<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

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

                               ----------------

                                  FORM 10-K/A

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

                     FOR THE YEAR ENDED DECEMBER 31, 1999

                        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                28202
          CHARLOTTE, NORTH CAROLINA                  (Zip Code)
   (Address of principal executive offices)

      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. Yes  X    No

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of 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 $454,741,141 as of March 17, 2000 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 17, 2000, there were 10,443,541 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, 1999 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 May 16, 2000 are incorporated by
reference into Part III of this report.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                               EXPLANATORY NOTE

  Form 10-K/A is being filed to amend US LEC Corp.'s Annual Report on Form 10-
K for the fiscal year ended December 31, 1999. The original Form 10-K, filed
on March 30, 2000, is being amended to reflect the March 31, 2000 order issued
by the North Carolina Utilities Commission which negatively effected US LEC
Corp.'s collectibility of certain reciprocal compensation. See "Business--
Forward Looking Statements and Risk Factors--Disputed Reciprocal Compensation
and Recent Significant Development" appearing below. The undersigned
registrant hereby amends the following items as set forth in the pages
attached hereto:

<TABLE>
   <C>         <S>
   PART I
      Item 1:  --Business
      Item 3:  --Legal Proceedings
   PART II
      Item 5:  --Market for the Registrant's Common Stock and Related
               Stockholder Matters
   PART III
      Item 10: --Directors and Executive Officers of the Registrant
   PART IV
      Item 14  --Exhibit 13--Specified portions (pages 12 to 46 and inside back
                cover) of the Company's Annual Report to Stockholders for the
                year ended December 31, 1999
               --Exhibit 23--Consent of Deloitte & Touche LLP
</TABLE>

                                   SIGNATURE

  Pursuant to the requirements 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.

                                                  /s/ Michael K. Robinson
Date: May 15, 2000                        By: _________________________________
                                                    Michael K. Robinson
                                            Executive Vice President and Chief
                                                     Financial Officer
<PAGE>

                                    PART I

Item 1. Business

The Company

  US LEC Corp. ("US LEC" or the "Company") is a provider of integrated
telecommunications services, including: local, long distance, data, Internet
and enhanced services to customers in selected markets in North Carolina,
Georgia, Tennessee, Florida, Virginia, Alabama, Pennsylvania, Mississippi,
South Carolina, Kentucky, Washington D.C. and Maryland. The Company is also
currently certified to provide telecommunications services in Delaware, New
Jersey, Texas, Massachusetts, New York, Ohio and Connecticut. 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 competitive local exchange carriers
("CLEC") in North Carolina to provide switched local exchange services. US
LEC's network is comprised of eighteen Lucent 5ESS(R) AnyMedia(TM) digital
switches in Charlotte, Raleigh/Durham, Greensboro/Winston Salem, Atlanta,
Memphis, Nashville, Knoxville, Orlando, Miami, Tampa/St. Petersburg,
Jacksonville, Norfolk/Virginia Beach, Richmond, Birmingham, Philadelphia,
Northern Virginia/Washington D.C., Baltimore and Chattanooga, in addition to
an Alcatel MegaHub(R) 600ES switch in Charlotte. The Company primarily serves
telecommunications-intensive customers including businesses, universities,
financial institutions, professional service firms and practices, hospitals,
enhanced service providers, Internet service providers, hotels, and government
agencies. As of March 31, 2000 the Company had over 54,000 business trunks,
over 22,000 Internet service provider ("ISP")/enhanced service provider
("ESP") trunks, and over 16,000 business lines in service.

Business Strategy

  US LEC's objective is to become a leading provider of integrated
telecommunications and data services to its existing and target customers and
to increase its market share by increasing its product portfolio and by
providing exceptional customer service. 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 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, Washington D.C. and Philadelphia) and Tier II cities
(mid-size metropolitan areas such as Greensboro, Tampa and Nashville). 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. The
Company currently focuses on markets in the Southeast and Mid-Atlantic United
States. Management believes that the Company's clustered network will enable
it to take advantage of 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, professional

                                       1
<PAGE>

service firms and practices, hospitals, enhanced service providers, ISP's,
hotels, 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, long distance and data services to
complement its core local services. This further 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 18 Lucent switches active throughout its network. To enhance its
service offerings, the Company deployed an Alcatel MegaHub(R) 600ES
("Alcatel") tandem switch in Charlotte. The Alcatel switch complements the
Lucent switches and improves US LEC's ability to provide enhanced services.
The Company has also deployed an Advanced Intelligent Network ("AIN")
platform. This AIN platform positions US LEC for enhanced services as well as
allows the Company Signaling System No. 7 ("SS7") connectivity independent of
the ILECs.

  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 sales force. 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 to efficiently
transition customers from the ILEC or other CLECs to the Company with minimal
disruption of the customer's operations. 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 its network. The NOC provides network
surveillance, real-time alarm notification, dispatch services, and 24 hour x 7
day a week availability and notification.

  Offer a Broad Range of Products and Services. US LEC offers customers a
broad range of telecommunication services, which can be bundled. Management
believes a broad product range, competitive pricing, and an opportunity to
bundle services gives 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 calling card, enhanced toll-free, digital
private line, dedicated high-speed internet access and competitively priced
long distance service, including intrastate, interstate, international and
toll-free calls. US LEC's efforts to add additional data products (such as
frame relay and digital subscriber line (DSL)) is consistent with the
predominant trend in the telecommunications industry of adding data products
and services to traditional voice products. To further this objective, the
Company has deployed its Asynchronous Transfer Mode ("ATM") and AIN platforms.
These systems provide the Company the ability to develop and offer advanced
communications products and services, such as Frame Relay and e-commerce
services that are critical to businesses throughout the United States.

US LEC's Network

  During 1999, the Company installed new Lucent 5ESS(R) Any Media(TM) digital
switches in five new cities, bringing the total to 16 local switches at the
end of 1999. During the first quarter of 2000, the Company activated its
seventeenth and eighteenth Lucent switch in Baltimore and Chattanooga,
respectively. The Company has announced plans to activate additional Lucent
switches in, Charleston, New York, Boston, Pittsburgh,

                                       2
<PAGE>

Atlanta, Louisville, New Orleans and West Palm Beach bringing its total number
of switches to 26 in addition to an Alcatel MegaHub(R) 600ES switch in
Charlotte.

  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.

  The Company has signed interconnection agreements with various ILECs,
including BellSouth Telecommunications, Inc. ("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 interconnection agreement with BellSouth expired on
December 31, 1999 but continues in force until a new interconnection agreement
is reached. When signed, the new agreement will be effective as of January 1,
2000.

Products and Services

  The Company provides local dial-tone services to customers. Local access is
available in many different forms including ISDN, PRI, T1 Access and Channel
Access. 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 and typical enhanced services such as voice mail.

  The Company is also adding data products to its portfolio of products. Most
notably, the Company now offers US LECnet, a direct, dedicated, high-speed
connection to the Internet. With US LECnet, the Company can bundle voice, data
and Internet access all on a single, converged, high-speed, digital access
facility. US LECnet can also be provisioned on separate facilities.

  The Company's ability to bundle local, long distance and data services
allows it to offer its customers more efficient use of transport facilities
and allows it to aggregate customers' monthly recurring and usage charges on a
single, consolidated invoice.

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 98
salespeople at December 31, 1998 to 180 salespeople at December 31, 1999 and
management expects to further increase the Company's sales force to
approximately 300 salespeople by the end of 2000. 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, bundled products and superior customer

                                       3
<PAGE>

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 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 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 to meet 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, 1998, and 1999, BellSouth, operating in the majority of the
Company's markets, accounted for approximately 65%, 80%, and 70%,
respectively, of the Company's net revenue (before reduction for the $12.0
million and $27.8 million allowance in 1998 and 1999, respectively, described
in Note 6 to the Company's consolidated financial statements). The majority of
this revenue for 1998 and 1999 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, 1998, and 1999,
BellSouth accounted for 67%, 94%, and 92% of the Company's total accounts
receivable before allowance, respectively. The majority of such receivables
and revenues are in dispute. The majority of these disputed 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 "Business--Forward Looking
Statements and Risk Factors--Disputed Reciprocal Compensation and Recent
Significant Development" appearing below).

Employees

  As of December 31, 1999, the Company employed 460 people. The Company
expects to employ over 750 people by the end of 2000. 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>
          Name           Age                             Position
          ----           ---                             --------
<S>                      <C> <C>
Richard T. Aab..........  51 Chairman of the Board and Director
Tansukh V. Ganatra......  56 Vice Chairman, Chief Executive Officer and Director
Aaron D. Cowell, Jr.....  38 President
Michael K. Robinson.....  43 Executive Vice President and Chief Financial Officer
Robert D. Ingram........  54 Executive Vice President-Engineering and Chief Technical Officer
</TABLE>

                                       4
<PAGE>

  Richard T. Aab co-founded US LEC in June 1996 and has served as Chairman of
the Board of Directors since that time. He also served as Chief Executive
Officer from June 1996 until July 1999. Between 1982 and 1997, Mr. Aab held
various positions with ACC Corp. including Chairman and Chief Executive
Officer and served as a director. ACC Corp was acquired by Teleport
Communications Group, Inc, in 1998.

  Tansukh V. Ganatra co-founded US LEC in June 1996 and has served as a
director since that time. He also served as President and Chief Operating
Officer from June 1996 until July 1999, when he was named President and Chief
Executive Officer. In January 2000, he was named Vice Chairman and Chief
Executive Officer. From 1987 to 1997, Mr. Ganatra held various positions with
ACC Corp., including serving as its President and Chief Operating Officer.
Prior to joining ACC Corp., Mr. Ganatra held various positions during a 19-
year career with Rochester Telephone Corp. culminating with the position of
Director of Network Engineering.

  Aaron D. Cowell, Jr. joined US LEC in June 1998 as Executive Vice President
and General Counsel. He was named President in January 2000. Prior to joining
US LEC, Mr. Cowell was a partner with Moore & Van Allen, PLLC, a large
southeastern law firm. Mr. Cowell focussed on business and transactional law,
specializing in mergers and acquisitions. He also represented
telecommunications-related businesses throughout his career in private
practice. At Moore & Van Allen, he represented US LEC since its initial
incorporation in 1996. He has been involved in numerous operating areas of US
LEC's business and legal affairs, including its IPO in April 1998. Mr. Cowell
is a graduate of Harvard Law School.

  Michael K. Robinson has been US LEC's Executive Vice President of Finance
and Chief Financial Officer since July 1998. Prior to joining US LEC, Mr.
Robinson held positions with the Telecom sector of Alcatel, an international
telecommunications equipment company headquartered in Paris, France. From 1996
to July 1998, Mr. Robinson was Executive Vice President and Chief Financial
Officer of Alcatel Data Networks, developers and manufacturers of wide area
network data switching equipment for carrier and enterprise solutions, based
in Ashburn, Virginia. He was responsible for financial controls, treasury,
contracts management, information systems, and facilities. In addition to his
duties at Alcatel Data Networks, Mr. Robinson was responsible for the
worldwide financial operations of the Enterprise and Data Networking division
for Alcatel. From 1989 to 1995, Mr. Robinson was Vice President and Chief
Financial Officer with Alcatel Network Systems in Raleigh, North Carolina, and
then in Richardson, Texas. The company develops, manufactures, and markets
transmission equipment for telecommunications systems. Prior to joining
Alcatel, Mr. Robinson held various management positions with Windward
International and Siecor Corp. He brings over 14 years of telecommunications
experience to US LEC. Mr. Robinson is a graduate of the MBA program at Wake
Forest.

  Robert D. Ingram joined US LEC in September 1999 as its Executive Vice
President--Engineering and Chief Technology Officer. Mr. Ingram has almost 30
years of experience in the telecommunications industry. Immediately prior to
joining US LEC, Mr. Ingram served in the capacity of Vice President--Planning,
Engineering and Construction for Citizens Communications in Dallas, Texas, a
telecommunications provider operating approximately one million access lines
in 13 states. In this role, Mr. Ingram was responsible for the integration of
engineering and construction activities in widely dispersed operating units.
He was instrumental in the implementation of Citizens' data services, in
addition to planning their network architecture and equipment selection for
introducing high-speed digital services, and he has extensive experience with
both voice and data networks. Previously, Mr. Ingram spent 22 years with
Rochester Telephone in similar functions.

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.

                                       5
<PAGE>

  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 "PUCs")
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 was
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
incumbent local exchange carriers and other new entrants into the local
telephone market. Specifically, the Telecom Act imposes on ILECs certain
interconnection obligations, some of which are implemented by FCC regulations.
The Telecom Act contemplates that states will apply the federal regulations
and oversee the 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, and resolve contract compliance
disputes arising from interconnection agreements. (See "Business--Forward
Looking Statements and Risk Factors--Disputed Reciprocal Compensation and
Recent Significant Development" for a discussion of the actions before PUCs
related to the Company's interconnection agreement with BellSouth).

  The Company has historically earned a significant portion of its initial
revenue in some markets from the ILEC in the form of reciprocal compensation
payments due to the Company. Several ILECs in the Company's territory
(principally BellSouth) have challenged the applicability of the reciprocal
compensation related to enhanced service providers and ISP customers receiving
more calls than they make. (See "Business--Forward Looking Statements and Risk
Factors--Disputed Reciprocal Compensation and Recent Significant
Development").

  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 ("RBOC"), other ILECs, long distance
carriers and other companies and likely will increase the level of competition
the Company faces. (See "Business--Competition").


                                       6
<PAGE>

  In addition, the Telecom Act 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.
Recently, the FCC approved Bell Atlantic's right to provide interLATA service
in New York, which is the only interLATA application by an RBOC that has been
approved to date. (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 (the "D.C. Court of Appeals") 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 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 afforded significant new pricing flexibility to ILECs subject to price
cap regulation. On August 5, 1999, the FCC adopted an order granting price cap
ILECs additional pricing flexibility. The order provides certain immediate
regulatory relief regarding price cap ILECs and sets forth a framework of
"triggers" to provide those companies with greater flexibility to set rates
for interstate access services. The order also initiated a rulemaking to
determine whether the FCC should regulate the access charges of CLECs, such as
the Company. To the extent such increased pricing flexibility is utilized for
ILECs or such additional regulation is implemented, the Company's ability to
compete with ILECs for certain service could 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 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 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).

                                       7
<PAGE>

  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 is 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 is based
on its share of the total interstate telecommunications service and certain
defined telecommunications end user revenues. Although the Company has made
minimal contributions to the fund, the amount of the Company's required
contribution changes each quarter. As a result, the Company cannot predict the
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. The United States Court of
Appeals for the Fifth Circuit upheld those rules.

  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 rules ("price cap LECs") recover
through monthly, non-traffic sensitive access charges and substantially
decrease the costs that price cap ILECs 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 could 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 D.C. Court of
Appeals 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. To
date, four PUCs in states where the Company has earned reciprocal compensation
have affirmed their prior position on this issue. The FCC order has been
appealed by several parties. On March 24, 2000, the United States Court of
Appeals for the D.C. Circuit vacated the FCC's February 26, 1999

                                       8
<PAGE>

declaratory ruling and remanded it back to the FCC. The D.C. Circuit Court of
Appeals found that the FCC failed to clearly explain and support why ISP
traffic should fall under its jurisdiction as long distance in nature rather
than under the domain of state regulators as local in nature. This ruling
means the FCC will have to reexamine its rules covering reciprocal
compensation for ISP traffic. The Company cannot predict the results of such
reexamination.

  The Company also 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). In addition, the
Supreme Court affirmed the "pick and choose" rules which allows carriers to
choose individual portions of existing interconnection agreements with other
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. On remand, the FCC largely retained its
list of unbundled elements, but eliminated the requirement that ILECs provide
unbundled access to local switching for customers with four or more lines in
the top 50 MSAs, and the requirement to provide unbundled operator service and
directory assistance.

  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.

                                       9
<PAGE>

  State Regulation. The Company has all of the certifications necessary to
offer its current services in the states of:

    State

   North Carolina
   Georgia
   Virginia
   Tennessee
   South Carolina
   Florida
   Alabama
   Washington, D.C.
   Pennsylvania
   Maryland
   Delaware
   New Jersey
   New York
   Massachusetts
   Kentucky
   Mississippi
   Ohio
   Texas
   Connecticut

  The Company has an application pending with the Louisiana PUC.

  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.

  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. PUCs will implement and enforce most of

                                      10
<PAGE>

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 has
demonstrated 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, CAPs, and
other CLECs, 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.

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

                                      11
<PAGE>

Stockholders for the year ended December 31, 1999, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and subsequently filed Annual Reports on
Form 10-K, as amended, 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:

  Disputed 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. In August 1997, BellSouth notified the Company and
other CLECs that it considered traffic terminated to ESPs, including ISPs, to
be interstate traffic, and therefore not subject to reciprocal compensation,
and that BellSouth would not pay (or bill) reciprocal compensation under
interconnection agreements for this traffic. BellSouth is disputing the
portion of reciprocal compensation billed by the Company related to the
transport and termination of local traffic from its customers to ESPs,
including ISPs and information service providers, primarily on the basis that
such traffic does not terminate in the same local exchange and, as described
below, the portion of the billings related to traffic on certain networks
(collectively referred to as "Disputed Reciprocal Compensation"). The Company
recorded Disputed Reciprocal Compensation revenue of approximately $0, $42
million and $92 million for 1997, 1998 and 1999, respectively, net of a $0,
$12 million and $27 million allowance, respectively. Management believes that
the Company had earned and was legally entitled to this revenue and payments
were due from BellSouth pursuant to the interconnection agreements that
BellSouth had with the Company. However, on March 31, 2000, the NCUC ruled
that the traffic associated with the Metacomm network is not compensable under
the interconnection agreements (See "Recent Significant Development").

  On February 26, 1998, following a petition by the Company, the North
Carolina Utilities Commission (the "NCUC") ordered BellSouth to bill and pay
for all ISP-related traffic (the "NCUC Order"). 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
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") pending
determination of certain related issues by the FCC. This action was filed
against the Company and the NCUC. In June 1999, the U.S. District Court
dismissed BellSouth's petition without prejudice and remanded back to the NCUC
for further review. Following the U.S District Court's remand, on June 22,
1999, the NCUC denied BellSouth's request for a further stay of the NCUC
Order. On July 16, 1999, the Company received an $11 million payment from
BellSouth for a portion of the Disputed Reciprocal Compensation earned from
North Carolina operations, and subject to the NCUC Order.

  Other than denying BellSouth's request for a further stay, the only action
taken by the NCUC with respect to the remand from the U.S. District Court is
that the NCUC filed with the U.S. Fourth Circuit Court of Appeals (the "4th
Circuit") a notice of appeal of the U.S. District Court's order that rejected
the NCUC's defenses, including its defense that the 11th Amendment to the
United States Constitution bars BellSouth from making the NCUC a party to our
proceeding in the federal courts. The Company has also appealed and the United
States

                                      12
<PAGE>

Justice Department has intervened in the appeal. The Appellate hearing on this
matter is tentatively scheduled for early June, 2000.

