<PAGE>

                                   FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

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

For the fiscal year ended December 31, 1997

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

                          Commission File No. 0-22821
                              Cable Michigan, Inc.
             (Exact name of registrant as specified in its charter)
         Pennsylvania                                      23-2566891
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification No.)

              105 Carnegie Center, Princeton, New Jersey    08540
            (Address of principal executive offices)     (Zip Code)

       Registrant's telephone number including area code:  609-734-3737
      Securities registered pursuant to Section 12(b) of the Act:   None
          Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $1.00 per share

                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                    X    Yes    No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)

Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 28, 1998
                            6,872,040  Common Stock

Aggregate market value of Registrant's voting stock held by non-affiliates at
February 28, 1998 computed by reference to closing price as reported by NASDAQ
for Common Stock ($24.50 per share), is as follows:

                           $86,777,065  Common Stock

                      Documents Incorporated by Reference

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

                                     PART I

ITEM 1.  BUSINESS

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

  Cable Michigan is a cable television operator in the State of Michigan which,
as of December 31, 1997, served approximately 204,000 subscribers.  These
figures include the approximately 39,400 subscribers served by Mercom, a 62%
owned subsidiary of the Company.  Except where the context indicates otherwise,
the terms the "Company" and "Cable Michigan" mean the Company and its
subsidiaries, including Mercom.

  Clustered primarily around the Michigan communities of Grand Rapids, Traverse
City, Lapeer and Monroe (Mercom), the Company's systems serve a total of
approximately 400 municipalities in attractive suburban markets and small towns.
The Company has generated strong growth in new homes passed and basic subscriber
levels.  From 1993 to 1997 compounded annual growth in basic subscribers was
4.6%; during the same period, basic penetration rose from 57.3% to 60.5%.
Growth in homes passed has primarily been the result of new home construction
and plant extensions.

  The following table summarizes the development of the Company's operations
since December 31, 1993:

<TABLE>
<CAPTION>
                                                                          As of December 31,
                                                         1993        1994        1995        1996      1997 (3)
<S>                                                    <C>         <C>         <C>         <C>         <C>
Homes Passed:
  Wholly Owned Systems                                  235,188     244,622     250,747     261,441     271,604
  Mercom Systems                                         61,730      63,721      65,449      65,998      65,291
     Total                                              296,918     308,343     316,196     327,439     336,895
Basic Subscribers:
  Wholly Owned Systems (1)                              135,420     141,785     152,921     158,310     164,552
  Mercom Systems (1)                                     34,714      37,324      38,853      40,012      39,360
     Total                                              170,134     179,109     191,774     198,322     203,912
Basic Penetration:
  Wholly Owned Systems                                     57.6%       58.0%       61.0%       60.6%       60.6%
  Mercom Systems                                           56.2%       58.6%       59.4%       60.6%       60.3%
     All Systems                                           57.3%       58.1%       60.7%       60.6%       60.5%
Average Monthly Revenue
  per Subscriber for Last
    Month of the Period: (2)
  Wholly Owned Systems                                 $  29.64    $  27.06    $  31.59    $  32.20    $  32.83
  Mercom Systems                                       $  29.70    $  29.36    $  30.41    $  32.72    $  33.89
     All Systems                                       $  29.65    $  27.53    $  31.36    $  32.30    $  33.03
</TABLE>
<PAGE>

(1) Systems include seasonal communities which experience increased subscriber
    levels during the second and third quarters.

(2) The revenue per subscriber calculation includes premium revenue for each
    period.

(3) The Mercom of Florida cable system was sold in July 1997.  This system
    served approximately 1,900 subscribers at the time of the sale.

  Cable Michigan plans to emphasize high technical standards and seeks to
incorporate, when cost effective, technological advances that enhance product
quality and service.  In particular, the Company plans to upgrade the technical
quality of its cable plant and to increase system capacity for the delivery of
additional programming and new services.  The Company has already deployed 592
miles of fiber optic cable as of December 31, 1997 and reduced the number of
headends in its systems as part of its commitment to improved service quality
and platform development for new technologies.

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

COMPANY STRATEGY

  The Company's strategic plan calls for a capital expenditure program intended
to result in over 90% of the Company's customers being served by systems with a
capacity of 550 MHz or 750 MHz by the end of 2001.  The Company's wholly owned
systems are currently built to 300 - 450 MHz, with the majority of the systems
having a capacity of 300 - 330 MHz, and include 53 headends, with two of these
headends serving approximately 63,500 subscribers.  The Mercom systems include 5
headends and are built to 400 - 450 MHz.

  The Company intends to maintain and enhance the value of its current cable
television systems through upgrading their networks as appropriate given the
characteristics of the particular service area.  The Company also intends to
institute new services as they are developed and become economically viable.  At
this stage, the Company's highest priority is to increase system capacity and
improve system reliability and picture quality.  Such network improvements are
necessary to enable the Company to better withstand potential competition,
expand channel lineups (which would permit the Company to increase revenue) and
facilitate new services when economically viable.

  The Company intends to evaluate and, if appropriate, pursue potential
acquisitions of cable television systems that are contiguous, or otherwise in
reasonable geographic proximity, to the Company's existing systems.  Increasing
the size of the Company's clusters will enable the Company to obtain operating
efficiencies and may position the Company to capitalize on new revenue and
business opportunities as the telecommunications industry evolves.  Given the
number of relatively small independently owned systems located near the
Company's systems, the Company believes that there may be a number of attractive
acquisition opportunities.
<PAGE>

  Capital expenditures for system extensions and upgrades, the development of
new services and the acquisition of additional cable television systems are
subject to the availability of cash generated from operations and debt or equity
financing.  The capital resources needed to accomplish these strategies are
expected to be provided by cash flow from operations, the Credit Agreement dated
as of July 1, 1997 between the Company, a group of lenders and First Union
National Bank, as agent ("Credit Agreement") and, in the case of acquisitions,
borrowings from other sources.  There can be no assurance that the capital
resources necessary to accomplish the Company's plans will be available on terms
and conditions acceptable to the Company, or at all.  In addition, the Company
may consider using equity as consideration for acquisitions in appropriate
cases.

THE CLUSTERS

  The Company's Michigan systems are clustered in four main areas:  Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom).  A brief description of these
clusters as of December 31, 1997 is set forth below.

<TABLE>
<CAPTION>
                                                Grand Rapids        Traverse City            Lapeer                Monroe
<S>                                          <C>                  <C>                  <C>                  <C>
Subscribers (approximate)                               71,000               77,200               16,400               39,400
Penetration Rate                                          59.8%                61.2%                61.2%                60.3%
Bandwidth Range                                     300-450MHz           300-550MHz           300-750MHz           400-450 MHz
Aerial Miles                                             1,706                1,982                  478                1,133
Underground Miles                                          965                  986                  188                  206
Total Miles                                              2,671                2,968                  666                1,339
Total Fiber Miles                                           83                  468                    9                   32
Headends                                                    20                   28                    5                    5
</TABLE>

  MERCOM

  The Company's systems include the Mercom systems, which as of December 31,
1997 served approximately 39,400 subscribers.  In July 1997 Mercom sold its Port
St. Lucie, Florida system to Adelphia Communications Corporation for $3,650,000
in cash.  C-TEC acquired an interest in Mercom in 1990 and C-TEC Cable Systems,
Inc. was subsequently hired to manage the Mercom systems by Mercom's Board of
Directors on January 1, 1992.  In August 1995, C-TEC increased its ownership
interest in Mercom to approximately 62%.  C-TEC transferred the 62% interest in
Mercom to Cable Michigan prior to the Distribution.

  The Company has entered into a Management Agreement with Mercom dated January
1, 1997.  Under the terms of the agreement, Mercom pays a management fee equal
to the greater of $500,000 or an amount equal to a certain percentage of
Mercom's annual revenue.  The fee schedule ranges from 5% of revenue up to $10
million to 4% of revenue over $20 million.  In addition to the basic fee, the
Company is also entitled to an annual incentive fee based on increases in
Mercom's operating cash flow.  For 1997, the total fee paid to the Company under
the Management Agreement was $1,204,000.  The revenue to the Company from the
Management Agreement is eliminated in the consolidated statement of operations.
The term of the Management Agreement is three years.  The Management Agreement
was approved by a committee of Mercom's Board of Directors composed of directors
unaffiliated with the Company.  As the 62% owner of Mercom, the Company accounts
for all Mercom subscribers as Cable Michigan subscribers.
<PAGE>

SERVICE OFFERINGS

  The Company offers a variety of basic and pay cable programming packages.
Since 1993, the Company has divided its service into three levels:  Limited
Basic Service, Expanded Basic Service and the Family Value Package.

  The first level of service is referred to as Limited Basic.  It consists
primarily of off-air broadcast networks, access channels and the home shopping
networks.  Expanded Basic Service includes Limited Basic Service plus certain
channels regulated by the Federal Communications Commission ("FCC") as "Cable
Programming Service" or "CPS" tier channels.  These include ESPN, USA Network,
MTV, Lifetime and other traditional cable channels.

  The Family Value Package was created through the conversion of some of its
traditional cable channels such as CNN and Discovery and the launch of new
channels such as ESPN 2 and fX to form a new a la carte level.  Networks offered
through the Family Value Package may be purchased individually or as a group at
a reduced rate.

  Like many cable operators in the United States, over the last four years the
Company has modified its existing programming services, equipment and rates in
an effort to comply with changing FCC regulations.

  Monthly service rates include fees for Limited Basic Service, Expanded Basic
Service, the Family Value Package, and premium services.  At December 31, 1997,
monthly residential subscriber rates were as follows: Limited Basic Service
rates ranged from $8.50 to $17.00; Expanded Basic Service rates ranged from
$6.70 to $13.75; Family Value Package rates ranged from $2.15 to $7.69; and
premium service rates ranged from $4.95 to $12.95 per service.  In addition, the
Company earns revenues from pay-per-view programs and advertising fees.  Pay-
per-view programs, which usually are either unique sporting events or recently
released movies, are available on many of the Company's cable television
systems.  Subscribers are permitted to choose individual movies for a set fee of
$3.95 per movie and individual special events for a set fee ranging from $5.95
to $49.95 or higher per event.  Related charges may include a nonrecurring
installation fee that ranges from $20.00 to $38.00; however, from time to time
the Company has followed the common industry practice of reducing the
installation fee during promotional periods.  Commercial subscribers such as
hotels, motels and hospitals are charged a nonrecurring connection fee that
usually covers the cost of installation.  Except under the terms of certain
contracts with commercial subscribers and residential apartment and condominium
complexes, subscribers are free to discontinue the service at any time without
penalty, and most terminations occur because a subscriber moves to another home
or another city.  For the year ended December 31, 1997 of the total subscriber
fees received by the Company's systems, Limited Basic Service, Expanded Basic
Service and Family Value Package fees accounted for approximately 77% of total
revenues, premium service fees accounted for approximately 9% of total revenues,
pay-per-view fees were approximately 1% of total revenues, advertising fees were
approximately 2% of total revenues and the remaining 11% of total revenues came
from equipment rentals, installation fees, home shopping, franchise fees and
program guide charges.

PROGRAMMING AND SUPPLIERS

  The Company has entered into an arrangement pursuant to which RCN will obtain
third party programming for the Company's systems.  RCN generally purchases this
programming at lower prices than the Company would be able to obtain
independently.  Programming purchasers such as RCN generally pay a monthly fee
per subscriber per channel.  Under the arrangement between the Company and RCN,
the Company reimburses RCN for the third party costs incurred by RCN to obtain
such programming.  The arrangement is terminable by the Company upon 60 days
notice and by RCN upon one year advance notice.
<PAGE>

  Programming costs increase in the ordinary course of the Company's business as
a result of increases in the number of subscribers, expansion of the number of
channels provided to customers and contractual rate increases from programming
suppliers.  The Company anticipates that programming costs will increase,
exceeding current levels, particularly for sports programming.  If the
programming supply arrangement with RCN were terminated, the Company's
programming costs could increase significantly.

  A wide range of national manufacturers are the primary sources of supplies,
equipment and material utilized in the construction and upgrade of the Company's
cable television systems.  The Company anticipates that its programming and
construction, rebuild and upgrade costs will be significant in future periods.
The amount of such costs will depend on numerous factors, many of which are
beyond the Company's control.

ADVERTISING REVENUES

  Advertising accounts for 2% of the Company's revenues.  Advertising sales are
handled primarily by Cable Time, an independent turnkey advertising sales
contractor.  Cable Time provides sales, billing, collection and production
services.  It remits an agreed portion of its collected revenues to the Company.
In addition, the Company operates its own classified advertising channel selling
real estate and other products and services offered locally.  The Company's net
advertising revenue for 1997 was $0.51 per subscriber per month after
compensation to Cable Time.

CUSTOMER SERVICE AND BILLING

  The Company places a great deal of importance on customer service.  The
Company has entered into an arrangement with RCN pursuant to which RCN will
handle calls by most Cable Michigan customers at RCN's 24-hour centralized
customer service facility in Dallas, Pennsylvania and administer the customer
billing function for the Company's subscribers. The Dallas facility communicates
with Cable Michigan's subscribers, field technicians and field offices.
Features include multiple 800 telephone numbers that allow a customer service
representative ("CSR") to identify the caller's location, an automatic call
distribution system to the next available CSR, Cable Data computers with billing
cycles, a centralized radio dispatch office to provide two-way communication
with the field technician's vehicles and alpha-numeric pagers.  Although the RCN
facility handles the Company's customer service calls and communications, the
Company directly operates and manages its own customer service field offices,
technicians and vehicles.  The Dallas facility also maintains rate tables and
subscriber base information that is provided to Cable Data, which prepares and
mails the customer bills for Cable Michigan.  The customer service and billing
administration arrangement is terminable by Cable Michigan on 60 days notice and
by RCN on one year notice.  Mercom administers its own customer service
function, primarily out of its office in Monroe.

FRANCHISES

  The cable television systems owned or managed by the Company are constructed
and operated under fixed-term franchises or other types of operating authorities
(referred to collectively herein as "franchises") that are generally non-
exclusive and are granted by local governmental authorities.  These franchises
typically contain many conditions, such as time limitations on commencement and
completion of construction, conditions of service, including the number of
channels, the provision of free service to schools and certain other public
institutions, and the maintenance of insurance and indemnity bonds.  The
provisions of these local franchises are subject to federal regulation.

  The Company holds approximately 400 franchises.  These franchises provide for
the payment of fees to the issuing authorities and generally range from 3% to 5%
of revenues.  The 1984 Act (defined below) prohibits franchising authorities
from imposing annual franchise fees in excess of 5% of gross revenues and also
permits the cable television system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
<PAGE>

  The duration of the Company's outstanding franchises expire at various points
in time through the year 2019.  The Company's ability to provide cable
television service is dependent to a large extent on its ability to obtain and
renew its franchises on acceptable terms.  Virtually all of the Company's cable
franchises have been renewed or extended, generally at or prior to their stated
expirations and on acceptable terms.  During 1997, the Company completed
negotiations with 38 communities resulting in franchise renewals on terms which
are acceptable to it.  Some of the issues involved in recent renewal
negotiations include customer service standards, access facilities and
equipment, cable plant upgrade or replacement and shorter terms of franchise
agreements.  Approximately 75 of the Company's franchises are due for renewal
within the next three years.  No one franchise accounts for more than 3% of the
Company's total revenue.

