<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1999      Commission File Number: 0-20763

                             MCLEODUSA INCORPORATED

             (Exact name of registrant as specified in its charter)


              DELAWARE                               42-1407240

     (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)              Identification No.)

     McLeodUSA Technology Park
     6400 C Street SW, P.O. Box 3177
     Cedar Rapids, IA                                 52406-3177
     (Address of principal executive offices)         (Zip Code)

       Registrant's telephone number, including area code: (319) 364-0000

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OFTHE ACT:

                                 Not applicable

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                Class A common stock, par value $0.01 per share
                   6.75% Series A preferred stock, par value
                                 $0.01 per share
                               (Title of Classes)

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the registrant's common stock as of
March 17, 2000 is $11,278,547,249.*/

The number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date is:

        o     Class A common stock, par value $.01 per share, outstanding as of
              March 17, 2000: 160,512,447 shares

-------------
*/ Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more than 5%
of the registrant's common stock that have representation on the registrant's
Board of Directors are considered to be affiliates.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated: Portions of the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 31, 2000, to be filed within 120 days after the end of the registrant's
fiscal year, are incorporated by reference into Part III, Items 10-13 of this
Form 10-K.

<TABLE>
<CAPTION>
                                                    TABLE OF CONTENTS

       PAGE

<S>               <C>                                                                                              <C>
       PART I     Item 1.           Business  ....................................................................... 1
                  Item 2.           Properties.......................................................................38
                  Item 3.           Legal Proceedings................................................................39
                  Item 4.           Submission of Matters to a Vote of Security Holders..............................39

       PART II    Item 5.           Market for Registrant's Common Equity and
                                    Related Stockholder Matters......................................................40
                  Item 6.           Selected Financial Data..........................................................41
                  Item 7.           Management's Discussion and Analysis of Financial
                                    Condition and Results of Operations..............................................43
                  Item 7A.          Quantitative and Qualitative Disclosures
                                    About Market Risk................................................................54
                  Item 8.           Financial Statements and Supplementary Data......................................54
                  Item 9.           Changes in and Disagreements with Accountants on
                                    Accounting and Financial Disclosure..............................................56

       PART III   Item 10.          Directors and Executive Officers of the Registrant...............................56
                  Item 11.          Executive Compensation...........................................................56
                  Item 12.          Security Ownership of Certain Beneficial Owners
                                    and Management...................................................................56
                  Item 13.          Certain Relationships and Related Transactions...................................56

       PART IV    Item 14.          Exhibits, Financial Statement Schedules, and
                                    Reports on Form 8-K..............................................................56

       GLOSSARY .....................................................................................................67

       SIGNATURES ...................................................................................................71

       INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................................................F-1

       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
       ON THE FINANCIAL STATEMENT SCHEDULES..........................................................................F-2
</TABLE>
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       References in this Form 10-K to "we," "us," "our" and "McLeodUSA" mean
       McLeodUSA Incorporated and our subsidiaries and predecessors, unless the
       context suggests otherwise. Dollar amounts over $1 million have been
       rounded to one decimal place and dollar amounts less than $1 million have
       been rounded to the nearest thousand, unless otherwise indicated. Some of
       the statements contained in this Form 10-K discuss future expectations,
       contain projections of results of operations or financial condition or
       state other forward-looking information. These statements are subject to
       known and unknown risks, uncertainties and other factors that could cause
       the actual results to differ materially from those contemplated by the
       statements. The forward-looking information is based on various factors
       and was derived using numerous assumptions. In some cases, you can
       identify these so-called "forward-looking statements" by words like
       "may," "will," "should," "expect," "plan," "anticipate," "believe,"
       "estimate," "predict," "project," "intend" or "potential" or the negative
       of those words and other comparable words. You should be aware that those
       statements only reflect our predictions. Actual events or results may
       differ substantially. Important factors that could cause our actual
       results to be materially different from the forward-looking statements
       are disclosed under the heading "Business--Risk Factors" and throughout
       this Form10-K. SEE THE "GLOSSARY" APPEARING AT PAGE 67 FOR DEFINITIONS OF
       SOME OF THE TERMS USED IN THIS FORM 10-K.

                                     PART I

       ITEM 1.  BUSINESS.
       OVERVIEW

       We provide communications services to business and residential customers
       in the Midwestern and Rocky Mountain regions of the United States. We
       offer local, long distance, Internet access, data and voice mail, all
       from a single company on a single bill. We believe we were the first
       communications provider in many of our markets to offer one-stop shopping
       for communications services tailored to customers' specific needs.

       Our approach makes it easier for both our business and our residential
       customers to satisfy their communications needs. It also allows
       businesses to receive customized services, such as competitive long
       distance pricing and enhanced calling features, that might not otherwise
       be directly available on a cost-effective basis. As of December 31, 1999,
       we served 679,000 local lines in 592 cities and towns.

       We derive most of our revenue from:

       o    our core business of providing competitive local, long distance and
            related communications services in competition with the existing
            telephone companies
       o    sale of advertising space in telephone directories
       o    traditional local telephone company services in east central
            Illinois and southeast South Dakota
       o    communications facilities and services dedicated for a particular
            customer's use

       We also derive revenue from:

       o    communications network maintenance services
       o    telephone equipment sales, leasing, service and installation
       o    video services
       o    telemarketing services
       o    computer networking services
       o    other communications services, including cellular, operator,
            payphone, and paging services

                                       1
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       In most of our markets, we compete with the incumbent local phone company
       by leasing its lines and switches. In other markets, primarily in Iowa,
       Illinois, South Dakota, Wisconsin, Indiana, Missouri, Minnesota and
       Michigan, we operate our own switches and lease lines from the incumbent
       phone company. In a limited number of markets in Iowa, South Dakota and
       Minnesota, we use our own switches and lines to provide service. We
       provide long distance services by using our own communications network
       facilities and leasing capacity from long distance and local
       communications providers. We are actively developing fiber optic
       communications networks throughout most of our 21 state target market
       area to carry additional communications traffic on our own network.

       The following chronology highlights some of the important events in the
       development of our business:

       DATE                                            EVENT

       November 1992                  Began providing fiber optic maintenance
                                      services for the Iowa Communications
                                      Network, a fiber optic communications
                                      network that links many schools, libraries
                                      and other public buildings in the State of
                                      Iowa.

       December                       1993 Received regulatory approvals
                                      in Iowa and Illinois to offer local
                                      and long distance services.

       June                           1996 Completed our initial public
                                      offering of Class A common stock.

       July 1996                      Acquired Ruffalo, Cody & Associates, Inc.,
                                      a telemarketing company.

       September 1996                 Acquired TelecomUSA Publishing Group,
                                      Inc., a telephone directory company.

       April and June 1997            The Federal Communications Commission
                                      awarded McLeodUSA a total of 26 "D" and
                                      "E" block frequency personal
                                      communications services ("PCS") licenses
                                      for approximately $32.8 million.

       July 1997                      The FCC awarded McLeodUSA four wireless
                                      communications services ("WCS") licenses.

       September 1997                 Acquired Consolidated Communications Inc.
                                      ("CCI"), a diversified telecommunications
                                      company offering a variety of products and
                                      services, including local exchange and
                                      long distance services and telephone
                                      directory publishing.

       February 1999                  Acquired Talking Directories, Inc. and
                                      Info America Phone Books, Inc., related
                                      companies publishing and distributing
                                      telephone directories primarily in
                                      Michigan and Northwestern Ohio.

                                       2
<PAGE>

       March 1999                     Acquired Dakota Telecommunications Group,
                                      Inc. ("DTG"), a diversified communications
                                      company offering a variety of products and
                                      services, including local exchange, long
                                      distance and data services and cable
                                      television operations.

                                      Acquired Ovation Communications, Inc.
                                      ("Ovation"), a diversified
                                      telecommunications company offering a
                                      variety of products and services,
                                      including local and network access, local
                                      and long distance telephone services and
                                      Internet access.

       August 1999                    Acquired Access Communications Holdings,
                                      Inc. ("Access"), a telecommunications
                                      company providing switch-based commercial
                                      and residential services, including
                                      traditional long distance service and an
                                      enhanced - 800# product.

       As of March 21, 2000, we offer communications services to business and
       residential customers in Iowa, Illinois, North Dakota, South Dakota,
       Wisconsin, Wyoming, Michigan and Colorado. We also offer communications
       services to business customers in a number of markets in Minnesota,
       Missouri, Indiana, Utah, Nebraska, Washington and Ohio. Over the next few
       years, depending on competitive and other factors, we intend to offer
       communications services in Idaho, Montana, Arizona, New Mexico, Oregon,
       and Kansas. We offer long distance service in 48 states in the
       continental United States.

       We plan to offer PCS or other wireless services as part of our
       communications services by building a wireless network, entering into
       strategic acquisitions or alliances, or employing a combination of these
       methods. We intend to use the frequency blocks covered by these licenses
       to provide fixed services. SEE "--PROPOSED WIRELESS SERVICES," "--
       REGULATION" AND "--RISK FACTORS--WE MAY NOT SUCCEED IN DEVELOPING OR
       MAKING A PROFIT FROM WIRELESS SERVICES."

       The statements in the foregoing paragraphs about our expansion plans and
       proposed wireless services are forward-looking statements within the
       meaning of the safe harbor provisions of the Private Securities
       Litigation Reform Act of 1995. These plans may be revised, and our actual
       geographic expansion and services may differ materially from that
       indicated by our current plans, in each case as a result of a variety of
       factors, including, among others: the availability of financing and
       regulatory approvals, the existence of strategic alliances or
       relationships and technological, regulatory or other developments in our
       business.

       Our principal executive offices are located at McLeodUSA Technology Park,
       6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our
       main phone number is (319) 364-0000.

       RECENT TRANSACTIONS

       THE SPLITROCK MERGER AGREEMENT AND HIRING OF ROY WILKENS. On January 7,
       2000 we announced that we had reached an agreement to acquire Splitrock
       Services, Inc. (Nasdaq: SPLT) and that Roy A. Wilkens would join
       McLeodUSA as the head of our Data Services operations with Splitrock as
       the core of those operations. Wilkens has extensive experience in the
       competitive telecommunications segment, most notably during his tenure at
       WilTel where he was founder and CEO of WilTel Network Services from 1985
       to 1997 as WilTel constructed and operated the first nationwide broadband
       fiber optic network.

                                       3
<PAGE>

       The pending acquisition of Splitrock provides for a merger, whereby
       Splitrock will become a wholly owned subsidiary of McLeodUSA. As a result
       of the merger, each share of Splitrock common stock will be converted
       into the right to receive 0.5347 of a share of McLeodUSA Class A common
       stock. Splitrock stockholders will own approximately 12.6 percent of the
       outstanding shares of McLeodUSA Class A common stock on a fully converted
       basis. The share data has not been adjusted to reflect the McLeodUSA
       three-for-one stock split scheduled to be distributed on April 24, 2000.

       Splitrock is a facilities-based provider of advanced data communications
       services. Splitrock markets its services to Internet service providers,
       telecommunications carriers and other businesses throughout the United
       States. The Splitrock services include an array of Internet access and
       data communications services delivered over its high capacity,
       facilities-based network. The combination of the Splitrock existing
       network with its pending acquisition of significant fiber optic
       facilities positions Splitrock to deliver a broad range of end-to-end
       data communications services on its network, including:

           o    dial and dedicated Internet access
           o    Internet access for higher bandwidth services, such as digital
                subscriber line and cable modem
           o    value-added services such as virtual private networks and web
                hosting
           o    bandwidth leasing and collocation services

       The completion of the Splitrock transaction is subject to the approval of
       stockholders. McLeodUSA and Splitrock expect that this transaction will
       be completed promptly after the stockholders' meetings for McLeodUSA and
       Splitrock scheduled for March 30, 2000.

       The completion of this transaction will enable us to offer data services,
       including Internet access services, to customers in our existing markets
       using the newly-acquired network platform and to achieve enhanced data
       margins and improved control over the quality of our data services. In
       addition, through Splitrock, we will be able to offer those same services
       on a national basis (initially on a wholesale basis) outside our current
       market area. The transaction will also allow us to accelerate our
       delivery of data services, while reducing to a certain degree the capital
       expenditure required for network construction, and to save costs for
       terminating calls from our markets to areas outside our target market
       region. The transaction also will increase the number of our
       communications services customers.

       We have obtained information regarding Splitrock from Splitrock. Although
       we believe this information is reliable, it has not been independently
       verified. Additional information about Splitrock and about the proposed
       merger is publicly available in our registration statement on Form S-4,
       as amended (File No. 333-95941), filed with the SEC on February 2, 2000
       and other reports filed by McLeodUSA and Splitrock with the SEC.

       THREE-FOR-ONE STOCK SPLIT. We announced on February 29, 2000 a
       three-for-one stock split in the form of a stock dividend. The record
       date for the stock split will be April 4, 2000. Stockholders of record at
       market close on that date will receive two additional shares of McLeodUSA
       Class A common stock for each share of Class A common stock held.
       Distribution of the additional shares will take place on April 24, 2000.
       The three-for-one split is subject to stockholder approval of an
       amendment to the McLeodUSA certificate of incorporation to increase the
       number of authorized shares. An amendment to accomplish this increase is
       scheduled to be considered at the March 30, 2000 special meeting of
       McLeodUSA stockholders.

                                       4
<PAGE>

       MCLEODUSA BUSINESS STRATEGY

       We want to be the leading and most admired provider of communications
       services in our markets. To achieve this goal, we are:

           o    aggressively capturing customer share and generating revenue
                using leased communications network capacity

           o    concurrently building our own communications network

           o    migrating customers to our communications network to provide
                enhanced services and reduce operating costs

       The principal elements of our business strategy are to:

       PROVIDE INTEGRATED COMMUNICATIONS SERVICES. We believe we can rapidly
       penetrate our target markets and build customer loyalty by providing an
       integrated product offering to business and residential customers.

       BUILD CUSTOMER SHARE THROUGH BRANDING. We believe we will create and
       strengthen brand awareness in our target markets by branding our
       communications services with the trade name McLeodUSA in combination with
       the distinctive black-and-yellow motif of our telephone directories.

       PROVIDE OUTSTANDING CUSTOMER SERVICE. Our customer service
       representatives are available 24 hours a day, seven days a week, to
       answer customer calls. Our customer-focused software and systems allow
       our representatives immediate access to our customer and network data,
       enabling a rapid and effective response to customer requests.

       EMPHASIZE SMALL AND MEDIUM SIZED BUSINESSES. We primarily target small
       and medium sized businesses because we believe we can rapidly capture
       customer share by providing face-to-face business sales and strong
       service support to these customers.

       EXPAND OUR FIBER OPTIC COMMUNICATIONS NETWORK. We are building a
       state-of-the-art fiber optic communications network to deliver multiple
       services and reduce operating costs.

       EXPAND OUR INTRA-CITY FIBER OPTIC COMMUNICATIONS NETWORK. Within selected
       cities, we plan to extend our network directly to our customers'
       locations. This will allow us to provide expanded services and reduce the
       expense of leasing communications facilities from the local exchange
       carrier.

       EXPLORE ACQUISITIONS AND STRATEGIC ALLIANCES. We plan to pursue
       acquisitions, joint ventures and strategic alliances to expand or
       complement our business.

       LEVERAGE PROVEN MANAGEMENT TEAM. Our executive management team consists
       of veteran telecommunications managers who successfully implemented
       similar customer-focused telecommunications strategies in the past.

       MARKET POTENTIAL

       The telecommunications industry is undergoing substantial changes due to
       statutory, regulatory and technological developments. We believe that we
       are well-positioned to take advantage of these fundamental changes.

                                       5
<PAGE>

       WIRELINE SERVICES. The market for local exchange services consists of a
       number of distinct service components, including:

          o   local network services, which generally include basic dial tone,
              local area charges, enhanced calling features and private line
              services (dedicated for a customer's use between locations)

          o   network access services, which consist of access provided by local
              exchange carriers to long distance communications network carriers

          o   short-haul long distance communications network services, which
              include intraLATA long distance calls and private lines

          o   other varied services, including operator services, Internet
              access, calling cards, publication of "white page" and "yellow
              page" telephone directories and the sale of business telephone
              equipment

       Industry sources have estimated that the 1999 aggregate revenues of all
       local exchange carriers were approximately $102 billion. Until recently,
       there was little competition in the local exchange markets, particularly
       for local network and network access services.

       Before 1984, AT&T largely monopolized local and long distance telephone
       services in the United States. In 1984, as the result of a court order
       approving a settlement agreement in an antitrust action, AT&T was
       required to divest its local telephone systems (the "Divestiture"). The
       Divestiture and subsequent related proceedings divided the country into
       201 Local Access and Transport Areas ("LATAs"). As part of the
       Divestiture, AT&T's former local telephone systems were organized into
       seven independent regional Bell operating companies. The original seven
       regional Bell operating companies are now concentrated into four large
       incumbent "MegaBells." Those companies have the authority to provide
       local telephone service, local access service and intraLATA long distance
       service, but cannot provide in-region interLATA service unless they
       demonstrate that certain competitive conditions have been met.
       Opportunities to compete in the local exchange market expanded
       substantially on February 8, 1996, when the Telecommunications Act of
       1996 was signed into law. The Telecommunications Act of 1996 eliminated
       state legal barriers to local exchange competition and requires incumbent
       local exchange carriers to allow other providers of telecommunications
       services to purchase elements of their local communications network
       offerings and to interconnect with their communications facilities and
       equipment. Most significantly, it requires the incumbent local exchange
       carriers to complete local calls originated by our customers and
       transferred or connected by us using our own communications network
       facilities, and to deliver inbound local calls to us for connection to
       our customers, assuring our customers unimpaired local calling ability.
       In addition, local exchange carriers are obligated to provide local
       number portability and dialing parity upon request and make their local
       services available for resale by competitors. Local exchange carriers
       also are required to allow competitors non-discriminatory access to local
       exchange carrier poles, conduit space and other rights-of-way.

       We believe that these requirements are likely, when fully implemented, to
       increase competition among providers of local communications services and
       simplify the process of switching from incumbent local exchange carrier
       services to those offered by competitive local exchange carriers. The
       Telecommunications Act of 1996 also offers important benefits to the
       MegaBells, however, such as the ability to provide interLATA long
       distance services under specified conditions. The process of implementing
       the Telecommunications Act of 1996 is still incomplete, and important
       questions remain unresolved. SEE "--REGULATION".

       A number of states have also taken additional regulatory and legislative
       action to open local communications markets to various degrees of
       competition. We expect that continuing pro-competitive regulatory
       changes, together with increasing customer demand, will create more
       opportunities for competitive service providers to introduce additional
       services, expand their

                                       6
<PAGE>

       networks and address a larger customer base. We cannot assure you
       however, that government actions to implement local telephone competition
       will be as complete or as timely as we require to implement our business
       plans.

       WIRELESS SERVICES. Demand for wireless communications has grown rapidly
       over the past decade. According to the Cellular Telecommunications
       Industry Association ("CTIA"), the number of wireless telephone
       subscribers nationwide has grown from approximately 680,000 in 1986 to an
       estimated 76 million as of June 30, 1999, with annual growth of
       approximately 25% from 1998 through 1999. Wireless communication revenues
       for the 12-month period ended June 30, 1999 are estimated by CTIA to have
       totaled over $37.2 billion, a 26% increase over the prior 12-month
       period. We believe that the demand for wireless communications will
       continue to grow dramatically, and that PCS will capture a significant
       share of the wireless market, due to anticipated declines in costs of
       service, increased function versatility, and increased awareness of the
       productivity, convenience and safety benefits associated with such
       services. We also believe the rapid growth of notebook computers and
       personal digital assistants, combined with emerging software applications
       for wireless delivery of electronic mail, fax and internet access, will
       further stimulate demand for wireless service. In addition, we expect
       future competition between wireline local exchange carriers and wireless
       service providers as "wireless local loop" technology and reduced
       wireless rates facilitate migration of wireline minutes to wireless
       carriers.

       CURRENT PRODUCTS AND SERVICES

       We derive most of our revenue from:

         o      our core business of providing local, long distance and related
                communications services to end users, typically in a bundled
                package
         o      the sale of advertising space in telephone directories
         o      traditional local telephone company services through the
                operation of Illinois Consolidated Telephone Company ("ICTC") in
                east central Illinois and Dakota Telecommunications Group, Inc.
                in southeast South Dakota
         o      communications facilities and services dedicated for a
                particular customer's use

       We also derive revenue from:

         o      communications network maintenance services
         o      telephone equipment sales, leasing, service and installation
         o      video services
         o      telemarketing services
         o      computer networking services
         o      other communications services, including cellular, operator,
                payphone and paging services

       For the year ended December 31, 1999, we derived 50% of our total
       revenues from our core business of providing local, long distance and
       related communications services, 23% from the sale of advertising space
       in telephone directories, 9% from traditional local telephone company
       services and 9% from communications facilities and services dedicated for
       a particular customer's use. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
       FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OVERVIEW."

       Splitrock reported revenues for 1999 of $89.6 million from its provision
       of facilities-based network services to internet service providers,
       telecommunication companies and business enterprise companies.
       SEE "--RECENT TRANSACTIONS."

                                       7
<PAGE>

       INTEGRATED COMMUNICATIONS SERVICES.

       OVERVIEW. As of December 31, 1999, we provided service, on a retail
       basis, to 679,000 local lines in our markets, primarily to small and
       medium sized business customers and to residential customers. Since
       beginning sales activities in January 1994, we have increased our revenue
       from the sale of local and long distance telecommunications services from
       $4.6 million for the year ended December 31, 1994 to $456.0 million for
       the year ended December 31, 1999.

       In order to provide local communications services to most of our business
       and residential customers, we purchase "Centrex" services through various
       agreements with U S WEST Communications, Inc., for our customers located
       in U S WEST's service territories, and with Ameritech Corporation for
       most of our customers located in Ameritech's service territories. These
       "Centrex" agreements allow us to partition part of the central office
       switching equipment serving the communities in which we provide local
       services, which allows us to aggregate lines, have control over several
       characteristics of those lines and provide a set of standard features on
       them. Our customers' telephone lines and numbers are assigned to our
       portion of the switch. U S WEST or Ameritech, as the case may be, bills
       us for all the lines assigned to our customers and provides us with call
       detail reports, which enable us to verify our customers' bills for both
       local and long distance service. These Centrex agreements protect us from
       unilateral rate increases until 2002 or 2003, depending on the state. We
       believe that our Centrex-based local services are superior to a standard
       business or residential telephone line, since we can offer features, such
       as three-way calling, consultation hold and call transfer, at no extra
       charge. Other custom calling features are available at additional cost.
       Because we also purchase the "Centrex Management System" and the "Centrex
       Mate Service" from U S WEST and Ameritech, respectively, our personnel
       have on-line access to U S WEST and Ameritech facilities and may make
       changes to the customers' services electronically and quickly.

       In certain markets in which we will move relatively quickly from
       reselling retail services of the MegaBell to offering services using our
       own switching facilities, we are reselling standard retail business
       services. We currently offer standard resold business services as an
       interim measure in certain markets in Missouri, Washington, Nebraska,
       Utah, Idaho and Indiana. This strategy allows us to aggressively capture
       customer share and generate revenue in a market with little up-front cost
       in comparison to establishing Centrex service, while we complete our own
       communications network.

       We have interconnection agreements with MegaBells in Iowa, Minnesota,
       South Dakota, North Dakota, Nebraska, Illinois, Indiana, Michigan,
       Wisconsin, Utah and Missouri that allow us to provide local service by
       leasing individual lines and switches from the MegaBells. These
       agreements provide us a wholesale discount on services that we resell. We
       also have interconnection agreements with GTE in certain markets in which
       GTE is the incumbent local exchange company. In certain markets in
       Illinois, Minnesota, Wisconsin, Michigan, and Indiana, we use our own
       switching equipment and communications network facilities together with
       unbundled local "loop" elements purchased from U S WEST or SBC/Ameritech
       through interconnection agreements. In Cedar Rapids, Iowa, southwest
       Minnesota and southeast South Dakota, we also provide competitive
       communications services to some of our business and residential customers
       using only our own lines and communications network facilities.

       We provide most of our long distance service by purchasing communications
       network capacity, in bulk, from national long distance carriers, and
       routing our customers' long distance traffic over this capacity. In some
       service areas, we also carry long distance traffic on our own network
       facilities.

                                       8
<PAGE>

       BUSINESS SERVICES. End-user business customers can obtain local, long
       distance and ancillary services, such as three-way calling and call
       transfer, directly from us in each of the cities and towns in which we
       offer communications services today.

       We generally offer business customers our integrated local communications
       services at prices that are similar to the published retail rates for
       basic business service provided by the incumbent local exchange carrier.
       We offer our business customers a flat rate or a negotiated rate for long
       distance service consistent with their particular needs and within the
       guidelines of our filed tariffs. These rates are not subject to increase
       for the duration of the term selected by the customer.

       Furthermore, in some states, including states outside of our target
       markets, we offer business customers long distance service only, in order
       to enhance our ability to attract business customers that have offices
       outside of our target markets.

       RESIDENTIAL SERVICES. We introduced our PrimeLine(R) service in 1996 and
       now offer that service to residential customers in various cities and
       towns in Iowa, Illinois, North Dakota, South Dakota, Wisconsin, Wyoming
       and Colorado. Our basic PrimeLine(R) service includes local and long
       distance telephone service, as well as enhanced features such as
       three-way calling, call transfer and consultation hold. Voice mail,
       Internet access and travel card services are also available at the
       customer's option as part of our PrimeLine(R) service. We generally price
       our basic PrimeLine(R) local service slightly higher than the rates for
       basic local service offered by the incumbent local exchange carrier since
       our basic PrimeLine(R) local service includes enhanced features that are
       not typically provided as part of the incumbent local exchange carrier's
       basic local service. Our customers can add voice mail and Internet access
       services to their basic PrimeLine(R) service at incremental rates
       designed to be no higher than separately purchasing these services from
       other companies. We generally offer our PrimeLine(R) customers a choice
       of either long distance rates that vary with the time of the call or
       flat-rate long distance pricing applicable 24 hours a day, seven days a
       week. In Michigan, we also offer residential services by leasing local
       lines from the MegaBell and using our local switching.

       DIRECTORY SERVICES. In 1999, we published 193 proprietary "white page"
       and "yellow page" telephone directory titles and distributed
       approximately 19.4 million copies of these directories to local telephone
       subscribers in 22 states in the Midwestern and Rocky Mountain regions of
       the United States, including most of our target markets. We also
       published 280 "white page" and "yellow page" telephone directory titles
       for other companies and distributed approximately 4.1 million copies of
       these directories to local telephone subscribers in 37 states and the
       U.S. Virgin Islands. Our telephone directory services generated 1999
       revenues of approximately $211.3 million, primarily from the sale of
       advertising space in the directories.

       Our proprietary telephone directories serve as "direct mail" advertising
       because they contain information on how to contact us and detailed
       product descriptions and step-by-step instructions on the use of our
       telecommunications products. In addition, we believe that our
       directories' distinctive black-and-yellow motif combined with the trade
       name McLeodUSA strengthens brand awareness in our markets. SEE "--SALES
       AND MARKETING."

       TRADITIONAL LOCAL TELEPHONE SERVICES. Through ICTC and Dakota
       Telecommunications, we provide regulated incumbent local exchange
       telephone service to subscribers in central Illinois and southeast South
       Dakota.

       ICTC operates in 37 exchanges, or service areas, the largest of which are
       in Mattoon, Charleston, and Effingham, Illinois. As of December 31, 1999,
       ICTC had 93,222 local access lines in its existing service areas. ICTC
       offers a broad range of local exchange services, including long distance
       carrier access service, intraLATA toll service, local telephone service,

                                       9
<PAGE>

       local paging service, national directory assistance, and equipment
       leasing. ICTC also offers most of its local telephone subscribers custom
       calling features such as call waiting, call forwarding, conference
       calling, speed dialing, caller identification, and call blocking. The
       rates for these and other local exchange services are regulated by the
       Illinois Commerce Commission and the FCC. To provide these services, ICTC
       owns and operates three central office switches and 33 remote switches.

       As of December 31, 1999, Dakota Telecommunications served approximately
       6,700 local service access lines in 9 telephone exchanges in southeastern
       South Dakota. Dakota Telecommunications provides a full range of
       communications products and services, including local dial tone and
       enhanced services, local private line and public telephone services,
       dedicated and switched data transmission services, long distance
       telephone services, operator assisted calling services, Internet access
       and related services.

       DEDICATED FACILITIES AND SERVICES. We provide, on a private carrier
       basis, a wide range of special access, private line and data services to
       long distance carriers, government agencies, wireless service providers
       and cable television and other end-user customers. These services
       include:

         o     POP-to-POP special access
         o     end user/long distance carrier special access
         o     private line services

       POP-to-POP special access services provide telecommunications lines that
       link the POPs of one long distance carrier or the POPs of different long
       distance carriers in a market, allowing these POPs to exchange
       telecommunications traffic for transport to final destinations.

       End user/long distance carrier special access services provide
       telecommunications lines that connect an end user such as a large
       business to the local POP of its selected long distance carrier.

       Long distance carrier special access services provide telecommunications
       lines that link a long distance carrier POP to the local central office.
       For example, we furnish long distance carrier special access services to
       AT&T in 17 cities in Illinois, Iowa, North Dakota and South Dakota.

       Private line services provide telecommunications lines that connect
       various locations of a customer's operation to transmit internal voice,
       video and/or data traffic. We provide private line services by using our
       own communications network facilities, leasing communications network
       facilities from other telecommunications carriers, or using some
       combination of owned and leased communications network facilities.

       NETWORK MAINTENANCE SERVICES. In 1990, the State of Iowa authorized
       construction of the initial fiber optic links of the Iowa Communications
       Network (the "Part I and II segments"). The Part I and II segments, which
       are owned by the State of Iowa, provide 3,400 miles of fiber optic
       communications network connections to approximately 139 sites in Iowa and
       are used primarily for interactive distance learning, telemedicine and
       the State's own long distance telephone traffic. Neither McLeodUSA nor
       any other communications carrier may use capacity on the Part I and II
       segments to provide communications services to customers because
       commercial use of the Part I and II segments is forbidden.

                                       10
<PAGE>

       We have entered into a fiber optic maintenance contract with the State of
       Iowa to provide maintenance services for the Part I and II segments of
       the Iowa Communications Network until 2004. Our maintenance activities
       under this contract are performed on a 24-hour-per-day, 365-days-per-year
       basis, and consist of alarm monitoring, repair services and cable
       location services. We believe that the expertise in fiber optic
       maintenance we have developed through the maintenance of the Iowa
       Communications Network provides advantages in maintaining our own
       communications network facilities.

       TELEPHONE EQUIPMENT SERVICES. We sell, lease, install and service
       telephone systems, primarily to small and medium sized businesses in
       Iowa, Illinois and Minnesota. We believe these services provide valuable
       expertise for and complement our communications services offerings,
       giving us additional contact with the small and medium sized businesses
       we target in marketing our communications services.

       VIDEO SERVICES. We own 85% of Greene County Partners, Inc., a cable
       television company that as of December 31, 1999 provides cable television
       service to approximately 16,700 subscribers in Illinois and Michigan.
       Through Dakota Telecommunications, we also own and operate 26 cable
       television systems located in southeastern South Dakota, northwestern
       Iowa and southwestern Minnesota. As of December 31, 1999, these systems
       provided service to approximately 7,500 subscribers.

       We provide cable television service in Cedar Rapids, Iowa pursuant to a
       franchise from that city. We are using this franchise to explore the
       possible synergies between cable television and our advanced
       communications services offerings, such as Integrated Services Digital
       Network ("ISDN"), low and high speed Internet, video and other advanced
       services. Depending on the results of this preliminary initiative and on
       other factors, including technological, regulatory or other developments
       in our business, changes in the competitive climate in which we operate,
       and the emergence of future opportunities, we may elect to offer cable
       service on an expanded basis in the future.

       TELEMARKETING SERVICES. We provide direct marketing and telemarketing
       services for third parties, as well as a variety of fund-raising services
       for colleges, universities and other non-profit organizations throughout
       the United States. We believe that these services provide valuable
       marketing opportunities and expertise for our communications services,
       particularly with respect to potential residential customers. In addition
       to providing telemarketing services for third parties, we also use our
       telemarketing sales personnel to sell communications services to small
       businesses and for sales of our PrimeLine(R) residential services. SEE
       "--SALES AND MARKETING."

       COMPUTER NETWORKING SERVICES. Through Dakota Telecommunications, we
       provide customized, integrated solutions for computing networks in some
       markets in South Dakota. Typical services include review of customer
       system requirements; selection, design and planning of system components
       and networks; and operating and network support services.

       OTHER COMMUNICATIONS SERVICES. We provide pay telephone service, operator
       services and paging services in some markets. In addition, we own a
       minority interest in a partnership that provides cellular service in
       central Illinois.

       EXPANSION OF SERVICES USING OUR OWN COMMUNICATIONS NETWORK FACILITIES

       We are also offering service to over 138,300 local lines, using our own
       switches and fiber optic communications network facilities connected
       directly to our customers' locations or combined with network elements
       purchased from SBC/Ameritech and US West through interconnection
       agreements. We are further enhancing our state-of-the-art fiber optic
       communications network

                                       11
<PAGE>

       either by extending our intra-city fiber optic communications network and
       switching capacity or by combining with network elements from existing
       telephone companies. Our communications network and switching capacity is
       also designed to serve other wireline and wireless carriers on a
       wholesale basis.

       As of March 21, 2000, we have received state regulatory approval to offer
       local switched services using our own communications network facilities
       in Colorado, Idaho, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota,
       Missouri, Montana, Nebraska, North Dakota, Ohio, Oregon, South Dakota,
       Utah, Washington, Wisconsin and Wyoming. We intend to offer additional
       local switched services using our own network facilities, either alone or
       in combination with network elements purchased from existing telephone
       companies, in selected markets in 21 states. We plan to expand these
       facilities-based services as our communications network develops and our
       market penetration increases.

       Our plans to provide local switched services using our own communications
       network facilities will depend upon obtaining favorable interconnection
       agreements and terms for leasing network elements from existing telephone
       companies. In August 1996, the FCC released a decision (the
       "Interconnection Decision") implementing the interconnection portions of
       the Telecommunications Act of 1996. The Interconnection Decision has been
       the subject of significant legal dispute. In January 1999, the U.S.
       Supreme Court rejected challenges to the Interconnection Decision and
       affirmed the authority of the FCC to establish rules governing
       interconnection. We believe that additional disputes regarding the
       Interconnection Decision and other related FCC actions are likely. We
       cannot assure you that we will succeed in obtaining interconnection
       agreements on terms that would permit us to offer local services using
       our own communications network facilities at profitable and competitive
       rates. SEE "--REGULATION."

       The foregoing statements are forward-looking statements within the
       meaning of the Private Securities Litigation Reform Act of 1995 and where
       we actually provide such services will depend on factors such as:

        o    the outcome of the judicial proceedings regarding the
             Interconnection Decision
        o    technological, regulatory or other developments in our business
        o    changes in the competitive climate in which we operate
        o    the emergence of future opportunities

       For a detailed description of the expansion of our fiber optic
       communications network, SEE "--NETWORK FACILITIES."

       POTENTIAL WIRELESS SERVICES

       We currently do not offer wireless services, although we do own a
       minority interest in a cellular telephone partnership serving parts of
       east central Illinois, and are conducting fixed wireless trials in two of
       our markets. In April and June 1997, the FCC awarded us a total of 26 "D"
       and "E" block frequency PCS licenses, each covering 10 MHz of radio
       spectrum, and in September 1997 we acquired CCI and its "E" block
       frequency PCS license, giving us a total of 27 PCS licenses in 25 markets
       covering areas of Illinois, Iowa, Minnesota, Nebraska and South Dakota.
       We paid approximately $32.8 million for the 26 PCS licenses awarded to us
       by the FCC. CCI paid the FCC for its PCS license before we acquired CCI.
       Our PCS licenses encompass approximately 110,000 square miles and a
       population of approximately 6.6 million. We are evaluating whether to
       offer PCS or other wireless services as part of our communications
       services by building a wireless network, entering into strategic
       acquisitions or alliances, or employing a combination of these methods.

