UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                      FOR THE YEAR ENDED DECEMBER 31, 1998

                         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. Employer
         incorporation or organization)                   Identification No.)

        401 NORTH TRYON STREET, SUITE 1000
            CHARLOTTE, NORTH CAROLINA                             28202
     (Address of principal executive offices)                  (Zip Code)

              Registrant's telephone number, including area code: (704) 319-1000

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

Securities registered pursuant to Section 12(g) of Act: Class A Common Stock,
par value $.01 per share.

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

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

        The aggregate market value of voting stock of the registrant held
by non-affiliates of the registrant was $152,153,585 as of March 23, 1999 based
on the closing sales price on The Nasdaq National Market as of that date. For
purposes of this calculation only, affiliates are deemed to be directors and
executive officers of the registrant.

        As of March 23, 1999, there were 10,351,500 shares of Class A Common
Stock and 17,075,270 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
        Portions of the registrant's Annual Report to Stockholders for the year
ended December 31, 1998 are incorporated by reference into Part I, Part II and
Part IV of this report. Portions of the registrant's Proxy Statement for its
Annual Meeting of Stockholders to be held on April 20, 1999 are incorporated by
reference into Part III of this report.

<PAGE>

                                  US LEC CORP.
                         1998 ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                          Page
                                                                                          ----
<S>           <C>                                                                         <C>
PART I
Item 1:       Business                                                                      3
Item 2:       Properties                                                                   17
Item 3:       Legal Proceedings                                                            18
Item 4.       Submission of Matters to a Vote of Security Holders                          18

PART II
Item 5:       Market for the Registrant's Common Stock and Related Stockholder Matters     18
Item 6:       Selected Consolidated Financial Data                                         18
Item 7:       Management's Discussion and Analysis of Financial Condition and Results
                of Operations                                                              18
Item 8:       Financial Statements and Supplementary Data                                  18
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial
                Disclosure                                                                 18

PART III
Item 10:      Directors and Executive Officers of the Registrant                           19
Item 11:      Executive Compensation                                                       19
Item 12:      Security Ownership of Certain Beneficial Owners and Management               19
Item 13:      Certain Relationships and Related Transactions                               19

PART IV
Item 14:      Exhibits, Financial Statement Schedules and Reports on Form 8-K              20

</TABLE>




                                       2

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

        US LEC Corp. ("US LEC" or the "Company") is a rapidly growing
competitive local exchange carrier ("CLEC") that provides switched local, long
distance and enhanced telecommunications services to its customers. The Company
primarily serves telecommunication-intensive customers including businesses,
universities, financial institutions, hospitals, hotels, Internet Service
Providers ("ISPs") and government agencies. The predecessor to US LEC was
incorporated in June 1996 after passage of the Telecommunications Act of 1996
("Telecom Act"), which enhanced the competitive environment for local exchange
services. On December 31, 1996, the original corporation was merged into US LEC
L.L.C., a limited liability company. On December 31, 1997, in anticipation of an
initial public offering, US LEC L.L.C. was merged into US LEC. US LEC initiated
service in North Carolina in March 1997, becoming one of the first CLECs in
North Carolina to provide switched local exchange services, and now has switches
in Charlotte, Raleigh, Greensboro, Atlanta, Memphis, Nashville, Knoxville,
Orlando, Miami, Tampa, Jacksonville, and Norfolk/Virginia Beach. US LEC
currently plans to establish switch sites in additional markets during 1999,
including Richmond, Birmingham, Philadelphia and the Washington D.C.
metropolitan area. As of December 31, 1998 the Company had 199,578 Equivalent
Access Lines in service. See "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a detailed explanation of how
the Company calculates Equivalent Access Lines.


BUSINESS STRATEGY

        US LEC's objective is to become a leading  telecommunications service
provider and the primary provider of telecommunications services to its existing
and target customers. The principal elements of US LEC's business strategy
include:

        DEPLOY A CAPITAL-EFFICIENT NETWORK. US LEC utilizes a "smart-build"
 strategy of purchasing and deploying switching equipment and leasing the
 required fiber optic transmission capacity from competitive access providers
 ("CAPs"), other CLECs and incumbent local exchange carriers ("ILECs").
 Management believes the Company's switch-based, leased-transport strategy
 enables it to enter markets and generate revenue and positive cash flow more
 rapidly than if the Company first constructed its own transmission facilities.
 By leasing fiber transport, this smart-build strategy also reduces the up-front
 capital expenditures required to build a network and enter new markets and
 avoid the risk of "stranded" investment in under-utilized fiber networks.
 Management also believes that the Company's ability to align its leased
 transmission costs with customer orders permits a higher return on invested
 capital.

         FOCUS ON A REGIONAL CLUSTER OF OPERATIONS. The Company focuses its
network build out and marketing presence in target markets composed of Tier I
cities (major metropolitan areas such as Atlanta, Miami and Washington D.C.) and
Tier II cities (mid-size metropolitan areas such as Greensboro, Tampa and
Nashville) throughout the southeastern and mid-Atlantic United States -- two of
the fastest growing regional markets for business telecommunications services in
the country. The Company has selected its target markets based on a number of
considerations, including the number of potential customers and other
competitors in such markets and the presence of multiple transmission facility
suppliers. Management believes that the Company's clustered network will enable
it to take advantage of regional calling patterns and capture an increasing
portion of customer traffic on its network.

        TARGET TELECOMMUNICATIONS-INTENSIVE CUSTOMERS. The Company focuses its
primary sales efforts on telecommunications-intensive customers including
businesses, universities, financial institutions, hospitals, hotels, ISPs and
government agencies. The volume of usage generated by the Company's target
customers allows the Company to efficiently concentrate the telecommunications
traffic of its customers. In addition, the Company frequently is able to sell
enhanced and long distance services to complement its core local services. This
further

                                       3
<PAGE>

enhances network utilization and thereby improves margins, as fixed network
costs are spread over a larger base of minutes of use. Unlike many other
CLECs, the Company does not resell ILEC services.

        INSTALL A ROBUST TECHNOLOGY PLATFORM. The Company has chosen the 5ESS(R)
Any Media(TM) digital switch manufactured by Lucent Technologies, Inc.
("Lucent") to provide a consistent technology platform throughout its network.
US LEC currently has twelve Lucent switches active throughout its network. To
enhance its service offerings, the Company is in the process of deploying
Alcatel MegaHub(R) 600ES ("Alcatel") tandem switches. The Alcatel switches will
complement the Lucent switches and improve US LEC's ability to provide enhanced
services, including calling cards, toll-free services, operator services and
Virtual Private Networks ("VPN"). The Company has also reached the final stages
of selection for an Advanced Intelligent Network ("AIN") platform. This AIN
platform will position US LEC for many enhanced services as well as allow the
Company more reliability for Signaling System No. 7 connectivity. This advanced
switching platform allows the Company to (i) deploy features and functions
quickly throughout its entire network, (ii) expand switch capacity in a cost
effective manner, (iii) achieve direct connectivity to cellular and personal
communication system applications in the future and (iv) provide a broader range
of product offerings.

        EMPLOY AN EXPERIENCED SALES FORCE. Management believes that the
 Company's success in a particular market is enhanced by employing a direct
 sales force with extensive local market and telecommunications sales
 experience. The Company employed this strategy in building its existing sales
 forces in North Carolina, Georgia, Tennessee, Florida and Virginia and intends
 to continue implementing this strategy in other markets. Salespeople with
 experience in a particular market provide the Company with extensive knowledge
 of the Company's target customer base and in many cases have existing
 relationships with target customers.