RELATIONSHIP AMONG CABLE MICHIGAN, RCN AND CTE

  The Distribution Agreement defines certain aspects of the relationship among
CTE, RCN and Cable Michigan and provides for the allocation of certain assets
and liabilities among CTE, RCN and Cable Michigan.  CTE, RCN and Cable Michigan
have also entered into a Tax Sharing Agreement dated as of September 5, 1997
(the "Tax Sharing Agreement") to define certain aspects of their relationship
with respect to taxes and to provide for the allocation of tax assets and
liabilities.

  Indemnification

  RCN, Cable Michigan and CTE have agreed to indemnify one another against
certain liabilities.  RCN has agreed to indemnify CTE and its subsidiaries at
the time of the Distribution (collectively, the "CTE Group") and the respective
directors, officers, employees and affiliates of each person in the CTE Group
(collectively, the "CTE Indemnitees") and Cable Michigan and its subsidiaries at
the time of the Distribution (collectively, the "Cable Michigan Group" or the
"Company Group") and the respective directors, officers, employees and
Affiliates of each person in the Cable Michigan Group (collectively, the "Cable
Michigan Indemnitees") from and against any and all damage, loss, liability and
expense ("Losses") incurred or suffered by any of the CTE Indemnitees or the
Cable Michigan Indemnitees, respectively, (i) arising out of, or due to the
failure of RCN or any of its subsidiaries at the time of the Distribution
(collectively, the "RCN Group") to pay, perform or otherwise discharge any of
the RCN Liabilities (as defined below), (ii) arising out of the breach by any
member of the RCN Group of any obligation under the Distribution Agreement or
any of the other Distribution Documents and (iii) in the case of the CTE
Indemnitees, arising out of the provision by the CTE Group of the services
described below to the RCN Group except to the extent that such Losses result
from the gross negligence or willful misconduct of a CTE Indemnitee.  "RCN
Liabilities" refers to (i) all liabilities of the RCN Group under the
Distribution Agreement or any of the other distribution documents, (ii) all
other liabilities of Cable Michigan, RCN or CTE (or their respective
subsidiaries), except as specifically provided in the Distribution Agreement or
any of the other Distribution Documents and whether arising before, on or after
the Distribution Date, to the extent such liabilities arise primarily from or
relate primarily to the management or conduct of the RCN Businesses prior to the
effective time of the Distribution (the liabilities in clauses (i) and (ii)
collectively, the "True RCN Liabilities") and (iii) 30% of the Shared
Liabilities (as defined below).

  Cable Michigan has agreed to indemnify the RCN Group and the respective
directors, officers, employees and Affiliates of each person in the RCN Group
(collectively, the "RCN Indemnitees") and the CTE Indemnitees from and against
any and all Losses incurred or suffered by any of the RCN Indemnitees or the CTE
Indemnitees, respectively, (i) arising out of, or due to the failure of any
person in the Cable Michigan Group to pay, perform or otherwise discharge any of
the Cable Michigan Liabilities (as defined below), (ii) arising out of the
breach by any member of the Cable Michigan Group of any obligation under the
Distribution Agreement or any of the other distribution documents, (iii) in the
case of the CTE Indemnitees, arising out of the provision by the CTE Group of
services to the Cable Michigan Group except to the extent that such Losses
result from the gross negligence or willful misconduct of a CTE Indemnitee and
(iv) in the case of the RCN Indemnitees, arising out of the provision by RCN of
the services described below to the Cable Michigan Group except to the extent
that such Losses result from the
<PAGE>

gross negligence or willful misconduct of an RCN Indemnitee. "Cable Michigan
Liabilities" refers to (i) all liabilities of the Cable Michigan Group under the
Distribution Agreement or any of the other distribution documents, (ii) all
other liabilities of Cable Michigan, RCN or CTE (or their respective
subsidiaries), except as specifically provided in the Distribution Agreement or
any of the other Distribution Documents and whether arising before, on or after
the Distribution Date, to the extent such liabilities arise primarily from or
relate primarily to the management or conduct of the business of the Cable
Michigan Group prior to the effective time of the Distribution (the liabilities
in clauses (i) and (ii) collectively, the "True Cable Michigan Liabilities") and
(iii) 20% of the Shared Liabilities (as defined below).

  CTE has agreed to indemnify the Cable Michigan Indemnitees and the RCN
Indemnitees from and against any and all Losses incurred or suffered by any of
the Cable Michigan Indemnitees or the RCN Indemnitees, respectively, (i) arising
out of, or due to the failure of any person in the CTE Group to pay, perform or
otherwise discharge any of the CTE Liabilities (as defined below), (ii) arising
out of the breach by any member of the CTE Group of any obligation under the
Distribution Agreement or any of the other Distribution Documents and (iii) in
the case of the RCN Indemnitees, arising out of the provision by RCN of the
services described below to the CTE Group except to the extent that such Losses
result from the gross negligence or willful misconduct of an RCN Indemnitee.
"CTE Liabilities" refers to (i) all liabilities of the CTE Group under the
Distribution Agreement or any of the other distribution documents, (ii) all
other liabilities of Cable Michigan, RCN or CTE (or their respective
subsidiaries), except as specifically provided in the Distribution Agreement or
any of the other Distribution Documents and whether arising before, on or after
the Distribution Date, to the extent such liabilities arise primarily from or
relate primarily to the management or conduct of the business of the CTE Group
prior to the effective time of the Distribution (the liabilities in clauses (i)
and (ii) collectively, the "True CTE Liabilities") and (iii) 50% of the Shared
Liabilities (as defined below).

  "Shared Liability" means any liability (whether arising before, on or after
the Distribution Date) of Cable Michigan, RCN or CTE or their respective
subsidiaries which (i)(a) arises from the conduct of the corporate overhead
function with respect to CTE and its subsidiaries prior to the effective time of
the Distribution with certain exceptions or (b) is one of certain fees and
expenses incurred in connection with the Restructuring and (ii) is not a True
CTE Liability, a True RCN Liability or a True Cable Michigan Liability.

  RCN, Cable Michigan and CTE have also generally agreed to indemnify each other
and each other's affiliates and controlling persons from certain liabilities
under the securities laws in connection with certain information provided to
shareholders in connection with the Distribution.

  The Distribution Agreement also includes procedures for notice and payment of
indemnification claims and provides that the indemnifying party may assume the
defense of claims or suits brought by third parties for non-Shared Liabilities
and may participate in the defense of claims or suits brought by third parties
for Shared Liabilities.  RCN is entitled to assume the defense of claims or
suits brought by third parties for Shared Liabilities.  Any indemnification paid
under the foregoing indemnities is to be paid net of the amount of any insurance
or other amounts that would be payable by any third party to the indemnified
party in the absence of such indemnity.
<PAGE>

  The Company does not believe that any of the foregoing indemnities will have a
material adverse effect on the business, financial condition or results of
operations of the Company.

  Employee Matters

  Under the Distribution Agreement, RCN, Cable Michigan and CTE agreed generally
to assume employee benefits-related liabilities with respect to its current and,
in some cases, former employees.

  Services Provided By RCN

  Pursuant to the Distribution Agreement, RCN has agreed to provide, or cause to
be provided, to Cable Michigan certain management, administrative and other
services, including: (i) customer service, (ii) marketing, (iii) accounting,
(iv) payroll, (v) management supervision, (vi) cash management, (vii) human
resources services and benefit plan administration, (viii) insurance
administration, (ix) legal, (x) tax, (xi) internal audit, (xii) programming
administration, (xiii) billing, (xiv) monthly cable guides, (xv) investor and
public relations, (xvi) provision of third party programming and (xvii) other
miscellaneous administrative services.

  Subject to certain limitations, the total fee for services listed in items
(ii)-(xii), (xv) and (xvii) will be 4.0% of revenues per year plus a direct
allocation of certain consolidated cable administration functions.  The fee for
customer service listed in item (i) along with the billing service listed in
item (xiii) will be a pro rata share (based on subscribers) of the expenses
incurred by RCN to provide such services for RCN and Cable Michigan.  The third
party expense incurred by RCN to obtain third party programming and monthly
cable guides for Cable Michigan will be reimbursed to RCN by Cable Michigan and
no additional fee will be charged with respect thereto.

  CTE has agreed to provide or cause to be provided to the RCN Group and the
Cable Michigan Group financial data processing applications, lockbox services,
storage facilities, LAN and WAN support services, building maintenance and other
miscellaneous administrative services.  The fees for such services and
arrangements will be an allocated portion (based on relative usage) of the cost
incurred by CTE to provide such services and arrangements to all three groups.

  The nature, scope and timing of the foregoing services are to be substantially
consistent with the nature, scope and timing of the service provider's services
prior to the Distribution, provided that the service provider shall not be
obligated to hire additional or replacement employees, or increase the
compensation of its existing employees, in order to provide the services.  The
services are to commence on the Distribution Date and will terminate upon 60
days notice by either the service provider or the relevant service recipient,
except that the billing, customer service, programming administration and
provision of third party programming services provided by RCN to Cable Michigan
may not be terminated by RCN on less than one year advance notice to Cable
Michigan.  A service recipient may also terminate individual services by giving
60 days notice to the applicable service provider.

  These services may be terminated upon 60 days notice by either RCN or the
Company, except that the services listed as items (i), (xii), (xiii) and (xvi)
above may not be terminated  by RCN on less than one year advance notice to the
Company.
<PAGE>

  The aforementioned arrangements are not the result of arm's length negotiation
between unrelated parties as Cable Michigan, CTE and RCN have certain common
officers and directors.  Although the transitional service arrangements in such
agreements are designed to reflect arrangements that would have been agreed upon
by parties negotiating at arm's length, there can be no assurance that Cable
Michigan would not be able to obtain similar services at a lower cost from
unrelated third parties. Additional or modified agreements, arrangements and
transactions may be entered into between the Company and either or both of CTE
and RCN after the Distribution, which will be negotiated at arm's length.

  Miscellaneous

  The Distribution Agreement also contains provisions concerning access to
information and records and rights to technology, software, intellectual
property, know-how or other proprietary rights owned, licensed or held for use
by the respective Groups. The Distribution Agreement provides that any dispute
arising out of or in connection with the Distribution Agreement will be
submitted to arbitration in accordance with the procedures described in the
Agreement.

  There exist relationships among CTE, RCN and Cable Michigan that may lead to
conflicts of interest. Each of the CTE, RCN and Cable Michigan are effectively
controlled by Kiewit Telecom. In addition, the majority of the directors and/or
executive officers of CTE, RCN and Cable Michigan also hold one or more offices
at other group companies. See "Item 10: Directors and Executive Officers of the
Registrant." The success of the Company may be affected by the degree of
involvement of its officers and directors in the Company's business and the
abilities of the Company's officers, directors and employees in managing both
the Company and the operations of RCN and/or CTE. Potential conflicts of
interest will be dealt with on a case-by-case basis taking into consideration
relevant factors including the requirements of NASDAQ and prevailing corporate
practices.

  Tax Sharing Agreement

  The Tax Sharing Agreement governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of Cable Michigan, ending or deemed to end on or before
the Distribution Date. Under the Tax Sharing Agreement, Adjustments (as defined
in the Tax Sharing Agreement) to taxes that are clearly attributable to the
Cable Michigan Group, the RCN Group or the CTE Group will be allocated solely to
such group. Adjustments to all other tax liabilities will generally be allocated
50% to CTE, 20% to Cable Michigan and 30% to RCN.

COMPETITION

  Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders.  The
extent to which a cable television system is competitive depends, in part, upon
the cable systems' ability to provide, at a reasonable price to consumers, a
greater variety of programming and other services than are available off-air or
through other alternative delivery sources and upon superior technical
performance and customer service.

  The FCC and Congress have adopted policies providing a more favorable
operating environment for new and existing technologies that provide, or have
the potential to provide, substantial competition to cable systems.  These
technologies include, among others, direct broadcast satellite ("DBS") service
whereby signals are transmitted by satellite to receiving facilities located on
customer premises.  The availability of reasonably-priced home satellite dish
earth stations ("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers.  Furthermore, the 1992 Act (defined below) contains provisions,
which the FCC has implemented with regulations, to enhance the ability of cable
competitors to purchase and make available to HSD owners certain satellite-
delivered cable programming at competitive costs.  The 1996 Act (defined below)
and FCC
<PAGE>

regulations implementing that law preempt certain local restrictions on the use
of HSDs and roof-top antennae to receive satellite programming and over-the-air
broadcasting services.

  DBS systems are expected to use video compression technology to increase the
channel capacity of their systems to provide movies, broadcast stations and
other program services comparable to those of cable systems.  Digital satellite
service ("DSS") offered by DBS systems currently has certain advantages over
cable systems with respect to programming capacity and digital quality, as well
as certain current disadvantages that include high up-front customer equipment
costs and a lack of local programming, local customer service and equipment
distribution.  While DSS presents a competitive threat to cable, the Company has
implemented a program to increase its channel capacity in many of its systems by
upgrading its networks.  These upgrades will enable the Company to introduce new
premium channels, pay-per-view programming, interactive computer-based services
and may enable these systems to deliver digital video along with other
communications services.  These upgrades, when combined with superior customer
service and technical support, will enhance the Company's ability to compete.

  The 1996 Act makes it easier for local exchange telephone companies ("LECs")
and others to provide a wide variety of video services competitive with services
provided by cable systems and to provide cable services directly to subscribers.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities.  Cable systems could be placed at a competitive
disadvantage if the delivery of video services by LECs becomes widespread since
LECs are not required, under certain circumstances, to obtain local franchises
to deliver such video services or to comply with the variety of obligations
imposed upon cable systems under such franchises.  Issues of cross-subsidization
by LECs of video and telephony services also pose strategic disadvantages for
cable operators seeking to compete with LECs which provide video services.
Ameritech has obtained cable television franchises in eastern Michigan and has
overbuilt some cable operators thereby creating a competitive environment.  To
date, Ameritech has not applied for cable franchises where the Company operates.
The Company cannot predict the likelihood of success of video service ventures
by LECs or the impact on the Company of such competitive ventures.

  Cable television systems generally operate pursuant to franchises granted on a
non-exclusive basis.  The 1992 Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and  permits franchising
authorities to operate cable systems.  Well-financed businesses from outside the
cable industry (such as the public utilities that own certain of the poles on
which cable is attached) may become competitors for franchises or providers of
competing services.  Certain municipal power companies have been exploring
building new video networks to compete with the Company within the areas where
such companies deliver power.  See "Regulation."  Competition from other cable
television operators exists in some areas served by the Company.  Approximately
2% of homes passed by the Company's wholly owned system have been overbuilt (4%
including Mercom).  The Company believes that its systems are less likely to be
overbuilt than those of many other operators because of their location in more
rural and less populated areas.

  Cable operators face additional competition from private satellite master
antenna television ("SMATV") systems that serve condominiums, apartment and
office complexes and private residential developments.  The 1996 Act broadens
the definition of SMATV systems not subject to regulation as a franchised cable
communications service.  SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered programming
services offered by franchised cable communications systems.  SMATV operators
often enter into exclusive agreements with building owners or homeowners'
associations, although some states have enacted laws to provide franchised cable
systems access to such private complexes, and the 1984 Act gives a franchised
cable operator the right to use existing compatible easements within its
franchise area under certain circumstances.  These laws have been challenged in
the courts with varying results.  In addition, some companies are developing
and/or offering packages of telephony, data and video services to these private
residential and commercial
<PAGE>

developments. The ability of the Company to compete for subscribers in
residential and commercial developments served by SMATV operators is uncertain.

