legislation may be less
favorable to us than current regulation and legislation and therefore may have a
material and adverse impact on our business and financial projects. In addition,
we may expand significant financial and managerial resources to participate in
proceedings setting rules at either federal or state level, without achieving a
favorable result.


<PAGE>

Federal Legislation and Regulation

         The Telecommunications Act ("Telecommunications Act") enacted on
February 21, 1996, substantially departs from prior legislation in the
telecommunications industry by establishing local exchange competition as a
national policy. This act removes state regulatory barriers to competition, and
imposes numerous requirements to facilitate the provision of local
telecommunications services by multiple providers. For instance, carriers must
provide to each other services for resale, number portability, dialing parity,
access to rights of way, and compensation for traffic they exchange. Incumbent
Local Exchange Carriers ("ILECs") must provide competitors with network
interconnection, access to unbundled network elements, and collocation at ILEC
premises, among other things. Finally, the FCC is responsible for implementing
and presiding over regimes for universal service subsidiaries and access.

         The FCC is charged with the broad responsibility of implementing the
local competition provisions of the Telecommunications Act. It has done so by
promulgating rules which encourage increased local competition. In 1997, a
federal appeals court for the Eighth Circuit vacated some of these rules. In
January 1999, the United States Supreme Court reversed elements of the Eighth
Circuit's ruling, finding that the FCC has broad authority to interpret the
Telecommunications Act and issue rules for its implementation. Specifically, the
Court stated that the FCC has authority to set pricing guidelines for unbundled
network elements, to prevent ILECs from dismantling existing combinations of
network elements, and to establish rules allowing competitors to "pick and
choose" among provisions of existing interconnection agreements. However, the
Court vacated the FCC's rules that identified the unbundled network elements
that ILECs must provide to CLECs. The FCC recently initiated a new proceeding to
reexamine which unbundled network elements ILECs must provide. In addition,
because the Eighth Circuit had only ruled on the FCC's jurisdiction to set a
pricing methodology, the ILECs have renewed their opposition to the actual
methodology.

         Many new carriers have experienced difficulties in working with the
ILECs, with respect to provisioning, interconnection, rights-of-way, collocation
and implementing the systems used by these new carriers to order and receive
unbundled network elements and wholesale service from the ILECs. Coordination
with ILECs is necessary for new carriers such as us to provide local service to
customers on a timely and competitive basis. The Telecommunications Act created
incentives for ILECs to cooperate with new carriers and permit access to their
facilities satisfied statutory conditions designed to open their local markets
to competition. The ILECs in the Company's proposed markets are not yet
permitted by the FCC to offer long distance services and the Company cannot be
assured that these ILECs will be accommodating to the Operating Companies once
they are permitted to offer long distance service. If the operating companies
are unable to obtain the cooperation of a ILEC in a region, whether or not such
ILEC has been authorized to offer long distance service, ability to offer local
services in such region on a timely and cost effective basis would be adversely
affected.

         The FCC recently adopted new rules designed to make it easier and less
expensive for CLECs to obtain collocation at ILEC central offices by, among
other things, restricting the ILECs' ability to prevent certain types of
equipment from being collocated and requiring ILECs to offer alternative
collocation arrangements to CLECs. The FCC also initiated a new proceeding to
address line sharing which, if implemented, would allow CLECs to offer data
services over the same line that a consumer uses for voice services without the
CLEC having to provide the voice service. While the Company expects that the
FCC's new collocation rules will be beneficial to the Operating Companies, it
remains uncertain that these new rules will be implemented in a favorable
manner. Moreover, ILECs or other parties may ask that FCC to reconsider some or
all of its new collocation rules, or may appeal these rules in federal court.

         A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating ISPs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. Most states have required
ILEC to pay ISPs reciprocal compensation. However, on February 25, 1999, the FCC
adopted an order in which it determined that calls to ISPs are interstate in

<PAGE>

nature and proposed rules to govern compensation to carriers for transmitting
these calls. It stated, however, that its action was not intended to dislodge
previous state decisions interpreting interconnection agreements between ILECs
and CLECs to require reciprocal compensation between two local carriers jointly
delivering dial-up traffic to ISPs. Although the FCC does not intend to require
ISPs to pay access charges to contribute to universal service funds, the FCC's
order could affect the costs incurred by ISPs and the demand for their
offerings. An unfavorable outcome could materially affect the Company's
potential future revenues.

         Several ILECs have recently filed petitions at the FCC requesting a
waiver of certain obligations imposed on incumbent LECs in the
Telecommunications Act with respect to ILEC-provisioned high-speed data
services, including, among other things, the obligation to unbundle and offer
for resale such services. In addition, the ILECs 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. The FCC has
subsequently approved that such services are subject to interstate jurisdiction
and to the resale and unbundling obligation of the Telecommunications Act.
However, the FCC has initiated a proceeding to determine whether ILECs can
create separate affiliates for their high speed data services that would be free
from these obligations. This outcome could have a material adverse effect on the
Company.

         Any of the regulatory changes discussed above could 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.

         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"). Tariffs set forth the terms and conditions under which
the operating companies provide services. This would deprive the Company of the
advantages of being able to rely on terms and conditions contained in a filed
tariff, requiring instead reliance on individual contracts. The IXC Detariffing
Order has been stayed pending review in the U.S. Court of Appeals for the
District of Columbia.

         In May 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded the federal subsidies for local exchange
telephone service provided to low-income consumers. Providers of interstate
telecommunications services, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of the payments into
these federal subsidy funds will be based on its share of certain defined
telecommunications end-users revenues. Currently, the FCC is assessing such
payments on the basis of a provider's revenue for the previous year. In the May
1997 order, the FCC also announced that it will soon revise its rules for
subsidizing service provided to consumers in high cost areas, which may result
in further substantial increases in the overall cost of the subsidy program.
Several parties have appealed the May 1997 order. Such appeals have been
consolidated and transferred to the United States Court of Appeals for the Fifth
Circuit where oral argument was heard in December 1998. Various states area also
in the process of implementing their own universal service programs.

         To the extent that the operating companies provide interexchange
telecommunications service, access charges are required to be paid to ILECs when
the facilities of those companies are used to originate or terminate
interexchange calls. Also, as CLECs, the operating companies provide access
service to other interexchange service providers. The interstate access charges
of ILECs are subject to extensive regulation by the FCC, while those of CLECs
are subject to a lesser degree of FCC regulation but remain subject to the
requirement that all charges be just, reasonable, and not unreasonably
discriminatory. In two orders released in December 1996 and May 1997, the FCC
made major changes in the interstate access charge structure. In the December
1996 order, the FCC removed restrictions on ILECs ability to lower access prices

<PAGE>

and relaxed the regulation of new switched access services in those markets
where there are other providers of access service. If this increased pricing
flexibility is not effectively monitored by federal regulators, it could have a
material adverse effect on the Company's ability to compete in providing
interstate access services. The May 1997 order substantially increased the cost
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through a monthly, non-traffic-sensitive access charges. In the May 1997 order,
the FCC also announced its plan to bring interstate access rate levels more in
line with cost. Th plan will include rules that are expected to be established
sometime in 1999 that may grant price cap LECs increased pricing flexibility
upon demonstration of increased competition (or potential competition) in
relevant markets. The manner in which the FCC implements this approach to
lowering access charge levels could have a material effect on the Company's
ability to compete in providing interstate access services.

         In addition, the operating companies assess access charges to companies
that use their facilities to originate or terminate long distance calls. Some of
these companies, including AT&T and Sprint, have announced plans to resist
paying access charges that exceed the access charges of the ILEC in any given
geographic area. While operating companies have not experienced any such
challenges to their rights to collect access charges, they could experience them
in the future. If so, the effect upon the Company's business could be material
and adverse.

         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. The Company
has challenged states' attempts to limit competition in certain rural areas. An
FCC order is pending. Depending on the result, the Company's expansion plans may
be adversely affected.

         The FCC also presides over ongoing proceedings addressing a variety of
other matters, including number portability, internet telephony, slamming, and
pole attachment. The outcome of any such proceedings may adversely affect the
Company and its ability to offer service in competition with LECs.

State Regulation

         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.

         In addition, operating companies have been certificated or are
otherwise authorized to provide telecommunications services in Alabama,
Arkansas, Connecticut, Delaware, District of Columbia, Florida, Indiana, Kansas,
Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Vermont and Virginia and West Virginia. The
certificates or other authorizations permit the operating companies to provide a
full range of local telecommunications services, including basic local exchange
service. 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. In some states, and
operating company's tariff lists a rate range or sets prices on an individual
case basis. Many states also may have additional regulatory requirements such as
reporting and customer service and quality requirements, Y2K compliance,
unbundling and universal service contributions all of which are subject to
change and may adversely affect the Company. 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.

         In addition to obtaining certification, an operating company must
negotiate terms of interconnection with the incumbent LEC before it can begin

<PAGE>

providing switched services. To date, the operating companies have negotiated
interconnection agreements with one or more of the incumbent LECs, in each state
in which they have been certificated. Agreements are subject to state PUC
approval.

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 addition, some municipalities may seek
to impose requirements or fees on users of transmission facilities, even though
they do not own such facilities.

         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.


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 December 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

         On February 24, 1999, the Company was served with a summons and
complaint filed in the United States District Court for the Northern District of
New York, Case Number 99-CV-268, by Hyperion Solutions Corporation
("Solutions"), which is described in the complaint as a company in the business
of developing, marketing and supporting comprehensive computer software tools,
executive information systems and applications that companies use to improve
their business performance. The complaint alleges, among other matters, that the
Company's use of the name "Hyperion" in its business infringes upon various
trademarks and service marks of Solutions in violation of federal trademark laws
and violates various New York business practices, advertising and business
reputation laws. The complaint seeks, among other matters, to enjoin the Company
from using the name or mark "Hyperion" in the Company's business as well as to
recover unspecified damages, treble damages and attorneys' fees. Management of
the Company believes that the Company has meritorious defenses to the complaint
and intends to vigorously defend this lawsuit. Although management believes that
this lawsuit will not in any event have a material adverse effect upon the
Company, no assurance can be given regarding the effect upon the Company if
Solutions were to prevail in this lawsuit.

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

         No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998, other than those previously reported on the
Company's Form 10-Q for the quarterly period ended December 31, 1998.


