UNITED
      STATES


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**









**FORM
      10-K**




(Mark
      One)




**x**
              **Annual
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934**
  For
        the
        fiscal year ended December 31, 2005
  or
  ** ̈**
              **Transition
                  Report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934**




For
      the
      transition period
      from                          to









Commission
      file number 1-16805














**RCN
      Corporation**


**(Exact
      name of registrant as specified in charter)**




**Delaware**
            **22-3498533****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            **(I.R.S.
                Employer**
              **Identification
                No.)**




**196
                Van Buren Street, Herndon, VA**
            **20170****(Address
                of principal executive offices)**
            **(Zip
                Code)**




**Registrant’s
      telephone number, including area code: (703) 434-8200**




**Securities
      Registered Pursuant to Section 12(b) of the Act: None**




1




Securities
      Registered Pursuant to Section
      12(g) of the Act:


**Common
      stock, par value $0.01 per share**


**(Title
      of Classes)**









Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes  ̈ No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act.  Yes  ̈ No x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No  ̈




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





 ̈ Large
      accelerated filer  x Accelerated filer   ̈ Non-accelerated filer





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).     Yes  ̈ No x




The
      aggregate market value of the outstanding common stock of the Registrant held
      by
      non-affiliates as of June 30, 2005 based on the closing price of $23.09 on
      the
      NASDAQ was $536,158,159. Shares reported on Schedule 13D or 13G as being
      beneficially owned by a holder or group of holders who collectively beneficially
      own 15% or more of the registrant's outstanding common stock have been excluded
      from such calculation. Such exclusion, however, shall not constitute an
      admission that such persons possess the power to direct or cause the direction
      of the management and policies of the registrant. There were 36,825,942 shares
      of voting common stock with a par value of $0.01 outstanding at March 3, 2006.




Indicate
      by check mark whether the registrant has filed all documents and reports to
      be
      filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934
      subsequent to the distribution of securities under a plan confirmed by a
      court.     Yes x No  ̈





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of our definitive proxy statement for the 2006 Annual Meeting of Stockholders
      to
      be held June 6, 2006 (the “2006 Proxy Statement”) are incorporated by reference
      into Part III hereof.





2





**RCN
      CORPORATION AND SUBSIDIARIES**


**For
      the year ended December 31, 2005**




**Table
      ofContents**




**Page****PART
                  I**Item
                  1
              Business
              6Item
                  1A
              Risk
                  Factors
              26Item
                  2
              Properties
              31Item
                  3
              Legal
                  Proceedings
              34Item
                  4
              Submission
                  of Matters to a Vote of Security
                  Holders
              37Item
                  4A
              Executive
                  Officers of the Registrant**PART
                  II**Item
                  5
              Market
                  for the Registrant’s Common Equity, Related
                  Stockholder Matters and Issuer Purchases of Equity
                  Securities
              37Item
                  6
              Selected
                  Financial Data
              40Item
                  7
              Management’s
                  Discussion and Analysis of Financial Condition
                  And Results of Operations
              42Item
                  7A
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              60Item
                  8
              Financial
                  Statements and Supplementary
                  Data
              60Item
                  9
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              60Item
                  9A
              Controls
                  and Procedures
              60Item
                  9B
              Other
                  Information
              62**PART
                  III**Item
                  10
              Directors
                  and Executive Officers of the
                  Registrant
              63Item
                  11
              Executive
                  Compensation
              63Item
                  12
              Security
                  Ownership of Certain Beneficial Owners and
                  Management
              63Item
                  13
              Certain
                  Relationships and Related
                  Transactions
              63Item
                  14
              Principal
                  Accountant’s Fees and
                  Services
              64**PART
                  IV**Item
                  15
              Exhibits
                  and Financial Statement
                  Schedules
              64SIGNATURES
              S-1INDEX
                  TO EXHIBITS
              E-1INDEX
                  TO FINANCIAL STATEMENTS
              F-1





3
 *Table
            of Contents*





**Cautionary
      Statement Regarding Forward Looking Statements:**




On
      Form
      10-K (“Annual Report”) includes certain “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995, which reflect
      the current views of RCN with respect to current events and financial
      performance. You can identify these statements by forward-looking words such
      as
“may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,”
“could,” “should,” and “continue” or similar words. These forward-looking
      statements may also use different phrases. From time to time, RCN Corporation
      (collectively, with its direct and indirect subsidiaries, “RCN”) also provides
      forward-looking statements in other materials RCN releases to the public or
      files with the United States Securities & Exchange Commission (“SEC”), as
      well as oral forward-looking statements. You should consult any further
      disclosures on related subjects in RCN’s quarterly reports on Form 10-Q and
      current reports on Form 8-K filed with the SEC.





Such
      forward-looking statements are and will be subject to many risks, uncertainties
      and factors relating to RCN’s operations and the business environment in which
      RCN operates which may cause its actual results to be materially different
      from
      any future results, express or implied, by such forward-looking statements.
      Factors that could cause RCN’s actual results to differ materially from these
      forward-looking statements include, but are not limited to, the following:





•
            the
                ability to operate in compliance with the terms of its financing
                facilities (particularly the financial covenants);





•
            the
                ability to maintain adequate liquidity and produce sufficient cash
                flow to
                fund RCN’s capital expenditures;





•
            the
                ability to attract and retain qualified management and other personnel;





•
            the
                number of potential customers in a target market and the ability
                to
                achieve targeted penetration and average subscriber revenue
                levels;





•
            changes
                in the competitive environment in which RCN operates;





•
            changes
                in government and regulatory policies;





•
            the
                ability to obtain regulatory approvals and to maintain approvals
                of
                franchises previously granted;





•
            uncertainty
                relating to economic conditions generally and in particular affecting
                the
                markets in which RCN operates;





•
            pricing
                and availability of equipment, materials, inventory and programming;





•
            the
                ability to meet the requirements in its franchise agreements;





•
            the
                ability to complete acquisitions or divestitures and to integrate
                any
                business or operation acquired;





•
            the
                ability to enter into strategic alliances or other business relationships;





•
            the
                ability to overcome significant operating losses;





•
            the
                ability to reduce costs;





•
            the
                ability to develop RCN’s products and services and to penetrate existing
                and new markets;





•
            technological
                developments and changes in the industry; and





4
 *Table
            of Contents*





•
            the
                risks discussed in “Risk Factors” under Item 1A below.





Statements
      in this Annual Report and the exhibits to this report should be evaluated in
      light of these important factors. RCN is not obligated to, and undertakes no
      obligation to, publicly update any forward-looking statement due to actual
      results, changes in assumptions, new information or as the result of future
      events.





5
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            of Contents*





**PART
      I**





**ITEM
                1.**
            **BUSINESS**





**Introduction**





RCN
      is a
      facilities-based, competitive provider of video, high-speed data and voice
      services in the United States. As of December 31, 2005, RCN served approximately
      409,000 residential and small business customers. RCN’s services are delivered
      over its broadband network to customers in the Boston, New York, eastern
      Pennsylvania, Washington, D.C., Chicago, San Francisco and Los Angeles markets.





On
      May
      27, 2004, RCN and four of its subsidiaries filed voluntary petitions for
      reorganization under Chapter 11 of the Bankruptcy Code in the United States
      Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”)
      and on August 5 and August 20, 2004, five additional subsidiaries of RCN filed
      voluntary petitions for reorganization under Chapter 11 (all ten collectively,
      the “RCN Debtors”). On December 21, 2004 (the “Effective Date”), the RCN
      Debtors’ joint plan of reorganization (the “Plan”) became effective and the RCN
      Debtors emerged from Chapter 11 of the Bankruptcy Code. Pursuant to the Plan,
      RCN’s consolidated indebtedness and its debt service requirements were reduced
      substantially, its capital structure was realigned and substantially all of
      the
      new equity of RCN was issued to certain of its former creditors. References
      in
      this report to the “Predecessor” and “Old RCN” mean RCN and its subsidiaries
      prior to the Effective Date and references to the “Successor,” “Reorganized RCN”
and the “Reorganized RCN Companies” mean RCN and its subsidiaries after the
      Effective Date. See “Business—RCN’s Chapter 11 Reorganization.”




RCN
      is a
      Delaware corporation formed in 1997. RCN’s principal executive office is located
      at 196 Van Buren Street, Herndon, Virginia 20170 and RCN’s telephone number is
      (703) 434-8200. RCN’s website is www.rcn.com.





This
      report, quarterly reports on Form 10-Q, current reports on Form 8-K and
      amendments to these reports filed or furnished pursuant to Section 13(a) of
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”) are made
      available free of charge through the SEC’s website (www.sec.gov), which contains
      reports, proxy and information statements and other information regarding
      issuers that file electronically with the SEC. In addition, these documents
      are
      made available on RCN’s website as soon as reasonably practicable after the
      material is electronically filed with, or furnished to, the SEC. The public
      may
      read and copy any material RCN files with the SEC at the SEC’s Public Reference
      Room located at 100 F Street N.E., Washington, D.C. 20549. The public may obtain
      information on the operation of the Public Reference Room by calling the SEC
      at
      1-800-SEC-0330.





**Strategy**





RCN’s
      goal is to be the leading provider of high-quality, video, high-speed data
      and
      voice services to customers in its target markets, and to generate cash flow
      through a balanced mix of revenue growth, cost reduction, and opportunistic
      investments, acquisitions, and divestitures. The key components of RCN’s
      strategy include:





•
            ***Increase
                revenues within existing footprint.***RCN intends to increase revenues within its existing network footprint
                by
                continuing to increase the number of customers subscribing to “triple
                play” bundled video, high-speed data and voice packages, leveraging its
                broadband network to provide innovative services and enhanced products,
                offering differentiated pricing and packaging, improving sales and
                marketing distribution and effectiveness and increasing penetration
                among
                business customers.





•
            ***Improve
                operational efficiency.***RCN
                also believes it can create a more profitable business model by reducing
                operating costs where appropriate. RCN intends to continue to improve
                its
                cost structure by simplifying its product offerings, streamlining
                back
                office systems and processes, standardizing, centralizing and automating
                headcount-intensive functions, focusing on improved service quality,
                consolidating real estate, renegotiating key contracts, and divesting
                under-performing or non-core customers and assets. In addition, to
                the
                extent RCN is able to increase subscribers, it should be able to
                realize
                economies of scale across certain elements of its cost
                structure.





•
            ***Selectively
                expand footprint.***RCN will continue to seek opportunities to increase its network footprint
                within and adjacent to its existing market clusters, based on availability
                of capital and stringent return on investment criteria. RCN currently
                has
                rights to provide “triple play” services to approximately six million
                homes, allowing it to increase the number of its marketable homes
                significantly beyond the current level of approximately 1.4 million
                homes,
                without the need to obtain additional licenses. In addition, RCN
                will
                continue to evaluate acquisition and joint venture opportunities
                that are
                accretive to RCN’s value and that leverage RCN’s experience as a leading
                provider of high-quality telecommunication
                services.





6
 *Table
            of Contents*





**Overview
      of Business**





RCN
      provides video programming (including digital cable and high definition
      television), data services (including cable modem, high-speed and dial-up
      Internet access), and local and long distance telephone primarily to residential
      customers over a broadband network in densely populated markets in the United
      States. Approximately 68% of our customers have two or more of our services
      (referred to as “bundles”) with the remainder having only one service. We
      operate in the Boston, New York, eastern Pennsylvania, Chicago, San Francisco,
      Los Angeles and Washington, D.C. markets. We also served the communities in
      and
      around Carmel, New York, until March 9, 2004, when we completed the sale of
      our
      Carmel, New York, cable and voice system for approximately $120.2 million in
      cash before closing adjustments.





RCN
      has
      48.93% interests in both Megacable, S.A. de C.V. (“Megacable”), a cable
      television and high-speed data services provider in certain portions of Mexico,
      and MCM Holding, S.A. de C.V. (“MCM”), a provider of local voice and high-speed
      data services in Mexico City. On March 6, 2006, RCN entered into an agreement
      to
      sell its investments in Megacable and MCM to the investors who currently own
      the
      remaining 51% of these entities for net after-tax proceeds of $300.0 million
      in
      cash. The transaction is expected to close by the end of March, 2006, after
      the
      necessary regulatory approval documents are filed.





**Fiber-optic
      Broadband Network**





As
      of
      December 31, 2005, RCN’s network passed approximately 1.4 million marketable
      homes. Marketable homes are the number of residential units such as homes,
      apartments or condominiums on the RCN network which have at least one service
      (video, high-speed data or voice) available to them and where such service
      can
      be provided without any additional plant build except for installation of drops
      and customer premise equipment, such as video converters, cable modems and
      telephone remote service units.





RCN
      utilizes broadband fiber-optic cable and coaxial cable distribution as the
      predominant medium for transporting traffic over its network. These broadband
      facilities provide significant benefits compared to narrowband cable or copper
      wire, including greater network capacity and increased functionality. These
      factors help to lower maintenance costs and increase the quality of RCN’s
      services. By utilizing a hybrid fiber-coax platform, RCN typically provides
      broadband service to 150 homes per node. RCN’s network design and integrated
      support systems generally permit RCN to add new communication services more
      efficiently and effectively than the incumbents.





In
      order
      to provide reliable service to customers, RCN has designed its operations to
      include:





•
            metropolitan
                rings with high-speed, redundant connections which allow immediate
                redirection of network traffic in the event of a fiber cut;





•
            back-up
                power supplies in the event of a power outage;




•
            sufficient
                inventory for maintenance and extensions;





•
            a
                highly trained employee base; and





•
            sufficient
                fiber capacity for future growth in services.





7
 *Table
            of Contents*





**Services**





RCN
      offers video programming (including digital cable and high definition
      television), data services (including cable modem, high-speed and dial-up
      Internet access), and local and long distance telephone. Customers can choose
      from a range of service bundles which are designed to address the differing
      needs of customers. By choosing a service package, customers can enjoy the
      mix
      and level of services at a lower incremental cost than if they were to subscribe
      for the services on an individual basis. Bundling its communications services
      enables RCN to increase penetration and operating efficiencies, facilitate
      customer service, reduce customer acquisition and installation costs, and
      increase customer retention.





***Video***





Cable
      television is a service that delivers multiple channels of television
      programming to subscribers who pay a monthly fee for the services they receive.
      Television signals are received over-the-air, by fiber-optic transport or via
      satellite delivery by antennas, microwave relay stations and satellite earth
      stations and are modulated, amplified and distributed over a network of
      fiber-optic and coaxial cable to subscribers’ television sets. Cable television
      systems are constructed and operated pursuant to non-exclusive licenses awarded
      by local and state governmental authorities for specified periods of time.





RCN’s
      video services include:





•
            ***Basic
                Analog Cable TV:***All of RCN’s video customers receive a package of basic programming which
                generally consists of local broadcast television, local community
                programming, including governmental and public access, and limited
                satellite-delivered or non-broadcast channels. The basic channel
                line-up
                generally has between 18 and 35 channels.





•
            ***Expanded
                Basic Cable TV:***This expanded programming level includes approximately 45 to 60 channels
                in addition to the basic channel line-up, including many popular
                cable
                networks.





•
            ***Digital
                Cable TV:***Access
                to this level of service requires a digital set-top box and includes
                approximately 31 to 50 channels of additional programming. The set-top
                box
                comes with an interactive program guide and 45 channels of digital
                music.
                Digital cable subscribers can receive advanced services such as Video
                on
                Demand and High Definition Television (described below). As of January
                15,
                2006 RCN enhanced its Digital Cable TV service to include Showtime,
                The
                Movie Channel, Cinemax, Starz!, and Encore services, which were previously
                only available as Premium Channels.





•
            ***Premium
                Channels:***These channels provide commercial-free movies, foreign language
                programming and adult content for an additional monthly fee. A converter
                box is required to receive these offerings. Subscribers that have
                a
                digital set-top box receive multiple screens of popular premium channel
                services, such as HBO with their subscription.





•
            ***Pay-Per-View:***This service allows customers to receive and pay on a per event basis
                to
                view a single showing of a recently released movie, a one-time special
                sporting event, music concert, or similar event on a commercial-free
                basis
                by tuning into a specific activated channel.





•
            ***Video
                on Demand and Subscription Video on Demand:***RCN offers VOD service in all markets, except Los Angeles, which
                allows
                customers to access hundreds of movies and other programming at any
                time
                with the ability to pause and rewind. RCN also offers SVOD services
                that
                are included as part of several of RCN’s service bundles or that can be
                added for an additional fee by customers if they have a digital set-top
                box.





•
            ***High
                Definition Television:***HDTV is offered to digital cable subscribers in most markets. HDTV
                is a
                digital television service that displays enhanced picture quality
                that
                surpass standard analog and digital television images.


•
              ***Digital
                  Video Recorder:***DVR technology is included with certain set-top boxes RCN offers
                  and
                  allows customers to digitally record television programs and watch
                  them on
                  their own schedule. In addition to recording and replay, DVRs also
                  allow
                  customers to pause and rewind live programming. RCN offers dual-tuner
                  DVRs
                  that allow customers to record programs while watching other channels
                  on a
                  real-time basis.





8
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            of Contents*





Programming
      is an important component of delivering video service. RCN believes that
      offering a wide variety of programming is an important factor that influences
      a
      customer’s decision to subscribe to and retain RCN’s cable television services.
      Basic and premium programming are purchased from a number of suppliers.
      Programming contracts generally continue for a fixed period of time, usually
      from three to ten years, and are subject to negotiated renewal.





RCN
      generally pays programming suppliers a monthly license fee based on the number
      of customers to whom RCN makes such programming available. Such license fees
      may
      include penetration-based discounts available for higher numbers of customers,
      as well as discounts for channel placement or service penetration. For shopping
      channels, RCN receives a percentage of the amount RCN’s customers spend on home
      shopping purchases. Programming costs are usually payable each month based
      on
      calculations performed by RCN and are subject to adjustment based on the results
      of periodic audits by the programmers.





In
      general, per subscriber rates for programming costs are impacted by the number
      of subscribers, with large cable system operators receiving greater volume
      discounts than smaller operators. In an effort to achieve greater purchasing
      power, RCN is a member of the National Cable Television Co-op (“NCTC”), a
      cooperative buying organization that provides volume discounts to its members
      on
      programming purchased through the NCTC. Notwithstanding the purchasing
      arrangements through the NCTC, RCN’s programming costs have increased in every
      year RCN has operated and RCN expects them to continue to increase due to a
      variety of factors, including annual increases agreed to in existing contracts.




***High-Speed
      Data***




RCN
      offers high-speed data (Internet) services to residential customers primarily
      via cable modems attached to personal computers. These services include Internet
      access, email addresses, web-based services and web storage services. RCN’s
      high-speed data service typically delivers much greater bandwidth to customers
      than traditional dial-up services. RCN offers several levels of access speed
      which are available at different price points and in different bundle tiers.




Customers
      can access RCN’s portal, which provides access to customizable broadband
      content, and can subscribe for premium services such as:





•
            **RCN*****interACTIONSM******Games:***Subscribers can download over 150 games onto their home computer
                on demand
                and for unlimited use.





•
            **RCN*****interACTIONSM******Kids:***Similar service as interACTION Games but offering games for children
                of
                various ages.





•
            **RCN*****interACTIONSM******Music:***Subscribers can download music onto their home computer from a substantial
                digital music library containing more than 1 million high-quality
                tracks.





***Dial-up
      Internet***





Customers
      can also connect to the Internet through RCN’s dial-up service, using a standard
      phone line and 56 kilobit per second (“kbps”) modem. Dial-up customers have the
      advantage of connecting to the Internet through a network of points-of-presence
      routers that are connected to RCN’s broadband network. In certain markets, RCN’s
      dial-up service allows customers with a V.92 modem to receive incoming telephone
      calls while remaining connected to the Internet. Dial-up service can also be
      bundled with any of RCN’s on-net video, data and voice offerings. RCN dial-up
      subscribers can also access the Internet at speeds of up to five times faster
      than traditional dial-up service by using the RCN dial-up accelerator.





***Voice***





RCN’s
      voice service includes local and long distance telephone services. RCN offers
      a
      full range of calling plans that generally include unlimited local calling,
      unlimited local and regional calling and bundles of local, regional and long
      distance calling with a variety of calling features. RCN’s voice services
      include voicemail, caller identification, call waiting, call forwarding, 3-way
      calling, 911 access, operator services, and directory assistance.





9
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            of Contents*





During
      2004, RCN launched VoIP service in its Chicago market. This service transmits
      digital voice signals over RCN’s broadband network between the customer’s
      premise and RCN’s telephone switch. RCN’s VoIP service is a high-quality voice
      service that offers unlimited local, regional and long distance calling within
      the United States at a flat monthly rate. This service is available to all
      on-network subscribers in the Chicago market. RCN will continue to prepare
      additional markets for future VoIP launches, including Boston and eastern
      Pennsylvania.





***Commercial
      Services***





RCN
      offers commercial services to two customer groups, carriers and enterprise.
      Carriers include voice carriers, Internet Service Providers (“ISPs”), data
      transport providers and other data services companies. These carrier customers
      utilize RCN to provide redundancy for their internal network and to develop
      customer specific applications. RCN’s enterprise clients are typically in the
      hospitality, education and financial services industries. RCN targets Fortune
      500 companies and works closely with enterprise clients to develop custom
      telecommunications solutions that will leverage the RCN network. RCN’s network
      enters more than 575 commercial buildings and passes within a short distance
      of
      approximately 20,000 additional commercial buildings. RCN’s specific commercial
      product offerings include:





•
            Metro
                and Intercity SONET and Ethernet based transport services including
                T1,
                DS3, OC3, OC12, OC48 Fast Ethernet and Gigabit Ethernet circuits;





•
            Dark
                Fiber leases;





•
            High-speed
                Internet access;





•
            Managed
                dedicated servers and Web-hosting;





•
            Bulk
                and retail video service; and





•
            Switch-based
                resale long distance and local telephone service to customers on
                its
                broadband network.





***Other
      Services***





RCN
      also
      currently offers the following services:





***Home
      Networking.***RCN *Home Networking*SM lets
      customers use multiple Internet connections at the same time. Offered in both
      wired and wireless formats, RCN *Home Networking*SM allows
      several members of a household to simultaneously use the high-speed cable modem
      service via a secure home network and a single integrated gateway. RCN *Home
      Networking*SM includes basic features such as security and basic
      parental controls. RCN *Home Networking*SM is currently
      available in the Boston, New York, eastern Pennsylvania, San Francisco and
      Washington D.C. metropolitan markets.





***Webwatch*****SM*****/Home
      Monitoring*****.** RCN *WebWatch*SM, a
      home monitoring solution launched in 2005, allows customers to view live,
      streaming video or record video files of their premises from any high-speed
      Internet connection through a personal, secure website. RCN *WebWatch*
      facilitates home monitoring in real time by allowing customers to log on
      remotely to a wireless webcam installed inside a customer house or apartment.
      This service is currently available in the Boston, Chicago and New York markets.





***Video
      Mail.*** RCN *Video
      Mail* introduced in 2005 allows customers to send video mail to friends and family.
      With *Video
      Mail* ,
      customers may send more than 50 different video greeting cards including
      birthday, anniversary, special events and similar items. *Story
      Teller* allows
      users to assemble pictures in a video slideshow. Video files are stored on
      the
      server and are available for viewing for a 30 day period. This service is
      currently available in all of RCN’s markets.





10
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**Pricing
      of RCN’s Products and Services**





RCN’s
      revenues are generated primarily by the monthly fees paid by customers for
      its
      services. RCN prices its services to promote sales of bundled packages. RCN
      offers bundles of two or more services with tiered features and prices to meet
      the demands of a variety of customers. RCN also sells individual services at
      prices competitive to those of the incumbent providers. The prices RCN charges
      vary based on the level of service the customer chooses. An installation fee,
      which is typically waived for a bundled installation, is charged to new and
      reconnected customers. RCN also charges monthly fees for cable customer premises
      equipment.





**Customer
      Service**





Customer
      service is an essential element of RCN’s operations and strategy for customer
      retention. RCN provides customer service 24 hours a day, seven days a week
      via
      the Internet. RCN also operates a centralized customer call center in
      Wilkes-Barre, PA, which handles customer service transactions for all of RCN’s
      products. In 2005, RCN opened a multi-lingual call center in Herndon, VA. This
      center also operates as a back-up site, in the event of a disaster, to the
      main
      call center in Wilkes-Barre, PA. RCN’s customer service operations utilize
      technologically advanced equipment that RCN believes enhances interactions
      with
      its customers through more intelligent call routing, data management,
      forecasting and scheduling capabilities. RCN also provides answers to frequently
      asked questions and equipment troubleshooting on RCN’s website (www.rcn.com).
      RCN believes that providing customers with the convenience of a single point
      of
      contact for all customer service issues for RCN’s video, data and voice services
      gives RCN a competitive advantage and complements RCN’s bundling strategy.





**Joint
      Ventures and Other Investments**





***Megacable
      and MCM***





RCN
      has
      48.93% interests in both Megacable, S.A. de C.V., a cable television and
      high-speed data services provider in certain portions of Mexico, and MCM, a
      provider of local voice and high-speed data services in Mexico City. Although
      RCN has historically accounted for these investments under the equity method,
      RCN was unable to record any income on these investments during 2005 due to
      the
      continued lack of timely financial information from Megacable and MCM and the
      unwillingness of Megacable’s management to cooperate with RCN in its attempts to
      confirm the reliability and US GAAP compliance of the limited financial
      information received by RCN. In addition, RCN has been unsuccessful in its
      attempts to assert its rights under the shareholder agreement to appoint
      representatives to the Megacable board of directors and management committees.
      Because of these factors, Management has determined that it did not exercise
      sufficient control over Megacable and MCM to continue accounting for its
      investments in them under the equity method and decided to account for these
      investments under the cost method, commencing in the fourth quarter of 2005,
      in
      accordance with APB 18 and FASB Interpretation No. 35 *“Criteria
      for Applying the Equity Method of Accounting for Investments in Common
      Stock”* (“FIN
      35”). On March 6, 2006, RCN entered into an agreement to sell its investments
      in
      Megacable and MCM to the investors who currently own the remaining 51% of these
      entities for net after-tax proceeds of $300 million in cash. The transaction
      is
      expected to close by the end of March, 2006, after the necessary regulatory
      approval documents are filed.





***Starpower***





Starpower
      Communications, L.L.C. (“Starpower”) is a Delaware limited liability company
      formed in 1997 as a joint venture between a subsidiary of RCN and Pepco
      Communications, L.L.C., a subsidiary of Pepco Holdings, Inc. (“Pepco”), to sell
      video and telecommunications services to residential and commercial customers
      in
      Washington D.C. and the surrounding areas in Maryland and Virginia. In December
      2004, RCN increased its ownership in Starpower from 50% to 100% by purchasing
      the 50% interest in Starpower owned by Pepco for $29 million. RCN financed
      the
      $29 million purchase price with borrowings under its credit facility. Starpower
      leases certain portions of Pepco’s fiber system and Pepco provides construction
      and construction management services to Starpower. RCN believes that the costs
      of the services provided by Pepco to Starpower are equivalent to those that
      would be obtained from third-party contractors. Starpower is fully consolidated
      in RCN’s financial statements from December 21, 2004 and is accounted for as an
      equity method investment in prior periods.





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***RCN-BecoCom***




RCN-BecoCom
      LLC (“RCN-BecoCom”) was formed in 1997 as a joint venture between RCN and NSTAR
      Communications, Inc., formerly BecoCom, Inc. (“NSTAR”), to increase penetration
      in the Boston market by assisting in the network rollout and gaining access
      to
      rights-of-way. In December 2003, RCN-BecoCom became a wholly-owned subsidiary
      of
      RCN, and in 2005 was converted from a limited liability company to a corporation
      under Massachusetts Business Corporation Law. Although the joint venture has
      been terminated, NSTAR continues to provide RCN-BecoCom with construction and
      construction management services and RCN-BecoCom uses portions of NSTAR’s
      broadband network, rights-of-way and certain equipment sites in the Boston
      metropolitan area. RCN believes that the cost of the services provided to
      RCN-BecoCom by NSTAR are equivalent to those that would be obtained from
      third-party contractors.





**Con
      Edison Communications**





In
      December 2005, RCN signed a definitive agreement to purchase Consolidated Edison
      Communications Holding Company, Inc. (“CEC”), the telecommunications subsidiary
      of Consolidated Edison, Inc., for $32 million plus an estimated $6-7 million
      in
      working capital and capital expenditure adjustments, to be funded with cash
      on
      hand. CEC is a competitive local exchange carrier offering a comprehensive
      suite
      of broadband-based communications products and services, including business
      continuity and disaster recovery to commercial customers in the greater New
      York
      metropolitan area CEC generated revenues of $33 million in 2004 and its revenues
      in 2005 are estimated to be approximately $42 million. By acquiring CEC, RCN
      will gain:





•
            560
                route miles of fiber optics in the greater New York metropolitan
                region,
                including 10 river crossings;





•
            193
                on-network buildings;





•
            superior
                positioning for disaster recovery networks through the use of the
                electrical conduit system to deliver service, which is diverse from
                the
                Verizon and Empire City Subway (ECS) ducts used by most telecommunications
                companies; and





•
            an
                experienced sales and engineering staff with state-of-the-art operational
                systems.





The
      RCN
      and CEC networks combined will represent one of the premier state-of-the-art
      alternative fiber networks in the metro New York region. CEC’s commercial
      business, which serves large enterprises and carriers in New York, complements
      RCN’s presence in the small and medium business segment. Further, the
      acquisition will allow RCN to increase the number of addressable homes in its
      New York, New Jersey and Connecticut residential franchise areas through
      significant footprint expansion, including multiple high-capacity river
      crossings.





The
      acquisition is expected to close by the end of March 2006, subject to regulatory
      approvals. RCN expects to incur approximately $2-3 million of integration and
      deal-related costs from the fourth quarter of 2005 through the fourth quarter
      of
      2006. Once the integration is complete, RCN expects to realize approximately
      $3-4 million per year in operating expense synergies, primarily from the
      elimination of redundant overhead.





**Asset
      Sales**




***Sale
      of Carmel, New York Cable System.*** On March
      9, 2004, RCN sold its Carmel, New York cable system for approximately $120.2
      million (net of purchase price and post-closing adjustments). In accordance
      with
      SFAS No. 144 *“Accounting
      for the Impairment or Disposal of Long-Lived*  *Assets”* ,
      the
      results of operations for this system are reported as discontinued operations.




***Sale
      of Central New Jersey Cable System*** **.** On
      February 19, 2003, RCN sold its central New Jersey cable system assets for
      approximately $242.8 million of proceeds (net of purchase price and post-closing
      adjustments). In connection with its regulatory review and approval of the
      transaction, the New Jersey Board of Public Utilities (NJBPU) required RCN
      to
      deposit an additional $1 million in escrow to satisfy any subscriber claims
      and
      administrative fines and penalties arising after or in connection with the
      sale.
      RCN is currently in negotiation with the NJBPU to gain release of the money
      in
      escrow. In accordance with SFAS 144, the results of operations for this system
      are reported as discontinued operations.





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***California
      Properties.*** In
      November, 2005, RCN announced that it would evaluate opportunities to sell
      RCN’s
      properties in the Los Angeles and San Francisco markets, as part of its strategy
      to focus primarily on the Northeast corridor. These properties contained
      approximately 20,000 subscribers as of December 31, 2005. RCN has begun
      marketing these properties, but it is too early in the process to determine
      the
      price, probability or timing of a potential sale.





**Employees**




As
      of
      December 31, 2005, RCN had approximately 2,000 employees, substantially all
      of
      which are full-time.





**Licenses**




As
      of
      December 31, 2005, RCN had approximately 130 franchise and open video system
      (“OVS”) agreements, permits and similar authorizations issued by local and state
      governmental authorities. Each license is awarded by a governmental authority,
      which often must approve any transfer to another party. Most licenses are
      subject to termination proceedings in the event of a material breach. In
      addition, most licenses require RCN to pay the granting authority a fee of
      up to
      5.0% of gross cable service revenues, as defined in the various agreements.
      RCN
      is entitled to and generally does pass this fee through to the customer. RCN
      is
      also obligated to pay contributions in support of public, educational and
      governmental (“PEG”) channels that match those provided by its incumbent cable
      operator competitors. These contributions are most often based on a percent
      of
      RCN’s gross revenues and are in the range of 1% to 3% percent of gross cable
      service revenues, but can also include “in kind” services and facilities such as
      the dedication of fiber facilities for use by the franchise authority and other
      PEG entities.




Prior
      to
      the scheduled expiration of most licenses, RCN initiates renewal proceedings
      with the granting authorities. The Cable Television Consumer Protection and
      Competition Act of 1992 (the “1992 Cable Act”) provides for an orderly license
      renewal process in which granting authorities may not unreasonably withhold
      renewals. Historically, RCN has been able to renew its licenses generally at
      or
      before their stated expirations and without incurring significant costs,
      although any particular license may not be renewed on commercially favorable
      terms or otherwise.




**Competition**




RCN
      competes with a wide range of service providers in each market, including
      incumbent local telephone carriers (“ILECs”), incumbent multiple system cable
      operators (“MSOs”), competitive local exchange carriers (“CLECs”), Direct
      Broadcast Satellite (“DBS”) providers, interexchange carriers (“IXCs”) and
      dial-up Internet service providers. These companies represent RCN’s primary
      competition in the delivery of “last mile” connections for video, data and voice
      services.




RCN’s
      principal competitors are ILECs and MSOs that are larger than RCN and have
      greater financial resources. These incumbents have numerous advantages as a
      result of their historically monopolistic control of their respective markets,
      economies of scale and scope, control of limited conduit and pole space,
      well-established customer and vendor relationships, and, in the case of MSOs,
      vertically integrated ownership of programming content. In addition, MSOs,
      ILECs
      and some CLECs have begun, either using their own networks or through joint
      marketing alliances, to provide a bundle of each of the services offered by
      RCN
      together, in some cases, with wireless phone service. This development is likely
      to place increased competitive pressure on RCN.




***Video***




RCN’s
      video service competes in each of its markets with incumbent MSOs, including
      Service Electric in Lehigh Valley, PA, Time Warner in New York, Cox in Virginia,
      and Comcast in the rest of its markets. In addition, RCN’s video services
      face competition from a variety of other methods of receiving and distributing
      television signals, and from alternative sources of news, information and
      entertainment, including Internet services, newspapers, radio, movie theatres
      and live theatre, sports, and music. Competitive programming sources include
      over-the-air television digital and analog broadcast programming, DBS,
      interactive online computer services, and home video products. Home video
      products include videotape cassette recorders, digital video disk players,
      and
      streaming personal computer applications. RCN also faces competition from
      private satellite master antenna television (“SMATV”) systems that serve
      condominiums, apartment and office complexes and private residential
      developments.





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DBS
      is a
      signifigcant competitor to cable systems, particularly those located in suburban
      and rural areas with large percentages of single family homes where their
      satellite dishes can be installed, such as the Company’s system in eastern
      Pennsylvania. The DBS industry has grown rapidly over the last several years,
      far exceeding the growth rate of the cable television industry. DBS service
      allows the subscriber to receive video services directly via satellite using
      a
      relatively small dish antenna. The two largest DBS providers are DirecTV, Inc.,
      an affiliate of News Corp. (“DirecTV”), and EchoStar Communications Corp.
      (“EchoStar”), which operates the Dish Network.





Video
      compression technology and high powered satellites allow DBS providers to offer
      more than 200 digital channels from a single transponder satellite, thereby
      surpassing the typical analog cable system. DBS providers are able to offer
      service nationwide and are able to establish a national image and branding
      with
      standardized offerings, which leads to greater efficiencies and lower costs
      in
      the lower tiers of service. RCN believes that its higher tier products,
      particularly its bundled premium packages, are price-competitive with DBS
      packages and that many consumers prefer RCN as a result of its ability to
      economically bundle its cable television packages with high-speed Internet
      and
      local and long distance telephone services. RCN believes that this ability
      to
      bundle, combined with its introduction of additional new products that DBS
      cannot currently offer (such as local HDTV and local interactive television),
      differentiates RCN from DBS competitors and could enable RCN to win customers
      who might otherwise subscribe to DBS. However, recent joint marketing
      arrangements between DBS providers and ILECs in some of RCN’s markets allow
      similar bundling of services by DBS providers. Both DirecTV and EchoStar have
      entered into joint marketing agreements with major telecommunications companies
      to offer bundled packages combining phone service, digital subscriber line
      service and DBS services. Moreover, DBS providers operate in a largely
      unregulated marketplace and are not subject to local franchise requirements
      and
      are not obligated to collect and pay license and other franchise-related fees
      to
      local authorities, which gives them a cost advantage over RCN and other cable
      operators.




In
      addition, certain ILECs and CLECs provide, or have announced plans to provide,
      video services within and outside of their telephone service areas through
      a
      variety of methods, including cable networks, satellite program distribution,
      and wireless transmission facilities. Such carriers are seeking relief in
      federal and state legislatures from the local franchise process which, if
      successful, would permit them to enter the video market more quickly and
      possibly without some of the obligations imposed in RCN’s franchises. The ILECs
      entering the video market are larger than RCN and have greater financial
      resources and well-established customer relationships that will make them
      formidable competitors to RCN’s bundled service offerings.




***Data***




The
      Internet access market is highly competitive and increasingly price-sensitive.
      Competition in this market has intensified, particularly among cable operators
      and ILECs who continue to make significant progress using their local
      distribution facilities to offer high speed Internet services over their local
      cable and telephone facilities. RCN must therefore compete with both ILECs
      and
      MSOs for subscribers to its high speed Internet service. In certain areas,
      CLECs
      are also starting to penetrate this market with facilities-based high speed
      Internet services. Other competitors to RCN’s high speed Internet services
      include local, regional and national ISPs who offer service using the facilities
      of other companies such as CLECs and ILECs.




ILECs
      typically compete with RCN by providing broadband Internet service over digital
      subscriber lines (“DSL”) that utilize their existing copper lines and plant. DSL
      service provides Internet access to subscribers at data transmission speeds
      greater than those available over conventional telephone lines. DSL service
      therefore is competitive with high-speed Internet access over cable systems.
      Although the availability of DSL service is restricted by certain distance
      and
      other network limitations, most ILECs that already have facilities, an existing
      customer base, and other operational functions in place (such as billing,
      service personnel, etc.) offer DSL service throughout most of the service areas
      served by RCN. RCN expects DSL to remain a significant competitor to RCN’s data
      services. In addition, while DSL service typically provides lower access speeds
      than RCN’s higher tiers of high-speed Internet service, the further deployment
      of fiber-optic cable by ILECs and CLECs into their networks will enable them
      to
      provide higher bandwidth Internet service than provided over traditional DSL
      lines.





In
      some
      of RCN’s service areas ILECs are also deploying advanced fiber optic facilities
      that will enable them to offer Internet services at speeds considerably higher
      than their existing DSL service and more competitive with RCN’s high speed
      connections. These fiber networks will also allow the ILECs to offer cable
      or
      Internet-based video programming services in competition with RCN’s cable and
      OVS service. Such networks have already come on line in limited areas but to
      date have been largely limited to telephone and high speed data service.
      Therefore, although the service currently provides some competition to RCN’s
      voice and data services, it does not yet provide significant competition to
      RCN’s bundled product offerings since the ILEC services do not yet include the
      full bundle of voice, data and video services offered by RCN over its networks.
      However, as these ILEC fiber networks are deployed more widely, and particularly
      as they are expanded to include video programming (assuming corresponding video
      licenses are obtained), the competitive impact on RCN will
      increase.





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With
      the
      recent consolidation among ISPs, competition is becoming concentrated to the
      larger national and regional providers of Internet access. Although RCN does
      not
      expect significant new entrants into the Internet access market in the near
      future, new technologies are being introduced which will provide customers
      other
      choices for Internet access. Many competitors have broader brand recognition
      and
      spend significantly more marketing dollars for customer acquisition. RCN
      competes directly or indirectly with:





•
            established
                online services;





•
            small,
                local ISPs;





•
            Internet
                access (including DSL service) offered by regional Bell operating
                companies (“RBOCs”);





•
            high-speed
                services offered by incumbent cable providers and other regional
                cable
                providers offering high-speed Internet access over a cable modem;





•
            fixed
                wireless Internet access services offered by certain telecommunications
                providers; and





•
            mobile
                wireless Internet access services offered by cellular providers.





In
      addition, local wireless Internet services have recently begun to operate in
      many markets using licensed portions of the radio spectrum, as well as available
      unlicensed radio spectrum. This service option, popularly known as “Wi-Fi” or
“Wi-Max”, offers another alternative to cable-based high speed Internet access.
      Other delivery systems, such as two-way satellite delivered Internet service
      and
      services that deliver high-speed Internet access over existing power lines,
      are
      currently under development.





Advances
      in communications technology, as well as changes in the marketplace and the
      regulatory and legislative environment, are constantly occurring. In addition,
      a
      continuing trend toward business combinations and alliances in the
      telecommunications industry may also create significant new competitors.




***Voice***




The
      voice
      service market, especially long distance, is characterized by intense price
      competition. RCN competes with the ILECs for the provision of voice services,
      including Verizon in the northeast corridor, and SBC in California and Chicago
      (both of which currently dominate their respective local telephone markets),
      as
      well as other CLECs and long distance service providers. Other local and long
      distance voice services competitors include, MSO’s who are entering the voice
      market in some locations, wireless service providers, and VoIP providers. VoIP
      is a significant competitive service that an increasing number of companies
      in
      the industry are offering over high speed Internet service connections,
      including the facilities provided by RCN.





RCN
      expects to continue to face significant competition in all markets from the
      ILECs, CLECs, MSO’s, VoIP providers and wireless providers, for both local and
      long distance service. In addition, the telecommunications industry has been
      characterized by increasing consolidation, which could lead to increased
      pressure from larger competitors as they achieve greater scale through
      acquisitions.








**RCN’s
      Chapter 11 Reorganization**





***Events
      Leading Up to Chapter 11 Reorganization***





Historically,
      RCN met its liquidity requirements through cash on hand, amounts available
      under
      its senior credit facility and issuances of high-yield debt securities in the
      capital markets and preferred stock and common stock to strategic investors.
      However, due to the severe slowdown in the telecommunications industry and
      limited access to the capital markets, RCN experienced financial difficulties.
      Beginning in 2001, RCN took a series of steps to meet its working capital needs,
      improve its near-term liquidity and capital structure and reduce its financial
      risk, including repurchasing senior notes at discounts to their face value
      through tender offers and open market purchases and reducing capital investments
      to provide cash flow to meet its debt service requirements. In addition, RCN
      sold its central New Jersey and Carmel, New York cable systems and applied
      the
      proceeds to repay outstanding debt. RCN also amended certain of its bank credit
      agreements to obtain more flexible covenants and entered into a credit agreement
      with Evergreen Investment Management Company LLC (the “Evergreen Credit
      Agreement”) to fund repurchases of senior notes.





15
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Despite
      these measures, RCN determined that its revenue and cash on hand were
      insufficient to meet its working capital, debt service, capital expenditure
      and
      other requirements, including interest payments on its senior notes. RCN, after
      consulting with its advisors and after exploring various out-of-court
      restructuring alternatives, concluded that the best approach to achieve a
      comprehensive restructuring and reduce its indebtedness was through a Chapter
      11
      reorganization.




***Commencement
      of the Chapter 11 Cases***




On
      May
      27, 2004, RCN and four of its subsidiaries filed voluntary petitions for
      reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States
      Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).
      On August 5 and August 20, 2004, five additional subsidiaries of RCN filed
      voluntary petitions for reorganization under Chapter 11.




***Plan
      of Reorganization and Exit Financing***




On
      October 12, 2004, the RCN Debtors and the official committee of unsecured
      creditors filed the Plan, describing their proposal for reorganizing, and a
      related disclosure statement (the “Disclosure Statement”) with the Bankruptcy
      Court. On October 13, 2004, the Bankruptcy Court entered an order approving
      the
      Disclosure Statement and the RCN Debtors’ solicitation procedures motion.




On
      December 8, 2004, the Bankruptcy Court entered a confirmation order approving
      the Plan. The Plan became effective on December 21, 2004 and the RCN Debtors
      emerged from Chapter 11.





The
      RCN
      Debtors obtained the following exit financing arrangements in order to
      consummate the Plan:




•
            The
                RCN Debtors obtained a $355 million senior secured credit facility
                comprised of term loans for an aggregate amount of $330 million and
                a $25
                million letter of credit facility (the “First Lien Credit Agreement”);





•
            RCN
                issued $125 million aggregate principal amount of 7.375% convertible
                second-lien notes due 2012 which are convertible into shares of
                Reorganized RCN’s common stock (the “Convertible Notes”); and





•
            RCN
                amended and extended its Evergreen Credit Agreement (the “Third-Lien Term
                Loan”)




Proceeds
      from the exit financing were used to pay amounts due to senior secured
      creditors, pay administrative expenses of the bankruptcy proceedings, make
      payments to other creditors under the Plan, purchase the 50% interest in
      Starpower from Pepco, and for general corporate purposes. For a detailed
      description of the First Lien Credit Agreement and the Convertible Notes, see
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations--Liquidity and Capital Resources.”







***Effect
      of Consummation of the Plan***





Pursuant
      to the Plan, on the Effective Date, all of the existing securities of Old RCN,
      including the existing common stock, preferred stock, stock options, and
      warrants, were extinguished and deemed cancelled. RCN filed an amended and
      restated certificate of incorporation authorizing new shares of common stock.
      In
      accordance with the Plan, Reorganized RCN issued 36,020,850 shares of common
      stock with a par value of $0.01 of which 31,919,044 were distributed to certain
      of its former bond holders and other general unsecured creditors on the
      Effective Date, and 4,101,806 shares were placed in reserve to settle disputed
      claims against RCN that were outstanding as of the date of emergence. In 2005,
      RCN distributed 3,303,868 shares of common stock in settlement of filed claims.
      As of December 31, 2005, 797,938 shares remained in reserve to satisfy the
      remaining allowed claims. In January 2006, the Company made an additional
      distribution of 169,492 shares, reducing the reserve share balance to 628,446.
      Once all outstanding claims are resolved, and the period for the Bankruptcy
      Court to reconsider its ruling on RCN’s objections to all creditor claims
      expires, RCN will distribute the remaining reserved shares of common stock
      to
      the general unsecured creditors and the former bond holders on a pro rata
      basis.





16
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            of Contents*





Additionally,
      RCN was authorized by the Plan to issue warrants to the former stockholders
      of
      Old RCN to purchase an aggregate of 735,119 shares of RCN’s common stock. Each
      warrant allows the holder to purchase one share of RCN’s common stock for a
      price of $34.16. As of December 31, 2005, the Company had distributed 188,032
      of
      these warrants which expire on December 21, 2006.





**Regulation**





***Overview***





Telecommunications
      and cable television operators are subject to extensive regulation by the FCC,
      state public utility commissions (“PUCs”), and local franchising authority
      (“LFAs”). These regulations affect the manner in which RCN must operate its
      business and can also have direct and indirect impacts on its costs of
      operation, and therefore the profitability of its services. These regulatory
      regimes are subject to change from time to time and any changes in the current
      regulatory system, including new or additional regulations, could negatively
      impact RCN’s businesses or operations in the future.




RCN’s
      ability to provide telephone and video programming transmission services was
      made possible by the Telecommunications Act of 1996 (the “1996 Act”) and
      government regulations which have been subject to court challenges and may
      be
      subject to change in the future. In addition, RCN is subject to other
      regulations at the federal, state and local levels. The costs of complying
      with
      these regulations, delays in receiving or failures to receive required
      regulatory authorizations, changes in existing regulations or the enactment
      of
      new, adverse regulatory requirements may have a material adverse effect upon
      RCN’s ability to obtain or retain authorizations on the business. RCN cannot
      assure you it will be able to obtain all of the authorizations needed to
      construct broadband network facilities or to retain the authorizations already
      acquired.




Set
      forth
      below is a summary of present and proposed federal, state, and local regulations
      and legislation that may affect RCN’s provision of video programming, data and
      voice services. 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 that could change, in varying degrees, the operations of
      communications companies. The ultimate outcome of these proceedings on RCN’s
      businesses cannot be determined at this time.




**Regulation
      of Video Services**




***Cable
      Television Systems***




RCN’s
      cable television systems are subject to regulation under the 1992 Cable Act.
      The
      1992 Cable Act regulates, among other things, rates for cable services in
      communities that are not subject to “effective competition,” certain programming
      requirements, and broadcast signal carriage requirements that allow local
      commercial television broadcast stations to require a cable system to carry
      the
      station. Local commercial television broadcast stations may 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 under the must carry or
      retransmission consent requirements of the 1992 Cable Act. The 1992 Cable Act
      also permits LFAs to require cable operators to set aside certain channels
      for
      public access, educational and governmental (“PEG”) programming. Cable systems
      with 36 or more channels must designate a portion of their channel capacity
      for
      commercial leased access by third parties to provide programming that may
      compete with services offered by the cable operator. Local non-commercial
      television stations are also given mandatory carriage rights.




Because
      a
      cable communications system uses local streets and rights-of-way, they are
      generally also subject to state and local regulation, typically imposed through
      the local franchising process. The terms and conditions of state or local
      government franchises vary materially from jurisdiction to jurisdiction.
      Generally, they contain provisions governing franchise fees and monetary and
      in-kind contributions to PEG channels and services, franchise term, 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, liquidated damages and the
      maintenance of insurance and indemnity bonds, maintenance obligations, customer
      service standards, franchise renewal, sale or transfer of the franchise,
      territory of the franchisee, use and occupancy of public streets, and types
      of
      cable services provided. LFAs may award one or more franchises within their
      jurisdictions and prohibit non-grandfathered cable systems from operating
      without a franchise. The 1992 Cable Act also provides that, in granting or
      renewing franchises, LFAs may establish requirements for cable-related
      facilities and equipment, but not for video programming content other than
      in
      broad categories. The 1992 Cable Act also permits the cable operator to seek
      modification of its franchise requirements through the franchise authority
      or by
      judicial action if changed circumstances warrant.





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The
      1992
      Cable Act limits franchise fees to 5% of gross revenues derived from the
      provision of cable services. In addition, franchises generally provide for
      monetary or in-kind contributions to support PEG services. Those PEG fees
      typically range from 1% to 3% of gross revenues, however, certain jurisdictions
      have adopted flat rate contributions rather than a rate based on revenues or
      numbers of subscribers. In flat rate jurisdictions, RCN is at a cost
      disadvantage compared to larger cable systems that pay a lower effective per
      subscriber fee. In addition to the relevant franchise agreements, cable
      authorities in some jurisdictions have adopted cable regulatory ordinances
      that
      further regulate the operation of cable systems. These additional regulations
      have the effect of increasing RCN’s expenses in operating its businesses. RCN
      cannot assure you that the LFAs will not impose new and more restrictive
      requirements on RCN.





***Open
      Video Systems***




In
      some
      jurisdictions, RCN provides cable television programming as an OVS provider.
      At
      various times between February 1997 and December 2002, RCN was certified by
      the
      FCC to operate OVS networks in certain areas within its foot print. The OVS
      framework is an alternative regulatory structure, established at the federal
      level, for operators providing multi-channel video service to subscribers.
      Although exempted by federal law from some of the regulations that apply to
      cable operators, the FCC rules require us to make channel capacity on the system
      available to unaffiliated video programming providers (“VPPs”). We have
      conducted open enrollment periods for our operational OVS systems, but to date
      no VPP has requested carriage on any of our systems. OVS networks are also
      subject to a certain degree of local regulation for use of local streets and
      rights-of-way and RCN’s OVS agreements with LFAs typically resemble a cable
      franchise agreement. RCN has entered into agreements with each of the
      municipalities where it offers OVS services that provide for the payment of
      the
      fees and carriage of PEG channels required by the 1996 Act. OVS operators also
      are subject to the same requirements as cable operators with regard to
      retransmission consent and must-carry, carriage of non-commercial television
      stations, and certain other programming-related regulatory requirements, as
      well
      as other cable-related FCC regulations. The terms and conditions of OVS
      agreements therefore vary from jurisdiction to jurisdiction, but generally
      contain provisions governing gross receipts fees, term, PEG channel and funding
      requirements, and other right-of-way management requirements similar to those
      in
      its cable franchises.




Generally,
      gross receipt fees for OVS operators, such as RCN, are usually required to
      match
      the gross receipt fees paid by the incumbent cable operator. These fees are
      limited by the Communications Act of 1934 (the “Communications Act”) to a
      maximum of 5% of gross revenues derived from the provision of cable services.
      In
      addition, OVS operators typically are required to match the monetary or in-kind
      contributions required of the incumbent cable operator to support PEG access.
      RCN’s OVS agreements provide that its PEG contributions match those of the
      incumbent cable operator proportionate to the level of RCN’s revenues or number
      of subscribers in relation to the incumbent on either a percent of gross revenue
      or per subscriber basis. Those PEG access fees typically range from 1% to 3%
      of
      RCN’s gross cable services revenues.




***Cable
      and OVS Regulation***





RCN’s
      existing cable franchises and OVS agreements expire at varying times. RCN’s
      ability to provide franchised cable television and OVS services depends largely
      on its ability to obtain and renew franchise and OVS agreements from LFAs on
      acceptable terms. RCN cannot assure you that such agreements will be reached
      in
      every instance, and the failure to do so in a particular local jurisdiction
      could have a material effect on its ability to enter or continue to operate
      in
      that local area. Historically, RCN’s cable franchises that have reached their
      expiration date have been renewed or extended, generally at or before their
      stated expirations and on acceptable terms. Due to reduced capital spending
      and
      curtailed expansion to new homes within existing markets, however, RCN cannot
      assure you that cable franchises and OVS agreements will be renewed at
      expiration with comparable terms and performance conditions. Furthermore,
      although RCN cannot assure you that it will be in compliance with those
      franchises and OVS agreements at the time of renewal or that it will be able
      to
      renew these or other franchise and OVS agreements on acceptable terms, our
      experience and the experience of other cable franchisees has been that
      franchises are generally renewed upon substantially similar terms upon
      expiration by mutual agreement between the LFA and the franchisee.





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In
      light
      of economic conditions in the communications industry and limitations on RCN’s
      ability to raise capital that have occurred since most of RCN’s cable franchises
      and OVS agreements were entered into, RCN has substantially decreased the amount
      it spends on new network construction and other capital expenditures below
      the
      levels that were anticipated when the franchises were entered. Although,
      consistent with FCC rules, RCN’s OVS agreements did not contain any network
      build-out requirements, many of its original cable franchises obligated RCN
      to
      construct systems throughout the franchise territory and often contained time
      limits for completion of such construction. Because of the reduction in capital
      spending, RCN was unable to meet the network build-out obligations set forth
      in
      many of the original franchises. With the exception of the four Massachusetts
      towns discussed below, RCN has been able to eliminate such build-out obligations
      either by amending the franchises, converting cable franchises to OVS
      agreements, or, in the case where RCN had not yet initiated construction,
      terminating the franchises without penalty or prejudice to entering a new
      franchise in the future.