                                       12
<PAGE>

       We will need to spend significant time and money to develop wireless
       services. To implement a wireless system, we will need to build or
       otherwise acquire access to wireless infrastructure. The infrastructure
       of a wireless system generally consists of switches, base station
       transmitters and receivers, and related equipment. We may also incur
       costs related to site acquisition and preparation, installation services,
       zoning approval or other permits, frequency planning, construction and
       equipment procurement, installation and testing. Furthermore, we believe
       that our ability to successfully offer wireless services will depend on
       our ability to offer roaming service to our customers so they can use
       their handsets outside our service area. This will require us to
       establish or acquire access to suitable roaming arrangements with other
       wireless operators in other markets constructing systems compatible with
       our own. We cannot predict when, or whether, we will be able to enter
       into such roaming agreements with local providers.

       We have entered into long-term agreements with Alliant Energy, an
       electric utility which is one of our principal stockholders, and with
       MidAmerican Energy, Wisconsin Electric Power Company, and Canadian
       National Railroad (formerly Illinois Central Railroad), that will enable
       us to install base stations and other equipment on such companies'
       rights-of-way or towers. SEE "--NETWORK FACILITIES." We expect the use of
       these existing towers and other facilities occupied by other
       telecommunications service providers and utility companies to facilitate
       our development of wireless services.

       On July 21, 1997, the FCC also awarded us four WCS licenses covering
       Milwaukee, Wisconsin, Minneapolis/St. Paul, Minnesota, Des Moines-Quad
       Cities, Iowa/Illinois and Omaha, Nebraska. We expect to use the frequency
       blocks covered by such licenses to provide fixed wireless services.

       Additionally, the FCC awarded us 13 "A" and "B" block LMDS frequency
       licenses in May 1999 covering 12 markets reaching approximately 2.8
       million people.

       As the wireline and wireless markets converge, we believe that we can
       identify other opportunities to generate revenues from the wireless
       industry on both a retail and a wholesale basis. On a retail basis, we
       believe that we will be able to enter into strategic arrangements with
       both cellular and PCS companies on favorable economic terms to allow us
       to offer wireless services as part of our integrated communications
       services offerings. On a wholesale basis, these opportunities may include
       (1) leasing tower sites to wireless providers, (2) connecting or
       transferring wireless traffic through our communications network
       facilities and (3) transporting wireless traffic using our fiber optic
       communications network to interconnect wireless providers' cell sites or
       to connect such sites to either our communications network facilities or
       to communications network facilities of other providers of wireline
       services.

       The statements in the foregoing paragraphs about our plans to offer
       wireless services are forward-looking statements within the meaning of
       the Private Securities Litigation Reform Act of 1995. These plans may be
       revised, and our actual wireless services may differ materially from that
       indicated by our current plans, in each case as a result of a variety of
       factors, including:

         o   the availability of financing and regulatory approvals
         o   the number of potential customers in a target market
         o   the existence of strategic alliances or relationships
         o   technological, regulatory or other developments in our business
         o   changes in the competitive climate in which we operate
         o   the emergence of future opportunities

                                       13
<PAGE>

       SEE "--RISK FACTORS--WE MAY NOT SUCCEED IN DEVELOPING OR MAKING A PROFIT
       FROM WIRELESS SERVICE" AND "--RISK FACTORS--COMPETITION IN THE WIRELESS
       TELECOMMUNICATIONS INDUSTRY COULD MAKE IT HARDER FOR US SUCCESSFULLY TO
       OFFER WIRELESS SERVICES."

       NETWORK FACILITIES

       As the incumbent local exchange carriers are compelled, by regulatory
       changes and competitive forces, to unbundle their network components and
       to permit resale of their network elements and products, we expect to be
       able to provide our customers with a full range of communications
       services using a combination of our own communications network, the
       networks of the incumbent local exchange carriers and the networks of
       other competitive carriers.

       As of December 31, 1999, we owned 10,036 route miles of fiber optic
       communications network and expect to add approximately 1,000 additional
       route miles of fiber optic network during 2000, primarily within the
       cities we plan to serve. These route miles are in addition to the
       acquisition of Splitrock and its fiber network. We will decide whether to
       begin construction of fiber optic network in a market based on various
       economic factors, including:

         o   the number of our customers in a market
         o   the anticipated operating cost savings associated with such
             construction
         o   any strategic relationships with owners of existing infrastructure
             (e.g., utilities and cable operators)
         o   strategic acquisitions of providers of wireless services or owners
             of existing infrastructure

       We are installing backbone communications network facilities that form a
       series of fiber optic "self-healing rings" and intra-city communications
       network facilities that provide access directly to customer locations.
       These communications network facilities are intended to enable us to
       provide local and long distance service using our own facilities in our
       target market areas. Our communications networks are designed to support
       a wide range of communications services, provide increased network
       reliability and reduce costs. Our communications network consists of
       fiber optic cables, which typically contain between 36 and 288 fiber
       strands, each of which is capable of providing many telecommunications
       circuits. A single pair of fibers on our network can transmit 32,256
       simultaneous voice conversations, whereas a typical pair of copper wires
       can carry a maximum of 24 digitized simultaneous voice conversations. We
       expect that continuing developments in compression technology and
       multiplexing equipment will increase the capacity of each fiber,
       providing greater capacity at relatively low incremental cost.

       In 1995, the Iowa General Assembly passed legislation to extend the Iowa
       Communications Network to 543 more endpoints (which are usually located
       in schools or public libraries) throughout the State of Iowa (the "Part
       III segments"). The majority of these fiber optic links, unlike the Part
       I and II segments of the Iowa Communications Network, will be leased to
       the State of Iowa from a private entity, such as McLeodUSA. As of
       December 31, 1999, we had contracts to build and then lease capacity to
       the State of Iowa on 235 of such segments. Under our lease agreements
       with the State of Iowa, we are constructing a "fiber-rich" broadband
       communications network on which the State of Iowa has agreed to lease one
       DS-3 circuit for a period of seven years for a total aggregate lease cost
       of approximately $27.0 million. Upon completion of installation of each
       segment, the leases provide that the State of Iowa will make a one-time
       up-front lease payment to us for the capacity, with nominal monthly lease
       payments thereafter. At the end of a seven-year period, the leases may be
       extended, upon terms to be mutually agreed upon. During the term of the
       leases, the State of Iowa may order additional DS-3 circuits at a
       mutually agreed upon price.

                                       14
<PAGE>

       We have reached agreements with Alliant Energy, an electric utility and
       one of our principal stockholders, and with MidAmerican, Wisconsin
       Electric Power Company, and Canadian National Railroad (formerly Illinois
       Central Railroad) that allow us to make use of those companies'
       rights-of-way, underground conduits, distribution poles, transmission
       towers and building entrances in exchange for rights by such companies to
       use capacity on our network. These agreements give us access to
       rights-of-way in parts of Iowa, Illinois and Wisconsin for installation
       of our wireline and wireless networks. We expect our access to these
       rights-of-way to have a significant positive impact on our capital costs
       for network construction and the speed with which we can construct our
       networks. We believe that our strategic relationships with our electric
       utility stockholders and other companies that own rights-of-way and
       infrastructure give us a competitive advantage.

       On January 7, 2000, we announced an agreement to acquire Splitrock
       Services, Inc., a facilities-based provider of enhanced data services.
       The acquisition of Splitrock is subject to approval of stockholders of
       both companies. We expect that the transaction will be completed promptly
       following the stockholders' meetings scheduled for March 30, 2000. SEE
       "--RECENT TRANSACTIONS."

       The Splitrock broadband access network includes over 320 operational
       points of presence ("POPs") and, when completed, is expected to have
       approximately 340 active broadband access POPs. The Splitrock network is
       designed to provide coverage of roughly 90% of the population of the
       United States. Splitrock has deployed asynchronous transfer mode (ATM)
       switches at every core, hub and remote POP of its network. This network
       architecture, called "ATM-to-the-EdgeTM," enables Splitrock to serve as a
       broad-based provider of data communications services through the creation
       of a platform that efficiently delivers multiple services, such as
       Internet access, virtual private networks and web hosting, across
       multiple protocols, including Internet Protocol, frame relay and ATM. The
       flexibility inherent in the Splitrock network design allows it to expand
       its service offerings to provide fully integrated data, video and voice
       services.

       To further expand and enhance its network and service offerings,
       Splitrock has agreed to acquire the indefeasible rights to use four dark
       fiber strands in a state-of-the-art fiber optic network currently under
       construction by Level 3 Communications, LLC, with an option to acquire
       indefeasible rights to use an additional 12 fibers. This nationwide fiber
       network will cover approximately 15,000 route miles and will be delivered
       in segments that are expected to become available from the first quarter
       of 2000 through the first quarter of 2001. Combining this fiber optic
       network with Splitrock's own broadband access network positions Splitrock
       to:

          o  deliver, on its own facilities, a broad array of end-to-end data
             communications services at the high level of quality and
             reliability increasingly demanded by customers

          o  reduce significantly its network costs as a percentage of revenues
             as it substitutes the acquired bandwidth for existing leased
             circuit arrangements with various telecommunications carriers

          o  expand its service offerings by providing bandwidth leasing
             services on a stand-alone basis or bundled with the other services
             of Splitrock

          o  increase the reliability and redundancy of its network

          o  increase the variety of service options and speeds available to
             customers

       SALES AND MARKETING

       We initially directed our communications sales efforts primarily toward
       small and medium sized businesses. In June 1996, we began marketing our
       PrimeLine(R) services to residential customers.

                                       15
<PAGE>

       Marketing of our integrated communications services to business customers
       is conducted by direct sales personnel, located in branch sales offices
       in Iowa, Illinois, North Dakota, South Dakota, Idaho, Michigan,
       Minnesota, Missouri, Wisconsin, Indiana, Colorado, Michigan, Utah,
       Nebraska, Washington, Kansas and Wyoming. In addition, we use
       telemarketers to market these services to smaller business customers and
       those located in areas that are geographically remote. Sales activities
       in our branch sales offices are organized and managed by region.

       Marketing of our PrimeLine(R) integrated communications services to
       residential customers is conducted by telemarketers. The telemarketers
       emphasize the PrimeLine(R) integrated package of communications services
       and its flat-rate per minute pricing structure for long distance service.

       Our sales force is trained to emphasize our customer-focused sales and
       service, including our 24-hours-per-day, 365-days-per-year customer
       service center. Our employees answer customer service calls directly
       rather than requiring customers to use an automated queried message
       system. We believe that our emphasis on a single point of contact for
       meeting our customer's communications needs is very appealing to our
       current and prospective customers. In addition, we have deployed
       skills-based routing software designed to match incoming calls with
       customer service representatives best trained to respond to the
       customer's needs.

       We have also developed and installed customer-focused software for
       providing integrated communications services. This software permits us to
       provide our customers one fully integrated monthly billing statement for
       local, long distance, 800, international, voice mail, paging, Internet
       access and travel card services, and will permit us to include additional
       services, such as wireless services, when available. We believe that our
       customer-focused software platform is an important element in the
       marketing of our communications services and gives us a competitive
       advantage in the marketplace.

       In addition, we believe our strategic acquisitions have enhanced our
       sales and marketing efforts and increased our penetration of existing
       markets and will also help accelerate our entry into new markets. For
       example, we began publishing and distributing telephone directories as a
       result of acquisitions. We can use our proprietary telephone directories
       as direct mail advertising simply by including detailed product
       descriptions and information about our communications products in them.
       We believe that these telephone directories provide us with a long-term
       marketing presence in the millions of households and businesses that
       receive them. We also believe that combining our directories' distinctive
       black-and-yellow motif with the trade name McLeodUSA strengthens brand
       awareness in all of our markets.

       In 1999, we expanded our communications sales and marketing efforts by
       adding 10 states to our target market area. We continue our efforts to
       expand sales and marketing in all states where we are located. For
       example, at the end of 1999 we had sales offices in 110 cities, compared
       to 68 sales offices at the end of 1998.

       The foregoing statements are forward-looking statements within the
       meaning of the Private Securities Litigation Reform Act of 1995 and the
       results of our actual expansion efforts may be materially different,
       depending on a variety of other factors, including:

       o     the availability of financing and regulatory approvals
       o     the number of potential customers in a target market
       o     the existence of strategic alliances or relationships
       o     technological, regulatory or other developments in our business
       o     changes in the competitive climate in which we operate
       o     the emergence of future opportunities

                                       16
<PAGE>

       COMPETITION

       WIRELINE COMPETITION. The communications services industry is highly
       competitive. We face intense competition from local exchange carriers,
       including the MegaBells (primarily U S WEST and SBC/Ameritech ) and GTE,
       which currently dominate their respective local telecommunications
       markets. Our long distance services also compete with the services of
       hundreds of other companies in the long distance marketplace. AT&T, MCI
       WorldCom and Sprint currently dominate the long distance market. Our
       local and long distance services also compete with the services of other
       competitive local exchange carriers in some markets. Other competitors
       may include cable television companies, competitive access providers,
       microwave and satellite carriers, wireless telecommunications providers,
       and private networks owned by large end-users. In addition, we compete
       with the MegaBells and other local exchange carriers, numerous direct
       marketers and telemarketers, equipment vendors and installers, and
       telecommunications management companies with respect to portions of our
       business. Many of our existing and potential competitors have financial
       and other resources far greater than our own.

       We believe that the distinction between the local and long distance
       markets is eroding, and other competitors will begin to offer integrated
       communications services similar to our own. For example, each of AT&T,
       MCI WorldCom and Sprint has begun to offer local telecommunications
       services using their own network facilities, network elements obtained
       from incumbent local exchange carriers, or the facilities of other
       parties. AT&T has announced its plan to enter into exclusive arrangements
       with cable operators to use their local network facilities for
       telecommunications services. These and other companies currently hold
       state regulatory certificates to offer local and long distance service in
       Iowa, Illinois and other states within our target markets. We cannot
       assure you that these firms, and others, will not enter the markets or
       target the small and medium sized businesses where we focus our sales
       efforts.

       A continuing trend toward business combinations and strategic alliances
       in the telecommunications industry may strengthen our competitors. For
       example, Southwestern Bell acquired Ameritech in October 1999, WorldCom
       acquired MCI in September 1998 and AT&T acquired Teleport Communications
       Group Inc. in July 1998 and Tele-Communications, Inc. in March 1999. In
       addition, merger plans have been announced by U S West and Qwest
       Communications, by Bell Atlantic and GTE and by MCI WorldCom and Sprint.
       Southwestern Bell and Williams Communications, Inc., a long distance
       company, have announced a strategic alliance to supply services to each
       other. These or other alliances or combinations between our competitors
       could put us at a significant competitive disadvantage.

       We depend on incumbent local exchange carriers, primarily the MegaBells,
       to provide access service for the origination and termination of most of
       our toll long distance traffic and interexchange private lines.
       Historically, charges for such access service made up a significant
       percentage of the overall cost of providing long distance service. The
       FCC and various states are considering changes to access charge rate
       levels and related issues involving support for universal service and
       other public policy objectives. The impact of these changes on us and our
       competitors is not yet clear. We could be adversely affected if we do not
       experience access cost reductions proportionally equivalent to those of
       our competitors, if our competitors receive a disproportionate share of
       universal service revenues, or if regulation of incumbent local exchange
       carriers' access services is reduced. As long as new Internet-based
       competitors continue to be exempt from these charges, they could enjoy a
       significant cost advantage in this area.

                                       17
<PAGE>

       The Telecommunications Act of 1996 requires payments by each carrier that
       terminates local traffic to another carrier. This system of payments is
       referred to as reciprocal compensation. Because a number of our customers
       typically receive more calls than they make, we expect to receive more
       reciprocal compensation than we pay for calls which originate on our
       network. As a result of developments in the regulatory environment and
       trends in the industry, we expect that the revenue we receive from
       reciprocal compensation (net of reciprocal compensation payments we make)
       will decline in the future.

       Some MegaBells have disputed payments for reciprocal compensation that
       they believe are the result of their customers' calls to internet service
       providers (ISPs), contending that this traffic is outside the scope of
       existing interconnection agreements. On February 26, 1999, the FCC issued
       a declaratory ruling and Notice of Proposed Rulemaking holding that
       ISP-bound traffic is largely interstate in nature, and that the FCC
       therefore has jurisidiction over compensation for that traffic. Pursuant
       to the Notice of Proposed Rulemaking, the FCC will consider what rules it
       should adopt to govern compensation for this traffic. Comments have been
       filed in that proceeding, but no decision has been made by the FCC. The
       FCC also determined in its February 26, 1999 declaratory ruling that no
       federal rule governed such compensation and that, in the absence of a
       federal rule, states were free to determine that this traffic should be
       treated as local traffic for purposes of existing interconnection
       agreements. Of the 28 state commissions that have considered the issue
       since the FCC's order, all but 4 have required carriers to compensate
       each other for terminating ISP-bound traffic. Court appeals on these
       issues remain pending in some states.

       The FCC's order was appealed to the United States Court of Appeals for
       the District of Columbia Circuit, which issued a decision on March 24,
       2000 vacating the order. The Court stated that the FCC had not adequately
       explained its conclusion that calls to ISPs should not be treated as
       "local" traffic. We view this decision as favorable but the court's
       direction to the FCC to re-examine the issue will likely result in
       further delay in the resolution of pending compensation disputes, and
       there can be no assurance about the ultimate outcome of these
       proceedings. We cannot predict the effect of the FCC's pending
       rulemaking, or an order on remand from the District of Columbia Circuit,
       or any future appeals, on existing state decisions or future compensation
       levels. In light of these orders, state commissions may, in the context
       of existing agreements, reconsider or modify their+ decisions about what
       compensation is applicable. Such decisions could include repayment of
       past reciprocal compensation for ISP-bound traffic.

       Upon expiration of existing interconnection agreements, new agreements
       must be negotiated. Those agreements may address compensation for
       ISP-bound traffic, or such compensation may be addressed in other ways.
       It is possible that rates of compensation for ISP-bound traffic will be
       lower in these new agreements than under our existing agreements.

       Recently, a U.S. District Court in Wisconsin dismissed several appeals of
       state commission decisions involving, among other issues, the obligation
       to pay reciprocal compensation. The Court dismissed the appeals in light
       of recent U.S. Supreme Court decisions which sought to clarify when
       states may be sued in the U.S. courts. Based on a reading of those
       decisions, the U.S. District Court determined the Wisconsin Public
       Service Commission may not be sued in federal court in connection with
       the Commission's enforcement of interconnection agreements. The decisions
       have been appealed to the U.S. Court of Appeals for the Seventh Circuit.
       If the ruling of the U.S. District Court in Wisconsin is upheld, it would
       raise serious questions concerning how state commission action approving
       and enforcing interconnection agreements may be reviewed.

       We also depend on incumbent local exchange carriers, primarily the
       MegaBells, to provide our local telephone service through access to local
       communications network elements, termination

                                       18
<PAGE>

       service or local central office switching, or through wholesale purchase
       of the local telephone services of such carriers that we then resell to
       end users. Any successful effort by the incumbent local exchange carriers
       to deny or substantially limit our access to their network elements or
       wholesale services would have a material adverse effect on our ability to
       provide local telephone services. Although the Telecommunications Act of
       1996 imposes interconnection obligations on incumbent local exchange
       carriers, we cannot assure you that we will be able to obtain access to
       their communications network elements or services at rates, and on terms
       and conditions, that will permit us to offer local services at rates that
       are both profitable and competitive.

       The Telecommunications Act also contains provisions that affect various
       "universal service" programs designed to promote the availability of
       telecommunications services in various areas and for various market
       segments. These programs provide assistance to schools, libraries, rural
       health care providers, low-income subscribers, and subscribers living in
       high-cost areas, for their purchase of various telecommunications related
       services. These programs are funded through charges on providers of
       interstate telecommunications services, although the amounts contributed
       may be recovered through charges to our end users. The current
       contribution rate is 5.877% of international and interstate end-user
       telecommunications revenue.

       We are unable to specify the amount of universal service contributions we
       will be required to make in future years, or the extent of universal
       service programs that will be in existence for areas served by rural and
       non-rural telephone companies. Changes to universal service programs may
       increase or decrease the level of support provided to various programs,
       and may change the level of contribution which telecommunications
       providers such as McLeodUSA are required to make.

       The Telecommunications Act of 1996 also provides the incumbent local
       exchange carriers with new competitive opportunities. For example, under
       the Telecommunications Act of 1996, the MegaBells will, upon the
       satisfaction of various conditions, be able to offer interLATA long
       distance services to local telephone service customers in their regions.
       The MegaBells are actively engaged in proceedings and other activities by
       which they are seeking to satisfy those conditions. We believe that we
       have advantages over the incumbent local exchange carriers in providing
       our telecommunications services, including our management's prior
       experience in the competitive telecommunications industry and our
       emphasis on marketing (primarily using a direct sales force for sales to
       business customers and telemarketing for sales to residential customers)
       and on responsive customer service. However, the MegaBells may be allowed
       to offer interLATA long distance services before their local exchange
       markets are completely open to competition. Under such circumstances in
       particular, additional competition from the incumbent local exchange
       carriers could have a material adverse effect on our business, results of
       operations and financial condition.

       Competition for local and special access telecommunications services is
       based principally on price, quality, network reliability, customer
       service and service features. We believe that our management expertise
       and emphasis on customer service allows us to compete effectively with
       the incumbent local exchange carriers in providing these services. In
       addition, our fiber optic communications networks provide both diverse
       access routing and redundant electronics, which design features are not
       widely deployed by the local exchange carriers' networks. However, if the
       incumbent local exchange carriers, particularly the MegaBells, charge
       alternative providers such as McLeodUSA unreasonably high fees for
       interconnection to their networks, significantly lower their rates for
       access and private line services, or offer significant volume and term
       discount pricing options to their customers, we could be at a significant
       competitive disadvantage.

                                       19
<PAGE>

       In the future, an important element of providing competitive services may
       be the ability to offer customers high-speed broadband local connections.
       The FCC is considering a proposal that would allow incumbent local
       exchange carriers to offer these and other services through separate
       affiliates, in which case their network elements for providing these
       services would not need to be made available to us or other competitors.
       AT&T has announced that it is entering into arrangements with cable
       companies for the exclusive use of their local networks for broadband
       telecommunications and several cable companies are offering broadband
       Internet access over their network facilities. As of March 17, 2000, we
       offer such broadband local access to our customers only in limited areas
       in Cedar Rapids, Iowa, southwest Minnesota and southeast South Dakota. If
       we are unable to meet future demands of our customers for broadband local
       access or other services on a timely basis at competitive rates, we may
       be at a significant competitive disadvantage.

       For more information about the regulatory environment in which we
       operate, SEE "--REGULATION."

       WIRELESS COMPETITION. The wireless telecommunications industry is
       experiencing significant technological change, as evidenced by the
       increasing pace of improvements in the capacity and quality of digital
       technology, the growth of wireless data, shorter cycles for new products
       and enhancements, and changes in consumer preferences and expectations.
       We believe the market for wireless telecommunications services is likely
       to expand significantly as equipment costs and service rates continue to
       decline, equipment becomes more convenient and functional, wireless
       services become more diverse, technology improves and new competitors
       enter the market. We also believe providers of wireless services
       increasingly will offer, in addition to products that supplement a
       customer's wireline communications like cellular telephone services in
       use today, wireline replacement products that may result in wireless
       services becoming the customer's primary mode of communication.
       Accordingly, we expect competition in the wireless telecommunications
       business to be dynamic and intense as a result of the entrance of new
       competitors and the development of new technologies, products and
       services. We anticipate that in the future there could potentially be
       eight wireless competitors in each of our proposed PCS markets: two
       existing cellular providers, five other PCS providers and Nextel
       Communications Inc., an ESMR provider. There are over ten principal
       cellular providers and over 20 principal PCS licensees in our proposed
       PCS markets. In addition, we could face competition from mobile satellite
       services which are under development.

       Competition with these or other providers of wireless telecommunications
       services may be intense. Many of our potential wireless competitors have
       substantially greater financial, technical, marketing, sales,
       manufacturing and distribution resources than our own and have
       significantly greater experience than us in testing new or improved
       wireless telecommunications products and services. Some competitors,
       particularly LMDS carriers, are expected to market other services, such
       as cable television access, with their wireless telecommunications
       service offerings. We do not currently offer wireless cable television
       access. In addition, several of our potential wireless competitors are
       operating or planning to operate, through joint ventures and affiliation
       arrangements, wireless telecommunications systems that encompass most of
       the United States. We cannot assure you that we will be able to compete
       successfully in this environment or that new technologies and products
       that are more commercially effective than our technologies and products
       will not be developed. SEE "--WIRELESS SERVICES."

       REGULATION

       OVERVIEW. Our services are subject to federal, state and local
       regulation. The FCC has jurisdiction over our facilities and services to
       the extent they are used to provide, originate or terminate interstate or
       international common carrier communications. State regulatory

                                       20
<PAGE>

       commissions retain jurisdiction over the same facilities and services to
       the extent they are used to originate or terminate intrastate common
       carrier communications. Local governments may require us to obtain
       licenses, permits or franchises regulating use of public rights-of-way
       necessary to install and operate our networks. In addition, the
       licensing, construction, operation, sale and interconnection arrangements
       of wireless telecommunications systems are regulated to varying degrees
       by the FCC. The construction and operation of wireless systems also may
       be subject to state and local regulation.

       Through our subsidiaries, we hold various federal and state regulatory
       authorizations. We often join other industry members in seeking
       regulatory reform at the federal and state levels to open additional
       telecommunications markets to competition.

       Through our wholly owned subsidiary McLeodUSA Network Services, we
       provide competitive access services as a private carrier on a
       non-regulated basis. In general, a private carrier is one that provides
       service to customers on an individually negotiated contractual basis, as
       opposed to a common carrier that provides service to the public on the
       basis of generally available rates, terms and conditions. We believe that
       McLeodUSA Network Services' private carrier status is consistent with
       applicable federal and state laws, as well as regulatory decisions
       interpreting and implementing those laws. Should such laws and/or
       regulatory interpretations change in the future to reclassify McLeodUSA
       Network Services' regulatory status, we believe that compliance with such
       reclassification would not have a material adverse effect on us.

       Through our wholly owned subsidiaries, we are also subject to federal and
       state regulatory requirements, including, in some states, bonding
       requirements, due to our direct marketing, telemarketing, fund-raising
       activities and sale of prepaid calling cards.

       FEDERAL REGULATION. The FCC classifies us as a non-dominant carrier. As a
       non-dominant carrier, our interstate and international services are not
       subject to material federal regulation, although we file tariffs with the
       FCC for our common carrier services. The FCC also imposes prior approval
       requirements on transfers of control and assignments of radio licenses
       and operating authorizations. The FCC has the authority to condition,
       modify, cancel, terminate or revoke such licenses and authorizations for
       failure to comply with federal laws or the rules, regulations and
       policies of the FCC. The FCC may also impose fines or other penalties for
       such violations. While we believe we are in compliance with applicable
       laws and regulations, we cannot assure you that the FCC or third parties
       will not raise issues with regard to our compliance.

       The FCC's role with respect to local telephone competition arises
       principally from the Telecommunications Act of 1996, which became
       effective February 8, 1996. The Telecommunications Act of 1996 preempts
       state and local laws to the extent that they prevent competitive entry
       into the provision of any telecommunications service and gives the FCC
       jurisdiction over important issues related to local competition. However,
       state and local governments retain authority over significant aspects of
       the provision of local telecommunications. The Telecommunications Act of
       1996 imposes a variety of new duties on local exchange carriers,
       including non-incumbent local exchange carriers like McLeodUSA, in order
       to promote competition in local exchange and access services. These
       duties include requirements to:

         o    complete calls originated by competing carriers on a reciprocal
              basis
         o    permit resale of services
         o    permit users to retain their telephone numbers when
              changing carriers
         o    provide competing carriers access to poles, ducts, conduits
              and
         o    rights-of-way at regulated prices

                                       21
<PAGE>

       Incumbent local exchange carriers are also subject to additional
       requirements. These duties include obligations of the incumbent local
       exchange carriers to:

         o    interconnect their networks with competitors
         o    offer collocation of competitors' equipment at their premises
         o    make available elements of their networks (including network
              facilities, features and capabilities) on non-discriminatory,
              cost-based terms
         o    offer wholesale versions of their retail services for resale at
              discounted rates

       Collectively, these requirements recognize that local exchange
       competition is dependent upon cost-based and non-discriminatory
       interconnection with and use of incumbent local exchange carrier
       networks. Failure to achieve such interconnection arrangements could have
       an adverse impact on the ability of McLeodUSA or other entities to
       provide competitive local exchange services. Under the Telecommunications
       Act of 1996, incumbent local exchange carriers are required to negotiate
       in good faith with carriers requesting any or all of the above
       arrangements. In addition, in the Interconnection Decision and related
       actions the FCC has adopted more specific rules to implement these
       requirements. The Interconnection Decision has been the subject of
       significant legal dispute. In January 1999, the U.S. Supreme Court
       rejected challenges to the Interconnection Decision and affirmed the
       authority of the FCC to establish rules governing interconnection. Other
       challenges to the Interconnection Decision and related rules remain
       pending in various courts. We believe that additional disputes regarding
       the Interconnection Decision and other related FCC actions are likely.

       The Telecommunications Act of 1996 also eliminates previous prohibitions
       on the provision of interLATA long distance services by the MegaBells and
       the general telephone operating companies. The MegaBells are permitted to
       provide interLATA long distance service outside those states in which
       they provide local exchange service ("out-of- region long distance
       service") upon receipt of any necessary state and/or federal regulatory
       approvals that are otherwise applicable to the provision of intrastate
       and/or interstate long distance service. Under the Telecommunications Act
       of 1996, the MegaBells will be allowed to provide long distance service
       within the regions in which they also provide local exchange service
       ("in-region service") on a state-by-state basis upon specific approval of
       the FCC and satisfaction of other conditions, including a checklist of
       interconnection requirements intended to open local telephone markets to
       competition. The FCC has found that only Bell Atlantic's operations in
       the state of New York have met these interconnection requirements. The
       FCC is currently considering the application of Southwestern Bell for its
       Texas operations, which application has been endorsed by the Texas Public
       Utility Commission. If the FCC does permit U S WEST or SBC/Ameritech to
       provide long distance service in their local service regions before they
       meet our local interconnection needs, they would be able to offer
       integrated local and long distance services and could have a significant
       competitive advantage in marketing those services to their existing local
       customers.

       The Telecommunications Act of 1996 imposes restrictions on the MegaBells
       in connection with their entry into the interLATA long distance services
       market. Among other things, for the first three years (unless extended by
       the FCC) the MegaBells must pursue such activities only through separate
       subsidiaries with separate books and records, financing, management and
       employees. In addition, affiliate transactions with these subsidiaries
       must be conducted on a non-discriminatory basis.

       In the future, an important element of providing competitive services may
       be the ability to offer customers high-speed broadband local connections.
       The FCC is considering a proposal that would allow incumbent local
       exchange carriers to offer these and other services through separate
       affiliates, in which case their network elements for providing these
       services would not

                                       22
<PAGE>

       need to be made available to us or other competitors. AT&T has announced
       that it is entering into arrangements with cable companies for the
       exclusive use of their local networks for broadband telecommunications
       and several cable companies are offering broadband Internet access over
       their network facilities. As of March 17, 2000, we offer such broadband
       local access to our customers only in limited areas in Cedar Rapids,
       Iowa, southwest Minnesota and southeast South Dakota. If we are unable to
       meet future demands of our customers for broadband local access or other
       services on a timely basis at competitive rates, we may be at a
       significant competitive disadvantage.

       The FCC also regulates the interstate access rates charged by incumbent
       local exchange carriers for the origination and termination of interstate
       long distance traffic. Those access rates make up a significant portion
       of the cost of providing long distance service. The FCC has implemented
       changes to its interstate access rules that result in restructuring of
       the access charge system and changes in access charge rate levels. These
       and related actions may reduce access rates, and hence the cost of
       providing long distance service, especially to business customers. The
       impact of these new changes will not be known until they are fully
       implemented over the next several years. In a related proceeding, the FCC
       has adopted changes to the methodology by which access has been used in
       part to subsidize universal telephone service and other public policy
       goals. Telecommunications providers like McLeodUSA pay a fee calculated
       as a percentage of their revenues to support these goals. The full
       implications of these charges also remain uncertain and subject to
       change.

       In addition, the FCC and the states are considering related questions
       regarding the applicability of access charge and universal service fees
       to Internet service providers. Currently, Internet service providers are
       not subject to these expenses. Many incumbent local exchange carriers and
       other parties have argued that this exemption unfairly advantages
       Internet service providers, particularly when they provide data, voice or
       other services in direct competition with conventional telecommunications
       providers.

       In connection with its interconnection decisions, the FCC has granted
       local exchange carriers additional flexibility in pricing their
       interstate, special and switched access services on a central office
       specific basis. Under this pricing scheme, local exchange carriers may
       establish pricing zones based on access traffic density and charge
       different prices for central offices in each zone. We anticipate that the
       FCC will grant local exchange carriers increasing pricing flexibility as
       the number of interconnection agreements and competitors increases. The
       potential impact of such pricing flexibility on McLeodUSA and other
       competitors is unclear at this time.

       With the exception of an alpha fixed wireless trial in Illinois, we do
       not currently offer PCS services. However, we do own a minority interest
       in a cellular telephone partnership serving parts of east central
       Illinois. We own 27 "D" and "E" block frequency PCS licenses in 25
       markets covering areas of Iowa, Illinois, Minnesota, Nebraska and South
       Dakota. Our PCS licenses encompass approximately 110,000 square miles and
       a population of approximately 6.9 million. We own four WCS licenses in
       the Major Economic Areas of Milwaukee, Wisconsin, Minneapolis/St. Paul,
       Minnesota, Des Moines-Quad Cities, Iowa/Illinois and Omaha, Nebraska. We
       also own 13 "A" and "B" block LMDS licenses. We are evaluating proposed
       wireless systems and expect to utilize our PCS licenses as part of a
       network or a strategic combination to add PCS or other wireless services
       to our integrated communications services. We intend to use the frequency
       blocks covered by our WCS licenses to provide fixed wireless services.
       All wireless licenses are subject to FCC regulation.

                                       23
<PAGE>

       All PCS licenses are awarded for a ten-year period, at the end of which,
       absent prior revocation or a violation of the FCC's rules by the
       licensee, they will be renewed. As a PCS licensee, we are subject to
       "build-out" requirements which require that specified levels of service
       be available by specified times. If we fail to meet these coverage
       requirements, we may be subject to forfeiture of our PCS licenses.

       PCS licenses permit use of radio spectrum that may be currently occupied
       by fixed microwave systems. The existing licensees of such systems retain
       the right to continue to operate their systems until 2005. To secure a
       sufficient amount of unencumbered spectrum to operate a PCS system
       efficiently, we may need to relocate many of these existing licensees. In
       an effort to balance the competing interests of existing microwave users
       and newly authorized PCS licensees, the FCC has adopted a transition plan
       to relocate such microwave operators to other spectrum blocks. This
       transition plan allows most microwave users to operate in the PCS
       spectrum for a one-year voluntary negotiation period and an additional
       one-year mandatory negotiation period. For public safety entities
       dedicating a majority of their system communications for police, fire or
       emergency medical services operations, the voluntary negotiation period
       is three years. Parties unable to reach agreement within these time
       periods may refer the matter to the FCC for resolution, but the existing
       microwave user is permitted to continue its operations until final FCC
       resolution of the matter. We estimate that we would be required to pay to
       relocate approximately 50 microwave links operated by 19 different
       microwave licensees in order to develop a PCS system in our target
       wireless markets. In addition, the FCC has imposed new universal service
       requirements on wireless carriers, as well as new number portability and
       enhanced "911" obligations on commercial mobile radio service providers
       including PCS carriers, which may require us to invest in advanced
       technology over the next few years.