<PAGE>



Executive Officers of the Registrant

         The executive officers of the Company are:
<TABLE>

<S>                                         <C>     <C>
Name                                        Age     Position
Executive Officers
John J. Rigas...........................     74     Chairman and Director
James P. Rigas..........................     41     Vice Chairman, Chief Executive Officer and Director
Michael J. Rigas........................     45     Vice Chairman and Director
Timothy J. Rigas........................     42     Vice Chairman, Chief Financial Officer, Treasurer and Director
Daniel R. Milliard......................     51     Vice Chairman, President, Secretary and Director

Other Officers
Edward E. Babcock, Jr...................     36     Vice President, Finance
Thomas W. Cady..........................     44     Vice President, Sales and Marketing
Mark Erickson...........................     45     Vice President, Operations
John B. Glicksman.......................     38     Vice President, General Counsel, Assistant Secretary
Theodore A. Huf.........................     57     Vice President, Engineering
John D. Lasater.........................     46     Vice President, National Accounts
Jeffrey J. Miller.....................       36     Vice President, Business Development

</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. Mr.
Rigas currently spend substantially all of his time on concerns of the Company.
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.

         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.

<PAGE>

Rigas graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.

         Daniel R. Milliard is Vice Chairman, President, 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.

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.

         Mark Erickson, Vice President of Operations, joined Hyperion in June
1998. Prior to joining Hyperion, Mr. Erickson spent 25 years with Bell of PA and
Bell Atlantic in a variety of technical and management positions. Mr. Erickson
graduated from the Pennsylvania Technical College in 1973.

         John B. Glicksman is Vice President, General Counsel and Assistant
Secretary. Mr. Glicksman joined Adelphia in February 1992 and previously held
the position of Deputy General Counsel for Operations. Prior to joining
Adelphia, Mr. Glicksman was in private practice with the Washington, D.C. law
firms of Leventhal, Senter & Lerman; Fleischman and Walsh; and Howrey & Simon.
Mr. Glicksman received his J.D. degree, with honors, from the National Law
Center, George Washington University, Washington, D.C. and his B.A. degree, with
high honors, from Trinity College, Hartford, Connecticut.

         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.
<PAGE>

         Jeffrey J. Miller, Vice President of Business Development, joined
Hyperion in April 1998 and is responsible for leading business development
efforts and contract negotiations. Mr. Miller joined Adelphia in December 1990
and held the positions of Director of Wireless Operations and Regional
Controller. Prior to joining Adelphia, Mr. Miller spent seven years with the
Stamford, Connecticut office of Arthur Young and Company. Mr. Miller graduated
magna cum laude from Lehigh University in 1984 with a B.S. in Accounting.

PART II

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

Market  Information

         The Company's Class A common stock is quoted 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.

         The following table sets forth the range of high and low closing bid
prices of the Class A common stock on NASDAQ/NMS. Such bid prices represent
inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.



                              CLASS A COMMON STOCK

                   QUARTER ENDED:         HIGH          LOW
                   June 30, 1998         $18 1/6      $14 1/4
                   September 30, 1998    $16 5/8      $ 5 7/8
                   December 31, 1998     $15 1/8      $ 4 1/2


         As of May 21, 1999 there were 144 holders of record of the Company's
Class A common stock, par value $0.01 per share and 25 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>


ITEM 6.  SELECTED FINANCIAL DATA

         The following selected consolidated financial data as of and for each
of the four years in the period ended March 31, 1998 and the nine months ended
December 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 the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Transition
Report on Form 10-K. The balance sheet data as of March 31, 1995, 1996 and 1997
and the statement of operations data and the other Company data with respect to
the fiscal years ended March 31, 1995 and 1996 have been derived from audited
consolidated financial statements of the Company not included herein.

<TABLE>
<S>                                                        <C>       <C>        <C>        <C>          <C>
                                                                                                        Nine
                                                                     Year Ended March 31,              Months
                                                                                                        Ended
                                                                                                     December 31,
                                                              1995       1996      1997      1998        1998
       Statement of Operations Data (a):                       (Dollars in thousands, except per share amounts)

         Revenues........................................  $  1,729  $   3,322  $   5,088  $  13,510    $  34,776
         Operating expenses:
           Network operations............................     1,382      2,690      3,432      7,804       18,709
           Selling, general and administrative...........     2,524      3,084      6,780     14,314       35,341
           Depreciation and amortization.................       463      1,184      3,945     11,477       26,671
                                                           --------  ---------  ---------  ---------    ---------
         Operating loss..................................    (2,640)    (3,636)    (9,069)   (20,085)     (45,945)
         Gain on sale of investment  ....................       ---        ---      8,405       ---          ---
         Interest income.................................        39        199      5,976     13,304       10,233
         Interest income - affiliate.....................       ---        ---        ---        ---        8,395
         Interest expense and fees.......................    (3,321)    (6,088)   (28,377)   (49,334)     (38,638)
         Other income....................................       ---        ---        ---        ---        1,113
         Equity in net loss of joint ventures............    (1,799)    (4,292)    (7,223)   (12,967)      (9,580)
           Net loss......................................    (7,692)   (13,620)   (30,547)   (69,082)     (74,185)
           Dividend requirements applicable to
                  preferred stock........................       ---         ---       ---    (12,409)     (21,117)
           Net loss applicable to common
                  stockholders...........................    (7,692)   (13,620)   (30,547)   (81,491)     (95,302)
         Basic and diluted net loss per weighted
                  average share of common stock..........  $  (0.24) $   (0.42) $   (0.89) $   (2.33)   $   (1.80)
         Common stock dividends..........................       ---        ---        ---        ---          ---

       Other Company Data (a):
         EBITDA (b)......................................  $ (2,177) $  (2,452) $  (5,124) $  (8,608)   $ (19,274)
         Capital expenditures and Company investments(c).    10,376     18,899     79,396    132,889      215,770
         Cash used in operating activities...............    (2,130)      (833)    (4,823)    (6,333)      (8,810)
         Cash used in investing activities...............   (10,376)   (18,899)   (72,818)  (266,604)    (200,458)
         Cash provided by financing activities...........    12,506     19,732    137,455    443,873      221,088

                                                                          As of March 31,          As of December 31,
                                                              1995       1996      1997       1998         1998
                                                                     (Dollars in thousands)
       Balance Sheet Data (a):
         Cash and cash equivalents.......................  $    ---   $    ---   $ 59,814  $ 230,750    $ 242,570
         Total assets....................................    23,212     35,269    174,601    639,992      836,342
         Long term debt and exchangeable redeemable
           preferred stock...............................    35,541     50,855    215,675    735,980      722,783
         Common stock and other stockholders' equity
           (deficiency)..................................   (13,703)   (27,323)   (50,254)  (118,991)      74,031
<FN>

(a)  The data presented represents financial information for the Company and its
     consolidated subsidiaries. As of December 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, 1995, 1996, 1997 and 1998 and the nine
     months ended December 31, 1998, the Company's capital expenditures
     (including capital expenditures relating to its wholly owned operating
     companies) were $2.9, $6.1, $24.6, $68.6 and $146.8 million, respectively,
     and the Company's investments in its less than wholly owned operating
     companies were $7.5, $12.8, $34.8, $64.3 and $69.0 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 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 an Adjusted GAAP 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.

 <TABLE>

ADJUSTED GAAP (a)

                                                                                        Unaudited
                                                                                                   Nine Months
                                                                                  Year                Ended
                                                                              Ended March 31,     December 31,
                                                                            1997         1998         1998
                                                                                (Dollars in thousands)
<S>                                                                     <C>          <C>          <C>
Operating revenue.................................................      $   14,159   $   27,255   $   47,336
Direct operating expenses.........................................           8,018       12,894       22,432
                                                                        ----------   ----------   ----------
Gross margin......................................................           6,141       14,361       24,904

Selling, general and administrative expenses......................          11,829       21,845       39,608
Depreciation and amortization expense.............................          26,793       36,079       39,101
                                                                        ----------   ----------   ----------
Operating loss....................................................         (32,481)     (43,563)     (53,805)
Interest income...................................................           6,035       13,175       10,345
Interest income - affiliate.......................................             ---          527        8,396
Interest expense..................................................         (30,948)     (52,420)     (39,597)
Other income......................................................           8,416          ---        1,113
                                                                        ----------   ----------   ----------
Net loss..........................................................         (52,874)     (90,005)     (82,309)
Dividend requirements applicable to preferred stock...............             ---      (12,409)     (21,117)
                                                                        ----------   ----------   ----------
Net loss applicable to common stockholders........................      $  (52,874)  $ (102,414)  $ (103,426)
                                                                        ==========   ==========   ==========
Basic and diluted net loss per weighted average share
        of common stock...........................................      $    (1.54)  $    (2.93)  $    (1.95)
                                                                        ==========   ==========   ==========
Weighted average shares of common stock outstanding (in  thousands)         34,421       34,986       53,035
                                                                        ==========   ==========   ==========
Other Operating Data:
  EBITDA (b)......................................................     $    (5,688)  $   (7,484)  $  (14,704)
  Capital Expenditures............................................          74,170      115,519      158,059

                                                                               As of March 31,    December 31,
                                                                            1997         1998          1998
Other Network Data:
    Gross property, plant & equipment (in thousands) (c)..........     $   169,174   $  336,473   $  533,719
  Networks (d)....................................................              21           22           22
  Markets served (e)..............................................              33           46           46
  Route miles (e).................................................           3,461        5,363       15,005
  Fiber miles (e).................................................         166,131      249,672      369,777
  Buildings w/ customers..........................................           1,270        1,909        6,460
  LEC central offices collocated.................................              104          113          123
  Access lines sold..............................................            7,000       41,500      133,686
  Access lines installed.........................................            1,450       23,200      110,005
  Switches installed (f).........................................                7           17           20
  Employees (g)..................................................              261          571          969



<PAGE>


<FN>

(a) The adjusted GAAP 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 adjusted for the
    consolidation of certain joint ventures (Buffalo, Syracuse, New Jersey,
    Louisville, Lexington, Harrisburg, Richmond, Jacksonville and Wichita).
    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.
(b) 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 adjusted GAAP property, plant and equipment (before accumulated
    depreciation) of the networks, the NOCC and the Company.
(d) Includes networks under construction.
(e) Data as of March 31, 1997 excludes networks under construction. Data as of
    March 31, 1998 and December 31, 1998 includes networks under construction.
(f) Represents Lucent 5ESS switches or remote switch modules which deliver full
    switch functionality.
(g) 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

(Dollars in thousands except per share amounts)

Overview

         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Transition 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 and the effects of competition. 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 "intends" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These risks and uncertainties include, but are not limited to, uncertainties
relating to economic conditions, acquisitions and divestitures, the cost of
availability of capital, government and regulatory policies, the pricing and
availability of equipment, materials, inventories and programming, Year 2000
issues, product acceptance, technological developments and changes in the
competitive environment in which the Company operates. Persons reading this
Transition 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 risks and uncertainties facing the Company.

