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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

or

For the transition period from                      to                     

Commission file number 1-16805

RCN Corporation

(Exact name of registrant as specified in charter)

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

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

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

Common stock, par value $0.01 per share

(Title of Classes)

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 an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the outstanding common stock of the Registrant held by non-affiliates as of June 30, 2004 based upon the average bid and asked prices of the common stock of the Registrant’s predecessor company on the over-the-counter market on such date of $ 0.135 per share, was approximately $16,514,228. There were 35,163,025 shares of voting common stock with a par value of $0.01 outstanding at May 6, 2005.

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  ¨

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RCN CORPORATION AND SUBSIDIARIES

For the year ended December 31, 2004

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Cautionary Statement Regarding Forward Looking Statements:

Certain of the statements contained in this Annual Report should be considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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:

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.

In connection with its reorganization under Chapter 11 of the Bankruptcy Code during 2004, RCN included financial projections in the disclosure statement provided to its creditors and shareholders. As more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” RCN’s post-reorganization results are not directly comparable to the financial projections contained in the disclosure statement. Accordingly, you should not rely on any of the projections provided in the disclosure statement.

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PART I

Introduction

RCN is one of the largest facilities-based, competitive providers of bundled video, high-speed data and voice services in the United States. As of December 31, 2004, RCN served approximately 425,000 residential customers. RCN’s services are delivered primarily over its own fiber-optic local network to consumers in densely populated markets in the United States. RCN currently serves customers in the Boston, New York, eastern Pennsylvania, Washington, D.C., Chicago, San Francisco and Los Angeles metropolitan 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 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 450 Fifth Street, N.W., 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, bundled video, high-speed data and voice services to customers in its target markets. The key components of RCN’s strategy include:

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Overview of Business

RCN sells a combination or “bundle” of telecommunication services primarily to residential customers in densely populated markets in the United States. Currently, RCN offers bundled services under its RCN Power^SM and RCN Essentials^SM packages, which allow customers to select combinations of video, data and voice (local and long distance) services. While a majority of customers purchase bundled package offerings, RCN also sells video, high-speed cable modem and dial-up data services and voice services to residential customers on an individual or “a-la-carte” basis. RCN also provides video, high-speed data and voice services to commercial customers in RCN’s service areas. RCN typically delivers service over its facilities based high-speed, high-capacity, fiber-optic broadband network. RCN believes that the bandwidth capacity and architecture of its fiber-optic network provides it with an advantage in delivering its services and products. RCN is positioned to deliver enhanced services as the industry and technology evolve and demand increased bandwidth.

RCN currently operates in Boston, New York City, eastern Pennsylvania, Washington D.C., Chicago, San Francisco and Los Angeles and numerous surrounding communities. RCN also owns an approximately 49% equity interest in Megacable, S.A. de. C.V. (“Megacable”), one of the largest cable television providers in Mexico.

Fiber-optic Broadband Network

As of December 31, 2004, 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 generally 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 state-of-the art network typically has fewer electronics than existing incumbent cable companies. RCN’s network design and integrated support systems generally permit RCN to add new communication services more efficiently and effectively than the incumbents.

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

Services

RCN offers its video, high-speed and dial-up data and voice services in bundled service packages under the brand names RCN Power^SM and RCN Essentials^SM. Customers can choose from a broad range of service bundles which are designed to address the differing needs of customers. By choosing a bundled service package, customers can enjoy additional 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.

The following tables summarize residential Revenue Generating Units (“RGUs”), Customers and Average Revenue per Unit (all amounts include Starpower Communications LLC as though owned 100% by RCN for all periods presented).

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Video

General. 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 franchises awarded by local and state governmental authorities for specified periods of time.

Video Services. RCN’s video services include:

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Programming. 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 under the MegaModem^® brand 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. During 2004, RCN enhanced the maximum available download speed of RCN MegaModem^® Mach 10 to 10 million bits per second (“Mbps”) and made the service available to all of RCN’s residential markets.

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

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.

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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.

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

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 400 commercial buildings and passes within a short distance of an additional approximately 20,000 commercial buildings. RCN’s specific commercial product offerings include:

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 Boston.

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.

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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 and the geographic market. 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. Under rules adopted by the Federal Communications Commission (the “FCC”), the prices RCN charges for cable-related equipment, such as set-top terminals and remote control devices, and for installation services are based on RCN’s actual costs, plus a permitted rate of return.

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, Pennsylvania which handles customer service transactions and its representatives are trained to handle inquiries for all of RCN’s products. 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

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.

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. 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.

Megacable and MCM

RCN has a 48.93% equity interest in Megacable, one of the largest cable television providers in Mexico. Megacable operates cable systems in Mexico, principally on the Pacific and Gulf coasts and including Guadalajara, the second largest city in Mexico; Hermosillo, the largest city in the state of Sonora; and Veracruz, the largest city in the state of Veracruz. Megacable also provides Internet services to customers.

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Under the agreements governing the investment in Megacable, RCN has the right to elect six of the 15 members of the Megacable board of directors and two of the six members of the Megacable management committee. These positions were vacant following the Effective Date. In addition, certain actions proposed to be taken by Megacable may not be taken without the consent of RCN. RCN accounts for its investment in Megacable on the equity method. As discussed under “Item 9A – Controls and Procedures – Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures,” RCN identified a material weakness in its disclosure controls due to its failure to obtain timely financial and other information from Megacable. The agreements governing RCN’s investment in Megacable provide for the delivery of audited financial statements of Megacable within 60 days of the end of Megacable’s fiscal year, which ends on December 31. RCN has not yet obtained audited financial information for the year ended December 31, 2004 with respect to Megacable. RCN is actively working to appoint representatives to the Megacable board of directors and management committee, to obtain Megacable’s financial statements for 2004 as soon as possible and to ensure timely receipt of Megacable’s quarterly and annual financial statements in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Joint Ventures” and Note 14 to RCN’s Consolidated Financial Statements.

Separately, RCN has a 48.93% interest in Megacable Comunicaciones de México S.A. (“MCM”). MCM, which was spun off from Megacable in November 2001, has a license from the Mexican government to operate a broadband network in Mexico City, Monterrey and Guadalajara. MCM has activated its network in Mexico City and is providing local voice and high-speed data service in that city, principally to commercial customers.

Recent 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, 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 arising after the sale. Though no such claims have arisen, the NJBPU has refused to authorize release of the escrow. RCN is currently litigating the NJBPU’s refusal before the Superior Court of New Jersey, Appellate Division, where the matter is pending. In accordance with SFAS No. 144, the results of operations for this system are reported as discontinued operations.

Employees

As of December 31, 2004, RCN employed approximately 2,200 employees, including approximately 20 part-time employees. None of RCN’s current employees are covered by a collective bargaining agreement.

Franchises

As of December 31, 2004, RCN operated systems pursuant to approximately 101 franchise and open video system (“OVS”) agreements, permits and similar authorizations issued by local and state governmental authorities. Each franchise is awarded by a governmental authority and such governmental authority often must approve a transfer to another party. Most franchises are subject to termination proceedings in the event of a material breach. In addition, most franchises require RCN to pay the granting authority a franchise fee of up to 5.0% of revenues, as defined in the various agreements, which is the maximum amount that may be charged under the applicable federal law. RCN is entitled to and generally does pass this fee through to the customer.

Prior to the scheduled expiration of most franchises, 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 franchise renewal process in which granting authorities may not unreasonably withhold

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renewals. Historically, RCN has been able to renew RCN’s franchises generally at or before their stated expirations and without incurring significant costs, although any particular franchise may not be renewed on commercially favorable terms or otherwise. RCN’s failure to obtain renewals of its franchises, especially those in the major metropolitan areas where RCN has the most customers, could have a significantly adverse effect on its consolidated financial condition, results of operations or liquidity. In some cases, franchises have not been removed at expiration and RCN operates under temporary authority from the local franchising authority (“LFA”) while negotiating renewal terms with the LFA. Currently five of RCN’s cable franchises in the eastern Pennsylvania market are beyond their stated expiration dates but are continuing under their existing terms and conditions. An additional three franchises in eastern Pennsylvania will expire by the end of 2005, if not renewed prior to expiration. RCN expects to renew substantially all of these franchises.

Competition

RCN competes with a wide range of service providers in each market, including incumbent local telephone carriers (“ILECs”), incumbent cable providers, competitive local exchange carriers (“CLECs”), Direct Broadcast Satellite (“DBS” providers), interexchange carriers (“IXCs”) and other dial-up 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 incumbent local telephone carriers and cable companies which are larger than RCN and have greater financial resources. These incumbents have numerous advantages, which result from their historically monopolistic control of their respective markets, economies of scale and scope, control of limited conduit and pole space, ownership of content, and well-established customer and vendor relationships. In addition, telecommunication companies have been begun to form joint marketing alliances to jointly 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.