       Wireless systems are also subject to Federal Aviation Administration
       regulations respecting the location, lighting and construction of
       transmitter towers and antennas and may be subject to regulation under
       the National Environmental Policy Act and the environmental regulations
       of the FCC. Wireless providers also must satisfy a variety of FCC
       requirements relating to technical and reporting matters. One such
       requirement is the coordination of proposed frequency usage between
       adjacent systems. In addition, the height and power of base station
       transmitting facilities and the type of signals they emit must fall
       within specified parameters.

       The Communications Act of 1934 requires the FCC's prior approval of the
       assignment or transfer of control of a PCS or other radio license. In
       addition, the FCC has established transfer disclosure requirements that
       require licensees who transfer control of or assign a PCS license within
       the first three years to file associated contracts for sale, option
       agreements, management agreements or other documents disclosing the total
       consideration that the applicant would receive in return for the transfer
       or assignment of its license. Non- controlling interests in an entity
       that holds a PCS license or PCS system generally may be bought or sold by
       U.S. companies or individuals without prior FCC approval, but subsequent
       notice must be provided to the FCC.

       The Telecommunications Act of 1996 imposes restrictions on investment in
       McLeodUSA by foreign persons or corporations arising from our ownership
       of common carrier radio licenses. However, these restrictions generally
       do not apply to investment by nationals of member countries of the World
       Trade Organization. We have no knowledge of any ownership by or
       affiliation with foreign persons or telecommunications carriers in
       violation of the Communications Act or the FCC's rules.

                                       24
<PAGE>

       Through our wholly owned subsidiaries, we are also subject to rules
       governing telemarketing that have been promulgated by both the FCC and
       the Federal Trade Commission. The FCC and FTC telemarketing rules
       prohibit telemarketers from engaging in deceptive telemarketing practices
       and require that telemarketers make specified disclosures. For example,
       these telemarketing rules:

       o      prohibit the use of autodialers that employ prerecorded voice
              messages without the prior express consent of the dialed party
       o      require telemarketers to disclose clear and conspicuous
              information concerning quality, cost and refunds to a customer
              before a customer makes a purchase
       o      require telemarketers to compile lists of individuals who desire
              not to be contacted
       o      limit telemarketers to calling residences between the hours of
              8:00 a.m. and 9:00 p.m.
       o      require telemarketers to explicitly identify the seller and state
              the purpose of the call
       o      prohibit product misrepresentations

       STATE REGULATION. We provide intrastate common carrier services and are
       subject to various state laws and regulations. Most public utility
       commissions subject providers such as McLeodUSA to some form of
       certification requirement, which requires providers to obtain authority
       from the state public utility commission before initiating service. In
       most states, we are also required to file tariffs setting forth the
       terms, conditions and prices for services that are classified as
       intrastate. We are required to update or amend these tariffs when we
       adjust our rates or add new products, and are subject to various
       reporting and record-keeping requirements in these states.

       Many states also require prior approval for transfers of control of
       certified carriers, corporate reorganizations, acquisitions of
       telecommunications operations, assignment of carrier assets, carrier
       stock offerings and incurrence by carriers of significant debt
       obligations. Certificates of authority can generally be conditioned,
       modified, canceled, terminated or revoked by state regulatory authorities
       for failure to comply with state law or the rules, regulations and
       policies of state regulatory authorities. Fines or other penalties also
       may be imposed for such violations. State utility commissions or third
       parties could raise issues with regard to our compliance with applicable
       laws or regulations which could have a material adverse effect on our
       business, results of operations and financial condition.

       We hold certificates of authority to offer local services using our own
       communications network facilities in Iowa, Illinois, Wisconsin,
       Minnesota, North Dakota, South Dakota, Wyoming, Idaho, Indiana, Missouri,
       Nebraska, Michigan, Colorado, Washington, Oregon, Kansas, Ohio, Montana
       and Utah and to resell the local services of the MegaBells in most of the
       markets they serve in those states. Applications are pending in New
       Mexico and Arizona. In addition, we are certificated to resell the local
       services of the incumbent and to offer local services using our own
       network facilities in states in which our target markets are served by
       major independent local exchanges companies, including GTE and Sprint.
       SEE "-- EXPANSION OF SERVICES USING OUR OWN COMMUNICATIONS NETWORK
       FACILITIES."

                                       25
<PAGE>

       We are also authorized to offer long distance service in all 48 states in
       the continental United States. We have obtained authority to offer long
       distance service in such states, including states outside our target
       markets, because we believe this capability will enhance our ability to
       attract business customers that have offices outside of our target
       markets. We may also apply for authority to provide services in all
       MegaBell exchanges in our target market states and, in the future, in
       other states. While we expect and intend to obtain the necessary
       regulatory authority in each jurisdiction where we plan to operate, we
       cannot assure you that each respective agency will grant our request for
       authority.

       The Telecommunications Act of 1996 preserves the ability of states to
       impose reasonable terms and conditions on the provision of intrastate
       service and other related regulatory requirements. In the last several
       years, many states have enacted broad changes in their telecommunications
       laws that authorize the entry of competitive local exchange carriers and
       provide for new regulations to promote competition in local and other
       intrastate telecommunications services. The MegaBells have consistently
       promoted sweeping legislation that would if enacted severely limit or
       altogether eliminate state regulatory oversight of the MegaBells. As a
       general matter, we believe the states will play a key role in the
       development of local exchange competition. Consequently, we could face
       regulatory decisions that adversely affect our ability to compete in
       particular states.

       States also regulate the intrastate carrier access services of the
       incumbent local exchange carriers. We are required to pay access charges
       to originate and connect our intrastate long distance traffic. We could
       be adversely affected by high access charges, particularly to the extent
       that the incumbent local exchange carriers do not incur the same level of
       costs with respect to their own intrastate long distance services. In a
       related development, states also will be developing intrastate universal
       service charges parallel to the interstate universal service charges
       created by the FCC. For example, some incumbent local exchange carriers
       are proposing that states create funds that would be supported by
       potentially large payments by firms such as McLeodUSA based on their
       total intrastate revenues. Another state regulatory issue that could
       adversely affect our business is the approval by some state regulatory
       agencies of extended local area calling for incumbent local exchange
       carriers, converting otherwise competitive intrastate toll service to
       local service. Our business could be adversely affected by these or other
       developments.

       We believe that, as the degree of intrastate competition increases,
       states will offer the local exchange carriers increasing pricing
       flexibility. This flexibility may present the local exchange carriers
       with an opportunity to subsidize services that compete with our services
       with revenues generated from non-competitive services, allowing incumbent
       local exchange carriers to offer competitive services at prices below the
       cost of providing the service. We cannot predict the extent to which this
       may occur or its impact on our business.

       ICTC is subject to rate of return regulation by the Illinois Commerce
       Commission. Under such regulation, ICTC is allowed to earn up to a fixed
       rate of return on its equity. In the event that the Illinois Commerce
       Commission finds that ICTC has exceeded its authorized rate of return on
       equity, ICTC could be required to lower its customer rates or make
       refunds. While we believe ICTC will earn less than its authorized rate of
       return during the current monitoring period, we cannot assure you that
       the Illinois Commerce Commission will not, at some future date, find that
       ICTC has earned more than its authorized rate of return or that such a
       finding would not have a material adverse effect on us.

                                       26
<PAGE>

       In addition, a substantial proportion of ICTC's and Dakota
       Telecommunications' revenues are derived from access charges imposed on
       long distance carriers. Access charge rate structures and rate levels
       have been modified by recent regulatory changes, and further changes are
       possible. If such revisions result in a reduction of ICTC's and Dakota
       Telecommunications' revenues and gross margins, it could have a material
       adverse effect on us.

       Several of our subsidiaries also hold state and federal certificates and
       FCC licenses in connection with the operation of wireless
       telecommunications services and paging services.

       Through our wholly owned subsidiaries, we engage in various direct
       marketing, telemarketing and fund-raising activities. Most states have
       laws that govern these activities. In states that regulate such
       activities, several types of restriction have been imposed, either singly
       or in combination, including requirements to:

         o    register with state authorities
         o    post professional bonds
         o    file operational contracts with state authorities
         o    respect statutory waiting periods
         o    register employees with state authorities
         o    prohibit control over funds collected from such activities

       LOCAL GOVERNMENT AUTHORIZATIONS. We are required to obtain construction
       permits and licenses or franchises to install and expand our fiber optic
       communications networks using rights-of-way. Some local governments where
       we have installed or anticipate constructing networks are proposing and
       enacting ordinances regulating use of rights-of-way and imposing various
       fees in connection with such use. In some instances we have negotiated
       interim agreements to authorize installation of facilities pending
       resolution of the fee issue. In many markets, the local exchange carriers
       do not pay rights-of-way fees or pay fees that are substantially less
       than the fees we are required to pay. To the extent that competitors do
       not pay the same level of fees as us, we could be at a competitive
       disadvantage. We must also negotiate and enter into franchise agreements
       with local governments in order to operate our video services networks.
       We have franchises for our existing services, but will need additional
       franchises in order to expand into additional markets. If we fail to
       receive necessary permits or franchise agreements on commercially
       reasonable terms or are unable to obtain or maintain right-of-way
       authorization or license agreements, we could be materially adversely
       affected. If we lose a right-of-way, we could be required to remove our
       facilities from the right-of-way or abandon our network in place.

       RISK FACTORS

       In connection with the safe harbor provisions of the Private Securities
       Litigation Reform Act of 1995, set forth below are cautionary statements
       identifying important factors that could cause our actual results to
       differ materially from those projected in any forward-looking statements
       made by or on behalf of us, whether oral or written. We wish to ensure
       that any forward- looking statements are accompanied by meaningful
       cautionary statements in order to maximize to the fullest extent possible
       the protections of the safe harbor established in the Private Securities
       Litigation Reform Act of 1995. Accordingly, any such statements are
       qualified in their entirety by reference to, and are accompanied by, the
       following important factors that could cause our actual results to differ
       materially from those projected in our forward-looking statements.

       FLUCTUATIONS IN THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY MAKE IT
       MORE DIFFICULT FOR US TO RAISE CAPITAL.

                                       27
<PAGE>

       The market price of our Class A common stock is extremely volatile and
       has fluctuated over a wide range. These fluctuations may impair our
       ability to raise capital by offering equity securities. The market price
       may continue to fluctuate significantly in response to various factors,
       including:

         o   market conditions in the industry
         o   announcements and actions by competitors
         o   low trading volume
         o   quarterly variations in operating results or growth rates
         o   changes in estimates by securities analysts
         o   regulatory and judicial actions
         o   general economic conditions

       SEE "MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
       MATTERS--PRICE RANGE OF CLASS A COMMON STOCK."

       FAILURE TO RAISE NECESSARY CAPITAL COULD RESTRICT OUR ABILITY TO DEVELOP
       OUR NETWORK AND SERVICES AND ENGAGE IN STRATEGIC ACQUISITIONS.

       We need significant capital to continue to expand our operations,
       facilities, network and services. We cannot assure you that our capital
       resources will permit us to fund our planned network deployment and
       operations or achieve operating profitability. Failure to generate or
       raise sufficient funds may require us to delay or abandon some of our
       expansion plans or expenditures, which could harm our business and
       competitive position.

       As of January 7, 2000, based on our anticipated capital requirements and
       growth projections as of that date, which projections include the pending
       merger with Splitrock, we estimate that we will require approximately
       $2.5 billion through 2002 to fund our planned capital expenditures and
       operating expenses. This estimate includes the projected costs of:

          o   expanding our fiber optic communications network, including
              national and intra-city fiber optic networks
          o   adding voice and ATM switches
          o   expanding operations in existing and new markets
          o   developing wireless services
          o   funding general corporate expenses
          o   completing recent acquisitions
          o   constructing, acquiring, developing or improving
              telecommunications assets

       Our estimate of future capital requirements is a "forward-looking
       statement" within the meaning of the safe harbor provisions of the
       Private Securities Litigation Reform Act of 1995. The actual amount and
       timing of our future capital requirements may differ substantially from
       our estimate due to factors such as:

          o   strategic acquisition costs and effects of acquisitions on our
              business plan, capital requirements and growth projections
          o   unforeseen delays
          o   cost overruns
          o   engineering design changes
          o   changes in demand for our services
          o   regulatory, technological or competitive developments
          o   new opportunities

                                       28
<PAGE>

       We also expect to evaluate potential acquisitions, joint ventures and
       strategic alliances on an ongoing basis. We may require additional
       financing if we elect to pursue any of these opportunities.

       Our projected additional funding need is approximately $900 million
       through 2002 based on the difference between existing cash balances and
       our business plan, capital requirements and growth projections. This
       projected additional funding assumes that the Splitock 11 3/4% senior
       notes due 2008, which are redeemable by the holders upon a change of
       control, will remain outstanding at the completion of our acquisition of
       Splitrock. We may meet any additional capital needs by issuing additional
       debt or equity securities or borrowing funds from one or more lenders. We
       cannot assure you that we will have timely access to additional financing
       sources on acceptable terms. If we do not, we may not be able to expand
       our markets, operations, facilities, network and services through
       acquisitions as currently intended. SEE "MANAGEMENT'S DISCUSSION AND
       ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
       CAPITAL RESOURCES."

       WE EXPECT TO INCUR SIGNIFICANT LOSSES OVER THE NEXT SEVERAL YEARS.

       If we do not become profitable in the future, the value of our shares may
       fall and we could have difficulty obtaining funds to continue our
       operations. We have incurred net losses every year since we began
       operations. Since January 1, 1995, our net losses applicable to common
       stock have been as follows:

                  PERIOD                              AMOUNT
                  ------                              ------
                   1995                         $   11.3 million
                   1996                         $   22.3 million
                   1997                         $   79.9 million
                   1998                         $  124.9 million
                   1999                         $  238.0 million

       We expect to incur significant operating losses during the next several
       years while we develop our businesses, expand our fiber optic
       communications network and develop wireless services.

       WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES INTO OUR
       OPERATIONS, WHICH COULD SLOW OUR GROWTH.

       The integration of acquired companies into our operations involves a
       number of risks, including:

         o    difficulty integrating new operations and personnel
         o    diversion of management attention
         o    potential disruption of ongoing business inability to retain key
              personnel
         o    inability to successfully to incorporate new assets and rights
              into our service offerings
         o    inability to maintain uniform standards, controls, procedures and
              policies
         o    impairment of relationships with employees, customers or vendors

       Failure to overcome these risks or any other problems encountered in
       connection with acquisition transactions could slow our growth or lower
       the quality of our services, which could reduce customer demand.

       CONTINUED RAPID GROWTH OF OUR NETWORK, SERVICES AND SUBSCRIBERS COULD BE
       SLOWED IF WE CANNOT MANAGE OUR GROWTH.

                                       29
<PAGE>

       We have rapidly expanded and developed our network, services and
       subscribers. This has placed and will continue to place significant
       demands on our management, operational and financial systems and
       procedures and controls. We may not be able to manage our anticipated
       growth effectively, which would harm our business, results of operations
       and financial condition. Further expansion and development will depend on
       a number of factors, including:

          o   cooperation of the existing local telephone companies
          o   regulatory and governmental developments
          o   changes in the competitive climate in which we operate
          o   development of customer billing, order processing and network
              management systems
          o   availability of financing
          o   technological developments
          o   availability of rights-of-way, building access and antenna sites
          o   existence of strategic alliances or relationships
          o   emergence of future opportunities

       We will need to continue to improve our operational and financial systems
       and our procedures and controls as we grow. We must also develop, train
       and manage our employees.

       OUR HIGH LEVEL OF DEBT COULD LIMIT OUR FLEXIBILITY IN RESPONDING TO
       BUSINESS DEVELOPMENTS AND PUT US AT A COMPETITIVE DISADVANTAGE.

       We have substantial debt, which could adversely affect us in a number of
ways, including:

          o   limiting our ability to obtain necessary financing in the future
          o   limiting our flexibility to plan for, or react to, changes in our
              business
          o   requiring us to use a substantial portion of our cash flow from
              operations to pay debt rather than for other purposes, such as
              working capital or capital expenditures
          o   making us more highly leveraged than some of our competitors,
              which may place us at a competitive disadvantage
          o   making us more vulnerable to a downturn in our business

       As of December 31, 1999, we had $1.8 billion of long-term debt, $1.0
       billion of redeemable convertible preferred stock issued and $1.1 billion
       of stockholders' equity. At the closing of our pending merger with
       Splitrock, we will assume approximately $261.0 million of additional
       debt. As a result, we expect our fixed charges to exceed our earnings for
       the foreseeable future. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
       FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL
       RESOURCES."

       COVENANTS IN DEBT INSTRUMENTS RESTRICT OUR CAPACITY TO BORROW AND INVEST,
       WHICH COULD IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR OPERATIONS.

       The indentures governing the terms of our long-term debt impose operating
       and financial restrictions that limit our discretion on some business
       matters, which could make it more difficult for us to expand, finance our
       operations or engage in other business activities that may be in our
       interest. These restrictions limit or prohibit our ability to:

                                       30
<PAGE>

          o   incur additional debt
          o   pay dividends or make other distributions
          o   make investments or other restricted payments
          o   enter into sale and leaseback transactions
          o   pledge or mortgage assets
          o   enter into transactions with related persons
          o   sell assets
          o   consolidate, merge or sell all or substantially all of our assets

       If we fail to comply with these restrictions, all of our long-term debt
       could become immediately due and payable. SEE "MANAGEMENT'S DISCUSSION
       AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY
       AND CAPITAL RESOURCES."

       OUR ABILITY TO PAY CASH DIVIDENDS IS RESTRICTED.

       We have never paid any cash dividends on shares of our Class A common
       stock. We do not anticipate paying any cash dividends on shares of our
       Class A common stock for the foreseeable future. The indentures governing
       our debt prohibit us from paying such cash dividends. You should
       therefore not expect that cash dividends will be paid on shares of our
       Class A common stock. In addition, you should be aware that shares of our
       Series A preferred stock and Series B preferred stock carry rights to
       receive a cumulative dividend before any cash dividend may be paid on
       shares of our Class A common stock.

       OUR DEPENDENCE ON THE MEGABELLS TO PROVIDE MOST OF OUR COMMUNICATIONS
       SERVICES COULD MAKE IT HARDER FOR US TO OFFER OUR SERVICES AT A PROFIT.

       We depend on the MegaBells to provide most of our core local and some of
       our long distance services. Today, without using the communications
       facilities of these companies, we could not provide bundled local and
       long distance services to most of our customers. Because of this
       dependence, our communications services are highly susceptible to changes
       in the conditions for access to these facilities and we may therefore
       have difficulty offering our services at profitable and competitive
       rates.

       U S WEST and SBC/Ameritech are our primary suppliers of local lines to
       our customers and communications services that allow us to transfer and
       connect calls. Their communications facilities allow us to provide (1)
       local service, (2) long distance service and (3) private lines dedicated
       to our customers' use. If these or other companies deny or limit our
       access to their communications network elements or wholesale services, we
       may not be able to offer profitable communications services.

       Our plans to provide local service using our own communications network
       equipment also depend on the MegaBells. In order to interconnect our
       network equipment and other communications facilities to network elements
       controlled by the MegaBells, we must first negotiate and enter into
       interconnection agreements with them. Interconnection obligations imposed
       on the MegaBells by the Telecommunications Act of 1996 have been and
       continue to be subject to a variety of legal proceedings, which could
       affect our ability to obtain interconnection agreements on acceptable
       terms. We cannot assure you that we will succeed in obtaining
       interconnection agreements on terms that would permit us to offer local
       services using our own communications network facilities at profitable
       and competitive rates.

       ACTIONS BY MEGABELLS MAY MAKE IT MORE DIFFICULT FOR US TO OFFER OUR
       COMMUNICATIONS SERVICES.

                                       31
<PAGE>

       U S WEST has introduced several measures that may make it more difficult
       for us to offer our communications services. For example, in February
       1996, U S WEST filed tariffs and other notices with the public utility
       commissions in its fourteen-state service region to limit future Centrex
       access to its switches. Centrex access allows us to aggregate lines, have
       control over several characteristics of those lines and provide a set of
       standard features on them. We use U S WEST's Centrex services to provide
       most of our local communications services in U S WEST's service
       territories.

       In January 1997, U S WEST also proposed interconnection surcharges in
       several of the states in its service region, which would increase our
       costs of providing communications services in those states.

       We have challenged or are challenging these actions by U S WEST before
       the FCC or applicable state public utility commissions. We cannot assure
       you we will succeed in our challenges to these or other actions by U S
       WEST that would prevent or deter us from using U S WEST's Centrex service
       or communications network elements. If U S WEST successfully withdraws or
       limits our access to Centrex services in any jurisdiction, we may not be
       able to offer communications services in that jurisdiction, which could
       harm our business.

       In 2000 U S West pursued legislation in Colorado which would deregulate
       its pricing and services. This legislation failed in the Colorado Senate.
       However, the Colorado legislative session for 2000 has not ended. We
       anticipate that U S WEST will continue to pursue legislation in Colorado
       and also pursue legislation in other states within our target market area
       to reduce state regulatory oversight over our rates and operations. If
       adopted, these initiatives could make it more difficult for us to
       challenge U S WEST's actions in the future.

       SBC/Ameritech has also introduced measures that may make it more
       difficult for us to offer certain types of communications services. For
       example, in 1998 and 1999, Ameritech assessed extra special construction
       charges to install service for our customers when we leased a line from
       them. Ameritech did not assess comparable charges to retail customers
       that ordered service directly from SBC/Ameritech, which puts us at a
       disadvantage. We have challenged or are challenging these actions by
       SBC/Ameritech before the applicable state public utility commissions.
       Though we have succeeded in two such challenges, we cannot assure you we
       will succeed in our challenges to these or other actions by SBC/Ameritech
       that would prevent or deter us from competing with them. If SBC/Ameritech
       can successfully charge us extraordinary costs to install service when it
       does not assess the same charges to retail customers, we may not be able
       to offer communications services in that location, which could harm our
       business.

       COMPETITION IN THE COMMUNICATIONS SERVICES INDUSTRY COULD CAUSE US TO
       LOSE CUSTOMERS AND REVENUE AND MAKE IT MORE DIFFICULT FOR US TO ENTER NEW
       MARKETS.

       We face intense competition in all of our markets. This competition could
       result in loss of customers and lower revenue for us. It could also make
       it more difficult for us to enter new markets. Existing local telephone
       companies, including U S WEST, SBC/Ameritech and GTE, currently dominate
       their local telecommunications markets. Three major competitors, AT&T,
       MCI WorldCom and Sprint, dominate the long distance market. Hundreds of
       other companies also compete in the long distance marketplace. AT&T, MCI
       WorldCom and Sprint also offer local telecommunications services in many
       locations.

       Our local and long distance services also compete with the services of
       other communications services companies competing with the existing local
       telephone companies in some markets.

                                       32
<PAGE>

       Other competitors may include cable television companies, providers of
       communications network facilities dedicated to particular customers,
       microwave and satellite carriers, wireless telecommunications providers,
       private networks owned by large end-users, and telecommunications
       management companies.

       These and other firms may enter the markets where we focus our sales
       efforts, which may create downward pressure on the prices for our
       services and negatively impact our returns. Many of our existing and
       potential competitors have financial and other resources far greater than
       our own. In addition, the trend toward mergers and strategic alliances in
       the communications industry may strengthen some of our competitors and
       could put us at a significant competitive disadvantage.

       FOR ADDITIONAL INFORMATION, SEE "--COMPETITION."

       WE MAY NOT SUCCEED IN DEVELOPING OR MAKING A PROFIT FROM WIRELESS
       SERVICES.

       Our proposal to offer wireless services involves a high degree of risk
       and will impose significant demands on our management and financial
       resources. Developing wireless services may require us to, among other
       things, spend substantial time and money to acquire, build and test a
       wireless infrastructure and enter into roaming arrangements with wireless
       operators in other markets. We may not succeed in developing wireless
       services. Even if we spend substantial amounts to develop wireless
       services, we may not make a profit from wireless operations.

       Our ability to successfully offer wireless services will also depend on a
       number of factors beyond our control, including:

          o   changes in communications service rates charged by other companies
          o   changes in the supply and demand for wireless services due to
              competition with other wireline and wireless operators in the same
              geographic area
          o   changes in the federal, state or local regulatory requirements
              affecting the operation of wireless systems
          o   changes in wireless technologies that could render obsolete the
              technology and equipment we choose for our wireless services

       SEE "--PROPOSED WIRELESS SERVICES."

       COMPETITION IN THE WIRELESS TELECOMMUNICATIONS INDUSTRY COULD MAKE IT
       HARDER FOR US SUCCESSFULLY TO OFFER WIRELESS SERVICES.

       The wireless telecommunications industry is experiencing increasing
       competition and significant technological change. This will make it
       harder for us to gain a share of the wireless communications market. We
       expect up to eight wireless competitors in each of our target wireless
       markets. We could face additional competition from mobile satellite
       services.

       Many of our potential wireless competitors have financial and other
       resources far greater than our own and have more experience testing new
       or improved products and services. In addition, several wireless
       competitors operate or plan to operate wireless telecommunications
       systems that encompass most of the United States, which could give them a
       significant competitive advantage, particularly if we only offer regional
       wireless services. SEE "-- COMPETITION--WIRELESS COMPETITION."

                                       33
<PAGE>

       THE SUCCESS OF OUR COMMUNICATIONS SERVICES WILL DEPEND ON OUR ABILITY TO
       KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.

       Communications technology is changing rapidly. These changes influence
       the demand for our services. We need to be able to anticipate these
       changes and to develop new and enhanced products and services quickly
       enough for the changing market. This will determine whether we can
       continue to increase our revenues and number of subscribers and be
       competitive.

       COMPUTER SYSTEMS MAY MALFUNCTION AND INTERRUPT OUR SERVICES IF WE OR OUR
       SUPPLIERS EXPERIENCE RESIDUAL EFFECTS FROM YEAR 2000 ISSUES.

       We and our major suppliers of communications services and network
       elements rely greatly on computer systems and other technological
       devices. Although we are not aware of the existence of any material
       adverse effect on our computer systems at the occurrence of the
       millennial date change, there may be latent problems that have not yet
       become apparent. Any such problem could cause any or all of our systems
       or services to malfunction or fail. If we, our major vendors, our
       material service providers or our customers do not recognize or resolve
       any latent year 2000 problems in a timely manner, our business, results
       of operations and financial condition could be adversely affected.

       THE LOSS OF KEY PERSONNEL COULD WEAKEN OUR TECHNICAL AND OPERATIONAL
       EXPERTISE, DELAY OUR INTRODUCTION OF NEW SERVICES OR ENTRY INTO NEW
       MARKETS AND LOWER THE QUALITY OF OUR SERVICE.

       We may not be able to attract, develop, motivate and retain experienced
       and innovative personnel. There is intense competition for qualified
       personnel in our business. The loss of the services of key personnel, or
       the inability to attract additional qualified personnel, could cause us
       to make less successful strategic decisions, which could hinder the
       introduction of new services or the entry into new markets. We could also
       be less prepared for technological or marketing problems, which could
       reduce our ability to serve our customers and lower the quality of our
       services. As a result, our financial condition could worsen.

       Our future success depends on the continued employment of our senior
       management team, particularly Clark E. McLeod, our Chairman and Chief
       Executive Officer, Stephen C. Gray, our President and Chief Operating
       Officer and President and Chief Executive Officer - Local Services, and
       Roy A. Wilkens, our Chief Technology Officer and President and Chief
       Executive Officer - Data Services.

       FAILURE TO OBTAIN AND MAINTAIN NECESSARY PERMITS AND RIGHTS-OF-WAY COULD
       DELAY INSTALLATION OF OUR NETWORKS AND INTERFERE WITH OUR OPERATIONS.

       To obtain access to rights-of-way needed to install our fiber optic
       cable, we must reach agreements with state highway authorities, local
       governments, transit authorities, local telephone companies, other
       utilities, railroads, long distance carriers and other parties. The
       failure to obtain or maintain any rights-of-way could delay our planned
       network expansion, interfere with our operations and harm our business.
       For example, if we lose access to a right-of- way, we may need to spend
       significant sums to remove and relocate our facilities. SEE
       "--REGULATION--LOCAL GOVERNMENT AUTHORIZATIONS."

       GOVERNMENT REGULATION MAY INCREASE OUR COST OF PROVIDING SERVICES, SLOW
       OUR EXPANSION INTO NEW MARKETS AND SUBJECT OUR SERVICES TO ADDITIONAL
       COMPETITIVE

                                       34
<PAGE>

       PRESSURES.


       Our facilities and services are subject to federal, state and local
       regulation. The time and expense of complying with these regulations
       could slow down our expansion into new markets, increase our costs of
       providing services and subject them to additional competitive pressures.
       One of the primary purposes of the Telecommunications Act of 1996 was to
       open the local telephone services market to competition. While this has
       presented us with opportunities to enter local telephone markets, it also
       provides important benefits to the existing local telephone companies,
       such as the ability, under specified conditions, to provide out-of-region
       long distance service to customers in their regions. In addition, we need
       to obtain and maintain licenses, permits and other regulatory approvals
       in connection with some of our services. Any of the following could harm
       our business:

         o   failure to maintain proper federal and state tariffs
         o   failure to maintain proper state certifications
         o   failure to comply with federal, state or local laws and regulations
         o   failure to obtain and maintain required licenses and permits
         o   burdensome license or permit requirements to operate in public
             rights-of-way
         o   burdensome or adverse regulatory requirements
         o   delays in obtaining or maintaining required authorizations

       FOR ADDITIONAL INFORMATION, SEE "--REGULATION."

       OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT OWNERSHIP AND
       MAY HAVE DIFFERENT INTERESTS THAN THOSE OF OTHER STOCKHOLDERS.

       As of December 31, 1999, Alliant Energy Corporation, M/C Investors
       L.L.C., Media/Communications Partners III Limited Partnership, Richard
       and Gail Lumpkin and various trusts for the benefit of their family,
       Clark and Mary McLeod, and our directors and executive officers
       beneficially owned approximately 36.4% of the outstanding our Class A
       common stock. These stockholders may be able to control management policy
       and many corporate actions requiring a stockholder vote, including
       election of the board of directors. Conflicts of interest may arise
       between the interests of these stockholders and other stockholders. For
       example, the fact that these stockholders hold so much of our Class A
       common stock could make it more difficult for a third party to acquire
       us. You should expect these stockholders to resolve any conflicts in
       their favor.

       PREFERRED STOCKHOLDERS MAY HAVE COMPETING INTERESTS.

       Holders of our preferred stock have the ability to convert their shares
       into over 37 million shares of our Class A common stock. Potential
       conflicts of interest may arise between holders of our Class A common
       stock and holders of our preferred stock with respect to, among other
       things, the payment of dividends, conversion rights, asset dispositions
       or liquidation matters, and operation and financial decisions of our
       board of directors. In addition, the holders of our preferred stock have
       class voting rights on specified actions requiring stockholder approval.
       You should expect these stockholders to resolve any conflicts in their
       favor.

       SECONDARY SALES OF OUR CLASS A COMMON STOCK IN THE PUBLIC MARKET COULD
       ADVERSELY AFFECT ITS STOCK PRICE.

       The market price of our Class A common stock may fluctuate or decline
       significantly in the future as a consequence of sales by either existing
       holders of our Class A common stock or

                                       35
<PAGE>

       existing holders of our preferred stock who convert their shares into
       shares of Class A common stock.

                                       36
<PAGE>

       As of December 31, 1999, there were outstanding:

           o    157,587,012 million shares of our Class A common stock
           o    1,150,000 shares of our Series A preferred stock convertible
                into 9.9 million shares of our Class A common stock
           o    400,000 shares of our Series B and Series C preferred stock
                convertible into 27.4 million shares of our Class A common
                stock, all of which are held by three partnerships affiliated
                with Forstmann Little & Co.
           o    options to purchase 35,070,056 million shares of our Class A
                common stock o 52,672,934 million shares of our Class A common
                stock owned by Alliant Energy, M/C Investors,
                Media/Communications Partners III, Richard and Gail Lumpkin and
                various trusts for the benefit of their family, Clark and Mary
                McLeod, and the directors and executive officers of McLeodUSA,
                all of which are eligible for sale in the public market either
                in accordance with Rule 144 under the Securities Act of 1933 or
                otherwise.
           o    options held by Alliant Energy to purchase 2,601,376 shares of
                our Class B common stock convertible into 2,601,376 shares of
                our Class A common stock

       After consummation of the merger with Splitrock, an additional 30.6
       million shares of our Class A common stock issued to the former
       stockholders of Splitock will be outstanding, as well as options and
       warrants to purchase an additional 2.8 million shares of our Class A
       common stock. These options and warrants will be fully exercisable upon
       consummation of the acquisition.

       EMPLOYEES

       As of December 31, 1999, we employed a total of 7,650 full-time employees
       and 925 part-time employees. We believe that our future success will
       depend on our continued ability to attract and retain highly skilled and
       qualified employees. We believe that our relations with our employees are
       good.

       EXECUTIVE OFFICERS OF THE COMPANY

       The following is a list of our executive officers as of March 17, 2000,
       together with biographical summaries of their experience. The ages of the
       persons set forth below are as of December 31, 1999.
<TABLE>
<CAPTION>

                NAME                         AGE                   POSITION(S) WITH COMPANY
                ----                         ---                   ------------------------
<S>                                          <C>        <C>
       Clark E. McLeod                       53         Chairman, Chief Executive Officer and Director
       Richard A. Lumpkin                    64         Vice Chairman and Director
       Stephen C. Gray                       41         President and Chief Operating Officer; President
                                                        and Chief Executive Officer - Local Services;
                                                        Director
       Roy A. Wilkens                        56         Chief Technology Officer; Chief Executive
                                                        Officer and President - Data Services; Director
       Blake O. Fisher, Jr.                  55         Group Vice President - Chief Planning &
                                                        Development Officer;  Director
       J. Lyle Patrick                       47         Group Vice President - Finance & Accounting;
                                                          Chief Financial & Accounting Officer
       Arthur L. Christoffersen              53         Group Vice President - Publishing Services
       Randall Rings                         37         Vice President, General Counsel and Secretary
</TABLE>

                                       37
<PAGE>

       CLARK E. MCLEOD. Mr. McLeod founded McLeodUSA and has served as Chairman,
       Chief Executive Officer and a director since its inception in June 1991.
       His previous business venture, Teleconnect, an Iowa-based long distance
       telecommunications company, was founded in January 1980. Mr. McLeod
       served as Chairman and Chief Executive Officer of Teleconnect from
       January 1980 to December 1988, and from December 1988 to August 1990, he
       served as President of Telecom*USA, the successor to Teleconnect
       following its merger with SouthernNet, Inc. in December 1988. By 1990,
       Telecom*USA had become America's fourth largest long distance
       telecommunications company with nearly 6,000 employees. MCI purchased
       Telecom*USA in August 1990 for $1.25 billion.

       RICHARD A. LUMPKIN. Mr. Lumpkin has served as Vice Chairman and a
       director since September 1997. Mr. Lumpkin was elected as an officer and
       a director pursuant to the requirements of the CCI Merger Agreement. Mr.
       Lumpkin served as Chairman and Chief Executive Officer of Consolidated
       Communications Inc. from 1990 to September 24, 1997, the date CCI was
       acquired by McLeodUSA. He continues to serve as Chairman, Chief Executive
       Officer and President of Illinois Consolidated Telephone Company
       ("ICTC"), a wholly-owned subsidiary. From its formation in 1984 to 1990,
       Mr. Lumpkin served as President of CCI. From 1968 to 1990, Mr. Lumpkin
       held various executive positions at ICTC, including Vice President of
       Operations and Treasurer. He is a director of Ameren Corporation, an
       electric utility holding company, First Mid-Illinois Bancshares, Inc., a
       bank holding company, and its wholly-owned subsidiary First Mid-Illinois
       Bank & Trust, a bank. Mr. Lumpkin is Chairman of the Board of Illuminet
       Holdings, Inc., formerly USTN Holdings, Inc., a telecommunications
       company.