         The "Company" or "Hyperion" means Hyperion Telecommunications, Inc.
together with its majority-owned subsidiaries, except where the context
otherwise requires. Unless the context otherwise requires, references herein to
the "networks" or the "Company's networks" mean the (a) 22 telecommunications
networks (in 46 markets served) in operation or under construction (the
"Existing Networks") owned as of December 31, 1998 by 20 Operating Companies
(which, as defined herein, are (i) wholly and majority owned subsidiaries of the
Company or (ii) joint venture partnerships and corporations managed by the
Company and in which the Company holds less than a majority equity interest with
one or more other partners) and (b) additional networks under development (the
"New Networks") as of such date.

         Hyperion is a super-regional provider of communications services
offering a full range of communications services to customers that include
businesses, governmental and educational end users and other telecommunications
service providers throughout the eastern United States. The Company provides
these customers with communications services such as local switch dial tone,
long distance service, high speed data, and Internet connectivity. The customer
has a choice of receiving these services individually or as part of a bundle of
services, which is typically priced at a discount when compared to the price of
the individual services. In order to take advantage of the improved economic
returns from providing services over the Company's own network system (having
"on-net" traffic), the Company is in the process of significantly expanding the
reach of its network system. This network system expansion includes the
purchase, lease or construction of fiber optic network facilities in more than
50 new markets and the interconnection of all of the Company's existing and new
markets with the Company's own fiber optic network facilities, as well as
implementing various technologies including Dense Wave Division Multiplexing
("DWDM") to provide greater bandwidth capacity on the Company's local and
long-haul network system.

         By the year 2001, Hyperion expects to serve most of the major cities in
the eastern half of the United States. The Company currently provides
communications services in 46 markets and plans to introduce services in more
than 50 new markets, expanding Hyperion's presence to approximately 30 states.
At December 31, 1998, the Company had installed 20 Lucent 5ESS switches or
remote switching modules and plans to put in operation during 1999 nine

<PAGE>

additional regional switches (the "super switches"). Once fully installed, the
Company's fiber optic backbone will connect each of the Company's markets. This
fully redundant, 16,000 route mile network system will support Hyperion's full
line of communications service offerings. The Company has chosen the eastern
half of the United States as its overall target market because it presents an
opportunity for rapid growth. Once fully deployed, management believes that the
Company's network system will encompass over 26 million addressable business
access lines (approximately 34% of the nation's population), which currently
generate annual estimated communications services revenues of over $50,000,000.

         The Company has experienced initial success in the sale of business
access lines with approximately 133,686 access lines sold as of December 31,
1998, of which approximately 110,005 lines are installed. This represents an
addition of 39,726 access lines sold and 32,871 access lines installed during
the quarter ended December 31, 1998. As of December 31, 1998, approximately 63%
of these access lines are provisioned entirely on the Company's network ("on-net
lines") with the remainder being a combination of unbundled loops or total
service resale from LEC networks.

Financing and Acquisition Transactions

         On May 8, 1998, Hyperion 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, Hyperion 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, Hyperion issued 3,642,666 shares of Class A common
stock to Adelphia in exchange for certain of Hyperion's indebtedness and
payables owed to Adelphia at a purchase price of $15.00 per share (or an
aggregate of $54,600). In a related transaction, on June 5, 1998, Hyperion
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. At December 31,
1998, Adelphia owned approximately 66% of the Hyperion outstanding common stock
and approximately 86% of the total voting power.

         On March 2, 1999 Hyperion issued $300,000 of 12% Senior Subordinated
Notes due 2007 (the "Subordinated Notes"). An entity controlled by members of
the Rigas family, controlling stockholders of Adephia, purchased $100,000 of the
Subordinated Notes directly from Hyperion at a price equal to the aggregate
principal amount less the discount to the initial purchasers. The net proceeds
of approximately $295,000 were or will be used to fund Hyperion's acquisition of
interests held by local partners in certain of its markets and will be used to
fund capital expenditures and investments in its networks and for general
corporate and working capital purposes.

         On March 23, 1999, Hyperion consummated a purchase agreement with
Multimedia, Inc. ("Multimedia"), the parent of its local partner in the Wichita,
KS market, whereby Multimedia received approximately $9,778 in cash for
Multimedia's ownership interest in this network. In addition, Hyperion will be
responsible for the payment of fiber lease liabilities due to Multimedia in the
amount of approximately $2,800 which are payable over the next six years. As a
result of the transaction, the Hyperion ownership in Wichita increased to 100%.

         On March 31, 1999, Hyperion consummated purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne received
approximately $81,520 in cash for MediaOne's ownership interests in these
networks. In addition, Hyperion will be responsible for the payment of fiber
lease liabilities due to MediaOne in the amount of approximately $14,500 which
are generally payable over the next ten years. As a result of the transactions,
Hyperion's ownership interest in each of these networks increased to 100%.
Together with the Multimedia acquisition, these transactions are referred to
below as the "Roll-ups."

         On March 31, 1999, Hyperion entered into purchase agreements with
Entergy Corporation ("Entergy"), the parent of its local partner in the Baton
Rouge, LA, Little Rock, AR and Jackson, MS markets, whereby Entergy will receive
$35,776 in cash for Entergy's ownership interests in these markets. Upon
consummation of this transaction, which is subject to normal closing conditions
and regulatory approvals, the Company's ownership interest in each of these
networks will increase to 100%.

<PAGE>


Results of Operations

         Change of Year End. On March 30, 1999, the Board of Directors of
Hyperion approved a change in Hyperion's fiscal year from March 31 to December
31. The decision was made to conform to general industry practice and for
administrative purposes. The change became effective for the nine months ended
December 31, 1998.

Nine months Ended December 31, 1998 in Comparison with Nine months Ended
December 31, 1997


         Revenues increased 300% to $34,776 for the nine months ended December
31, 1998, from $8,690 for the same period in the prior fiscal year. Growth in
revenues of $26,086 resulted from an increase in revenues from majority and
wholly-owned Operating Companies of approximately $27,171 as compared to the
same period in the prior fiscal year due to the continued expansion of the
Company's customer base, its success in the roll out of switched services as a
result of the retail end user strategy adopted by the Company and the
consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington and
Harrisburg networks. Management fees from non-consolidated subsidiaries
decreased $1,085 as compared to the same period in the prior fiscal year
primarily due to the consolidation of the above mentioned networks.

         Network operations expense increased 255% to $18,709 for the nine
months ended December 31, 1998 from $5,263 for the same period in the prior
fiscal year. The increase was attributable to the expansion of operations at the
NOCC, and the increased number and size of the operations of the Operating
Companies which resulted in increased employee related costs and equipment
maintenance costs and the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.

         Selling, general and administrative expense increased 288% to $35,341
for the nine months ended December 31, 1998 from $9,099 for the same period in
the prior fiscal year. The increase was due primarily to increased expense
associated with the network expansion plan, an increase in the sales force in
the Existing Networks and an increase in corporate overhead costs to accommodate
the growth in the number, size and operations of Operating Companies managed and
monitored by the Company, as well as the consolidation of the Buffalo, Syracuse,
New Jersey, Louisville, Lexington and Harrisburg networks.

         Depreciation and amortization expense increased 280% to $26,671 during
the nine months ended December 31, 1998 from $7,027 for the same period in the
prior fiscal year primarily as a result of increased amortization of deferred
financing costs and increased depreciation resulting from the higher depreciable
asset base at the NOCC and the majority and wholly owned Operating Companies and
the consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington
and Harrisburg networks.

         Interest income for the nine months ended December 31, 1998 increased
33% to $10,233 from $7,675 for the same period in the prior fiscal year as a
result of increased cash and cash equivalents and U.S. Government securities due
to the investment of the proceeds of the 12 1/4% Senior Secured Notes, the 12
7/8% Senior Exchangeable Redeemable Preferred Stock and the IPO, partially
offset by demand advances made to Adelphia.

         Interest income - affiliate for the nine months ended December 31, 1998
increased to $8,395 from $276 as a result of demand advances made to Adelphia
during the current period.

         Interest expense increased 8% to $38,638 during the nine months ended
December 31, 1998 from $35,934 for the same period in the prior fiscal year. The
increase was attributable to the interest on the 12 1/4% Senior Secured Notes
partially offset by the reduction of interest expense associated with the
reduced amounts payable to Adelphia and higher interest capitalized on networks
under construction.
<PAGE>

         Equity in net loss of joint ventures increased to $9,580 during the
nine months ended December 31, 1998 from $9,284 for the same period in the prior
fiscal year. The net losses of the nonconsolidated Operating Companies for the
nine months ended December 31, 1998 were primarily the result of increased
revenues only partially offsetting startup and other costs and expenses
associated with design, construction, operation and management of the networks
of the 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 increase was partially offset by the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg networks for
the current period.

         The number of non-consolidated Operating Companies paying management
fees to the Company was 8 at December 31, 1998. These Operating Companies and
networks under construction paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $2,724 for the nine
months ended December 31, 1998, as compared with $3,809 for the same period in
the prior fiscal year. The non-consolidated Operating Companies' net losses,
including networks under construction, for the nine months ended December 31,
1997 and 1998 aggregated approximately $13,719 and $22,325 respectively.

         Preferred stock dividends increased by 264% to $21,117 for the nine
months ended December 31, 1998 from $5,794 for the same period in the prior
fiscal year. The increase is due to the preferred stock which was issued in
October 1997.

Year ended March 31, 1998 in comparison with year ended March 31, 1997

         Revenues increased 166% to $13.5 million for the fiscal year ended
March 31, 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 from nonconsolidated Operating
Companies increased $1.6 million over the prior fiscal year due to a full year
of operation 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. The increase was attributable to the
expansion of operations at the NOCC, and the increased number and size of the
operations of the Operating Companies which resulted in increased employee
related costs and equipment maintenance costs and the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg Operating
Companies.

         Selling, general and administrative expense increased 111% to $14.3 in
Fiscal 1998 from $6.8 million in the prior fiscal year. The increase was due to
an increase in the sales 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.
<PAGE>

         Interest income for Fiscal 1998 increased to $13.3 million from $6.0 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, the 12 7/8% Senior Exchangeable
Redeemable Preferred.

         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 million
Fiscal 1998 from $7.2 million in the prior fiscal year as more non-consolidated
Operating Companies began operations. The net losses of the non-consolidated
Operating Companies for Fiscal 1998 were primarily the result revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks of the
non-consolidated 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 non-consolidated Operating Companies paying management
fees to the Company decreased form 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 prior fiscal year. The
non-consolidated networks' net losses, including networks under construction,
for Fiscal 1998 aggregated approximately $19.9 million.