        IMPLEMENT EFFICIENT PROVISIONING PROCESSES WITH STATE-OF-THE-ART BACK
OFFICE Support. Management believes that a critical aspect of the success of a
CLEC is timely and effective provisioning systems, which includes the process of
transitioning ILEC customers to the Company's network. The Company focuses on
implementing effective and timely provisioning practices in each of its markets
to rapidly and efficiently transition customers from the ILEC or other CLECs to
the Company with minimal disruption of the customer's operations. US LEC
continues to work with ILECs to streamline its process for migration of
customers to US LEC's network. Among other things, US LEC is approved by
Lockheed Martin as a provider of Local Number Portability("LNP") for its
customers. In addition, the US LEC Network Operations Center ("NOC") houses the
tools to monitor and maintain customers' networks at all times. The NOC provides
network surveillance, real-time alarm notification, dispatch services, and 24
hour x 7 day a week availability and notification. Management believes that
these practices provide the Company with a long-term competitive advantage and
enable it to implement services in its markets rapidly and to shorten the time
between receipt of the customer order and the generation of revenue.

              OFFER A BROAD RANGE OF PRODUCTS AND SERVICES. US LEC offers
customers a broad range of bundled telecommunication services. Management
believes rapid deployment of new technologies, customized services for diverse
applications and highly competitive pricing give US LEC customers an exceptional
value. Local network access is available in many forms including Integrated
Services Digital Network ("ISDN"), Primary Rate Interface ("PRI"), T1 Access and
Channel Access ("DSO"). Multiple local access services are also available,
including business lines, Private Branch Exchange ("PBX") trunks and Foreign
Exchange trunks. US LEC also offers its customers competitively priced long
distance service including intrastate, interstate, international and toll-free
calls. US LEC's efforts to expand its technology platform will allow the Company
to further increase its product offerings.


US LEC'S NETWORK

        During 1998, the Company installed new Lucent 5ESS(R) Any Media(TM)
digital switches in eight new cities, bringing the total to eleven switches
serving twenty-four markets. During the first quarter of 1999, the Company
activated its twelfth Lucent switch in Norfolk/Virginia Beach. The Company has
announced plans to activate additional Lucent switches during 1999 in Richmond,
Birmingham, Philadelphia and the Washington D.C. metropolitan area. Also during
the first quarter of 1999, US LEC installed its first Alcatel switch in
Charlotte.

                                       4
<PAGE>

        US LEC utilizes a "smart build" strategy of purchasing and deploying
switching equipment and leasing fiber optic transmission capacity from CAPs,
other CLECs and ILECs.

        Calls originating with a US LEC customer are transported over leased
lines to the US LEC switch and can either be terminated directly on the
Company's network or routed to a long distance carrier, an ILEC or another CLEC,
depending on the location of the call recipient. Similarly, calls originating
from the public switched telephone network and destined for a US LEC customer
are routed through the US LEC switch and delivered to call recipients via leased
transmission facilities. Management believes that this smart-build strategy
results in the following competitive advantages:

o  an increased number of buildings that can be directly connected to the
   Company's switching network, which should maximize the number of
   customers to which the Company can offer its services;

o  a higher volume of telecommunications traffic both originating and
   terminating on the Company's network, which should result in improved
   operating margins; and

o  the ability to leverage its investment in high capacity switching equipment
   and related electronics.

        The Company has signed interconnection agreements with various ILECs,
including BellSouth, GTE, Sprint, Bell Atlantic and other carriers. These
agreements provide the framework for the Company to serve its customers when
other local carriers are involved. The agreement with BellSouth covers all
states in BellSouth's operating area in which US LEC operates. The Company's
interconnection agreement with BellSouth is scheduled to expire in June 1999,
but management does not anticipate any interruption of interconnect services. No
other interconnection agreements are scheduled to expire in 1999.


PRODUCTS AND SERVICES

               The Company provides local dial-tone services to customers. Local
access is available in many different forms including ISDN, PRI, TI Access and
Channel Access. Local services and long distance services can be bundled
together using the same transport facility. The Company's network is designed to
allow a customer to easily increase or decrease capacity and utilize enhanced
services as the telecommunications requirements of the customer change. The
Company also provides access to third party directory assistance and operator
services.

        US LEC provides domestic and international long distance services for
completing intrastate, interstate and international calls. The Company also
provides toll-free services. Long distance calls which do not terminate on the
Company's network are passed to long distance carriers which route the remaining
portion of the call. The Company's ability to bundle local and long distance
services allows it to offer its customers more efficient use of transport
facilities and allows it to aggregate customers' monthly recurring, local usage
and long distance charges on a single, consolidated invoice.

        In addition to providing typical enhanced services such as voice mail,
call transfer and conference calling, US LEC offers additional value-added
enhanced services to complement its core local and long distance services. These
enhanced service offerings include:

o       Access to Internet Services -- Enables customers to use their available
        capacity for access to ISPs.

o       Data Networking Services -- The Company can provide high-speed,
        broadband services to use for data and Internet access such as ISDN and
        PRI.

o       Specialized Application Services -- The Company can create products and
        services that are tailored for target industries with special
        telecommunications needs such as the hospitality industry. These
        services typically include non-measured rate local calling, expanded
        local calling area, discounted long distance rates and tailored trunking
        configurations.

                                       5
<PAGE>


SALES AND MARKETING

        SALES. US LEC is building a highly motivated and experienced direct
sales force. The Company recruits salespeople with strong sales backgrounds in
its existing and target markets, including salespeople from long distance
companies, telecommunications equipment manufacturers, network systems
integrators, CLECs and ILECs. The Company expanded its sales force from 23
salespeople at December 31, 1997 to 98 salespeople at December 31, 1998, and
management expects to further increase the Company's sales force to over 150
salespeople by the end of 1999. The Company plans to continue to attract and
retain highly qualified salespeople by offering them an opportunity to work with
an experienced management team in an entrepreneurial environment and to
participate in the potential economic rewards made available through a
results-oriented compensation program. The Company also utilizes independent
sales agents to identify and maintain customers.

        MARKETING. In its existing markets, US LEC seeks to position itself as a
high quality alternative to ILECs for local telecommunication services by
offering network reliability and superior customer support at competitive
prices. The Company is building its reputation and brand identity by working
closely with its customers to develop services tailored to their particular
needs and by implementing targeted product offerings, advertising and
promotional efforts.

        The Company primarily uses three service marks: US LEC, a logo that
includes US LEC, and THE COMPETITIVE TELEPHONE COMPANY. These service marks have
been registered either on the principal or the supplemental register of the U.S.
Patent and Trademark Office for uses related to telecommunications services. The
Company also has pending trademark applications for these marks.

        CUSTOMER SERVICE. Management believes that the Company's ability to
provide superior customer service is a key factor in acquiring new customers and
reducing churn of existing customers. The Company has developed a customer
service strategy that is designed to effectively meet the service requirements
of its target customers. The principal salesperson for each customer provides
the first line of customer service by identifying and resolving any customer
needs. An account development representative is assigned to each customer to
supervise all aspects of customer relations, including account collections and
complaint resolution, and to provide a single point of contact for all customer
service issues. To support this locally-based team, the Company also has a
centrally based customer service and NOC team.

        BILLING. US LEC outsources the preparation of customer bills, which are
available in a variety of formats that can be tailored to a customer's specific
needs. US LEC offers customers simplicity and convenience by sending one bill
for all services, and the bill is sent out within a few days after the billing
cycle.


SIGNIFICANT CUSTOMER

        In fiscal 1997 and 1998, BellSouth, the predominant ILEC operating in
the Company's existing markets, accounted for 65% and 80%, respectively, of the
Company's net revenue (before reduction for the $12 million allowance described
in Note 6 to Company's consolidated financial statements). The majority of this
revenue for 1998 was generated from reciprocal compensation. Although reciprocal
compensation owed to the Company by BellSouth is not a customer relationship in
the traditional sense, BellSouth is shown here due to the significant
contribution to revenue. At December 31, 1997 and 1998, BellSouth accounted for
67% and 94% of the Company's total accounts receivables before allowance,
respectively. The majority of such receivables and revenues have resulted from
traffic associated with Metacomm, LLC ("Metacomm"), a customer of the Company
and BellSouth, and which became a related party to the Company during 1998 (see
Notes 6 and 8 to Company's consolidated financial statements).

                                       6
<PAGE>

EMPLOYEES

        As of December 31, 1998, the Company employed 253 people. The Company
expects to employ over 400 people by the end of 1999. The Company considers its
employee relations to be very good.

EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth certain information regarding the
executive officers of US LEC Corp:

<TABLE>
<CAPTION>

<S>                         <C>             <C>
        Name                 Age            Position*

        Richard T. Aab       49             Chairman of the Board, Chief Executive Officer
                                            and Director
        Tansukh V. Ganatra   55             President, Chief Operating Officer and Director
        Aaron D. Cowell, Jr. 36             Executive Vice President, General Counsel and
                                            Secretary (since June 1998)
        Michael K. Robinson  42             Executive Vice President and Chief Financial
                                            Officer (since July 1998)
        David C. Conner      41             Executive Vice President -- Engineering
                                            and Operations and Chief Technology Officer
        Gary D. Grefrath     57             Executive Vice President -- Administration
        Michael K. Simmons   40             Executive Vice President -- Corporate Development
        Craig K. Simpson     36             Executive Vice President -- Sales
</TABLE>

        * Except as otherwise indicated, all offices were assumed on January 1,
1998.


REGULATION

        The following summary of regulatory developments and legislation does
not purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
existing federal and state legislation and regulations are currently the subject
of judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company, can be predicted at this time. This
section also includes a brief description of regulatory and tariff issues
pertaining to the operation of the Company.

        OVERVIEW. The Company's services are subject to varying degrees of
federal, state and local regulation. The Federal Communications Commission (the
"FCC") generally exercises jurisdiction over the facilities of, and services
offered by, telecommunications common carriers that provide interstate or
international communications. The state regulatory commissions (herein "PUC's)
retain jurisdiction over the same facilities and services to the extent they are
used to provide intrastate communications.

        FEDERAL LEGISLATION. The Company must comply with the requirements of
common carriage under the Communications Act of 1934, as amended (the
"Communications Act"). The Telecom Act, enacted on February 8, 1996,
substantially revised the Communications Act. The Telecom Act establishes a
regulatory framework for the introduction of local competition throughout the
United States and is intended to reduce unnecessary regulation to the greatest
extent possible. Among other things, the Telecom Act preempts, after notice and
an opportunity for comment, any state or local government from prohibiting any
entity from providing telecommunications service.

        The Telecom Act also establishes a dual federal-state regulatory scheme
for eliminating other barriers to competition faced by competitors to the ILECs
and other new entrants into the local telephone market. Specifically, the
Telecom Act imposes on ILECs certain interconnection obligations, some of which
are to be implemented by FCC regulations. The Telecom Act contemplates that
states will apply the federal regulations and oversee the

                                       7
<PAGE>

implementation of all aspects of interconnection not subject to FCC jurisdiction
as they oversee interconnection negotiations between ILECs and their new
competitors.

        The FCC has significant responsibility in the manner in which the
Telecom Act will be implemented especially in the areas of pricing universal
service, access charges and price caps. The details of the rules adopted by the
FCC will have a significant effect in determining the extent to which barriers
to competition in local services are removed, as well as the time frame within
which such barriers are eliminated.

        The PUCs also have significant responsibility in implementing the
Telecom Act. Specifically, the states have authority to establish
interconnection pricing, including unbundled loop charges, reciprocal
compensation and wholesale pricing consistent with the FCC regulations. The
states are also charged under the Telecom Act with overseeing the arbitration
process for resolving interconnection negotiation disputes between CLECs and the
ILECs and must approve interconnection agreements. See "Business -- Forward
Looking Statements and Risk Factors -- Uncertainties Related to Reciprocal
Compensation" for a discussion of the actions before the North Carolina PUC
related to its interconnection agreement with BellSouth.

        The Telecom Act imposes on ILECs certain interconnection obligations
that, taken together, grant competitive entrants such as the Company what is
commonly referred to as "co-carrier status." It is anticipated that co-carrier
status and the preemption of state and local prohibitions on entry could permit
the Company to become a full service provider of switched telecommunications
services anywhere in the United States.

        The Company has historically received a significant portion of its
initial revenue in a given market from the ILEC in the form of reciprocal
compensation payments due to the Company. Several ILECs have challenged the
applicability of the reciprocal compensation related to enhanced service
providers ("ESP") and ISP customers receiving more calls than they make. See
"Business -- Forward Looking Statements and Risk Factors -- Uncertainties
Related to Reciprocal Compensation".

        The obligations imposed on ILECs by the Telecom Act to promote
competition, such as local number portability, dialing parity, reciprocal
compensation arrangements and non-discriminatory access to telephone poles,
ducts, conduits and rights-of-way also apply to CLECs, including the Company. As
a result of the Telecom Act's applicability to other telecommunications
carriers, it may provide the Company with the ability to reduce its own
interconnection costs by interconnecting directly with non-ILECs, but may also
cause the Company to incur additional administrative and regulatory expenses in
responding to interconnection requests. At the same time, the Telecom Act also
makes competitive entry into other service or geographic markets more attractive
to Regional Bell Operating Companies ("RBOCs"), other ILECs, long distance
carriers and other companies and likely will increase the level of competition
the Company faces. See "Business - Competition".

        In addition, the Telecom Act, as passed, provided that ILECs that are
subsidiaries of RBOCs could not offer in-region, long distance services across
LATAs until they had demonstrated that (i) they have entered into an approved
interconnection agreement with a facilities-based CLEC or that no such CLEC has
requested interconnection as of a statutorily determined deadline, (ii) they
have satisfied a 14-element checklist designed to ensure that the ILEC is
offering access and interconnection to all local exchange carriers on
competitive terms and (iii) the FCC has determined that in-region, inter-LATA
approval is consistent with the public interest, convenience and necessity.
These limitations have been challenged by the RBOC's. See "Business -- Forward
Looking Statements and Risk Factors--Regulation".

        FEDERAL REGULATION AND RELATED PROCEEDINGS. The Telecom Act and the
FCC's efforts to initiate reform have resulted in numerous legal challenges. As
a result, the regulatory framework in which the Company operates is subject to a
great deal of uncertainty. Any changes that result from this uncertainty could
have a material adverse effect on the Company. The FCC has adopted orders
eliminating tariff filing requirements for non-dominant carriers providing
interstate access and domestic interstate long distance services. However, on
February 13, 1997, the United States Court of Appeals for the District of
Columbia granted motions for stay of the FCC order detariffing domestic
interstate long distance service pending judicial review of that order. The
result of this stay is that carriers

                                       8
<PAGE>

must continue to file tariffs for interstate long distance services. Tariff
filing requirements remain in place for international traffic. US LEC has filed
federal interstate long distance, interstate access and international tariffs.

        The FCC also has proposed reducing the level of regulation that applies
to the ILECs, and increasing their ability to respond quickly to competition
from the Company and others. For example, in accordance with the Telecom Act,
the FCC has applied "streamlined" tariff regulation to the ILECs, which greatly
accelerates the time prior to which changes to tariffed service rates may take
effect, and has eliminated the requirement that ILECs obtain FCC authorization
before constructing new domestic facilities. These actions will allow ILECs to
change service rates more quickly in response to competition. Similarly, the FCC
has proposed affording significant new pricing flexibility to ILECs subject to
price cap regulation. To the extent such increased pricing flexibility is
provided, the Company's ability to compete with ILECs for certain service may be
adversely affected.

        The FCC has taken several actions related to the assignment of telephone
numbers, first in July 1995 mandating the responsibility for administering and
assigning local telephone numbers be transferred from the RBOCs and a few other
ILECs to a neutral entity, and second in July 1996 adopting a regulatory
structure under which a wide range of number portability issues would be
resolved. In March 1997, the FCC affirmed its number portability rules, but it
extended slightly certain deadlines for the implementation of true number
portability. The FCC has established cost recovery rules for long-term number
portability.

        On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, long distance companies and state PUCs regarding
several provisions of the Telecom Act. The rules include, among other things,
FCC guidance on: (i) discounts for end-to-end resale of ILEC retail local
exchange services (which the FCC has suggested should be in the range of
17%-25%); (ii) availability of unbundled local loops and other unbundled ILEC
network elements; (iii) the use of Total Element Long Run Incremental Costs in
the pricing of these unbundled network elements; (iv) average default proxy
prices for unbundled local loops in each state; (v) mutual compensation proxy
rates for termination of ILEC/CLEC local calls; and (vi) the ability of CLECs
and other service providers to opt into portions of previously-approved
interconnection agreements negotiated by the ILECs with other parties on a most
favored nation (or a "pick and choose") basis. See " Regulation -- Eighth
Circuit Court of Appeals Decision and Supreme Court Reversal" for a discussion
of the Eighth Circuit Court of Appeals decision related to this order.

