<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

    [X]        Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 1997

                                       OR

    [  ]       Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                 For the transition period from ______ to ______

                         Commission File Number: 0-20763

                             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) of the Act:

                                 Not Applicable

           Securities registered pursuant to Section 12(g) of the Act:

                 Class A Common Stock, par value $.01 per share
            ------------------------------------------------------
                                 Title of Class

     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 February 27, 1998 is $1,097,168,805. */
                                        -

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

      Class A Common Stock, par value $.01 per share, outstanding as of 
                         February 27, 1998: 62,375,991


                       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:

(1) Portions of the definitive proxy statement for the Annual Meeting of
    Stockholders to be held on May 27, 1998, 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.

--------------
*/ 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 are considered to be affiliates.
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE> 
<CAPTION> 
                                                                                                     Page
<S>       <C>       <C>                                                                              <C> 
PART I    Item 1.   Business....................................................................        1
          Item 2.   Properties..................................................................       34
          Item 3.   Legal Proceedings...........................................................       35
          Item 4.   Submission of Matters to a Vote of Security Holders.........................       37
                    
PART II   Item 5.   Market for Registrant's Common Equity and
                    Related Stockholder Matters.................................................       37
          Item 6.   Selected Financial Data.....................................................       40
          Item 7.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations.........................................       41
          Item 7A.  Quantitative and Qualitative Disclosures
                    About Market Risk...........................................................       50
          Item 8.   Financial Statements and Supplementary Data.................................       50
          Item 9.   Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure.........................................       50
                    
PART III  Item 10.  Directors and Executive Officers of the Registrant..........................       51
          Item 11.  Executive Compensation......................................................       51
          Item 12.  Security Ownership of Certain Beneficial Owners
                    and Management..............................................................       51
          Item 13.  Certain Relationships and Related Transactions..............................       51
                    
PART IV   Item 14.  Exhibits, Financial Statement Schedules, and Reports
                    on Form 8-K.................................................................       52

GLOSSARY........................................................................................       62

SIGNATURES......................................................................................       65

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES............................................................      S-1
</TABLE> 

                                      (i)
<PAGE>
 
         This Form 10-K contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under the caption "Business--Risk
Factors" and elsewhere in this Form 10-K. Unless the context suggests otherwise,
references in this Form 10-K to the "Company" mean McLeodUSA Incorporated and
its subsidiaries and predecessors. Unless otherwise indicated, 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. See the "Glossary"
appearing elsewhere herein for definitions of certain terms used in this Form
10-K.

                                     PART I

Item 1.  Business.

Overview

         The Company is a provider of integrated telecommunications services to
small and medium-sized businesses in Iowa, Illinois, North Dakota, South Dakota,
Minnesota, Wisconsin, Indiana, Colorado and Wyoming and to residential customers
in Iowa, Illinois, North Dakota, South Dakota, Wisconsin and Colorado. The
Company derives its telecommunications revenue from (i) the sale of "bundled"
local, long distance and other telecommunications services to end users, (ii)
telecommunications network maintenance services and telephone equipment sales,
service and installation, (iii) special access, private line and data services,
(iv) the sale of advertising space in telephone directories, (v) local exchange
services through the operation of an independent local exchange company,
Illinois Consolidated Telephone Company ("ICTC"), acquired as part of the CCI
Acquisition (as defined herein), (vi) telemarketing services and (vii) other
telecommunications services, including cellular, operator, payphone and paging
services. As of December 31, 1997, the Company served over 173,200
telecommunications customers in 227 cities and towns.

         The Company offers "one-stop" integrated telecommunications services,
including local, long distance, voice mail, paging and Internet access services,
tailored to the customer's specific needs. For business customers, this approach
simplifies telecommunications procurement and management and makes available
customized services, such as competitive long distance pricing and enhanced
calling features, that might not otherwise be directly available to such
customers on a cost-effective basis. For residential customers, this approach
provides integrated local, long distance and other telecommunications services,
flat-rate long distance pricing and enhanced calling features as part of the
Company's basic PrimeLine(R) residential service. The Company offers a variety
of private line and data services to large businesses, institutional customers
and interexchange carriers. The Company also sells, installs and services
telephone equipment, primarily to business customers in Iowa, Illinois and
Minnesota, and provides network maintenance services for the State of Iowa's
fiber optic network. In addition, the Company annually publishes over 13 million
competitive "white page" and "yellow page" telephone directories in 21 states.
See "--Current Products and Services."

         The Company was formed on June 6, 1991 as McLeod Telecommunications,
Inc. It began operations in November 1992, providing fiber optic maintenance
services for the Iowa Communications Network. The Iowa Communications Network is
a fiber optic network that links certain of the State of Iowa's schools,
libraries and other public buildings. On August 1, 1993, the Company was
reincorporated in the State of Delaware. On May 29, 1997, the stockholders of
the Company approved an amendment to the Company's Amended and Restated
Certificate of Incorporation (the "Restated Certificate") changing the name of
the Company from McLeod, Inc. to McLeodUSA Incorporated. The Company is
organized as a holding company and operates primarily through wholly owned
subsidiaries. McLeodUSA Telecommunications Services, Inc. ("McLeodUSA
Telecommunications"), a wholly owned subsidiary of the Company, received
regulatory approvals in Iowa and Illinois to offer local and long distance
services in December 1993 and began providing such services in January 1994. In
April 1995, July 1996 and September 1996, respectively, the Company acquired MWR
Telecom, Inc. ("MWR") (now part of McLeodUSA Network Services, Inc. ("McLeodUSA
Network Services")), a competitive access provider in 

                                       1
<PAGE>
 
Des Moines, Iowa, Ruffalo Cody & Associates, Inc. ("Ruffalo Cody"), a
telemarketing company, and TelecomoUSA Publishing Group, Inc. (now known as
McLeodUSA Media Group, Inc. ("McLeodUSA Publishing")), a telephone directory
company. On September 24, 1997, the Company acquired Consolidated Communications
Inc. ("CCI"), a diversified telecommunications holding company offering a
variety of communications products and services, including local exchange and
long distance services and "white page" and "yellow page" telephone directory
publishing (the "CCI Acquisition").

         As of the date hereof, the Company is offering integrated
telecommunications services to business and residential customers in Iowa,
Illinois, North Dakota, South Dakota, Wisconsin and Colorado. The Company also
offers integrated telecommunications services to business customers in a number
of markets in Minnesota, Indiana, and Wyoming. Over the next several years,
depending on competitive and other factors, the Company also intends to offer
integrated telecommunications services in Idaho, Missouri, Montana, Nebraska and
Utah. The Company offers long distance service in 48 states in the continental
United States.