In
      the
      Massachusetts towns of Dedham, Framingham, Lexington and Waltham, network
      construction obligations may still remain in the cable franchises, and RCN
      is
      negotiating with the LFAs to amend or modify the terms of the applicable
      franchise to avoid any breaches and related penalties, to terminate the
      applicable franchise without penalty or prejudice to entering a new franchise
      in
      the future, to convert the franchise to an OVS agreement in order to relax
      build-out obligations or to postpone indefinitely any build-out obligations
      under the franchise. Only one of these four towns, Framingham, has asserted
      any
      formal claim that RCN is in breach of its franchise for failure to complete
      the
      build-out of the cable system and for breach of certain local programming
      obligations. Although LFAs in other markets have worked with RCN to reach
      agreements as to amendments or modifications to relieve RCN’s build-out
      obligations, RCN cannot assure you that it will be able to reach a satisfactory
      resolution of these issues in Framingham, or that the other three towns will
      not
      assert similar claims of breach, or that some or all of the municipalities
      involved will not seek to invoke the liquidated damages and other penalties
      to
      which they may claim to be entitled pursuant to the franchise agreements. If
      efforts to settle the disputes are unsuccessful, RCN intends to prosecute its
      right to modify the franchises. However, RCN cannot assure you that it will
      be
      successful in obtaining the relief it seeks, or that one or all of these LFAs
      will not recover damages for breach and/or an order for specific performance
      against RCN. If required to fully comply with the build-out obligations in
      all
      four of the Massachusetts towns, the cost of such construction could be up
      to
      $4.5 million.




RCN,
      like
      most if not all other cable providers, currently does not pay a franchise fee
      on
      its cable modem Internet access services on the basis that the FCC has
      determined that such Internet services are not “cable services” as defined in
      the Communications Act. RCN’s position has been challenged by the City of
      Chicago, which has brought suit against RCN Cable TV of Chicago, Inc.
      (“RCN-Chicago”), as well as AT&T Broadband (now Comcast), the incumbent
      cable operator in RCN-Chicago’s franchised service area, and the other
      franchised cable television operator in the City of Chicago (collectively,
      the
“Defendants”). The Defendants removed the action to federal court and succeeded
      initially in obtaining dismissal of the action on the ground that cable modem
      service, as a matter of law, is not a “cable television service” within the
      scope of the franchise agreements and therefore cannot be subject to the
      agreements’ franchise fee provision, which by its express terms is to be
      interpreted and applied in accordance with the Communications Act. The City
      of
      Chicago appealed both the removal to federal District Court and the District
      Court’s dismissal of its case to the U.S. Seventh Circuit Court of Appeals. On
      October 1, 2004, the Seventh Circuit vacated on jurisdictional grounds the
      District Court’s decision dismissing the City of Chicago’s claims, and remanded
      the case back to the Circuit Court for Cook County, Illinois, for further
      proceedings. The Seventh Circuit expressed no opinion on the merits of the
      case.
      The City of Chicago then re-filed its case in the Cook County Circuit Court.
      The
      Cook County Circuit Court, on October 5, 2005, also dismissed the City’s
      complaint, and the City has now appealed the Circuit Court’s dismissal to the
      Illinois Appellate Court.





In
      the
      event the City of Chicago were ultimately to prevail on its complaint,
      RCN-Chicago would need to pay the 5% franchise fee on its cable modem revenues
      and therefore to pass through the additional fees to its cable modem Internet
      service customers, which would raise their rates as compared to the high-speed
      Internet services provided by ILECs and therefore could have an adverse effect
      on RCN-Chicago’s ability to compete with such providers. In the event that these
      fees are assessed retroactively, RCN-Chicago would likely not be able to recover
      these costs from its customers. However, because any adverse result will affect
      all of RCN-Chicago’s cable competitors in the Chicago market, such a ruling
      would likely not have a disproportional effect on RCN’s ability to compete with
      other cable operators in the Chicago market. RCN also notes that the United
      States Supreme Court in the Brand X decision upheld the FCC’s classification of
      cable modem service as an information service, rather than a cable or
      telecommunications service, for federal regulatory purposes. However, the scope
      of state and local authority to regulate cable modem service as an information
      service is a question of nationwide significance to LFAs and cable television
      franchisees, and is the subject of both pending litigation and FCC rulemaking.
      The ultimate result of all these actions will likely determine whether and
      to
      what extent RCN’s cable modem Internet access service is subject to state and
      local regulation, in addition to any obligations that may be imposed by the
      FCC.
      RCN cannot predict the outcome of such legal and regulatory proceedings. The
      ultimate result of all of these actions, including the action brought by the
      City of Chicago, will likely determine whether RCN’s cable modem Internet
      service gross revenues will be required to be included for purposes of franchise
      fee payments, and RCN cannot assure you that it will not be subject to gross
      revenue fees or other regulation of its cable modem Internet access services
      in
      the future.





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In
      addition, a number of jurisdictions have imposed or attempted to impose
      so-called “open access” and/or “net neutrality” requirements in connection with
      the grant or transfer of a cable franchise and others may do so. As used in
      this
      context, “open access” refers to the requirement that a broadband operator
      permit unaffiliated entities to provide Internet services over the cable
      television operator’s broadband facilities and “net neutrality” is a general
      principle favoring access by consumers to their choice of Internet content,
      connection equipment, and applications without unreasonable restrictions by
      broadband and other service providers. While RCN is committed to net neutrality
      and does not in any way limit the access of its customers to information and
      services available on the Internet, and believes that its business interests
      may
      in the future be served by open access, the desirability of government
      regulation intended to assure net neutrality and whether and how to make such
      access available must be determined on the basis of technological and market
      conditions, and regulatory mandates could impose significant costs on RCN and
      restrict the manner in which it conducts its business.





Similarly,
      there have recently been efforts underway at the FCC and in Congress to explore
      whether cable companies should be required to offer programming services on
      an
      unbundled “a la carte” basis so that consumers would have more choice over which
      programs they purchase. RCN has supported the concept of a la carte programming
      and wants to be able to test consumer reaction to themed program tiers on its
      digital systems. To implement a la carte programming, however, all customers
      would need digital set-top boxes and RCN would need relief from restrictive
      programming contracts. Any legislative or regulatory mandate requiring RCN
      to
      implement a la carte programming that does not recognize technological and
      contractual limitations, or that mandates particular a la carte service
      offerings and therefore does not permit RCN to develop a la carte programming
      tiers based upon market demand and conditions, could impose significant costs
      on
      RCN and the manner in which it conducts its business. In addition, if it were
      to
      be mandated, RCN cannot predict the impact that a la carte programming would
      have on customer or revenue trends.




Cable
      television systems, where effective competition has not been demonstrated to
      exist, are subject to rate regulation of the basic service tier. None of the
      municipalities in which RCN holds a cable franchise are currently attempting
      to
      impose rate regulation on RCN. As required by the 1996 Act, rates were
      deregulated for all cable programming services except limited basic service
      on
      March 31, 1999. In the event that a municipality in which RCN holds a cable
      franchise were to attempt to impose rate regulation, it would be necessary
      for
      RCN to demonstrate that effective competition exists in its franchise area.
      RCN
      believes that effective competition can be demonstrated as to RCN with respect
      to all of RCN’s cable franchises, since in each case there is an existing
      incumbent cable operator serving the same area.




The
      FCC
      has also issued rules establishing standards for digital television. The FCC’s
      rules require television stations to simulcast their existing television signals
      and digital television signals for a period of years prior to the expected
      cut
      over to full digital broadcasting in 2009. The FCC recently issued an order
      stating that cable operators will not be required to simultaneously carry
      broadcasters’ digital and analog signals, nor will cable operators be required
      to carry more than a single digital programming stream from any single
      broadcaster. These rules are beneficial to RCN, insofar as they limit the burden
      on RCN’s channel capacity, but the rules could be challenged by broadcasters.




In
      addition to the FCC regulations previously discussed, there are other FCC cable
      regulations that directly affect the way that RCN operates its video businesses
      in areas such 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 and access to cable home wiring and home run wiring
      in multiple dwelling units; indecent programming; programmer access to cable
      systems; programming agreements; technical standards; and consumer electronics
      equipment compatibility and closed captioning.




The
      FCC
      has the authority to enforce its regulations by imposing substantial fines,
      issuing cease and desist orders and/or imposing other administrative sanctions,
      such as revoking FCC licenses needed to operate certain transmission facilities
      often used in connection with cable operations.





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**Regulation
      of Data Services**




The
      data
      services business, including Internet access, is largely unregulated at this
      time apart from federal, state and local laws and regulations applicable to
      businesses in general. Some federal, state, local and foreign governmental
      organizations are considering a number of legislative and regulatory proposals
      with respect to Internet user privacy, infringement, pricing, quality of
      products and services and intellectual property ownership. It is uncertain
      how
      existing laws will be applied to the Internet in areas such as property
      ownership, copyright, trademark, trade secret, obscenity and defamation.
      Additionally, some jurisdictions have sought to impose taxes and other burdens
      on providers of data services, and to regulate content provided via the Internet
      and other information services. RCN expects that proposals of this nature will
      continue to be debated in Congress and state legislatures in the future.
      Additionally, the FCC is now considering a proposal to impose obligations on
      some or all providers of Internet access services to contribute to the cost
      of
      federal universal service programs, which could increase the cost of Internet
      access. The adoption of new laws or the modification of existing laws to the
      Internet may decrease the growth in the use of the Internet, which could in
      turn
      have a significantly adverse effect on RCN’s Internet businesses. As discussed
      above in connection with the franchise fees claimed by the City of Chicago
      on
      RCN’s cable modem service gross revenues, the FCC has classified high-speed
      cable modem Internet service as an “interstate information service,” which
      historically has meant that no regulations apply to the provision of this
      service. The FCC is currently considering, however, whether to impose any
      federal regulations on high-speed cable modem Internet service and permit LFAs
      to impose fees or other requirements on such service. RCN cannot predict the
      outcome of such regulatory proceedings.




**Regulation
      of Voice Services**





***Federal
      Regulation***





The
      use
      of RCN’s networks for interstate and international voice services, including the
      local component of any interstate or international call, is regulated by the
      FCC
      under the Communications Act. RCN provides domestic interstate voice services
      nationwide, and has been authorized by the FCC to offer worldwide international
      services. Under recent FCC decisions, the rates, terms, and conditions of these
      services are not filed with the FCC, although RCN remains subject to the FCC’s
      jurisdiction over complaints regarding these services. RCN is required to pay
      various regulatory fees and assessments to support programs authorized by the
      FCC. RCN must also comply with various FCC rules regarding the disclosure of
      rates, terms and conditions of service; the content and format of invoices,
      obtaining proper authorization for carrier changes, and the like. In addition,
      the FCC requires prior approval for transfers of control and asset transfers
      by
      regulated carriers, including reorganizations and asset transfers undertaken
      in
      connection with restructuring transactions.




The
      1996
      Act gives RCN important rights to connect with the networks of ILECs in the
      areas where it operates (primarily Verizon and SBC). This law, among other
      things, requires ILECs to provide nondiscriminatory access and interconnection
      to potential competitors, such as cable operators, wireless telecommunications
      providers and long distance companies. These obligations include the following:





•
            Interconnection—Requires
                the ILECs to permit their competitors to interconnect with ILEC facilities
                at any technically feasible point in the ILEC’s network.





•
            Reciprocal
                Compensation—Requires all ILECs and CLECs to complete calls originated by
                competing local exchange carriers under reciprocal arrangements at
                prices
                set by the FCC, PUCs or negotiated prices.





•
            Access
                to Unbundled Network Elements—Requires ILECs to provide nondiscriminatory
                access to unbundled network elements (“UNEs”), including network
                facilities, equipment, features, functions and capabilities, at any
                technical feasible point within their networks, on nondiscriminatory
                terms, at prices based on the ILEC’s forward looking costs, which may
                include a reasonable profit.





•
            Collocation
                of Equipment—Allows CLECs to install and maintain their own network
                equipment in ILEC central offices.





•
            Resale—Requires
                the ILEC to establish wholesale “discounted” rates for services it
                provides to end-users at retail rates.





•
            Number
                Portability—Requires all ILECs and CLECs to permit users of
                telecommunications services to retain existing telephone numbers
                without
                impairment of quality, reliability or convenience when switching
                from one
                telecommunications provider to another.





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•
            Dialing
                Parity—Requires the ILECs and CLECs to establish dialing parity so that
                all customers must dial the same number of digits to place the same
                type
                of call.





•
            Access
                to Rights-of-Way—Requires all ILECs to permit competing carriers access to
                poles, ducts, conduits and rights-of-way at regulated prices.




Regulations
      promulgated by the FCC to implement these provisions of the law require local
      exchange carriers to provide competitors more access to UNEs at prices based
      on
      incremental cost studies. The FCC began to re-examine its rules regarding access
      to UNEs in late 2001. In orders released in 2003 and 2005, the FCC adopted
      significant changes to its UNE rules. Because RCN built its own networks rather
      than relying on the ILECs’ facilities, these changes may affect RCN less than
      they do some of its competitors. The most recent rulings eliminate a form of
      competition known as “UNE-P,” which included an unbundled local switching
      element. Although RCN has never used the UNE-P, it was subject to competition
      from telephone companies that did use it, so the elimination of this form of
      competition may benefit RCN. The new rules did, however, increase RCN’s cost for
      accessing certain databases used in providing local telephone service (such
      as
      the calling party name database used to provide Caller ID with Name service
      on
      calls received from the ILECs), and may also increase RCN’s cost to lease loop
      facilities in certain markets (primarily New York City). Depending on how the
      new rules are interpreted by the FCC and PUCs, RCN may also incur increased
      costs for some of the facilities used to exchange local telephone calls with
      the
      ILECs. The FCC rules are the subject of a current court proceeding, which could
      result in further changes in RCN’s access to UNEs.




The
      FCC
      has given notice of a proposed rulemaking that may change the way prices for
      interconnection and network elements are determined. Also, ILECs may ask PUCs
      to
      increase UNE rates under existing rules based on new cost information, which
      SBC
      has done in certain states, including Illinois. While RCN cannot predict the
      outcome of the FCC and PUC proceedings, a significant increase in the wholesale
      rates it pays for UNEs could negatively impact RCN’s ability to provide
      competitively-priced retail services in the markets in which RCN uses UNEs
      (New
      York, Chicago and portions of Lehigh Valley) and any other markets in which
      RCN
      may in the future use such services. In addition, other regulatory and court
      decisions could affect RCN’s ability to interconnect with ILECs or the terms of
      such interconnection.




RCN
      has
      interconnection agreements with Verizon, SBC, and other ILECs serving the
      markets where they provide telephone service. These agreements, which are
      required under the terms of the 1996 Act, are usually effective for terms of
      two
      or three years. As a general matter, these agreements provide for service to
      continue without interruption while a new agreement is negotiated. Most of
      the
      agreements also provide for amendments in the event of changes in the law,
      such
      as the regulatory and court decisions described above. RCN cannot assure you
      that it will be able to obtain or enforce future interconnection agreements,
      or
      obtain renewal of existing agreements, on acceptable terms.





***Reciprocal
      Compensation***





The
      interconnection agreements with ILECs entitle RCN to collect reciprocal
      compensation payments from them for local telephone calls that terminate on
      its
      facilities. In 2001, the FCC adopted rules limiting the compensation that RCN
      can collect for terminating dial-up Internet traffic. Under these rules, the
      maximum rate for termination of this class of traffic was reduced in a series
      of
      steps to its current level of $.0007 per minute, which will remain in effect
      until further action by the FCC. In May 2002, the United States Court of Appeals
      for the District of Columbia Circuit remanded the FCC’s April 2001 decision for
      lack of an adequate legal justification for the rules adopted, but did not
      vacate those rules. The FCC has not yet taken any action in response to the
      Court’s remand, so the April 2001 rules remain in effect. The rate caps imposed
      by the FCC rules are, in most states, considerably lower than the rates that
      RCN
      previously was collecting under existing interconnection agreements. These
      rules
      have reduced, and are expected to continue to reduce, the revenues received
      by
      RCN from termination of dial-up Internet traffic.





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***Access
      Charges***





RCN,
      when
      carrying long distance calls, remits access fees directly to local exchange
      carriers or indirectly to underlying long distance carriers for the origination
      and termination of this traffic. Generally, intrastate access charges are higher
      than interstate access charges. Therefore, to the degree access charges increase
      or a greater percentage of this long distance traffic is intrastate, RCN’s costs
      of providing long distance services will increase. RCN, when providing local
      telephone service, also bills access charges to long distance providers for
      the
      origination and termination of those providers’ long distance calls.
      Accordingly, RCN’s local exchange business benefits from the receipt of
      intrastate and interstate long distance traffic. As an entity that both collects
      and remits access charges, RCN has implemented systems designed to ensure that
      it properly tracks and records the jurisdiction of its telecommunications
      traffic and remits or collects access charges accordingly. Any changes to the
      existing regulatory scheme for access charges could have a substantial and
      material adverse effect on RCN’s business.





The
      FCC
      has made major changes in the interstate access charge structure in recent
      years. On May 31, 2000, the FCC issued the so-called “CALLS Order” that lowered
      collective interstate access charges by local exchange carriers subject to
      price
      cap regulation by $3.2 billion and ended certain charges paid by IXCs. This
      action has reduced access charges for IXCs and resulted in increased price
      competition for long distance services.




In
      2001,
      the FCC adopted rules lowering the rates carriers like RCN can charge long
      distance carriers for origination and termination of calls over their local
      facilities. These rules now require that RCN’s access rates be reduced to levels
      no higher than those of the ILEC in each area they serve. As a matter of
      business policy, RCN has never adopted access charges higher than those of
      the
      ILEC, so RCN was not adversely affected by these rules.




In
      April
      2001, the FCC released a Notice of Proposed Rulemaking in which it proposed
      a
“fundamental re-examination of all currently regulated forms of intercarrier
      compensation.” The FCC proposed that carriers transport and terminate local
      traffic on a bill-and-keep basis, rather than per minute reciprocal compensation
      charges. Several different industry groups have submitted access charge reform
      proposals to the FCC. While the FCC has not yet acted on these proposals, and
      it
      is not yet known when it will act, all of the proposals would result in
      substantial reductions in access charge payments, and some would eliminate
      these
      payments entirely over a period of time. Because RCN both makes payments to
      and
      receives payments from other carriers for exchange of local and long distance
      calls, the effect that the FCC’s ultimate determination may have upon their
      business cannot be predicted at this time.




***Slamming
      and Cramming***





A
      customer’s choice of local or long distance telecommunications company is
      encoded in a customer record, which is used to route the customer’s calls so
      that the customer is served and billed by the desired company. A user may change
      service providers at any time, but the FCC and some states regulate this process
      and require that specific procedures be followed. When these procedures are
      not
      followed, particularly if the change is unauthorized or fraudulent, the process
      is known as “slamming.” Slamming has been addressed in detail by Congress in the
      1996 Act, by some state legislatures, and by the FCC. The FCC has levied
      substantial fines for slamming. The risk of financial damage, in the form of
      fines, penalties and legal fees and costs, and to business reputation from
      slamming is significant. Even one slamming complaint could cause extensive
      litigation expenses for RCN.




FCC
      rules
      and other laws also regulate the types of services that can appear on a local
      telephone bill, as well as the format of those bills. Only charges for services
      authorized by the subscriber may appear on bills. The practice of billing for
      unauthorized services is known as “cramming.” Violations of rules regarding
      cramming may result in fines, penalties, and other costs.




RCN
      has
      implemented internal procedures designed to ensure that new subscribers are
      switched to RCN in accordance with federal and state regulations. Because of
      the
      large volume of service orders processed by RCN, however, it is possible that
      some unauthorized carrier changes may be processed inadvertently, and RCN cannot
      assure you that RCN will not be subject to slamming or cramming complaints.





***Voice
      over Internet Protocol***





RCN
      uses
      Internet Protocol technology to deliver voice telephone services to some of
      its
      Chicago-area cable subscribers. The FCC currently is investigating what, if
      any,
      regulatory requirements should apply to the provision of telephone service
      over
      Internet facilities, and whether regulation of this service should differ from
      regulation of traditional telephone service. During 2005, the FCC adopted rules
      requiring providers of “Voice over Internet Protocol” services that are
      interconnected to the public switched telephone network to provide all customers
      with emergency 9-1-1 dialing service with certain capabilities, and to install
      network capabilities (not all of which have yet been specified) required by
      law
      enforcement agencies for interception of communications pursuant to the
      Communications Assistance for Law Enforcement Act. RCN believes that it is
      substantially in compliance with the FCC’s 9-1-1 requirements at present. RCN
      cannot predict, however, whether it will be able to comply with further 9-1-1
      requirements that the FCC may adopt in the future, or particular network
      capabilities for law enforcement assistance, without substantial additional
      cost.





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***State
      Regulation***





PUCs
      have
      jurisdiction over intrastate communications (i.e., those that originate and
      terminate in the same state). Providers of intrastate local and long distance
      telephone services typically must receive a certificate of public convenience
      and necessity or similar authorization to offer local and toll services. Many
      PUCs also require prior approval for transfers of control of certificated
      carriers, corporate reorganizations, acquisitions of telecommunications
      operations, transfer of carrier assets, carrier stock offerings and incurrence
      by carriers of significant debt obligations. RCN has received authority to
      offer
      intrastate telephone services, including local exchange service, in all states
      where it provides telephone service. Certificates of authority can generally
      be
      conditioned, modified, cancelled, terminated or revoked by a PUC for failure
      to
      comply with state law or the rules, regulations or policies of a PUC. Fines
      or
      other penalties may also be imposed for such violations.




RCN
      is
      also subject to state laws and regulations regarding slamming, cramming, and
      other consumer protection and disclosure regulations. These rules could
      substantially increase the cost of doing business in any particular state.
      PUCs
      have issued or proposed several substantial fines against CLECs for slamming
      or
      cramming. The risk of financial damage, in the form of fines, penalties and
      legal fees and costs, and to business reputation from slamming is significant.
      Even one slamming complaint before a PUC could lead to extensive litigation
      expense. In addition, state law enforcement authorities may utilize their powers
      under state consumer protection laws against RCN in the event legal requirements
      in that state are not met.




Rates
      for
      intrastate switched access services, which RCN provides to long distance
      companies to originate and terminate in-state toll calls, are subject to the
      jurisdiction of the PUC of the state in which the call originated and
      terminated. Such regulation by states could materially and adversely affect
      RCN’s revenues and business opportunities within that state. As a matter of
      business practice, however, RCN has refrained from filing switched access rates
      exceeding those charged by the ILEC in a given state, which limits the risk
      of
      adverse regulatory actions against RCN affecting these rates.




The
      1996
      Act generally preempts state statutes and regulations that restrict the
      provision of competitive services. As a result of this preemption, RCN will
      be
      generally free to provide the full range of local, long distance, and data
      services in any state. This preemption also increases the amount of competition
      to which RCN may be subject. In addition, the cost of enforcing federal
      preemption against certain state policies and programs may be large and may
      cause considerable delay.




Under
      the
      1996 Act, PUCs have jurisdiction over the terms and conditions of
      interconnection agreements between ILECs and other carriers such as RCN. In
      each
      state, RCN has the option of adopting the terms of an agreement negotiated
      by
      another carrier, but RCN cannot be certain that other agreements with suitable
      terms will be available for adoption in all cases. If no such agreement is
      available, RCN can negotiate a new agreement with the ILEC, and in the event
      of
      an impasse either RCN or the ILEC may request binding arbitration by the PUC.
      While current FCC rules and regulations require the ILEC to provide
      interconnection and network elements on an individual and combined basis, RCN
      cannot assure you that the ILECs will provide these components in a manner
      and
      at a price that will support competitive operations. RCN cannot assure you
      that
      the outcome of any arbitration proceeding would be favorable to RCN, and there
      is considerable legal uncertainty as to how interconnection agreements are
      to be
      enforced before PUCs and where appeals of PUCs’ interconnection agreement
      determinations may be heard.




***Taxes
      and Regulatory Fees***





RCN
      is
      subject to numerous local, state and federal taxes and regulatory fees,
      including, but not limited to, the federal excise tax, FCC universal service
      fund contributions and regulatory fees, and numerous PUC regulatory fees. RCN
      has procedures in place to ensure that it properly collects taxes and fees
      from
      its customers and remits such taxes and fees to the appropriate entity pursuant
      to applicable law and/or regulation. If RCN’s collection procedures prove to be
      insufficient or if a taxing or regulatory authority determines that RCN’s
      remittances were inadequate, RCN could be required to make additional payments,
      which could have a material adverse effect on its business.





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**Other
      Regulatory Issues**




***Right-of-Way
      Access***





In
      a
      number of jurisdictions, local authorities have attempted to impose right-of-way
      fees on RCN over and above the gross revenues fees paid pursuant to RCN’s cable
      franchises or OVS agreements or which are not imposed on the incumbent local
      telephone companies **,** which
      RCN
      believes are in violation of federal law. A number of FCC and judicial decisions
      have addressed the issues posed by the imposition of right-of-way fees on CLECs
      and on video distributors. To date the state of the law is uncertain and may
      remain so for some time. In New York City, RCN and other competitive
      telecommunications carriers have entered into agreements that provide for the
      payment of a percentage of their gross telecommunications revenues to the City
      of New York. Similar fees are not paid by Verizon, which is the incumbent local
      telephone company in the City of New York. This has had a negative impact on
      RCN’s ability to provide local telephone service in competition with Verizon. If
      RCN were required to pay local right-of-way fees that are excessive or
      discriminatory in other cities **,** this
      could have similar adverse effects on its local telephone business activities
      in
      those markets.




***Pole
      and Conduit Attachments***





Under
      the
      Pole Attachment Act, the FCC is required to regulate the rates, terms and
      conditions imposed by utilities for cable systems’ and telecommunications
      providers’ use of utility pole and conduit space unless state authorities can
      demonstrate that they adequately regulate pole attachment rates, terms and
      conditions. In the absence of state regulation, the FCC administers pole
      attachment rates on a formula basis. RCN is subject in some instances to pole
      attachment practices and fees that RCN believes are in violation of applicable
      federal law. RCN has attempted to resolve certain of these matters informally.
      In some cases, utility companies have increased pole attachment fees for cable
      systems that have installed fiber-optic cables and that are using these cables
      for the distribution of non-video services. The 1996 Act amendments to the
      Pole
      Attachment Act modified the prior pole attachment provisions by establishing
      a
      new formula for setting rates for attachment of telecommunications wiring,
      and
      requires that utilities provide cable systems and telecommunications carriers
      with nondiscriminatory access to any pole, conduit or right-of-way, owned or
      controlled by the utility if the facility is carrying cable or
      telecommunications wires already. The FCC adopted regulations to govern the
      charges for pole attachments used by companies providing telecommunications
      services, including cable operators. The United States Supreme Court and Court
      of Appeals for the District of Columbia Circuit both issued rulings in 2002
      upholding aspects of the FCC’s pole attachment rules favorable to RCN. In a
      ruling of particular importance to RCN, the Supreme Court held that broadband
      service providers who co-mingled video, telecommunications, and Internet
      services over their networks are entitled to the protections of the Pole
      Attachment Act. This ruling ensures that RCN will have the benefit of the FCC’s
      rate formula for pole attachments. Notwithstanding this Supreme Court decision,
      RCN cannot predict whether utility companies will seek to raise the rates that
      RCN pays for pole attachments or whether such increases would materially affect
      the costs of RCN.




***Program
      Access***





The
      1992
      Cable Act, the 1996 Act and FCC regulations preclude any cable operator or
      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. In certain circumstances, these
      programmers are required to sell their programming to other multi-channel video
      distributors. The 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 FCC’s Cable Service Bureau, however, has
      ruled that, except in limited circumstances, these statutory and regulatory
      limitations do not apply to programming which is distributed other than by
      satellite. Although RCN typically has been able to negotiate viable agreements
      to carry such programming, absent a change in the law pertaining to programming
      which is distributed other than by satellite, RCN will not have guaranteed
      access to certain non-satellite delivered programming, which could impact its
      ability to compete effectively in those markets.




Certain
      important provisions of the 1992 Cable Act that restrict exclusivity in the
      distribution of certain video programming were scheduled to lapse in 2002 but
      were extended by the FCC for an additional five years. The extension of these
      rules ensures that RCN will continue to have access to satellite-delivered
      programming until at least 2007.





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***Building
      Access***





RCN
      has
      had difficulty gaining access to the video distribution wiring in certain
      multiple dwelling units (“MDUs”) in the City of Boston and elsewhere. In some
      buildings in Boston the management will not permit RCN to install its own
      distribution wiring and the incumbent cable company has not been willing to
      permit use of the existing wiring on some equitable basis when RCN attempts
      to
      initiate service to an individual unit previously served by the incumbent.
      Similar problems have been encountered in New York City and Washington, D.C.
      Where RCN provides service as an OVS operator, it is unsettled whether RCN
      has
      the protection of the mandatory access laws that entitle franchised cable
      television operators to gain entry to MDU buildings. RCN sought a ruling from
      the FCC that existing FCC inside wiring rules required incumbent Cablevision
      to
      cooperate and make such wiring available to RCN in Boston. By order released
      on
      January 29, 2003, the FCC granted the request, ruling that where cable wiring
      is
      located behind sheet rock walls or ceilings, the designated point at which
      RCN
      is allowed to access the wires must be demarcated at a physically accessible
      location that does not require disturbing the sheet rock. The order applies
      to
      all markets, not just Boston. The order also clarified that the FCC’s rules
      apply to both OVS operators and franchised cable television providers. Upon
      appeal of the order by the National Cable & Telecommunications Association,
      however, the U.S. Circuit Court for the District of Columbia held that the
      FCC
      did not adequately support its earlier ruling on the specific point of
      inaccessibility of wiring behind sheet rock, thereby invalidating the rule.
      The
      matter has been remanded back to the FCC for further consideration consistent
      with the judgment, and RCN will participate in any new rulemaking process that
      the FCC may undertake in this matter.




RCN
      is
      also at times precluded from serving an MDU because the owner has entered into
      an exclusive agreement with another provider. In some instances, these exclusive
      agreements are perpetual. The FCC, in its January 29, 2003 order, declined
      to
      ban such exclusive and perpetual contracts for the provision of video service
      in
      MDUs. To the extent that incumbent cable operators continue to hold exclusive
      contracts with MDUs in the areas served by RCN, such contracts may preclude
      the
      ability of RCN to enter those properties.





**ITEM
                  1A.**
              **RISK
                  FACTORS**





***We
      emerged from Chapter 11 reorganization in 2004 and have a history of losses.***




We
      sought
      protection under Chapter 11 of the U.S. Bankruptcy Code in May 2004 and emerged
      on December 21, 2004. We reported a net loss of $138.5 million for the year
      ended December 31, 2005 and a net loss of $3.7 million for the period December
      21, 2004 through December 31, 2005 (Successor). We reported net income of $1.0
      billion for the period January 1, 2004 through December 20, 2004 due to the
      forgiveness of our unsecured obligations in bankruptcy (Predecessor), and losses
      of $499.0 million during the fiscal year ended December 31, 2003. See
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations”.




Our
      equity ownership, board of directors, and senior management were replaced in
      connection with our reorganization. While we have concentrated on refining
      our
      business strategy, we cannot predict if or when we will attain profitability
      or
      achieve significant improvement in our operating performance.




***We
      continue to be highly leveraged and to have substantial indebtedness relative
      to
      our cash flow.***




Our
      Chapter 11 reorganization reduced significantly the principal amount of
      outstanding indebtedness by converting approximately $1.2 billion in aggregate
      principal of our senior notes and accrued interest into new common stock. In
      addition, our indebtedness under our bank credit agreement was repaid in full
      in
      cash and indebtedness under our Evergreen Credit Agreement was reinstated and
      modified. Upon confirmation and effectiveness of the Plan, the total outstanding
      debt obligations for Reorganized RCN were reduced to approximately $494.0
      million.




Despite
      these reductions, we remain highly leveraged. This amount of leverage may have
      important consequences for us, including:




•
            placing
                us at a competitive disadvantage compared to our competitors that
                have
                less debt; and




•
            making
                it difficult for us to obtain additional financing in the future
                for
                working capital, capital expenditures and other purposes.





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We
      cannot
      guarantee that we will be able to reduce our level of indebtedness or generate
      sufficient cash flow to service our debt and meet our capital expenditure
      requirements. If we cannot do so, we would need to seek additional financing,
      reduce our capital expenditures or take other steps, such as disposing of
      assets. We cannot assure you that financing would be available on acceptable
      terms or that asset sales could be accomplished on acceptable terms.




In
      connection with operating our business and building our network, we have
      incurred operating and net losses and we expect to continue to experience losses
      for the foreseeable future. We had experienced negative cash flow in the past
      and may not be able to achieve or sustain operating profitability in the future.
      A variety of factors will affect our efforts to achieve positive cash flow
      in
      the future, including:





•
            the
                intensity of competition and our ability to successfully market our
                products and services;





•
            the
                rate at which we add new customers and lose existing customers;





•
            the
                time and expense required to acquire new customers and to enhance
                our
                broadband network as planned; and





•
            our
                ability to lower the cost of serving customers and the expense we
                will
                incur to achieve these cost savings.





These
      factors may hinder our business prospects and have a significant adverse effect
      on our cash flows.





***The
      covenants in our debt instruments restrict our financial and operational
      flexibility.***





The
      credit agreements for our first- and third-lien debt facilities and the
      indenture for our Convertible Notes impose operating and financial restrictions
      that affect our ability to, among other things:





•
            incur
                additional debt;





•
            issue
                preferred stock;





•
            create
                liens on our assets;





•
            make
                particular types of investments or other restricted payments;





•
            engage
                in transactions with affiliates;





•
            acquire
                assets or make certain capital expenditures;





•
            utilize
                proceeds from asset sales for purposes other than debt
                reduction;





•
            merge
                or consolidate or sell substantially all of our assets; and





•
            pay
                dividends.





In
      addition, our first- and third-lien facilities require us to achieve specific
      goals such as minimum earnings before interest, taxes, depreciation and
      amortization (“EBITDA”), interest coverage, adjusted leverage and unrestricted
      cash. These requirements may affect our ability to finance future operations
      or
      to engage in other beneficial business activities. These restrictions may also
      limit our flexibility in planning for or reacting to changes in market
      conditions and cause us to be more vulnerable in the event of a downturn in
      our
      business. If we violate any of these lien restrictions, we could be in default
      under these agreements and be required to repay our debt immediately rather
      than
      at scheduled maturity. The security for our Convertible Notes and first- and
      third-lien facilities consists of liens on substantially all of our domestic
      assets. If we default under these financing agreements, the creditors could
      seek
      to accelerate our repayment obligations, and could seek to foreclose on our
      assets. If this were to happen, it would materially and adversely affect our
      company and our business. In addition, our debt facilities contain cross-default
      provisions which could result in the acceleration of our repayment obligations
      under all of our debt facilities in the event that we default on other
      indebtedness or become the subject of bankruptcy or insolvency proceedings.





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***Future
      sales of our common stock could adversely affect the price of our stock and
      our
      ability to raise capital.***




A
      significant portion of our outstanding common stock is held by institutions,
      who
      own large blocks of our shares. Due to the relatively low trading volume in
      our
      stock, a decision by any of these investors to sell all or a portion of their
      holdings could cause our stock price to drop significantly, or cause significant
      volatility in our stock price.





In
      addition, we have a significant number of shares that we are obligated to issue
      or that will be come available for resale in the future:





•
            in
                2005 we issued options to purchase 3,752,835 shares of our common
                stock
                and 730,086 shares of our restricted stock under our Stock Plan,
                which
                vest ratably over three years (some of which are subject to performance
                criteria);





•
            in
                2005 we distributed warrants to purchase 188,032 shares of our common
                stock at a per share price of $34.16 to holders of Old RCN stock
                as part
                of our Chapter 11 reorganization;





•
            we
                have issued notes that are currently convertible into 4,968,204 shares
                of
                our common stock at a per share price of $25.16; and





•
            we
                have 628,446 shares of our common stock remaining in a reserve to
                settle
                disputed claims against us that were outstanding as of the date of
                our
                emergence from Chapter 11, which will be distributed either to claimants
                in settlement of any remaining outstanding claims, or to unsecured
                creditors and former bond holders on a pro rata basis once all outstanding
                claims are resolved and the period to reconsider the Bankruptcy Court’s
                ruling on RCN’s objections to the claims of all creditors
                expires.





***Our
      markets are highly competitive.***





In
      each
      of our markets we face significant competition from larger incumbent cable
      and
      telephone companies and DBS companies, high-speed data service providers and
      other telecommunication providers. These incumbents have numerous advantages,
      which result from their historically monopolistic control of their respective
      markets. These competitive advantages include:





•
            significant
                economies of scale;





•
            greater
                name recognition;





•
            greater
                financial, technical, marketing and other resources;





•
            well-established
                customer and vendor relationships;





•
            significant
                control over limited conduit and pole space (in the case of incumbent
                cable and telephone companies); and





•
            ownership
                of sought after content.





In
      addition, a continuing trend toward business combinations and alliances in
      the
      telecommunications industry may also create significant new competitors. We
      cannot predict the extent to which competition from such future competitors
      will
      impact our operations. Increased competition could lead to price reductions,
      fewer bundled sales, under-utilization of resources, reduced operating margins
      and loss of market share. Business combinations and joint ventures may also
      impact our ability to access new technology or other resources.





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We
      may be
      unable to successfully anticipate and respond to various competitive factors
      affecting our industry, including regulatory changes that may affect our
      competitors differently from us, new technologies and services that may be
      introduced, changes in consumer preferences, demographic trends and discount
      pricing strategies by competitors.




***New
      regulations or changes in existing regulations could adversely affect our
      business.***




Telecommunications
      and cable television operators are subject to extensive regulation at the
      federal, state and local levels. This regulation affects the manner in which
      we
      must operate our business, and also has a direct and indirect impact on our
      operating costs.




These
      regulations are subject to change from time to time and new regulations are
      adopted periodically by both federal and other regulatory agencies. In addition,
      many of the existing regulations and requirements are currently the subject
      of
      judicial proceedings, legislative hearings and administrative proposals that
      could change the operations of communications companies. We cannot predict
      the
      ultimate outcome of these proceedings or how those outcomes may impact our
      business. Regulations, or interpretations of those regulations, that enhance
      the
      ability of our competitors could adversely affect our competitive position.
      Our
      ability to compete successfully will depend on the nature and timing of these
      legislative changes, regulations and interpretations and whether they are
      favorable to us or our competitors. See “Business-Regulation” for more
      information.






***Changes
      in regulations or additional regulations may make it more difficult or costly
      to
      obtain or retain necessary governmental authorizations for our business.***




We
      are
      required to have various governmental authorizations to operate our business
      and
      offer our services. New regulations, or changes to existing regulations, could
      negatively impact our ability to obtain and retain these authorizations by
      imposing additional requirements or qualifications, expanding restrictions
      or
      increasing the cost of compliance. We cannot assure you that we will be able
      to
      obtain all of the authorizations needed to construct broadband network
      facilities or to retain the authorizations we have already acquired. In
      addition, we cannot predict whether any additional regulations will be adopted
      that will increase our costs or reduce our revenues.




***We
      may encounter difficulties expanding our existing markets and delays in
      constructing our network.***




To
      expand
      our existing markets, we may have to obtain pole attachment agreements,
      construction permits, telephone numbers, franchises and other regulatory
      approvals. Delays in entering into pole attachment agreements, receiving the
      necessary construction permits and conducting the construction itself have
      adversely affected our schedule in the past and could do so again in the future.




We
      project the capital expenditures that will be required to upgrade or expand
      our
      network based in part on the amount of time necessary to complete the
      construction or upgrade of the network and the difficulty of this construction.
      If construction lasts longer than anticipated or is more difficult than
      anticipated, Our capital expenditures could be significantly higher, which
      could
      adversely affect our growth, financial condition and results of operations.




***Programming
      costs have risen in past years and are expected to continue to rise, which
      may
      adversely affect our financial results.***




The
      cost
      of acquiring programming is a significant portion of the operating costs for
      our
      cable television business. These costs have increased each year and we expect
      them to continue to increase, especially the costs associated with sports
      programming. Many of our programming contracts cover multiple years and provide
      for future increases in the fees we must pay. Historically, we have absorbed
      increased programming costs in large part through increased prices to our
      customers. However, we cannot assure you that competitive and other marketplace
      factors will permit us to continue to pass through these costs. In order to
      minimize the negative impact that increased programming costs may have on our
      margins, we may pursue a variety of strategies, including moving some
      programming to premium tiers or migrating some programming from our analog
      service to our digital service. Despite our efforts to manage programming
      expenses, we cannot assure you that the rising cost of programming will not
      adversely affect our cash flow and operating margins.





29
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***We
      are not large enough to negotiate programming contracts as favorable as some
      of
      our larger competitors.***




Programming
      costs are generally directly related to the number of subscribers to which
      the
      programming is provided, with discounts available to large MSOs and DBS
      providers based on their high subscriber levels. As a result, larger cable
      and
      DBS systems generally pay lower per subscriber programming costs. We have
      attempted to obtain volume discounts through our membership in the NCTC. Despite
      these efforts, we believe that our per subscriber programming costs are
      significantly higher than large MSOs and DBS providers with which we compete
      in
      some of our markets. This may put us at a competitive disadvantage in terms
      of
      maintaining our operating results while remaining competitive with prices
      offered by these providers.





In
      addition, as programming agreements come up for renewal, we cannot assure you
      that we will be able to renew these agreements on comparable or favorable terms.
      To the extent that we are unable to reach agreement with a programmer on terms
      that we believe are reasonable, we may be forced to remove programming from
      our
      line-up, which could result in a loss of customers.





***We
      operate OVS systems in some of the markets that we service under FCC channel
      capacity rules that are not applicable to franchised cable systems.***




In
      portions of our New York, Boston, San Francisco and Washington, DC markets,
      we
      operate our video services under open video system (“OVS”) certificates. The
      FCC’s rules exempt OVS operators from many of the regulations and requirements
      applicable to cable operators, including the right of local governments to
      impose build-out obligations as a condition to constructing the OVS network.
      The
      FCC’s OVS rules, however, generally require OVS operators to make channel
      capacity on their facilities available to unaffiliated VPPs on a
      non-discriminatory basis. Following certification by the FCC, OVS operators
      must
      complete an open enrollment period that permits VPPs to seek capacity on the
      systems. To date, no VPP has sought capacity on any of our OVS
      systems.





Under
      the
      FCC’s rules, a competing in-region cable operator is not entitled to become a
      VPP on an OVS except in limited circumstances. Despite this, incumbent cable
      operators in the Boston, New York and Washington, D.C. area markets have in
      the
      past sought proprietary information about our OVS system to analyze the
      possibility of becoming a VPP on our network. We have rejected all of these
      requests based on our belief that the cable companies are ineligible under
      the
      FCC’s rules. The requesting companies have challenged our rejections at the FCC.
      One of those challenges was subsequently withdrawn by one of the two cable
      operators, and the FCC has never ruled upon the other complaint which was
      brought by Time Warner seeking access to proprietary OVS system information
      for
      our Boston and New York markets.




In
      2002,
      we obtained new OVS certifications from the FCC for Boston and San Francisco,
      and since that time we have entered into OVS agreements with those cities and
      terminated our cable franchises. We subsequently completed a new open enrollment
      period for both cities and did not receive any requests for carriage by any
      VPP
      or from any of the incumbent cable operators in those markets. We believe that
      we are operating in conformity with all applicable provisions of the law and
      will continue to defend our OVS systems against what we believe are
      anti-competitive requests for data or carriage by competing in-region cable
      operators. We believe that Time Warner’s request for data regarding our Boston
      system in connection with its initial OVS open enrollment period has been
      rendered moot by the subsequent open enrollment period, in which Time Warner
      did
      not renew its claim. However, we cannot assure you that the FCC will resolve
      the
      Time Warner request for OVS data in our favor, or that other incumbents will
      not
      file similar requests in other markets during any subsequent open enrollment
      periods. If the FCC were to grant such a request, and require us to share such
      system data with local competitors, such an action could have a significant
      adverse effect on our company and our business. The FCC has the authority to
      enforce its OVS regulations by imposing substantial fines, issuing cease and
      desist orders and/or imposing other administrative sanctions, such as revoking
      FCC certifications.




***Loss
      of interconnection arrangements could impair our telephone service.***




We
      rely
      on other companies to connect our local telephone customers with customers
      of
      other local telephone providers. We presently have the right to interconnect
      with the networks of Verizon, SBC and other ILECs. If any of these
      interconnection agreements are not renewed, we will have to negotiate new
      interconnection agreements with the respective carriers. A renegotiated
      agreement could be on terms less favorable than current terms.




It
      is
      generally expected that the 1996 Act will continue to undergo considerable
      interpretation and implementation, which could have a negative impact on our
      interconnection agreements with Verizon and SBC. It is also possible that
      further amendments to the Communications Act may be enacted which could have
      a
      negative impact on our interconnection agreements with Verizon and SBC. The
      contractual arrangements for interconnection and access to UNEs with incumbent
      carriers generally contain provisions for incorporating changes in governing
      law. As a resulting, future FCC, PUC and/or court decisions may negatively
      impact the rates, terms and conditions of the interconnection services we have
      obtained and may seek to obtain under these agreements, which could adversely
      affect our business, financial condition or results of operations. Our ability
      to compete successfully will depend on the nature and timing of any such
      legislative changes, regulations and interpretations and whether they are
      favorable to us or to our competitors. See “Business-Regulation,” page 28.





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***The
      rates we pay for pole attachments and rights-of-way may increase significantly.***




A
      portion
      of our network is attached to local utility companies’ poles and located in
      other rights-of-way of third parties. The rates we must pay utility companies
      for space on their utility poles or other public and private rights-of-way
      are
      frequently disputed. If the rates we pay for pole attachments or other public
      and private rights-of-way increase significantly or unexpectedly, it would
      cause
      our network to be more expensive to operate. It could also place us at a
      disadvantage to competitors who do not require, or who are less dependent upon,
      pole attachments, such as satellite providers and wireless voice service
      providers. See “Business-Regulation—Regulation of Video Services—Pole and
      Conduit Attachments” for more information.





***Our
      current licenses are generally non-exclusive and the granting authorities are
      not required to renew them.***




Our
      cable
      television systems are operated primarily under non-exclusive license agreements
      with local government licensing authorities, in some cases with the approval
      of
      state cable television authorities. Consequently, our business is dependent
      on
      our ability to obtain and renew these licenses. Although we have never lost
      a
      license as a result of a failure to obtain a renewal, our licenses are subject
      to non-renewal or termination under some circumstances.




If
      we
      fail to obtain renewals of our licenses, especially in the major metropolitan
      areas where we have a large number of customers, this could significantly and
      adversely affect our consolidated financial condition, results of operations
      or
      liquidity. In some cases, our licenses have not been renewed at expiration
      and
      we operate under temporary authority from the LFA while negotiating renewal
      terms with them. Currently seven of our cable franchises in the eastern
      Pennsylvania market are beyond their stated expiration dates but are continuing
      under their existing terms and conditions. We expect to renew substantially
      all
      of these franchises, but we cannot assure you that we will obtain these renewals
      on favorable terms.





***There
      are risks of network failure and disruption.***




Our
      network architecture generally limits any failure or disruption to the market
      in
      which the failure occurs. Many of our agreements with commercial customers,
      franchise agreements to provide cable television and certificates to provide
      phone service contain performance provisions that include rebates or credits
      for
      service interruptions. While we consider the likelihood low, prolonged or
      repeated service interruptions could adversely affect our ability to attract
      and
      retain customers, and therefore adversely affect our operating results.








**ITEM
                2.**
            **PROPERTIES**




**Overview
      of the RCN Network**




RCN’s
      broadband network is designed to support video, data and voice services via
      a
      fiber-rich network architecture. The multi-service network is presently
      operating in Boston, New York City, eastern Pennsylvania, San Francisco,
      Chicago, Los Angeles and Washington, D.C. The broadband network typically
      consists of fiber-optic transport facilities; local and long distance voice
      capability; video head-ends; video, data and voice transmission and distribution
      equipment; and data routing and wide-area-network equipment and the associated
      network wiring and termination equipment. RCN’s voice switching network
      typically utilizes the Lucent 5ESS-2000 switching platforms as the local
      switching element, and the network is generally designed to provide local
      telephony service. These elements enable RCN to offer digital television,
      high-speed data services and other advanced services, including two-way
      communications for interactive services.





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A
      substantial portion of RCN’s network has a bandwidth of 860 megahertz. This
      bandwidth capacity enables RCN to offer digital television, high-speed data
      services and other advanced services. RCN’s bandwidth also permits two-way
      communication for Internet access, interactive services and voice services.
      RCN
      is upgrading certain segments of its network in the Lehigh Valley of eastern
      Pennsylvania to increase the bandwidth to 860 or 750 megahertz and allow for
      two-way communication.




The
      network’s common backbone signal transport medium, for both digital (video, data
      and voice) and analog (video), is normally broadband cable, either RCN-owned
      or
      leased from other providers. Generally, the digital broadband backbone transport
      network utilizes a self-healing synchronous optical network ring architecture
      (“SONET”) and other technologically advanced transport methods to provide
      high-speed, redundant connections for the delivery of video, data and voice
      services. Facility connections from the backbone network to individual
      buildings, residential and commercial services are typically provided via
      RCN-owned broadband facilities.




The
      majority of RCN’s network is built using fiber-optic cable as the predominant
      transport medium. Broadband systems are suitable for transmission of cable
      television, Internet and telephone information, or a combination of these types
      of signals. The main benefits resulting from the deployment of fiber-optic
      cable
      versus traditional coaxial cable or copper wire are greater network capacity,
      increased functionality, and decreased requirements for periodic amplification
      of the signal. These factors contribute to lower maintenance costs, and increase
      the capacity for and quality of the service offerings. Fiber-based networks
      provide a superior platform for delivering video, high-speed, high-capacity
      data
      and voice services, when compared to traditional legacy systems that rely more
      heavily on copper wire or coaxial cable.




RCN’s
      network is designed and built to provide the capacity necessary for the
      transport and delivery of high bandwidth video and data transmissions. The
      fiber-optic cable used contains up to 864 individual strands of optical fiber.
      Each strand of fiber is capable of providing a large number of high-bandwidth
      telecommunications channels that can each be used to reliably transport a high
      volume of video, data and voice signals. Although the ILECs commonly use copper
      wire in their networks, they are currently deploying fiber cable to upgrade
      portions of their copper based network, particularly in areas served by RCN.
      RCN
      expects that continued developments and enhancements in communications equipment
      will increase the capacity of each optical fiber, thereby providing even more
      capacity at relatively low incremental cost.








**Video
      Plant and Equipment**




***Broadband
      Video***




RCN’s
      video head-ends typically consist of optical transmitters, optical receivers,
      satellite receivers, signal processors, modulators, encoding equipment, digital
      video transport equipment, network status monitoring and other ancillary
      equipment. From the head-end, the video signals are transported to secondary
      hub
      sites in either digital or analog signal format. Once the signal is received
      at
      the secondary hub site, the signal is conditioned, processed and interconnected
      to the local broadband transport facilities for distribution to the video
      subscribers.




Typically,
      the video signals are distributed to individual fiber nodes or receivers via
      the
      broadband cable used to deliver the data and voice service. The local
      distribution fiber cable terminates in a broadband receiver within an individual
      building or video service area. From the fiber node, coaxial cable and related
      distribution equipment is used to distribute the video signals to the customer
      premises. The bandwidth of the video distribution is generally 50-860 MHz,
      which
      in most service areas is capable of supporting between 90 and 110 analog video
      channels and a substantial number of digital video channels. The distribution
      plants are designed to be predominantly fiber-based, which increases the
      capacity, reliability and the quality of the services delivered as compared
      to
      traditional cable television distribution architectures.




***Wireless
      Video***




RCN
      also
      owns and operates wireless video television systems in its New York market
      using
      point-to-point 18 GHz microwave technology as an alternate means to deliver
      video programming to buildings that are not connected to RCN’s broadband
      network. During 2005, RCN sold a wireless video system in New York City,
      reducing its subscriber count by approximately 3,300, and will look to sell
      additional wireless video systems in the future. As of December 31, 2005, RCN
      had approximately 4,300 customers remaining on wireless video
      systems.





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**High-Speed
      Data Plant and Equipment**




RCN’s
      primary Internet product is a high-speed data connection over its broadband
      network. RCN’s high-speed data connection currently offers download speeds up to
      a maximum of 10.0 Mbps to the individual cable modem user. Starting in March
      2006, RCN will increase its maximum download speeds to 20 Mbps.




The
      data
      network consists of all the networking and computer equipment required to
      provide full and complete ISP services to both RCN’s cable modem and dial-up
      customers. These Internet services include unlimited access to the World Wide
      Web, personal email addresses, access to news services, personal web pages
      and
      file transfer capability. Additionally, RCN data customers are able to access
      other popular Internet-based services such as Instant Messaging, on-line
      electronic gaming and chat facilities. The underlying RCN network is comprised
      of core, border and edge routers, servers, switches, and the necessary
      high-speed transport and interconnection network. RCN has also designed and
      deployed a long haul, high-bandwidth broadband transport facility that
      interconnects Boston, New York, Philadelphia and Washington, D.C. This facility
      is used to provide high-speed connectivity between each of RCN’s points of
      presence in the northeast United States.




RCN
      relies on a combination of copyright, trademark and trade secret laws and
      contractual restrictions to establish and protect its proprietary technology.
      RCN cannot assure you that this technology will not be misappropriated or that
      equivalent or superior technologies will not be developed. In addition, RCN
      cannot assure you that third parties will not assert that RCN’s services,
      technology or users’ content infringe upon their proprietary rights. RCN has
      obtained authorization, typically in the form of a license, to distribute
      third-party software incorporated in the RCN access software product for
      Microsoft Windows and Macintosh platforms. RCN plans to maintain or negotiate
      renewals of existing software licenses and authorizations, and may desire or
      need to license other applications in the future.







**Voice
      Plant and Equipment**




***Voice
      Networks***




The
      voice
      network is capable of supporting both switched and non-switched (private line)
      services. In metropolitan areas, individual buildings are connected to the
      network backbone via fiber extensions that are generally terminated on
      high-speed transport equipment, which provides redundant and fail-safe
      interconnection between the building and the RCN central switch location. In
      limited situations where fiber extensions are not available, leasing special
      access facilities from long distance service providers, ILECs or other service
      providers, can provide interim facility connections. As the network expands
      to
      reach more areas within a target market, subscribers served by these temporary
      connections are migrated to the RCN broadband network. Within large MDU
      buildings in metropolitan areas, generally a voice service hub is established
      by
      installing Integrated Digital Loop Carrier (“IDLC”) equipment, which acts as the
      point of interface between the backbone facility and the intra-building wiring.
      Each IDLC is installed with a standby power system and is capable of serving
      up
      to 2,048 lines. RCN’s voice offerings include a full suite of features and
      services including custom calling and custom local access signaling services
      features. The network is built with excess capability to meet the anticipated
      requirements of future subscriber demand.




Generally,
      RCN provides a fiber-rich architecture capable of delivering voice services
      to
      the residential or commercial subscriber. Fiber-optic backbone facilities using
      SONET transport electronics typically provide interconnection from the RCN
      local
      telephony switch to the telephony distribution electronics. The telephony
      distribution electronics support up to 2,048 lines and serve as the
      interconnection point between the telephone switch and the local distribution
      fiber. Broadband facilities are utilized to transport the telephony signals
      to a
      residential service area node, a point typically within 900 feet from the
      furthest subscriber, which encompasses on average approximately 150 homes.
      These
      distances and home figures vary based on housing density and type of plant.
      The
      distribution facilities between the node and the subscriber are typically
      coaxial cable. RCN’s voice network provides primary line service with full
      interconnection to the local emergency 911 centers and is fully powered with
      reserve batteries in the network or at the premise to provide backup power,
      for
      a limited number of hours, in the event of a power outage.




