FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

           [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

                                       or

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

              From the transition period from ________ to ________

                        Commission file number 333-41723

                                BTI Telecom Corp.
             (Exact name of registrant as specified in its charter)


                  North Carolina                                 56-2047220
           (State or other jurisdiction                       (I.R.S. Employer
         of incorporation or organization)                   Identification No.)

4300 Six Forks Road, Suite 500,  Raleigh, North Carolina           27609
        (Address of principal executive offices)                 (Zip Code)

                                  (800)849-9100

              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
        Securities registered pursuant to Section 12(g) of the Act: None

     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 the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the last practicable date.

No Par Value Common Stock               100,000,000 shares as of August 14, 1998

<PAGE>


                                BTI Telecom Corp.

                                    Form 10-Q
                                      Index

                                                                           Page
                                                                          Number
Part I.    FINANCIAL INFORMATION

  Item 1.  Financial Statements

           Consolidated Statements of Operations for the three
           months ended and for the six months ended June 30, 1998
           and June 30, 1997                                                 3

           Consolidated Balance Sheets as of June 30, 1998 and
           December 31, 1997                                                 4

           Consolidated Statements of Cash Flows for the three
           months ended and for the six months ended June 30, 1998
           and June 30, 1997                                                 5

           Notes to Consolidated Financial Statements                        6

  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                               9

Part II.   OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form 8-K                                 16

           Signature                                                        17

           Index to Exhibits                                                18

<PAGE>


                                BTI Telecom Corp.
                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       Three Months                   Six Months
(In thousands, except per share data)                 Ended June 30,                Ended June 30,
                                                ------------------------      ------------------------
                                                   1998           1997           1998           1997
                                                ---------      ---------      ---------      ---------
<S>                                             <C>            <C>            <C>            <C>      
Revenue                                         $  50,721      $  47,675      $ 105,806      $  94,447

Cost of services                                   36,740         32,849         77,848         65,227
                                                ---------      ---------      ---------      ---------
     Gross profit                                  13,981         14,826         27,958         29,220

Selling, general and
   administrative expenses                         16,524         12,077         32,104         24,071
Depreciation and amortization                       2,395          1,500          4,649          3,090
                                                ---------      ---------      ---------      ---------
Income (loss) from operations                      (4,938)         1,249         (8,795)         2,059

Other income (expense):
     Interest expense                              (6,355)          (408)       (12,751)          (913)
     Interest income                                1,587             26          3,469             26
                                                ---------      ---------      ---------      ---------
Income (loss) before income taxes                  (9,706)           867        (18,077)         1,172

Income taxes                                           --             --             --             --

Net income (loss)                               $  (9,706)     $     867      $ (18,077)     $   1,172
                                                =========      =========      =========      =========

Basic and diluted earnings (loss) per share     $   (0.10)     $    0.00      $   (0.18)     $    0.01
                                                =========      =========      =========      =========

Weighted average shares outstanding               100,000        200,000        100,000        200,000
                                                =========      =========      =========      =========
</TABLE>

See accompanying notes.

<PAGE>


                                BTI Telecom Corp.
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
(Dollars in thousands)                                          June 30, 1998      December 31, 
                                                                 (Unaudited)           1997
                                                                ------------    -----------------
<S>                                                               <C>               <C>      
Assets
Current assets:
    Cash and cash equivalents                                     $  44,067         $  67,009
    Restricted cash                                                  25,084            25,016
    Accounts receivable, less allowance of $5,259
        and $4,825, respectively                                     27,548            22,710
    Other current assets                                              4,259             2,296
                                                                  ---------         ---------
        Total current assets                                        100,958           117,031

Equipment, furniture and fixtures:
    Equipment, furniture and fixtures                                73,993            53,744
    Construction in progress                                         17,683            10,154
    Less: accumulated depreciation                                  (23,607)          (19,321)
                                                                  ---------         ---------
        Total equipment, furniture and fixtures                      68,069            44,577

     Other assets, net                                               12,293            11,916
     Restricted cash, non-current                                    37,047            50,026
                                                                  ---------         ---------
Total assets                                                      $ 218,367         $ 223,550
                                                                  =========         =========