         In April and June 1997, the Federal Communications Commission ("FCC")
granted the Company a total of 26 "D" and "E" block frequency personal
communications services ("PCS") licenses and in September 1997 the Company
acquired one additional "E" block frequency PCS license as a result of the CCI
Acquisition (the "CCI PCS License"), giving the Company 27 PCS licenses in a
total of 25 markets covering areas of Iowa, Illinois, Minnesota, Nebraska and
South Dakota. The Company paid the FCC approximately $32.8 million for the 26
PCS licenses granted to the Company by the FCC in April and June 1997. CCI paid
the FCC for the CCI PCS License prior to the CCI Acquisition. The Company's PCS
licenses encompass approximately 110,000 square miles and a population of
approximately 6.9 million. The Company expects to begin constructing its PCS
network and offering PCS services as part of its integrated telecommunications
services over the next several years. See "--Wireless Services," "--Risk
Factors--PCS System Implementation Risks" and "--Risk Factors--Regulation."

         On July 21, 1997, the FCC granted licenses to the Company for four
wireless communications service ("WCS") licenses in the Major Economic Areas of
Milwaukee, Wisconsin, Minneapolis-St. Paul, Minnesota, Des Moines-Quad Cities,
Iowa/Illinois and Omaha, Nebraska. The Company intends to use the frequency
blocks covered by the licenses to provide certain fixed services, such as
wireless local loop, Internet access or meter reading.

         The statements in the foregoing paragraphs about the Company's
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 the Company's
actual geographic expansion and services may differ materially from that
indicated by its current plans, in each case as a result of a variety of
factors, including: (i) the availability of financing and regulatory approvals;
(ii) the number of potential customers in a target market; (iii) the existence
of strategic alliances or relationships; (iv) technological, regulatory or other
developments in the Company's business; (v) changes in the competitive climate
in which the Company operates; and (vi) the emergence of future opportunities.

         The Company believes it is the first telecommunications provider in
most of its markets to offer "bundled" local, long distance and other
telecommunications services. As a result, the Company believes that it is
well-positioned to take advantage of fundamental changes occurring in the
telecommunications industry resulting from the Telecommunications Act of 1996
(the "Telecommunications Act") and to challenge incumbent local exchange
carriers. In areas other than those served by ICTC (which operates its own lines
and switches), the Company provides local service using existing telephone lines
and switches or unbundled network elements (lines only) obtained from incumbent
local exchange carriers, which allows customers to switch to local service
provided by the Company without changing existing telephone numbers. The Company
provides long distance services by purchasing bulk capacity from long distance
carriers or, in central Illinois, by using its inter-city fiber optic network.
The Company also provides voice mail, paging and Internet access services. In
ICTC's service area, which includes 37 central office exchanges in east central
Illinois, the Company offers local and long distance service using ICTC's
facilities. The Company is currently constructing fiber optic networks in Iowa,
Illinois, Wisconsin, South Dakota and North Dakota to carry additional
telecommunications services traffic on its own network.

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

                                       2
<PAGE>
 
Recent Transactions

         In March 1997, the Company completed a private offering of $500 million
aggregate principal amount at maturity of its 10 1/2% senior discount notes due
March 1, 2007 (the "Senior Discount Notes") yielding net proceeds of
approximately $288.9 million (the "Senior Discount Note Offering"). The Senior
Discount Notes were subsequently exchanged for $500 million aggregate principal
amount at maturity of substantially identical 10 1/2% senior discount notes due
March 1, 2007 (the "Senior Discount Exchange Notes") that had been registered
under the Securities Act of 1933, as amended (the "Securities Act"), in an
exchange offer (the "Senior Discount Note Exchange Offer") that expired on
August 24, 1997. In July 1997, the Company completed a private offering of $225
million aggregate principal amount of its 9 1/4% Senior Notes due July 15, 2007
(the "Senior Notes"), yielding net proceeds of approximately $217.7 million (the
"Senior Note Offering"). The Senior Notes were subsequently exchanged for $225
million aggregate principal amount of substantially identical 9 1/4% Senior
Notes due July 15, 2007 (the "Senior Exchange Notes") that had been registered
under the Securities Act in an exchange offer (the "Senior Note Exchange Offer")
that expired on January 9, 1998.

         On September 24, 1997, the Company acquired CCI pursuant to an
Agreement and Plan of Reorganization dated as of June 14, 1997 (the "Merger
Agreement"). As consideration for the acquisition, the Company issued an
aggregate of 8,488,596 shares of the Company's Class A Common Stock, $.01 par
value per share (the "Class A Common Stock"), and paid approximately $155
million in cash to the shareholders of CCI. The CCI Acquisition is the Company's
largest acquisition to date. CCI served telecommunications customers in 45
cities and towns primarily in Illinois at the time the CCI Acquisition was
consummated. As a result of the CCI Acquisition, the Company now owns all of the
former CCI subsidiaries, including ICTC, an independent local exchange carrier
with 37 central office exchanges in east central Illinois which was serving over
89,000 access lines as of December 31, 1997, Consolidated Communications Telecom
Services Inc. ("CCTS"), a competitive local exchange carrier which was offering
integrated local, long distance and other telecommunications services to over
6,700 customers in central and southern Illinois and in Indiana as of December
31, 1997, and which holds a certificate of authority to provide resale and
facilities based services in Missouri; Consolidated Communications Directories
Inc. ("CCD"), a telephone directory company that as of December 31, 1997 was
publishing and distributing annual "white page" and "yellow page" telephone
directories in 38 states and the United States Virgin Islands; an operator
service company; an inmate pay-phone company; a full service telemarketing
agency; a majority interest in a cable television company serving customers in
Greene, Sangamon and Menard counties in Illinois and in Benton Harbor, Michigan;
and a minority interest in a cellular telephone partnership serving parts of
east central Illinois.

         On September 25, 1997, and pursuant to the terms of the Merger
Agreement, Richard A. Lumpkin, the Chairman and Chief Executive Officer of CCI
and Robert J. Currey, the President and Chief Operating Officer of CCI, were
elected directors of the Company and joined the Company's executive management
team. Mr. Lumpkin, certain members of his family and trusts for the benefit
thereof own approximately 13.6% of the shares of Class A Common Stock
outstanding as of February 27, 1998. Mr. Currey resigned his position as an
executive officer of the Company effective March 6, 1998 but will remain a
director of the Company.

Business Strategy

         The Company's objective is to become a leading provider of integrated
wireline and wireless telecommunications services in Iowa, Illinois, North
Dakota, South Dakota, Minnesota, Wisconsin, Indiana, Colorado, Missouri,
Montana, Idaho, Nebraska, Utah and Wyoming. The Company intends to increase its
penetration of its current markets and expand into new markets by: (i)
aggressively capturing market share and generating revenues using leased network
capacity and (ii) concurrently constructing additional network infrastructure to
more cost-effectively serve its customers.

         The principal elements of the Company's business strategy include:

         .    Provide Integrated Telecommunications Services. The Company
              believes that there is substantial demand among business and
              residential customers in its target markets for an integrated
              package of wireline and wireless telecommunications services that
              meets all of the 

                                       3
<PAGE>
 
              customer's telecommunications needs. The Company believes that, by
              bundling a variety of telecommunications services, it will
              position itself to become an industry leader in offering "one-
              stop" integrated telecommunications services, to penetrate rapidly
              its target markets and to build customer loyalty. The Company
              intends to add PCS services to its current array of integrated
              telecommunications services over the next several years.