  Cable television systems also compete with wireless program distribution
services such as multipoint multichannel distribution service ("MMDS") which use
low-power microwave frequencies to transmit video programming over-the-air to
subscribers.  There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served by
the Company's cable systems.  Additionally, the FCC recently adopted new
regulations allocating frequencies in the 28-GHz band for a new multichannel
wireless video service similar to MMDS.  The Company is unable to predict
whether wireless video services will have a material impact on its operations.

  Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer.  The 1996 Act
directed the FCC to establish, and the FCC has adopted, regulations and policies
for the issuance of licenses for digital television ("DTV") to incumbent
television broadcast licensees.  DTV is expected to deliver high definition
television pictures, multiple digital-quality program streams, as well as CD-
quality audio programming and advanced digital services, such as data transfer
or subscription video.  The FCC also has authorized television broadcast
stations to transmit textual and graphic information useful both to consumers
and businesses.  The FCC also permits commercial and non-commercial FM stations
to use their subcarrier frequencies to provide non-broadcast services including
data transmissions.  The FCC established an over-the-air Interactive Video and
Data Service that will permit two-way interaction with commercial and
educational programming along with informational and data services.  LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services.  The FCC
has conducted spectrum auctions for licenses to provide personal communications
services ("PCS").  PCS will enable license holders, including cable operators,
to provide voice and data services.

  Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring.  Thus,
it is not possible to predict the effect that ongoing or future developments
might have on the cable television industry or on the operations of the Company.

REGULATION

  The Cable Communications Policy Act of 1984 (the "1984 Act"), the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Act") and
the Telecommunications Act of 1996 (the "1996 Act") amended the Communications
Act of 1934 (as amended, the "Communications Act") and established a national
policy to guide the development and regulation of cable systems.  Principal
responsibility for implementing the policies of the Communications Act relating
to cable television is allocated between the FCC and state agencies or local
franchising authorities.  The following is a summary of federal laws and
regulations materially affecting the growth and operation of the cable
television industry and a description of certain state and local laws.

  The 1992 Act authorized rate regulation for cable television services and
equipment in communities that are not subject to "effective competition," as
defined by federal  law.  Basic cable service and equipment is subject to
regulation by local franchising authorities that choose to become certified by
the FCC to regulate rates.  Such local regulation occurs with oversight by the
FCC, which has prescribed detailed criteria for the regulation of basic
services.  The 1992 Act also requires the FCC to resolve complaints about rates
for cable programming services tiers ("CPST") (other than programming offered on
a per channel or per program basis, which is not subject to rate regulation) and
to reduce any such rates found to be unreasonable.   The 1996 Act provides for
rate deregulation of CPSTs by March 1999.

  The 1996 Act deregulates rates for CPSTs in March 1999 for large Multiple
System Operators ("MSOs") and immediately for certain small operators.  The 1996
Act also modifies the uniform rate provisions of the 1992 Act by prohibiting
regulation of non-predatory, bulk discount rates offered to
<PAGE>

subscribers in commercial residential developments and permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level. The 1996 Act
eliminates the right of individual subscribers to file rate complaints with the
FCC concerning CPSTs and permits franchising authorities to file CPST rate
complaints with the FCC only after having received multiple subscriber
complaints. The FCC is required to issue a final order within 90 days after
receipt of a CPST rate compliant filed by any franchising authority.

  FCC regulations, which became effective in September 1993, govern rates that
may be charged to subscribers for basic cable service and certain CPSTs
(together, the "Regulated Services").  The FCC uses a benchmark methodology as
the principal method of regulating rates for Regulated Services.  Cable
operators are also permitted to justify rates using various cost-of-service
methodologies.  In 1994, the FCC's benchmark regulations required operators to
implement rate reduction for Regulated Services up to 17% of the rates for such
services in effect on September 30, 1992, adjusted for inflation and changes in
programming costs, equipment costs and certain operating costs.  The FCC has
also adopted comprehensive and restrictive regulations allowing operators to
modify their regulated rates on a  quarterly or annual basis using various
methodologies that account for changes in number of regulated channels,
inflation and increases in certain external costs, such as franchise and other
governmental fees, copyright and retransmission consent fees, taxes, programming
costs and the cost of franchise-related obligations.  The Company cannot predict
whether the FCC will modify these "going forward" regulations in the future.

  Franchising authorities are empowered to regulate the rates charged for
additional outlets and for the installation, lease and sale of equipment used by
subscribers to receive the basic cable service tier, such as converter boxes and
remote control units.  The FCC's rules require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable profit, as
defined by the FCC.  Cable operators required to reduce rates may also be
required to refund overcharges with interest.

  Under the FCC's standard cost of service analysis, a cable operator can
demonstrate that existing rates for Regulated Services are reasonable using the
FCC's cost-of-service rate regulations which require, among other things, the
exclusion from the rate base of 34% of system acquisition costs related to
intangible and tangible assets used to provide Regulated Services.  The FCC's
cost-of-service regulations contain a rebuttable presumption of an industry-wide
11.25% after tax rate of return on an operator's allowable rate base, but the
FCC has initiated a further rule making in which it proposes to use an
operator's actual debt cost and capital structure to determine an operator's
cost of capital or rate of return.

  There are currently CPST rate complaints pending against rates in numerous
communities served by the Company in Michigan.  In addition, in many of the
communities where the Company provides cable service, local franchising
authorities have become certified to regulate rates for basic service.
<PAGE>

  The FCC has issued decisions requiring rate reductions for certain of the
CPSTs of the Company, based on, among other things, the finding that the Company
does not qualify for small system rate relief under the 1996 Act.  The FCC staff
issued a ruling that the Company does not qualify as a "small system operator"
because all affiliated companies served more than 400,000 subscribers (due to
RCN's investment in Mexican cable systems).  The Company has challenged those
decisions on the basis that it should qualify as a "small cable operator" under
the 1996 Act and the FCC's rules, or, in the alternative, that its rates are
justified under the FCC's standard price caps/going forward methodology in any
event.

  "Anti-Buy Through" Provisions

  The 1992 Act requires cable systems to permit subscribers to purchase video
programming offered by the operator on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic cable service tier, unless technological limitations prevent the system
from doing so.  There is a statutory exemption for cable systems that do not
have the technological capability to offer programming in the manner required by
the statute.  This exemption is available until a system obtains such
capability, but not later than December 2002.  The FCC may waive such time
periods.  The Company expects that its systems will be in compliance with this
requirement by the December 2002 deadline.

  Must Carry/Retransmission Consent

  The 1992 Act contains broadcast signal carriage requirements that allow local
commercial television broadcast stations to elect once every three years to
require a cable system to carry the station ("must-carry"), subject to certain
exceptions, or to withhold consent and negotiate the terms of carriage
("retransmission consent").  A cable system generally is required to devote up
to one-third of its activated channel capacity for the carriage of local
commercial television stations whether pursuant to the mandatory carriage or
retransmission consent requirements of the 1992 Act.  Local non-commercial
television stations are also given mandatory carriage rights; however, such
stations are not given the option to negotiate retransmission consent for the
carriage of their signals by cable systems.  Additionally, cable systems are
required to obtain retransmission consent for all "distant" commercial
television stations (except for certain commercial satellite-delivered
independent "superstations"), commercial radio stations and low-power television
stations carried by such systems.  In March 1997, the U.S. Supreme Court
affirmed a three-judge district court decision upholding the constitutional
validity of the 1992 Act's mandatory signal carriage requirements.

  The FCC recently issued rules establishing standards for DTV.  Among other
provisions, the FCC's rules require television stations to simulcast their NTSC
and DTV signals for a period of years.  During this simulcast period, it is
unclear whether must-carry rules will apply to DTV signals.
<PAGE>

  The FCC is conducting a rule making in the future to consider the
requirements, if any, for mandatory carriage of DTV signals. The Company cannot
predict the ultimate outcome of such a rule making or the impact of new carriage
requirements on the Company or its business.

  Access Channels

  The Communications Act permits franchising authorities to require cable
operators to set aside certain channels for public, educational and governmental
("PEG") access programming.  The 1984 Act also requires a cable system with 36
or more channels to designate a portion of its channel capacity for commercial
leased access by third parties to provide programming that may compete with
services offered by the cable operator.  The FCC has adopted rules regulating:
(i) the maximum reasonable rate a cable operator may charge for commercial use
of the designated channel capacity; (ii) the terms and conditions for commercial
use of such channels; and (iii) the procedures for the expedited resolution of
disputes concerning rates or commercial use of the designated channel capacity.
The U.S. Supreme Court recently held parts of the 1992 Act regulating "indecent"
programming on PEG access channels to be unconstitutional, but upheld the
statutory right of cable operators to prohibit or limit the provision of
"indecent" programming on commercial leased access channels.

  Franchise Procedures

  The 1984 Act affirms the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions and prohibits non-grandfathered cable systems from
operating without a franchise in such jurisdictions.  The 1992 Act encourages
competition with existing cable systems by (i) allowing municipalities to
operate their own cable systems without franchises; (ii) preventing franchising
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable system's service area;
and (iii) prohibiting (with limited exceptions) the common ownership of cable
systems and co-located MMDS or SMATV systems.  In January, 1995, the FCC relaxed
its restrictions on ownership of  SMATV systems to permit a cable operator to
acquire SMATV systems in the operator's existing franchise area so long as the
programming services provided through the SMATV system are offered according to
the terms and conditions of the cable operator's local franchise agreement.  The
1996 Act provides that the cable/SMATV and cable/MMDS cross-ownership rules do
not apply in any franchise area where the operator faces "effective competition"
as defined by federal law.

  The Communications Act also provides that in granting or renewing franchises,
local authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories.  The Communications Act limits the payment of franchise fees
to 5% of revenues derived from cable operations and permits the cable operator
to obtain modification of franchise requirements by the franchise authority or
judicial action if warranted by changed circumstances.  The Company's franchises
typically provide for periodic payment of fees to franchising authorities of 3%
to 5% of "revenues" (as defined by each franchise agreement), which fees may be
passed on to subscribers.  The 1996 Act generally prohibits franchising
authorities from (i) imposing requirements in the cable franchising process that
require, prohibit or restrict the provision of telecommunications services by an
operator, (ii) imposing franchise fees on revenues derived by the operator from
providing telecommunications services over its cable system, or (iii)
restricting an operator's use of any type of subscriber equipment or
transmission technology.

  The Communications Act contains renewal procedures designed to protect
incumbent franchisees against arbitrary denials of renewal.  Franchising
authorities may seek to impose new and more onerous requirements, such as
significant upgrades in facilities and services or increased franchise fees, as
a condition of renewal.  Similarly, if a franchising authority's consent is
required for the purchase or sale of a cable system or franchise, the
franchising authority may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for such consent.  Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of
<PAGE>

their franchises. The Company believes that it has generally met the terms of
its franchises and has provided quality levels of service. As such, the Company
anticipates that its future franchise renewal prospects generally will be
favorable.

  Various courts have considered whether franchising authorities have the legal
right to limit franchise awards to a single operator and to impose certain
substantive franchise requirements (e.g., access channels, universal service and
other technical requirements). These decisions have been somewhat inconsistent
and, until the U.S. Supreme Court rules definitively on the scope of cable
operators' First Amendment protections, the legality of the franchising process
generally and of various specific franchise requirements is likely to be in a
state of flux.

  Ownership Limitations

  Pursuant to the 1992 Act, the FCC adopted rules prescribing national
subscriber limits and limits on the number of channels that can be occupied on a
cable system by a video programmer in which the operator has an attributable
interest.  The effectiveness of these FCC horizontal ownership limits has been
stayed because a federal district court found the statutory limitation to be
unconstitutional.  An appeal of that decision has been consolidated with appeals
challenging the FCC's regulatory ownership restrictions and is pending.  The
1996 Act eliminates the statutory prohibition on the common ownership, operation
or control of a cable system and a television broadcast station in the same
service area and directs the FCC to review its broadcast/cable ownership
restrictions to determine if they are necessary in the public interest.
Pursuant to the mandate of the 1996 Act, the FCC eliminated its regulatory
restriction on cross-ownership of cable systems and national broadcasting
networks.

  LEC Ownership of Cable Systems

  The 1996 Act makes far-reaching changes in the regulation of LECs that provide
cable services.  The 1996 Act eliminates the requirement that LECs obtain FCC
approval under Section 214 of the Communications Act before providing video
services in their telephone service areas and removes the statutory telephone
company/cable television cross-ownership prohibition, thereby allowing LECs to
offer video services in their telephone service areas.  LECs may provide service
as traditional, franchised cable operators or they may opt to provide their
programming over unfranchised "open video systems," subject to certain
conditions, including, but not limited to, setting aside up to two-thirds of
their channel capacity for use by unaffiliated program distributors.  The 1996
Act also prohibits a LEC from acquiring an existing cable system in its
telephone service area except in limited circumstances.  The 1996 Act removes
barriers to entry into the local telephone exchange market by preempting state
and local laws that restrict competition and by requiring all LECs to provide
nondiscriminatory access and interconnection to potential competitors, such as
cable operators, wireless telecommunications providers and long distance
companies.

  Regulations promulgated by the FCC under the 1996 Act require LECs to open
their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local exchange
services. Numerous parties appealed certain aspects of these regulations, and
the appeals were consolidated in the United States Court of Appeals for the
Eighth Circuit. On July 18, 1997, the Eighth Circuit found constitutional
challenges to certain practices implementing cost provisions of the
Telecommunications Act that were ordered by certain state public utility
companies ("PUCs") to be premature; vacated significant portions of the FCC's
nationwide pricing rules; and overturned FCC rules that required that LECs
combine unbundled elements, on request, for the benefit of a competitive
carrier. On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the cost of
obtaining the use of combinations of an incumbent LEC's unbundled network
elements. On January 26, 1998, the Supreme Court granted a writ of certiorari
under which it will review the July 18 Eighth Circuit decision; it is expected
(but not yet certain) that the Court will hear arguments on this case in the
fall of 1998. Although state PUCs may still choose to implement at their
discretion some of the FCC rules that were overturned by the Eighth Circuit, the
Eighth Circuit decisions create uncertainty about the rules governing pricing
and terms and conditions of
<PAGE>

interconnection agreements, and could make negotiating and enforcing such
agreements more difficult and protracted and may require renegotiation of
existing agreements.

  Pole Attachment

  The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities can demonstrate that they adequately
regulate pole attachment rates.  In the absence of state regulation, the FCC
administers pole attachment rates on a formula basis.  In some cases, utility
companies have increased pole attachment fees for cable systems that have
installed fiber optic cables and that are using such cables for the distribution
of non-video services.  The FCC concluded that, in the absence of state
regulation, it has jurisdiction to determine whether utility companies have
justified their demand for additional rental fees and that the Communications
Act does not permit disparate rates based on the type of service provided over
the equipment attached to the utility's pole.  The 1996 Act and the FCC's
implementing regulations modify the current pole attachment provisions of the
Communications Act by immediately permitting certain providers of
telecommunications services to rely upon the protections of the current law and
by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility. As required by the 1996 Act, the FCC has established
new regulations to govern the charges for pole attachments used by companies
providing telecommunications services, including cable operators. Although the
FCC has issued its regulations, they are subject to changes on reconsideration
(or appeal), and some issues that may affect the ultimate rates for
telecommunications attachments to utility poles remain outstanding. These new
pole attachment rate regulations will become effective five years after
enactment of the 1996 Act, and any increase in attachment rates resulting from
the FCC's new regulations will be phased in equal annual increments over a
period of five years beginning in February 2001.