Liabilities and shareholder's deficit:
Current liabilities:
    Accounts payable and accrued expenses                         $  44,423         $  30,055
    Accrued interest                                                  7,743             7,232
    Other liabilities                                                 3,295             2,902
                                                                  ---------         ---------
        Total current liabilities                                    55,461            40,189

    Long-term debt                                                  250,000           250,000
    Other long-term liabilities                                       2,005             2,935
                                                                  ---------         ---------
        Total liabilities                                           307,466           293,124

Shareholder's deficit:
    Common stock, no par value, authorized                               37                37
        500,000,000 shares, issued and outstanding
        100,000,000 in 1998 and 200,000,000 in 1997
    Additional paid-in capital                                          762               738
    Accumulated deficit                                             (89,898)          (70,349)
                                                                  ---------         ---------
        Total shareholder's deficit                                 (89,099)          (69,574)
                                                                  ---------         ---------
Total liabilities & shareholder's deficit                         $ 218,367         $ 223,550
                                                                  =========         =========
</TABLE>

See accompanying notes.

<PAGE>


                                BTI Telecom Corp.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Six Months
(In thousands)                                                                     Ended June 30,
                                                                             -------------------------
                                                                               1998             1997
                                                                             --------         --------
<S>                                                                          <C>              <C>     
OPERATING ACTIVITIES:
Net income (loss)                                                            $(18,077)        $  1,172
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
    Depreciation and amortization                                               4,649            3,090
    Non-cash compensation related to stock options                                 24               --
    Deferred interest expense on shareholder note                                  --              (15)
Changes in operating assets and liabilities:
       Accounts receivable, net                                                (4,838)          (1,459)
       Other assets                                                              (390)            (161)
       Accounts payable and accrued expenses                                   15,193            2,349
       Accrued interest                                                        (1,333)              13
       Other liabilities                                                          (24)             (94)
                                                                             --------         --------
Net cash (used in) provided by operating activities                            (4,796)           4,895

INVESTING ACTIVITIES:
Change in restricted cash                                                      12,911             (749)
Purchases of equipment, furniture and fixtures, net                           (27,518)          (4,472)
Line access fees                                                                 (226)            (410)
Settlement of stock and option repurchase obligations                          (2,300)              --
                                                                             --------         --------
Net cash used in investing activities                                         (17,133)          (5,631)

FINANCING ACTIVITIES:
Net proceeds of long-term debt                                                     --            2,360
Decrease in other long-term liabilities                                          (513)            (338)
Increase in deferred financing costs and other assets                            (500)              -- 
Dividends paid                                                                     --           (1,125)
                                                                             --------         --------
Net cash (used in) provided by financing activities                            (1,013)             897
                                                                             --------         --------
(Decrease) increase in cash and cash equivalents                              (22,942)             161

Cash and cash equivalents at beginning of period                               67,009              504
                                                                             --------         --------
Cash and cash equivalents at end of period                                   $ 44,067         $    665
                                                                             ========         ========

Supplemental disclosure of cash flow information:
Cash paid for interest                                                       $ 12,895         $    901
                                                                             ========         ========

Supplemental schedule of non-cash investing and financing activities:
Transfer of paging equipment from inventory                                  $    273         $    134
                                                                             ========         ========
</TABLE>

See accompanying notes.

<PAGE>


Note 1: The Company and Significant Accounting Policies

Basis of Presentation

     The "Company"  refers to BTI Telecom  Corp.  ("BTITC") and its wholly owned
subsidiary,  Business Telecom,  Inc. ("BTI"). The consolidated interim financial
statements  of BTITC  included  herein are  unaudited  and have been prepared in
accordance with generally accepted  accounting  principles  ("GAAP") for interim
financial reporting and Securities and Exchange Commission ("SEC")  regulations.
Certain  information  and footnote  disclosures  normally  included in financial
statements  prepared  in  accordance  with GAAP have been  condensed  or omitted
pursuant  to such  rules and  regulations.  In the  opinion of  management,  the
financial  statements reflect all adjustments (of a normal and recurring nature)
which are  necessary  to  present  fairly  the  financial  position,  results of
operations and cash flows for the interim  periods.  The results for any interim
period are not necessarily indicative of the results for any other period. These
financial  statements  should be read in conjunction  with the Company's  Annual
Report on Form 10-K for the year ended December 31, 1997.

