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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission file number: 0-24061
 US LEC Corp.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    56-2065535(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Morrocroft III6801 Morrison BoulevardCharlotte, North Carolina
    
    28211(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
(585) 340-2500
 Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act: None
 o þ
 o þ
 þ o
  o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 None.




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Explanatory Note








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##### 



US LEC CORP.
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 PagePART IItem 1:
    
    Business
    
    
    3Item 1A:
    
    Risk Factors
    
    
    12Item 1B:
    
    Unresolved Staff CommentsItem 2:
    
    Properties
    
    
    18Item 3:
    
    Legal Proceedings
    
    
    18Item 4:
    
    Submission of Matters to a Vote of Security HoldersPART IIItem 5:
    
    Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    19Item 6:
    
    Selected Financial Data
    
    
    20Item 7:
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    21Item 7A:
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 8:
    
    Financial Statements and Supplementary Data
    
    
    32Item 9:
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    54Item 9A:
    
    Controls and ProceduresItem 9B
    
    Other InformationPART IIIItem 10:
    
    Directors, Executive Officers and Corporate Governance
    
    
    55Item 11:
    
    Executive Compensation
    
    
    57Item 12:
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    64Item 13:
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    67Item 14:
    
    Principal Accounting Fees and Services
    
    
    68PART IVItem 15:
    
    Exhibits, Financial Statement Schedules
    
    
    69EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
   
 PART I
 
 ITEM 1. BUSINESS
 Combination of PAETEC and US LEC
    3




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Business Overview
 SM ®
   www.uslec.com
 BUSINESS STRATEGY
 US LECs Mission Statement:
  Offer a Broad Range of Next-Generation and Traditional Communications Services. SM SM
 4




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Overlay the Existing Network to Support the Shift to IP-based Solutions.
 Maintain a Robust Technology Platform. ®
 Provide Outstanding Customer Service. SM SM
 Target Telecommunications-Intensive Customers.
 Focus of Operations.
 5




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THE US LEC NETWORK
      SERVICES
  SM SM
 SM
   6




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TM
 SALES AND MARKETING
 Sales.
 Marketing and Branding.
   Billing. SM
 EMPLOYEES
  7




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REGULATION
  Overview.
 Federal Legislation.
  Federal Regulation and Related Proceedings.
  i.e.
 e.g.
 8




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9




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State Regulation.
 10




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COMPETITION
  ILECs.
  Mega
Mergers.
 Other CLECs.
 11




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Internet Service Providers (ISPs).
 IXCs.
 VoIP
Providers.
  Other Competitors.
 
 ITEM 1A. RISK FACTORS
 The Companys merger with PAETEC involves certain risks including, but not limited to:
 
    
    difficulties assimilating the merged operations and personnel;
    
    potential disruptions of the Companys ongoing business;
    
    the diversion of resources and management time;
    
    the possibility that uniform standards, controls, procedures and policies may not be
maintained;
    
    risks associated with entering new markets in which the Company has little or no
experience;
 12




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
    
    the potential impairment of relationships with employees or customers as a result of
changes in management;
    
    difficulties in evaluating the future financial performance of the merged businesses;
    
    difficulties integrating network equipment and operating support systems;
    
    brand awareness issues related to the combined companies;
    
    the incurrence of indebtedness required to complete the transaction including the
terms of the indebtedness, interest rates and charges, repayment obligations and
covenants; and
    
    risks associated with attainment of targeted synergy and savings goals including
reductions in personnel, reductions or changes in current and proposed spending, and
changes to current business plans.
 The Companys success depends on its ability to manage and expand operations effectively.
 s
 
    
    offer high-quality, reliable services at reasonable costs;
    
    install and operate telecommunications switches and related equipment;
    
    lease access to suitable transmission facilities at competitive prices;
    
    scale operations;
    
    obtain successful outcomes in disputes and in litigation, rule-making, legislation
and regulatory proceedings;
    
    successfully negotiate, adopt or arbitrate interconnection agreements with other carriers;
    
    acquire necessary equipment, software and facilities;
    
    integrate existing and newly acquired technology and facilities, such as switches and
related equipment;
    
    evaluate markets;
    
    add products;
    
    monitor operations;
    
    control costs;
    
    maintain effective quality controls;
    
    hire, train and retain qualified personnel;
    
    enhance operating and accounting systems;
    
    address operating challenges;
    
    adapt to market and regulatory developments; and
    
    obtain and maintain required governmental authorizations.
  13




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The Company faces intense competition that could adversely affect its business.
  
    
    long-distance carriers, or IXCs;
    
    incumbent local exchange carriers, or ILECs;
    
    other competitive local exchange carriers, or CLECs;
    
    competitive access providers, or CAPS;
    
    cable television companies;
    
    electric utilities;
    
    microwave carriers;
    
    wireless telephone system operators;
    
    private networks built by large end-users; and
    
    VoIP providers.
   The loss of key personnel could adversely affect the Companys operations and growth.
 14




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A failure to manage processes and systems for ordering, provisioning and billing effectively,
or the failure of third parties to deliver these services on a timely and accurate basis, could
have a material adverse effect on the Companys ability to retain existing customers or to attract
and retain new customers.
  A failure to operate switches and other network equipment successfully could have a material
adverse effect on the Companys operations and the ability to attract and retain customers or to
enter additional markets.
  We and other industry participants are frequently involved in disputes over issues that are
important to our financial and operational success. Further legislation and regulatory rulemaking
is expected to occur as the industry continues to deregulate and as we enter new markets or offer
new products. Rulings or legislation adverse to us could have a material adverse effect on our
operations and financial well being.
  15




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There are significant uncertainties about the future availability and pricing of unbundled
network elements and related elements from incumbent local exchange carriers.
    If the FCC Adopts the Missoula Plan or otherwise changes its rules on intercompany
compensation, our results of operations, cash flow and financial condition could be negatively
affected.
  System disruptions could cause delays or interruptions of service, which could cause the
Company to lose customers.
   16




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The FCC has undertaken a review of special access pricing which, if decided adversely to us,
could have an adverse impact on the prices we pay for components of our network.
   The outcome of pending rule-making proceedings addressing the proper framework for all
intercarrier compensation could have an adverse effect on our results of operations and cash flow.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  17




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ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  18




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
   Stock Price
 2005
    
    High
    
    
    LowFirst Quarter
    
    $
    3.28
    
    
    $
    2.36Second Quarter
    
    $
    2.86
    
    
    $
    1.92Third Quarter
    
    $
    2.60
    
    
    $
    1.77Fourth Quarter
    
    $
    2.15
    
    
    $
    1.51
 2006
    
    High
    
    
    LowFirst Quarter
    
    $
    2.79
    
    
    $
    1.64Second Quarter
    
    $
    4.74
    
    
    $
    2.55Third Quarter
    
    $
    7.10
    
    
    $
    3.10Fourth Quarter
    
    $
    9.52
    
    
    $
    6.80
 19




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ITEM 6. SELECTED FINANCIAL DATA
   (Dollars in thousands, except per share data)2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006Statement of Operations:Revenue
    
    $
    250,363
    
    
    $
    310,825
    
    
    $
    356,181
    
    
    $
    387,738
    
    
    $
    424,201Network Expenses (including depreciation and amortization shown below)
    
    
    121,127
    
    
    
    148,699
    
    
    
    171,292
    
    
    
    186,924
    
    
    
    212,140Depreciation and Amortization
    
    
    45,062
    
    
    
    48,374
    
    
    
    49,851
    
    
    
    50,668
    
    
    
    48,656Selling, General and Administrative (1)
    
    
    112,878
    
    
    
    126,267
    
    
    
    139,231
    
    
    
    148,902
    
    
    
    161,107Provision (Recovery) for Doubtful Accounts Related to WorldCom (1)
    
    
    9,500
    
    
    
    (5,867
    )
    
    
    
    
    
    
    
    
    
    
    Charge Related to Carrier Access Disputes (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,292
    
    
    
    Income (Loss) from Operations
    
    
    (38,204
    )
    
    
    (6,648
    )
    
    
    (4,193
    )
    
    
    (22,048
    )
    
    
    2,298Charges Related to Early Extinguishment of Debt (2)
    
    
    
    
    
    
    
    
    
    
    (4,416
    )
    
    
    
    
    
    
    Other Income
    
    
    
    
    
    
    267
    
    
    
    
    
    
    
    202
    
    
    
    Net Interest Expense
    
    
    (7,688
    )
    
    
    (8,159
    )
    
    
    (11,153
    )
    
    
    (16,802
    )
    
    
    (18,965
    )Net Loss
    
    
    (45,892
    )
    
    
    (14,540
    )
    
    
    (19,762
    )
    
    
    (38,648
    )
    
    
    (16,667
    )Less: Dividends on Preferred Stock
    
    
    13,596
    
    
    
    14,431
    
    
    
    15,316
    
    
    
    16,256
    
    
    
    17,253Accretion of Preferred Stock Issuance Cost
    
    
    521
    
    
    
    553
    
    
    
    587
    
    
    
    623
    
    
    
    662Net Loss Attributable to Common Stockholders
    
    $
    (60,009
    )
    
    $
    (29,524
    )
    
    $
    (35,665
    )
    
    $
    (55,527
    )
    
    $
    (34,582
    )Net Loss
Attributable to Common Shareholders Per ShareBasic
    
    $
    (2.26
    )
    
    $
    (1.08
    )
    
    $
    (1.19
    )
    
    $
    (1.83
    )
    
    $
    (1.10
    )Net Loss
Attributable to Common Shareholders Per ShareDiluted
    
    $
    (2.26
    )
    
    $
    (1.08
    )
    
    $
    (1.19
    )
    
    $
    (1.83
    )
    
    $
    (1.10
    )Weighted
Average Number of Shares OutstandingBasic
    
    
    26,546
    
    
    
    27,392
    
    
    
    29,927
    
    
    
    30,399
    
    
    
    31,337Weighted
Average Number of Shares OutstandingDiluted
    
    
    26,546
    
    
    
    27,392
    
    
    
    29,927
    
    
    
    30,399
    
    
    
    31,337Other Financial Data:Cash Capital Expenditures
    
    $
    32,029
    
    
    $
    35,767
    
    
    $
    33,395
    
    
    $
    34,954
    
    
    $
    29,443Net Cash Flow Provided by (Used in) Operating Activities
    
    
    (5,645
    )
    
    
    55,333
    
    
    
    25,219
    
    
    
    17,736
    
    
    
    36,234Net Cash Flow Used in Investing Activities
    
    
    (31,809
    )
    
    
    (42,202
    )
    
    
    (35,724
    )
    
    
    (34,638
    )
    
    
    (29,441
    )Net Cash Flow Provided by (Used in) Financing Activities
    
    
    (17,333
    )
    
    
    4,280
    
    
    
    15,611
    
    
    
    (626
    )
    
    
    5,065Operating Data (3):Number of States Served with All Services (including Washington, DC)
    
    
    14
    
    
    
    16
    
    
    
    16
    
    
    
    17
    
    
    
    17Number of Local Switch Locations
    
    
    26
    
    
    
    27
    
    
    
    27
    
    
    
    27
    
    
    
    27Number of Business Class Customers
    
    
    10,290
    
    
    
    16,814
    
    
    
    22,324
    
    
    
    26,225
    
    
    
    28,843Number of Employees
    
    
    911
    
    
    
    1,016
    
    
    
    1,065
    
    
    
    1,128
    
    
    