  Other Statutory Provisions

  The 1992 Act, the 1996 Act and  FCC regulations preclude any satellite video
programmer affiliated with a cable company, or with a common carrier providing
video programming directly to its subscribers, from favoring an affiliated
company over competitors and require such programmers to sell their programming
to other multichannel video distributors.  These provisions limit the ability of
program suppliers affiliated with cable companies or with common carriers
providing satellite delivered video programming directly to their subscribers to
offer exclusive programming arrangements to their affiliates.  The 1992 Act
requires operators to block fully both the video and audio portion of sexually
explicit or indecent programming on channels that are primarily dedicated to
sexually oriented programming or alternatively to carry such programming only at
"safe harbor" time, periods currently defined by the FCC as the hours between 10
p.m. and 6 a.m.  Several adult-oriented cable programmers have challenged the
constitutionality of this statutory provision, but the U.S. Supreme Court
recently refused to overturn a lower court's denial of a preliminary injunction
motion seeking to enjoin the enforcement of this law.  The FCC's regulations
implementing this statutory provision are now in effect.  The 1996 Act also
contains provisions regulating the content of video programming and computer
services.  Specifically, the new law prohibits the use of computer services to
transmit "indecent" material to minors.  The U.S. Supreme Court has ruled that
the provisions relating to the regulation of indecent material are
unconstitutional.  In accordance with the 1996 Act, the television industry
recently adopted a voluntary ratings system for violent and indecent video
programming.  The 1996 Act also requires all new television sets to contain a
so-called "V-chip" capable of blocking all programs with a given rating.  The
Communications Act also includes provisions, among others, concerning horizontal
and vertical ownership of cable systems, customer service, subscriber privacy,
marketing practices, equal employment opportunity, obscene or indecent
programming, regulation of technical standards and equipment compatibility.

  The 1996 Act modifies the existing statutory provisions governing cable system
technical standards, equipment compatibility, subscriber notice requirements and
program access, permits certain operators to include losses incurred prior to
September 1992 in setting regulated rates and repeals the three-year anti-
<PAGE>

trafficking prohibition adopted in the 1992 Act.  FCC regulations implementing
the 1996 Act preempt certain local restrictions on satellite and over-the-air
antenna reception of video programming services, including zoning, land-use or
building regulations, or any private covenant, homeowners' association rule or
similar restriction on property within the exclusive use or control of the
antenna user.

  Other FCC Regulations

  In addition to the FCC regulations noted above, there are other
FCC regulations covering such areas as equal employment opportunity, syndicated
program exclusivity, network program non-duplication, registration of cable
systems, maintenance of various records and public inspection files, microwave
frequency usage, lockbox availability, sponsorship identification, antenna
structure notification, tower marking and lighting, carriage of local sports
broadcast programming, application of rules governing political broadcasts,
limitations on advertising contained in non-broadcast children's programming,
consumer protection and customer service, ownership of home wiring, indecent
programming, programmer access to cable systems, programming agreements,
technical standards, consumer electronics equipment compatibility and closed
captioning.  The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities often used in
connection with cable operations.

  Other bills and administrative proposals pertaining to cable television have
previously been introduced in Congress or considered by other governmental
bodies over the past several years.  It is probable that there will be
legislative proposals in the future by Congress and other governmental bodies
relating to the regulation of communications services.

  Copyright

  Cable television systems are subject to federal compulsory copyright licensing
covering the retransmission of television and radio broadcast signals.  In
exchange for filing certain reports and contributing a percentage of their basic
revenues to a federal copyright royalty pool, cable operators can obtain blanket
licenses to retransmit the copyrighted material on broadcast signals.  The
nature and amount of future payments for broadcast signal carriage cannot be
predicted at this time.  The possible simplification, modification or
elimination of the compulsory copyright license is the subject of continuing
legislative review.  The elimination or substantial modification of the cable
compulsory license could adversely affect the Company's ability to obtain
suitable programming and could substantially increase the cost of programming
available for distribution to the Company's subscribers.  The Company cannot
predict the outcome of this legislative activity.
<PAGE>

  Cable operators distribute programming and advertising that use music
controlled by the two major music performing rights organizations, ASCAP and
BMI.  In October 1989, the special rate court of the U.S. District Court for the
Southern District of New York imposed interim rates on the cable industry's use
of ASCAP-controlled music.  The same federal district court recently established
a special rate court for BMI.  BMI and cable industry representatives recently
concluded negotiations for a standard licensing agreement covering the
performance of BMI music contained in advertising and other information inserted
by operators into cable programming and on certain local access and origination
channels carried on cable systems.  ASCAP and cable industry representatives
have met to discuss the development of a standard licensing agreement covering
ASCAP-controlled music in local origination and access channels and pay-per-view
programming.  Although the Company cannot predict the ultimate outcome of these
industry negotiations or the amount of any license fees it may be required to
pay for past and future use of ASCAP-controlled music, it does not believe such
license fees will be significant to the Company's financial position, results of
operations or liquidity.

  State and Local Regulation

  Because a cable television system uses local streets and rights-of-way, cable
systems are subject to state and local regulation, typically imposed through the
franchising process.  Cable television systems generally are operated pursuant
to non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity.  Franchises generally are granted for
fixed terms and in many cases are terminable if the franchisee fails to comply
with material provisions.  The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction.  Each franchise generally contains
provisions governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided.  A number of states subject  cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.  Attempts in
other states to regulate cable television systems are continuing and can be
expected to increase.  At this time, the state of Michigan does not regulate
rates on behalf of its municipalities.  State and local franchising jurisdiction
is not limited, however, and must be exercised consistently with federal law.
The 1992 Act immunizes franchising authorities from monetary damage awards
rising from regulation of cable systems or decisions made on franchise grants,
renewals, transfers and amendments.

  The foregoing does not purport to describe all present and proposed federal,
state, and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry or the Company can be predicted at this time.

EMPLOYEES

  As of December 31, 1997 the Company had a total of approximately 210
employees.  The Company believes that its relationships with employees are good.

ITEM 2.   PROPERTY
<PAGE>

  The principal physical assets of a cable television system consist of a
central receiving apparatus, distribution equipment, cables, converters,
electronics, vehicles, origination equipment and local business offices.  The
Company owns or leases the receiving and distribution equipment of each system
and owns or leases parcels of real property for the receiving sites and local
business offices.  The physical components of cable television systems require
maintenance and periodic upgrading and rebuilding to keep pace with
technological advances.  The Company's management believes that substantially
all of its physical assets are in good operating condition.

ITEM 3.  LEGAL PROCEEDINGS.

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

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

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

No matters were submitted to a vote of security holders of the Registrant during
the fourth quarter of the Registrant's 1997 fiscal year.
<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to Section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act").

Executive Officers of the Registrant

     David C. McCourt, 41, has been the Chairman, Chief Executive Officer and a
Director of the Company since September 1997.  Mr. McCourt has been Chairman and
Chief Executive Officer of RCN  since September 1997. In addition, he has been
Chairman and Chief Executive Officer of CTE since October 1993. Mr. McCourt is
President and Chief Executive Officer, as well as a Director of Kiewit Telecom
Holdings, Inc.  He has been Chairman and Chief Executive officer of Mercom since
October 1993, Director of MFS Communications Company, Inc. from July 1990 to
December 1996, President and a Director of Metropolitan Fiber Systems/McCourt,
Inc. a subsidiary of MFS Telecom, Inc., since 1988, a Director of Cable
Satellite Public Affairs Network ("C-SPAN") since June 1995, a Director of
WorldCom, Inc. since December 1996 and a Director of Kiewit Diversified Group,
Inc. now Level 3 Communications, Inc. since August 1997.

  Mark Haverkate, 43, has been the President and Chief Operating Officer and a
Director of the Company since September 1997. Mr. Haverkate has been Executive
Vice President of Business Development of RCN since such date. He has been
President and Chief Operating Officer of Mercom since October 1997. He was the
President of RCN Development (a division of RCN) from June 1997 to September
1997 and the Executive Vice President of Business Development of CTE from May
1997 to September 1997. Previously, he was President for Business Operations of
RCN Telecom Services, Inc. (a wholly owned subsidiary of RCN) from August 1996
to November 1996, Executive Vice President of CTE's Cable Television Group from
July 1995 to August 1996, Executive Vice President of Development for CTE from
February 1995 to July 1995, Executive Vice President for Development of Mercom
from November 1995 to February 1996, Vice President of Development for CTE from
December 1993 to February 1995, Vice President of CTE's Cable Television Group
from October 1989 to December 1993.

     Bruce C. Godfrey, 42, has been a Director and Corporate Secretary of the
Company since September 1997.  Mr. Godfrey has served as a Director of CTE since
November 1996, Executive Vice President and Chief Financial Officer since April
1994 and Corporate Secretary since September 1997. He has been Executive Vice
President and Chief Financial Officer and a Director of RCN since September
1997. He has also been Executive Vice President and Chief Financial Officer of
Mercom since April 1994 and a Director of Mercom since May 1994 and Corporate
Secretary since October 1997. Mr. Godfrey served as Senior Vice President and
Principal of Daniels and Associates from January 1984 to April 1994.

     Timothy J. Stoklosa, 37, has been the Executive Vice President, Chief
Financial Officer and a Director of the Company since September 1997. Mr.
Stoklosa has been Senior Vice President and Treasurer of RCN since such date.
Mr. Stoklosa has been Senior Vice President of Finance of CTE since February
1997, Treasurer of CTE since August 1994 and Executive Vice President and Chief
Financial Officer of Mercom since October 1997. Previously, Mr. Stoklosa served
as Manager of Mergers and Acquisitions at Peter Kiewit Sons, Inc. from October
1991 to August 1994 and Senior Financial Analyst of Corporate Development at
Citizens Utilities Co. from February 1990 to October 1991.

     John J. Gdovin, 40, has been Executive Vice President of the Company since
September 1997. Mr. Gdovin was Executive Vice President of CTE's Cable
Television Group from August 1996 to September 1997, Senior Vice President of
RCN Telecom Services, Inc. since February 1997 and Executive
<PAGE>

Vice President of Mercom since August 1996. Previously, Mr. Gdovin was Vice
President of CTE's Cable Television Group from February 1995 to August 1996.

     Ralph S. Hromisin, CPA, 37, has been Vice President and Chief Accounting
Officer of the Company since September 1997. He also has been Vice President and
Chief Accounting Officer of RCN and CTE since such date.  He served as Vice
President and Corporate Conroller of CTE from August  1994 to September 1997.
Mr. Hromisin has been Vice President and Corporate Controller for Mercom since
October 1996, Director of Corporate Accounting for CTE from March 1992 to August
1994. He also held various positions, most recently Audit Manager for Parente,
Randolph, Orlando, Carey & Associates, CPA's from November 1982 to March 1992.

     John D. Filipowicz, 39, has been Senior Vice President and Assistant
General Counsel and Assistant Secretary of the Company since September 1997. He
also has been Senior Vice President, Assistant General Counsel and Assistant
Secretary of RCN since such date and Senior Vice President since September 1997
and Vice President, Assistant General Counsel and Assistant Secretary of CTE
from February 1995 to September 1997; Assistant Corporate Secretary for CTE
since December 1994; Corporate Counsel for CTE from December 1990. Mr.
Filipowicz has also been Senior Vice President, Assistant General Counsel and
Corporate Secretary for Mercom from December 1996 to October 1997, Assistant
Secretary since October 1997 and Vice President, Assistant General Counsel and
Assistant Secretary from May 1995 to December 1996.
<PAGE>

                                    PART II

Item 5.  Market for the Registrant's Common Stock and Related Stockholder
Matters.

There were approximately 1,819 holders of Registrant's Common Stock on February
28, 1998.  The Company maintains a no cash dividend policy.  The Company does
not intend to alter this policy in the foreseeable future.   Other information
required under Item 5 of Part II is set forth in Note 15 to the consolidated
financial statements included in Part IV Item 14(a)(1) of this Form 10-K.

Item 6.  Selected Financial Data

Information required under Item 6 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operation.

Information required under Item 7 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.

Item 8.  Financial Statements and Supplementary Data.

The consolidated financial statements and supplementary data required under Item
8 of Part II are set forth in Part IV Item 14(a)(1) of this Form 10-K.

Item 9.  Disagreements on Accounting and Financial Disclosure.

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

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

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

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

Item 11.  Executive Compensation

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

Item 13.  Certain Relationships and Related Transactions

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

                                    PART IV

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

Item 14.  (a)(1)   Financial Statements:
  Consolidated Statements of Operations for Years Ended December 31, 1997, 1996
    and 1995
  Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996
    and 1995
  Consolidated Balance Sheets - December 31, 1997 and 1996
  Consolidated Statements of Changes In Common Shareholders' Deficit for Years
    Ended December 31, 1997, 1996 and 1995
  Notes to Consolidated Financial Statements
  Report of Independent Accountants

Item 14.  (a)(2)  Financial Statement Schedules:
Description

Valuation and Qualifying Accounts and Reserves for the Years Ended December 31,
1997, 1996 and 1995 (Schedule II)

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

Item 14.  (a) (3)  Exhibits

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

(3)  Articles of incorporation and by-laws.

     (a) Amended and Restated Articles of Incorporation of the Registrant are
incorporated herein by reference to Exhibit 3.1 to the Company's Amendment No. 2
to Form 10/A filed September 5, 1997 (Commission File No. 0-22821.)

     (b) Amended and Restated Bylaws of the Registrant are incorporated herein
by reference to Exhibit 3.2 to the Company's Amendment No. 2 to Form 10/A filed
September 5, 1997 (Commission File No. 0-22821.)

(4)  Instruments defining the rights of security holders, including indentures.

     (a) Credit Agreement dated July 1, 1997 between Cable Michigan, Inc. and
First Union National Bank, as agent is incorporated herein by reference to
Exhibit 4.1 to the Company's Amendment No. 2 to Form 10/A filed September 5,
1997 (Commission file No. 0-22821.)

     (b) Amended and Restated Credit Agreement dated August 16, 1995, to Credit
Agreement dated as of November 26, 1989, by and between Mercom, Inc. and Morgan
Guaranty Trust Company of New York is incorporated herein by reference to
Exhibit 10.10 of the Form 8-K of Mercom, Inc. dated August 22, 1995, File No.
0-17750.

     (c) Amendment No. 1 dated August 14, 1996 to Amended and Restated Credit
Agreement dated August 16, 1995, to Credit Agreement dated as of November 26,
1989, by and between Mercom, Inc. and Morgan Guaranty Trust Company of New York
is incorporated herein by reference to Exhibit 4.3 to the Company's Amendment
No. 2 to Form 10/A filed September 5, 1997 (Commission File No. 0-22821.)

     (d) Amended and Restated Credit Agreement dated September 29, 1997, to
Credit Agreement dated as of November 26, 1989 and further amended and restated
as of August 16, 1995 by and between Mercom, Inc. and Registrant is incorporated
herein by reference to Exhibit 98 to the Company's report on Form 10-Q for the
quarter ended September 30, 1997 (Commission File No. 0-22821).