        On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service program which subsidized certain eligible
services. For example, the FCC established new subsidies for services provided
to qualifying schools and libraries with an annual cap of $2.25 billion and for
services provided to rural health care providers with an annual cap of $400
million. The FCC also expanded the federal subsidies to low-income consumers and
consumers in high-cost areas. Providers of interstate telecommunications
service, such as the Company, as well as certain other entities, must pay for
these programs. The Company's share of the schools, libraries and rural health
care funds will be based on its share of the total industry telecommunications
service and certain defined telecommunications end user revenues. The Company's
share of all other federal subsidy funds will be based on its share of the total
interstate telecommunications service and certain defined telecommunications end
user revenues. Although the Company has already begun contributing to the fund,
the amount of the Company's required contribution changes each quarter. As a
result, the Company cannot predict the revenue effect these regulations will
have on the Company in the future. In the May 8 order, the FCC also announced
that it will revise its rules for subsidizing service provided to consumers in
high cost areas. Several parties have appealed the May 8 order. Such appeals
have been consolidated and transferred to the United States Court of Appeals for
the Fifth Circuit where they are currently pending. In addition, on July 3,
1997, several ILECs filed a petition for stay of the May 8 order with the FCC.
That petition is also pending.

        In a combined Report and Order and Notice of Proposed Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the interstate access charge structure. In the Report and Order, the FCC
removed restrictions on an ILEC's ability to lower access prices and relaxed the
regulation of new switched access services in those markets where there are
other providers of access services. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on the Company's ability to compete in providing interstate access
services. On May 16, 1997, the FCC released an order revising its access charge
rate structure. The new rules substantially increase the costs that ILECs
subject to the FCC's price cap

                                       9
<PAGE>

rules ("price cap LECs") recover through monthly, non-traffic sensitive access
charges and substantially decrease the costs that price cap LECs recover through
traffic sensitive access charges. In the May 16 order, the FCC also announced
its plan to bring interstate access rate levels more in line with cost. The plan
will include rules to be established that grant price cap LECs increased pricing
flexibility upon demonstrations of increased competition (or potential
competition) in relevant markets. The manner in which the FCC implements this
approach to lowering access charge levels will have a material effect on the
Company's ability to compete in providing interstate access services. Several
parties have appealed the May 16 order. Those appeals were consolidated and
transferred to the United States Court of Appeals for the Eighth Circuit which
upheld the Commission's rules.

        As part of its overall plan to lower interstate access rates, the FCC
also released an order on May 21, 1997, in which the FCC revised its price cap
rules. In the May 21 order, the FCC increased the so-called X-Factor (the
percentage by which price cap LECs must lower their interstate access charges
every year, net of inflation and exogenous cost increases) and made it uniform
for all price cap LECs. The results of these rule changes will be both a
one-time overall reduction in price cap LEC interstate access charges and an
increase in the rate at which those charges will be reduced in the future.
Several parties have appealed the May 21 order. Those appeals were consolidated
and transferred to the United States Court of Appeals for the Tenth Circuit.
They have been subsequently transferred to the United States Court of Appeals
for the District of Columbia where they are currently pending.

        On February 26, 1999, the FCC issued a declaratory ruling and notice of
proposed rulemaking concerning ISP traffic. The FCC concluded in its ruling that
ISP traffic is jurisdictionally interstate in nature. The FCC has requested
comment as to what reciprocal compensation rules should govern this traffic upon
expiration of existing interconnection agreements. The FCC also determined that
no federal rule existed that governed reciprocal compensation for ISP traffic at
the time existing interconnection agreements were negotiated and concluded that
it should permit states to determine whether reciprocal compensation should be
paid for calls to ISPs under existing interconnection agreements. In light of
the FCC order, state commissions which previously addressed this issue and
required reciprocal compensation to be paid for ISP traffic may reconsider and
may modify their prior rulings. The FCC order has been appealed by several
parties. No procedural calendar has been established yet. To date, no PUC in any
state where the Company has earned reciprocal compensation has either affirmed
or altered its prior position on this issue.

        The Company anticipates that the FCC will initiate a number of
additional proceedings, of its own volition and as a result of requests from
CLECs and others, as a result of the Telecom Act.

        The FCC also requires carriers to file periodic reports concerning
carriers interstate circuits and deployment of network facilities. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non-dominant carriers, although it has the
power to do so. The FCC also imposes prior approval requirements on transfers of
control and assignments of operating authorizations. The FCC has the authority
to generally condition, modify, cancel, terminate, or revoke operating authority
for failure to comply with federal laws or rules, regulations and policies of
the FCC. Fines or other penalties also may be imposed for such violations. There
can be no assurance that the FCC or third parties will not raise issues with
regard to the Company's compliance with applicable laws and regulations.

        EIGHTH CIRCUIT COURT OF APPEALS DECISIONS AND THE SUPREME COURT
REVERSAL. Various parties, including ILECs and state PUCs, requested that the
FCC reconsider its own rules and/or filed appeals of the FCC's August 8, 1996
order.

        The U.S Court of Appeals for the Eighth Circuit ("8th Circuit") held
that, in general, the FCC does not have jurisdiction over prices for
interconnection, resale, leased unbundled network elements and traffic
termination. The 8th Circuit also overturned the FCC's "pick and choose" rules
as well as certain other FCC rules implementing the Telecom Act's local
competition provisions. In addition, the 8th Circuit decisions substantially
limited the FCC's authority to enforce the local competition provisions of the
Telecom Act. On January 25, 1999, U.S. Supreme Court reversed the 8th Circuit
and upheld the FCC's authority to issue regulations governing pricing of
unbundled network elements provided by the ILECs in interconnection agreements
(including regulations governing reciprocal compensation, which is discussed in
more detail below). In addition, the Supreme Court affirmed the "pick and
choose" rules which allows carriers to choose individual portions of existing
interconnection agreements with other

                                       10
<PAGE>

carriers and to opt-in only to those portions of the interconnection agreement
that they find most attractive. The Supreme Court did not, however, address
other challenges raised about the FCC's rules at the 8th Circuit because the 8th
Circuit did not decide those challenges. These challenges will now have to be
addressed by the 8th Circuit in light of the Supreme Court's decision. In
addition, the Supreme Court disagreed with the standard applied by the FCC for
determining whether an ILEC should be required to provide a competitor with
particular unbundled network elements. This issue will have to be addressed by
the FCC in a new rule-making proceeding that the FCC intends to initiate in the
spring of 1999.

        The 8th Circuit decisions and the reversal by the Supreme Court continue
to create uncertainty about the rules governing pricing terms and conditions of
interconnection agreements. This uncertainty makes it difficult to predict
whether the Company will be able to rely on existing interconnection agreements
or have the ability to negotiate acceptable interconnection agreements in the
future.

        STATE REGULATION. The Company is certified by the appropriate state PUCs
as follows:

<TABLE>
<CAPTION>

                    STATE                          TELECOMMUNICATION SERVICES
                <S>                    <C>
                North Carolina         local exchange, exchange access, and intrastate
                                       interexchange long distance
                Georgia                local exchange, long distance and intrastate interexchange
                                       alternate operator services
                Virginia               intrastate local exchange and exchange access, not
                                       required for long distance
                Tennessee              local exchange, exchange access and interexchange
                South Carolina         resale and facilities-based local exchange, exchange access and
                                       intrastate interexchange
                Florida                local exchange, long distance
                Alabama                facilities-based and resold local exchange, exchange access and
                                       interexchange

        The Company has applications pending with the following PUC's:

                Washington D.C.        resale and facilities-based local exchange
                Pennsylvania           resale and facilities-based local exchange, exchange access and
                                       interexchange (provisional certification granted)
                Maryland               resale and facilities-based local exchange and interexchange
                Delaware               resale and facilities-based local exchange and interexchange
                New Jersey             resale and facilities-based local exchange and interexchange
</TABLE>

        To the extent that an area within a state in which the Company operates
is served by a small (in line counts) or rural ILEC not currently subject to
competition, the Company generally does not have authority to service those
areas at this time. Most states regulate entry into local exchange and other
intrastate service markets, and states' regulation of CLECs vary in their
regulatory intensity. The majority of states mandate that companies seeking to
provide local exchange and other intrastate services apply for and obtain the
requisite authorization from the PUC. This authorization process generally
requires the carrier to demonstrate that it has sufficient financial, technical,
and managerial capabilities and that granting the authorization will serve the
public interest.