    1,035Number of Sales and Sales Support Employees
    
    
    367
    
    
    
    412
    
    
    
    460
    
    
    
    485
    
    
    
    435Balance Sheet Data:Cash and Cash Equivalents
    
    $
    25,715
    
    
    $
    43,126
    
    
    $
    48,232
    
    
    $
    30,704
    
    
    $
    42,562Working Capital
    
    
    26,620
    
    
    
    12,574
    
    
    
    32,605
    
    
    
    10,889
    
    
    
    22,280Accounts Receivable, Net
    
    
    57,989
    
    
    
    48,294
    
    
    
    60,745
    
    
    
    49,841
    
    
    
    44,496Current Assets
    
    
    96,030
    
    
    
    101,622
    
    
    
    119,721
    
    
    
    89,901
    
    
    
    96,425Property and Equipment, Net
    
    
    178,810
    
    
    
    165,793
    
    
    
    158,617
    
    
    
    144,350
    
    
    
    127,043Total Assets
    
    
    285,314
    
    
    
    285,299
    
    
    
    298,311
    
    
    
    252,352
    
    
    
    237,472Long-Term Debt (including current portion)
    
    
    130,617
    
    
    
    125,818
    
    
    
    149,288
    
    
    
    149,438
    
    
    
    149,587Series A Redeemable Convertible Preferred Stock
    
    
    230,272
    
    
    
    245,255
    
    
    
    261,158
    
    
    
    278,037
    
    
    
    295,952Total Stockholders Deficiency
    
    $
    (153,991
    )
    
    $
    (171,161
    )
    
    $
    (205,304
    )
    
    $
    (260,014
    )
    
    $
    (287,701
    )
 
 (1)
    
    See Note 7 of the Companys consolidated financial statements for the year ended December
31, 2005 and 2006. Normal and recurring provisions for doubtful accounts are included in selling,
general and administrative expenses for all periods presented.(2)
    
    See Note 5 of the Companys consolidated financial statements.(3)
    
    Amounts presented are as of the end of the period. 20




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Overview
 General. SM ®
  
    
    total revenue;
    
    end customer revenue in total and as a percentage of total revenue;
    
    customer retention;
    
    control of network expense, general and administrative expenses; and
    
    working capital management.
  Total and End Customer Revenue.
 (Dollars in millions)2006
    
    
    2005
    
    
    2004End Customer RevenueVoice Monthly Recurring Charges
    
    $
    180.5
    
    
    $
    159.2
    
    
    $
    143.4Data Monthly Recurring Charges
    
    
    140.2
    
    
    
    120.8
    
    
    
    92.2Long Distance
    
    
    54.5
    
    
    
    50.8
    
    
    
    48.4$
    375.2
    
    
    $
    330.8
    
    
    $
    284.0Percent of Total Revenue
    
    
    88
    %
    
    
    85
    %
    
    
    80
    %Inter-Carrier CompensationCarrier Access
    
    $
    26.1
    
    
    $
    35.0
    
    
    $
    50.3Reciprocal Compensation
    
    
    7.7
    
    
    
    8.7
    
    
    
    10.6$
    33.8
    
    
    $
    43.7
    
    
    $
    60.9Percent of Total Revenue
    
    
    8
    %
    
    
    11
    %
    
    
    17
    %Other Revenue
    
    $
    15.2
    
    
    $
    13.2
    
    
    $
    11.3Percent of Total Revenue
    
    
    4
    %
    
    
    3
    %
    
    
    3
    %Total Revenue
    
    $
    424.2
    
    
    $
    387.7
    
    
    $
    356.2
 21




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Uncertainties That Could Adversely Affect Revenue.
    Customer Retention.
 Network Expense.
 22




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Working Capital Management.
 Results of Operations
 Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005
 Revenue.
    Network Expenses.
 23




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Depreciation and Amortization.
 Selling, General and Administrative Expenses (excluding stock-based compensation expense and
merger related expenses) .
  Stock-based
Compensation Expense.
 Merger
Related Expenses.
 Charge Related to Carrier Access Disputes.
 Interest Income and Expense.
 Income Taxes.
 24




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Net Loss.
 Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004
 Revenue.
  Network Expenses.
 Depreciation and Amortization.
 Selling, General and Administrative Expenses .
 25




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Charge Related to Carrier Access Disputes.
 Charges Related to the Early Extinguishment of Debt.
 Interest Income and Expense.
 Income Taxes.
 Net Loss.
 Liquidity and Capital Resources
   26




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Payment Due by Period (in millions)Less than
    
    
    1-3
    
    
    3-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsLong-term debt (1)
    
    $
    150.0
    
    
    $
    
    
    
    $
    
    
    
    $
    150.0
    
    
    $
    Operating leases
    
    
    34.0
    
    
    
    8.5
    
    
    
    20.8
    
    
    
    2.6
    
    
    
    2.1Total contractual cash obligations
    
    $
    184.0
    
    
    $
    8.5
    
    
    $
    20.8
    
    
    $
    152.6
    
    
    $
    2.1
 
 (1)
    
    Amount excludes interest which is payable semi-annually on the $150.0 million face
value of the Notes at an annual rate of six-month LIBOR plus 8.50% which is estimated to total
approximately $57.2 million over the remaining term of the Notes, assuming current interest
rates of 13.87% over the period. The discount on the Notes, totaling $0.75 million, is being
amortized to interest expense on the statement of operations through the maturity date of
October 1, 2009. There were no amounts outstanding under our $10.0 million Revolving Facility.   27




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Critical Accounting Policies and Estimates
 Revenue
Recognition
     Network
Expenses
 28




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Provisions for Doubtful Accounts 
 Deferred Customer and Network Installation Costs 
  Impairment of Long-Lived Assets
 Stock-Based
Compensation
  29




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2005
    
    
    2004Net loss, as reported
    
    $
    (38,648
    )
    
    $
    (19,762
    )Preferred dividends
    
    
    (16,256
    )
    
    
    (15,316
    )Accretion of preferred stock issuance fees
    
    
    (623
    )
    
    
    (587
    )Net loss attributable to common stockholders, as reported
    
    
    (55,527
    )
    
    
    (35,665
    )Add: Stock-based employee compensation expense included
in reported net income
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (1,823
    )
    
    
    (6,357
    )Pro forma net loss
    
    $
    (57,350
    )
    
    $
    (42,022
    )Weighted average shares outstanding
    
    
    30,399
    
    
    
    29,927Net loss per share:Basic and diluted, as reported
    
    $
    (1.83
    )
    
    $
    (1.19
    )Basic and diluted, pro forma
    
    $
    (1.89
    )
    
    $
    (1.40
    )
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  30




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Carrying Value
    
    
    Fair Value
    
    
    Maturity2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    DateFloating Rate Notes (1)
    
    $
    149,587
    
    
    $
    149,438
    
    
    $
    149,587
    
    
    $
    149,438
    
    
    Oct 2009
 
 (1)
    
    Notes incur interest at an annual rate of six-month LIBOR plus 8.50%. 31




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 32




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US LEC Corp. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 December 31,
    
    
    December 31,2006
    
    
    2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    42,562
    
    
    $
    30,704Restricted cash
    
    
    64
    
    
    
    67Accounts receivable (net of allowance of $3,964 and $10,349
at December 31, 2006 and December 31, 2005, respectively)
    
    
    44,496
    
    
    
    49,841Prepaid expenses and other assets
    
    
    9,303
    
    
    
    9,289Total current assets
    
    
    96,425
    
    
    
    89,901Property and Equipment, Net
    
    
    127,043
    
    
    
    144,350Other Assets
    
    
    14,004
    
    
    
    18,101Total Assets
    
    $
    237,472
    
    
    $
    252,352Liabilities and StockholdersDeficiencyCurrent LiabilitiesAccounts payable
    
    $
    10,958
    
    
    $
    9,125Accrued network costs
    
    
    17,681
    
    
    
    20,252Commissions payable
    
    
    134
    
    
    
    984Accrued expenses  other
    
    
    28,606
    
    
    
    31,567Deferred revenue
    
    
    15,122
    
    
    
    14,292Deferred income taxes
    
    
    1,644
    
    
    
    2,792Total current liabilities
    
    
    74,145
    
    
    
    79,012Long-Term Debt
    
    
    149,587
    
    
    
    149,438Other Liabilities
    
    
    5,489
    
    
    
    5,879Commitments and Contingencies (Note 7)Series A Mandatorily Redeemable Convertible Preferred Stock
(10,000 authorized shares, 296 and 278 shares issued with a redemption values
of $298,420 and $281,167 at December 31, 2006 and 2005, respectively) (Note 6)
    
    
    295,952
    
    
    
    278,037Stockholders DeficiencyCommon stock-Class A, $.01 par value (122,925 authorized shares, 33,271 and
30,751 shares outstanding at December 31, 2006 and December 31, 2005)
    
    
    333
    
    
    
    307Additional paid-in capital (Note 10)
    
    
    100,050
    
    
    
    93,181Retained deficit
    
    
    (388,084
    )
    
    
    (353,502
    )Total stockholders deficiency
    
    
    (287,701
    )
    
    
    (260,014
    )Total Liabilities and Stockholders Deficiency
    
    $
    237,472
    
    
    $
    252,352
 See notes to consolidated financial statements
 33




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##### Table of Contents



US LEC Corp. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Data)
 2006
    
    
    2005
    
    
    2004Revenue
    
    $
    424,201
    
    
    $
    387,738
    
    
    $
    356,181Network Expenses (including depreciation and amortization shown below)
    
    
    212,140
    
    
    
    186,924
    
    
    
    171,292Depreciation and Amortization
    
    
    48,656
    
    
    
    50,668
    
    
    
    49,851Selling, General and Administrative Expenses
    
    
    161,107
    
    
    
    148,902
    
    
    
    139,231Charge Related to Carrier Access Disputes
    
    
    
    
    
    
    23,292
    
    
    
    Gain (Loss) from Operations
    
    
    2,298
    
    
    
    (22,048
    )
    
    
    (4,193
    )Other (Income) ExpenseOther Income
    
    
    
    
    
    
    (202
    )
    
    
    Charges Related to Early Extinguishment of Debt (Note 5)
    
    
    
    
    
    
    
    
    
    
    4,416Interest Income
    
    
    (1,537
    )
    
    
    (1,003
    )
    
    
    (581
    )Interest Expense (Note 6)
    
    
    20,502
    
    
    
    17,805
    
    
    
    11,734Net Loss
    
    
    (16,667
    )
    
    
    (38,648
    )
    
    
    (19,762
    )Less: Preferred Stock Dividends (Note 6)
    
    
    17,253
    
    
    
    16,256
    
    
    
    15,316Less: Accretion of Preferred Stock Issuance Cost (Note 6)
    
    
    662
    
    
    
    623
    
    
    
    587Net Loss Attributable to Common Stockholders
    
    $
    (34,582
    )
    
    $
    (55,527
    )
    
    $
    (35,665
    )Net Loss Attributable to Common Stockholders Per Common Share (Note 11):Basic and Diluted
    
    $
    (1.10
    )
    
    $
    (1.83
    )
    
    $
    (1.19
    )Weighted Average Number of Shares Outstanding (Note 11):Basic and Diluted
    
    
    31,337
    
    
    
    30,399
    
    
    
    29,927
 See notes to consolidated financial statements
 34




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##### Table of Contents



US LEC Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
 2006
    
    2005
    
    2004Operating ActivitiesNet loss
    
    $
    (16,667
    )
    