Advances in communications technology and changes in the regulatory and legislative environment are constantly occurring. RCN cannot predict the effect that ongoing or future developments might have on the video, data and voice industries, or RCN’s operations and financial condition.

Video

RCN’s video service competes in each of its markets with incumbent multiple system franchised cable operators (“MSOs”).

All video services providers face competition from a variety of 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 faces additional competition from private satellite master antenna television systems that serve condominiums, apartment and office complexes and private residential developments. Congress and the FCC have adopted policies providing a more favorable operating environment for new and existing technologies that compete, or may compete, with various video distribution systems.

DBS is a significant competitor to cable systems. 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.

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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’s ability to economically bundle cable television packages with high-speed Internet and phone services. RCN believes that this, combined with the introduction of more 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 back some of RCN’s former customers who migrated to satellite. However, recent joint marketing arrangements between DBS providers and telecommunications carriers allow similar bundling of services by DBS providers in certain areas. 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. They are not subject to local franchise requirements and are not obligated to collect and pay license fees to local authorities.

RCN’s video programming services will continue to face growing competition from DBS service providers and multi-channel digital program distributors utilizing unused digital bandwidth allocated to local broadcast stations. Additionally, while Multi-Channel Multi-Point Distribution Service license holders, who use wireless, low-power microwave frequencies to transmit video programming over-the-air to subscribers, are scaling back their deployments, those remaining in the market continue to focus on the technology mainly as a platform for delivery of high-speed Internet service.

In addition, certain local telephone companies 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.

Data

The Internet access market is highly competitive and increasingly price-sensitive. Competition in this market has intensified, specifically among cable operators and ILECs who continue to make significant progress penetrating this market.

Current competitors include local, regional and national ISPs, national and international telecommunications companies, cable operators, and ILECs.

ILECs compete with RCN by providing broadband Internet service over digital subscriber lines (“DSL”). 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. Most telephone companies which already have facilities, an existing customer base, and other operational functions in place (such as billing, service personnel, etc.) offer DSL service. 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 telephone companies into their networks will enable them to provide higher bandwidth Internet service than provided over traditional DSL lines.

With the recent consolidation among ISPs, competition is becoming concentrated to the larger national and regional providers of Internet access. While 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:

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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 Internet access. Other delivery systems, such as two-way satellite delivered Internet service and services that deliver high-speed Internet access over existing powerlines, 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 local voice services, as well as alternative service providers including CLECs. Cable operators are also entering the local exchange market in some locations. Other sources of competitive local and long distance voice services include: commercial mobile radio service providers, including cellular carriers, personal communication service carriers, and enhanced specialized mobile radio service providers. VoIP is a significant competitive service that an increasing number of companies in the industry are offering.

Landline local phone service continues to be the most widely used medium for voice services. However, wireless technology provides growing competition to landlines and long distance usage via landlines.

Long distance competition continues to come from traditional IXCs, RBOCs, wireless companies, new bundlers using unbundled network element platform (“UNE-P”) and VoIP.

RCN expects to continue to face significant competition in all markets from the ILECs, CLECs and MSOs for both local and long distance service. The ILECs include Verizon in the northeast corridor, and SBC in California and Chicago (both of which currently dominate their respective local telephone markets). The telephony business has been characterized by increasing consolidation. For example, in the traditional landline business, AT&T has entered into an agreement to be acquired by SBC and MCI has entered into an agreement to be acquired by Verizon. In the wireless business, which is increasingly challenging the traditional landline business, especially in the residential market, Cingular Wireless has recently completed the acquisition of AT&T Wireless. As a result, RCN expects that it will face increased pressure from these larger competitors as they achieve greater scale through these acquisitions.

RCN anticipates the entry of more cable companies into the voice service marketplace within 6 to 12 months, further adding to the competitive nature of the market. Similarly, the traditional ILECs are adding video solutions to their phone packages.

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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.

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:

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 Senior Secured Credit Agreement and the Convertible Notes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Liquidity and Capital Resources.”

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Effect of Consummation of the Plan

Pursuant to the Plan, on the Effective Date, all of the existing securities of 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 will issue a total of 36,020,850 shares of its common stock, par value $0.01 per share, to certain of its former general unsecured creditors and will issue warrants to certain former holders of Old RCN’s preferred stock and common stock. As of May 6, 2005, RCN had issued and distributed a total of 35,163,025 shares of common stock to those certain former general unsecured creditors. The balance of the shares of common stock to be issued have been reserved pending the resolution of certain disputed claims. Remaining distributions will be made as and when objections to disputed and unliquidated claims are resolved. Although the majority of disputed claims have been resolved, the resolution of a few of the disputed claims is expected to continue during 2005. See “Legal Proceedings.” RCN expects to complete the distribution of the warrants to certain former holders of Old RCN’s preferred stock and common stock in May 2005.

Resolution of Disputes with City of Chicago and Chicago Access Corporation

In connection with RCN’s Chapter 11 reorganization, RCN and RCN Cable TV of Chicago, Inc. (“RCN-Chicago”), a subsidiary of RCN, resolved their ongoing disputes with the City of Chicago and the Chicago Access Corporation. For a description of these disputes, see “Legal Proceedings.”

Regulation

Overview

Telecommunications and cable television operators are subject to extensive regulation by the FCC, state public utility commissions (“PUCs”), and LFAs. Such regulation affects the manner in which RCN must operate its business and can also have direct and indirect impacts on its costs of operation. 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 other important changes in government regulations which have been subject to various court challenges and may be subject to change in the future. These regulations often have a direct or indirect impact on the costs of operating networks, and therefore the profitability of services. In addition, RCN is subject to other regulations at the federal, state and local levels, all of which may change in the future. 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

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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, 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 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.

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 who 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.

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. OVS networks are 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 standard right-of-way management requirements.

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

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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.

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 franchise and OVS agreements will be renewed at expiration with comparable terms and performance conditions. Furthermore, RCN cannot assure you that it will be in compliance with those franchise 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.

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 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 and therefore below the level required to meet the network build-out obligations set forth in many of the original franchises. RCN decreased year over year capital expenditures in 2001, 2002, 2003, and 2004. As a result, RCN has not been able to meet all of the construction and system build-out requirements contained in some of the cable franchises it has entered into with certain LFAs and will not be able to meet them during the remaining terms of the franchises. In certain communities in the Boston area, southern Florida, the Pacific Northwest, the Chicago area, and eastern Pennsylvania, RCN agreed with LFAs either to terminate the franchise without penalty or prejudice to entering a new franchise in the future, or to eliminate any build-out obligations. In the Cities of Boston and San Francisco, RCN entered into OVS agreements with each city and terminated its cable franchises. RCN has completed amendments of its cable franchises in Arlington, Virginia and Montgomery County, Maryland to eliminate network build-out obligations and monetary penalties for failure to complete such build-outs, and has recently reached similar agreements to do the same in a number of communities in the Boston, Philadelphia, San Francisco and Los Angeles markets. In the other markets where network construction obligations still remain in the cable franchises, RCN has reached agreements or is negotiating with 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.

Although in most of these cases LFAs have worked with RCN to reach agreements as to such amendments or modifications, RCN cannot assure you that it will be able to reach a satisfactory resolution of these issues in all cases, or that some 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. Several jurisdictions have sought damages or other remedies for RCN’s current or expected future non-compliance with construction and system build-out requirements. The majority of these instances have been resolved, on acceptable terms. In one instance, litigation remains pending. On December 8, 2003, the Board of Selectmen (“Board”) of the Town of Wakefield, Massachusetts (“Wakefield”) issued a notice that RCN-BecoCom is in violation of its franchise obligation to complete construction of cable facilities throughout Wakefield. In response, RCN-BecoCom filed a Petition for Modification of the franchise pursuant to section 625 of the Communications Act. The Board subsequently denied that Petition on July 12, 2004, and RCN-BecoCom filed its appeal of that decision with the U.S. District Court for Massachusetts. Wakefield counterclaimed for breach of the cable license (franchise) agreement, specific performance, damages, and the right to proceed against RCN-BecoCom’s $100,000 performance bond and $10,000 letter of credit. The case currently is scheduled to go to trial in October 2006. If

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efforts to settle the dispute are unsuccessful, RCN-BecoCom intends to prosecute its claims and defend against Wakefield’s claims vigorously, and to pursue any appropriate appeals. However, RCN cannot assure you that RCN-BecoCom will be successful in obtaining the relief it seeks, or that Wakefield will not recover damages for breach and/or an order for specific performance against RCN-BecoCom, either of which could have a significantly adverse effect on RCN-BecoCom.