     Preparation  of the financial  statements in conformity  with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements,  and the reported amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

Equipment, Furniture and Fixtures

     During the fourth quarter of 1997, the Company  commenced  construction  on
certain capital projects,  including its longhaul fiber optic network.  Interest
costs associated with the  construction of capital assets are  capitalized.  The
total amount capitalized for the three and six month periods ended June 30, 1998
was $0.4  million  and  $0.7  million,  respectively.  Interest  costs  were not
capitalized  in prior  periods  because  the  amounts  were not  material to the
Company's results of operations, cash flows or financial position.

     Costs  associated  with the longhaul  fiber optic network are classified as
"Construction in Progress" in the accompanying consolidated balance sheets. Upon
completion of network  segments,  the associated  costs will be transferred into
service and depreciated over their useful lives.

Note 2: Long-Term Debt

     Effective June 30, 1998, the Company amended and restated its $60.0 million
revolving  credit facility to provide a $30.0 million  revolving credit facility
and a  $30.0  million  capital  expenditure  facility  (the  "Facilities").  The
Facilities  are secured by  substantially  all of the Company's  assets and bear
interest, at the Company's option, at

<PAGE>


either the 30, 60 or 90 day LIBOR  rate or the prime  rate,  plus an  applicable
margin which varies based on the Company's  financial  position.  The Company is
also required to pay a fee of 0.375% per annum on the unused  commitment.  As of
June 30,  1998,  there were no amounts  outstanding  under the  Facilities.  The
Facilities  contain  various  financial  covenants  with which the Company  must
comply on a quarterly  basis. As of June 30, 1998, the Company was in compliance
with all such covenants.

Note 3: New Accounting Pronouncement

     As of  January  1,  1998,  the  Company  implemented  Financial  Accounting
Standards   Board   ("FASB")   Statement  No.  130  ("SFAS   130"),   "Reporting
Comprehensive  Income."  SFAS 130  establishes  new rules for the  reporting and
display of  comprehensive  income and its components;  however,  the adoption of
this  statement  had no  impact on the  Company's  net  income or  shareholder's
equity.  SFAS 130  requires  unrealized  gains or losses  on  available-for-sale
securities,  which prior to adoption were reported  separately in  shareholder's
equity,  to  be  included  in  comprehensive   income.  There  are  no  material
differences  between net income and comprehensive  income as defined by SFAS 130
for the periods presented.

     The FASB has issued SFAS 131,  "Disclosures about Segments of an Enterprise
and Related  Information" ("SFAS 131"),  effective for financial  statements for
fiscal years  beginning  after December 15, 1997.  This statement  requires that
public companies report certain information about operating segments in complete
sets  of  financial  statements  of  the  company  and  in  condensed  financial
statements  of interim  periods  issued to  shareholders.  It also requires that
public companies report certain  information  about their products and services,
the geographic areas in which they operate,  and their major  customers.  In the
initial year of application,  comparative information for earlier years is to be
restated.   The  Company  is  currently  evaluating  the  additional  disclosure
requirements, if any, that will result from the adoption of SFAS 131.

Note 4: Commitments and Contingencies

     During 1997, the Company signed a contract for the irrevocable right to use
certain  optical  fibers  in a  communication  system.  Commitments  under  this
contract will total  approximately  $50.0 million over the next 18 month period,
$16.7 million of which was fulfilled  through June 30, 1998.  Payments under the
agreement  have  been  capitalized  and are  included  in the  "Construction  in
Progress" caption in the consolidated balance sheets. In addition, certain other
commitments  have been made for the purchase of equipment in connection with the
Company's capital program.