  In February 1999, the FCC issued a declaratory ruling (the "FCC Ruling")
which concluded that for jurisdictional purposes most calls delivered to ISPs
should be deemed to continue to Internet web sites, which are often located in
other states. Thus, the FCC ruled that such calls are jurisdictionally
"interstate" in nature. However, the FCC further declared that where parties
have previously agreed in interconnection agreements that reciprocal
compensation must be paid for traffic bound for ISPs, the parties should be
bound by those agreements, as interpreted and enforced by state regulatory
bodies. The FCC also recognized that some commissions might reconsider their
decisions in light of its ruling. As noted, the NCUC had ruled on February 26,
1998 in favor of the Company with respect to payment for traffic bound to ISPs
under the Company's first interconnection agreement with BellSouth. To date,
state regulatory bodies in at least twenty-three states have considered the
effect of the FCC Ruling and have overwhelmingly reaffirmed their earlier
decisions requiring payment of reciprocal compensation for this type of
traffic or for the first time determined that such compensation is due.
Included among these states are Alabama, Florida, Louisiana, South Carolina
and Tennessee, all of which are in BellSouth's operating territory. In this
regard, the Alabama Public Service Commission concluded that the treatment of
ISP traffic as local was so prevalent in the industry at the time BellSouth
entered into interconnection agreements with CLECs that, if it is so intended,
BellSouth had an obligation to negate such local treatment in the agreements
by specifically delineating that ISP traffic was not local traffic subject to
the payment of reciprocal compensation. The Florida Public Service Commission
reached a similar conclusion. Georgia and Tennessee have also reaffirmed
decisions that reciprocal compensation is owed for calls to ISPs. In an
arbitration of the terms of a new interconnection agreement between BellSouth
and another CLEC, the NCUC recently determined that until the FCC issues a
definitive ruling pursuant to the notice of proposed rulemaking which was part
of the FCC Ruling, reciprocal compensation should continue to be paid under
the new interconnection agreement. While US LEC was not a party to this
arbitration, management believes this decision to be favorable in light of the
U.S. District Court's remand (discussed above). Two BellSouth states--South
Carolina and Louisiana--have ruled that reciprocal compensation is not due for
traffic to ISPs. These decisions also came after the FCC's Declaratory Ruling.
All of these decisions have been appealed. The South Carolina and Louisiana
decisions represent a view adopted by very few other states. (The Company does
not provide local service in Louisiana or South Carolina).

  In February 2000, the Company received payment from GTE for reciprocal
compensation related to ISP and voice traffic in North Carolina. This payment
was pursuant to a commercial arbitration award rendered January 4, 2000
resulting from a proceeding before the American Arbitration Association. GTE
was ordered to pay US LEC approximately $650,000 for ISP traffic for the
period ending September 1999. Although they paid the Company, GTE is currently
appealing this decision. The Company is currently working through dispute
resolution procedures with respect to subsequent periods and anticipates a
favorable ruling.

  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 from BellSouth. Also on September 14, 1998,
BellSouth filed a complaint with the NCUC seeking to be relieved from its
obligations under its interconnection agreement with the Company to pay
reciprocal compensation for traffic related to networks including that
operated by Metacomm, LLC ("Metacomm"), a customer of BellSouth and the
Company and, as of June 1998, a related party of the Company. The two
proceedings were consolidated for purposes of discovery, which concluded June
16, 1999, and hearings concluded in August 1999 with respect to BellSouth's
complaint. Hearings concerning US LEC's complaint have been continued by the
NCUC pending an order in the BellSouth complaint. The BellSouth proceeding
primarily involves the treatment of traffic over a network established by
Metacomm and whether, under the interconnection agreements between the Company
and BellSouth and the Telecom Act, BellSouth is required to pay reciprocal
compensation to the Company for traffic associated with this network and
whether BellSouth has breached its interconnection agreements with the Company
by failing to pay reciprocal compensation for this traffic.

                                      13
<PAGE>

  In the NCUC proceedings filed September 14, 1998, BellSouth claims
principally that the traffic on Metacomm's network does not qualify for
reciprocal compensation because the Metacomm network was designed to generate
reciprocal compensation and that such traffic does not constitute
"telecommunications" subject to the reciprocal compensation payment provisions
of the Telecom Act and the interconnection agreements with BellSouth. In
addition, BellSouth has identified other issues on which it bases its claim
that the traffic on the Metacomm network is not compensable, including (1)
that the Company agreed to share reciprocal compensation with Metacomm, (2)
that, as disclosed in the Company's Form 10-Q for the period ended September
30, 1998, Richard T. Aab, the largest shareholder of the Company and the
Chairman of its Board of Directors, acquired a controlling interest in
Metacomm, (3) reciprocal compensation has been billed on an "always-on" basis
even though there is no measurement of the amount of data transversing the
network that is originated by customers of Metacomm, (4) that the billed
traffic includes traffic during periods when Metacomm had not yet connected
customers to its network or when customers of Metacomm were not sending data
over the network, (5) that the Metacomm network includes facilities that cross
LATA boundaries and, therefore, data traversing these facilities is not local
(and, therefore, is ineligible for reciprocal compensation), (6) that Metacomm
is an unlicensed reseller of US LEC's services, not an end-user, and (7) that
the Metacomm network is a quasi-dedicated network which should not be eligible
for reciprocal compensation.

  It is the Company's understanding that during the relevant period, Metacomm
was engaged in the business of developing and operating a high-speed, always-
on data network in North Carolina and its network provides users with
continuous access to data, wide area network services, software applications
and other services, including access to the Internet. In the course of these
proceedings, the Company concluded, based on positions taken and information
provided by Metacomm, that Metacomm related traffic should not be considered
to be solely ISP traffic because its network provides additional services and
functions to users. Notwithstanding this determination, the Company believes
BellSouth will continue to contend the Disputed Reciprocal Compensation
related to the Metacomm network traffic is subject, in the first instance, to
the resolution of the ISP issue. The Company has recorded approximately $0,
$50 million and $98 million of gross revenue, before allowances and before
late payment charges, for fiscal 1997, 1998 and 1999, respectively, related to
reciprocal compensation revenue generated as a result of Metacomm network
traffic. (See "Recent Significant Development").

  When the Metacomm network was originally developed, the Company agreed to
pay Metacomm commissions equal to a specified percentage of the reciprocal
compensation the Company receives from ILEC's for the network traffic. The
Company recorded approximately $200,000, $20 million and $39 million for 1997,
1998 and 1999, respectively, in reciprocal compensation commission expense
earned by Metacomm, which is included in cost of services in the accompanying
financial statements. As of December 31, 1998 and 1999, the Company had a
liability to Metacomm in the amount of $5.3 million and $22.8 million,
respectively, which is recorded as accrued commissions--related party in the
accompanying financial statements. The Company and Metacomm are parties to
agreements by which commissions earned by Metacomm related to reciprocal
compensation are not payable until the related reciprocal compensation is
collected from the ILEC. However, in fiscal 1997, 1998 and 1999, the Company
paid Metacomm $0, $8.3 million and $12 million prior to collecting the earned
reciprocal compensation from BellSouth. These payments are subject to a
repayment agreement if the related reciprocal compensation is ultimately not
collected from BellSouth. (See "Recent Significant Development").

  The Company believes that calls to establish, maintain and manage data
network connections and intra-network communications generated by data
processing routers, which are necessary to maintain the functionality and
integrity of the Metacomm network, are within the definition of
"telecommunications" under the Telecom Act and constitute compensable traffic
subject to reciprocal compensation under the interconnection agreements the
Company has with BellSouth. The Company also believes that the issues raised
by BellSouth as additional bases for nonpayment does not excuse BellSouth from
its obligation to pay reciprocal compensation under its interconnection
agreement with the Company.

                                      14
<PAGE>

  As noted above, on July 16, 1999, the Company received a payment of $11
million from BellSouth representing a portion of the amounts due the Company
for ISP reciprocal compensation in North Carolina. In making the payment,
BellSouth stated that it was for ISP traffic the NCUC had ordered it to pay
for in February 1998, including late fees, and that it was reserving all of
its appeal rights with respect to the payment. BellSouth also stated that this
payment did not include any amounts at issue in its September 14, 1998 NCUC
proceeding. This partial payment did not cover all outstanding amounts the
Company claims are due from BellSouth in North Carolina and other states the
Company serves. For example, while the Company has outstanding amounts due
from BellSouth for ISP traffic in Tennessee, Georgia and Florida, BellSouth
has not paid these amounts, presumably because no orders specific to US LEC
have been entered by state commissions in those states directing BellSouth to
pay the Company. However, state commissions in these states have issued
rulings in favor of other competitive carriers and as discussed above, the
state commissions in Florida and Alabama have made rulings subsequent to the
FCC Ruling. To address this issue, the Company has filed the following
additional actions against BellSouth related to delinquent reciprocal
compensation payments, none of which involve Metacomm or any similar network:

  .  On July 1, 1999, the Company filed a complaint against BellSouth before
     the Georgia Public Service Commission ("GAPSC"). The hearing with
     relation to this complaint concluded January 21, 2000. The Company
     anticipates receiving the ruling from the hearing officer in April 2000.

  .  On July 2, 1999, the Company filed a complaint against BellSouth before
     the Florida Public Service Commission ("FLPSC"). This matter is
     scheduled for hearing in late April 2000.

  .  On August 6, 1999, the Company filed a complaint against BellSouth
     before the Tennessee Regulatory Authority ("TRA"). This matter has not
     yet been scheduled for hearing.

  Management believes that the Company will ultimately obtain favorable
results in the state proceedings described above before the NCUC, GAPSC, FLPSC
and the TRA; however, BellSouth may elect to initiate additional proceedings
(by way of appeal or otherwise) challenging amounts owed to the Company. In
this regard, BellSouth recently has asserted a variety of other objections to
paying portions of the reciprocal compensation billed by the Company. They
include assertions that US LEC has miscalculated late payment fees due from
BellSouth and that US LEC has billed reciprocal compensation using the wrong
rates. The Company believes BellSouth has asserted these issues and will
attempt to raise further issues in order to avoid or delay payment. Similarly,
GTE has recently appealed the arbitration award in favor of the Company. The
Company believes it will be successful in this appeal.

  If a decision adverse to the Company is issued in any of these proceedings
by any of the state commissions, and in particular the NCUC, or in any appeal
or review of a favorable decision by the U.S. District Court, state
commissions, or the FCC, or if either the FCC or any of the applicable state
commissions were to alter its view of reciprocal compensation, such an event
could have a material adverse effect on the Company's operating results and
financial condition. The Company's gross trade accounts receivable as of
December 31, 1998 and 1999 included approximately $54 million and $190
million, respectively, of earned but uncollected Disputed Reciprocal
Compensation (before a $12 million and $39 million allowance and before late
payment charges) of which approximately $50 million and $148 million was
generated as a result of traffic related to the Metacomm network. (See "Recent
Significant Development").

  In June 1999, the Company adopted an existing agreement to extend local
interconnection with BellSouth replacing the previous interconnection
agreement, which expired on June 15, 1999. The adopted interconnection
agreement with BellSouth expired on December 31, 1999 but continues in force
until new interconnection agreements are reached, the new agreements will be
effective as of January 1, 2000. The Company filed petitions for arbitration
in all nine states in BellSouth operating territory seeking to obtain a PSC
ordered interconnection agreement, but the Company anticipates that it will be
able to avoid the arbitration process by adopting interconnection agreements
that are either currently in effect or which will result from arbitrations
involving other CLECs. The Company's ability to obtain favorable terms for
interconnection following December 31, 1999

                                      15
<PAGE>

will depend on a number of factors, including decisions of the FCC and state
regulatory authorities. However, the Company intends to pursue such agreements
vigorously and does not anticipate any interruption in interconnection
service.

  The Company does anticipate that any such new interconnection agreements
will provide for reciprocal compensation at rates lower than in the Company's
current interconnection agreement. The Company also anticipates that the
reciprocal compensation related to Metacomm will not continue due to changes
in the terms of the interconnection agreement, changes in Metacomm's business
or the architecture of its network or a combination. In light of this, the
Company did not advance any payment to Metacomm in February 2000. In February,
2000 the Company received a notice by which Metacomm notified BellSouth that
due to BellSouth's failure to pay reciprocal compensation, Metacomm was no
longer able to sustain its network operations. Metacomm instructed BellSouth
to terminate the facilities it provides to Metacomm. One effect of that
termination will be to reduce US LEC's revenue from the Metacomm network. US
LEC estimates that the reduction in quarterly revenue during 2000 will be
approximately $18 million, the reduction in cost of services related to
commissions approximately $9 million, resulting in a decrease in earnings from
operations of approximately $9 million.

  Recent Significant Development. As discussed under the caption "Disputed
Reciprocal Compensation Revenue," BellSouth filed a claim before the NCUC on
September 14, 1998 seeking to be relieved of any obligation under its
interconnection agreements with the Company to pay reciprocal compensation for
traffic related to the Metacomm network. On March 31, 2000, the NCUC issued an
order in this proceeding that relieves BellSouth from paying reciprocal
compensation to US LEC for any minutes of use attributable to the network
operated by Metacomm, or any similar network, and requires US LEC to cease
billing BellSouth reciprocal compensation for minutes of use attributable to
the Metacomm or any similar network (the "March 31 Order"). The Company is
considering its options with respect to an appeal of the order, but plans to
comply fully with the March 31 Order.

  As a result of the March 31 Order, the Company estimates that it will record
a pre-tax, non-recurring, non-cash charge of approximately $55 million in the
quarter ending March 31, 2000. The charge is composed of the write-off of
approximately $153 million in receivables related to reciprocal compensation
revenue offset by a previously established allowance of $39 million and a
reduction of approximately $59 million in reciprocal compensation commissions
payable to Metacomm.

  In accordance with existing agreements between Metacomm and the Company,
approximately $21 million in commission advances to Metacomm and approximately
$16 million in receivables for services provided to Metacomm are due to the
Company. Metacomm has assured the Company that these amounts will be paid.

  The March 31 Order does not affect in any way the NCUC's order of February
26, 1998, requiring BellSouth to pay reciprocal compensation to the Company
for ISP traffic in North Carolina. The March 31 Order also has no effect on US
LEC's operations in any other state or its pending claims against BellSouth
for reciprocal compensation for ISP traffic before the GAPSC, FLPSC and TRA.

  Disputed Access Revenues. In February 2000, US LEC filed suit in U.S.
District Court for the Western District of North Carolina against Sprint
Communications. This action seeks to collect amounts owed to US LEC for access
charges for intrastate and interstate traffic which was either handed off to
Sprint by the Company or terminated to the Company by Sprint. As of December
31, 1999, Sprint owed US LEC $4.3 million in access charges. Sprint has
refused to pay the amounts invoiced by US LEC on the basis that the rates are
higher than the amounts that Sprint is willing to pay. US LEC's invoices to
Sprint are at the rates specified in US LEC's state and federal tariffs. The
FCC recently determined that a long distance company may not withhold access
charges on the basis that it believes the charges to be too high (MGC
Communications, Inc. v. AT&T Corp., FCC Release 99-408). As such, US LEC
anticipates a favorable resolution of this matter.

  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

                                      16
<PAGE>

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.

  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. In June 1999, the Company adopted an
existing agreement to extend local interconnection with BellSouth replacing
the previous interconnection agreement, which expired on June 15, 1999. The
adopted interconnection agreement with BellSouth expired on December 31, 1999
but continues in force until new interconnection agreements are reached. The
new agreements will be effective as of January 1, 2000. The Company filed
petitions for arbitration in all nine states in BellSouth operating territory
seeking to obtain a PUC ordered interconnection agreement, but the Company
anticipates that it will be able to avoid the arbitration process by adopting
interconnection agreements that are either currently in effect or which will
result from arbitrations involving other CLECs. The Company's ability to
obtain favorable terms for interconnection following December 31, 1999 will
depend on a number of factors, including decisions of the FCC and state
regulatory authorities. (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.

                                      17
<PAGE>

  Products And Services. The Company currently offers local, long distance,
data, Internet and enhanced 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,
Tansukh V. Ganatra, Vice Chairman and Chief Executive Officer, Aaron D.
Cowell, Jr., President and Michael K. Robinson, Executive Vice President and
Chief Financial 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 LECs
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 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.

                                      18
<PAGE>

  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 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 2000 and future years. In December 1999, the Company amended its Senior
Secured Credit Facility increasing the amount available under the facility to
$150 million (the "Credit Facility"). In addition, in February 2000, the
Company announced it had executed a letter of intent with affiliates of Bain
Capital, Inc. and Thomas H. Lee Partners, L.P. to invest up to $300 million in
convertible preferred stock of US LEC (the "Preferred Stock Investment"). The
investment will be made in two tranches. The first tranche of $200 million
closed on April 11, 2000. During the first year after closing of the first
tranche, the investors, at their option, may invest up to an additional $100
million. (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, proceeds
from the Preferred Stock Investment 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

                                      19
<PAGE>

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 Preferred Stock Investment, 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 and the
anticipated decline in reciprocal compensation revenue, the Company's
operating results may vary significantly from period to period.

  Control By Single Stockholder. As of March 17, 2000, 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 3. Legal Proceedings

  US LEC is not currently a party to any material legal proceedings, other
than the GPSC, TRA, FPSC, NCUC and U.S. District Court proceedings related to
reciprocal compensation and other amounts due from BellSouth and the U.S.
District Court proceeding related to access fees due from Sprint
Communications (See "Business--Regulation" and "Forward Looking Statements and
Risk Factors" above and Notes 6 and 14 to the Company's consolidated financial
statements for a detailed description of these proceedings).

                                    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 1999
Annual Report to Stockholders (the "Annual Report"). This section of the
Annual Report has been included in Exhibit 13 to this report.

  On December 16, 1999, the Company issued 61,995 shares of Class A Common
Stock to Global Vista Communications, LLC, a company controlled by Mr. Aab, in
exchange for software valued at $1.75 million. The shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. This transaction was privately negotiated with an
accredited investor (as defined by Rule 501(a) of Regulation D).

                                      20
<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 May 16,
2000 (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".