    $
    (38,648
    )
    
    $
    (19,762
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    48,656
    
    
    
    50,668
    
    
    
    49,851Charges related to early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    4,416Accretion of debt
    
    
    150
    
    
    
    150
    
    
    
    509Accretion of lease exit costs
    
    
    127
    
    
    
    70
    
    
    
    73Other Income
    
    
    173
    
    
    
    (45
    )
    
    
    118Deferred compensation expense
    
    
    2,278Charge related to carrier access disputes
    
    
    
    
    
    
    23,292
    
    
    
    Changes in assets and liabilities which provided (used) cash:Accounts receivable
    
    
    5,253
    
    
    
    (12,260
    )
    
    
    (12,451
    )Notes receivable
    
    
    
    
    
    
    (150
    )
    
    
    Prepaid expenses and other assets
    
    
    245
    
    
    
    1,436
    
    
    
    202Other assets
    
    
    790
    
    
    
    (24
    )
    
    
    1,522Accounts payable
    
    
    71
    
    
    
    (289
    )
    
    
    2,712Deferred revenue
    
    
    830
    
    
    
    718
    
    
    
    (473
    )Accrued network costs
    
    
    (2,571
    )
    
    
    (8,452
    )
    
    
    3,642Customer commissions payable
    
    
    (850
    )
    
    
    (4,288
    )
    
    
    (7,586
    )Other liabilities  noncurrent
    
    
    (1,039
    )
    
    
    (392
    )
    
    
    (881
    )Accrued expenses  other
    
    
    (1,212
    )
    
    
    5,950
    
    
    
    3,327Net cash provided by operating activities
    
    
    36,234
    
    
    
    17,736
    
    
    
    25,219Investing ActivitiesPurchase of property and equipment
    
    
    (29,443
    )
    
    
    (34,954
    )
    
    
    (33,395
    )Businesses and assets acquired
    
    
    (1
    )
    
    
    (34
    )
    
    
    (2,321
    )Proceeds from insurance claim
    
    
    
    
    
    
    202
    
    
    
    Increase (decrease) in restricted cash
    
    
    3
    
    
    
    148
    
    
    
    (8
    )Net cash used in investing activities
    
    
    (29,441
    )
    
    
    (34,638
    )
    
    
    (35,724
    )Financing ActivitiesIssuance of notes payable
    
    
    460
    
    
    
    
    
    
    
    Proceeds from exercise of stock options, warrants, and ESPP
    
    
    4,617
    
    
    
    817
    
    
    
    1,458Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    149,250Payments on long-term debt
    
    
    
    
    
    
    
    
    
    
    (128,330
    )Payments on notes payable
    
    
    
    
    
    
    (980
    )
    
    
    (1,300
    )Payment for deferred loan fees
    
    
    (12
    )
    
    
    (463
    )
    
    
    (5,467
    )Net cash provided by (used in) financing activities
    
    
    5,065
    
    
    
    (626
    )
    
    
    15,611Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    11,858
    
    
    
    (17,528
    )
    
    
    5,106Cash and Cash Equivalents, Beginning of Period (1)
    
    
    30,704
    
    
    
    48,232
    
    
    
    43,126Cash and Cash Equivalents, End of Period
    
    $
    42,562
    
    
    $
    30,704
    
    
    $
    48,232Supplemental Cash Flow DisclosuresCash Paid for Interest
    
    $
    20,023
    
    
    $
    17,033
    
    
    $
    7,565Cash Paid for Income Taxes
    
    $
    
    
    
    $
    
    
    
    $
    Supplemental Noncash Investing and Financing Activities:At December 31, 2006, 2005, and 2004, $4,984, $3,537 and $7,677, respectively, of property and equipment
additions are included in outstanding accounts payable.
 See notes to consolidated financials statements.
 35




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##### Table of Contents



US LEC Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
For the years ended December 31, 2006, 2005 and 2004
(In Thousands)
 Common Stock
    
    Common Stock
    
    AdditionalClass A
    
    Class B
    
    Paid-In
    
    RetainedShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    TotalBalance, December 31, 2003
    
    
    29,677
    
    
    $
    297
    
    
    
    
    
    
    $
    
    
    
    $
    90,852
    
    
    $
    (262,310
    )
    
    $
    (171,161
    )Exercise of stock options
and warrants
    
    
    227
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    297Issuance of ESPP Stock
    
    
    379
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    1,157
    
    
    
    
    
    
    
    1,161Private Placement of Class
A Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    64Preferred Stock Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,316
    )
    
    
    (15,316
    )Accretion of Preferred
Stock Issuance Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (587
    )
    
    
    (587
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,762
    )
    
    
    (19,762
    )Balance, December 31, 2004
    
    
    30,283
    
    
    $
    303
    
    
    
    
    
    
    $
    
    
    
    $
    92,368
    
    
    $
    (297,975
    )
    
    $
    (205,304
    )Exercise of stock options
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    24Issuance of ESPP Stock
    
    
    458
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    789
    
    
    
    
    
    
    
    793Preferred Stock Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,256
    )
    
    
    (16,256
    )Accretion of Preferred Stock
Issuance Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (623
    )
    
    
    (623
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,648
    )
    
    
    (38,648
    )Balance, December 31, 2005
    
    
    30,751
    
    
    $
    307
    
    
    
    
    
    
    $
    
    
    
    $
    93,181
    
    
    $
    (353,502
    )
    
    $
    (260,014
    )Exercise of stock options
    
    
    2,093
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    3,777
    
    
    
    
    
    
    
    3,799Issuance of ESPP Stock
    
    
    427
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    818Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,278
    
    
    
    
    
    
    
    2,278Preferred Stock Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,253
    )
    
    
    (17,253
    )Accretion of Preferred
Stock Issuance Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (662
    )
    
    
    (662
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,667
    )
    
    
    (16,667
    )Balance, December 31, 2006
    
    
    33,271
    
    
    $
    333
    
    
    
    
    
    
    $
    
    
    
    $
    100,050
    
    
    $
    (388,084
    )
    
    $
    (287,701
    )
 See notes to consolidated financial statements
 36




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##### Table of Contents



US LEC Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2006, 2005 and 2004
(In Thousands, Except Per Share Data)
 1. PAETEC AND US LEC MERGERS
      2. ORGANIZATION AND NATURE OF BUSINESS
   37




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##### Table of Contents



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Revenue
Recognition
    Network
Expenses
  38




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##### Table of Contents



Cash and Cash Equivalents
 Restricted Cash
 Accounts
Receivable
 Deferred Customer and Network Installation Costs 
  Property and Equipment
  Telecommunications switching and other equipment
    
    5  9 yearsOffice equipment, furniture and other
    
    5 yearsLeasehold improvements
    
    The lesser of the estimateduseful lives or the lease term
  Long-Lived Assets
 39




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##### Table of Contents



Intangible
Assets
 Debt Issuance Cost
 Fair Value of Financial Instruments
 Income Taxes
 Concentration of Risk
  Use of Estimates
 Advertising
 Investment in Variable Interest Entity
 40




---



##### Table of Contents



Stock-Based Compensation Expense
     41




---



##### Table of Contents



2005
    
    2004Net loss, as reported
    
    $
    (38,648
    )
    
    $
    (19,762
    )Preferred dividends
    
    
    (16,256
    )
    
    
    (15,316
    )Accretion of preferred stock issuance fees
    
    
    (623
    )
    
    
    (587
    )Net loss attributable to common stockholders, as reported
    
    
    (55,527
    )
    
    
    (35,665
    )Add: Stock-based employee compensation expense included in reported net income
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
    
    
    (1,823
    )
    
    
    (6,357
    )Pro forma net loss
    
    $
    (57,350
    )
    
    $
    (42,022
    )Weighted average shares outstanding
    
    
    30,399
    
    
    
    29,927Net loss per share:Basic and diluted, as reported
    
    $
    (1.83
    )
    
    $
    (1.19
    )Basic and diluted, pro forma
    
    $
    (1.89
    )
    
    $
    (1.40
    )
   Recent
Accounting Pronouncements
   42




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##### Table of Contents



3. ACQUISITIONS
  December 31,2004Current assets
    
    $
    980Current liabilities
    
    
    (696
    )Property and equipment
    
    
    96Identifiable intangible assets
    
    
    2,009$
    2,389
  4. PROPERTY AND EQUIPMENT
  2006
    
    
    2005
    
    
    2004Telecommunications and other equipment
    
    $
    278,952
    
    
    $
    257,710
    
    
    $
    234,524Office equipment, furniture and other
    
    
    105,910
    
    
    
    101,596
    
    
    
    97,079Leasehold improvements
    
    
    31,285
    
    
    
    30,937
    
    
    
    30,862416,147
    
    
    
    390,243
    
    
    
    362,465Less accumulated depreciation and amortization
    
    
    (289,104
    )
    
    
    (245,893
    )
    
    
    (203,848
    )Total
    
    $
    127,043
    
    
    $
    144,350
    
    
    $
    158,617
 5. LONG-TERM DEBT
  43




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##### Table of Contents



6. SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
   44




---



##### Table of Contents



7. COMMITMENTS AND CONTINGENCIES
  Proposed Reduction and Unification of Rates for Access, Local and ISP-bound Traffic
 45




---



##### Table of Contents



Access
Revenues
    46




---



##### Table of Contents



Reciprocal
Compensation
    47




---



##### Table of Contents



Forbearance Petitions
  Legislation
 48




---



##### Table of Contents



Interconnection
Agreements with ILECs
 Interconnection with Other Carriers
 Other Litigation
 49




---



##### Table of Contents



8. INCOME TAXES
  2006
    
    
    2005
    
    
    2004Statutory federal rate
    
    
    (35.00
    )%
    
    
    (35.00
    )%
    
    
    (35.00
    )%State income taxes
    
    
    
    
    
    
    
    
    
    
    Change in valuation allowance
    
    
    35.28
    
    
    
    34.99
    
    
    
    35.27Miscellaneous
    
    
    (0.28
    )
    
    
    0.01
    
    
    
    (0.27
    )Effective tax rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  2006
    
    
    2005Deferred tax assets:Net operating loss carryforward
    
    $
    139,361
    
    
    $
    134,597Accrued expenses
    
    
    739
    
    
    
    3,395Deferred tax assets
    
    
    140,100
    
    
    
    137,992Less: Valuation Allowance
    
    
    (117,067
    )
    
    
    (108,995
    )Total deferred tax assets
    
    
    23,033
    
    
    
    28,997Deferred tax liabilities:Net deferred revenues
    
    
    1,504
    
    
    
    1,549Depreciation and amortization
    
    
    18,822
    
    
    
    24,721Capitalized salaries and interest
    
    
    2,707
    
    
    
    2,727Total deferred tax liabilities
    
    
    23,033
    
    
    
    28,997Net Deferred Taxes
    
    $
    
    
    
    $
    
   9. EMPLOYEE BENEFIT PLAN
  50




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##### Table of Contents



10. STOCKHOLDERS DEFICIENCY
 Common
Stock
 Employee
Stock Purchase Plan
 Stock Option Plan
  Options
    
    
    WarrantsWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Fair Value
    
    
    
    
    
    
    ExerciseNumber of
    
    
    Price Per
    
    
    at Date
    
    
    Number of
    
    
    Price PerShares
    
    
    Share
    
    
    of Grant
    
    
    Warrants
    
    
    WarrantBalance at December 31, 2003
    
    
    4,602
    
    
    $
    4.05
    
    
    
    
    
    
    