         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.

Supplementary Operating Company Financial Analysis

         The Company believes that historically, working with local partners to
develop markets has enabled the Company to build larger networks in a rapid and
more cost effective manner then it could have on its own. As of December 31,
1998, the Company had joint ventures covering 10 networks with local partners
where the Company owns 50% or less of each joint venture. In three of these
joint ventures, the Company has recently purchased its local partners' interest.
As a result of the Company's historic ownership position in these joint
ventures, a substantial portion of the Operating Companies' historic 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
unconsolidated Operating Companies. Because of the recently completed Roll-ups,
the historical Generally Accepted Accounting Principles ("GAAP") presentation of
the assets, liabilities and results of operations of the Company does not
represent a complete measure of the financial position, growth or operations of
the Company.

         In order to provide an additional measure of the financial position,
growth and performance of the Company and its Operating Companies, management of
the Company analyzes financial information of the Operating Companies on an
adjusted GAAP basis. Adjusted GAAP reflects Hyperion's consolidated GAAP
financial position and results of operations adjusted for the inclusion of
certain operating companies (Buffalo, Syracuse, New Jersey, Louisville,
Lexington, Harrisburg, Richmond, Jacksonville, and Wichita) which were either
purchased in February 1998 or are involved in the Roll-ups, as more fully
described in "Item 1-Business, Recent Developments". All adjusted GAAP results
of operations are presented as if Hyperion consolidated all Operating Companies
which were either purchased in February 1998 or are involved in the Roll-ups
during the entire period presented. This financial information, however, is not
indicative of the Company's overall historical financial position or results of
operations.



<PAGE>




Summary adjusted GAAP information:

<TABLE>

                                                                    Nine Months Ended
                                                                       December 31,
                                                                   1997           1998
                                                               ------------  -------------
<S>                                                             <C>           <C>
Adjusted GAAP revenue                                           $  18,715     $   47,336
Adjusted GAAP EBITDA                                               (5,086)       (14,704)
Adjusted GAAP operating loss                                      (31,719)       (53,805)
Adjusted GAAP net loss applicable to common stockholders          (72,913)      (103,426)
Adjusted GAAP capital expenditures                                 76,029        158,059
Adjusted GAAP gross property, plant and equipment                 386,089        533,719

</TABLE>


         For the nine months ended December 31, 1998, adjusted GAAP revenue
increased 153% to $47,336 as compared to $18,715 for the same period in the
prior fiscal year. The increase in revenues resulted from the continued
expansion of the Company's customer base and its success in the roll out of
switched services as a result of the retail end user strategy adopted by the
Company.

         For the nine months ended December 31, 1998, adjusted GAAP EBITDA loss
was $14,704 as compared to $5,086 for the same period in the prior fiscal year.
The increase in adjusted GAAP EBITDA loss for the nine months ended December 31,
1998 was due primarily to increased selling, general, and administrative
expenses as a result of the increase 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, and was
also due to increased costs associated with the Company's New Network expansion
efforts.

         For the nine months ended December 31, 1998, adjusted GAAP operating
loss was $53,805 as compared to $31,719 for the same period in the prior fiscal
year. The increase in adjusted GAAP operating loss was due primarily to the
above mentioned increase in selling, general and administrative expenses and
increased depreciation and amortization expense resulting from a higher
depreciable asset base.

         For the nine months ended December 31, 1998, adjusted GAAP net loss
applicable to common stockholders was $103,426 as compared to $72,913 for the
same period in the prior fiscal year. The increase in adjusted GAAP net loss
applicable to common stockholders was due primarily to the above mentioned
increase in selling, general and administrative expenses, increased depreciation
and amortization, increased equity in net loss of joint ventures and increased
preferred stock dividends associated with the Company's financing activities. In
particular, depreciation and amortization increased substantially due to the
significant capital investment the Company has made and the consolidation of the
Operating Companies involved in the February 1998 acquisitions and the Roll-ups.

         During the nine months ended December 31, 1998, the Company and its
Operating Companies invested $200,331 in capital expenditures, of which
Hyperion's adjusted GAAP share was $158,059.

Liquidity and Capital Resources

         The development of the Company's business and the installation and
expansion of the Operating Companies' networks, as well as the development of
the New Networks, combined with the construction of the Company's NOCC, have

<PAGE>

resulted in substantial capital expenditures and investments during the past
several years. Capital expenditures by the Company were $39,775 and $146,752 for
the nine months ended December 31, 1997 and 1998, respectively. Further,
investments made by the Company in nonconsolidated Operating Companies and in
LMDS licenses were $53,194 and $69,018 for the nine months ended December 31,
1997 and 1998, respectively. The significant increase in capital expenditures
for the nine months ended December 31, 1998 as compared with the same period in
the prior fiscal year is largely attributable to capital expenditures necessary
to develop the Existing Networks and the New Networks, as well as the fiber
purchases to interconnect the networks. The Company expects that it will
continue to incur substantial capital expenditures in this development effort.
The Company also expects to continue to fund operating losses as the Company
develops and grows its business. For information regarding recent transactions
affecting the Company's liquidity and capital resources, see "Financing and
Acquisition Transactions."

         The Company has experienced negative operating and investing cash flow
since its inception. A combination of operating losses, substantial capital
investments required to build the Company's networks and its state-of-the-art
NOCC, and incremental investments in the Operating Companies has resulted in
substantial negative cash flow.

         Expansion of the Company's Existing Networks and services and the
development of New Networks and additional networks and services requires
significant capital expenditures. 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 New Networks and (iv) the acquisition of
additional ownership interests in Existing Networks or New Networks. The Company
has made substantial capital investments and investments in Operating Companies
in connection with the installation of 5ESS switches or remote switching modules
in all of its Existing Networks and plans to install regional super switches in
certain key New Networks when such New Networks are operational. To date, the
Company has installed switches in 20 of its Existing Networks and plans to
provide such services in all of its New Networks on a standard switching
platform based on Lucent 5 switch technology. In addition, the Company intends
to increase spending on marketing and sales significantly in the foreseeable
future in connection with the expansion of its sales force and marketing efforts
generally. The Company also plans to purchase its partners' interest in the
Operating Companies when it can do so at attractive economic terms. The Company
estimates that it will require approximately $400,000 to fund the Roll-ups, the
Entergy acquisition, anticipated capital expenditures, working capital
requirements and operating losses and pro rata investments in the Operating
Companies from January 1999 through the end of March 2000. The Company believes
that the net proceeds from the offering of the Subordinated Notes, together with
its existing cash balance and internally generated funds, will be sufficient to
fund the Rollups, the Entergy acquisition, the Company's capital expenditures,
working capital requirements, operating losses and pro rata investments in the
Operating Company's capital expenditures through the fiscal quarter ended
September 30, 2000. In addition, there can be no assurance (i) that the
Company's future cash requirements will not vary significantly from those
presently planned due to a variety of factors including acquisition of
additional networks, development of the LMDS spectrum, continued acquisition of
increased ownership in its networks and material variances from expected capital
expenditure requirements for Existing Networks and New Networks or (ii) that
anticipated financings, local partner investments and other sources of capital
will become available to the Company. In addition, it is possible that expansion
of the Company's networks may include the geographic expansion of the Company's
existing clusters and the development or acquisition of other new markets not
currently planned. The Company expects to continue to build new networks in
additional markets, which have broader geographic coverage and require higher
capital outlays than those with partners in the past. The Company also has
funded the purchase of certain partnership interests and expects to fund
additional purchases of partnership interests.


         The Company will need substantial additional funds to fully fund its
business plan. The Company expects to fund its capital requirements through
existing resources, credit facilities and vendor financings at the Company and
Operating Company levels, internally generated funds, equity invested by local
partners in Operating Companies and additional debt or equity financings, as

<PAGE>

appropriate, and expects to fund its purchase of partnership interests of local
partners through existing resources, internally generated funds and additional
debt or equity financings, as appropriate. There can be no assurances, however,
that the Company will be successful in generating sufficient cash flow or in
raising sufficient debt or equity capital on terms that it will consider
acceptable, or at all.

Recent Accounting Pronouncements

         Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," has been issued
and is effective for fiscal quarters of fiscal years 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. Management of the Company
has not completed its evaluation of the impact of the impact of SFAS No. 133 on
the Company's financial statements.

         Statement of Position ("SOP") 98-5, "Reporting on the Cost 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 organizational costs. It requires such costs to be expensed
as incurred. Management of the Company believes that SOP 98-5 will not have a
material impact on the Company's financial statements.

Year 2000 Issues

         The year 2000 issue refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. This could
present risks to the operation of the Company's business in several ways. The
Company is evaluating the impact of the year 2000 issue on its business
applications and its products and services. The evaluation includes a review of
the Company's information technology systems, telephony equipment and other
embedded technologies. A significant portion of the Company's computerized
systems and technologies have been developed, installed or upgraded in recent
years and are generally more likely to be year 2000 ready. The Company is also
evaluating the potential impact as a result of its reliance on third-party
systems that may have year 2000 issues.


         Computerized business applications that could be adversely affected by
the year 2000 issue include:

      information processing and financial reporting systems,

      customer billing systems,

      customer service systems,

      telecommunication transmission and reception systems, and

      facility systems.

         System failure or miscalculation could result in an inability to
process transactions, send invoices, accept customer orders or provide customers
with products and services. Customers could also experience a temporary
inability to receive or use the Company's products and services.

         The Company has developed a program to assess and address the year 2000
issue. This program consists of the following phases:

      inventorying and assessing the impact on affected technology and systems,

      developing solutions for affected technology and systems,
<PAGE>

      modifying or replacing affected technology and systems,

      testing and verifying solutions,

      implementing solutions, and

      developing contingency plans.

         The Company has substantially completed inventorying and assessing the
affected computerized systems and technologies. The Company is in various stages
of its year 2000 compliance program with respect to the remaining phases as it
relates to the affected systems and technologies.

         The Company has engaged a consulting firm familiar with its financial
reporting systems. This firm has developed and tested year 2000 solutions that
the Company is in the process of implementing. The Company expects its financial
reporting systems to be year 2000 compliant by July 1999.

         A third-party billing vendor currently facilitates customer billing.
The Company is currently in the process of testing an in-house service ordering,
provisioning, maintenance and billing system that would replace the third-party
billing vendor. The Company expects to have this new system implemented by
September 1999. On a contingency basis, the third-party vendor has provided a
written statement that it will certify it is fully year 2000 compliant by August
1999.