If one or more other LFAs with which RCN has agreements were to prevail in such efforts to enforce unmet build-out requirements, RCN could be subject to aggregate penalties in an amount that would have a material adverse effect on its operations. In addition, the failure to build-out under the franchises will severely limit the number of new marketable homes passed by the network and, accordingly, limit the growth in potential subscribers. As a result, RCN will have to focus on marketing, or often re-marketing, to prospective customers in the network footprint. RCN expects this could limit RCN’s ability to increase the subscriber numbers in the short-term at historical rates, and lead to a decrease in the rate of revenue growth in the future.

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, which will now be litigated in the Cook County Circuit Court as though the initial District Court decision, which was favorable to RCN, had never been rendered. 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 have an adverse effect on RCN-Chicago’s ability to compete with such providers. 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 proper classification of cable modem service for regulatory purposes, and the scope of state and local authority to regulate cable modem service, is a question of nationwide significance to LFAs and cable television franchisees, and is the subject of pending litigation, including in the Brand X case before the United States Supreme Court, and FCC rulemaking. 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.

In addition, a number of jurisdictions have imposed or attempted to impose so-called “open access” 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. While RCN believes that its business interests may in the future be served by such open access, whether and how to make such access available must be determined on the basis of technological and market conditions, and RCN has therefore opposed regulations or government intervention in regard to such matters. Such regulatory mandates could impose significant costs on RCN and restrict the manner in which it conducts its business.

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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 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 2006. 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.

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 has historically meant that no regulations apply to the provision of this service. However, the FCC’s decision was vacated by a federal appellate court. That court decision has been appealed to the United States Supreme Court in the Brand X case, which is expected to decide the case in the near future, but there is likely to be continuing uncertainty about how RCN’s cable modem

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Internet access service will ultimately be classified for regulatory purposes. Moreover, even if the FCC’s decision is upheld, the FCC will still consider 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 no longer regulated, although RCN remains subject to the FCC’s jurisdiction over complaints regarding these services. RCN must also comply with various FCC rules regarding disclosure of billing rates, content and format of invoices, payment of various regulatory fees and contributions, 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 introduced widespread changes in the regulation of the communications industry, including the local voice, long distance voice, data services, and video programming services. It was intended to eliminate many of the pre-existing legal barriers to competition in these businesses, promote competition and decrease regulation of these segments of the industry. The law delegates regulatory administrative authority to implement the 1996 Act to the FCC and PUCs. The 1996 Act also has allowed Verizon and SBC and other incumbent telephone companies to enter the long distance market within their local service regions, and to compete with RCN in offering such services.

The 1996 Act, 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:

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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. The rules also limited the total number of minutes on which RCN can collect this compensation each year, although this limitation was removed by the FCC during 2004. 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.

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

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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 in recent orders. 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.

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,

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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 PUCs 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 either negotiating the terms of such an agreement, or 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. 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. If the ILECs do not readily provide network functionality in the manner required, RCN has regulatory and legal alternatives, including arbitration before PUCs, to force provision of services in a manner required to support its service offerings. However, RCN cannot assure you that the outcome of any such 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.

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-

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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. These regulations became effective on February 8, 2001 and any increase in attachment rates for telecommunications companies resulting from the FCC’s new regulations is being phased-in in equal annual increments over a period of five years beginning on the effective date of the new FCC regulations. A number of pole-owning utilities challenged the new rules, raising constitutional and other issues. The FCC strongly asserted its jurisdiction to regulate pole attachment fees, including those charged to companies providing broadband services. 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 assure you 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.

Risk Factors

Risks Related to RCN’s Financing and Recently Completed Reorganization

RCN emerged from Chapter 11 reorganization and has a history of losses.

RCN sought protection under Chapter 11 of the U.S. Bankruptcy Code in May 2004. RCN realized a net loss of $3.7 million for the period December 21, 2004 through December 31, 2004 (Successor Company) and a gain of $1 billion for the period January 1, 2004 through December 20, 2004 (Predecessor Company) and losses of $499 million and $1.57 billion during the fiscal years ended December 31, 2003 and 2002, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

RCN’s equity ownership and board of directors was replaced in connection with its reorganization. While RCN’s current senior management has concentrated on refining RCN’s business strategy, RCN cannot assure you that it will attain profitability or achieve improvement in its operating performance.

RCN continues to be highly leveraged and to have substantial indebtedness relative to its cash flow.

The Chapter 11 reorganization reduced significantly the principal amount of outstanding indebtedness of RCN and its subsidiaries by converting approximately $1.2 billion in aggregate principal of senior notes and accrued interest amount thereon into new common stock of RCN. In addition, indebtedness under RCN’s bank credit agreement was repaid in full in cash and indebtedness under RCN’s 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 million.

Despite these reductions, RCN remains highly leveraged. This amount of leverage may have important consequences for RCN, including:

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RCN cannot assure you that it will be able to reduce its level of indebtedness or generate sufficient cash flow to service its debt and meet its capital expenditure requirements. To the extent it is unable to do so, it would be required to seek additional financing, reduce its level of capital expenditures or take other steps, such as disposing of assets. RCN cannot assure you that any such financing would be available on acceptable terms or that asset sales could be accomplished in a manner that was acceptable to RCN.

In connection with operating its business, including the build-out of the network, RCN has incurred operating and net losses, and expects to continue to experience losses for the foreseeable future. RCN experienced negative cash flow in the past and may not be able to achieve or sustain operating profitability in the future. Whether RCN continues to have negative cash flow in the future will be affected by a variety of factors including:

These factors may hinder RCN’s business and prospects and have a significant adverse effect on the timing of its cash flows.

The covenants in RCN’s debt instruments restrict its financial and operational flexibility.

The credit agreements for RCN’s secured debt facilities and the indenture for the Convertible Notes impose operating and financial restrictions that affect RCN’s ability to, among other things:

In addition, RCN’s secured debt facilities require RCN to achieve specific operational goals such as minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”), interest coverage, adjusted leverage and unrestricted cash. These requirements may affect RCN’s ability to finance its future operations or to engage in other business activities that may be in RCN’s interest. These restrictions may also limit RCN’s flexibility in planning for or reacting to changes in market conditions and cause RCN to be more vulnerable in the event of a downturn in its business. If RCN violates any of these restrictions, RCN could be in default under these agreements and be required to repay its debt immediately rather than at scheduled maturity. The security for RCN’s Convertible Notes and the secured debt facilities consists of liens on substantially all of RCN’s assets. If RCN defaults under these financing agreements, the creditors could seek to accelerate RCN’s repayment obligations, and could seek to foreclose on RCN’s assets. Any such actions would have a material adverse effect on RCN and its business. In addition, RCN’s secured debt facilities contain cross-default provisions which could result in the acceleration of RCN’s repayment obligations under these debt facilities in the event that RCN were to default on certain other indebtedness or were to become the subject of bankruptcy or insolvency proceedings.

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RCN’s adoption of “fresh start” accounting makes comparisons of its financial position and results of operations with those of prior periods more difficult.

RCN implemented “fresh start” accounting and reporting 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”) upon its emergence from Chapter 11 on the Effective Date. Fresh start accounting required RCN to re-value 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. RCN engaged an independent expert to compute the fair market value of the RCN assets and to assist in the allocation of its reorganization value and in determining the fair market value of its property and equipment and intangible assets. The fair values of the assets as determined for “fresh start” reporting were based on estimates of anticipated future cash flow as generated from each market and applying business valuation techniques. Liabilities existing on the Effective Date are stated at the present values of amounts to be paid discounted at appropriate rates. The determination of fair values of assets and liabilities is subject to significant estimation and assumptions. As a result, the consolidated financial statements for periods after RCN’s emergence from bankruptcy are not comparable to its consolidated financial statements for the periods prior to its emergence from bankruptcy, which were prepared on an historical cost basis. The application of “fresh start” accounting makes it more difficult to compare RCN’s post-emergence operations and results to those in pre-emergence periods and could therefore adversely affect trading in and the liquidity of RCN’s common stock.

Future sales of Reorganized RCN’s common stock could adversely affect its price and/or RCN’s ability to raise capital.

Pursuant to the Plan, on December 21, 2004, all of the existing securities of RCN, including common stock, preferred stock, stock options, and warrants, were extinguished and Reorganized RCN issued shares of its new common stock to certain former creditors and agreed to issue warrants to purchase shares of its new common stock to certain former holders of RCN’s preferred stock and common stock. The total number of shares of common stock of Reorganized RCN to be issued under the Plan is 36,020,850 shares, of which 35,163,025 shares of common stock were issued and outstanding as of May 6, 2005. The remaining shares of RCN’s common stock to be issued under the Plan have been reserved pending the settlement of certain disputed claims.

In addition to the 36,020,850 shares discussed above, Reorganized RCN has reserved 4,968,204 shares of common stock for issuance upon the conversion of the Convertible Notes and 735,119 shares of common stock for issuance upon the exercise of warrants to be issued to former holders of RCN’s preferred stock and common stock. In addition, up to 10% of RCN’s common stock (on a fully diluted basis) will be available under a management incentive plan.