                                    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./A

  (1) Financial statements:

    A. Consolidated Balance Sheets as of December 31, 1998 and 1999

    B. Consolidated Statements of Operations years ended December 31, 1997,
  1998 and 1999

    C. Consolidated Statements of Stockholders' Equity (Deficiency) years
  ended December 31, 1997, 1998 and 1999

    D. Consolidated Statements of Cash Flows for the years ended December 31,
  1997, 1998 and 1999

    E. Notes to Consolidated Financial Statements for the years ended
  December 31, 1997, 1998 and 1999

    F. Independent Auditors' Report

  (2) List of Exhibits:

   13  Specified portions (pages 12 to 46 and inside back cover) of the
       Company's Annual Report to Stockholders for the year ended December 31,
       1999
   23  Consent of Deloitte & Touche LLP

                                      21
<PAGE>

                                                                      EXHIBIT 13

                            SELECTED FINANCIAL DATA

              For the years ended December 31, 1997, 1998 and 1999
    (In Thousands, Except Per Share Data and Operating Data, as noted below)

<TABLE>
<CAPTION>
                                                      1997     1998      1999
                                                     -------  -------  --------
<S>                                                  <C>      <C>      <C>
Statement of Operations:
  Revenue, Net...................................... $ 6,458  $84,716  $175,180
  Cost of Services..................................   4,201   33,646    73,613
  Gross Margin......................................   2,257   51,070   101,567
  Selling, General and Administrative...............   6,117   25,020    48,375
  Depreciation and Amortization.....................     443    4,941    11,720
  Earnings (Loss) from Operations...................  (4,303)  21,109    41,472
  Interest Income (Expense), Net....................    (355)   1,623    (2,046)
  Earnings (Loss) before Income Taxes...............  (4,658)  22,732    39,426
  Provision for Income Taxes........................     --     9,305    15,617
  Net Earnings (Loss)............................... $(4,658) $13,427  $ 23,809
  Net Earnings (Loss) Per Share-Basic............... $ (0.25) $  0.53  $   0.87
  Net Earnings (Loss) Per Share-Diluted............. $ (0.25) $  0.52  $   0.84
  Weighted Average Shares Outstanding-Basic.........  18,653   25,295    27,431
  Weighted Average Shares Outstanding-Diluted.......  18,653   25,804    28,411
Other Financial Data:
  Capital Expenditures.............................. $13,055  $47,292  $ 57,396
  EBITDA............................................  (3,860)  26,050    53,192
  Net Cash Flow Used in Operating Activities........  (5,594) (19,143)  (25,935)
  Net Cash Flow Used in Investing Activities........  (5,951) (48,538)  (49,696)
  Net Cash Flow Provided in Financing Activities....  14,008  106,457    48,840
Operating Data:
  Business Trunks...................................       *   15,823    46,019
  ISP/ESP Trunks....................................       *   23,481    33,169
  Business Lines....................................       *    3,058    13,237
  Number of States..................................       1        4         7
  Number of Local Switches..........................       3       11        16
  Number of Long Distance Switches..................     --       --          1
  Number of Customers...............................     142      558     1,946
  Number of Employees...............................      78      253       460
  Number of Sales Employees.........................      24       98       180
Balance Sheet Data:
  Working Capital (Deficit)......................... $(2,269) $76,215  $113,109
  Accounts Receivable, net..........................   6,006   66,214   193,943
  Current Assets....................................   9,656  112,184   213,269
  Property and Equipment, Net.......................  12,889   56,219   102,002
  Total Assets......................................  22,681  170,203   320,100
  Long-Term Debt....................................   5,000   20,000    72,000
  Total Stockholders' Equity........................   5,757  112,975   138,870
</TABLE>
--------
*  Not Available

                                       22
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

  Except for the historical information contained herein, this annual report
contains forward-looking statements, subject to uncertainties and risks,
including the demand for US LEC's services, the ability of the Company to
introduce additional products, the ability of the Company to successfully
attract and retain personnel, competition, issues related to Year 2000,
uncertainties regarding its dealings with incumbent local exchange carriers
("ILECs") and other telecommunications carriers and facilities providers,
regulatory uncertainties, the possibility of an adverse decision related to
reciprocal compensation owing to the Company by BellSouth Telecommunications,
Inc. ("BellSouth"), as well as the Company's ability to begin operations in
additional markets. These and other applicable risks are summarized in the
"Forward-Looking Statements and Risk Factors" section and elsewhere in the
Company's annual report on Form 10-K for the period ended December 31, 1999,
as amended, and in other reports which are on file with the Securities and
Exchange Commission.

  The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" on page 12 of this report and the Company's
consolidated financial statements and related notes thereto appearing
elsewhere in this report.

Company Overview

  US LEC is a rapidly growing switch-based competitive local exchange carrier
("CLEC") that provides integrated telecommunications services to its
customers. The Company primarily serves telecommunication-intensive customers
including businesses, universities, financial institutions, professional
service firms, hospitals, enhanced service providers ("ESPs"), Internet
service providers ("ISPs"), hotels and government agencies. US LEC was founded
in June 1996 after passage of the Telecommunications Act of 1996 (the "Telecom
Act"), which enhanced the competitive environment for local exchange services.
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. US
LEC currently offers local, long-distance, data and enhanced services to
customers in selected markets in North Carolina, Florida, Georgia, Tennessee,
Virginia, Alabama, Washington D.C., Pennsylvania, Mississippi, Maryland, South
Carolina and Kentucky. In addition, US LEC is currently certified to provide
telecommunication services in Delaware, New Jersey, New York, Ohio, Texas and
Massachusetts. US LEC's current network is comprised of eighteen Lucent
5ESS(R) AnyMedia digital switches in Charlotte, Raleigh/Durham,
Greensboro/Winston-Salem, Atlanta, Memphis, Nashville, Knoxville, Orlando,
Miami, Tampa/St. Petersburg, Jacksonville, Norfolk/Virginia Beach, Richmond,
Birmingham, Philadelphia, Northern Virginia/Washington D.C., Baltimore and
Chattanooga, in addition to its Alcatel MegaHub(R) 600ES switch in Charlotte.

Revenue and Cost of Services

  US LEC's revenue is comprised of two primary components: (1) fees paid by
customers for local, long distance, data, Internet and enhanced services, and
(2) access charges, including reciprocal compensation, which is discussed
below. Local, long distance, data, Internet and enhanced service revenue is
comprised of monthly recurring charges, usage charges, and initial non-
recurring charges. Monthly recurring charges include the fees paid by
customers for facilities (lines and trunks) in service and additional features
on those facilities. Usage charges consist of usage-sensitive fees paid for
calls made. Initial non-recurring charges consist primarily of installation
charges. Access charges are comprised of charges paid by interexchange
carriers ("IXCs") for the origination and termination of interexchange toll
and toll-free calls and reciprocal compensation, which is discussed below. US
LEC's "core business" revenue is comprised of local, long distance, data,
Internet, and enhanced service fees and toll and toll-free access charges as
described above. The Company does not resell any ILEC services.

                                      23
<PAGE>

  Reciprocal compensation arises when a local exchange carrier completes a
call that originated on another local exchange carrier's network. Reciprocal
compensation rates are fixed by an interconnection agreement negotiated
between those carriers. The majority of the Company's 1999 revenue was earned
from reciprocal compensation and is currently being disputed by BellSouth.
This dispute arises from reciprocal compensation charges related to traffic
that is terminated to enhanced service providers, including internet service
providers. As part of this dispute BellSouth has disputed reciprocal
compensation charges related to Metacomm, LLC ("Metacomm"), a company over
which Richard T. Aab, the majority stockholder and Chairman of the Board of
Directors of the Company acquired control after this dispute arose. BellSouth
contends in part that such traffic does not constitute "telecommunications,"
subject to reciprocal compensation under the Telecom Act and the existing
interconnection agreement between BellSouth and the Company. (See Disputed
Reciprocal Compensation Revenue appearing below for a description of these
proceedings and uncertainties associated with their outcome and Recent
Significant Development regarding the outcome of the dispute with BellSouth
related to charges associated with traffic on the Metacomm network).

  Although the Company has generated a majority of its revenue from reciprocal
compensation, US LEC was founded to establish a company that would provide a
wide array of telecommunications services to its customers and reciprocal
compensation is not considered to be a part of the Company's core revenue. US
LEC has deployed a significant regional network, and as of December 1999 has
active switches in 16 sites, serving over 1,900 customers. Management believes
this customer base, achieved in less than three years, is indicative of the
market's acceptance of US LEC's strategy and service offerings in its core
business. Management expects the Company's core business revenue to continue
to increase and reciprocal compensation to continue to decrease significantly
as percentages of total revenue in future periods as US LEC continues to
deploy its network, and expand its customer base, and as reciprocal
compensation rates decline and the Metacomm network facilities are terminated
(See Disputed Reciprocal Compensation Revenue and Recent Significant
Development).

  In order to provide local exchange services, the Company has signed
interconnection agreements with various ILECs, including BellSouth, Bell
Atlantic, GTE and Sprint. These agreements provide the framework for the
Company to serve its customers when other local carriers are involved. The
Company's interconnection agreement with BellSouth expired in June 1999. At
that time, as allowed by the 1996 Telecom Act, the Company adopted an existing
agreement which expired on December 31, 1999, but continues in force until new
interconnection agreements are entered into. Any new agreements will be
effective as of January 1, 2000. Management does not anticipate any
interruption of interconnect services. While the Company does not anticipate
that BellSouth will agree to renew the agreements with terms consistent with
the Company's existing agreements as they relate to reciprocal compensation,
it intends to pursue favorable terms vigorously. The Company's ultimate
ability to obtain such terms will depend on a number of factors, including the
decisions of the Federal Communications Commission and state regulatory
authorities.

  Cost of services is comprised primarily of leased transport charges and
commissions payable with respect to reciprocal compensation revenue. The
Company's leased transport charges are the lease payments incurred by US LEC
for the transmission facilities used to connect the Company's customers to its
switch and to connect to the ILEC and other carrier networks. US LEC, as part
of its "smart-build" strategy, does not currently own any fiber or copper
transport facilities. These facilities are leased from various providers
including, in many cases, the ILEC. The Company's strategy of leasing rather
than building its own fiber transport facilities results in the Company's cost
of services being a significant component of total costs. Management believes
that this strategy has several benefits, including faster time-to-market, more
efficient asset utilization, and diverse interconnection opportunities. The
Company has to date been successful in negotiating lease agreements which
generally match the duration of its customer contracts, thereby allowing the
Company to mitigate the risk of incurring charges associated with transmission
facilities that are not being utilized by customers. The Company shares
revenue in the case of toll-free access and reciprocal compensation revenue.
While the majority of the Company's cost of services is comprised of leased
transport charges and reciprocal compensation commissions, management expects
that over time outbound traffic and other usage sensitive charges will become
a major component of cost of services as the Company begins to carry more of
its customers' outbound calls.

                                      24
<PAGE>

Selling, General and Administrative Expenses; Depreciation and Amortization

  In addition to the costs of services described above, the Company incurs
certain other expenses. The largest component of selling, general and
administrative expense ("SG&A") relates to employee salaries, related taxes
and benefits, and other incentive-based compensation. Other major categories
of SG&A include expenses associated with leasing real estate for the Company's
offices and network, travel, supplies, legal and accounting.

  Depreciation and amortization expense is primarily due to capital
expenditures made by the Company. Gross property, plant, and equipment
increased from $61.3 million in 1998 to $118.5 million in 1999. Depreciation
and amortization expense increased from $4.9 million in 1998 to $11.7 million
in 1999.

  As the Company continues to build its network, SG&A and depreciation and
amortization expense will continue to grow.

Results of Operations

 Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998

  Net revenue increased to $175.2 million for the year ended December 31,
1999, from $84.7 million in 1998. The increase in revenue of $90.5 resulted
from an increase of $58.2 million related to reciprocal compensation and a
$32.3 million increase in core revenue. These increases were caused by the
Company's continued expansion into new markets, an increase in the total
number of customers in existing markets and an increase in telecommunications
traffic on its network. The Company's core business revenue continued to grow,
as well as the revenue related to reciprocal compensation. Core business
revenue, or revenue other than reciprocal compensation, increased to $62.6
million for the year ended December 31, 1999, from $30.3 million for the year
ended December 31, 1998. For the years ended December 31, 1999 and 1998,
reciprocal compensation revenue increased to $112.6 million from $54.4
million, respectively, net of allowances. Due to the disputed reciprocal
compensation issues as described below, the Company recorded a $27.8 million
and $12.0 million allowance against reciprocal compensation revenue and
related receivables for the years ended December 31, 1999 and 1998,
respectively, bringing the total allowance offsetting the related receivables
to $39.8 million at December 31, 1999. Unless otherwise specified, the results
of operations reflected in this report are net of these and other normal
operating adjustments. This allowance was made due to the current judicial and
regulatory proceedings related to this disputed revenue. (See Disputed
Reciprocal Compensation Revenue and Recent Significant Development appearing
below for a further discussion related to reciprocal compensation and other
disputed amounts due from BellSouth).

  To quantify the size of its network, the Company uses the number of Customer
Connections for business trunks, ISP/ESP trunks and business lines. Customer
connections at December 31, 1999, and December 31, 1998, were as follows:
business trunks increased to 46,019 from 15,823, ISP/ESP trunks increased to
33,169 from 23,481, and business lines increased to 13,237 from 3,058. Prior
to December 1999, the Company quantified the size of its network by reporting
its number of Equivalent Access Lines in service.

  Cost of services is comprised primarily of leased transport, facility
installation, commissions and usage charges. Cost of services increased from
$33.6 million for 1998 to $73.6 million for 1999. This increase was primarily
a result of the increase in the size of US LEC's network, increased usage by
its customers, and increased commissions on reciprocal compensation. For the
years ended December 31, 1998 and 1999, network costs represented 39.7% and
42.0% of revenue, respectively. The increase in cost as a percentage of
revenue was due to the increase of core revenue as a percentage of total
revenue and the one-time costs associated with entering several new markets
(See Recent Significant Development).

  SG&A for 1999 increased to $48.4 million, or 27.6% of revenue, compared to
$25.0 million, or 29.5% of revenue, for 1998. This increase was primarily a
result of costs associated with developing and expanding the infrastructure of
the Company as it expands into new markets, such as expenses associated with
personnel, sales

                                      25
<PAGE>

and marketing, occupancy, administration and billing, as well as legal
expenses associated with the BellSouth litigation.

  Depreciation and amortization for 1999 increased to $11.7 million from $4.9
million in 1998 primarily due to the increase in depreciable assets in service
related to US LEC's network expansion.

  Interest income for 1999 decreased to $1.1 million from $1.9 million in
1998. Interest expense for 1999 increased from 1998 by $2.9 million to $3.1
million. This increase was due to borrowings under the Company's loan
agreement totaling $52.0 million in 1999, bringing total debt to $72.0 million
at December 31, 1999.

  Provision for income taxes for 1999 was $15.6 million, based on an effective
tax rate of 39.6% compared to a provision in 1998 for $9.3 million, based on
an effective tax rate of 40.9%. As a result of timing differences between book
and tax income primarily related to disputed reciprocal compensation, the
Company had a tax net operating loss carryforward of $40.2 million at December
31, 1999.

  Net earnings for 1999 amounted to $23.8 million, or $0.84 per share
(diluted), compared to a net earnings of $13.4 million, or $0.52 per share
(diluted) for 1998. The increase in net earnings and net earnings per share is
attributed to the factors discussed above.

 Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997

  Net revenue increased to $84.7 million for the year ended December 31, 1998,
from $6.5 million in 1997. The increase in revenue of $78.2 resulted from the
Company's expansion into new markets, an increase in the total number of
customers in existing markets and an increase in telecommunications traffic on
its network. As mentioned above, a majority of the Company's revenue was
comprised of reciprocal compensation originated by customers of ILECs. In
consideration of the industry-wide dispute concerning reciprocal compensation,
the Company recorded a $12.0 million allowance against reciprocal compensation
revenue and related receivables during 1998. The results discussed in this
report are net of this adjustment (See Recent Significant Development).

  Cost of services is comprised primarily of leased transport, facility
installation, commissions and usage charges. Cost of services increased from
$4.2 million, or 65.1% of revenue, for 1997, to $33.6 million, or 39.7% of
revenue, for 1998. This increase was primarily a result of the increase in the
size of US LEC's network, increased usage by its customers, and increased
commissions due to reciprocal compensation (See Recent Significant
Development).

  SG&A for 1998 increased to $25.0 million, or 29.5% of revenue, compared to
$6.1 million, or 94.7% of revenue, for 1997. This increase was primarily a
result of costs associated with developing and expanding the infrastructure of
the Company as it expands into new markets, such as expenses associated with
personnel, sales and marketing, occupancy, administration and billing as well
as legal expenses associated with the BellSouth litigation.

  Depreciation and amortization for 1998 increased to $4.9 million from $0.4
million in 1997 primarily due to the increase in depreciable assets in service
related to US LEC's network expansion.

  Interest income for 1998 increased by $1.8 million over 1997 to $1.9 million
as a result of investing the proceeds from the Company's initial public
offering. Interest expense for 1998 decreased from 1997 by $184 thousand to
$237 thousand. This decrease was primarily due to the full repayment of $3.3
million in notes payable in June 1998.

  Provision for income taxes for 1998 was $9.3 million, based on an effective
tax rate of 40.9%. US LEC was organized as a limited liability company during
1997 and effectively converted to C Corporation status as of January 1, 1998.
Accordingly, no provision (benefit) for income taxes was necessary for 1997
since income taxes were the responsibility of the individual limited liability
company members.

                                      26
<PAGE>

  Net earnings after tax for 1998 amounted to $13.4 million, or $.52 per share
(diluted), compared to a net loss of $4.7 million, or ($.25) per share
(diluted) for 1997. The increase in net earnings and net earnings per share is
attributed to the factors discussed above.

Liquidity and Capital Resources

  US LEC's business is capital intensive and its operations require
substantial capital expenditures for the purchase and installation of network
switches, related electronic equipment and facilities. The Company's cash
capital expenditures were $49.7 million and $47.7 million for the years ended
December 31, 1999 and 1998, respectively. The Company anticipates that it will
have substantial capital requirements in connection with its planned expansion
into additional locations during 2000 and beyond. In June 1999, the Company
amended the loan agreement with General Electric Capital Corporation and First
Union National Bank to increase the amount available under the agreement from
$50.0 million to $75.0 million. In December 1999, the Company again amended
the loan agreement increasing the amount available from $75.0 million to
$150.0 million. As of December 31, 1999, the outstanding amount under the loan
agreement was $72.0 million; therefore, $78.0 million was available to borrow
under the loan agreement. While management believes the current availability
under the loan agreement and operations will fund the Company's planned
expansion in 2000, funding for expansion beyond the Company's planned network
deployment in 2000 may require additional financing unless the Company
receives significant payment of the remaining outstanding balance due to the
Company from BellSouth excluding amounts related to Metacomm (See Recent
Significant Development).

  The Company also anticipates that any new interconnection agreements will
provide for reciprocal compensation at rates lower than in the Company's
interconnection agreement, which expired on December 31, 1999. In spite of the
elimination of Metacomm revenues and the potential for lower interconnection
rates, management believes that the $78.0 million unused line of credit at
December 31, 1999 will be sufficient to meet the Company's needs over the next
12 months (See Recent Significant Development).

  Furthermore, in February 2000, the Company announced it had executed a
letter of intent with affiliates of Bain Capital, Inc. and Thomas H. Lee
Partners, L.P. to invest up to $300 million in convertible preferred stock of
US LEC, the proceeds of which will be used for additional expansion. The
investment will be made in two tranches yielding a 6% dividend and at a
weighted average conversion price of approximately $39. The first tranche of
$200 million will carry a conversion price of $35. During the first year after
closing, the investors, at their option, may invest up to an additional $100
million with a conversion price of $46.50. The first tranche of this
investment for $200 million closed and was funded in the second quarter of
2000.

  Cash used in operating activities was approximately $25.9 million in 1999
compared to $19.1 million in 1998. The increase in cash used in operating
activities was primarily due to a $65.6 million increase related to accounts
receivable (net of allowances) offset by increases in net income of $10.4
million, depreciation of $6.8 million, prepaid and other assets of $1.1
million, accounts payable of $1.7 million, accrued commissions payable-related
party and accrued network cost of $17.9 million, commissions payable of $14.9
million, deferred taxes of $7.3 million and deferred revenue $1.2 million and
accrued expenses--other of $1.1 million. The majority of the Company's
accounts receivable at December 31, 1999, represented amounts due from
BellSouth for reciprocal compensation, facility charges, toll and other
charges. Although the Company received a payment of $11.2 million from
BellSouth in July 1999 representing a portion of the amounts due the Company
for reciprocal compensation in North Carolina, management expects receivables
due from BellSouth to continue to increase until the judicial and regulatory
proceedings with BellSouth are resolved. (See Disputed Reciprocal Compensation
Revenue and Recent Significant Development appearing below for a further
discussion related to reciprocal compensation and other disputed amounts due
from BellSouth). The increase in depreciation was due to the increase in
depreciable assets in service related to US LEC's network expansion. The
increase in accounts payable, accrued expenses, accrued network cost, prepaid
expenses and other assets and deferred revenue was related to the continued
expansion of the Company.