       STEPHEN C. GRAY. Mr. Gray serves as President and Chief Operating Officer
       of McLeodUSA and as President and Chief Executive Officer - Local
       Services. He has been a director since April 1993. Prior to joining
       McLeodUSA in 1992, Mr. Gray served from August 1990 to September 1992 as
       Vice President of Business Services at MCI, where he was responsible for
       MCI's local access strategy and for marketing and sales support of the
       Business Markets division. From February 1988 to August 1990, he served
       as Senior Vice President of National Accounts and Carrier Services for
       Telecom*USA, where his responsibilities included sales, marketing, key
       contract negotiations and strategic acquisitions and combinations. Before
       joining Telecom*USA, Mr. Gray held a variety of management positions with
       Williams Telecommunications Company, a long distance telephone company.

       ROY A. WILKENS. Mr. Wilkens serves as Chief Technology Officer of
       McLeodUSA and as President and Chief Executive Officer - Data Services,
       having joined the Company in January 2000. Mr. Wilkens has served as a
       director of McLeodUSA since June 1999. Mr. Wilkens was President of the
       Williams Pipeline Company when he founded WilTel Network Services as an
       operating unit of the Williams Companies, Inc., in 1985. He was
       founder/Chief Executive Officer of WilTel Network Services from 1985 to
       1997. In 1995, WilTel Network Services was acquired by LDDS
       Communications, which now operates under the name WorldCom. Mr. Wilkens
       served as Vice Chairman of WorldCom until his retirement in 1997. In
       1992, Mr. Wilkens was appointed by President George Bush to the National
       Security Telecommunications Advisory Council. He also has served as
       chairman of both the Competitive Telecommunications Association (CompTel)
       and the National Telecommunications Network. Mr. Wilkens is a director of
       Splitrock Services, Inc., Williams Communications Group, Orillion
       Corportion, Inc., UniDial Inc., TMNG, Inc. and Tachion Networks, Inc.

                                       38
<PAGE>

       BLAKE O. FISHER, JR. Mr. Fisher serves as Group Vice President - Chief
       Planning & Development Officer and has served as a director since October
       1996. Mr. Fisher previously served in various executive positions at the
       Company including Regional President - Western Region, Executive Vice
       President, Corporate Administration and Chief Financial Officer and as
       Treasurer, having joined the Company in February 1996. He served as
       Executive Vice President and Chief Financial Officer of IES, a
       diversified electric utility holding company, from 1991 to 1996. Mr.
       Fisher served as one of IES' nominees on our Board from April 1993 to
       February 1996. Mr. Fisher also served as President of IES Utilities Inc.
       from February 1995 to February 1996. Prior to joining IES, Mr. Fisher
       held a variety of management positions with Consumers Power Company, an
       electric utility, including Vice President of Finance and Treasurer.

       J. LYLE PATRICK. Mr. Patrick was named Group Vice President and Chief
       Financial Officer in September 1998. Mr. Patrick served as Executive Vice
       President of Public Policy and Accounting from September 1997 to
       September 1998 with responsibility for financial, billing and other
       administrative functions of McLeodUSA, as well as directing regulatory
       and legislative efforts with various state and national agencies. From
       1988 until September 1997, Mr. Patrick was Vice President and Chief
       Financial Officer of Consolidated Communications Inc. Mr. Patrick is a
       Certified Public Accountant and was a partner with Arthur Andersen LLP
       for the 14 years prior to his tenure with CCI. Mr. Patrick is a past
       Chairman of the CompTel Board of Directors, the national competitive
       telecommunications association. He is a past Chairman of the Illinois
       Telecommunications Association Board of Directors, and has served on
       various committees as well as the Board of Directors of the United States
       Telephone Association.

       ARTHUR L. CHRISTOFFERSEN. Mr. Christoffersen serves as Group Vice
       President - Publishing Services. He joined the Company in September 1996
       when McLeodUSA acquired McLeodUSA Publishing. Mr. Christoffersen served
       as Chairman, President and Chief Executive Officer of McLeodUSA
       Publishing from November 1990, the date Mr. Christoffersen and other
       investors acquired McLeodUSA Publishing from MCI, and has continued to
       serve in that capacity following the acquisition of McLeodUSA Publishing
       by McLeodUSA. From December 1987 to August 1990, Mr. Christoffersen
       served as Executive Vice President and Chief Financial Officer of
       Teleconnect and its successor, Telecom*USA. From 1975 to 1987, Mr.
       Christoffersen held a variety of management positions, including
       Executive Vice President of Life Investors, Inc., a diversified financial
       services company.

       RANDALL RINGS. Mr. Rings has served as Vice President, Secretary and
       General Counsel of McLeodUSA since March 1998. From May 1996 to March
       1998, he served as General Counsel of McLeodUSA Publishing, where he was
       responsible for its legal, legislative and regulatory affairs. Prior to
       1996, Mr. Rings served as an Associate Attorney at March & McMillan,
       P.C., with a diverse legal practice which included business planning,
       commercial litigation, employment and environmental law, and
       representation of electric and telephone cooperatives. From November 1988
       to June 1992, he served as Corporate Counsel to the Association of
       Illinois Electric Cooperatives, where he acted as its chief legal officer
       and advised electric and telephone cooperatives throughout Illinois on
       corporate, tax, employment and other legal matters.

       ITEM 2.  PROPERTIES.

       We own approximately 314 acres of land in southern Cedar Rapids, Iowa on
       which we have developed an office complex known as McLeodUSA Technology
       Park. Our headquarters buildings consist of a one-story, 160,000 square
       foot office building, a two-story, 320,000 square foot office building
       which also houses some of our telephone switching and computer equipment,
       and a 36,000 square foot maintenance building and warehouse. The total
       cost of

                                       39
<PAGE>

       the construction of our new headquarters buildings was approximately
       $35.6 million. We also own a 60,000 square foot office building in
       Mattoon, Illinois. In addition, we own 88 acres of undeveloped farm and
       forest land in southern Cedar Rapids, Iowa.

       We occupy 115,000 square feet of office space at our former headquarters
       in Cedar Rapids, Iowa, under leases expiring in March 2001 and 2005, and
       approximately 33,000 square feet of other office space in downtown Cedar
       Rapids under a lease expiring in 2010; 80,000 square feet of office space
       in St. Louis, Missouri under a lease expiring in 2009; and 100,000 square
       feet of office and warehouse space under construction in Des Moines, Iowa
       under a lease expiring in 2015. We also own or lease other offices or
       space at a number of locations, primarily for sales offices or network
       equipment installation.

       ITEM 3.  LEGAL PROCEEDINGS.

       We are not aware of any material litigation against McLeodUSA. We do,
       however, have various legal proceedings pending against us or on our
       behalf.

       We are involved in numerous regulatory proceedings before various public
       utility commissions and the FCC, particularly in connection with actions
       by the MegaBells. For example, we have filed complaints in both Colorado
       and Iowa challenging U S WEST's apparent practice of installing service
       for its own retail customers quicker than it installs service for our
       customers when new facilities are required. The Iowa regulatory agency
       determined that U S WEST was discriminating unfairly against us. We have
       also complained to three state commissions that Ameritech's practice of
       charging us extra fees to install service for our customers when we lease
       a line was unfair because Ameritech did not attempt to assess the same
       extra charges to its retail customers. Two state agencies have ruled that
       Ameritech's charges were not proper. The third complaint is pending.

       We anticipate the MegaBells will also pursue legislation in states within
       our target market area to reduce state regulatory oversight over its
       rates and operations. If adopted, these initiatives could make it more
       difficult for us to challenge the MegaBells' actions in the future.

       We cannot assure you we will succeed in our challenges to these or other
       actions by the MegaBells that would prevent or deter us from successfully
       competing with the MegaBells. SEE "BUSINESS--RISK FACTORS--OUR DEPENDENCE
       ON REGIONAL BELL OPERATING COMPANIES TO PROVIDE MOST OF OUR
       COMMUNICATIONS SERVICES COULD MAKE IT HARDER FOR US TO OFFER OUR SERVICES
       AT A PROFIT" AND "BUSINESS--RISK FACTORS-- ACTIONS BY U S WEST MAY MAKE
       IT MORE DIFFICULT FOR US TO OFFER OUR COMMUNICATIONS SERVICES."

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

       None.

                                       40
<PAGE>

                                     PART II

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

         PRICE RANGE OF CLASS A COMMON STOCK

         Our Class A common stock is quoted on The Nasdaq Stock Market's
         National Market System under the symbol "MCLD". The following table
         sets forth for the periods indicated the high and low sales price per
         share of our Class A common stock as reported by The Nasdaq Stock
         Market. Prices per share of McLeodUSA Class A common stock take into
         account the two-for-one stock split in the form of a stock dividend
         effective July 26, 1999 but do not reflect the three-for-one stock
         split to be effected in the form of a stock dividend announced February
         29, 2000.

                     1997                                  HIGH         LOW
                     ----                                --------     -----
            First Quarter...........................    $   14.375  $   8.688
            Second Quarter .........................    $   17.125  $   8.188
            Third Quarter...........................    $   20.000  $  14.313
            Fourth Quarter..........................    $   20.875  $  16.000

                     1998
            First Quarter...........................    $   23.188  $  15.250
            Second Quarter..........................    $   24.156  $  19.000
            Third Quarter...........................    $   20.063  $  10.688
            Fourth Quarter..........................    $   19.250  $   7.625

                     1999
            First Quarter...........................    $   22.125  $  15.188
            Second Quarter..........................    $   30.958  $  21.844
            Third Quarter...........................    $   42.750  $  22.625
            Fourth Quarter..........................    $   63.375  $  36.625

         On March 17, 2000, the last reported sale price of our Class A common
         stock on The Nasdaq Stock Market was $ 92.8125 per share. On March 17,
         2000, there were 4,415 holders of record of our Class A common stock
         and no holders of record of our Class B common stock, $.01 par value
         per share.

         DIVIDEND POLICY

         We have never declared or paid any cash dividends on our common stock
         and do not anticipate paying these dividends in the foreseeable future.
         Restrictions contained in the indentures that govern the terms of our
         debt prohibit us from paying cash dividends on our common stock. Future
         dividends, if any, will be at the discretion of our board of directors
         and will depend upon, among other things, our operations, capital
         requirements and surplus, general financial condition, contractual
         restrictions in financing agreements (including the indentures that
         govern the terms of our debt) and such other factors as our board of
         directors may deem relevant. In addition, shares of our Series A
         preferred stock and Series B preferred stock carry rights to receive a
         cumulative dividend before any cash dividend may be paid on shares of
         our Class A common stock. See "Management's Discussion and Analysis of
         Financial Condition and Results of Operations--Liquidity and Capital
         Resources."

                                       41
<PAGE>

         RECENT SALES OF UNREGISTERED SECURITIES

         During the fourth quarter of 1999, we offered and sold the following
         equity securities that were not registered under the Securities Act of
         1933, as amended:

         On December 22, 1999, we acquired One Stop Telecommunications Inc. in
         exchange for 623,359 shares of our Class A common stock.

         The issuance of securities described above was made in reliance upon
         the exemption from registration provided by Section 4(2) of the
         Securities Act or Regulation D promulgated thereunder for transactions
         by an issuer not involving any public offering. The recipients of
         securities in such transaction represented their intention to acquire
         the securities for investment only and not with a view to or for
         distribution in connection with such transaction. All recipients had
         adequate access to information about us through their relationship with
         us or through information about us made available to them.

         ITEM 6.  SELECTED FINANCIAL DATA.

         The following table sets forth selected consolidated financial data and
         should be read in conjunction with and is qualified by reference to
         "Management's Discussion and Analysis of Financial Condition and
         Results of Operations," our consolidated financial statements, the
         notes thereto and the other financial data contained elsewhere in this
         Form 10-K.

         The information in the following table reflects financial information
         for the following companies we have acquired:

                     ACQUIRED COMPANY                        DATE ACQUIRED

             MWR Telecom, Inc.                                 April 28, 1995
             Ruffalo, Cody & Associates, Inc.                   July 15, 1996
             Telecom*USA Publishing Group, Inc.              September 20, 1996
             Consolidated Communications Inc.                September 24, 1997
             Ovation Communications, Inc.                      March 31, 1999

         The operations statement data and other financial data in the table
         include the operations of these companies beginning on the dates they
         were acquired. The balance sheet data in the table include the
         financial position of these companies at the end of the periods
         presented, beginning with the period in which they were acquired. These
         acquisitions affect the comparability of the financial data for the
         periods presented.

         The information in the table also reflects the following debt and
         equity securities that we have issued:
<TABLE>
<CAPTION>

                 DESCRIPTION OF SECURITIES                 PRINCIPAL AMOUNT        DATE ISSUED

<S>  <C>                                                     <C>                        <C>
     10 1/2% senior discount notes due March 1, 2007         $500 million         March 4, 1997
     9 1/4% senior notes due July 15, 2007                   $225 million         July 21, 1997
     83/8% senior notes due March 15, 2008                   $300 million         March 10, 1998
     9 1/2% senior notes due November 1, 2008                $300 million         October 30, 1998
     81/8 % senior notes due February 15, 2009               $500 million         February 22,1999
     Series A preferred stock                                $287 million         August 23, 1999
     Series B preferred stock                                $687 million         September 15, 1999
     Series C preferred stock                                $313 million         September 15, 1999
</TABLE>

                                       42
<PAGE>

         The operations statement data and other financial data in the table
         include the effects of the issuances beginning on the dates the
         securities were issued. The balance sheet data in the table include the
         effects of these issuances at the end of the periods presented,
         beginning with the period in which they occurred.

                                                 (TABLE BEGINS ON THE NEXT PAGE)

                                       43
<PAGE>

<TABLE>

                                 Selected Consolidated Financial Data of McLeodUSA

                                       (IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>


                                                                  YEAR ENDED DECEMBER 31,
                                          ---------------------------------------------------------------------
                                              1995         1996          1997           1998          1999
                                          ----------    ---------     ----------     -----------    -----------

OPERATIONS STATEMENT DATA:
<S>                                   <C>            <C>            <C>            <C>            <C>
   Revenue ........................   $    28,998    $    81,323    $   267,886    $   604,146    $   908,792
                                          ----------    ---------     ----------     -----------    -----------
   Operating expenses:
     Cost of service ..............        19,667         52,624        151,190        323,208        457,085
     Selling, general and
        Administrative ............        18,054         46,044        148,158        260,931        392,687
     Depreciation and
        Amortization ..............         1,835          8,485         33,275         89,107        190,695

     Other ........................          --            2,380          4,632          5,575           --
                                          ----------    ---------     ----------     -----------    -----------
     Total operating
        Expenses ..................        39,556        109,533        337,255        678,821      1,040,467
                                          ----------    ---------     ----------     -----------    -----------
   Operating loss .................       (10,558)       (28,210)       (69,369)       (74,675)      (131,675)

   Interest income (expense),
     Net ..........................          (771)         5,369        (11,967)       (52,234)       (94,244)

     Other income .................          --              495          1,426          1,997          5,637
   Income taxes ...................          --             --             --             --             --
                                          ----------    ---------     ----------     -----------    -----------
   Net loss .......................       (11,329)       (22,346)       (79,910)      (124,912)      (220,282)
   Preferred stock dividends ......          --             --             --             --          (17,727)
                                          ----------    ---------     ----------     -----------    -----------
   Loss applicable to common stock    $   (11,329)   $   (22,346)   $   (79,910)   $  (124,912)   $  (238,009)
                                          ==========    =========     ==========     ===========    ===========
   Loss per common share ..........   $     (0.20)   $     (0.28)   $     (0.73)   $     (0.99)   $     (1.61)
                                          ==========    =========     ==========     ===========    ===========
   Weighted average common
     shares outstanding ...........        56,008         81,012        109,948        125,614        147,710
                                          ==========    =========     ==========     ===========    ===========




                                                                     DECEMBER 31,
                                          ---------------------------------------------------------------------
                                              1995         1996          1997           1998          1999
                                          ----------    ---------     ----------     -----------    -----------
BALANCE SHEET DATA:
   Current assets .................   $     8,507    $   224,401    $   517,869    $   793,192    $ 1,569,473
   Working capital (deficit) ......   $    (1,208)   $   185,968    $   378,617    $   613,236    $ 1,272,794
   Property and equipment, net ....   $    16,119    $    92,123    $   373,804    $   629,746    $ 1,270,032
   Total assets ...................   $    28,986    $   452,994    $ 1,345,652    $ 1,925,197    $ 4,203,147
   Long-term debt .................   $     3,600    $     2,573    $   613,384    $ 1,245,170    $ 1,763,775
   Redeemable convertible preferred
      stock .......................   $      --      $      --             --             --      $ 1,000,000
   Stockholders' equity ...........   $    14,958    $   403,429    $   559,379    $   462,806    $ 1,108,542



                                                                  YEAR ENDED DECEMBER 31,
                                          ---------------------------------------------------------------------
                                              1995         1996          1997           1998          1999
                                          ----------    ---------     ----------     -----------    -----------
                                         (unaudited)   (unaudited)    (unaudited)    (unaudited)    (unaudited)
OTHER FINANCIAL DATA:
   Capital expenditures, includ-
     ing business acquisitions......      $   14,697     $173,782         $ 601,137    $  339,660    $1,316,629
   EBITDA(1)........................      $   (8,723)    $(17,345)        $ (31,462)   $   20,007    $   59,020

</TABLE>

----------------------------
  (1) EBITDA consists of operating loss before depreciation, amortization and
      other nonrecurring operating expenses. We have included EBITDA data
      because it is a measure commonly used in the industry. EBITDA is not a
      measure of financial performance under generally accepted accounting
      principles and should not be considered an alternative to net income as a
      measure of performance or to cash flows as a measure of liquidity.


                                                                 44
<PAGE>

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

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN TOGETHER WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER FINANCIAL
DATA APPEARING ELSEWHERE IN THIS FORM 10-K.

OVERVIEW

We derive most of our revenue from:

o    our core business of providing local, long distance and related
     communications services to end users, typically in a bundled package

o    the sale of advertising space in telephone directories

o    traditional local telephone company services through the operation of
     Illinois Consolidated Telephone Company ("ICTC") in east central Illinois
     and Dakota Telecommunications Group, Inc. in southeast South Dakota

o    communications facilities and services dedicated for a particular
     customer's use

We also derive revenue from:

o    communications network maintenance services

o    telephone equipment sales, leasing, service and installation

o    video services

o    telemarketing services

o    computer networking services

o    other communications services, including cellular, operator, payphone and
     paging services.

We began providing traditional local telephone company services and other
communications services as a result of our acquisition of CCI in September 1997,
telephone directory advertising as a result of our acquisition of Telecom*USA
Publishing in September 1996, and telemarketing services as a result of our
acquisition of Ruffalo Cody in July 1996. The table set forth below summarizes
our percentage of revenues from these sources:

                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------
                                                       1999     1998    1997
                                                      ------   ------  ------
Local and long distance
communications service..............................    50%      45%      41%
Telephone directory advertising ....................    23       24       30
Traditional local telephone company services .......     9       11        6
Dedicated facilities and services ..................     9        7        6
Network maintenance and equipment services .........     4        5        8
Telemarketing services .............................     2        3        5
Other communications services ......................     3        5        4
                                                        ----    ----      ----
                                                        100%    100%      100%
                                                        ====    ====      ====


We began offering local and long distance services to business customers in
January 1994. At the end of 1995, we began offering, on a test basis, long
distance services to residential customers. In June 1996, we began marketing and
providing to residential customers in Cedar Rapids, Iowa and Iowa City, Iowa an
integrated package of communications services that includes local and long
distance service, voice mail, Internet access and travel card services. Since
June 1996, we have expanded the states in which we offer service to business

                                       45
<PAGE>

customers to include Iowa, Illinois, Indiana, Michigan, Minnesota, Nebraska,
Wisconsin, North Dakota, South Dakota, Colorado, Missouri, Utah, Nebraska,
Washington, Ohio and Wyoming. We also expanded our residential service to
additional cities in Iowa and Illinois and began offering the service to
customers in North Dakota, South Dakota, Wisconsin, Wyoming, Colorado and
Michigan. We plan to continue our efforts to market and provide local, long
distance and other communications services to business customers and market our
service to residential customers.

Our principal operating expenses consist of cost of service; selling, general
and administrative expenses ("SG&A"); and depreciation and amortization. Cost of
service primarily includes local services purchased from the MegaBells, costs to
terminate the long distance calls of our customers through long distance
carriers, costs of printing and distributing telephone directories and costs
associated with maintaining the Iowa Communications Network. The Iowa
Communications Network is a fiber optic communications network that links many
schools, libraries and other public buildings in the State of Iowa. SG&A
consists of sales and marketing, customer service and administrative expenses,
including the costs associated with operating our communications network.
Depreciation and amortization include depreciation of our telecommunications
network and equipment; amortization of goodwill and other intangibles related to
our acquisitions, amortization expense related to the excess of estimated fair
market value in aggregate of options over the aggregate exercise price of such
options granted to some of our officers, other employees and directors; and
amortization of one-time installation costs associated with transferring
customers' local line service from the regional Bell operating companies to our
local telecommunications service.

As we expand into new markets, both cost of service and SG&A will increase. We
expect to incur cost of service and SG&A expenses before achieving significant
revenues in new markets. Fixed costs related to leasing of central office
facilities needed to provide telephone services must be incurred prior to
generating revenue in new markets, while significant levels of marketing
activity may be necessary in the new markets in order for us to build a customer
base large enough to generate sufficient revenue to offset such fixed costs and
marketing expenses.

We have experienced operating losses since our inception as a result of efforts
to build our customer base, develop and construct our communications network
infrastructure, build our internal staffing, develop our systems and expand into
new markets. We expect to continue to focus on increasing our customer base and
geographic coverage and bringing our customer base onto our communications
network. Accordingly, we expect that our cost of service, SG&A and capital
expenditures will continue to increase significantly, all of which may have a
negative impact on operating results.

In addition, our projected increases in capital expenditures will continue to
generate negative cash flows from construction activities during the next
several years while we install and expand our fiber optic communications network
and develop wireless services. We may also be forced to change our pricing
policies to respond to a changing competitive environment, and we cannot assure
you that we will be able to maintain our operating margin. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.



                                       46
<PAGE>

We have generated net operating losses since our inception and, accordingly,
have incurred no income tax expense. We have reduced the net deferred tax assets
generated by these losses by a valuation allowance which offsets the net
deferred tax asset due to the uncertainty of realizing the benefit of the tax
loss carry forwards. We will reduce the valuation allowance when, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will be realized.

For a description of other important factors relating to our business, SEE
"BUSINESS - RISK FACTORS."

YEAR ENDED 1999 COMPARED WITH YEAR ENDED 1998

Total revenue increased from $604.1 million for the year ended December 31, 1998
to $908.8 million for the year ended December 31, 1999, representing an increase
of $304.7 million or 50%. The increase was due to the many acquisitions
completed in 1999 and 1998 as well as the increase in local and long distance
customers. Revenue from the sale of local and long distance communications
services accounted for $184.8 million of this increase, including $96.2 million
contributed by Dakota Telecommunications Group, Inc., Ovation Communications,
Inc., and Access Communications Holdings, Inc. which were acquired on March 5,
1999, March 31, 1999 and August 13, 1999, respectively. Local exchange services
increased by $10.6 million over 1998, including $7.5 million contributed by DTG.
Private line and data revenues accounted for $40.0 million of increased revenues
over 1998, including $21.7 million contributed by DTG, Ovation and Access.
Network maintenance and equipment revenue increased $3.4 million over 1998,
including $1.5 million contributed by DTG. Other communications revenue
represented $2.3 million of the increase in revenues. Directory revenues
increased $64.3 million from 1998 to 1999 due mainly to revenues from new
directories acquired in 1999. Telemarketing revenues in 1999 decreased $0.7
million when compared to 1998.

Cost of service increased from $323.2 million for 1998 to $457.1 million for
1999, representing an increase of $133.9 million or 41%. This increase in cost
of service was due primarily to the growth in our local and long distance
communications services and to the acquisitions of DTG, Ovation and Access,
which contributed an aggregate of $56.4 million to the increase. Cost of service
as a percentage of revenue decreased from 54% for 1998 to 50% for 1999, as a
result of these acquisitions and as a result of reductions in the cost of
providing local and long distance services as a percentage of local and long
distance communications revenue, which decreased from 75% in 1998 to 65% in
1999. This decrease was primarily due to the realization of benefits associated
with new wholesale line cost rate agreements with the regional Bell operating
companies and reduced long distance costs resulting from migration of over 84%
of customer long distance traffic to our fiber optic communications network.

SG&A increased from $260.9 million for the year ended December 31, 1998 to
$392.7 million for the year ended December 31, 1999, an increase of $131.8
million or 51%. The acquisitions of Talking Directories Inc. and Info America
Phone Books, Inc. (collectively, "Talking Directories"), DTG, Ovation and Access
contributed an aggregate of $82.6 million to the increase. Also contributing to
this increase were increased costs of $49.2 million primarily related to
expansion of selling, customer support and administration activities to support
our growth.

Depreciation and amortization expenses increased from $89.1 million for the year
ended December 31, 1998 to $190.7 million for the year ended December 31, 1999,
representing an increase of $101.6 million or 114%. This increase consisted of
$55.9 million related to the acquisitions of Talking Directories, DTG, Ovation
and Access and $45.7 million due


                                       47
<PAGE>

primarily to the growth of our communications network.

Other operating expenses in 1998 represented the amortization of capitalized
costs associated with Consolidated Communications Directories in progress at the
time we acquired CCI in 1997. This amortization did not exist in 1999.

Interest income increased from $26.0 million for the year ended December 31,
1998, to $42.6 million in 1999. This increase resulted from a higher average
investment balance during 1999 as a result of our 81/8% senior notes offering in
February 1999 and from our preferred stock issuances in August and September
1999.

Gross interest incurred increased from $88.9 million for the year ended December
31, 1998 to $159.9 million in 1999. This increase was primarily a result of an
increase in the accretion of interest on our 10 1/2% senior discount notes of
$3.8 million and an increase of interest of $63.7 million as the result of the
issuance of our 9 1/4% senior notes, 83/8% senior notes, 9 1/2% senior notes and
81/8% senior notes. Interest expense of approximately $23.0 million and $8.1
million was capitalized as part of our construction of fiber optic
communications network during 1999 and 1998, respectively. In addition, interest
expense of approximately $2.6 million was capitalized as part of our operating
facilities building construction and our software development in 1998, with no
corresponding amount in 1999.

Net loss applicable to common shares increased from $124.9 million for the year
ended December 31, 1998 to $238.0 million for the year ended December 31, 1999,
an increase of $113.1 million. This increase resulted primarily from the
following three factors: the expansion of our local and long distance services,
which requires significant expenditures, a substantial portion of which is
incurred before the realization of revenues; the increased depreciation expense
related to the construction and expansion of our communications networks and
amortization of intangibles related to acquisitions; and net interest expense on
indebtedness to fund market expansion, network development and acquisitions.

YEAR ENDED 1998 COMPARED WITH YEAR ENDED 1997

Total revenue increased from $267.9 million for the year ended December 31, 1997
to $604.1 million for the year ended December 31, 1998, representing an increase
of $336.2 million or 125%. Revenue from the sale of local and long distance
communications services accounted for $161.2 million of this increase, including
$58.1 million contributed by CCI. Local exchange services generated by ICTC
increased by $51.7 million over 1997. Private line and data revenues accounted
for $22.9 million of increased revenues over 1997, which was primarily
attributable to the acquisition of CCI. Network maintenance and equipment
revenue increased $11.9 million over 1997 due primarily to the acquisitions of
various directories and other telecommunication businesses. Other communications
revenue, which was due almost entirely to the acquisition of CCI, represented
$17.9 million of the increase in revenues. Directory revenues increased $63.8
million from 1997 to 1998 due to revenues from new directories acquired in 1998
and the acquisition of CCI. The $6.8 million increase in telemarketing revenues
from 1997 to 1998 was due almost entirely to the acquisition of CCI.

Cost of service increased from $151.2 million for 1997 to $323.2 million for
1998, representing an increase of $172.0 million or 114%. This increase in cost
of service was due primarily to the growth in our local and long distance
communications services and to the acquisitions of various directories and other
telecommunications businesses, which contributed an aggregate of $109.7 million
to the increase. Cost of service as a percentage of revenue decreased from 56%
for 1997 to 54% for 1998, as a result of these acquisitions and as a result of
reductions in the cost of providing local and long distance services as a
percentage of local


                                       48
<PAGE>

and long distance communications revenue, which decreased from 84% in 1997 to
75% in 1998. This decrease was primarily due to the realization of benefits
associated with new wholesale line cost rate agreements with the MegaBells and
reduced long distance costs resulting from migration of over 60% of customer
long distance traffic to our fiber optic communications network.

SG&A increased from $148.2 million for the year ended December 31, 1997 to
$260.9 million for the year ended December 31, 1998, an increase of $112.7
million or 76%. The acquisitions of various directories and other
telecommunications businesses contributed an aggregate of $61.9 million to the
increase. Also contributing to this increase were increased costs of $50.8
million primarily related to expansion of selling, customer support and
administration activities to support our growth.

Depreciation and amortization expenses increased from $33.3 million for the year
ended December 31, 1997 to $89.1 million for the year ended December 31, 1998,
representing an increase of $55.8 million or 168%. This increase consisted of
$38.1 million related to the acquisitions of various directories and other
telecommunication businesses, and $17.7 million due primarily to the growth of
our communications network.

Other operating expenses represented the amortization of capitalized costs
associated with CCD directories in progress at the time we acquired CCI.

Interest income increased from $22.7 million for the year ended December 31,
1997, to $26.0 million in 1998. This increase resulted from increased earnings
on investments made with the remaining proceeds from our debt offerings in March
and July 1997 and the proceeds from our offerings of 83/8% senior notes and 9
1/2% senior notes in March and October 1998, respectively.

Gross interest incurred increased from $39.0 million for the year ended December
31, 1997 to $88.9 million in 1998. This increase was primarily a result of an
increase in the accretion of interest on our 10 1/2% senior discount notes of
$8.4 million and an increase of interest of $36.0 million as the result of the
issuance of our 9 1/4% senior notes, 83/8% senior notes and 9 1/2% senior notes.
Interest expense of approximately $8.1 million and $4.4 million was capitalized
as part of our construction of fiber optic communications network during 1998
and 1997, respectively. In addition, interest expense of approximately $2.6
million was capitalized as part of our operating facilities building
construction and our software development in 1998, with no corresponding amount
in 1997.

Net loss applicable to common shares increased from $79.9 million for the year
ended December 31, 1997 to $124.9 million for the year ended December 31, 1998,
an increase of $45.0 million. This increase resulted primarily from the
following three factors:

o    the expansion of our local and long distance services, which requires
     significant expenditures, a substantial portion of which is incurred before
     the realization of revenues

o    the increased depreciation expense related to the construction and
     expansion of our communications networks and amortization of intangibles
     related to acquisitions

o    net interest expense on indebtedness to fund market expansion, network
     development and acquisitions

LIQUIDITY AND CAPITAL RESOURCES

Our total assets increased from $1.9 billion at December 31, 1998 to $4.2
billion at December 31, 1999, primarily due to the net proceeds from our
offering of 8 1/8% senior notes


                                       49
<PAGE>

of $485.8 million, our offering of Series B and C redeemable, convertible
preferred stock of $998.7 million and our offering of Series A preferred stock
of $278.1 million. At December 31, 1999, our current assets of $1,569.5 million
exceeded our current liabilities of $296.7 million, providing working capital of
$1,272.8 million, which represents an increase of $659.5 million compared to
December 31, 1998, primarily attributable to the net proceeds from our offerings
of 81/8% senior notes and the Series A, B and C preferred stock issuances. At
December 31, 1998, our current assets of $793.2 million exceeded current
liabilities of $179.9 million, providing working capital of $613.3 million.

Net cash used in operating activities totaled $42.2 million for the year ended
December 31, 1999 and $22.5 million for the year ended December 31, 1998. During
the year ended December 31, 1999, cash for operating activities was used
primarily to fund our net loss of $220.3 million for such period. As a result of
the expansion of our local and long distance communications services, we also
required cash to fund:

o    growth in trade receivables of $20.7 million

o    growth in inventory of $12.7 million

o    increases in deferred expenses of $4.0 million

o    deferred line installation costs of $27.2 million

o    decreases in accounts payable and accrued expenses of $16.9 million

These amounts were partially offset by:

o    decreases in prepaid and other expenses of $10.2 million

o    increases in deferred revenue of $10.5 million

o    increases in customer deposits of $9.3 million

o    cumulative non-cash expenses of $229.6 million

During the year ended December 31, 1998, cash for operating activities was used
primarily to fund our net loss of $124.9 million for such period. We also
required in 1998 cash to fund the growth in accounts receivable, inventory,
prepaid expenses and other and deferred line installation costs of $6.4 million,
$8.2 million, $34.3 million and $13.6 million, respectively, offset by a
decrease in deferred expenses of $.9 million and increases in accounts payable
and accrued expenses of $32.2 million, deferred revenues of $4.6 million,
customer deposits of $4.1 million and cumulative non-cash expenses of $123.1
million.

Net cash used in investing activities totaled $1,550.9 million during the year
ended December 31, 1999 and $423.9 million during the year ended December 31,
1998. The expansion of our local and long distance communications services,
development and construction of our fiber optic communications networks and
other capital expenditures resulted in purchases of equipment and fiber optic
cable and other property and equipment totaling $599.7 million and $289.9
million during the years ended December 31, 1999 and 1998, respectively. We also
used cash of $1,247.3 million to acquire available-for-sale securities during
the year ended December 31, 1999, offset by proceeds from sales and maturities
of available-for-sale securities of $535.8 million during the period. During the
year ended December 31, 1998, we used $607.4 million to acquire
available-for-sale securities partially offset by net the sales and maturities
of available-for-sale securities of $506.4 million during the period.

During the year ended December 31, 1999, we used an aggregate of $230.8 million
cash in addition to shares of our Class A common stock to acquire:

     o    the capital stock of Talking Directories in February 1999

     o    the capital stock of Dakota Telecommunications, Inc. in March 1999

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<PAGE>

     o    the capital stock of Ovation Communications, Inc. in March 1999

     o    the capital stock of Access Communications in August 1999

During the year ended December 31, 1998, we used an aggregate of $27.8 million
cash to acquire various directories and other telecommunication businesses.

Net cash received from financing activities was $1,464.9 million during the year
ended December 31, 1999, primarily as a result of our offering of 81/8% senior
notes, our offering of Series B and C redeemable, convertible preferred stock,
and our offering of Series A preferred stock. Net cash received from financing
activities during the year ended December 31, 1998 was $569.6 million and was
primarily obtained from our offerings of 83/8% senior discount notes in March
1998 and 9 1/2% senior notes in October 1998.

1999 FINANCINGS. On February 22, 1999, we completed an offering of $500 million
aggregate principal amount of our 81/8% senior notes in which we received net
proceeds of approximately $485.8 million. Interest on the 81/8% senior notes
accrues at the rate of 81/8% per annum and is payable in cash semi-annually in
arrears on February 15 and August 15.

Our 10 1/2% senior discount notes, 9 1/4% senior notes, 83/8% senior notes, 9
1/2% senior notes and 81/8% senior notes are senior unsecured obligations of
McLeodUSA ranking PARI PASSU in right of payment with all other existing and
future senior unsecured obligations of McLeodUSA and senior to all existing and
future subordinated debt of McLeodUSA. The 10 1/2% senior discount notes, 9 1/4%
senior notes, 83/8% senior notes, 9 1/2% senior notes and 81/8% senior notes are
effectively subordinated to all existing and future secured indebtedness of
McLeodUSA and our subsidiaries to the extent of the value of the assets securing
such indebtedness. The 10 1/2% senior discount notes, 9 1/4% senior notes, 83/8%
senior notes, 9 1/2% senior notes and 81/8% senior notes also are effectively
subordinated to all existing and future third-party indebtedness and other
liabilities of our subsidiaries.