     (e) Assignment and Assumption Agreement dated September 29, 1997 by and
between Registrant and Morgan Guaranty Trust Company of New York is incorporated
herein by reference to Exhibit 97 to the Company's report on Form 10-Q for the
quarter ended September 30, 1997 (Commission File No. 0-22821).

     (f) Assumption Agreement dated September 30, 1997 by and among C-TEC
Corporation, the Registrant and First Union Bank is incorporated herein by
reference to Exhibit 99 to the Company's report on Form 10-Q for the quarter
ended September 30, 1997 (Commission File No. 0-22821).

 *   (g) First Amendment and Restatement dated September 29, 1997 to the Credit
Agreement dated as of June 30, 1997 by and among Cable Michigan, Inc., the
Lenders and First Union National Bank, as Administrative Agent for the Lenders.

 *   (h) Credit Agreement dated June 30, 1997 by and among C-TEC Corporation,
the Lenders and First Union National Bank, as Administrative Agent for the
Lenders.

(10) Material Contracts

     (a) Tax Sharing Agreement by and among C-TEC Corporation, RCN Corporation
and the Registrant is incorporated herein by reference to Exhibit 10.1 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission file
No. 0-22821.)

     (b) Management Agreement dated January 1, 1997 by and between Mercom, Inc.
and C-TEC Cable Systems of Michigan, Inc. is incorporated herein by reference to
Exhibit 10.2 to the Company's Amendment No. 2 to Form 10/A filed September 5,
1997 (Commission File No. 0-22821.)

     (c) Distribution Agreement among C-TEC Corporation, RCN Corporation and
the Registrant is incorporated herein by reference to Exhibit 2.1 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File
No. 0-22821.)

<PAGE>

*(21) Subsidiaries of the Registrant

*(23) Consent of Independent Accountants

*(24) Powers of Attorney

*(27) Financial Data Schedule

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

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


<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.

                 Cable Michigan, Inc.

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

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

<TABLE>
<CAPTION>
     Signature                   Title                   Date
     ---------                   -----                   ----

PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
<S>                              <C>                     <C>


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


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


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


 /s/ Ralph S. Hromisin           Vice President and      March 31, 1998
---------------------------      Chief Accounting
   Ralph S. Hromisin             Officer


<CAPTION>
DIRECTORS:
<S>                              <C>                     <C>


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


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


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


 /s/ Frank M. Henry                                      March 31, 1998
---------------------------
  Frank M. Henry


 /s/ Daniel E. Knowles                                   March 31, 1998
---------------------------
  Daniel E. Knowles


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


 /s/ Mark Haverkate                                      March 31, 1998
---------------------------
  Mark Haverkate


 /s/ Timothy J. Stoklosa                                 March 31, 1998
---------------------------
  Timothy J. Stoklosa
</TABLE>

<PAGE>

                             CABLE MICHIGAN, INC.
                               AND SUBSIDIARIES

                            SELECTED FINANCIAL DATA
                (Dollars in Thousands Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                               For the Years Ended
                                                                    December 31,
                                            -----------------------------------------------------------
                                              1997        1996         1995         1994         1993
<S>                                         <C>         <C>         <C>          <C>          <C>
Sales                                       $ 81,299    $ 76,187    $  60,675    $  49,141    $  48,665
Income (loss) from continuing operations     ($4,358)    ($8,256)    ($10,501)    ($26,226)    ($29,143)
Income (loss) per average common share
 from continuing operation                    ($0.63)     ($1.20)      ($1.53)      ($6.14)      ($7.06)
Dividends per share*                               -           -            -            -            -
Total assets                                $142,597    $149,200    $ 172,759    $ 116,972    $ 147,286
Long-term debt, net of current maturities   $143,000    $ 15,680    $  17,430            -            -
</TABLE>
------------------------
* Based on average shares of Common Stock

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

Certain statements contained in this annual report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective.  Such forward-looking statements include, in
particular, statements regarding the Company's operations, economic performance
and financial condition,  plans to develop networks and upgrade facilities, the
development of the Company's businesses, the markets for the Company's services
and products, the Company's anticipated capital expenditures, the Company's
anticipated sources of capital and effects of regulatory reform and competitive
and technological developments.  No assurance can be given that the future
results covered by the forward-looking statements will be achieved.  Such
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements.

The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:

The Company is a cable television operator in the State of Michigan, which, as
of December 31, 1997, served approximately 204,000 subscribers.  These figures
include the approximately 39,400 subscribers served by Mercom, a 62% owned
subsidiary of the Company.

Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation.  On September 30, 1997, C-TEC distributed 100% of the outstanding
shares of common stock of its wholly owned subsidiaries, RCN Corporation ("RCN")
and Cable Michigan, Inc. ("Cable Michigan" or the "Company") to holders of
record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close
of business on September 19, 1997 (the "Distribution") in accordance with the
terms of a Distribution Agreement dated September 5, 1997 among C-TEC, RCN and
Cable Michigan.   Cable Michigan consists of C-TEC's Michigan cable operations,
including its 62% ownership in Mercom, Inc. ("Mercom").  Following the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc.
("CTE").  C-TEC , RCN and Cable Michigan have entered into certain agreements
providing for the Distribution, and governing various ongoing relationships
between the three companies, including a distribution agreement and a tax-
sharing agreement.  The historical financial information presented herein

<PAGE>

reflects periods during which the Company did not operate as an independent
company and accordingly, certain assumptions were made in preparing such
financial information. Such information, therefore, may not necessarily reflect
the results of operations or the financial condition of the Company which would
have resulted had the Company been an independent, public company during the
reporting periods, and are not necessarily indicative of the Company's future
operating results or financial condition

Year Ended December 31, 1997 Compared With Year Ended December 31, 1996

For the year ended December 31, 1997, operating income before depreciation and
amortization and management fees was $36,832 compared to $35,594 for the year
ended December 31, 1996.  Sales increased 6.7% to $81,299 for 1997 from $76,187
in 1996.  For the year ended December 31, 1997, net loss was ($4,358) as
compared to a net loss of ($8,256) for 1996.  The improvement in operating
income before depreciation and amortization and management fees of $1,238 was
substantially offset by higher depreciation and amortization of $655.  Lower
interest expense of $3,428 and a $2,571 gain on the sale of the Port St. Lucie
cable operations of Mercom, partially offset by a lower benefit for income taxes
of $1,598 and a lower minority share of Mercom's losses of $1,098 primarily
account for the decrease in the net loss of $3,898 in 1997 as compared to 1996.

Sales are primarily comprised of subscription fees for basic service packages,
premium and pay per view services and cable advertising sales.  Sales for 1997
were $81,299, an increase of $5,112 or 6.7%, primarily due to higher basic
revenue resulting from approximately 5,757 additional average subscribers over
the same period in 1996 and the effects of rate increases during the first
quarter of 1997.

Management fees increased $217, or 6.2% primarily due to costs associated with
the spin-off of the Company from CTE.

Costs and expenses, excluding depreciation and amortization and management fees,
are comprised of direct costs of providing services, primarily cable programming
and franchise costs, salaries and benefits, customer service costs, sales and
marketing costs and general and administrative expenses.  Costs and expenses
excluding depreciation and amortization and management fees were $44,467 for
1997, an increase of $3,874, or 9.5% as compared to 1996.  The increase is
primarily due to higher basic programming costs resulting from higher rates,
additional channels and increased subscribers and due to increased payroll and
benefits.

Depreciation and amortization was $32,082 in 1997, an increase of $655 or 2.1%
as compared to 1996.

Interest expense was $11,751 in 1997, a decrease of approximately $3,428, or
22.6% as compared to 1996 due to lower notes payable to affiliates, partially
offset by an increase in interest expense on new third-party debt.

For the year ended December 31, 1997, the Company realized a gain of $2,571 on
the sale of the Port St. Lucie cable operations of Mercom which also resulted in
an increase in the minority share of Mercom's income.

The Company's effective income tax rate was (48.6%) in 1997 and (40.9%) in 1996.
For an analysis of the change in income taxes, see the reconciliation of the
effective income tax rate in Note 6 to the Consolidated Financial Statements.

Year Ended December 31, 1996 compared with Year Ended December 31, 1995

For the year ended December 31, 1996, operating income before depreciation and
amortization and management fees was $35,594 as compared to $29,228 for the year
ended December 31, 1995.  Sales increased 25.6% to $76,187 for 1996 from $60,675
in 1995.  For the year ended December 31, 1996, net loss was ($8,256) as
compared to a net loss of ($10,501) for 1995.  The improvement in operating
income

<PAGE>

before depreciation and amortization and management fees of $6,366 was
substantially offset by higher depreciation and amortization of $6,273. Lower
interest expense of $794 and a higher minority share of Mercom's losses of
$1,337 primarily account for the decrease in the net loss of $2,245 in 1996 as
compared to 1995.

Sales for 1996 were $76,187, an increase of $15,512 or 25.6%, primarily as a
result of the consolidation of Mercom for a full year in 1996 as compared to
five months in 1995.  Mercom accounts for $9,648 of the increase in sales over
the same period in 1995.  On an annualized basis, Mercom's sales increased
approximately $1,600 or 11.7%, of which approximately $1,000 relates to a rate
increase implemented in February 1996 and approximately $500 relates to 1,845
additional average subscribers per month in 1996 as compared to 1995.  The
remaining $5,864 increase in consolidated sales is due primarily to an increase
in average subscribers of Cable Michigan of approximately 7,600 and the effects
of rate increases of approximately 5.7% in April 1995, which affected 1996
results for a full year, and approximately 12.1% in February 1996.  On an
annualized basis, the rate increases, excluding Mercom, provide additional basic
revenues of approximately $3,700, subject to final decision by the FCC with
respect to these rate increases, of which no assurances can be given.

Costs and expenses, excluding depreciation and amortization and management fees,
were $40,593 for 1996, an increase of $9,146, or 29.1% as compared to 1995.  The
increase is primarily due to the consolidation of the financial results of
Mercom for a full year in 1996 as compared to five months in 1995, as discussed
above.  Mercom contributed $6,097 to the increase in costs and expenses in 1996.

On an annualized basis, Mercom's costs and expenses, excluding depreciation and
amortization, increased approximately $1,200 or 13.5%.  Programming, franchise
and other variable costs increased approximately $775.  This increase is
directly related to costs associated with subscriber growth, increased
programming rates on existing channels and new basic channels added during the
year.  Operating, marketing and other fixed system costs increased by $423.
This increase is primarily due to salaries and benefits, costs associated with
maintaining a larger subscriber base and a concentration on customer service
initiatives.  The remaining increase in costs and expenses, excluding
depreciation and amortization, is primarily due to higher programming expense of
Cable Michigan due to license fees increases, subscriber growth and channel
additions.

Depreciation and amortization was $31,427 in 1996, an increase of $6,273, or
24.9% as compared to 1995.  The increase is attributable to the securing of a
majority voting interest in Mercom in August 1995.  Mercom's financial results
have been consolidated since that time resulting in an increase in depreciation
and amortization of approximately $5,800 for the twelve months in 1996 as
compared to the five months in 1995.

Interest expense was $15,179 in 1996, a decrease of approximately $800, or 5% as
compared to 1995, due to a combination of lower average outstanding borrowings
and lower average interest rates.

The Company acquired a majority voting interest in Mercom in August 1995
pursuant to a common stock rights offering.  Immediately prior to the rights
offering, the Company had a 43.63% interest in Mercom and accounted for its
investment under the equity method.  Following the rights offering, the Company
has a 61.92% interest in Mercom and has consolidated Mercom in its financial
statements since August 1995.  As a result, for 1995, minority interest in the
income of Mercom was ($186) while for 1996, minority interest in the loss of
Mercom was $1,151.

The Company's effective income tax rate was (34.7%) in 1995 and (40.9%) in 1996.
For an analysis of the change in income taxes, see the reconciliation of the
effective income tax rate in Note 6 to the Consolidated Financial Statements.

Liquidity and Capital Resources

<PAGE>

During 1997, the Company incurred $128,000 of newly issued third party debt and
repaid approximately $110,000 of the total amount of outstanding intercompany
notes payable owed to C-TEC Cable Systems, Inc., which is an RCN subsidiary.
The remaining amount of outstanding intercompany indebtedness of the Company of
approximately $30,731 was treated as a capital contribution to the Company.  In
addition, the Company assumed approximately $15,000 of CTE indebtedness, which
is collateralized by the 62% interest in Mercom in connection with CTE's
contribution of its investment in Mercom to the Company. Cable Michigan, Inc.
(the parent company) assumed all of the bank's interest in Mercom's Term Credit
Agreement (approximately $14,000). Immediately after the assumption of the Term
Credit Agreement by Cable Michigan, Inc., the Term Credit Agreement was amended
and restated (see Note 7).

The Company has generated operating income before depreciation and amortization
of $33,117, $32,096 and $25,926 for the years ended December 31, 1997, 1996 and
1995, respectively. The Company currently anticipates that capital expenditures
in respect of system upgrades will be approximately $22,300 during 1998 and
approximately $19,300 during 1999.  Additional capital expenditures in respect
of plant expansion and maintenance of $7,800 and $5,700 are expected to be
incurred in 1998 and 1999, respectively. The Company believes that cash flow
generated by operations, cash balances on hand and, if necessary, borrowings,
will enable the Company to fund its capital expenditure requirements and to make
scheduled payments of principal and interest on indebtedness, but there can be
no assurance in the regard. The Company has $37,000 of credit availability under
its Revolving Credit Facility (Note 7) at December 31, 1997.

For the year ended December 31, 1997, the Company's net cash provided by
operating activities was $18,344 comprised primarily of a net loss of $4,358
adjusted by non-cash depreciation and amortization of $32,082, other non-cash
items totaling ($4,096) and working capital changes of ($4,570).  Net cash used
in investing activities of $10,009 consisted primarily of additions to property,
plant and equipment of $14,041, partially offset by proceeds from the sale of
Port St. Lucie of $3,496.  Net cash provided by financing activities of $5,587
consisted of the issuance of long-term debt of $128,000 and transfers from CTE
of $12,500, substantially offset by a change in affiliate notes of ($116,836)
and redemption of long-term debt of $17,430.

For the year ended December 31, 1996, the Company generated cash from operating
activities of $27,817, comprised principally of a net loss of $8,256 adjusted
for non-cash depreciation and amortization of $31,427, other non-cash items of
$2,099 and working capital changes of $2,393.  Net cash used in investing
activities was $9,215, comprised principally of capital expenditures of $9,605.
Net cash used in financing activities was $18,334, comprised of a decrease in
affiliate notes of $16,834 and principal payments on long-term debt of $1,500.

Regulatory Issues

No assurances can be given at this time that the following regulatory matters
will not have a material adverse effect on the Company's business and results of
operations in the future.  Also, no assurance can be given as to what other
future actions Congress, the Federal Communications Commission ("FCC") or other
regulatory authorities may take or the effects thereof on the Company.

Telecommunications Act of 1996

The Telecommunications Act of 1996 (the "1996 Act") is intended to stimulate
growth and competition in virtually every component of the communications
industry.  The 1996 Act established a framework for deregulation and calls for
state regulators and the FCC to work out the specific implementation process.
Companies are permitted to combine historically separate lines of business into
one, and provide that combined service in markets of their own choice.  In
addition, there will be relief from the earnings restrictions and price controls
that have governed the local telephone business for many years and were imposed
on the cable industry in 1992 by the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act").