        As a CLEC, the Company is subject to the regulatory directives of each
state in which the Company is certified. In addition to tariff filing
requirements, most states require that CLECs charge just and reasonable rates
and not discriminate among similarly situated customers. Some states also
require the filing of periodic reports, the payment of various regulatory fees
and surcharges, and compliance with service standards and consumer protection
rules. States also often require prior approvals or notifications for certain
transfers of assets, customers or ownership of a CLEC. States generally retain
the right to sanction a carrier or to revoke certifications if a carrier
violates relevant laws and/or regulations.

        In all of the states where US LEC is certified, the Company is required
to file tariffs or price lists setting forth the terms, conditions and/or prices
for services which are classified as intrastate. In some states, the Company's
tariff may list a range of prices or a ceiling price for particular services,
and in others, such prices can be set on an individual customer basis, although
the Company may be required to file tariff addenda of the contract terms. The
Company is not subject to price cap or to rate of return regulation in any state
in which it currently provides services.

                                       11
<PAGE>

        As noted above, the states have the primary regulatory role over
intrastate services under the Telecom Act. The Telecom Act allows state
regulatory authorities to continue to impose competitively neutral and
nondiscriminatory requirements designed to promote universal service, protect
the public safety and welfare, maintain the quality of service and safeguard the
rights of consumers. State PUCs will implement and enforce most of the Telecom
Act's local competition provisions, including those governing the specific
charges for local network interconnection. In some states, those charges are
being determined by generic cost proceedings and in other states they are being
established through arbitration proceedings. Depending on how such charges are
ultimately determined, such charges could become a material expense to the
Company.


COMPETITION

        As noted above, the regulatory environment in which the Company operates
is changing rapidly. The passage of the Telecom Act combined with other actions
by the FCC and state regulatory authorities continues to promote competition in
the provision of telecommunications services.

        ILECS. In each market served by its networks, the Company faces, and
expects to continue to face, significant competition from the ILECs, which
currently dominate their local telecommunications markets as a result of their
historic monopoly position.

        The Company competes with the ILECs in its markets for local exchange
services on the basis of product offerings, reliability, state-of-the-art
technology, price, route diversity, ease of ordering and customer service.
However, the ILECs have long-standing relationships with their customers and
provide those customers with various transmission and switching services, a
number of which the Company does not currently offer. In addition, ILECs enjoy a
competitive advantage due to their vast financial resources. The Company has
sought, and will continue to seek, to achieve parity with the ILECs in order to
become able to provide a full range of local telecommunications services. See
"Business -- Regulation" for additional information concerning the regulatory
environment in which the Company operates. Because US LEC leases fiber optic
transmission capacity to link its customers with its networks, and uses
state-of-the-art technology in its switch platforms, the Company may have cost
and service quality advantages over some currently available ILEC networks.

        OTHER COMPETITORS. The Company also faces, and expects to continue to
face, competition from other potential competitors in certain of the markets in
which the Company offers its services. In addition to the ILECs and CAPs,
potential competitors capable of offering switched local and long distance
services include long distance carriers, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end-users. Many of these potential competitors enjoy
competitive advantages based upon existing relationships with subscribers, brand
name recognition and vast financial resources. A continuing trend toward
business combinations and alliances in the telecommunications industry may
create significant new competitors to the Company.

        The Company believes that the Telecom Act, as well as a recent series of
completed and proposed transactions between ILECs and long distance companies
and cable companies, increase the likelihood that barriers to local exchange
competition will be removed. The Telecom Act, as passed, conditioned the
provision of in-region interLATA services by RBOCs upon a demonstration that the
market in which an RBOC seeks to provide such services has been opened to
competition. When ILECs that are RBOC subsidiaries are permitted to provide such
services they will be in a position to offer single source service. ILECs that
are not RBOC subsidiaries may offer single source service presently. The Telecom
Act's limitations on provision of in-region interLATA services have been
challenged by the RBOCs. See "Business - Regulation".

        The Company also competes with long distance carriers in the provision
of long distance services. Although the long distance market is dominated by a
few major competitors, hundreds of other companies also compete in the long
distance marketplace.

                                       12
<PAGE>


FORWARD LOOKING STATEMENTS AND RISK FACTORS

          Except for historical statements and discussions, statements contained
in this report constitute "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, the Company's Annual
Report to Stockholders for the year ended December 31, 1998, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and subsequently filed Annual Reports
on Form 10-K may include forward looking statements. Other written or oral
statements which constitute forward looking statements have been made and may in
the future be made by or on behalf of US LEC, including statements regarding
future operating performance, share of new and existing markets, short-term and
long-term revenue, earnings and cash flow amounts, judicial, statutory and
regulatory developments and general industry growth rates and US LEC's
performance in relation thereto. These statements are identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "estimates" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. These forward looking statements are based on a
number of assumptions concerning future events, including the outcome of
judicial and regulatory proceedings, the adoption of balanced and effective
rules and regulations by the FCC and PUCs, and US LEC's ability to successfully
execute its strategy. These forward looking statements are also subject to a
number of uncertainties and risks, many of which are outside of US LEC's
control, that could cause actual results to differ materially from such
statements. These risks include, but are not limited to, the following:

         UNCERTAINTIES RELATED TO RECIPROCAL COMPENSATION The Telecom Act
requires ILECs to provide reciprocal compensation to a CLEC for local traffic
terminated on such CLEC's network. Notwithstanding this requirement, a number of
ILECs have taken the position that traffic terminated to ESPs, including
information service providers such as ISPs, is not local traffic. A majority of
the Company's revenue is derived from reciprocal compensation amounts due from
ILECs, principally BellSouth, a majority of which relates to ISP revenue
(approximately $54 million in 1998 before an allowance of $12 million) that is
being disputed. Management believes that such revenue has been earned by the
Company and payments are due from BellSouth pursuant to the interconnection
agreements that BellSouth has with the Company. However, in August 1997,
BellSouth notified the Company and other CLECs that it considered ISP traffic
interstate (and therefore not subject to reciprocal compensation) and that
BellSouth would not pay (or bill) reciprocal compensation under interconnection
agreements for traffic terminated to ESPs, including information service
providers and ISPs. On February 26, 1998, following a petition by the Company,
the NCUC ordered BellSouth to bill and pay for all such traffic. Following
motions filed by BellSouth, the NCUC stayed enforcement of its order until June
1, 1998. On April 27, 1998, BellSouth filed a petition for judicial review of
the NCUC's order and an action for declaratory judgment and other relief
(including a request for an additional stay) with the United States District
Court for the Western District of North Carolina (U.S. District Court). This
matter was filed against the Company and the NCUC and is currently pending
before the U.S. District Court.

        On February 26, 1999, the FCC issued a declaratory ruling and notice of
proposed rulemaking concerning ISP traffic. The FCC concluded in its ruling that
ISP traffic is jurisdictionally interstate in nature. The FCC has requested
comment as to what reciprocal compensation rules should govern this traffic upon
expiration of existing interconnection agreements. The FCC also determined that
no federal rule existed that governed reciprocal compensation for ISP traffic at
the time existing interconnection agreements were negotiated and concluded that
it should permit states to determine whether reciprocal compensation should be
paid for calls to ISPs under existing interconnection agreements. In light of
the FCC order, state commissions which previously addressed this issue and
required reciprocal compensation to be paid for ISP traffic may reconsider and
may modify their prior rulings. The FCC order has been appealed by several
parties. No procedural calendar has been established yet. To date, no PUC in any
state where the Company has earned reciprocal compensation has either affirmed
or altered its prior position on this issue.