         Telecommunication plant rebuilds and upgrades in recent years have
minimized the potential impact of the year 2000 issue on the Company's
facilities, customer service, telecommunication transmission and reception
systems. The Company is engaged in a comprehensive internal inventory and
assessment of all hardware components and component controlling software
throughout its telecommunication networks. The Company expects to implement any
hardware and software modifications, upgrades or replacements resulting from the
internal review by August 1999.

         Through December 31, 1998, costs incurred directly related to
addressing the year 2000 issue totaled $350. The Company has also redeployed
internal resources to meet the goals of its year 2000 program. The Company
currently estimates the total cost of its year 2000 remediation program to be
approximately $775. Although the Company will continue to incur substantial
capital expenditures in the ordinary course of meeting its telecommunications
system upgrade goals through the year 2000, it will not specifically accelerate
its expenditures to facilitate year 2000 readiness, and accordingly such
expenditures are not included in the above estimate.

         The Company has begun communicating with others with whom it does
significant business to determine their year 2000 readiness and to determine the
extent to which the Company is vulnerable to year 2000 issues related to those
third parties. The Company purchases much of its technology from third parties.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be year 2000 ready or timely converted into systems
compatible with the Company systems. The Company's failure or a third-party's
failure to become year 2000 ready or the Company's inability to become
compatible with third parties with which the Company has a material
relationship, may have a material adverse effect on the Company, including
significant service interruption or outages; however the Company can not
currently estimate the extent of any such adverse effects.

         The Company is in the process of identifying secondary sources to
supply its systems or services in the event it becomes probable that any of its
systems will not be year 2000 ready prior to the end of 1999. The Company is
also in the process of identifying secondary vendors and service providers to
replace those vendors and service providers whose failure to be year 2000 ready
could lead to a significant delay in the company's ability to provide its
service to its customers.


<PAGE>

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 in the past two fiscal years in the period ended March 31,
1998 and the nine months ended December 31, 1998.



<PAGE>


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company uses fixed rate debt to fund its working capital
requirements, capital expenditures and acquisitions. These debt arrangements
expose the Company to market risk related to changes in interest rates. The
table below summarizes the fair values and contract terms of the Company's
financial instruments subject to interest rate risk as of December 31, 1998.



<TABLE>
<S>                           <C>        <C>        <C>          <C>      <C>      <C>         <C>       <C>
                                              Expected Maturity
                            ------------------------------------------------------
                                                                                                          Fair
                              1999       2000       2001         2002     2003     Thereafter   Total     Value
                            ---------- ---------- ---------- ---------- ---------- ----------- --------- --------
Debt:                             ---        ---        ---        ---    303,840     478,674   782,514  669,924

Fixed Rate
   Average Interest Rate       12.72%     12.72%     12.72%     12.72%     12.62%      12.62%       ---      ---

</TABLE>



<PAGE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>


<S>                                                                                                  <C>
Independent Auditors' Report.....................................................................    39
Consolidated Balance Sheets, March 31, 1998 and December 31, 1998................................    40
Consolidated Statements of Operations, Years Ended March 31, 1997 and 1998 and Nine Months           41
        Ended December 31, 1998..................................................................
Consolidated Statements of Common Stock and Other Stockholders' Equity (Deficiency),
        Years Ended March 31, 1997 and 1998 and Nine Months ended December 31, 1998..............    42
Consolidated Statements of Cash Flows, Years Ended March 31, 1997 and 1998 and Nine
        Months Ended December 31, 1998...........................................................    43
Notes to Consolidated Financial Statements.......................................................    44

</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, 1998 and
December 31, 1998, and the related consolidated statements of operations, of
common stock and other stockholders' equity (deficiency) and of cash flows for
the years ended March 31, 1997 and 1998 and the nine months ended December 31,
1998. Our audits also included the financial statement schedule listed in the
Index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
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, 1998 and December 31, 1998, and the results
of their operations and their cash flows for the years ended March 31, 1997 and
1998 and the nine months ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.



DELOITTE & TOUCHE LLP


Pittsburgh, Pennsylvania
May 17, 1999


<PAGE>



               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands except per share amounts)

<TABLE>
<S>                                                                                     <C>          <C>
                                                                                        March 31,    December 31,
                                                                                           1998           1998
ASSETS:
Current assets:

     Cash and cash equivalents.......................................................   $  230,750   $  242,570
        Due from parent - net........................................................          ---        4,950
        Due from affiliates - net....................................................        2,151        1,078
     Accounts receivable - net.......................................................        4,434       15,583
                                                                                        ----------   ----------
          Total current assets.......................................................      237,335      264,181

U.S. government securities - pledged.................................................       70,535       58,054
Investments..........................................................................       53,064      112,328
Property, plant and equipment--net...................................................      250,633      374,702
Other assets--net....................................................................       28,425       27,077
                                                                                        ----------   ----------
          Total......................................................................   $  639,992   $  836,342
                                                                                        ==========   ==========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(DEFICIENCY):
Current liabilities:
     Accounts payable................................................................   $   11,775   $   20,386
     Due to parent--net..............................................................        6,541          ---
     Accrued interest and other liabilities..........................................        4,687       19,142
                                                                                        ----------   ----------
          Total current liabilities..................................................       23,003       39,528

13% Senior Discount Notes due 2003...................................................      215,213      220,784
12 1/4% Senior Secured Notes due 2004................................................      250,000      250,000
Note payable--Adelphia...............................................................       35,876          ---
Other debt...........................................................................       27,687       23,325
                                                                                        ----------   ----------
          Total liabilities..........................................................      551,779      533,637
                                                                                        ----------   ----------
12 7/8% Senior Exchangeable Redeemable Preferred Stock ..............................      207,204      228,674
                                                                                        ----------   ----------
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,
        396,500 and 22,376,071 shares outstanding, respectively......................            4          224
     Class B common stock, $0.01 par value, 150,000,000 shares authorized,
        32,500,000 and 32,314,761 shares outstanding, respectively...................          325          323
     Additional paid in capital......................................................          179      286,782
        Class A common stock warrant.................................................       13,000          ---
     Class B common stock warrants...................................................       11,087        4,483
     Loans to stockholders...........................................................       (3,000)         ---
     Accumulated deficit.............................................................     (140,586)    (217,781)
                                                                                        ----------   ----------
          Total common stock and other stockholders' equity (deficiency).............     (118,991)      74,031
                                                                                        ----------   ----------
          Total......................................................................   $  639,992   $  836,342
                                                                                        ==========   ==========
                 See notes to consolidated financial statements.
</TABLE>


<PAGE>



               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Amounts in thousands except per share amounts)

<TABLE>
<S>                                                                     <C>          <C>           <C>
                                                                                                   Nine Months
                                                                                                      Ended
                                                                           Year Ended March 31,   December 31,
                                                                            1997         1998         1998

Revenues ..........................................................     $    5,088   $   13,510    $   34,776
                                                                        ----------   ----------    ----------
Operating expenses:
     Network operations............................................          3,432        7,804        18,709
     Selling, general and administrative...........................          6,780       14,314        35,341
     Depreciation and amortization.................................          3,945       11,477        26,671
                                                                        ----------   ----------    ----------
               Total...............................................         14,157       33,595        80,721
                                                                        ----------   ----------    ----------
Operating loss ....................................................         (9,069)     (20,085)      (45,945)

Other income (expense):
     Gain on sale of investment....................................          8,405          ---           ---
     Interest income...............................................          5,976       13,304        10,233
     Interest income - affiliate ..................................            ---          ---         8,395
     Interest expense and fees.....................................        (28,377)     (49,334)      (38,638)
     Other income..................................................            ---          ---         1,113
                                                                        ----------   ----------    ----------
Loss before income  taxes, equity in net loss of joint ventures and
     extraordinary gain............................................        (23,065)     (56,115)      (64,842)

Income tax expense.................................................           (259)         ---           ---
                                                                        ----------   ----------    ----------
Loss before equity in net loss of joint ventures and extraordinary
     gain..........................................................        (23,424)     (56,115)      (64,842)

Equity in net loss of joint ventures...............................         (7,223)     (12,967)       (9,580)
                                                                        ----------   ----------    ----------
Loss before extraordinary gain.....................................        (30,547)     (69,082)      (74,422)
Extraordinary gain on repurchase of debt...........................            ---          ---           237
                                                                        ----------   ----------    ----------
Net loss...........................................................        (30,547)     (69,082)      (74,185)

Dividend requirements applicable to preferred stock................            ---      (12,409)      (21,117)
                                                                        ----------   ----------    ----------
Net loss applicable to common stockholders.........................     $  (30,547)  $  (81,491)   $  (95,302)
                                                                        ==========   ==========    ==========
Basic and diluted net loss per weighted average share of common
     stock before extraordinary gain...............................     $    (0.89)  $    (2.33)   $    (1.81)
Basic and diluted extraordinary gain on repurchase of debt per
     weighted average share of common stock........................            ---          ---          0.01
                                                                        ----------   ----------    ----------
Basic and diluted net loss per weighted average share of common
     stock.........................................................     $    (0.89)  $    (2.33)   $    (1.80)
                                                                        ==========   ==========    ==========
Weighted average shares of common stock outstanding................         34,421       34,986        53,035
                                                                        ==========   ==========    ==========



                 See notes to consolidated financial statements.