         .    Build Market Share Through Branding and Customer Service. The
              Company believes that, by branding its telecommunications services
              with the trade name *McLeodUSA in combination with the distinctive
              black-and-yellow motif of the McLeodUSA Publishing directories,
              it will create and strengthen brand awareness in all of the
              Company's markets. The Company also believes that the key to
              revenue growth in its target markets is capturing and retaining
              customers through an emphasis on marketing, sales and customer
              service. The Company's customer focused software and network
              architecture allow immediate access to the Company's customer data
              by Company personnel, enabling a quick and effective response to
              customer requests and needs at any time. This software permits the
              Company to present its customers with one fully integrated monthly
              billing statement for local, long distance, 800, international,
              voice mail, paging, Internet access and travel card services, and
              will permit the Company to include additional services, such as
              PCS, when available. The Company believes that its customer
              focused software platform is an important element in the marketing
              of its telecommunications services and gives it a competitive
              advantage in the marketplace. The Company has been successful in
              obtaining long-term commitments from its business customers and
              responding rapidly and creatively to customer needs.

         .    Focus on Small and Mid-sized Markets. The Company principally
              targets small and mid-sized markets (cities and towns with a
              population between 8,000 and 350,000) in its service areas. The
              Company estimates that its current and planned target markets have
              a combined population of approximately 16.9 million. The Company
              strives to be the first to market integrated telecommunications
              services in its principal markets and expects that intense
              competition in bundled telecommunications services will be slower
              to develop in these markets than in larger markets.

         .    Expand its Fiber Optic Network. The Company is constructing a
              state-of-the-art digital fiber optic telecommunications network
              designed to serve markets in Iowa, Illinois, Wisconsin, South
              Dakota and North Dakota. As part of the CCI Acquisition, the
              Company acquired approximately 900 route miles of fiber optic
              network in central Illinois. In the future, the Company expects to
              expand its fiber optic network to include additional markets. The
              Company's decision to expand its fiber optic network will continue
              to be based on various economic factors, including: (i) the number
              of its customers in a market; (ii) the anticipated operating cost
              savings associated with such construction; and (iii) any strategic
              relationships with owners of existing infrastructure or
              rights-of-way (e.g., utilities, railroad companies and cable
              operators). As of December 31, 1997, the Company owned
              approximately 4,900 route miles of fiber optic network and,
              subject to the foregoing factors, expects to construct
              approximately 5,500 additional route miles of fiber optic network
              during the next three years. Through its strategic relationships
              with its electric utility stockholders and other owners of
              infrastructure and rights-of-way, and its contracts to build the
              final links of the Iowa Communications Network, as described
              herein and lease a portion of the capacity on those links to the
              State of Iowa, the Company believes that it has achieved and will
              be able to continue to achieve capital efficiencies in
              constructing its fiber optic network in a rapid and cost-effective
              manner. The Company also believes that its fiber optic network in
              combination with its customer focused software creates an
              attractive platform for the provision of local, long distance,
              wireless and enhanced services.

         .    Expand Intra-City Fiber Network Build. The Company has identified
              approximately 50 cities in which it proposes to build, on average,
              approximately 40 miles of fiber network per city, which will be
              utilized to provide a direct link between business end users and
              the Company's facilities. This strategy will allow the Company to
              avoid leasing unbundled local loop or Centrex service from the
              incumbent local exchange carrier. Costs associated with the
              intra-city build include fiber optic cable and related equipment.
              The strategy is expected to reduce the Company's costs and to
              enable the Company to provide expanded customer services.

                                       4
<PAGE>
 
         .    Transition into Local Switched Services Business. The Company has
              interconnection agreements with Ameritech Corporation
              ("Ameritech") under which the Company provides facilities-based
              switched services to over 8,500 local lines in central Illinois
              and in Indiana as of the date hereof. When certain judicial and
              regulatory proceedings are resolved, and assuming the economics
              are favorable to the Company, the Company intends to begin
              offering additional facilities-based switched services in other
              markets by using its six existing high capacity digital switches
              and installing additional switches. In August 1996, the FCC
              released a decision implementing the interconnection portions of
              the Telecommunications Act (the "Interconnection Decision").
              Certain provisions of the Interconnection Decision have been
              vacated by July and October 1997 decisions of the U.S. Eighth
              Circuit Court of Appeals. The U.S. Supreme Court has granted
              certiorari to review the decisions of the Eighth Circuit Court of
              Appeals during the 1998 term. Although these court decisions do
              not prevent the Company from negotiating interconnection
              agreements, they do create uncertainty about the rules governing
              pricing, terms and conditions of interconnection agreements. There
              may be further judicial and regulatory proceedings. If the Company
              can negotiate favorable interconnection agreements, and subject to
              court and regulatory proceedings necessary to implement such
              agreements, the Company believes that it could begin offering
              additional local facilities-based switched services in other
              markets over the next three years. The Company has received state
              regulatory approval to offer local facilities-based switched
              services in all areas serviced by U S WEST Communications, Inc.
              ("U S WEST") in Iowa, South Dakota and Idaho and in all areas
              served by Ameritech in Illinois (except Chicago), Indiana and
              Wisconsin. The Company intends to seek regulatory approval to
              provide such services in other markets targeted by the Company
              when the economic terms of interconnection with the incumbent
              local exchange carrier make the provision of local
              facilities-based switched services cost-effective.

         .    Explore Potential Acquisitions and Strategic Alliances. The
              Company believes that its strategic alliances with two utilities
              in its Iowa markets, one utility in Wisconsin and one utility and
              one railroad in Illinois provide it with access to rights-of-way
              and other resources on favorable terms. The Company believes that
              its acquisitions of Ruffalo Cody, McLeodUSA Publishing and CCI
              will increase the Company's penetration of its current markets and
              accelerate its entry into new markets. As part of its expansion
              strategy, the Company may pursue additional acquisitions, joint
              ventures and strategic alliances with businesses that are related
              or complementary to its current operations. The Company believes
              that the addition of such related or complementary businesses will
              help it to continue to expand its operations into its target
              markets. As a result, the Company plans to consider acquisitions,
              joint ventures and strategic alliances in areas such as wireline
              and wireless services, directory publishing, network construction
              and infrastructure and Internet access. In undertaking these
              transactions, the Company may use proceeds from the Senior
              Discount Note Offering, the Senior Note Offering, credit
              facilities and other borrowings, and additional debt and equity
              issuances.