         On September 14, 1998, BellSouth filed a complaint with the NCUC
 seeking to be relieved from an unspecified portion of obligations under its
 interconnection agreement with the Company to pay reciprocal compensation for
 traffic related to Metacomm, a customer of BellSouth and the Company, and
 currently a related party of the Company (see Note 8 to Company's consolidated
 financial statements). In addition to disputing the traffic due to its ISP
 nature, BellSouth has also alleged that the traffic related to Metacomm would
 not qualify for reciprocal compensation, alleging that such traffic does not
 constitute "telecommunications" subject to reciprocal compensation under the
 Telecom Act and the existing interconnection agreement. Also, on September 14,
 1998, the Company filed a complaint with the NCUC seeking payment of facilities
 charges, non-ISP based reciprocal compensation and intraLATA toll termination
 charges. These matters are currently pending before the NCUC.

                                       13
<PAGE>

         Management believes that the Company will ultimately obtain favorable
 results in these proceedings; however, BellSouth may elect to initiate
 additional proceedings (by way of appeal or otherwise) challenging amounts owed
 to the Company. If a decision adverse to the Company is issued in any of these
 proceedings by the U.S. District Court, the NCUC or the FCC, or in any appeal
 or review of a favorable decision by the U.S. District Court, the NCUC, or the
 FCC, or in any other proceeding affecting these issues in another forum, or if
 the FCC were to alter its position regarding reciprocal compensation
 obligations under existing interconnection agreements or if the NCUC were to
 alter its position on this issue, such an event could have a material adverse
 effect on the Company's operating results and financial condition. The
 Company's revenues for the year ended December 31, 1998 and trade accounts
 receivable as of December 31, 1998 included approximately $54 million (before
 the $12 million allowance) of earned but unpaid ISP reciprocal compensation,
 the majority of which was related to Metacomm.

                The Company's interconnection agreements with BellSouth are
scheduled to expire in June 1999 and the Company does not anticipate that
BellSouth will willingly agree to renew the agreements in a manner consistent
with the Company's existing agreements as they relate to reciprocal
compensation. However, the Company intends to pursue consistent agreements
vigorously and does not anticipate any interruption in interconnection service.
The Company's ultimate ability to obtain such terms will depend on a number of
factors, including decisions of the FCC and the PUCs.

               LIMITED OPERATING HISTORY. US LEC was formed in June 1996 and
began generating revenue in March 1997. Accordingly, investors have limited
historical operating and financial information upon which to base an evaluation
of the Company's performance. Given the Company's limited operating history,
there can be no assurance that it will continue to compete successfully in the
telecommunications business, sustain profitability or generate sufficient
positive cash flow in the future to meet debt service, working capital or other
cash requirements. See "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".

        RISKS ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY. The expansion
and development of US LEC's operations depend on, among other things, the
Company's ability to continue to (i) accurately assess potential new markets,
(ii) identify, hire and retain qualified personnel, (iii) lease access to
suitable fiber optic transmission facilities, (iv) purchase, install and operate
switches and related equipment and (v) obtain any required government
authorizations, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions. In addition, US LEC has experienced rapid growth since its
inception, and management believes that sustained growth will place a strain on
operational, human and financial resources. The Company's ability to manage its
expansion effectively depends on the continued development of plans, systems and
controls for its operational, financial and management needs. Given the
Company's limited operating history, there can be no assurance that the Company
will be able to satisfy these requirements or otherwise manage its growth
effectively. The failure of US LEC to satisfy these requirements could have a
material adverse effect on the Company's financial condition and its ability to
fully implement its expansion plans.

     The Company's growth strategy also involves the following risks:

        QUALIFIED PERSONNEL. A critical component for US LEC's success is hiring
and retaining additional qualified managerial, sales and technical personnel.
Since its inception, the Company has experienced significant competition in
hiring and retaining personnel possessing necessary skills and
telecommunications experience. Although management believes the Company has been
successful in hiring and retaining qualified personnel, there can be no
assurance that US LEC will be able to do so in the future.

        SWITCHES AND RELATED EQUIPMENT. An essential element of the Company's
current strategy is the provision of switched local service. There can be no
assurance that installation of the switches and associated equipment necessary
to implement the Company's business plan will be completed on a timely basis or
that the Company will not experience technological problems that cannot be
resolved in a satisfactory or timely matter. The failure of the Company to
install and operate successfully switches and other network equipment could have
a material adverse effect on the Company's financial condition and its ability
to enter additional markets.

                                       14
<PAGE>

        INTERCONNECTION AGREEMENTS. The Company has agreements for the
interconnection of its networks with the networks of the ILECs covering each
market in which US LEC either has or is currently installing a switching
platform. US LEC may be required to negotiate new interconnection agreements as
it enters new markets in the future. In addition, as its existing
interconnection agreements expire, it will be required to negotiate extension or
replacement agreements. There can be no assurance that the Company will
successfully negotiate such additional agreements for interconnection with the
ILECs or renewals of existing interconnection agreements on terms and conditions
acceptable to the Company. The Company's interconnection agreement with
BellSouth is scheduled to expire in June 1999 but management does not anticipate
any interruption of interconnect services. The regulatory environment related to
interconnection agreements is not static, and recent decisions may change the
rules related to this process. See "Business -- Regulation". The regulatory
uncertainty makes negotiating and enforcing such agreements more difficult and
possibly more protracted, and could result in the need to renegotiate existing
agreements. The failure to negotiate and obtain required interconnection
agreements on terms and conditions acceptable to the Company could have a
material adverse effect on the Company's ability to rapidly enter a particular
market and on its operations in its existing markets.

        ORDERING, PROVISIONING AND BILLING. The Company has developed processes
and procedures and is working with external vendors, including the ILECs, in the
implementation of customer orders for services, the provisioning, installation
and delivery of such services and monthly billing for those services. The
failure to manage effectively processes and systems for these service elements
or the failure of the Company's current vendors or the ILECs to deliver
ordering, provisioning and billing services on a timely and accurate basis could
have a material adverse effect upon the Company's ability to fully execute its
strategy.

        PRODUCTS AND SERVICES. The Company currently focuses its efforts on
providing local and long distance telecommunications services. In order to
address the needs of its target customers, the Company will be required to
emphasize and develop additional products and services. No assurance can be
given that the Company will be able to provide the range of telecommunication
services that its target customers need or desire.

        ACQUISITIONS. US LEC may acquire other businesses as a means of
expanding into new markets or developing new services. The Company is unable to
predict whether or when any prospective acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions. Such transactions would involve certain risks including, but not
limited to, (i) difficulties assimilating acquired operations and personnel;
(ii) potential disruptions of the Company's ongoing business; (iii) the
diversion of resources and management time; (iv) the possibility that uniform
standards, controls, procedures and policies may not be maintained; (v) risks
associated with entering new markets in which the Company has little or no
experience; and (vi) the potential impairment of relationships with employees or
customers as a result of changes in management. If an acquisition were to be
made, there can be no assurance that the Company would be able to obtain the
financing to consummate any such acquisition on terms satisfactory to it or that
the acquired business would perform as expected.

        DEPENDENCE ON KEY PERSONNEL. The Company's business is managed by a
small number of key executive officers, most notably Richard T. Aab, Chairman
and Chief Executive Officer, and Tansukh V. Ganatra, President and Chief
Operating Officer. The loss of the services of one or more of these key people,
particularly Mr. Aab or Mr. Ganatra, could materially and adversely affect US
LEC's business and its prospects. None of the Company's executive officers have
employment agreements and the Company does not maintain key man life insurance
on any of its officers. The competition for qualified managers in the
telecommunications industry is intense. Accordingly, there can be no assurance
that US LEC will be able to hire and retain necessary personnel in the future to
replace any of its key executive officers, if any of them were to leave US LEC
or be otherwise unable to provide services to US LEC.