</TABLE>
<PAGE>




               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
        CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS'
                              EQUITY (DEFICIENCY)
                 (Dollars in thousands except per share amounts)

<TABLE>

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

<S>                             <C>        <C>      <C>        <C>        <C>        <C>        <C>        <C>
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 bonus.....        1       ---         26       ---        ---        ---          ---         27
   Net loss ..................      ---       ---        ---       ---        ---        ---      (69,082)   (69,082)
                                -------    ------   --------   -------    -------    -------    ---------  ---------
Balance, March 31, 1998.......        4       325        179    13,000     11,087     (3,000)    (140,586)  (118,991)
   Proceeds from issuance of
       Class A common stock...      129       ---    190,731       ---        ---        ---          ---    190,860
   Proceeds from issuance of
       Class A common stock to
       Adelphia...............       33       ---     49,827       ---        ---        ---          ---     49,860
   Exercise of Class A
       common stock warrant...        7       ---     12,993   (13,000)       ---        ---          ---        ---
   Conversion of note and
       payables to Adelphia to
       Class A common stock...       36       ---     44,222       ---        ---        ---          ---     44,258
   Exercise of Class B
       common stock warants...      ---         8      6,596       ---     (6,604)       ---          ---        ---
   Conversion of Class B
       common stock to
       Class A common stock...       10       (10)       ---       ---        ---        ---          ---        ---
   Repayment of loan
       to stockholders........      ---       ---        ---       ---        ---      3,000          ---      3,000
   Dividend requirements
       applicable to preferred
       stock..................      ---       ---    (18,168)      ---        ---        ---       (2,949)   (21,117)
   Other......................      ---       ---       (353)      ---        ---        ---          (61)      (414)
   Issuance of Class A
       common stock bonus.....        5       ---        755       ---        ---        ---          ---        760
   Net loss...................      ---       ---        ---       ---        ---        ---      (74,185)   (74,185)
                                -------    ------   --------   -------    -------    -------    ---------  ---------
Balance December 31, 1998.....  $   224    $  323   $286,782   $   ---    $ 4,483    $   ---    $(217,781) $  74,031
                                =======    ======   ========   =======    =======    =======    =========  =========

                 See notes to consolidated financial statements.
</TABLE>


<PAGE>



               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
                                                                                                               Nine Months
                                                                                                                  Ended
                                                                                       Year Ended March 31,    December 31,
                                                                                          1997        1998         1998
Cash flows from operating activities:
<S>                                                                                <C>           <C>            <C>
     Net loss....................................................................  $    (30,547) $    (69,082)  $   (74,185)
     adjustments to reconcile net loss to net cash used in operating
        activities:
          Depreciation...........................................................         2,604         9,038        23,838
          Amortization...........................................................         1,341         2,439         2,833
          Equity in net loss of joint ventures...................................         7,223        12,967         9,580
          Non-cash interest expense..............................................        23,467        34,038        23,857
          Deferred income taxes..................................................           257           ---           ---
          Gain on sale of investment.............................................        (8,405)          ---           ---
          Issuance of Class A common stock bonus.................................           156            27           761
          Extraordinary gain on repurchase of debt...............................           ---           ---          (237)
          Changes in operating assets and liabilities, net of effects of
             acquisitions:
               Other assets--net.................................................          (624)       (5,302)      (15,533)
               Accounts payable..................................................          (264)        6,023         9,862
               Accrued interest and other liabilities - net......................           (31)        3,519        10,414
                                                                                   ------------  ------------   -----------
Net cash used in operating activities............................................        (4,823)       (6,333)       (8,810)
                                                                                   ------------  ------------   -----------
Cash flows from investing activities:
        Net cash used for acquisitions...........................................        (5,040)      (65,968)          ---
        Expenditures for property, plant and equipment...........................       (24,627)      (68,629)     (146,752)
        Investment in fiber asset and senior secured note........................       (20,000)          ---           ---
        Proceeds from sale of investment.........................................        11,618           ---           ---
        Investments in joint ventures............................................       (34,769)      (64,260)      (69,018)
        Investments in U.S. government securities - pledged......................           ---       (83,400)          ---
        Sale of U.S. government securities - pledged.............................           ---        15,653        15,312
                                                                                   ------------  ------------   -----------
Net cash used in investing activities............................................       (72,818)     (266,604)     (200,458)
                                                                                   ------------  ------------   -----------
Cash flows from financing activities:
       Proceeds from issuance of preferred stock.................................           ---       194,522           ---
       Proceeds from issuance of Class A common stock............................           ---           ---       255,462
       Proceeds from sale and leaseback of equipment.............................           ---        14,876           ---
       Proceeds from debt........................................................       163,705       250,000           ---
       Repayments of debt........................................................           ---        (2,326)      (19,868)
       Proceeds from issuance of Class B common stock warrants...................        11,087           ---           ---
       Costs associated with debt financing......................................        (6,555)      (12,664)          ---
       Costs associated with issuance of Class A common stock....................           ---           ---       (14,742)
       (Loans to) repayment from stockholders....................................        (3,000)          ---         3,000
       Repayment of note payable--Adelphia.......................................       (25,000)          ---           ---
       Advances to affiliates....................................................        (2,782)         (535)       (2,764)
                                                                                   ------------  ------------   -----------
Net cash provided by financing activities........................................       137,455       443,873       221,088
                                                                                   ------------  ------------   -----------
Increase in cash and cash equivalents............................................        59,814       170,936        11,820
Cash and cash equivalents, beginning of period...................................           ---        59,814       230,750
                                                                                   ------------  ------------   -----------
Cash and cash equivalents, end of period.........................................  $     59,814  $    230,750   $   242,570
                                                                                   ============  ============   ===========

                 See notes to consolidated financial statements.

</TABLE>

<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (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 it's 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 is a majority owned subsidiary of Adelphia Communications Corporation
("Adelphia").

         On March 30, 1999, the Board of Directors of Hyperion approved a change
in Hyperion's fiscal year from March 31 to December 31. The decision was made to
conform to general industry practice and for administrative purposes. The change
became effective for the nine months ended December 31, 1998.

         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 with a carrying value of $44,258 owed to Adelphia at a purchase price
of $15.00 per share (or an aggregate of $54,600). 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. At December 31, 1998, Adelphia owned approximately 66% of Hyperion's
outstanding common stock and approximately 86% of total voting power.

         The Company provides facilities-based telecommunications services
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 has historically partnered 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. Most networks provide local switch dial tone, long
distance service, high speed data and internet connectivity to businesses,
governmental and educational end users and other telecommunication service
providers. 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.

Acquisitions and Sale of Partner Interests

         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 year ended March 31, 1997 were $221.

         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

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

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.

         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, 1996.


<TABLE>
<S>                                                                   <C>          <C>           <C>
                                                                                                Nine Months
                                                                           Year Ended              Ended
                                                                             March 31,          December 31,
                                                                         1997          1998         1998

Revenues.........................................................     $    8,495   $   17,919    $   34,776
Net loss.........................................................        (38,744)     (80,004)      (74,185)
Net loss applicable to common stockholders.......................        (38,744)     (92,413)      (95,302)
Net loss per weighted average share of common stock..............          (1.10)       (2.59)        (1.80)

</TABLE>

See Note 4 for discussion of other partnership interest purchases subsequent to
December 31, 1998.

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.

Accounts Receivable

         An allowance for doubtful accounts of $1,128 is recorded as a reduction
of accounts receivable at December 31, 1998. There was no allowance for doubtful
accounts at March 31, 1998.

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.

         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.

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)


         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 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. The Company recognizes revenues related to management and network
monitoring of the joint ventures in the month that the related services are
provided. Reciprocal compensation revenue is an element of switched service
revenue, which represents compensation from Local Exchange Carriers ("LECs") for
local exchange traffic terminated on the Company's facilities originated by
other LECs. Hyperion recognizes revenue based upon established contracts with
the LECs and has established a reserve for a portion of those revenues that are
under dispute.

Significant Customers

         During the nine months ended December 31, 1998, Hyperion's sales to
AT&T and Bell Atlantic represented 11.4% and 10.1% of total revenues,
respectively. During the year ended March 31, 1998, Hyperion sales to AT&T and
MCIWorldCom ("MCI"), represented 18.3% and 14.5% of total revenues,
respectively.

Basic and Diluted Net Loss Per Weighted Average Share of Common Stock

         Basic net loss per weighted average share of common stock is computed
based upon the weighted average number of common shares and warrants outstanding
during the period. Diluted net loss per common share is equal to basic net loss
per common share because the Adelphia Warrant discussed in Note 6 had an
antidilutive effect for the periods presented; however, the Adelphia Warrant
could have a dilutive effect 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 shares of Class B common stock have been included as shares
outstanding for purposes of the calculation of both basic and diluted net loss
per share for the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998. 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).

Other Assets - net

         Costs incurred in developing new networks or expanding existing
networks 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 non-development 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, 1998 and December 31, 1998 were $16,566 and $14,606, respectively. Also
included in other assets at March 31, 1998 and December 31, 1998 is a Senior
Secured Note (See Note 3).

<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)


Asset Impairments

         Hyperion periodically 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 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 and $2,500
at March 31, 1998 and December 31, 1998, respectively. The fair value of the
Redeemable Preferred Stock exceeded the carrying value by approximately $15,688
at March 31, 1998; the carrying value of the Redeemable Preferred Stock exceeded
the fair value by approximately $23,938 at December 31, 1998. The fair value of
the Senior Discount Notes exceeded the carrying value by approximately $35,649
and $9,516 at March 31, 1998 and December 31, 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 year ended March 31, 1998 and
the nine months ended December 31, 1998 totaled $24,500 and $1,155, respectively
(See Note 5). Dividend requirements applicable to preferred stock were satisfied
by the issuance of an additional 6,860 and 20,624 shares of such preferred stock
during the year ended March 31, 1998 and the nine months ended December 31,
1998, respectively (See Note 5). During the nine months ended December 31, 1998,
Hyperion converted the Note Payable - Adelphia and certain accounts payable into
Class A common stock (See Note 1). See Note 1 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.

<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)


Recent Accounting Pronouncements

         Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," has been issued
and is effective for fiscal quarters of fiscal years 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. Management of the Company
has not completed its evaluation of the impact of SFAS No. 133 on the Company's
financial statements.

         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 believes that SOP 98-5 will not have a
material impact on the Company's financial statements.

Reclassifications

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

<TABLE>
<S>                                                                    <C>            <C>
(2)  Property, Plant and Equipment

         Property, plant and equipment consists of the following:
                                                                        March 31,     December 31,
                                                                           1998           1998

     Telecommunications networks....................................   $  50,421      $   59,764
     Network monitoring and switching equipment.....................     130,283         165,697
     Fiber asset under construction (Note 3) .......................      11,500          11,500
     Fiber optic use rights.........................................         ---          44,109
     Construction in process .......................................      66,075         123,439
     Other..........................................................       6,605           8,282
                                                                       ---------      ----------
                                                                         264,884         412,791
     Less accumulated depreciation..................................     (14,251)        (38,089)
                                                                       ---------      ----------
     Total .........................................................   $ 250,633      $  374,702
                                                                       =========      ==========
</TABLE>

         Depreciation is computed on the straight-line method using estimated
useful lives of 5 to 20 years for operating plant and equipment and 3 to 20
years for support equipment and real estate.  Additions to property, plant and
equipment are recorded at cost which includes amounts for material, applicable
labor and overhead and interest.  Depreciation expense amounted to $2,604,
$9,038 and $23,838 for the years ended March 31, 1997 and 1998 and the nine
months ended December 31, 1998, respectively.  Capitalized interest amounted to
$4,271 and $9,986 for the year ended March 31, 1998 and the nine months ended
December 31, 1998, respectively.

(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"), a right
to receive 58,752 shares of Telergy Class A common stock ("Telergy Stock"), 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

<PAGE>


               HYPERION TELECOMMUNCIATIONS, INC. AND SUBSIDIARIES
                     NOTES CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

fiber asset and the Senior Secured Note. No amounts were allocated to the
Telergy Stock. The allocation reflects the Company's estimate of the relative
fair values of the assets acquired. Hyperion will recognize the interest income
on the Senior Secured Note when received.