                                      27
<PAGE>

  Cash used in investing activities increased to $49.7 million in 1999 from
$48.5 million in 1998. The investing activities are related to purchases of
switching and related telecommunications equipment, office equipment and
leasehold improvements associated with the Company's expansion into additional
locations and markets during 1999.

  Cash provided by financing activities decreased to $48.8 million for 1999
from $106.5 million in 1998. The decrease was primarily due to the $87.1
million of net proceeds from the initial public stock offering in 1998
partially offset by $52.0 of borrowing under the Company's credit facility in
1999, which is discussed above.

  Disputed Reciprocal Compensation Revenue--A majority of the Company's
revenue is derived from reciprocal compensation amounts due from ILECs,
principally BellSouth. In August 1997, BellSouth notified the Company and
other CLECs that it considered traffic terminated to Enhanced Service
Providers ("ESPs"), including internet service providers ("ISPs"), to be
interstate traffic, and therefore not subject to reciprocal compensation, and
that BellSouth would not pay (or bill) reciprocal compensation under
interconnection agreements for this traffic. BellSouth is disputing (1) the
portion of reciprocal compensation billed by the Company related to the
transport and termination of local traffic from its customers to ESPs,
including ISPs and information service providers, primarily on the basis that
such traffic does not terminate in the same local exchange and, (2) as
described below, the portion of the reciprocal compensation billings related
to traffic on the Metacomm network (collectively referred to as "Disputed
Reciprocal Compensation"). The Company recorded Disputed Reciprocal
Compensation revenue of approximately $0.0 million, $42.0 million and $92.0
million for 1997, 1998 and 1999, respectively, net of a $0.0 million, $12.0
million and $27.0 million allowance, respectively. Management believes that
the Company earned and was legally entitled to this revenue and payments were
due from BellSouth pursuant to the interconnection agreements that BellSouth
has with the Company. However, on March 31, 2000, the NCUC ruled that the
traffic associated with the Metacomm network is not compensable under the
interconnection agreements (See Recent Significant Development).

  On February 26, 1998, following a petition by the Company, the North
Carolina Utilities Commission (the "NCUC") ordered BellSouth to bill and pay
for all ISP-related traffic (the "NCUC Order"). 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
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") pending
determination of certain related issues by the Federal Communications
Commission ("FCC"). This action was filed against the Company and the NCUC. In
June 1999, the U.S. District Court dismissed BellSouth's petition without
prejudice and remanded back to the NCUC for further review. Following the U.S
District Court's remand, on June 22, 1999, the NCUC denied BellSouth's request
for a further stay of the NCUC Order. On July 16, 1999, the Company received
an $11.2 million payment from BellSouth for a portion of the Disputed
Reciprocal Compensation earned from terminating calls to ISPs that are
customers to the Company's North Carolina operations, and subject to the NCUC
Order.

  Other than denying BellSouth's request for a further stay, the only action
taken by the NCUC with respect to the remand from the U.S. District Court is
that the NCUC filed with the U.S. Fourth Circuit Court of Appeals (the "4th
Circuit") a notice of appeal of the U.S. District Court's order that rejected
the NCUC's defenses, including its defense that the 11th Amendment to the
United States Constitution bars BellSouth from making the NCUC a party to our
proceeding in the federal courts. The Company has also appealed and the United
States Justice Department has intervened in the appeal. The Appellate hearing
on this matter is tentatively scheduled for early June, 2000.

  In February, 1999, the FCC issued a declaratory ruling (the "FCC Ruling")
which concluded that for jurisdictional purposes most calls delivered to ISPs
should be deemed to continue to internet web sites, which are often located in
other states. Thus, the FCC ruled that such calls are jurisdictionally
"interstate" in nature. However, the FCC further declared that where parties
have previously agreed in interconnection agreements that reciprocal
compensation must be paid for traffic bound for ISPs, the parties should be
bound by those agreements, as interpreted and enforced by state regulatory
bodies. The FCC also recognized that some

                                      28
<PAGE>

commissions might reconsider their decisions in light of its ruling. As noted,
the NCUC ruled on February 26, 1998 in favor of the Company with respect to
payment for traffic bound to ISPs under the Company's first interconnection
agreement with BellSouth. To date, state regulatory bodies in at least twenty-
three states have considered the effect of the FCC Ruling and have
overwhelmingly reaffirmed their earlier decisions requiring payment of
reciprocal compensation for this type of traffic or for the first time
determined that such compensation is due. Included among these states are
Alabama, Florida, and Tennessee, all of which are in BellSouth's operating
territory. In this regard, the Alabama Public Service Commission concluded
that the treatment of ISP traffic as local was so prevalent in the industry at
the time BellSouth entered into interconnection agreements with CLECs that, if
it is so intended, BellSouth had an obligation to negate such local treatment
in the agreements by specifically delineating that ISP traffic was not local
traffic subject to the payment of reciprocal compensation. The Florida Public
Service Commission reached a similar conclusion. Georgia and Tennessee have
also reaffirmed decisions that reciprocal compensation is owed for calls to
ISPs. In an arbitration of the terms of a new interconnection agreement
between BellSouth and another CLEC, the NCUC recently determined that until
the FCC issues a definitive ruling pursuant to the notice of proposed
rulemaking which was part of the FCC Ruling, reciprocal compensation should
continue to be paid under the new interconnection agreement. While US LEC was
not a party to this arbitration, management believes this decision to be
favorable in light of the U.S. District Court's remand (discussed above). Two
BellSouth states--South Carolina and Louisiana--have ruled that reciprocal
compensation is not due for traffic to ISPs. These decisions also came after
the FCC's Declaratory Ruling. All of these decisions have been appealed. The
South Carolina and Louisiana decisions represent a view adopted by very few
other states. (The Company does not provide local service in Louisiana and has
no reciprocal compensation recorded for traffic in South Carolina or
Louisiana).

  In February 2000, the Company received payment from GTE for reciprocal
compensation related to ISP and voice traffic in North Carolina. This payment
was pursuant to a commercial arbitration award rendered January 4, 2000,
resulting from a proceeding before the American Arbitration Association. GTE
was ordered to pay US LEC for all ISP traffic for the period ending September
1999 (approximately $650,000). Although they paid the Company, GTE is
currently appealing this decision. The Company is currently working through
dispute resolution procedures with respect to subsequent periods and
anticipates a favorable ruling.

  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 from BellSouth. Also on September 14, 1998,
BellSouth filed a complaint with the NCUC seeking to be relieved from its
obligations under its interconnection agreement with the Company to pay
reciprocal compensation for traffic related to networks including that
operated by Metacomm, a customer of BellSouth and the Company and, as of June
1998, a related party of the Company. The two proceedings were consolidated
for purposes of discovery, which concluded June 16, 1999, and hearings
concluded in August 1999 with respect to BellSouth's complaint. Hearings
concerning US LEC's complaint have been continued by the NCUC pending an order
in the BellSouth complaint. The BellSouth proceeding primarily involves the
treatment of traffic over a network established by Metacomm and whether, under
the interconnection agreements between the Company and BellSouth and the
Telecommunications Act of 1996 (the "Telecom Act"), BellSouth is required to
pay reciprocal compensation to the Company for traffic associated with this
network and whether BellSouth has breached its interconnection agreements with
the Company by failing to pay reciprocal compensation for this traffic (See
Recent Significant Development).

  In the NCUC proceedings filed September 14, 1998, BellSouth claims
principally that the traffic on Metacomm's network does not qualify for
reciprocal compensation because the Metacomm network was designed to generate
reciprocal compensation and that such traffic does not constitute
"telecommunications" subject to the reciprocal compensation payment provisions
of the Telecom Act and the interconnection agreements with BellSouth. In
addition BellSouth has identified other issues on which it bases its claim
that the traffic on the Metacomm network is not compensable, including (1)
that the Company agreed to share reciprocal compensation with Metacomm, (2)
that, as disclosed in the Company's Form 10-Q for the period ended September
30, 1998, Richard T. Aab, the largest shareholder of the Company and the
Chairman of its Board of

                                      29
<PAGE>

Directors, acquired a controlling interest in Metacomm after the dispute
arose, (3) reciprocal compensation has been billed on an "always-on" basis
even though there is no measurement of the amount of data transversing the
network that is originated by customers of Metacomm, (4) that the billed
traffic includes traffic during periods when Metacomm had not yet connected
customers to its network or when customers of Metacomm were not sending data
over the network, (5) that the Metacomm network includes facilities that cross
LATA boundaries and, therefore, data traversing these facilities is not local
(and, therefore, is ineligible for reciprocal compensation), (6) that Metacomm
is an unlicensed reseller of US LEC's services, not an end-user, and (7) that
the Metacomm network is a quasi-dedicated network which should not be eligible
for reciprocal compensation (See Recent Significant Development).

  It is the Company's understanding that during the relevant period Metacomm
was engaged in the business of developing and operating a high-speed, always-
on data network in North Carolina, and its network provides users with
continuous access to data, wide area network services, software applications
and other services, including access to the Internet. In the course of the
these proceedings, the Company concluded, based on positions taken and
information provided by Metacomm, that Metacomm related traffic should not be
considered to be solely ISP traffic, in part because its network provides
additional services and functions to users. Notwithstanding this
determination, the Company believes BellSouth will continue to contend the
Disputed Reciprocal Compensation related to the Metacomm network traffic is
subject, in the first instance, to the resolution of the ISP issue. The
Company has recorded approximately $0.0 million, $50.0 million and $98.0
million of gross revenue, before allowances and late payment charges, for
fiscal 1997, 1998 and 1999, respectively, related to reciprocal compensation
revenue generated as a result of Metacomm network traffic (See Recent
Significant Development).

  When the Metacomm network was originally developed, the Company agreed to
pay Metacomm commissions equal to a specified percentage of the reciprocal
compensation the Company receives from ILECs for the network traffic. The
Company recorded approximately $0.2 million, $20.0 million and $39.0 million
for 1997, 1998 and 1999, respectively, in reciprocal compensation commission
expense earned by Metacomm, which is included in cost of services in the
accompanying financial statements. As of December 31, 1998 and 1999, the
Company had a liability to Metacomm net of amounts owed by Metacomm to the
Company in the amount of $5.3 million and $22.8 million, respectively, which
is recorded as accrued commissions, net--related party in the accompanying
financial statements. The Company and Metacomm are parties to agreements by
which commissions earned by Metacomm related to reciprocal compensation are
not payable until the related reciprocal compensation is collected from the
ILEC. However, in fiscal 1997, 1998 and 1999, the Company advanced to Metacomm
$0.0 million, $8.3 million and $12.0 million prior to collecting the earned
reciprocal compensation from BellSouth. These payments are subject to a
repayment agreement whether or not the related reciprocal compensation is
ultimately collected from BellSouth and are offset with commissions due to
Metacomm since the legal right of offset exists (See Recent Significant
Development).

  The Company believes that calls to establish, maintain and manage data
network connections and intra-network communications generated by data
processing routers, which were necessary to maintain the functionality and
integrity of the Metacomm network, are within the definition of
"telecommunications" under the Telecom Act and constitute compensable traffic
subject to reciprocal compensation under the interconnection agreements the
Company has with BellSouth. The Company also believes that the issues raised
by BellSouth as additional bases for nonpayment do not excuse BellSouth from
its obligation to pay reciprocal compensation under its interconnection
agreement with the Company.

  As noted above, on July 16, 1999, the Company received a payment of $11.2
million from BellSouth representing a portion of the amounts due the Company
for ISP reciprocal compensation in North Carolina. In making the payment,
BellSouth stated that it was for ISP traffic the NCUC had ordered it to pay
for in February 1998, including late fees, and that it was reserving all of
its appeal rights with respect to the payment. BellSouth also stated that this
payment did not include any amounts at issue in its September 14, 1998, NCUC
proceeding. This partial payment did not cover all outstanding amounts the
Company claims are due from BellSouth in North

                                      30
<PAGE>

Carolina and other states the Company serves. For example, while the Company
has outstanding amounts due from BellSouth for ISP traffic in Tennessee,
Georgia and Florida, BellSouth has not paid these amounts, presumably because
no orders specific to US LEC have been entered by state commissions in those
states directing BellSouth to pay the Company. However, state commissions in
these states have issued rulings in favor of other competitive carriers and as
discussed above, the state commissions in Florida and Alabama have made
rulings subsequent to the FCC Ruling. To address this issue, the Company has
filed the following additional actions against BellSouth related to delinquent
reciprocal compensation payments, none of which involve Metacomm or any
similar network:

  .  On July 1, 1999, the Company filed a complaint against BellSouth before
     the Georgia Public Service Commission ("GAPSC"). The hearing with
     relation to this complaint concluded January 21, 2000. The Company
     anticipates receiving the ruling from the hearing officer in April 2000.

  .  On July 2, 1999, the Company filed a complaint against BellSouth before
     the Florida Public Service Commission ("FLPSC"). This matter is
     scheduled for hearing in late April 2000.

  .  On August 6, 1999, the Company filed a complaint against BellSouth
     before the Tennessee Regulatory Authority ("TRA"). This matter has not
     yet been scheduled for hearing.

  Management believes that the Company will ultimately obtain favorable
results in the state proceedings described above before the NCUC, GAPSC, FLPSC
and the TRA; however, BellSouth may elect to initiate additional proceedings
(by way of appeal or otherwise) challenging amounts owed to the Company. In
this regard, BellSouth recently has asserted a variety of other objections to
paying portions of the reciprocal compensation billed by the Company. They
include assertions that US LEC has miscalculated late payment fees due from
BellSouth and that US LEC has billed reciprocal compensation using the wrong
rates. The Company believes BellSouth has asserted these issues and will
attempt to raise further issues in order to avoid or delay payment. Similarly,
GTE has recently appealed the arbitration award in favor of the Company. The
Company believes it will be successful in this appeal.

  If a decision adverse to the Company is issued in any of these proceedings
by any of the state commissions, and in particular the NCUC, or in any appeal
or review of a favorable decision by the Fourth Circuit Court of Appeals,
state commissions, or the FCC, or if either the FCC or any of the applicable
state commissions were to alter its view of reciprocal compensation, such an
event could have a material adverse effect on the Company's operating results
and financial condition. The Company's gross trade accounts receivable as of
December 31, 1998 and 1999 included approximately $54.0 million and $190.0
million, respectively, of earned but uncollected Disputed Reciprocal
Compensation (before a $12.0 million and $39.0 million allowance and before
late payment charges) of which approximately $50.0 million and $148.0 million,
respectively, was generated as a result of traffic related to the Metacomm
network (See Recent Significant Development).

  In June 1999, the Company adopted an existing agreement to extend local
interconnection with BellSouth replacing the previous interconnection
agreement, which expired on June 15, 1999. The adopted interconnection
agreement with BellSouth expired on December 31, 1999, but continues in force
until new interconnection agreements are reached. The new agreements will be
effective as of January 1, 2000. The Company filed petitions for arbitration
in all nine states in BellSouth operating territory seeking to obtain a PSC
ordered interconnection agreement, but the Company anticipates that it will be
able to avoid the arbitration process by adopting interconnection agreements
that are either currently in effect or which will result from arbitrations
involving other CLECs. The Company's ability to obtain favorable terms for
interconnection following December 31, 1999, will depend on a number of
factors, including decisions of the FCC and state regulatory authorities.
However, the Company intends to pursue such agreements vigorously and does not
anticipate any interruption in interconnection service.

  The Company does anticipate that any such new interconnection agreements
will provide for reciprocal compensation at rates lower than in the Company's
current interconnection agreement. The Company also anticipates that the
reciprocal compensation related to Metacomm will not continue due to changes
in the terms

                                      31
<PAGE>

of the interconnection agreement, changes in Metacomm's business or the
architecture of its network or a combination thereof. In light of this, the
Company determined to stop advancing any payment to Metacomm in February 2000.
In February 2000 the Company received a notice by which Metacomm notified
BellSouth that due to BellSouth's failure to pay reciprocal compensation,
Metacomm was no longer able to sustain its network operations. Metacomm
instructed BellSouth to terminate the facilities it provides to Metacomm. One
effect of that termination will be to eliminate US LEC's revenue from the
Metacomm network. Based on fourth quarter 1999 results, US LEC estimates that
the reduction in revenue during 2000 will be approximately $18.0 million per
quarter, the reduction in cost of services related to commissions
approximately $9.0 million per quarter, resulting in a decrease in earnings
from operations of approximately $9.0 million per quarter.

  Disputed Access Revenues--In February 2000, US LEC filed suit in U.S.
District Court for the Western District of North Carolina against Sprint
Communications. This action seeks to collect amounts owed to US LEC for access
charges for intrastate and interstate traffic which was either handed off to
Sprint by the Company or terminated to the Company by Sprint. As of December
31, 1999, Sprint owed US LEC $4.3 million in access charges. Sprint has
refused to pay the amounts invoiced by US LEC on the basis that the rates are
higher than the amounts that Sprint is willing to pay. US LEC's invoices to
Sprint are at the rates specified in US LEC's state and federal tariffs. The
FCC recently determined that a long distance company may not withhold access
charges on the basis that it believes the charges to be too high (MGC
Communications, Inc. v. AT&T Corp., FCC Release 99-408). As such, US LEC
anticipates a favorable resolution of this matter.

Effect of Recently Issued Accounting Pronouncements

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard addresses the accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts and hedging activities. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the effective date of SFAS No. 133". The Company has not yet
completed its analysis of any potential impact of SFAS No. 133 on its
financial statements.

Year 2000 Compliance

  Many computer systems may experience difficulty processing dates beyond the
year 1999 and will need to be modified prior to the Year 2000. Failure to make
such modifications could result in system failures or miscalculations causing
a disruption of operations. No piece of equipment or software, owned or
maintained by the Company predates August 1996, with the majority of all
technology purchases concentrated in the period following March 1997. Since
all of its internal systems are relatively new and there were no legacy
systems to integrate, the Company believes that it does not face material Year
2000 issues that may afflict many technology owners and that its internal
software and hardware systems will function properly in all material respects
with regard to Year 2000 issues. In addition, Year 2000 issues are also
addressed as the Company's network and internal systems are upgraded in the
normal course of business. As of December 31, 1999, the Company's costs
expended towards Year 2000 compliance have been minimal and it does not expect
its additional expenditures directly related to Year 2000 compliance cost to
exceed $0.1 million. Management continually reassessed the status of the
Company's Year 2000 compliance efforts through March 2000.

  The Company began conducting verification testing of all its internal
information technology and information systems in 1998. The testing was
concluded on September 25, 1999. The testing was a multi-phased process which
includes, but is not limited to, setting the system clocks to simulate several
key dates and times in the Year 2000, then performing daily activities. The
infrastructure, servers and workstations, as well as software systems were
tested and validated using this process. The Company's internal information
technology and systems, based on manufacturer supplied information and
internal testing, are 100% compliant, barring new contradictory information
from the manufactures or vendors. The core of the Company's telecommunication
operations, the Lucent Technologies 5ESS(R) Any Media(TM) switch, is fully
compliant at this time, as are other

                                      32
<PAGE>

telecommunications systems owned by the Company. The majority of the services
and facilities vendors to the Company are compliant. While the Company has no
control over vendors of telecommunications systems and facilities, based on
information provided to the Company, the Company believed that the vendors
utilized by the Company would be and were Year 2000 compliant by the end of
1999.