        RELIANCE ON LEASED CAPACITY. A key element of US LEC's business and
growth strategy is leasing fiber optic transmission capacity instead of
constructing its own transport facilities. In implementing this strategy, the
Company relies upon its ability to lease capacity from CAPs, other CLECs and
ILECs operating in its markets. In order for this strategy to be successful, the
Company must be able to negotiate and renew satisfactory agreements with its
fiber optic network providers, and the providers must process provisioning
requests on a timely basis, maintain their networks in good working order and
provide adequate capacity. Although US LEC enters into agreements with its
network providers that are intended to ensure access to adequate capacity and
timely processing

                                       15
<PAGE>

of provisioning requests and although US LEC's interconnection agreements with
ILECs generally provide that the Company's connection and maintenance orders
will receive attention at parity with the ILECs and other CLECs and that
adequate capacity will be provided, there can be no assurance that the ILECs and
other network providers will comply with their contractual (and, in the case of
the ILECs, legally required) network provisioning obligations, or that the
provisioning process will be completed for the Company's customers on a timely
and otherwise satisfactory basis. Furthermore, there can be no assurance that
the rates to be charged to US LEC under future interconnection agreements or
lease agreements with other providers will allow the Company to offer usage
rates low enough to attract a sufficient number of customers and operate its
networks at satisfactory margins.

        COMPETITION. The telecommunications industry is highly competitive. In
each of the Company's existing and target markets, the Company competes and will
continue to compete principally with the ILECs serving that area. ILECs are
established providers of local telephone and exchange access services to all or
virtually all telephone subscribers within their respective service areas. ILECs
also have greater financial and personnel resources, brand name recognition and
long-standing relationships with customers and with regulatory authorities at
the federal and state levels and with most long distance carriers.

        The Company also faces, and expects to continue to face, competition
from other current and potential market entrants, including long distance
carriers seeking to enter, reenter or expand entry into the local exchange
marketplace, and from other CLECs, CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end-users. In addition, a continuing trend toward
combinations and strategic alliances in the telecommunications industry could
give rise to significant new competitors. Many of these current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than those of the Company, as well as other
competitive advantages over the Company.

        The Company also competes with long distance carriers in the
provisioning of long distance services. Although the long distance market is
dominated by few major competitors, hundreds of other companies also compete in
the long distance marketplace.

        In addition, the regulatory environment in which the Company operates is
undergoing significant change. As this regulatory environment evolves, changes
may occur which could create greater or unique competitive advantages for all or
some of the Company's current or potential competitors, or could make it easier
for additional parties to provide services.
See "Business -- Competition".

        REGULATION. Although passage of the Telecom Act has resulted in
increased opportunities for companies that are competing with the ILECs, no
assurance can be given that changes in current or future regulations adopted by
the FCC or state regulators or other legislative or judicial initiatives
relating to the telecommunications industry would not have a material adverse
effect on the Company. In addition, although the Telecom Act, as passed,
conditions RBOCs' provisioning of in-region long distance service on a showing
that the local market has been opened to competition, in the event a RBOC has
satisfied these conditions, it could (i) remove the incentive RBOCs presently
have to cooperate with companies like US LEC to foster competition within their
service areas so that they can qualify to offer in-region long distance by
allowing RBOCs to offer such services immediately and (ii) give the RBOCs the
ability to offer "one-stop shopping" for both long distance and local service.

        In addition to the specific concern regarding the RBOC's ability to
provide in-region long distance, the regulatory environment facing the Company
is subject to numerous uncertainties. The FCC and PUC orders that were designed
to implement the Telecom Act have been challenged in numerous proceedings. As a
result, the Company must attempt to execute its business strategy without
knowing the rules that will govern its operations and its dealings with other
telecommunications companies. As the regulatory environment changes, it is
possible that

                                       16
<PAGE>

the Company's strategy and its execution of the strategy may not be the optimal
choice. Any such changes could also result in additional, unanticipated
expenses. There can be no assurances that regulatory change will not have a
material and adverse effect on the Company. See "Business - Regulation".

        FUTURE CAPITAL AND OPERATING REQUIREMENTS. Implementation of the
Company's business strategy will require significant capital and operating
expenditures during 1999 and future years. In December 1998, the Company entered
into a $50 million loan agreement with two lenders (the "Credit Facility"). See
"Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources". The Company's principal
capital expenditures relate to the purchase and installation of its switching
platform, related infrastructure and facilities. Management expects to satisfy
its capital and operating requirements primarily with current cash balances,
borrowings under the Credit Facility and cash flow from operations, although
there can be no assurance that the actual expenditures required to implement the
Company's business strategy will not exceed amounts available from these
sources. In addition, the actual amount and timing of the Company's future
expenditures may differ materially from the Company's estimates as a result of,
among other things, the ability of the Company to meet its planned expansion
schedule, the number of its customers and the services for which they subscribe
and regulatory, technological and competitive developments in the Company's
industry. Due to the uncertainty of these factors, actual revenues and costs may
vary from expected amounts, possibly to a material degree, and such variations
are likely to affect the implementation of the Company's business strategy.

        The Company also will continue to evaluate revenue opportunities in
planned and other markets as well as potential acquisitions. The Company expects
to obtain the capital required to pursue additional opportunities from the
Credit Facility and other borrowings, the sale of additional equity or debt
securities or cash generated from operations. There can be no assurance,
however, that the Company would be successful in raising sufficient additional
capital on acceptable terms or that the Company's operations would produce
sufficient positive cash flow to pursue such opportunities should they arise.
Failure to raise and generate sufficient funds, or unanticipated increases in
capital requirements may require the Company to delay or curtail its expansion
plans, which could have a material adverse effect on the Company's growth and
its ability to compete in the telecommunications services industry.

        VARIABILITY OF QUARTERLY OPERATING RESULTS. As a result of the
significant expenses associated with the Company's expansion into new markets,
the Company's operating results may vary significantly from period to period.

        CONTROL BY SINGLE STOCKHOLDER. As of March 23, 1999, Richard T. Aab
beneficially owns or otherwise controlled 100% of the outstanding shares of
Class B Common Stock representing approximately 94% of the Company's total
voting power. In addition, holders of Class B Common Stock are entitled to vote
as a separate class to elect two members of the Board of Directors and to vote
with the holders of Class A Common Stock for the election of other members of
the Board of Directors. As a result, Mr. Aab will be able to control the board
and all stockholder decisions and, in general, to determine (without the consent
of the Company's other stockholders) the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of the Company's assets.
Mr. Aab also has the power to prevent or cause a change in control of the
Company. See "Item 12: Security Ownership of Certain Beneficial Owners and
Management".


ITEM 2.  PROPERTIES

        The Company's corporate headquarters are located at its principal office
at 401 North Tryon Street, Suite 1000, Charlotte, North Carolina 28202. The
Company leases all of its administrative and sales offices and its switch sites.
The various leases expire in years ranging from 2000 to 2005. Most of these
leases have renewal options. Additional office space and switch sites will be
leased or otherwise acquired as the Company's operations and networks are
expanded and as new networks are constructed.

                                       17
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

        US LEC is not currently a party to any material legal proceedings, other
than the NCUC and U.S. District Court proceedings related to reciprocal
compensation and other amounts due from BellSouth. See "Business--Regulation"
and "Forward Looking Statements and Risk Factors" above and Note 6 to the
Company's consolidated financial statements for a detailed description of these
proceedings.

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

        No matters were submitted to a vote of security holders during the
quarter ending December 31, 1998.


                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

        The information required to be furnished in response to Item 5 is
incorporated by reference to the inside back cover of the Company's 1998 Annual
Report to Stockholders (the "Annual Report"). This section of the Annual Report
has been included in Exhibit 13 to this report.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The information required to be furnished in response to Item 6 is
incorporated by reference to the section of the Annual Report that appears under
the heading "Selected Financial Data". This section of the Annual Report has
been included in Exhibit 13 to this report.