***VoIP***




In
      its
      Chicago market, RCN uses VoIP technology within its local loop. This service
      uses RCN’s data network to carry digital voice information from the customer’s
      home to RCN’s local telephone switch for call completion. This service provides
      cost effective capabilities, while also providing the reliability of a standard
      circuit switched telephone offering, including e-911 service. In mid-2006,
      RCN
      intends to deploy new hubs in both Boston and eastern Pennsylvania that will
      utilize VoIP technology within the distribution plant. This deployment will
      allow efficient use of bandwidth and will reduce our cost per home passed and
      premise CPE. RCN will continue to roll out VoIP technology in other markets
      as
      needed.





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**Real
      Estate**




As
      of
      December 31, 2005, RCN leased approximately 105 facilities including 85
      technical and 20 non-technical facilities, which encompass 738,501 and 504,044
      square feet, respectively, to support its operations under various
      non-cancelable leases with terms ranging from one to 25 years. RCN is actively
      seeking to sublease or negotiate a termination of the leases in part or all
      of
      14 facilities, including seven technical and seven non-technical facilities,
      which contain 66,823 and 165,495 square feet, respectively. RCN also currently
      owns six technical facilities, which encompass 73,368 square feet. During 2005,
      due to reduced growth plans, RCN terminated 10 leases encompassing 113,118
      square feet and subleased space at 5 locations totaling 95,341 square
      feet.







**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





**ERISA
      Litigation**





In
      re:
      RCN Corporation ERISA Litigation: On May 16, 2005, a consolidated class action
      complaint (the "Class Action Complaint") was filed in the United States District
      Court for the District of New Jersey under Master File NO. 04-CV-5068 (SRC),
      naming RCN Corporation and certain of its current and former directors,
      officers, employee administrators and managers, as well as Merrill Lynch Trust
      Company, FSB, as defendants for alleged violations of the Employee Retirement
      Income Security Act of 1974 (as
      amended, "ERISA"). On September 13, 2005, the plaintiffs filed a notice of
      voluntary dismissal of the claims against RCN’s current directors.





The
      Class
      Action Complaint seeks recovery of unspecified money damages for the benefit
      of
      a purported class of participants and beneficiaries of the RCN Savings And
      Stock
      Ownership Plan (the "Savings Plan") as a result of the defendants' alleged
      breaches of their fiduciary duties under ERISA. Defendants have filed a motion
      to dismiss the complaint in its entirety, which will be argued in March, 2006.
      Plaintiffs, to date, have not filed a motion for class certification. This
      litigation is subject to certain limitations ordered by the Bankruptcy Court
      described below.





Previously,
      on September 22, 2004, former employee Deborah K. Craig ("Craig"), on behalf
      of
      the Savings Plan and its participants and beneficiaries, filed a motion for
      leave to file proof of claim (the "Late Claim Motion"), seeking to assert a
      claim (the "Craig Proof of Claim") against RCN, after the claims bar date of
      August 11, 2004, for alleged violations of ERISA to recover alleged losses
      similar to those alleged in the Class Action Complaint. On October 5, 2004,
      Craig filed a purported class action complaint against certain fiduciaries
      of
      the Savings Plan within the meaning of ERISA in a lawsuit captioned Craig v.
      Filipowicz, et al., Case No. 04-cv-07875 (JSR) (S.D.N.Y.), which was
      subsequently transferred to the District of New Jersey, with a new Case No.
      04-cv-05940 (SRC) (D.N.J.) (the "NJ Action"). On November 3, 2004, the
      Bankruptcy Court issued an order denying the Late Claim Motion in its entirety
      (the "Late Claim Order"), which Craig appealed to the United States District
      Court for the Southern District of New York. On December 20, 2004, Craig sought
      from the Bankruptcy Court limited relief (the "Injunction Relief Motion"),
      for
      the benefit of herself and all other similarly situated beneficiaries of the
      Savings Plan, from the injunction issued by the Bankruptcy Court's order
      confirming the Plan for the purpose of naming RCN as a nominal defendant in
      the
      NJ Action. On February 16, 2005, Craig filed a motion on the NJ Action docket
      to
      have the NJ Action consolidated with certain other related actions, with a
      proposed caption In re RCN Corporation ERISA Litigation, Master File No.
      04-cv-5068 (SRC) (the "Consolidated Action"). On March 18, 2005, the United
      States District Court for the Southern District of New York issued an order
      affirming the Late Claim Order. On April 1, 2005, the Bankruptcy Court entered
      an order (the "Injunction Relief Order") granting the Injunction Relief Motion
      to the extent that (1) Craig and all other similarly situated parties
      (collectively, the "Plaintiffs") are permitted to name RCN as a nominal
      defendant in the pending Consolidated Action and (2) the Plaintiffs may enforce
      any judgment obtained against RCN solely against any applicable insurance
      companies and only up to limits of any applicable insurance coverage, to the
      extent such coverage is available. The Injunction Relief Order does not prevent
      the Plaintiffs from pursuing litigation claims against others, including current
      or former directors, officers, employees, partners, members, or managers of
      RCN
      or any other reorganized debtor and collecting in full any judgment Plaintiffs
      may obtain against such third parties. As an express condition to the entry
      of
      the Injunctive Relief Order, Craig waived any right of further appeal to the
      denial of the Late Claim Order. Subsequently, Plaintiffs filed the Class Action
      Complaint in the ERISA Litigation to pursue their remedies against RCN, subject
      to the limitations imposed by the Bankruptcy Court, and additional third
      parties. At this stage of the litigation, RCN cannot reasonably estimate the
      amount of uninsurable loss, if any, that may result from this matter.





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**Legal
      Proceedings Relating to Megacable**


In
        connection
        with RCN’s efforts to have its representatives named to the Board of Directors
        and to the Management Committee of Megacable, to receive financial information
        in a timely fashion and otherwise to enforce its rights under the agreements
        governing the relationship between RCN, Megacable and its shareholders, several
        legal proceedings have been initiated. Megacable alleged that, as a result
        of
        RCN’s reorganization under Chapter 11 of the Bankruptcy Code, RCN rejected its
        obligations under one of the three agreements governing the relationship
        between
        RCN, Megacable and its shareholders, and that this rejection constitutes
        a
        breach by RCN of its obligations under all three of the agreements. They
        further
        asserted that the alleged breach entitled Megacable to terminate the agreements.
        In response to these claims, RCN filed a motion in the Bankruptcy Court for
        the
        Southern District of New York seeking an order to the effect that no such
        rejection had occurred or, in the alternative, seeking to amend the Plan
        to
        specifically assume, as of the Effective Date of the Plan, the Megacable
        agreement alleged to have been rejected.
 
 In
        addition,
        on November 14, 2005, Megacable, MCM and 23 of their shareholders (the
“Claimants”) filed an arbitration petition against RCN with the International
        Chamber of Commerce International Court of Arbitration alleging the same
        arguments. Claimants have requested that the arbitration tribunal declare
        the
        three agreements terminated as a result of the RCN’s alleged breach and that
        RCN’s interest in Megacable and MCM be extinguished in exchange for payment by
        Megacable and MCM of the book value of those interests.
 
 At
        hearings
        held in the Bankruptcy Court on RCN’s motion described above, the judge made
        certain findings which RCN believes address, in a manner favorable to RCN,
        whether any breach of the underlying agreements occurred, which is the sole
        premise of Megacable’s arbitration action.
  On
        March
        6, 2006, RCN entered into an agreement to sell its investments in Megacable
        and
        MCM to the shareholders who currently own the remaining 51% of these entities.
        In connection with the sale, RCN and the Claimants entered into a Settlement
        Agreement, pursuant to which the parties agreed that, upon the closing of
        the
        sale, the arbitration proceedings and Bankruptcy Court motion will be withdrawn
        with prejudice and all claims among the parties relating to the three agreements
        governing their relationship will be released in full. The sale is expected
        to
        close by the end of March, 2006. The sale is conditioned upon certain regulatory
        filings to be made by the purchaser, but is not subject to the receipt of
        any
        regulatory approvals or consents or any other conditions precedent.





**City
      of Chicago Franchise Fee**





RCN,
      like
      most if not all other cable providers, currently does not pay a franchise fee
      on
      its cable modem Internet access services on the basis that the FCC has
      determined that such Internet services are not “cable services” as defined in
      the Communications Act. RCN’s position has been challenged by the City of
      Chicago, which has brought suit against RCN-Chicago, as well as AT&T
      Broadband (now Comcast), the incumbent cable operator in RCN-Chicago’s
      franchised service area, and the other franchised cable television operator
      in
      the City of Chicago (collectively, the “Defendants”). The Defendants removed the
      action to federal court and succeeded initially in obtaining dismissal of the
      action on the ground that cable modem service, as a matter of law, is not a
      “cable television service” within the scope of the franchise agreements and
      therefore cannot be subject to the agreements’ franchise fee provision, which by
      its express terms is to be interpreted and applied in accordance with the
      Communications Act. The City of Chicago appealed both the removal to federal
      District Court and the District Court’s dismissal of its case to the U.S.
      Seventh Circuit Court of Appeals. On October 1, 2004, the Seventh Circuit
      vacated on jurisdictional grounds the District Court’s decision dismissing the
      City of Chicago’s claims, and remanded the case back to the Circuit Court for
      Cook County, Illinois, for further proceedings. The Seventh Circuit expressed
      no
      opinion on the merits of the case. The City of Chicago then re-filed its case
      in
      the Cook County Circuit Court. The Cook County Circuit Court on October 5,
      2005,
      also dismissed the City’s complaint, and the City has now appealed the Circuit
      Court’s dismissal to the Illinois Appellate Court.





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In
      the
      event the City of Chicago was ultimately to prevail on its complaint,
      RCN-Chicago would need to pay a 5% franchise fee on its cable modem revenues.
      Going forward, RCN-Chicago would likely pass through the additional fees to
      its
      cable modem Internet service customers, which would raise their rates as
      compared to the high-speed Internet services provided by ILECs and therefore
      could have an adverse effect on RCN-Chicago’s ability to compete with such
      providers. In the event that these fees are assessed retroactively, RCN-Chicago
      would likely not be able to recover these costs from its customers. Since any
      adverse result will affect all of RCN-Chicago’s cable competitors in the Chicago
      market, such a ruling would likely not have a disproportionate effect on RCN’s
      ability to compete with other cable operators in the Chicago market. RCN also
      notes that the United States Supreme Court in the Brand X decision upheld the
      FCC’s classification of cable modem service as an information service, rather
      than a cable or telecommunications service, for federal regulatory purposes.
      However, the scope of state and local authority to regulate cable modem service
      as an information service is a question of nationwide significance to LFAs
      and
      cable television franchisees, and is the subject of both pending litigation
      and
      FCC rulemaking. The ultimate result of all of these actions will likely
      determine whether and to what extent RCN’s cable modem Internet access service
      is subject to state and local regulation, in addition to any obligations that
      may be imposed by the FCC. RCN cannot predict the outcome of such legal and
      regulatory proceedings. The ultimate result of all of these actions, including
      the action brought by the City of Chicago, will likely determine whether RCN’s
      cable modem Internet service gross revenues will be required to be included
      for
      purposes of franchise fee payments, and RCN cannot assure you that it will
      not
      be subject to gross revenue fees or other regulation of its cable modem Internet
      access services in the future.






**Other
      Legal Proceedings**





**Bankruptcy
      Matters**





On
      December 21, 2004, RCN and nine of its direct and indirect wholly-owned
      subsidiaries emerged from protection under Chapter 11 of the U.S. Bankruptcy
      Code pursuant to direct and indirect protection under the Plan. Under the Plan,
      essentially all claims against Old RCN and the RCN Debtors that arose prior
      to
      the commencement of the Chapter 11 cases were discharged. Claims for monetary
      damages (and equitable claims that give rise to a right to payment), including
      most of the legal proceedings pending against Old RCN at that time were included
      in the discharge. However, certain claims which were pending at the time the
      Plan became effective have not yet been resolved and are expected to continue
      through the first quarter of 2006. The following is a description of the
      material claims and of material legal proceedings in respect of claims that
      were
      resolved in the fourth quarter of 2005. As of December 31, 2005 there were
      no
      material remaining claims outstanding.







**Claims
      by Kemper Insurance**





On
      or
      about November 9, 2004, Kemper Insurance (including its affiliated companies,
      American Motorists Insurance Company, Lumbermen’s Mutual Casualty Company,
      American Protection Insurance Company, and American Manufacturing Mutual Company
      (collectively, “Kemper”)) filed general unsecured proofs of claim in an
      unliquidated amount in the Chapter 11 cases (the “Kemper Proofs of Claim”).
      Through the Kemper Proofs of Claim, Kemper sought an unliquidated amount for
      unpaid premiums and other charges in connection with certain insurance policies,
      claims processing agreements and other agreements between Kemper and one or
      more
      of the RCN Debtors. Since the filing of the objection, RCN and Kemper entered
      an
      agreement dated March 28, 2005 to consensually resolve the Kemper claims and
      the
      Bankruptcy Court approved a stipulation on June 13, 2005 which called for RCN
      to
      place $4.9 million in a trust account to serve as collateral to secure the
      payment of claims by Kemper related to workers compensation, auto, and general
      liability insurance policies written by Kemper for the period of March 2000
      to
      March 2003. These funds, classified as long-term restricted investments on
      our
      balance sheet, were moved into the trust account in November 2005, replacing
      the
      prior collateral amount of $6.9 million, which consisted of $2.5 million of
      cash
      in escrow (also classified as long-term restricted investments) and a $4.4
      million letter of credit.





**Claims
      by Merrill Lynch, Pierce, Fenner & Smith**





On
      January 19, 2006, RCN distributed 169,492 shares of common stock with a current
      market value of $4.0 million (valued as of January 13, 2006) to Merrill Lynch,
      Pierce, Fenner & Smith ("Merrill") in full and final satisfaction of general
      unsecured proofs of claims against RCN and the other RCN Debtors that asserted
      joint and several liability of $9.8 million in unpaid fees associated with
      work
      Merrill performed leading up to RCN's restructuring. The Bankruptcy Court
      authorized the distribution of these shares and dismissed all pending claims
      among the parties in connection with the dispute.





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**Claim
      by Former Employee**





On
      December 17, 2005, RCN distributed 60,000 shares of common stock to Marie DeWees
      and her attorneys in full and final satisfaction of her general unsecured proof
      of claim filed with the Bankruptcy Court on July 27, 2004, which sought an
      allowed claim of $4.5 million. Previously, Ms. DeWees had filed a state court
      action in the Superior Court of New Jersey, Law Division, Mercer County,
      captioned Marie
      DeWees, et al v. RCN Corporation, et al. (Docket
      No. L—175-00) against RCN and various of its officers and employees which had
      been pending since January 12, 2000, alleging that Ms. DeWees, a Vice President,
      had been separated from the Company unlawfully on the basis of sex and age.
      On
      February 5, 2003, the trial court granted Summary Judgment in favor of RCN
      dismissing the state court complaint in its entirety. On February 12, 2003,
      Ms.
      DeWees filed an appeal in the Superior Court, Appellate Division, seeking
      reinstatement of her complaint. The appeal was stayed pending the RCN
      bankruptcy. On October 12, 2004, the Bankruptcy Court entered an order
      memorializing the agreement between RCN and Ms. DeWees to lift the stay for
      the
      purpose of allowing the Appellate Division to decide Ms. DeWees' appeal. On
      July
      15, 2005, the Appellate Division reversed the order of the trial court and
      reinstated the complaint. On November 30, 2005, the Bankruptcy Court entered
      an
      order allowing Ms. DeWees' claim against RCN for $2.0 million to be satisfied
      with a one-time distribution of 60,000 shares of RCN’s common stock which
      occurred in 2005 and all claims in the state court action were
      dismissed.





**Ordinary
      Course Matters**





RCN
      or
      its subsidiaries are defendants in numerous personal injury, employment law
      and
      other matters in various jurisdictions that arise in the ordinary course of
      its
      business. None of these matters, individually or in the aggregate, is expected
      to be material.







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




There
      were no matters were submitted to a vote of the security holders of RCN during
      the fourth quarter of RCN’s 2005 fiscal year.







**PART
      II**





**ITEM
                5.**
            **MARKET
                FOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS**





**Market
      Information**





Old
      RCN’s
      common stock traded on The Nasdaq National Market (“NASDAQ”) under the symbol
“RCNC” until it was delisted from trading on May 12, 2004 as a result of RCN’s
      Chapter 11 bankruptcy filing and low trading prices. Immediately thereafter,
      Old
      RCN’s common stock began quotation on the over-the-counter (“OTC”) market under
      the symbol “RCNC.OB” until the Effective Date when the common stock of Old RCN
      was extinguished.





The
      table
      below sets forth, on a per share basis for the periods indicated, the intra-day
      high and low sales prices for Old RCN’s common stock as reported by the NASDAQ
      and the closing high and low bid prices as reported on the OTC market. In
      addition, the fourth quarter 2004 high price reflects the OTC market high bid
      price through the Effective Date and the fourth quarter 2004 low price reflects
      the cancellation of all interests in Old RCN’s common stock effective on that
      date. The OTC bid prices represent prices between dealers and do not include
      retail markup, markdown or commission. They do not represent actual
      transactions.





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**Period**
              
              **High
                  Price**
              
              **Low
                  Price****2004**First
                  Quarter
              
              $
              1.58
              
              $
              0.25Second
                  Quarter
              
              $
              0.33
              (1)(2)
              $
              0.10
              (1)(2)Third
                  Quarter
              
              $
              0.14
              (1)
              $
              0.04
              (1)Fourth
                  Quarter (through December 20, 2004)
              
              $
              0.07
              (1)
              $
              0.0
              (1)




(1)
            Represents
                market prices while operating during the Chapter 11 reorganization
                for
                periods subsequent to May 11, 2004.





(2)
            High
                sales price reflects the sales price on NASDAQ prior to Old RCN’s
                delisting on May 12, 2004. Low sales price reflects the OTC Market
                low bid
                price during the balance of the quarter.





Immediately
      prior to the cancellation of Old RCN’s common stock on the Effective Date, there
      were approximately 4,296 stockholders of record of such stock.





Reorganized
      RCN’s new common stock began quotation on the OTC market under the symbol “RCNI”
on December 21, 2004 and continued until March 21, 2005, when Reorganized RCN’s
      new common stock was accepted for quotation on NASDAQ under the symbol “RCNI”.
      The table below sets forth, on a per share basis for the periods indicated,
      the
      closing high and low bid prices for Reorganized RCN’s new common stock as
      reported on the OTC market for the period from December 21, 2004 to March 20,
      2005, and the intra-day high and low sales prices for RCN’s new common stock as
      reported by NASDAQ from March 21, 2005 to December 31, 2005. The OTC bid prices
      represent prices between dealers and do not include retail markup, markdown
      or
      commission. They do not represent actual transactions.




**Period**
              
              **High
                  Price**
              
              **Low
                  Price****2004**December
                  21, 2004 through December 31, 2004
              
              $
              23.25
              
              $
              19.05**2005**From
                  January 1, 2005 through March 20, 2005
              
              $
              23.40
              
              $
              18.75From
                  March 21, 2005 through March 31, 2005
              
              $
              20.95
              
              $
              19.11Second
                  Quarter
              
              $
              24.75
              
              $
              16.69Third
                  Quarter
              
              $
              25.67
              
              $
              21.00Fourth
                  Quarter
              
              $
              24.57
              
              $
              19.56





On
      March
      3, 2006, the last reported sale price of RCN’s common stock was $25.00 per share
      and the number of stockholders of record was 10. This does not include those
      stockholders who hold shares in street name accounts.





**Dividends**





RCN
      has
      never declared or paid a cash dividend on its common stock and currently does
      not expect to do so for the foreseeable future.





**Description
      of RCN Corporation’s Equity Securities**





In
      accordance with the Plan, Reorganized RCN issued 36,020,850 shares of common
      stock with a par value of $0.01 of which 31,919,044 were distributed to certain
      of its former bond holders and other general unsecured creditors on the date
      of
      emergence, and 4,101,806 shares were placed in reserve to settle disputed claims
      against RCN that were outstanding as of the date of emergence. In 2005, RCN
      distributed 3,303,868 shares of common stock from the reserve in settlement
      of
      filed claims. As of December 31, 2005, 797,938 shares remained in the reserve
      to
      satisfy the remaining allowed claims. In January 2006, the Company made an
      additional distribution of 169,492 shares, reducing the reserve share balance
      to
      628,446. After all outstanding claims are resolved, and the period to reconsider
      the Bankruptcy Court’s ruling on RCN’s objections to the claims of all creditors
      expires, RCN will distribute the remaining reserved shares to its unsecured
      creditors and former bond holders on a pro rata basis.





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As
      contemplated in the Plan of Reorganization, RCN issued Convertible Notes which,
      pursuant to their terms, are convertible into approximately five million shares
      of RCN Common Stock, subject to certain limitations. Additionally, RCN was
      authorized by the Plan to issue warrants to the former stockholders of Old
      RCN
      to purchase an aggregate of 735,119 shares of RCN’s common stock. Each warrant
      allows the holder to purchase one share of RCN’s common stock for a price of
      $34.16. As of December 31, 2005, the Company had distributed 188,032 of these
      warrants which expire on December 21, 2006, and five such warrants were
      exercised in 2005.





The
      Plan
      also contemplated RCN issuing up to 10% of the common stock of Reorganized
      RCN,
      on a fully diluted basis, under a management incentive option plan to be adopted
      by RCN’s board of directors and submitted to its stockholders for approval. In
      the second quarter of 2005, RCN’s board of directors approved the RCN Stock
      Compensation Plan (the “Stock Plan”), which was approved by the Company’s
      stockholders in July 2005. The Stock Plan allows for the issuance of up to
      4,636,619 shares of our common stock, in the form of stock options or restricted
      stock. As of December 31, 2005, the Company had issued 730,086 shares of
      restricted stock and granted options to purchase 3,752,835 shares of common
      stock at various strike prices. As of December 31, 2005, the Company had
      3,149,802 options outstanding, which included 528,033 forfeitures. During 2005,
      RCN did not repurchase any of its common stock.






**Securities
      Authorized For Issuance Under Equity Compensation Plans**





The
      table
      below sets forth the summary information of RCN’s equity compensation plans,
      under which RCN’s common stock are authorized for issuance, as of December 31,
      2005.




Number
                  of securities to
                be
                  issued upon exercise
                of
                  outstanding options
              
              Weighted
                  average
                exercise
                  price of
                outstanding
                  options
              
              Number
                  of securities
                remaining
                  available for
                future
                  issuanceEquity
                  compensation plans approved by stockholders
              
              
              3,149,802
              
              $
              21.77
              
              
              681,731Equity
                  compensation plans not approved by stockholders
              
              
              -
              
              $
              -
              
              
              -Total
              
              
              3,149,802
              
              $
              -
              
              
              681,731





**Sales
      of Unregistered Securities**





Section
      1145(a) of the Bankruptcy Code generally exempts from registration under the
      Securities Act the offer or sale of a debtor’s securities under a Chapter 11
      plan if such securities are offered or sold in exchange for a claim against,
      or
      an equity interest in, such debtor. In reliance upon this exemption, Reorganized
      RCN’s common stock issued to general unsecured creditors under the Plan and its
      warrants to be issued to Old RCN’s common stock and preferred stock holders
      under the Plan generally are exempt from the registration requirements of the
      Securities Act. Accordingly, such securities may be resold without registration
      under the Securities Act or other federal securities laws pursuant to an
      exemption provided by Section 4(1) of the Securities Act, unless the holder
      is
      an “underwriter” with respect to such securities, as that term is defined in the
      Bankruptcy Code. In addition, such securities generally may be resold without
      registration under state securities laws pursuant to various exemptions provided
      by the respective laws of the several states. However, recipients of securities
      issued under the Plan are advised to consult with their own legal and tax
      advisors as to the availability of any such exemption from registration under
      state law in any given instance and as to any applicable requirements or
      conditions to such availability.





Section
      1145(b) of the Bankruptcy Code defines “underwriter” for purposes of the
      Securities Act as one who (1) purchases a claim with a view to distribution
      of
      any security to be received in exchange for the claim other than in ordinary
      trading transactions, (2) offers to sell securities issued under a plan for
      the
      holders of such securities, (3) offers to buy securities issued under a plan
      from persons receiving such securities, if the offer to buy is made with a
      view
      to distribution of such securities, or (4) is a control person of the issuer
      of
      the securities or other issuer of the securities within the meaning of Section
      2(11) of the Securities Act. The legislative history of section 1145 of the
      Bankruptcy Code suggests that a creditor who owns at least ten percent (10%)
      of
      the securities of a reorganized debtor may be presumed to be a “control person.”





39
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Notwithstanding
      the foregoing, statutory underwriters may be able to sell their securities
      pursuant to the resale limitations of Rule 144 promulgated under the Securities
      Act. Rule 144 would, in effect, permit the resale of securities received by
      statutory underwriters pursuant to a Chapter 11 plan, subject to applicable
      volume limitations, notice and manner of sale requirements, and certain other
      conditions.





**Registration
      Rights**





As
      required by the Plan and a registration rights agreement, in the third quarter
      of 2005, RCN registered 7,048,205 shares of its common stock held by affiliates
      beneficially owning 5% or more of the Company’s stock.





**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**




The
      table
      below presents selected consolidated financial data of RCN as of and for the
      five years ended December 31, 2005.




The
      consolidated financial statements of the Predecessor for the period from May
      27,
      2004 to December 20, 2004, were prepared while RCN was involved in Chapter
      11
      proceedings and, accordingly, were prepared in accordance with SOP 90-7. As
      a
      result, the selected historical financial data for such periods does not include
      any adjustments relating to the recoverability and classification of asset
      carrying amounts or the amount and classification of liabilities that would
      have
      resulted if the Predecessor were deemed not to have been continuing as a going
      concern.




Upon
      emergence from Chapter 11 of the Bankruptcy Code on December 21, 2004, RCN
      adopted “fresh start” reporting in accordance with SOP 90-7. “Fresh start”
accounting required RCN to re-value its assets and liabilities based upon their
      estimated fair values and to allocate its reorganization value. “Fresh start”
reporting has changed the recorded value of RCN’s tangible and intangible assets
      with an associated change in expense items as compared to the historical
      financial statements. In addition, “fresh start” reporting adjustments were made
      to reflect the changes specified in the Plan (see Note 5 “Fresh Start
      Accounting” to RCN’s Consolidated Financial Statements). As a result, the
      historical financial data of the Predecessor may not be entirely comparable
      to
      the historical financial data of Reorganized RCN and may be of limited value
      in
      evaluating RCN’s financial and operating prospects in the future.




The
      consolidated balance sheet data and the consolidated statement of operations
      data presented below as of December 31, 2005 and 2004, and for the years then
      ended, have been derived from RCN’s Consolidated Financial Statements, which
      have been audited by Friedman LLP, an independent registered public accounting
      firm.




The
      consolidated balance sheet data and the consolidated statement of operations
      data presented below as of December 31, 2003, 2002 and 2001, and for each of
      the
      years in the three-year period ended December 31, 2003, have been derived from
      RCN’s Consolidated Financial Statements, which have been audited by
      PricewaterhouseCoopers LLP, an independent registered public accounting firm.





All
      of
      the information presented below should be read in conjunction with the
      information in the section titled “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations,” as well as RCN’s Consolidated
      Financial Statements and related notes beginning on page F-1.





40
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**RCN
      CORPORATION**


**SELECTED
      FINANCIAL DATA(1)**


**(Dollars
      in Thousands Except Per Share Amounts)**




**Successor**
              
              **Predecessor****2005**
              
              **December 21, to**
                **December 31,**
                **2004(2)**
              
              **January
                  1, to**
                **December 20,**
                **2004**
              
              **2003**
              
              **2002**
              
              **2001**Revenues
              
              $
              560,964
              
              $
              16,372
              
              $
              470,459
              
              $
              484,854
              
              $
              433,494
              
              $
              386,386Income/(loss)
                  from continuing operations
              
              
              (138,601
              )
              
              (3,688
              )(3)
              
              971,962
              (4)
              
              (499,747
              )
              
              (1,422,295
              )
              
              (692,849
              )Income/(loss)
                  from continuing operations per average common share:Basic
              
              $
              (3.86
              )
              $
              (0.10
              )
              $
              8.33
              
              $
              (6.07
              )
              $
              14.92
              
              $
              (8.97
              )Diluted
              
              $
              (3.86
              )
              $
              (0.10
              )
              $
              6.77
              
              $
              (6.07
              )
              $
              14.92
              
              $
              (8.97
              )Total
                  assets
              
              
              1,253,940
              
              
              1,400,510
              
              
              1,254,689
              
              
              1,529,356
              
              
              1,990,272
              
              
              3,603,131Total
                  debt
              
              
              492,097
              
              
              493,568
              
              
              1,669,560
              
              
              1,654,585
              
              
              1,744,114
              
              
              1,896,148Redeemable
                  preferred stock
              
              
              -
              
              
              -
              
              
              1,825,212
              
              
              1,772,310
              
              
              2,304,426
              
              
              2,142,276Preferred
                  stock dividend and accretion
              
              
              -
              
              
              -
              
              
              52,902
              
              
              173,392
              
              
              162,150
              
              
              151,663




(1)
            Excludes
                discontinued operations (See “Management’s Discussion and Analysis of
                Financial Condition and Results of Operations—Discontinued Operations” and
                Note 9 to RCN’s Consolidated Financial Statements).


(2)
            Successor
                11 day period includes consolidated Starpower results.


(3)
            Includes
                a gain from “fresh start” adjustments of approximately $173.2 million. See
                Note 5 to RCN’s Consolidated Financial Statements.


(4)
            Includes
                a gain on settlement of liabilities as a result of RCN’s bankruptcy
                restructuring under Chapter 11 of the Bankruptcy Code of approximately
                $1,166.0 million. See Note 5 to RCN’s Consolidated Financial Statements.





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




**The
      following discussion and analysis should be read together with RCN’s
      Consolidated Financial Statements and related notes beginning on page F-1.
      Reference is made to “Cautionary Statement Regarding Forward Looking Statements”
on page 1 of this Annual Report, which describes important factors that could
      cause actual results to differ from expectations and non-historical information
      contained in this Annual Report. The application of SOP 90-7 and RCN’s
      implementation of “fresh start” accounting for periods following its
      reorganization under Chapter 11 of the Bankruptcy Code makes it more difficult
      to compare RCN’s post-emergence operations and results to those for periods
      prior to the date RCN filed for protection under Chapter 11 of the Bankruptcy
      Code. See “Accounting Impact of Reorganization” below.**





**Overview**





We
      provide local and long distance telephone, video programming (including digital
      cable and high definition television), and data services (including cable modem,
      high-speed and dial-up Internet access) primarily to residential customers
      over
      a broadband network in densely populated markets in the U.S. Approximately
      67%
      of our customers have two or more of our services (i.e., bundles) with the
      remainder having only one service. We operate in the Boston, New York, eastern
      Pennsylvania, Chicago, San Francisco, Los Angeles and the Washington, D.C.
      markets. We also served the communities in and around Carmel, New York, until
      March 9, 2004, when we completed the sale of our Carmel, New York cable and
      voice system for approximately $120.2 million in cash before closing
      adjustments.





On
      May
      27, 2004, we, along with four of our subsidiaries, filed voluntary petitions
      for
      reorganization under Chapter 11 of the Bankruptcy Code in the United States
      Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”)
      and on August 5 and August 20, 2004, five additional subsidiaries of the Company
      filed voluntary petitions for reorganization under Chapter 11 (RCN and such
      subsidiaries are collectively referred to as the “RCN Debtors”). On December 21,
      2004 (the “Effective Date”), the RCN Debtors’ joint plan of reorganization (the
“Plan”) became effective and the RCN Debtors emerged from Chapter 11. Pursuant
      to the Plan, our consolidated indebtedness and our debt service requirements
      were reduced substantially, our capital structure was realigned and
      substantially all of the new equity of RCN was issued to certain of our former
      creditors. For more details regarding the Plan, see “Business - RCN’s Chapter 11
      Reorganization” in this Annual Report on Form 10-K.





The
      consolidated financial statements include the accounts of RCN and its
      consolidated subsidiaries. All intercompany transactions and balances among
      consolidated entities have been eliminated. On December 21, 2004, we increased
      our ownership interest in Starpower Communications, LLC (“Starpower”) from 50%
      to 100%. Starting on December 21, 2004, the assets acquired and liabilities
      assumed of Starpower were recorded at their respective fair values and our
      consolidated results of operations included Starpower. Prior to December 21,
      2004, RCN accounted for its interest in Starpower under the equity method.




**Critical
      Accounting Policies and Estimates**





The
      preparation of the consolidated financial statements in accordance with
      accounting principles generally accepted in the United States (“US GAAP”)
      requires management to make judgments, estimates and assumptions regarding
      uncertainties that affect the reported amounts of assets and liabilities,
      disclosure of contingent assets and liabilities and the reported amounts of
      revenues and expenses. Management uses historical experience and all available
      information to make these judgments and estimates. These estimates and
      assumptions affect the reported amounts of assets and liabilities at the dates
      of the financial statements and the reported amounts of revenues and expenses
      during the periods presented. Actual results could differ. Despite these
      inherent limitations, management believes that Management’s Discussion and
      Analysis and the accompanying consolidated financial statements and footnotes
      provide a meaningful and fair perspective of the Company’s financial condition
      and operating results for the current period. Management believes the following
      critical accounting policies and estimates represent the more significant
      judgments and estimates used in the preparation of the audited consolidated
      financial statements included in this Annual Report:





·
            Fresh
                start adjustments


·
            Revenue
                recognition


·
            Accrual
                of telecommunication costs


·
            Valuation
                of long-lived assets and indefinite-lived
                assets


·
            Leases





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·
            Allowance
                for doubtful accounts





In
      addition, there are other items within the financial statements that require
      estimates or judgment but are not deemed critical, such as the accrual of
      bonuses and contingencies, but changes in judgment, or estimates in these other
      items could also have a material impact on the financial
      statements.





**Fresh
      Start Adjustments**





Upon
      emergence from bankruptcy, we adopted “fresh start” accounting and reporting
      which resulted in material adjustments to the historical carrying amount of
      our
      assets and liabilities. Fresh start accounting and reporting was applied in
      accordance with SOP 90-7, which required us to allocate the reorganization
      value
      to our assets and liabilities based upon their estimated fair values. RCN
      management, with the help of its advisors, estimated the fair value of our
      tangible and intangible assets and liabilities. The determination of the fair
      values of assets and liabilities was subject to significant estimation and
      assumption.





**Revenue
      Recognition**





Revenues
      are recognized as earned when the services are rendered, evidence of an
      arrangement exists, the fee is fixed and determinable and collectibility is
      probable. Video and high-speed data revenues are recognized in the period
      service is provided and related cable installation revenues are recognized
      in
      the period of installation since they do not exceed the direct selling costs.
      Dial-up Internet revenues are earned based on the contract period. Telephone
      service revenues are recognized when services are provided. Local telephone
      revenues are based on tariff rates while long distance telephone revenues are
      based upon minutes of traffic processed in accordance with tariffs and the
      rates
      of long-distance providers. In 2003, RCN changed the method of recognizing
      revenue from reciprocal compensation payments, the fee that local exchange
      carriers pay to terminate calls on each other’s networks. RCN now records an
      estimate of the reciprocal compensation fees based upon calls terminated on
      RCN’s network. In prior periods, RCN recognized reciprocal compensation payments
      as realized. This change was a result of FCC rulings that enable RCN to
      accurately estimate these revenues.





**Accrual
      of Telecommunication Costs**





Cost
      of
      service includes expenses directly associated with providing telecommunications
      services to customers. We accrue for the estimated costs of services received
      from third party telecommunications providers during the period the services
      are
      received. Invoices received from the third party telecommunications providers
      are often disputed due to billing discrepancies. We accrue for all invoiced
      amounts, even amounts in dispute, as these amounts represent contingent
      liabilities that are considered probable and estimatable. Disputes resolved
      in
      our favor may reduce cost of service in the period the dispute is settled.
      As
      the period of time required to resolve these types of disputes often lapses
      over
      several quarters, the benefits associated with the favorable resolution of
      such
      disputes are often realized in periods subsequent to the accrual of the disputed
      amount.





**Valuation
      of Indefinite-Lived Intangible Assets and Long-Lived
      Assets**





As
      of
      October 1, 2005, we conducted our annual impairment test of our indefinite-lived
      franchise rights agreements in accordance with SFAS No. 142 *,
      “Goodwill and Other Intangible Asset”* (“SFAS
      142”). We used an income based approach and discounted the cash flows
      attributable to our franchise rights to estimate their fair value. We
      incorporated several estimates in this analysis, including our operating and
      capital spending budgets, growth rates and cost of capital. We also conducted
      a
      sensitivity analysis using different discount rates. Our impairment test
      indicated the our franchise rights agreements were not impaired as of October
      1,
      2005. While we believe our estimates are reasonable, actual results may differ
      significantly from our assumptions which could materially affect the
      valuation.





We
      evaluate our long-lived assets for impairment whenever indicators of impairment
      exist. Such indicators include factors such as the impairment of our
      indefinite-life franchises under SFAS 142, advances in technology by our
      competitors, adverse changes in relationships with local franchise authorities,
      adverse changes in market conditions and/or poor operating results. SFAS No.
      144, “ *Accounting
      for Impairment or Disposal of Long-Lived Assets* ”
(“SFAS
      144”) require that if the sum of the undiscounted future cash flows expected to
      result from a company’s long-lived assets is less than the reported value of the
      asset, an asset impairment must be recognized in the financial statements.
      The
      amount of the recognized impairment would be calculated by subtracting the
      fair
      value of the asset from the reported value of the asset. We recognized
      impairment expense of $0.3 million, $6.9 million and $107.6 million in the
      year
      ended December 31, 2005 (Successor), the period from January 1 to December
      20,
      2004 (Predecessor) and the year ended December 31, 2003.





43
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**Exit
      Costs and Other Lease Related Costs**





We
      have
      exited in excess of forty leased facilities, in whole or in part, over the
      last
      three years. SFAS No. 146 “ *Accounting
      for Costs Associated with Exit or Disposal Activities”* (“SFAS
      146”) requires us to offset the present value of our lease payments for the
      exited property against estimated sublease rental income. Sublease assumptions
      frequently change based on market conditions which require us to adjust our
      projected cash flows related to exited properties. Changes in assumptions are
      recognized in income when made. When we terminate or buy out an exited lease,
      payment is charged against the liability and/or the remaining liability is
      reversed into income. We amortize this liability for these facilities as an
      offset to rent expense, which is included in selling, general and administrative
      expense, over the remaining term of the lease.





Upon
      emergence from bankruptcy, we recorded a “fresh start” liability for the excess
      of cost over fair value on all of our leased facilities. We amortize this
      liability for these facilities as an offset to rent expense, which is included
      in selling, general and administrative expense, over the remaining term of
      the
      lease. When we exit a facility and accrue an exit cost liability, in accordance
      with SFAS 146, we reverse the remaining “fresh start” reserve established for
      that property. Similarly, when we renegotiate a lease on one of these properties
      the reserve is reversed into income.





**Allowance
      for Doubtful Accounts**





We
      carry
      our accounts receivable at cost less an allowance for doubtful accounts. We
      compute our allowance by applying an increasing percentage to discounts in
      past
      due categories. This percentage is based on our history of actual write-offs.
      We
      also perform a subjective review of specific accounts to determine if an
      additional reserve is necessary.





**Joint
      Ventures**




***Starpower***




Starpower
      is a Delaware limited liability company formed in 1997 as a joint venture
      between a one of our subsidiaries and Pepco to sell video and telecommunications
      services to commercial and residential customers in Washington D.C. and the
      surrounding areas in Maryland and Virginia. On the Effective Date, We increased
      our ownership in Starpower from 50% to 100% by purchasing the 50% interest
      in
      Starpower owned by Pepco for $29.0 million. The $29.0 million purchase price
      was
      financed with borrowings under our credit facility. Prior to the purchase of
      the
      remaining 50% interest in Starpower, We accounted for the Starpower joint
      venture under the equity method of accounting and our pro-rata portion of
      Starpower’s operating results were included in the Predecessor’s formal
      statements as “equity in income (loss) of unconsolidated entities.” The
      Successor accounts for Starpower as a consolidated wholly-owned subsidiary.




***Megacable
      and MCM***




RCN
      has
      48.93% interests in both Megacable, a cable television and high-speed data
      services provider in certain portions of Mexico, and MCM, a provider of local
      voice and high-speed data services in Mexico City. Although we have historically
      accounted for our investments under the equity method, we were unable to record
      any income on our investments during 2005 due to the continued lack of timely
      financial information from Megacable and MCM and the unwillingness of
      Megacable’s management to cooperate with us in our attempts to confirm the
      reliability and US GAAP compliance of the limited financial information we
      received. In addition, we have been unsuccessful in our attempts to assert
      our
      rights under the shareholder agreement to appoint representatives to the
      Megacable board of directors and management committees. Because of these
      factors, we have determined that we did not exercise sufficient control over
      Megacable and MCM to continue accounting for our investments in them under
      the
      equity method and have decided to account for these investments under the cost
      method, commencing in the fourth quarter of 2005, in accordance with Accounting
      Principles Board Opinion No. 18 *“The
      Equity Method of Accounting for Investments in Common Stock”* (“APB
      18”) ** and
      FASB
      Interpretation No. 35 “ *Criteria
      for Applying the Equity Method of Accounting for Investments in Common
      Stock* ”
(“FIN
      35”). On March 6, 2006, RCN entered into an agreement to sell its investments
      in
      Megacable and MCM to the investors who currently own the remaining 51% of these
      entities for net after-tax proceeds of $300 million in cash. The transaction
      is
      expected to close by the end of March, 2006, after the necessary regulatory
      approval documents are filed.





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***RCN-BecoCom***




RCN-BecoCom
      was formed in 1997 as a joint venture between RCN and NSTAR to increase
      penetration in the Boston market by assisting in the network rollout and gaining
      access to rights-of-way. In December 2003, RCN-BecoCom became a wholly-owned
      subsidiary of RCN. In 2005, we converted RCN-BecoCom to a business corporation
      from a limited liability company. Prior to December 2003, we consolidated the
      results of RCN-BecoCom because RCN was allocated 100% of any profits and losses
      of the joint venture.





**Accounting
      Impact of Reorganization**





***Fresh
      Start Reporting***





Our
      emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting
      entity and the adoption of “fresh start” reporting in accordance with SOP 90-7.
      Upon adoption of “fresh start” reporting, a new reporting entity is created for
      accounting purposes and the recorded amounts of assets and liabilities are
      adjusted to reflect their estimated fair values. Accordingly, our reported
      historical financial statements prior to the adoption of “fresh start” reporting
      for periods ended prior to December 21, 2004 are not comparable to those of
      Reorganized RCN. In this Annual Report on Form 10-K, references to our
      operations and cash flows during the periods ended September 30, 2004 refer
      to
      the Predecessor.





SOP
      90-7
      requires that financial statements for the period following the Chapter 11
      filing through the bankruptcy confirmation date distinguish transactions and
      events that are directly associated with the reorganization from the ongoing
      operations of the business. Accordingly, revenues, expenses, realized gains
      and
      losses and provisions for losses directly associated with the reorganization
      and
      restructuring of the business, including adjustments to fair value assets and
      liabilities and the gain on the discharge of pre-petition debt, are reported
      separately as reorganization items, net, in the Predecessor’s consolidated
      statements of operations.





In
      accordance with “fresh start” reporting, all assets and liabilities are recorded
      at their respective fair values as of December 21, 2004. Such fair values
      represent our best estimates. We engaged valuation consultants to assist us
      in
      our determination of fair value.





In
      applying “fresh start” reporting, adjustments to reflect the fair value of
      assets and liabilities, on a net basis resulted in a gain of $173.2 million.
      The
      restructuring of our capital structure and resulting discharge of the senior
      lenders’ pre-petition debt, resulted in a gain of approximately $1,166.0
      million. In addition, we incurred $92.6 million in reorganization expenses
      in
      2004, primarily related to legal and professional services.





See
      Note
      3, “Fresh Start Accounting,” to our Unaudited Condensed Consolidated Financial
      Statements for a description of the impact of “fresh start” accounting on the
      Successor’s consolidated balance sheet on the Effective Date. As a result of
      these changes to the capital structure, Reorganized RCN’s interest expense and
      preferred dividend obligations will be significantly less than we incurred
      in
      periods prior to our reorganization.





**Reclassifications**





Effective
      January 1, 2005, we changed the classifications of certain expenses from
      operating and selling, general and administrative to direct expenses. We feel
      expenses for pole rental, right-of-way use fees and plant utilities are directly
      related to generating revenue and therefore are properly classified as direct
      expenses. This resulted in an increase in direct costs of $6.8 million with
      a
      corresponding decrease in selling, general and administrative costs for the
      year
      ended December 31, 2004 (Successor/Predecessor). Certain other reclassifications
      have been made to the prior period financial statements to conform to the
      current period presentation.





**Segment
      Reporting**





We
      view
      our business of providing voice, video and data communications services to
      residential and commercial customers as one business segment. All services
      are
      provided from the same telecommunications backbone, and no separate financial
      information is maintained or reviewed. We believe we can aggregate these revenue
      streams under the quantitative and qualitative thresholds defined in SFAS No.
      131, “ *Disclosures
      about Segments of an Enterprise and Related Information* .”





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**Key
      Financial and Statistical Measures**





Set
      forth
      below are certain key financial and statistical measures that we consider
      important in managing and assessing our business and financial performance.
      These measures are set forth below for convenience only and each of these
      measures should be considered in the context of our complete financial
      statements and the analysis and discussion set forth elsewhere in this
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.”





Key
      customer performance measures are Revenue Generating Units (“RGUs”), Average
      Revenue per Customer (“ARPC”), and Average RGUs per Customer. These metrics are
      closely monitored each month to track sales and revenue performance.





The
      following tables summarize RGUs, Customers, ARPC, Average RGU’s per Customer and
      other important statistical measures. The decline in voice and video RGUs is
      due
      in part to management’s strategy to dispose or allow attrition of
      underperforming assets.


Successor
                  2005
                
                Successor
                    / Predecessor
                  2004Voice
                    RGUs1
                    , 6
                
                
                273,000
                
                
                280,000Penetration
                
                
                19.5
                %
                
                19.9
                %Basic
                    Video RGUs1
                    , 6
                
                
                370,000
                
                
                383,000Penetration
                
                
                26.4
                %
                
                27.2
                %Data
                    RGUs1
                    , 6
                
                
                244,000
                
                
                222,000Penetration
                
                
                17.4
                %
                
                15.8
                %Total
                    RGUs (Excluding Digital)1
                    , 6
                
                
                887,000
                
                
                885,000Digital
                    Subscribers2
                
                
                220,000
                
                
                196,000Penetration
                
                
                59.5
                %
                
                51.2
                %Customers3
                    , 6
                
                
                409,000
                
                
                425,000Average
                    Revenue Per Customer4
                
                $
                102
                
                $
                96Average
                    RGUs Per Customer5
                
                
                2.1
                
                
                2.0


(1)
      RGUs
      are all video, high-speed data, and voice connections provided to residential
      households and small businesses. Dial-up Internet and long distance voice
      services are not included. Additional telephone lines are each counted as a
      RGU,
      but additional room hook-ups for video service are not counted. For bulk
      arrangements in MDUs, the number of RGUs is based on the number of video,
      high-speed data and voice connections provided in that MDU. Delinquent accounts
      are generally disconnected and no longer counted as RGUs after a set period
      of
      time in accordance with our credit and disconnection policies. RGUs may include
      customers receiving some services for free or at a reduced rate in connection
      with promotional offers or bulk arrangements. RGUs provided free of charge
      under
      courtesy account arrangements are not counted, but additional services paid
      for
      are counted. Voice, basic video and data penetration is the number of RGUs
      for
      that service divided by the number of marketable homes, expressed as a
      percentage.




(2)
      A
      Digital Subscriber is a residential household or small business with at least
      one digital set-top box. Digital video penetration is the number of digital
      video subscribers divided by the number of basic video RGUs, expressed as a
      percentage.





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            of Contents*





(3)
      A
      Customer is a residential household or small business that has at least one
      paid
      video, high-speed data or local voice connection. Customers with only Dial-up
      Internet or long distance voice service are not included. For bulk arrangements
      in MDUs, a Customer is included if they pay for an additional service beyond
      those included in the bulk arrangement or if a service relationship exists
      with
      the end-user of our service. Delinquent accounts are generally disconnected
      and
      no longer counted as Customers after a set period of time in accordance with
      our
      credit and disconnection policies.




(4)
      Average Revenue per Customer is total revenue for a given monthly period
      (excluding Dial-up Internet, reciprocal compensation and commercial revenue)
      divided by the average number of Customers for the period.




(5)
      Average RGUs per Customer is the total average number of RGUs during a period
      divided by the average number of Customers for that period.





(6)
      Effective January 1, 2006, the Company changed its methodology for counting
      Customers and RGUs. Previously, certain commercial Customers and certain
      residential Customers in bulk MDU arrangements were not counted. In addition,
      dormitories and certain other commercial buildings will now be counted as only
      one Customer and one RGU. If individuals in those commercial buildings subscribe
      to additional services, they will also be counted as Customers and RGUs. The
      following table provides a reconciliation of the Customer and RGU amounts as
      of
      December 31, 2005 as reported above to those that would be reported under the
      new methodology. This change does not have a material impact on the Average
      Revenue per Customer or Average RGUs per Customer.




Previous
                  Methodology
                  December
                    31, 2005
                
                New
                  Methodology
                  December
                    31, 2005Voice
                    RGUs
                
                
                273,000
                
                
                278,000Basic
                    Video RGUs
                
                
                370,000
                
                
                369,000Data
                    RGUs
                
                
                244,000
                
                
                244,000Total
                    RGUs
                
                
                887,000
                
                
                891,000Customers
                
                
                409,000
                
                
                419,000




**Results
      of Operations**





The
      financial information presented in this report comprises the audited condensed
      consolidated financial information of Successor for the year ended December
      31,
      2005, Successor/Predecessor for the year ended December 31, 2004 and Predecessor
      for the year ended December 31, 2003. These financial statements do not include
      any adjustments relating to the recoverability and classification of asset
      carrying amounts or the amount and classification of liabilities that would
      have
      resulted had Predecessor not been accounted for as a going concern.





Approximately
      92% of our revenue for the year ended December 31, 2005 is attributable to
      recurring monthly charges for services provided to residential and commercial
      customers. The remaining 8% of our revenue is attributable to charges for
      usage-based services.




47
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          of Contents*





Expenses
      primarily consist of direct expenses, selling and general and administrative
      expenses, depreciation and amortization, and interest expense. Direct expenses
      include the cost of providing services such as cable programming, franchise
      costs and network access fees. Selling and general and administrative expenses
      include customer service costs, advertising, sales, marketing, order processing,
      telecommunications, network maintenance and repair (“technical expenses”),
      general and administrative expenses, installation and provisioning expenses,
      and
      other corporate overhead. All personnel costs, excluding stock-based
      compensation and certain retention and severance costs, are included in selling,
      general and administrative expense.





48
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**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Dollars
      in Thousands, Except Share and Per Share Data)**


**Successor**
              
              **Successor**
              
              **Predecessor**
              
              **Predecessor****For
                  the year**
                **ended**
                **December
                  31,**
                **2005**
              
              **December
                  21 to**
                **December
                  31,**
                **2004**
              
              **January
                  1 to**
                **December
                  20,**
                **2004**
              
              **For
                  the year**
                **ended**
                **December
                  31,**
                **2003**Revenues
              
              $
              560,964
              
              $
              16,372
              
              $
              470,459
              
              $
              484,854Costs
                  and expenses:Direct
                  expenses
              
              
              196,832
              
              
              5,958
              
              
              172,188
              
              
              174,260Selling,
                  general and administrative (exclusive of stock-based compensation
                  shown
                  seperately below)
              
              
              275,994
              
              
              7,996
              
              
              237,998
              
              
              308,151Non-cash
                  stock-based compensation
              
              
              8,913
              
              
              -
              
              
              4,414
              
              
              4,692Impairments,
                  exit costs and restructuring
              
              
              5,245
              
              
              -
              
              
              (7,674
              )
              
              167,241Depreciation
                  and amortization
              
              
              190,322
              
              
              5,218
              
              
              231,734
              
              
              197,267Operating
                  loss
              
              
              (116,342
              )
              
              (2,800
              )
              
              (168,201
              )
              
              (366,757
              )Investment
                  income
              
              
              5,648
              
              
              -
              
              
              2,942
              
              
              6,260Interest
                  expense
              
              
              42,333
              
              
              888
              
              
              96,702
              
              
              180,206Gain
                  on sale of assets
              
              
              2,536
              
              
              -
              
              
              1,875
              
              
              7,130Gain
                  on the early extinuishment of debt
              
              
              -
              
              
              -
              
              
              -
              
              
              45,556Other
                  income (expense), net
              
              
              1,556
              
              
              -
              
              
              (295
              )
              
              1,071Loss
                  from continuing operations before reorganization items, income
                  taxes and
                  equity in income (loss) of unconsolidated entities
              
              
              (148,935
              )
              
              (3,688
              )
              
              (260,381
              )
              
              (486,946
              )Reorganization
                  (expense) income, net
              
              
              11,113
              
              
              -
              
              
              (92,554
              )
              
              -Gain
                  on settlement of liabilities subject to compromise and
                  restructuring
              
              
              -
              
              
              -
              
              
              1,166,027
              
              
              -Gain
                  from "Fresh Start" adjustments
              
              
              -
              
              
              -
              
              
              173,178
              
              
              -Income
                  tax expense (benefit)
              
              
              779
              
              
              -
              
              
              (114
              )
              
              1,271Income
                  (loss) from continuing operations before equity in unconsolidated
                  entities
              
              
              (138,601
              )
              
              (3,688
              )
              
              986,384
              
              
              (488,217
              )Equity
                  in income (loss) of unconsolidated entities
              
              
              -
              
              
              -
              
              
              11,267
              
              
              23,470Impairment
                  of unconsolidated entities
              
              
              -
              
              
              -
              
              
              (25,689
              )
              
              (35,000
              )Net
                  income (loss) from continuing operations
              
              
              (138,601
              )
              
              (3,688
              )
              
              971,962
              
              
              (499,747
              )Income
                  (loss) from discontinued operations, net of tax
              
              
              (111
              )
              
              -
              
              
              2,204
              
              
              10,362Gain
                  on sale of discontinued operations, net of tax
              
              
              -
              
              
              -
              
              
              88,580
              
              
              163,684Net
                  income (loss) before cumulative effect of change in accounting
                  principle
                  and preferred dividend and accretion requirements
              
              
              (138,712
              )
              
              (3,688
              )
              
              1,062,746
              
              
              (325,701
              )Cumulative
                  effect on prior years of retroactive application of a change in
                  accounting
                  for legal fees, net of tax
              
              
              2,600
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss) before preferred dividend and accretion
                  requirements
              
              
              (136,112
              )
              
              (3,688
              )
              
              1,062,746
              
              
              (325,701
              )Preferred
                  dividend and accretion requirements
              
              
              -
              
              
              -
              
              
              52,902
              
              
              173,392Net
                  income (loss) attributable to common stockholders
              
              $
              (136,112
              )
              $
              (3,688
              )
              $
              1,009,844
              
              $
              (499,093
              )





49
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            of Contents*





**2005
      (Successor) Compared to 2004 (Successor/Predecessor)**





***Revenues***





Revenue
      increased $74.1 million, or 15.2%, to $561.0 million for the year ended December
      31, 2005 (Successor) compared to the year ended December 31, 2004
      (Successor/Predecessor combined) primarily due to our acquisition of the
      remaining 50% interest in Starpower. Excluding the impact of the consolidation
      of Starpower, revenue decreased $1.3 million, or 0.2%. The decrease was due
      mainly to the decline in customers from approximately 425,000 to 409,000. This
      accounted for a revenue decline of $19.4 million. Also contributing to the
      decline was lower dial-up revenue, lower reciprocal compensation revenue and
      the
      elimination of our video programming development business, RCN Entertainment,
      Inc., at the end of 2004. Dial-up revenue, which is reported in data, decreased
      by $10.0 million as the number of dial-up customers continued to decline.
      Reciprocal compensation revenue, which is impacted to a large degree by dial-up
      service, decreased $2.3 million. Revenue of RCNE for 2004 was $3.1 million.