The indentures governing our 10 1/2% senior discount notes, 9 1/4% senior notes,
83/8% senior notes, 9 1/2% senior notes and 81/8% senior notes impose operating
and financial restrictions on our subsidiaries and us. These restrictions
affect, and in many cases significantly limit or prohibit, among other things,
our and our subsidiaries' ability to:

     o    incur additional indebtedness

     o    pay dividends or make distributions in respect of our or our
          subsidiaries' capital stock

     o    redeem capital stock

     o    make other restricted payments

     o    enter into sale and leaseback transactions

     o    create liens upon assets

     o    enter into transactions with affiliates or related persons

     o    sell assets

     o    consolidate, merge or sell all or substantially all of our assets

We cannot assure you that such covenants will not adversely affect our ability
to finance our future operations or capital needs or to engage in other business
activities that may be in our interests.

We issued one million shares of our Series A preferred stock, par value $.01 per
shares ("Series A preferred stock"), on August 11, 1999 and an additional
150,000 shares on August 23, 1999. Net proceeds from the financing amounted to
approximately $277.3 million. Holders of Series A preferred stock are entitled
to receive cumulative dividends at an annual rate of 6.75% of the liquidation
preference payable quarterly on each February 15, May 15,


                                       51
<PAGE>

August 15 and November 15. The quarterly dividend is $4.21875 per share, payable
at our option in cash or shares of our Class A common stock. Series A preferred
stock is convertible at the option of its holder, unless previously redeemed, at
any time, into shares of our Class A common stock at a conversion rate of
8.60289 shares of Class A common stock for each share of Series A preferred
stock (representing a conversion price of $29.06 per share of Class A common
stock), subject to adjustment in certain events including our recently announced
three-for-one stock split. In addition, if on or after August 15, 2002, the
closing price of our Class A common stock has equaled or exceeded 135% of the
conversion price for at least 20 out of 30 consecutive business days, we will
have the option to convert all of the Series A preferred stock into Class A
common stock at the then current conversion rate. The holders of the Series A
preferred stock will not be entitled to any voting rights unless payments of
dividends on the Series A preferred stock are in arrears and unpaid for an
aggregate of six or more quarterly dividend payments.

We issued on September 15, 1999 (the "Issue Date") 275,000 shares of Series B
preferred stock, par value $.01 per share, ("Series B preferred stock") and
125,000 shares of Series C preferred stock, par value $.01 per share, ("Series C
preferred stock" and together with the Series B preferred stock, the "Preferred
Shares") through a private offering. Net proceeds from the financing amounted to
approximately $1 billion. The Preferred Shares are redeemable on a
proportionally equal basis, in whole or in part, by us at any time following the
seventh anniversary of the Issue Date; or by the holders within 180 days
following the tenth anniversary of the Issue Date. The Preferred Shares are
convertible on a proportionally equal basis, at the Series B holders option, in
whole or in part at any time into Class A common stock. Each share of Series B
preferred stock is entitled to receive a quarterly dividend based on its
liquidation preference. Dividends are cumulative and payable quarterly on March
31, June 30, September 30, and December 31. If prior to the fifth anniversary of
the Issue Date we pay a dividend on our Class A common stock, holders of the
Preferred Shares shall be entitled to receive an equivalent dividend calculated
on a common stock equivalent basis as if the Preferred Shares had been converted
into Class A common stock. Holders of Series B preferred stock are not entitled
to voting rights other than the right to vote as a series for the election of
two additional members to the Board of Directors. Board representation decreases
as the outstanding shares of the Series B preferred stock decreases. Holders of
Series C preferred stock are not entitled to voting rights other than the right
to vote as a series for the election of one observer to the Board of Directors.
Board representation decreases as the outstanding shares of the Series C
preferred stock decreases. The Series B and Series C preferred stock rank on a
parity with the Series A preferred stock with respect to dividend rights and
rights on liquidation.


1998 FINANCINGS. On March 16, 1998, we completed an offering of $300 million
aggregate principal amount of our 83/8% senior notes in which we received net
proceeds of approximately $291.9 million. Interest on the 83/8% senior notes
accrues at the rate of 83/8% per annum and is payable in cash semi-annually in
arrears on March 15 and September 15. The 83/8% senior notes are redeemable at
our option, in whole or in part, at any time on or after March 15, 2003 at
104.188% of their principal amount at maturity, plus accrued and unpaid
interest, declining to 100.000% of their principal amount at maturity, plus
accrued and unpaid interest, on or after March 15, 2006. In the event of
specified equity investments in McLeodUSA by specified strategic investors on or
before March 15, 2001, we may, at our option, use all or a portion of the net
proceeds from such sale to redeem up to 331/3% of the original principal amount
of the 83/8% senior notes at a redemption price equal to 108.375% of their
principal amount plus accrued and unpaid interest, if any, to but excluding the
redemption date, provided that at least 662/3% of the original principal amount
of the 83/8% senior notes would remain outstanding immediately after giving
effect to such redemption. In addition, in the event of a "Change of Control"
(as defined in the indenture governing the

                                       52
<PAGE>

8 3/8% senior notes) of McLeodUSA, each holder of 83/8% senior notes will have
the right to require us to repurchase all or any part of such holder's 83/8%
senior notes at a purchase price equal to 101% of the principal amount of the
83/8% senior notes tendered by such holder plus accrued and unpaid interest, if
any, to any "Change of Control Payment Date" (as defined in the indenture
governing the 83/8% senior notes). The 83/8% senior notes will mature on March
15, 2008.

On October 30, 1998, we completed an offering of $300 million aggregate
principal amount of our 9 1/2% senior notes in which we received net proceeds of
approximately $291.9 million. Interest on the 9 1/2% senior notes accrues at the
rate of 9 1/2% per annum and is payable in cash semi-annually in arrears on
November 1 and May 1. The 9 1/2% senior notes are redeemable at our option, in
whole or in part, at any time on or after November 1, 2003 at 106.75% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100.000% of their principal amount at maturity, plus accrued and unpaid
interest, on or after November 1, 2008. In the event of specified equity
investments in McLeodUSA by specified strategic investors on or before November
1, 2001, we may, at our option, use all or a portion of the net proceeds from
such sale to redeem up to 331/3% of the original principal amount of the 9 1/2%
senior notes at a redemption price equal to 111.5% of their principal amount
plus accrued and unpaid interest, if any, to but excluding the redemption date,
provided that at least 662/3% of the original principal amount of the 9 1/2%
senior notes would remain outstanding immediately after giving effect to such
redemption. In addition, in the event of a "Change of Control" (as defined in
the indenture governing the 9 1/2% senior notes) of McLeodUSA, each holder of 9
1/2% senior notes will have the right to require us to repurchase all or any
part of such holder's 9 1/2% senior notes at a purchase price equal to 101% of
the principal amount of the 9 1/2% senior notes tendered by such holder plus
accrued and unpaid interest, if any, to any "Change of Control Payment Date" (as
defined in the indenture governing the 9 1/2% senior notes). The 9 1/2% senior
notes will mature on November 1, 2008.

RECENT EVENTS.

THE SPLITROCK MERGER AGREEMENT. On January 6, 2000, we entered into an Agreement
and Plan of Merger (as amended, the "Splitrock Merger Agreement") with Splitrock
Services, Inc., a Delaware corporation and Splitrock Holdings, Inc., a Delaware
corporation (together "Splitrock"), and certain stockholders of Splitrock
pursuant to which a newly formed wholly owned subsidiary of McLeodUSA will be
merged with and into Splitrock (the "Splitrock Merger"). As a result of the
Splitrock Merger, each share of Splitrock's common stock will be converted into
 .5347 shares of McLeodUSA Class A common stock. A Splitrock stockholder will
also receive a cash payment for any fractional share of Class A common stock as
specified in the Splitrock Merger Agreement. We estimate that we will issue
approximately 30.6 million shares of Class A common stock to effect the
Splitrock Merger. We will also assume $261.0 million in Splitrock debt. In
addition, under the terms of the Splitrock Merger Agreement, each option or
warrant to purchase Splitrock common stock issued under Splitrock's stock option
plan or granted under the Warrant Agreement will become or be replaced by an
option or warrant to purchase a number of shares of Class A common stock equal
to the number of shares of Splitrock common stock that could have been purchased
under the Splitrock stock option plan or warrant agreement multiplied by the
 .5347 exchange ratio used to convert Splitrock common stock into Class A common
stock. The share data has not been adjusted for the three-for-one stock split
scheduled to be distributed on April 24, 2000.

Consummation of the Splitrock Merger is subject to the satisfaction of certain
conditions, including (i) approval of the Splitrock Merger Agreement by the
Splitrock stockholders, (ii) approval of the amendment to the certificate of
incorporation of McLeodUSA that will increase the number of authorized shares of
the Company's Class A common stock, (iii) the approval of the issuance of shares
of the Company's Class A common stock for the Splitrock


                                       53
<PAGE>

merger, and (iv) certain other customary conditions. Both the Company and
Splitrock may terminate the Splitrock Merger Agreement if the Splitrock Merger
has not been consummated by July 30, 2000. Certain stockholders of Splitrock
holding in the aggregate approximately 52.3% of the voting power attributable to
Splitrock's common stock have agreed to vote all of their shares in favor of the
Splitrock Merger at a meeting of the stockholders of Splitrock.

THREE-FOR-ONE STOCK SPLIT. We announced on February 29, 2000 a three-for-one
stock split in the form of a stock dividend. The record date for the stock split
will be April 4, 2000. Stockholders of record at market close on that date will
receive two additional shares of McLeodUSA Class A common stock for each share
of Class A common stock held. Distribution of the additional shares will take
place on April 24, 2000. The three-for-one split is subject to stockholder
approval of an amendment to the McLeodUSA certificate of incorporation to
increase the number of authorized shares. An amendment to accomplish this
increase is scheduled to be considered at the March 30, 2000 Special Meeting of
the McLeodUSA stockholders.

OTHER. We need significant capital to continue to expand our operations,
facilities, network and services. We cannot assure you that our capital
resources will permit us to fund our planned network deployment and operations
or achieve operating profitability. Failure to generate or raise sufficient
funds may require us to delay or abandon some of our expansion plans or
expenditures, which could have a material adverse effect on our business,
results of operations or financial condition.

As of January 7, 2000, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $2.5 billion through 2002. Our estimated aggregate capital
requirements include the projected costs of:

     o    building our fiber optic communications network, including intra-city
          fiber optic communications networks
     o    adding voice and ATM switches
     o    expanding operations in existing and new markets
     o    developing wireless services
     o    funding general corporate expenses
     o    completing recent and pending acquisitions
     o    constructing, acquiring, developing or improving telecommunications
          assets

The estimated costs and incremental capital needs associated with the
acquisitions of Splitrock is included in our estimated aggregate capital
requirements.

We expect to use the following to address our capital needs:

     o    approximately $1,261.0 million of cash and investments on hand at
          December 31, 1999
     o    additional issuances of debt or equity securities
     o    projected operating cash flow



                                       54
<PAGE>

Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements may differ substantially from our estimate due to factors
such as:

     o    strategic acquisition costs and effects of acquisitions on our
          business plan, capital requirements and growth projections
     o    unforeseen delays
     o    cost overruns
     o    engineering design changes
     o    changes in demand for our services
     o    regulatory, technological or competitive developments
     o    new opportunities

We also expect to evaluate potential acquisitions, joint ventures and strategic
alliances on an ongoing basis. We may require additional financing if we pursue
any of these opportunities. Accordingly, we may need additional capital to
continue to expand our markets, operations, facilities, network and services.

Our projected additional funding need is approximately $900 million through 2002
based on the difference between existing cash balances and the combined
McLeodUSA and Splitrock business plan, capital requirements and growth
projections. This projected additional funding need assumes that the Splitrock
11 3/4% senior notes due 2008, which are redeemable by the holders upon a change
of control, will remain outstanding at the completion of the Splitrock Merger.

We may meet any additional capital needs by issuing additional debt or equity
securities or borrowing funds from one or more lenders. We cannot assure you
that we will have timely access to additional financing sources on acceptable
terms.

Failure to generate or raise sufficient funds may require us to delay or abandon
some of our expansion plans or expenditures, which could have a material adverse
effect on our business, results of operations or financial condition. SEE
"BUSINESS--RISK FACTORS--FAILURE TO RAISE NECESSARY CAPITAL COULD RESTRICT OUR
ABILITY TO DEVELOP OUR NETWORK AND SERVICES AND ENGAGE IN STRATEGIC
ACQUISITIONS."


MARKET RISK

SEE ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

RESULTS OF THE YEAR 2000 DATE CONVERSION ISSUE

The Year 2000 conversion issue, which involved the millennial date change from
1999 to 2000, threatened to impact computer programs and hardware timers using
two digits (rather than four) to define the applicable year. Prior to the end of
1999, we completed our review of our system readiness for the processing of
date-sensitive information by our computerized information systems. Upon the
occurrence of the millennial date change, none of our computer systems appeared
to suffer material adverse effects from the Year 2000 conversion.

We incurred costs arising from our Year 2000 readiness process in the amount of
$6.3 million. Our review and related Year 2000 readiness activities did not
cause us to defer or forego, to any material degree, any other critical
Information Technology project.



                                       55
<PAGE>

You should be aware that there is the possibility of latent defects or issues
related to the Year 2000 conversion issue that could result in future
miscalculations or system failures. If we, our major vendors, our material
service providers or our customers fail to identify and address any latent Year
2000 issues in a timely manner, such failure could have a material adverse
effect on our business, results of operations and financial condition. We depend
on local exchange carriers, primarily the MegaBells, to provide most of our
local and some of our long distance services. To the extent U S WEST and
SBC/Ameritech fail to address latent Year 2000 issues which might interfere with
their ability to fulfill their obligations to us, such interference could have a
material adverse effect on our future operations. If other telecommunications
carriers are unable to resolve such issues, it is likely that we will be
affected to a similar degree as others in the telecommunications industry.

EFFECTS OF NEW ACCOUNTING STANDARDS

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. The Company does not
expect the impact of the adoption of SFAS 133 to be material to its results of
operations as it does not currently hold any derivative instruments or engage in
hedging activities.

INFLATION

We do not believe that inflation has had a significant impact on our
consolidated operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

At December 31, 1999, we recorded our marketable equity securities at a fair
value of $89.7 million. These securities have exposure to price risk. A
hypothetical ten percent adverse change in quoted market prices would amount to
a decrease in the recorded value of investments of approximately $9 million. We
believe our exposure to market price fluctuations on all other investments is
nominal due to the short-term nature of our investment portfolio.

We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of our
long-term debt obligations are fixed rate obligations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial statements, including our consolidated balance sheets
as of December 31, 1999 and 1998, consolidated statements of operations and
comprehensive income for the years ended December 31, 1999, 1998 and 1997,
consolidated statements of stockholders' equity for the years ended December 31,
1999, 1998 and 1997, consolidated statements of cash flows for the years ended
December 31, 1999, 1998 and 1997, and notes to our consolidated financial
statements, together with a report thereon of Arthur Andersen LLP, dated January
26, 2000, are attached hereto as pages F-1 through F-34.



                                       56
<PAGE>

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

Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Reference is made to the information set forth under the captions "Election of
Directors - Information as to Nominees and Other Directors" and "Executive
Compensation and Other Information - Section 16(a) Beneficial Ownership
Reporting Compliance" appearing in our definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 31, 2000 (the "Proxy Statement"), to
be filed within 120 days after the end of our fiscal year, which information is
incorporated herein by reference. Information required by this item with respect
to executive officers is provided in Item 1 of this Form 10-K. SEE
"BUSINESS-EXECUTIVE OFFICERS."

ITEM 11. EXECUTIVE COMPENSATION.

Reference is made to the information set forth under the captions "Election of
Directors-Directors' Compensation" and "Executive Compensation and Other
Information" appearing in the Proxy Statement to be filed within 120 days after
the end of our fiscal year, which information is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Reference is made to the information set forth under the caption "Stock Owned by
Management" and "Principal Holders of Voting Securities" appearing in the Proxy
Statement to be filed within 120 days after the end of our fiscal year, which
information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Reference is made to the information set forth under the caption "Executive
Compensation and Other Information-Certain Transactions" appearing in the Proxy
Statement to be filed within 120 days after the end of our fiscal year, which
information is incorporated herein by reference.

                                     PART IV

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

(a)(1) The following consolidated financial statements of McLeodUSA and report
       of independent public accountants are included in Item 8 of this
       Form 10-K.

       Report of independent public accountants.

       Consolidated balance sheets as of December 31, 1999 and 1998.

       Consolidated statements of operations and comprehensive income for the
       years ended December 31, 1999, 1998 and 1997.


                                       57
<PAGE>

       Consolidated statements of stockholders' equity for the years ended
       December 31, 1999, 1998 and 1997.

       Consolidated statements of cash flows for the years ended December 31,
       1999, 1998 and 1997.

       Notes to consolidated financial statements.

(a)(2) The following financial statement schedule is filed as part of this
       report and is attached hereto as pages S-1 and S-2.

       Report of Independent Public Accountants on the Financial Statement
       Schedule

       Schedule II-- Valuation and Qualifying Accounts.

All other schedules for which provision is made in the applicable accounting
regulations of the SEC either have been included in our consolidated financial
statements or the notes thereto, are not required under the related instructions
or are inapplicable, and therefore have been omitted.

(a)(3) The following exhibits are either provided with this Form 10-K or are
       incorporated herein by reference:

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION


2.1       Agreement and Plan of Reorganization dated as of January 27, 1997
          among McLeod, Inc., Digital Communications of Iowa, Inc., Clark E.
          McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current Report on
          Form 8-K, File No. 0-20763, filed with the Commission on February 24,
          1997 and incorporated herein by reference).

2.2       Asset Purchase Agreement dated as of May 30, 1997 by and among
          McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI Communications,
          Inc., ESI Communications/ SW, Inc., ESI Communications/West, Inc., ESI
          Communications Downtown, Inc., ESI Communications North, Inc., and
          Michael Reichert, Peter Jones, John Pupkes and Jeff Meehan. (Filed as
          Exhibit 2.1 to Current Report on Form 8-K, File No. 0-20763 (the "June
          1997 Form 8-K"), filed with the Commission on June 26, 1997 and
          incorporated herein by reference).

2.3       Agreement and Plan of Reorganization dated as of June 14, 1997 among
          McLeodUSA Incorporated, Eastside Acquisition Co. and Consolidated
          Communications Inc. (Filed as Exhibit 2.2 to the June 1997 Form 8-K
          and incorporated herein by reference).

2.4       Agreement and Plan of Merger dated as of October 27, 1998 among
          McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
          Telecommunications Group, Inc. (Filed as Exhibit 2.7 to the
          Registration Statement on Form S-4, File No. 333-68891 (the "December
          1998 Form S-4"), and incorporated herein by reference).

2.5       Agreement and Plan of Merger, dated as of January 7, 1999 among
          McLeodUSA Incorporated, Bravo Acquisition Corporation, Ovation
          Communications, Inc. and certain stockholders of Ovation
          Communications, Inc. (Filed as Exhibit 2.1 to current Report on Form
          8-K, File No. 0-20763 (the "January 1999 Form 8-K"), filed with the
          Commission on January 14, 1999 and incorporated herein by reference).

                                       58
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION


2.6       Amended and Restated Agreement and Plan of Merger, dated as of January
          7, 1999, among McLeodUSA Incorporated, McLeodUSA Publishing Company,
          Pubco Merging Co., Talking Directories, Inc. and the stockholders of
          Talking Directories, Inc. (Filed as Exhibit 4.8 to the Registration
          Statement on Form S-3, file number 333-78561, and incorporated herein
          by reference).

2.7       Amended and Restated Agreement and Plan of Merger, dated as of January
          7, 1999 among McLeodUSA Incorporated, McLeodUSA Publishing Company,
          Publication Merge Co., Info America Phone Books, Inc. and certain
          stockholders of Info America Phone Books, Inc. (Filed as Exhibit 4.9
          to the Registration Statement on Form S-3, file number 333-78561, and
          incorporated herein by reference).

2.8       Amended and Restated Agreement and Plan of Merger by and among
          McLeodUSA, Southside Acquisition Corporation, Splitrock Services,
          Inc., Splitrock Holdings, Inc., and Splitrock Merger Sub dated as of
          February 11, 2000. (Filed as Exhibit 2.1 to Registration Statement on
          Form S-4, file number 333-95941 (the "February 2000 Form S-4"), and
          incorporated herein by reference).

3.1       Amended and Restated Certificate of Incorporation of McLeod, Inc.
          (Filed as Exhibit 3.1 to Registration Statement on Form S-1, File No.
          333-3112 ("Initial FormS-1") and incorporated herein by reference).

3.2       Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
          Registration Statement on Form S-1, File No. 333-13885 (the "November
          1996 Form S-1"), and incorporated herein by reference).

3.3       Certificate of Amendment of Amended and Restated Certificate of
          Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
          Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4")
          and incorporated herein by reference).

3.4       Certificate of Change of Registered Agent and Registered Office of
          McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on Form
          10-K, File No. 0-20763, filed with the Commission on March 6, 1998
          (the "1997 Form 10-K") and incorporated herein by reference).

3.5       Certificate of Designations of the 6.75% Series A preferred stock.
          (Filed as Exhibit 3.1 to 3.5 Current Report on Form 8-K, file number
          0-20763, filed with the Commission on August 9, 1999 and incorporated
          herein by reference).

3.6       Certificate of Designations of the Series B preferred stock. (Filed as
          Exhibit 3.6 to February 2000 Form S-4 and incorporated herein by
          reference).

3.7       Certificate of Designations of the Series C preferred stock. (Filed as
          Exhibit 3.7 to February 2000 Form S-4 and incorporated herein by
          reference).

                                       59
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION


4.1       Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
          Exhibit 4.1 to Initial Form S-1 and incorporated herein by reference).

4.2       Indenture dated March 4, 1997 between McLeod, Inc. and United States
          Trust Company of New York, as Trustee, relating to the 101/2% Senior
          Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2 to
          Annual Report on Form 10-K, File No. 0-20763, filed with the
          Commission on March 31, 1997 (the "1996 Form 10-K") and incorporated
          herein by reference).

4.3       Initial Global 101/2% Senior Discount Note Due March 1, 2007 of
          McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
          Form 10-K and incorporated herein by reference).

4.4       Form of Certificated 101/2% Senior Discount Note Due March 1, 2007 of
          McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
          incorporated herein by reference).

4.5       Investor Agreement dated as of April 1, 1996 among McLeod, Inc., IES
          Investments Inc., Midwest Capital Group Inc., MWR Investments Inc.,
          Clark and Mary McLeod, and certain other stockholders. (Filed as
          Exhibit 4.8 to Initial Form S-1 and incorporated herein by reference).

4.6       Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
          and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
          Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod. (Filed
          as Exhibit 4.3 to the November 1996 Form S-1 and incorporated herein
          by reference).

4.7       Form of 101/2 % Senior Discount Exchange Note Due 2007 of McLeodUSA
          Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
          incorporated herein by reference).

4.8       Indenture dated as of July 21, 1997 between McLeodUSA Incorporated and
          United States Trust Company of New York, as Trustee, relating to the
          91/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed as
          Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
          reference).

4.9       Form of Initial Global 91/4 % Senior Note Due 2007 of McLeodUSA
          Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
          incorporated herein by reference).

4.10      Stockholders' Agreement dated June 14, 1997 among McLeodUSA
          Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR
          Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard A.
          Lumpkin on behalf of each of the shareholders of Consolidated
          Communications Inc. listed on Schedule 1 of the Stockholders'
          Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
          incorporated herein by reference).



                                       60
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION

4.11      Amendment No. 1 to Stockholders' Agreement dated as of September 19,
          1997 by and among McLeodUSA Incorporated, IES Investments Inc.,
          Midwest Capital Group, Inc., MWR Investments Inc., Clark E. McLeod,
          Mary E. McLeod and Richard A. Lumpkin on behalf of each of the
          shareholders of Consolidated Communications Inc. listed in Schedule I
          thereto. (Filed as Exhibit 4.1 to the Quarterly Report on Form 10-Q,
          File No. 0-20763, filed with the Commission on November 14, 1997 and
          incorporated herein by reference).

4.12      Form of 91/4% Senior Exchange Note Due 2007 of McLeodUSA Incorporated.
          (Filed as Exhibit 4.14 to the 1997 Form 10-K and incorporated herein
          by reference).

4.13      Indenture dated as of March 16, 1998 between McLeodUSA Incorporated
          and United States Trust Company of New York, as Trustee, relating to
          the 83/8% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
          Exhibit 4.15 to Registration Statement on Form S-4, File No. 333-52793
          (the "May 1998 Form S-4") and incorporated herein by reference).

4.14      Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA Incorporated
          (contained in the Indenture filed as Exhibit 4.13).

4.15      Stockholders' Agreement dated November 18, 1998 by and among McLeodUSA
          Incorporated; IES Investments Inc.; Clark E. McLeod; Mary E. McLeod;
          and Richard A. Lumpkin and each of the former shareholders of
          Consolidated Communications Inc. ("CCI") and certain permitted
          transferees of the former CCI shareholders. (Filed as Exhibit 99.1 to
          the Current Report on Form 8-K, File No. 0-20763, filed with the
          Commission on November 19, 1998 and incorporated herein by reference).

4.16      Indenture dated as of October 30, 1998 between McLeodUSA Incorporated
          and United States Trust Company of New York, as Trustee, relating to
          the 9 1/2% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
          Exhibit 4.19 to Registration Statement on Form S-4, File No. 333-69621
          (the "December 23, 1998 Form S-4") and incorporated herein by
          reference).

4.17      Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated
          (contained in the Indenture filed as Exhibit 4.16).

4.18      Stockholders' Agreement dated January 7, 1999 by and among McLeodUSA
          Incorporated, IES Investments Inc., Clark E. McLeod, Mary E. McLeod,
          Richard A. Lumpkin, Gail Lumpkin, M/C Investors L.L.C. and
          Media/Communications Partners III Limited Partnership. (Filed as
          Exhibit 4.1 to the January 1999 Form 8-K and incorporated herein by
          reference).

4.19      Indenture dated as of February 22, 1999 between McLeodUSA Incorporated
          and United States Trust Company of New York, as Trustee, relating to
          the 81/8 % Senior Notes Due 2009 of McLeodUSA Incorporated. (Filed as
          Exhibit 4.22 to the 1998 Form 10-K and incorporated herein by
          reference).

4.20      Form of Global 81/8% Senior Note Due 2009 of McLeodUSA Incorporated
          (contained in the Indenture filed as Exhibit 4.19). (Filed as Exhibit
          4.22 to the 1998 Form 10-K and incorporated herein by reference).


                                       61
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION

4.21      Form of 6.75% Series A preferred stock certificate. (Filed as Exhibit
          4.1 to Current Report on Form 8-K, filed number 0-20763, filed with
          the Commission on August 9, 1999 and incorporated herein by
          reference).

4.22      Form of Series B preferred stock certificate. (Filed as Exhibit 22 to
          the February 2000 Form S-4 and incorporated herein by reference).

4.23      Form of Series C preferred stock certificate. (Filed as Exhibit 23 to
          the February 2000 Form S-4 and incorporated herein by reference).

4.24      Second Amended and Restated November 1998 Stockholders' Agreement
          dated December 17, 1999 by and among certain Alliant Entities, Clark
          and Mary McLeod, Richard Lumpkin and certain CCI Shareholders.

4.25      Second Amended and Restated January 1999 Stockholders' Agreement dated
          December 17, 1999 by and among certain Alliant Entities, Clark and
          Mary McLeod, Richard Lumpkin, certain CCI Shareholders and the M/C
          Stockholders.

10.1      Lease Agreement dated September 5, 1995 between State of Iowa and MWR
          Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1 and
          incorporated herein by reference).

10.2      Lease Agreement dated September 5, 1995 between State of Iowa and
          McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial Form
          S-1 and incorporated herein by reference).

10.3      U S WEST Centrex Plus Service Rate Stability Plan dated October 15,
          1993 between McLeod Telemanagement, Inc. and U S WEST Communications,
          Inc. (Filed as Exhibit 10.26 to Initial Form S-1 and incorporated
          herein by reference).

10.4      U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993
          between McLeod Telemanagement, Inc. and U S WEST Communications, Inc.
          (Filed as Exhibit 10.27 to Initial Form S-1 and incorporated herein by
          reference).

10.5      Ameritech Centrex Service Confirmation of Service Orders dated various
          dates in 1994, 1995 and 1996 between McLeod Telemanagement, Inc. and
          Ameritech Information Industry Services. (Filed as Exhibit 10.28 to
          Initial Form S-1 and incorporated herein by reference).

10.6      Lease Agreement dated as of December 28, 1993 between 2060 Partnership
          and McLeod Telemanagement, Inc., as amended by Amendments First to
          Ninth dated as of July 3, 1994, March 25, 1994, June 22, 1994, August
          12, 1994, September 12, 1994, September 20, 1994, November 16, 1994,
          September 20, 1995 and January 6, 1996, respectively. (Filed as
          Exhibit 10.29 to Initial Form S- 1 and incorporated herein by
          reference).

10.7      Lease Agreement dated as of May 24, 1995 between 2060 Partnership and
          McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form
          S-1 and incorporated herein by reference).


                                       62
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION

10.8      Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture
          and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial
          Form S-1 and incorporated herein by reference).

10.9      First Amendment to Lease Agreement dated as of November 20, 1995
          between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed
          as Exhibit 10.32 to Initial Form S-1 and incorporated herein by
          reference).

10.10     Master Right-of-Way Agreement dated July 27, 1994 between McLeod
          Network Services, Inc. and IES Industries Inc. (Filed as Exhibit 10.34
          to Initial Form S-1 and incorporated herein by reference).

10.11     Master Right-of-Way and Tower Use Agreement dated February 13, 1996
          between IES Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35
          to Initial Form S-1 and incorporated herein by reference).

10.12     Master Pole, Duct and Tower Use Agreement dated February 20, 1996
          between MidAmerican Energy Company and McLeod, Inc. (Iowa and South
          Dakota). (Filed as Exhibit 10.36 to Initial Form S-1 and incorporated
          herein by reference).

10.13     Master Pole, Duct and Tower Use Agreement dated February 20, 1996
          between MidAmerican Energy Company and McLeod, Inc. (Illinois). (Filed
          as Exhibit 10.37 to Initial Form S-1 and incorporated herein by
          reference).

10.14     Settlement Agreement dated March 18, 1996 between U S WEST
          Communications, Inc. and McLeod Telemanagement, Inc. (Filed as Exhibit
          10.38 to Initial Form S-1 and incorporated herein by reference).

10.15     McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan.
          (Filed as Exhibit 10.40 to Initial Form S-1 and incorporated herein by
          reference).

10.16     McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41
          to Initial Form S-1 and incorporated herein by reference).

10.17     McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42
          to Initial Form S-1 and incorporated herein by reference).

10.18     McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as
          Exhibit 10.43 to Initial Form S-1 and incorporated herein by
          reference).

10.19     Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
          McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1 and
          incorporated herein by reference).

10.20     Promissory Note dated March 29, 1996 between Stephen K. Brandenburg
          and McLeod, Inc. (Filed as Exhibit 10.45 to Initial Form S-1 and
          incorporated herein by reference).

+10.21    Telecommunications Services Agreement dated March 14, 1994 between
          WiITeI, Inc. and McLeod Telemanagement, Inc., as amended. (Filed as
          Exhibit 10.47 to Initial Form S-1 and incorporated herein by
          reference).


                                       63
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION

10.22     First Amendment to Agreement Regarding Support Agreement dated May 14,
          1996 among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
          (Filed as Exhibit 10.50 to Initial Form S-1 and incorporated herein by
          reference).

10.23     First Amendment to Agreement Regarding Guarantee dated May 14, 1996
          among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
          (Filed as Exhibit 10.51 to Initial Form S-1 and incorporated herein by
          reference).

10.24     Amended and Restated Directors Stock Option Plan of McLeod, Inc.
          (Filed as Exhibit 10.52 to Initial Form S-1 and incorporated herein by
          reference).

10.25     Forms of Employment, Confidentiality and Non-Competition Agreement
          between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as
          Exhibit 10.53 to Initial Form S-1 and incorporated herein by
          reference).

10.26     Form of Change-of-Control Agreement between McLeod, Inc. and certain
          employees of McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1
          and incorporated herein by reference).

10.27     McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed as
          Exhibit 10.55 to the November 1996 Form S-1 and incorporated herein by
          reference).

10.28     McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as
          Exhibit 10.56 to the 1996 Form 10-K and incorporated herein by
          reference).

10.29     Form of Indemnity Agreement between McLeod, Inc. and certain officers
          and directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form
          S-1 and incorporated herein by reference).

10.30     McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the November
          1996 Form S-1 and incorporated herein by reference).

10.31     Amended and Restated Credit Agreement dated as of May 5, 1996 among
          TelecomUSA Publishing Group, Inc., TelecomUSA Publishing Company and
          TelecomUSA Neighborhood Directories, Inc. and Norwest Bank Iowa,
          National Association. (Filed as Exhibit 10.64 to the November 1996
          Form S- 1 and incorporated herein by reference).

10.32     First Amendment to Amended and Restated Credit Agreement dated as of
          January 31, 1996 by and between TelecomUSA Publishing Group, Inc.,
          TelecomUSA Publishing Company and TelecomUSA Neighborhood Directories,
          Inc. and Norwest Bank Iowa, National Association. (Filed as Exhibit
          10.65 to the November 1996 Form S-1 and incorporated herein by
          reference).

10.33     Lease Agreement dated as of July 18, 1995 between 2060 Partnership,
          L.P. and TelecomUSA Publishing Company. (Filed as Exhibit 10.68 to the
          November 1996 Form S-1 and incorporated herein by reference).


                                       64
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION


10.34     Lease Agreement dated April 26, 1995 by and between A.M. Henderson and
          TelecomUSA Publishing Company. (Filed as Exhibit 10.69 to the November
          1996 Form S-1 and incorporated herein by reference).

10.35     License Agreement dated as of April 19, 1994, between Ameritech
          Information Industry Services and TelecomUSA Publishing Company.
          (Filed as Exhibit 10.70 to the November 1996 Form S-1 and incorporated
          herein by reference).

10.36     License Agreement dated September 13, 1993 between U S WEST
          Communications, Inc. and TelecomUSA Publishing Company. (Filed as
          Exhibit 10.71 to the November 1996 Form S-1 and incorporated herein by
          reference).

10.37     Form of McLeod, Inc. Directors Stock Option Plan Option Agreement.
          (Filed as Exhibit 10.72 to the November 1996 Form S-1 and incorporated
          herein by reference).

10.38     Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive Stock
          Option Agreement. (Filed as Exhibit 10.73 to the November 1996 Form
          S-1 and incorporated herein by reference).

10.39     Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive
          Stock Option Agreement. (Filed as Exhibit 10.74 to the November 1996
          Form S-1 and incorporated herein by reference).

10.40     Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA
          Publishing Company, Fronteer Financial Holdings, Ltd., Classified
          Directories, Inc., Larry A. Scott, James Greff, Randall L. Gowin and
          Edwin Dressler and certain directors, officers and shareholders of
          Fronteer Financial Holdings, Ltd. (Filed as Exhibit 10.90 to the 1996
          Form 10-K and incorporated herein by reference).

10.41     Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA
          Publishing Company, Indiana Directories, Inc., John Morgan, Hank
          Meijer, Jack Hendricks, Brad Nelson and Talking Directories, Inc.
          (Filed as Exhibit 10.91 to the 1996 Form 10-K and incorporated herein
          by reference).

10.42     Amendment to Sale and Purchase Agreement dated February 28, 1997
          between McLeodUSA Publishing Company and Indiana Directories, Inc.
          (Filed as Exhibit 10.92 to the 1996 Form 10-K and incorporated herein
          by reference).