<PAGE>

The rate regulation provisions of the 1992 Act have not had a materially adverse
effect on the Company's financial condition and results of operations.  With the
passage of the 1996 Act, all cable systems rates are deregulated as effective
competition  enters the franchise area, or by March 31, 1999, whichever comes
first.  The Company anticipates that certain provisions of the 1992 Act that do
not relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will reduce the future operating margins
of the Company.

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

Impact of the Year 2000 Issue

The Company has certain financial, administrative and operational systems which
are subject to Year 2000 exposures.  The Company has performed a study to
identify those specific systems which require remediation and developed a plan
to correct such situations in a timely fashion.  The Company's plan is
proceeding on target.  The plan includes ensuring that those systems for which
the Company is dependent on external vendors, such as certain billing systems,
will be Year 2000 compliant by the end of 1999 based on the status of external
vendors' remediation efforts.  For those internal systems that require
corrective action, the Company has contracted with its information systems
services provider to rewrite the relevant programming code.  Finally, the
Company is well along on a conversion of its suite of financial systems to a
state-of-the-art Oracle system.  Such system is expected to ensure Year 2000
compliance in financial applications, enable the Company to process and report
its financial transactions more efficiently and provide a greater level of
detailed information to facilitate management's analysis which is critical to
its business decisions.

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

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

<PAGE>


CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                 For the Years Ended December 31,
                                                                                    1997       1996       1995
                                                                                    ----       ----       ----
<S>                                                                              <C>        <C>        <C>
Sales                                                                            $81,299    $76,187    $60,675
Costs and expenses, excluding management fees and                                 44,467     40,593     31,447
 depreciation and amortization
Management fees                                                                    3,715      3,498      3,302
Depreciation and amortization                                                     32,082     31,427     25,154
                                                                                 -------    -------    -------
Operating income                                                                   1,035        669        772
Interest income                                                                      358        127         55
Interest expense                                                                 (11,751)   (15,179)   (15,973)
Gain on sale of Florida cable system                                               2,571          -          -
Other (expense), net                                                                (738)      (736)      (363)
                                                                                 -------    -------    -------
(Loss) before income taxes                                                        (8,525)   (15,119)   (15,509)
(Benefit) from income taxes                                                       (4,114)    (5,712)    (5,590)
                                                                                 -------    -------    -------
(Loss) before minority interest and equity in
 unconsolidated entities                                                          (4,411)    (9,407)    (9,919)
Equity in (loss) of unconsolidated entities                                            -          -       (396)
Minority interest in loss (income) of consolidated entity                             53      1,151       (186)
                                                                                 -------    -------    -------
Net (loss)                                                                      ($ 4,358)  ($ 8,256)  ($10,501)
                                                                                 =======    =======    =======
Basic earnings per average common share:
Net (loss) to shareholders                                                        ($0.63)    ($1.20)    ($1.53)
Average common shares outstanding                                              6,870,528  6,864,799  6,861,292

Diluted earnings per average common share:
Net (loss) to shareholders                                                        ($0.63)    ($1.20)    ($1.53)
Average common shares and common stock equivalents outstanding                 6,870,528  6,864,799  6,861,292
</TABLE>

See accompanying notes to Consolidated Financial Statements.

<PAGE>

CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                                 1997       1996
                                                                              --------------------
<S>                                                                           <C>         <C>
ASSETS
  Cash and temporary cash investments                                         $ 17,219    $  3,297
  Accounts receivable, net of reserve for
    doubtful accounts of $541 in 1997 and $579 in 1996                           3,644       3,884
  Prepayments and other                                                            663         518
  Accounts receivable from related parties                                         166       1,716
  Deferred income taxes                                                          1,006         974
  Property, plant and equipment, net of accumulated depreciation
     of $94,174 in 1997 and $80,325 in 1996                                     73,836      77,792
  Intangible assets, net                                                        45,260      60,956
  Deferred charges and other assets                                                803          63
                                                                              --------------------
Total assets                                                                  $142,597    $149,200
                                                                              ====================

LIABILITIES AND SHAREHOLDERS' DEFICIT
  Liabilities
  Current maturities of long-term debt                                        $      -    $  1,750
  Accounts payable                                                               5,564       3,337
  Advance billings and customer deposits                                         2,242       2,113
  Accrued taxes                                                                    167         228
  Accrued cable programming expense                                              2,720       1,811
  Accrued litigation costs                                                       1,450       2,150
  Accrued expenses                                                               2,928       3,092
  Accounts payable to related parties                                            1,560       9,861
  Long-term debt                                                               143,000      15,680
  Notes payable - affiliates                                                         -     147,567
  Deferred income taxes                                                         22,197      26,656
                                                                              --------------------
Total liabilities                                                              181,828     214,245
Minority interest                                                               14,643      14,696
Commitments and contingencies
Preferred Stock                                                                      -           -
Common shareholders' deficit                                                   (53,874)    (79,741)
                                                                              --------------------

Total Liabilities and Shareholders' Deficit                                   $142,597    $149,200
                                                                              ====================
</TABLE>

See accompanying notes to Consolidated Financial Statements.
<PAGE>

CABLE MICHIGAN, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                               For the years ended December 31,
                                                                                          ------------------------------------------
                                                                                             1997          1996         1995
                                                                                          ------------------------------------------
<S>                                                                                        <C>           <C>          <C>
Cash Flows from Operating Activities
  Net (loss)                                                                             $  (4,358)     $ (8,256)     $(10,501)
  Gain on pension curtailment/settlement                                                         -          (855)            -
  Depreciation and amortization                                                             32,082        31,427        25,154
  Deferred income taxes and investment tax credits, net                                     (4,359)          988        (4,853)
  Provision for losses on accounts receivable                                                  826           843           747
  Gain on sale of Florida cable operations                                                  (2,571)            -             -
  Equity in loss of unconsolidated entitites                                                     -             -           396
  (Decrease) increase in minority interest                                                     (53)       (1,151)          186
  Other non-cash items                                                                       1,914         2,274         2,147
  Net change in certain assets and liabilities, net of business acquisitions:
    Accounts receivable and unbilled revenues                                                 (617)       (1,226)       (1,208)
    Accounts payable                                                                         2,234         1,365        (1,682)
    Accrued expenses                                                                           580           125          (495)
    Accrued taxes                                                                               61           (99)       (9,020)
    Accounts receivable from related parties                                                 1,549           567           499
    Accounts payable to related parties                                                     (8,300)        1,314        (1,082)
    Other, net                                                                                  70          347            19
  Other                                                                                       (714)          154             4
                                                                                         ---------      --------      --------
Net cash provided by operating activitites                                                  18,344        27,817           311
                                                                                         ---------      --------      --------
Cash Flows from Investing Activities
  Additions to property, plant and equipment                                               (14,041)       (9,605)      (11,207)
  Acquisitions, net of cash acquired                                                           (24)            -        (2,445)
  Proceeds from sale of Florida cable operations                                             3,496             -             -
  Other                                                                                        560           390           307
                                                                                         ---------      --------      --------
Net cash used in investing activities                                                      (10,009)       (9,215)      (13,345)
                                                                                         ---------      --------      --------
Cash Flows from Financing Activities
  Issuance of long-term debt                                                               128,000             -             -
  Redemption of long-term debt                                                             (17,430)       (1,500)       (5,763)
  Proceeds from the issuance of common stock                                                     -             -         8,256
  Transfers from CTE                                                                        12,500             -         4,615
  Change in affiliate notes, net                                                          (116,836)      (16,834)        7,885
  Payments made for debt financing costs                                                      (647)            -             -
                                                                                         ---------      --------      --------
Net cash (used in) provided by financing activities                                          5,587       (18,334)       14,993
Net increase in cash and temporary cash investments                                         13,922           268         1,959
Cash and temporary cash investments at beginning of year                                     3,297         3,029         1,070
                                                                                         ---------      --------      --------
Cash and temporary cash investments at end of year                                       $  17,219      $  3,297      $  3,029
                                                                                         =========      ========      ========
</TABLE>

See accompanying notes to Consolidated Financial Statements.


<PAGE>

CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                            For the Years Ended December 31,
Supplemental disclosures of cash flow information                            1997           1996       1995
<S>                                                                       <C>            <C>        <C>
Cash paid during the year for:
  Interest                                                                $11,400        $15,199    $15,849
  Income taxes                                                               $370            $29          -
</TABLE>

Supplemental Schedule of Non-cash Investing and Financing Activities:

In September 1997, in connection with the transfer of CTE's investment in Mercom
 to the Company, the Company assumed CTE's $15,000 Term Credit Facility.

In 1995, C-TEC acquired an additional 18.29% of the outstanding Common Stock of
Mercom, Inc. for cash of $6,912. The acquisition, along with C-TEC's previous
investment of 43.63% outstanding Common Stock, was accounted for as a purchase.
A summary of the acquisition is as follows:

<TABLE>
<S>                                                              <C>
Capital contribution by stockholder                              $6,912
Liabilities assumed                                              38,054
Deferred tax liability incurred                                  16,044
Reduction of equity-method investment                             2,511
Minority interest recognized                                     15,680
                                                                -------
Fair value of assets acquired                                   $79,201
                                                                =======
</TABLE>

Certain intercompany accounts receivable and payable and intercompany note
 balances were transferred to shareholders' net investment in connection with
 the Distribution.
<PAGE>

                     CABLE MICHIGAN, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
             For the Years Ended December 31, 1997, 1996 and 1995
                            (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                         Common                                                        Total
                                                         Shares        Common                     Shareholder's     Shareholders'
                                                      Outstanding      Stock       Deficit       Net Investment       Deficit
<S>                                                   <C>             <C>           <C>          <C>                <C>
Balance, December 31, 1994                               1,000        $     1       $    -          ($76,933)         ($76,932)
  Net loss                                                                                           (10,501)          (10,501)
  Transfers from (to) CTE                                                                             13,676            13,676
                                                     ---------        -------     --------        ----------         ---------
Balance, December 31, 1995                               1,000              1            -           (73,758)          (73,757)
  Net loss                                                                                            (8,256)           (8,256)
  Transfers from (to) CTE                                                                              2,272             2,272
                                                     ---------        -------     --------        ----------         ---------
Balance, December 31, 1996                               1,000              1            -           (79,742)          (79,741)
  Net loss from 1/1/97 through 9/30/97                                                                (3,251)           (3,251)
  Net loss from 10/1/97 through 12/31/97                                            (1,107)                             (1,107)
  Transfers from RCN Corporation                                                                      30,225            30,225
  Common stock issued in connection                  6,870,165          6,870      (59,638)           52,768                 -
    with the distribution
                                                     ---------        -------     --------        ----------         ---------
Balance, December 31, 1997                           6,871,165        $ 6,871     ($60,745)       $        -          ($53,874)
                                                     =========        =======     ========        ==========         =========
</TABLE>
<PAGE>

                             CABLE MICHIGAN, INC.
                    NOTES CONSOLIDATED FINANCIAL STATEMENTS
                 (Dollars In Thousands Except Per Share Data)

1.   BACKGROUND AND BASIS OF PRESENTATION

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

The consolidated financial statements have been prepared using the historical
basis of assets and liabilities and historical results of operations of all
wholly and majority owned subsidiaries.  However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information.  Such information, therefore, may not
necessarily reflect the results of operations, financial condition or cash flows
of the Company in the future or what they would have been had the Company been
an independent, public company during the reporting periods.  All material
intercompany transactions and balances have been eliminated.

RCN's corporate services group has historically provided substantial support
services such as finance, cash management, legal, human resources, insurance and
risk management.  Prior to the Distribution, the corporate office of C-TEC
allocated the cost for these services pro rata among the business units
supported primarily based on assets; contribution to consolidated earnings
before interest, depreciation, amortization, and income taxes; and number of
employees.  In the opinion of management, the method of allocating these costs
is reasonable; however, such costs are not necessarily indicative of the costs
that would have been incurred by the Company on a stand-alone basis.

CTE, RCN and Cable Michigan have entered into certain agreements providing for
the Distribution, and governing various ongoing relationships, including the
provision of support services between the three companies, including a
distribution agreement and a tax-sharing agreement.

The fee per year for support services from RCN will be 4.0% of the revenues of
Cable Michigan plus a direct allocation of certain consolidated cable
administration functions of RCN.  The direct charge for customer service along
with the billing service and the cable guide service will be a pro rata share
(based on subscribers) of the expenses incurred by RCN to provide such customer
service and to provide such billing and cable guide service for all relevant
members of the RCN Group and all relevant members of the Cable Michigan Group.

<PAGE>

CTE has agreed to provide or cause to be provided to RCN and Cable Michigan
certain financial data processing services for a transitional period after the
Distribution.  The fees for such services will be an allocated portion (based on
relative usage) of the cost incurred by CTE to provide such financial data
processing services to all three groups.

In addition, RCN has agreed to obtain programming from third party suppliers for
Cable Michigan, the costs of which will be reimbursed to RCN by Cable Michigan.
In those circumstances where RCN purchases third party programming on behalf of
both RCN and Cable Michigan, such costs will be shared by each Company on a pro
rata basis based on each Company's number of subscribers.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of financial statements in conformity with
----------------
generally accepted accounting principles requires management to make estimates
and assumptions that effect 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.

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

Property, Plant and Equipment and Depreciation - Property, plant and equipment
----------------------------------------------
reflects the original cost of acquisition or construction, including payroll and
related costs such as taxes, pensions and other fringe benefits, and certain
general administrative costs.

Depreciation on cable plant is provided on the straight-line method based on the
useful lives of the various classes of depreciable property.  The average
estimated lives of depreciable cable plant are:

Buildings.................................................. 12 to 25 years
Cable Television Distribution Equipment.................... 8.5 to 12 years
Vehicles................................................... 5 years
Other Equipment............................................ 12 years

Maintenance and repair costs are charged to expense as incurred.  Major
replacements and betterments are capitalized.  Gain or loss is recognized on
retirements and dispositions.

Intangible Assets - Intangible assets are amortized on a straight-line basis
-----------------
over the expected period of benefit ranging from 5 to 19.3 years.  Intangible
assets include cable television franchises.  The cable television systems owned
or managed by the Company are constructed and operated under fixed-term
franchises or other types of operating authorities (referred to collectively
herein as "franchises") that are generally non-exclusive and are granted by
local governmental authorities. The provisions of these local franchises are
subject to federal regulation. Costs incurred to obtain or renew franchises are
capitalized and amortized over the term of the applicable franchise agreement.

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

<PAGE>

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

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

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

Advertising Expense - Advertising costs are expensed as incurred.  Advertising
-------------------
expense charged to operations was  $560, $514 and $574 in 1997, 1996 and 1995,
respectively.

Stock-Based Compensation - The Company applies Accounting Principles Board
------------------------
Opinion No. 25 - "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock plans.  The Company has adopted the disclosure - only
provisions of Statement of Financial Accounting Standards No. 123 - "Accounting
for Stock-Based Compensation" ("SFAS 123").