<PAGE>


Note 5:  Shareholder's Equity

     Stock  Split  - In  April  1998,  the  Board  of  Directors  and  the  sole
shareholder of the Company approved and the Company effected a 10-for-1 split of
the outstanding Common Stock of the Company in the form of a stock dividend with
no change  in the par value of Common  Stock  authorized  and  outstanding,  and
increased  the number of shares of common stock  authorized  from 100 million to
500  million.  Historical  share  and per share  data  have  been  retroactively
adjusted to reflect these changes.

     Stock Option  Repurchase- In 1994, the Company entered into agreements with
certain former employees to repurchase stock options that had been granted under
the Company's 1994 Stock Plan. The measurement date for compensation relating to
the stock options did not occur until  September 1997, at which time an estimate
for this liability was recorded. In addition,  the Company assumed certain stock
repurchase  obligations  in connection  with its  acquisition of the fiber optic
assets of  FiberSouth,  Inc.  ("FiberSouth")  in 1997. In May 1998,  the Company
satisfied  these  obligations  to a  former  employee  in  accordance  with  the
repurchase agreements.  As a result of this transaction,  the Company recorded a
$1.5 million  adjustment to equity in the second quarter of 1998 which decreased
equity  by the  difference  between  the  estimated  liability  and  the  actual
settlement  amount.  This  adjustment  represents a reallocation of the original
FiberSouth purchase price.

<PAGE>


Item 2 - Management's Discussion and Analysis of Financial Condition and Results
         of Operations

     The matters  discussed  throughout  this Form 10-Q,  except for  historical
facts, may be  forward-looking  in nature, or  "forward-looking
statements."  Actual  results  may  differ  materially  from  the  forecasts  or
projections presented.  Forward-looking  statements are identified by such words
as "expects,"  "anticipates,"  "believes,"  "intends," "plans" and variations of
such words and similar  expressions.  The Company believes that its primary risk
factors  include but are not limited to: high  leverage;  the ability to service
debt;  significant  capital  requirements;  ability to manage  growth;  business
development and expansion risks; competition; and changes in laws and regulatory
policies.  Any forward-looking  statements in the June 30, 1998 Form 10-Q should
be evaluated in light of these important risk factors. For additional disclosure
regarding risk factors refer to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (File No. 333-41723).

Business of the Company

     The Company ("BTITC"),  which began operations in 1984 as Business Telecom,
Inc. ("BTI"), provides integrated  telecommunications  services to approximately
60,000   customers,   primarily   small-to-medium   sized  business   customers,
concentrated in the southeastern United States. During 1997, BTI was reorganized
into a new  corporate  structure  comprised of BTI Telecom  Corp.  as the parent
company and Business  Telecom,  Inc. as a wholly owned  subsidiary.  The Company
provides a broad array of services,  including  local,  long distance,  Internet
access, frame relay,  high-speed data transmission,  data network management and
paging.

Results of Operations

Revenue

     Revenue  for the  second  quarter of 1998 and on a  year-to-date  basis was
$50.7 million and $105.8 million,  respectively,  representing increases of 6.4%
and 12.0%,  respectively,  as compared to the same periods in 1997. The increase
in  revenue  of $3.0  million  during the three  months  ended June 30,  1998 as
compared to the same period in 1997 is attributable  to a $2.7 million  increase
in integrated services revenue and a $1.9 million increase in revenue from local
services,  partially offset by a decrease in wholesale  revenue of $1.6 million.
The  increase in  integrated  services  revenue  includes  $1.6 million from the
business of  FiberSouth,  Inc.  ("FiberSouth"),  the fiber optic assets of which
were  acquired by BTITC in  September  1997.  Also  contributing  to the overall
growth in  integrated  services  revenue  was the impact of  certain  changes in
access  charges during 1998 that have been  reflected in customer  billings,  as
well as continued  improvement in new integrated  services sales.  For the three
months ended June 30, 1998 and 1997,  wholesale  revenue  represented  35.3% and
40.9%, respectively,  of total revenue. The decrease in wholesale revenue during
the second quarter of 1998 as

<PAGE>


compared to the same period in the prior year is  primarily  due to  competitive
pricing pressures heightened by the effect of access charge reform.