  The Company assessed the building access, security, and related issues at
all of its switch locations. Each switch site is accessible by manual methods
in the event of building systems failure. Further, each US LEC switch site was
built with a Year 2000 compliant uninterruptible power supply and a back-up
generator. The Company's corporate office and network operations center
received assurances from the building management that all systems within these
buildings are Year 2000 compliant. The Company's supporting services are
centralized at the corporate offices.

  The Company (as are all other telecommunications providers) is heavily
dependent on the public switched network, over which the Company has little
control. The Company cannot give comfort on the status of the public switched
network or other telecommunications carriers and facility providers (such as
other local exchange carriers ("LECs"), competitive access providers ("CAPs")
or interexchange carriers ("IXCs")).

  The Company experienced no major Year 2000 issues, therefore, management
believes that its internal hardware and software applications are Year 2000
compliant in all material respects. There can be no absolute assurance that
future problems may arise due to undetected issues with the Company's or
supplier's systems. The Company is monitoring all key vendors and suppliers
for Year 2000 issues. While most of the Company's significant suppliers and
vendors have advised the Company that they are or anticipate being Year 2000
compliant, if the software applications of other LECs, IXCs, CAPs, or others
on whose services the Company depends are not Year 2000 compliant, a material
adverse effect on the Company's financial condition and results of operations
could result. The Company is not aware of any significant vendor who may be
unable to provide services to the Company as a result of Year 2000 non-
compliance. The Company has developed Year 2000 contingency plans, in
conjunction with its disaster recovery plans, in the event of a Year 2000
related failure including if its suppliers and vendors are not Year 2000
compliant, but there can be no assurance that the contingency plan will avoid
service disruptions related to Year 2000 issues.

Market Risk

  US LEC is exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes on its investments and
debt. As of December 31, 1999, investments consisted primarily of
institutional money market funds. All of the Company's long-term debt consists
of variable rate instruments with interest rates that are based on a floating
rate which, at the Company's option, is determined by either a base rate or
the London Interbank Offered Rate, plus, in each case, a specified margin.

  Although US LEC does not currently utilize any interest rate management
tools, it will evaluate the use of derivatives such as, but not limited to,
interest rate swap agreements to manage its interest rate risk. As the
Company's investments are all short-term in nature and its long-term debt is
at variable short-term rates, management believes the carrying values of the
Company's financial instruments approximate fair values.

Recent Significant Development

  As discussed under the caption "Disputed Reciprocal Compensation Revenue,"
BellSouth filed a claim before the NCUC on September 14, 1998 seeking to be
relieved of any obligation under its interconnection agreements with the
Company to pay reciprocal compensation for traffic related to the Metacomm
network. On March 31, 2000, the NCUC issued an order in this proceeding that
relieves BellSouth from paying reciprocal compensation to US LEC for any
minutes of use attributable to the network operated by Metacomm, or any
similar network, and requires US LEC to cease billing BellSouth reciprocal
compensation for minutes of use attributable to the Metacomm or any similar
network (the "March 31 Order"). The Company is considering its options with
respect to an appeal of the order, but plans to comply fully with the March 31
Order.

                                      33
<PAGE>

  As a result of the March 31 Order, the Company estimates that it will record
a pre-tax, non-recurring, non-cash charge of approximately $55 million in the
quarter ending March 31, 2000. The charge is composed of the write-off of
approximately $153 million in receivables related to reciprocal compensation
revenue offset by a previously established allowance of $39 million and a
reduction of approximately $59 million in reciprocal compensation commissions
payable to Metacomm.

  In accordance with existing agreements between Metacomm and the Company,
approximately $21 million in commission advances to Metacomm and approximately
$16 million in receivables for services provided to Metacomm are due to the
Company. Metacomm has assured the Company that these amounts will be paid.

  The March 31 Order does not affect in any way the NCUC's order of February
26, 1998, requiring BellSouth to pay reciprocal compensation to the Company
for ISP traffic in North Carolina. The March 31 Order also has no effect on US
LEC's operations in any other state or its pending claims against BellSouth
for reciprocal compensation for ISP traffic before the GAPSC, FLPSC and TRA.


                                      34
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
US LEC Corp.
Charlotte, North Carolina

  We have audited the accompanying consolidated balance sheets of US LEC Corp.
and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

  In our opinion, such financial statements present fairly in all material
respects, the financial position of the companies as of December 31, 1998 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.

  As discussed in Note 6 to the financial statements, a significant portion of
the Company's accounts receivable and revenues relate to reciprocal
compensation which is currently in dispute.

Deloitte & Touche LLP

February 29, 2000
Charlotte, North Carolina

                                      F-1
<PAGE>

                         US LEC CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           December 31, 1998 and 1999
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                 1998      1999
                                                               --------  --------
<S>                                                            <C>       <C>
                        ASSETS (Note 5)
Current Assets:
  Cash and cash equivalents (Note 2).......................... $ 41,965  $ 15,174
  Certificates of deposit and restricted cash (Notes 2 and 6).    1,167     1,173
  Accounts receivable, net of allowance of $12,024 and
    $40,074, at 1998 and 1999, respectively (Notes 2 and 6)...   66,214   193,943
  Prepaid expenses and other assets...........................    2,838     2,979
                                                               --------  --------
      Total current assets....................................  112,184   213,269
Property and Equipment, Net (Notes 2, 3 and 5)................   56,219   102,002
Other Assets (Note 2).........................................    1,800     4,829
                                                               --------  --------
      Total Assets............................................ $170,203  $320,100
                                                               ========  ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable (Note 8)................................... $  8,909  $ 13,050
  Deferred revenue (Note 2)...................................      829     1,702
  Accrued network costs (Note 2)..............................    4,521    12,911
  Accrued commissions, net--related party (Note 8)............    5,345    22,809
  Deferred income taxes (Notes 2 and 7).......................    7,108    15,160
  Commissions Payable (Note 2)................................    4,600    23,702
  Accrued expenses--other.....................................    4,657    10,826
                                                               --------  --------
      Total current liabilities...............................   35,969   100,160
                                                               --------  --------
Long-Term Debt (Note 5).......................................   20,000    72,000
Deferred Income Taxes, Noncurrent (Notes 2 and 7).............    1,259     8,796
Other Liabilities--Noncurrent.................................      --        274
Stockholders' Equity (Note 10):
  Common stock--Class A, $.01 par (72,925 authorized shares,
    10,345 and 10,426 outstanding at December 31, 1998 and
    1999, respectively).......................................      103       104
  Common stock--Class B, $.01 par (17,076 shares authorized
    shares, 17,076 and 17,076 outstanding at December 31,
    1998 and 1999, respectively)..............................      171       171
  Additional paid-in capital..................................  106,800   108,665
  Retained earnings...........................................    6,556    30,365
  Unearned compensation--stock options........................     (655)     (435)
                                                               --------  --------
      Total stockholders' equity..............................  112,975   138,870
                                                               --------  --------
      Total Liabilities and Stockholders' Equity.............. $170,203  $320,100
                                                               ========  ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-2
<PAGE>

                         US LEC CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

             For the years ended December 31, 1997, 1998, and 1999
                     (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                      1997     1998      1999
                                                     -------  -------  --------
<S>                                                  <C>      <C>      <C>
Revenue, Net (Notes 2, 6 and 8--includes related
 party transactions totaling $6,239 and $9,511 in
 1998 and 1999, respectively)......................  $ 6,458  $84,716  $175,180
Cost of Services (Notes 6 and 8--includes related
 party transactions totaling $19,759 and $38,990 in
 1998 and 1999, respectively)......................    4,201   33,646    73,613
                                                     -------  -------  --------
Gross Margin.......................................    2,257   51,070   101,567
Selling, General and Administrative (Note 8).......    6,117   25,020    48,375
Depreciation and Amortization......................      443    4,941    11,720
                                                     -------  -------  --------
Earnings (Loss) from Operations....................   (4,303)  21,109    41,472
Other (Income) Expense
  Interest income..................................      (66)  (1,860)   (1,050)
  Interest expense (Note 4)........................      421      237     3,096
                                                     -------  -------  --------
Earnings (Loss) Before Income Taxes................   (4,658)  22,732    39,426
Provision For Income Taxes (Note 7)................      --     9,305    15,617
                                                     -------  -------  --------
Net Earnings (Loss)................................  $(4,658) $13,427  $ 23,809
                                                     =======  =======  ========
Net Earnings (Loss) Per Share (Note 11):
  Basic............................................  $ (0.25) $  0.53  $   0.87
                                                     =======  =======  ========
  Diluted..........................................  $ (0.25) $  0.52  $   0.84
                                                     =======  =======  ========
Weighted Average Shares Outstanding (Note 11):
  Basic............................................   18,653   25,295    27,431
                                                     =======  =======  ========
  Diluted..........................................   18,653   25,804    28,411
                                                     =======  =======  ========
</TABLE>


                See notes to consolidated financial statements.

                                      F-3
<PAGE>

                         US LEC CORP. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

             For the years ended December 31, 1997, 1998, and 1999
                                (In Thousands)

<TABLE>
<CAPTION>
                                               Common Stock/   Common Stock/
                   Common Stock  Common Stock   Voting Units     Nonvoting                           Unearned
                      Class A       Class B         (1)          Units(1)     Additional Retained  Compensation
                   ------------- ------------- --------------  -------------   Paid-in   Earnings     Stock
                   Shares Amount Shares Amount Shares Amount   Shares Amount   Capital   (Deficit)   Options     Total
                   ------ ------ ------ ------ ------ -------  ------ ------  ---------- --------- ------------ --------
<S>                <C>    <C>    <C>    <C>    <C>    <C>      <C>    <C>     <C>        <C>       <C>          <C>
Balance
 (Deficiency),
 December 31,
 1996............     --   $--      --   $--    --    $   --    --    $  --    $    --    $  (963)      --      $   (335)
 Issuance of
  nonvoting
  units..........     --    --      --    --     10       600     2       28        --        --        --         4,413
 Issuance of
  voting units...     --    --      --    --      1               1    4,413        --        --        --         4,555
 Issuance of
  warrants.......     --    --      --    --    --      4,555   --       --          70       --        --            70
 Contribution to
  capital........     --    --      --    --    --        --    --       --       1,711       --        --         1,711
 Exchange of
  limited
  liability
  company units
  for C
  Corporation
  shares.........   3,855    39  16,595   166   (11)   (5,155)   (3)  (4,441)     9,392       --        --             1
 Net loss........     --    --      --    --    --        --    --       --         --     (4,658)      --        (4,658)
                   ------  ----  ------  ----   ---   -------   ---   ------   --------   -------     -----     --------
Balance, December
 31, 1997........   3,855    39  16,595   166   --        --    --       --      11,173    (5,621)      --         5,757
 Public stock
  offering.......   6,325    63     --    --    --        --    --       --      87,079       --        --        87,142
 Conversion of
  $5,000
  stockholder
  loans for 481
  shares of Class
  B common
  stock..........     --    --      481     5   --        --    --       --       4,995       --        --         5,000
 Dividend (Note
  4).............     --    --      --    --    --        --    --       --       1,250    (1,250)      --           --
 Issuance of
  stock
  warrants.......     --    --      --    --    --        --    --       --          75       --        --            75
 Unearned
  compensation--
  stock options..     --    --      --    --    --        --    --       --         819       --       (655)         164
 Exercise of
  warrants.......     165     1     --    --    --        --    --       --         471       --        --           472
 Tax effect of
  non-qualified
  options
  exercised......     --    --      --    --    --        --    --       --         938       --        --           938
 Net earnings....     --    --      --    --    --        --    --       --         --     13,427       --        13,427
                   ------  ----  ------  ----   ---   -------   ---   ------   --------   -------     -----     --------
Balance, December
 31, 1998........  10,345   103  17,076   171   --        --    --       --     106,800     6,556      (655)     112,975
 Exercise of
  stock options..      14   --      --    --    --        --    --       --         103       --        --           103
 Exercise of
  warrants.......       5   --      --    --    --        --    --       --          14       --        --            14
 Tax effects of
  warrants
  exercised......     --    --      --    --    --        --    --       --          23       --        --            23
 Issuance of
  Shares.........      62     1     --    --    --        --    --       --       1,749       --        --         1,750
 Unearned
  compensation--
  stock options..     --    --      --    --    --        --    --       --         (29)      --        220          191
 Tax effect of
  Unearned Comp--
  Stock Options..     --    --      --    --    --        --    --       --         (76)      --        --           (76)
 Tax effect of
  disqualified
  dispositions--
  ISO's..........     --    --      --    --    --        --    --       --          81       --        --            81
 Net earnings....     --    --      --    --    --        --    --       --         --     23,809       --        23,809
                   ------  ----  ------  ----   ---   -------   ---   ------   --------   -------     -----     --------
Balance, December
 31, 1999........  10,426  $104  17,076  $171   --    $   --    --    $  --    $108,665   $30,365     $(435)    $138,870
                   ======  ====  ======  ====   ===   =======   ===   ======   ========   =======     =====     ========
</TABLE>
-------
(1) On December 31, 1997, all limited liability units were converted into C
    Corporation common shares based upon a conversion ratio of 1,500 shares
    for each unit.

                See notes to consolidated financial statements.

                                      F-4
<PAGE>

                         US LEC CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

             For the years ended December 31, 1997, 1998, and 1999
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                   1997      1998      1999
                                                  -------  --------  ---------
<S>                                               <C>      <C>       <C>
Operating Activities:
 Net earnings (loss)............................. $(4,658) $ 13,427  $  23,809
 Adjustments to reconcile net earnings (loss) to
  net cash used in operating activities:
 Depreciation and amortization...................     443     4,941     11,720
 Accounts receivable allowance...................     --     12,024     28,050
 Stock compensation..............................      71       240        --
 Deferred compensation...........................     --       (655)       191
 Deferred taxes..................................     --      8,367     15,617
 Changes in assets and liabilities which provided
  (used) cash:
  Accounts receivable............................  (6,006)  (74,177)  (155,779)
  Prepaid expenses and other assets..............      31      (579)       495
  Other assets...................................     (14)   (1,271)       (41)
  Accounts payable...............................     459     1,609        (96)
  Deferred revenue...............................   1,141      (312)       873
  Accrued expenses--other........................     634     5,082      3,995
  Commissions Payable............................     440     4,160     19,103
  Other Liabilities--Noncurrent..................     --        --         274
  Accrued Commissions Payable--Related Party.....      81     5,264     17,464
  Accrued network costs..........................   1,784     2,737      8,390
                                                  -------  --------  ---------
   Total adjustments.............................    (936)  (32,570)   (49,744)
                                                  -------  --------  ---------
    Net cash used in operating activities........  (5,594)  (19,143)   (25,935)
                                                  -------  --------  ---------
Investing Activities:
 Purchase of property and equipment..............  (5,802)  (47,721)   (49,690)
 Purchases of certificates of deposit and
  restricted cash................................    (349)     (817)        (6)
 (Advances to) repayments from stockholder.......    (200)      --         --
                                                  -------  --------  ---------
    Net cash used in investing activities........  (5,951)  (48,538)   (49,696)
                                                  -------  --------  ---------
Financing Activities:
 Issuance of common shares and limited liability
  company units..................................   8,968       471        --
 Proceeds from public stock offering.............     --     87,142        114
 Contribution of capital.........................   1,711       --         --
 Proceeds from long-term debt....................     --     20,000     52,000
 Payment for deferred loan fees..................     --     (1,156)    (3,274)
 Proceeds from notes payable--stockholders.......   4,289     3,289        --
 Repayment of notes payable--stockholders........    (960)   (3,289)       --
                                                  -------  --------  ---------
    Net cash provided by financing activities....  14,008   106,457     48,840
                                                  -------  --------  ---------
Net Increase (Decrease) in Cash and Cash
 Equivalents.....................................   2,463    38,776    (26,791)
Cash and Cash Equivalents, Beginning of Period...     726     3,189     41,965
                                                  -------  --------  ---------
Cash and Cash Equivalents, End of Period......... $ 3,189  $ 41,965  $  15,174
                                                  =======  ========  =========
Supplemental Cash Flows Disclosures
 Cash paid for:
 Interest........................................ $   672  $    505  $   2,748
                                                  =======  ========  =========
 Taxes........................................... $   --   $  1,860  $       2
                                                  =======  ========  =========
</TABLE>

Supplemental Noncash Investing and Financing Activities:

  During 1997, accrued interest of $55 due to stockholders was converted into
voting equity.

  At December 31, 1997, 1998, and 1999, $7,267, $6,838 and $11,079
respectively, of property and equipment additions are included in outstanding
accounts payable.

  During 1998, the majority stockholder converted $5,000 of loans to the
Company for 481 shares of Class B Stock. The dividend resulting from the
cancellation of the loan was $1,250.

                See notes to consolidated financial statements.

                                      F-5
<PAGE>

                         US LEC CORP. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             For the years ended December 31, 1997, 1998, and 1999
                     (In Thousands, Except Per Share Data)

1. ORGANIZATION AND NATURE OF BUSINESS

  The consolidated financial statements include the accounts of US LEC Corp.
(the "Company") and its ten wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company was incorporated in 1996 as an S Corporation. Effective December
31, 1996, US LEC Corp. was converted to a limited liability company ("US LEC
L.L.C.") through an exchange of the S Corporation common stock for voting and
nonvoting units of US LEC L.L.C. On December 31, 1997, in anticipation of an
initial public offering of common stock, the Company became a C Corporation
through a merger of US LEC L.L.C. into the Company and the exchange of all of
the limited liability company units into shares of Class A or Class B Common
Stock. On April 29, 1998, the Company completed the sale of 5,500 shares of
Class A Common Stock through an initial public offering. Additionally, on May
12, 1998, the Company issued 825 shares of Class A Common Stock in connection
with the underwriters' exercise of their option to cover over-allotments. The
total offering resulted in net proceeds of approximately $87,142, after
deducting underwriting discounts, commissions and offering expenses. The
Company has used all of the net proceeds of the initial public offering to
further expand and develop its telecommunications network and services.