Offsetting
      the above decline was an increase in the Average Revenue per Customer from
      $96
      to $102. The improvement in Average Revenue per Customer resulted in increased
      revenue of $31.1 million which was driven primarily by an improvement in Average
      RGUs per Customer from 2.0 to 2.1 due to higher cable modem penetration. Also
      contributing to the increased revenue was an average 4% price increase for
      the
      basic video tier and higher digital penetration due to a network upgrade in
      our
      Chicago market. In addition, Commercial revenue increased $2.3
      million.


Revenuefor
                  the year ended December 31,Successor
              
              Predecessor
              
              Fav/(unfav)2005
              
              2004
              
              Variance
              
              Var
                  %Video
              
              $
              254,820
              
              $
              220,158
              
              $
              34,662
              
              
              15.7
              %Data
              
              
              135,456
              
              
              105,919
              
              
              29,537
              
              
              27.9
              %Voice
              
              
              146,961
              
              
              141,475
              
              
              5,486
              
              
              3.9
              %Reciprocal
                  Compensation
              
              
              6,582
              
              
              6,758
              
              
              (176
              )
              
              -2.6
              %Other
              
              
              17,145
              
              
              12,521
              
              
              4,624
              
              
              36.9
              %Total
              
              $
              560,964
              
              $
              486,831
              
              $
              74,133
              
              
              15.2
              %





***Direct
      Expenses***





Direct
      expenses increased $18.7 million, or 10.5%, to $196.8 million for the year
      ended
      December 31, 2005 (Successor) compared to the year ended December 31, 2004
      (Successor/Predecessor combined) due to our acquisition of the remaining 50%
      interest in Starpower. Excluding the impact of the consolidation of Starpower,
      direct expenses decreased $5.1 million, or 2.5%. Significant contributors
      reducing direct costs were a reduction in certain accrued interconnection fees,
      more favorable contract pricing from vendors and network optimization.
      Offsetting the declines in direct costs was an increase in video programming
      expenses due to a 6% increase in average programming costs per subscriber,
      offset by the decline in total video RGU’s.





The
      year
      ended December 31, 2004 also included net benefits of $4.8 million related
      to a
      $1.6 million settlement with our provider of Caller Name Identification services
      (CNAM), which resulted in a credit for past over-billings, $2.5 million related
      to video programming services and $0.7 million related to other direct cost
      benefits. The year ended December 31, 2005 included net benefits of $4.4 million
      primarily due to settlements related to billing for UNE loops, reciprocal
      compensation and from our data network providers. Also included in 2004 were
      costs associated with our video programming development division, RCNE, which
      was eliminated. Direct costs of RCNE for the year ended December 31, 2004 were
      $2.5 million.





50
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***Selling,
      General and Administrative Expenses***





Selling,
      general and administrative expenses increased $30.0 million, or 12.2%, to $276.0
      million for the year ended December 31, 2005 (Successor) compared to the year
      ended December 31, 2004 (Predecessor/Successor combined) due to our acquisition
      of the remaining 50% interest in Starpower. Excluding the impact of the
      consolidation of Starpower, selling, general and administrative expenses
      decreased $7.4 million, or 2.6%.  Selling,
      general and administrative expenses for 2004 included $5.3 million in net
      benefits. During the year ended December 31, 2004, $5.4 million of net expense
      was reversed for amounts associated with the elimination of the Chairman’s Bonus
      Plan and other incentive plans. Additionally, the Company reached favorable
      settlements on disputed property taxes, franchise agreements and litigation
      and
      reversed provisions totaling $10.1 million. The company also recorded a charge
      of $7.8 million for rent to adjust for the fact that it was not recording rent
      expense on a straight-line basis and $2.5 million of expense for severance
      related to a work force reduction at the end of 2004. For 2005, selling,
      general and administrative expenses included net benefits totaling $1.4 million
      primarily related to litigation and tax reserves. Also, the years ended December
      31, 2004 and 2005, included credits of approximately $1.7 million in 2004 and
      $0.5 million in 2005 related to transition services reimbursements received
      from
      the purchaser of our Carmel cable system. Excluding the impact of these benefits
      in 2004 and 2005, and the acquisition of Starpower, selling, general and
      administrative expenses declined $12.5 million or 4.3%.





The
      decline in selling, general and administrative expenses was due to our continued
      reduction of operating expenses. The savings related in part to reduced salaries
      and related labor costs of $12.1 million. Average employee headcount was down
      by
      406 across all functional areas. The decline in average headcount was offset
      by
      an increase in average cost per employee due to annual merit increases,
      increased benefits costs and incentive compensation since the company
      significantly reduced its incentive pay in 2004 due to 2004 performance and
      the
      restructuring process. Other reductions related to network maintenance costs,
      telephone expenses in customer service, marketing, bad debt and property taxes
      totaled $8.8 million. Offsetting the reductions were increases in legal fees,
      building expenses and other costs totaling $8.4 million.




SG&Afor
                  the year ended December 31,Successor
              
              Predecessor
              
              Fav/(unfav)2005
              
              2004
              
              Variance
              
              Var
                  %Network
                  operations and construction
              
              $
              98,313
              
              $
              93,569
              
              
              ($4,744
              )
              
              -5.1
              %Sales
                  and marketing
              
              
              50,571
              
              $
              45,523
              
              
              (5,048
              )
              
              -11.1
              %Customer
                  Service
              
              
              20,791
              
              $
              24,348
              
              
              3,557
              
              
              14.6
              %Operating,
                  general and administrative
              
              
              106,319
              
              $
              82,554
              
              
              (23,765
              )
              
              -28.8
              %Total
                  SG&A
              
              $
              275,994
              
              $
              245,994
              
              
              ($30,000
              )
              
              -12.2
              %





***Non-Cash
      Stock-Based Compensation***





In
      the
      second quarter of 2005, our Board of Directors approved the RCN Stock
      Compensation Plan (“Stock Plan”) which was approved by our stockholders in July
      2005. The Stock Plan allows for the issuance of up to 4,636,619 shares, of
      our
      common stock in the form of stock options or restricted stock. During 2005,
      we
      granted 730,086 shares of restricted stock to our non-executive board members
      and certain executives. We also granted 3,752,835 options to purchase RCN stock
      to a broad category of employees. Total non-cash stock-based compensation
      expenses recognized for the year ended December 31, 2005 was $8.9 million using
      the Black-Scholes and lattice model valuation methods. We expect to recognize
      approximately $20.0 million, $19.4 million and $4.5 million in compensation
      expense based on outstanding grants under the Stock Plan in the upcoming years
      ending December 31, 2006, 2007 and 2008, respectively.





51
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***Impairments,
      Exit Costs and Restructuring***





During
      the year ended December 31, 2005, we recorded exit costs of $8.9 million
      primarily due to vacating major facilities in Manhattan, NY, Princeton, NJ,
      Boston, MA, and suburban Philadelphia, PA. Offsetting this was a reversal into
      income of $6.9 million related to the cost over fair value liability for real
      estate leases that was recorded upon emergence from bankruptcy. This reversal
      is
      due to the fact that we recorded an exit cost liability on vacated facilities,
      and therefore a cost over fair value reserve was no longer appropriate. In
      addition the Company recorded $1.9 million of retention and severance expense
      due to the planned closure of our former headquarters facility. We also
      announced a plan to terminate 95 employees across all business functions in
      order to reduce future operating expenses consistent with our business plan.
      We
      recorded $1.1 million in severance expense related to this plan in the fourth
      quarter of 2005.





***Depreciation
      and Amortization***





Depreciation
      and amortization expense decreased $46.6 million, or 19.7%, to $190.3 million
      for the year ended December 31, 2005 (Successor) compared to the year ended
      December 31, 2004 (Predecessor/Successor combined). The net decrease is due,
      in
      part, to the effect of the fresh start accounting revaluation of assets upon
      emergence from Chapter 11 bankruptcy (see Note 4, Fresh Start Accounting).
      The
      decrease is also due to the change in the estimated life of capitalized
      technical labor and equipment on new home installations in 2004 which had a
      disproportionate effect on that year. The decrease is offset by $11.9 million
      in
      depreciation for Starpower, which was recorded as an equity investment in 2004.
      The decrease is also offset by an incremental $5.0 million of depreciation
      expense recorded due to the adjustment of the remaining lives of leasehold
      improvements and other fixed assets in the former headquarters which the company
      has announced it will close in the second quarter of 2006.





***Investment
      Income***





Investment
      income increased $2.7 million, or 91.9%, to $5.6 million for the year ended
      December 31, 2005 (Successor) compared to the year ended December 31, 2004
      (Predecessor/Successor combined) due to an increase in return earned on
      investments.





***Interest
      Expense***





Interest
      expense decreased by $55.3 million, or 56.6%, to $42.3 million for year ended
      December 31, 2005 (Successor) compared to the year ended December 31, 2004
      (Predecessor/Successor combined). This decrease is primarily due to the
      restructuring of debt during the fourth quarter of 2004. Outstanding debt at
      December 31, 2005 was $492.1 million compared to $493.6 million at December
      31,
      2004. The debt canceled in bankruptcy had interest rates of 9.8% to 11.125%.
      Our
      weighted average interest rate for 2005 was 7.9%.





***Gain
      on sale of assets***





Gain
      on
      sale of assets of $2.5 million for the year ended December 31, 2005 (Successor),
      consists primarily of $3.0 million of gains related to the sales of
      approximately 3,300 off-net video subscribers in the New York market, offset
      by
      losses on the disposition of property, plant and equipment.





***Other
      income, net***





Other
      income of $1.5 million for the year ended December 31, 2005 (Successor),
      consisting primarily of a settlement of $1.1 million received from a vendor
      for
      reimbursement of costs we incurred in prior years removing and reinstalling
      faulty equipment they supplied.





***Reorganization
      expense***





Reorganization
      income of $11.1 million consists of settlements of bankruptcy claims for amounts
      less than what was estimated and accrued in deferred reorganization expense
      at
      December 31, 2004.





***Equity
      in Income of Unconsolidated Entities***





Equity
      in
      income of unconsolidated entities decreased $11.3 million or 100.0% for the
      year
      ended December 31, 2005 (Successor) compared to the year ended December 31,
      2004
      (Predecessor/Successor combined). On December 21, 2004, we acquired the 50%
      remaining interest in Starpower we did not already own. Prior to the
      acquisition, we accounted for our 50% interest in Starpower under the equity
      method. The results of Starpower are consolidated in our financial statements
      for the year ended December 31, 2005, whereas they are reported as equity in
      income of unconsolidated entities for the period from January 1 to December
      20,
      2004. We recorded an equity loss for Starpower of $5.9 million for the period
      from January 1 to December 20, 2004 excluding an impairment of $25.7 million
      which was recognized in the impairment of unconsolidated investments line of
      the
      statement of operations.





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As
      discussed earlier in management’s discussion and analysis of financial results,
      we no longer account for our investments in Megacable and MCM under the equity
      method. In the period from January 1 to December 20, 2004 we recorded equity
      income of $17.2 million for our portion of Megacable’s estimated income for the
      first six months of 2004. We also recorded a fresh start gain of $25.6 million
      to value our investments in Megacable and MCM at their fair value. This amount
      was recorded in the gain from fresh start adjustments line of the statement
      of
      operations.





***Discontinued
      Operations***





On
      March
      8, 2004, we completed the sale of our Carmel, NY (“Carmel”) cable system for
      proceeds of approximately $120.2 million (net of purchase price and post-closing
      adjustments). Carmel had approximately 30,000 customers when it was sold. On
      February 19, 2003, we completed the sale of our Central New Jersey (“CNJ”) cable
      system for proceeds of approximately $242.8 million. CNJ had approximately
      80,000 customers when it was sold. In accordance with SFAS 144, the results
      of
      operations for Carmel and CNJ are reported as discontinued operations and their
      results are shown on one line, net of tax. In 2005 we had residual settlements
      of insurance claims and other matters resulting in income from Carmel of $0.04
      million and a loss of $0.2 million from CNJ. Income from the Carmel cable system
      was $1.6 million for the year ended December 31, 2004, and we realized a gain
      on
      the sale of $88.6 million. Income from the CNJ cable system was $0.6 million
      for
      the year ended December 31, 2004.





**2004
      (Successor/Predecessor) Compared to 2003 (Predecessor)**




***Revenues***




In
      2004,
      revenues increased $2.0 million or 0.4%, to $486.8 million for the year ended
      December 31, 2004 (Successor/Predecessor combined) compared to the year ended
      December 31, 2003 (Predecessor). Revenues for 2004 include $2.2 million
      contributed by Starpower for the eleven-day period, December 21 through December
      31, 2004. Included in the 2003 revenues is $20.9 million related to a settlement
      of certain disputes with an ILEC surrounding reciprocal compensation. As a
      result of this settlement, a cash payment of $18.5 million along with $2.4
      million previously deferred were recognized as revenue. Excluding this
      settlement and the Starpower contribution, revenues in 2004 increased $20.7
      million, or 4.5% over 2003. The revenue increase is due to an increase in the
      Average Revenue per Customer from $85 to $96 driven by a combination of rate
      increases for video services and increased RGUs for high-speed data. In
      addition, the revenue of RCNE increased by $4.4 million in 2004.





The
      revenue increases were offset by declines in voice revenues due to lower billed
      usage and prices, lower dial-up revenue and lower reciprocal compensation
      revenue. Dial-up revenue, which is reported in data, decreased by $4.5 million
      as the number of dial-up customers continued to decline. Reciprocal compensation
      revenue, which is impacted to a large degree by dial-up service, decreased
      $8.0
      million, excluding the impact of the dispute settlement in 2003.





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Revenuefor
                  the year ended December 31,Predecessor
              
              Predecessor
              
              Fav/(unfav)2004
              
              2003
              
              Variance
              
              Var
                  %Video
              
              $
              220,158
              
              $
              201,845
              
              $
              18,313
              
              
              9.1
              %Data
              
              
              105,919
              
              
              95,068
              
              
              10,851
              
              
              11.4
              %Voice
              
              
              141,475
              
              
              146,265
              
              
              (4,790
              )
              
              -3.3
              %Reciprocal
                  Compensation
              
              
              6,758
              
              
              35,763
              
              
              (29,005
              )
              
              -81.1
              %Other
              
              
              12,521
              
              
              5,913
              
              
              6,608
              
              
              111.8
              %Total
              
              $
              486,831
              
              $
              484,854
              
              $
              1,977
              
              
              0.4
              %





***Direct
      Expenses***




Direct
      expenses increased $3.9 million, or 2.2%, to $178.1 million for the year ended
      December 31, 2004 (Successor/Predecessor combined) compared to the year ended
      December 31, 2003 (Predecessor). The year ended December 31, 2003 included
      $3.5
      million of net benefits related to settlements with certain voice and data
      network providers. The year ended December 31, 2004 included net benefits of
      $4.8 million related to a $1.6 million settlement with our provider of
      Caller Name Identification services (CNAM), which resulted in a credit for
      past
      over-billings, $2.5 million related to video programming services, $0.7
      million related to other direct cost benefits and $0.7 million of costs
      related to Starpower for the eleven-day period, December 21 through December
      31,
      2004.





Significant
      contributors reducing direct costs were a reduction in certain accrued
      interconnection fees, more favorable contract pricing from vendors and network
      optimization. Offsetting the declines in direct costs was an increase in video
      programming expenses due to an increase in average programming costs per
      subscriber, offset by a decline in average video RGU’s.




***Selling,
      and General and Administrative Expenses***




Selling,
      and general and administrative expenses declined $62.2 million, or 20.2% to
      $246.0 million for the year ended December 31, 2004 (Successor/Predecessor
      combined) compared to the year ended December 31, 2003 (Predecessor). Selling,
      general and administrative expenses for 2003 included $18.9 million of benefits
      related to incentive and other compensation, property taxes, employee benefits,
      billing costs and certain marketing expenses. The year ended December 31, 2003
      also included charges of $16.8 million related to restructuring costs, franchise
      and litigation reserves and credit card fees.





Selling,
      general and administrative expenses for 2004 included $5.3 million in net
      benefits. During the year ended December 31, 2004, $5.4 million of net expense
      was reversed for amounts associated with the elimination of the Chairman’s Bonus
      Plan and other incentive plans. Additionally, the Company reached favorable
      settlements on disputed property taxes, franchise agreements and litigation
      and
      reversed provisions totaling $10.1 million. The company also recorded a charge
      of $7.8 million for rent to adjust for the fact that it was not recording rent
      expense on a straight-line basis and $2.5 million of expense for severance
      related to a work force reduction at the end of 2004. Also, the year ended
      December 31, 2004 included credits of approximately $1.7 million related to
      transition services reimbursements received from the purchaser of our Carmel
      cable system.





Excluding
      these items, selling, general and administrative expenses declined $57.3
      million, or 18.5%. The savings primarily related to reduced salaries and
      employee-related costs as well as facilities expenses as a result of staff
      reductions in customer service and general and administrative groups. Average
      employee headcount declined by 804 from 2004 to 2003. Other reductions included
      bad debt, insurance and telecommunications expenses.





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SG&Afor
                  the year ended December 31,Predecessor
              
              Predecessor
              
              Fav/(unfav)2004
              
              2003
              
              Variance
              
              Var
                  %Network
                  operations and construction
              
              $
              93,569
              
              $
              100,483
              
              $
              6,914
              
              
              6.9
              %Sales
                  and marketing
              
              
              45,523
              
              $
              52,815
              
              
              7,292
              
              
              13.8
              %Customer
                  Service
              
              
              24,348
              
              $
              37,309
              
              
              12,961
              
              
              34.7
              %Operating,
                  general and administrative
              
              
              82,554
              
              $
              117,544
              
              
              34,990
              
              
              29.8
              %Total
                  SG&A
              
              $
              245,994
              
              $
              308,151
              
              $
              62,157
              
              
              20.2
              %




***Non-cash
      Stock-Based Compensation***




Non-cash
      stock-based compensation decreased $0.3 million, or 5.9%, to $4.4 million for
      the full year 2004. The decrease was largely due to the effect of restricted
      stock cancellations in the Chapter 11 reorganization and the absence of any
      significant stock-based grants during 2004.




***Impairments
      and other charges, net***




We
      recorded an impairment gain of $7.7 million in 2004 as compared to a charge
      of
      $167.2 million in 2003. The gain in 2004 is primarily the result of our being
      able to negotiate more favorable lease terminations than originally
      anticipated.




***Depreciation
      and Amortization***




Depreciation
      and amortization expense in 2004 increased by $39.7 million or 20.1%, to $237.0
      million from $197.3 million in 2003. The increase is due to the effect of
      previous dispositions and impairment in the value of network construction
      materials, equipment and leasehold improvements as network expansion plans
      were
      curtailed to preserve capital, offset by additional depreciation due to the
      change in accounting estimate adopted on January 1, 2004. (See Note 4, Summary
      of Significant Accounting Policies, to RCN’s Consolidated Financial Statements)




***Investment
      Income***




Investment
      income for 2004 of $2.9 million decreased from $6.3 million in 2003 due to
      lower
      interest rates and a decrease in average cash, temporary cash investments,
      short-term investments and restricted investments during 2004 compared to 2003.




***Interest
      Expense***




Interest
      expense decreased to $97.6 million compared to $180.2 million in 2003. The
      decrease in interest expense for the year ended December 31, 2004 reflects
      RCN’s
      implementation of SOP 90-7. On May 27, 2004, August 5, 2004 and August 20,
      2004,
      the RCN Debtors filed a voluntary petition for reorganization under Chapter
      11.
      RCN stopped recording interest on its senior notes and senior discount notes
      and
      classified this debt as a pre-petition liability subject to compromise. RCN
      did
      not pay the interest accrued beyond the date of its Chapter 11 filing.




***Gain
      on Early Extinguishment of Debt***




During
      the quarter ended September 30, 2003, we completed a debt repurchase for certain
      of its senior discount notes. Approximately $75.2 million in book and face
      value
      of senior notes was retired. A gain of approximately $45.6 million was recorded
      from the early retirement of debt in which approximately $27.8 million of cash
      was paid. In addition, RCN incurred fees of approximately $1.1 million and
      wrote
      off debt issuance costs of approximately $0.6 million.





55
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***Gain
      on Sale of Assets***





During
      2004 we sold various pieces of excess property, plant and equipment that were
      available due to our exiting facilities and reducing staff.




***Reorganization
      Expenses***




We
      incurred substantial expenses related to our bankruptcy filing and subsequent
      workout. These expenses included fees paid to attorneys, bankers, accountants
      and workout and other consultants. We also recorded retention expense to retain
      key employees through the bankruptcy process.




***Gain/(loss)
      on Settlement of Liabilities Subject to Compromise and
      Restructuring***




We
      recorded a net gain of $1,166.0 million in 2004 relating to the settlement
      of
      liabilities subject to compromise and restructuring. The major component of
      this
      gain was the expungement of RCN’s senior notes for $1,179.0 million upon
      emergence from Chapter 11.




***Gain/(loss)
      on Fresh Start Adjustments***




RCN
      recorded a net gain of $173.2 million in 2004 relating to fresh start
      adjustments. The major components in this gain were the revaluation of RCN’s
      fixed assets and intangible assets.




***Discontinued
      Operations***





On
      March
      8, 2004, we completed the sale of our Carmel, NY (“Carmel”) cable system for
      proceeds of approximately $120.2 million. Carmel had approximately 30,000
      customers when it was sold. On February 19, 2003, we completed the sale of
      our
      CNJ cable system for proceeds of approximately $242.8 million. CNJ had
      approximately 80,000 customers when it was sold. In accordance with SFAS 144,
      the results of operations for Carmel and CNJ are reported as discontinued
      operations and their results are shown on one line, net of tax. Income from
      the
      Carmel cable system was $8.4 million for the year ended December 31, 2003.
      Income from the CNJ cable system was $2.0 million for the year ended December
      31, 2003 and we realized a gain of $163.7 million on the sales.




***Equity
      in Income of Unconsolidated Entities***




Equity
      in
      income of unconsolidated entities for 2004 was $11.3 million compared to $23.5
      million for 2003. The 2004 amounts reflect $17.2 million of income from
      Megacable, offset by a $5.9 million equity loss for Starpower. Results for
      2003
      included $22.8 million in income for Megacable and $0.6 million in income for
      Starpower. Results for 2004 include only six months of our portion of estimated
      income from Megacable. As part of the fresh start adjustments, Megacable and
      MCM
      were revalued on the date of emergence to $178.0 million and we recorded a
      gain
      of $25.6 million in the gain on fresh start adjustments line of the statement
      of
      operations.




***Impairment
      of Unconsolidated Entities***




Impairment
      of unconsolidated entities in 2004 included a write-down of $25.7 million for
      the re-valuation of Starpower. Included in the 2003 results is an impairment
      charge of $35.0 million reflecting a further write-down of RCN’s investment in
      Starpower. The write-down reflects RCN’s current assessment of the fair value of
      this investment based on its most recent operating plan.





**Liquidity
      and Capital Resources**





**December
                31,**
              **2005**
            
            **December
                31,**
              **2004**Cash,
                cash equivalents and short-term investments
            
            $
            143,017
            
            $
            163,964Debt
                (including current maturities and capital lease obligations)
            
            
            492,097
            
            
            493,568





***Cash
      Provided by (Used in) Operating Activities***





Net
      cash
      provided by operating activities was $60.4 million for the year ended December
      31, 2005 (Successor). Net loss from continuing operations was $136.0 million
      offset by $198.0 million in non-cash operating items. Net cash used by operating
      activities was $46.8 million for the twelve months ended December 31, 2004
      (Successor/Predecessor). Although the Company recorded net income from
      continuing operations of $968.3 million for the period, noncash items, including
      $173.2 million of income from fresh start adjustments, a $1,166.0 million gain
      on the settlement of liabilities subject to compromise and $231.7 million of
      depreciation and amortization expense contributed $1,052.6 million to the income
      from continuing operations. Excluding these non-cash items, as well as the
      net
      change in certain assets and liabilities net of business acquisitions, cash
      used
      by continuing operations was $84.3 million. This was partially offset by a
      reduction in working capital, primarily reflecting a $42.8 million increase
      in
      accrued expenses.





56
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***Cash
      Provided by Investing Activities***





Net
      cash
      used by investing activities was $97.8 million in the twelve months ended
      December 31, 2005 (Successor), which includes $89.3 million in additions to
      property, plant and equipment, a $21.7 million increase in short-term
      investments and $2.2 million for investments in acquisitions, partially offset
      by $6.3 million in proceeds from the sale of assets and a $9.0 million decrease
      in investments restricted for debt service. In comparison, cash provided by
      investing activities in the twelve months ended December 31, 2004 (Successor
      and
      Predecessor) was $209.7 million reflecting a $207.8 million decrease in
      investments restricted for debt service and proceeds of $120.2 million (net
      of
      purchase price and post-closing adjustments) from the sale of our Carmel, New
      York cable system partly offset by a $50.4 million decrease in short term
      investments, $52.3 million in additions to property, plant and equipment and
      $14.9 million (net of cash acquired) related to the acquisition of Starpower.





***Cash
      Provided by (Used in) Financing Activities***





Net
      cash
      used in financing activities was $5.2 million in the twelve months ended
      December 31, 2005 (Successor), reflecting $6.5 million in repayments under
      our
      First-Lien Credit Agreement and capital lease obligations, offset by $1.4
      million in proceeds from the issuance of shares of our common stock under our
      2005 Stock Compensation Plan . In comparison, cash used in financing activities
      in the twelve months ended December 31, 2004 (Successor and Predecessor) was
      $67.7million. The net use of cash was primarily due to the refinancing
      activities that took place under reorganization. Pursuant to the Plan, the
      Term
      Loan of the predecessor company was repaid and the related credit facility
      was
      terminated, all Senior Notes and Discount Notes of RCN were canceled in exchange
      for the right to receive shares of Reorganized RCN common Stock and the
      Evergreen Credit Agreement replaced with the Amended and Restated Term Loan
      and
      Credit Agreement (the “Third-Lien Term Loan”).




We
      believe that our available cash, cash equivalents, short-term investments and
      cash generated from operations will be sufficient to fund our existing
      operations, planned capital spending and other commitments over the next twelve
      months. If our operating performance differs significantly from our forecasts,
      we may be required to reduce our operating expenses and curtail capital
      spending, and we may not remain in compliance with our debt covenants.





From
      time
      to time, we may evaluate certain strategic actions that would enhance our value,
      including selling assets and acquiring or merging with another entity. Under
      the
      terms of our credit facility, the proceeds of asset sales are required, with
      certain exceptions, to be used to pay down the credit facility. Acquisitions
      or
      mergers would require approval of our current lenders and in certain cases,
      our
      current stockholders. As of December 31, 2005, we have utilized all of our
      committed borrowing capacity. We have no assurance that our lenders and
      stockholders would give us approval to pursue acquisitions or mergers, nor
      can
      we be assured that we would be able to raise any funds necessary to undertake
      such acquisitions or mergers at terms favorable to us, if at all.





***Description
      of Outstanding Debt***





As
      of
      December 31, 2005, our total debt was approximately $492.1 million, including
      $3.5 million of capital leases. The following is a description of our debt
      and
      the significant terms contained in the related agreements.





*Successor
      First-Lien Credit Agreement*





Our
      obligations under the First-Lien Credit Agreement are guaranteed fully and
      unconditionally, jointly and severally, by each of our domestic subsidiaries.
      As
      collateral security for our obligations under the First Lien Credit Agreement
      and the guarantees thereof, we and each of the domestic subsidiaries has granted
      to Deutsche Bank, for the benefit of the syndicated Lenders (“First-Lien
      Lenders”), a first priority lien on substantially all of our tangible and
      intangible assets, including, without limitation, pledges of our equity
      ownership in our domestic corporations.





On
      December 5, 2005, the Company entered into an amendment to its First-Lien Credit
      Agreement so that it could enter into an agreement to purchase Consolidated
      Edison Communications Holding Company, Inc. (“CEC”), the telecommunications
      subsidiary of Consolidated Edison, Inc. (See “Business - Con Edison
      Communications”). The amendment added to the First Lien Credit Agreement an
      additional letter of credit facility under which up to $32.0 million of letters
      of credit may be issued to support obligations assumed in connection with the
      acquisition of CEC as well as other obligations supported by outstanding letters
      of credit. The amendment also made changes to the financial covenants included
      in the First Lien Credit Agreement to take into account the acquisition of
      CEC
      and certain additional updated assumptions. In addition, a schedule to the
      First
      Lien Credit Agreement was amended to insert items inadvertently
      omitted.




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On
      March
      3, 2006, the Company entered into another amendment to its First-Lien Credit
      Agreement to permit the sale of its investments in Megacable and MCM (See
“Business - Overview of Business”), and to provide the Company with the ability
      to use a portion of the proceeds to pay down the Third Lien Term Loan. The
      amendment also modified the terms of the previous amendment entered into in
      December, 2005, to allow for working capital and capital expenditure adjustments
      to the purchase price of CEC, as defined in the CEC stock purchase
      agreement.




*Successor
      Notes*




On
      the
      Effective Date, we issued $125.0 million aggregate principal amount of 7.375%
      convertible second lien notes due 2012, which are convertible into shares of
      our
      common stock at a per share conversion price of $25.16 subject to certain
      adjustments. The Notes are governed by the indenture between us and HSBC Bank
      USA as Indenture Trustee dated December 21, 2004.





The
      Notes
      mature on June 21, 2012, subject, in certain instances, to earlier repayment
      in
      whole or in part. We used the proceeds from the Notes to finance, in part,
      the
      consummation of the Plan and the payment of the fees and expenses relating
      thereto. The Notes are guaranteed fully and unconditionally, jointly and
      severally, by all subsidiaries and the obligations under such guarantees,
      together with our obligations under the Notes, are secured by a second priority
      lien on substantially the same assets which secure the First Lien Credit
      Agreement.





*Successor
      Third-Lien Term Loan*





On
      the
      Effective Date, we amended and restated our Evergreen Credit Agreement by
      entering into an Amended and Restated Term Loan and Credit Agreement (the
“Third-Lien Term Loan”) with HSBC Bank USA, National Association, as agent and
      collateral agent (in such capacities, the “Agent”) and certain financial
      institutions parties thereto, as lenders (the “Third-Lien Lenders”).





The
      Third-Lien Term Loan provides, among other things, for a seven and three-quarter
      year, approximately $34.5 million term loan credit facility, subject, in certain
      instances, to early repayment in whole or in part.





As
      collateral security for our obligations under the Third-Lien Term Loan, we
      have
      granted to the Agent, for the benefit of the Third-Lien Lenders, a third
      priority lien on substantially all of RCN Corporation’s tangible and intangible
      assets, including, without limitation, pledges of our equity ownership in
      domestic corporations. The Third-Lien Term Loan is not guaranteed by any of
      our
      subsidiaries.





In
      addition, we with HSBC Bank USA, as Indenture Trustee of the Convertible Notes
      and as Collateral Agent for the Third-Lien Term Loan, have executed an
      Intercreditor Agreement ordering the priority of the liens of the various
      lenders.





***Covenants***





We
      are
      subject to certain covenants and restrictions on our debt agreements. As of
      December 31, 2005 we were in compliance with all covenants.





***Letters
      of Credit***





We
      have
      approximately $21.0 million of letters of credit as of December 31, 2005
      relating to our workmen’s compensation and employee liability insurance
      policies, real estate lease obligations and license and permit obligations
      to
      governmental agencies. Approximately $0.9 million of these requirements are
      collateralized with restricted cash, as reflected in restricted investments
      in
      our Consolidated Financial Statements.





58
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***Contractual
      Cash Commitments***




The
      following table summarizes RCN’s contractual cash commitments at December 31,
      2005:


**(dollars
                  in thousands)****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                    than**
                **1
                  Year**
              
              **1-3
                  years**
              
              **4-5
                  years**
              
              **After**
                **5
                  years**First
                  Lien
              
              $
              324,479
              
              $
              3,278
              
              $
              9,833
              
              $
              311,368
              
              $
              -Convertible
                  Second Lien Notes
              
              
              125,000
              
              
              -
              
              
              -
              
              
              -
              
              
              125,000Third
                  Lien
              
              
              39,155
              
              
              -
              
              
              -
              
              
              -
              
              
              39,155Capital
                  leases
              
              
              3,463
              
              
              370
              
              
              458
              
              
              392
              
              
              2,243Operating
                  leases
              
              
              138,520
              
              
              21,356
              
              
              41,895
              
              
              33,732
              
              
              41,537Total
                  Contractual Obligations
              
              $
              630,617
              
              $
              25,004
              
              $
              52,186
              
              $
              345,492
              
              $
              207,935




***Recently
      Issued Accounting Pronouncements***




See
      Note
      3, “Summary of Significant Accounting Policies,” to the accompanying
      consolidated financial statements for a full description of recently issued
      accounting pronouncements including the date of adoption and effects on results
      of operations and financial condition.




***Inflation***




RCN
      does
      not believe that its business is impacted by inflation to a significantly
      different extent than the general economy in the United States and Mexico.





59
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**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





In
      the
      normal course of business RCN is exposed to market risk arising from changes
      in
      interest rates that could impact cash flows and earnings. Our primary interest
      rate risk results from changes in the London Interbank Offered Rate, or LIBOR,
      and U.S. prime and Eurodollar rates, which are used to determine the interest
      rates applicable to our borrowings under our First Lien Credit
      Agreement. RCN is also exposed to exchange rate risk relative to its
      equity investments in Megacable and MCM, which are subject to Dollar/Peso
      translation adjustments.





As
      of
      December 31, 2005, we held $72.1 million of short-term investments and $70.9
      million of cash and cash equivalents primarily consisting of investment grade
      US
      Treasury bills, commercial paper, government backed obligations, and money
      market deposits. Our primary interest rate risk on these short-term investments
      and cash and cash equivalents results from changes in short-term (less than
      six
      months) interest rates. However, this risk is largely offset by the fact that
      interest on our bank credit facility borrowings is variable and is reset over
      periods of less than six months.





At
      December 31, 2005 the interest rate for the First Lien Credit Agreement
      approximated LIBOR plus 4.25%, or 8.8125%. Approximately 34.1% of RCN’s debt at
      December 31, 2005 is fixed in interest rate. If interest rates had been 10%
      higher throughout 2005, RCN would have incurred $2.8 million of additional
      interest expense.








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




RCN’s
      Consolidated Financial Statements, the related notes and the reports of the
      independent registered public accounting firms are included in this Annual
      Report beginning on page F-1.




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




None.








**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**




We
      carried out an evaluation required by Rule 13a-15 of the Securities Exchange
      Act
      of 1934 under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of RCN’s "disclosure controls and
      procedures" and "internal control over financial reporting" as of the end of
      the
      period covered by this Annual Report.




The
      evaluation of RCN’s disclosure controls and procedures and internal control over
      financial reporting included a review of our objectives and processes,
      implementation by the Company and the effect on the information generated for
      use in this Annual Report. In the course of this evaluation and in accordance
      with Section 302 of the Sarbanes Oxley Act of 2002, we sought to identify
      material weaknesses in our controls, to determine whether we had identified
      any
      acts of fraud involving personnel who have a significant role in our internal
      control over financial reporting that would have a material effect on our
      consolidated financial statements, and to confirm that any necessary corrective
      action, including process improvements, were being undertaken. Our evaluation
      of
      our disclosure controls and procedures is done quarterly and management reports
      the effectiveness of our controls and procedures in our periodic reports filed
      with the SEC. Our internal control over financial reporting is also evaluated
      on
      an ongoing basis by RCN’s internal auditors and by other personnel in RCN’s
      finance organization. The overall goals of these evaluation activities are
      to
      monitor our disclosure controls and procedures and internal control over
      financial reporting and to make modifications as necessary. We periodically
      evaluate our processes and procedures and make improvements as required.




Because
      of its inherent limitations, disclosure controls and procedures and internal
      control over financial reporting may not prevent or detect misstatements. In
      addition, projections of any evaluation of effectiveness to future periods
      are
      subject to the risk that controls may become inadequate because of changes
      in
      conditions or that the degree of compliance with the policies or procedures
      may
      deteriorate. Management applies its judgment in assessing the benefits of
      controls relative to their costs. Because of the inherent limitations in all
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues and instances of fraud, if any, within the company have
      been
      detected. The design of any system of controls is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions, regardless of how remote.




60
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*Disclosure
      Controls and Procedures*




Disclosure
      controls and procedures are designed with the objective of ensuring that (i)
      information required to be disclosed in the Company's reports filed under the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods specified in the SEC's rules and forms and (ii)
      information is accumulated and communicated to management, including our Chief
      Executive Officer and Chief Financial Officer, as appropriate to allow timely
      decisions regarding required disclosures. Based on their evaluation, RCN's
      Chief
      Executive Officer and Chief Financial Officer have concluded that our disclosure
      controls and procedures are effective.




*Management's
      Report on Internal Control over Financial Reporting*




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rule
      13a-15(f). Under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, we conducted
      an evaluation of the effectiveness of our internal control over financial
      reporting based on the framework in *Internal
      Control — Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission.
      Internal control over financial reporting is a process designed to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that (a) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the Company; (b) provide reasonable assurance that transactions are
      recorded as necessary to permit the preparation of financial statements in
      accordance with generally accepted accounting principles and that receipts
      and
      expenditures of the Company are being made only in accordance with
      authorizations of the Company's management and directors; and (c) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use or disposition of the Company's assets that could have a
      material effect on the financial statements. Based on our evaluation under
      the
      framework in *Internal
      Control — Integrated Framework* ,
      our
      management concluded that our internal control over financial reporting was
      effective as of December 31, 2005.




Our
      management's assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2005 and the effectiveness of our
      internal control over financial reporting as of December 31, 2005 has been
      audited by Friedman LLP, an independent registered public accounting firm,
      as
      stated in their report which appears in Item 8 of this Annual Report.




*Remediation
      of the Material Weaknesses Identified at December 31, 2004*




As
      described more fully in the RCN’s Annual Report on Form 10-K for the period
      ended December 31, 2004, RCN’s management, including the Chief Executive Officer
      and Chief Financial Officer, conducted an evaluation of the effectiveness of
      RCN’s disclosure controls and procedures (as defined in the Exchange Act Rule 13
      (a)-15 (e)) as of December 31, 2004. Based upon the evaluation, our Chief
      Executive Officer and the Chief Financial Officer concluded that RCN’s
      disclosure controls and procedures were not effective as of December 31, 2004
      because of (1) the failure to obtain timely information about its 48.93%
      ownership interest in Megacable, and (2) the material weakness in internal
      control over financial reporting, related to lease accounting and the
      reconciliation of general ledger account balances.




During
      2005, we implemented additional controls and procedures in order to address
      the
      material weaknesses related to lease accounting and the reconciliation of
      general ledger account balances.  Also
      during 2005, Management determined that it did not exercise sufficient control
      over Megacable and MCM to continue accounting for those investments under equity
      method and has decided to account for these investments under the cost method,
      commencing in the fourth quarter of 2005, in accordance with APB No. 18 *“The
      Equity Method of Accounting for Investments in Common Stock”* ,
      and
      FASB Interpretation No. 35 *“Criteria
      for Applying the Equity Method of Accounting for Investments in Common
      Stock”* (“FIN
      35”). Consequently, these matters did not constitute control deficiencies as of
      December 31, 2005.




61
 *Table
          of Contents*




Our
      Chief
      Executive Officer and Chief Financial Officer evaluated the effectiveness of
      the
      our disclosure controls and procedures in place at the end of the period covered
      by this Annual Report pursuant to Rule 13a-15(b) of the Exchange Act. Based
      on
      this evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that RCN’s disclosure controls and procedures (as defined in the
      Exchange Act Rule 13 (a)-15 (e)) were effective as of December 31,
      2005.




*Changes
      in Internal Control over Financial Reporting*




Other
      than the remediation efforts discussed above, there were no changes in our
      internal control over financial reporting that occurred during RCN's last fiscal
      quarter that have materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.




In
      the
      third quarter of 2005, we announced that we would be closing our former
      headquarters in Princeton, NJ in the second quarter of 2006, and moving the
      functions performed there, which include accounting, finance, human resources,
      legal, information technology, and marketing to our new headquarters in Herndon,
      VA, or other RCN locations. The majority of our Princeton employees will not
      remain with RCN after the facility is closed. While we have a plan in place
      to
      ensure an effective transition, including two to three months of training for
      new employees by our Princeton employees, we cannot give absolute assurance
      that
      this transition will not negatively impact our internal controls over financial
      reporting.






**ITEM
                9B.**
            **OTHER
                INFORMATION**




RCN
        has
        amended its forms of Non-Qualified Option Agreement and Incentive Stock Option
        Agreement . These amended agreements are included as Exhibits 10.29 and 10.30
        to
        this Annual Report.  The agreements were amended to correct a typographical
        error in the forms previously filed on RCN’s Current Report on Form 8-K dated
        January 6, 2006.  The previously filed forms mistakenly indicated that the
        term of the options is a maximum of 10 years.  The correct term of the
        options is a maximum of 7 years.
  RCN
        has
        amended outstanding restricted stock awards made to its outside directors
        to (i)
        permit transfers of shares to entities in which a director is a shareholder,
        partner or member so long as the director retains sole power over the voting,
        tendering and disposition of the shares and (ii) clarify that the requirement
        that the director continue to hold 50% of all vested granted shares for so
        long
        as he or she serves as an RCN director is determined on a net-after tax
        basis.  An amended form of Director Restricted Stock Agreement is attached
        as Exhibit 10.31 to this Annual Report.


62
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            of Contents*





**PART
      III**




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





The
      information required by this item with respect to our directors, our Audit
      Committee and Audit Committee financial expert is incorporated by reference
      to
      the information set forth under the captions entitled "Proposal No. 1. Election
      of Directors" and "Board of Directors and Corporate Governance Matters - Audit
      Committee" in our 2006 Proxy Statement.




The
      information required by this item with respect to our executive officers is
      set
      forth under the caption "Executive Officers of the Registrant" in Item 4A of
      this Annual Report.




The
      information required by this item with respect to our compliance with Section
      16(a) of the Securities Exchange Act of 1934 is incorporated by reference to
      the
      information set forth under the caption entitled "Section 16(a) Beneficial
      Ownership Reporting Compliance" in our 2006 Proxy Statement.




We
      adopted a revised Code of Business Conduct on April 7, 2005. The Code of
      Business Conduct is applicable to all our personnel, including all of our
      executive officers. The Code, together with the Charters of our Executive
      Committee, Nominating/ Corporate Governance Committee, Compensation Committee
      and Audit Committee, are publicly available at
      http://investor.rcn.com/downloads/codeofconduct.pdf or through our website
      at
      www.rcn.com. If we make any substantive amendments to the Code of Business
      Conduct or grant to any of our executive officers or members of our Board of
      Directors any waiver, including any implicit waiver, from any of the provisions
      of the Code, we will disclose the nature of such amendment or waiver on our
      website or in a current report on Form 8-K.






**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**





The
      information required by this item is incorporated by reference to the
      information set forth under the captions entitled "Board of Directors and
      Corporate Governance Matters - Compensation of Directors" and "Executive
      Compensation" in our 2006 Proxy Statement.





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




The
      information required by this item with respect to the security ownership of
      certain beneficial owners and management is incorporated by reference to the
      information set forth under the caption entitled "Security Ownership of Certain
      Beneficial Owners and Management" in our 2006 Proxy, as well as under the
      caption “Securities Authorized for Issuance Under Equity Compensation Plans” in
      Item 5 of this Annual Report.




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




RCN
      had
      the following material transactions with related parties during the year. RCN
      believes all transactions were designed to reflect arrangements that would
      have
      been agreed upon by parties negotiating at arm’s length.




In
      1997,
      Starpower and Pepco entered into an agreement for the lease of certain portions
      of Pepco’s fiber system and under which Pepco provides construction and
      construction management services to Starpower. The costs of such services
      provided by RCN and Pepco to Starpower are believed to be equivalent to those
      that would be obtained from third party contractors. Based on the joint venture
      approved service agreement, which is renewed annually by Starpower, RCN
      allocates certain identified expenses incurred to Starpower. These expenses
      include network cost allocations, customer call center costs, and general
      administrative costs. These identifiable costs totaled approximately $11.7
      million for the year ended December 31, 2005. Based on RCN’s interest in the
      Starpower joint venture, 50% of these costs are recognized by RCN on the Equity
      in (loss) of unconsolidated entities line in the Consolidated Statements of
      Operations. Subsequent to the acquisition, RCN accounted for Starpower as a
      100%
      consolidated subsidiary.





63
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            of Contents*





In
      2004,
      RCN paid Level 3 Communications (“Level 3”) approximately $.03 million for
      network construction and $3.1 million for circuit costs. Level 3 owned
      approximately 22% of the outstanding shares of RCN’s common stock immediately
      prior to the Effective Date (all such shares were extinguished in the Chapter
      11
      proceedings). In addition, Old RCN’s former Chairman and CEO served as director
      on Level 3’s board of directors. In July 2004, Level 3 filed a lawsuit against
      RCN alleging breach of contract in relation to several participation agreements
      RCN and Level 3 entered into in 2000. Level 3 claimed RCN owed approximately
      $1.7 million plus interest under the participation agreements. RCN defended
      the
      claim asserting that it opted out of those agreements. In February 2005, RCN
      and
      Level 3 executed a settlement agreement pursuant to which RCN paid Level 3
      $0.7
      million for settlement of the claim in full.




Prior
      to
      becoming RCN’s chief executive officer in December 2004, Peter Aquino provided
      consulting services to RCN through two advisory companies, the terms of which
      were approved by the Bankruptcy Court. From November 2003 until his resignation
      in August 2004, Mr. Aquino provided consulting services to RCN on behalf of
      Capital and Technology Advisors, LLC (“CTA”), the industry and technology
      advisors to the creditors’ committee in RCN’s Chapter 11 reorganization. For
      2004, RCN paid approximately $3.6 million to CTA for such services. Upon
      emergence from bankruptcy, RCN retained CTA to provide strategic advisory
      services, for which RCN paid CTA $1.1 million in 2005.





In
      August, 2004, Mr. Aquino, through his company PDA Group, LLC (“PDA”), was
      retained by RCN to perform consulting services relating to RCN’s market and
      network operations, customer care and execution of sales and marketing
      strategies. In December 2004, RCN appointed Mr. Aquino chief executive officer,
      effectively ending his role as consultant, and he became an employee of RCN.
      As
      an operations consultant under PDA Group, LLC, Mr. Aquino was paid $0.2 million
      from August to December, 2004.






**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT’S FEES AND SERVICES**





The
      information required by this item is incorporated by reference to the
      information set forth under the caption entitled "Independent Registered Public
      Accountants and Related Fees" in our 2006 Proxy Statement.








**PART
      IV**





**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES**





(a)
            The
                following documents are filed as part of this Annual Report:





(1)
            Financial
                Statements.





A
      listing
      of the financial statements, notes and reports of independent registered public
      accountants required by Item 8 begins on page F-1 of this annual report.





(2)
            Financial
                Statement Schedules





See
      “Schedule II—Valuation and Qualifying Accounts” on page F-60





(3)
            The
                index to the Exhibits begins on page E-1 of this Annual Report.





64
 *Table
            of Contents*





**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.




Date:
                March 14, 2006
            RCN
                CorporationBy:
            /s/
                JAMESF.
                MOONEY**James
                F. Mooney**
              **Chairman**




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




Signature
            
            Title
            DatePRINCIPAL
                EXECUTIVE OFFICERS:/S/
                JAMES F. MOONEY
            
            Chairman
                (Principal Executive Officer)
            March
                14, 2006**James
                F. Mooney**/S/
                PETER D. AQUINO
            
            President
                and Chief Executive Officer (Principal Executive Officer)
            March
                14, 2006**Peter
                D. Aquino**/S/
                Michael T. Sicoli
            
            Executive
                Vice President andChief
                Financial Officer (Principal Financial Officer)
            March
                14, 2006**Michael
                T. Sicoli**DIRECTORS:/S/
                JAMES F. MOONEY
            
            
            March
                14, 2006**James
                F. Mooney**/S/
                PETER D. AQUINO
            
            
            March
                14, 2006**Peter
                D. Aquino**/S/
                BENJAMIN C. DUSTER IV
            
            
            March
                14, 2006**Benjamin
                C. Duster IV**/S/
                LEE S. HILLMAN
            
            
            March
                14, 2006**Lee
                S. Hillman**





*Table
            of Contents*




/S/
                MICHAEL E. KATZENSTEIN
            
            
            March
                14, 2006**Michael
                E. Katzenstein**/S/
                THEODORE H. SCHELL
            
            
            March
                14, 2006**Theodore
                H. Schell**/S/
                DANIEL TSEUNG
            
            
            March
                14, 2006**Daniel
                Tseung**




S-1
 *Table
            of Contents*




**EXHIBITS
        INDEX**
  **(Exhibits
        are listed by numbers corresponding to the Exhibit Table of Item 601 in
        Regulation S-K).**
  **Exhibit****No.**
              
              **Description**2.1
              
              Joint
                  Plan of Reorganization of RCN Corporation and Certain Subsidiaries,
                  dated
                  as of December 21, 2004 (incorporated by reference to Exhibit 2.1
                  of RCN’s
                  Current Report on Form 8-K filed on December 14, 2004).2.2
              
              Order
                  Confirming the Joint Plan of Reorganization of RCN Corporation
                  and Certain
                  Subsidiaries, dated as of December 8, 2004 (incorporated by reference
                  to
                  Exhibit 2.2 of RCN’s Current Report on Form 8-K filed on December 14,
                  2004).3.1
              
              Amended
                  and Restated Certificate of Incorporation of RCN Corporation, dated
                  as of
                  December 21, 2004 (incorporated by reference to Exhibit 3.1 of
                  RCN’s
                  Current Report on Form 8-K filed on December 27, 2004
                  8-K).3.2
              
              Amended
                  and Restated Bylaws of RCN Corporation (incorporated by reference
                  to
                  Exhibit 3.2 of RCN’s Current Report on Form 8-K filed on December 27,
                  2004).4.1
              
              Warrant
                  Agreement, dated as of December 21, 2004, by and between RCN Corporation
                  and HSBC Bank USA, National Association as Warrant Agent (incorporated
                  by
                  reference to Exhibit 4.1 of RCN’s Current Report on Form 8-K filed on
                  December 27, 2004.4.2
              
              Registration
                  Rights Agreement, dated as of December 21, 2004, by and between
                  RCN
                  Corporation and the Stockholders listed on the signature pages
                  thereto
                  (incorporated by reference to Exhibit 4.2 of RCN’s Current Report on Form
                  8-K filed on December 27, 2004).4.3
              
              Note
                  Purchase Agreement, dated as of December 21, 2004, by and among
                  RCN
                  Corporation, the Guarantors listed on the signature pages thereto
                  and the
                  Purchasers listed in Schedule I and Schedule II thereto (incorporated
                  by
                  reference to Exhibit 4.3 of RCN’s Current Report on Form 8-K filed on
                  December 27, 2004).4.4
              
              Indenture,
                  dated as of December 21, 2004, by and among RCN Corporation and
                  HSBC Bank
                  USA, National Association (incorporated by reference to Exhibit
                  4.4 of
                  RCN’s Current Report on Form 8-K filed on December 27,
                  2004).4.5
              
              Registration
                  Rights Agreement, dated as of December 21, 2004, by and between
                  RCN
                  Corporation and the Purchasers listed in Schedule I and Schedule
                  II
                  thereto (incorporated by reference to Exhibit 4.5 of RCN’s Current Report
                  on Form 8-K filed on December 27, 2004).10.1
              
              Dark
                  Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan
                  Fiber
                  Systems/McCourt, Inc. and RCN Telecom Services of Massachusetts,
                  Inc. (is
                  incorporated by reference to Exhibit 10.2 to RCN’s Amendment No. 2 to Form
                  10/A filed September 5, 1997 (Commission File No.
                  0-22825.))10.2
              
              Dark
                  Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan
                  Fiber
                  Systems of New York, Inc. and RCN Telecom Services of New York,
                  Inc. (is
                  incorporated by reference to Exhibit 10.3 to RCN’s Amendment No. 2 to Form
                  10/A filed September 5, 1997 (Commission File No.
                  0-22825.))10.3
              
              Amended
                  and Restated Operating Agreement of RCN-Becocom, LLC dated as of
                  June 17,
                  1997 (is incorporated by reference to Exhibit 10.8 to RCN’s Amendment No.
                  2 to Form 10/A filed September 5, 1997 (Commission File No.
                  0-22825.))10.4
              
              Management
                  Agreement dated as of June 17, 1997 among RCN Operating Services,
                  Inc. and
                  RCN-Becocom, Inc. (is incorporated herein by reference to Exhibit
                  10.9 to
                  RCN’s Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
                  File No. 0-22825.))10.5
              
              Construction
                  and Indefeasible Right of Use Agreement dated as of June 17, 1997
                  between
                  RCN-Becocom, Inc. and RCN-Becocom, LLC (is incorporated herein
                  by
                  reference to Exhibit 10.10 to RCN’s Amendment No. 2 to Form 10/A filed
                  September 5, 1997 (Commission File No.
                  0-22825.))