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

Diluted earnings (loss) per share is computed based on net income (loss) divided
by the weighted average number of shares of common stock outstanding during the
period after giving effect to convertible securities considered to be dilutive
common stock equivalents.  The conversion of stock options during periods in
which the Company incurs a loss from continuing operations is not assumed since
the effect is anti-dilutive.  The number of stock options which would have been
converted in 1997 and had a dilutive effect if the Company had income from
continuing operations is 55,602.

For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by one-fourth the average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common stock for each
four shares of C-TEC common equity owned.
<TABLE>
<CAPTION>
                                               Years Ended December 31,
                                              1997       1996       1995
                                              ----       ----       ----
<S>                                           <C>        <C>        <C>
Net loss                                      $(4,358)   $(8,256)   $(10,501)

Basic earnings per average common share:
Average shares outstanding                   6,870,528  6,864,799   6,861,292

(Loss) per average common share                $(0.63)    $(1.20)     $(1.53)

Diluted earnings per average common share:
Average shares outstanding                   6,870,528  6,864,799   6,861,292

Dilutive shares resulting from stock options         -          -           -
                                             ---------  ---------   ---------
                                             6,870,528  6,864,799   6,861,292
                                             =========  =========   =========

(Loss) per average common share                $(0.63)    $(1.20)     $(1.53)

</TABLE>

<PAGE>

Income Taxes - Cable Michigan, Inc. and Mercom file separate consolidated
------------
federal income tax returns. Prior to the Distribution, income tax expense was
allocated to C-TEC's subsidiaries on a separate return basis except that C-TEC's
subsidiaries receive benefit for the utilization of net operating losses and
investment tax credits included in the consolidated tax return even if such
losses and credits could not have been used on a separate return basis. The
Company accounts for income taxes using Statement of Financial Accounting
Standards No. 109 - "Accounting for Income Taxes". The statement requires the
use of an asset and liability approach for financial reporting purposes. The
asset and liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between financial reporting basis and tax basis of assets and liabilities. If it
is more likely than not that some portion or all of a deferred tax asset will
not be realized, a valuation allowance is recognized.

3.  BUSINESS COMBINATION AND DISPOSITIONS

Pursuant to a common stock rights offering, C-TEC, through a wholly-owned
subsidiary, acquired majority voting control of Mercom, Inc.  ("Mercom") in
August 1995 through the exercise of stock rights and oversubscription
privileges.  Immediately prior to the rights offering, C-TEC owned 43.63% of the
outstanding common stock of Mercom.  C-TEC purchased a total of 1,920,000 shares
of common stock through the rights offering for an aggregate consideration of
$6,912.  The rights offering concluded on August 10, 1995.  Following the
purchase, C-TEC owned 61.92% of the outstanding common stock of Mercom and,
accordingly, consolidated Mercom in its financial statements since August 1995.
Prior to the rights offering, C-TEC accounted for its 43.63% ownership interest
under the equity method of accounting.  The acquisition has been accounted for
as a purchase.  C-TEC's investment in Mercom was transferred to the Company in
connection with the Distribution.

In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for cash
of approximately $3,500.  The Company realized a pretax gain of $2,571 on the
transaction.


4.  PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>

                                                    1997        1996
                                                    ----        ----
<S>                                             <C>         <C>
Leasehold improvements................          $    156    $    170
Cable plant...........................           158,655     149,434
Buildings and land....................             2,837       2,733
Furniture, fixtures and vehicles......             5,372       4,982
Construction in process...............               990         798
                                                --------    --------
Total property, plant and equipment...           168,010     158,117
Less accumulated depreciation.........           (94,174)    (80,325)
                                                --------    --------
Property, plant and equipment, net....          $ 73,836    $ 77,792
                                                ========    ========
</TABLE>
Depreciation expense was $16,431, $15,728 and $12,115 for the years ended
December 31, 1997, 1996 and 1995, respectively.

<PAGE>

5.  INTANGIBLE ASSETS

Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>

                             Amortization
                               Period         1997        1996
                           --------------   ---------   ---------
<S>                        <C>              <C>         <C>
Franchises..............   6.8-19.3 years   $ 91,437    $ 91,572
Subscriber lists........       19.3 years     43,452      43,427
Noncompete agreements...          5 years        473         473
Goodwill................       9-10 years      3,990       3,990
Other...................   5.0-19.3 years      1,729       1,772
                                            --------    --------
Total...................                     141,081     141,234
Less accumulated
  amortization..........                     (95,821)    (80,278)
                                            --------    --------
Intangible assets, net..                    $ 45,260    $ 60,956
                                            ========    ========
</TABLE>
Amortization expense charged to operations in 1997, 1996 and 1995 was $15,651,
$15,699 and $13,039, respectively.

During 1996, Cable Michigan removed from its balance sheet noncompete agreements
which had an original cost of $70,696 and which were fully amortized.

<PAGE>

6.  INCOME TAXES

The income tax provision (benefit) in the accompanying consolidated financial
statements of operations is comprised of the following:
<TABLE>
<CAPTION>

                                        1997        1996       1995
                                      ---------   --------   ---------
<S>                                   <C>         <C>        <C>
Current:
Federal............................    $   245    $(6,700)    $  (737)
State..............................          -          -           -
                                       -------    -------     -------
  Total Current....................        245     (6,700)       (737)
                                       -------    -------     -------
Deferred:
Federal............................     (4,359)       988      (4,853)
State..............................          -          -           -
                                       -------    -------     -------
  Total Deferred...................     (4,359)       988      (4,853)
                                       -------    -------     -------
Total (benefit) for income taxes...    $(4,114)   $(5,712)    $(5,590)
                                       =======    =======     =======
</TABLE>

The benefit for income taxes is different from the amounts computed by applying
the U.S. statutory federal tax rate of 34% for 1997 and 35% for 1996 and 1995.
The differences are as follows:
<TABLE>
<CAPTION>

                                                         1997        1996        1995
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
(Loss) before (benefit) for income taxes............    $(8,525)   $(15,119)   $(15,509)
                                                        =======    ========    ========
Federal tax (benefit) at statutory rates............    $(2,899)   $ (5,307)   $ (5,434)
State income taxes..................................          -           -           -
Goodwill............................................        171         175         176
Increase (decrease) in valuation allowance..........     (1,190)       (518)       (255)
IRS Audit Adjustment................................          -           -        (132)
Adjustment to prior year amortization...............          -           -          28
Nondeductible expenses..............................        147           -           -
Benefit of rate differential applied to reversing
  timing differences................................       (424)          -           -
Other, net..........................................         81         (62)         27
                                                        -------    --------    --------
(Benefit) for income taxes..........................    $(4,114)   $ (5,712)   $ (5,590)
                                                        =======    ========    ========
</TABLE>

In 1995, C-TEC Corporation, the parent company, received official notification
of final settlement from the Internal Revenue Service relating to the
examination of C-TEC's consolidated federal income tax returns for 1989, 1990
and 1991.  The most significant adjustment relates to the disallowance of the
claimed amortization of certain intangible assets.  As a result of this
disallowance, Cable Michigan's taxes payable for prior years increased
approximately $4,000, net operating loss carryforwards were reduced by
approximately $24,000 and AMT credits were increased by approximately $5,000.
Additionally, interest of $900 was payable.  The amount accrued in previous
years was sufficient to satisfy the above adjustment.  No additional accrual
during 1995 was required.

Mercom, which files a separate consolidated income tax return, has the following
net operating losses available:
<TABLE>
<CAPTION>
                                 Tax Net
                                Operating   Expiration
                        Year     Losses       Date
                        ----     ------       ----
<S>                     <C>      <C>          <C>
                        1991     $  329       2006
                        1992     $1,628       2007
                        1995     $2,713       2010
</TABLE>

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

<PAGE>

Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>

                                       1997        1996
                                       ----        ----
<S>                                  <C>         <C>
NOL carryforwards.................   $  1,588    $  3,532
Alternative minimum tax credits...        141          39
Reserves..........................        753         828
Other, net........................        230         158
                                     --------    --------
Total deferred assets.............      2,712       4,557
                                     --------    --------
Property, plant and equipment.....    (11,940)    (15,354)
Intangible assets.................    (11,963)    (13,623)
                                     --------    --------
Total deferred liabilities........    (23,903)    (28,977)
                                     --------    --------
Sub total.........................    (21,191)    (24,420)
Valuation allowance...............          -      (1,262)
                                     --------    --------
Total deferred taxes..............   $(21,191)   $(25,682)
                                     ========    ========
</TABLE>

In the opinion of management, based on the future reversal of taxable temporary
differences, primarily depreciation and amortization, the Company will more
likely than not be able to realize all of its deferred tax assets.  As a result,
the net change in the valuation allowance for deferred tax assets during 1997
was a decrease of $1,262, of which $72 related to Mercom of Florida.

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

7. DEBT

Long-term debt outstanding at December 31 is as follows:
<TABLE>
<CAPTION>

                                 1997      1996
                                 ----      ----
<S>                            <C>        <C>
Term Credit Facility........   $100,000         -
Revolving Credit Facility...     28,000         -
Term Loan...................     15,000         -
Term Credit Agreement.......          -    17,430
                               --------   -------
Total.......................    143,000    17,430
Due within one year.........          -     1,750
                               --------   -------
Total Long-Term Debt........   $143,000   $15,680
                               ========   =======
</TABLE>

The Company has in place two secured credit facilities (the "Credit Facilities")
pursuant to a single credit agreement with a group of lenders for which First
Union National Bank acts as agent (the "Credit Agreement"), which was effective
as of July 1, 1997.  The first is a five-year revolving credit facility in the
amount of $65,000 (the "Revolving Credit Facility").  The second is an eight-
year term credit facility in the amount of $100,000 (the "Term Credit
Facility").

The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (6.6% at December
31,1997) (each as defined in the Credit Agreement).

The entire amount of the Term Credit Facility has been drawn and as of December
31, 1997, $100,000 of the principal was outstanding thereunder.  The entire
amount of the Revolving Credit Facility is available to the Company until June
30, 2002.  As of December 31, 1997, $28,000 of principal was outstanding
thereunder.  Revolving loans may be repaid and reborrowed from time to time.

The Term Credit Facility is payable over six years in quarterly installments,
from September 30, 1999 through June 30, 2005.  Interest only is due through
June 1999.  The credit agreement is currently unsecured.

<PAGE>

The Credit Agreement contains restrictive covenants which, among other things,
require the Company to maintain certain debt to cash flow, interest coverage and
fixed charge coverage ratios and place certain limitations on additional debt
and investments.  The Company does not believe that these covenants will
materially restrict its activities.

On September 30, 1997, the Company assumed all obligations of CTE under a $15
million credit facility extended by a separate group of lenders for which First
Union National Bank also acts as agent (the "$15 Million Facility").  The $15
Million Facility matures in a single installment on June 30, 1999 and is
collateralized by a first priority pledge of all shares of Mercom owned by the
Company.  The $15 Million Facility has interest rate provisions (6.56% at
December 31,1997), covenants and events of default substantially the same as the
Credit Facilities.

Contractual maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                                   Aggregate
                            Year    Amounts
                            ----   ---------
                            <S>      <C>
                            1998          -
                            1999     20,000
                            2000     11,250
                            2001     13,750
                            2002     58,401
</TABLE>

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

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

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

At December 31, 1997 Mercom was in compliance with all covenants under the term
credit agreement, including the covenants requiring Mercom to maintain a certain
debt to cash and interest coverage ratio.  The borrowings under the term credit
agreement are eliminated in the Company's consolidated balance sheet.

8.  COMMON STOCK RIGHTS OFFERING

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

<PAGE>

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

9.  COMMON STOCK AND STOCK PLANS

The Company has authorized 25,000,000 shares of $1 par value common stock, and
50,000,000 shares of $1 par value Class B common stock.  The Company also has
authorized 10,000,000 shares of $1 par value preferred stock.  At December 31,
1997, 6,871,165 common shares are issued and outstanding.

In connection with the Distribution, the Company Board adopted the Cable
Michigan, Inc. 1997 Equity Incentive Plan (the "1997 Plan"), designed to provide
equity based compensation opportunities to key employees when shareholders of
the Company have received a corresponding benefit through appreciation in the
value of Cable Michigan Common Stock.

The 1997 Plan contemplates the issuance of incentive stock options, as well as
stock options that are not designated as incentive stock options, performance-
based stock options, stock appreciation rights, performance share units,
restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards").  Up to 300,000 shares of Common Stock, plus shares of
Common Stock issuable in connection with the Distribution related option
adjustments, may be issued pursuant to Awards granted under the 1997 Plan.

All employees and outside consultants to the Company and any of its subsidiaries
and all Directors of the Company who are not also employees of the Company are
eligible to receive discretionary Awards under the 1997 Plan.

Unless earlier terminated by the Company Board, the 1997 Plan will expire on the
10th anniversary of the Distribution.  The Company Board or the Compensation
Committee may, at any time, or from time to time, amend or suspend and, if
suspended, reinstate, the 1997 Plan in whole or in part.

Prior to the Distribution, certain employees of Cable Michigan were granted
stock option awards under C-TEC's stock option plans. In connection with the
Distribution, 380,013 options covering Common Stock were issued. Each C-TEC
option was adjusted so that each holder would hold options to purchase shares of
Commonwealth Telephone Enterprises Common Stock, RCN Common Stock and Cable
Michigan Common Stock. The number of shares subject to, and the exercise price
of, such options were adjusted to take into account the Distribution and to
ensure that the aggregate intrinsic value of the resulting RCN, Cable Michigan
and Commonwealth Telephone Enterprises options immediately after the
Distribution was equal to the aggregate intrinsic value of the C-TEC options
immediately prior to the Distribution.

Information relating to Cable Michigan stock options during 1997 is as follows:

<PAGE>

<TABLE>
<CAPTION>

                                                      Weighted
                                                       Average
                                          Number of   Exercise
                                            Shares       Price
                                          --------------------
<S>                                         <C>       <C>
Outstanding December 31, 1994               178,875
Granted                                     157,125
Exercised                                        --
Canceled                                    (35,000)
                                            -------
Outstanding December 31, 1995               301,000
Granted                                      33,750        8.82
Exercised                                    (7,250)          -
Canceled                                    (35,500)      10.01
                                            -------
Outstanding December 31, 1996               292,000        8.46
Granted                                      88,013        8.82
Exercised                                         -           -
Canceled                                       (375)      10.01
                                            -------
Outstanding December 31, 1997               379,638        8.82
                                            =======
Shares exercisable December 31, 1997        155,125        8.45
</TABLE>
The range of exercise prices for options outstanding at December 31, 1997 is
$7.47 to $10.06.

No compensation expense related to stock option grants was recorded in 1997 as
the option exercise prices were equal to fair market value on the date granted.

Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS 123.  The fair value for these
options was estimated at the date of grant using a Black Scholes option pricing
model with the following weighted average assumptions for 1997.  The fair value
for these options was estimated at the date of grant using a Black Scholes
option pricing model with weighted average assumptions for dividend yield of 0%
for 1997, 1996 and 1995; expected volatility of 38.6% prior to the Distribution
and 49.8% subsequent to the Distribution for 1997 39.5% for 1996, and 35.9% for
1995; risk-free interest rate of 6.52%, 5.95% and 6.32% for 1997, 1996 and 1995,
respectively, and expected lives of 5 years for 1997, 1996 and 1995.