  The Company, through its subsidiaries, provides switched local, long
distance, data, Internet and enhanced telecommunications services primarily to
businesses and other organizations in selected markets in the southeastern
United States. The Company was a development stage enterprise from inception
until March 1997, when it began generating telecommunications revenues.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Revenue Recognition--The Company recognizes revenue on telecommunications
and enhanced communications services in the period that the service is
provided. Revenue is recognized when it meets specific criteria: 1) the
revenue is earned and our earnings process is complete, 2) the revenue is
realizable in that it was due and payable, and 3) ultimate collectibility of
the revenue is reasonably assured. Reciprocal compensation that we record as
revenue from other local exchange carriers represents compensation for local
telecommunications traffic terminated on our network that originates on
another carrier's network. To date, a majority of our reciprocal compensation
revenue has been generated through the Metacomm network from traffic
originated by customers of BellSouth Telecommunications, Inc. ("BellSouth").
The billing, payment and other arrangements for this reciprocal compensation
are governed by an interconnection agreement between BellSouth and the
Company. Reciprocal compensation revenue recognized by the Company is earned
because we have completed performance of the service that the BellSouth
interconnection agreement requires us to perform. Revenue is recorded net of
amounts which are rebated to a customer or outside sales agent pursuant to
each respective telecommunications service contract as well as net of amounts
relating to the allowance for potentially uncollectible receivables related to
disputed reciprocal compensation. For the years ended December 31, 1998, and
December 31, 1999, commissions expense of $6,377 and $25,265, respectively,
and an allowance of $12,000 and $27,944, respectively, are netted with gross
revenues in the accompanying financial statements. Revenue related to billings
in advance of providing services is deferred and recognized when earned. At
December 31, 1997, deferred revenue primarily represented billings to
incumbent local exchange carriers ("ILECs") relating to internet service
provider ("ISP") reciprocal compensation. Reciprocal compensation represents
the compensation paid to and by a competitive local exchange carrier ("CLEC")
and the ILEC for termination of a local call on the other's network. The
Company deferred the recognition of such amounts in 1997 pending a ruling from
the North Carolina Utilities Commission ("NCUC") relating to ISP reciprocal
compensation. During 1998, such amounts were subsequently recorded as revenue
as a result of the decision by the NCUC on February 26, 1998, in favor of the
Company. As a result of this ruling, the Company began recognizing all such
reciprocal

                                      F-6
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

compensation revenue in the period in which the service was provided. However,
due to current regulatory and judicial proceedings related to this type of
revenue, the Company established an allowance of $39,823 at December 31, 1999,
which has been recorded as a reduction of revenue of $12,000 and $27,823
during the years ended December 31, 1998, and December 31, 1999, respectively.
(See Notes 6 and 14)

  Cash and Cash Equivalents--Cash equivalents consist of highly liquid
investments with original maturities of three months or less at the time of
purchase.

  Restricted Cash--The restricted cash balance as of December 31, 1998 and
December 31, 1999 serves as collateral for letters of credit related to
certain office leases.

  Accounts Receivable--The majority of the accounts receivable at December 31,
1998 and December 31, 1999, arose from reciprocal compensation revenue earned
in accordance with terms of an interconnection agreement with BellSouth
Telecommunications, Inc. ("BellSouth"). The Company established an allowance
of $12,000 and $39,823 as of December 31, 1998 and December 31, 1999,
respectively, due to the current judicial and regulatory proceedings and
related to this revenue. The Company anticipates a ruling on these proceedings
and collection within twelve months and therefore continues to treat the
disputed amounts as current on the accompanying financial statements. (See
Notes 6 and 14)

  Property and Equipment--Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, except for leasehold
improvements as noted below.

  The estimated useful lives of the Company's principal classes of property
and equipment are as follows:

<TABLE>
   <S>                                            <C>
   Telecommunications switching and other
    equipment.................................... 5-9 years
   Office equipment, furniture and other......... 5 years
   Leasehold improvements........................ The lesser of the estimated
                                                  useful lives or the lease
                                                  term
</TABLE>

  In 1999, the Company capitalized $264 and $81 in payroll related and
interest costs respectively in accordance with the AICPA Statement of Position
("SOP ") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."

  Long-Lived Assets--The Company reviews the carrying value of its long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying value of these assets may not be recoverable. Measurement of
any impairment would include a comparison of estimated undiscounted future
operating cash flows anticipated to be generated during the remaining life of
the assets with their net carrying value. An impairment loss would be
recognized as the amount by which the carrying value of the assets exceeds
their fair value.

  Accrued Network Costs--Accrued network costs include management's estimate
of charges for direct access lines, facility charges, outgoing and incoming
minutes, reciprocal compensation and other costs of revenue for a given period
for which bills have not been received by the Company. Management's estimate
is developed from the minutes of use and rates charged by each respective
service provider. Subsequent adjustments to this estimate may result when
actual costs are billed by the service provider to the Company. However,
management does not believe such adjustments will be material to the Company's
financial statements.

  Debt Issuance Cost--The Company capitalizes loan fees associated with
securing long term debt and amortizes such deferred loan fees over the term of
the debt agreement. The Company had deferred loan fees of

                                      F-7
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$1,156 and $4,664 as of December 31, 1998 and 1999, respectively, recorded in
other assets on the accompanying balance sheet which are being amortized over
7 years. (See Note 5)

  Fair Value of Financial Instruments--Management believes the fair values of
the Company's financial instruments, including cash equivalents, restricted
cash, accounts receivables, and accounts payable approximate their carrying
value. In addition, because the long-term debt consists of variable rate
instruments, their carrying values approximate fair values.

  Income Taxes--The Company was a limited liability company for the period
from January 1, 1997 to December 31, 1997, on which date it was converted to a
C Corporation. Accordingly, no provision (benefit) for income taxes was
necessary for 1997 since income taxes were the responsibility of the
individual limited liability company members. On a pro forma basis, had the
Company been structured as a C Corporation, there would have been no change in
the net loss or net loss per share for 1996 and 1997. At December 31, 1997,
deferred tax assets and liabilities related to the conversion to a C
Corporation were not significant.

  For 1998 and 1999, income taxes are provided for temporary differences
between the tax and financial accounting basis of assets and liabilities using
the liability method. The tax effects of such differences, as reflected in the
balance sheet, are at the enacted tax rates expected to be in effect when the
differences reverse.

  Concentration of Risk--The Company is exposed to concentration of credit
risk principally from trade accounts receivable. The Company's trade customers
are located in the southeastern and mid-Atlantic United States. The Company
performs ongoing credit evaluations of its customers but does not require
collateral to support customer receivables. Credit risk may be reduced by the
fact that the Company's most significant trade receivables are from large,
well-established telecommunications entities. However, at December 31, 1998
and 1999, the majority of the accounts receivable balance is due from
BellSouth and is currently in dispute (See Notes 6 and 14).

  The Company is dependent upon certain suppliers for the provision of
telecommunications services to its customers. The Company has executed
interconnection agreements for all of its current operating networks, and a
number of these agreements were re-negotiated in 1999. Management believes
that suitable interconnection agreements can be negotiated for the remaining
agreements that will expire during 2000 and, accordingly, does not expect any
disruption of services. The interconnection agreement with BellSouth expired
on December 31, 1999, but continues in force until new interconnection
agreements are reached. The new BellSouth agreements will be effective as of
January 1, 2000 (See Note 6).

  Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
Significant estimates relate to the accrual of network costs payable to other
telecommunications entities and the estimate for the allowance for receivables
due from BellSouth. Any difference between the amounts recorded and amounts
ultimately realized or paid will be adjusted prospectively as new facts become
known (See Notes 6 and 14).

  Advertising--The Company expenses advertising costs in the period incurred.
Advertising expense amounted to $137, $276, and $522 for 1997, 1998 and 1999,
respectively, which for 1999 were entirely offset by marketing incentives
provided by a vendor.

  Significant Customer--In fiscal 1997, 1998, and 1999, BellSouth, operating
in the majority of the Company's markets, accounted for approximately 65%,
80%, and 70%, respectively, of the Company's net revenue (before reduction for
the $12,000 and $27,823 allowance in 1998 and 1999, respectively, described in

                                      F-8
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 6). The majority of this revenue for 1998 and 1999 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, 1998, and 1999, BellSouth accounted for 67%, 94%, and 92%
of the Company's total accounts receivable 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, 8 and 14).

  Recent Accounting Pronouncements--In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and hedging
activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the effective date
of SFAS No. 133". The Company has not yet completed its analysis of any
potential impact of this standard on its financial statements.

  Reclassifications--Certain reclassifications have been made to 1997 and 1998
amounts to conform to the 1999 presentation.

3. PROPERTY AND EQUIPMENT

  Property and equipment at December 31, 1998 and 1999 is summarized by major
class as follows:

<TABLE>
<CAPTION>
                                                               1998      1999
                                                              -------  --------
     <S>                                                      <C>      <C>
     Telecommunications switching and other equipment........ $45,334  $ 79,494
     Office equipment, furniture and other...................   9,158    24,950
     Leasehold improvements..................................   6,785    14,071
                                                              -------  --------
                                                               61,277   118,515
     Less accumulated depreciation and amortization..........  (5,058)  (16,513)
                                                              -------  --------
       Total................................................. $56,219  $102,002
                                                              =======  ========
</TABLE>

4. NOTES PAYABLE-STOCKHOLDERS

  During 1997, the Company's majority stockholder loaned an aggregate of
$5,000 to the Company. Interest charged on loaned amounts was at prime plus 2%
(10.5% per annum at December 31, 1997). On February 14, 1998, the Company's
majority stockholder exchanged the $5,000 loan for 481 shares of Class B
Common Stock with a fair value of $10.40 per share. The fair value of the
Class B Common Stock issued in the exchange was $1,250 in excess of the
carrying value of the debt. Accordingly, the difference between the carrying
value of the debt and the fair value of the Class B Common Stock issued in the
exchange was recorded as a dividend to the majority stockholder in the first
quarter of 1998. In January 1998, an entity controlled by this stockholder
loaned an additional $2,289 to the Company with an interest rate of 12%. The
Company repaid all the outstanding amounts due under the loan in June 1998.

  Another stockholder loaned the Company an aggregate of $960 in 1996, with an
interest rate of prime plus 2%. These loans were repaid in 1997. In January
1998, this stockholder loaned $1,000 to the Company, with an interest rate of
12%. The Company repaid all the outstanding amounts due under the loan in June
1998.

  Interest expense to related parties totaled $420, $223 and $0 in 1997, 1998
and 1999, respectively.

                                      F-9
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. LONG-TERM DEBT

  In December 1998, the Company entered into a $50,000 senior secured loan
agreement with General Electric Capital Corporation and First Union National
Bank. The loan agreement was comprised of a $42,500 one-year revolving credit
facility which converted to a seven year term loan and a $7,500 reducing
revolving credit facility with a six year term. The amount outstanding at
December 31, 1998, was $20,000. In June 1999, the Company amended the loan
agreement to increase the amount available under the agreement from $50,000 to
$75,000. In December 1999, the Company again amended the loan agreement
increasing the amount available from $75,000 to $150,000. The credit facility
is now comprised of (i) a $125,000 revolving credit facility with a term of 18
months and an option to convert into a six-year term loan at the end of that
18 month period and (ii) a $25,000 reducing revolving credit facility with a
six-year term. The interest rate for the facility is a floating rate based, at
the Company's option, on a base rate (as defined in the loan agreement) or the
London Interbank Offered Rate (LIBOR), plus a specified margin. The amount
outstanding under the credit facility at December 31, 1999, was $72,000.
Advances under the agreement as of December 31, 1999, bear interest at an
annual rate ranging between approximately 10.5% and 11.7%. The credit facility
is subject to certain financial covenants, the most significant of which
relate to the maintenance of levels of revenue, earnings and debt ratios. The
credit facility is secured by a pledge of the capital stock of the Company's
principal operating subsidiaries and a security interest in a substantial
portion of the Company's and its operating subsidiaries' equipment,
receivables, leasehold improvements and general intangibles. Proceeds from the
credit facility have been and will be used to fund capital expenditures and
working capital requirements and for other general corporate purposes.
Scheduled maturities of long-term debt, assuming conversion to a term loan are
as follows:

<TABLE>
     <S>                                                                 <C>
     Year ending December 31:
       2000............................................................. $   --
       2001.............................................................     --
       2002.............................................................  10,800
       2003.............................................................  10,800
       2004.............................................................  14,400
       Thereafter.......................................................  36,000
                                                                         -------
         Total.......................................................... $72,000
                                                                         =======
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

  Disputed Reciprocal Compensation Revenues (See Note 14)--A majority of the
Company's revenue is derived from reciprocal compensation amounts due from
ILECs, principally BellSouth. In August 1997, BellSouth notified the Company
and other CLECs that it considered traffic terminated to Enhanced Service
Providers ("ESPs"), including internet service providers ("ISPs"), to be
interstate traffic, and therefore not subject to reciprocal compensation, and
that BellSouth would not pay (or bill) reciprocal compensation under
interconnection agreements for this traffic. BellSouth is disputing the
portion of reciprocal compensation billed by the Company related to the
transport and termination of local traffic from its customers to ESPs,
including ISPs and information service providers, primarily on the basis that
such traffic does not terminate in the same local exchange and, as described
below, the portion of the reciprocal compensation billings related to traffic
on the network of Metacomm, LLC ("Metacomm") (collectively referred to as
"Disputed Reciprocal Compensation"). The Company recorded Disputed Reciprocal
Compensation revenue of approximately $0, $42,000 and $92,000 for 1997, 1998
and 1999, respectively, net of a $0, $12,000 and $27,000 allowance,
respectively. Management believes that the Company has earned and is legally
entitled to this revenue and payments are due from BellSouth pursuant to the
interconnection agreements that BellSouth has with the Company.

                                     F-10
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  On February 26, 1998, following a petition by the Company, the North
Carolina Utilities Commission (the "NCUC") ordered BellSouth to bill and pay
for all ISP-related traffic (the "NCUC Order"). 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
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") pending
determination of certain related issues by the Federal Communications
Commission ("FCC"). This action was filed against the Company and the NCUC. In
June 1999, the U.S. District Court dismissed BellSouth's petition without
prejudice and remanded back to the NCUC for further review. Following the U.S
District Court's remand, on June 22, 1999, the NCUC denied BellSouth's request
for a further stay of the NCUC Order. On July 16, 1999, the Company received
an $11,187 payment from BellSouth for a portion of the Disputed Reciprocal
Compensation earned from terminating calls to ISPs that are customers to the
Company's North Carolina operations, and subject to the NCUC Order.

  Other than denying BellSouth's request for a further stay, the only action
taken by the NCUC with respect to the remand from the U.S. District Court is
that the NCUC filed with the U.S. Fourth Circuit Court of Appeals (the "4th
Circuit") a notice of appeal of the U.S. District Court's order that rejected
the NCUC's defenses, including its defense that the 11th Amendment to the
United States Constitution bars BellSouth from making the NCUC a party to our
proceeding in the federal courts. The Company has also appealed and the United
States Justice Department has intervened in the appeal. The Appellate hearing
on this matter is tentatively scheduled for early June, 2000.

  In February 1999, the FCC issued a declaratory ruling (the "FCC Ruling")
which concluded that for jurisdictional purposes most calls delivered to ISPs
should be deemed to continue to internet web sites, which are often located in
other states. Thus, the FCC ruled that such calls are jurisdictionally
"interstate" in nature. However, the FCC further declared that where parties
have previously agreed in interconnection agreements that reciprocal
compensation must be paid for traffic bound for ISPs, the parties should be
bound by those agreements, as interpreted and enforced by state regulatory
bodies. The FCC also recognized that some commissions might reconsider their
decisions in light of its ruling. As noted, the NCUC had ruled on February 26,
1998, in favor of the Company with respect to payment for traffic bound to
ISPs under the Company's first interconnection agreement with BellSouth. To
date, state regulatory bodies in at least twenty-three states have considered
the effect of the FCC Ruling and have overwhelmingly reaffirmed their earlier
decisions requiring payment of reciprocal compensation for this type of
traffic or for the first time determined that such compensation is due.
Included among these states are Alabama, Florida, and Tennessee, all of which
are in BellSouth's operating territory. In this regard, the Alabama Public
Service Commission concluded that the treatment of ISP traffic as local was so
prevalent in the industry at the time BellSouth entered into interconnection
agreements with CLECs that, if it is so intended, BellSouth had an obligation
to negate such local treatment in the agreements by specifically delineating
that ISP traffic was not local traffic subject to the payment of reciprocal
compensation. The Florida Public Service Commission reached a similar
conclusion. Georgia and Tennessee have also reaffirmed decisions that
reciprocal compensation is owed for calls to ISPs. In an arbitration of the
terms of a new interconnection agreement between BellSouth and another CLEC,
the NCUC recently determined that until the FCC issues a definitive ruling
pursuant to the notice of proposed rulemaking which was part of the FCC
Ruling, reciprocal compensation should continue to be paid under the new
interconnection agreement. While US LEC was not a party to this arbitration,
management believes this decision to be favorable in light of the U.S.
District Court's remand (discussed above). Two BellSouth states--South
Carolina and Louisiana--have ruled that reciprocal compensation is not due for
traffic to ISPs. These decisions also came after the FCC's Declaratory Ruling.
All of these decisions have been appealed. The South Carolina and Louisiana
decisions represent a view adopted by very few other states. (The Company does
not provide local service and has no reciprocal compensation recorded for
traffic in South Carolina or Louisiana).

                                     F-11
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In February 2000, the Company received payment from GTE for reciprocal
compensation related to ISP and voice traffic in North Carolina. This payment
was pursuant to a commercial arbitration award rendered January 4, 2000,
resulting from a proceeding before the American Arbitration Association. GTE
was ordered to pay US LEC for all ISP traffic for the period ending September
1999 (approximately $650). The Company is currently working through dispute
resolution procedures with respect to subsequent periods and anticipates a
favorable ruling.

  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 from BellSouth. Also on September 14, 1998,
BellSouth filed a complaint with the NCUC seeking to be relieved from its
obligations under its interconnection agreement with the Company to pay
reciprocal compensation for traffic related to networks including that
operated by Metacomm, a customer of BellSouth and the Company and, as of June
1998, a related party of the Company. The two proceedings were consolidated
for purposes of discovery, which concluded June 16, 1999, and hearings
concluded in August 1999 with respect to BellSouth's complaint. Hearings
concerning US LEC's complaint have been continued by the NCUC pending an order
in the BellSouth complaint. The BellSouth proceeding primarily involves the
treatment of traffic over a network established by Metacomm and whether, under
the interconnection agreements between the Company and BellSouth and the
Telecommunications Act of 1996 (the "Telecom Act"), BellSouth is required to
pay reciprocal compensation to the Company for traffic associated with this
network and whether BellSouth has breached its interconnection agreements with
the Company by failing to pay reciprocal compensation for this traffic.

  In the NCUC proceedings filed September 14, 1998, BellSouth claims
principally that the traffic on Metacomm's network does not qualify for
reciprocal compensation because the Metacomm network was designed to generate
reciprocal compensation and that such traffic does not constitute
"telecommunications" subject to the reciprocal compensation payment provisions
of the Telecom Act and the interconnection agreements with BellSouth. In
addition BellSouth has identified other issues on which it bases its claim
that the traffic on the Metacomm network is not compensable, including (1)
that the Company agreed to share reciprocal compensation with Metacomm, (2)
that, as disclosed in the Company's Form 10-Q for the period ended September
30, 1998, Richard T. Aab, the largest shareholder of the Company and the
Chairman of its Board of Directors, acquired a controlling interest in
Metacomm after the dispute arose, (3) reciprocal compensation has been billed
on an "always-on" basis even though there is no measurement of the amount of
data transversing the network that is originated by customers of Metacomm, (4)
that the billed traffic includes traffic during periods when Metacomm had not
yet connected customers to its network or when customers of Metacomm were not
sending data over the network, (5) that the Metacomm network includes
facilities that cross LATA boundaries and, therefore, data traversing these
facilities is not local (and, therefore, is ineligible for reciprocal
compensation), (6) that Metacomm is an unlicensed reseller of US LEC's
services, not an end-user, and (7) that the Metacomm network is a quasi-
dedicated network which should not be eligible for reciprocal compensation.