    3,496
    
    
    $
    2.01Granted at fair market value
    
    
    509
    
    
    $
    4.27
    
    
    $
    2.85
    
    
    
    
    
    
    
    Exercised
    
    
    (89
    )
    
    $
    3.33
    
    
    
    
    
    
    
    (184
    )
    
    $
    1.90Forfeited or cancelled
    
    
    (274
    )
    
    $
    4.01
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    4,748
    
    
    $
    4.09
    
    
    
    
    
    
    
    3,312
    
    
    $
    2.01Granted at fair market value
    
    
    522
    
    
    $
    2.32
    
    
    $
    1.57
    
    
    
    
    
    
    
    Exercised
    
    
    (9
    )
    
    $
    2.43
    
    
    
    
    
    
    
    
    
    
    $
    Forfeited or cancelled
    
    
    (358
    )
    
    $
    4.19
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2005
    
    
    4,903
    
    
    $
    3.90
    
    
    
    
    
    
    
    3,312
    
    
    $
    2.01Granted at fair market value
    
    
    4,903
    
    
    $
    2.20
    
    
    $
    0.52
    
    
    
    
    
    
    
    Exercised
    
    
    (1,312
    )
    
    $
    2.61
    
    
    
    
    
    
    
    (1,046
    )
    
    $
    2.02Forfeited or cancelled
    
    
    (4,130
    )
    
    $
    3.94
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    4,364
    
    
    $
    2.34
    
    
    
    
    
    
    
    2,266
    
    
    $
    2.01
 51




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##### Table of Contents



Options OutstandingNumber of
    
    
    Weighted
    
    
    Weighted
    
    
    Number of
    
    
    WeightedRange of
    
    
    Options
    
    
    Avg. Remaining
    
    
    Avg. Exercise
    
    
    Options
    
    
    Avg. ExerciseExercise Price
    
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    PriceOptions granted at fair market value:$
    1.74-2.06
    
    
    
    86
    
    
    7.3 years
    
    $
    1.96
    
    
    
    36
    
    
    $
    1.982.08 - 2.08
    
    
    
    2,918
    
    
    7.2 years
    
    
    2.08
    
    
    
    1,236
    
    
    
    2.082.12 - 2.14
    
    
    
    338
    
    
    8.9 years
    
    
    2.12
    
    
    
    
    
    
    
    2.20 - 2.34
    
    
    
    306
    
    
    8.5 years
    
    
    2.34
    
    
    
    76
    
    
    
    2.342.40 - 3.00
    
    
    
    461
    
    
    7.8 years
    
    
    2.99
    
    
    
    16
    
    
    
    3.003.01 - 3.98
    
    
    
    154
    
    
    7.9 years
    
    
    3.27
    
    
    
    48
    
    
    
    3.374.05 - 27.69
    
    
    
    101
    
    
    6.1 years
    
    
    6.37
    
    
    
    82
    
    
    
    6.53Total options outstanding at December 31, 2006
    
    $
    1.74-$27.69
    
    
    
    4,364
    
    
    7.5 years
    
    $
    2.34
    
    
    
    1,494
    
    
    $
    2.39
 Warrants OutstandingNumber of
    
    
    Weighted
    
    
    WeightedRange of
    
    
    Warrants
    
    
    Avg. Remaining
    
    
    Avg. ExerciseExercise Price
    
    
    Outstanding
    
    
    Contractual Life
    
    
    PriceWarrants granted at
    
    
    6.21
    
    
    
    26
    
    
    1.9 years
    
    $
    6.21fair market value
    
    
    2.06
    
    
    
    895
    
    
    2.8 years
    
    
    2.06921
    
    
    2.8 years
    
    
    2.18Warrants granted at less
than fair market value
    
    
    1.90
    
    
    
    1,345
    
    
    2.8 years
    
    
    1.90Total warrants outstanding
at December 31, 2006
    
    $
    1.90-$6.21
    
    
    
    2,266
    
    
    2.8 years
    
    $
    2.01
    52




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##### Table of Contents



Years EndedBlack-Scholes Option Valuation Assumptions (1)
    
    December 31, 2006
    
    December 31, 2005Risk-free interest rate (2)
    
    
    4.28% - 5.21
    %
    
    
    3.72% - 4.35
    %Expected term (years) (3)
    
    
    5.00 - 6.25
    
    
    
    5.20 - 5.30Volatility (4)
    
    
    71.5% - 91.4
    %
    
    
    80.0
    %Dividend yield (5)
    
    
    0
    %
    
    
    0
    %
 
 (1)
    
    Forfeitures are estimated and based on historical experience.(2)
    
    Based on interpolation between Treasury Constant Maturity rates with maturities corresponding to the
expected term of our stock options.(3)
    
    Represents the period of time that options granted are expected to be outstanding using the SAB 107
simplified method.(4)
    
    Expected stock price volatility is based on historical experience.(5)
    
    Assumes no dividend yield.  11. LOSS PER SHARE
  53




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##### Table of Contents



12. QUARTERLY FINANCIAL DATA (UNAUDITED)
  Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September
    
    
    December2006
    
    
    2006
    
    
    30, 2006
    
    
    31, 2006Revenue
    
    $
    102,797
    
    
    $
    106,683
    
    
    $
    105,420
    
    
    $
    109,301Network Expenses
    
    
    50,250
    
    
    
    53,149
    
    
    
    53,818
    
    
    
    54,923Depreciation and Amortization
    
    
    12,194
    
    
    
    12,172
    
    
    
    12,303
    
    
    
    11,987Selling, General and Administrative
    
    
    38,519
    
    
    
    39,618
    
    
    
    43,177
    
    
    
    39,793Income (Loss) from Operations
    
    
    1,834
    
    
    
    1,744
    
    
    
    (3,878
    )
    
    
    2,598Net Interest Expense
    
    
    (4,545
    )
    
    
    (4,867
    )
    
    
    (4,800
    )
    
    
    (4,753
    )Net Loss
    
    
    (2,711
    )
    
    
    (3,123
    )
    
    
    (8,678
    )
    
    
    (2,155
    )Preferred Stock Dividends
    
    
    4,218
    
    
    
    4,281
    
    
    
    4,345
    
    
    
    4,409Accretion of Preferred Stock Issuance Cost
    
    
    162
    
    
    
    164
    
    
    
    167
    
    
    
    169Net Loss Attributable to Common Stockholders
    
    $
    (7,091
    )
    
    $
    (7,568
    )
    
    $
    (13,190
    )
    
    $
    (6,733
    )Net Loss Attributable to Common Stockholders per Share:Basic and Diluted
    
    $
    (0.23
    )
    
    $
    (0.25
    )
    
    $
    (0.42
    )
    
    $
    (0.21
    )Weighted Average Share Outstanding:Basic and Diluted
    
    
    30,751
    
    
    
    30,792
    
    
    
    31,343
    
    
    
    32,442
 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September
    
    
    December2005
    
    
    2005
    
    
    30, 2005
    
    
    31, 2005Revenue
    
    $
    93,516
    
    
    $
    95,343
    
    
    $
    98,824
    
    
    $
    100,055Network Expenses
    
    
    45,784
    
    
    
    46,597
    
    
    
    47,680
    
    
    
    46,863Depreciation and Amortization
    
    
    12,931
    
    
    
    12,638
    
    
    
    12,684
    
    
    
    12,415Selling, General and Administrative
    
    
    35,868
    
    
    
    36,590
    
    
    
    37,560
    
    
    
    38,884Charge Related to Carrier Access Disputes (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,292Income (Loss) from Operations
    
    
    (1,067
    )
    
    
    (482
    )
    
    
    900
    
    
    
    (21,399
    )Other Income
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    Net Interest Expense
    
    
    (3,712
    )
    
    
    (4,279
    )
    
    
    (4,228
    )
    
    
    (4,583
    )Net Loss
    
    
    (4,779
    )
    
    
    (4,761
    )
    
    
    (3,126
    )
    
    
    (25,982
    )Preferred Stock Dividends
    
    
    3,974
    
    
    
    4,033
    
    
    
    4,094
    
    
    
    4,155Accretion of Preferred Stock Issuance Cost
    
    
    152
    
    
    
    155
    
    
    
    157
    
    
    
    159Net Loss Attributable to Common Stockholders
    
    $
    (8,905
    )
    
    $
    (8,949
    )
    
    $
    (7,377
    )
    
    $
    (30,296
    )Net Loss Attributable to Common Stockholders per Share:Basic and Diluted
    
    $
    (0.29
    )
    
    $
    (0.30
    )
    
    $
    (0.24
    )
    
    $
    (0.99
    )Weighted Average Share Outstanding:Basic and Diluted
    
    
    30,255
    
    
    
    30,295
    
    
    
    30,504
    
    
    
    30,507
 
 (1)
    
    The quarter ended December 31, 2005 Loss from Operations includes the impact of carrier
access disputes settlements as discussed in Note 7.(2)
    
    The quarters ended September 30, 2006 and December 31, 2006 include merger related
expenses of approximately $5,070 and $2,106, respectively. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  54




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##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES
  
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Directors and Executive Officers of the Registrant
 Richard T. Aab
 Tansukh V. Ganatra
 Michael C. Mac Donald
 55




---



##### Table of Contents



Aaron D. Cowell, Jr.
 David M. Flaum
 Steven L. Schoonover
 Anthony J. DiNovi
 Michael A. Krupka
 J. Lyle Patrick
 56




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##### Table of Contents



Audit Committee Information
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
 www.uslec.com
 
 ITEM 11. EXECUTIVE COMPENSATION
 Compensation Disclosure and Analysis
  
    
    link executive compensation to US LECs business strategy and performance to
attract, retain and reward key executive officers;
    
    provide performance incentives and equity-based compensation to align the long-term
interests of executive officers with those of US LECs stockholders; and
    
    offer salaries and incentive performance pay opportunities that are competitive in
the marketplace.
  Annual Cash Compensation
  57




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Annual Salary
  Performance-Based Cash Bonuses
   58




---



##### Table of Contents



Long-term Equity Compensation
  Federal Income Tax Considerations
  Unavailability of Compensation Committee Report
 
 A. Summary Compensation Table
  Non-Equity
    
    All OtherOption
    
    Incentive Plan
    
    CompensationName and Principal Position (1)
    
    Year
    
    Salary ($)
    
    Awards($)
    
    Compensation($)
    
    ($)
    
    Total ($)Richard T. Aab
    
    
    2006
    
    
    
    176,000
    
    
    
    
    
    
    
    
    
    
    
    3,195
    (2)
    
    
    179,195Chairman of the BoardAaron D. Cowell, Jr.
    