A significant portion of Reorganized RCN’s outstanding common stock is held by former creditors of RCN who received such shares pursuant to RCN’s reorganization. These stockholders have entered into registration rights agreements with Reorganized RCN which requires Reorganized RCN to register shares for resale under the Securities Act. The shares of Reorganized RCN common stock available for sale on the open market could increase materially as a result of a decision by any of these significant stockholders to reduce or eliminate its equity stake in Reorganized RCN. Such an increase could also occur if a significant portion of the Convertible Notes are converted into common shares. Due to the limited period of time during which Reorganized RCN’s common stock has traded on NASDAQ (since March 21, 2005) and its low trading volume since being listed on NASDAQ, any such material increase in the shares available for sale on the open market could significantly depress the market price of Reorganized RCN’s common stock or cause significant volatility in such market price.

A major portion of RCN’s bank debt consists of variable-rate obligations, which subjects RCN to interest rate fluctuations.

At April 29, 2005, approximately $330 million of indebtedness under RCN’s credit facilities were variable-rate obligations, which expose RCN to interest rate risks. If interest rates increase, RCN’s debt service obligations on its variable-rate obligations would increase even if the amount borrowed remained the same, resulting in a decrease in RCN’s net income.

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Risks Related to RCN’s Business and Industry

RCN’s markets are highly competitive.

In each of the markets where RCN offers services, RCN faces significant competition from larger incumbent cable companies and DBS companies, high-speed data service providers and telephone carriers. These incumbents have numerous advantages, which result from their historically monopolistic control of their respective markets. These competitive advantages include:

In addition, a continuing trend toward business combinations and alliances in the telecommunications industry may also create significant new competitors. RCN cannot predict the extent to which competition from such future competitors will impact 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 RCN’s ability to access new technology or other resources.

RCN may be unable to successfully anticipate and respond to various competitive factors affecting the industry, including regulatory changes that may affect competitors and RCN differently, 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 interpretation of existing regulations, could adversely affect RCN’s 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 RCN must operate its business and also has a direct or indirect impact on its costs of operation.

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, 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, and the related impact of any final regulations adopted thereunder on RCN’s businesses, cannot be determined at this time. Regulations, or interpretations thereof, that enhance the ability of RCN’s competitors would adversely affect RCN’s competitive position. RCN’s 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 RCN or its competitors. See “Regulation” for more information.

Changes in regulations or additional regulations may make it more difficult to obtain or retain necessary governmental authorizations for RCN’s business.

The federal, state and local regulations that govern RCN’s ability to provide telephone and video programming transmission services often have a direct impact on the costs of operating networks, and therefore the profitability of services. Many of these regulations have been challenged and may be subject to change in the future and additional regulations may be enacted. The costs of complying with these regulations, delays or failures to receive required regulatory authorizations, changes in existing regulations or the enactment of new, adverse

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regulatory requirements may have a material adverse effect upon RCN’s ability to obtain or retain authorizations on the business. RCN cannot assure you that it will be able to obtain all of the authorizations needed to construct broadband network facilities or to retain the authorizations already acquired. In addition, RCN cannot predict whether any additional regulations will be adopted that will result in reductions in revenues received.

RCN may encounter difficulties expanding its existing markets and delays in constructing its network.

To expand its existing markets, RCN 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 RCN’s schedule in the past and could do so again in the future.

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

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

The cost of acquiring programming is a significant portion of the operating costs for RCN’s cable television operations. These costs have increased each year and RCN expects them to continue to increase, especially the costs associated with sports programming. RCN has programming contracts with multi-year durations that include future cost escalations. Historically, RCN has absorbed increased programming costs in large part through increased prices to its customers. However, RCN cannot assure you that competitive and other marketplace factors will permit it to continue to do so. In order to maintain, or to mitigate reductions in its margins despite increasing programming costs, RCN may pursue a variety of strategies, including moving some programming to premium tiers or migrating certain programming from RCN’s analog level of service to RCN’s digital tiers. As RCN migrates programming to its digital tier packages, certain programming that was previously available to all of its customers via an analog signal may be part of an elective digital tier package. As a result, the customer base upon which RCN pays programming fees will proportionately decrease, and the overall expense for providing that service would likewise decrease. However, reductions in the size of certain programming customer bases may result in the loss of specific volume discount benefits. Despite RCN’s efforts to manage programming expenses, RCN cannot assure you that the rising cost of programming will not adversely affect RCN’s cash flow and operating margins.

RCN is not large enough to take advantage of more favorable programming discounts available to some of its 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 that are based on the number of subscribers served by the provider and certain of its affiliates. As a result, larger cable and DBS systems generally pay lower per subscriber programming costs. Although RCN has attempted to obtain certain volume discounts through its membership in the NCTC, RCN believes that its per subscriber programming costs are higher than large MSOs and DBS providers with which it competes in certain of its markets, which may put RCN at a competitive disadvantage in terms of maintaining its operating results while remaining competitive with prices offered by these providers.

If RCN is unable to renegotiate programming agreements, it may be forced to remove programming from its system.

As of December 31, 2004, approximately 40% of RCN’s current programming contracts (as measured by programming costs), either had expired or are scheduled to expire by the end of 2005. RCN plans to seek to renegotiate the terms of these agreements with certain programmers as these agreements come due for renewal.

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RCN cannot assure you that these agreements will be renewed on favorable or comparable terms. To the extent that RCN is unable to reach agreement with certain programmers on terms that it believes are reasonable, RCN may be forced to remove such programming channels from its line-up, which could result in a loss of customers. In addition, RCN’s inability to fully pass programming cost increases on to its customers would have an adverse impact on its cash flow and operating margins. In addition RCN may not be able to obtain or retain content on acceptable terms in the future. The loss of programming could have a material impact on RCN’s ability to retain its existing customer base and revenue.

RCN operates OVS systems in certain markets it services under FCC channel capacity rules that are not applicable to franchised cable systems.

The FCC’s rules require OVS operators to make channel capacity on their facilities available to unaffiliated video programming providers (“VPP”) on a non-discriminatory basis, with certain exceptions. One such exception is that a competing in-region cable operator is not entitled to become a VPP on an OVS except in certain limited circumstances. Notwithstanding this limitation, incumbent cable operators in the Boston, New York and Washington, D.C. area markets have in the past sought proprietary OVS system information to analyze the possibility of becoming a VPP on RCN’s network. All such requests were denied based on RCN’s belief that the cable companies are ineligible under the FCC’s rules. Two incumbents subsequently filed complaints with the FCC against RCN seeking the imposition of fines or canceling of RCN’s OVS authority, one of which was subsequently withdrawn when the incumbent transferred its local operations to a new operator. The other complaint, brought by Time Warner with respect to RCN’s system in New York and its interim OVS agreement in Boston, is still pending at the FCC.

OVS operators must complete an open enrollment period that permits VPPs to seek capacity on the systems. In 2002, RCN obtained new OVS certifications from the FCC for Boston and San Francisco, and has since that time entered into OVS agreements with those cities and terminated its cable franchises. RCN has completed a new open enrollment period for Boston, and plans to initiate one in the near future for San Francisco. RCN believes that it is operating in conformity with all applicable provisions of the law and will continue to defend OVS rollouts against what it believes are anti-competitive requests for data or carriage by competing in-region cable operators. RCN believes that Time Warner’s request for data regarding the 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, RCN cannot assure you that the FCC will resolve the pending Time Warner request for OVS data in favor of RCN, 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 RCN to share such system data with local competitors, such an action could have a significantly adverse effect on RCN and its business plan.

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 RCN’s telephone service.

RCN relies on other companies to connect its local telephone customers with customers of other local telephone providers. RCN presently has the right to interconnect with the networks of Verizon, SBC and other ILECs. If any of these interconnection agreements is not renewed, RCN will have to negotiate another interconnection agreement with the respective carrier. 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 RCN’s 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 RCN’s interconnection agreements with Verizon and SBC. The contractual arrangements for interconnection and access to UNEs with incumbent carriers generally contain provisions for incorporating

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changes in governing law. Thus, future FCC, PUC and/or court decisions may negatively impact the rates, terms and conditions of the interconnection services RCN has obtained and may seek to obtain under these agreements, which could adversely affect RCN’s business, financial condition or results of operations. RCN’s 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 RCN or to its competitors. See “Regulation” for more information.

The rates RCN pays for pole attachments and rights-of-way may increase significantly.

A portion of RCN’s network is attached to local utility companies’ poles and in other rights-of-way of third parties. The rates RCN must pay utility companies for space on their utility poles or other public and private rights-of-way is the subject of frequent disputes. If the rates RCN pays for pole attachments or other public and private rights-of-way increase significantly or unexpectedly, it would cause RCN’s network to be more expensive to operate. It could also place RCN 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 “Regulation—Regulation of Video Services—Pole and Conduit Attachments” for more information.