         .    Leverage Proven Management Team. The Company's executive
              management team consists of veteran competitive telecommunications
              managers, led by entrepreneur Clark McLeod, several of whom have
              together in the past successfully implemented a similar customer
              focused telecommunications strategy in the same regions. Six of
              the executive officers of the Company served as officers of
              Teleconnect Company ("Teleconnect") or its successor,
              Telecom*USA, Inc. ("Telecom*USA"). Teleconnect began providing
              long distance services in Iowa in 1982 and rapidly expanded into
              dozens of cities and towns in the Midwest. Telecom*USA was the
              fourth-largest U.S. long distance provider when MCI purchased it
              in 1990 for $1.25 billion.

                                       5
<PAGE>
 
Market Potential

         The telecommunications industry is undergoing substantial changes due
to statutory, regulatory and technological developments. The Company believes
that it is well-positioned to take advantage of these fundamental changes.

         Wireline Services. The market for local exchange services consists of a
number of distinct service components, including: (i) local network services,
which generally include basic dial tone, local area charges, enhanced calling
features and private line services (dedicated point-to-point intraLATA service);
(ii) network access services, which consist of access provided by local exchange
carriers to long distance network carriers; (iii) short-haul long distance
network services, which include intraLATA long distance calls and private lines;
and (iv) other varied services, including the publication of "white page" and
"yellow page" telephone directories and the sale of business telephone
equipment. Industry sources have estimated that the 1996 aggregate revenues of
all local exchange carriers approximated $108 billion. Until recently, there was
little competition in the local exchange markets, particularly for local network
and network access services.

         Until 1984, AT&T Corp. ("AT&T") largely monopolized local and long
distance telephone services in the United States. Technological developments
gradually enabled others to compete with AT&T in the long distance market. In
1984, as the result of a court decree, AT&T was required to divest its local
telephone systems (the "Divestiture"), which created the present structure of
the telecommunications industry. 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 (now five, as a result of industry consolidation)
independent Regional Bell Operating Companies. The Regional Bell Operating
Companies were given the right to provide local telephone service, local access
service and intraLATA long distance service, but were prohibited from providing
interLATA service. AT&T retained its long distance services operations. The
separation of the Regional Bell Operating Companies from AT&T's long distance
business created two distinct telecommunications market segments: local exchange
and long distance. The Divestiture decreed direct, open competition in the long
distance segment, but continued the regulated monopoly environment in local
exchange services.

         Subsequently, competition began to make inroads with respect to local
exchange services. Several factors served to promote such competition,
including: (i) rapidly growing customer demand for an alternative to the local
exchange carrier monopoly, spurred partly by the development of competitive
activities in the long distance market; (ii) advances in the technology for
transmission of data and video, which require greater capacity and reliability
levels than many local exchange carrier networks (which principally are
copper-based) can accommodate; (iii) the development of fiber optic and digital
electronic technology, which reduced network construction costs while increasing
transmission speeds, capacity and reliability as compared to the local exchange
carriers' copper-based network; (iv) the significant access charges
interexchange carriers are required to pay to local exchange carriers to access
the local exchange carriers' networks; and (v) a willingness on the part of
legislators to enact and regulators to enforce legislation and regulations
permitting and promoting competition in the local exchange market.

         As a result of regulatory changes and competitive trends, competitive
local telecommunications companies and access providers are experiencing
significant growth. Effective in early 1994, FCC decisions announced in
September 1992 and August 1993, as modified by subsequent FCC and court
decisions (the "Initial Interconnection Decisions"), opened additional segments
of the market by permitting competitive access providers expanded authority to
interconnect with and use facilities owned by local exchange companies for
interstate traffic. The Company believes that the Initial Interconnection
Decisions, together with other statutory and regulatory initiatives in the
telecommunications industry (including the Telecommunications Act) recently
introduced to foster competition in the local exchange markets, have stimulated
demand for competitive local services.

         Opportunities to compete in the local exchange market increased
substantially on February 8, 1996, when the Telecommunications Act was enacted.
The Telecommunications Act eliminated state legal prohibitions against local
exchange competition and prohibited states from enforcing other barriers to the
provision of local services, though states may regulate local telephone
competition. The Telecommunications Act also established requirements governing
the interconnection of competing local 

                                       6
<PAGE>
 
telephone networks, including special requirements applicable to the Regional
Bell Operating Companies and other incumbent local exchange companies. The
Telecommunications Act requires incumbent local exchange carriers to "unbundle"
their local network offerings and allow other providers of telecommunications
services to interconnect with their facilities and equipment. Most
significantly, the incumbent local exchange carriers are required to complete
local calls originated by the Company's customers and switched by the Company
and to deliver inbound local calls to the Company for termination to its
customers, assuring customers of unimpaired local calling ability. Although
there can be no assurance, the Company believes that it should also be able to
obtain access to incumbent carrier "loop" facilities (the transmission lines
connecting customers' premises to the public telephone network) on an unbundled
basis at reasonable and non-discriminatory rates. As of December 31, 1997, the
Company was serving over 8,500 local lines through use of such "loop"
facilities. 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. Moreover, states may not erect "barriers
to entry" to the provision of any telecommunications service.

         The Company believes that each of these requirements is likely, when
fully implemented, to increase competition among providers of local
telecommunications services and simplify the process of switching from incumbent
local exchange carrier services to those offered by competitive local exchange
carriers. However, the Telecommunications Act also offers important benefits to
the incumbent local exchange carriers. Regional Bell Operating Companies have
regained the ability to provide InterLATA long distance services under specified
conditions (some of which have been held unconstitutional by the U.S. District
Court for the Northern District of Texas (see "--Regulation")) and have new
rights to provide certain cable TV services. The Telecommunications Act,
however, also provides for certain safeguards to attempt to protect against
anticompetitive abuses by the Regional Bell Operating Companies.

         However, the process of implementing the Telecommunications Act is
still underway, and important questions remain unresolved. For example, in
August 1996, the FCC released the Interconnection Decision implementing the
interconnection portions of the Telecommunications Act. The Interconnection
Decision establishes rules for negotiating interconnection agreements and
guidelines for review of such agreements by state public utilities commissions.
In July and October 1997, the U.S. Eighth Circuit Court of Appeals decided that
the FCC had exceeded its jurisdiction and vacated several provisions of the
Interconnection Decision, including provisions regarding pricing, provisions
permitting carriers to "pick and choose" among individual provisions of
arbitrated interconnection agreements, and certain provisions relating to the
purchase of unbundled network elements. The overall impact of the Eighth
Circuit's decisions was to limit the obligations of the incumbent local exchange
carriers as originally interpreted by the FCC, materially reduce the role of the
FCC in fostering local competition, and increase the role of state utility
commissions. The U.S. Supreme Court has granted certiorari to review the
decisions of the Eighth Circuit Court of Appeals during the 1998 term. Although
these decisions and other legal proceedings do not prevent the Company from
entering into interconnection agreements, as it has done in Illinois, Indiana,
Iowa and Minnesota, they do create uncertainty about the rules governing
pricing, terms and conditions of interconnection agreements and will likely
delay the execution of these agreements. If the Company can negotiate favorable
interconnection agreements, and subject to the resolution of judicial and
regulatory proceedings necessary to implement such agreements, the Company
believes that it could begin offering local facilities-based switched services
in markets outside of the markets in central Illinois and Indiana in which the
Company currently provides such services.