     On a year-to-date  basis, the $11.4 million increase in revenue as compared
to the same  period  in 1997 was  primarily  driven by the  Company's  wholesale
business.  Wholesale revenue increased $6.3 million in the six months ended June
30,  1998 as compared to 1997,  comprising  40.4% and 38.5% of total  revenue in
1998 and 1997, respectively.  Also contributing to the increase was $3.2 million
in revenue from the previously  discussed  acquisition of FiberSouth  assets. In
addition, the Company recognized revenue of $2.5 million from local services for
the six month  period  ended June 30,  1998.  These  increases  in revenue  were
partially  offset by a decline in integrated  services revenue on a year-to-date
basis,  due  primarily to retail long distance  rate  decreases  and  increasing
competitive pressures.

Cost of Services

     Cost of services  represented  72.4% and 73.6% of revenue for the three and
six month  periods ended June 30, 1998,  respectively,  as compared to 68.9% and
69.1%,  respectively,  for the same periods in 1997. The higher cost of services
percentage  for the six month period ended June 30, 1998 as compared to the same
period in the prior year reflects the changes in the Company's  revenue mix to a
higher proportion of wholesale traffic. In addition,  a larger percentage of the
Company's wholesale revenue was from international traffic, which yields a lower
margin percentage than domestic  wholesale  traffic.  For the three month period
ended June 30, 1998 as compared to the same period in the prior year, the higher
cost of services  percentage is driven by the  previously  discussed  effects of
competitive  pricing and access  charge  reform.  The effect of spreading  fixed
network costs over a smaller  integrated  services revenue base also contributed
to the  increase  in cost of  services as a  percentage  of revenue in 1998.  In
addition,  the  introduction  of  Competitive  Local Exchange  Carrier  ("CLEC")
services  contributed  to lower gross  margins as these  services are  initially
being offered primarily on a resale basis. However, as the Company completes the
installation of its local switches,  a significant  portion of this service will
be provided via company owned facilities, which will have the effect of reducing
costs of services for this product offering.

     Costs of services has also been adversely  impacted by regulatory  matters,
including  increased costs related to the public payphone  compensation order. A
Federal Communications Commission ("FCC") ruling established,  effective October
1997, a "per call  compensation  plan" that provides  payphone service providers
with  compensation for calls completed using their  payphones.  During the first
quarter of 1998, the Company began assessing a surcharge to these payphone users
in order to recover the amount of compensation  and related costs ordered by the
FCC.

     Construction of the longhaul fiber optic network and the continuing  effect
of access charge reform is expected to reduce the Company's network costs in the
future.  Management  anticipates  that its longhaul  fiber optic network will be
substantially operational by mid-1999.

<PAGE>


Selling, General and Administrative Expenses

     Selling, general and administrative ("SG&A") expenses in the second quarter
of 1998 were $16.5 million, or 32.6% of revenue as compared to $12.1 million, or
25.3% of revenue  in the same  period in 1997.  On a  year-to-date  basis,  SG&A
expenses  were $32.1  million,  or 30.3% of revenue  in 1998 as  compared  $24.1
million,  or 25.5% of revenue in 1997. The increase in SG&A expenses during 1998
is largely  attributable to the  significant  investments in human resources and
increased  marketing and advertising efforts associated with the introduction of
the  Company's  CLEC  services.  These  investments  are intended to provide the
Company  with the  ability to  continue  to expand  into new  markets,  maximize
customer  retention and provide for growth in 1998 and beyond. In addition,  the
Company is expending  resources to facilitate  the deployment of its fiber optic
network.

     Depreciation  and  amortization  was $2.4  million and $4.6  million in the
three and six months ending June 30, 1998, respectively,  representing increases
of 59.7% and 50.5%,  respectively,  over the same periods in the prior year. The
increase  in  depreciation   and   amortization  is  primarily  due  to  capital
expenditures  related to the  expansion  of the  Company's  existing  operations
centers and support  infrastructure to accommodate  increased traffic volume and
expanded service offerings.