    
    2006
    
    
    
    362,558
    
    
    
    134,098
    (3)
    
    
    238,000
    (5)
    
    
    182,889
    (6)
    
    
    1,218,771Former Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    301,226
    (4)Tansukh V. Ganatra
    
    
    2006
    
    
    
    50,000
    (7)
    
    
    
    
    
    
    
    
    
    
    42
    (8)
    
    
    50,042
 59




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##### Table of Contents



Non-Equity
    
    All OtherOption
    
    Incentive Plan
    
    CompensationName and Principal Position (1)
    
    Year
    
    Salary ($)
    
    Awards($)
    
    Compensation($)
    
    ($)
    
    Total ($)Interim Chief Executive OfficerJ. Lyle Patrick
    
    
    2006
    
    
    
    304,500
    
    
    
    118,763
    (9)
    
    
    129,412
    (10)
    
    
    156,288
    (11)
    
    
    708,963Executive Vice President  Finance
and Chief Financial
Officer
 
 (1)
    
    Position shown is that held with US LEC. Mr. Cowells employment with US LEC was
terminated effective December 4, 2006. Mr. Ganatra was appointed as US LECs interim Chief
Executive Officer effective November 27, 2006.(2)
    
    This amount consists of the following: 401(k) plan company matching contribution, $3,046; and
group term life insurance premiums, $149.(3)
    
    Represents the dollar amount recognized for financial statement reporting purposes in 2006,
computed in accordance with SFAS 123R, with respect to an option to purchase an aggregate of
560,000 shares of US LEC common stock which was granted to Mr. Cowell pursuant to the US LEC
option exchange offer in consideration for the cancellation of previously granted options to
purchase an aggregate of 560,000 shares.(4)
    
    Represents the dollar amount recognized for financial statement reporting purposes with
respect to 2006, computed in accordance with SFAS 123R.(5)
    
    Represents bonus for 2006 earned pursuant to pre-established performance goals; the bonus
amount shown was authorized to be paid on or before December 31, 2006. If US LECs board of
directors finally determines that Mr. Cowells actual 2006 bonus would have been less than the
amount paid during 2006, the amount by which the bonus paid during 2006 exceeds Mr. Cowells
actual 2006 bonus will be deducted from the first cash severance payment to be made to Mr.
Cowell.(6)
    
    This amount consists of the following: retention bonus paid in connection with the completion
of the PAETEC Merger, $175,000; 401(k) plan company matching contribution, $7,500; and group
term life insurance premiums, $389. The incremental cost of perquisites is less than the
$10,000 minimum required for disclosure.(7)
    
    Represents $46,154 paid as fees pursuant to Mr. Ganatras consulting agreement and $3,846
paid as salary following Mr. Ganatras appointment as interim Chief Executive Officer. See
Item 13Certain Relationships and Related TransactionsGanatra Consulting Agreement for
further information regarding Mr. Ganatras compensation for 2006.(8)
    
    This amount consists of group term life insurance premiums. The incremental cost of
perquisites is less than the $10,000 minimum required for disclosure.(9)
    
    Represents the dollar amount recognized for financial statement reporting purposes with
respect to 2006, computed in accordance with SFAS 123R, other than the exclusion of any
estimates of forfeitures relating to service-based vesting.(10)
    
    Represents bonus for 2006 earned pursuant to pre-established performance goals; the bonus
amount shown was authorized to be paid on or before December 31, 2006, subject to upward
adjustment (with a corresponding additional payment to Mr. Patrick) or downward adjustment
(with a corresponding repayment by Mr. Patrick) if US LECs board of directors finally
determines that Mr. Patricks actual 2006 bonus would have differed from the amount paid
during 2006.(11)
    
    This amount consists of the following: retention bonus paid in connection with the completion
of the PAETEC Merger, $152,250; 401(k) plan company matching contribution, $3,782; and group
term life insurance premiums, $256. The incremental cost of perquisites is less than the
$10,000 minimum required for disclosure. B. Grants of Plan-Based Awards
  60




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All Other OptionAwards: Number
    
    Exercise or
    
    Closing Priceof
    
    Base
    
    of
    
    Grant Date FairDate of
    
    Securities
    
    Price of
    
    Shares on
    
    Value ofBoard
    
    Underlying
    
    Option
    
    Date
    
    Option AwardsName
    
    Grant Date
    
    Approval
    
    Options (#)
    
    Awards ($/Sh)
    
    of Grant ($)
    
    ($)Aaron D. Cowell, Jr.
    
    
    3/27/06
    (1)
    
    
    
    
    
    
    560,000
    
    
    
    2.08
    
    
    
    2.32
    
    
    
    34,5983/27/06
    (2)
    
    
    2/15/06
    
    
    
    190,000
    
    
    
    2.08
    
    
    
    2.32
    
    
    
    301,226
 
 (1)
    
    Option granted pursuant to the US LEC option exchange offer in consideration for the
cancellation of previously granted options to purchase an aggregate of 560,000 shares. The
Grant Date Fair Value of such award represents the incremental fair value of such option,
computed in accordance with SFAS 123R other than the exclusion of any estimate of forfeitures
relating to service-based vesting. In connection with the termination of Mr. Cowells
employment with US LEC, all such stock options became fully vested and exercisable in
accordance with the terms of Mr. Cowells Letter Agreement. For additional information about
such vesting, see US LEC Retention and Severance Agreements. For a discussion of the
assumptions used in the valuation, see note 10 to US LECs audited consolidated financial
statements as of and for the year ended December 31, 2006. For further information about the
US LEC option exchange offer, see Item 13Certain Relationships and Related
TransactionsOption Exchange Offer.(2)
    
    Represents stock options granted pursuant to the US LEC 1998 Omnibus Stock Plan, as amended.
For his performance in 2005, on February 15, 2006, US LECs board of directors authorized the
grant of an option to purchase 190,000 shares to be made to Mr. Cowell on March 27, 2006, with
an exercise price calculated as the average closing price of a share of US LEC common stock on
the five consecutive trading days immediately preceding March 27, 2006, the same method used
to determine the exercise price of options granted pursuant to the US LEC option exchange
offer. In connection with the termination of Mr. Cowells employment with US LEC, all such
stock options became fully vested and exercisable in accordance with the terms of Mr. Cowells
Letter Agreement, as described below under US LEC Retention and Severance Agreements. C. Outstanding Equity Awards at Fiscal Year-End
  Option AwardsNumber of
    
    Number ofSecurities
    
    SecuritiesUnderlying
    
    UnderlyingUnexercised
    
    Unexercised
    
    OptionOptions
    
    Options
    
    Exercise
    
    Option(#)
    
    (#)
    
    Price
    
    ExpirationName
    
    Exercisable
    
    Unexercisable
    
    ($)
    
    DateAaron D. Cowell, Jr.
    
    
    700,000
    (1)
    
    
    
    
    
    
    2.08
    
    
    
    12/31/07J. Lyle Patrick
    
    
    75,000
    
    
    
    225,000
    (2)
    
    
    2.34
    
    
    
    6/17/15
 61




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##### Table of Contents



Option AwardsNumber of SharesAcquired on
    
    Value RealizedName
    
    Exercise (#)
    
    On Exercise ($)Aaron D. Cowell, Jr.
    
    
    50,000
    
    
    
    336,000
 
 (1)
    
    Mr. Cowells stock options became fully vested in connection with the termination of his
employment with US LEC in December 2006.(2)
    
    For a description of the vesting of unvested stock options held by Mr. Patrick, see US LEC
Retention and Severance Agreements. D. Option Exercises and Stock Vested
  Option AwardsNumber of SharesAcquired on
    
    Value RealizedName
    
    Exercise (#)
    
    On Exercise ($)Richard T. Aab
    
    
    
    
    
    
    Aaron D.
Cowell, Jr.
    
    
    50,000
    
    
    
    336,000Tansukh V.
Ganatra
    
    
    
    
    
    
    J. Lyle Patrick
    
    
    
    
    
    
    
 E. US LEC Retention and Severance Agreements
    62




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##### Table of Contents



Number of
    
    
    
    
    
    Number of
    
    
    
    
    
    Aggregate IntrinsicShares Subject
    
    
    
    
    
    Shares Subject
    
    
    
    
    
    Value of Vested andto Vested
    
    Exercise Price
    
    to Unvested
    
    Exercise Price
    
    Unvested OptionsName of Executive Officer
    
    Options
    
    ($/share)
    
    Options
    
    ($/share)
    
    ($)Aaron D. Cowell, Jr.
    
    
    700,000
    
    
    
    2.08
    
    
    
    
    
    
    
    
    
    
    
    5,404,000J. Lyle Patrick
    
    
    75,000
    
    
    
    2.34
    
    
    
    225,000
    
    
    
    2.34
    
    
    
    2,238,000
 F. Director Compensation
  63




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##### Table of Contents



Number of
    
    Weighted
    
    Number of
    
    Weighted
    
    Aggregate IntrinsicShares Subject
    
    Average
    
    Shares Subject
    
    Average
    
    Value of Vested andto Vested
    
    Exercise Price
    
    to Unvested
    
    Exercise Price
    
    Unvested OptionsName of Director
    
    Options
    
    ($/share)
    
    Options
    
    ($/share)
    
    ($)David M. Flaum
    
    
    35,000
    
    
    
    2.21
    
    
    
    30,000
    
    
    
    2.08
    
    
    
    497,200Steven L. Schoonover
    
    
    85,000
    
    
    
    2.13
    
    
    
    80,000
    
    
    
    2.08
    
    
    
    1,269,200
 
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 Security Ownership of Certain Beneficial Owners and Management of US LEC
  
    
    each of US LECs directors;
    
    US LECs President and Chief Executive Officer and its other executive officers
serving during the year ended December 31, 2006;
    
    all directors and executive officers of US LEC as a group; and
    
    each person known to US LEC to own beneficially more than 5% of the US LEC common
stock or US LEC preferred stock.
  64




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##### Table of Contents



65




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##### Table of Contents



Common Stock
    
    Preferred StockNumber of
    
    % of
    
    Number of
    
    % ofName of Beneficial Owner
    
    Shares
    
    Class (1)
    
    Shares
    
    Class (1)
    
    % of Voting Power (1)Executive Officers and Directors:Richard T. Aab (2)
    
    
    10,425,429
    
    
    
    30.4
    
    
    
    
    
    
    
    
    
    
    
    23.2Tansukh V. Ganatra (3)
    
    
    3,182,763
    
    
    
    9.5
    
    
    
    
    
    
    
    
    
    
    
    7.2David M. Flaum (4)
    
    
    240,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Steven L. Schoonover (5)
    
    
    140,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Aaron D. Cowell, Jr. (6)
    
    
    763,086
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    *J. Lyle Patrick (7)
    
    
    100,299
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Michael C. Mac Donald (8)
    
    
    20,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Michael A. Krupka (9)
    
    
    5,355,813
    
    
    
    13.8
    
    
    
    149,480
    
    
    
    50.0
    
    
    
    12.1Anthony J. DiNovi (10)
    
    
    5,074,632
    
    
    
    13.2
    
    
    
    141,632
    
    
    
    47.4
    
    
    
    11.5All executive officers and directors as
a group (9 persons)
    
    
    25,302,022
    
    
    
    55.3
    
    
    
    291,112
    
    
    
    97.4
    
    
    
    55.3Other 5% Stockholders:Bain Capital CLEC Investors, L.L.C. (11)
    
    
    5,355,813
    
    
    
    13.8
    
    
    
    149,480
    
    
    
    50.0
    
    
    
    12.1Thomas H. Lee Investors (12)
    
    
    5,355,813
    
    
    
    13.8
    
    
    
    149,480
    
    
    
    50.0
    
    
    
    12.1
 
 *
    
    Represents beneficial ownership of less than 1%.(1)
    
    The percentage of beneficial ownership of the class and of the total common voting power as
to any person as of a particular date is calculated by dividing the number of shares
beneficially owned by such person, which includes the number of shares as to which such person
has the right to acquire voting or investment power within 60 days, by the sum of the number
of shares outstanding as of such date plus the number of shares as to which such person has
the right to acquire voting or investment power within 60 days. For purposes of determining
beneficial ownership of the US LEC common stock, each share of US LEC preferred stock is
deemed to be convertible into approximately 36 shares of US LEC common stock as of January 31,
2007.(2)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Aab include 4,309,500
shares of US LEC common stock held by Melrich Associates, L. P., for which Mr. Aab and his
wife are the sole general partners and share voting and dispositive power, and 789,473 shares
issuable upon the exercise of warrants that are exercisable as of or within 60 days after
January 31, 2007. Mr. Aabs address is c/o US LEC Corp., 6801 Morrison Boulevard, Charlotte,
North Carolina 28211. 66