         During the nine months ended December 31, 1998, construction of the
fiber has continued and no repayments have been received on the Senior Secured
Note. On May 15, 1998, Telergy paid Hyperion $1,000 in exchange for the Telergy
Stock and a gain of $1,000 was recorded by the Company, which is included in
"other income" in the consolidated statement of operations.

         On November 10, 1998, the Senior Secured Note was amended to mature on
January 20, 2000 in exchange for an indefeasible right to use ("IRU") or long
term lease of certain fiber segments in New York City and along Telergy's long
haul fiber segments in the northeastern United States and Southeastern Canada.

 (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>
<S>                                                                        <C>   <C>    <C>           <C>

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

MediaOne Fiber Technologies (Jacksonville)...........................      20.0% (1)    $   7,984     $   8,150
Multimedia Hyperion Telecommunications (Wichita).....................      49.9% (2)        3,537         5,863
MediaOne of Virginia (Richmond)......................................      37.0% (1)        7,213         7,284
PECO-Hyperion (Philadelphia).........................................      50.0%           21,229        33,936
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading)................      50.0%            2,753         7,227
Hyperion of York.....................................................      50.0%            4,256         5,721
Allegheny Hyperion Telecommunications................................      50.0%              ---         3,043
Entergy Hyperion Telecommunications of Louisiana.....................      50.0% (3)        3,407         6,714
Entergy Hyperion Telecommunications of Mississippi...................      50.0% (3)        3,666         7,130
Entergy Hyperion Telecommunications of Arkansas......................      50.0% (3)        4,209         7,586
Baker Creek Communications...........................................      49.9% (4)       10,009        44,637
Other................................................................      Various          1,333         1,323
                                                                                        ---------     ---------
                                                                                           69,596       138,614
Cumulative equity in net losses......................................                     (16,532)      (26,286)
                                                                                        ---------     ---------
Total Investments....................................................                   $  53,064     $ 112,328
                                                                                        =========     =========
</TABLE>
<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

 (1)  As discussed below, the Company consummated agreements on March 31, 1999
      which increased its ownership to 100% in these networks.
 (2)  As discussed below, the Company consummated agreements on March 23, 1999
      which increased its ownership to 100% in this network.
 (3)  As discussed below, the Company entered into a definitive agreement on
      March 31, 1999 to increase its ownership to 100% in these networks.
 (4)  On March 24, 1998, the Federal Communications Commission ("FCC") completed
      the auction of licenses for Local Multipoint Distribution Service
      ("LMDS"). In connection with the FCC's full review of all bids and the
      granting of final licenses, the Company, through Baker Creek
      Communications, acquired 195 licenses for a total cost of approximately
      $44,605, $10,000 of which was paid upon submission of the Company's bid in
      January 1998 with the remainder paid as of October 1998.

         Summarized unaudited combined financial information for the Company's
nonconsolidated investments listed above being accounted for using the equity
method of accounting as of the dates and for the periods ended, is as follows:

                                              March 31,   December 31,
                                                1998         1998

      Current assets................         $  7,476     $  11,315
      PP&E-net......................          153,495       190,552
      Non-current assets............           13,454        47,522
      Current liabilities...........           13,422        18,599
      Non-current liabilities.......           58,004        48,635

                                     Year Ended March 31,     Nine months ended
                                                                 December 31,
                                         1997          1998          1998

      Revenues .....................  $  7,251    $  11,999     $   24,986
      Net loss .....................    (9,881)     (19,923)       (22,325)


         During 1998, through a partnership in which Hyperion is a 49.9% limited
partner, the Company was the successful bidder, at a cost of approximately
$45,000, for 195 31-GHz licenses (see above), which cover approximately 83
million people in the eastern United States representing coverage in most of its
network system territory. Hyperion and its partner are currently in the process
of dissolving the partnership and the licenses are to become the property of
Hyperion at no additional cost to Hyperion. As of December 31, 1998, the
partnership had fully funded its obligation due to the FCC. The Company plans to
use the LMDS spectrum in most of its markets, and believes the spectrum to be
highly complementary to its fiber-based systems as an economical means to
provide "last-mile" connectivity for customers which otherwise could not be
economically addressed with broadband connectivity. The Company is in the
process of further refining its plans for utilization of the LMDS spectrum,
which could involve substantial additional funds.

         On March 23, 1999, Hyperion consummated a purchase agreement with
Multimedia, Inc. ("Multimedia"), the parent of its local partner in the Wichita,
KS market, whereby Multimedia received approximately $9,778 in cash for
Multimedia's ownership interest in this network. In addition, Hyperion will be
responsible for the payment of fiber lease liabilities due to Multimedia in the
amount of approximately $2,800 which are payable over the next six years. As a
result of the transaction, the Hyperion ownership in Wichita increased to 100%.



<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

         On March 31, 1999, Hyperion consummated purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partners in
the Jacksonville, FL and Richmond, VA networks, whereby MediaOne received
approximately $81,520 in cash for MediaOne's ownership interests in these
networks. In addition, Hyperion will be responsible for the payment of fiber
lease liabilities due to MediaOne in the amount of approximately $14,500 which
are generally payable over the next ten years. As a result of the transactions,
Hyperion's ownership interest in each of these networks increased to 100%.

         On March 31, 1999, Hyperion entered into purchase agreements with
Entergy Corporation ("Entergy"), the parent of its local partner in the Baton
Rouge, LA, Little Rock, AR, and Jackson, MS markets, whereby Entergy will
receive $35,776 in cash for Entergy's ownership interests in each of these
markets. Upon consummation of this transaction, which is subject to normal
closing conditions and regulatory approvals, the Company's ownership interest in
each of these networks will increase to 100%.

(5)  Financing Arrangements

Note payable - Adelphia

         The Company had 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. 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 was evidenced by an unsecured subordinated note due April 16,
2003. This obligation had an interest rate of 16.5% per annum. Interest accrued
through May 8, 1998 on the amount outstanding to Adelphia totaled $10,645. 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.
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 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



<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

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. Through December 31, 1998, 195,965
warrants were exercised and converted into 1,187,541 shares of Class B common
stock. Of the 1,187,541 shares issued, 1,172,391 shares had been converted into
Class A common stock as of December 31, 1998. The Company received $3 in
consideration for the exercise of the warrants.

         During the nine months ended December 31, 1998, the Company paid
$17,313 to repurchase a portion of the Senior Discount Notes which had a face
value of $25,160 and a carrying value of $17,750. The notes were retired upon
repurchase which resulted in a $237 gain.

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 the Company's wholly-owned subsidiaries. A
portion of the proceeds 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.

         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
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 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.

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.

         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

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

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.

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 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 other debt for the five years after December 31, 1998 are as
follows:

          1999.............................................         $ 3,288
          2000.............................................           3,117
          2001.............................................           3,266
          2002.............................................           3,653
          2003.............................................           3,635

12% Senior Subordinated Notes

         On March 2, 1999, Hyperion issued $300,000 of 12% Senior Subordinated
Notes due 2007 (the "Subordinated Notes"). An entity controlled by members of
the Rigas family, controlling stockholders of Adelphia, purchased $100,000 of
the Subordinated Notes directly from Hyperion at a price equal to the aggregate
principal amount less the discount to the other initial purchasers. The net
proceeds of approximately $295,000 were or will be used to fund Hyperion's
acquisition of interests held by local partners in certain of its markets and
will be used to fund capital expenditures and investments in its networks, and
for general corporate and working capital purposes.

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

(6)  Common Stock and Other Stockholders' Equity (Deficiency)

         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 of
its Class A common stock (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 terminated
automatically upon the date of the IPO. 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.

         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 $1,000 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 of the IPO and the Officers have the right to sell at least $1,000 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 $1,000 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 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.

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

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).

Adelphia Warrant

         On June 13, 1997, the Company entered into agreements with MCI.
Pursuant to these agreements 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 met certain
purchase volume thresholds over the term of the agreement.

         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 purchased 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 purchased
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 paid to Adelphia a fee of $500 and issued a warrant to
Adelphia, 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

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

Plan provides the 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 shares, respectively, of Class A common stock
to Daniel R. Milliard pursuant to his employment agreement with the Company.

         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-thrid 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). At December 31, 1998, no Rigas Options or Rigas Grants have been
granted. Also in April 1998, pursuant to the then existing Stockholder
Agreement, the Company authorized the issuance under the 1996 Plan to certain
Officers of stock options (the "Management Stockholder Options") currently
covering a total of 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 and the 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 1999.

(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 $1,103, $1,236 and $1,893 for the years ended March 31, 1997
and 1998 and the nine months ended December 31, 1998, respectively.

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

 Period ending December 31,
      1999........................................             $ 3,296
      2000........................................               2,888
      2001........................................               2,779
      2002........................................               2,659
      2003........................................               2,645
      Thereafter..................................               8,176

         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 ("Telecommunications Act"), the most
comprehensive reform of the nation's telecommunications laws since the



<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

the Commununications 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.

         Hyperion has entered into a series of agreements with several local and
long-haul fiber optic network providers that will allow Hyperion to
significantly increase its presence in the eastern half of the United States.
These agreements, totaling approximately $126,000, provide Hyperion with
ownership or an IRU to over 9,000 route miles of local and long-haul fiber optic
cable. Through December 31, 1998, Hyperion has paid $42,604 of the total due
under the agreements, which was included in property, plant and equipment.
Hyperion believes this will allow it to expand its business strategy to include
on-net provisioning of regional, local and long distance, internet and data
communications and to cost-effectively further interconnect most of its 46
existing markets and to enter and interconnect approximately 50 new markets by
the end of 2001.

(8)  Related Party Transactions

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

<TABLE>

<S>                                                                          <C>        <C>          <C>
                                                                                                    Nine Months
                                                                                Year Ended             Ended
                                                                                   March 31,        December 31,
                                                                                1997       1998         1998
      Revenues:

           Management fees.............................................      $   2,600  $   3,809    $  2,135
           Network monitoring fees.....................................            604        977         589
           Special access fees.........................................            540        500         ---
                                                                             ---------  ---------    --------
           Total.......................................................      $   3,744  $   5,286    $  2,724
                                                                             =========  =========    ========
      Interest Income..................................................      $     230  $     617    $  8,395
                                                                             =========  =========    ========
      Expenses:
           Interest expense and fees...................................      $   4,731  $   5,997    $    737
           Allocated corporate costs...................................          1,199      1,656       2,981
           Fiber leases................................................            738         47         139
                                                                             ---------  ---------    --------
           Total.......................................................      $   6,668  $   7,700     $ 3,857
                                                                             =========  =========    ========
</TABLE>

         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 represents interest charged on certain affiliate
receivable balances with joint ventures and with Adelphia.