RCN’s current franchises are generally non-exclusive and the franchisors are not required to renew the franchises.

RCN’s cable television systems are operated primarily under non-exclusive franchise agreements with local government franchising authorities, in some cases with the approval of state cable television authorities. Consequently, RCN’s business is dependent on its ability to obtain and renew its franchises. Although RCN has never lost a franchise as a result of a failure to obtain a renewal, its franchises are subject to non-renewal or termination under some circumstances.

In some cases, franchises have not been renewed at expiration, and RCN operates under temporary authority from the LFA while negotiating renewal terms with the franchise authorities. Currently five of RCN’s cable franchises in the eastern Pennsylvania market are beyond their stated expiration dates but are continuing under their existing terms and conditions. An additional three franchises in eastern Pennsylvania will expire by the end of 2005, if not renewed prior to expiration. RCN expects to renew substantially all of these franchises.

RCN relies on senior management and highly skilled employees.

RCN’s businesses depend on the efforts, abilities and expertise of executive officers, other senior management and technically skilled employees. RCN cannot assure you that it will be able to retain the services of any of the key executives. In addition, future operating results will substantially depend upon the ability to attract and retain highly qualified management, financial, technical and administrative personnel. Competition for services of these types of employees is vigorous. RCN cannot assure you that it will be able to attract and retain these types of employees. If RCN is unable to continue to attract and retain members of the senior management team as well as additional skilled employees, its competitive position could be materially adversely affected.

There are risks of network failure and disruption.

RCN maintains independent networks for each market. This architecture limits any failure or disruption to the market in which the failure occurs and generally would not affect all of RCN’s markets. Many of the 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 RCN considers the likelihood low, prolonged or repeated service interruptions could adversely affect RCN’s operating results and ability to attract and retain customers and adversely affect RCN’s operating results. For example, many of the agreements with commercial customers, many of the franchise agreements to provide cable television services, and many of the certificates to provide local telephone service contain provisions requiring RCN to rebate or credit customers for service interruptions. Further, RCN would expect repeated service interruptions to result in customers disconnecting from RCN’s services.

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RCN’s migration to VoIP could result in a decrease in the quality of RCN’s voice service.

During 2004, RCN launched its VoIP service in its Chicago market and RCN intends to continue preparing additional markets for VoIP launches. Although VoIP may provide subscribers and service providers the potential for significant cost savings through flat rate calling plans, VoIP service is subject to quality issues depending on network configuration and management, transmission protocols and choice of technology. VoIP users often experience a higher rate of dropped calls (as well as delayed and echoed voice transmissions) than traditional switched voice service. As RCN transitions subscribers into its VoIP service, RCN may not be able to provide these subscribers a quality of service comparable to RCN’s traditional switched voice service. This could cause RCN to lose RGUs and, ultimately, customers.

Other Risks

RCN has identified material weaknesses in its internal controls and disclosure controls.

In conjunction with the testing of internal controls, RCN identified material weaknesses involving (1) the lease accounting process and (2) the general ledger account reconciliation process. RCN accounted for leases on a cash basis when generally accepted accounting principles, in accordance with FAS 13, call for certain future, increases in base rents and free rent periods to be straightlined and amortized in the calculation of current rent costs. Because the discovery did not occur as part of RCN’s routine quarterly closing process, RCN’s management has concluded that this is a material weakness in the closing process. RCN’s management also identified that general ledger account balances are not always timely and accurately reconciled to supporting documentation. In RCN management’s opinion, these weaknesses relate to inadequate processes by accounting department staff and supervisors during the quarterly or annual closing process, combined with the loss of key accounting management personnel late in 2004 as a result of RCN’s Chapter 11 bankruptcy proceedings. RCN’s management has also concluded that RCN’s disclosure controls and procedures were not effective as of December 31, 2004 because of RCN’s inability to obtain timely information about its approximately 49% ownership interest in Megacable, as well as the material weakness in internal control noted above.

RCN’s management is in the process of developing a plan to address the material weaknesses described above. At a minimum, the remediation plans will include hiring additional accounting resources and having the internal audit group more frequently audit general ledger account reconciliations and recommend specific improvements. With respect to the disclosure controls relating to Megacable, RCN is contractually entitled to receive audited annual and unaudited quarterly financial statements of Megacable within specified periods of time. RCN is actively working to appoint representatives to the Megacable board of directors and management committee and obtain Megacable’s financial statements for 2004 as soon as possible and to ensure timely receipt of Megacable’s quarterly and annual financial statements in the future.

RCN cannot be certain that the measures described above will ensure that RCN implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm RCN’s operating results or cause RCN to fail to meet its reporting obligations. Inadequate internal controls could also cause investors to lose confidence in RCN’s reported financial information, which could have a negative effect on the trading price of RCN’s common stock.

RCN has not included Starpower in the scope of its assessment of internal control over financial reporting as of December 31, 2004 due to the inability of RCN’s management to conduct an assessment of Starpower’s internal control over financial reporting between December 21, 2004 (the date Starpower became a wholly-owned subsidiary of RCN) and December 31, 2004.

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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.

As of April 29, 2005 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.

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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 using point-to-point 18 GHz microwave technology. RCN uses this technology in New York City, Jersey City and Chicago as an alternate means to deliver video programming to buildings that are not connected to RCN’s broadband network. RCN is in the process of selling, certain microwave systems thereby reducing RCN’s video subscriber count.

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 offers download speeds up to a maximum of 10.0 Mbps to the individual cable modem user. Future developments will further increase the speed of the cable modem service. RCN also provides Internet access via dial-up modems. This dial-up product is available in all service areas as well as all metropolitan markets across the United States.

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 a state-of-the-art network including 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,

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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. The residential service node encompasses on average approximately 150 homes. 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 to provide backup power in the event of a commercial power failure.

Chicago VoIP

In its Chicago market, RCN uses VoIP technology. 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.

Real Estate

As of December 31, 2004, RCN leased approximately 113 facilities including 92 technical and 21 non-technical facilities, which encompass 756,080 and 539,579 square feet, respectively, to support its operations under various non-cancelable leases with terms ranging from 1 to 25 years. RCN is actively seeking to sublease or negotiate a termination of the leases in part or all of 17 facilities, including 11 technical and six non-technical facilities, which contain 134,074 and 221,680 square feet, respectively. RCN also currently owns seven technical facilities, which encompass 176,648 square feet, and is looking to sell one of these facilities encompassing 51,640 square feet. During 2004, due to reduced growth plans, RCN terminated 24 leases encompassing 865,780 square feet.

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. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” for further discussion. 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. The following is a description of those claims and of material legal proceedings in respect of claims alleged to have arisen after the commencement of the RCN Debtors’ Chapter 11 cases that were pending during or after the fourth quarter of 2004.

Prepetition Claims

Pursuant to the Plan, certain claims that arose prior to the commencement of the RCN Debtors’ Chapter 11 cases are entitled to share in the distributions under the Plan to the extent allowed. As of the date hereof, partial distributions have been made to certain holders of allowed prepetition claims. Further distributions will be made as and when objections to disputed and unliquidated claims are resolved. Although the majority of disputed claims have been resolved, the resolution of a few of the disputed claims is expected to continue through 2005.

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Claims by IBM

On or about August 11, 2004 and September 24, 2004, International Business Machines Corporation (“IBM”) filed general unsecured proofs of claim in the Chapter 11 cases (the “IBM Proofs of Claim”). The IBM Proofs of Claim asserted damages of $37.6 million against RCN and damages in an unliquidated amount against the other RCN Debtors. In the IBM Proofs of Claim, IBM alleged that certain of the RCN Debtors had infringed and continued to infringe on one or more of IBM’s patents. On October 7 and 29, 2004, respectively, the RCN Debtors filed objections to the IBM Proofs of Claim and a motion to estimate the IBM Prepetition Claims. On November 23, 2004, the Bankruptcy Court approved a Stipulation and Order Resolving Claims of IBM in which the RCN Debtors received a complete release of all claims against each of them. IBM and RCN also entered into a five-year confidential licensing agreement whose terms were filed with the Bankruptcy Court under seal pursuant the Bankruptcy Court’s order dated November 23, 2004, which resolved IBM’s claims of alleged infringement against the remaining RCN companies.

Claims by Kemper Insurance

On or about August 9, 2004, Kemper Insurance (including its affiliated companies, American Motorists Insurance Company, Lumbermens Mutual Casual 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 seeks 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. RCN believes that claims alleged by the Kemper Proofs of Claim are without merit. To the extent that any money is in fact owed to Kemper, the RCN Debtors further believe that such amounts are owed solely by RCN and that none of RCN’s subsidiaries are liable for such amounts. On September 28, 2004, the RCN Debtors filed an objection to the Kemper Proofs of Claim. Since the filing of the objection, RCN and Kemper have agreed to consensually resolve the Kemper claims and expect to have the agreement memorialized shortly. Management does not believe this settlement will have a material impact on the financial position of RCN.