  It is the Company's understanding that during the relevant period Metacomm
was engaged in the business of developing and operating a high-speed, always-
on data network in North Carolina and its network provides users with
continuous access to data, wide area network services, software applications
and other services, including access to the Internet. In the course of the
these proceedings, the Company concluded, based on positions taken and
information provided by Metacomm, that Metacomm related traffic should not be
considered to be solely ISP traffic, in part because its network provides
additional services and functions to users. Notwithstanding this
determination, the Company believes BellSouth will continue to contend the
Disputed Reciprocal Compensation related to the Metacomm network traffic is
subject, in the first instance, to the resolution of the ISP issue. The
Company has recorded approximately $0, $50,000 and $98,000 of gross revenue,
before allowances and late payment charges, for fiscal 1997, 1998 and 1999,
respectively, related to reciprocal compensation revenue generated as a result
of Metacomm network traffic.

                                     F-12
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  When the Metacomm network was originally developed, the Company agreed to
pay Metacomm commissions equal to a specified percentage of the reciprocal
compensation the Company receives from ILEC's for the network traffic. The
Company recorded approximately $200, $20,000 and $39,000 for 1997, 1998 and
1999, respectively, in reciprocal compensation commission expense earned by
Metacomm, which is included in cost of services in the accompanying financial
statements. As of December 31, 1998 and 1999, the Company had a liability to
Metacomm net of amounts owed by Metacomm to the Company in the amount of
$5,345 and $22,809, respectively, which is recorded as accrued commissions,
net--related party in the accompanying financial statements. The Company and
Metacomm are parties to agreements by which commissions earned by Metacomm
related to reciprocal compensation are not payable until the related
reciprocal compensation is collected from the ILEC. However, in fiscal 1997,
1998 and 1999, the Company advanced to Metacomm $0, $8,257 and $12,015 prior
to collecting the earned reciprocal compensation from BellSouth. These
payments are subject to a repayment agreement whether or not the related
reciprocal compensation is ultimately collected from BellSouth and are offset
with commissions due to Metacomm since the legal right of offset exists.

  The Company believes that calls to establish, maintain and manage data
network connections and intra-network communications generated by data
processing routers, which were necessary to maintain the functionality and
integrity of the Metacomm network, are within the definition of
"telecommunications" under the Telecom Act and constitute compensable traffic
subject to reciprocal compensation under the interconnection agreements the
Company has with BellSouth. The Company also believes that the issues raised
by BellSouth as additional bases for nonpayment does not excuse BellSouth from
its obligation to pay reciprocal compensation under its interconnection
agreement with the Company.

  As noted above, on July 16, 1999, the Company received a payment of $11,187
from BellSouth representing a portion of the amounts due the Company for ISP
reciprocal compensation in North Carolina. In making the payment, BellSouth
stated that it was for ISP traffic the NCUC had ordered it to pay for in
February 1998, including late fees, and that it was reserving all of its
appeal rights with respect to the payment. BellSouth also stated that this
payment did not include any amounts at issue in its September 14, 1998, NCUC
proceeding. This partial payment did not cover all outstanding amounts the
Company claims are due from BellSouth in North Carolina and other states the
Company serves. For example, while the Company has outstanding amounts due
from BellSouth for ISP traffic in Tennessee, Georgia and Florida, BellSouth
has not paid these amounts, presumably because no orders specific to US LEC
have been entered by state commissions in those states directing BellSouth to
pay the Company. However, state commissions in these states have issued
rulings in favor of other competitive carriers and as discussed above, the
state commissions in Florida and Alabama have made rulings subsequent to the
FCC Ruling. To address this issue, the Company has filed the following
additional actions against BellSouth related to delinquent reciprocal
compensation payments, none of which involve Metacomm or any similar network:

  .  On July 1, 1999, the Company filed a complaint against BellSouth before
     the Georgia Public Service Commission ("GAPSC"). The hearing with
     relation to this complaint concluded January 21, 2000. The Company
     anticipates receiving the ruling from the hearing officer in April 2000.

  .  On July 2, 1999, the Company filed a complaint against BellSouth before
     the Florida Public Service Commission ("FLPSC"). This matter is
     scheduled for hearing in late April 2000.

  .  On August 6, 1999, the Company filed a complaint against BellSouth
     before the Tennessee Regulatory Authority ("TRA"). This matter has not
     yet been scheduled for hearing.

  Management believes that the Company will ultimately obtain favorable
results in the state proceedings described above before the NCUC, GAPSC, FLPSC
and the TRA; however, BellSouth may elect to initiate additional proceedings
(by way of appeal or otherwise) challenging amounts owed to the Company. In
this

                                     F-13
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

regard, BellSouth recently has asserted a variety of other objections to
paying portions of the reciprocal compensation billed by the Company. They
include assertions that US LEC has miscalculated late payment fees due from
BellSouth and that US LEC has billed reciprocal compensation using the wrong
rates. The Company believes BellSouth has asserted these issues and will
attempt to raise further issues in order to avoid or delay payment.

  If a decision adverse to the Company is issued in any of these proceedings
by any of the state commissions, and in particular the NCUC, or in any appeal
or review of a favorable decision by the Fourth Circuit Court of Appeals,
state commissions, or the FCC, or if either the FCC or any of the applicable
state commissions were to alter its view of reciprocal compensation, such an
event could have a material adverse effect on the Company's operating results
and financial condition. The Company's gross trade accounts receivable as of
December 31, 1998 and 1999 included approximately $54,000 and $190,000,
respectively, of earned but uncollected Disputed Reciprocal Compensation
(before a $12,000 and $39,000 allowance and before late payment charges) of
which approximately $50,000 and $148,000, respectively, was generated as a
result of traffic related to the Metacomm network.

  In June 1999, the Company adopted an existing agreement to extend local
interconnection with BellSouth replacing the previous interconnection
agreement, which expired on June 15, 1999. The adopted interconnection
agreement with BellSouth expired on December 31, 1999, but continues in force
until new interconnection agreements are reached. The new agreements will be
effective as of January 1, 2000. The Company filed petitions for arbitration
in all nine states in BellSouth operating territory seeking to obtain a PSC
ordered interconnection agreement, but the Company anticipates that it will be
able to avoid the arbitration process by adopting interconnection agreements
that are either currently in effect or which will result from arbitrations
involving other CLECs. The Company's ability to obtain favorable terms for
interconnection following December 31, 1999 will depend on a number of
factors, including decisions of the FCC and state regulatory authorities.
However, the Company intends to pursue such agreements vigorously and does not
anticipate any interruption in interconnection service.

  The Company does anticipate that any such new interconnection agreements
will provide for reciprocal compensation at rates lower than in the Company's
current interconnection agreement. The Company also anticipates that the
reciprocal compensation related to Metacomm will not continue due to changes
in the terms of the interconnection agreement, changes in Metacomm's business
or the architecture of its network or a combination thereof. In light of this,
the Company determined to stop advancing any payment to Metacomm in February
2000. In February, 2000 the Company received a notice by which Metacomm
notified BellSouth that due to BellSouth's failure to pay reciprocal
compensation, Metacomm was no longer able to sustain its network operations.
Metacomm instructed BellSouth to terminate the facilities it provides to
Metacomm. One effect of that termination will be to eliminate US LEC's revenue
from the Metacomm network. Based on fourth quarter 1999 results, US LEC
estimates that the reduction in revenue during 2000 will be approximately
$18,000 per quarter, the reduction in cost of services related to commissions
approximately $9,000 per quarter, resulting in a decrease in earnings from
operations of approximately $9,000 per quarter.

  Disputed Access Revenues--In February 2000, US LEC filed suit in U.S.
District Court for the Western District of North Carolina against Sprint
Communications. This action seeks to collect amounts owing to US LEC for
access charges for intrastate and interstate traffic which was either handed
off to Sprint by the Company or terminated to the Company by Sprint. As of
December 31, 1999, Sprint owed US LEC $4,320 in access charges. Sprint has
refused to pay the amounts invoiced by US LEC on the basis that the rates are
higher than the amounts that Sprint is willing to pay. US LEC's invoices to
Sprint are at the rates specified in US LEC's state and federal tariffs. The
FCC recently determined that a long distance company may not withhold access
charges on the basis that it believes the charges to be too high (MGC
Communications, Inc. v. AT&T Corp., FCC Release 99-408). As such, US LEC
anticipates a favorable resolution of this matter.

                                     F-14
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Leases--The Company leases office premises in various locations under
operating lease arrangements. Total rent expense on these leases amounted to
$1,801, $1,853, and $4,195 in 1997, 1998 and 1999, respectively. The Company's
restricted cash balance as of December 31, 1999, serves as collateral for
letters of credit for some of these office leases. (See Note 8)

  Future minimum rental payments under operating leases having initial or
remaining non-cancelable lease terms in excess of one year are as follows (See
Note 8):

<TABLE>
     <S>                                                                 <C>
     2000............................................................... $ 5,054
     2001...............................................................   5,478
     2002...............................................................   5,460
     2003...............................................................   4,932
     2004...............................................................   4,087
     Beyond.............................................................  18,229
                                                                         -------
                                                                         $43,240
                                                                         =======
</TABLE>

  Purchase Commitments--At December 31, 1998 and 1999, the Company has
outstanding commitments to purchase switching equipment with an aggregate cost
of $6,154 and $5,275, respectively.

7. INCOME TAXES

  The provision for income taxes in 1998 and 1999 consists of the following
components:

<TABLE>
<CAPTION>
                                                                1998   1999
                                                               ------ -------
     <S>                                                       <C>    <C>
     Current--Charge equivalent to net tax benefit of stock
      warrant exercise and issuance of stock options.......... $  938 $    28
                                                               ------ -------
     Deferred
      Federal.................................................  6,702  12,869
      State...................................................  1,665   2,720
                                                               ------ -------
                                                                8,367  15,589
                                                               ------ -------
       Total provision for income taxes....................... $9,305 $15,617
                                                               ====== =======
</TABLE>

  The reconciliation of the statutory federal income tax rate to the Company's
federal and state overall effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                 1998   1999
                                                                 -----  -----
     <S>                                                         <C>    <C>
     Statutory federal rate..................................... 35.00% 35.00%
     State income taxes.........................................  5.30   4.49
     Miscellaneous..............................................   .63    .11
                                                                 -----  -----
     Effective tax rate......................................... 40.93% 39.60%
                                                                 =====  =====
</TABLE>

                                     F-15
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1999 are as follows:

  Deferred tax assets:

<TABLE>
<CAPTION>
                                                                 1998    1999
                                                                ------- -------
     <S>                                                        <C>     <C>
     Net operating loss carryforward........................... $ 1,192 $17,054
       Deferred state taxes and other..........................     584   1,696
       Accrued expenses........................................     328     727
                                                                ------- -------
         Total deferred tax assets.............................   2,104  19,477
                                                                ------- -------
     Deferred tax liabilities:
       Net deferred revenues...................................   7,834  33,476
       Depreciation and amortization...........................   2,591   9,811
       Other...................................................      46     146
                                                                ------- -------
         Total deferred tax liabilities........................  10,471  43,433
                                                                ------- -------
     Net deferred tax liability................................ $ 8,367 $23,956
                                                                ======= =======
</TABLE>

  At December 31, 1999 the Company has net operating loss carryforwards for
federal purposes of approximately $40,206 expiring through 2019.

8. RELATED PARTIES

  In 1997, the Company repaid $200 for amounts advanced to its major
stockholder and received services under consulting agreements with two
entities controlled by Company stockholders. Under these agreements in fiscal
1997, the Company expensed $175 which is included in selling, general and
administrative expenses in the accompanying financial statements. No such
consulting agreements existed during the years ended December 31, 1998 and
1999.

  During 1998, the Company's majority stockholder acquired an indirect
controlling interest in Metacomm. Metacomm is engaged in the business of
developing and operating a high-speed data network in North Carolina, and is a
customer of the Company and BellSouth. During 1998 and 1999, respectively, the
Company recorded $6,239 and $9,511 in revenue earned from services provided to
Metacomm (which did not include revenue from reciprocal compensation due from
BellSouth, see Note 6). Metacomm also earns commissions from the Company for
reciprocal compensation revenue relating to Metacomm's network. The Company
recorded $19,759 and $38,990 for 1998 and 1999, respectively, in reciprocal
compensation commission expense earned by Metacomm, which is included in cost
of services in the accompanying financial statements. Because the amounts due
from Metacomm relating to services provided by the Company and commissions due
to Metacomm have the legal right of offset, the Company has recorded a net
liability to Metacomm of $5,345 and $22,809, in accrued commissions, net--
related party in the accompanying financial statements. The Company and
Metacomm are parties to agreements by which commissions earned by Metacomm
related to reciprocal compensation would not be paid to Metacomm until the
related reciprocal compensation is collected from the ILEC. However, in 1998
and 1999 the Company advanced to Metacomm $8,257 and $12,015, respectively,
prior to collecting the earned reciprocal compensation from BellSouth. These
payments are subject to a repayment agreement if the related reciprocal
compensation is ultimately determined not to be collectible from BellSouth. In
February 2000, Metacomm notified the Company they would no longer be able to
sustain their operations (See Notes 6 and 14).

                                     F-16
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During 1998, the Company incurred $35 in expenses for chartered aircraft
services provided by the majority stockholder.

  The Company incurred $89 and $50 in 1998 and 1999, respectively, in expenses
for consulting services provided by Global Vista Communications, LLC ("Global
Vista"). As of December 31, 1998 and 1999, a liability totaling $6 and $66,
respectively, was included in accounts payable in the Company's financial
statements, relating to software and consulting services purchased from Global
Vista. In addition, during 1998 and 1999, the Company acquired $471 and
$2,081, respectively, in software from Global Vista Communications, LLC
("Global Vista"), a company controlled by the Company's majority stockholder.

  During 1999, the Company capitalized $185 in site acquisition costs for
services performed by Lincoln Harris LLC, a company controlled by a member of
the Company's Board of Directors, these costs are included in leasehold
improvements in the accompanying financial statements. In addition, the
Company incurred $3 in expenses for services provided by Lincoln Harris. As of
December 31, 1999, a liability totaling $46 was recorded in accounts payable
in the Company's financial statements relating to leasehold improvements and
services purchased from Lincoln Harris LLC.

  During 1999, the Company entered into an operating lease with H-C REIT,
Inc., a Company controlled by a member of the Company's Board of Directors.
The lease commences on May 1, 2000, and continues for a period of ten years.
As part of the new lease agreement, H-C REIT, Inc. agreed to limit the
Company's liability under their existing lease agreement to $500 for early
termination and lease incentive costs. The Company has recognized this expense
in 1999. Future minimum rental payments under the new lease are as follows and
are included in total future minimum rental payments defined under Leases (See
Note 6):

<TABLE>
     <S>                                                                 <C>
     2000............................................................... $ 1,391
     2001...............................................................   2,127
     2002...............................................................   2,190
     2003...............................................................   2,255
     2004...............................................................   2,322
     Beyond.............................................................  13,584
                                                                         -------
       Total............................................................ $23,869
                                                                         =======
</TABLE>

  Company management believes that all of the above transactions were under
terms no less favorable to the Company than could be arranged with unrelated
parties.

9. EMPLOYEE BENEFIT PLAN

  The Company has a 401(k) savings plan under which employees can contribute
up to 15% of their annual salary. For 1999, the Company made matching
contributions to the plan totaling $381 based on 50% of the first 6% of an
employee's contribution to the plan. For 1998, the Company made matching
contributions to the plan totaling $41.

10. STOCKHOLDERS' EQUITY

  Common Stock--The Company has authorized two classes of common stock, Class
A and Class B. The rights of holders of the Class A Common Stock and the Class
B Common Stock are substantially identical, except that (i) holders of the
Class A Common Stock are entitled to one vote per share and holders of the
Class B Common Stock are entitled to ten votes per share; (ii) holders of the
Class B Common Stock vote as a separate class to elect two members of the
Company's Board of Directors in addition to voting with the holders of Class A

                                     F-17
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Common Stock in the election of the other members of the Board of Directors;
and (iii) the Class B Common Stock is fully convertible at any time into Class
A Common Stock, at the option of the holder, or automatically upon transfer to
certain third persons, on a one-for-one basis. Pursuant to an agreement among
the Class B stockholders, if a Class B stockholder proposes to sell or
transfer Class B Common Stock to anyone other than a permitted transferee (as
defined in the agreement), the other Class B stockholders who are parties to
the agreement would have a right to acquire the Class B Common Stock that is
proposed to be sold or transferred.

  Preferred Stock--The Company is authorized to issue 10,000 shares of
preferred stock ($.01 par value) in one or more series without stockholder
approval, subject to any limitations prescribed by law. Each series of
preferred stock shall have such rights and preferences as shall be determined
by the Company's Board of Directors. No shares of preferred stock have been
issued (See Note 12).

  Capital Contribution--During 1997, the Company's majority stockholder
contributed an aggregate of $1,711 to additional paid-in capital. In addition,
during 1998, this stockholder exchanged a $5,000 loan for 481 shares of Class
B Common Stock (See Note 4).

  Warrants--During 1997, the Company issued warrants to three employees to
purchase an aggregate of 345 shares of Class A Common Stock and a warrant to
an outside sales agent to purchase 99 shares of Class A Common Stock. All of
these warrants are fully vested and are exercisable at $2.86 per share for a
three-year period from the date of issuance. Management believes that these
employee warrants issued through October 1997 are non-compensatory based upon
an internal valuation of their fair value.

  For the warrant issued in 1997 to the outside sales agent, the fair value
charged to expense was $24. The exercise price of those warrants is the same
as the issuance price in 1997 of shares to numerous outside investors. In
November 1997, the Company granted to an employee a warrant to purchase 15
shares of Class A Common Stock at an exercise price of $2.86 per share. This
warrant was fully vested at date of grant and exercisable over three years.
Management estimated the fair value of the warrant granted in November to be
$6.00 per share. As a result, compensation of $47 was charged to expense
relating to the difference between the fair value and the exercise price of
the warrant on the date of grant. In January 1998, the Company issued a
warrant to a consultant to purchase 25 shares of Class A Common Stock at $10
per share, exercisable at any time through January 1, 2001. These warrants are
fully vested and exercisable over three years. The Company recorded
compensation expense of $75 in 1998 associated with the warrant issued in
January 1998.

  Stock Option Plan--In January 1998, the Company adopted the US LEC Corp.
1998 Omnibus Stock Plan (the "Stock Plan"). In August 1998, the Company filed
a registration statement to register (i) 1,300 shares of Class A Common Stock
reserved for issuance under the Stock Plan and (ii) 180 shares of Class A
Common Stock reserved for issuance upon the exercise of nontransferable
warrants granted by the Company to employees. In April 1999, the Company's
stockholders voted to amend the Plan to increase the number of Class A Common
Stock reserved for issuance under the Plan from 1,300 shares to 2,000 shares
and in May 1999, the Company filed a registration statement to register these
additional 700 shares. Under the amended Stock Plan, 2,000 shares of Class A
Common Stock have been reserved for issuance for stock options, stock
appreciation rights, restricted stock, performance awards or other stock-based
awards. Options granted under the Stock Plan are at exercise prices determined
by the Board of Directors or its Compensation Committee. For incentive stock
options, the option price may not be less than the market value of the Class A
Common Stock on the date of grant (110% of market value for greater than 10%
stockholders).