10.43     Ameritech Centrex Service Confirmation of Service Orders dated August
          21, 1996 between McLeod Telemanagement, Inc. and Ameritech Information
          Industry Services. (Filed as Exhibit 10.93 to the 1996 Form 10-K and
          incorporated herein by reference).

+10.44    Amended and Restated Program Enrollment Terms dated November 1, 1996
          between WorldCom Network Services, Inc. d/b/a WilTel and McLeod
          Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual Report on Form
          10-K/A, File No. 0-20763, filed with the Commission on April 8, 1997
          and incorporated herein by reference).


                                       65
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION


10.45     Letter Agreement dated April 15, 1997 between U S WEST Communications
          and McLeodUSA Network Services, Inc. (Filed as Exhibit 10.1 to
          Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
          Commission on May 14, 1997 and incorporated herein by reference).

10.46       Network Agreement dated April 7, 1997, between Wisconsin Power
            and Light Company and McLeodUSA Telecommunications Services,
            Inc. (Filed as Exhibit 10.96 to the July 1997 Form S-4 and
            incorporated herein by reference).

10.47     Agreement dated July 7, 1997 between McLeodUSA Telecommunications
          Services, Inc. and U S WEST Communications, Inc. (Filed as Exhibit
          10.97 to the July 1997 Form S-4 and incorporated herein by reference).

10.48     Agreement dated August 14, 1997 between McLeodUSA Incorporated and
          Taylor Ball, Inc. (Filed as Exhibit 10.98 to Registration Statement on
          Form S-4, File No. 333-34227 (the "November 1997 Form S-4") and
          incorporated herein by reference).

10.49     Interconnection Agreement Under Sections 251 and 252 of the
          Telecommunications Act of 1996 dated as of October 28, 1996 between
          Ameritech Information Industry Services and Consolidated
          Communications Telecom Services Inc. (Filed as Exhibit 10.99 to the
          November 1997 Form S-4 and incorporated herein by reference).

10.50     Interconnection Agreement Under Sections 251 and 252 of the
          Telecommunications Act of 1996 dated as of July 17, 1997 between
          Ameritech Information Industry Services and Consolidated
          Communications Telecom Services Inc. (Filed as Exhibit 10.100 to the
          November 1997 Form S-4 and incorporated herein by reference).


                                       66
<PAGE>

EXHIBIT
NUMBER                            EXHIBIT DESCRIPTION

10.51     Supply Agreement dated February 26, 1990 and Amendment Number 4 to
          Supply Agreement dated January 4, 1999 between Alcatel USA Marketing,
          Inc. and McLeodUSA Incorporated. (Filed as Exhibit 10.51 to the 1998
          Form 10-K and incorporated herein by reference).

10.52     Stock Purchase Agreement dated as of August 30, 1999 by and between
          McLeodUSA Incorporated and 10.52 three Forstmann Little Partnerships.
          (Filed as Exhibit 10.1 to Current Report on Form 8-K, file number
          0-20763, filed with the Commission on September 23, 1999 and
          incorporated herein by reference).

10.53     Employment Agreement dated January 7, 2000 between McLeodUSA
          Incorporated and Clark E. McLeod. 10.53 (Filed as Exhibit 99.2 to
          Current Report on Form 8-K, file number 0-20763, filed with the
          Commission on February 3, 2000 and incorporated herein by nce).

10.54     Employment Agreement dated January 7, 2000 between McLeodUSA
          Incorporated and Stephen C. Gray. (Filed as Exhibit 99.3 to Current
          Report on Form 8-K, file number 0-20763, filed with the Commission on
          February 3, 2000 and incorporated herein by reference).

10.55     Employment Agreement dated January 7, 2000 between McLeodUSA
          Incorporated and Roy A. Wilkens. (Filed as Exhibit 99.4 to Current
          Report on Form 8-K, file number 0-20763, filed with the Commission on
          February 3, 2000 and incorporated herein by reference).

10.56     McLeodUSA Incorporated Second Amended and Restated Directors Stock
          Option Plan. (Filed as Exhibit 4.1 to Registration Statement on Form
          S-8, file number 333-89361 and incorporated herein by reference).

+10.57     Network Agreement dated November 24, 1999 between Alliant Energy
          Companies and McLeodUSA Telecommunications Services, Inc.

11.1      Computation of Loss per common and common equivalent share.

21.1      Subsidiaries of McLeodUSA Incorporated.

23.1      Consent of Arthur Andersen LLP.

27.1      Financial Data Schedule.


--------------------------
+   Confidential treatment has been requested. The copy filed as an exhibit
    omits the information subject to the confidential treatment request.


          (b)       Reports on Form 8-K.

          On October 29, 1999 we filed a Current Report on Form 8-K to report
          various management organizational changes.


                                       67
<PAGE>

          (c)       Exhibits.

          We hereby file as part of this Form 10-K the exhibits listed in the
          Index to Exhibits.

          (d)       Financial Statement Schedule

          The following financial statement schedule is filed herewith:

          Schedule II -- Valuation and Qualifying Accounts

          Schedules not listed above have been omitted because they are
          inapplicable or the information required to be set forth therein is
          provided in our consolidated financial statements or notes thereto.




                                       68
<PAGE>

                                    GLOSSARY

         ACCESS--Telecommunications services that permit long distance carriers
to use local exchange facilities to originate and/or terminate long distance
service.

         ACCESS TO RIGHTS-OF-WAY--Access to poles, ducts, conduits and other
rights-of-way.

         CAP (COMPETITIVE ACCESS PROVIDER)--A company that provides its
customers with an alternative to the local exchange company for local transport
of private line and special access telecommunications services.

         CENTRAL OFFICES--The switching centers or central switching facilities
of the local exchange companies.

         COLLOCATION--The ability of a CAP such as McLeodUSA to connect its
network to the LEC's central offices. Physical collocation occurs when a CAP
places its network connection equipment inside the local exchange company's
central offices. Virtual collocation is an alternative to physical collocation
by which the local exchange company permits a CAP to connect its network to the
local exchange company's central offices on comparable terms, even though the
CAP's network connection equipment is not physically located inside the central
offices.

         DEDICATED--Telecommunications service or capacity reserved for use by
particular customers.

         DIALING PARITY--The ability of a competing local or toll service
provider to provide telecommunications services in such a manner that customers
have the ability to route automatically, without the use of any access code,
their telecommunications to the service provider of the customer's designation.

         DIGITAL--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).

         ESMR--Enhanced Specialized Mobile Radio. A technology that allows
two-way radio service with the capability to provide wireless voice telephone
service to compete against cellular service.

         FCC--Federal Communications Commission.

         INTERCONNECTION--Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.

         INITIAL INTERCONNECTION DECISIONS--Rulings by the FCC announced in
September 1992 and August 1993, which require the regional Bell operating
companies and most other large local exchange carriers to provide
interconnection in local exchange company central offices to any CAP, long
distance carrier or end user seeking such interconnection for the provision of
interstate special access and switched access transport services.

         INTERCONNECTION DECISION--The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act of
1996.


                                       69
<PAGE>

         INTERLATA--Telecommunications services originating in a LATA and
terminating outside of that LATA.

         INTRALATA--Telecommunications services originating and terminating in
the same LATA.

         LATA (LOCAL ACCESS AND TRANSPORT AREA)--A geographic area composed of
contiguous local exchanges, usually but not always within a single state. The
State of Iowa contains all or part of five LATAs; the State of Illinois contains
all or part of 17 LATAs. There are approximately 200 LATAs in the United States.

         LMDS--Local Multipoint Distribution System. A method of distributing TV
signals to locations in a particular community.

         LOCAL EXCHANGE--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.

         LEC (LOCAL EXCHANGE CARRIER)--A company providing local telephone
services.

         LONG DISTANCE CARRIERS (INTEREXCHANGE CARRIERS)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.

         MEGABELLS--The four large incumbent telephone companies which remain
after a number of mergers involving the seven regional Bell operating companies
into which AT&Ts local telephone systems were divided in 1984. The MegaBells are
Bell Atlantic, Bell South, SBC Communications and US West.

         NUMBER PORTABILITY--The ability of an end user to change local exchange
carriers while retaining the same telephone number.

         PCS (PERSONAL COMMUNICATIONS SERVICES) - A high frequency digital
technology competitive with cellular.

         POPS (POINTS OF PRESENCE)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.

         PRIVATE LINE--A dedicated telecommunications connection between end
user locations.

         PUBLIC SWITCHED NETWORK--That portion of a local exchange company's
network available to all users generally on a shared basis (i.e., not dedicated
to a particular user). Traffic along the public switched network is generally
switched at the local exchange company's central offices.

         PUBLIC UTILITY COMMISSION--A state regulatory body, established in most
states, which regulates utilities, including telephone companies providing
intrastate services.

         RECIPROCAL COMPENSATION--The same compensation to a new competitive
local exchange carrier for termination of a local call by the local exchange
carrier on the new competitor's network as the new competitor pays the local
exchange carrier for termination of local calls on the local exchange carrier's
network.

         RESALE--Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.


                                       70
<PAGE>

         ROUTE MILE--The number of miles of the telecommunications path in which
fiber optic cables are installed.

         SELF-HEALING RING--A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub facility
with one or more network nodes (such as customer premises). Traffic is routed
between the hub and each of the nodes simultaneously in both a clockwise and a
counterclockwise direction. In the event of a cable cut or component failure
along one of these paths, traffic will continue to flow along the alternate path
so no traffic is lost. In the event of a catastrophic node failure, other nodes
will be unaffected because traffic will continue to flow along whichever path
(primary or alternate) does not pass through the affected node. The switch from
the primary to the alternate path will be imperceptible to most users.

         SPECIAL ACCESS SERVICES--The lease of private, dedicated
telecommunications lines or "circuits" along the network of a local exchange
company or a CAP, which lines or circuits run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end user to a
long distance carrier POP.

         SWITCH--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.

         SWITCHED ACCESS TRANSPORT SERVICES--Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.

         SWITCHED TRAFFIC--Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.

         UNBUNDLED ACCESS--Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.

         WCS (WIRELESS COMMUNICATIONS SERVICES) - A wireless technology for
cellular, PCS and similar communications.



                                       71
<PAGE>

                                   SIGNATURES

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

                                                McLEODUSA INCORPORATED

                                          By   /S/ CLARK E. MCLEOD
                                             ---------------------------
                                            Clark E. McLeod
                                            Chairman and Chief Executive Officer

                                           March 28, 2000

         Pursuant to the requirements of the Securities Exchange Act of 1934,
         this report has been signed below by the following persons on behalf of
         the registrant and in the capacities indicated as of March 28, 2000.

              SIGNATURE                          TITLE

/S/ CLARK E. MCLEOD               Chairman, Chief Executive Officer and
------------------------          Director (Principal Executive Officer)
Clark E. Mcleod



/S/ RICHARD A. LUMPKIN            Vice Chairman and Director
------------------------
Richard A. Lumpkin



/S/ STEPHEN C. GRAY               President and Chief Operating Officer;
-------------------               President and CEO-Local Services; Director
Stephen C. Gray



/S/ BLAKE O. FISHER, JR.          Group Vice President and Chief Planning and
------------------------          Development Officer; Director
Blake O. Fisher, Jr.



/S/ J. LYLE PATRICK               Group Vice President-Finance and Accounting
------------------------          and Chief Financial and Accounting Officer
J. Lyle Patrick                   (Principal Financial Officer and Principal
                                  Accounting Officer)



/S/ROY A. WILKENS                 Chief Technology Officer; President
------------------------          and CEO-Data Services; Director
Roy A. Wilkens



/S/ THOMAS M. COLLINS             Director
------------------------
Thomas M. Collins



/S/ ROBERT J. CURREY              Director
------------------------
Robert J. Currey



/S/ LEE LIU                       Director
------------------------
Lee Liu



/S/ PAUL D. RHINES                Director
------------------------
Paul D. Rhines



/S/PETER H.O. CLAUDY              Director
------------------------
Peter H.O. Claudy


                                       72
<PAGE>

/S/ANNE K. BINGAMAN                     Director
------------------------
Anne K. Bingaman



/S/THEODORE R. FORSTMANN                Director
------------------------
Theodore R. Forstmann



/S/ERSKINE B. BOWLES                    Director
------------------------
Erskine B. Bowles



                                       73
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

MCLEODUSA INCORPORATED AND SUBSIDIARIES

<TABLE>

<S>                                                                                                        <C>
Report of Independent Public Accountants...................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998...............................................F-3
Consolidated Statements of Operations and Comprehensive Income for the years ended
     December 31, 1999, 1998 and 1997......................................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
     1998 and 1997.........................................................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998
     and 1997..............................................................................................F-6
Notes to Consolidated Financial Statements.................................................................F-7

</TABLE>


                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
McLeodUSA Incorporated:

     We have audited the accompanying consolidated balance sheets of McLeodUSA
Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations and
comprehensive income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of McLeodUSA Incorporated'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. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of McLeodUSA
Incorporated and subsidiaries as of December 31, 1999 and 1998, 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.

                                                           ARTHUR ANDERSEN LLP



Chicago, Illinois
January 26, 2000
(except  with  respect to the  matters  discussed  in
Note 16, as to which the date is February 29, 2000)


                                      F-2
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                         (IN MILLIONS, EXCEPT SHARES)

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                       ------------------
                                                                                        1999        1998
                                                                                      --------   --------
<S>                                                                                    <C>        <C>
                                        ASSETS
Current Assets
    Cash and cash equivalents....................................................      $ 326.9    $ 455.1
    Investment in available-for-sale securities..................................        934.1      136.6
    Trade receivables, net.......................................................        183.8      116.4
    Inventory....................................................................         27.5       12.8
    Deferred expenses............................................................         39.2       26.7
    Prepaid expenses and other...................................................         58.0       45.6
                                                                                      --------   --------
        Total current assets.....................................................      1,569.5      793.2
                                                                                      --------   --------

Property and Equipment
    Land and building............................................................         85.1       60.3
    Telecommunications networks..................................................        635.9      307.3
    Furniture, fixtures and equipment............................................        267.2      138.3
    Networks in progress.........................................................        453.2      185.5
    Building in progress.........................................................          1.2       12.6
                                                                                      --------   --------
                                                                                       1,442.6      704.0
    Less accumulated depreciation................................................        172.6       74.3
                                                                                      --------   --------
                                                                                       1,270.0      629.7
Investments, Intangibles and Other Assets
    Other investments............................................................         35.9       35.9
    Goodwill, net................................................................        957.1      289.6
    Other intangibles, net.......................................................        290.2      112.4
    Other........................................................................         80.4       64.4
                                                                                      --------   --------
                                                                                       1,363.6      502.3
                                                                                      --------   --------
                                                                                      $4,203.1   $1,925.2
                                                                                      ========   ========
                                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
    Current maturities of long-term debt.........................................      $  14.4     $  8.2
    Contracts and notes payable..................................................           .1        4.5
    Accounts payable.............................................................        109.6       62.0
    Accrued payroll and payroll related expenses.................................         26.2       13.6
    Other accrued liabilities....................................................         92.2       63.8
    Deferred revenue, current portion............................................         24.1       11.0
    Customer deposits............................................................         30.1       16.8
                                                                                      --------   --------
        Total current liabilities................................................        296.7      179.9
Long-Term Debt, less current maturities..........................................      1,763.8    1,245.2
Deferred Revenue, less current portion...........................................         15.8       16.8
Other Long-term liabilities......................................................         18.3       20.5
                                                                                      --------   --------
                                                                                       2,094.6    1,462.4
Redeemable convertible preferred stock
        Preferred, Series B, redeemable, convertible, $.01 par value, authorized,
          issued and Outstanding 1999 275,000: 1998 none.........................        687.5        --

        Preferred, Series C, redeemable, convertible, $.01 par value, authorized,
          issued and Outstanding 1999 125,000: 1998 none.........................        312.5        --
                                                                                      --------   --------
                                                                                       1,000.0        --
                                                                                      --------   --------
Stockholders' Equity
    Capital stock:
        Preferred, Series A, $.01 par value: authorized, issued and outstanding
          1999 1,150,000 shares; 1998 none ......................................         --          --
        Common, Class A, $.01 par value; authorized 250,000,000 shares; issued
          and outstanding 1999 157,587,012 shares and 1998 127,358,350 shares....          1.6        1.3
        Common, Class B, convertible, $.01 par value; authorized 22,000,000
          shares; issued and outstanding 1999 none; 1998 none....................         --          --
    Additional paid-in capital...................................................      1,523.5      716.5
    Accumulated deficit..........................................................       (491.3)    (253.3)
    Accumulated other comprehensive income (loss) ...............................         74.7       (1.7)
                                                                                      --------   --------
                                                                                       1,108.5      462.8
                                                                                      --------   --------
                                                                                      $4,203.1   $1,925.2
                                                                                      ========   ========
</TABLE>

                The accompanying notes are an integral part of
                   these consolidated financial statements.



                                      F-3
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                     (IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                               --------------------------------
                                                                                 1999        1998         1997
                                                                               --------    --------     -------
<S>                                                                            <C>         <C>         <C>
Revenue:
   Telecommunications:
     Local and long distance ............................................      $  456.0    $  271.2     $ 110.0
     Local exchange services.............................................          78.4        67.8        16.1
     Private line and data...............................................          80.1        40.1        17.2
     Network maintenance and equipment...................................          36.3        32.9        21.0
     Other telecommunications............................................          30.1        27.8         9.9
                                                                               --------    --------     -------
          TOTAL TELECOMMUNICATIONS REVENUE...............................         680.9       439.8       174.2
   Directory.............................................................         209.2       144.9        81.1
   Telemarketing.........................................................          18.7        19.4        12.6
                                                                               --------    --------     -------
          TOTAL REVENUE..................................................         908.8       604.1       267.9

Operating expenses:
   Cost of service.......................................................         457.1       323.2       151.2
   Selling, general and administrative...................................         392.7       260.9       148.2
   Depreciation and amortization.........................................         190.7        89.1        33.3
   Other.................................................................           --          5.6         4.6
                                                                            ----------- -----------  -----------
          TOTAL OPERATING EXPENSES.......................................       1,040.5       678.8       337.3
                                                                            ----------- -----------  -----------
          OPERATING LOSS.................................................        (131.7)      (74.7)      (69.4)

Nonoperating income (expense):
   Interest income.......................................................          42.6        26.0        22.7
   Interest (expense)....................................................        (136.8)      (78.2)      (34.6)
   Other income..........................................................           5.6         2.0         1.4
                                                                            ----------- -----------  -----------
          TOTAL NONOPERATING INCOME (EXPENSE)............................         (88.6)      (50.2)      (10.5)
                                                                            ----------- -----------  -----------

          LOSS BEFORE INCOME TAXES.......................................        (220.3)     (124.9)      (79.9)

Income taxes.............................................................          --           --           --
                                                                            ----------- -----------  -----------
          NET LOSS.......................................................        (220.3)     (124.9)      (79.9)
Preferred stock dividend.................................................         (17.7)        --           --
                                                                            ----------- ------------  -----------
              NET LOSS APPLICABLE TO COMMON SHARES.......................    $   (238.0)   $ (124.9)   $  (79.9)
                                                                             ========== ============  ===========
Basic and diluted loss per common share..................................    $    (1.61)   $   (.99)   $   (.73)
                                                                             ========== ============  ===========
Weighted average common shares outstanding...............................         147.7       125.6       109.9
                                                                             ========== ============  ===========
Other comprehensive income (loss):
    Unrealized gains on securities:
       Unrealized holding gains (losses) arising during the
        Period ..........................................................          83.4         3.0        (2.5)
       Less:  Reclassification adjustment for gains included in
         Net income......................................................          (7.0)       (2.2)         --
                                                                            ----------- -----------  -----------
                TOTAL OTHER COMPREHENSIVE INCOME (LOSS) .................          76.4          .8        (2.5)
                                                                            ----------- -----------  -----------
                 COMPREHENSIVE LOSS .....................................   $    (161.6)   $ (124.1)  $   (82.4)
                                                                            ===========  =========== ===========

</TABLE>

                The accompanying notes are an integral part of
                   these consolidated financial statements.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                         (IN MILLIONS, EXCEPT SHARES)


<TABLE>
<CAPTION>
                                                                                      ACCUMULATED
                                                 COMMON STOCK  ADDITIONAL                OTHER
                                               ---------------  PAID-IN  ACCUMULATED COMPREHENSIVE
                                               CLASS A CLASS B  CAPITAL    DEFICIT     INCOME      TOTAL
                                               ------- ------- --------- ----------- ------------- ------
<S>                                            <C>     <C>     <C>       <C>         <C>           <C>
Balance, December 31, 1996...................  $  0.4  $ 0 .2   $  450.7  $   (47.8)     $   --    $ 403.5
  Net loss                                        --      --         --       (79.9)         --      (79.9)
  Issuance of 1,137,883 shares of Class A
    Common stock                                  --      --         0.9        --           --        0.9
  Release of 56,177 shares of Class A common
    stock from escrow........................     --      --         1.3        --           --        1.3
  Issuance of 84,430 shares of Class A common
    stock in connection with the acquisition of
    Digital Communications of Iowa, Inc......     --      --         2.3        --           --        2.3
  Issuance of 8,488,596 shares of Class A
    Common stock in connection with the
    Acquisition of CCI.......................     --      --       223.6        --           --      223.6
  Issuance of 55,500 shares of Class A common
    stock in connection with the acquisition of
    certain assets of OneTEL Corp............     --      --         2.0        --           --        2.0
  Issuance of 140,000 shares of Class A
    common stock in connection with the
    acquisition of ownership interests of
    Colorado Directory Company LLC                --      --         4.5        --           --        4.5
  Issuance of 38,080 shares of Class A common
    stock to participants in the Employee
    Stock Purchase Plan                           --      --         0.7        --           --        0.7
  Conversion of 15,625,929 shares of Class B
    Common stock to 15,625,929 shares of Class
    A common stock...........................     0.2    (0.2)       --         --           --        --
  Amortization of compensation expense
related to stock options                          --      --         3.0        --           --        3.0

  Other comprehensive income.................     --      --         --         --          (2.5)     (2.5)
                                                -----   -----   --------   -------       -------  --------
Balance, December 31, 1997...................     0.6     --       689.0     (127.7)        (2.5)    559.4
  Net loss                                        --      --         --      (124.9)         --     (124.9)
  Issuance of 1,353,785 shares of Class A
    common stock                                  --      --         3.7        --           --        3.7
  Issuance of 70,508 shares of Class A common
    stock in connection with the acquisition
    of NewCom Technologies, Inc. and NewCom
    OSP Services, Inc. ......................     --      --         3.2        --           --        3.2
  Issuance of 151,019 shares of Class A
   Common stock in connection with the
   acquisition of certain assets of
   Communications Cable-Laying Company,
   Inc. .....................................     --      --         6.0        --           --        6.0
  Issuance of 70,672 shares of Class A common
    stock in connection with the acquisition
    of Inlet, Inc. ..........................     --      --         2.4        --           --        2.4
  Issuance of 82,602 shares of Class A common
    stock to participants in the 401(k)
    profit-sharing plans.....................     --      --         2.6        --           --        2.6
  Issuance of 132,893 shares of Class A
    common stock to participants in the
    Employee Stock Purchase Plan                  --      --         3.7        --           --        3.7

  Amortization of compensation expense
    related to stock options                      --      --         5.9        --           --        5.9
  Other comprehensive income.................     --      --         --         --           0.8       0.8
                                                -----   -----   --------   -------       -------  --------
Balance, December 31, 1998...................     0.6     --       716.5     (252.6)        (1.7)    462.8
    Two-for-one stock split (Note 8).........     0.7     --         --        (0.7)         --        --
  Net loss                                        --      --         --      (238.0)         --     (238.0)
  Issuance of 4,174,274 shares of Class A
    common stock                                  --      --        20.7        --           --       20.7
  Issuance of 25,397,456 shares of Class A
    common stock in connection with
    the acquisitions (Note 8).                    0.3     --       487.7                             488.0
  Issuance of 222,762 shares of Class A
    common stock to participants in the
    401(k) profit-sharing plans..............     --      --         4.9        --           --        4.9
  Issuance of 313,909 shares of Class A
    common stock to participants in the
    Employee Stock Purchase Plan                  --      --         4.4        --           --        4.4
  Issuance of 1,150,000 shares of Series A
    preferred stock                               --      --       277.3        --           --      277.3
  Amortization of compensation expense
    related to stock options                      --      --         6.9        --           --        6.9
  Issuance of 120,261 shares of Class A
    common stock to Series A preferred stock
    shareholders.............................     --      --         5.1        --           --        5.1
     Other comprehensive income..............     --      --        --          --          76.4      76.4
                                                -----   -----   --------   -------       -------  --------
Balance, December 31, 1999...................   $ 1.6   $ --    $1,523.5   $(491.3)       $ 74.7  $1,108.5
                                                =====   =====   ========   =======       =======  ========

</TABLE>


                The accompanying notes are an integral part of
                   these consolidated financial statements.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                    -----------------------------
                                                                                      1999       1998      1997
                                                                                    --------   --------  --------
                                                                                    <S>        <C>       <C>
Cash Flows from Operating Activities
  Net loss........................................................................  $(220.3)   $(124.9)   $(79.9)
  Adjustments to reconcile net loss to net cash (used in) operating activities:
    Depreciation..................................................................    105.6       53.3      17.6
    Amortization..................................................................     85.1       34.7      15.7
    Accretion of interest on senior discount notes................................     38.9       35.1      26.7
    Changes in assets and liabilities, net of effects of acquisitions:
      (Increase) in trade receivables.............................................    (20.7)      (6.4)    (15.9)
      (Increase) in inventory.....................................................    (12.7)      (8.2)     (0.8)
      (Increase) decrease in deferred expenses....................................      (4.0)      0.9       1.2
      (Increase) decrease in prepaid expenses and other...........................      10.2     (34.3)
                                                                                                            (1.0)
      (Increase) in deferred line installation costs..............................    (27.2)     (13.6)     (9.7)
      Increase (decrease) in accounts payable and accrued expenses................     (16.9)     32.2      27.1
      Increase in deferred revenue................................................     10.5        4.6       7.2
      Increase in customer deposits...............................................      9.3        4.1       3.0
                                                                                    --------   --------  --------
        NET CASH (USED IN) OPERATING ACTIVITIES...................................    (42.2)     (22.5)     (8.8)
                                                                                    --------   --------  --------
Cash Flows from Investing Activities
  Purchase of property and equipment..............................................   (599.7)    (289.9)   (151.3)
  Available-for-sale securities:
    Purchases..................................................................... (1,247.3)    (607.4)   (116.0)
    Sales.........................................................................    144.3      264.4     102.4
    Maturities....................................................................    391.5      242.0     133.8
  Business acquisitions...........................................................   (230.8)     (27.8)   (181.9)
  Deposits on PCS licenses........................................................      --         --      (28.0)
  Other...........................................................................
                                                                                       (8.9)      (5.2)     (1.8)
                                                                                    --------   --------  --------
        NET CASH (USED IN) INVESTING ACTIVITIES................................... (1,550.9)    (423.9)   (242.8)
                                                                                    --------   --------  --------
Cash Flows from Financing Activities
  Payments on contracts and notes payable.........................................    (26.2)     (11.1)    (19.0)
  Proceeds from long-term debt....................................................    485.8      583.9     506.6
  Payments on long-term debt......................................................   (279.2)     (10.9)     (2.2)
  Net proceeds from issuance of common stock......................................     18.0        7.7       1.6
  Net proceeds from preferred stock - Series A....................................    278.1         --       --
  Net proceeds from preferred stock - Series B and C..............................    998.7         --       --
  Payments of preferred stock dividends...........................................    (10.3)        --       --
                                                                                    --------   --------  --------
        NET CASH PROVIDED BY FINANCING ACTIVITIES.................................  1,464.9      569.6     487.0
                                                                                    --------   --------  --------

        NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................  (128.2)      123.2     235.4
Cash and cash equivalents:
  Beginning.......................................................................   455.1       331.9      96.5
                                                                                    --------   --------  --------
  Ending..........................................................................   $326.9     $455.1    $331.9
                                                                                    ========   ========  ========

Supplemental Disclosure of Cash Flow Information
  Cash payment for interest, net of interest capitalized 1999 $23.0; 1998 $10.7;
    1997 $4.4.....................................................................   $ 85.8     $ 27.0    $  1.8
                                                                                    ========   ========  ========
Supplemental Schedule of Noncash Investing and Financing Activities
  Release of 112,354 shares of Class A common stock from escrow ..................    $ --       $ --     $  1.3
                                                                                    ========   ========  ========
  Capital leases incurred for the acquisition of property and equipment ..........   $ 10.3     $  5.9    $  3.4
                                                                                    ========   ========  ========


</TABLE>

                The accompanying notes are an integral part of
                   these consolidated financial statements.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS: McLeodUSA Incorporated and subsidiaries (the "Company") is a
diversified telecommunications company, incorporated in Delaware, that provides
communications services to business and residential customers in the Midwestern
and Rocky Mountain regions of the United States. The Company's services
primarily include local, long-distance and related telecommunications services,
telecommunications network maintenance services and telephone equipment sales,
leasing, service and installation, private line and data services, the sale of
advertising space in telephone directories, the operation of two independent
local exchange companies, and telemarketing services. The Company's business is
highly competitive and is subject to various federal, state and local
regulations. In 1997, the Company's stockholders approved a change in its name
to McLeodUSA Incorporated from McLeod, Inc.

ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

A summary of the Company's significant accounting policies is as follows:

PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include those
of the Company and its subsidiaries, substantially all of which are wholly
owned. All significant intercompany items and transactions have been eliminated
in consolidation.

REGULATORY ACCOUNTING: Illinois Consolidated Telephone Company ("ICTC"), an
independent local exchange carrier and a wholly owned subsidiary of the Company,
prepares its financial statements in accordance with the provisions of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS No. 71"). Management periodically reviews the
criteria for applying these provisions to determine whether continuing
application of SFAS No. 71 is appropriate. Management believes that such
criteria are still being met and therefore has no current plans to change its
method of accounting.

In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore, any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less and all certificates of deposit, regardless of maturity, to be
cash equivalents.

INVESTMENTS: Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness of
such classifications at each balance sheet date. The Company has classified its
securities as available-for-sale. Available-for-sale securities are stated at
fair value, and unrealized holding gains and losses are reported as a component
of stockholders' equity. Realized gains and losses are determined on the basis
of the specific securities sold.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

TRADE RECEIVABLES: In accordance with the industry practice for the publication
of telephone directories, trade receivables include certain unbilled revenue
from installment contracts. It is anticipated that a substantial portion of all
such amounts at December 31, 1999 and 1998 will be collected within one year
(see Note 2).

INVENTORY: Inventory is carried principally at the lower of average cost or
market and consists primarily of new and reusable parts to maintain fiber optic
networks and parts and equipment used in the maintenance and installation of
telephone systems. All inventory is classified as raw materials.

PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Construction
costs, including interest, are capitalized during the installation of fiber
optic telecommunications networks. Interest expense was also capitalized as part
of the construction of the Company's headquarters buildings and the development
of the Company's software.

ICTC's property and equipment for its regulated operations is summarized as
follows at December 31, 1999 (In millions):

<TABLE>

<S>                                                                     <C>
        Telephone plant:
          In service..............................................      $107.8
          Under construction......................................         2.7
                                                                           ---
                                                                         110.5
          Less accumulated depreciation...........................       (16.3)
                                                                        ------
                                                                        $ 94.2
                                                                        ======
</TABLE>

When regulated property and equipment are retired, the original cost, net of
salvage, is charged against accumulated depreciation. The cost of maintenance
and repairs of property and equipment including the cost of replacing minor
items not constituting substantial betterments is charged to operating expense.

The provision for depreciation of regulated property and equipment is based upon
remaining life rates for property placed in service through 1980 and equal life
rates for property additions placed in service after 1980. The regulated
provision is equivalent to an annual composite rate of 5.75% for 1999.

The provision for depreciation of nonregulated property and equipment is
recorded using the straight-line method based on the following estimated useful
lives:

<TABLE>
<CAPTION>

<S>                                                           <C>
                                                                YEARS
        Buildings...........................................    20-39
        Telecommunications networks.........................     5-15
        Furniture, fixtures and equipment...................     2-10

</TABLE>

The Company's telecommunications networks are subject to technological risks and
rapid market changes due to new products and services and changing customer
demand. These changes may result in changes in the estimated economic lives of
these assets.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

OTHER INVESTMENTS: Other investments primarily includes approximately $23.4
million for a minority interest in a limited partnership which provides cellular
services to customers in east central Illinois. The Company follows the equity
method of accounting for this investment, which recognizes the Company's
proportionate share of the income and losses accruing to it under the terms of
its partnership agreement.

GOODWILL: Goodwill resulting from the Company's acquisitions is being amortized
over a range of 15 to 30 years using the straight-line method and the
acquisitions are periodically reviewed for impairment based upon an assessment
of future operations to ensure that it is appropriately valued. Accumulated
amortization on goodwill totaled $52.1 million and $16.4 million at December 31,
1999 and 1998, respectively.

OTHER INTANGIBLES: Other intangibles consist of customer lists and noncompete
agreements related to the Company's acquisitions, deferred line installation
costs incurred in the establishment of local access lines for customers and
franchise rights to provide cable services to customers in three Illinois
counties and in a Michigan city. The customer lists and noncompete agreements
are being amortized using the straight-line method over periods ranging from 3
to 15 years. The deferred line installation costs are being amortized using the
straight-line method over 36 to 60 months, which approximates the average lives
of residential and business customer contracts. The franchise rights are being
amortized using the straight-line method over periods ranging from 10 to 15
years. Accumulated amortization on the other intangibles totaled $60.7 million
and $25.1 million at December 31, 1999 and 1998, respectively.

INCOME TAX MATTERS: The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Net
deferred tax assets are reduced by a valuation allowance when appropriate (see
Note 6). Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

DEFERRED REVENUE: Amounts received in advance under long-term leases of fiber
optic telecommunications networks are recognized as revenue on a straight-line
basis over the life of the leases.

REVENUE RECOGNITION: Revenues for local and long-distance services are
recognized when subscribers use telecommunications services. The revenue from
long-term leases of fiber optic telecommunications networks is recognized over
the term of the lease. Base annual revenue for telecommunications network
maintenance is recognized on a straight-line basis over the term of the
contract. Additional services provided under these contracts are recognized as
the services are performed.

ICTC's toll revenue is provided through a combination of billed carrier access
charges, traditional end-user billed toll revenues, interstate tariffed
subscriber line charges and ICTC's share of revenues and expenses from the
non-traffic sensitive pool administered by the National Exchange Carrier
Association.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

ICTC's prescribed rate of return on interstate access revenues for 1999
continues to be 11.25%, as it has been since the FCC's represcription order in
December 1990. The FCC's rate of return rules also establishes a maximum for the
overall interstate rate of return by allowing up to 0.25% over the prescribed
rate, and also establishes a maximum rate of return for each individual access
element by allowing up to 0.40% over the prescribed rate per element.

Fees from telemarketing contracts are recognized as revenue in the period the
services are performed.

Revenues from directories are recorded upon publication.

Customer deposits consist of cash received from customers at the time a sales
contract is signed. They are recorded as revenue when the related directory is
published or when the related service is performed.

COST OF SERVICE AND DEFERRED EXPENSES: Cost of service includes local and
long-distance services purchased from certain Regional Bell Operating Companies
and interexchange carriers, the cost of providing local exchange services to
customers in ICTC's service area and the cost of operating the Company's fiber
optic telecommunications networks. Cost of service also includes production
costs associated with the publication of directories and direct costs associated
with telemarketing services and the sale and installation of telephone systems.

Deferred expenses consist of production and selling costs on unpublished
directory advertising orders. They are expensed when the related directory is
published and the related revenue of the directory is recognized.

KEY BUSINESS SUPPLIERS: U S WEST, Ameritech and Southwestern Bell Company are
the Company's primary suppliers of local central office switching and local
lines.

STOCK OPTIONS ISSUED TO EMPLOYEES: The Company has adopted the provisions of
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which establishes a fair
value based method for the financial reporting of its stock-based employee
compensation plans. The Company measures compensation using the intrinsic value
based method as prescribed by Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under this method, compensation is
measured as the difference between the market value of the stock on the grant
date, less the amount required to be paid for the stock. The difference, if any,
is charged to expense over the vesting period of the options.