E-1
 *Table
            of Contents*




**Exhibit****No.**
              
              **Description**10.6
              
              License
                  Agreement dated as of June 17, 1997 between Boston Edison Company
                  and
                  RCN-Becocom, Inc. (is incorporated by reference to Exhibit 10.11
                  to RCN’s
                  Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
                  File No.
                  0-22825.))10.7
              
              Joint
                  Investment and Non-Competition Agreement dated as of June 17, 1997
                  among
                  RCN Telecom Services of Massachusetts, Inc., RCN-Becocom, Inc.
                  and
                  RCN-BecoCom, LLC (is incorporated by reference to Exhibit 10.12
                  to RCN’s
                  Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
                  File No.
                  0-22825.))10.8
              
              Amended
                  and restated Operating Agreement of Starpower Communications, L.L.C.
                  by
                  and between Pepco Communications, L.L.C. and RCN Telecom Services
                  of
                  Washington, D.C. Inc. dated October 28, 1997(is incorporated by
                  reference
                  to Exhibit 10.13 to RCN’s Annual Report on Form 10-K for the year ended
                  December 31, 1997 (Commission File No. 0-22825.))10.9+
              
              Employment
                  Agreement between RCN Corporation and Peter D. Aquino, dated May
                  6, 2005.
                  (incorporated by reference to Exhibit 10.9 of RCN’s Annual Report on Form
                  10-K, filed on May 11, 2005).10.10+
              
              Employment
                  Agreement between RCN Corporation and James Mooney dated May 6,
                  2005.
                  (incorporated by reference to Exhibit 10.10 of RCN’s Annual Report on Form
                  10-K, filed on May 11, 2005).10.11
              
              Credit
                  Agreement, dated as of December 21, 2004, by and among RCN, the
                  lenders
                  party thereto and Deutsche Bank AG Cayman Islands Branch, as
                  administrative agent (incorporated by reference to Exhibit 99.2
                  of RCN’s
                  December 27, 2004 8-K).10.12
              
              Amended
                  and Restated Term Loan and Credit Agreement, dated as of December
                  21,
                  2004, by and among RCN Corporation, HSBC Bank USA, National Association,
                  as agent and collateral agent and certain financial institutions
                  parties
                  thereto, as lenders (incorporated by reference to Exhibit 99.3
                  of RCN’s
                  December 27, 2004 8-K).10.13
              
              Security
                  Agreement, dated as of December 21, 2004, made by RCN and each
                  Guarantor
                  in favor of the Second-Lien Collateral Agent for the benefit of
                  the
                  Secured Creditors (as defined therein) (incorporated by reference
                  to
                  Exhibit 99.4 of RCN’s Current Report on Form 8-K filed on December 14,
                  2004).10.14
              
              Pledge
                  Agreement, dated as of December 21, 2004, made by RCN Corporation
                  and each
                  Guarantor in favor of the Second-Lien Collateral Agent for the
                  benefit of
                  the Secured Creditors (as defined therein) (incorporated by reference
                  to
                  Exhibit 99.5 of RCN’s Current Report on Form 8-K filed on December 14,
                  2004).10.15
              
              Subsidiary
                  Guaranty, dated as of December 21, 2004, made by each of the Guarantors
                  (as defined therein) in favor of the Agent (as defined therein)
                  for the
                  benefit of the Secured Creditors (as defined therein) (incorporated
                  by
                  reference to Exhibit 99.6 of RCN’s Current Report on Form 8-K filed on
                  December 14, 2004).10.16
              
              Intercreditor
                  Agreement, dated as of December 21, 2004, by and between Deutsche
                  Bank
                  Cayman Islands Branch, as Administrative Agent, and HSBC Bank USA,
                  National Association, as Second-Lien Collateral Agent and Third-Lien
                  Collateral Agent (incorporated by reference to Exhibit 99.7 of
                  RCN’s
                  Current Report on Form 8-K filed on December 14, 2004).10.17
              
              Security
                  Agreement, dated as of December 21, 2004, made by each of the Loan
                  Parties
                  (as defined therein) in favor of Deutsche Bank AG Cayman Islands
                  Branch,
                  the First-Lien Collateral Agent (incorporated by reference to Exhibit
                  99.8
                  of RCN’s Current Report on Form 8-K filed on December 14,
                  2004).10.18
              
              Pledge
                  Agreement, dated as of December 21, 2004, made by each of the Loan
                  Parties
                  (as defined therein) in favor of Deutsche Bank AG Cayman Islands
                  Branch,
                  as First-Lien Collateral Agent for the benefit of the Secured Creditors
                  (as defined therein) (incorporated by reference to Exhibit 99.9
                  of RCN’s
                  Current Report on Form 8-K filed on December 14, 2004).10.19
              
              Subsidiary
                  Guaranty, dated as of December 21, 2004, made by each of the Guarantors
                  (as defined therein) in favor of HSBC Bank USA, National Association,
                  as
                  Second-Lien Collateral Agent for the benefit of the Secured Creditors
                  (as
                  defined therein) (incorporated by reference to Exhibit 99.10 of
                  RCN’s
                  Current Report on Form 8-K filed on December 14,
                  2004).


E-2
 *Table
            of Contents*




**Exhibit****No.**
                  
                  **Description**10.20
                  
                  Security
                      Agreement, dated as of December 21, 2004, made by RCN Corporation
                      in favor
                      of the Third-Lien Collateral Agent (incorporated by reference
                      to Exhibit
                      99.11 of RCN’s Current Report on Form 8-K filed on December 14,
                      2004).10.21
                  
                  Pledge
                      Agreement, dated as of December 21, 2004, made by RCN Corporation
                      in favor
                      of HSBC Bank USA, National Association, as Third-Lien Collateral
                      Agent for
                      the benefit of the Secured Creditors (as defined therein) (incorporated
                      by
                      reference to Exhibit 99.12 of RCN’s Current Report on Form 8-K filed on
                      December 14, 2004).10.22+
                  
                  Employment
                      Letter by and between RCN Corporation and Stephen A. Bogiages,
                      dated April
                      7, 2005 (incorporated by reference to Exhibit 99.1 of RCN’s Current Report
                      on Form 8-K, filed on April 20, 2005).10.23+
                  
                  Employment
                      Letter by and between RCN Corporation and Michael Sicoli, dated
                      May 12,
                      2005 (incorporated by reference to Exhibit 99.2 of RCN’s Current Report on
                      Form 8-K, filed on May 12, 2005).10.24*+
                  
                  Separation
                      Agreement between RCN Corporation and Patrick T. Hogan, dated
                      as of June
                      30, 2005.10.25+
                  
                  RCN
                      Corporation Senior Executive Annual Bonus Plan (incorporated
                      by reference
                      to Exhibit 99.1 of RCN’s Current Report on Form 8-K, filed on July 26,
                      2005).10.26+
                  
                  RCN
                      Corporation 2005 Stock Compensation Plan (incorporated by reference
                      to
                      Exhibit 99.2 of RCN’s Current Report on Form 8-K, filed on July 26,
                      2005).10.27
                  
                  First
                      Amendment, dated as of November 30, 2005, to the First Lien
                      Credit
                      Agreement, dated as of December 21, 2004, among RCN Corporation,
                      the
                      lenders from time to time party thereto and Deutsche Bank AG,
                      Cayman
                      Islands Branch, as Administrative Agent (incorporated by reference
                      to
                      Exhibit 99.3 of RCN’s Current Report on Form 8-K, filed on December 8,
                      2005).10.28*+
                  
                  Separation
                      Agreement between RCN Corporation and Stephen A. Bogiages,
                      dated as of
                      December 22, 2005.10.29*+
                  
                  Amended
                      Form Non-Qualified Option Agreement.10.30*+
                  
                  Amended
                      Form Incentive Stock Option Agreement.10.32+
                  
                  Form
                      Executive Restricted Stock Agreement (incorporated by reference
                      to Exhibit
                      10.1 of RCN’s Current Report on Form 8-K, filed on January 6,
                      2006).10.33*
                  
                  Stock
                      Purchase Agreement between RCN Corporation and Consolidated
                      Edison, Inc.,
                      dated as of December 5, 2005.10.34
                  
                  Stock
                      Purchase Agreement, dated March 6, 2006, entered into by and
                      among RCN
                      International Holdings, Inc, Teleholding, S.A. de C.V., Mega
                      Cable, S.A.
                      de C.V. and MCM Holding, S.A. de C.V. (incorporated by reference
                      to
                      Exhibit 99.2 of RCN’s Current Report on Form 8-K, filed on March 8,
                      2006)10.35*
                  
                  Settlement
                      Agreement, dated March 6, 2006, entered into by and among RCN
                      International Holdings, Inc., Teleholding, S.A. de C.V., Mega
                      Cable, S.A.
                      de C.V., MCM Holding, S.A. de C.V. and the Private Shareholders
                      listed
                      therein.21
                  
                  Subsidiaries
                      of Registrant (incorporated by reference to Exhibit 21 of RCN’s Annual
                      Report on Form 10-K for the year ended December 31, 2004 (Commission
                      File
                      No. 001-16805))23.1*
                  
                  Consent
                      of Pricewaterhouse Coopers LLP, Independent Registered Public
                      Accounting
                      Firm23.2*
                  
                  Consent
                      of Friedman LLP, Independent Registered Public Accounting
                      Firm31.1*
                  
                  Certification
                      of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
                      promulgated
                      under the Securities and Exchange Act of 1934, as amended,
                      as adopted
                      pursuant to section 302 of the Sarbanes-Oxley Act of
                      2002.31.2*
                  
                  Certification
                      of the Executive Vice President and Chief Financial Officer
                      pursuant to
                      Rules 13a-14 and 15d-14 promulgated under the Securities and
                      Exchange Act
                      of 1934, as amended, as adopted pursuant to section 302 of
                      the
                      Sarbanes-Oxley Act of 2002.32.1*
                  
                  Certification
                      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
                      as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.32.2*
                  
                  Certification
                      of Executive Vice President and Chief Financial Officer pursuant
                      to 18
                      U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                      Sarbanes-Oxley Act of 2002.99.1
                  
                  Press
                      release announcing emergence of RCN Corporation from Bankruptcy
                      published
                      December 22, 2004 ((incorporated by reference to Exhibit 99.1
                      of RCN’s
                      Current Report on Form 8-K filed on December 14, 2004) RCN’s December 27,
                      2004 8-K).
 *****
              **Document
                  attached.**
 
 **+**
              **Management
                  compensatory plan or arrangement.**


E-3
 *Table
            of Contents*





**Index
      to FinancialStatements**





**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Report
                of Independent Registered Public Accounting Firm on Internal Control
                over
                Financial Reporting
            F-3Report
                of Independent Registered Public Accounting Firm
            F-4Consolidated
                Statements of Operations for the year ended December 31, 2005 (Successor),
                the periods from December 21, 2004 to December 31, 2004 (Successor)
                and
                January 1, 2004 to December 20, 2004 (Predecessor) and the year ended
                December 31, 2003 (Predecessor)
            F-5Consolidated
                Balance Sheets as of December 31, 2005 (Successor) and December 31,
                2004
                (Successor)
            F-6Consolidated
                Statements of Cash Flows for the year ended December 31, 2005 (Successor),
                the period from December 21, 2004 to December 31, 2004 (Successor),
                the
                period from January 1, 2004 to December 20, 2004 (Predecessor) and
                the
                year ended December 31, 2003 (Predecessor)
            F-8Consolidated
                Statements of Changes in Common Stockholders’ Equity (Deficit) for the
                year ended December 31, 2005 (Successor), the periods from December
                21,
                2004 to December 31, 2004 (Successor) and January 1, 2004 to December
                20,
                2004 (Predecessor) and the year ended December 31, 2003
                (Predecessor)
            F-9Notes
                to Consolidated Financial Statements
            F-10Schedule
                II—Valuation and Qualifying Accounts
            F-67





F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








The
      Board
      of Directors and Stockholders of RCN Corporation


Herndon,
      Virginia








We
      have
      audited the accompanying consolidated balance sheets of RCN Corporation (a
      Delaware corporation) and subsidiaries, as of December 31, 2005 and 2004
      (Successor Company) and the related consolidated statements of operations,
      cash
      flows and stockholders’ equity (deficit) and comprehensive income (loss) for the
      year ended December 31, 2005 and for the period from December 21, 2004 through
      December 31, 2004 (Successor Company), and for the period January 1, 2004
      through December 20, 2004 (Predecessor Company). Our audits also included the
      financial statements and schedules listed in the Index at Item 15 (a). These
      consolidated financial statements and financial statement schedules are the
      responsibility of RCN’s management. Our responsibility is to express an opinion
      on these consolidated financial statements and financial statement schedules
      based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of RCN Corporation
      as of December 31, 2005 and December 31, 2004 (Successor Company), and the
      consolidated results of its operations and its cash flows for the year ended
      December 31, 2005 and for the period December 21, 2004 through December 31,
      2004
      (Successor Company), and for the period January 1, 2004 through December 20,
      2004 (Predecessor Company), in conformity with accounting principles generally
      accepted in the United States of America. Also, in our opinion, the related
      financial statement schedules, when considered in relation to the basic
      consolidated financial statements taken as a whole present fairly in all
      material respects the information set forth therein.





As
      described in Notes 2 and 4 to the consolidated financial statements, the
      Successor Company emerged from bankruptcy on December 21, 2004 pursuant to
      a
      Plan of Reorganization confirmed by the Bankruptcy Court by order dated December
      21, 2004. Accordingly, the accompanying consolidated financial statements of
      the
      Successor Company have been prepared in conformity with the fresh start
      accounting provisions of the AICPA’s Statement of Position 90-7, “Financial
      Reporting by entities in Reorganization Under the Bankruptcy Code” as of
      December 21, 2004.





As
      a
      result, the consolidated financial statements of the Successor Company are
      presented on a different basis than those of the Predecessor Company and,
      therefore, are not comparable in all respects.




As
      discussed in Note 2 to the consolidated financial statements, in the first
      quarter of 2005 the Company changed its method of accounting for legal fees
      related to legal activities directed against it.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of RCN Corporation and
      subsidiaries’ internal control over financial reporting as of December 31, 2005,
      based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway commission (COSO),
      and our report dated March 10, 2006 expressed an unqualified opinion
      thereon.







Friedman
      LLP


East
      Hanover, New Jersey





March
      10,
      2006.





F-2





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and Stockholders of


RCN
      Corporation


Herndon,
      Virginia








We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that RCN Corporation and
      subsidiaries (the “Company”) maintained effective internal control over
      financial reporting as of December 31, 2005 based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. The
      Company’s management is responsible for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of the
      Company’s internal control over financial reporting. Our responsibility is to
      express an opinion on management’s assessment and an opinion on the
      effectiveness of the Company’s internal control over financial reporting based
      on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed by, or
      under the supervision of, the company’s principal executive and principal
      financial officers, or persons performing similar functions, and effected by
      the
      company’s board of directors, management, and other personnel to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of managements and directors
      of the company; and (3) provide reasonable assurance regarding prevention or
      timely detection of un-authorized acquisition, use, or disposition of the
      company’s assets that could have a material effect on the financial
      statements.





Because
      of inherent limitations of internal control over financial reporting, including
      the possibility of collusion or improper management override of controls,
      material misstatements due to error or fraud may not be prevented or detected
      on
      a timely basis. Also, projections of any evaluation of the effectiveness of
      the
      internal control over financial reporting to future periods are subject to
      the
      risk that the controls may become inadequate because of changes in conditions,
      or that the degree of compliance with the policies or procedures may
      deteriorate.





In
      our
      opinion, management’s assessment that the Company maintained effective internal
      control over financial reporting as of December 31, 2005, is fairly stated,
      in
      all material respects, based on the criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. Also
      in
      our opinion, the Company maintained, in all material respects, effective
      internal control over financial reporting as of December 31, 2005 based on
      the
      criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway
      Commission.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated financial statements of the
      Company as of December 31, 2005 and 2004 (Successor Company) and the related
      consolidated statements of operations, cash flows and stockholders' equity
      (deficit) and comprehensive income (loss) for the year ended December 31, 2005
      and for the period December 21, 2004 through December 31, 2004 (Successor
      Company) and for the period January 1, 2004 through December 20, 2004
      (Predecessor Company) the financial statements and schedules listed in the
      index
      at Item 15(a) and our report dated March 10, 2006 expressed an unqualified
      opinion thereon.








Friedman
      LLP


East
      Hanover, New Jersey


March
      10,
      2006





F-3





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Shareholders and Board of Directors of RCN Corporation




In
      our
      opinion, the consolidated statements of operations, changes in common
      stockholders' equity / (deficit) and of cash flows for the year ended December
      31, 2003 listed in the accompanying index, present fairly, in all material
      respects, the results of operations and cash flows of RCN Corporation
      (Predecessor Company) for the year ended December 31, 2003, in conformity with
      accounting principles generally accepted in the United States of America. In
      addition, in our opinion, the financial statement schedule listed in the
      accompanying index for the years ended December 31, 2003 presents fairly, in
      all
      material respects, the information set forth therein when read in conjunction
      with the related consolidated financial statements. 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 audit. We conducted
      our
      audit of these statements in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audit provides a reasonable basis for our opinion.





The
      consolidated financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, which appears in the financial statements included in the Company's
      Form 10-K for the year ended December 31, 2003 and not presented herein, the
      Company has a working capital deficiency, a net capital deficiency and has
      incurred recurring losses from operations and net cash outflows from operations.
      At December 31, 2003, the Company will not have sufficient cash to meet its
      anticipated cash needs for working capital, capital expenditures, contractual
      debt maturities, cash interest payments and other activities for the next twelve
      months without successfully restructuring its balance sheet. Furthermore, the
      Company has not made recent interest payments on certain of its Senior Notes
      and
      is in default of its debt agreements. These matters raise significant doubt
      about the Company s ability to continue as a going concern. Management s plans
      in regard to these matters are also discussed in Note 2, which appears in the
      financial statements included in the Company's Form 10-K for the year ended
      December 31, 2003 and not presented herein. The financial statements do not
      include any adjustments that might result from the outcome of this uncertainty.








/s/
      PricewaterhouseCoopers LLP


PricewaterhouseCoopers
      LLP


Florham
      Park, NJ


March
      25,
      2004, except as to the guarantor subsidiaries financial statements for the
      year
      ended December 31, 2003 presented in Note 26 which is as of July 18,
      2005.





F-4





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Dollars
      in Thousands, Except Share and Per Share Data)**




**Successor**
                
                **Successor**
                
                **Predecessor**
                
                **Predecessor****For
                    the period**
                  **ended**
                  **December
                    31,**
                  **2005**
                
                **For
                    the year**
                  **December
                    21 to**
                  **December
                    31,**
                  **2004**
                
                **For
                      the period**
                    **ended
                        January 1 to**
                  **December
                    20,**
                  **2004**
                
                **For
                    the year**
                  **ended**
                  **December
                    31,**
                  **2003**Revenues
                
                $
                560,964
                
                $
                16,372
                
                $
                470,459
                
                $
                484,854Costs
                    and expenses:Direct
                    expenses
                
                
                196,832
                
                
                5,958
                
                
                172,188
                
                
                174,260Selling,
                    general and administrative (exclusive of stock-based compensation
                    shown
                    seperately below)
                
                
                275,994
                
                
                7,996
                
                
                237,998
                
                
                308,151Non-cash
                    stock-based compensation
                
                
                8,913
                
                
                -
                
                
                4,414
                
                
                4,692Impairments,
                    exit costs and restructuring
                
                
                5,245
                
                
                -
                
                
                (7,674
                )
                
                167,241Depreciation
                    and amortization
                
                
                190,322
                
                
                5,218
                
                
                231,734
                
                
                197,267Operating
                    loss
                
                
                (116,342
                )
                
                (2,800
                )
                
                (168,201
                )
                
                (366,757
                )Investment
                    income
                
                
                5,648
                
                
                -
                
                
                2,942
                
                
                6,260Interest
                    expense
                
                
                42,333
                
                
                888
                
                
                96,702
                
                
                180,206Gain
                    on sale of assets
                
                
                2,536
                
                
                -
                
                
                1,875
                
                
                7,130Gain
                    on the early extinuishment of debt
                
                
                -
                
                
                -
                
                
                -
                
                
                45,556Other
                    income (expense), net
                
                
                1,556
                
                
                -
                
                
                (295
                )
                
                1,071Loss
                    from continuing operations before reorganization items, income
                    taxes and
                    equity in income (loss) of unconsolidated entities
                
                
                (148,935
                )
                
                (3,688
                )
                
                (260,381
                )
                
                (486,946
                )Reorganization
                    (expense) income, net
                
                
                11,113
                
                
                -
                
                
                (92,554
                )
                
                -Gain
                    on settlement of liabilities subject to compromise and
                    restructuring
                
                
                -
                
                
                -
                
                
                1,166,027
                
                
                -Gain
                    from "Fresh Start" adjustments
                
                
                -
                
                
                -
                
                
                173,178
                
                
                -Income
                    tax expense (benefit)
                
                
                779
                
                
                -
                
                
                (114
                )
                
                1,271Income
                    (loss) from continuing operations before equity in unconsolidated
                    entities
                
                
                (138,601
                )
                
                (3,688
                )
                
                986,384
                
                
                (488,217
                )Equity
                    in income (loss) of unconsolidated entities
                
                
                -
                
                
                -
                
                
                11,267
                
                
                23,470Impairment
                    of unconsolidated entities
                
                
                -
                
                
                -
                
                
                (25,689
                )
                
                (35,000
                )Net
                    income (loss) from continuing operations
                
                
                (138,601
                )
                
                (3,688
                )
                
                971,962
                
                
                (499,747
                )Income
                    (loss) from discontinued operations, net of tax
                
                
                (111
                )
                
                -
                
                
                2,204
                
                
                10,362Gain
                    on sale of discontinued operations, net of tax
                
                
                -
                
                
                -
                
                
                88,580
                
                
                163,684Net
                    income (loss) before cumulative effect of change in accounting
                    principle
                    and preferred dividend and accretion requirements
                
                
                (138,712
                )
                
                (3,688
                )
                
                1,062,746
                
                
                (325,701
                )Cumulative
                    effect on prior years of retroactive application of a change
                    in accounting
                    for legal fees, net of tax
                
                
                2,600
                
                
                -
                
                
                -
                
                
                -Net
                    income (loss) before preferred dividend and accretion
                    requirements
                
                
                (136,112
                )
                
                (3,688
                )
                
                1,062,746
                
                
                (325,701
                )Preferred
                    dividend and accretion requirements
                
                
                -
                
                
                -
                
                
                52,902
                
                
                173,392Net
                    income (loss) attributable to common stockholders
                
                $
                (136,112
                )
                $
                (3,688
                )
                $
                1,009,844
                
                $
                (499,093
                )Net
                    income (loss) per common shareBasic:Continuing
                    Operations
                
                $
                (3.85
                )
                $
                (0.10
                )
                $
                8.33
                
                $
                (6.07
                )Discontinued
                    Operations
                
                
                -
                
                
                -
                
                
                0.82
                
                
                1.57Net
                    Income/(loss) before cumulative effect of change in accounting
                    principle
                
                $
                (3.85
                )
                $
                (0.10
                )
                $
                9.15
                
                $
                (4.50
                )Cumulative
                    effect of change in accounting for legal fees
                
                
                0.07
                
                
                -
                
                
                -
                
                
                -Net
                    income (loss) attributable to common stockholders
                
                $
                (3.78
                )
                $
                (0.10
                )
                $
                9.15
                
                $
                (4.50
                )Diluted:Continuing
                    Operations
                
                $
                (3.85
                )
                $
                (0.10
                )
                $
                6.77
                
                $
                (6.07
                )Discontinued
                    Operations
                
                
                -
                
                
                -
                
                
                0.63
                
                
                1.57Net
                    Income/(loss) before cumulative effect of change in accounting
                    principle
                
                $
                (3.85
                )
                $
                (0.10
                )
                $
                7.40
                
                $
                (4.50
                )Cumulative
                    effect of change in accounting for legal fees
                
                
                0.07
                
                
                -
                
                
                -
                
                
                -Net
                    income (loss) attributable to common stockholders
                
                $
                (3.78
                )
                $
                (0.10
                )
                $
                7.40
                
                $
                (4.50
                )Weighted
                    Average Shares Outstanding:Basic
                
                
                36,040,165
                
                
                36,020,850
                
                
                110,294,169
                
                
                110,877,797Diluted
                
                
                36,040,165
                
                
                36,020,850
                
                
                143,519,490
                
                
                110,877,797
  The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-5




**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(Dollars
      in Thousands)**




**December
                  31,****Successor**
                **2005**
              
              **Successor**
                **2004**ASSETSCurrent
                  Assets:Cash
                  and cash equivalents
              
              $
              70,906
              
              $
              113,539Short-term
                  investments
              
              
              72,111
              
              
              50,425Accounts
                  receivable, net of allowance for doubtful accounts of $3,665 and
                  $4,568
              
              
              49,242
              
              
              52,618Unbilled
                  revenues
              
              
              655
              
              
              792Interest
                  receivable
              
              
              390
              
              
              755Prepayments
                  and other current assets
              
              
              13,603
              
              
              22,373Short-term
                  restricted investments
              
              
              -
              
              
              1,525Total
                  current assets
              
              
              206,907
              
              
              242,027Property,
                  plant and equipment, net of accumulated depreciation of $175,215
                  and
                  $4,605
              
              
              705,908
              
              
              793,691Investment
                  in unconsolidated entity
              
              
              184,896
              
              
              178,000Intangible
                  assets, net of accumulated amortization of $19,743 and
                  $613
              
              
              118,145
              
              
              141,786Long-term
                  restricted investments
              
              
              17,568
              
              
              25,063Deferred
                  charges and other assets
              
              
              20,516
              
              
              19,943Total
                  assets
              
              $
              1,253,940
              
              $
              1,400,510




F-6





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS—(Continued)**


**(Dollars
      in Thousands, Except Share and Per Share Data)**




**December
                  31,****Successor**
                **2005**
              
              **Successor**
                **2004**LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  Liabilities:Current
                  maturities of capital lease obligations
              
              $
              370
              
              $
              558Current
                  maturities of long-term debt
              
              
              3,278
              
              
              3,300Accounts
                  payable
              
              
              24,153
              
              
              29,763Advance
                  billings and customer deposits
              
              
              36,202
              
              
              37,082Accrued
                  expenses
              
              
              25,656
              
              
              36,330Accrued
                  interest
              
              
              4,942
              
              
              837Accrued
                  direct expenses
              
              
              42,287
              
              
              32,301Accrued
                  exit costs
              
              
              3,106
              
              
              2,340Accrued
                  employee compensation and related expenses
              
              
              17,365
              
              
              14,704Deferred
                  reorganization costs
              
              
              -
              
              
              21,644Current
                  liabilities of discontinued operations
              
              
              1,422
              
              
              1,082Total
                  current liabilities
              
              
              158,781
              
              
              179,941Long-term
                  debt and capital lease obligations
              
              
              488,449
              
              
              489,710Other
                  long-term liabilities
              
              
              43,808
              
              
              25,937Total
                  liabilities
              
              
              691,038
              
              
              695,588Commitments
                  and contingenciesStockholders'
                  Equity:Common
                  stock, par value $0.01 per share, 100,000,000 shares authorized,
                  36,028,116 and 31,919,044 shares issued and outstanding
              
              
              360
              
              
              319Committed
                  stock, par value $0.01, 797,938 and 4,101,806 shares
                  committed
              
              
              8
              
              
              41Committed
                  capital in excess of par
              
              
              25,549
              
              
              131,355Additional
                  paid-in-capital
              
              
              684,146
              
              
              576,895Unearned
                  compensation
              
              
              (14,384
              )
              
              -Accumulated
                  deficit
              
              
              (139,800
              )
              
              (3,688
              )Accumulated
                  other comprehensive income
              
              
              7,023
              
              
              -Total
                  stockholders' equity
              
              
              562,902
              
              
              704,922Total
                  liabilities and stockholders' equity
              
              $
              1,253,940
              
              $
              1,400,510





The
      accompanying notes are an integral part of these consolidated financial
      statements




F-7





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Dollars
      in Thousands)**


**Successor**
                
                **Successor**
                
                **Revised**
                  **Predecessor**
                
                **Revised**
                  **Predecessor****For
                    the year**
                  **ended**
                  **December
                    31,**
                  **2005**
                
                **For
                    the period**
                  **December
                    21 to**
                  **December
                    31,**
                  **2004**
                
                **For
                    the period**
                  **January
                    1 to**
                  **December
                    20,**
                  **2004**
                
                **For
                    the year**
                  **ended**
                  **December
                    31,**
                  **2003****Cash
                    flows from operating activities:**Net
                    income (loss) before preferred dividend and accretion
                    requirements
                
                $
                (136,112
                )
                $
                (3,688
                )
                $
                1,062,746
                
                $
                (325,701
                )Income
                    (loss) from discontinued operations, net of tax
                
                
                111
                
                
                -
                
                
                (2,204
                )
                
                (10,362
                )Gain
                    on sale of discontinued operations
                
                
                -
                
                
                -
                
                
                (88,580
                )
                
                (163,684
                )Cumulative
                    effect of a change in accounting for legal fees
                
                
                (2600
                )
                
                -
                
                
                -
                
                
                -Net
                    income (loss) from continuing operations
                
                
                (138,601
                )
                
                (3,688
                )
                
                971,962
                
                
                (499,747
                )**Adjustments
                    to reconcile net income (loss) to net cash provided by (used
                    in) operating
                    activities:**Accretion
                    of discounted debt
                
                
                4,608
                
                
                -
                
                
                4,541
                
                
                14,370Amortization
                    of financing costs
                
                
                2,333
                
                
                -
                
                
                9,511
                
                
                15,762Non-cash
                    stock based compensation
                
                
                8,913
                
                
                -
                
                
                4,413
                
                
                4,692Gain
                    on sale of assets
                
                
                (2,536
                )
                
                -
                
                
                (1,651
                )
                
                (8,386
                )Write
                    off of deferred financing charges
                
                
                -
                
                
                -
                
                
                18,076
                
                
                -Gain
                    on early extingishment of debt
                
                
                -
                
                
                -
                
                
                -
                
                
                (45,556
                )Gain
                    on settlement of lease obligation
                
                
                -
                
                
                -
                
                
                (14,525
                )
                
                -Non-cash
                    fresh start adjustments
                
                
                -
                
                
                -
                
                
                (173,178
                )
                
                -Gain
                    on settlement of liabilities subject to compromise
                
                
                -
                
                
                -
                
                
                (1,166,027
                )
                
                -Depreciation
                    and amortization
                
                
                190,322
                
                
                5,218
                
                
                231,734
                
                
                197,267Tax
                    provision charged against intangibles
                
                
                809
                
                
                -
                
                
                -
                
                
                -Deferred
                    income taxes, net
                
                
                -
                
                
                -
                
                
                (934
                )
                
                -Provision
                    for doubtful accounts
                
                
                9,516
                
                
                342
                
                
                8,617
                
                
                12,335Equity
                    in loss of unconsolidated entities
                
                
                -
                
                
                -
                
                
                (11,267
                )
                
                (23,470
                )Impairment
                    in unconsolidated entity
                
                
                -
                
                
                -
                
                
                25,689
                
                
                35,000Non-cash
                    impairments, exit costs and restructuring
                
                
                8,264
                
                
                -
                
                
                6,851
                
                
                167,241Payment
                    of deferred reorganization costs
                
                
                (21,644
                )
                
                -
                
                
                -
                
                
                -**61,984**
                
                
                **1,872**
                
                
                **(86,188**
                **)**
                
                **(130,492**
                **)**Net
                    change in certain assets and liabilities, net of business
                    acquisitionsAccounts
                    receivable and unbilled revenues
                
                
                (6,003
                )
                
                (914
                )
                
                (10,700
                )
                
                (2,931
                )Accounts
                    payable
                
                
                (6,237
                )
                
                (20,594
                )
                
                29,513
                
                
                (4,579
                )Accrued
                    expenses
                
                
                8,168
                
                
                5,842
                
                
                36,945
                
                
                (9,043
                )Accounts
                    receivable from related parties
                
                
                -
                
                
                15,469
                
                
                3,378
                
                
                (3,261
                )Accounts
                    payable to related parties
                
                
                -
                
                
                (15,469
                )
                
                1,803
                
                
                (10,117
                )Advanced
                    billing and customer deposits
                
                
                (880
                )
                
                -
                
                
                1,310
                
                
                135Unrealized
                    appreciation (depreciation) on investments
                
                
                127
                
                
                -
                
                
                -
                
                
                -Other
                
                
                3,028
                
                
                1,075
                
                
                (12,207
                )
                
                (13,049
                )Net
                    cash provided by (used in) continuing operations
                
                
                60,187
                
                
                (12,719
                )
                
                (36,146
                )
                
                (173,337
                )Cash
                    provided by discontinued operations
                
                
                239
                
                
                -
                
                
                2,012
                
                
                3,087**Net
                    cash provided by (used in) operating activities**
                
                
                **60,426**
                
                
                **(12,719**
                **)**
                
                **(34,134**
                **)**
                
                **(170,250**
                **)****Cash
                    flows from investing activities:**Additions
                    to property, plant and equipment
                
                
                (89,340
                )
                
                -
                
                
                (52,294
                )
                
                (87,481
                )Acquisition
                    of Starpower, net of cash acquired
                
                
                -
                
                
                (14,933
                )
                
                -
                
                
                -Investment
                    in acquisition
                
                
                (2,244
                )
                
                -
                
                
                -
                
                
                -(Increase)
                    decrease in short-term investments
                
                
                (21,559
                )
                
                -
                
                
                (50,425
                )
                
                227,641Investment
                    in unconsolidated joint venture
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,000
                )Distribution
                    from unconsolidated joint venture
                
                
                -
                
                
                -
                
                
                -
                
                
                7,750Proceeds
                    from sale of assets
                
                
                6,259
                
                
                -
                
                
                391
                
                
                17,408Decrease
                    (increase) in restricted investments
                
                
                -
                
                
                -
                
                
                203,160
                
                
                (199,285
                )Decrease
                    (increase) in investments restricted for debt service
                
                
                9,020
                
                
                4,634
                
                
                1,077
                
                
                -Net
                    cash provided by (used in) continuing operations
                
                
                (97,864
                )
                
                (10,299
                )
                
                101,909
                
                
                (35,967
                )Proceeds
                    from sale of discontinued operations
                
                
                -
                
                
                -
                
                
                118,061
                
                
                239,644Cash
                    used in discontinued operations
                
                
                (10
                )
                
                -
                
                
                -
                
                
                (8,813
                )**Net
                    cash provided by (used in) investing activities**
                
                
                **(97,874**
                **)**
                
                **(10,299**
                **)**
                
                **219,970**
                
                
                **194,864****Cash
                    flows from financing activities:**Repayments
                    of long-term debt
                
                
                (5,522
                )
                
                -
                
                
                (395,367
                )
                
                (68,000
                )Change
                    in term loans
                
                
                -
                
                
                -
                
                
                (111,377
                )
                
                -Payments
                    of capital lease obligations
                
                
                (558
                )
                
                -
                
                
                (3,715
                )
                
                (2,590
                )Payments
                    made for debt financing costs
                
                
                (515
                )
                
                -
                
                
                (12,215
                )
                
                (12,853
                )Proceeds
                    from the issuance of long-term debt
                
                
                -
                
                
                -
                
                
                455,000
                
                
                27,806Proceeds
                    from the exercise of stock options
                
                
                1,410
                
                
                -
                
                
                -
                
                
                53**Net
                    cash used in financing activities**
                
                
                **(5,185**
                **)**
                
                **-**
                
                
                **(67,674**
                **)**
                
                **(55,584**
                **)**Net
                    increase (decrease)
                    incash and cash equivalents
                
                
                (42,633
                )
                
                (23,018
                )
                
                118,162
                
                
                (30,970
                )Cash
                    and cash equivalents at beginning of period
                
                
                113,539
                
                
                136,557
                
                
                18,395
                
                
                49,365**Cash
                    and cash equivalents at end of period**
                
                $
                70,906
                
                $
                113,539
                
                $
                136,557
                
                $
                18,395**Supplemental
                    disclosures of cash flow information**Cash
                    paid during the periods for:Interest,
                    net of capitalized interest of $0, $0, $539 and $1,430
                
                $
                31,277
                
                $
                1,763
                
                $
                39,775
                
                $
                137,794Income
                    taxes
                
                $
                -
                
                $
                -
                
                $
                68
                
                $
                56




The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-8





**RCN
      CORPORATION**


**Consolidated
      Statements of Changes in**


**Common
      Stockholders' Equity/(Deficit)**


**Each
      of the years in the three year period ended December 31,
      2005**


**(Dollars
      in thousands Except Share and Per Share Data)**


**Common Stock**
                  **Class
                    A Shares**
                
                **Common Stock**
                  **Class A**
                  **Amount**
                
                **Committed
                    Capital Shares**
                
                **Committed
                    Capital Amount**
                
                **Committed**
                  **Capital**
                  **in
                    Excess**
                  **of
                    Par**
                
                **Common**
                  **Stock
                    Class**
                  **B
                    Shares**
                
                **Common Stock**
                  **Class
                    B**
                  **amount**
                
                **Warrants**
                
                **Additional**
                  **Paid in Capital**
                
                **Retained**
                  **Earnings/**
                  **(Accumulated**
                  **Deficit)**
                
                **Treasury**
                  **Stock**
                  **Shares**
                
                **Treasury**
                  **Stock Amount**
                
                **Unearned**
                  **Compensation**
                  **Expense**
                
                **Unrealized**
                  **Cumulative**
                  **Translation**
                  **Adjustment**
                
                **Appreciation/**
                  **Depreciation on**
                  **Investments**
                
                **Total Common**
                  **Stockholders’**
                  **Equity(Deficit)****Balance,
                    December 31, 2002, Predesessor**
                
                
                110,795,577
                
                $
                110,796
                
                
                
                
                $
                -
                
                $
                -
                
                
                
                
                $
                -
                
                
                
                
                $
                1,451,744
                
                $
                (3,889,385
                )
                
                (682,867
                )
                $
                (9,583
                )
                $
                (4,336
                )
                $
                (5,134
                )
                $
                1,484
                
                $
                (2,344,414
                )Net
                    loss to common shareholders
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (499,093
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (499,093
                )Stock
                    plan transactions
                
                
                1,355,983
                
                
                1,356
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,718
                
                
                
                
                
                
                
                
                
                
                
                58
                
                
                
                
                
                
                
                
                7,132Conversion
                    of joint venture ownership interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                276
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                276Warrant
                    issuance
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,025
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,025Recognition of unearned compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,936
                
                
                
                
                
                
                
                
                3,936Conversion of Series B Preferred Stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                11,424,810
                
                
                11,425
                
                
                
                
                
                694,082
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                705,507Cancellation of restricted stock grants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,427
                )
                
                
                
                
                (633,693
                )
                
                (727
                )
                
                
                
                
                
                
                
                
                
                
                (6,154
                )Unrealized
                    depreciation on investments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,244
                )
                
                (1,244
                )Cumulative
                    translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (8,856
                )
                
                
                
                
                (8,856
                )**Balance,
                    December 31, 2003, Predesessor**
                
                
                112,151,560
                
                $
                112,152
                
                
                -
                
                $
                -
                
                $
                -
                
                
                11,424,810
                
                $
                11,425
                
                
                -
                
                $
                2,150,418
                
                $
                (4,388,478
                )
                
                (1,316,560
                )
                $
                (10,310
                )
                $
                (342
                )
                $
                (13,990
                )
                $
                240
                
                $
                (2,138,885
                )Net
                    Income/(loss) to common shareholders
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,009,844
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,009,844Stock
                    plan transactions
                
                
                84,359
                
                
                84
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                144
                
                
                (6
                )
                
                
                
                
                
                
                
                222Record
                    Restricted Stock Expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                316
                
                
                
                
                
                
                
                
                316Recognition
                    of unearned compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,851
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,851Conversion
                    of Series B Preferred Stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Cancellation
                    of restricted stock grants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (638,649
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Unrealized
                    depreciation on investments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (403
                )
                
                (403
                )Cumulative
                    translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,298
                )
                
                
                
                
                (3,298
                )**Impact
                    on Fresh Start Adjustments:**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Cancellation
                    of shares in Predecessor
                
                
                (112,235,919
                )
                
                (112,236
                )
                
                
                
                
                
                
                
                
                
                
                (11,424,810
                )
                
                (11,425
                )
                
                
                
                
                
                
                
                
                
                
                1,955,209
                
                
                10,166
                
                
                
                
                
                
                
                
                
                
                
                (113,495
                )Elimination
                    of accumulated losses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,378,634
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,378,634Other
                    Fresh Start adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,154,269
                )
                
                
                
                
                
                
                
                
                
                
                32
                
                
                17,288
                
                
                163
                
                
                (2,136,786
                )**Balance,
                    December 20, 2004, Predesessor**
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -**Successor:**$
                576,895
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                576,895Equity
                    issued to creditors Issuance of common stockIssuance
                    of common stock
                
                
                31,919,044
                
                $
                319
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                319Committed
                    capital
                
                
                
                
                
                
                
                
                4,101,806
                
                $
                41
                
                $
                131,355
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                131,396Successor
                    Balance December 21, 2004
                
                
                31,919,044
                
                
                319
                
                
                4,101,806
                
                
                41
                
                
                131,355
                
                
                -
                
                
                -
                
                
                -
                
                
                576,895
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                708,610Net
                    Income/(loss) to common shareholders
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,688
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,688
                )**Balance
                    December 31, 2004, Successor**
                
                
                31,919,044
                
                $
                319
                
                
                4,101,806
                
                $
                41
                
                $
                131,355
                
                
                -
                
                $
                -
                
                
                -
                
                $
                576,895
                
                $
                (3,688
                )
                
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                704,922Net
                    loss to common shareholders
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (136,112
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (136,112
                )Issuance
                    of committed shares in payment of claims
                
                
                3,303,981
                
                
                33
                
                
                (3,303,981
                )
                
                (33
                )
                
                (105,806
                )
                
                
                
                
                
                
                
                
                
                
                105,806
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (0
                )Issuance
                    of restricted stock
                
                
                730,086
                
                
                7
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                17,486
                
                
                
                
                
                
                
                
                
                
                
                (17,493
                )
                
                
                
                
                
                
                
                -Exercise
                    of warrant
                
                
                5
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Return
                    of committed shares
                
                
                
                
                
                
                
                
                113
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Amortization
                    of restricted stock award
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,109
                
                
                
                
                
                
                
                
                3,109Amortization
                    of stock options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,804
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,804Issuance
                    of stock upon exercise of options
                
                
                75,000
                
                
                1
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,409
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,410Adjustment
                    to deferred tax valuation allowance related to indefinite-lived
                    intangible
                    assets
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (23,819
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (23,819
                )Warrant
                    issuance
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0
                
                
                
                
                
                
                
                
                735
                
                
                565
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                565Foreign
                    currency translation gain/(loss)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,896
                
                
                
                
                
                6,896Gain
                    (loss) on assets held for sale
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                127
                
                
                127**Balance
                    December 31, 2005, Successor**
                
                
                36,028,116
                
                $
                360
                
                
                797,938
                
                $
                8
                
                $
                25,549
                
                
                -
                
                $
                -
                
                
                735
                
                $
                684,146
                
                $
                (139,800
                )
                
                -
                
                $
                -
                
                $
                (14,384
                )
                $
                6,896
                
                $
                127
                
                $
                562,902




The
      accompanying notes are an integral part of these consolidated financial
      statements





F-9





**RCN
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Thousands
      of Dollars, Except Share and Per Share Data)**




**1.**
                **ORGANIZATION
                    AND BASIS OF PRESENTATION**





RCN’s
      primary business is delivering video programming (including digital cable and
      high definition television), data services (including cable modem, high-speed
      and dial-up Internet access), and local and long distance telephone services,
      primarily to residential customers over a broadband network in the Boston,
      New
      York, eastern Pennsylvania, Chicago, San Francisco and Los Angeles markets.
      RCN
      also holds a 100% interest (50% prior to December 21, 2004) in Starpower
      Communications LLC (“Starpower”) which serves the Washington, D.C. metropolitan
      market. RCN also served the communities in and around Carmel, New York, until
      March 9, 2004, when it closed on the sale of its Carmel, New York, cable and
      voice system for approximately $120.2 million in cash before closing
      adjustments. RCN was also the incumbent franchised cable operator in many
      communities of central New Jersey until these operations were sold on February
      19, 2003 for approximately $242.8 million.




The
      consolidated financial statements include the accounts of RCN and all wholly
      owned subsidiaries. All intercompany transactions and balances among
      consolidated entities have been eliminated. On December 21, 2004, RCN acquired
      a
      controlling interest in Starpower (See Note 6). Starting on December 21, 2004,
      the date of acquisition, the assets acquired and liabilities assumed were
      recorded at their respective fair values and the consolidated results of
      operations included Starpower. Prior to December 21, 2004, RCN accounted for
      its
      interest in Starpower under the equity method.





***Megacable
      and MCM***





RCN
      has
      48.93% interests in both Megacable, a cable television and high-speed data
      services provider in certain portions of Mexico, and MCM, a provider of local
      voice and high-speed data services in Mexico City. Although we have historically
      accounted for our investments under the equity method, we were unable to record
      any income on our investments during 2005 due to the continued lack of timely
      financial information from Megacable and MCM and the unwillingness of
      Megacable’s management to cooperate with us in our attempts to confirm the
      reliability and US GAAP compliance of the limited financial information we
      received. In addition, we have been unsuccessful in our attempts to assert
      our
      rights under the shareholder agreement to appoint representatives to the
      Megacable board of directors and management committees. Because of these
      factors, we have determined that we did not exercise sufficient control over
      Megacable and MCM to continue accounting for our investments in them under
      the
      equity method and have decided to account for these investments under the cost
      method, commencing in the fourth quarter of 2005, in accordance with Accounting
      Principles Board Opinion No. 18 *“The
      Equity Method of Accounting for Investments in Common Stock”* (“APB
      18”) ** and
      FASB
      Interpretation No. 35 “ *Criteria
      for Applying the Equity Method of Accounting for Investments in Common
      Stock* ”
(“FIN
      35”). The investments in Megacable and MCM were recorded at fair value in
      accordance with “fresh start” accounting on the date of emergence, and as noted
      above the Company has recorded no income on these investments in 2005. On March
      6, 2006, RCN entered into an agreement to sell its investments in Megacable
      and
      MCM to the investors who currently own the remaining 51% of these entities
      for
      net after-tax proceeds of $300.0 million in cash. The transaction is expected
      to
      close by the end of March, 2006, after the necessary regulatory approval
      documents are filed.





***Starpower***




Starpower
      is a Delaware limited liability company formed in 1997 as a joint venture
      between a subsidiary of RCN and Pepco Communications, L.L.C., a subsidiary
      of
      Pepco Holdings, Inc. (“Pepco”), to sell video and telecommunications services to
      residential and commercial customers in Washington, D.C. and the surrounding
      areas in Maryland and Virginia. On December 21, 2004, RCN increased its
      ownership in Starpower from 50% to 100% by purchasing the 50% interest in
      Starpower owned by Pepco for $29.0 million. RCN financed the $29.0 million
      purchase price with borrowings under its credit facility. Starpower continues
      to
      lease certain portions of Pepco’s fiber system and Pepco provides construction
      and construction management services to Starpower. RCN believes that the terms
      and conditions of the services provided by Pepco to Starpower are consistent
      with those which could be obtained from other utilities.





F-10





***Change
      in Accounting for Legal Fees***




During
      the first quarter of 2005, the Company changed its method of accounting for
      legal fees related to legal actions directed against it. RCN previously accrued
      anticipated legal fees for these actions based on an estimate of fees that
      would
      be incurred if these actions were believed to require outside legal services.
      Management of the Company recognizes that there is a diversity of practice
      for
      accounting for legal fees and there is no clear preference for one method over
      another expressed in any authoritative accounting literature. Management
      believes that estimating fees for legal matters that can have many possible
      outcomes is inherently difficult and therefore believes it is preferable to
      accrue legal fees when the work is performed, consistent with the Company’s
      accounting for all other services. Management further believes this treatment
      is
      consistent with the definition of a liability in Financial Accounting Standards
      Concept Statement No. 6. In accordance with Accounting Principles Board (“APB”)
      Opinion No. 20, “ *Accounting*  *Changes* ”
(“APB
      20”), the Company recorded the cumulative amount of the change in the three
      months ended March 31, 2005, resulting in a reversal of $2.6 million of expense
      recorded in previous periods. This change resulted in a decrease in net loss
      of
      $2.6 million or $0.07 per share for the year ended December 31, 2005. Management
      has discussed this change with RCN’s independent registered public accounting
      firm, who concurs with this change.




***Revisions
      and Reclassifications***




RCN
      has revised its statements of cash flows for the
      periods of January 1 to December 20, 2004 (Predecessor) and the year ended
      December 31, 2003, to separately disclose the operating, investing and financing
      portions of cash flows attributable to the Company's discontinued operations.
      RCN has previously reported these amounts on a combined basis.




Effective
      on January 1, 2005, RCN changed the classifications of certain expenses from
      operating and selling, general and administrative to direct expenses. Management
      believes expenses for pole rental, right-of-way use fees and plant utilities
      are
      directly related to generating revenue and therefore are properly classified
      as
      direct expenses. This resulted in an increase in direct costs of $6.8 million
      and 9.0 million with a corresponding decrease in selling, general and
      administrative costs for the period from January 1 to December 20, 2004
      (Predecessor) and December 31, 2003 (Predecessor), respectively. Certain other
      reclassifications have been made to the prior financial statements to conform
      to
      the current period presentation.




**2.**
            **EMERGENCE
                FROM CHAPTER 11**




**Operations
      and Liquidity Prior to Commencement of Chapter 11 Cases**




At
      December 31, 2003 and prior to RCN’s emergence from bankruptcy protection on
      December 21, 2004, RCN had a working capital deficiency, a net capital
      deficiency, recurring losses from operations and net cash outflows from
      operations. RCN’s cash, cash equivalents and short-term investments at December
      31, 2003 and projected 2004 cash flows from operations were deemed insufficient
      to meet its anticipated cash needs for working capital, capital expenditures,
      contractual debt maturities, cash interest payments and other activities.
      Furthermore, RCN had not made scheduled interest payments on certain of its
      Senior Notes and was in default of its senior credit facilities and Senior
      Notes
      and there was substantial doubt about RCN’s ability to continue as a going
      concern.




**Commencement
      of Chapter 11 Cases**




On
      May
      27, 2004, RCN Corporation (together with its direct and indirect subsidiaries,
      “RCN”) and four of its subsidiaries filed voluntary petitions for reorganization
      under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
      Court for the Southern District of New York (the “Bankruptcy Court”) and on
      August 5 and August 20, 2004, five additional subsidiaries of RCN filed
      voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
      (all ten collectively, the “RCN Debtors”).




**Plan
      of Reorganization and Exit Financing**




On
      October 12, 2004, the RCN Debtors and the official committee of unsecured
      creditors filed a joint plan of reorganization (the “Plan”) and a related
      disclosure statement (the “Disclosure Statement”) with the Bankruptcy Court. On
      October 13, 2004, the Bankruptcy Court entered an order approving the Disclosure
      Statement and the RCN Debtors’ solicitation procedures motion. References in
      these Consolidated Financial Statements and the Notes thereto to the
“Predecessor” and “Old RCN” mean RCN and its subsidiaries prior to the Effective
      Date.





F-11





On
      December 8, 2004, the Bankruptcy Court entered a confirmation order approving
      the Plan. On December 21, 2004 (the “Effective Date”), the Plan became effective
      and the RCN Debtors emerged from reorganization proceedings under the Bankruptcy
      Code. References to the “Successor,” “Reorganized RCN,” and the “Reorganized RCN
      Companies” mean RCN and its subsidiaries after the Effective Date.




The
      RCN
      Debtors obtained the following exit financing arrangements in order to
      consummate the Plan:




•
            The
                RCN Debtors obtained a $355 million senior secured credit facility
                comprised of term loans for an aggregate amount of $330 million and
                a $25
                million letter of credit facility (the “First-Lien Credit Facility”); and




•
            RCN
                issued $125 million aggregate principal amount of 7.375% convertible
                second-lien notes due 2012 which are convertible into shares of
                reorganized RCN’s common stock (the “Convertible Notes”).




•
            RCN
                amended and extended its Evergreen Credit Agreement (the “Third-Lien Term
                Loan”)




**Effect
      of Consummation of the Plan**




Pursuant
      to the Plan, on the Effective Date, all of the existing securities of Old RCN,
      including the existing common stock, preferred stock, stock options, and
      warrants, were extinguished and deemed cancelled. RCN filed an amended and
      restated certificate of incorporation authorizing new shares of common stock.
      In
      accordance with the Plan, Reorganized RCN issued 36,020,850 shares of common
      stock with a par value of $0.01 of which 31,919,044 were distributed to certain
      of its former bond holders and other general unsecured creditors on the
      effective date, and 4,101,806 shares were placed in reserve to settle disputed
      claims against RCN that were outstanding as of the date of emergence. In 2005,
      RCN distributed 3,303,868 shares of common stock in settlement of filed claims.
      As of December 31, 2005, 797,938 shares remained in reserve to satisfy the
      remaining allowed claims. In January 2006, the Company made an additional
      distribution of 169,492 shares, reducing their reserve share balance to 628,446.
      After all outstanding claims are resolved, and the period for the Bankruptcy
      Court to reconsider its ruling on RCN’s objection to all creditor claims
      expires, RCN will distribute the remaining reserved shares of common stock
      to
      the general unsecured creditors and the former bond holders on a pro rata
      basis.




Additionally,
      RCN was authorized by the Plan to issue warrants to the former stockholders
      of
      Old RCN to purchase an aggregate of 735,119 shares of RCN’s common stock. Each
      warrant allows the holder to purchase one share of RCN’s common stock for a
      price of $34.16. As of December 31, 2005, the Company had distributed 188,032
      of
      these warrants which expire on December 21, 2006







**3.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**




**“Fresh
      Start” Accounting**




As
      discussed more fully in Note 4, RCN implemented “fresh start” accounting upon
      its emergence from bankruptcy on the Effective Date, in accordance with the
      American Institute of Certified Public Accountants (“AICPA”) statement of
      position No. 90-7 *“Financial
      Reporting By Entities in Reorganization Under the Bankruptcy
      Code”* (“SOP
      90-7”).




**Cash
      and Cash Equivalents**




The
      Company considers all highly liquid investments with an original maturity of
      three months or less when purchased to be cash equivalents. Cash equivalents
      are
      held in investment grade fixed income securities including United States
      Treasury, government backed and corporate obligations. The carrying amount
      of
      cash and cash equivalents approximates its fair value due to its short-term
      nature.





F-12





**Short-term
      Investments**




The
      Company’s entire portfolio of short-term investments is currently classified as
      available for sale and is stated at fair value as determined by quoted market
      values. Investments having maturities of more than three months but not more
      than one year from the date of acquisition are considered short-term and are
      classified as current assets. The Company’s short-term investments consist of
      the following:




**(dollars
                  in thousands)****Short
                    Term**
                **Investments**
              
              **Successor**
                **December
                  31, 2005**
              
              **Successor**
                **December
                  31, 2004**Commercial
                  Paper
              
              $
              21,425
              
              $
              -Corporate
              
              
              -
              
              
              30,647Federal
                  Agency
              
              
              50,686
              
              
              19,778Total
              
              $
              72,111
              
              $
              50,425


**Concentration
      of Credit Risk**





Financial
      instruments that potentially subject RCN to concentrations of credit risk
      consist primarily of cash and cash equivalents, short-term investments,
      restricted investments and accounts receivable.





The
      Company invests its cash in accordance with the terms and conditions of our
      First Lien Credit Agreement, which seeks to ensure both liquidity and safety
      of
      principal. The policy limits investments to instruments issued by the U.S.
      government and commercial institutions with strong investment grade credit
      ratings, and places restrictions on maturity.





RCN’s
      trade receivables reflect a diverse, high-quality customer base. Up front credit
      evaluation and account monitoring procedures are used to minimize the risk
      of
      loss. As a result, concentrations of credit risk are limited.