  In January 1998, the Company granted incentive stock options to
substantially all employees to purchase an aggregate of 183 shares of Class A
Common Stock at $10 per share (fair market value on date of grant was $13 per
share). These options began vesting annually in four equal installments
beginning in January 1999. The Company recorded deferred compensation of $548
in 1998 associated with these options which will be amortized

                                     F-18
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

to compensation expense over the four-year vesting period. During 1998 and
1999, the Company amortized $105 and $101, respectively, to compensation
expense relating to these options, after consideration of forfeitures.

  Also, during 1998, the Company granted to an employee, an option to purchase
360 shares of Class A Common Stock at $13 per share (fair market value on the
date of grant was $14 per share). The Company recorded deferred compensation
of $360 associated with these options and will amortize this amount to
compensation expense over the four year vesting period. During 1998 and 1999,
the Company amortized $60 and $90, respectively, to compensation expense
relating to these options. In both 1998 and 1999 the Company granted options
to purchase 5 shares of Class A Common Stock at the fair market value on the
date of grant to each of the Company's two and three outside directors,
respectively. These options vested immediately upon grant.

  In September 1998, the Company repriced 744 options outstanding to the fair
value on such date of $7.31 per share. As a condition to the repricing, these
options (other than the directors' options) vest over four years beginning at
the repricing date.

  A summary of the option and warrant activity is as follows:

<TABLE>
<CAPTION>
                                    Options                       Warrants
                         ----------------------------- ------------------------------
                                   Weighted
                                   Average   Weighted            Weighted   Weighted
                                   Exercise  Average              Average   Average
                                    Price   Fair Value           Exercise  Fair Value
                          Number     Per     at  Date  Number of Price Per  at Date
                         of Shares  Share    of Grant  Warrants   Warrant   of Grant
                         --------- -------- ---------- --------- --------- ----------
<S>                      <C>       <C>      <C>        <C>       <C>       <C>
Balance at December 31,
 1996
 Granted at fair market
  value.................                                  429     $ 2.86     $ 2.86
 Granted at less than
  fair market value.....                                   15       2.86       6.00
                                                         ----     ------
Balance at December 31,
 1997 (all
 exercisable)...........                                  444       2.86
 Granted at fair market
  value*................   1,324    $10.27    $ 3.95
 Granted at less than
  fair market value.....     575     11.88      6.89       25      10.00     $13.00
 Exercised..............               --                (165)      2.86
 Forfeited or
  cancelled*............    (817)    14.41                --         --
                           -----    ------                        ------
Balance at December 31,
 1998...................   1,082    $ 8.00                304     $ 3.45
                           -----    ------               ----     ------
 Granted at fair market
  value.................     794    $22.65    $10.29
 Exercised..............     (14)     7.85                 (5)      2.86
 Forfeited or
  cancelled.............     (67)    12.66                --         --
                           -----    ------               ----     ------
Balance at December 31,
 1999...................   1,795    $14.30                299     $ 3.46
                           =====    ======               ====     ======
</TABLE>
--------
* Includes 744 options repriced

  The Company measures the compensation cost of its stock option plan under
the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", as permitted under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Under the provisions of APB No. 25, compensation cost is
measured based on the intrinsic value of the equity instrument awarded. Under
the provisions of SFAS No. 123, compensation cost is measured based on the
fair value of the equity instrument awarded.

  Had compensation cost for the employee warrants and stock options been
determined consistent with SFAS No. 123, the Company's net earnings (loss) and
net earnings (loss) per share would approximate the following proforma
amounts:

                                     F-19
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                 1997                  1998                 1999
                         --------------------  -------------------- --------------------
                         As Reported Proforma  As Reported Proforma As Reported Proforma
                         ----------- --------  ----------- -------- ----------- --------
<S>                      <C>         <C>       <C>         <C>      <C>         <C>
Net earnings (loss).....   $(4,658)  $(4,737)    $13,427   $12,832    $23,809   $22,463
Earnings (loss) per
 share:
  Basic.................     (0.25)    (0.25)       0.53      0.51       0.87      0.82
  Diluted...............     (0.25)    (0.25)       0.52      0.50       0.84      0.79
</TABLE>

  The Company estimated the fair value for both the stock options and the
warrants using the Black-Scholes model assuming no dividend yield in 1997,
1998 and 1999; volatility of 0%, 40% and 40% for 1997, 1998 and 1999,
respectively, an average risk-free interest rate of 6.0%, 5.0% and 6.5% for
1997, 1998 and 1999, respectively, an expected life of 18 months for the
warrants and 5.8 and 5.1 years for the stock options in 1998 and 1999,
respectively. The weighted average remaining contractual life of warrants and
stock options outstanding at December 31, 1999 was 8 months and 9.1 years,
respectively.

  A summary of the range of exercise prices and weighted average remaining
lives for options and warrants outstanding and exercisable at December 31,
1999 is as follows:

<TABLE>
<CAPTION>
                                                       Options Outstanding
                         --------------------------------------------------------------------------------
                                                     Weighted
                                                      Average
                                         Number of   Remaining     Weighted     Number of     Weighted
                            Range of      Options   Contractual    Average       Options      Average
                         Exercise Price Outstanding    Life     Exercise Price Exercisable Exercise Price
                         -------------- ----------- ----------- -------------- ----------- --------------
<S>                      <C>            <C>         <C>         <C>            <C>         <C>
Options granted at fair
 market value..........          $ 7.31      890     8.7 years      $ 7.31         222         $ 7.31
                                   9.50        6     8.8 years        9.50           1           9.50
                           11.25- 15.38      157     8.7 years       12.87          45          12.89
                           16.50- 16.50      145     9.3 years       16.50
                           18.38- 22.75       69     9.5 years       19.16
                           23.13- 25.75      164     9.7 years       24.15
                           26.13- 27.69      357    10.0 years       26.15           5          27.69
                                           -----                    ------         ---         ------
                            7.31- 27.69    1,788     9.1 years       14.32         273           8.61
Options granted at less
 than fair market
 value.................           10.00        7     8.1 years       10.00           1          10.00
                                           -----                    ------         ---         ------
 Total options
  outstanding at
  December 31, 1999....  $  7.31-$27.39    1,795     9.1 years      $14.30         274         $ 8.62
                                           =====                    ======         ===         ======
</TABLE>

<TABLE>
<CAPTION>
                                          Warrants Outstanding
                          -----------------------------------------------------
                                          Number of   Weighted
                                          Warrants     Average
                                         Outstanding  Remaining     Weighted
                             Range of        and     Contractual    Average
                          Exercise Price Exercisable    Life     Exercise Price
                          -------------- ----------- ----------- --------------
<S>                       <C>            <C>         <C>         <C>
Warrants granted at fair
 market value...........         $ 2.86      264      7.1 months     $ 2.86
Warrants granted at less
 than fair market
 value..................           2.86       10     10.4 months       2.86
                                  10.00       25     12.0 months      10.00
                            2.86- 10.00       35     11.5 months       7.96
                                             ---                     ------
 Total options warrants
  at December 31, 1999..   $2.86-$10.00      299      7.6 months     $ 3.46
                                             ===                     ======
</TABLE>

11. EARNINGS (LOSS) PER SHARE

  Earnings (loss) per common and common equivalent share and are based on net
income (loss) divided by the weighted average shares outstanding during the
period. The weighted average shares outstanding used in the

                                     F-20
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

calculation has been determined by giving retroactive effect to the merger of
the predecessor limited liability company into the Company, which occurred on
December 31, 1997 (based on the share conversion ratios utilized in the
merger). Outstanding options and warrants are included in the calculation of
diluted earnings per common share to the extent they are dilutive. Securities
and Exchange Commission Staff Accounting Bulletin No. 98 requires that equity
instruments granted at nominal amounts for periods prior to the filing of the
registration statement be included in the calculation of per share data as if
outstanding for all periods presented. Accordingly, the weighted average
shares used in the calculation of basic and diluted earnings (loss) per share
includes two thousand, three hundred and ten shares (two limited liability
company units) granted in 1996 to employees, as if such shares were
outstanding for the entire period. Following is the reconciliation of earnings
(loss) per share for 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                                        1997     1998    1999
                                                       -------  ------- -------
   <S>                                                 <C>      <C>     <C>
   Basic earnings (loss) per share:
     Net earnings (loss).............................. $(4,658) $13,427 $23,809
     Weighted average shares outstanding..............  18,653   25,295  27,431
                                                       -------  ------- -------
     Basic earnings (loss) per share.................. $ (0.25) $  0.53 $  0.87
                                                       =======  ======= =======
   Diluted earnings (loss) per share:
     Net earnings (loss).............................. $(4,658) $13,427 $23,809
                                                       =======  ======= =======
     Weighted average shares outstanding..............  18,653   25,295  27,431
     Dilutive effect of stock options.................     --       214     725
     Dilutive effect of warrants......................     --       295     255
                                                       -------  ------- -------
     Weighted average shares, adjusted................  18,653   25,804  28,411
                                                       -------  ------- -------
   Diluted earnings (loss) per share.................. $ (0.25) $  0.52 $  0.84
                                                       =======  ======= =======
</TABLE>

12. SUBSEQUENT EVENTS

  On February 25, 2000, the Company announced it has executed a letter of
intent with affiliates of Bain Capital, Inc. (Bain) and Thomas H. Lee
Partners, L.P. (THL) to invest up to $300 million in US LEC. Under the letter
of intent, Bain and THL have each agreed to invest up to $150 million in
convertible preferred stock in US LEC, subject to definitive documentation and
other standard closing conditions and approvals. Bain and THL will each
receive a seat on US LEC's board of directors. The investment will be made in
two tranches yielding a 6% dividend and at a weighted average conversion price
of approximately $39. The first tranche of $200 million will carry a
conversion price of $35. During the first year after closing, the investors,
at their option, may invest up to an additional $100 million with a conversion
price of $46.50.

                                     F-21
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. QUARTERLY FINANCIAL DATA (UNAUDITED)

  The following table summarizes the Company's results of operations as
presented in the consolidated statements of operations by quarter for 1997,
1998, and 1999. Amounts below exclude per share data for periods prior to the
completion of the Company's initial public offering:

<TABLE>
<CAPTION>
                                                    Quarter Ended
                                        --------------------------------------
                                        March 31, June 30,  Sept. 30, Dec. 31,
                                          1999      1999      1999      1999
                                        --------- --------  --------- --------
<S>                                     <C>       <C>       <C>       <C>
Year ended December 31, 1999:
  Revenue, Net.........................  $36,212  $43,553    $47,348  $48,067
  Cost of Services.....................   15,762   18,702     19,524   19,625
                                         -------  -------    -------  -------
Gross Margin...........................   20,450   24,851     27,824   28,442
Selling, General and Administrative....    9,666   11,806     13,707   13,196
Depreciation and Amortization..........    2,320    2,676      3,124    3,600
                                         -------  -------    -------  -------
Earnings from Operations...............    8,464   10,369     10,993   11,646
Interest Income (Expense), Net.........      (35)    (359)      (621)  (1,031)
                                         -------  -------    -------  -------
Earnings Before Income Taxes...........    8,429   10,010     10,372   10,615
Provision for Income Taxes.............    3,414    4,035      4,170    3,998
                                         -------  -------    -------  -------
Net Earnings...........................  $ 5,015  $ 5,975    $ 6,202  $ 6,617
                                         =======  =======    =======  =======
Net Earnings per Share:
  Basic................................  $   .18  $   .22    $   .23  $   .24
                                         =======  =======    =======  =======
  Diluted..............................  $   .18  $   .21    $   .22  $   .23
                                         =======  =======    =======  =======
Weighted Average Shares Outstanding:
  Basic................................   27,422   27,427     27,428   27,447
                                         =======  =======    =======  =======
  Diluted..............................   28,206   28,381     28,520   28,554
                                         =======  =======    =======  =======
</TABLE>

                                     F-22
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                     Quarter Ended
                                           -----------------------------------
                                             March    June     Sept.    Dec.
                                              31,      30,      30,      31,
                                             1998     1998     1998     1998
                                           --------- -------  -------  -------
<S>                                        <C>       <C>      <C>      <C>
Year ended December 31, 1998:
  Revenue, Net............................  $13,630  $18,348  $22,291  $30,447
  Cost of Services........................    6,473    7,537    7,296   12,340
                                            -------  -------  -------  -------
Gross Margin..............................    7,157   10,811   14,995   18,107
Selling, General and Administrative.......    4,426    5,747    6,690    8,157
Depreciation and Amortization.............      442      925    1,547    2,027
                                            -------  -------  -------  -------
Earnings from Operations..................    2,289    4,139    6,758    7,923
Interest Income (Expense), Net............      (90)     596      704      413
                                            -------  -------  -------  -------
Earnings Before Income Taxes..............    2,199    4,735    7,462    8,336
Provision for Income Taxes................      880    1,905    2,999    3,521
                                            -------  -------  -------  -------
Net Earnings..............................  $ 1,319  $ 2,830  $ 4,463  $ 4,815
                                            =======  =======  =======  =======
Net Earnings per Share:
  Basic...................................           $   .11  $   .16  $   .18
                                                     =======  =======  =======
  Diluted.................................           $   .11  $   .16  $   .17
                                                     =======  =======  =======
Weighted Average Shares Outstanding:
  Basic...................................            25,548   27,420   27,420
                                                     =======  =======  =======
  Diluted.................................            26,082   27,905   28,016
                                                     =======  =======  =======
<CAPTION>
                                                     Quarter Ended
                                           -----------------------------------
                                             March    June     Sept.    Dec.
                                              31,      30,      30,      31,
                                             1997     1997     1997     1997
                                           --------- -------  -------  -------
<S>                                        <C>       <C>      <C>      <C>
Year ended December 31, 1997:
  Revenue.................................  $     1  $   229  $ 1,530  $ 4,698
  Cost of Services........................      423      315    1,075    2,388
                                            -------  -------  -------  -------
Gross Margin (loss).......................     (422)     (86)     455    2,310
Selling, General and Administrative.......    1,049    1,048    1,294    2,726
Depreciation and Amortization.............       14       88      125      216
                                            -------  -------  -------  -------
Loss from Operations......................   (1,485)  (1,222)    (964)    (632)
Interest Expense, Net.....................       67      108      102       78
                                            -------  -------  -------  -------
Net Loss..................................  $(1,552) $(1,330) $(1,066) $  (710)
                                            =======  =======  =======  =======
</TABLE>

14. THE MARCH 31, 2000 NCUC ORDER (UNAUDITED)

  As discussed under Note 6, BellSouth filed a claim before the NCUC on
September 14, 1998 seeking to be relieved of any obligation under its
interconnection agreements with the Company to pay reciprocal compensation for
traffic related to the Metacomm network. On March 31, 2000, the NCUC issued an
order in this proceeding that relieves BellSouth from paying reciprocal
compensation to US LEC for any minutes of use attributable to the network
operated by Metacomm, or any similar network, and requires US LEC to cease
billing BellSouth reciprocal compensation for minutes of use attributable to
the Metacomm or any similar network (the "March 31 Order"). The Company is
considering its options with respect to an appeal of this order, but plans to
comply fully with the March 31 Order.

                                      F-23
<PAGE>

                          US LEC CORP. & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  As a result of the March 31 Order, the Company estimates that it will record
a pre-tax, non-recurring, non-cash charge of approximately $55,000 in the
quarter ending March 31, 2000. The charge is composed of the write-off of
approximately $153,000 in receivables related to reciprocal compensation
revenue offset by a previously established allowance of $39,000 and a
reduction of approximately $59,000 in reciprocal compensation commissions
payable to Metacomm.

  In accordance with existing agreements between Metacomm and the Company,
approximately $21 million in commission advances to Metacomm and approximately
$16 million in receivables for services provided to Metacomm are due to the
Company. Metacomm has assured the Company that these amounts will be paid.

  The March 31 Order does not affect in any way the NCUC's order of February
26, 1998, requiring BellSouth to pay reciprocal compensation to the Company
for ISP traffic in North Carolina. The March 31 Order also has no effect on US
LEC's operations in any other state or its pending claims against BellSouth
for reciprocal compensation for ISP traffic before the GAPSC, FLPSC and TRA.

                                     F-24
<PAGE>

Board of Directors

    Richard T. Aab                            David M. Flaum (1)(2)
    Chairman of the Board                     President
    US LEC Corp.                              Flaum Management Company, Inc.

    Tansukh V. Ganatra                        John W. Harris (1)(2)
    Vice Chairman and Chief Executive Officer President and Chief Executive
    US LEC Corp.                              Officer
                                              Lincoln Harris, LLC.
    Steven L. Schoonover (1)(2)
    President and Chief Executive Officer
    CellXion, Inc.
--------
(1) Member of Audit Committee
(2) Member of Compensation Committee

Executive Officers

    Richard T. Aab
    Chairman of the Board

    Tansukh V. Ganatra
    Vice Chairman and Chief Executive Officer

    Michael K. Robinson
    Executive Vice President--Chief Financial Officer

    Aaron D. Cowell, Jr.
    President

    Robert D Ingram
    Executive Vice President Engineering and Chief Technical Officer

                                      F-25
<PAGE>

Corporate Information

 Form 10-K/Investor Contact

  A copy of the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission, may be obtained from the Company at no
charge. Requests for the Annual Report on Form 10-K and other investor
contacts should be directed to Michael K. Robinson, Executive Vice President
and Chief Financial Officer, at the Company's corporate office.

 Common Stock and Dividend Information

  The Company's common stock trades on The Nasdaq National Market under the
symbol CLEC. As of March 17, 2000, US LEC Corp. had approximately 5,300
beneficial holders of its common stock. Of that total, 127 were stockholders
of record. To date, the Company has not paid cash dividends on its common
stock. The Company currently intends to retain earnings to support operations
and finance expansion and therefore does not anticipate paying cash dividends
in the foreseeable future.

  The following table sets forth the high and low closing price information as
reported by Nasdaq during the period indicated since the Company's Class A
Common Stock began trading publicly on April 24, 1998.

<TABLE>
<CAPTION>
                                                                   Stock Price*
                                                                  --------------
                                                                   High    Low
                                                                  ------- ------
     <S>                                                          <C>     <C>
     1998
     First Quarter...............................................     N/A    N/A
     Second Quarter.............................................. $ 27.00 $15.00
     Third Quarter............................................... $ 25.88 $ 7.31
     Fourth Quarter.............................................. $ 14.81 $ 9.50
     1999
     First Quarter............................................... $ 19.50 $13.38
     Second Quarter.............................................. $ 24.62 $16.50
     Third Quarter............................................... $ 33.13 $22.75
     Fourth Quarter.............................................. $32.250 $23.50
</TABLE>
--------
* No public market for the stock prior to April 24, 1998

  Corporate Office
    US LEC Corp.
    Transamerica Square
    401 North Tryon Street, Suite 1000
    Charlotte, North Carolina 28202
    704-319-1000

  Internet Address
    http://www.uslec.com

  Registrar and Transfer Agent
    First Union National Bank
    Charlotte, North Carolina

  Independent Auditors
    Deloitte & Touche LLP
    Charlotte, North Carolina

  Legal Counsel
    Moore & Van Allen, PLLC
    Charlotte, North Carolina

    Swidler Berlin Shereff Friedman, LLP
    Washington, D.C.

                                     F-26