Claims by Merrill Lynch

On or about August 11, 2004 and September 28, 2004, Merrill Lynch, Pierce, Fenner & Smith (“Merrill”) filed general unsecured proofs of claims against RCN and the other RCN Debtors asserting that Merrill is entitled to a $9.8 million fee in connection with work it performed leading up to RCN’s restructuring (the “Merrill Proofs of Claim”). RCN and the RCN Debtors commenced an adversary proceeding in the Bankruptcy Court to contest the Merrill Proofs of Claim and assert damages to the RCN Debtors in an amount of $10 million, under theories of breach of implied covenant of good faith and fair dealing, unjust enrichment/restitution, preferential transfer, fraudulent conveyance, professional malpractice, breach of fiduciary duty, breach of contract and gross negligence. The adversary proceeding is presently in the early stages of discovery. While the RCN Debtors believe that this claim is without merit, the RCN Debtors cannot assure you of success in defending against the Merrill Proofs of Claim or in the prosecution of the RCN Debtors’ theory of damages in the adversarial proceedings. RCN, nevertheless, does not anticipate that an unfavorable outcome will exceed materially the amount in which the Merrill Proofs of Claim are asserted, plus any interest or costs assessed thereon. Because the Merrill Proofs of Claim are asserted against RCN and the other RCN Debtors, Merrill’s recovery under the Plan could be paid out in either stock or cash, depending whether Merrill’s remedy is against RCN or any or all of the remaining RCN Debtors, respectively.

Claims by the City of Chicago and Chicago Access Corporation

Prior to 2004, RCN-Chicago entered four separate non-exclusive franchise agreements with the City of Chicago under which RCN-Chicago was authorized and required to construct, install, maintain and operate a cable television system in various geographic regions of the City. Under the franchise agreements, RCN-Chicago was obligated to submit construction schedules and make certain fixed capital cost payments to the Chicago Access Corporation, an entity authorized by the Chicago Cable Ordinance to operate a public access cable

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channel in the City of Chicago. RCN posted surety bonds and letters of credit to secure its obligations under the agreements. Prior to filing for Chapter 11 protection, RCN-Chicago determined that completing the required construction would cost in excess of $350 million.

RCN-Chicago filed a petition with the Chicago Cable Commission seeking to modify the various franchise agreements to provide relief from the construction requirements, reduce surety obligations, and eliminate certain of the fixed capital cost payments to the Chicago Access Corporation. Notwithstanding RCN-Chicago’s petition for modification, the City imposed multi-million dollar fines on RCN-Chicago for purported breaches of the various franchise agreements. In February 2004, the City drew down on letters of credit and made demands against the surety bonds. In April 2004, the City denied RCN-Chicago’s petition for modification of the franchise agreements and continued to impose multi-million dollar fines and make demands against RCN’s surety. In August 2004, RCN-Chicago filed for Chapter 11 protection and simultaneously filed an adversary action in the Bankruptcy Court for injunctive relief to prevent the City from assessing and collecting any amounts for alleged breaches under any of the franchise agreements and for approval of the petition for franchise modifications, as well as seeking damages for the City’s alleged violations under federal law. The Chicago Access Corporation filed a proof of claim with the Bankruptcy Court in the amount of $1.275 million for RCN-Chicago’s alleged failure to make fixed capital payments that had allegedly become due. In November and December 2004, respectively, RCN and the City of Chicago and Chicago Access Corporation agreed to settle all disputes between them. In December 2004, the Bankruptcy Court approved these settlement agreements.

Claims by former stockholders

Edward T. Joyce v. RCN Corporation, et al.: Edward T. Joyce, as representative of former stockholders and warrant holders (including LaSalle options holders) of 21^st Century Telecom Group, Inc. (“21^st Century”) sued RCN in the Delaware Court of Chancery. Mr. Joyce is a former member of the board of directors of 21^st Century. RCN acquired the stock of 21^st Century pursuant to an Agreement and Plan of Merger that closed in April 2000 (the “Merger Agreement”). Pursuant to the Merger Agreement, RCN held back 10% of its common stock consideration (the “10% Holdback”) for a period of one year to allow for any indemnity claims. The Merger Agreement stated that the 10% Holdback would be based upon RCN’s stock price at the time the Merger Agreement was executed. The suit and proof of claim seeks reformation of the Merger Agreement to reflect what the plaintiffs allege was actually negotiated and agreed to: that the 10% Holdback would be based upon Old RCN’s stock price as of the end of the one year holdback period. Because RCN’s stock fell in value during this period, if the plaintiffs had prevailed, RCN would have had to distribute approximately 5 million additional shares of Old RCN’s common stock in consideration of the Merger Agreement. Mr. Joyce also filed a related proof of claim in RCN’s Chapter 11 case and a proof of claim based on his lawsuit (the “Joyce Proofs of Claim”) . RCN and Mr. Joyce have reached a settlement regarding the Joyce Proofs of Claim which the Bankruptcy Court has approved. The court-approved settlement resolved all alleged liabilities of RCN to Joyce, including those asserted in the Delaware Court of Chancery.

Deborah Craig, et al. v. John Filipowicz, et al.: On September 22, 2004, former employee Deborah K. Craig (“Craig”), on behalf of the RCN Savings And Stock Ownership Plan (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 the Employee Retirement Income Security Act of 1974 (as amended, “ERISA”) to recover for alleged losses to the Savings Plan of approximately $26 million. On October 5, 2004, Craig filed a related Class Action Complaint against certain fiduciaries of the Savings Plan within the meaning of ERISA, 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 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

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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 Injunction Relief Order, Craig waived any right to further appeal the denial of the Late Claim Order.

Rejection Damage Claims

Pursuant to the Plan, all claims arising out of the rejection of an executory contract and unexpired leases (“Rejection Damage Claims”) were required to be served upon the RCN Debtors and their counsel by January 7, 2005. The RCN Debtors agreed to voluntarily extend the bar date for filing of Rejection Damage Claims for certain programmers whom RCN contracted through the NCTC through January 28, 2005 due to the alleged failure of such programmers to receive timely notice that their contracts had been rejected. Any Rejection Damage Claims not filed against the RCN Debtors within the time period allowed under the Plan are forever barred under the Plan from assertion against any RCN Debtor.

Claims by Programmers

On or about January 5, 2005, the Game Show Network, LLC, filed a proof of claim in the amount of approximately $1 million based on notice of rejection of its agreement with Old RCN (the “GSN Proof of Claim”) for carriage of the Game Show Network (“GSN”). RCN expects to amicably resolve the GSN Proof of Claim because RCN has continued to carry and pay license fees for GSN programming despite the purported rejection and plans to opt into the current terms for GSN under the NCTC’s agreement. On or about January 27, 2005, three separate networks affiliated with Rainbow Media Holdings LCC (“RMH”), filed claims totaling approximately $4.7 million in the aggregate based on the rejection of agreements with RCN to carry the Independent Film Channel, Women’s Entertainment Channel and FUSE Networks (the “RMH Proofs of Claim”). RCN has been in discussions with RMH to resolve the RMH Proofs of Claim and presently intends to object to the amounts claimed in each. At this time, RCN cannot assure you that it will be able to amicably resolve the GSN Proof of Claim and RMH Proofs of Claim or will be successful in any objection RCN might file to these proofs of claim. RCN, nevertheless, does not anticipate that an unfavorable outcome of either the GSN Proof of Claim or any or all of the RMH Proofs of Claim will exceed materially the amount in which each is asserted, plus any interest or costs assessed thereon, paid in accordance with the Plan.

Administrative Claims

Pursuant to the Plan, certain claims that arose after the commencement of RCN’s Chapter 11 cases (“Administrative Claims”) are entitled to payment in full to the extent allowed. On January 24, 2005, the deadline for filing Administrative Claim requests expired. As is typical in Chapter 11 cases, Administrative Claims were asserted against RCN in excess of amounts owed. In addition, certain of the Administrative Claim requests are not obligations of the RCN Debtors or were previously satisfied. On March 25, 2005, RCN filed an objection to the Administrative Claim requests. A hearing on the objection is scheduled for May 24, 2005. RCN does not expect the resolution of these claims to have a material adverse effect on its results of operations or financial condition.

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Other Legal Proceedings

City of Chicago v. AT&T Broadband, et al.: 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 franchise 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, which will now be litigated in the Cook County Circuit Court as though the initial District Court decision, which was favorable to RCN, had never been rendered. 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 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 have an adverse effect on RCN-Chicago’s ability to compete with such providers. 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 disproportionate effect on Reorganized RCN’s ability to compete with other cable operators in the Chicago market. 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.

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.

Other than matters voted on by holders of RCN’s debt securities in the ordinary course of RCN’s then pending bankruptcy proceedings, no matters were submitted to a vote of the security holders of RCN during the fourth quarter of RCN’s 2004 fiscal year.