**Accounts
      Receivable**




RCN
      carries its accounts receivable at cost less an allowance for doubtful accounts.
      On a periodic basis, RCN evaluates its allowance for doubtful accounts and
      adjusts the allowance for doubtful accounts based upon a percentage of the
      aged
      accounts receivable balance. RCN’s formula for calculating its reserve closely
      parallels its history of actual write-offs and account adjustments based upon
      contractual terms.




**Property,
      Plant and Equipment and Depreciation and Amortization**




Property,
      plant and equipment, which includes amounts under capital leases, is stated
      at
      its estimated fair value as of the Effective Date, as determined by RCN’s
      reorganization value (see Note 4). Prior to the Effective Date, property, plant
      and equipment was recorded at cost of acquisition or construction, including
      all
      direct and certain indirect costs. These costs include related payroll, employee
      benefits, and interest (if material) from borrowed funds used in the development
      and construction of the network. Expenditures for repairs and maintenance are
      charged to expense as incurred, while equipment replacement and betterments
      are
      capitalized. The Successor will employ these same principles for recording
      property, plant and equipment subsequent to the Effective Date. Depreciation
      is
      recorded on the straight-line method based on the useful lives of the various
      classes of depreciable property.




Leasehold
      improvements are amortized over the lesser of the life of the lease or its
      estimated useful life. The costs and related depreciation for assets no longer
      in service are eliminated from the account. Gain or loss is recognized on
      retirements and dispositions. The average estimated lives of depreciable
      property, plant and equipment are:





F-13




LivesTelecommunication
                network
            
            
            5
                - 22.5 yearsComputer
                equipment
            
            
            3
                - 5 yearsBuilding
                and leasehold improvements
            
            
            5
                - 30 yearsFurniture,
                fixtures and vehicles
            
            
            3
                - 10 yearsOther
            
            
            5
                - 10 years




**Intangibles**




Intangible
      assets consist of trademarks, trade names, customer relationships and franchise
      agreements. The fair values at the Effective Date were based on a number of
      significant factors determined by RCN management with the help of its advisors.
      Identifiable intangible assets, with the exception of franchise agreements,
      will
      be amortized over the estimated useful lives, estimated by RCN to be between
      3
      and 5 years. (See Note 13). Franchise agreements are considered to be
      indefinite-lived assets and consequently are not amortized, but are measured
      annually for impairment under SFAS No. 142 *,
      “Goodwill and Other Intangible Asset”* (“SFAS
      142”).




Also
      included in intangible assets are costs incurred to develop software for
      internal use. Certain direct development costs and software enhancements costs
      associated with internal use software are capitalized, including external direct
      costs of material and service, and internal labor costs devoted to these
      software projects under AICPA SOP 98-1, *“Accounting
      for Costs of Computer Software Developed or Obtained for Internal
      Use.* ”
Costs
      incurred during the preliminary project stage, as well as maintenance and
      training costs, are expensed as incurred. Upon completion of the projects,
      the
      total costs are amortized over their estimated useful lives of three years.







**Valuation
      of Long-Lived Assets**




RCN
      accounts for its long-lived assets in accordance with SFAS No. 144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets,”* (“SFAS
      144”) which requires that long-lived assets be evaluated whenever events or
      changes in circumstances indicate that the carrying amount may not be
      recoverable. If the total of the undiscounted future cash flows is less than
      the
      carrying amount of the asset or asset group, an impairment loss is recognized
      for the difference between the estimated fair value and the carrying value
      of
      the asset or asset group. As described in Note 6, “Business Combinations” an
      impairment of RCN’s interest in Starpower was recorded in the fourth quarter of
      2004 (Predecessor).





**Short-Term
      and Long-Term Restricted Investments**




RCN
      has
      cash balances held at insurance companies for various insurance policies (mainly
      general and auto liability, and workers compensation), cash collateralizing
      letters of credit mainly for franchise performance bonds and franchise
      agreements and cash on deposit with a payment processing company. These
      investments are restricted and unavailable for use by RCN. In addition, as
      of
      December 31, 2004, RCN had cash and short-term investments held as collateral
      for the benefit of the lenders for RCN’s original bank credit agreement with
      JPMorgan Chase (the “JPMorgan Credit Facility”).




**Leases**




The
      majority of the leases entered into by RCN are operating leases, primarily
      for
      office and administrative facilities. Rent expense for operating leases is
      recognized based on the straight-line amortization of total cash payments over
      the lease term, taking into account free rent periods, escalating rents and
      other landlord incentives. Leases that meet the criteria of capitalized leased
      assets and the corresponding lease obligations are recorded on RCN’s balance
      sheet.





F-14





**Programmer
      Launch Funds**




RCN
      receives incentives from programming networks to carry their programming. RCN
      reflects the deferred portion of these fees within current and noncurrent
      liabilities and recognizes the fees as a reduction of programming costs (which
      are included in direct expenses) on a straight-line basis over the term RCN
      carries the programming, which ranges from three to seven years.





**Direct
      Expenses**





Direct
      expenses consist primarily of network related costs required to support delivery
      of voice, video and data products including the fixed and variable cost
      associated with circuits and call delivery. In addition, direct costs include
      fees paid to vendors for programming to support the cable channel line-ups.




**Selling,
      General and Administrative**





Selling,
      general and administrative expenses include selling, advertising, legal, all
      payroll, employee benefits, other headcount-related costs, and other
      administrative fees. Selling, general and administrative does not include
      non-cash stock based compensation of $8.9 million, $4.4 million, and $4.7
      million for the year ended December 31, 2005, the period from January 1, 2004
      to
      December 20, 2004 and for the year ended December 31, 2003, respectively. (See
      Note 18).





**Non-cash
      stock based compensation**





The
      Company accounts for stock based compensation in accordance with SFAS No. 123R,
      “Share-Based Payment” which requires the Company to recognize compensation
      expense for stock-based compensation issued to employees, net of estimated
      forfeitures, using a fair value approach .





**Advertising
      Expense**




Advertising
      costs are expensed as incurred. Advertising expense included in selling, general
      and administration expense was $14.0 million, $13.5 million and $11.7 million,
      for the year ended December 31, 2005, the period from January 1, 2004 to
      December 20, 2004 and for the year ended December 31, 2003, respectively.




**Debt
      Issuance Costs**




*Successor*




Debt
      financing costs are capitalized and amortized over the terms of the underlying
      obligation using the straight-line method, which approximates the effective
      interest method.




**Income
      Taxes**




Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the estimated future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases and operating
      loss and tax credit carryforwards. Deferred tax assets and liabilities are
      measured using enacted tax rates in effect for the year in which those temporary
      differences are expected to be recovered or settled. The measurement of net
      deferred tax assets is reduced by the amount of any tax benefit that, based
      on
      available evidence, are not expected to be realized, and a corresponding
      valuation allowance is established. The determination of the required valuation
      allowance against net deferred tax assets was made without taking into account
      the deferred tax liabilities created from the book and tax differences on
      indefinite lived assets.





**Foreign
      Currency Translation**




The
      Company’s functional currency is the U.S. Dollar. RCN has 48.93% interests in
      Megacable and MCM, whose functional currency is the Mexican peso. For periods
      in
      which RCN recorded it’s share in the earnings of Megacable and MCM, RCN
      translated the revenues and expenses of Megacable and MCM into U.S. dollars
      at
      the average exchange rates during the period reported. The assets and
      liabilities are translated into U.S. dollars at the exchange rate as of the
      balance sheet date. The foreign currency translation gains or losses are
      recorded on the balance sheet as a separate component of stockholders’ equity.





F-15





**Comprehensive
      Income (Loss)**




RCN
      primarily has three components of comprehensive loss, net income (loss),
      cumulative translation adjustments and unrealized appreciation (depreciation)
      on
      investments. Under the terms of the Plan, the balance of other comprehensive
      income as of the Effective Date was recorded as a component of Fresh Start
      adjustments in the Statement of Operations pursuant to SOP 90-7. The following
      table reflects the components of comprehensive income (loss).




**(dollars
                  in thousands)****Successor**
              
              **Predecessor****2005**
              
              **December 21, to**
                  **December 31,**
                **2004**
              
              **January
                      1, to**
                  **December 20,**
                **2004**
              
              **2003**Net
                  income(loss) before preferred dividend and accretion
                  requirements
              
              $
              (136,112
              )
              $
              (3,688
              )
              $
              1,062,746
              
              $
              (325,701
              )Cumulative
                  foreign currency translation gain (loss)
              
              
              6,896
              
              
              -
              
              
              (3,298
              )
              
              (8,856
              )Unrealized
                  appreciation (depreciation) on investments
              
              
              127
              
              
              -
              
              
              (403
              )
              
              (1,244
              )“Fresh
                  Start” adjustments
              
              
              -
              
              
              -
              
              
              17,451
              
              
              -Comprehensive
                  income (loss)
              
              $
              (129,089
              )
              $
              (3,688
              )
              $
              1,076,496
              
              $
              (335,801
              )


***Use
      of Estimates***




The
      Company’s condensed consolidated financial statements are prepared in accordance
      with GAAP. These accounting principles require management to make estimates,
      judgments and assumptions that affect the amounts reported in the condensed
      consolidated financial statements and accompanying notes. When sources of
      information regarding the carrying values of assets, liabilities and reported
      amounts of revenue and expenses are not readily apparent, RCN bases its
      estimates on historical experience and on various other assumptions that RCN’s
      management believes to be reasonable for making judgments. RCN evaluates all
      of
      its estimates on an on-going basis and may consult outside experts to assist
      in
      RCN’s evaluations. These estimates, judgments and assumptions can affect the
      reported amounts of assets and liabilities as of the date of the consolidated
      financial statements, as well as the reported amounts of revenue and expenses
      during the periods presented. Actual results could differ from those estimates.




***Change
      in Accounting Estimates***




The
      Company capitalizes the cost of technical labor and material associated with
      the
      installation of new customers. Effective January 1, 2004, the Company changed
      the useful life of these assets from ten to five years which the Company
      believes is a more accurate estimate of the useful life. The change resulted
      in
      approximately $10.5 million of additional depreciation expense for the year
      ended December 31, 2004.





***Segment
      Reporting***




RCN’s
      management views RCN’s business of providing video, data and voice
      communications services to residential and commercial customers as one business
      segment. All services are provided from the same telecommunications backbone.
      No
      separate asset information is maintained or reviewed. RCN’s management believes
      RCN can aggregate these revenue streams under the quantitative and qualitative
      thresholds defined in SFAS No. 131, *“Disclosures
      about Segments of an Enterprise and Related Information.”*





**Revenue
      Recognition**





Revenues
      are recognized as earned when the services are rendered, evidence of an
      arrangement exists, the fee is fixed and determinable and collectibility is
      probable. Video and high-speed data revenues are recognized in the period
      service is provided and related cable installation revenues are recognized
      in
      the period of installation since they do not exceed the direct selling costs.
      Dial-up Internet revenues are earned based on the contract period. Telephone
      service revenues are recognized when services are provided. Local telephone
      revenues are based on tariff rates while long distance telephone revenues are
      based upon minutes of traffic processed in accordance with tariffs and the
      rates
      of long-distance providers. The Company recognizes revenue from reciprocal
      compensation payments, the fees that local exchange carriers pay to terminate
      calls on each other’s networks, based upon calls terminated on RCN’s network.





F-16





***Recently
      Issued Accounting Pronouncements***





In
      May
      2005, the FASB issued SFAS No. 154, *“Accounting
      Changes and Error Corrections, a replacement of APB 20 and FASB Statement No.
      3”* (“SFAS
      154”). Previously, APB 20, *“Accounting
      Changes”* and
      SFAS
      No. 3, *“Reporting
      Accounting Changes in Interim Financial Statements”* required
      the inclusion of the cumulative effect of changes in accounting principle in
      net
      income of the period of the change. SFAS 154 requires companies to recognize
      changes in accounting principle, including changes required by a new accounting
      pronouncement when the pronouncement does not include specific transition
      provisions, retrospectively to prior period financial statements. SFAS 154
      will
      be effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. SFAS 154 does not change the transition
      provisions of any existing accounting pronouncements, including those that
      are
      in a transition phase as of the effective date of SFAS 154. The Company will
      assess the impact of a retrospective application of a change in accounting
      principle in accordance with SFAS 154 if the need for such a change arises
      after
      the effective date of January 1, 2006.




In
      March
      2005, the FASB issued FASB Interpretation No. 47, *“Accounting
      for Conditional Asset Retirement Obligations”* (“FIN
      47”). FIN 47 clarifies the definition and treatment of conditional asset
      retirement obligations as discussed in SFAS No. 143, “ *Accounting
      for Asset Retirement Obligations* ,”
A
      conditional asset retirement obligation is defined as an asset retirement
      activity in which the timing and/or method of settlement are dependent on future
      events that may be outside the control of the Company. FIN 47 requires an entity
      to recognize a liability for the fair value of a conditional asset retirement
      obligation if the fair value of the liability can be reasonably estimated.
      FIN
      47 is intended to provide more information about long-lived assets, more
      information about future cash outflows for these obligations and more consistent
      recognition of these liabilities. FIN 47 is effective no later than the end
      of
      fiscal years ending after December 15, 2005. Retrospective application of
      interim financial information is permitted but is not required. Early adoption
      of this Interpretation is encouraged. The adoption of FIN 47 did not have a
      material effect on the Company’s financial statements.




In
      December 2004, the FASB issued SFAS No. 123R, *“Share-Based
      Payment (“SFAS No. 123R”),”* SFAS
      123R
      is a revision of SFAS No. 123, *“Accounting
      for Stock Based Compensation,”* and
      supersedes APB No. 25, *“Accounting
      for Stock Issued to Employees.”* SFAS
      123R
      requires companies to recognize the cost of stock-based compensation awards
      by
      applying the grant date fair value of those awards as a charge to results of
      operations over the remaining vesting period. The effective date of SFAS 123R
      is
      January 1, 2006, for calendar year companies. The Company adopted SFAS 123R
      as
      of July 1, 2005 **.** Because
      RCN had previously recognized share-based compensation expenses under SFAS
      123
      since January 1, 2000, the adoption of SFAS 123R has not materially changed
      the
      way the Company accounts for its share-based payments.




In
      December 2004, the FASB issued SFAS No. 153, *Exchanges
      of Nonmonetary Assets - an amendment of APB Opinion No. 29* (“SFAS
      153”). APB Opinion No. 29 requires a nonmonetary exchange of assets be accounted
      for at fair value, recognizing any gain loss, if the exchange meets a commercial
      substance criterion and fair value is determinable. The commercial substance
      criterion is assessed by comparing the entity’s expected cash flows immediately
      before and after the exchange. SFAS 153 eliminates the “similar productive
      assets exception,” which accounts for the exchange of assets at book value with
      no recognition of gain or loss. SFAS 153 is effective for nonmonetary asset
      exchanges occurring in fiscal periods beginning after June 15, 2005. The
      adoption of SFAS 153 did not have an impact on our financial statements.





In
      November 2004, SFAS No. 151 *“Inventory
      Costs — an amendment of ARB No. 43, Chapter 4”* was
      issued. SFAS 151 is the result of efforts to converge U.S. accounting standards
      for inventories with International Accounting Standards. SFAS 151 requires
      abnormal amounts of idle facility expense, freight, handling costs and spoilage
      to be recognized as current-period charges. It also requires that allocation
      of
      fixed production overheads to the costs of conversion be based on the normal
      capacity of the production facilities. SFAS 151 will be effective for inventory
      costs incurred during fiscal years beginning after June 15, 2005. The Company
      does not expect the adoption to have a material impact on the financial
      statements .




In
      November 2005, the FASB issued Staff Position No. 115-1, *“The
      Meaning of Other Than Temporary Impairment and its Application to Certain
      Investments”* (“FSP
      115-1”). FSP 115-1 provides accounting guidance for determining and measuring
      other-than-temporary impairments of debt and equity securities, and confirms
      the
      disclosure for investments in unrealized loss positions as outlined in EITF
      03-01, “The Meaning of Other-Than-Temporary Impairments ands its Application tom
      Certain Investments”. The accounting requirements are effective for us on
      January 1, 2006 and will not have a material impact on our financial position
      or
      cash flows.





F-17





**4.**
            **FRESH
                START ACCOUNTING**




On
      the
      Effective Date, Reorganized RCN emerged with a new capital structure and with
      no
      retained earnings or accumulated losses. This resulted in a new reporting entity
      under a new basis of accounting (the Successor as of December 21, 2004).
      Following the emergence on December 21, 2004, the Successor commenced operations
      and thus experienced an eleven-day operating period at the end of 2004. The
      results for the period January 1, 2004 through December 20, 2004 represent
      the
      Predecessor’s operations.





RCN
      implemented “fresh start” accounting and reporting in accordance with the AICPA
      SOP 90-7, upon its emergence from Chapter 11 on the Effective Date, because
      the
      holders of existing voting shares immediately before confirmation of the Plan
      received less than 50% of the voting shares of Reorganized RCN. “Fresh start”
accounting required RCN to re-value its assets and liabilities based upon their
      estimated fair values. Adopting “fresh start” accounting resulted in material
      adjustments to the historical carrying amount of RCN’s assets and liabilities.
      Reorganization adjustments were recorded to the consolidated balance sheet
      to
      reflect the discharge of debt and other obligations and the adoption of “fresh
      start” reporting. RCN, with the help of its advisors, determined the
      reorganization value as defined in SOP 90-7. The value was based on a variety
      of
      estimates and assumptions which, though considered reasonable by management,
      may
      not be realized and are inherently subject to significant business, economic
      and
      competitive uncertainties and contingencies, many of which are beyond RCN’s
      control.





In
      applying “fresh start” reporting as of the Effective Date, the reorganization
      value of RCN was allocated to its assets in conformity with the procedures
      specified by SFAS No. 141, “ *Business
      Combinations* .”
The
      sum of the amounts assigned to assets and liabilities exceeded the
      reorganization value. This excess was allocated as a pro rata reduction of
      the
      amounts that otherwise would have been assigned to the Successor’s long-lived
      assets.





The
      “fresh start” balance sheet at December 21, 2004 includes RCN’s 50% interest in
      Starpower at fair value. Successor RCN acquired the remaining 50% of Starpower
      upon emergence.





New
      debt,
      which was used to settle certain Predecessor liabilities, payoff existing
      Predecessor debt and increase available working capital, was treated as
      Predecessor debt since it primarily serviced Predecessor liabilities.





The
      following table reflects the debt and equity restructuring, reorganization
      adjustments and “fresh start” reporting adjustments to RCN’s consolidated
      balance sheet as of the Effective Date.





F-18





**RCN
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**


**(Dollars
      in Thousands)**




**Predecessor**
                **Dec.
                  20,**
                
                **2004**
              
              **Equity**
              
              **Restructuring**
              
              **“Fresh**
                **Start”**
              
              **Successor**
                **Dec.
                  21,**
                
                **2004**ASSETSCurrent
                  Assets:Cash
                  and cash equivalents
              
              $
              136,557
              
              $
              —
              
              $
              (37
              )(K)
              $
              —
              
              $
              136,520Short-term
                  investments
              
              
              50,425
              
              
              —
              
              
              —
              
              
              —
              
              
              50,425Accounts
                  receivable from related parties
              
              
              9,951
              
              
              —
              
              
              —
              
              
              —
              
              
              9,951Accounts
                  receivable, net
              
              
              47,461
              
              
              —
              
              
              (80
              )(L)
              
              —
              
              
              47,381Unbilled
                  revenues
              
              
              792
              
              
              —
              
              
              —
              
              
              —
              
              
              792Interest
                  and dividends receivable
              
              
              755
              
              
              —
              
              
              —
              
              
              —
              
              
              755Prepayments
                  and other current assets
              
              
              21,652
              
              
              —
              
              
              (129
              )(M)
              
              —
              
              
              21,523Short-term
                  restricted investments
              
              
              1,348
              
              
              —
              
              
              —
              
              
              —
              
              
              1,348Current
                  deferred tax asset
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  current assets
              
              
              268,941
              
              
              —
              
              
              (246
              )
              
              —
              
              
              268,695Property,
                  plant and equipment, net
              
              
              719,999
              
              
              —
              
              
              
              
              
              4,501
              (Z)
              
              724,500Investments
                  in unconsolidated entity
              
              
              210,063
              
              
              —
              
              
              (25,689
              )(N)
              
              33,626
              (AA)
              
              218,000Intangible
                  assets, net
              
              
              1,218
              
              
              —
              
              
              —
              
              
              141,181
              (AB)
              
              142,399Goodwill,
                  net
              
              
              6,130
              
              
              —
              
              
              —
              
              
              (6,130
              )(AC)
              
              —Long-term
                  restricted investments
              
              
              29,697
              
              
              —
              
              
              —
              
              
              —
              
              
              29,697Deferred
                  charges and other assets
              
              
              18,641
              
              
              —
              
              
              846
              (O)
              
              —
              
              
              19,487Noncurrent
                  assets of discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  assets
              
              $
              1,254,689
              
              $
              —
              
              $
              (25,089
              )
              $
              173,178
              
              $
              1,402,778





F-19





**RCN
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**


**(Dollars
      in Thousands)**




**Predecessor**
                **Dec.
                  20,**
                
                **2004**
              
              **Equity**
              
              **Restructuring**
              
              **“Fresh**
                **Start”**
              
              **Successor**
                **Dec.
                  21,**
                
                **2004**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
                  Liabilities:Current
                  maturities of capital lease obligations
              
              $
              529
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              529Current
                  maturities of long-term debt
              
              
              3,300
              
              
              —
              
              
              —
              
              
              —
              
              
              3,300Accounts
                  payable
              
              
              52,209
              
              
              —
              
              
              (2,408
              )(P)
              
              —
              
              
              49,801Accounts
                  payable to related parties
              
              
              5,519
              
              
              —
              
              
              —
              
              
              —
              
              
              5,519Advance
                  billings and customer deposits
              
              
              28,216
              
              
              —
              
              
              (73
              )(Q)
              
              —
              
              
              28,143Accrued
                  expenses
              
              
              29,417
              
              
              —
              
              
              1,210
              (R)
              
              —
              
              
              30,627Accrued
                  interest
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Accrued
                  cost of sales
              
              
              22,856
              
              
              —
              
              
              —
              
              
              —
              
              
              22,856Accrued
                  exit costs
              
              
              669
              
              
              —
              
              
              —
              
              
              —
              
              
              669Accrued
                  employee compensation and related expenses
              
              
              15,375
              
              
              —
              
              
              —
              
              
              —
              
              
              15,375Deferred
                  reorganization costs
              
              
              —
              
              
              —
              
              
              21,644
              (S)
              
              —
              
              
              21,644Deferred
                  income taxes
              
              
              (919
              )
              
              —
              
              
              919
              (S)
              
              —
              
              
              —Current
                  liabilities of discontinued operations
              
              
              1,082
              
              
              —
              
              
              —
              
              
              —
              
              
              1,082Total
                  current liabilities
              
              
              158,253
              
              
              —
              
              
              21,292
              
              
              —
              
              
              179,545Long-term
                  debt
              
              
              486,991
              
              
              —
              
              
              2,751
              (T)
              
              —
              
              
              489,742Other
                  deferred credits
              
              
              5,073
              
              
              —
              
              
              19,808
              (U)
              
              —
              
              
              24,881Liabilities
                  subject to compromise
              
              
              1,215,626
              
              
              —
              
              
              (1,215,626
              )(S)
              
              —
              
              
              —Preferred
                  Stock
              
              
              
              
              
              —Cumulative
                  Convertible Series A
              
              
              350,362
              
              
              (350,362
              )(A)
              
              —
              
              
              —
              
              
              —Cumulative
                  Convertible Series B
              
              
              1,474,850
              
              
              (1,474,850
              )(B)
              
              —
              
              
              —
              
              
              —Stockholders’
                  Equity (deficit):Predecessor
                  Class A
              
              
              112,163
              
              
              (112,163
              )(C)
              
              —
              
              
              —
              
              
              —Common
                  stockSuccessor
                  Common stock
              
              
              —
              
              
              —
              
              
              319
              (V)
              
              —
              
              
              319Predecessor
                  Class B
              
              
              11,425
              
              
              (11,425
              )(D)
              
              —
              
              
              —
              
              
              —Common
                  stockCommitted
                  Capital
              
              
              —
              
              
              —
              
              
              131,396
              (W)
              
              —
              
              
              131,396Additional
                  paid-in capital
              
              
              2,155,794
              
              
              (1,630,265
              )(E)
              
              (121,812
              )(X)
              
              173,178
              (AD)
              
              576,895Accumulated
                  deficit
              
              
              (4,688,198
              )
              
              3,551,415
              (F)
              
              1,136,783
              (Y)
              
              —
              
              
              —Unearned
                  compensation expense
              
              
              (32
              )
              
              32
              (G)
              
              —
              
              
              —
              
              
              —Cumulative
                  translation adjustments
              
              
              (17,288
              )
              
              17,288
              (H)
              
              —
              
              
              —
              
              
              —Unrealized
                  appreciation on investments
              
              
              (162
              )
              
              162
              (I)
              
              —
              
              
              —
              
              
              —Predecessor
                  Treasury stock
              
              
              (10,168
              )
              
              10,168
              (J)
              
              —
              
              
              —
              
              
              —Total
                  stockholders’ equity (deficit)
              
              
              (2,436,466
              )
              
              1,825,212
              
              
              1,146,686
              
              
              173,178
              
              
              708,610Total
                  liabilities and stockholders’ equity
              
              $
              1,254,689
              
              $
              —
              
              $
              (25,089
              )
              $
              173,178
              
              $
              1,402,778




F-20




***Notes
      to “Fresh Start” Activity***





(A)
            Preferred
                Stock Series A - represents the cancellation of the old Preferred
                Stock
                Series A.





(B)
            Preferred
                Stock Series B - represents the cancellation of the old Preferred
                Stock
                Series B.





(C)
            Common
                Stock Class A - represents the cancellation of the old Common Stock
                Class
                A.





(D)
            Common
                Stock Class B - represents the cancellation of the old Common Stock
                Class
                B.





(E)
            Additional
                paid-in capital - represents the cancellation of all the outstanding
                preferred common and treasury stock of the predecessor company in
                accordance with the plan of
                reorganization.





(F)
            Accumulated
                deficit - represents the cancellation of all accumulated
                losses.





(G)
            Unearned
                compensation expense - represents the closing out of the remaining
                equity
                accounts in accordance with the recapitalization provisions of fresh
                start
                accounting.





(H)
            Cumulative
                translation adjustments - represents closing out of the remaining
                equity
                accounts in accordance with the recapitalization provisions of fresh
                start
                accounting.





(I)
            Unrealized
                appreciation on investments - represents the closing out of the remaining
                equity accounts in accordance with the recapitalization provisions
                of
                fresh start accounting.





(J)
            Treasury
                stock - represents the cancellation of treasury
                stock.





(K)
            Cash
                and cash equivalents - represents cash used in
                restructuring.





(L)
            Accounts
                receivable, net - represents adjustments in the carrying value of
                accounts
                receivable due in accordance with fresh start
                accounting.





(M)
            Prepayments
                and other current assets - represents adjustments in the carrying
                value of
                prepaids in accordance with fresh start
                accounting.





(N)
            Investments
                in unconsolidated entities - represents the valuation decrease in
                Starpower in accordance with fresh start
                accounting.





(O)
            Deferred
                charges and other assets - represents increase in debt issuance costs
                due
                to restructuring.





(P)
            Accounts
                payable - represents the adjustment of certain liabilities to fair
                value
                in accordance with fresh start
                accounting.





(Q)
            Advance
                billings and customer deposits - represents the adjustment of certain
                liabilities to fair value in accordance with fresh start
                accounting.





(R)
            Accrued
                expenses - represents the adjustment of certain liabilities to fair
                value
                in accordance with fresh start
                accounting.




(S)
            Liabilities
                subject to compromise - represents the adjustment of deferred taxes
                and
                the settlement of the prior liabilities subject to compromise and
                liabilities not yet settled.





(T)
            Long-term
                debt - represents the reduction of warrants associated with the old
                debt.





(U)
            Other
                deferred credits - includes $19.0 million for deferred rent associated
                with fair value of leases upon
                emergence.





(V)
            Common
                stock - represents the issuance of the new common
                stock.





(W)
            Committed
                capital - represents the value of shares committed for
                reserve.





F-21





(X)
            Additional
                paid in capital - represents the net decrease associated with
                restructuring.





(Y)
            Accumulated
                deficit - represents the net of all the restructuring
                charges.





(Z)
            Property,
                plant and equipment - represents the adjustment in the carrying value
                in
                accordance with fresh start
                accounting.





(AA)
            Investments
                in unconsolidated entities - represents the valuation increase in
                Megacable.





(AB)
            Intangible
                assets - represents the adjustment in the carrying value for intangible
                assets in accordance with fresh start accounting.





(AC)
            Goodwill,
                net - represents the adjustment in the carrying value in accordance
                with
                fresh start accounting.





(AD)
            Additional
                paid-in capital - represents the gain on the adjustment in the carrying
                values of property, plant and equipment, intangible assets and goodwill
                in
                accordance with fresh start
                accounting.





F-22





**5.**
            **INCOME
                (LOSS) PER SHARE**





**Successor**





RCN
      adopted a new capital structure as of December 21, 2004 upon the adoption of
      fresh-start reporting. The Company issued 36,020,850 million shares of new
      common stock, of which 4,101,806 shares were placed in a reserve to settle
      disputed claims against RCN that were outstanding as of the date of emergence.
      As of December 31, 2005, 797,938 shares were remaining in the reserve. Shares
      in
      the reserve are considered outstanding and are included in the computation
      of
      basic EPS.





In
      accordance with SFAS No. 128, *“Earnings
      per Share* ”
(“SFAS
      128”) the calculation of basic earnings per share (“EPS”) is computed by
      dividing the income available to common stockholders by the weighted number
      of
      common stock during the period. The weighted average shares used in the
      computation of basic EPS were 36,040,165 and 36,020,850 for the year ended
      December 31, 2005 and the period from December 21 to December 31, 2004,
      respectively.





The
      computation of weighted average shares outstanding for the dilutive EPS
      calculation includes the number of additional shares of common stock that would
      be outstanding if all dilutive potential common stock equivalents would have
      been issued. For the year ended December 31, 2005 and the period December 21
      to
      December 31, 2004 respectively, all potential common stock equivalents would
      have been antidilutive, so the average weighted common stock for the basic
      EPS
      computation is equal to the weighted average common stock for the diluted EPS
      computation for those periods.





The
      following table shows the securities outstanding at December 31, 2005 that
      could
      potentially dilute basic EPS in the future but were not included in the
      calculation of diluted EPS because their inclusion would have been
      antidilutive.





Outstanding
                atDecember
                31,2005Options
            
            
            3,149,802Warrants
            
            
            188,032Shares
                issuable upon conversion of convertible debt
            
            
            4,968,204Unvested
                restricted stock
            
            
            730,086Total
            
            
            9,036,124




**Predecessor**





As
      discussed in Note 2, RCN emerged from Chapter 11 protection on December 21,
      2004. Implementation of the Plan resulted in cancellation of all of the
      Predecessor’s common stock and options that were outstanding prior to the
      Effective Date and the issuance the Successor’s new common stock as of the
      Effective Date.





Diluted
      income per share was computed based on net income after preferred stock dividend
      and accretion requirements divided by the weighted average number of shares
      of
      common stock and equivalents outstanding during the period after giving effect
      to convertible securities considered to be dilutive common stock equivalents.
      The conversion of preferred stock and stock options during the periods in which
      RCN incurred a loss from continuing operations before giving effect to net
      income from discontinued operations was not assumed since the effect was
      anti-dilutive. Common stock equivalents excluded from the calculation of diluted
      EPS as of December 31, 2003 for the convertible preferred stock and stock
      options were 32,517,583 and 9,296,144, respectively.





F-23





The
      following table is a reconciliation of the numerators and denominators of the
      basic and diluted per share computations:


**(dollars
                  in thousands)****Successor**
              
              **Predecessor****2005**
              
              **December 21, to**
                **December 31,**
                **2004**
              
              **January
                    1, to**
                **December 20,**
                **2004**
              
              **2003**Net
                  Income/(loss) from continuing operations
              
              $
              (138,601
              )
              $
              (3,688
              )
              $
              971,962
              
              $
              (499,747
              )Income
                  from discontinued operations, net of tax
              
              
              (111
              )
              
              -
              
              
              90,784
              
              
              174,046Cumulative
                    effect of a change in accounting for legal fees
              
              
              2,600Net
                  Income/(loss )
              
              $
              (136,112
              )
              $
              (3,688
              )
              $
              1,062,746
              
              $
              (325,701
              )Preferred
                  dividend and accretion requirements
              
              
              -
              
              
              -
              
              
              52,902
              
              
              173,392Net
                  Income/(loss) to common stockholders
              
              $
              (136,112
              )
              $
              (3,688
              )
              $
              1,009,844
              
              $
              (499,093
              )Weighted
                  average shares outstandingBasic
              
              
              36,040,165
              
              
              36,020,850
              
              
              110,294,169
              
              
              110,877,797Incremental
                  Shares based on cumulative convertible preferred stock
                  (Predecessor)
              
              
              
              
              
              
              
              
              33,225,321Diluted
              
              
              36,040,165
              
              
              36,020,850
              
              
              143,519,490
              
              
              110,877,797Basic
                  earnings (loss) per shareIncome/(loss)
                  per average common share from continuing operations
              
              $
              (3.85
              )
              $
              (0.10
              )
              $
              8.33
              
              $
              (6.07
              )Income
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              0.82
              
              
              1.57Net
                  Income/(loss) before cumulative effect ofchange in accounting
                  principle
              
              
              (3.85
              )
              
              (0.10
              )
              
              9.15
              
              
              (4.50
              )Cumulative
                    effect of a change in accounting for legal fees
              
              
              0.07
              
              
              -
              
              
              -
              
              
              -Net
                  Income/(loss) attributable to common stockholders
              
              $
              (3.78
              )
              $
              (0.10
              )
              $
              9.15
              
              $
              (4.50
              )Diluted
                  earnings per shareIncome/(loss)
                  per average common share from continuing operations
              
              $
              (3.85
              )
              $
              (0.10
              )
              $
              6.77
              
              $
              (6.07
              )Income
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              0.63
              
              
              1.57Net
                    Income/(loss) before cumulative effect of change in accounting
                    principle
              
              
              (3.85
              )
              
              (0.10
              )
              
              7.40
              
              
              (4.50
              )Cumulative
                    effect of a change in accounting for legal fees
              
              
              0.07
              
              
              -
              
              
              -
              
              
              -Net
                  Income/(loss) to common stockholders
              
              $
              (3.78
              )
              $
              (0.10
              )
              $
              7.40
              
              $
              (4.50
              )





F-24





**6.**
            **BUSINESS
                COMBINATIONS**




On
      December 21, 2004, subsequent to emergence from bankruptcy RCN acquired the
      50%
      membership interest in Starpower which it did not previously own from Pepco
      for
      $29.0 million in cash. Starpower provides video, voice and other communication
      services to residential and commercial customers in the Washington, D.C.
      metropolitan area. Prior to the acquisition, RCN accounted for its 50% interest
      in Starpower under the Equity Method. RCN, with the help of its advisors,
      determined the fair value of Starpower to be $80.0 million. Based on this
      determination, the Predecessor recorded an impairment charge of $25.7 million
      to
      its 50% investment in Starpower as of December 20, 2004 and carried its
      investment in Starpower at $40.0 million on the Effective Date. RCN has
      accounted for the transaction as a purchase and has included the operations
      of
      Starpower in the consolidated statement of operations commencing December 21,
      2004. Because the purchase price of the remaining 50% membership interest was
      less than fair value, RCN has reduced the fair value of Starpower’s fixed assets
      by the excess of the fair value over the cost. An allocation of the purchase
      price, including RCN’s equity investment in Starpower as of December 21, 2004,
      is as follows:





**(dollars
                in thousands)**Cash
                and Cash Equivalents and Short-Term Investments
            
            $
            14,067Current
                Assets
            
            
            11,430Fixed
                Assets
            
            
            73,806Other
                Assets
            
            
            456Total
                Assets
            
            $
            99,759Current
                Liabilities
            
            
            (27,417
            )Long-term
                Liabilities
            
            
            (3,342
            )Fair
                Value of Net Assets
            
            $
            69,000





Summary
      financial information for Starpower is presented in the following tables. The
      amounts shown represent Starpower’s operating results and financial position.





**(dollars
                in thousands)****As
                of December 31,****Predecessor****2003**Current
                assets
            
            $
            24,300Non-current
                assets
            
            
            291,100Current
                liabilities
            
            
            35,900Non-current
                liabilities
            
            
            1,700Members’
                equity
            
            
            277,800





F-25





**Predecessor**
              **January
                1, to**
              **December
                20,**
            
            **Predecessor**
              **Year
                ended December****31,****2004**
            
            **2003**Revenues
            
            $
            76,152
            
            $
            106,529Operating
                expense
            
            
            88,405
            
            
            105,280Operating
                income (loss)
            
            
            (12,253
            )
            
            1,249Net
                income (loss)
            
            
            (12,253
            )
            
            1,317




In
      accordance with APB 18, RCN considered its ability to recover the carrying
      amount of its investment in Starpower and determined that the loss in the value
      of the investment was other than temporary due to weaker than projected
      performance and decreased valuations in the overall telecommunication industry.
      As a result, RCN recorded an impairment in its investment in Starpower in the
      amount of $35.0 million in 2003. The amount of the impairment was calculated
      based upon RCN’s comparison of the estimated fair value of its investment in
      Starpower with the carrying amount of the investment. The impairment on the
      Starpower investment is reflected as an equity loss from unconsolidated
      entities.







**7.**
            **IMPAIRMENTS,
                EXIT COSTS AND RESTRUCTURING**




The
      total
      impairments, exit costs and restructuring charges are comprised of the
      following:


**(dollars
                    in thousands)**
                **For
                  the years ended December 31,****Successor**
                **2005**
              
              **Predecessor/**
                **Successor**
                **2004**
              
              **Predecessor**
                **2003**Exit
                  costs for excess facilities
              
              $
              8,858
              
              $
              (14,525
              )
              $
              14,534Accrual/Reversal
                  of deferred rent
              
              
              (6,903
              )
              
              -
              
              
              -Asset
                  impairment
              
              
              279
              
              
              6,851
              
              
              107,600Abandoned
                  Assets
              
              
              
              
              
              
              
              
              45,1072,234
              
              
              (7,674
              )
              
              167,241Severance
                  and retention
              
              
              3,011
              
              
              -
              
              
              -Total
              
              $
              5,245
              
              $
              (7,674
              )
              $
              167,241





All
      2004
      impairment and exit costs were expensed in the period January 1, 2004 to
      December 20, 2004 (Predecessor).








The
      Company continually reviews its facility requirements against lease obligations
      to identify excess space and opportunities to consolidate, exit or sublease
      excess facilities. As facilities are vacated, exit costs are recognized in
      accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or
      Disposal Activities” (“SFAS 146”). SFAS 146 requires the Company to offset the
      present value of its lease payments for the exited property against estimated
      sublease rental. When the Company terminates or buys out the lease, the payment
      is charged against the liability and/or the remaining liability is reversed
      into
      income. Changes in assumptions about lease rentals based on market conditions
      are recognized in income when made. RCN amortizes the liability for these
      facilities as an offset to rent expense, which is included in selling, general
      and administrative expense, over the remaining term of the lease.





As
      part
      of its emergence from bankruptcy, RCN recorded a “fresh start” liability for the
      excess of cost over fair value on all of its leased facilities. RCN amortizes
      the liability for these facilities as an offset to rent expense, which is
      included in selling, general and administrative expense, over the remaining
      term
      of the lease. When RCN exits a facility and accrues an exit cost liability,
      it
      reverses the remaining “fresh start” reserve established for that property.
      Similarly, when RCN renegotiates a lease on one of these properties the reserve
      is reversed into income.





F-26





RCN
      tests
      its long-lived assets for impairment in accordance with SFAS 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets,”* (“SFAS
      144”) if an event or circumstance, such as the exiting of a facility, indicates
      that there may be an impairment. In 2003, in response to RCN’s financial
      position and its difficulty obtaining financing for the continued build out
      of
      the network it recorded impairment charges of $152.7 million.





The
      rollforward of the activity of our cost over fair value liability and our
      accrued exit costs liability is as follows:




**(dollars
                  in thousands)****Lease
                    Cost/Fair Value**
                **Reserve**
              
              **Exit
                  Costs**Balance,
                  December 31, 2002
              
              $
              -
              
              $
              30,667Additional
                  accrued costs
              
              
              -
              
              
              19,278Recoveries
              
              
              -
              
              
              (3,278
              )Payments
              
              
              -
              
              
              (8,572
              )Balance,
                  December 31, 2003
              
              
              
              
              
              38,095Additional
                  accrued costs
              
              
              19,005
              
              
              3,778Recoveries
              
              
              -
              
              
              (32,033
              )Payments
              
              
              -
              
              
              (7,500
              )Balance,
                  December 31, 2004
              
              
              19,005
              
              
              2,340Additional
                  accrued costs
              
              
              -
              
              
              8,858Amortization
              
              
              (2,541
              )
              
              (1,950
              )Reversals/Settlements
              
              
              (6,903
              )
              
              -Payments
              
              
              -
              
              
              (650
              )Balance,
                  December 31, 2005
              
              
              9,561
              
              
              8,598Less
                  current portion
              
              
              1,471
              
              
              1,635$
              8,090
              
              $
              6,963


The
      current portion of these liabilities is included in accrued exit costs on the
      balance sheet and the long-term portion is included in other long-term
      liabilities.







**8.**
            **DISCONTINUED
                OPERATIONS**




On
      March
      9, 2004, RCN completed the sale of its Carmel, New York (“Carmel”) cable system
      for proceeds of approximately $120.2 million resulting in a gain on the sale
      of
      approximately $90.1 million (including net income from operations of $1.6
      million). The transaction was structured as an asset purchase, with the buyer
      assuming certain liabilities related to the business. Approximately $5.0 million
      was placed into escrow for future claims of the buyer of which $4.0 million
      and
      $1.0 million were released during 2004 and 2005, respectively. In accordance
      with SFAS 144, the results of operations for Carmel are reported as discontinued
      operations.





On
      February 19, 2003, RCN sold its central New Jersey cable system assets for
      approximately $242.8 million of proceeds (net of purchase price and post-closing
      adjustments). In connection with its regulatory review and approval of the
      transaction, the New Jersey Board of Public Utilities (NJBPU) required RCN
      to
      deposit an additional $1 million in escrow to satisfy any subscriber claims
      and
      administrative fines and penalties arising after or in connection with the
      sale.
      RCN is currently in negotiation with the NJBPU to gain release of the money
      in
      escrow. In accordance with SFAS No. 144 *“Accounting
      for the Impairment or Disposal of Long-Lived*  *Assets,”* the
      results of operations for this system are reported as discontinued
      operations.





F-27





The
      following are the summarized results of operations for the Carmel operation
      for
      the periods ended:




**Successor**
              **December
                31,**
              **2005**
            
            **Predecessor**
              **January
                1,**
              **to
                December 20,**
              **2004**
            
            **Predecessor**
              **December
                31,**
              **2003**Revenues
            
            $
            —
            
            $
            5,928
            
            $
            29,083Operating
                expenses
            
            
            (25
            )
            
            4,354
            
            
            20,723Other
                Income
            
            
            15Income
                before tax
            
            
            
            
            
            1,574
            
            
            8,360Income
                after tax
            
            
            40
            
            
            1,574
            
            
            8,360






The
      following are the summarized results of operations for the Central New Jersey
      operation:




**Successor**
              **December
                21,**
              **to
                December 31**
              **2004**
            
            **Predecessor**
              **January
                1,**
              **to
                December 20,**
              **2004**
            
            **Predecessor**
              **January
                1,**
              **to
                December 31,**
              **2003**Revenues
            
            $
            —
            
            $
            —
            
            $
            7,438Operating
                expenses
            
            
            49
            
            
            20
            
            
            5,436Other
                Income (expense)
            
            
            (200
            )
            
            650
            
            
            —Income
                after tax
            
            
            (151
            )
            
            630
            
            
            2,002Income
                after tax
            
            
            (151
            )
            
            630
            
            
            2,002




F-28





**9.**
            **FAIR
                VALUE OF FINANCIAL INSTRUMENTS**




The
      estimated carrying fair value of RCN’s financial instruments at December 31,
      2005 (Successor) and 2004 (Successor) are as follows:


**(dollars
                  in thousands)****Successor
                  2005**
              
              **Successor
                  2004****Carrying**
                **Amount**
              
              **Fair**
                **Value**
              
              **Carrying**
                **Amount**
              
              **Fair**
                **Value**Financial
                  Assets:Cash
                  and cash equivents
              
              $
              70,906
              
              $
              70,906
              
              $
              113,539
              
              $
              113,539Short-term
                  investments
              
              
              72,111
              
              
              72,111
              
              
              50,425
              
              
              50,425Restricted
                  short-term investments
              
              
              -
              
              
              -
              
              
              1,525
              
              
              1,525Financial
                  Liabilities:Fixed
                  rate long-term debtConvertible
                  Notes
              
              
              125,000
              
              
              147,854
              
              
              125,000
              
              
              125,000Third-Lien
                  Term Loan
              
              
              39,156
              
              
              39,156
              
              
              34,547
              
              
              34,547Floating
                  rate long-term debt:First-Lien
                  Term Loan
              
              
              324,478
              
              
              327,723
              
              
              330,000
              
              
              330,000Unrecognized
                  financial instrumentsLetters
                  of credit
              
              
              20,984
              
              
              20,984
              
              
              29,977
              
              
              29,977Capital
                  lease obligations
              
              
              3,463
              
              
              3,463
              
              
              4,021
              
              
              4,021







**10.**
            **RESTRUCTURING**




In
      the
      third quarter of 2005, RCN announced that it would close its former headquarters
      facility in Princeton, NJ in the second quarter of 2006. The plan would result
      in the termination of approximately 120 employees in finance, information
      technology, legal, human resources and other corporate functions. The Company
      expects to incur approximately $3.0 million in retention, severance, relocation
      and other expenses in connection with this plan of which $1.9 million has been
      recognized in 2005. The Company expects to pay the majority of the accrued
      retention and severance to the affected employees in the second quarter of
      2006.
      In addition, the Company has recorded increased depreciation of $2.9 million
      in
      2005 as it adjusted the depreciable lives of leasehold improvements and other
      fixed-assets to reflect the expected closing date.





RCN
      also
      announced a reduction in force in December in conjunction with plans to reduce
      its operating expenses, terminating approximately 95 employees across all
      business functions. The Company recognized approximately $1.1 million of expense
      in the fourth quarter in severance and benefits for the terminated employees
      all
      of which will be paid out in the first quarter of 2006.








Activity
      related to these restructuring actions in 2005 is as follows:




**(dollars
                  in thousands)**Costs
                  accrued
              
              $
              3,011Payments
              
              
              (198
              )$
              2,813





F-29





The
      expenses are recorded in the Impairments, exit costs and restructuring line
      of
      the statements of operations and Accrued restructuring is included in accrued
      expenses on the balance sheet.





In
      conjunction with the above plans, the compensation committee of the Company’s
      Board of Directors allowed terminated employees to keep the portion of their
      unvested options that are scheduled to vest in May 2006. RCN deemed this to
      be a
      plan modification under the modification guidance in SFAS 123(R) and accounted
      for the modification as an exchange of the original award for a new award.
      As a
      result, RCN recorded the incremental fair value of the modified award, as
      compensation cost on the date of the modification. The fair value per “modified”
option was calculated between $5.45 and $8.13, using a lattice model valuation
      method with a vesting date of May 24, 2006, and an expiration date of August
      24,
      2006. A total of 142,076 options were affected resulting in a net
      increase in non-cash stock-based compensation of $0.2
      million.








**11.**
            **PROPERTY,
                PLANT AND EQUIPMENT**




Property,
      plant and equipment consists of the following at December 31, 2005 (Successor)
      and 2004 (Successor).




**(dollars
                  in thousands)****Successor**
                **2005**
              
              **Successor**
                **2004**Telecommunications
                  plant
              
              $
              715,883
              
              $
              685,415Computer
                  equipment
              
              
              47,774
              
              
              30,217Buildings,
                  leasehold improvements and land
              
              
              44,024
              
              
              48,662Furniture,
                  fixtures and vehicles
              
              
              25,404
              
              
              18,334Construction
                  materials
              
              
              19,546
              
              
              9,852Construction
                  in process
              
              
              27,967
              
              
              5,816Other
              
              
              525
              
              
              -Total
                  property, plant and equipment
              
              
              881,123
              
              
              798,296Less
                  accumulated depreciation
              
              
              (175,215
              )
              
              (4,605
              )Property,
                  plant and equipment, net
              
              $
              705,908
              
              $
              793,691





As
      previously disclosed in Note 5, and pursuant to SOP 90-7, the Successor adjusted
      its carrying value of property and equipment to their estimated fair values
      as
      of the Effective Date.




Depreciation
      expense was $171.2 million, $4.6 million, $231.4 million, and $196.8 million
      for
      the year ended December 31, 2005 (Successor), the period December 21, 2004
      through December 31, 2004 (Successor), the period January 1, 2004 through
      December 20, 2004 (Predecessor), and the year ended December 31, 2003
      (Predecessor), respectively.




**12.**
            **INVESTMENTS
                IN JOINT VENTURES**





**Starpower**




On
      December 21, 2004, RCN acquired the 50% membership interest in Starpower which
      it did not already own from Pepco for $29.0 million in cash. Starpower provides
      video, voice and other communications services to residential and commercial
      customers in the Washington, D.C. metropolitan area. Prior to the acquisition
      of
      the full interest, RCN accounted for its 50% interest in Starpower under the
      equity method, and carried an investment balance of $65.7 million on the
      Effective Date. Prior to acquiring the remaining interest, the Predecessor
      Company recorded its proportionate share of income (losses) in Starpower of
      $5.9
      million, and $0.6 million for the period from January 1 to December 20, 2004
      and
      for the year ended December 31, 2003 respectively.





F-30





In
      accordance with APB No. 18 *“The
      Equity Method of Accounting for Investments in Common Stock”* ,
      RCN
      performed impairment tests on Starpower because of weaker than projected
      performance and decreased valuations in the overall telecommunication industry.
      As a result, the Predecessor Company recorded impairments in its investment
      in
      Starpower in the amounts of $25.7 as of December 20, 2004 (Predecessor) (see
      Note 6), and $35.0 million in 2003. The impairments were calculated based upon
      RCN’s comparison of the estimated fair value of its investment in Starpower to
      the carrying amount of the investment. The impairment on the Starpower
      investment is reflected in the line item, Impairment of unconsolidated entities.




**Megacable
      and MCM**





RCN
      has
      48.93% interests in both Megacable, S.A. de C.V., a cable television and
      high-speed data services provider in certain portions of Mexico (“Megacable”),
      and Megacable Communicaciones de Mexico S.A. (“MCM”), a provider of local voice
      and high-speed data services in Mexico City. Although RCN has historically
      accounted for these investments under the equity method, RCN was unable to
      record any income on these investments during 2005 due to the continued lack
      of
      timely financial information from Megacable and MCM, and the unwillingness
      of
      Megacable management to cooperate with RCN in its attempts to confirm the
      reliability and US GAAP compliance of the limited financial information received
      by RCN. In addition, RCN has been unsuccessful in its attempts to assert its
      rights under the shareholder agreement to appoint representatives to the
      Megacable board of directors and management committees. Because of these
      factors, Management determined that it did not exercise sufficient control
      over
      Megacable and MCM to continue accounting for its investments in them under
      the
      equity method and decided to account for these investments under the cost
      method, commencing in the fourth quarter of 2005, in accordance with APB 18
      and
      FASB Interpretation No. 35 *“Criteria
      for Applying the Equity Method of Accounting for Investments in Common
      Stock”* (“FIN
      35”).





As
      noted
      above, the Company recorded no income on these investments in 2005. Upon
      emergence from bankruptcy on December 21, 2004, the Company revalued its assets
      to their fair values in accordance with SOP 90-7, which led to a write-up of
      its
      investments in Megacable and MCM to $178.0 million. A gain of $25.6 million
      gain
      was recorded on the “Gain from fresh start adjustments” line in the statement of
      operations. RCN recorded its proportionate share of income under the equity
      method of $17.2 million and $22.8 million for the period from January 1 to
      December 20, 2004 and for the year ended December 31, 2003. On March 6, 2006,
      RCN entered into an agreement to sell its investments in Megacable and MCM
      to
      the investors who currently own the remaining 51% of these entities for net
      after-tax proceeds of $300 million in cash. The transaction is expected to
      close
      by the end of March, 2006, after the necessary regulatory approval documents
      are
      filed.







**RCN-BECOCOM**




Prior
      to
      December 24, 2003 RCN, through its wholly owned subsidiary, RCN Telecom Services
      of Massachusetts, Inc. was one of the two members of RCN-BecoCom, LLC
      (“RCN-BecoCom”), which provides bundled communication services, including local
      and long distance telephone, video, and high-speed data services primarily
      to
      residential customers in the Boston metropolitan area. The other member of
      the
      joint venture was NSTAR Communications, Inc., formerly BecoCom, Inc. (“NSTAR”).
      Pursuant to an agreement with RCN, NSTAR had the right to convert its ownership
      interest in RCN-Becocom, which it exercised in three exchanges prior to December
      31, 2002. On December 24, 2003, a total of 11,597,193 shares, or 9.49%, of
      RCN’s
      common stock, was held by NSTAR. NSTAR’s profit and loss sharing ratio in
      RCN-BecoCom was reduced to zero in 2002 upon the completion of the third
      exchange. However, NSTAR retained its investment percentage and the right to
      invest in future capital calls by RCN-BecoCom as if it owned a 29.76% interest.




On
      December 24, 2003 NSTAR notified RCN that it voluntarily and unconditionally
      waived, surrendered and discharged any and all ownership interest in both
      RCN-BecoCom and in the shares of RCN’s common stock held by NSTAR. Despite
      NSTAR’s surrendering its ownership interest in the joint venture and RCN’s
      common stock, the shares of RCN common stock previously held by NSTAR are
      treated as outstanding as of December 31, 2004, because NSTAR has not
      specifically assigned them to RCN. Upon emergence from Chapter 11 all of RCN’s
      stock was cancelled. In 2005, RCN-BecoCom converted to a business corporation
      from a limited liability company.