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

        The information required to be furnished in response to Item 7 is
incorporated by reference to the section of the Annual Report that appears under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations". This section of the Annual Report has been included in
Exhibit 13 to this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required to be furnished in response to Item 8 is
incorporated by reference to the sections of the Annual Report that appear under
the headings "Consolidated Balance Sheets," "Consolidated Statements of
Operations," "Consolidated Statements of Stockholders' Equity (Deficiency),"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements" and "Independent Auditors' Report." These sections of the Annual
Report have been included in Exhibit 13 to this report.

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

        None.

                                       18
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required to be furnished in response to Item 10 with
respect to directors is incorporated by reference from the section of the proxy
statement for the Company's annual meeting of stockholders to be held April 20,
1999 (the "Proxy Statement") that appears under the heading "Election of
Directors". Information relating to the Company's executive officers is
contained in Part I of this report under the heading "Executive Officers of the
Registrant".


ITEM 11. EXECUTIVE COMPENSATION

        The information required to be furnished in response to Item 11 is
incorporated by reference from the sections of the Proxy Statement that appear
under the headings "Compensation of Directors" and "Compensation of Executive
Officers".


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required to be furnished in response to Item 12 is
incorporated by reference from the section of the Proxy Statement that appear
under the heading "Security Ownership of Certain Beneficial Owners and
Management".


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required to be furnished in response to Item 13 is
incorporated by reference from the section of the Proxy Statement that appear
under the heading "Certain Relationships and Related Transactions".

                                       19
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  Financial Statements, Financial Statement Schedules and Exhibits - The
          following documents are filed as part of this Form 10-K.

          (1)  Financial statements:

               A. Consolidated Balance Sheets as of December 31, 1997 and 1998

               B. Consolidated Statements of Operations for the Period from
                  June 6, 1996 (Inception) to December 31, 1996 and years ended
                  December 31, 1997 and 1998

               C. Consolidated Statements of Stockholders' Equity (Deficiency)
                  for the Period from June 6, 1996 (Inception) to December 31,
                  1996 and years ended December 31, 1997 and 1998

               D. Consolidated  Statements of Cash Flows for the Period from
                  June 6, 1996 (Inception) to December 31, 1996 and years
                  ended December 31, 1997 and 1998

               E. Notes to Consolidated Financial Statements for the Period
                  from June 6, 1996 (Inception) to December 31, 1996 and years
                  ended December 31, 1997 and 1998

               F. Independent Auditors' Report

          (2)  Financial Statement Schedules:

               A. Schedule I - Independent Auditors' Report

               B. Schedule II -Valuation and Qualifying Accounts

          (3)  List of Exhibits:
<TABLE>
<CAPTION>

          No.           Exhibit
          ---           -------
         <S>            <C>
          3.1           Form of Restated Certificate of Incorporation of the Company (1)
          3.2           Bylaws of the Company (1)
          3.3           Amendment No. 1 to Bylaws of the Company (1)
          4             Form of Class A Common Stock Certificate (1)
          10.1          US LEC Corp. 1998 Omnibus Stock Plan (1) (2)
          10.2          Promissory Note, dated January 16, 1998, made by the Company to
                        Melrich Associates, LP (1)
          10.3          Security Agreement dated January 16, 1998, by and between the
                        Company and Melrich Associates, L.P. (1)
          10.4          Promissory Note, dated January 16, 1998, made by the Company to
                        Tansukh V. Ganatra (1)
          10.5          Security Agreement, dated January 16, 1998, by and between the
                        Company and Tansukh V. Ganatra (1)
          10.6          Guaranty and Suretyship Agreement, dated January 16, 1998, by and
                        among the Company and Richard T. Aab, Melrich Associates, L.P. and
                        Tansukh V. Ganatra (1)
          10.7          Contribution Agreement, dated February 14, 1998, by and between
                        US LEC Corp. and Richard T. Aab (1)
          10.8          Form of Non-transferable Warrant, dated August 4, 1997, issued
                        Craig K. Simpson (1) (2)
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>

          No.           Exhibit
          ---           -------
         <S>            <C>
          10.9          Amended and Restated Class B Stockholders Agreement, dated as of
                        January 1, 1998 (1)
          10.10         Consulting Agreement, dated December 18, 1997, by and between the
                        Company and RTA Associates, LLC and related termination letter,
                        dated January 1, 1998 (1)
          10.11         Consulting Agreement, dated December 18, 1997 by and between the
                        Company and Super STAR Associates Limited Partnership and related
                        termination letter, dated January 1, 1998 (1) 10.12 Loan and Security
                        Agreement, dated as of December 30, 1998, among US LEC Corp.,
                        certain operating subsidiaries of US LEC Corp., General Electric
                        Capital Corporation and First Union National Bank (3)
          13            Specified portions (pages 13 to 36 and inside back cover) of the
                        Company's Annual Report to Stockholders for the year ended
                        December 31, 1998
          21            Subsidiaries of the Registrant
          23            Consent of Deloitte & Touche LLP
          27            Financial Data Schedule
----------------------------
</TABLE>

          (1) Incorporated by reference to Registration Statement from Form S-1
              (File No. 333-46341) filed February 13, 1998.
          (2) Indicates a management contract or compensatory plan or
              arrangement.
          (3) Incorporated by reference from the Company's Current Report on
              Form 8-K filed on January 7, 1999.

     (b) Reports on Form 8-K.

          No Current Reports on Form 8-K were filed during the quarter ending
          December 31, 1998.

                                       21
<PAGE>

                                   SCHEDULE I

                          INDEPENDENT AUDITORS' REPORT


Board of Directors US LEC Corp.
Charlotte, North Carolina


        We have audited the consolidated financial statements of US LEC Corp.
and subsidiaries as of December 31, 1997 and 1998, and for the period from June
6, 1996 (inception) to December 31, 1996 and each of the two years in the period
ended December 31, 1998, and have issued our report thereon dated February 6,
1999 (February 26, 1999 as to Note 6), which report includes an emphasis of a
matter paragraph as to a significant portion of the Company's accounts
receivables and revenues relating to reciprocal compensation currently in
dispute; such financial statements and report are included in your 1998 Annual
Report to Stockholders and are incorporated herein by reference. Our audits also
included the consolidated financial statement schedule of US LEC Corp. and
subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information as set forth therein.

DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 26, 1999


                                       22
<PAGE>

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS




                           US LEC CORP. (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                ADDITIONS
                                        --------------------------
                         BALANCE AT
                        BEGINNING OF    CHARGED TO    CHARGED TO                     BALANCE AT END
                           PERIOD        COSTS AND      OTHER                           OF PERIOD
    DESCRIPTION       (DEC. 31, 1997)    EXPENSES      ACCOUNTS      DEDUCTIONS      (DEC. 31, 1998)
--------------------- ----------------- ------------ ------------- --------------- ---------------
<S>                   <C>                <C>           <C>           <C>             <C>
Allowance against
accounts receivables         $0           $12,024         $0             $0           $12,024
                             --           -------         --             --           -------
</TABLE>







                                      23

<PAGE>


SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                            US LEC CORP.


Date:   March 30, 1999                 By:    /s/ Richard T. Aab           
                                              -----------------------------
                                              Richard T. Aab
                                              Chairman of the Board and
                                              Chief Executive Officer



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

<TABLE>
<CAPTION>

        Signature                                   Title                       Date
        ---------                                   -----                       ----
        <S>                                         <C>                         <C>

        /s/ Richard T. Aab          Chairman of the Board and                 March 30, 1999
        ------------------            Chief Executive Officer          
        Richard T. Aab                (Principal Executive Officer)    

        /s/ Tansukh V. Ganatra      President, Chief Operating Officer and    March 30, 1999
        ----------------------         Director
        Tansukh V. Ganatra
 
        /s/ Michael K. Robinson     Executive Vice President and              March 30, 1999
        -----------------------        Chief Financial Officer                        
        Michael K. Robinson            (Principal Financial and Accounting
                                       Officer)

        /s/ David M. Flaum          Director                                  March 30, 1999
        ------------------
        David M. Flaum

        /s/Steven L. Schoonover     Director                                  March 30, 1999
        -----------------------
        Steven L. Schoonover
</TABLE>


                                      24