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##### Table of Contents



(3)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Ganatra include 235,000
shares of US LEC common stock jointly owned with his wife, 105,263 shares issuable upon the
exercise of warrants that are exercisable as of or within 60 days after January 31, 2007 and
2,842,500 shares as to which Mr. Ganatra has exclusive voting and dispositive power through a
stock control agreement with his son. Mr. Ganatras address is c/o US LEC Corp., 6801 Morrison
Boulevard, Charlotte, North Carolina 28211.(4)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Flaum include 50,000
shares of US LEC common stock issuable upon the exercise of options that are exercisable as of
or within 60 days after January 31, 2007.(5)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Schoonover include
15,000 shares of US LEC common stock held by Schoonover Investments Limited Partnership, a
limited partnership controlled by Mr. Schoonover, and include 125,000 shares of US LEC common
stock issuable upon the exercise of options that are exercisable as of or within 60 days after
January 31, 2007.(6)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Cowell include 700,000
shares of US LEC common stock issuable upon the exercise of options that are exercisable as of
or within 60 days after January 31, 2007.(7)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Patrick include 75,000
shares of US LEC common stock issuable upon the exercise of options that are exercisable as of
or within 60 days after January 31, 2007.(8)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Mac Donald include
20,000 shares of US LEC common stock issuable upon the exercise of options that are
exercisable as of or within 60 days after January 31, 2007.(9)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. Krupka are issuable upon
conversion of the shares of US LEC preferred stock shown as owned by Mr. Krupka at a
conversion price per share of US LEC common stock of approximately $28.00. Mr. Krupka is a
member of Bain Capital Investors, LLC, which we refer to as Bain Investors. Bain Investors
is the sole general partner of Bain Capital Partners VI, L.P., which is the sole general
partner of Bain Capital Fund VI, L.P. or Bain Fund VI. Bain Fund VI is the Administrative
Member of Bain Capital CLEC Investors, L.L.C., or CLEC Investors. By virtue of this
relationship, Mr. Krupka may be deemed to share voting and dispositive power with respect to
the 149,480 shares of preferred stock held by CLEC Investors. Mr. Krupka disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest therein. Mr. Krupkas
address is Bain Capital, Inc., 111 Huntington Avenue, Boston, Massachusetts 02199.(10)
    
    The shares of US LEC common stock shown as beneficially owned by Mr. DiNovi are issuable upon
conversion of the shares of US LEC preferred stock shown as owned by Mr. DiNovi at a
conversion price per share of US LEC common stock of approximately $28.00. The 141,632 shares
of preferred stock include (a) 366 shares held by Mr. DiNovi for his own account, (b) 124,865
shares held by Thomas H. Lee Equity Fund IV, L.P., or THL Equity Fund, (c) 4,274 shares held
by Thomas H. Lee Foreign Fund IV, L.P., or THL Foreign Fund, and (d) 12,127 shares held by
Thomas H. Lee Foreign Fund IV-B, or THL Foreign Fund B. THL Equity Advisors IV, LLC. is the
general partner of each of these three funds. Mr. DiNovi is a managing director of THL
Advisors. Other than the 366 shares Mr. DiNovi holds for his own account, Mr. DiNovi disclaims
beneficial ownership of all reported shares except to the extent of his pecuniary interest
therein. Mr. DiNovis address is Thomas H. Lee Partners, L.P., 100 Federal Street, Boston,
Massachusetts 02110.(11)
    
    The information concerning CLEC Investors is based upon US LECs records and information
provided to US LEC on behalf of CLEC Investors. The shares of US LEC common stock shown as
beneficially owned by CLEC Investors are issuable upon conversion of the shares of US LEC
preferred stock shown as owned by CLEC Investors at a conversion price per share of US LEC
common stock of approximately $28.00. By virtue of its role as Administrative Member of CLEC
Investors, Bain Fund VI may be deemed to beneficially own all 149,480 shares of preferred
stock held by CLEC Investors. Bain Fund VI disclaims beneficial ownership of all but the
63,750 shares of preferred stock in which it holds a pecuniary interest. Based on their
pro-rata share of membership interests in CLEC Investors, other members of CLEC Investors
affiliated with Bain Fund VI may be deemed to beneficially own shares of preferred stock held
by CLEC Investors as follows: (a) 70,737 shares held by Bain Capital VI Coinvestment Fund,
L.P., whose sole general partner is Bain Partners VI, whose sole general partner is Bain
Investors; (b) 3,880 shares held by BCIP Associates II, a Delaware general partnership of
which Bain Investors is the managing 67




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##### Table of Contents



partner; (c) 416 shares held by BCIP Trust Associates II, a Delaware general partnership of
which Bain Investors is the managing partner; (d) 631 shares held by BCIP Associates II-B, a
Delaware general partnership of which Bain Investors is the managing partner; (e) 469 shares
held by BCIP Trust Associates II-B, a Delaware general partnership of which Bain Investors
is the managing partner; (f) 639 shares held by BCIP Associates II-C, a Delaware general
partnership of which Bain Investors is the managing partner; and (g) 213 shares held by PEP
Investments Pty Ltd., for which Bain Investors is attorney-in-fact. Bain Capital, Inc.s
address is 111 Huntington Avenue, Boston, Massachusetts 02199.(12)
    
    The information concerning the Thomas H. Lee Investors is based upon US LECs records and
information provided to US LEC on behalf of Thomas H. Lee Investors. The shares of US LEC
common stock shown as beneficially owned by the Thomas H. Lee Investors are issuable upon
conversion of the shares of US LEC preferred stock shown as owned by the Thomas H. Lee
Investors at a conversion price per share of US LEC common stock of approximately $28.00. The
149,480 shares of preferred stock includes (a) 124,865 shares held by THL Equity Fund, whose
sole general partner is THL Advisors, (b) 4,274 shares held by THL Foreign Fund, whose sole
general partner is THL Advisors, (c) 12,127 shares held by THL Foreign Fund B, whose sole
general partner is THL Advisors, (d) 812 shares held by Thomas H. Lee Charitable Investment
Limited Partnership, (e) an aggregate of 5,348 shares held by certain parties affiliated with
Thomas H. Lee Partners, L.P., and (f) 2,054 shares held by Putnam Investment Holdings, LLC.
Each of the Thomas H. Lee Investors disclaims beneficial ownership of the shares held by the
other Thomas H. Lee Investors. Thomas H. Lee Partners, L.P.s address is 100 Federal Street,
Boston, Massachusetts 02110. Equity Compensation Plans
  Number of securitiesNumber of
    
    
    
    
    
    remaining available for futuresecurities to be issued
    
    Weighted-average
    
    issuance under equityupon exercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,
    
    (excluding securities reflectedwarrants, rights
    
    warrants, rights
    
    in column (a)Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    4,363,984
    
    
    $
    2.34
    
    
    
    1,260,000
 
 1)
    
    Includes shares issuable under the 1998 Omnibus Stock Plan, as amended, and the Employee
Stock Purchase Plan (the ESPP), as amended. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Ganatra Consulting Agreement
 68




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##### Table of Contents



Option Exchange Offer
 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  2005
    
    2006Audit Fees (1)Recurring Audit and Quarterly Reviews
    
    $
    508,000
    
    
    $
    515,000Registration Statements and Related Services
    
    
    
    
    
    $
    59,000Tax Fees (2)Tax Compliance Services
    
    $
    20,000
    
    
    $
    20,000All Other Fees (3)
    
    
    
    
    
    $
    187,200
 
 1)
    
    Audit fees consist of fees for professional services rendered in connection with or
related to the audit of our consolidated annual financial statement, for the review of
interim consolidated financial statements in Form 10-Qs and for services normally provided
in connection with statutory and regulatory filings or engagements, including registration
statements for the merger with PAETEC.2)
    
    Tax fees consist of fees billed for professional services rendered for tax compliance
and tax advice.3)
    
    All other fees consist of fees billed for assistance with assessment for
Sarbanes-Oxley, SEC correspondence, review of the employee stock purchase plan amendments
and effects to reporting, and products and services other than the services reported in
other categories.   69




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
           ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of August 11, 2006, as amended, among US LEC Corp. (US LEC), PAETEC
Corp. (PAETEC), PAETEC Holding Corp. (PAETEC Holding), WC Acquisition Sub U Corp. and WC Acquisition Sub
P Corp. 13.1
    
    Restated Certificate of
Incorporation of the Company 23.2
    
    Amended and Restated Bylaws of the
Company 33.3
    
    Certificate of Designation Related
to Series A Convertible Preferred Stock 4
 
 1
    
    Incorporated by reference to Exhibit 2.1 to the Registration Statement
on Form S-4 (File No. 333-138594) of PAETEC Holding Corp.2
    
    Incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-46341) filed February 13, 1998.3
    
    Incorporated by reference to the
Companys Quarterly Report on Form 10-Q for its quarter ended March 31,
2004.4
    
    Incorporated by reference to the
Companys Current Report on Form 8-K filed May 12, 2000. 70




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ExhibitNumber
    
    Description3.4
    
    Amendment to Certificate of
Designation Related to Series A Convertible Preferred Stock 53.5
    
    Certificate of Amendment of
Restated Certificate of Incorporation of the Company 63.6
    
    Certificate of Retirement and
Prohibition of Reissuance of Class B Common Stock of US LEC Corp. 64.1
    
    Form of Class A Common Stock
Certificate 24.4
    
    Corporate Governance Agreement,
dated April 11, 2000 44.5
    
    Registration Rights Agreement,
dated April 11, 2000 44.6
    
    Voting and Tag Along Agreement dated as of April 11, 2000 by and among certain Investors, Richard T. Aab,
Melrich Associates, L.P., Tansukh V. Ganatra and Super STAR
Associates Limited Partnership 54.7
    
    Amendment to Voting and Tag Along Agreement dated as of August 6, 2001 by and among Richard T. Aab, Melrich
Associates, L.P., Super STAR Associates Limited Partnership, Bain Capital CLEC Investors, L.L.C., Thomas H.
Lee Equity Fund IV, L.P., Thomas H. Lee foreign Fund IV-B, L.P. and Thomas H. Lee Foreign Fund IV, L.P.
54.8
    
    Form of Second Priority Senior
Secured Floating Rate Note due 2009, Series B
104.9
    
    Indenture, dated September 30, 2004, by and among US LEC Corp., as issuer, the Guarantors party thereto, as
Guarantors, and U.S. Bank National Association, as trustee, relating to the Second Priority Senior Secured
Floating Rate Notes due 2009
94.11
    
    Security Agreement, dated September 30, 2004, by and among US LEC Corp., the Guarantors party thereto and
U.S. Bank National Association, as trustee
94.12
    
    Trademark Security Agreement, dated September 30, 2004, by and among US LEC Corp., and U.S. National
Association, as trustee
94.13
    
    Form of Common Stock Purchase
Warrant 74.14
    
    Registration Rights Agreement,
dated December 31, 2002 710.1
    
    Preferred Stock Repurchase Agreement, dated as of August 11, 2006, as amended, by and among US LEC, the
persons identified on the signature pages thereto as the Bain Seller and the THL Sellers, PAETEC, Richard
T. Aab, Melrich Associates, L.P. and Tansukh V. Ganatra.
1110.2
    
    Voting Agreement, dated as of August 11, 2006, as amended, by and among PAETEC, US LEC, Madison Dearborn
Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P. and Special Advisors Fund I, LLC.
Filed as Exhibit 10.2 to the Registration Statement on Form S-4 (File No. 333-138594) of PAETEC
Holding Corp. and incorporated herein by reference.
 