The estimated market value used for the stock options granted was determined on
a periodic basis by the Company's Board of Directors prior to the Company's
initial public offering on June 10, 1996. Subsequent to the Company's initial
public offering, the market value used for stock options granted is based upon
the closing price of the Class A common stock on the day before the grant date.

STOCK OPTIONS ISSUED TO NONEMPLOYEES: The Company uses the Black-Scholes model
to determine the fair value of the stock options issued to nonemployees at the
date of grant. This amount is amortized to expense over the vesting period of
the options.
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

LOSS PER COMMON SHARE: Loss per common share has been computed using the
weighted average number of shares of common stock outstanding. All stock options
granted are anti-dilutive, and therefore excluded from the computation of
earnings per share. In the future, these stock options may become dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of cash and cash
equivalents approximates fair value due to the short maturity of the
instruments. For other investments for which there are no quoted market prices,
a reasonable estimate of fair value could not be made without incurring
excessive cost. The $35.9 million carrying amount of unquoted investments at
December 31, 1999, represents the original cost of the investments, which
management believes is not impaired. The fair value of the Company's long-term
debt is estimated to be $1.7 billion based on the quoted market rates for the
same or similar issues or the current rates offered to the Company for debt with
similar maturities.

RECLASSIFICATIONS: Certain items in the 1998 and 1997 consolidated financial
statements have been reclassified to be consistent with the presentation in the
1999 consolidated financial statements.

NOTE 2.   TRADE RECEIVABLES

     The composition of trade receivables, net is as follows:

<TABLE>
<CAPTION>

                                                                     DECEMBER 31, 1999
                                                                    -------------------
                                                                      1999       1998
                                                                    -------    --------
                                                                      (IN MILLIONS)
<S>                                                                 <C>        <C>
        Billed..................................................     $165.7     $ 110.6
        Unbilled................................................       59.5        21.4
                                                                    -------     -------
                                                                      225.2       132.0
     Less allowance for doubtful accounts and discounts.........      (41.4)      (15.6)
                                                                    -------     -------
                                                                     $183.8      $116.4
                                                                    =======     =======
</TABLE>

NOTE 3.   INVESTMENTS

At December 31, 1999, the Company held $1,123.8 million, $23.0 million and $89.7
million in corporate debt securities, United States Government and governmental
agency securities and marketable equity securities, respectively. At December
31, 1998, the Company held $187.1 million, $30.3 million and $30.6 million in
corporate debt securities, United States Government and governmental agency
securities and marketable equity securities, respectively. The Company has
classified these securities as available-for-sale, and at December 31, 1999 and
1998, the debt securities' amortized cost approximates fair value. The
marketable equity securities have been recorded at their fair market value at
December 31, 1999. The available-for-sale securities have been classified as
cash and cash equivalents, and investment in available-for-sale
securities-current, with $302.4 million and $934.1 million, respectively, being
recorded in each classification at December 31, 1999. At December 31, 1998,
$111.5 million and $136.6 million, respectively, were recorded in each
classification.

The contractual maturities of the available-for-sale securities of $1,237
million and $248 million in 1999 and 1998, respectively, are due within one
year.

Expected maturities will differ from contractual maturities because the issuers
of certain debt securities have the right to call or prepay their obligations
without any penalties. The amount
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3.   INVESTMENTS (CONTINUED)

classified as current assets on the accompanying balance sheets represent the
expected maturities of the debt securities during the next year.

NOTE 4.   PLEDGED ASSETS AND DEBT

On March 16, 1998, the Company completed a private offering of its 83/8% Senior
Notes due March 5, 2008 (the "March 1998 Privately Placed Senior Notes"), for
which the Company received net proceeds of approximately $291.9 million. The
Company filed a registration statement with the SEC for the registration of $300
million principal amount of 83/8% Senior Notes due March 15, 2008 (the "March
Exchange Notes" together with the March 1998 Privately Placed Senior Notes, the
"March 1998 Senior Notes") to be offered in exchange for the March 1998
Privately Placed Senior Notes (the "March Exchange Offer"). The registration
statement was declared effective by the SEC on May 15, 1998 and the March
Exchange Offer was commenced. The March Exchange Offer expired on June 25, 1998,
at which time all of the March 1998 Privately Placed Senior Notes were exchanged
for the March Exchange Notes. The form and terms of the March Exchange Notes are
identical in all material respects to the form and terms of the March 1998
Privately Placed Senior Notes except that (i) the March Exchange Notes have been
registered under the Securities Act of 1933 (the "Securities Act") and (ii)
holders of the March Exchange Notes are not entitled to certain rights under a
registration agreement related to the March 1998 Privately Placed Senior Notes.
Interest on the March 1998 Senior Notes will be payable in cash semi-annually in
arrears on March 15 and September 15 of each year at a rate of 83/8% per annum,
starting September 15, 1998. The March 1998 Senior Notes rank PARI PASSU in
right of payment with all existing and future senior unsecured indebtedness of
the Company and rank senior in right of payment to all existing and future
subordinated indebtedness. The March 1998 Senior Notes will mature on March 15,
2008. The March 1998 Senior Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after March 15, 2003 at 104.188%
of their principal amount at maturity, plus accrued and unpaid interest,
declining to 100.000% of their principal amount at maturity, plus accrued and
unpaid interest, on or after March 15, 2006. In the event of certain equity
investments in the Company by certain strategic investors on or before March 15,
2001, the Company may, at its option, use all or a portion of the net proceeds
from such sale to redeem up to 331/3% of the originally issued principal amount
of the March 1998 Senior Notes at a redemption price equal to 108.375% of the
principal amount of the March 1998 Senior Notes plus accrued and unpaid interest
thereon, if any, to the redemption date, provided that at least 662/3% of the
originally issued principal amount of the March 1998 Senior Notes would remain
outstanding immediately after giving effect to such redemption. In addition, in
the event of a Change of Control (as defined in the indenture dated as of March
16, 1998 between the Company and the United States Trust Company of New York as
trustee, governing the March 1998 Senior Notes (the "March 1998 Senior Note
Indenture")) of the Company, each holder of March 1998 Senior Notes will have
the right to require the Company to repurchase all or any part of such holder's
March 1998 Senior Notes at a purchase price equal to 101% of the principal
amount of the March 1998 Senior Notes tendered by such holder plus accrued and
unpaid interest, if any, to any Change of Control Payment Date (as defined in
the March 1998 Senior Note Indenture).

On October 30, 1998, the Company completed a private offering of its 9 1/2%
Senior Notes due November 1, 2008 (the "October 1998 Privately Placed Senior
Notes"), for which the Company received net proceeds of approximately $291.9
million. The Company filed a registration statement



                                      F-12
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4.   PLEDGED ASSETS AND DEBT --(CONTINUED)
with the SEC for the registration of $300 million principal amount of 9 1/2%
Senior Notes due November 1, 2008 (the "October Exchange Notes" together with
the October 1998 Privately Placed Senior Notes, the "October 1998 Senior Notes")
to be offered in exchange for the October 1998 Privately Placed Senior Notes
(the "October Exchange Offer"). The registration statement was declared
effective by the SEC on January 29, 1999 and the October Exchange Offer was
commenced. The October Exchange Offer expired on March 3, 1999, at which time
all of the October 1998 Privately Placed Senior Notes were exchanged for the
October Exchange Notes. The form and terms of the October Exchange Notes are
identical in all material respects to the form and terms of the October 1998
Privately Placed Senior Notes except that (i) the October Exchange Notes have
been registered under the Securities Act and (ii) holders of the October
Exchange Notes are not entitled to certain rights under a registration agreement
related to the October 1998 Privately Placed Senior Notes. Interest on the
October 1998 Senior Notes will be payable in cash semi-annually in arrears on
May 1 and November 1 of each year at a rate of 9 1/2% per annum, starting May 1,
1999. The October 1998 Senior Notes rank PARI PASSU in right of payment with all
existing and future senior unsecured indebtedness of the Company and rank senior
in right of payment to all existing and future subordinated indebtedness. The
October 1998 Senior Notes will mature on November 1, 2008. The October 1998
Senior Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after November 1, 2003 at 106.750% of their principal
amount at maturity, plus accrued and unpaid interest, declining to 100.000% of
their principal amount at maturity, plus accrued and unpaid interest, on
November 1, 2008. In the event of certain equity investments in the Company by
certain strategic investors on or before November 1, 2001, the Company may, at
its option, use all or a portion of the net proceeds from such sale to redeem up
to 331/3% of the originally issued principal amount of the October 1998 Senior
Notes at a redemption price equal to 111.500% of the principal amount of the
October 1998 Senior Notes plus accrued and unpaid interest thereon, if any, to
the redemption date, provided that at least 662/3% of the originally issued
principal amount of the October 1998 Senior Notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event of
a Change of Control (as defined in the indenture dated as of October 30, 1998
between the Company and the United States Trust Company of New York as trustee,
governing the October 1998 Senior Notes (the "October 1998 Senior Note
Indenture")) of the Company, each holder of October 1998 Senior Notes will have
the right to require the Company to repurchase all or any part of such holder's
October 1998 Senior Notes at a purchase price equal to 101% of the principal
amount of the October 1998 Senior Notes tendered by such holder plus accrued and
unpaid interest, if any, to any Change of Control Payment Date (as defined in
the October 1998 Senior Note Indenture).

On February 22, 1999, the Company completed a private offering of its 81/8%
Senior Notes due February 15, 2009 (the "February 1999 Privately Placed Senior
Notes"), for which the Company received net proceeds of approximately $485.8
million. The Company filed a registration statement with the SEC for the
registration of $500 million principal amount of 81/8% Senior Notes due February
15, 2009 (the "February Exchange Notes" together with the February 1999
Privately Placed Senior Notes, the "February 1999 Senior Notes") to be offered
in exchange for the February 1999 Privately Placed Senior Notes (the "February
Exchange Offer"). The registration statement

                                      F-13
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4.   PLEDGED ASSETS AND DEBT (CONTINUED)

was declared effective by the SEC on June 4, 1999 and the February Exchange
Offer was commenced. The February Exchange Offer expired on July 8, 1999, at
which time all of the February 1999 Privately Placed Senior Notes were exchanged
for the February Exchange Notes. The form and terms of the February Exchange
Notes are identical in all material respects to the form and terms of the
February 1999 Privately Placed Senior Notes except that (i) the February
Exchange Notes have been registered under the Securities Act and (ii) holders of
the February Exchange Notes are not entitled to certain rights under a
registration agreement related to the February 1999 Privately Placed Senior
Notes. Interest on the February 1999 Senior Notes will be payable in cash
semi-annually in arrears on August 15 and February 15 of each year at a rate of
81/8% per annum, starting August 15, 1999. The February 1999 Senior Notes rank
PARI PASSU in right of payment with all existing and future senior unsecured
indebtedness of the Company and rank senior in right of payment to all existing
and future subordinated indebtedness. The February 1999 Senior Notes will mature
on February 15, 2009. The February 1999 Senior Notes will be redeemable at the
option of the Company, in whole or in part, at any time on or after February 15,
2004 at 104.063% of their principal amount at maturity, plus accrued and unpaid
interest, declining to 100.000% of their principal amount at maturity, plus
accrued and unpaid interest, on February 15, 2007. In the event of certain
equity investments in the Company by certain strategic investors on or before
February 15, 2002, the Company may, at its option, use all or a portion of the
net proceeds from such sale to redeem up to 331/3% of the originally issued
principal amount of the February 1999 Senior Notes at a redemption price equal
to 108.125% of the principal amount of the February 1999 Senior Notes plus
accrued and unpaid interest thereon, if any, to the redemption date, provided
that at least 662/3% of the originally issued principal amount of the February
1999 Senior Notes would remain outstanding immediately after giving effect to
such redemption. In addition, in the event of a Change of Control (as defined in
the indenture dated as of February 22, 1999 between the Company and the United
States Trust Company of New York as trustee, governing the February 1999 Senior
Notes (the "February 1999 Senior Note Indenture")) of the Company, each holder
of February 1999 Senior Notes will have the right to require the Company to
repurchase all or any part of such holder's February 1999 Senior Notes at a
purchase price equal to 101% of the principal amount of the February 1999 Senior
Notes tendered by such holder plus accrued and unpaid interest, if any, to any
Change of Control Payment Date (as defined in the February 1999 Senior Note
Indenture).

The March 1998, October 1998 and February 1999 Senior Note Indentures impose
operating and financial restrictions on the Company and its subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make other restricted payments,
enter into sale and leaseback transactions, create liens upon assets, enter into
transactions with affiliates or related persons, sell assets, or consolidate,
merge or sell all or substantially all of their assets.

                                      F-14
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4.   PLEDGED ASSETS AND DEBT (CONTINUED)

     The Company's debt consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>

                                                                                     1999      1998
                                                                                  ---------- ----------
                                                                                       (IN MILLIONS)
<S>                                                                               <C>        <C>
Contracts payable, unsecured, non-interest bearing, due in various installments
   with the final payment to be made in 1999 ..................................   $       -- $      4.4
Other long-term borrowings, due in various installments
   bearing interest at rates ranging from 0% to 8.625% ........................
                                                                                         0.1        0.1
                                                                                  ---------- ----------
                                                                                  $      0.1 $      4.5
                                                                                  ========== ==========

10 1/2% Senior Discount Notes .................................................   $    400.8 $    361.9
9 1/4% Senior Notes ...........................................................        225.0      225.0
83/8% Senior Notes ............................................................        300.0      300.0
9 1/2% Senior Notes ...........................................................        300.0      300.0
81/8% Senior Notes ............................................................        500.0         --
CCI unsecured senior notes payable, bearing interest at 7.75% .................           --        8.6
CCI Series A Senior Unsecured Notes, bearing interest at 6.83% ................           --       10.0
CCI Series B Senior Unsecured Notes, bearing interest at 6.71% ................           --        5.0
Greene County Partners, Inc. senior notes due in quarterly payments of
   $450,000 bearing interest at 6.35% and maturing in April 2001 ..............         11.7       13.5
ICTC Series K, 8.620% First Mortgage Bonds due September 2022 (A) .............         10.0       10.0
ICTC Series L, 7.050% First Mortgage Bonds due October 2013 (A) ...............         10.0       10.0
Capitalized Lease payable, due in various installments payments, bearing
         interest at 3.90% to 10.2%, with final payment due in August 2002 ....         11.5        5.2
Note payable due in various annual installments, including
   interest at 8.25%, through 2006. Collateralized by publishing
   rights to purchased directories ............................................          0.5        0.6
Other long-term borrowings, due in various installments
   bearing interest at rates ranging from 0% to 9.75%
   through March 2004 .........................................................          3.5        2.4
     Note Payable, bearing interest at 5%, due January, 2000 ..................          4.6         --
Incentive compensation agreements, due in various
   estimated amounts plus interest at 6.0% through
   January 2001
                                                                                         0.6        1.2
                                                                                  ---------- ----------
                                                                                     1,778.2    1,253.4
Less current maturities
                                                                                        14.4        8.2
                                                                                  ---------- ----------
                                                                                  $  1,763.8 $  1,245.2
                                                                                  ========== ==========
</TABLE>

------------------------
(A)  ICTC's first mortgage bonds are collateralized by substantially all real
     and personal property of the subsidiary. The bond indenture contains
     various provisions restricting, among other things, the payment of
     dividends and repurchase of its own stock. Early redemption of the Series K
     and Series L Bonds is permitted.

In 1996, the Company used a portion of the proceeds from the Company's initial
public offering (see Note 8) to pay off all existing indebtedness under three
line of credit facilities, which were then canceled. Options to purchase Class B
common stock were granted to a stockholder which had guaranteed borrowings under
two of the facilities. The Company used the Black-Scholes model to determine the
value of the options, which was approximately $3.4 million, at the date of
grant. This value was being amortized over the vesting period of the options.
Upon cancellation of the credit facilities, the options' vesting schedule and
amortization of the fair value of the options were terminated. A total of
2,601,376 Class B common stock options were outstanding at December 31, 1999 and
December 31, 1998.

                                      F-15
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4.   PLEDGED ASSETS AND DEBT (CONTINUED)

Principal payments required on the outstanding debt at December 31, 1999 are as
follows (In millions):

                 2000 ......................................         $14.4
                 2001 ......................................          14.7
                 2002 ......................................           2.0
                 2003 ......................................           0.6
                 2004 ......................................           0.7
                 Later years................................       1,745.8
                                                                  --------
                                                                  $1,778.2

NOTE 5.   LEASES AND COMMITMENTS

LEASES: The Company leases certain of its office and network facilities under
noncancelable agreements which expire at various times through September 2022.
These agreements require various monthly rentals plus the payment of applicable
property taxes, maintenance and insurance. The Company also leases vehicles and
equipment under agreements which expire at various times through January 2009
and require various monthly rentals.

The total minimum rental commitment at December 31, 1999 under the leases
mentioned above is as follows (In millions):

                 2000.......................................         $32.3
                 2001.......................................          22.6
                 2002.......................................          16.6
                 2003.......................................          12.7
                 2004.......................................          10.2
                 Thereafter.................................          35.3
                                                                    ------
                                                                    $129.7
                                                                    ======


The total rental expense included in the consolidated statements of operations
for 1999, 1998 and 1997 is approximately $21.9 million, $19.8 million, and $8.1
million, respectively, which also includes short-term rentals for office
facilities.

NETWORK CONSTRUCTION: During 1995, the Company was awarded contracts from the
State of Iowa to build fiber optic telecommunications network segments
throughout the State of Iowa. As of December 31, 1999, the contracts call for
the construction of 235 network segments. Upon completion of each segment, the
Company will receive approximately $115,000 for a seven-year lease for certain
capacity on that segment. The Company will recognize this revenue of
approximately $27 million on a straight-line basis over the term of the lease
based on the relationship of individual segment costs to total projected costs.
For the years ended December 31, 1999, 1998 and 1997, revenue of $3.4 million,
$2.8 million and $1.8 million, respectively, had been recognized under these
contracts.

                                      F-16
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5.   LEASES AND COMMITMENTS--(CONTINUED)

The Company estimates that minimum future construction costs required to fulfill
its obligations under the 1995 contract with the State of Iowa would be
approximately $2.6 million. The Company, however, expects that its actual
construction costs will be higher with respect to such network segments, because
the Company is adding more fiber and route miles than is contractually required
with respect to such construction, in order to optimize the design of its
network. The Company anticipates that the minimum costs to complete this project
will be incurred in 2000.

BUILDINGS: In August 1996, the Company purchased approximately 194 acres of land
on which the Company constructed its headquarters and associated buildings. Of
the land purchased, approximately 75 acres was purchased from a subsidiary of a
stockholder for approximately $0.7 million. At December 31, 1999, the total
remaining contracted commitments on the building in progress is approximately
$0.4 million.

ALCATEL: In January 1999 the Company entered into an agreement with Alcatel USA
Marketing, Inc. to purchase equipment, software and services for a total
commitment of $200 million over a six (6) year period. If McLeodUSA does not
meet the committed purchases on a cumulative annual basis, Alcatel retains the
right to renegotiate the applicable prices. If regulatory conditions
substantially prevent the Company from continuing to implement its current
network deployment plans, the Company has the option to request renegotiation of
unit prices based on revised quantities of products or to renegotiate unit
prices based on the quantities of products purchased to that time and cease any
further purchases of products.

NOTE 6.   INCOME TAX MATTERS

Net deferred taxes consist of the following components as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>

                                                                        1999          1998
                                                                     ----------    ----------
                                                                            (IN MILLIONS)
<S>                                                                    <C>           <C>
     Deferred tax assets:
        Net operating loss carryforwards..........................     $ 214.0       $  106.5
        Accruals and reserves not currently deductible............         35.9          24.5
        Deferred revenues.........................................         11.3           8.2
        Intangibles and other assets..............................          8.5           7.6
        Other.....................................................          5.1           2.1
                                                                     ----------    ----------
                                                                          274.8         148.9
        Less valuation allowance..................................        169.6          78.6
                                                                     ----------    ----------
                                                                          105.2          70.3
                                                                     ----------    ----------
     Deferred tax liabilities:
        Property and equipment....................................         64.3          39.5
        Other investments.........................................         15.9          11.4
        Differences in revenue recognition........................          9.6          10.9
        Deferred line installation cost...........................         11.9           8.0
        Other.....................................................          3.5            .5
                                                                     ----------    ----------
                                                                          105.2          70.3
                                                                     ----------    ----------
                                                                     $       --    $       --
                                                                     ==========    ==========
</TABLE>

                                      F-17
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6.   INCOME TAX MATTERS--(CONTINUED)

A valuation allowance has been recognized to offset the related net deferred tax
assets due to the uncertainty of realizing the benefit of the loss
carryforwards. The Company has available net operating loss carryforwards
totaling approximately $533.9 million which expire in various amounts in the
years 2008 to 2019.

The income tax rate differs from the U. S. Federal income tax rate for 1999,
1998 and 1997 due to the following:
<TABLE>
<CAPTION>

                                                                                 1999       1998      1997
                                                                               --------  -------    ------
<S>                                                                                <C>      <C>        <C>
     "Expected" tax (benefit) rate...........................................      (35)%    (35)%      (35)%
     Percent increase (decrease) in income taxes resulting from:
          Change in valuation allowance......................................       36       34         15
          Tax deductions due to exercises of incentive stock options.........        (7)     (2)        (2)
          Goodwill amortization for stock purchases..........................         5       6         --
          Net deferred liability balance purchased in CCI
             transaction (see Note 11).......................................        --      --         21
          Other..............................................................         1      (3)         1
                                                                               --------  -------    ------
                                                                                     --%      --%       --%
                                                                               ========  =======    =======
</TABLE>

NOTE 7.   STOCK-BASED COMPENSATION PLANS

At December 31, 1999, the Company has various stock-based compensation plans
which are described below. Grants under the Company's stock option plans are
accounted for in accordance with Accounting Principles Board (APB) Opinion No.
25 and related Interpretations. The Company granted a total of 3,307,376 stock
options in January and February 1996 at an exercise price of $1.335 per share.
The estimated aggregate fair market value of these options at the date of grant
was later determined to exceed the aggregate exercise price by approximately
$9,190,000. Additionally, in September 1997, the Company granted a total of
2,937,890 stock options at an exercise price of $12.25 per share. The aggregate
fair market value of these options at the date of grant exceeded the aggregate
exercise price by approximately $15,790,000. As a result, the Company is
amortizing these amounts over the four-year vesting period of the options.
Compensation cost of $6,629,000, $5,820,000 and $2,993,000 has been charged to
income for the years ended December 31, 1999, 1998 and 1997, respectively, using
the intrinsic value based method as prescribed by APB No. 25. Had compensation
cost for all of the stock-based compensation plans been determined based on the
grant date fair values of awards granted during 1999, 1998 and 1997, as
prescribed by SFAS No. 123, reported net loss and loss per common share would
have been as follows (in millions, except per share data):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                -----------------------------------------
                                                    1999         1998          1997
                                                ------------ ------------- --------------
<S>                                                <C>           <C>            <C>
     Pro forma net loss.........................   $(307.6)      $(151.2)       $(93.9)
     Pro forma loss per common share............     (2.08)        (1.20)        (0.85)
</TABLE>

                                      F-18
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7.   STOCK-BASED COMPENSATION PLANS(CONTINUED)

1992, 1993 AND 1995 INCENTIVE STOCK OPTION PLANS: The Company has reserved
4,109,458 shares of Class A common stock for issuance to employees under the
1992, 1993 and 1995 Incentive Stock Option Plans. Options outstanding under
these plans were granted at prices equal to the estimated fair market value on
the dates of grant as determined by the Company's Board of Directors. Under the
1992 and 1993 plans, all options granted become exercisable at a rate of 25% per
year, on a cumulative basis, and expire seven years after the date of grant.
Under the 1995 plan, all options, except for options granted to the Company's
chairman and chief executive officer, become exercisable at a rate of 25% per
year, on a cumulative basis, beginning five years from the date of grant. The
options granted to the Company's chairman and chief executive officer vest at a
rate of 20% per year on a cumulative basis. All options granted under the 1995
plan expire ten years after the date of grant. These plans have been superseded
by the 1996 Employee Stock Option Plan, and no future grants of options will be
made under these plans.

1996 EMPLOYEE STOCK OPTION PLAN: In 1997, the Company's stockholders approved an
amendment to the 1996 Employee Stock Option Plan to increase the number of Class
A common shares available under the plan to 75,000,000 shares from 9,050,000
shares. At December 31, 1999, after adjusting for option exercises, the Company
has reserved 72,385,693 shares of Class A common stock for issuance to employees
under the plan, which supersedes the 1992, 1993 and 1995 Incentive Stock Option
Plans. The exercise price for incentive stock options granted under this plan is
no less than the fair market value, as defined in the Plan of the Company's
Class A common stock on the date of the grant (or 110% of the fair market value
if the grantee beneficially owns more than 10% of the outstanding Class A common
stock). The options granted expire ten years after the grant date (or five years
after the grant date if the grantee beneficially owns more than 10% of the
outstanding Class A common stock) and vest over periods determined by the
Compensation Committee. However, options will qualify as incentive stock options
only to the extent that the aggregate exercise price for options that become
first exercisable by an employee in any calendar year does not exceed $100,000.
The 1996 Plan will terminate in March 2006, unless terminated earlier by the
Board of Directors.

DIRECTORS' STOCK OPTION PLAN: The Company has reserved, after adjusting for
option exercises, 1,600,624 shares of Class A common stock for issuance under
the Directors' Plan to directors who are not officers or employees of the
Company. The Director's Plan was adopted and approved by the stockholders in
1993. The Plan was amended and restated in 1996 to be a "formula" plan providing
for an automatic grant of options to eligible directors. In 1999 a further
amendment and restatement to the Plan was adopted and approved by stockholders.
Under the Plan as currently amended and restated each eligible director who
commences service after the 1999 amendment and restatement will be granted an
initial option to purchase from 20,000 to 40,000 shares of Class A common stock,
such amount to be determined by the Board of Directors in its discretion. Each
such eligible director also will be granted an additional option to purchase up
to 20,000 shares of Class A common stock after each subsequent annual meeting of
the stockholders. In addition each eligible director may receive discretionary
options to purchase shares of Class A common stock as may be determined by the
Board of Directors in its discretion. However, no more than an aggregate of
200,000 shares of Class A common stock may be granted as discretionary options
under the plan as currently amended and restated. Options granted under the
Directors' Plan vest at a rate of 25% per year, on a cumulative basis, and
expire seven years after the date of grant (ten years after the date of grant
for options granted under the amended and restated plan). However, upon a change
in control of the Company as defined in the Directors' Plan, all options will
become fully exercisable. The Company has the right to repurchase any Class A
common stock issued pursuant to the exercise of an option granted under this
plan that is offered for sale to an individual who is not an employee or
director of

                                      F-19
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7.   STOCK-BASED COMPENSATION PLANS--(CONTINUED)

the Company. The Directors' Plan will terminate in March 2006, unless terminated
earlier by the Board of Directors.

The fair value of each grant under the Company's stock option plans is estimated
at the grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in 1999, 1998 and 1997,
respectively: no expected dividends, risk-free interest rates of 6.26%, 4.65%
and 5.48%; price volatility of 68.44% in 1999, 59.39% in 1998 and 48.63% in 1997
and expected lives of 4 years for all three years.

EMPLOYEE STOCK PURCHASE PLAN: Under the stock purchase plan, employees may
purchase up to an aggregate of 2,000,000 shares of Class A common stock through
payroll deductions. Employees of the Company who have been employed more than 90
days and who are regularly scheduled to work more than 20 hours per week are
eligible to participate in the plan, provided that they own less than five
percent of the total combined voting power of all classes of stock of the
Company. The purchase price for each share will be determined by the
Compensation Committee, but may not be less than 85% of the closing price of the
Class A common stock on the first or last trading day of the applicable purchase
period, whichever is lower. No employee may purchase in any calendar year Class
A common stock having an aggregate fair value in excess of $25,000. Upon
termination of employment, an employee other than a participating employee who
is subject to Section 16(b) under the Securities Exchange Act of 1934, as
amended, will be refunded all moneys in his or her account and the employee's
option to purchase shares will terminate. The plan will terminate in March 2006,
unless terminated earlier by the Board of Directors. The Company has implemented
this plan effective February 1, 1997. Under the plan, the Company sold 313,909
shares of Class A common stock in 1999, 265,786 shares in 1998 and 76,160 shares
in 1997. The fair value of the employees' purchase rights was calculated for
disclosure purposes using the Black-Scholes model with the following
assumptions: an expected life of 12 months in 1999 and 1998 and 11 months in
1997; a risk-free interest rate of 6.26% in 1999, 4.65% in 1998 and 5.40% in
1997; expected volatility of 68.44% in 1999, 59.39% in 1998 and 48.63% in 1997;
and no expected dividends. The fair value of each purchase right granted in 1999
was $6.05, in 1998 was $5.38 and in 1997 was $3.18.

A summary of the status of the Company's stock option plans as of and for the
years ended December 31, 1999, 1998 and 1997 is as follows (In thousands, except
price data):
                                                                       WEIGHTED-
                                                                        AVERAGE
                                                                       EXERCISE
                                                           SHARES       PRICE
                                                         ----------    ---------
     Outstanding at January 1, 1997..................      15,088        $ 3.27
          Granted....................................      13,348         13.36
          Exercised..................................      (2,276)         0.58
          Forfeited..................................      (4,944)        14.87
                                                         --------
     Outstanding at December 31, 1997................      21,216          7.20
          Granted....................................      12,546         15.64
          Exercised..................................      (2,746)         1.36
          Forfeited..................................      (6,474)        17.93
                                                         --------
     Outstanding at December 31, 1998................      24,542          9.35
          Granted....................................      14,987
                                                                        21.99
          Exercised..................................      (4,161)         5.61
          Forfeited..................................      (1,610)        16.08
                                                         --------
     Outstanding at December 31, 1999................      33,758          14.96
                                                         ========

                                      F-20
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7.   STOCK-BASED COMPENSATION PLANS--(CONTINUED)
<TABLE>
<CAPTION>

                                                                                             NUMBER OF OPTIONS
                                                                                       ------------------------------
                                                                                         1999        1998      1997
                                                                                       --------   ---------  --------
<S>                                                                                       <C>         <C>       <C>
Exercisable, end of year ........................................................         7,093       5,552     4,794c
                                                                                       --------   ---------  --------

Weighted-average fair value per option of options granted
   during the year ..............................................................      $  12.34   $    9.09  $   6.12
                                                                                       ========   =========  ========
</TABLE>


Other pertinent information related to the options outstanding at December 31,
1999 is as follows:
<TABLE>
<CAPTION>

                                                     OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                                       -------------------------------------------   --------------------------
                                                         WEIGHTED-
                                                          AVERAGE        WEIGHTED-                   WEIGHTED-
                                                         REMAINING        AVERAGE                     AVERAGE
                                         NUMBER         CONTRACTUAL      EXERCISE       NUMBER       EXERCISE
    RANGE OF EXERCISE PRICES           OUTSTANDING            LIFE          PRICE     EXERCISABLE       PRICE

<S>                                     <C>                 <C>           <C>          <C>             <C>
$0.40 to $1.33...................       4,366,775           3.03          $ 1.07       3,303,344       $ 1.02
$1.47 to $8.87...................         349,022           4.95            2.78         285,964         2.99
$8.88 to $8.88...................       3,716,807           7.04            8.88         677,790         8.88
$9.31 to $11.75..................         683,753           7.55           10.53         114,537        10.10
$12.13 to $12.13.................       4,790,533           8.77           12.13         693,188        12.13
$12.25 to $14.88.................       4,968,754           8.35           13.69       1,430,168        13.52
$15.78 to $18.19.................       1,594,138           8.23           17.21         547,739        17.19
$19.19 to $19.19.................       7,106,654           9.24           19.19           1,000        19.19
$19.23 to $23.75.................       3,742,783           9.48           23.19          37,743        19.57
$25.69 to $43.00.................       2,438,406           9.64           30.62           1,525        27.81
                                       ----------                                      ---------
                                       33,757,625           7.93         $ 14.73       7,092,998      $  6.96
                                       ==========                                      =========
</TABLE>

In addition, options to purchase shares of Class B common stock were granted to
a stockholder which had guaranteed borrowings under certain credit facilities
which were paid off with a portion of the proceeds from the Company's initial
public offering and subsequently canceled. These options have a weighted-average
exercise price of $0.90 and are fully vested at December 31, 1999.

NOTE 8.   CAPITAL STOCK INFORMATION AND INVESTOR AGREEMENT

PUBLIC OFFERINGS: On June 10, 1996, the Company undertook an initial public
offering of Class A common stock which yielded net proceeds of approximately
$258 million. On November 20, 1996, the Company completed an additional public
offering of Class A common stock which yielded net proceeds of approximately
$138 million in additional capital.

RECAPITALIZATION: In May 1997, the Company's stockholders approved an increase
in the authorized Class A common stock from 75,000,000 shares of $.01 par value
stock to 250,000,000 shares of $.01 par value stock. All Class B common stock
has rights identical to Class A common stock other than their voting rights,
which are equal to .40 vote per share. Each share of Class B common stock is
convertible into one share of Class A common stock at the option of the holder.
The restated Articles of Incorporation also authorizes the Board of Directors to
issue up to 2,000,000 shares of $.01 par value preferred stock. The terms of the
preferred stock are determined at the time of issuance.

                                      F-21
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8.  CAPITAL STOCK INFORMATION AND INVESTOR AGREEMENT (CONTINUED)

REDEEMABLE CONVERTIBLE PREFERRED STOCK: Pursuant to a Stock Purchase Agreement
dated August 30, 1999 (the "Stock Purchase Agreement"), the Company issued on
September 15, 1999 (the "Issue Date") 275,000 shares of Series B preferred
stock, par value $.01 per share, ("Series B preferred stock") and 125,000 shares
of Series C preferred stock, par value $.01 per share, ("Series C preferred
stock" and together with the Series B preferred stock, the "Preferred Shares")
through a private offering. Net proceeds from the financing amounted to
approximately $1 billion. The Preferred Shares are redeemable on a
proportionally equal basis, in whole or in part, by the Company at any time
following the seventh anniversary of the Issue Date; or by the holders within
180 days following the tenth anniversary of the Issue Date. The Preferred Shares
are convertible on a proportionally equal basis, at the Series B holders option,
in whole or in part at any time into Class A Common Stock. Shares of each series
will have a liquidation preference of $2,500.00 per share plus accrued and
unpaid dividends, if any, and will be convertible into shares of the Company's
Class A common stock at a rate of (a) the liquidation preference divided by (b)
$36.50. Each share of Series B preferred stock is entitled to receive a
quarterly dividend of approximately $31.82. Dividends are cumulative and payable
quarterly on March 31, June 30, September 30, and December 31. If prior to the
fifth anniversary of the Issue Date the Company pays a dividend on its Class A
common stock, par value $.01 per share ("Class A common stock"), holders of the
Preferred Shares shall be entitled to receive an equivalent dividend calculated
on a common stock equivalent basis as if the Preferred Shares had been converted
into Class A common stock. Holders of Series B preferred stock are not entitled
to voting rights other than the right to vote as a series for the election of
two additional members to the Board of Directors. Board representation decreases
as the outstanding shares of the Series B preferred stock decreases. Holders of
Series C preferred stock are not entitled to voting rights other than the right
to vote as a series for the election of one observer to the Board of Directors.
Board representation decreases as the outstanding shares of the Series C
preferred stock decreases. The Series B and Series C preferred stock rank on a
parity with the company's 6.75% Series A cumulative convertible preferred stock,
par value $.01 per share (the "Series A preferred stock"), with respect to
dividend rights and rights on liquidation.