         A number of states have taken regulatory and legislative action to open
local telecommunications markets to various degrees of competition. As noted
above, the Telecommunications Act preempts any remaining state prohibitions of
local competition and also forbids unreasonable restrictions on resale of local
services. The Company expects 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 networks and address a larger customer base. However,
there can be no assurance that government actions to implement local telephone
competition will be as complete or as timely as the Company requires to
implement its business plans.

         The Telecommunications Act also creates the foundation for increased
competition in the long distance market. For example, certain provisions
eliminate previous prohibitions on the provision of 

                                       7
<PAGE>
 
interLATA long distance services (both retail and carriers' carrier) by the
Regional Bell Operating Companies subject to compliance by such companies with
requirements set forth in the Telecommunications Act and implemented by the FCC.
These requirements are focused on creating the conditions for successful local
competition notwithstanding the market power of the Regional Bell Operating
Companies. The FCC has denied the first applications of the Regional Bell
Operating Companies for approval to provide interLATA service on the ground that
actions necessary for local exchange competition have not been implemented
sufficiently. Certain of these FCC decisions have been appealed by the Regional
Bell Operating Companies. Separately, on December 31, 1997, the U.S. District
Court for the Northern District of Texas ruled that the imposition of these
preconditions on the Regional Bell Operating Companies was unconstitutional, and
that these companies must be allowed to provide interLATA services without
meeting them. The District Court has stayed its order pending appeal. The
Company could be adversely affected if the Regional Bell Operating Companies
(and particularly U S WEST or Ameritech) are allowed to provide wireline
interLATA long distance services within their own regions before local
competition is established.

         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 49 million as of
June 30, 1997, with a compound annual growth rate in excess of 40% from 1990
through 1997. Wireless communication revenues for the 12-month period ended June
30, 1997 are estimated by CTIA to have totaled over $25.5 billion, a 19%
increase over the prior 12-month period. The Company believes 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. The Company also believes the rapid growth of notebook computers
and personal digital assistants, combined with emerging software applications
for wireless delivery of electronic mail, fax and database searching, will
further stimulate demand for wireless service. In addition, future competition
with wireline local exchange carriers is expected as "wireless local loop"
technology and reduced wireless rates facilitate migration of wireline minutes
to wireless carriers. BIA Consulting, Inc. estimates that the number of wireless
service subscriptions will reach 90.5 million by the year 2000, with PCS
accounting for approximately 23.1 million of such subscriptions.

Current Products and Services

         The Company derives its telecommunications revenue from: (i) the sale
of "bundled" local, long distance and other telecommunications services to end
users, (ii) telecommunications network maintenance services and telephone
equipment sales, service and installation, (iii) special access, private line
and data services, (iv) the sale of advertising space in telephone directories,
(v) local exchange services through the operation of an independent local
exchange company, ICTC, acquired as part of the CCI Acquisition, (vi)
telemarketing services, and (vii) other telecommunications services, including
cellular, operator, payphone and paging services. For the year ended December
31, 1997, these services represented 41%, 8%, 6%, 30%, 6%, 5% and 4%,
respectively, of the Company's total revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."

         Integrated Telecommunications Services. As of December 31, 1997, the
Company was providing service, on a retail basis, to approximately 283,000 lines
in its markets, primarily to small and medium-sized business customers and to
residential customers. Since beginning sales activities in January 1994, the
Company has increased its revenue from the sale of local and long distance
telecommunications services from $4.6 million for the year ended December 31,
1994 to $110 million for the year ended December 31, 1997. In order to provide
integrated telecommunications services to most of its business and residential
customers, the Company, pursuant to agreements with U S WEST for its customers
located in U S WEST's service territories and Ameritech for most of its
customers located in Ameritech's service territories, partitions part of the
central office switches serving the communities in which the Company provides
such services ("Centrex" services). The Company's customers' telephone lines and
numbers are assigned to the Company's portion of the switch. U S WEST or
Ameritech, as the case may be, bills the Company for all the lines that the
Company has assigned to the Company's customers and provides the Company with
call detail reports, which enable the Company to verify its customers' bills for
both local and long distance service. See "--Risk Factors--Failure of U S WEST
to Furnish Call Detail Records."

                                       8
<PAGE>
 
         The Company believes that these services are superior to a standard
business or residential telephone line, since the Company can offer features,
such as three-way calling, consultation hold and call transfer, at no extra
charge to the end user. Certain other custom calling features are also available
at additional cost to the end user. Because the Company has also purchased the
"Centrex Management System" and the "Centrex Mate Service" from U S WEST and
Ameritech, respectively, Company personnel have on-line access to U S WEST and
Ameritech facilities and may make changes to the customers' services
electronically and quickly.

         In March 1996, the Company entered into a settlement agreement with U S
WEST in connection with a complaint brought against U S WEST by the Company
before the Iowa Utilities Board. The settlement agreement permits the Company to
obtain access to the partitioned portion of U S WEST central office switches in
Iowa until March 18, 2001 and contains rates that may not be increased by U S
WEST unless the rates are renegotiated by the parties based on U S WEST's rates
for access to unbundled elements of its network. See "Legal Proceedings." As of
the date hereof, the Company is purchasing Centrex service in Minnesota and
Wyoming from U S WEST on a month-to-month basis. In September 1997, the Company
exercised its right to opt into an existing interconnection agreement with U S
WEST that will govern interconnection between the Company and U S WEST in Iowa.
Under the agreement, the Company is entitled to purchase Centrex Plus service
(and other services) from U S WEST in Iowa at a wholesale discount retroactive
to September 8, 1997. In October 1997, the Company exercised its right to opt
into an existing interconnection agreement with U S WEST that will govern
interconnection between the Company and U S WEST in Minnesota. Under the
agreement which went into effect on January 30, 1998, the Company will be
entitled to purchase Centrex service (and other services) from U S WEST in
Minnesota at a wholesale discount from retail prices. On February 18, 1998, the
Company entered into five-year rate stability Centrex agreements with U S WEST
for service in South Dakota. The lower rate-stabilized Centrex prices relate
back to the time service was first initiated in each South Dakota central
office.

         The Company has five-year Centrex agreements with Ameritech that extend
through 2002 in Illinois and in Wisconsin, and has seven-year Centrex agreements
with Ameritech that extend through 2000 in Indiana. These agreements provide for
stabilized rates that may not be unilaterally increased by Ameritech. In June
1997, the Company and Ameritech signed resale agreements providing for wholesale
rates for the services purchased by the Company from Ameritech in Illinois and
Wisconsin. These agreements have been approved by the Illinois Commerce
Commission and the Wisconsin Public Service Commission, respectively.