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PART II

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.

The table below sets forth, on a per share basis for the periods indicated, the following information:

The historical prices for the Old RCN common stock will not be indicative of the anticipated or prospective value or future trading price of or trading market for Reorganized RCN’s common stock.

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 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, 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 December 31, 2004. The OTC bid prices represent prices between dealers and do not include retail markup, markdown or commission.

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On May 5, 2005, the closing bid price of RCN’s common stock quoted on the NASDAQ was $17.76 per share. The quotation reflects inter-dealer prices and does not include retail mark-up, markdown or commission.

There were approximately 3,636 holders of Reorganized RCN’s common stock on March 7, 2005.

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

Pursuant to the Plan, 36,020,850 shares of common stock of Reorganized RCN were issued and outstanding as of the Effective Date. The distribution of these shares is subject to verification of claims filed and allowed under the Plan. In addition, as contemplated by the Plan, RCN (1) will issue to the holders of Old RCN’s common stock and preferred stock warrants to purchase up to 735,119 shares of common stock of Reorganized RCN for an initial exercise price of $34.16 per share (the “Warrants”) and (2) issued the Convertible Notes which, pursuant to their terms, are convertible into approximately five million shares of the common stock of Reorganized RCN (subject to adjustment for anti-dilution events). The Plan also contemplates 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.

Securities Law Matters Relating to Reorganized RCN’s Equity 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.”

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.

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Reorganized RCN issued the Convertible Notes in a private placement transaction pursuant to Section 4(2) of the Securities Act and granted the purchasers of the Convertible Notes certain registration rights (see description under “Registration Rights” below).

Registration Rights

As contemplated by the Plan, Reorganized RCN granted the following registration rights in connection with the above issuances of securities:

Reorganized RCN also intends to register under the Securities Act the issuance of shares of its common stock upon future exercise of the Warrants. Reorganized RCN must file a “shelf” registration statement with the SEC to permit resales of these securities pursuant to Rule 415 promulgated under the Securities Act and is obligated, subject to certain limitations, to keep such registration effective. In the event Reorganized RCN fails to meet certain deadlines with respect to filing the registration statement with the SEC and causing it to be declared effective, a penalty will be payable by Reorganized RCN on the Convertible Notes for each quarter (up to eight quarters) during any period that any of the foregoing events have not occurred by the applicable deadlines. These registration rights agreements have been filed as exhibits to RCN’s Form 8-K filed on December 27, 2004.

The table below presents selected consolidated financial data of RCN as of and for the five years ended December 31, 2004.

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, 2004 and for the year then ended, have been derived from RCN’s Consolidated Financial Statements, which have been audited by Friedman LLP, an independent registered public accounting firm.

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The consolidated balance sheet data and the consolidated statement of operations data presented below as of December 31, 2003, 2002, 2001 and 2000, and for each of the years in the four-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. The report issued by PricewaterhouseCoopers LLP with respect to its audit of RCN’s financial statements for the year ended December 31, 2003 included an explanatory paragraph that describes an uncertainty about RCN’s ability to continue as a going concern.

All of the information presented below should be read in conjunction with the information in the sections 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.

RCN CORPORATION

SELECTED FINANCIAL DATA(1)

(Thousands of Dollars Except Per Share Amounts)

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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

RCN is one of the largest facilities-based, competitive providers of bundled video, high-speed data and voice services in the United States. As of December 31, 2004, RCN served approximately 425,000 residential customers. RCN’s services are delivered primarily over its own fiber-optic local network to consumers in densely populated markets in the United States. RCN currently serves customers in the Boston, New York, eastern Pennsylvania, Washington, D.C., Chicago, San Francisco and Los Angeles metropolitan markets.

Economic Factors

Revenue is dependent on spending patterns of RCN’s customers, who sometimes purchase in reaction to changes in the economy. Bundled communication services are increasingly perceived as necessities by consumers. Management believes based on its own internal historical data that consumers generally will make a decision to discontinue a provider of a single service more rapidly than a provider of multiple services.

RCN may experience seasonality in its customer acquisition activity; however, due to the size of the overall customer base, RCN does not experience significant seasonality that could impact profitability.

Key Performance Indicators

Set forth below are certain key financial and statistical measures that management of RCN considers important in managing and assessing RCN’s 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 RCN’s 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.”

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RCN CORPORATION

Key Financial Indicators*

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Key customer performance measures are average revenue per customer (“ARPC”) and average services per customer (“ASPC”). ARPC inherently reflects the quantity of the bundled services sold and is a key indicator of both shifts in product mix as well as the value of discounts given to attract new customers and retain existing customers. This metric and ASPC are closely tracked each month to assist in identifying targeted customers and product sets. ASPC and RGUs also serve to assist in volume and pricing statistics, which are closely monitored to track the performance of the sales organization throughout the year. RCN’s ARPC and ASPC have each grown steadily through the last several years.

Chapter 11 Reorganization

Beginning in 2001, RCN began experiencing financial difficulties due to a severe slowdown in the telecommunications industry and RCN’s limited ability to access capital markets to fund operations. On May 27, 2004, RCN and four of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and on August 5 and August 20, 2004, five additional subsidiaries of RCN filed voluntary petitions for reorganization under Chapter 11. On December 21, 2004, the RCN Debtors emerged from bankruptcy. For more details regarding the Plan, see “Business—RCN’s Chapter 11 Reorganization”.

Accounting Impact of Reorganization

Fresh-Start Reporting

RCN’s 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, the reported historical financial statements of RCN 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 RCN’s operations and cash flows during the periods ended December 20, 2004 and in fiscal 2003 and 2002 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 statement of operations.

“Fresh Start” Adjustments.

In accordance with “fresh start” reporting, all assets and liabilities are recorded at their respective fair values as of December 20, 2004. Such fair values represent RCN’s best estimates based on independent appraisals and valuations.

In applying “fresh start” reporting, adjustments to reflect the fair value of assets and liabilities, on a net basis, and the restructuring of RCN’s capital structure and resulting discharge of the senior lender’s pre-petition debt, resulted in a gain of approximately $173 million. In addition, RCN incurred $92.6 million in reorganization expenses in 2004 primarily related to legal and professional services.

See Note 5, “Fresh Start Accounting,” to RCN’s Consolidated Financial Statements for a full 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 RCN incurred in periods prior to our reorganization.

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Inclusion of Results of Operations of the Successor and the Predecessor during 2004

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.

The discussion and analysis of results below covers all periods for which financial statements are presented, even when those periods relate to a period shorter than a full 12-months. Such shortened periods are not directly comparable to full-year periods. Therefore, in order to provide a more informative comparison of results, RCN is presenting this information below showing the twelve months ended December 31, 2004 by combining the results of operations of the Predecessor from January 1, 2004 through December 20, 2004 with the results of operations of the Successor from December 21, 2004 through December 31, 2004.

Comparison of Financial Results

In light of events and circumstances that occurred during the twelve months ended December 31, 2004, the 2004 results are not necessarily comparable to the years ended December 31, 2003 and 2002.

Discontinued Operations

During 2004 and 2003, RCN sold its Carmel, New York and central New Jersey cable systems. In accordance with SFAS No. 144, the results of operations for both systems are reported as discontinued operations. These sales are described briefly below.

Sale of Carmel, New York Cable System. On March 9, 2004, RCN sold its Carmel, New York cable system for proceeds of approximately $120.2 million (net of purchase price and post-closing adjustments) and recorded a gain on the sale of approximately $90,154 million (including net income from operations of $1,614 million). The transaction was structured as an asset purchase, with the buyer assuming certain liabilities related to the business.

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) and recorded a gain on sale of $166 million. In connection with its regulatory review and approval of the transaction, the NJBPU required RCN to deposit an additional $1 million in escrow to satisfy any subscriber claims arising post-closing. Though no such claims have arisen, the NJBPU has refused to authorize release of the escrow. RCN is currently challenging the NJBPU’s refusal before the Superior Court of New Jersey, Appellate Division, where the matter is pending.

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Joint Ventures

Starpower

Starpower is a Delaware limited liability company formed in 1997 as a joint venture between a subsidiary of RCN 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 of the Plan, RCN increased its ownership in Starpower from 50% to 100% by purchasing the 50% interest in Starpower owned by Pepco for $29 million. The $29 million purchase price was financed with borrowings under RCN’s credit facility. Prior to the purchase of the remaining 50% interest in Starpower, the Predecessor accounted for the Starpower joint venture in the financial statements under the equity method of accounting and RCN’s 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 a 48.93% equity interest in Megacable, one of the largest cable television providers in Mexico. Megacable operates cable systems in Mexico, principally on the Pacific and Gulf coasts and including Guadalajara, the second largest city in Mexico; Hermosillo, the largest city in the state of Sonora; and Veracruz, the largest city in the state of Veracruz. Megacable also provides Internet services to customers.