 5
    
    Incorporated by reference to the
Companys Annual Report on Form 10-K for its year ended December 31,
2001.6
    
    Incorporated by reference to Amendment No. 1
to the Companys Registration Statement on Form 8-A filed January 16,
2004.7
    
    Incorporated by reference to the
Companys Current Report on Form 8-K filed January 17, 2003. 71




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ExhibitNumber
    
    Description10.3
    
    Voting Agreement, dated as of August 11, 2006, as amended, by and among PAETEC, US LEC, Blackstone CCC
Capital Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and Blackstone Family Investment
Partnership III L.P. Filed as Exhibit 10.3 to the Registration Statement on Form S-4 (File No.
333-138594) of PAETEC Holding Corp. and incorporated herein by reference.10.4
    
    Commitment Letter, dated August 11, 2006, among Deutsche Bank Trust Company Americas, Deutsche Bank
Securities Inc., Merrill Lynch Capital Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIT
Lending Services Corporation, and CIT Capital Securities, LLC and US LEC, PAETEC and PAETEC Communications,
Inc. Filed as Exhibit 10.4 to the August 2006 US LEC Form 8-K and incorporated herein by reference.10.5
    
    Loan and Security Agreement dated October 25, 2005, by and among US LEC Corp., the Guarantors party thereto,
and Wachovia Bank, National Association, as Lender. Filed as Exhibit 10.3 to US LEC Corp.s Annual Report on
Form 10-K for the year ended December 31,2005 and incorporated herein by reference.10.6
    
    Pledge and Security Agreements dated October 25, 2005, by US LEC Corp., to and in favor of Wachovia Bank,
National Association. Filed as Exhibit 10.4 to US LEC Corp.s Annual Report on Form 10-K for the year ended
December 31,2005 and incorporated herein by reference.10.7
    
    Trademark Security Agreement dated October 25, 2005, by US LEC Corp., to and in favor of Wachovia Bank,
National Association. Filed as Exhibit 10.5 to US LEC Corp.s Annual Report on Form 10-K for the year ended
December 31,2005 and incorporated herein by reference.10.8
    
    Guarantee dated October 25, 2005, by the Guarantors in favor of Wachovia Bank, National Association. Filed as
Exhibit 10.6 to US LEC Corp.s Annual Report on Form 10-K for the year ended December 31,2005 and
incorporated herein by reference.10.9
    
    Form of Letter Agreement by and between US LEC and Aaron D. Cowell. Filed as Exhibit 10.6 to the August 14,
2006 US LEC Corp. Form 8-K and incorporated herein by reference.10.10
    
    Form of Letter Agreement by and between US LEC and J. Lyle Patrick. Filed as Exhibit 10.7 to the August 14,
2006 US LEC Corp. Form 8-K and incorporated herein by reference10.11.1
    
    Form of US LEC 1998 Omnibus Stock Plan, as amended. Filed as Exhibit (d) to US LEC Corp.s Schedule TO filed
February 23, 2006 and incorporated herein by reference.10.11.2
    
    Form of Non-Qualified Stock Option Agreement (for a Director who is not an Employee) under the US LEC 1998
Omnibus Stock Plan. Filed as Exhibit 10.12.2 to the Registration Statement on Form S-4 (File No. 333-138594)
of PAETEC Holding Corp. and incorporated herein by reference.10.11.3
    
    Form of Incentive Stock Option Agreement under the US LEC 1998 Omnibus Stock Plan. Filed as Exhibit 10.12.3
to the Registration Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated
herein by reference.10.11.4
    
    Form of Non-Qualified Stock Option Agreement under the 1998 Omnibus Stock Plan. Filed as Exhibit 10.12.4 to
the Registration Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein
by reference.10.12
    
    US LEC Corp. Retention and Severance Plan. Filed as Exhibit 10.5 to the August 2006 US LEC Corp. Form 8-K and
incorporated herein by reference.10.13
    
    Consulting Agreement dated, as of February 7, 2002, by and between US LEC and Tansukh V. Ganatra. Filed as
Exhibit 10.8 to US LEC Corp.s Annual Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference.
8
 72




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ExhibitNumber
    
    Description**10.14
    
    Settlement Agreement and General Release between Sprint Communications Company L.P., on behalf of itself and
all parent, subsidiary and affiliated corporations, excluding the business of the Sprint local
telecommunications division operations, and US LEC, and all of its affiliates or subsidiaries. Filed as
Exhibit 10.1 to US LEC Corp.s Quarterly Report on Form 10-Q (SEC File No. 0-24061) for the period ended
March 31, 2006, as amended as of February 6, 2007 (the 2006 US LEC Form 10-Q), and incorporated herein by
reference.**10.15
    
    Settlement Agreement between MCI, LLC (formerly known as MCI, Inc.) and all of its subsidiaries, and US LEC
and all of its affiliates or subsidiaries. Filed as Exhibit 10.2 to the 2006 US LEC Form 10-Q and
incorporated herein by reference.10.16
    
    Release and Settlement Agreement, dated as of August 4, 2006, by and between Qwest Communications Corporation
and US LEC Corp., US LEC Communications Inc., US LEC of Alabama Inc., US LEC of Florida Inc., US LEC of
Georgia Inc., US LEC of Maryland Inc., US LEC of North Carolina Inc., US LEC of South Carolina Inc., US LEC
of Pennsylvania Inc., US LEC of Tennessee Inc. and US LEC of Virginia LLC. Filed as Exhibit 10.19 to the
Registration Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein by
reference.10.17
    
    Intrastate Wireless-Originated 8YY Services Settlement Agreement, dated as of August 4, 2006, by and between
Qwest Communications Corporation, on behalf of itself and all parent, subsidiary and affiliated corporations,
and US LEC, and all of its affiliates or subsidiaries. Filed as Exhibit 10.20 to the Registration Statement
on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein by reference.10.18
    
    Wholesale Services Agreement, dated August 4, 2006, between Qwest Communications Corporation and US LEC and
its subsidiaries. Filed as Exhibit 10.21 to the Registration Statement on Form S-4 (File No. 333-138594) of
PAETEC Holding Corp. and incorporated herein by reference.10.19
    
    Indemnity Agreement, dated August 6, 2001, by and among US LEC, Metacomm, LLC, RTA Associates, LLC, Richard
T. Aab and Joyce M. Aab. Filed as Exhibit 10.6 to US LECs Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and incorporated herein by reference. Filed as Exhibit 10.22 to the Registration
Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein by reference.10.20
    
    Indemnity Agreement dated August 6, 2001, by and among US LEC, Tansukh V. Ganatra, Sarlaben T. Ganatra,
Rajesh T. Ganatra and Super STAR Associates Limited Partnership. Filed as Exhibit 10.5 to US LEC Corp.s
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference.21
    
    Subsidiaries of US LEC Corp.23
    
    Consent of Deloitte & Touche
LLP, Independent Registered Public Accounting Firm, regarding the financial statements of US LEC.24
    
    Power of Attorney.31.1
    
    Rule 13a-14(a) Certification of
Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of
Chief Financial Officer.32.1
    
    Certification of
Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 8
    
    Management or compensatory plan or
arrangement.9
    
    Incorporated by reference to the Companys current
Report on Form 8-K filed October 6, 2004.10
    
    Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-4 (File No. 333-120232) filed November 4, 2004.11
    
    Incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S-4 (File No. 333-138594) of PAETEC Holding
Corp.**
    
    Certain confidential portions of this exhibit were omitted by means of
redacting a portion of the text. This exhibit has been filed separately
with the Secretary of the SEC without such text pursuant to the
Application of US LEC Corp. Requesting Confidential Treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
    
    Certain confidential portions of this exhibit were omitted by means
of redacting a portion of the text. This exhibit has been filed separately with
the Secretary of the SEC without such text pursuant to the Application of US
LEC Corp. Requesting Confidential Treatment pursuant to Rule 406 under the
Securities Act of 1933. 73




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##### Table of Contents



SCHEDULE II
 VALUATION AND QUALIFYING ACCOUNTS
 US LEC Corp. (IN THOUSANDS)
 AdditionsBalance at
    
    
    
    
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Charged to Costs
    
    Other
    
    
    
    
    
    End ofDescription
    
    of Period
    
    and Expenses
    
    Accounts
    
    Deductions
    
    PeriodAllowance against accounts receivableYear ended December 31, 2006
    
    $
    10,349
    
    
    $
    2,430
    
    
    
    
    
    
    $
    8,815
    
    
    $
    3,964Year ended December 31, 2005
    
    $
    10,137
    
    
    $
    28,116
    (2)
    
    
    
    
    
    $
    27,904
    (2)
    
    $
    10,349Year ended December 31, 2004
    
    $
    10,998
    
    
    $
    7,270
    
    
    $
    417
    (1)
    
    $
    8,548
    
    
    $
    10,137Allowance against deferred tax assetsYear ended December 31, 2006
    
    $
    108,995
    
    
    $
    8,072
    
    
    
    
    
    
    
    
    
    
    $
    117,067Year ended December 31, 2005
    
    $
    94,312
    
    
    $
    14,683
    
    
    $
    
    
    
    $
    
    
    
    $
    108,995Year ended December 31, 2004
    
    $
    85,695
    
    
    $
    8,617
    
    
    $
    
    
    
    $
    
    
    
    $
    94,312
 
 (1)
    
    Represents allowance for doubtful accounts related to the accounts receivable purchased from StarNet on November 10, 2004.(2)
    
    Contains $22,893 included in charge related to carrier access disputes. 74




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##### Table of Contents



SIGNATURES
  Date:      April 2, 2007
    By:
    /s/ Keith M. WilsonKeith M. Wilson
Executive Vice President and
Chief Financial Officer of PAETEC Holding Corp.  Signature
    
    Title
    
    Date/s/ Arunas A. Chesonis

Arunas A. Chesonis
    
    Chairman and Chief Executive Officer
(Principal Executive Officer)
    
    April 2, 2007/s/ Keith M. Wilson

Keith M. Wilson
    
    Director and Executive Vice President and
Chief Financial Officer (Principal Financial Officer)
    
    April 2, 2007/s/ Richard T. Aab

Richard T. Aab
    
    Vice Chairman
    
    April 2, 2007/s/ Tansukh V. Ganatra

Tansukh V. Ganatra
    
    Director
    
    April 2, 2007/s/ James A. Kofalt

James A. Kofalt
    
    Director
    
    April 2, 2007/s/ Michael C. Mac Donald

Michael C. Mac Donald
    
    Director
    
    April 2, 2007/s/ William R. McDermott

William R. McDermott
    
    Director
    
    April 2, 2007/s/ H. Russell Frisby

H. Russell Frisby
    
    Director
    
    April 2, 2007/s/ Mark Zupan

Mark Zupan
    
    Director
    
    April 2, 2007/s/ Algimantas K. Chesonis
    
    Senior Vice President, Chief Accounting
Officer and Controller (Principal Accounting Officer)
    