<PAGE>

               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

         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.

         During the year ended March 31, 1998 and the nine months ended
December 31, 1998, Hyperion paid $299 and $1,044, respectively, to entities
owned by certain shareholders of Adelphia primarily for property, plant and
equipment and services.

(9)  Income Taxes

         Adelphia and its corporate subsidiaries (including the Company) filed
consolidated federal income tax returns for the years ended March 31, 1997 and
1998. For the nine months ended December 31, 1998, Hyperion will not be included
within Adelphia's 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 for the year ended March 31, 1998 are adjusted for the
effects of filing a consolidated income tax return, similar to provisions of the
Internal Revenue Code. At December 31, 1998, the Company had net operating loss
carryforwards for federal income tax purposes of $178,503 expiring through 2018.

         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.


<PAGE>



               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

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

<TABLE>
<S>                                                                                      <C>            <C>
                                                                                          March 31,  December 31,
                                                                                              1998        1998
      Deferred tax assets:

         Differences between book and tax basis of intangible assets.................    $      188     $       138
         Net operating loss carryforwards............................................        33,918          71,391
         Other.......................................................................            77              77
                                                                                         ----------     -----------
             Total...................................................................        34,183          71,606
         Valuation allowance.........................................................       (17,379)        (48,746)
                                                                                         ----------     -----------
             Total...................................................................        16,804          22,860
                                                                                         ----------     -----------
      Deferred tax liabilities:
         Differences between book and tax basis of property, plant and
             Equipment..............................................................        12,959           19,015
         Investment in partnerships.................................................         3,808            3,808
                                                                                         ---------      -----------
             Total..................................................................        16,767           22,823
                                                                                         ---------      -----------
         Net deferred tax asset.....................................................     $      37      $        37
                                                                                         =========      ===========
</TABLE>

         The net change in the valuation allowance for the year ended March 31,
1998 and the nine months ended December 31, 1998 was an increase of $5,023 and
$31,367, respectively.

         Income tax expense for the years ended March 31, 1997 and 1998 and the
nine months ended December 31, 1998 is as follows:

<TABLE>

                                                                                                      Nine Months
                                                                                   Year Ended            Ended
                                                                                    March 31,         December 31,
                                                                                 1997        1998        1998

<S>                                                                             <C>       <C>           <C>
     Current................................................................... $   (2)   $   ---       $   ---
     Deferred..................................................................   (257)       ---           ---
                                                                                ------    -------       -------
     Total..................................................................... $ (259)   $   ---       $   ---
                                                                                ======    =======       =======
</TABLE>



<PAGE>


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

<TABLE>

                                                                                   Year Ended      Nine Months Ended
                                                                                    March 31,         December 31,
                                                                                  1997      1998          1998

<S>                                                                               <C>       <C>           <C>
     Statutory federal income tax rate........................................    35.0%     35.0%         35.0%
     Change in valuation allowance............................................   (34.6)    (35.0)        (35.0)
     State taxes, net of federal benefit and other............................    (1.2)      ---           ---
                                                                                  ------    -----         -----
     Income tax expense.......................................................    (0.8)%     ---%          ---%
                                                                                  ======    =====         =====
</TABLE>


<PAGE>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (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 year ended March 31, 1998 and the nine months ended
December 31, 1998:

<TABLE>

                                                                               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>


               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

(10) Quarterly Financial Data (unaudited), continued

<TABLE>


                                                            June 30,      September 30,   December 31,
                                                              1998            1998            1998

<S>                                                      <C>             <C>             <C>
Revenues...............................................  $      7,635    $     12,098    $     15,043
                                                         ------------    ------------    ------------
Operating expenses:
   Network operations..................................         4,989           7,056           6,664
   Selling, general and administrative.................         8,432          10,391          16,518
   Depreciation and amortization.......................         6,120           9,843          10,708
                                                         ------------    ------------    ------------
   Total...............................................        19,541          27,290          33,890
                                                         ------------    ------------    ------------
Operating loss.........................................       (11,906)        (15,192)        (18,847)

Other income (expense):
   Interest income.....................................         4,235           4,169           1,829
   Interest income - affiliate.........................         1,824           2,995           3,576
   Interest expense and fees...........................       (13,704)        (12,535)        (12,399)
   Other income........................................         1,000             113             ---
                                                         ------------    ------------    ------------
Loss before income taxes, equity in net loss
   of joint ventures and extraordinary gain............       (18,551)        (20,450)        (25,841)

Income tax expense.....................................           ---             ---             ---
                                                         ------------    ------------    ------------
Loss before equity in net loss of joint ventures and
   extraordinary gain..................................       (18,551)        (20,450)        (25,841)

Equity in net loss of joint ventures...................        (3,190)         (2,614)         (3,776)
                                                         ------------    ------------    ------------
Loss before extraordinary gain.........................       (21,741)        (23,064)        (29,617)
Extraordinary gain on repurchase of debt...............           ---             237             ---
                                                         ------------    ------------    ------------
Net loss...............................................       (21,741)        (22,827)        (29,617)

Dividend requirements applicable to preferred
   stock...............................................        (6,807)         (7,026)         (7,284)
                                                         ------------    ------------    ------------
Net loss applicable to common stockholders.............  $    (28,548)   $    (29,853)   $    (36,901)
                                                         ============    ============    ============
Basic and diluted net loss per weighted average
   share of common stock...............................  $      (0.59)   $      (0.54)   $      (0.66)
                                                         ============    ============    ============
Weighted average shares of common stock
   outstanding (in thousands)..........................        48,110          55,497          55,497
                                                         ============    ============    ============
</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 Transition 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 1999 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
Transition 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 1999 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
Transition 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 1999 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 Transition 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
                 in the index in Item 8 of this Transition Report on Form 10-K.

            (2)  Financial Statement Schedules: Schedule II - Valuation and
                 Qualifying Accounts

            (3)  Exhibits

<PAGE>

<TABLE>

                                   SCHEDULE II
               HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in thousands)

                                                  Balance    Charged
                                                    at       to Costs                  Balance
                                                 Beginning     and      Deductions     at End
                                                 of Period   Expenses   Write-Offs    of Period

Year Ended March 31, 1997:
<S>                                              <C>         <C>         <C>           <C>
Allowance for Doubtful Accounts                  $    ---    $    ---    $    ---      $    ---
                                                 --------    --------    --------      --------
Valuation allowance for derferred tax assets     $ 10,459    $  1,897    $    ---      $ 12,356
                                                 --------    --------    --------      --------

Year Ended March 31, 1998:
Allowance for Doubtful Accounts                  $    ---    $    ---     $   ---      $    ---
                                                 --------    --------     -------      --------
Valuation allowance for deferred tax assets      $ 12,356    $  5,023     $   ---      $ 17,379
                                                 --------    --------     -------      --------

Nine Months Ended December 31, 1998:
Allowance for Doubtful Accounts                  $    ---    $  1,128     $   ---      $  1,128
                                                 --------    --------     -------      --------
Valuation allowance for deferred tax assets      $ 17,379    $ 31,367     $   ---      $ 48,746
                                                 --------    --------     -------      --------

</TABLE>




<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       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)

    4.9       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)

    4.10      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)

    4.11      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>

    4.12      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)

    4.13      Indenture dated as of March 2, 1999, with respect to Hyperion
              Telecommunications, Inc. 12% Senior Subordinated Notes due 2007,
              between Hyperion and the Bank of Montreal Trust Company
              (Incorporated by reference herein is Exhibit 4.01 to the Current
              Report on Form 8-K for Adelphia Communications Corporation filed
              on March 10, 1999.) (File No. 0-16014).

    4.14      Form of 12% Senior Subordinated Notes due 2007 (Contained in
              Exhibit 4.13).

   10.1*      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.)

   10.2*      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.)

   10.3*      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.)

   10.4       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.)

   10.5       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.)

   10.6       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.)

   10.7       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.)

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

   10.9*      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)

   10.10*     1996 Long-Term Incentive Compensation Plan. (Incorporated herein
              by reference is Exhibit 10.17 to Registration Statement No.
              333-13663 on Form S-1.)

   10.11      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.)
<PAGE>

   10.12      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.)

   10.13      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)

   10.14      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)

   10.15      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)

   10.16*     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).

   10.17      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).

   10.18      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).

   10.19      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).

   10.20      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)

   10.21      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)

   10.22      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)

   10.23      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)
<PAGE>

   10.24      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)

   10.25      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)

   10.26      Purchase Agreement between Hyperion Telecommunications, Inc. and
              the Initial Purchasers named therein, dated as of February 25,
              1999, regarding Hyperion's 12% Senior Subordinated Notes due 2007
              (Incorporated herein by reference is Exhibit 10.03 to Adelphia's
              Current Report on Form 8-K for the event dated February 22, 1999.)
              (File No. 0-16104).

   10.27      Purchase Agreement between Hyperion Telecommunications, Inc. and
              Highland Holdings, dated as of February 25, 1999, regarding
              Hyperion's 12% Senior Subordinated Notes due 2007 (Incorporated
              herein by reference is Exhibit 10.05 to Adelphia's Current Report
              on Form 8-K for the event dated February 22, 1999.) (File No.
              0-16104).

   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.


----------------------
*        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.

May 27, 1999                   By:  /s/ Daniel R. Milliard
                               Daniel R. Milliard,
                               President

         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.

May 27, 1999                   /s/ John J. Rigas
                               John J. Rigas,
                               Chairman and Director

May 27, 1999                   /s/ Timothy J. Rigas
                               Timothy J. Rigas,
                               Vice Chairman, Treasurer, Chief Financial Officer
                               and Director

May 27, 1999                   /s/ Michael J. Rigas
                               Michael J. Rigas,
                               Vice Chairman and Director

May 27, 1999                   /s/ James P. Rigas
                               James P. Rigas,
                               Vice Chairman, Chief Executive Officer and
                               Director

May 27, 1999                   /s/ Daniel R. Milliard
                               Daniel R. Milliard,
                               Vice Chairman, President, Secretary and Director

May 27, 1999                   /s/ Pete J. Metros
                               Pete J. Metros,
                               Director

May 27, 1999                   /s/ James L. Gray
                               James L. Gray,
                               Director

May 27, 1999                   /s/ Randolph F. Fowler
                               Randolph F. Fowler,
                               Director

May 27, 1999                   /s/ Edward E. Babcock Jr.
                               Edward E. Babcock, Jr.
                               Chief Accounting Officer