Under the agreements governing the investment in Megacable, RCN has the right to elect six of the 15 members of the Megacable board of directors and two of the six members of the Megacable management committee. In addition, certain actions proposed to be taken by Megacable may not be taken without the consent of RCN. RCN accounts for its investment in Megacable on the equity method. As previously disclosed in RCN’s 10-Q for the period ending September 30, 2004, RCN identified a material weakness in its disclosure controls due to its inability to obtain timely information from Megacable. RCN is actively working to appoint representatives to the Megacable board of directors and management committee, to obtain Megacable’s financial statements for 2004 as soon as possible and to ensure timely receipt of Megacable’s quarterly and annual financial statements in the future. See Note 14 to RCN’s Consolidated Financial Statements.

Separately, RCN has a 48.93% interest in MCM. MCM, which was spun off from Megacable in November 2001, has a license from the Mexican government to operate a broadband network in Mexico City, Monterrey and Guadalajara. MCM has activated its network in Mexico City and is providing local voice and high-speed data service in that city, principally to commercial customers.

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. Prior to December 2003, RCN consolidated the results of RCN-BecoCom because RCN was allocated 100% of any profits and losses of the joint venture.

Critical Accounting Policies

In preparing its financial statements, RCN is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon available information. 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. The significant accounting policies which RCN believes are the most critical to aid in fully understanding and evaluating its reported financial results include:

Revenue Recognition. In general, revenues are recognized as earned when evidence of an arrangement exists, the services are rendered, the selling price is determinable and collection is reasonably assured. Video and high-speed data revenues are recognized in the month 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

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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.

Leases. The majority of the leases entered into by RCN are operating leases. Management has conducted a review of its accounting for operating leases and has concluded that RCN did not account for scheduled rent increases in conformity with Statement of Financial Accounting Standards No. 13, Accounting for Leases (SFAS 13.) Specifically, RCN recognized rent expense based on the cash payment to the lessor and not on a straight-line method including future rent increases in the minimum lease payments. The cumulative effect of the error is to increase selling, general and administrative expense by $6.450 million and to increase deferred rent in accrued expenses and other deferred credits by the same amount. RCN’s management and the audit committee of RCN’s board of directors have concluded that the amount of the error is not material to the financial statements of any previous year or for the period from January 1, 2004 to December 20, 2004. Accordingly, the cumulative impact of the lease accounting error has been expensed in the statement of operations for the period from January 1, 2004 to December 20, 2004 and recognized as deferred rent in the balance sheet at December 31, 2004.

RCN also has certain leases where it bears all substantial risks and rewards from the use of the leased item. These leases are accounted for as capital leases, with the asset and corresponding lease obligation recorded on the balance sheet.

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 changes the allowance for doubtful accounts, based upon a percentage of the aged accounts receivable balance. RCN’s formula for calculating its reserve is believed to closely parallel its history of actual write-offs and account adjustments based upon contractual terms.

Capitalization

All equipment that is purchased, or issued into service from inventory, that extends the size of the network, or significantly enhances functionality, capacity or the useful life of the network, including the equipment that is placed into customer’s homes and the materials that are used to reach the customer’s home, is capitalized. RCN also capitalizes certain equipment and materials that extend or enhance functionality, capacity or the useful life of the Company’s computer network, software and owned or leased facilities.

Labor, both internal and contracted, that is associated with capital projects and first time product installs, as well as certain expenses both directly and indirectly related to the labor that is associated with capital projects and first time product installs, is also capitalized.

Capitalized network construction projects are charged interest while in progress until that project is completed and converted into a fixed asset. The amount of interest that accumulates on that project during the in-progress stage is capitalized.

Valuation and Impairments of Long-Lived Assets

RCN assesses the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Long-lived assets, which include construction material, property, plant and equipment, and other intangible assets, other than goodwill, are

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assessment involves, among other things, an estimation of the fair value of the reporting unit based on the discounted cash flow methodology. If the assessment indicates that the fair value is less than the carrying value, then the goodwill would be subject to an impairment loss adjustment.

If the impairment review of goodwill, intangible assets, and other long-lived assets differ significantly from actual results, it could have a material adverse effect on RCN’s results of operations and financial condition.

Restructuring. Restructuring activities require RCN to make significant judgments and estimates in determining restructuring charges, including, but not limited to, future severance costs and other employee separation costs, sublease income or disposal costs, length of time on market for abandoned rented facilities, and contractual termination costs. Such estimates are inherently judgmental and changes in such estimates, especially as they relate to contractual lease commitments and related anticipated third-party sub-lease payments, could have a material effect on the restructuring liabilities and consolidated results of operations.

Please see Note 4 to RCN’s Consolidated Financial Statements included in this Annual Report for a more complete description of RCN’s significant accounting policies and “fresh-start” reporting.

See further discussions in this Item and Note 8, “Asset Impairment and Accrued Exit Cost,” to RCN’s Consolidated Financial Statements included in this Annual Report for information on restructuring activities.

Deferred Tax Valuation Allowance

RCN continues to incur tax operating losses and there is an uncertainty regarding the future realization of any portion of these losses as a tax benefit. Accordingly, RCN has recorded a tax valuation allowance for net deferred tax assets and will maintain such an allowance until sufficient positive evidence (i.e., cumulative positive earnings and future taxable income) exists to support the reversal of the valuation allowance.

In addition to these policies, as of dates after emergence from Chapter 11 and for periods ending after emergence from Chapter 11, RCN’s financial statements will also reflect the impact of “fresh start” reporting.

Segment Reporting

RCN’s management views RCN’s business as providing bundled communications services to residential and commercial customers as one business segment. Included among these bundled services are video, data and voice communications. All services are provided from the same telecommunications backbone and the cost of these revenue streams is largely allocated based on respective service revenues. No separate asset information is maintained or reviewed. Residential customers, including dial-up data subscribers, provide approximately 96% of RCN’s consolidated revenues. 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”.

Results of Operations

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 Predecessor ended business on December 20, 2004. The Successor commenced operations on December 21, 2004 and thus experienced an eleven-day operating period in 2004. The results for the period January 1, 2004 through December 20, 2004 represent the Predecessor’s operations.

The following discussion compares the restated results of operations of the Successor and the Predecessor on a combined basis for the year ended December 31, 2004 with the historical results of operations of the Predecessor for the year ended December 31, 2003. The discussion is provided for comparative purposes only,

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Results of Operations

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 Predecessor ended business on December 20, 2004. The Successor commenced operations on December 21, 2004 and thus experienced an eleven-day operating period in 2004. The results for the period January 1, 2004 through December 20, 2004 represent the Predecessor’s operations.

The following discussion compares the results of operations of the Successor and the Predecessor on a combined basis for the year ended December 31, 2004 with the historical results of operations of the Predecessor for the year ended December 31, 2003. The discussion is provided for comparative purposes only, and the value of such a comparison may be limited. The results of operations for the year ended December 31, 2004 combines the results of operations for the Predecessor for the period from January 1, 2004 to December 20, 2004 with the results of operations for the Successor for the period from December 21, 2004 to December 31, 2004. Such financial information does not reflect the results of operations that either the Predecessor or the Successor would have achieved for a full 12-month operating cycle in 2004. The combined financial information for the year ended December 31, 2004 is merely additive and does not give pro forma effect to the Predecessor’s results as if the consummation of the Plan and the related “fresh start” and other adjustments had occurred at the beginning of the period presented. In addition, the Successor has a significantly different capital structure than the Predecessor as a result of the reorganization.

The tables below reflect the selected statement of operations data for the periods December 21 to December 31, 2004 and January 1 to December 20, 2004 and the years ended December 31, 2003 and 2002.

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RCN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

Revenues:

In 2004, revenues increased $1.977 million or 0.41%, to $486.831 million from $484.854 million in 2003. Revenues for 2004 include $2.201 million contributed by Starpower for the eleven-day period, December 21 through December 31, 2004. Included in the 2003 revenues is $20.902 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 $2.402 million previously deferred were recognized as revenue. Excluding this settlement and the Starpower contribution, recurring revenues in 2004 increased $20.678 million, or 4.4% over 2003. The revenue increase is due to a combination of rate increases for video services and increased RGUs for high-speed data, partially offset by decreased voice revenues.

Residential revenue increased $1.567 million from $447.008 million in 2003. Video revenues increased $17.730 million primarily due to higher average rates during 2004. High Speed data revenues increased $14.703 million due almost entirely to increases in the number of high speed data connections in 2004 compared to 2003. Revenues from voice services decreased $2.178 million due to declines in average rates, partially offset by an increase in the number of voice connections. RCN’s management anticipates further continued erosion in dial-up connections and revenues in future years.

A summary of revenues, RGUs and average revenue per unit follows (excludes Carmel, New York and central New Jersey cable systems which are being accounted for as discontinued operations due to their sale):