         In addition, in order to provide integrated telecommunications services
to some of its business and residential customers in central Illinois, the
Company purchases unbundled "loop" elements pursuant to an agreement with
Ameritech and uses its own switching and network facilities. In October 1996 and
July 1997, CCI entered into interconnection agreements with Ameritech for the
provision of local service using unbundled "loops" in Illinois and Indiana,
respectively.

         The Company provides long distance service by purchasing capacity, in
bulk, from national interexchange carriers, and routing its customers' long
distance traffic over this capacity. In certain Illinois and Wisconsin service
areas, long distance traffic is being migrated to the Company's own network
facilities.

         The Company has also developed and installed state-of-the-art,
"customer focused" software for providing integrated telecommunications
services. This software permits the Company to present its customers with one
fully integrated monthly billing statement for local, long distance, 800,
international, voice mail, paging, Internet access and travel card services, and
will permit the Company to include additional services, such as PCS, when
available. The Company believes that its customer focused software platform is
an important element in the marketing of its telecommunications services and
gives it a competitive advantage in the marketplace.

         Business Services. End-user business customers in each of the cities
and towns in which the Company offers its integrated telecommunications services
as of the date hereof can obtain local, long distance and ancillary (such as
three-way calling and call transfer) services directly from the Company.

                                       9
<PAGE>
 
         Business customers subscribing to the Company's integrated
telecommunications services generally receive local service at prices that are
substantially similar to the published retail local exchange carrier rates for
basic business service provided by the incumbent local exchange carrier. Long
distance rates for a majority of such business customers generally are
calculated by totaling each business customer's monthly calls and comparing the
total charges that would be applicable to that customer's calls under each of
the pricing plans of the major long distance carriers that generally are
believed to be most popular with the Company's business customers. Specifically,
the Company's billing software, known as Raterizer(R), enables the Company to
calculate the monthly charges that each customer would be billed based on the
customer's actual calls under each of several long distance plans offered by
AT&T, MCI Communications Corporation ("MCI") and Sprint Corporation ("Sprint")
and, in certain instances, other rates specifically identified by a customer and
agreed to by the Company. The customer is then billed an amount equal to such
"lowest cost" monthly charges calculated using this software, minus any discount
to which the customer may be entitled as a result of having made a long-term
commitment to use the Company's services. Many other customers are offered a
"postalized" (flat rate) or a negotiated rate consistent with the customer's
particular needs and within the guidelines of the Company's filed tariffs. These
rates are not subject to increase for the duration of the term selected by the
customer.

         Business customers served by CCI are on different long distance rate
plans. The Company is transitioning these customers to the Company's most
appropriate rate plan consistent with the customer's needs. Furthermore, in
certain states, including states outside of its target markets, the Company
offers business customers long distance service only, in order to enhance the
Company's ability to attract business customers that have offices outside of the
Company's target markets.

         Residential Services. In June 1996, the Company introduced its
PrimeLine(R) service to residential and certain small business customers in the
Cedar Rapids, and Iowa City, Iowa markets. The Company has expanded its
PrimeLine(R) service to additional cities and towns in Iowa and to certain
cities and towns in Illinois, North Dakota, South Dakota, Wisconsin and
Colorado. PrimeLine(R) service includes local and long distance telephone
service, paging, voice mail, Internet access and travel card services, as well
as enhanced features such as three-way calling, call transfer and consultation
hold. As of the date hereof, PrimeLine(R) customers may choose from five
integrated telecommunications service packages generally ranging in price from
$8.00 to $42.95 per month. Per minute long distance rates for PrimeLine(R)
customers range from $.12 to $.15, depending on monthly calling volumes. These
rates are applied 24 hours a day, seven days a week for all calls within the
continental United States.

         Local Exchange Services. Through ICTC, the Company provides regulated
local exchange telephone service to subscribers in central Illinois. ICTC
operates in 37 "exchanges," or service areas, the largest of which are in
Mattoon, Charleston, and Effingham, Illinois. As of December 31, 1997, ICTC had
over 89,000 local access lines in its existing service areas. ICTC offers a
broad range of local exchange services, including interexchange carrier access
service, intraLATA toll service, local telephone service, local paging service,
directory assistance, and equipment leasing. Local telephone service consists of
furnishing a "dial tone" to local subscribers, at which time subscribers can
make a local call or a long distance call. 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 certain 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 34 remote
switches.

         Special Access, Private Line and Data Services. The Company provides,
on a private carrier basis, a wide range of special access, private line and
data services to its interexchange carrier, cable television and other end-user
customers, interexchange carrier special access. These services include
POP-to-POP special access, end user/interexchange carrier special access and
private line services. POP-to-POP special access services provide
telecommunications lines that link the POPs of one interexchange carrier, or the
POPs of different interexchange carriers, in a market, allowing these POPs to
exchange telecommunications traffic for transport to final destinations. End
user/interexchange carrier special access services provide telecommunications
lines that connect an end user (such as a large business) to the local POP of
its selected interexchange carrier. Interexchange carrier special access
services provide telecommunications lines that link an interexchange carrier POP
to the local central office. For example, the Company has agreed to provide such
interexchange special access services to AT&T in 30 Midwestern cities in
Illinois, Iowa, Minnesota, North Dakota and South Dakota, providing a 

                                       10
<PAGE>
 
catalyst for the expansion of intra-city networks for the Company. About 20
cities are scheduled for installation in 1998, with the remainder in 1999.
Private line services provide telecommunications lines that connect various
locations of a customer's operation to transmit internal voice, video and/or
data traffic.

         The Company's networks are designed to support this wide range of
communications services, provide increased network reliability and reduce costs
for its customers. The Company's network consists of fiber optic cables, which
typically contain between 24 and 144 fiber strands, each of which is capable of
providing many telecommunications circuits. A single pair of fibers on the
Company's 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. The Company expects that continuing developments in
compression technology and multiplexing equipment will increase the capacity of
each fiber, thereby providing more capacity at relatively low incremental cost.

         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 were completed
in 1993 and are owned by the State of Iowa, provide fiber optic connections to
over 100 classrooms or other meeting facilities in Iowa, and are used primarily
for interactive distance learning, telemedicine and the State's own long
distance telephone traffic. The Company maintains the Part I and II segments of
the 2,900 miles of the Iowa Communications Network pursuant to a fiber optic
maintenance contract (the "Iowa Communications Network Maintenance Contract")
which expires in 2004. The Company's maintenance activities under the Iowa
Communications Network Maintenance Contract are available on a 24-hour-per-day,
365-days-per-year basis, and consist of alarm monitoring, repair services and
cable location services.

         The Company believes that the expertise in fiber optic maintenance
developed through the maintenance of the Iowa Communications Network provides
advantages in maintenance of the Company's own network facilities. Because
commercial telecommunications use of the Part I and II segments is forbidden,
however, neither the Company nor any other telecommunications carrier may use
capacity on the Part I and II segments to provide telecommunications services to
customers.