    April 2, 2007
 75




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of August 11, 2006, as amended, among US LEC Corp. (US LEC), PAETEC
Corp. (PAETEC), PAETEC Holding Corp. (PAETEC Holding), WC Acquisition Sub U Corp. and WC Acquisition Sub
P Corp. 13.1
    
    Restated Certificate of
Incorporation of the Company 23.2
    
    Amended and Restated Bylaws of the
Company 33.3
    
    Certificate of Designation Related
to Series A Convertible Preferred Stock 43.4
    
    Amendment to Certificate of
Designation Related to Series A Convertible Preferred Stock 53.5
    
    Certificate of Amendment of
Restated Certificate of Incorporation of the Company 63.6
    
    Certificate of Retirement and
Prohibition of Reissuance of Class B Common Stock of US LEC Corp. 64.1
    
    Form of Class A Common Stock
Certificate 24.4
    
    Corporate Governance Agreement,
dated April 11, 2000 44.5
    
    Registration Rights Agreement,
dated April 11, 2000 44.6
    
    Voting and Tag Along Agreement dated as of April 11, 2000 by and among certain Investors, Richard T. Aab,
Melrich Associates, L.P., Tansukh V. Ganatra and Super STAR
Associates Limited Partnership 54.7
    
    Amendment to Voting and Tag Along Agreement dated as of August 6, 2001 by and among Richard T. Aab, Melrich
Associates, L.P., Super STAR Associates Limited Partnership, Bain Capital CLEC Investors, L.L.C., Thomas H.
Lee Equity Fund IV, L.P., Thomas H. Lee foreign Fund IV-B, L.P. and Thomas H. Lee Foreign Fund IV, L.P.
54.8
    
    Form of Second Priority Senior
Secured Floating Rate Note due 2009, Series B
104.9
    
    Indenture, dated September 30, 2004, by and among US LEC Corp., as issuer, the Guarantors party thereto, as
Guarantors, and U.S. Bank National Association, as trustee, relating to the Second Priority Senior Secured
Floating Rate Notes due 2009
94.11
    
    Security Agreement, dated September 30, 2004, by and among US LEC Corp., the Guarantors party thereto and
U.S. Bank National Association, as trustee
9
 
 1
    
    Incorporated by reference to Exhibit 2.1 to the Registration
Statement on Form S-4 (File No. 333-138594) of PAETEC Holding
Corp.2
    
    Incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-46341) filed February 13, 1998.3
    
    Incorporated by reference to the
Companys Quarterly Report on Form 10-Q for its quarter ended March 31,
2004.4
    
    Incorporated by reference to the
Companys Current Report on Form 8-K filed May 12, 2000.5
    
    Incorporated by reference to the
Companys Annual Report on Form 10-K for its year ended December 31,
2001.6
    
    Incorporated by reference to Amendment No. 1
to the Companys Registration Statement on Form 8-A filed January 16,
2004. 76




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##### Table of Contents



ExhibitNumber
    
    Description4.12
    
    Trademark Security Agreement, dated September 30, 2004, by and among US LEC Corp., and U.S. National
Association, as trustee
94.13
    
    Form of Common Stock Purchase
Warrant 74.14
    
    Registration Rights Agreement,
dated December 31, 2002 710.1
    
    Preferred Stock Repurchase Agreement, dated as of August 11, 2006, as amended, by and among US LEC, the
persons identified on the signature pages thereto as the Bain Seller and the THL Sellers, PAETEC, Richard
T. Aab, Melrich Associates, L.P. and Tansukh V. Ganatra.
1110.2
    
    Voting Agreement, dated as of August 11, 2006, as amended, by and among PAETEC, US LEC, Madison Dearborn
Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P. and Special Advisors Fund I, LLC.
Filed as Exhibit 10.2 to the Registration Statement on Form S-4 (File No. 333-138594) of PAETEC
Holding Corp. and incorporated herein by reference.10.3
    
    Voting Agreement, dated as of August 11, 2006, as amended, by and among PAETEC, US LEC, Blackstone CCC
Capital Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and Blackstone Family Investment
Partnership III L.P. Filed as Exhibit 10.3 to the Registration Statement on Form S-4 (File No.
333-138594) of PAETEC Holding Corp. and incorporated herein by reference.10.4
    
    Commitment Letter, dated August 11, 2006, among Deutsche Bank Trust Company Americas, Deutsche Bank
Securities Inc., Merrill Lynch Capital Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIT
Lending Services Corporation, and CIT Capital Securities, LLC and US LEC, PAETEC and PAETEC Communications,
Inc. Filed as Exhibit 10.4 to the August 2006 US LEC Form 8-K and incorporated herein by reference.10.5
    
    Loan and Security Agreement dated October 25, 2005, by and among US LEC Corp., the Guarantors party thereto,
and Wachovia Bank, National Association, as Lender. Filed as Exhibit 10.3 to US LEC Corp.s Annual Report on
Form 10-K for the year ended December 31,2005 and incorporated herein by reference.10.6
    
    Pledge and Security Agreements dated October 25, 2005, by US LEC Corp., to and in favor of Wachovia Bank,
National Association. Filed as Exhibit 10.4 to US LEC Corp.s Annual Report on Form 10-K for the year ended
December 31,2005 and incorporated herein by reference.10.7
    
    Trademark Security Agreement dated October 25, 2005, by US LEC Corp., to and in favor of Wachovia Bank,
National Association. Filed as Exhibit 10.5 to US LEC Corp.s Annual Report on Form 10-K for the year ended
December 31,2005 and incorporated herein by reference.10.8
    
    Guarantee dated October 25, 2005, by the Guarantors in favor of Wachovia Bank, National Association. Filed as
Exhibit 10.6 to US LEC Corp.s Annual Report on Form 10-K for the year ended December 31,2005 and
incorporated herein by reference.10.9
    
    Form of Letter Agreement by and between US LEC and Aaron D. Cowell. Filed as Exhibit 10.6 to the August 14,
2006 US LEC Corp. Form 8-K and incorporated herein by reference.10.10
    
    Form of Letter Agreement by and between US LEC and J. Lyle Patrick. Filed as Exhibit 10.7 to the August 14,
2006 US LEC Corp. Form 8-K and incorporated herein by reference
 
 7
    
    Incorporated by reference to the
Companys Current Report on Form 8-K filed January 17, 2003. 77




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##### Table of Contents



ExhibitNumber
    
    Description10.11.1
    
    Form of US LEC 1998 Omnibus Stock Plan, as amended. Filed as Exhibit (d) to US LEC Corp.s Schedule TO filed
February 23, 2006 and incorporated herein by reference.10.11.2
    
    Form of Non-Qualified Stock Option Agreement (for a Director who is not an Employee) under the US LEC 1998
Omnibus Stock Plan. Filed as Exhibit 10.12.2 to the Registration Statement on Form S-4 (File No. 333-138594)
of PAETEC Holding Corp. and incorporated herein by reference.10.11.3
    
    Form of Incentive Stock Option Agreement under the US LEC 1998 Omnibus Stock Plan. Filed as Exhibit 10.12.3
to the Registration Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated
herein by reference.10.11.4
    
    Form of Non-Qualified Stock Option Agreement under the 1998 Omnibus Stock Plan. Filed as Exhibit 10.12.4 to
the Registration Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein
by reference.10.12
    
    US LEC Corp. Retention and Severance Plan. Filed as Exhibit 10.5 to the August 2006 US LEC Corp. Form 8-K and
incorporated herein by reference.10.13
    
    Consulting Agreement dated, as of February 7, 2002, by and between US LEC and Tansukh V. Ganatra. Filed as
Exhibit 10.8 to US LEC Corp.s Annual Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference.
8**10.14
    
    Settlement Agreement and General Release between Sprint Communications Company L.P., on behalf of itself and
all parent, subsidiary and affiliated corporations, excluding the business of the Sprint local
telecommunications division operations, and US LEC, and all of its affiliates or subsidiaries. Filed as
Exhibit 10.1 to US LEC Corp.s Quarterly Report on Form 10-Q (SEC File No. 0-24061) for the period ended
March 31, 2006, as amended as of February 6, 2007 (the 2006 US LEC Form 10-Q), and incorporated herein by
reference.**10.15
    
    Settlement Agreement between MCI, LLC (formerly known as MCI, Inc.) and all of its subsidiaries, and US LEC
and all of its affiliates or subsidiaries. Filed as Exhibit 10.2 to the 2006 US LEC Form 10-Q and
incorporated herein by reference.10.16
    
    Release and Settlement Agreement, dated as of August 4, 2006, by and between Qwest Communications Corporation
and US LEC Corp., US LEC Communications Inc., US LEC of Alabama Inc., US LEC of Florida Inc., US LEC of
Georgia Inc., US LEC of Maryland Inc., US LEC of North Carolina Inc., US LEC of South Carolina Inc., US LEC
of Pennsylvania Inc., US LEC of Tennessee Inc. and US LEC of Virginia LLC. Filed as Exhibit 10.19 to the
Registration Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein by
reference.
 
 8
    
    Management or compensatory plan or
arrangement.9
    
    Incorporated by reference to the Companys current
Report on Form 8-K filed October 6, 2004.10
    
    Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-4 (File No. 333-120232) filed November 4, 2004.11
    
    Incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-4 (File No. 333-138594) of
PAETEC Holding Corp.**
    
    Certain confidential portions of this exhibit were omitted by means of
redacting a portion of the text. This exhibit has been filed separately
with the Secretary of the SEC without such text pursuant to the
Application of US LEC Corp. Requesting Confidential Treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
    
    Certain confidential portions of this exhibit were omitted by means
of redacting a portion of the text. This exhibit has been filed separately with
the Secretary of the SEC without such text pursuant to the Application of US
LEC Corp. Requesting Confidential Treatment pursuant to Rule 406 under the
Securities Act of 1933.




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##### Table of Contents



ExhibitNumber
    
    Description10.17
    
    Intrastate Wireless-Originated 8YY Services Settlement Agreement, dated as of August 4, 2006, by and between
Qwest Communications Corporation, on behalf of itself and all parent, subsidiary and affiliated corporations,
and US LEC, and all of its affiliates or subsidiaries. Filed as Exhibit 10.20 to the Registration Statement
on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein by reference.10.18
    
    Wholesale Services Agreement, dated August 4, 2006, between Qwest Communications Corporation and US LEC and
its subsidiaries. Filed as Exhibit 10.21 to the Registration Statement on Form S-4 (File No. 333-138594) of
PAETEC Holding Corp. and incorporated herein by reference.10.19
    
    Indemnity Agreement, dated August 6, 2001, by and among US LEC, Metacomm, LLC, RTA Associates, LLC, Richard
T. Aab and Joyce M. Aab. Filed as Exhibit 10.6 to US LECs Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and incorporated herein by reference. Filed as Exhibit 10.22 to the Registration
Statement on Form S-4 (File No. 333-138594) of PAETEC Holding Corp. and incorporated herein by reference.10.20
    
    Indemnity Agreement dated August 6, 2001, by and among US LEC, Tansukh V. Ganatra, Sarlaben T. Ganatra,
Rajesh T. Ganatra and Super STAR Associates Limited Partnership. Filed as Exhibit 10.5 to US LEC Corp.s
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference.21
    
    Subsidiaries of US LEC Corp.23
    
    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, regarding the financial
statements of US LEC.24
    
    Power of Attorney.31.1
    
    Rule 13a-14(a) Certification of
Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of
Chief Financial Officer.32.1
    
    Certification of
Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 79