Other Income (Expense)

     Interest  expense was $6.4  million in the three months ended June 30, 1998
as  compared  to $0.4  million  in the  same  period  in the  prior  year.  On a
year-to-date basis,  interest expense was $12.8 million and $0.9 million in 1998
and  1997,  respectively.  The  increase  in  interest  expense  during  1998 is
primarily  attributable  to the Company's  issuance in September  1997 of $250.0
million 10 1/2% Senior Notes due in 2007 (the "Senior Notes") to finance capital
expenditures and the Company's introduction of CLEC services.

     Interest income increased to $1.6 million and $3.5 million in the three and
six months ended June 30, 1998, respectively, due to the investment of a portion
of the proceeds of the September 1997 Senior Note offering.

Income Taxes

     The Company  generated a net loss for the year ended  December 31, 1997 and
during  the  three  and six  month  periods  ended  June 30,  1998.  Based  upon
management's plans to expand the business through the construction and expansion
of its networks,  customer base and product offerings, this trend is expected to
continue for the foreseeable future.  Given these circumstances and the level of
taxable income  expected to be generated from reversing  temporary  differences,
the Company has established a

<PAGE>


valuation  allowance  for the  deferred  tax  assets  associated  with these net
operating losses. The Company will reduce the valuation allowance when, based on
the weight of available  evidence,  it is more likely than not that some portion
or all of the deferred tax assets will be realized.

     Prior to the Company's  reorganization during 1997, BTI elected to be taxed
for  federal  and  state  income  tax  purposes  as an S  Corporation  under the
provisions of the Internal Revenue Code. Accordingly, income, losses and credits
were passed through directly to the shareholders  rather than being taxed at the
corporate  level.  Throughout  the period of time that BTI was an S Corporation,
shareholders were provided,  in the form of dividends,  with the funds necessary
to meet tax  obligations  arising  from income  earned by BTI.  The Company will
continue to  reimburse  shareholders  for any tax  obligations  arising from the
income earned by BTI while it was an S  Corporation.  The Company  believes that
any such  reimbursements  will  not  have a  material  effect  on the  Company's
financial condition or results of operations.

EBITDA

     Earnings before  interest,  taxes,  depreciation and amortization and other
non-cash  charges  (EBITDA) is a common  measurement  of a company's  ability to
generate  cash  flow from  operations.  EBITDA  is not a  measure  of  financial
performance  under generally  accepted  accounting  principles and should not be
considered an  alternative  to net income as a measure of performance or to cash
flows as a measure of liquidity. The Company experienced negative EBITDA of $2.5
million  and $4.1  million for the three and six month  periods  ended June 30,
1998, respectively, and positive EBITDA of $2.7 million and $5.1 million for the
three and six month  periods  ended June 30,  1997,  respectively.  The Company
expects to generate  negative  EBITDA in the remainder of 1998 as it expands its
CLEC  offerings  and  deploys its fiber optic  network.  The  decrease in EBITDA
experienced  by the Company  throughout  1998 is primarily  attributable  to the
increase in cost of services  resulting  from the change in revenue  composition
and additional SG&A associated with the Company's introduction of CLEC services.

Liquidity and Capital Resources

     The Company has funded its operations  and growth  primarily from operating
cash flows and borrowings.  During the first six months of 1998 the Company used
$4.8 million for operating  activities as compared to generating $4.9 million of
cash from operations  during the same period in 1997. The primary driver of this
change is the net loss of $18.1 million  experienced during the first six months
of 1998, of which $12.8 million is attributable  to interest  expense related to
the issuance of the Senior Notes.

<PAGE>


     Cash used for investing activities during the first six months of 1998 and
1997 amounted to $17.1 million and $5.6 million, respectively. The primary
investment for both periods was capital expenditures. The increase in net
capital expenditures from $4.5 million in the first six months of 1997 to $27.5
million in the first six months of 1998 was primarily due to the deployment of
the longhaul fiber optic network and purchases of equipment for the development
of the Company's facilities-based local service business. Cash used for
investing activities also includes the capitalization of line access fees, which
represent installation charges paid primarily to the incumbent local exchange
carriers ("ILECs") for securing additional leased fiber optic facilities. In May
1998, the Company satisfied stock and option repurchase obligations which arose
as a result of the assumption of stock repurchase obligations in connection with
the September 1997 acquisition of the fiber optic assets of FiberSouth and as a
result of the 1994 Stock Plan. The Company settled these obligations with a $2.3
million cash payment. The difference between the liability estimated for the
stock repurchase obligation that was recorded in conjunction with the FiberSouth
acquisition and the actual settlement amount is reflected as an adjustment to
equity and represents a reallocation of the original FiberSouth purchase price.
Cash used for investments was offset in part by the provision of $12.9 million
of cash from the restricted cash accounts. This results from the Company's
utilization of its restricted cash to fund the March 1998 interest obligation on
the Senior Notes. The restricted cash balance as of June 30, 1998 includes
proceeds from the Senior Note offering placed in escrow to secure the next five
scheduled interest payments.