         Other Services. Through McLeodUSA Publishing and CCD, the Company
published and distributed in 1997, over 13 million competitive "white page" and
"yellow page" telephone directories and approximately 4 million utility
directories to local telephone subscribers in twenty-one states in the
midwestern and Rocky Mountain regions of the United States, including most of
the Company's target markets. In 1997, the Company had combined revenues from
McLeodUSA Publishing and CCD of approximately $81.1 million, primarily from the
sale of advertising space in its telephone directories to approximately 272,000
advertisers.

         In addition, the Company provides direct marketing and telemarketing
services. Such services include sales of the Company's telecommunications
products and services, as well as a variety of fund-raising services for
colleges, universities and other non-profit organizations throughout the United
States.

         The Company believes that its telephone directories and its direct
marketing and telemarketing services provides valuable marketing opportunities
and expertise for its telecommunications services, particularly with respect to
potential residential customers. The Company intends to utilize McLeodUSA
Publishing's and CCD's combined sales force of 578 direct sales personnel and
telemarketers as of December 31, 1997 to sell both advertising space in the
Company's telephone directories and, where available, the Company's
telecommunications services. Furthermore, all of the Company's 139 full-time
telemarketing sales personnel at its Ruffalo Cody subsidiary as of December 31,
1997 were engaged in sales of the Company's PrimeLine(R) residential services.
See "--Sales and Marketing."

         The Company also sells, installs and services telephone systems,
primarily to small and medium sized businesses in Iowa, Illinois and Minnesota.
The Company believes these services will provide valuable expertise for and
complement its telecommunications services offerings.

         The Company is seeking a franchise from the city of Cedar Rapids, Iowa
to provide cable television service. The Company seeks to explore the possible
synergies between cable television and 

                                       11
<PAGE>
 
the Company's advanced telecommunications services offerings such as Integrated
Services Digital Network ("ISDN"), low and high speed Internet, video and other
such services. Depending upon the results of this preliminary initiative and on
other factors, the Company may or may not elect to offer cable service on an
expanded basis in the future.

Expansion of Certain Facilities-based Services

         As of December 31, 1997, the Company is offering facilities-based
service to over 8,500 local lines located in central and southern Illinois and
in Indianapolis, Indiana pursuant to an interconnection agreement with Ameritech
and through use of fiber optic network facilities owned by the Company. The
Company is constructing a fiber optic network that will enable it, when certain
judicial and regulatory proceedings are resolved, to serve additional end-user
customers on a local switched basis as well as to serve other wireline and
wireless carriers on a wholesale basis.

         The Company has received state regulatory approval to offer local
facilities-based switched services in all areas served by U S WEST in Iowa,
South Dakota and Idaho and in all areas served by Ameritech in Illinois (except
Chicago), Indiana and Wisconsin. The Company intends to seek regulatory
approvals to provide such services in other markets targeted by the Company when
the economic terms of interconnection with the incumbent local exchange carrier
make the provision of local facilities-based switched services cost-effective.

         The Company's plans to provide local switched services are dependent
upon obtaining favorable interconnection agreements with local exchange
carriers. In August 1996, the FCC released the Interconnection Decision
implementing the interconnection portions of the Telecommunications Act. Certain
provisions of the Interconnection Decision have been appealed in proceedings
before the U.S. Eighth Circuit Court of Appeals. In July and October 1997, the
U.S. Eighth Circuit Court of Appeals vacated portions of the Interconnection
Decision, including provisions establishing a pricing methodology and a
procedure permitting new entrants to "pick and choose" among various provisions
of existing interconnection agreements. The U.S. Supreme Court has granted
certiorari to review the decision of the U.S. Eighth Circuit Court of Appeals
during the 1998 term. Although these decisions do not prevent the Company from
negotiating interconnection agreements with local exchange carriers, they do
create uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements, and could make negotiating such agreements more
difficult and protracted. There can be no assurance that the Company will be
able to obtain interconnection agreements on terms acceptable to the Company.
See "--Regulation."

         In addition to providing facilities-based service in Champaign-Urbana,
Decatur, Peoria, Bloomington, Fairview Heights, and Springfield, Illinois, the
Company also intends to provide facilities-based switched services in Cedar
Rapids, Des Moines, Waterloo, Cedar Falls, Dubuque, Sioux City, Council Bluffs,
and Iowa City, Iowa and the Quad Cities of Iowa/Illinois (Davenport, Bettendorf,
Rock Island and Moline), among other places. The Company then plans to expand
its facilities-based services to other cities as its network develops and its
market penetration increases. The foregoing statements are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and where the Company actually provides such services will depend on
factors such as the outcome of the judicial proceedings regarding the
Interconnection Decision; technological, regulatory or other developments in the
Company's business; changes in the competitive climate in which the Company
operates; and the emergence of future opportunities.

         For a detailed description of the expansion of the Company's fiber
optic network, see "--Network Facilities."

Wireless Services

         The Company believes that 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 and
wireless services become more diverse. The Company also believes that wireline
and wireless markets are converging, and that providers of wireless services
increasingly will offer, in addition to products that supplement a customer's
wireline communications (similar to cellular telephone services in use today),
wireline replacement products that may result in wireless services 

                                       12
<PAGE>
 
becoming the customer's primary mode of communication. The Company anticipates
that in the future there could potentially be eight wireless competitors in each
of its proposed PCS markets: two existing cellular providers, five other PCS
providers and one enhanced specialized mobile radio ("ESMR") provider.

         Wireless telecommunications networks use a variety of radio frequencies
to transmit voice and data in place of, or in addition to, standard wireline
telephone networks. Wireless telecommunications technologies include one-way
radio applications, such as paging or beeper services, and two-way radio
applications, such as cellular and PCS telephone networks. In 1993, the FCC
allocated 140 MHz of the radio spectrum (and subsequently allocated an
additional 10 MHz of spectrum) for the provision of PCS. PCS differs from
traditional cellular telephone service principally in that PCS systems operate
at a higher frequency band and employ advanced digital technology. Relative to
existing cellular service, these features are expected to enable PCS system
operators to offer customers lower cost service options, lighter handsets with
longer battery lives, and new and enhanced service offerings. In addition, new
mobile satellite services targeting business customers are under development.