CUMULATIVE CONVERTIBLE PREFERRED STOCK: The Company issued one million shares of
its Series A preferred stock on August 11, 1999 and an additional 150,000 shares
on August 23, 1999. Holders of Series A preferred stock are entitled to receive
cumulative dividends at an annual rate of 6.75% of the liquidation preference
payable quarterly on each February 15, May 15, August 15 and November 15. The
quarterly dividend is $4.21875 per share, payable at the Company's option in
cash or shares of its Class A common stock. Series A preferred stock is
convertible at the option of its holder, unless previously redeemed, at any time
after the issue date, into shares of its Class A common stock at a conversion
rate of 8.60289 shares of Class A common stock for each share of Series A
preferred stock (representing a conversion price of $29.06 per share of Class A
common stock), subject to adjustment in certain events. In addition, if on or
after August 15, 2002, the closing price of its Class A common stock has equaled
or exceeded 135% of the conversion price for at least 20 out of 30 consecutive
business days, the Company will have the option to convert all of the Series A
preferred stock into Class A common stock at the then current conversion rate.
The holders of the Series A preferred stock will not be entitled to any voting
rights unless payments of dividends on the Series A preferred stock are in
arrears and unpaid for an aggregate of six or more quarterly dividend payments.

                                      F-22
<PAGE>

MCLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8.  CAPITAL STOCK INFORMATION AND INVESTOR AGREEMENT (CONTINUED)

COMMON STOCK SPLIT: On June 30, 1999, the Company announced a two-for-one stock
split in the form of a stock dividend on the Company's Class A common stock. The
record date for the stock split was July 12, 1999 and the distribution of the
additional shares took place on July 26, 1999. All share data in the
consolidated financial statements and notes to the financial statements have
been adjusted to reflect the stock split.

INVESTOR AGREEMENT: On December 17, 1999, McLeodUSA entered into a further
amendment and restatement of a stockholders' agreement originally entered into
on November 18, 1998 with several of its significant stockholders consisting of
Alliant Energy Corporation and several of its subsidiaries, Alliant Energy
Foundation, Inc., Clark and Mary McLeod, and Richard and Gail Lumpkin and
various trusts for the benefit of their family.

Such further amended and restated November 1998 stockholders' agreement
provides, among other things, that:

  o      until December 31, 2001, the parties will not sell any equity
         securities of McLeodUSA, or any other securities convertible into or
         exchangeable for McLeodUSA equity securities, without receiving the
         prior written consent of the McLeodUSA board of directors, except for
         transfers specifically permitted by the agreement
  o      to the extent the McLeodUSA board of directors approves a transfer of
         McLeodUSA equity securities by a party, the other parties are
         automatically granted transfer rights
  o      the McLeodUSA board of directors will determine on a quarterly basis
         the aggregate number, if any, of shares of McLeodUSA Class A common
         stock, not to exceed in the aggregate 300,000 shares per quarter, that
         the parties may sell during designated trading periods following the
         release of the quarterly financial results of McLeodUSA
  o      to the extent the McLeodUSA board of directors grants registration
         rights to a party in connection with a sale of McLeodUSA securities by
         that party, it will grant similar registration rights to the other
         parties
  o      the McLeodUSA board of directors will determine for each of 2000 and
         2001 the aggregate number, if any, of shares of McLeodUSA Class A
         common stock, not to exceed in the aggregate on a per year basis a
         number of shares equal to 15% of the total number of shares of
         McLeodUSA Class A common stock beneficially owned by the parties as of
         December 31, 1998, to be registered by McLeodUSA under the Securities
         Act for sale by the parties
  o      in any underwritten offering of shares of McLeodUSA Class A common
         stock, other than an offering on a registration statement on Form S-4
         or Form S-8 or any other form which would not permit the inclusion of
         shares of McLeodUSA Class A common stock owned by the parties, the
         McLeodUSA board of directors will determine the aggregate number, if
         any, of shares of McLeodUSA Class A common stock, not to exceed on a
         per year basis a number of shares equal to 15% of the total number of
         shares of McLeodUSA Class A common stock beneficially owned by the
         parties as of December 31, 1998, to be registered by McLeodUSA for sale
         by the parties in connection with the offering. McLeodUSA may
         subsequently determine not to register any shares of the parties under
         the Securities Act and may either not file a registration statement or
         otherwise withdraw or abandon a registration statement previously filed

Under the further amended and restated November 1998 stockholders' agreement,
each party also agreed, until it owns less than 5,000,000 shares of McLeodUSA
Class A common stock, to vote its shares and take all action within its power
to:

                                      F-23
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8.  CAPITAL STOCK INFORMATION AND INVESTOR AGREEMENT (CONTINUED)


  o      establish the size of the McLeodUSA board of directors at up to 13
         directors
  o      cause to be elected to the McLeodUSA board of directors one director
         designated by Alliant Energy Corporation and its subsidiaries for so
         long as they collectively own at least 5,000,000 shares of McLeodUSA
         Class A common stock
  o      cause to be elected to the McLeodUSA board of directors three directors
         who are executive officers of McLeodUSA designated by Clark McLeod for
         so long as Clark and Mary McLeod collectively own at least 5,000,000
         shares of McLeodUSA Class A common stock
  o      cause Richard Lumpkin to be elected to the McLeodUSA board of directors
         for so long as Richard and Gail Lumpkin and various other parties
         related to the Lumpkins collectively own at least 5,000,000 shares of
         McLeodUSA Class A common stock
  o      cause to be elected to the McLeodUSA board of directors up to eight
         non-employee directors nominated by the board

The further amended and restated November 1998 stockholders' agreement
terminates on December 31, 2001. In addition, if during each of 2000 and 2001
McLeodUSA has not provided a party a reasonable opportunity to sell an aggregate
number of shares of McLeodUSA Class A common stock equal to not less than 15% of
the total number of shares of McLeodUSA Class A common stock beneficially owned
by a party as of December 31, 1998, then that party may terminate the agreement
as it applies to that party.

On December 17, 1999, McLeodUSA also entered into a further amendment and
restatement of a stockholders' agreement originally entered into on January 7,
1999 with the parties to the further amended and restated November 1998
stockholders' agreement described above and M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership in connection with the
acquisition by McLeodUSA of Ovation Communications, Inc.

The further amended and restated January 1999 stockholders' agreement provides
that, until December 31, 2001, the M/C entities will not sell any equity
securities of McLeodUSA, or any other securities convertible into or
exchangeable for McLeodUSA equity securities, without receiving the prior
written consent of the McLeodUSA board of directors, except for transfers
specifically permitted by the agreement. The further amended and restated
January 1999 stockholders' agreement also contains various provisions intended
to insure that the M/C entities and the parties to the further amended and
restated November 1998 stockholders' agreement are treated on a basis generally
similar to one another in connection with permitted sales and registration of
McLeodUSA securities under such agreements. In addition, for so long as the M/C
entities own at least 5,000,000 shares of McLeodUSA Class A common stock, the
M/C entities have agreed to vote their shares in accordance with the voting
agreement contained in the further amended and restated November 1998
stockholders' agreement and the other parties have agreed to vote their shares
to cause to be elected to the McLeodUSA board of directors one director
designated by the M/C entities.

The further amended and restated January 1999 stockholders' agreement terminates
on December 31, 2001. In addition, if (1) during each of 2000 and 2001,
McLeodUSA has not provided the M/C entities an opportunity to register under the
Securities Act for sale an aggregate number of shares of McLeodUSA Class A
common stock equal to not less than 15% of the total number of shares of
McLeodUSA Class A common stock beneficially owned by the M/C entities as a
result of the acquisition of Ovation

                                      F-24
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8.  CAPITAL STOCK INFORMATION AND INVESTOR AGREEMENT (CONTINUED)


Communications, Inc., or (2) the further amended and restated November 1998
stockholders' agreement has been terminated by all parties to such agreement,
then the M/C entities may terminate the further amended and restated January
1999 stockholders' agreement. The further amended and restated January 1999
stockholders' agreement will be terminated with respect to parties other than
the M/C entities and McLeodUSA at the time as the further amended and restated
November 1998 stockholders' agreement is terminated with respect to such other
parties.

Two additional stockholders' agreements are contemplated to be entered into in
connection with the Splitrock merger agreement in relation to certain
restrictions on transferability of equity securities of McLeodUSA received by
three principal stockholders of Splitrock.


NOTE 9.   CHANGE-OF-CONTROL AGREEMENTS

CHANGE-OF-CONTROL AGREEMENTS: The Company has entered into change-of-control
agreements with certain executive employees, which provide for certain payments
in connection with termination of employment after a change of control (as
defined within the agreements) of the Company. The change-of-control agreements
terminate on December 31, 2006 unless a change of control occurs during the
six-month period prior to December 31, 2006, in which case the agreements
terminate on December 31, 2007. The agreements provide that if an executive
terminates his or her employment within six months after a change of control or
if the executive's employment is terminated within 24 months after a change of
control in accordance with the terms and conditions set forth in the agreements,
the executive will be entitled to certain benefits. The benefits include cash
compensation, immediate vesting of outstanding stock options and coverage under
the Company's group health plan.

Employment agreements with the Company's top three executive employees also
contain provisions relating to change of control. These employment agreements,
which expire on January 7, 2003, provide that if the executive's employment is
terminated in connection with a change of control, whether by the executive or
by the Company or its successor, then the executive will be entitled to certain
severance benefits. These benefits include foregone salary and other cash
compensation, immediate vesting of all outstanding options to purchase common
stock of the Company, and continuing coverage under the Company's group
insurance programs for the remainder of the term of the relevant employment
agreement.

NOTE 10.   RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

CCI, a wholly owned subsidiary of the Company, maintains noncontributory defined
pension and death benefit plans covering substantially all of its salaried and
hourly employees. The pension benefit formula used in the determination of
pension cost is based on the highest five consecutive calendar years' base
earnings within the last ten calendar years immediately preceding retirement or
termination. It is CCI's policy to fund pension costs as they accrue subject to
any applicable Internal Revenue Code limitations.

In 1997, the Company offered salaried CCI plan participants a choice between
transferring their plan assets to the hourly employee defined benefit plan or
participating in the 1996 Employee Stock Option Plan, as the salaried defined
benefit plan was terminated effective April 1, 1998. This plan

                                      F-25
<PAGE>

                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10.   RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--(CONTINUED)

change substantially reduced the expected future benefits under the defined
benefits pension plans and has been reflected in the tables below. As a result
of the termination of the salaried plan, the Company recognized a gain of $2.2
million.

The Company continues to maintain the defined benefit pension plan for
substantially all hourly employees of CCI.

In addition to providing pension benefits, CCI provides an optional retiree
medical program to its salaried and union retirees and spouses under age 65 and
life insurance coverage for the salaried retirees. All retirees are required to
contribute to the cost of their medical coverage while the salaried life
insurance coverage is provided at no cost to the retiree.

The change in benefit obligations and the change in plan assets for 1999 and
1998, and the components of net periodic benefit costs and the weighted-average
assumption for 1999, 1998 and 1997, are as follows (in millions):

<TABLE>
<CAPTION>

                                                     PENSION BENEFITS              POSTRETIREMENT BENEFITS
                                              ---------------------------------   ----------------------------
                                                  1999              1998             1999              1998
                                              ------------       -----------     ------------      -----------
<S>                                           <C>                <C>             <C>               <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year         $     45.1        $     52.1       $       4.6      $      5.0
Service cost                                            .8                .8                .1              .1
Interest cost                                          2.9               3.9                .4              .4
Plan amendments                                         --                --                --              --
Curtailment gain                                        --                --                --              --
Special termination benefits and other                  --               6.5                --              --
Benefits paid                                         (2.8)            (20.3)              (.2)            (.4)
Actuarial gains                                       (4.7)              2.0                .6             (.5)
                                                ----------        ----------       -----------      ----------
Benefit obligation at end of year               $     41.3        $     45.0       $       5.5      $      4.6
                                                ==========        ==========       ===========      ==========

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year  $     52.2        $     65.7       $        --     $        --
Actual return on plan assets                           5.0               6.8                --              --
Employer contributions                                  --                --                .2              .4
Benefits paid                                         (2.8)            (20.3)      $       (.2)            (.4)
                                                ----------        ----------       -----------      ----------
Fair value of plan assets at end of year        $     54.4        $     52.2       $        --     $        --
                                                ==========        ==========       ===========      ==========



Funded status                                   $      13.1       $       7.1      $     (5.5)      $     (4.6)
Unrecognized net actuarial gain                       (18.6)            (13.8)            (3.0)            (3.7)
Unrecognized prior service cost                          4.0               4.5            (2.0)            (2.2)
Unrecognized    transition    (asset)   or                                                 3.9              4.3
obligation                                              (.1)              (.1)
                                                -----------       -----------     -----------      ------------
Accrued benefit cost                            $      (1.6)      $      (2.3)    $      (6.6)     $      (6.2)
                                                ===========       ===========     ===========      ===========

</TABLE>

                                      F-26
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10.   RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--(CONTINUED)

<TABLE>
<CAPTION>
                                                  PENSION BENEFITS                    POSTRETIREMENT BENEFITS
                                        1999            1998           1997         1999          1998          1997
                                      --------        --------       --------     --------      --------      --------
<S>                                 <C>              <C>           <C>         <C>            <C>             <C>
COMPONENTS OF NET
PERIODIC BENEFIT COSTS
Service cost                          $     .8        $     .7       $    2.4     $     .1      $     .1      $     .6

Interest cost                              2.9             3.9            3.5           .4            .4            .6
Expected return on plan assets            (4.1)           (5.0)           3.9           --            --            --
Amortization of prior service
costs                                       .5              .5             .5          (.2)          (.2)           --
Amortization of transitional
(asset) or obligation                       --              --             --           .4            .4            .4
Recognized actuarial (gain) or
loss                                       (.9)           (1.7)           (.5)         (.1)          (.2)          (.1)
                                      --------        --------       --------     --------      --------      --------
Net periodic benefit cost             $               $              $    2.0     $     .6      $     .5      $    1.5
                                      ========        ========       ========     ========      ========      ========
                                           (.8)           (1.6)
                                      ========        ========
<CAPTION>

WEIGHTED-AVERAGE ASSUMPTION
AS OF DECEMBER 31
<S>                                 <C>              <C>           <C>         <C>            <C>             <C>
Discount rate                              7.5%              7%             7%         7.5%            7%            6%
Expected return on plan assets               8%              8%             8%          --            --            --
Rate of compensation increase                5%              5%             5%           5%            5%            5%
</TABLE>

The postretirement benefit obligation is calculated assuming that health-care
costs increased by 7.5% in 1999 and 8.0% in 2000, and that the rate of increase
thereafter (the health-care cost trend rate) will decline to 5% in 2006 and
subsequent years. The health-care cost trend rate has a significant effect on
the amounts reported for costs each year as well as on the accumulated
postretirement benefit obligation. For example, a one percentage point increase
each year in the health-care trend rate would have the following effects:

<TABLE>
<CAPTION>
                                                    ONE PERCENTAGE                ONE PERCENTAGE
                                                    POINT INCREASE                POINT DECREASE
<S>                                                 <C>                           <C>
Effect on total of service and
interest cost components in 1999                        $  41,517                 $   (36,843)

Effect on year-end 1999 postretirement
benefit obligations                                     $350,956                    $(327,803)
</TABLE>

The weighted average discount rate used in determining the benefit obligation
was 7.5% in 1999.

The postretirement medical and life insurance benefit plans have been modified
effective January 1, 1998 to provide benefits only to employees meeting certain
age and years of service requirements as of January 1, 1998.

Pension benefits for substantially all employees of DTG are provided through the
National Telephone Cooperative Association Retirement and Security Program (a
defined benefit plan) and Savings Plan (a defined contribution plan). The
Company makes annual contributions to the plans equal to the amounts accrued for
pension expense. The Retirement and Security Program is a multi-

                                      F-27
<PAGE>

MCLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--(CONTINUED)
employer plan and the accumulated benefits and plan assets are not determined or
allocated separately by individual employer. The total pension costs for 1999
and 1998 were $393,000 and $240,000.

The Company also has various 401(k) profit-sharing plans available to eligible
employees. The Company contributed approximately $3.0 million, $2.0 million and
$1.3 million for the years ended December 31, 1999, 1998 and 1997, respectively.
An additional discretionary 1998 contribution of $1.5 million was also made.

In addition the Company has a nonqualified deferred compensation plan, which
allows selected employees to defer a portion of any compensation received. Those
deferred amounts are invested in various funds at December 31, 1999 to provide
assets and accumulated earnings to offset the deferred compensation amounts due
to the participating employees.

NOTE 11.   ACQUISITIONS
CCI: On September 24, 1997, pursuant to the terms and conditions of an Agreement
and Plan of Reorganization dated June 14, 1997 (the "Merger Agreement"), the
Company issued 16,977,172 shares of Class A common stock, after giving effect to
the two-for-one stock split described in Note 8, and paid approximately $155
million in cash to the shareholders of CCI in exchange for all of the
outstanding shares of CCI in a transaction accounted for using the purchase
method of accounting. The total purchase price was approximately $382.1 million
based on the average closing price of the Company's Class A common stock five
days before and after the date of the Merger Agreement. The purchase price
includes approximately $3.4 million of direct acquisition costs.

TALKING DIRECTORIES, INC. (TALKING DIRECTORIES) AND INFO AMERICA PHONE BOOKS,
INC. (INFO AMERICA): On February 10, 1999, the Company acquired Talking
Directories in exchange for 5.2 million shares of its Class A common stock, par
value $.01 per share ("Class A common stock"), after giving effect to the
two-for-one stock split described in Note 8. In a related and concurrent
transaction, on February 10, 1999, the Company acquired Info America in exchange
for 2.4 million shares of its Class A common stock. The Company also paid
outstanding obligations of Talking Directories and Info America of approximately
$27 million.

DAKOTA TELECOMMUNICATIONS GROUP, INC. (DTG): On March 5, 1999, the Company
acquired DTG in exchange for approximately two million shares of its Class A
common stock, after giving effect to the two-for-one stock split described in
Note 8, and the assumption of approximately $31 million in DTG debt.

OVATION COMMUNICATIONS, INC. (OVATION): On March 31, 1999, the Company acquired
Ovation in exchange for approximately 11.2 million shares of its Class A common
stock, after giving effect to the two-for-one stock split described in Note 8,
and the payment of approximately $121.3 million in cash to the stockholders of
Ovation. The total purchase price was approximately $310.2 million based on the
average closing price of the Company's Class A common stock five days before and
after the date of the acquisition agreement. The Company also assumed
approximately $105.6 million in Ovation debt.

ACCESS COMMUNICATIONS HOLDINGS, INC. (ACCESS) AND S.J. INVESTMENTS HOLDINGS,
INC. (SJIH): On August 14, 1999, the Company acquired Access and SJIH in
exchange for approximately 3.87 million shares of its Class A common stock,
after giving effect to the two-for-one stock split described in Note 8, and the
payment of $48.3 million in cash to the stockholders of Access and SJIH. The
Company also assumed approximately $96.7 million in Access and SJIH debt.

                                      F-28
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11.   ACQUISITIONS--(CONTINUED)

The following table summarizes the purchase price allocations for the Company's
business acquisitions (in millions):

<TABLE>
<CAPTION>
           TRANSACTION YEAR:                                           1999           1998          1997
           ----------------                                        -------------- ------------- -------------
<S>                                                               <C>             <C>           <C>
           Cash purchase price                                          $236.4         $27.6        $178.5
           Acquisition costs                                               8.7           0.2           3.4
           Contracts payable                                               3.0           9.5           7.1
           Option agreements                                               0.8            --           0.5
           Promissory notes                                                9.2           1.0
           Stock issued                                                  480.2          11.4         232.4
           Note received                                                                  --            --
                                                                          (1.6)
                                                                   -------------- ------------- -------------
                                                                        $736.7         $49.7        $421.9
                                                                   ============== ============= =============

           Working capital acquired, net                                $(16.4)        $(0.1)       $ 41.8
           Fair value of other assets acquired                           133.0          13.5         174.4
           Goodwill and other intangibles                                874.0          38.7         288.0
           Liabilities assumed                                          (253.9)         (2.4)        (82.3)
                                                                   -------------- ------------- -------------
                                                                        $736.7         $49.7        $421.9
                                                                   ============== ============= =============
</TABLE>

These acquisitions have been accounted for as purchases and the results of
operations are included in the consolidated financial statements since the dates
of acquisition.

The unaudited consolidated results of operations for the years ended December
31, 1999 and 1998 on a pro forma basis as though the above entities had been
acquired as of the beginning of the respective periods are as follows:

<TABLE>
<CAPTION>
                                                                         1999            1998
                                                                        -------         -------
                                                                        (IN MILLIONS, EXCEPT
                                                                          PER SHARE DATA)
<S>                                                                     <C>             <C>
     Revenue.....................................................        $991.5         $612.7
     Net loss applicable to common shares .......................        (244.3)        (127.0)
     Loss per common share.......................................         (1.59)         (2.02)
</TABLE>

The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor are
such operating results necessarily indicative of future operating results.

NOTE 12.   RELATED PARTY TRANSACTIONS

The Company has entered into agreements with two stockholders that gives certain
rights-of-way to the Company for the construction of its telecommunications
network in exchange for capacity on the network.

The Company provided and purchased services from various companies, the
principals of which are stockholders or directors of McLeodUSA Incorporated or
are affiliates. Revenues from services provided totaled $4.2 million, $3.7
million and $1.0 million and services purchased, primarily rent,

                                      F-29
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12.   RELATED PARTY TRANSACTIONS - CONTINUED

legal services and database verification services, totaled $5.0 million, $3.1
million and $2.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively.

In December 1998, the Company entered into a split dollar arrangement for life
insurance policies owned by the McLeod Family 1998 Special Trust (the "Owner")
on the joint lives of Clark and Mary McLeod (the "McLeods"). The Owner agreed to
assign the policies to the Company as collateral for the premium payments. No
loans have been taken against these policies. The premium payments paid by the
Company totaled $1.9 million in 1999 and 1998. The aggregate face amount of the
policies is $113 million. The McLeod Family 1998 Special Trust is sole owner and
beneficiary of each policy. The Company has agreed with Clark and Mary McLeod
that one of the principal reasons for entering into this arrangement is to avoid
any need for their heirs to liquidate their holdings of Class A common stock at
or soon after the death of one or both of them. Clark and Mary McLeod have
agreed to restrictions on their ability to sell or otherwise dispose of their
shares of Class A common stock. The Company also paid premiums of $71,000 and
$138,257 in 1999 and 1998, respectively, for a universal life policy on the
Clark and Mary McLeod with a face value of $13.5 million. The Company is the
beneficiary of this policy.

During 1997, the Company also acquired two condominium units from a Company
director for a total purchase price of $171,000 and purchased a 15,000 square
foot building, which is used as a support facility for its fiber optic network,
from a stockholder for a cash purchase price of $500,000.

NOTE 13.   QUARTERLY DATA--(UNAUDITED)

     The following tables include summarized quarterly financial data for the
years ended December 31:
<TABLE>
<CAPTION>


                                                                                 QUARTERS
                                                             --------------------------------------------------
                                                                 FIRST      SECOND       THIRD      FOURTH
                                                             --- ------- -  -------   -- -------    ------
                                                                   (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                            <C>          <C>         <C>         <C>
     1999:
        Revenue..............................................    $181.1       $222.7      $241.1      $263.9
        Operating loss.......................................     (26.3)       (32.5)      (36.7)      (36.2)
        Net loss.............................................     (47.5)       (61.4)      (58.4)      (53.0)
        Loss applicable to common shares.....................     (47.5)       (61.4)      (62.5)      (66.6)
        Loss per common share................................     (0.36)       (0.41)      (0.41)      (0.43)

     1998:
        Revenue..............................................    $134.3       $155.7      $148.6      $165.5
        Operating loss.......................................     (20.8)       (17.3)      (21.3)      (15.3)
        Net loss.............................................     (30.3)       (29.8)      (33.0)      (31.8)
        Loss applicable to common shares.....................     (30.3)       (29.8)      (33.0)      (31.8)
        Loss per common share................................     (0.25)       (0.24)      (0.26)      (0.25)

     1997:
        Revenue..............................................    $ 35.8       $ 46.5      $ 49.3      $136.3
        Operating loss.......................................     (15.2)       (15.7)      (20.1)      (18.4)
        Net loss.............................................     (13.4)       (16.5)      (23.7)      (26.3)
        Loss applicable to common shares.....................     (13.4)       (16.5)      (23.7)      (26.3)
        Loss per common share................................     (0.13)       (0.15)      (0.22)      (0.21)
</TABLE>

                                      F-30
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14:  INFORMATION BY BUSINESS SEGMENT

The Company operates predominantly in the business of providing local, long
distance and related communications services to end users and the sale of
advertising space in telephone directories. The two business segments have
separate management teams and infrastructures that offer different products and
services. The principal elements of these segments are to provide integrated
communications services, provide outstanding customer service, expand fiber
optic network, expand intra-city fiber network build, and publish and distribute
directories to local area subscribers.

The Company evaluates the performance of its operating segments based on
earnings before interest, taxes, depreciation and amortization, excluding
general corporate expenses ("EBITDA"). The accounting policies of the reportable
segments are the same as those described in Note 1 of Notes to Consolidated
Financial Statements. Intersegment transfers are accounted for on an arm's
length pricing basis.

Identifiable assets (excluding intersegment receivables) are the Company's
assets that are identified in each business segment. Corporate assets primarily
include cash and cash equivalents, investments in available-for-sale securities,
administrative headquarters and goodwill recorded primarily as a result of the
CCI merger in 1997.

In 1999, 1998 and 1997, no single customer or group under common control
represented 10% or more of the Company's sales.

                                      F-31
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14:   INFORMATION BY BUSINESS SEGMENT--(CONTINUED)

Segment information for the years 1999, 1998 and 1997 was as follows (in
millions):

<TABLE>
<CAPTION>

                                   TELECOMMUNICATIONS       MEDIA         CORPORATE         TOTAL
<S>                                 <C>                <C>          <C>              <C>
1999
Revenues                              $      697.5      $      211.3      $      --       $   908.8
                                      ============      ============      ==========     ===========
EBITDA                                        44.4              33.8          (19.2)           59.0
Depreciation and amortization               (117.8)            (30.0)         (42.9)         (190.7)
Interest Revenue                               1.9                --           40.7            42.6
Interest Expense                              (6.4)              (.7)        (129.7)         (136.8)
Taxes and Other                                7.0               (.1)          (1.3)            5.6
                                      -------------     -------------     ----------     -----------
Net Income (Loss)                            (70.9)              3.0         (152.4)         (220.3)
                                      =============     =============     ==========     ===========

Total assets                               1,729.6             441.3        2,032.2         4,203.1
Capital expenditures                         716.9             217.2          382.5         1,316.6

---------------------------------------------------     -------------     ----------     -----------
1998
Revenues                              $      459.2      $      144.9      $      --       $   604.1
                                      =============     =============     ==========     ===========

EBITDA                                        13.1              18.8          (11.9)           20.0
Depreciation and amortization                (56.1)             (9.8)         (23.2)          (89.1)
Interest Revenue                                .9                .1           25.0            26.0
Interest Expense                              (5.2)               --          (73.0)          (78.2)
Taxes and Other                               (4.0)              (.1)            .5            (3.6)
                                      -------------     -------------     ----------     -----------
Net Income (Loss)                            (51.3)              9.0          (82.6)         (124.9)
                                      =============     =============     ==========     ===========

Total assets                                 684.7             199.7        1,040.8         1,925.2
Capital expenditures                         251.4              26.4           61.9           339.7

---------------------------------------------------     -------------     ----------     -----------
1997
Revenues                              $      218.3      $       49.6      $      --       $   267.9
                                      =============     =============     ==========     ===========

EBITDA                                       (30.0)             11.9          (13.4)          (31.5)
Depreciation and amortization                (18.3)             (5.8)          (9.2)          (33.3)
Interest Revenue                                .3                --           22.4            22.7
Interest Expense                              (1.4)               --          (33.2)          (34.6)
Other                                          1.4              (2.6)          (2.0)           (3.2)
                                      -------------     -------------     ----------     -----------
Net Income (Loss)                            (48.0)              3.5          (35.4)          (79.9)
                                      =============     =============     ==========     ===========

Total assets                                 352.0             172.4          821.2         1,345.6
Capital expenditures                         121.6              34.2          445.3           601.1
</TABLE>

                                      F-32
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15:   EFFECTS OF NEW ACCOUNTING STANDARDS

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. The Company does not
expect the impact of the adoption of SFAS 133 to be material to its results of
operations as it does not currently hold any derivative instruments or engage in
hedging activities.

NOTE 16:  SUBSEQUENT EVENTS

THE SPLITROCK MERGER AGREEMENT. On February 11, 2000, the Company entered into
an Amended and Restated Agreement and Plan of Merger, dated as of February 11,
2000 (the "Splitrock Merger Agreement"), by and among the Company, Southside
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of
the Company ("Southside"), Splitrock Services, Inc., a Delaware corporation
("Splitrock"), Splitrock Holdings, Inc., a Delaware corporation and wholly owned
subsidiary of Splitrock ("Splitrock Holdings"), and Splitrock Merger Sub Inc., a
Delaware corporation and wholly owned subsidiary of Splitrock Holdings
("Splitrock Merger Sub"), that contemplated two separate but related
transactions: (1) the holding company reorganization, in which Splitrock would
become a wholly owned subsidiary of Splitrock Holdings (the "Holding Company
Reorganization"); and (2) the merger of Southside with and into Splitrock
Holdings, in which Splitrock Holdings would be the surviving corporation and
would become a wholly owned subsidiary of the Company (the "Splitrock Merger").
The Company and Splitrock expect that the Splitrock merger will be consummated
immediately following or in any event as soon as practicable following the
Holding Company Reorganization.

At the effective time of the Holding Company Reorganization, each outstanding
share of Splitrock common stock will be converted into the right to receive one
share of common stock of Splitrock Holdings. At the effective time of the
Splitrock Merger, each right to receive one share of Splitrock Holdings common
stock will be converted into the right to receive 0.5347 of a share of Class A
common stock and cash in lieu of fractional shares.

The Company estimates that it will be required to issue approximately 30.6
million shares of Class A common stock to effect the Splitrock Merger. The
Company will also assume approximately $261.0 million in Splitrock debt. In
addition, under the terms of the Splitrock Merger Agreement, each option or
warrant to purchase Splitrock common stock issued under Splitrock's stock option
plan or granted under the Warrant Agreement will become or be replaced by an
option or warrant to purchase a number of shares of Class A common stock equal
to the number of shares of Splitrock common stock that could have been purchased
(assuming full vesting) under the Splitrock stock option plan or warrant
agreement multiplied by the .5347 exchange ratio used to convert Splitrock
common stock into Class A common stock.

Consummation of the Splitrock Merger is subject to the satisfaction of certain
conditions, including (i) approval of the Splitrock Merger Agreement by the
Splitrock stockholders, (ii) approval of the amendment to the certificate of
incorporation of McLeodUSA that will increase the number of authorized shares of
the Company's Class A common stock, (iii) the approval of the issuance of shares
of the Company's Class A common stock for the Splitrock merger, and (iv) certain
other customary conditions. Both the Company and Splitrock may terminate the
Splitrock Merger Agreement if the Splitrock Merger has not been consummated by
July 30, 2000. Certain stockholders of Splitrock holding in the aggregate
approximately 52.3% of the voting power

                                      F-33
<PAGE>

                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 16:   SUBSEQUENT EVENTS (CONTINUED)

attributable to Splitrock's common stock have agreed to vote all of their shares
in favor of the Splitrock Merger at a meeting of the stockholders of Splitrock.

THREE-FOR-ONE STOCK SPLIT. On February 29, 2000, the Company announced a
three-for-one stock split in the form of a stock dividend on the Company's Class
A common stock. The record date for the stock split is April 4, 2000 and the
distribution of the additional shares are scheduled to take place on April 24,
2000. The three-for-one split is subject to stockholder approval of an amendment
to the McLeodUSA certificate of incorporation to increase the number of
authorized shares. An amendment to accomplish this increase is scheduled to be
considered at the March 30, 2000 Special Meeting of McLeodUSA stockholders.

The share data in the consolidated financial statements and notes to the
financial statements have not been adjusted to reflect the three-for-one stock
split.

                                      F-34
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of McLeodUSA Incorporated:

         We have audited, in accordance with auditing standards generally
accepted in the United States, the financial statements of McLeodUSA
Incorporated included in this Form 10-K, and have issued our report thereon
dated January 26, 2000 (except with respect to the matters discussed in Note 16,
as to which the date is February 29, 2000). Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
Schedule II--Valuation and Qualifying Accounts ("Schedule II") is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. The Schedule II has been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

                                                ARTHUR ANDERSEN LLP



Chicago, Illinois
January 26, 2000

                                       1
<PAGE>

                            MCLEODUSA INCORPORATED
               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                                COLUMN A       COLUMN B      COLUMN C     COLUMN D        COLUMN E
                                                                     ADDITIONS
                                                BALANCE       CHARGED        CHARGED                       BALANCE
                                                  AT            TO             TO                            AT
                                               BEGINNING      COST AND        OTHER                        END OF
                DESCRIPTION                    OF PERIOD      EXPENSES       ACCOUNTS     DEDUCTIONS       PERIOD
                -----------                    ---------      --------       --------     ----------       ------
<S>                                          <C>           <C>             <C>           <C>           <C>
Year Ended December 31, 1997:
   Allowance for uncollectible accounts
     and discounts.........................   $ 3,899,000   $ 8,052,000(1)  $       --    $       --   $  11,951,000
   Valuation reserve on deferred tax assets    16,211,000    13,321,000             --            --      29,532,000
                                              -----------   -----------     -----------   -----------  -------------
                                              $20,110,000   $21,373,000     $       --    $       --   $  41,483,000
                                              ===========   ===========     ===========   ===========  =============
Year Ended December 31, 1998:
   Allowance for doubtful accounts
     and discounts.........................   $11,951,000   $19,620,000(2)  $       --    $16,003,000  $  15,568,000
   Valuation reserve on deferred tax assets    29,532,000    49,024,000             --            --      78,556,000
                                              -----------   -----------     -----------   -----------  -------------
                                              $41,483,000   $68,644,000     $       --    $16,003,000  $  94,124,000
                                              ===========   ===========     ===========   ===========  =============
Year Ended December 31, 1999:
   Allowance for doubtful accounts
     and discounts.........................   $15,568,000   $20,412,000(3) $  7,015,000   $ 1,580,000  $  41,415,000
   Valuation reserve on deferred tax assets    78,556,000    91,037,000             --            --     169,593,000
                                              ------------  ------------    -----------   -----------  -------------
                                              $94,124,000   $111,449,000    $ 7,015,000   $ 1,580,000  $211,008,000
                                              ===========   ============    ===========   ============ ============
</TABLE>

----------------------
(1)   Includes $4,809,000 of allowance for doubtful accounts and discounts
      related to acquisitions during the year.
(2)   Includes $15,000 of allowance for doubtful accounts and discounts related
      to acquisitions during the year.
(3)   Includes $1,296,000 of allowance for doubtful accounts and discounts
      related to acquisitions during the year.

                                       2
<PAGE>

                                INDEX TO EXHIBITS

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

 4.24        Second Amended and Restated November 1998 Stockholders' Agreement
             dated December 17, 1999 by and among certain Alliant Entities,
             Clark and Mary McLeod, Richard Lumpkin and certain CCI
             Shareholders.

 4.25        Second Amended and Restated January 1999 Stockholders' Agreement
             dated December 17, 1999 by and among certain Alliant Entities,
             Clark and Mary McLeod, Richard Lumpkin, certain CCI shareholders
             and the M/C Stockholders.

10.57        Network Agreement dated November 24, 1999 between Alliant Energy
             Companies and McLeodUSA Telecommunications Services, Inc.

 11.1        Statement regarding Computation of Per Share Earnings

 21.1        Subsidiaries of McLeodUSA Incorporated

 23.1        Consent of Arthur Andersen LLP

 27.1        Financial Data Schedule

--------------------------
+    Confidential treatment has been requested. The copy filed as an exhibit
     omits the information subject to the confidential treatment request.