The weighted-average fair value of options granted during 1997 was $4.19.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.  The Company's pro
forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>


                                               1997       1996       1995
                                               --------------------------
<S>                                          <C>        <C>        <C>
Net (Loss) as reported                       ($4,358)   ($8,256)   ($10,501)
Net (Loss) pro forma                         ($4,373)   ($8,256)   ($10,501)
Basic (Loss) per share - as reported          ($0.63)    ($1.20)     ($1.53)
Basic (Loss) per share - pro forma            ($0.64)    ($1.20)     ($1.53)
Diluted (Loss) per share - as reported        ($0.63)    ($1.20)     ($1.53)
Diluted (Loss) per share - pro forma          ($0.64)    ($1.20)     ($1.53)
</TABLE>

In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP").
Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in
an amount of between 1% and 20% of their annual base compensation and between 1%
and 100% of their annual bonus compensation and provided, however, that in no
event

<PAGE>

shall the participant's total contribution exceed 20% of the sum of their annual
compensation, as defined by the C-TEC ESPP. Participant's accounts are credited
with the number of share units derived by dividing the amount of the
participant's contribution by the average price of a share of C-TEC Common Stock
at approximately the time such contribution is made. The share units credited to
participant's account do not give such participant any rights as a shareholder
with respect to, or any rights as a holder or record owner of, any shares of C-
TEC Common Stock. Amounts representing share units that have been credited to a
participant's account will be distributed, either in a lump sum or in
installments, as elected by the participant, following the earlier of the
participant's termination of employment with the Company or three calendar years
following the date on which the share units were initially credited to the
participant's account. It is anticipated that, at the time of distribution, a
participant will receive one share of C-TEC Common Stock for each share unit
being distributed.

Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name.  Each
matching share is subject to forfeiture as provided in the C-TEC ESPP.  The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement.  A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow. Shares of restricted
C-TEC Common Stock awarded under the C-TEC ESPP and share units awarded under
the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so that following
the Distribution, each such participant was credited with an aggregate
equivalent value of restricted shares of common stock of Commonwealth Telephone
Enterprises, the Company and RCN.  In September 1997, the Company's Board of
Directors approved the Cable Michigan, Inc. Executive Stock Purchase Plan, (the
"Cable Michigan ESPP"), with terms substantially the same as the C-TEC ESPP.
The number of shares which may be distributed under the Cable Michigan ESPP as
matching shares or in payment of share units is 30,000.  At December 31, 1997,
13,198 matching shares have been issued  under the Cable Michigan ESPP, none of
which are vested.

10. PENSIONS AND EMPLOYEE BENEFITS

Prior to the Distribution, the Company's financial statements reflect the costs
experienced for its employees and retirees while included in the C-TEC plans.

Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC.  Upon retirement, employees are provided a monthly pension based on
length of service and compensation.  C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA.  Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
County Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.

The information that follows relates to the entire C-TEC noncontributory defined
benefit plan.  The components of C-TEC's pension cost are as follows for 1996:
<TABLE>
<CAPTION>

<S>                                                           <C>
Benefits earned during the year (service cost).............   $ 2,365
Interest cost on projected benefit obligation..............     3,412
Actual return on plan assets...............................    (3,880)
Other components - net.....................................    (1,456)
                                                              -------
Net periodic pension cost..................................   $   441
                                                              =======
</TABLE>
The following assumptions were used in the determination of the consolidated
projected benefit  obligation and net periodic pension cost (credit) for
December 31, 1996:

<TABLE>

<S>                                                                 <C>
Discount Rate...............................................        7.5%
Expected long-term rate of return on plan assets............        8.0%
Weighted average long-term rate of compensation increases...        6.0%
</TABLE>

<PAGE>

The Company's allocable share of the consolidated net periodic pension costs
(credit), based on the Company's proportionate share of consolidated annualized
salaries as of the valuation date, was approximately $10 and $3 for 1996 and
1995, respectively. These amounts are reflected in operating expenses. As
discussed below, no pension cost (credit) was recognized in 1997.

In connection with the restructuring, C-TEC completed a comprehensive study of
its employee benefit plans in 1996.  As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date.  C-TEC notified affected participants
in December 1996.  In December 1996, C-TEC allocated pension plan assets of
$6,984 and the related liabilities to a separate plan for employees who no
longer accrue benefits after sum distributions.  The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292.  The Company's
allocable share of this gain was $855.  This gain results primarily from the
reduction of the related projected benefit obligation.  The curtailed plan has
assets in excess of the projected benefit obligation.

The following table sets forth the plans' funded status and amounts recognized
in the C-TEC's balance sheet at December 31, 1996:
<TABLE>
<CAPTION>

<S>                                                                    <C>
Plan assets at fair value                                              $ 53,325
  Actuarial present value of benefit obligations:
    Accumulated benefit obligations:
       Vested                                                            32,372
       Nonvested                                                          1,704
                                                                       --------
    Total                                                                34,076
    Effect of increases in compensation                                   6,042
                                                                       --------

Plan assets in excess of (less than) projected benefit obligation        15,207
Unrecognized transition asset                                            (3,463)
Unrecognized prior service cost                                           2,438
Unrecognized net gain                                                   (11,215)
                                                                       --------
Prepaid pension cost                                                   $  2,967
                                                                       ========
</TABLE>

C-TEC's pension plan has assets in excess of the accumulated benefit obligation.
Plan assets include cash, equity, fixed income securities and pooled funds under
management by an insurance company.  Plan assets include common stock of C-TEC
with a fair value of approximately $5,835 at December 31, 1996.

C-TEC sponsors a 401(k) savings plan covering substantially all employees of the
Company who are not covered by collective bargaining agreements.  Contributions
made by the Company to the 401(k) plan are based on a specific percentage of
employee contributions.  Contributions charged to expense were $128 and $107 in
1996 and 1995, respectively.  Contributions charged to expense in 1997 prior to
the Distribution were $107.

In connection with the Distribution, Cable Michigan, Inc. established a
qualified saving plan under Section 401(k) of the Code.  Contributions charged
to expense in 1997 were $53.

The Company provides certain postemployment benefits to former or inactive
employees of the Company who are not retirees.  These benefits are primarily
short-term disability salary continuance.  The Company accrues the cost of
postemployment benefits over employees' service lives.  The Company uses the
services of an enrolled actuary to calculate the expense.  Prior to the
Distribution, C-TEC allocated the cost of these benefits to the Company based on
the Company's proportionate share of consolidated annualized salaries.  The
Company reimbursed C-TEC for its allocable share of the consolidated
postemployment benefit cost.  The net periodic postemployment benefit cost was
approximately $109, $100 and $98 in 1997, 1996 and 1995, respectively.

<PAGE>

11.  COMMITMENTS AND CONTINGENCIES

a.  Total rental expense, primarily for office space and pole rental, was $908,
$984 and $998 for 1997, 1996 and 1995, respectively.  At December 31, 1997,
rental commitments under noncancelable leases, excluding annual pole rental
commitments of approximately $692 that are expected to continue indefinitely,
are as follows:
<TABLE>
<CAPTION>
                                                                AGGREGATE
                                               YEAR              AMOUNTS
                                               ----             ---------
                                               <S>                <C>
                                               1998               $187
                                               1999               $125
                                               2000               $104
                                               2001                $47
                                               2002                $32
                                               Thereafter         $312
</TABLE>

b.  The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended and the Telecommunications
Act of 1996.  The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no assurance
that there will not be further additional challenges to its rates.  The 1996
statements of operations include charges aggregating approximately $833 relating
to cable rate regulation liabilities.  Such charges were not significant in 1997
and 1995.

c.  The Company had various purchase commitments at December 31, 1997 related to
its 1998 construction budget.

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

e.  The Company has agreed to indemnify RCN and C-TEC and their respective
subsidiaries against any and all liabilities which arise primarily from or
relate primarily to the management or conduct of the business of the Company
prior to the effective time of the Distribution.  The Company has also agreed to
indemnify RCN and C-TEC and their respective subsidiaries against 20% of any
liability which arises from or relates to the management or conduct prior to the
effective time of the Distribution of the businesses of C-TEC and its
subsidiaries and which is not a true C-TEC liability, a true RCN liability or a
true Company liability.

The Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the "Tax
Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of the Company, ending or deemed to end on or before
the Distribution Date.  Under the Tax Sharing Agreement, Adjustments (as defined
in the Tax Sharing Agreement) to taxes that are clearly attributable to the
Company group, the RCN group, or the C-TEC group will be borne solely by such
group.  Adjustments to all other tax liabilities will be borne 50% by C-TEC, 20%
by the Company and 30% by RCN.

<PAGE>

Notwithstanding the above, if as a result of the acquisition of all or a portion
of the capital stock or assets of the Company, the Distribution fails to qualify
as a tax-free distribution under Section 355 of the Code, then the Company will
be liable for any and all increases in tax attributable thereto.

12.  AFFILIATE AND RELATED PARTY TRANSACTIONS

The Company has the following transactions with affiliates during the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>

                                                      1997     1996      1995
                                                     ------   -------   -------
<S>                                                  <C>      <C>       <C>
Corporate office costs allocated to the Company...   $3,715   $ 3,498   $ 3,302
Cable staff and customer service costs
  allocated from RCN Cable........................    3,489     3,577     2,982
Interest expense on affiliate notes...............    8,447    13,952    15,318
Royalty fees charged by CTE.......................      465       585       486
Charges for engineering services..................        -       296     2,169
Other affiliate expenses..........................      171       189       153
</TABLE>

At December 31, 1997 and 1996, the Company has accounts receivable from related
parties of $166 and $1,716 respectively, for these transactions.  At December
31, 1997 and 1996, the Company has accounts payable to related parties of $1,560
and $9,861 respectively, for these transactions.

The Company had a note payable to RCN Corporation of $147,567 at December 31,
1996 primarily related to the acquisition of the Michigan cable operations and
its subsequent operations.  The Company repaid approximately $110,000 of this
note payable in 1997.  The remaining balance was transferred to shareholder's
net investment in connection with the Distribution.

In the first quarter of 1995, C-TEC loaned $887 to Mercom to enable it to make a
principal payment on its Credit Agreement of $887 scheduled for March 31, 1995.
C-TEC also loaned Mercom $1,400 in June 1995 to meet its scheduled payment under
the Lahey settlement agreement (Note 11).  Mercom paid interest in 1995 of $39
to C-TEC in connection with these two demand notes.  These demand notes were
repaid in August 1995.

13.  OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

The Company places its cash and temporary investments with high credit quality
financial institutions.  The Company also periodically evaluates the
creditworthiness of the institutions with which it invests.  The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.

The Company's trade receivables reflect a customer base centered in the state of
Michigan.  The Company routinely assesses the financial strength of its
customers; as a result, concentrations of credit risk are limited.

14.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

<PAGE>

b.  The fair value of the cash and temporary cash investments approximates fair
value because of the short maturity of these instruments.

The estimated fair value of the Company's financial instruments are as follows
at December 31:
<TABLE>
<CAPTION>
                                                 1997                   1996
                                                 ----                   ----
                                                CARRYING               CARRYING
                                           AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                           ------    ----------    ------    ----------
<S>                                        <C>        <C>          <C>       <C>

Financial assets:
  Cash and temporary cash investments      $ 17,219     $ 17,219   $ 3,297      $ 3,297
Financial liabilities:
  Floating rate long-term debt:
    Term Credit Facility                    100,000      100,000         -            -
    Revolving Credit Facility                28,000       28,000         -            -
    $15 Million Facility                     15,000       15,000         -            -
    Term Credit Agreement                         -            -    17,430       17,430
</TABLE>
15.  QUARTERLY INFORMATION (Unaudited)

The Company estimated the following quarterly data based on assumptions which it
believes are reasonable.  The quarterly data may differ from quarterly data
subsequently presented in interim financial statements.
<TABLE>
<CAPTION>


                                   FIRST    SECOND     THIRD       FOURTH
1997                              QUARTER   QUARTER    QUARTER     QUARTER
----                              -------   -------    -------     -------
<S>                               <C>       <C>        <C>        <C>
Sales..........................   $19,557   $20,673    $20,682    $ 20,387
Operating income before
 depreciation, amortization,
 and management
 fees..........................   $ 8,940   $ 9,592    $ 9,287    $  9,013
Operating income (loss)........   $   275   $   809      ($118)   $     69
Net (loss).....................       N/A       N/A        N/A     ($1,107)
Net (loss) per average
 Common Share..................       N/A       N/A        N/A      ($0.16)
Common Stock closing price
 High                                 N/A       N/A    $ 18.38    $  23.88
 Low                                  N/A       N/A    $ 17.75    $  19.00
<CAPTION>

                                   FIRST    SECOND     THIRD       FOURTH
1996                              QUARTER   QUARTER    QUARTER     QUARTER
----                              -------   -------    -------     -------
<S>                               <C>       <C>        <C>        <C>
Sales..........................   $18,340   $19,004    $19,544    $ 19,299
Operating income before
 depreciation, amortization,
 and management
 fees..........................   $ 8,598   $ 8,582    $ 9,003    $  9,411
Operating income (loss)........   $   168     ($372)   $   367    $    506

</TABLE>

<PAGE>

REPORT OF MANAGEMENT


The integrity and objectivity of the financial information presented in these
financial statements is the responsibility of the management of Cable Michigan,
Inc.

The financial statements report on management's accountability for Company
operations and assets.  To this end, management maintains a system of internal
controls and procedures designed  to provide reasonable assurance that the
Company's assets are protected and that all transactions are accounted for in
conformity  with generally accepted accounting principles.  The system includes
documented policies and guidelines, augmented by a comprehensive program of
internal and independent audits conducted to monitor overall accuracy of
financial information and compliance with established procedures.

Coopers & Lybrand, L.L.P., independent accountants, conduct a review of internal
accounting controls to the extent required by generally accepted auditing
standards and perform such tests and procedures as they deem necessary to arrive
at an opinion on the fairness of the financial statements presented herein.

The Board of Directors meets its responsibility for the Company's financial
statements through its Audit Committee which is comprised exclusively of
directors who are not officers or employees of the Company.  The Audit Committee
recommends to the Board of Directors the independent auditors for election by
the shareholders.  The Committee also meets periodically with management and the
independent and internal auditors to review accounting, auditing, internal
accounting controls and financial reporting matters.  As a matter of policy, the
internal auditors and the independent auditors periodically meet alone with, and
have access to, the Audit Committee.


\s\ Bruce C. Godfrey
--------------------
Executive Vice President
Chief Financial Officer
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders of Cable Michigan, Inc.:

We have audited the consolidated financial statements and financial statement
schedule of Cable Michigan Inc. and Subsidiaries listed in Item 14(a) of this
Form 10-K.  These financial statements and financial statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

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

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

/S/ Coopers & Lybrand L.L.P.
---------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998

<PAGE>

                             CABLE MICHIGAN, INC.                    SCHEDULE II
                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
                            (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                               ----------------------
                                                                     ADDITIONS
                                                               ----------------------

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

                        1997                 $579                  $826       ($21)               $843              $541
                        1996                 $496                  $843        $23                $783              $579
                        1995                 $344                  $747        $47                $642              $496

ALLOWANCE FOR DEFERRED TAX ASSETS-
 DEDUCTED FROM DEFERRED TAX ASSETS
 IN THE CONSOLIDATED BALANCE SHEETS.

                        1997                $1,262                  $0         $0                $1,262              $0
                        1996                $1,780                  $0         $0                 $518             $1,262
                        1995                  $0                    $0       $2,036               $256             $1,780
</TABLE>