RCN
      continues to own and operate RCN-BecoCom as a wholly owned subsidiary. Under
      the
      terms of The Construction and Indefeasible Right of Use Agreement with NSTAR,
      NSTAR provides construction and construction management services to RCN-BecoCom
      and access to and use of portions of NSTAR’s broadband network, rights-of-way
      and certain equipment sites in the Boston metropolitan area. RCN’s management
      believes that the cost of such services provided to RCN-BecoCom by NSTAR are
      equivalent to that which would be obtained from third party contractors. (See
      Note 22 - Related Party Transactions)





F-31





**13.**
            **INTANGIBLE
                ASSETS**




Intangible
      assets consist of the following:




**(dollars
                    in thousands)****Estimated**
                  **Useful
                    Life**
                
                **Successor**
                  **2005**
                
                **Successor**
                  **2004**Trademarks/Tradenames
                
                
                5
                    years
                
                $
                13,753
                
                $
                14,203Customer
                    Lists
                
                
                4
                    years
                
                
                63,371
                
                
                65,444Franchise
                    Agreements
                
                
                Indefinite
                
                
                60,584
                
                
                62,566Software
                
                
                3
                    years
                
                
                180
                
                
                186137,888
                
                
                142,399Less
                    accumulated amortization
                
                
                
                
                
                (19,743
                )
                
                (613
                )Total
                    intangibles
                
                
                
                
                $
                118,145
                
                $
                141,786




Expected
      amortization of finite-lived intangible assets over the next five years is
      as
      follows:


**(dollars
                  in thousands)****Year
                    Ended**
                **December
                  31,**
              
              **Amount**2006
              
              $
              18,4782007
              
              
              18,4762008
              
              
              17,9552009
              
              
              2,6522010
              
              
              -




As
      previously disclosed in Note 4, and pursuant to SOP 90-7, RCN recorded the
      estimated fair value of intangible assets of $142.4 million on the Effective
      Date. As discussed in Note 4, under SFAS 142, goodwill and indefinite-lived
      intangible assets are no longer amortized, but instead are tested for impairment
      at least annually. Amortization expense was $19.1 million and $0.6 million
      in
      2005 and for the period from December 21 to December 31, 2004, respectively.





As
      of
      October 1, 2005, RCN conducted its annual impairment test of its
      indefinite-lived franchise rights agreements in accordance with SFAS 142. The
      Company used an income based approach and discounted the cash flows attributable
      to its franchise rights to estimate their fair value. The impairment test
      indicated the franchise rights agreements were not impaired as of October 1,
      2005.




The
      reduction in total intangibles, on an allocated basis, between December 31,
      2004
      and 2005 is due to the reduction of the deferred tax asset valuation allowance
      in accordance with SFAS No. 109 *“Accounting
      for Income Taxes”* (“SFAS
      109”) (See Note 19).





F-32





**14.**
            **DEFERRED
                CHARGES AND OTHER ASSETS**




RCN
      implemented “fresh start” accounting and reporting in accordance with SOP 90-7
      upon its emergence from bankruptcy on the Effective Date. Fresh start accounting
      required RCN to allocate the reorganization value to its assets and liabilities
      based upon their estimated fair values. Adopting “fresh start” accounting has
      resulted in material adjustments to the historical carrying amount of RCN’s
      assets and liabilities. The fair values of the assets as determined for “fresh
      start” reporting were based on estimates of anticipated future cash flow.




Deferred
      charges and other assets consist of the following:


**(dollars
                  in thousands)****Successor**
                **2005**
              
              **Successor**
                **2004**Debt
                  issuance cost, net of accumulated amortization
              
              $
              14,814
              
              $
              16,094Security
                  deposits
              
              
              2,080
              
              
              1,607Other
              
              
              3,622
              
              
              2,242Total
                  deferred charges and other assets
              
              $
              20,516
              
              $
              19,943





**15.**
            **OTHER
                LONG-TERM LIABILITIES**




Other
      Long-term Liabilities consist of the following:




**(dollars
                in thousands)****Successor**
            
            **Successor****December
                  31,**
              **2005**
            
            **December
                  31,**
              **2004**Deferred
                taxes
            
            $
            23,819
            
            $
            -Lease
                cost/fair value reserve
            
            
            8,090
            
            
            19,005Unearned
                revenue
            
            
            4,864
            
            
            5,536Lease
                exit costs
            
            
            6,963
            
            
            -Other
                deferred credits
            
            
            72
            
            
            1,396Total
                other long-term liabilities
            
            $
            43,808
            
            $
            25,937





F-33





**16.**
            **DEBT**




Long-term
      debt outstanding at December 31, 2005 (Successor) and 2004 (Successor) is as
      follows:




**(dollars
                  in thousands)****Successor**
                **2005**
              
              **Successor**
                **2004**First-Lien
                  Term Loan
              
              $
              324,478
              
              $
              330,000Convertible
                  Notes
              
              
              125,000
              
              
              125,000Third-Lien
                  Term Loan
              
              
              39,156
              
              
              34,547Capital
                  Leases
              
              
              3,463
              
              
              4,021Total
              
              
              492,097
              
              
              493,568Less
                  current portion
              
              
              3,648
              
              
              3,858$
              488,449
              
              $
              489,710




**First-Lien
      Credit Agreement**




On
      the
      Effective Date, RCN entered into a First-Lien Credit Agreement dated as of
      December 21, 2004, with Deutsche Bank AG Cayman Island Branch, the
      Administrative Agent, and certain financial institutions, as lenders for a
      new
      $355.0 million senior secured credit facility. The First-Lien Credit Agreement
      includes a seven-year term loan of $330.0 million and a $25.0 million line
      of
      credit used as collateral for letters of credit. The term loan bears interest
      at
      the Administrative Agent’s prime lending rate plus an applicable margin or at
      the Eurodollar rate plus an applicable margin, at the election of RCN. The
      rate
      at December 31, 2005 and 2004 was 8.8125% and 7.0625%, respectively. The
      First-Lien Credit Agreement was entered into by RCN and is fully and
      unconditionally guaranteed, jointly and severally, by all subsidiaries. RCN
      has
      granted to the Administrative Agent, for the benefit of the lenders, a first
      priority lien on substantially all of RCN’s tangible and intangible domestic
      assets. The First-Lien Credit Agreement contains certain covenants that, among
      other things, limit the ability of RCN and its subsidiaries to incur
      indebtedness, sell assets, prepay subordinated indebtedness, repurchase capital
      stock, engage in transactions with stockholders and affiliates, create liens
      and
      engage in mergers and consolidations. The Credit Facility also contains
      covenants that require RCN to meet certain financial targets. Borrowings under
      the First-Lien Credit Agreement rank senior to RCN’s other indebtedness.





On
      December 5, 2005, the Company entered into an amendment to its First-Lien Credit
      Agreement so that it could enter into an agreement to purchase Consolidated
      Edison Communications Holding Company, Inc. (“CEC”), the telecommunications
      subsidiary of Consolidated Edison, Inc. (See Note 27). The amendment added
      to
      the First-Lien Credit Agreement an additional letter of credit facility under
      which up to $32.0 million of letters of credit may be issued to support
      obligations assumed in connection with the acquisition as well as other
      obligations supported by outstanding letters of credit. The amendment also
      made
      changes to the financial covenants included in the First Lien Credit Agreement
      to take into account the acquisition of CEC and certain additional updated
      assumptions. In addition, a schedule to the First Lien Credit Agreement was
      amended to insert items inadvertently omitted.





On
      March
      3, 2006, the Company entered into another amendment to its First-Lien Credit
      Agreement to permit the sale of its investments in Megacable and MCM (See Note
      28), and to provide the Company with the ability to use a portion of the
      proceeds to pay down the Third Lien Term Loan. The amendment also modified
      the
      terms of the previous amendment entered into in December, 2005, to allow for
      working capital and capital expenditure adjustments to the purchase price of
      CEC, as defined in the CEC stock purchase agreement.




As
      of
      December 31, 2005, the Company was in full compliance with all financial
      covenants under this facility.





F-34





**Convertible
      Notes**




On
      the
      Effective Date, RCN issued $125.0 million aggregate principal amount of its
      7.375% Convertible Notes due in 2012. The Convertible Notes were issued by
      RCN
      under an Indenture entered on December 21, 2004, with HSBC USA as Indenture
      Trustee, and are fully and unconditionally guaranteed, jointly and severally,
      by
      all subsidiaries. The Convertible Notes are convertible into RCN common stock,
      at the election of the holder, if RCN’s common stock price reaches a conversion
      price as determined by the Indenture Agreement between RCN and the Indenture
      Trustee. The Convertible Notes contain certain covenants similar to those in
      the
      Credit Facility. The Convertible Notes contain cross default provisions
      entitling holders to declare the Convertible Notes and any accrued and unpaid
      interest thereon immediately due and payable. The Convertible Notes are secured
      by a second priority lien on substantially the same assets which secure the
      First-Lien Credit Agreement. The Convertible Notes are subordinate to the
      First-Lien Credit Agreement and rank senior to the Third-Lien Term Loan.




**Third-Lien
      Term Loan**




On
      the
      Effective Date, RCN entered into an Amended and Restated Term Loan and Credit
      Agreement with HSBC Bank USA, National Association, as Agent and Collateral
      Agent and certain financial institutions parties thereto, as lenders (the
“Third-Lien Term Loan”). The Third-Lien Term Loan provides, among other things,
      for a seven and three-quarter year, approximately $34.5 million term loan credit
      facility, subject, in certain instances, to early repayment, in whole or in
      part
      pursuant to an Intercreditor Agreement signed by the various lenders and RCN.
      The liens securing the Third-Lien Term Loan are subordinated to the liens
      securing the obligations under the First-Lien Credit Agreement and the
      Convertible Notes.






Interest
      for the facility is calculated as follows:




(i)
      Through March 31, 2006, the interest accrued to any Interest Payment Date (last
      day of each quarter) is capitalized and added to the principal amount of the
      Term Loans as the “PIK Amount.”




(ii)
      Starting April 1, 2006 through the Maturity Date of the Term Loan, accrued
      interest is payable on each Interest Payment Date as follows: (i) interest
      at a
      rate of 6.25% is paid in cash, and (ii) interest at a rate of 6.95% is
      capitalized as a PIK Amount and the principal amount of the Term Loan is
      increased by the PIK Amount so capitalized.




(iii)
      For
      any Interest Payment Date starting April 1, 2006, the Company can pay in cash
      the full amount of the interest accrued for that interest period, in which
      case
      interest is accrued at a rate of 12.5% for such period.







Contractual
      maturities of long-term debt including capital leases over the next 5 years
      are
      as follows:





F-35




**17.**
            **REORGANIZATION
                EXPENSES**




Reorganization
      costs represent amounts RCN incurred as a result of the Chapter 11
      reorganization process and are presented separately in the table listed below.




**(dollars
                  in thousands)****Successor**
              
              **Predecessor****For
                    the year ended**
                **December
                  31, 2005**
              
              **For
                    the period**
                **from
                    January 1**
                **to
                  December 20, 2004**Settlement
                  of bankruptcy claims
              
              $
              (11,113
              )
              $
              -Professional
                  Fees:Legal
              
              
              -
              
              
              17,626Bankers
              
              
              -
              
              
              23,123Consultants
              
              
              -
              
              
              15,831Auditors
              
              
              -
              
              
              558Employee
                  Costs
              
              
              -
              
              
              4,001Interest
                  Income
              
              
              -
              
              
              (497
              )Other
              
              
              -
              
              
              31,912Total
                  Reorganization Expenses
              
              $
              (11,113
              )
              $
              92,554


During
      2005, RCN settled outstanding bankruptcy claims for amounts less than that
      accrued at the date of emergence by cash payments or issuance of stock (see
      Note
      18).





The
      following provides additional information relating to the above deferred
      reorganization items:




•
            Professional
                fees—Professional fees include financial, legal and valuation services
                directly associated with the reorganization process.





•
            Employee
                costs—RCN implemented a Bankruptcy Court approved retention plan that
                provides for cash incentives to key members of RCN’s management team. The
                retention plan is a milestone-based plan expected to encourage employees
                to continue their employment through the reorganization process.





•
            Interest
                income—Interest income represents interest income earned by the Debtors
                as
                a result of excess cash balances due to the Chapter 11 filing.





•
            Other—Other
                represents Franchise restructuring expenses, Director and Officer
                insurance and Investor Notifications and communications.





F-36





**18.**
            **STOCKHOLDERS’
                EQUITY AND STOCK PLANS**





**RCN
      Common Stock**





**Successor**





On
      December 21, 2004, RCN issued 36,020,850 shares of common stock with a par
      value
      of $0.01 of which 31,919,044 were distributed to certain of its former bond
      holders and other general unsecured creditors on the date of emergence, and
      4,101,806 shares were placed in reserve to settle disputed claims against RCN
      that were outstanding as of the date of emergence. These reserve shares and
      related claim amounts are classified as committed stock on the balance sheet.
      As
      these shares are distributed, RCN reclassifies the amount of the claims to
      additional paid-in capital.




During
      2005, RCN distributed 3,303,868 shares from the reserve in settlement of claims.
      As of December 31, 2005, 797,938 shares remained in reserve to satisfy the
      remaining allowed claims. In January 2006, RCN distributed an additional 169,492
      shares in settlement of another claim, reducing the reserve share balance to
      628,446. After all outstanding claims are resolved, and the period for the
      Bankruptcy Court to reconsider its rulings on RCN’s objections to all claims
      expires, RCN will distribute the remaining reserved shares to its general
      unsecured creditors and former bond holders on a pro rata basis.




The
      Plan
      of Reorganization also authorized RCN to issue Convertible Notes (see Note
      9)
      that are convertible into RCN Common Stock at a per share conversion price
      of
      $25.16, subject to certain limitations. As of December 31, 2005, the Convertible
      Notes may be converted into 4,968,204 shares of RCN’s common stock.







RCN
      was
      authorized by the Plan to issue warrants to the former stockholders of Old
      RCN
      to purchase an aggregate of 735,119 shares of RCN’s common stock. Each warrant
      allows the holder to purchase one share of RCN’s common stock for a price of
      $34.16. As of December 31, 2005, the Company had distributed 188,032 of these
      warrants which expire on December 21, 2006. The Company has allocated the fair
      value of the distributed warrants to the Company’s reorganization value and has
      increased its intangible assets on a pro rate basis for the fair value of the
      warrants. The Company has recorded the fair value of the distributed warrants
      to
      as an additional paid-in-capital. Using the following assumptions, the Company
      has determined that the fair value of the warrants to be $0.6 million.




Strike
                  price
              
              $
              34.16Stock
                  price on date of emergence
              
              $
              20.00Expected
                  life
              
              
              2.0
                  yearsExpected
                  volatility
              
              
              55.0
              %Risk-free
                  rate
              
              
              3.03
              %Fair
                  value
              
              $
              3.14


**RCN
      Stock-Based Compensation**





**Successor**





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *“Share-Based
      Payment”* (“SFAS
      123R”). This is a revision of SFAS 123, *“Accounting
      for Stock-Based Compensation,”* and
      supersedes APB 25, “ *Accounting
      for Stock Issued to Employees.”* SFAS
      123R addresses the accounting for share-based compensation in which the Company
      receives employee services in exchange for RCN’s equity instruments. Under the
      standard, the Company is required to recognize compensation expense for
      share-based compensation issued to or purchased by employees, net of estimated
      forfeitures, using a fair value method. RCN had followed the recognition
      provisions of SFAS 123 since January 1, 2000. Effective with the adoption of
      the
      RCN Stock Compensation Plan (“Stock Plan”) in the third quarter of 2005, the
      Company adopted the provisions of SFAS 123R.





F-37





On
      May
      24, 2005, the Board of Directors approved the RCN Stock Compensation Plan (the
      “Stock Plan”), which was approved by the Company’s stockholders on July 19,
      2005. The Stock Plan allows for the issuance of up to 4,636,619 shares of the
      Company’s stock in the form of stock options or restricted stock. The maximum
      term of stock options is seven years.





The
      following table summarizes the Company’s option activity during the
      year:




**Share
                  Options**
              
              **Weighted
                  average exercise price per option**
              
              **Weighted
                  average fair value per option**Awards
                  Outstanding, December 31, 2004Granted
              
              
              3,752,835
              
              $
              21.48
              
              $
              10.94Exercised
              
              
              (75,000
              )
              $
              18.80
              
              $
              9.46Forfitures
              
              
              (528,033
              )
              $
              20.11
              
              $
              10.87Awards
                  Outstanding, December 31, 2005
              
              
              3,149,802
              
              $
              21.77
              
              $
              10.98




In
      conjunction with the cost reduction plans discussed in Note 10, the compensation
      committee of the Company’s Board of Directors allowed terminated employees to
      keep the portion of their unvested options that are scheduled to vest in May
      2006. RCN deemed this to be a plan modification under the modification guidance
      in SFAS 123(R) and accounted for the modification as an exchange of the original
      award for a new award. As a result, RCN recorded the incremental fair value
      of
      the modified award, as compensation cost on the date of the modification. The
      fair value per “modified” option was calculated between $5.45 and $8.13, using a
      lattice model valuation method with a vesting date of May 24, 2006, and an
      expiration date of August 24, 2006. A total of 142,076 options were affected
      resulting in a net increase in non-cash stock-based compensations of $0.2
      million.











As
      of
      December 31, 2005, 3,752,835 options had been distributed under the Stock Plan
      which excludes 284,149 unvested options that will be forfeited by employees
      to
      be terminated under our restructuring plan.




**Options
                  Outstanding**
              
              **Options
                  Exercisable****Exercise
                  Price Range of**
                **Options**
              
              **Share
                  Options**
              
              **Weighted
                  average remaining contractual life (Years)**
              
              **Weighted
                  average exercise price per share**
              
              **As
                  of**
                **December
                  31, 2005**
              
              **Weighted
                  average exercise price**$
                  18.80 - 21.74
              
              
              2,732,560
              
              
              6.40
              
              $
              20.29
              
              
              -
              
              $
              -31.46
              
              
              417,242
              
              
              6.40
              
              
              31.46
              
              
              -
              
              
              -18.80
                  - 31.46
              
              
              3,149,802
              
              
              6.40
              
              $
              21.77
              
              
              -
              
              $
              -




In
      the
      third quarter of 2005, certain senior executives, including the Chairman and
      President/CEO, of the Company were granted options to purchase 717,242 shares
      of
      the Company’s stock at a price of $20.97. Also, in the third quarter of 2005,
      the Chairman and President/CEO were granted options in the aggregate, to
      purchase 417,242 shares of the Company’s stock at a price of $31.46. The grants
      for the Chairman and President/CEO vest in equal installments in January 2005,
      2006 and 2007 and the other senior executive grants will vest in equal
      installments in May 2006, 2007 and 2008. Fifty percent of these senior executive
      grants will vest in equal installments subject to meeting internal goals related
      to revenue, income and subscriber growth. In addition, the Company has granted
      a
      former executive options to purchase 75,000 shares of the Company’s stock at a
      price $18.80 as part of his termination agreement. These options vested in
      the
      third quarter of 2005 and the former executive exercised the options for a
      gain
      of $0.2 million.





F-38




The
      Company has valued the senior executive options using the Black-Scholes method
      with the following assumptions:




**Chairman and**
              **President/CEO**
            
            **Chairman and**
              **President/CEO**
            
            **Other Senior**
              **Executives**
            
            **Former**
              **Executive**Strike
                Price(1)
            
            $
            20.97
            
            $
            31.46
            
            $
            20.97
            
            $
            18.80Stock
                price on date of grant(2)
            
            $
            24.00
            
            $
            24.00
            
            $
            24.00
            
            $
            24.00Term
            
            
            7
                years
            
            
            7
                years
            
            
            7
                years
            
            
            7
                yearsVesting
                period
            
            
            2.5
                to 3 years
            
            
            2.5
                to 3 years
            
            
            2.5
                to 3 years
            
            
            3
                monthsOptions
                Granted
            
            
            417,242
            
            
            417,242
            
            
            300,000
            
            
            75,000Expected
                life of options
            
            
            4.08
                years
            
            
            5.06
                years
            
            
            4.5
                years
            
            
            1.67
                yearsExpected
                volatility
            
            
            58.0
            %
            
            58.0
            %
            
            58.0
            %
            
            58.0
            %Risk-free
                rate
            
            
            3.72
            %
            
            3.72
            %
            
            3.72
            %
            
            3.72
            %Dividend
                yield
            
            
            —
            
            
            —
            
            
            —
            
            
            —Annual
                forfeiture rate
            
            
            —
            
            
            —
            
            
            —
            
            
            —Fair
                value at date of grant
            
            $
            12.57
            
            $
            11.22
            
            $
            13.08
            
            $
            9.46




(1)
              Set
                  by RCN Board of Directors on May 24, 2005, subject to stockholder
                  approval
                  of the Stock Plan.
 (2)
              As
                  of July 19, 2005, the date of stockholder approval of the Stock
                  Plan.




Expected
      volatility was based on the historical volatility of the price of several
      similarly sized cable and telecommunications companies over the past four years.
      The Company used historical information to estimate award exercise and
      forfeitures within the valuation model. The expected term of awards is derived
      from an analysis of the historical average holding periods and represents the
      period of time that options granted are expected to be outstanding. The
      risk-free rate for periods within the contractual life of the option is based
      on
      the U.S. Treasury yield curve in effect at the time of grant. Compensation
      expense is recognized using a straight-line method over the vesting or service
      period and is net of estimated forfeitures .




The
      Company recorded expense of $3.2 million for the year ended December 31, 2005
      for the amortization of the above stock options using the Black-Scholes
      valuation model.




In
      the
      third quarter of 2005, certain senior managers were granted options to purchase
      940,000 shares of the Company’s stock at a price of $20.97. These options will
      vest in equal installments in May 2006, 2007 and 2008. Also in the third quarter
      of 2005, the Company granted options to purchase 1,131,775 shares of the
      Company’s stock to other employees at a price of $18.80. The Company also issued
      329,500 supplemental, promotional and new hire grants in the fourth quarter.
      The
      Company has valued these options using a lattice model with the following
      assumptions:





The
      Company has recorded an expense of $2.6 million for the year ended December
      31,
      2005 for the amortization of the above stock options.





**Restricted
      Stock**





Non-employee
      directors were issued an initial aggregate grant of 150,000 shares of restricted
      stock, which will vest in equal installments in January 2006, 2007 and 2008.
      In
      addition certain senior executives were granted 580,086 shares of restricted
      stock, 50% of which will vest in equal installments over the next three years
      and the remaining 50% will vest over a three year period subject to meeting
      the
      same internal goals established for the option grants. Management estimates
      the
      Company has achieved these goals based on the Company’s performance for the year
      ended December 31, 2005. The Company recorded expense of $3.1 million for the
      year ended December 31, 2005 for the amortization of the restricted stock
      grants.





F-39





All
      of
      the awards granted during the period are classified as equity awards. Total
      compensation expense for share-based payment arrangements recognized for the
      year ended December 31, 2005 was $8.9 million. As of December 31, 2005 there
      is
      $29.5 million of fair value of outstanding options to be recognized in the
      years
      ended December 31, 2006, 2007 and 2008. As of December 31,2005, there was $14.4
      million of unearned compensation relating to restricted stock awards that will
      be recognized through 2008. The Company expects to recognize approximately
      $20.0
      million, $19.4 million and $4.5 million in compensation expense based on
      outstanding grants under the Stock Plan in the years ended December 31, 2006,
      2007 and 2008, respectively related to its Stock Plan.







**Predecessor**




**Non-Cash
      Stock-Based Compensation**




Non-cash
      stock-based compensation was recognized in connection with the following plans
      in the following amounts during the years ended:





**(dollars
                    in thousands)**
                  **For
                    the years ended December 31,****Predecessor**
                  **2004***
                
                **Predecessor**
                  **2003**Incentive
                    stock options
                
                $
                1,029
                
                $
                2,532Outperform
                    stock options
                
                
                2,819
                
                
                4,916Restricted
                    stock
                
                
                316
                
                
                (3,184
                )Executive
                    stock purchase plan
                
                
                250
                
                
                428Total
                    non-cash stock-based compensation
                
                $
                4,414
                
                $
                4,692




*No
      non-cash stock-based compensation was recognized for the Successor in
      2004.





F-40





**Stock
      Options**




The
      1997
      RCN Corporation Stock Option Plan (“the 1997 Plan”) contemplated the issuance of
      incentive stock options, as well as stock options that were 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 30,000,000 shares of Common
      stock, plus 3,040,100 shares of Common stock that were issuable in connection
      with the Distribution related option adjustments, may have been issued pursuant
      to the Plan.




Unless
      it
      was terminated earlier by the RCN Board, the 1997 Plan would have expired on
      the
      tenth anniversary of the Distribution.




The
      RCN
      Corporation 1997 Stock Plan for Non-Employee Directors contemplated the issuance
      of 1,000,000 options to purchase shares of common stock for directors of RCN
      who
      were not employees of RCN or its affiliates. This plan required the exercise
      price for these options to be equal to the fair market value of RCN’s stock on
      the date of grant, the term was ten years from the date of grant, and the
      options became exercisable immediately.




As
      a
      result of the option exchange program, approximately 6,150,000 new Incentive
      Stock Options (“ISO’s”) were granted and approximately 9,750,000 pre-existing
      stock options were cancelled since its inception. The incremental fair value
      of
      the options as a result of the exchange under SFAS No. 123 was $10.1 million.
      For the period from January 1 to December 20, 2004 (Predecessor) and for the
      year ended December 31, 2003 RCN recognized non-cash stock based compensation
      expense of $0.9 million and $2.3 million, respectively, related to the exchange
      program for the ISO’s. Under SFAS No. 123, the unamortized non-cash stock based
      compensation costs related to the cancelled options was recognized based on
      the
      service period associated with the new terms of the new options.




Excluding
      the options granted as a result of the option exchange program, RCN granted
      approximately 97,700 ISO’s to employees and non-employee directors during the
      year ended December 31, 2003 with a fair value per option under SFAS No. 123
      of
      $51. The fair value of stock options recognized during the period from January
      1
      to December 20, 2004 and for the year ended December 31, 2003 were $0.1 million
      and $0.2 million respectively.




As
      of
      December 31, 2004, no Successor stock options had been granted and no stock
      compensation expense was recognized in the period from December 21 to December
      31, 2004.




No
      stock
      options were granted during the period January 1 to December 20, 2004. The
      weighted-average fair value of ISOs granted during the year ended December
      31,
      2003 was $0.52. There were no ISOs issued for the period from January 1 to
      December 20, 2004.




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 2004, and 2003; expected volatility for 2004 and 2003 of 97.5%; a risk-free
      interest rate of 3.93% for 2004 and 2003; and expected lives of 3 years for
      2003
      and 2002.




The
      following table summarizes stock options outstanding and exercisable under
      the
      ISO and non-qualified plans discussed above at December 20, 2004:





**Outperform
      Stock Option Plan**




In
      June
      2000, RCN adopted an OSO program pursuant to RCN’s 1997 Equity Incentive Plan.
      The OSO program was designed so that RCN’s stockholders would receive a market
      return on their investment before OSO holders receive any return on their
      options. Participants in the OSO program do not realize any value from awards
      unless the Common stock price outperformed the S&P 500 Index. When the stock
      price gain was greater than the corresponding gain on the S&P 500 Index, the
      value received for awards under the OSO program was based on a formula involving
      a multiplier related to the level by which the Common stock outperformed the
      S&P 500 Index. To the extent that RCN’s Common stock outperformed the
      S&P 500 Index, the value of the OSO’s to a holder may have exceeded the
      value of other stock options.




OSO
      grants were only made to participants who were employees of RCN as of the grant
      date. Each award vested over five years and had a ten-year life.




As
      a
      result of the option exchange program, approximately 1,622,000 new OSO’s were
      granted and approximately 3,163,000 pre-existing stock options were cancelled.
      The incremental fair value of the options as a result of the exchange under
      SFAS
      No. 123 was $16.6 million. For the period from January 1 to December 20, 2004
      and the year ended December 31, 2003 RCN recognized non-cash stock based
      compensation expense of $2.4 million and $4.0 million, respectively, related
      to
      the exchange program for the OSO’s. The unamortized non-cash stock-based
      compensation costs related to the cancelled options were recognized based on
      the
      service period associated with the new terms of the new options.





F-41





Excluding
      the options granted as a result of the option exchange program, RCN granted
      750,000 OSO’s to directors and employees during the year ended December 31, 2003
      with a fair value of $0.4 million. During the period from January 1, 2004 to
      December 20, 2004 (Predecessor) and for the year ended December 31, 2003 the
      fair value recognized for OSO’s, in addition to the exchange, were $0.5 million
      and $0.9 million, respectively. As of December 31, 2004, no Successor stock
      options had been granted and no stock compensated expense was recognized in
      the
      period from December 21 to December 31, 2004.




The
      weighted-average fair value of OSOs granted during 2003 was $0.56. No OSOs
      were
      granted during the period January 1 to December 20, 2004.




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 2004 and 2003; expected volatility of 97.5% for 2004 and 2002; risk-free
      interest rates of 3.93% for 2004, and 2003; and expected lives of 5 years for
      2004 and 2003.




F-42




Information
      relating to outperform stock options is as
      follows:




**Number
                  of**
              
              **Weighted
                  Average****Options**
              
              **Exercise
                  Price**Grants
                  Outstanding, December 31, 2002
              
              
              2,609,875
              
              $
              2.17Granted
              
              
              750,000
              
              $
              0.96Exercised
              
              
              -
              
              
              -Cancelled
              
              
              150,000
              
              $
              2.90Grants
                  Outstanding, December 31, 2003
              
              
              3,209,875
              
              $
              1.85Granted
              
              
              -Exercised
              
              
              -Cancelled
              
              
              656,875
              
              $
              2.12Grants
                  Outstanding, December 20, 2004
              
              
              2,553,000
              
              $
              1.79Cancelled
              
              
              2,553,000
              
              $
              1.79Grants
                  Outstanding, December 21, 2004
              
              
              -





**Restricted
      Stock**





For
      the
      period from January 1 to December 20, 2004 and during the year ended December
      31, 2003, RCN issued 10,000 and 994,567 shares of restricted stock with an
      approximate fair value of $0.2 million and $1.3 million, respectively. During
      the performance period the grantee may have voted the shares, but the shares
      were subject to transfer restrictions and were all or partially forfeited if
      a
      grantee terminated employment with RCN. The restricted stock granted in 2004
      vested over a period of six months and the restricted stock granted in 2003
      vested over a period of six months or two years. The restricted stock was
      considered issued and outstanding.





Including
      the effect of forfeitures, RCN recorded $0.3 million and ($3.2 million) of
      non-cash stock-based compensation expense for the period from January 1 to
      December 20, 2004 and for the year ended December 31, 2003 relating to its
      restricted stock program.





As
      of
      December 20, 2004, unearned compensation costs of $0.3 million were written-off
      as a “fresh-start” adjustment.





**Preferred
      Stock**





On
      the
      Effective Date of the Plan, December 21, 2004, all of the existing securities
      of
      RCN, including the existing common stock, preferred stock and warrants, were
      extinguished and deemed cancelled. RCN has no intentions of issuing any
      preferred stock in the near future.





**Executive
      Stock Purchase Plan**





RCN
      had
      an Executive Stock Purchase Plan (“ESPP”), under which participants deferred, on
      a tax-free basis, up to 20% of their annual salary plus bonus. The deferred
      funds were used to purchase shares of RCN Common Stock. Share units
      corresponding to the shares purchased were credited to participants’ accounts
      and held for the benefit of the participant until the earlier of the end of
      the
      deferral period (no less than 3 years) or termination of employment. RCN issued
      a matching share unit for each share unit that was credited to a participant’s
      account. The share units did not give such participant any rights as a
      shareholder. The matching share units vest three years from the deferral and
      are
      subject to forfeiture as provided in the ESPP.




The
      number of shares, which may have been distributed under the RCN ESPP as matching
      shares, or in payment of share units, was 500,000. At December 20, 2004 there
      were no RCN ESPP shares arising from participants contributions and no matching
      shares. At December 31, 2003, there were 757,265 RCN ESPP shares arising from
      participants’ contributions and 757,265 matching shares. For the year ended
      December 31, 2003, deferred compensation cost relating to matching shares was
      $0.2 million. Expense recognized for the period from January 1 to December
      20,
      2004 and for the year ended December 31, 2003 were $0.2 million and $0.4
      million, respectively. Matching shares were included in weighted average shares
      outstanding for purposes of computing earnings/loss per share.





F-43





**19.**
            **INCOME
                TAXES**




The
      provision/(benefit) for income taxes is compromised of the following:




**(dollars
                  in thousands)****Successor**
              
              **Predecessor****2005**
              
              **December 21, to**
                  **December 31,**
                **2004**
              
              **January
                    1, to**
                **December 20,**
                **2004**
              
              **2003**Current
                  taxes
              
              $
              (30
              )
              $
              -
              
              $
              98
              
              $
              50Deferred
                  taxes
              
              
              809
              
              
              -
              
              
              (212
              )
              
              1,221Provision
                  (Benefit) for income taxes:From
                  continuing operations
              
              
              779
              
              
              -
              
              
              (114
              )
              
              1,271From
                  discontinued operations
              
              
              
              
              
              -
              
              
              -
              
              
              -Total
                  provision (benefit) for income taxes
              
              $
              779
              
              $
              -
              
              $
              (114
              )
              $
              1,271





Temporary
      differences that give rise to a significant portion of deferred tax assets
      and
      liabilities at December 31, 2005 and 2004 are as follows:


**(dollars
                  in thousands)****Successor**
              
              **Successor****December
                  31,**
                **2005**
              
              **December
                  31,**
                **2004**Net
                  operating loss carryforwards
              
              $
              1,084,859
              
              $
              1,006,625Employee
                  benefit plan
              
              
              5,452
              
              
              5,291Reserve
                  for bad debt
              
              
              1,553
              
              
              1,795Stock
                  based compensation
              
              
              3,105
              
              
              -Investment
                  in unconsolidated entity
              
              
              43,507
              
              
              44,448Unearned
                  revenue
              
              
              1,955
              
              
              1,573Deferred
                  rent
              
              
              3,397
              
              
              6,757Reserve
                  for obsolete inventory
              
              
              10,818
              
              
              3,699Accruals
                  for non-recurring charges and contract settlements
              
              
              4,554
              
              
              3,913Property,
                  plant, and equipment
              
              
              85,992
              
              
              181,914Other,
                  net
              
              
              3,342
              
              
              3,331Total
                  deferred tax assets
              
              
              1,248,534
              
              
              1,259,346Intangibles
              
              
              (32,068
              )
              
              (39,971
              )Total
                  deferred tax liabilities
              
              
              (32,068
              )
              
              (39,971
              )Subtotal
              
              
              1,216,466
              
              
              1,219,375Valuation
                  allowance
              
              
              (1,240,285
              )
              
              (1,219,375
              )Total
                  deferred taxes
              
              $
              (23,819
              )
              $
              -


During
      2005, RCN generated federal net operating losses (“NOLs”) of approximately
      $268.9 million resulting in a deferred tax asset of approximately $94.1 million.
      In the year ended December 31, 2004, RCN generated federal net operating losses
      of approximately $331.6 million resulting in a deferred tax asset of
      approximately $116.1 million. In the opinion of management, RCN is not certain
      of the realization of its deferred tax assets. Thus, a valuation allowance
      has
      been provided against federal and state deferred tax assets that are not
      anticipated to be offset by the reversal of deferred tax liabilities. In the
      fourth quarter of 2005, a deferred tax liability of $23.8 million was recorded
      to adjust the valuation allowance related to the tax accounting effects on
      an
      indefinite lived asset which was recorded as a result of the implementation
      of "Fresh Start" accounting in accordance with SOP 90-7 in December 2004. Had
      this adjustment been recorded at the "Fresh Start" date, the adjustment to
      the
      Company's reorganization value would not have been material.





F-44





As
      of
      December 31, 2005, RCN had Federal net operating loss carryforwards of
      approximately $2.6 billion. The Federal net operating losses will expire between
      2009 and 2025 (see discussion below for limitation on use of NOL carryforward).
      Use of the net operating losses generated prior to the emergence from bankruptcy
      are limited due to the limitations imposed under the ownership change rules
      in
      the U.S. Internal Revenue Code. The utilization of the expected tax benefit
      from
      property and equipment depreciation could also be impacted by the ownership
      change rules of the U.S. Internal Revenue Code.




The
      net
      change in the valuation allowance for deferred tax assets during 2005 was an
      increase of $20.9 million and during 2004 was a decrease of $227.8 million.
      The
      valuation allowance is primarily related to deferred tax assets due to the
      uncertainty of realizing the full benefit of the net operating loss (“NOL”)
      carryforwards. In evaluating the amount of the valuation allowance needed,
      RCN
      considers the prior operating results and future plans and expectations. The
      utilization period of the NOL carryforwards and the turnaround period of other
      temporary differences are also considered.




The
      provision/(benefit) for income tax is different from the amounts computed by
      applying the U.S. statutory federal tax rate of 35% are as follows:


**(dollars
                  in thousands)****Successor**
              
              **Predecessor****2005**
              
              **December 21, to**
                **December 31,**
                **2004**
              
              **January
                    1, to**
                **December 20,**
                **2004**
              
              **2003**Net
                  (loss) income before cumulative effect of change in accountng principle
                  and preferred dividend and accretion requirements
              
              $
              (138,712
              )
              $
              (3,688
              )
              $
              1,062,746
              
              $
              (325,701
              )Cumulative
                  effect of on prior years of retroactive application of a change
                  in
                  accounting for legal fees, net of tax
              
              
              2,600Total
                  provision (benefit) for income taxes
              
              
              779
              
              
              -
              
              
              (114
              )
              
              1,271(Loss)
                  income before provision for income taxes
              
              $
              (135,333
              )
              $
              (3,688
              )
              $
              1,062,632
              
              $
              (324,430
              )Federal
                  income tax (benefit) expense at statutory rate
              
              $
              (47,366
              )
              $
              (1,291
              )
              $
              371,921
              
              $
              (113,550
              )State
                  income taxes, net of federal income tax provision
                  (benefit)
              
              
              507
              
              
              
              
              
              64
              
              
              161Federal
                  valuation allowance
              
              
              46,947
              
              
              1,291
              
              
              (129,508
              )
              
              114,613Nondeductible
                  expenses
              
              
              13
              
              
              
              
              
              30
              
              
              47FMV
                  stock bondholders received
              
              
              
              
              
              
              
              
              (253,400
              )Reversal
                  of stock-based compensation
              
              
              395
              
              
              
              
              
              52,793Restructuring
                  costs
              
              
              
              
              
              
              
              
              28,501Fresh
                  start adjustments
              
              
              
              
              
              
              
              
              (111,662
              )Reversal
                  of State Valuation Allowance
              
              
              283Other,
                  net
              
              
              
              
              
              
              
              
              41,147Total
                  provision (benefit) for income taxes
              
              $
              779
              
              $
              -
              
              $
              (114
              )
              $
              1,271






RCN's
      reorganization has resulted in a significantly modified capital structure as
      a
      result of applying "fresh start" accounting in accordance with SOP 90-7 on
      the
      Effective Date. "Fresh start" accounting has important consequences on the
      accounting for realization of valuation allowances, related to net deferred
      tax
      assets that existed as of the Effective Date and arose in pre-emergence periods.
      Specifically, "fresh start" accounting requires the reversal of such allowances
      to be recorded as a reduction of reorganization value in excess of amounts
      allocable to identifiable assets until exhausted and thereafter as additional
      paid-in capital and not a benefit recorded in the statement of operations.




F-45





The
      Company's effective income tax rate differs from the federal statutory income
      tax rate primarily due to nondeductible permanent differences, state income
      taxes and changes in valuation allowance for deferred income taxes. In assessing
      whether the deferred tax assets are realizable, management considers whether
      it
      is more likely than not that some portion or all of the net deferred tax assets
      will be realized. The ultimate realization of deferred tax assets is dependent
      upon the generation of future taxable income during the periods in which those
      temporary differences become deductible. No benefit for federal income taxes
      has
      been recorded for the twelve months ended December 31, 2005 and for the periods
      December 21 to December 31, 2004 and January 1 to December 20, 2004, as the
      net
      deferred tax assets generated, primarily from temporary differences related
      to
      the net operating loss, were offset by a full valuation allowance because it
      is
      not considered more likely than not that these benefits will be realized. The
      determination of the required valuation allowance against net deferred tax
      assets was made without taking into account the deferred tax liabilities created
      from the book and tax differences on indefinite lived assets.





The
      Company's 2005 income tax provision of $0.8 million was attributable to the
      benefit on current earnings, offset by realized pre-emergence deferred tax
      assets. The reversal of the related valuation allowance that existed as of
      the
      "fresh start" date, which normally benefits earnings under SFAS 109, has instead
      been recorded as a reduction of intangibles. Once intangibles are reduced to
      zero, any subsequent reversal of the valuation allowance related to the
      utilization of a pre-emergence deferred tax asset will be recorded as an
      increase to additional paid-in capital. This treatment does not result in any
      change in liabilities to taxing authorities or cash flows.




In
      connection with RCN's emergence from bankruptcy, RCN realized significant
      cancellation of debt income (CODI). This income is not taxable for federal
      or
      state income tax purposes because it resulted from RCN's reorganization under
      the Bankruptcy Code. However, for federal and state income tax reporting
      purposes, as of the beginning of the 2005 tax year, RCN is required to reduce
      certain tax attributes, such as net operating loss (NOL) carry-forwards, in
      an
      amount equal to the gain on the extinguishment of debt excluded from income.
      The
      reduction in federal NOLs is approximately $480.0 million.





The
      reorganization of RCN on the Effective Date constituted an ownership change
      under Section 382 of the Internal Revenue Code of 1986, as amended ("IRC")
      ("Change of Control"). Generally, upon a Change of Control, a company is subject
      to limitations on its ability to use its pre-Change of Control NOLs and certain
      built-in losses and deductions to offset taxable income in future years. The
      amount of pre-Change of Control NOLs that can be utilized in any post-Change
      of
      Control tax year is limited to the product of the value of the company
      immediately before the Change of Control, multiplied by the long-term tax-exempt
      interest rate (published by the IRS) in effect at the time the Change of Control
      occurs ("382 Limitation"). Any portion of these limited NOLs not used in a
      particular year may be carried to subsequent years until such time as another
      Change of Control occurs or the NOLs expire unused (based on the original
      expiration date). There is no limitation, under IRC 382, on the use of
      post-Change of Control NOLs unless another Change of Control occurs at which
      point the pre-Change of Control 382 Limitation amount would either remain the
      same, or be reduced if the company's value had declined since the previous
      Change of Control.





Under
      a
      special rule (commonly known as the "(l)(5) rule"), the 382 Limitation described
      above would not apply to a company's NOLs if a Change of Control occurs while
      in
      bankruptcy, as long as the company's pre-Change of Control stockholders and
      "qualified creditors" own 50% or more of the company's stock post-emergence
      (as
      a result of having been stockholders or "qualified creditors" before the
      ownership change). Under the (l)(5) rule, however, a company would be required
      to reduce its NOL carry-forwards by the amount of the interest deductions taken
      during the year of the Change of Control and the three preceding tax years
      on
      any debt that was converted to stock as a result of the bankruptcy proceeding,
      and if another Change of Control occurs within two years following emergence
      from bankruptcy, the 382 Limitation applicable to that second ownership change
      would automatically be zero, effectively eliminating the company's ability
      to
      use its pre- and post-bankruptcy NOLs.




If
      a
      Change of Control occurs while in bankruptcy but a company does not qualify
      for
      the (l)(5) Rule described above (or qualifies but elects not to apply the (l)(5)
      rule), a 382 Limitation would be applicable to the company's pre-Change of
      Control NOLs. However, the 382 Limitation applicable to the company following
      its emergence from bankruptcy would be calculated using the value of the Company
      immediately after emergence from bankruptcy, rather than the pre-emergence
      value.




RCN
      qualified for the (l)(5) rule, however, after careful consideration and analysis
      elected not to apply the (l)(5) rule. The key determining factors in the
      analysis were the timing of when the Company expects to become a cash taxpayer,
      and potential Change of Control scenarios, many of which would be beyond
      management's control, including sales of stock by current large stockholders,
      as
      well as merger and acquisition opportunities. As a result of our election,
      the
      382 Limitation on our pre-bankruptcy NOLs is approximately $30.0 million per
      year. NOLs generated prior to 1998 have a carry-forward period of 15 years
      and
      any subsequent NOLs have a carry-forward period of 20 years.




F-46





**20.**
            **EMPLOYEE
                BENEFIT PLANS**




RCN
      has a
      401(k) savings plan that covers substantially all of its employees. Participants
      in the savings plan may elect to contribute, on a pretax basis, a certain
      percentage of their salary to the plan. The Company matches a certain percentage
      of each participant's contributions as per the provisions of the plan. The
      expense under the plan related to RCN’s matching contribution was $2.2 million,
      $0, $2.3 million and $2.2 million for the year ended December 31, 2005, for
      the
      periods from December 21 to December 31, 2004, and from January 1 to December
      20, 2004, and for the year ended December 31, 2003, respectively. A 401(k)
      plan
      from the acquisition of Starpower was merged with the RCN plan on April 1,
      2005.




**21.**
            **COMMITMENTS
                AND CONTINGENCIES**




Total
      rental expense, primarily for office space and equipment, was $17.7 million,
      $0.6 million, $23.0 million, and $22.6 million for the year ended December
      31,
      2005, the periods from December 21 to December 31, 2004, and from January 1
      to
      December 31, 2004, and the year ended December 31, 2003. At December 31, 2005,
      rental commitments under non-cancelable leases, excluding annual pole rental
      commitments of approximately $3.0 million that are expected to continue
      indefinitely, are as follows:




**(dollars
                  in thousands)****Year**
              
              **Aggregate**
                **Amounts**2006
              
              $
              21,3562007
              
              
              21,0522008
              
              
              20,8442009
              
              
              18,4042010
              
              
              15,328Thereafter
              
              
              41,536


RCN
      also
      has outstanding letters of credit aggregating $21.0 million at December 31,
      2005
      of which $0.9 million is collateralized by cash.





RCN
      is
      party to the following legal matters:





**ERISA
      Litigation**





On
      May
      16, 2005, a consolidated class action complaint (the "Class Action Complaint")
      was filed in the United States District Court for the District of New Jersey
      under Master File NO. 04-CV-5068 (SRC), naming RCN Corporation and certain
      of
      its current and former directors, officers, employee administrators and
      managers, as well as Merrill Lynch Trust Company, FSB, as defendants for alleged
      violations of the Employee Retirement Income Security Act of 1974 (as amended,
      "ERISA"). On September 13, 2005,the Plaintiffs filed a notice of voluntary
      dismissal in regard to the Counts in the Complaint against the current
      directors.





The
      purported Class Action Complaint seeks recovery of unspecified money damages
      for
      the benefit of a purported class of participants and beneficiaries of the RCN
      Savings And Stock Ownership Plan (the "Savings Plan") as a result of the
      defendants' alleged breaches of their fiduciary duties under ERISA (the "ERISA
      Litigation"). Defendants have filed a motion to dismiss the complaint in its
      entirety, which will be argued in March 2006. Plaintiffs, to date, have not
      filed a motion for class certification. This Litigation is subject to certain
      limitations ordered by the Bankruptcy Court described below.





F-47





Previously,
      on September 22, 2004, former employee Deborah K. Craig ("Craig"), on behalf
      of
      the Savings Plan and its participants and beneficiaries, filed a Motion For
      Leave To File Proof Of Claim (the "Late Claim Motion"), seeking to assert a
      claim (the "Craig Proof of Claim") against RCN, after the claims bar date of
      August 11, 2004, for alleged violations of ERISA to recover alleged losses
      similar to those alleged in the Class Action Complaint. On October 5, 2004,
      Craig filed a purported class action complaint against certain fiduciaries
      of
      the Savings Plan within the meaning of ERISA in a lawsuit captioned Craig v.
      Filipowicz, et al., Case No. 04-cv-07875 (JSR) (S.D.N.Y.), which was
      subsequently transferred to the District of New Jersey, with a new Case No.
      04-cv-05940 (SRC) (D.N.J.) (the "NJ Action"). On November 3, 2004, the
      Bankruptcy Court issued an order denying the Late Claim Motion in its entirety
      (the "Late Claim Order"), which Craig appealed to the United States District
      Court for the Southern District of New York. On December 20, 2004, Craig sought
      from the Bankruptcy Court limited relief (the "Injunction Relief Motion"),
      for
      the benefit of herself and all other similarly situated beneficiaries of the
      Savings Plan, from the injunction issued by the Bankruptcy Court's order
      confirming the Plan for the purpose of naming RCN as a nominal defendant in
      the
      NJ Action. On February 16, 2005, Craig filed a motion on the NJ Action docket
      to
      have the NJ Action consolidated with certain other related actions, with a
      proposed caption In re RCN Corporation ERISA Litigation, Master File No.
      04-cv-5068 (SRC) (the "Consolidated Action"). On March 18, 2005, the United
      States District Court for the Southern District of New York issued an order
      affirming the Late Claim Order. On April 1, 2005, the Bankruptcy Court entered
      an order (the "Injunction Relief Order") granting the Injunction Relief Motion
      to the extent that (1) Craig and all other similarly situated parties
      (collectively, the "Plaintiffs") are permitted to name RCN as a nominal
      defendant in the pending Consolidated Action and (2) the Plaintiffs may enforce
      any judgment obtained against RCN solely against any applicable insurance
      companies and only up to limits of any applicable insurance coverage, to the
      extent such coverage is available. The Injunction Relief Order does not prevent
      the Plaintiffs from pursuing litigation claims against others, including current
      or former directors, officers, employees, partners, members, or managers
      (collectively, the "Third Parties") of RCN or any other reorganized debtor
      and
      collecting in full any judgment Plaintiffs may obtain against such Third
      Parties. As an express condition to the entry of the Injunctive Relief Order,
      Craig waived any right of further appeal to the denial of the Late Claim Order.
      Subsequently, Plaintiffs filed the Class Action Complaint in the ERISA
      Litigation to pursue their remedies against RCN, subject to the limitations
      imposed by the Bankruptcy Court, and additional Third Parties. At this stage
      of
      the litigation, RCN cannot reasonably estimate the amount of uninsurable loss,
      if any, that may result from this matter.




**Legal
        Proceedings Relating to Megacable**
 
 In
        connection with RCN’s efforts to have its representatives named to the Board of
        Directors and to the Management Committee of Megacable, to receive financial
        information in a timely fashion and otherwise to enforce its rights under
        the
        agreements governing the relationship between RCN, Megacable and its
        shareholders, several legal proceedings have been initiated. Megacable alleged
        that, as a result of RCN’s reorganization under Chapter 11 of the Bankruptcy
        Code, RCN rejected its obligations under one of the three agreements governing
        the relationship between RCN, Megacable and its shareholders, and that this
        rejection constitutes a breach by RCN of its obligations under all three
        of the
        agreements. They further asserted that the alleged breach entitled Megacable
        to
        terminate the agreements. In response to these claims, RCN filed a motion
        in the
        Bankruptcy Court for the Southern District of New York seeking an order to
        the
        effect that no such rejection had occurred or, in the alternative, seeking
        to
        amend the Plan to specifically assume, as of the Effective Date of the Plan,
        the
        Megacable agreement alleged to have been rejected.
 
 In
        addition, on November 14, 2005, Megacable, MCM and 23 of their shareholders
        (the
“Claimants”) filed an arbitration petition against RCN with the International
        Chamber of Commerce International Court of Arbitration alleging the same
        arguments. Claimants have requested that the arbitration tribunal declare
        the
        three agreements terminated as a result of the RCN’s alleged breach and that
        RCN’s interest in Megacable and MCM be extinguished in exchange for payment by
        Megacable and MCM of the book value of those interests.
 
 At
        hearings held in the Bankruptcy Court on RCN’s motion described above, the judge
        made certain findings which RCN believes address, in a manner favorable to
        RCN,
        whether any breach of the underlying agreements occurred, which is the sole
        premise of Megacable’s arbitration action.
  On
        March
        6, 2006, RCN entered into an agreement to sell its investments in Megacable
        and
        MCM to the shareholders who currently own the remaining 51% of these entities.
        In connection with the sale, RCN and the Claimants entered into a Settlement
        Agreement, pursuant to which the parties agreed that, upon the closing of
        the
        sale, the arbitration proceedings and Bankruptcy Court motion will be withdrawn
        with prejudice and all claims among the parties relating to the three agreements
        governing their relationship will be released in full. The sale is expected
        to
        close by the end of March, 2006. The sale is conditioned upon certain regulatory
        filings to be made by the purchaser, but is not subject to the receipt of
        any
        regulatory approvals or consents or any other conditions precedent.


**City
      of Chicago Franchise Fee**




RCN,
      like
      most if not all other cable providers, currently does not pay a franchise fee
      on
      its cable modem Internet access services on the basis that the FCC has
      determined that such Internet services are not “cable services” as defined in
      the Communications Act. RCN’s position has been challenged by the City of
      Chicago, which has brought suit against RCN-Chicago, as well as AT&T
      Broadband (now Comcast), the incumbent cable operator in RCN-Chicago’s
      franchised service area, and the other franchised cable television operator
      in
      the City of Chicago (collectively, the “Defendants”). The Defendants removed the
      action to federal court and succeeded initially in obtaining dismissal of the
      action on the ground that cable modem service, as a matter of law, is not a
      “cable television service” within the scope of the franchise agreements and
      therefore cannot be subject to the agreements’ franchise fee provision, which by
      its express terms is to be interpreted and applied in accordance with the
      Communications Act. The City of Chicago appealed both the removal to federal
      District Court and the District Court’s dismissal of its case to the U.S.
      Seventh Circuit Court of Appeals. On October 1, 2004, the Seventh Circuit
      vacated on jurisdictional grounds the District Court’s decision dismissing the
      City of Chicago’s claims, and remanded the case back to the Circuit Court for
      Cook County, Illinois, for further proceedings. The Seventh Circuit expressed
      no
      opinion on the merits of the case. The City of Chicago then re-filed its case
      in
      the Cook County Circuit Court. The Cook County Circuit Court on October 5,
      2005,
      also dismissed the City’s complaint, and the City has now appealed the Circuit
      Court’s dismissal to the Illinois Appellate Court.







F-48







In
      the
      event the City of Chicago was ultimately to prevail on its complaint,
      RCN-Chicago would need to pay a 5% franchise fee on its cable modem revenues.
      Going forward, RCN-Chicago would likely pass through the additional fees to
      its
      cable modem Internet service customers, which would raise their rates as
      compared to the high-speed Internet services provided by ILECs and therefore
      could have an adverse effect on RCN-Chicago’s ability to compete with such
      providers. In the event that these fees are assessed retroactively, RCN-Chicago
      would likely not be able to recover these costs from its customers. Since any
      adverse result will affect all of RCN-Chicago’s cable competitors in the Chicago
      market, such a ruling would likely not have a disproportionate effect on RCN’s
      ability to compete with other cable operators in the Chicago market. RCN also
      notes that the United States Supreme Court in the Brand X decision upheld the
      FCC’s classification of cable modem service as an information service, rather
      than a cable or telecommunications service, for federal regulatory purposes.
      However, the scope of state and local authority to regulate cable modem service
      as an information service is a question of nationwide significance to LFAs
      and
      cable television franchisees, and is the subject of both pending litigation
      and
      FCC rulemaking. The ultimate result of all of these actions will likely
      determine whether and to what extent RCN’s cable modem Internet access service
      is subject to state and local regulation, in addition to any obligations that
      may be imposed by the FCC. RCN cannot predict the outcome of such legal and
      regulatory proceedings. The ultimate result of all of these actions, including
      the action brought by the City of Chicago, will likely determine whether RCN’s
      cable modem Internet service gross revenues will be required to be included
      for
      purposes of franchise fee payments, and RCN cannot assure you that it will
      not
      be subject to gross revenue fees or other regulation of its cable modem Internet
      access services in the future.