     Cash used for  financing  was $1.0 million for the first six months of 1998
due  to  payments  made  on  the  note  payable  to a  shareholder  and  certain
capitalized  costs  associated  with  financing.  During the first six months of
1997,  financing  activities  provided  the Company  with $0.9  million of cash,
primarily as a result of net  borrowings  on long-term  credit  facilities.  The
dividends  paid during the first six months of 1997 were in accordance  with the
terms  of a  shareholders'  agreement  that  terminated  in  September  1997  in
conjunction with the Company's  reorganization.  A portion of the dividends paid
during 1997 was to provide funds for tax obligations owed by BTI's  shareholders
as a result of net income  during  the period in which BTI was an S  Corporation
for income tax purposes.

     In September  1997,  the Company issued $250.0 million 10 1/2% Senior Notes
due 2007.  The  Indenture  governing  the Senior  Notes  requires the Company to
comply with certain financial covenants, including restrictions on the Company's
ability to pay  dividends.  As of June 30, 1998,  the Company was in  compliance
with all such covenants.

     Effective June 30, 1998, the Company amended and restated its $60.0 million
revolving  credit facility to provide a $30.0 million  revolving credit facility
and a $30.0 million capital expenditure facility (the "Facilities").  Borrowings
under the Facilities bear interest at the Company's  option, at the 30, 60 or 90
day London  Interbank  Offered Rate ("LIBOR") or prime rate,  plus an applicable
spread which varies based upon the  Company's  financial  position.  At June 30,
1998, no amounts were  outstanding  under the  Facilities.  The Company  settled
these obligations with a $2.3 million cash payment.

<PAGE>


The  Facilities  require  the  Company's   compliance  with  various  financial,
administrative and affirmative  covenants.  As of June 30, 1998, the Company was
in compliance with these covenants.

     During the second quarter of 1998, Moody's adjusted the Company's long-term
credit rating from B2 to B3, citing concern that integrated services revenue and
operating  cashflow  are  unlikely to grow as rapidly as Moody's  had  initially
expected when the Company's  $250.0 million Senior Notes were originally  rated.
Moody's  indicated  that the  trend  in  operating  results  has the  effect  of
weakening BTI's  anticipated  debt protection  measurements for the intermediate
term.  However,  Moody's  indicated  that  the  Company's  strategy  to  improve
operating  margins and cash flow through the  migration of its long distance and
local traffic over more of its own switches and network facilities  continues to
be a sound  business plan.  Moody's also affirmed the Company's  rating of B1 on
the $60.0 million secured credit facility.

Capital Spending

     Through  June 30,  1998,  capital  expenditures  were  approximately  $28.0
million as compared  to $4.9  million in the prior  year.  Capital  expenditures
during  the first six  months of 1998  included  $10.5  million  related  to the
longhaul  fiber  optic  network  and $13.9  million  in  switching  and  related
equipment  primarily for the Company's CLEC  operations.  The Company expects to
require  significant  capital for its future  capital  expenditures  and working
capital  requirements.  The Company plans to spend a total of approximately $200
million  (with  respect  to which it has  commitments  for $50  million)  on its
capital  program over the period 1998 through  2002.  A  substantial  portion of
these planned capital  expenditures  will be related to the longhaul fiber optic
network and  purchases  of switches  and related  equipment  to  facilitate  the
offering  of local  services.  The actual  amount  and  timing of the  Company's
capital  requirements  may differ  materially  from the foregoing  estimate as a
result of  regulatory,  technological  or  competitive  developments  (including
market developments and new opportunities) in the Company's  industry.  Although
there can be no assurance,  management  believes  that cash on hand,  borrowings
expected to be available under the Facilities and cash flow from operations will
be sufficient to expand the Company's business as currently planned for the next
12 months.  The Company  also may require  additional  capital in the future (or
sooner than currently  anticipated) for new business  activities  related to its
current and planned  businesses,  or in the event it decides to make  additional
acquisitions  or enter into joint ventures and strategic  alliances.  Sources of
additional  capital may include cash flow from operations and public and private
debt and equity offerings, which would be subject to provisions in the Indenture
requiring  the Company to maintain  certain  financial  ratios in order to incur
additional indebtedness.