**Claims
      by Kemper Insurance**





On
      or
      about November 9, 2004, Kemper Insurance (including its affiliated companies,
      American Motorists Insurance Company, Lumbermen’s Mutual Casualty Company,
      American Protection Insurance Company, and American Manufacturing Mutual Company
      (collectively, “Kemper”)) filed general unsecured proofs of claim in an
      unliquidated amount in the Chapter 11 cases (the “Kemper Proofs of Claim”).
      Through the Kemper Proofs of Claim, Kemper sought an unliquidated amount for
      unpaid premiums and other charges in connection with certain insurance policies,
      claims processing agreements and other agreements between Kemper and one or
      more
      of the RCN Debtors. Since the filing of the objection, RCN and Kemper entered
      an
      agreement dated March 28, 2005 to consensually resolve the Kemper claims and
      the
      Bankruptcy Court approved a stipulation on June 13, 2005 which called for RCN
      to
      place $4.9 million in a trust account to serve as collateral to secure the
      payment of claims by Kemper related to workers compensation, auto, and general
      liability insurance policies written by Kemper for the period of March 2000
      to
      March 2003. These funds, classified as long-term restricted investments on
      our
      balance sheet, were moved into the trust account in November 2005, replacing
      the
      prior collateral amount of $6.9 million, which consisted of $2.5 million of
      cash
      in escrow (also classified as long-term restricted investments) and a $4.4
      million letter of credit.





**Claims
      by Merrill Lynch**




On
      January 19, 2006, RCN distributed 169,492 shares of common stock with a current
      market value of $4.0 million (valued as of January 13, 2006) to Merrill Lynch,
      Pierce, Fenner & Smith ("Merrill") in full and final satisfaction of general
      unsecured proofs of claims against RCN and the other RCN Debtors that asserted
      joint and several liability of $9.8 million in unpaid fees associated with
      work
      Merrill performed leading up to RCN's restructuring. The Bankruptcy Court
      authorized the distribution of these shares and dismissed all pending claims
      among the parties in connection with the dispute.




**Claim
      by Former Employee**





On
      December 17, 2005, RCN distributed 60,000 shares of common stock to Marie DeWees
      and her attorneys in full and final satisfaction of her general unsecured proof
      of claim filed with the Bankruptcy Court on July 27, 2004, which sought an
      allowed claim of $4.5 million. Previously, Ms. DeWees had filed a state court
      action in the Superior Court of New Jersey, Law Division, Mercer County,
      captioned Marie
      DeWees, et al v. RCN Corporation, et al. (Docket
      No. L—175-00) against RCN and various of its officers and employees which had
      been pending since January 12, 2000, alleging that Ms. DeWees, a Vice President,
      had been separated from the Company unlawfully on the basis of sex and age.
      On
      February 5, 2003, the trial court granted Summary Judgment in favor of RCN
      dismissing the state court complaint in its entirety. On February 12, 2003,
      Ms.
      DeWees filed an appeal in the Superior Court, Appellate Division, seeking
      reinstatement of her complaint. The appeal was stayed pending the RCN
      bankruptcy. On October 12, 2004, the Bankruptcy Court entered an order
      memorializing the agreement between RCN and Ms. DeWees to lift the stay for
      the
      purpose of allowing the Appellate Division to decide Ms. DeWees' appeal. On
      July
      15, 2005, the Appellate Division reversed the order of the trial court and
      reinstated the complaint. On November 30, 2005, the Bankruptcy Court entered
      an
      order allowing Ms. DeWees' claim against RCN for $2.0 million to be satisfied
      with a one-time distribution of 60,000 shares of RCN’s common stock which
      occurred in 2005 and all claims in the state court action were
      dismissed.





In
      addition to the above, in the normal course of business, RCN becomes party
      to
      various legal proceedings of which there are several pending. In the opinion
      of
      management, these proceedings will not have a material adverse effect on the
      financial position or results of operations or liquidity of RCN.




**22.**
            **RELATED
                PARTY TRANSACTIONS**




As
      described more fully in Notes 6 and 12, RCN owned a 50% interest in Starpower
      prior to December 21, 2004 when the Successor acquired the remaining 50%
      interest from Pepco. RCN and Starpower were party to several agreements under
      which RCN provided certain support services to Starpower. These services
      included accounting and technical services, customer service and administrative
      support. RCN charged these services to Starpower at cost. The amount of such
      services provided by RCN to Starpower for the period from January 1 to December
      20, 2004 (Predecessor) and for the year ending December 31, 2003 were $11.7
      million and $18.5 million, respectively. RCN also sells long distance
      telecommunications services to Starpower for resale to Starpower’s customers at
      cost. Revenue and cost of revenue recorded for these sales were $0.7 million
      and
      $1.0 million for the period from January 1 to December 20, 2004 (Predecessor)
      and for the year ended December 31, 2003 (Predecessor), respectively. RCN had
      receivables from Starpower for these transactions of $10.2 million at December
      31, 2003.




Starpower,
      which as of December 21, 2004 was a wholly owned subsidiary of RCN, pays Pepco
      for right-of-way access for its broadband network. Expenses related to this
      access were $1.5 million, $1.4 million and $1.4 million for the year ended
      December 31, 2005, the period of January 1 to December 20, 2004 (Predecessor)
      and the year ended December 31, 2003, respectively. Starpower also purchases
      equipment, most of which is capitalized and utility services from Pepco. These
      purchases were $2.2 million for the year ended December 31, 2005, $2.4 million
      for the period of January 1 to December 20, 2004 (Predecessor) and $2.4 million
      for the year ended December 31, 2003. RCN had payables to Pepco related to
      these
      transactions of $0.9 million at December 31, 2005, $0.6 million at December
      31,
      2004. Starpower had payables to Pepco of $0.5 million at December 31, 2003.





F-49





As
      described more fully in Note 12, RCN was party to a joint venture, RCN-Becocom,
      with NSTAR. The JV terminated on December 24, 2003. RCN-Becocom, now a wholly
      owned subsidiary of RCN continues to make payments to NSTAR for right-of-way
      access and utility expenses. The amount of expense recorded by RCN for payments
      to NSTAR were $8.8 million, $7.5 million, and $7.8 million for the year ended
      December 31, 2005, for the period January 1 to December 20, 2004 (Predecessor)
      and for the year ended December 31, 2003, respectively. RCN had payables to
      NSTAR related to these expenses of $1.1 million, and $0.9 million at December
      31, 2005 and 2004, respectively.





Peter
      D.
      Aquino was appointed President and Chief Executive Officer of RCN on December
      21, 2004. Prior to becoming RCN’s chief executive officer in December 2004, Mr.
      Aquino provided consulting services to RCN through two advisory companies,
      the
      terms of which were approved by the Bankruptcy Court. From November 2003 until
      his resignation in August 2004, Mr. Aquino provided consulting services to
      RCN
      on behalf of Capital and Technology Advisors, LLC (“CTA”), the industry and
      technology advisors to the creditors’ committee in RCN’s Chapter 11
      reorganization. For 2004, RCN paid approximately $3.6 million to CTA for such
      services. Upon emergence from bankruptcy, RCN retained CTA to provide strategic
      advisory services, for which RCN paid CTA $1.1 million in 2005.





In
      August, 2004, Mr. Aquino, through his company PDA Group, LLC (“PDA”), was
      retained by RCN to perform consulting services relating to RCN’s market and
      network operations, customer care and execution of sales and marketing
      strategies. In December 2004, RCN appointed Mr. Aquino chief executive officer,
      effectively ending his role as consultant, and he became an employee of RCN.
      As
      an operations consultant under PDA Group, LLC, Mr. Aquino was paid $0.2 million
      from August to December, 2004.







**23.**
            **PREPAYMENTS
                AND OTHER CURRENT ASSETS**




Prepayments
      and other current assets consist of the following:


**(dollars
                  in thousands)****Successor**
              
              **Successor****December
                  31,**
                **2005**
              
              **December
                  31,**
                **2004**Prepaid
                  maintenance
              
              $
              1,790
              
              $
              2,389Prepaid
                  rent
              
              
              1,483
              
              
              1,519Prepaid
                  taxes
              
              
              4,146
              
              
              3,986Prepaid
                  insurance
              
              
              1,886
              
              
              2,225Prepaid
                  other
              
              
              958
              
              
              6,514Security
                  deposits
              
              
              537
              
              
              604Escrow
                  accounts
              
              
              -
              
              
              4,963Other
                  current assets
              
              
              2,803
              
              
              173Total
                  prepayments and other current assets
              
              $
              13,603
              
              $
              22,373








**24.**
            **SUPPLEMENTAL
                SCHEDULE OF NON-CASH INVESTING AND FINANCING
                ACTIVITIES**





During
      the year ended December 31, 2005 RCN distributed 3,308,868 shares of committed
      capital in settlement of claims totaling approximately $105.8 million, including
      $11.1 million accrued in deferred reorganization costs as of December 31, 2004.
      As of December 31, 2005 there were 797,938 shares held in reserve to satisfy
      the
      remaining allowed claims.





On
      December 21, 2004 RCN issued 36,020,850 shares of common stock with a par value
      of $.01 of which 31,919,044 were distributed to bond holders and other general
      unsecured creditors in settlement of $1,215.0 million of obligations of the
      Predecessor. The remaining 4,101,806 shares were placed in reserve to settle
      disputed claims against RCN that were still outstanding. As of December 31,
      2004, these shares were reserved to settle unresolved claims totaling
      approximately $131.4 million.





F-50





During
      the year ended December 31, 2005, the periods from December 21 to December
      31,
      2004 (Successor) and January 1 to December 20, 2004 (Predecessor) and during
      the
      year ended December 31, 2003 (Predecessor), RCN entered into capital lease
      obligations of $0, $0, $0 and $1.4 million, respectively.




Preferred
      stock dividends in the form of additional shares of redeemable preferred stock
      aggregated $51.0 million and $167.7 million for the period from January 1 to
      December 20, 2004 (Predecessor) and for the year ended December 31, 2003
      (Predecessor), respectively.




Non-cash
      accretion of preferred stock was $1.9 million and $5.7 million, for the period
      from January 1 to December 20, 2004 (Predecessor) and for the year ended
      December 31, 2003 (Predecessor), respectively.





During
      2003, Vulcan Ventures, Inc. converted 705,507 shares of Series B Preferred
      Stock
      into 11,424,810 shares of Class B Common Stock.




F-51


**25.**
            **SELECTED
                FINANCIAL DATA**




**RCN
      CORPORATION**


**SELECTED
      QUARTERLY FINANCIAL DATA**


**Thousands
      of Dollars Except Per Share Amounts**


**For
      the Years Ended December 31, 2005 and 2004**




**Successor
                  2005****1st Quarter**
              
              **2nd Quarter**
              
              **3rd Quarter**
              
              **4th
                  Quarter**Revenues
              
              $
              140,809
              
              $
              141,426
              
              $
              138,809
              
              $
              139,920Operating
                  Income/(loss) before non-cash stock-based compensation, depreciation
                  and
                  amortization, and goodwill write-down and other charges
              
              
              23,156
              
              
              19,782
              
              
              23,276
              
              
              21,924Net
                  Income/(loss) from continuing operations
              
              
              (32,058
              )
              
              (31,340
              )
              
              (42,087
              )
              
              (33,032
              )Income/(loss)
                  before discontinued operations per average share
              
              $
              (0.89
              )
              $
              (0.87
              )
              $
              (1.17
              )
              $
              (0.94
              )Net
                  Income/(loss) available to common shareholders
              
              
              (29,403
              )
              
              (31,347
              )
              
              (42,097
              )
              
              (33,265
              )Common
                  StockHigh
              
              $
              22.66
              
              $
              24.75
              
              $
              25.67
              
              $
              24.57Low
              
              $
              18.75
              
              $
              16.69
              
              $
              21.00
              
              $
              19.56







**Predecessor
                    2004**
                
                **Successor**
                  **2004****1st Quarter**
                
                **2nd Quarter**
                
                **3rd Quarter**
                
                **4th
                    Quarter**
                
                **4th
                    Quarter**Revenues
                
                $
                121,260
                
                $
                121,281
                
                $
                121,358
                
                $
                106,560
                
                $
                16,372Operating
                    Income/(loss) before non-cash stock-based compensation, depreciation
                    and
                    amortization, and goodwill write-down and other charges
                
                
                3,417
                
                
                21,383
                
                
                10,007
                
                
                24,851
                
                
                2,418Net
                    Income/(loss) from continuing operations
                
                
                (97,082
                )
                
                (71,575
                )
                
                (75,081
                )
                
                1,207,026
                
                
                (3,688
                )Income/(loss)
                    before discontinued operations per average share
                
                $
                (1.06
                )
                $
                (0.75
                )
                $
                (0.61
                )
                $
                10.89
                
                $
                (0.10
                )Net
                    Income/(loss) available to common shareholders
                
                
                (37,312
                )
                
                (94,139
                )
                
                (75,445
                )
                
                1,208,066
                
                
                (3,688
                )Common
                    StockHigh
                
                $
                1.58
                
                $
                0.33
                
                $
                0.14
                
                $
                0.07
                
                $
                23.25Low
                
                $
                0.25
                
                $
                0.10
                
                $
                0.04
                
                $
                0.01
                
                $
                19.05
 **26.**
              **GUARANTOR
                  SUBSIDIARIES FINANCIAL STATEMENTS**





The
      First-Lien Credit Facility and the Convertible Notes are issued by RCN
      Corporation and are unconditionally guaranteed, jointly and severally, by all
      of
      RCN Corporation’s subsidiaries. The following tables set forth the consolidating
      financial statements of RCN Corporation (“Non-guarantor”) and its guarantor
      subsidiaries as of December 31, 2005, December 31, 2004 and December 31, 2003.




F-52





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the year ended December 31, 2005**


**(Dollars
      in Thousands)**




**Successor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              -
              
              $
              560,964
              
              $
              -
              
              $
              560,964Costs
                  and expenses:Direct
                  expenses
              
              
              -
              
              
              196,832
              
              
              -
              
              
              196,832Selling,
                  general and administrative
              
              
              1,480
              
              
              274,514
              
              
              -
              
              
              275,994Non-cash
                  stock based compensation
              
              
              8,913
              
              
              -
              
              
              -
              
              
              8,913Impairments,
                  exit costs and restructurings
              
              
              -
              
              
              5,245
              
              
              -
              
              
              5,245Depreciation
                  and amortization
              
              
              -
              
              
              190,322
              
              
              -
              
              
              190,322Operating
                  loss
              
              
              (10,393
              )
              
              (105,949
              )
              
              -
              
              
              (116,342
              )Investment
                  income
              
              
              15
              
              
              5,633
              
              
              -
              
              
              5,648Interest
                  expense
              
              
              41,827
              
              
              506
              
              
              -
              
              
              42,333Gain
                  (loss) on sale of assets
              
              
              -
              
              
              2,536
              
              
              -
              
              
              2,536Other
                  income (expense,) net
              
              
              (264
              )
              
              1,820
              
              
              -
              
              
              1,556Loss
                  from continuing operations before reorganization items and income
                  taxes
              
              
              (52,469
              )
              
              (96,466
              )
              
              -
              
              
              (148,935
              )Reorganization
                  (expense) income, net
              
              
              11,113
              
              
              -
              
              
              -
              
              
              11,113Income
                  tax expense (benefit)
              
              
              13,961
              
              
              (13,182
              )
              
              -
              
              
              779Loss
                  from continuing operations before equity in unconsolidated entities
              
              
              (55,317
              )
              
              (83,284
              )
              
              -
              
              
              (138,601
              )Equity
                  in income (loss) of consolidated entities
              
              
              (80,795
              )
              
              -
              
              
              80,795
              
              
              -Net
                  Loss from continuing operations
              
              
              (136,112
              )
              
              (83,284
              )
              
              80,795
              
              
              (138,601
              )Income
                  from discontinued operations, net of tax
              
              
              -
              
              
              (111
              )
              
              -
              
              
              (111
              )Net
                  loss
              
              
              (136,112
              )
              
              (83,395
              )
              
              80,795
              
              
              (138,712
              )Cumulative
                  effect of change in accounting
              
              
              -
              
              
              2,600
              
              
              -
              
              
              2,600Net
                  loss to common stockholders
              
              $
              (136,112
              )
              $
              (80,795
              )
              $
              80,795
              
              $
              (136,112
              )




F-53





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2005**


**(Dollars
      in Thousands)**




**Successor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated****ASSETS**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              -
              
              $
              70,906
              
              $
              -
              
              $
              70,906Short-term
                  investments
              
              
              -
              
              
              72,111
              
              
              -
              
              
              72,111Accounts
                  receivable from related parties
              
              
              2,802
              
              
              -
              
              
              (2,802
              )
              
              -Accounts
                  receivable, net of reserve
              
              
              215,036
              
              
              (165,794
              )
              
              -
              
              
              49,242Unbilled
                  revenues
              
              
              -
              
              
              655
              
              
              -
              
              
              655Interest
                  receivable
              
              
              -
              
              
              390
              
              
              -
              
              
              390Prepayments
                  and other current assets
              
              
              -
              
              
              13,603
              
              
              -
              
              
              13,603Total
                  current assets
              
              
              217,838
              
              
              (8,129
              )
              
              (2,802
              )
              
              206,907Property,
                  plant and equipment, net
              
              
              -
              
              
              705,908
              
              
              -
              
              
              705,908Investments
                  in joint ventures and equity securities
              
              
              -
              
              
              184,896
              
              
              -
              
              
              184,896Investments
                  in consolidated entities
              
              
              1,089,334
              
              
              -
              
              
              (1,089,334
              )
              
              -Intangible
                  assets, net of accumulated
              
              
              -
              
              
              118,145
              
              
              -
              
              
              118,145Long-term
                  restricted investments
              
              
              -
              
              
              17,568
              
              
              -
              
              
              17,568Deferred
                  charges and other assets
              
              
              14,814
              
              
              5,702
              
              
              -
              
              
              20,516Total
                  assets
              
              $
              1,321,986
              
              $
              1,024,090
              
              $
              (1,092,136
              )
              $
              1,253,940




F-54





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2005**


**(Dollars
      in Thousands)**


**(continued)**




**Successor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated****LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  Liabilities:Current
                  maturities of long-term debt
              
              $
              3,278
              
              $
              370
              
              $
              -
              
              $
              3,648Accounts
                  payable
              
              
              265,430
              
              
              (241,277
              )
              
              -
              
              
              24,153Accounts
                  payable related parties
              
              
              -
              
              
              2,802
              
              
              (2,802
              )
              
              -Advance
                  billings and customer deposits
              
              
              -
              
              
              36,202
              
              
              -
              
              
              36,202Accrued
                  exit costs
              
              
              -
              
              
              3,106
              
              
              -
              
              
              3,106Accrued
                  expenses
              
              
              5,020
              
              
              85,230
              
              
              -
              
              
              90,250Current
                  liabilities of discontinued operations
              
              
              -
              
              
              1,422
              
              
              -
              
              
              1,422Total
                  current liabilities
              
              
              273,728
              
              
              (112,145
              )
              
              (2,802
              )
              
              158,781Long
                  term debt
              
              
              485,356
              
              
              3,093
              
              
              -
              
              
              488,449Other
                  deferred credits
              
              
              -
              
              
              43,808
              
              
              -
              
              
              43,808Total
                  liabilities
              
              
              759,084
              
              
              (65,244
              )
              
              (2,802
              )
              
              691,038Sockholders'
                  equity:Common
                  stock
              
              
              360
              
              
              -
              
              
              -
              
              
              360Committed
                  common stock
              
              
              8
              
              
              -
              
              
              -
              
              
              8Committed
                  capital in excess of par
              
              
              25,549
              
              
              -
              
              
              -
              
              
              25,549Additional
                  paid-in-capital
              
              
              684,146
              
              
              1,163,843
              
              
              (1,163,843
              )
              
              684,146Unearned
                  compensation
              
              
              (14,384
              )
              
              -
              
              
              -
              
              
              (14,384
              )Accumulated
                  deficit
              
              
              (139,800
              )
              
              (81,532
              )
              
              81,532
              
              
              (139,800
              )Accumulated
                  other comprehensive income
              
              
              7,023
              
              
              7,023
              
              
              (7,023
              )
              
              7,023Total
                  stockholders' equity (deficit)
              
              
              562,902
              
              
              1,089,334
              
              
              (1,089,334
              )
              
              562,902Total
                  liabilities and stockholders' equity
              
              $
              1,321,986
              
              $
              1,024,090
              
              $
              (1,092,136
              )
              $
              1,253,940




F-55





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the year ended December 31, 2005**


**(Dollars
      in Thousands)**




**Successor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (136,112
              )
              $
              (80,795
              )
              $
              80,795
              
              $
              (136,112
              )Income
                  from discontinued operations
              
              
              -
              
              
              111
              
              
              -
              
              
              111Net
                  loss from continuing operations
              
              
              (136,112
              )
              
              (80,684
              )
              
              80,795
              
              
              (136,001
              )Adjustments
                  to reconcile net loss from continuing operations to net cash used
                  in
                  operating activities:Cumulative
                  effect of change in accounting
              
              
              -
              
              
              (2,600
              )
              
              -
              
              
              (2,600
              )Accretion
                  of discounted debt
              
              
              4,608
              
              
              -
              
              
              -
              
              
              4,608Amortization
                  of financing costs
              
              
              2,333
              
              
              -
              
              
              -
              
              
              2,333Non-cash
                  stock based compensation expense
              
              
              8,913
              
              
              -
              
              
              -
              
              
              8,913Gain
                  on sale of assets
              
              
              -
              
              
              (2,536
              )
              
              -
              
              
              (2,536
              )Depreciation
                  and amortization
              
              
              -
              
              
              190,322
              
              
              -
              
              
              190,322Tax
                  provision charged against intangibles
              
              
              809
              
              
              -
              
              
              -
              
              
              809Provision
                  for losses on accounts receivable
              
              
              -
              
              
              9,516
              
              
              -
              
              
              9,516Equity
                  in income of consolidated entities
              
              
              80,795
              
              
              -
              
              
              (80,795
              )
              
              -Payment
                  of deferred reorganization costs
              
              
              (21,644
              )
              
              -
              
              
              -
              
              
              (21,644
              )Impairments,
                  exit costs and restructurings
              
              
              -
              
              
              8,264
              
              
              -
              
              
              8,264(60,298
              )
              
              122,282
              
              
              -
              
              
              61,984Net
                  change in certain assets, net of business acquisitionsAccounts
                  receivable and unbilled revenues
              
              
              -
              
              
              (6,003
              )
              
              -
              
              
              (6,003
              )Accounts
                  payable
              
              
              -
              
              
              (6,237
              )
              
              -
              
              
              (6,237
              )Accrued
                  expenses
              
              
              -
              
              
              8,168
              
              
              -
              
              
              8,168Accounts
                  receivable for related parties
              
              
              103,968
              
              
              (103,968
              )
              
              -
              
              
              -Unearned
                  revenue, advanced billing and customer deposits
              
              
              -
              
              
              (880
              )
              
              -
              
              
              (880
              )Other
              
              
              -
              
              
              3,155
              
              
              -
              
              
              3,155Net
                  cash provided by continuing operations
              
              
              43,670
              
              
              16,517
              
              
              -
              
              
              60,187Cash
                  provided by discontinued operations
              
              
              -
              
              
              239
              
              
              -
              
              
              239Net
                  cash provided by operating activities
              
              
              43,670
              
              
              16,756
              
              
              -
              
              
              60,426Cash
                  flows from investing activities:Additions
                  to property, plant and equipment
              
              
              -
              
              
              (89,340
              )
              
              -
              
              
              (89,340
              )(Increase)
                  decrease in short-term investments
              
              
              -
              
              
              (21,559
              )
              
              -
              
              
              (21,559
              )Investment
                  in unconsolidated joint venture
              
              
              (2,244
              )
              
              -
              
              
              -
              
              
              (2,244
              )Proceeds
                  from sale of assets
              
              
              -
              
              
              6,259
              
              
              -
              
              
              6,259Decrease
                  (increase) in investments restricted for debt service
              
              
              9,020
              
              
              -
              
              
              -
              
              
              9,020Net
                  cash provided by (used in) continuing operations
              
              
              6,776
              
              
              (104,640
              )
              
              -
              
              
              (97,864
              )Cash
                  used in discontinued operations
              
              
              -
              
              
              (10
              )
              
              -
              
              
              (10
              )Net
                  cash provided by (used in) investing activities
              
              
              6,776
              
              
              (104,650
              )
              
              -
              
              
              (97,874
              )Cash
                  flows from financing activities:Repayment
                  of long-term debt
              
              
              (5,522
              )
              
              -
              
              
              -
              
              
              (5,522
              )Repayment
                  of capital lease obligations
              
              
              -
              
              
              (558
              )
              
              -
              
              
              (558
              )Payments
                  made for debt financing costs
              
              
              -
              
              
              (515
              )
              
              -
              
              
              (515
              )Proceeds
                  from exercise of options
              
              
              1,410
              
              
              -
              
              
              -
              
              
              1,410Net
                  cash used in financing activities
              
              
              (4,112
              )
              
              (1,073
              )
              
              -
              
              
              (5,185
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              46,334
              
              
              (88,967
              )
              
              -
              
              
              (42,633
              )Cash
                  and cash equivalents at beginning of year
              
              
              779
              
              
              112,760
              
              
              -
              
              
              113,539Cash
                  and cash equivalents at end of year
              
              $
              47,113
              
              $
              23,793
              
              $
              -
              
              $
              70,906





F-56




**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the period December 21, 2004 through December 31, 2004**


**(Dollars
      in Thousands)**




**Successor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              -
              
              $
              16,372
              
              $
              -
              
              $
              16,372Costs
                  and expenses:Direct
                  expenses
              
              
              -
              
              
              5,958
              
              
              -
              
              
              5,958Selling,
                  general and administrative
              
              
              -
              
              
              7,996
              
              
              -
              
              
              7,996Depreciation
                  and amortization
              
              
              -
              
              
              5,218
              
              
              -
              
              
              5,218Operating
                  loss
              
              
              -
              
              
              (2,800
              )
              
              -
              
              
              (2,800
              )Interest
                  expense
              
              
              888
              
              
              -
              
              
              -
              
              
              888Loss
                  from continuing operations before reorganization items and income
                  taxes
              
              
              (888
              )
              
              (2,800
              )
              
              -
              
              
              (3,688
              )Loss
                  from continuing operations before equity in unconsolidated entities
              
              
              (888
              )
              
              (2,800
              )
              
              -
              
              
              (3,688
              )Equity
                  in income (loss) of consolidated entities
              
              
              (2,800
              )
              
              -
              
              
              2,800
              
              
              -Net
                  Loss from continuing operations
              
              
              (3,688
              )
              
              (2,800
              )
              
              2,800
              
              
              (3,688
              )Net
                  loss
              
              $
              (3,688
              )
              $
              (2,800
              )
              $
              2,800
              
              $
              (3,688
              )




F-57




**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the period January 1, 2004 through December 20, 2004**


**(Dollars
      in Thousands)**




**Predecessor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              -
              
              $
              470,459
              
              $
              -
              
              $
              470,459Costs
                  and expenses:Direct
                  expenses
              
              
              -
              
              
              172,188
              
              
              -
              
              
              172,188Selling,
                  general and administrative
              
              
              2,168
              
              
              235,830
              
              
              -
              
              
              237,998Non-cash
                  stock based compensation
              
              
              4,316
              
              
              98
              
              
              -
              
              
              4,414Impairments,
                  exit costs and restructurings
              
              
              -
              
              
              (7,674
              )
              
              -
              
              
              (7,674
              )Depreciation
                  and amortization
              
              
              -
              
              
              231,734
              
              
              -
              
              
              231,734Operating
                  loss
              
              
              (6,484
              )
              
              (161,717
              )
              
              -
              
              
              (168,201
              )Investment
                  income
              
              
              6
              
              
              2,936
              
              
              -
              
              
              2,942Interest
                  expense
              
              
              96,688
              
              
              14
              
              
              -
              
              
              96,702Gain
                  (loss) on sale of assets
              
              
              -
              
              
              1,875
              
              
              -
              
              
              1,875Other
                  income (expense), net
              
              
              (105
              )
              
              (190
              )
              
              -
              
              
              (295
              )Loss
                  from continuing operations before reorganization items and income
                  taxes
              
              
              (103,271
              )
              
              (157,110
              )
              
              -
              
              
              (260,381
              )Reorganization
                  items, net
              
              
              (84,882
              )
              
              (7,672
              )
              
              -
              
              
              (92,554
              )Gain
                  on liabilities subject to compromise and restructuring
              
              
              1,189,304
              
              
              (23,277
              )
              
              -
              
              
              1,166,027Gain
                  from fresh start adjustments
              
              
              -
              
              
              173,178
              
              
              -
              
              
              173,178Income
                  tax expense (benefit)
              
              
              (114
              )
              
              -
              
              
              -
              
              
              (114
              )Loss
                  from continuing operations before equity in unconsolidated entities
              
              
              1,001,265
              
              
              (14,881
              )
              
              -
              
              
              986,384Equity
                  in income (loss) of unconsolidated entities
              
              
              -
              
              
              11,267
              
              
              -
              
              
              11,267Equity
                  in income (loss) of consolidated entities
              
              
              87,170
              
              
              -
              
              
              (87,170
              )
              
              -Impairment
                  of unconsolidated entities
              
              
              (25,689
              )
              
              -
              
              
              -
              
              
              (25,689
              )Net
                  Loss from continuing operations
              
              
              1,062,746
              
              
              (3,614
              )
              
              (87,170
              )
              
              971,962Income
                  from discontinued operations, net of tax of $0 and $0
              
              
              -
              
              
              90,784
              
              
              -
              
              
              90,784Net
                  loss
              
              
              1,062,746
              
              
              87,170
              
              
              (87,170
              )
              
              1,062,746Preferred
                  dividend and accretion requirements
              
              
              52,902
              
              
              -
              
              
              -
              
              
              52,902Net
                  loss to common stockholders
              
              
              1,009,844
              
              
              87,170
              
              
              (87,170
              )
              
              1,009,844




F-58





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2004**


**(Dollars
      in Thousands)**




**Successor****NonGuarantor**
                
                **Guarantor****Financials**
                
                **Financials**
                
                **Eliminations**
                
                **Consolidated****ASSETS**Current
                    Assets:Cash
                    and cash equivalents
                
                $
                779
                
                $
                112,760
                
                $
                -
                
                $
                113,539Short-term
                    investments
                
                
                -
                
                
                50,425
                
                
                -
                
                
                50,425Accounts
                    receivable, net of reserve
                
                
                -
                
                
                52,618
                
                
                -
                
                
                52,618Unbilled
                    revenues
                
                
                -
                
                
                792
                
                
                -
                
                
                792Interest
                    receivable
                
                
                -
                
                
                755
                
                
                -
                
                
                755Prepayments
                    and other current assets
                
                
                450
                
                
                21,923
                
                
                -
                
                
                22,373Short-term
                    restricted investments
                
                
                -
                
                
                1,525
                
                
                -
                
                
                1,525Total
                    current assets
                
                
                1,229
                
                
                240,798
                
                
                -
                
                
                242,027Property,
                    plant and equipment, net
                
                
                -
                
                
                793,691
                
                
                -
                
                
                793,691Investments
                    in consolidated entities
                
                
                1,208,241
                
                
                178,000
                
                
                (1,208,241
                )
                
                178,000Intangible
                    assets, net of accumulated
                
                
                -
                
                
                141,786
                
                
                -
                
                
                141,786Long-term
                    restricted investments
                
                
                -
                
                
                25,063
                
                
                -
                
                
                25,063Deferred
                    charges and other assets
                
                
                16,094
                
                
                3,849
                
                
                -
                
                
                19,943Total
                    assets
                
                $
                1,225,564
                
                $
                1,383,187
                
                $
                (1,208,241
                )
                $
                1,400,510




F-59





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2004**


**(Dollars
      in Thousands)**


**(continued)**




**Successor****NonGuarantor**
                
                **Guarantor****Financials**
                
                **Financials**
                
                **Eliminations**
                
                **Consolidated****LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    Liabilities:Current
                    maturities of capital lease obligations
                
                $
                -
                
                $
                558
                
                $
                -
                
                $
                558Current
                    maturities of long-term debt
                
                
                3,300
                
                
                -
                
                
                -
                
                
                3,300Accounts
                    payable
                
                
                6,899
                
                
                22,864
                
                
                -
                
                
                29,763Advance
                    billings and customer deposits
                
                
                -
                
                
                37,082
                
                
                -
                
                
                37,082Accrued
                    expenses
                
                
                1,215
                
                
                35,115
                
                
                -
                
                
                36,330Accrued
                    interest
                
                
                837
                
                
                -
                
                
                -
                
                
                837Accrued
                    cost of sales
                
                
                -
                
                
                32,301
                
                
                -
                
                
                32,301Accrued
                    exit costs
                
                
                -
                
                
                2,340
                
                
                -
                
                
                2,340Accrued
                    employee compensation and related expenses
                
                
                694
                
                
                14,010
                
                
                -
                
                
                14,704Deferred
                    reorganization costs
                
                
                21,450
                
                
                194
                
                
                -
                
                
                21,644Current
                    liabilities of discontinued operations
                
                
                -
                
                
                1,082
                
                
                -
                
                
                1,082Total
                    current liabilities
                
                
                34,395
                
                
                145,546
                
                
                -
                
                
                179,941Long
                    term debt and capital lease obligations
                
                
                486,247
                
                
                3,463
                
                
                -
                
                
                489,710Other
                    deferred credits
                
                
                -
                
                
                25,937
                
                
                -
                
                
                25,937Total
                    liabilities
                
                
                520,642
                
                
                174,946
                
                
                -
                
                
                695,588Sockholders'
                    equity:Common
                    stock
                
                
                319
                
                
                4
                
                
                (4
                )
                
                319Committed
                    common stock
                
                
                41
                
                
                -
                
                
                -
                
                
                41Committed
                    capital in excess of par
                
                
                131,355
                
                
                -
                
                
                -
                
                
                131,355Additional
                    paid-in-capital
                
                
                576,895
                
                
                1,208,974
                
                
                (1,208,974
                )
                
                576,895Accumulated
                    deficit
                
                
                (3,688
                )
                
                (737
                )
                
                737
                
                
                (3,688
                )Total
                    stockholders' equity (deficit)
                
                
                704,922
                
                
                1,208,241
                
                
                (1,208,241
                )
                
                704,922Total
                    liabilities and stockholders' equity
                
                $
                1,225,564
                
                $
                1,383,187
                
                $
                (1,208,241
                )
                $
                1,400,510


F-60





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the period December 21, 2004 through December 31, 2004**


**(Dollars
      in Thousands)**




**Successor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (3,688
              )
              $
              (2,800
              )
              $
              2,800
              
              $
              (3,688
              )Net
                  loss from continuing operations
              
              
              (3,688
              )
              
              (2,800
              )
              
              2,800
              
              
              (3,688
              )Adjustments
                  to reconcile net loss from continuing operations to net cash used
                  in
                  operating activities:Depreciation
                  and amortization
              
              
              -
              
              
              5,218
              
              
              -
              
              
              5,218Provision
                  for losses on accounts receivable
              
              
              -
              
              
              342
              
              
              -
              
              
              342Equity
                  in income of consolidated entities
              
              
              2,800
              
              
              -
              
              
              (2,800
              )
              
              -(888
              )
              
              2,760
              
              
              -
              
              
              1,872Accounts
                  receivable and unbilled revenues
              
              
              -
              
              
              (914
              )
              
              -
              
              
              (914
              )Accounts
                  payable
              
              
              -
              
              
              (20,594
              )
              
              -
              
              
              (20,594
              )Accrued
                  expenses
              
              
              -
              
              
              5,842
              
              
              -
              
              
              5,842Accounts
                  receivable from related parties
              
              
              -
              
              
              15,469
              
              
              -
              
              
              15,469Accounts
                  payable to related parties
              
              
              -
              
              
              (15,469
              )
              
              -
              
              
              (15,469
              )Guarantor/nonguarantor
                  interco
              
              
              (187
              )
              
              187
              
              
              -
              
              
              -Other
              
              
              1,075
              
              
              -
              
              
              -
              
              
              1,075Net
                  cash used in continuing operations
              
              
              -
              
              
              (12,719
              )
              
              -
              
              
              (12,719
              )Net
                  cash used in operating activities
              
              
              -
              
              
              (12,719
              )
              
              -
              
              
              (12,719
              )Cash
                  flows from investing activities:Acquisition
                  of Starpower, net of cash acquired
              
              
              -
              
              
              (14,933
              )
              
              -
              
              
              (14,933
              )Decrease
                  (increase) in investments restricted for debt service
              
              
              -
              
              
              4,634
              
              
              -
              
              
              4,634Net
                  cash used in investing activities
              
              
              -
              
              
              (10,299
              )
              
              -
              
              
              (10,299
              )Cash
                  flows from financing activities:Net
                  cash used in financing activities
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  decrease in cash and cash equivalents
              
              
              -
              
              
              (23,018
              )
              
              -
              
              
              (23,018
              )Cash
                  and cash equivalents at beginning of period
              
              
              779
              
              
              135,778
              
              
              -
              
              
              136,557Cash
                  and cash equivalents at end of period
              
              $
              779
              
              $
              112,760
              
              $
              -
              
              $
              113,539




F-61




**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the period January 1, 2004 through December 20, 2004**


**(Dollars
      in Thousands)**




**Revised
                  Predecessor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              1,062,746
              
              $
              (3,614
              )
              $
              3,614
              
              $
              1,062,746Income
                  from discontinued operations
              
              
              -
              
              
              (2,204
              )
              
              -
              
              
              (2,204
              )Gain
                  on sale of discontinued operation
              
              
              -
              
              
              (88,580
              )
              
              -
              
              
              (88,580
              )Net
                  income (loss) from continuing operations
              
              
              1,062,746
              
              
              (94,398
              )
              
              3,614
              
              
              971,962Adjustments
                  to reconcile net loss from continuing operations to net cash used
                  in
                  operating activities:Accretion
                  of discounted debt
              
              
              4,541
              
              
              -
              
              
              -
              
              
              4,541Amortization
                  of financing costs
              
              
              9,511
              
              
              -
              
              
              -
              
              
              9,511Non-cash
                  stock based compensation expense
              
              
              4,316
              
              
              97
              
              
              -
              
              
              4,413Gain
                  on sale of assets
              
              
              -
              
              
              (1,651
              )
              
              -
              
              
              (1,651
              )Debt
                  Issuance costs
              
              
              18,076
              
              
              -
              
              
              -
              
              
              18,076Gain
                  on settlement of lease obligation
              
              
              (14,525
              )
              
              -
              
              
              -
              
              
              (14,525
              )Noncash
                  fresh start adjustments
              
              
              (173,178
              )
              
              -
              
              
              -
              
              
              (173,178
              )Gain
                  on settlement of liabilities subject to comprominse
              
              
              (1,166,027
              )
              
              -
              
              
              -
              
              
              (1,166,027
              )Depreciation
                  and amortization
              
              
              -
              
              
              231,734
              
              
              -
              
              
              231,734Deferred
                  income taxes, net
              
              
              -
              
              
              (934
              )
              
              -
              
              
              (934
              )Provision
                  for losses on accounts receivable
              
              
              -
              
              
              8,617
              
              
              -
              
              
              8,617Equity
                  in income of consolidated entities
              
              
              3,614
              
              
              -
              
              
              (3,614
              )
              
              -Equity
                  in income of unconsolidated entities
              
              
              -
              
              
              (11,267
              )
              
              -
              
              
              (11,267
              )Impairment
                  in unconsolidated entity
              
              
              25,689
              
              
              -
              
              
              -
              
              
              25,689Impairments,
                  exit costs and restructurings
              
              
              -
              
              
              6,851
              
              
              -
              
              
              6,851(225,237
              )
              
              139,049
              
              
              -
              
              
              (86,188
              )Accounts
                  receivable and unbilled revenues
              
              
              -
              
              
              (10,700
              )
              
              -
              
              
              (10,700
              )Accounts
                  payable
              
              
              -
              
              
              29,513
              
              
              -
              
              
              29,513Accrued
                  expenses
              
              
              -
              
              
              36,945
              
              
              -
              
              
              36,945Accounts
                  receivable from related parties
              
              
              -
              
              
              3,378
              
              
              -
              
              
              3,378Accounts
                  payable to related parties
              
              
              -
              
              
              1,803
              
              
              -
              
              
              1,803Unearned
                  revenue, advanced billings
              
              
              -
              
              
              1,310
              
              
              -
              
              
              1,310Guarantor/nonguarantor
                  intercompany
              
              
              299,424
              
              
              (299,424
              )
              
              -
              
              
              -Other
              
              
              (12,207
              )
              
              -
              
              
              -
              
              
              (12,207
              )Net
                  cash provided by (used in) continuing operations
              
              
              61,980
              
              
              (98,126
              )
              
              -
              
              
              (36,146
              )Cash
                  provided by discontinued operations
              
              
              2,012
              
              
              -
              
              
              -
              
              
              2,012Net
                  provided by (used in) cash operating activities
              
              
              63,992
              
              
              (98,126
              )
              
              -
              
              
              (34,134
              )




F-62





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the period January 1, 2004 through December 20, 2004**


**(Dollars
      in Thousands)**


**(continued)**




**Revised
                  Predecessor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Cash
                  flows from investing activities:Additions
                  to property, plant and equipment
              
              $
              -
              
              $
              (52,294
              )
              $
              -
              
              $
              (52,294
              )(Increase)
                  decrease in short-term investments
              
              
              -
              
              
              (50,425
              )
              
              -
              
              
              (50,425
              )Proceeds
                  from sale of assets
              
              
              -
              
              
              391
              
              
              -
              
              
              391Decrease
                  (increase) in investments restricted for debt service
              
              
              -
              
              
              203,160
              
              
              -
              
              
              203,160Refund
                  of sales tax on capital equipment
              
              
              -
              
              
              1,077
              
              
              -
              
              
              1,077Net
                  cash provided by continuing operations
              
              
              -
              
              
              101,909
              
              
              -
              
              
              101,909Proceeds
                  from sale of discontinued operations
              
              
              -
              
              
              118,061
              
              
              -
              
              
              118,061Net
                  cash provided by investing activities
              
              
              -
              
              
              219,970
              
              
              -
              
              
              219,970Cash
                  flows from financing activities:Repayment
                  of long-term debt
              
              
              (395,367
              )
              
              -
              
              
              -
              
              
              (395,367
              )Change
                  in term loans
              
              
              (111,377
              )
              
              -
              
              
              -
              
              
              (111,377
              )Repayment
                  of capital lease obligations
              
              
              -
              
              
              (3,715
              )
              
              -
              
              
              (3,715
              )Payments
                  made for debt financing costs
              
              
              (12,215
              )
              
              -
              
              
              -
              
              
              (12,215
              )Proceeds
                  from the issuance of long-term debt
              
              
              455,000
              
              
              -
              
              
              -
              
              
              455,000Net
                  cash used in financing activities
              
              
              (63,959
              )
              
              (3,715
              )
              
              -
              
              
              (67,674
              )Net
                  increase in cash and cash equivalents
              
              
              33
              
              
              118,129
              
              
              -
              
              
              118,162Cash
                  and cash equivalents at beginning of period
              
              
              746
              
              
              17,649
              
              
              -
              
              
              18,395Cash
                  and cash equivalents at end of period
              
              $
              779
              
              $
              135,778
              
              $
              -
              
              $
              136,557





F-63





**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the year ended December 31, 2003**


**(Dollars
      in Thousands)**




**Predecessor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              -
              
              $
              484,854
              
              $
              -
              
              $
              484,854Costs
                  and expenses:Direct
                  expenses
              
              
              -
              
              
              174,260
              
              
              -
              
              
              174,260Selling,
                  general and administrative
              
              
              113
              
              
              308,038
              
              
              -
              
              
              308,151Non-cash
                  stock based compensation
              
              
              4,264
              
              
              428
              
              
              -
              
              
              4,692Impairments,
                  exit costs and restructurings
              
              
              -
              
              
              167,241
              
              
              -
              
              
              167,241Depreciation
                  and amortization
              
              
              -
              
              
              197,267
              
              
              -
              
              
              197,267Operating
                  loss
              
              
              (4,377
              )
              
              (362,380
              )
              
              -
              
              
              (366,757
              )Investment
                  income
              
              
              4
              
              
              6,256
              
              
              -
              
              
              6,260Interest
                  expense
              
              
              180,636
              
              
              (430
              )
              
              -
              
              
              180,206Gain
                  on early extinguishment of debt
              
              
              45,556
              
              
              -
              
              
              -
              
              
              45,556Other
                  income (expense) net
              
              
              (1,232
              )
              
              9,433
              
              
              -
              
              
              8,201Loss
                  from continuing operations before reorganization items and income
                  taxes
              
              
              (140,685
              )
              
              (346,261
              )
              
              -
              
              
              (486,946
              )Income
                  tax expense (benefit)
              
              
              118,554
              
              
              (117,283
              )
              
              -
              
              
              1,271Loss
                  from continuing operations before equity in unconsolidated entities
              
              
              (259,239
              )
              
              (228,978
              )
              
              -
              
              
              (488,217
              )Equity
                  in income (loss) of unconsolidated entities
              
              
              -
              
              
              23,470
              
              
              -
              
              
              23,470Equity
                  in income (loss) of consolidated entities
              
              
              (66,462
              )
              
              (35,000
              )
              
              66,462
              
              
              (35,000
              )Net
                  loss from continuing operations
              
              
              (325,701
              )
              
              (240,508
              )
              
              66,462
              
              
              (499,747
              )Income
                  from discontinued operations, net of tax
              
              
              -
              
              
              174,046
              
              
              -
              
              
              174,046Net
                  loss
              
              
              (325,701
              )
              
              (66,462
              )
              
              66,462
              
              
              (325,701
              )Preferred
                  dividend and accretion requirements
              
              
              -
              
              
              173,392
              
              
              -
              
              
              173,392Net
                  loss to common stockholders
              
              $
              (325,701
              )
              $
              (239,854
              )
              $
              66,462
              
              $
              (499,093
              )





F-64




**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the year ended December 31, 2003**


**(Dollars
      in Thousands)**




**Revised
                  Predecessor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (325,701
              )
              $
              (66,462
              )
              $
              66,462
              
              $
              (325,701
              )Income
                  from discontinued operations
              
              
              -
              
              
              (10,362
              )
              
              -
              
              
              (10,362
              )Gain
                  on sale of discontinued operation
              
              
              -
              
              
              (163,684
              )
              
              -
              
              
              (163,684
              )Net
                  loss from continuing operations
              
              
              (325,701
              )
              
              (240,508
              )
              
              66,462
              
              
              (499,747
              )Adjustments
                  to reconcile net loss from continuing operations to net cash used
                  in
                  operating activities:Accretion
                  of discounted debt
              
              
              14,370
              
              
              -
              
              
              -
              
              
              14,370Amortization
                  of financing costs
              
              
              15,762
              
              
              -
              
              
              -
              
              
              15,762Non-cash
                  stock based compensation expense
              
              
              4,692
              
              
              -
              
              
              -
              
              
              4,692Gain
                  on sale of assets
              
              
              -
              
              
              (8,386
              )
              
              -
              
              
              (8,386
              )Gain
                  on early extinguishment of debt
              
              
              (45,556
              )
              
              -
              
              
              -
              
              
              (45,556
              )Depreciation
                  and amortization
              
              
              -
              
              
              197,267
              
              
              -
              
              
              197,267Provision
                  for losses on accounts receivable
              
              
              -
              
              
              12,335
              
              
              -
              
              
              12,335Equity
                  in income of unconsolidated entities
              
              
              -
              
              
              (23,470
              )
              
              -
              
              
              (23,470
              )Equity
                  in income of consolidated entities
              
              
              66,462
              
              
              35,000
              
              
              (66,462
              )
              
              35,000Impairments,
                  exit costs and restructurings
              
              
              -
              
              
              167,241
              
              
              -
              
              
              167,241(269,971
              )
              
              139,479
              
              
              -
              
              
              (130,492
              )Net
                  change in certain assets, net of business acquisitionsAccounts
                  receivable and unbilled revenues
              
              
              -
              
              
              (2,931
              )
              
              -
              
              
              (2,931
              )Accounts
                  payable
              
              
              -
              
              
              (4,579
              )
              
              -
              
              
              (4,579
              )Accrued
                  expenses
              
              
              -
              
              
              (9,043
              )
              
              -
              
              
              (9,043
              )Accounts
                  receivable for related parties
              
              
              -
              
              
              (3,261
              )
              
              -
              
              
              (3,261
              )Accounts
                  payable to related parties
              
              
              522,159
              
              
              (532,276
              )
              
              -
              
              
              (10,117
              )Unearned
                  revenue, advanced billing and customer deposits
              
              
              -
              
              
              135
              
              
              -
              
              
              135Other
              
              
              -
              
              
              (13,049
              )
              
              -
              
              
              (13,049
              )Net
                  cash provided by (used in) continuing operations
              
              
              252,188
              
              
              (425,525
              )
              
              -
              
              
              (173,337
              )Cash
                  provided by discontinued operations
              
              
              -
              
              
              3,087
              
              
              -
              
              
              3,087Net
                  cash (provided by) used in operating activities
              
              $
              252,188
              
              $
              (422,438
              )
              $
              -
              
              $
              (170,250
              )


F-65




**RCN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the year ended December 31, 2003**


**(Dollars
      in Thousands)**


**(continued)**




**Revised
                  Predecessor****NonGuarantor**
              
              **Guarantor****Financials**
              
              **Financials**
              
              **Eliminations**
              
              **Consolidated**Cash
                  flows from investing activities:Additions
                  to property, plant and equipment
              
              $
              -
              
              $
              (87,481
              )
              $
              -
              
              $
              (87,481
              )Acquisition
                  of starpower, net of cash acquired
              
              
              -
              
              
              227,641
              
              
              -
              
              
              227,641(Increase)
                  decrease in short-term investments
              
              
              -
              
              
              (2,000
              )
              
              -
              
              
              (2,000
              )Investment
                  in unconsolidated joint venture
              
              
              -
              
              
              7,750
              
              
              -
              
              
              7,750Proceeds
                  from sale of assets
              
              
              -
              
              
              17,408
              
              
              -
              
              
              17,408Decrease
                  (increase) in investments restricted for debt service
              
              
              (199,285
              )
              
              -
              
              
              -
              
              
              (199,285
              )Net
                  cash provided by (used in) continuing operations
              
              
              (199,285
              )
              
              163,318
              
              
              -
              
              
              (35,967
              )Proceeds
                  from sale of discontinued operations
              
              
              -
              
              
              239,644
              
              
              -
              
              
              239,644Cash
                  used in discontinued operations
              
              
              -
              
              
              (8,813
              )
              
              -
              
              
              (8,813
              )Net
                  cash provided by (used in) investing activities
              
              
              (199,285
              )
              
              394,149
              
              
              -
              
              
              194,864Cash
                  flows from financing activities:Repayment
                  of long-term debt
              
              
              (68,000
              )
              
              -
              
              
              -
              
              
              (68,000
              )Repayment
                  of capital lease obligations
              
              
              -
              
              
              (2,590
              )
              
              -
              
              
              (2,590
              )Proceeds
                  from exercise of options
              
              
              53
              
              
              -
              
              
              -
              
              
              53Payments
                  made for debt financing costs
              
              
              (12,853
              )
              
              -
              
              
              -
              
              
              (12,853
              )Proceeds
                  from the issuance of long-term debt
              
              
              27,806
              
              
              -
              
              
              -
              
              
              27,806Net
                  cash used in financing activities
              
              
              (52,994
              )
              
              (2,590
              )
              
              -
              
              
              (55,584
              )Net
                  decrease in cash and cash equivalents
              
              
              (91
              )
              
              (30,879
              )
              
              -
              
              
              (30,970
              )Cash
                  and cash equivalents at beginning of period
              
              
              779
              
              
              48,586
              
              
              -
              
              
              49,365Cash
                  and cash equivalents at end of period
              
              $
              688
              
              $
              17,707
              
              $
              -
              
              $
              18,395





**27.**
            **ACQUISITION**





In
      December 2005, RCN signed a definitive agreement to purchase Consolidated Edison
      Communications Holding Company, Inc. (“CEC”), the telecommunications subsidiary
      of Consolidated Edison, Inc., for $32 million plus an esetimated $6-7 million
      in
      working capital and capital expenditure adjustments, to be funded with cash
      on
      hand. RCN expects the acquisition to close by the end of March
      2006.





F-66





**28.**
            **SUBSEQUENT
                EVENTS**





On
      March
      6, 2006, RCN entered into an agreement to sell its investments in Megacable
      and
      MCM to the investors who currently own the remaining 51% of these entities
      for
      net after-tax proceeds of $300.0 million in cash. The transaction is expected
      to
      close by the end of March, 2006, after the necessary regulatory approval
      documents are filed. The proceeds from this sale will be used to pay down debt,
      as required under our various debt agreements








**SCHEDULE
      II**




**RCN
      CORPORATION**


**VALUATION
      AND QUALIFYING ACCOUNTS AND RESERVES**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003**


**(THOUSANDS
      OF DOLLARS)**




**Column
                  A**
              
              
              **Column
                  B**
              
              **Column
                  C**
              
              **Column
                  D**
              
              **Column
                  E****Additions****Description**
              
              
              **Balance
                    at**
                **Beginning
                    of**
                **Period**
              
              **Charged**
                **to
                    Cost and**
                **Expense**
              
              **Charged**
                **to
                    Other**
                **Accounts**
              
              **Accounts**
                **Written
                  Off**
              
              **Balance at****End
                    of**
                **Period**Allowance
                  for Doubtful Accounts—Deducted
                  from Accounts Receivable in the ConsolidatedBalance
                  Sheets2005
                  Successor
              
              $
              4,568
              
              $
              9,516
              
              $
              1,168
              
              $
              11,587
              
              $
              3,6652004
                  Successor December 21, 2004 - December 31, 2004
              
              $
              3,606
              
              $
              342
              
              $
              620
              
              $
              -
              
              $
              4,5682004
                  Predecessor January 1, 2004 - December 20, 2004
              
              $
              5,923
              
              $
              8,617
              
              $
              2,360
              
              $
              13,294
              
              $
              3,6062003
                  Predecessor
              
              $
              10,653
              
              $
              12,335
              
              $
              848
              
              $
              17,913
              
              $
              5,923





F-67




**Exhibits**10.24
            Separation
                Agreement between RCN Corporation and Patrick T. Hogan, dated as
                of June
                30, 2005.10.28
            Separation
                Agreement between RCN Corporation and Stephen A. Bogiages, dated
                as of
                December 22, 2005.10.29
            Amended
                Form Non-Qualified Option Agreement.10.30
            Amended
                Form Incentive Stock Option Agreement.10.33
            Stock
                  Purchase Agreement between RCN Corporation and Consolidated Edison,
                  Inc.,
                  dated as of December 5, 2005.10.35
            Settlement
                Agreement, dated March 6, 2006, entered into by and among RCN
                International Holdings, Inc., Teleholding, S.A. de C.V., Mega Cable,
                S.A.
                de C.V., MCM Holding, S.A. de C.V. and the Private Shareholders listed
                therein.23.1
            Consent
                of Pricewaterhouse Coopers LLP, Independent Registered Public Accounting
                Firm.23.2
            Consent
                of Friedman LLP, Independent Registered Public Accounting
                Firm.31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.*32.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.*


___________________


*
            This
                certification accompanies this Report pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
                by
                the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for
                purposes of Section 18 of the Securities Exchange Act of 1934, as
                amended.






F-68