<PAGE>


Year 2000 Issues

     The Company has  developed a plan  designed to ensure that its key computer
systems will be Year 2000  compliant  in advance of December 31, 1999.  The plan
includes review and revision,  where necessary,  of computer  applications  that
directly  connect  elements of the  Company's  business  with  customers,  major
suppliers and third party network service providers. Any failure by such vendors
or third party network service providers to resolve Year 2000 issues on a timely
basis, or in a manner that is compatible with the Company's systems,  could have
a material adverse effect on the Company.

     Implementation of the plan began in 1997 and will continue through 1999. It
involves capital  expenditures for new software and hardware and modification of
existing software.  In most cases these  modifications will not only provide for
Year 2000 compliance,  but will also otherwise enhance the Company's operations.
In many cases,  these  changes  will  merely be an  acceleration  of  previously
planned improvements.

     Based upon its  initial  evaluation,  the  Company  does not expect it will
encounter Year 2000 systems  problems or compliance  costs that could materially
impact operations or financial results. There can be no assurance, however, that
there  will  not  be a  delay  in,  or  increased  costs  associated  with,  the
implementation of changes as the program  progresses.  Failure to implement such
changes could have an adverse effect on future results of operations.

New Accounting Standards

     As of  January  1,  1998,  the  Company  implemented  Financial  Accounting
Standards   Board   ("FASB")   Statement  No.  130  ("SFAS   130"),   "Reporting
Comprehensive  Income."  SFAS 130  establishes  new rules for the  reporting and
display of  comprehensive  income and its components;  however,  the adoption of
this  statement  had no  impact on the  Company's  net  income or  shareholder's
equity.  SFAS 130  requires  unrealized  gains or losses  on  available-for-sale
securities,  which prior to adoption were reported  separately in  shareholder's
equity,  to  be  included  in  comprehensive   income.  There  are  no  material
differences  between net income and comprehensive  income as defined by SFAS 130
for the periods presented.

     The FASB has issued  Statement  No. 131 ("SFAS  131"),  "Disclosures  about
Segments of an  Enterprise  and Related  Information,"  effective  for financial
statements  for periods  beginning  after  December  15,  1997.  This  statement
requires  that public  companies  report  certain  information  about  operating
segments  in  complete  sets  of  financial  statements  of the  company  and in
condensed  financial  statements of interim periods issued to  shareholders.  It
also requires  that public  companies  report  certain  information  about their
products and services,  the  geographic  areas in which they operate,  and their
major customers. In the initial year of application, comparative information for
earlier  years is to be  restated.  The  Company  is  currently  evaluating  the

<PAGE>


additional disclosure  requirements,  if any, that will result from the adoption
of SFAS 131.

<PAGE>


Part II - Other Information

Item 6 - Exhibits and Reports on Form 8-K

(a)  See Exhibit Index


(b)  Reports on Form 8-K filed during the quarter: None

<PAGE>


                                   SIGNATURES



     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                                    BTI Telecom Corp.
                                        ----------------------------------------
                                                      (Registrant)



Dated: August 14, 1998
                                             By:
                                                  ------------------------------
                                                  Brian Branson
                                                  Chief Financial Officer
                                                  (Principal Financial and
                                                  Accounting Officer)

<PAGE>


                                INDEX TO EXHIBITS




Exhibit
Number                          Description
------                          -----------

  27                       Financial Data Schedule