         To accommodate a wide range of services and technologies with different
spectrum requirements and to facilitate the entry of small business and rural
telephone companies, the FCC divided the 150 MHz of PCS spectrum into three 10
MHz blocks, three 30 MHz blocks and 30 MHz of unlicensed spectrum. The FCC
adopted the following frequency plan for licensed PCS:

              Block A:   30 MHz (1850-1865/1930-1945 MHz)
              Block B:   30 MHz (1870-1885/1950-1965 MHz)
              Block C:   30 MHz (1895-1910/1975-1990 MHz)
              Block D:   10 MHz (1865-1870/1945-1950 MHz)
              Block E:   10 MHz (1885-1890/1965-1970 MHz)
              Block F:   10 MHz (1890-1895/1970-1975 MHz)

         The FCC divided service areas based upon the 51 Major Trading Areas
("MTA") and the 493 Basic Trading Areas ("BTA"), as defined by Rand McNally
Commercial Atlas and Marketing Guide. Two 30 MHz frequency blocks were
designated for MTA operation, and one 30 MHz frequency block was designated for
BTA operation. The FCC determined that providing two frequency blocks on an MTA
basis would provide economies of scale and scope necessary for the development
of low-cost PCS equipment. The remaining three 10 MHz frequency blocks are
designated for BTA operation. The FCC concluded that a combination of these
frequency blocks and BTA service areas would minimize the start-up costs likely
to result from competitive bidding, and therefore provide greater opportunity
for participation by small businesses, rural telephone companies and others.

         In April and June 1997, the FCC granted the Company a total of 26 "D"
and "E" block frequency PCS licenses and in September 1997 the Company acquired
the CCI PCS License, giving the Company 27 PCS licenses in a total of 25 markets
covering areas of Illinois, Iowa, Minnesota, Nebraska and South Dakota. The
Company paid the FCC approximately $32.8 million for the 26 PCS licenses granted
to the Company by the FCC in April and June 1997. CCI paid the FCC for the CCI
PCS License prior to the CCI Acquisition. The Company's PCS licenses encompass
approximately 110,000 square miles and a population of approximately 6.9
million. The Company expects to begin constructing its PCS network and offering
PCS services as part of its integrated telecommunications services over the next
several years.

         The infrastructure of a PCS system generally consists of digital
switches, base station transmitters and receivers, and related equipment.
Additional costs are attributable to site acquisition and preparation, and
installation services. The Company expects to begin selecting and acquiring
sites for transmitters by the end of 1999. In many cases, the Company may be
required to obtain zoning approval or other permits. The use of existing towers
and other facilities occupied by other telecommunications service providers and
utility companies is expected to facilitate the site selection and acquisition
process. The Company has entered into long-term agreements with its electric
utility stockholders (IES Industries Inc. (collectively with its subsidiaries,
"IES"), and MidAmerican Energy Holdings Company (collectively with its
predecessors and subsidiaries, "MidAmerican")) and with Wisconsin Power and
Light Company, Illinois Power Company ("Illinois Power") and Illinois Central
Railroad Corporation ("Illinois Central Railroad"), and may negotiate similar
agreements with other companies, that will enable the Company to install PCS
base stations and other equipment on such companies' towers. See "--Network
Facilities." 

                                       13
<PAGE>
 
In addition to system design and site acquisitions, the implementation of the
proposed PCS system will require frequency planning, construction and equipment
procurement, installation and testing. The Company will be required to make
significant expenditures to develop, construct and operate a PCS system.

         In order to build and operate a PCS system, the Company will be
required to select from among competing and potentially incompatible
technologies. Digital signal transmission is accomplished through the use of
frequency management technologies, or "protocols." These protocols "manage" the
radio channel either by dividing it into distinct time slots (a method known as
Time Division Multiple Access, or "TDMA") or by assigning specific coding
instructions to each packet of digitized data that comprises a signal (a method
known as Code Division Multiple Access, or "CDMA"). While the FCC has
established compatible analog signaling protocols for licensed cellular systems
in the U.S., there is no required universal digital signaling protocol. As of
the date hereof, three principal competing, incompatible signaling protocols
have been proposed by various vendors for use in PCS systems: Global System for
Mobile Communications ("GSM") (a TDMA-based protocol), IS-136 (also a TDMA-based
protocol) and CDMA. Because these protocols are incompatible, a subscriber of a
system that relies on GSM technology, for example, will be unable to use a GSM
handset when traveling in an area served only by CDMA-based wireless operators,
unless it is a dual-mode handset that permits the subscriber to use the cellular
system in that area. For this reason, the success of each protocol will depend
both on its ability to offer enhanced wireless service and on the extent to
which its users will be able to use their handsets when roaming outside their
service area. Each of the three principal PCS signaling protocols have been
adopted by at least one PCS licensee, and each offers certain advantages and
disadvantages.

         The Company has not yet selected one of the digital signaling protocols
for its planned PCS network. The Company anticipates that its decision will be
based primarily on an assessment of the signaling protocols selected by PCS
licensees in the markets in which the Company wishes to offer roaming services
as well as the technical advantages and disadvantages of each protocol.

         The Company intends to provide roaming service in its proposed PCS
markets by establishing suitable roaming arrangements with other PCS operators
in other markets constructing systems compatible with the digital protocol
technology to be selected by the Company. The Company cannot predict when, or
whether, it will be able to enter into such roaming agreements with local
providers. Future subscribers to the Company's proposed PCS services will not be
able to roam in markets without at least one PCS licensee using the protocol
selected by the Company unless the subscriber uses a dual-mode telephone that
would permit the subscriber to use the existing cellular wireless system in such
other market. Such dual-mode phones are generally heavier and more expensive
than single-mode phones.

         The Company plans to operate a fully digital PCS system. As of the date
hereof, most cellular services transmit voice and data signals over analog-based
systems, which use one continuous electronic signal that varies in amplitude or
frequency over a single radio channel. Digital systems, on the other hand,
convert voice or data signals into a stream of digits that is compressed before
transmission, enabling a single radio channel to carry multiple simultaneous
signal transmissions. The Company believes that this enhanced capacity, along
with improvements in digital protocols, will allow the Company's proposed PCS
system to offer new and enhanced services, including secure communications,
sophisticated call management, enhanced battery performance, single number
service, enhanced wireless data transmission, and integrated wireless/wireline
features.

         The Company intends to offer a variety of wireless telecommunications
services, ranging from wireline enhancement services that supplement the
customer's wireline telephone (much like cellular) to wireline replacement
services that will serve as the customer's primary mode of communication. An
example of the latter service is "enhanced cordless" handsets, which operate as
cordless wireline telephones when used in or near the customer's home and
operate as wireless PCS handsets when used elsewhere.

         On July 21, 1997, the FCC also issued four WCS licenses to the Company
in the Major Economic Areas of Milwaukee, Wisconsin, Minneapolis-St. Paul,
Minnesota, Des Moines-Quad Cities, Iowa/Illinois and Omaha, Nebraska. The
Company expects to use the frequency blocks covered by such licenses to provide
certain fixed services, such as wireless local loop, Internet access or meter
reading.

                                       14
<PAGE>
 
         As the wireline and wireless markets converge, the Company believes
that it can also identify other opportunities to generate revenues from the
wireless industry on both a retail and a wholesale basis. On a retail basis, the
Company believes that it will be able to enter into "bundling/branding"
arrangements with both cellular and PCS companies on favorable economic terms.
On a wholesale basis, these opportunities may include (i) leasing tower sites to
wireless providers, (ii) switching wireless traffic through the Company's
switching platform and (iii) transporting wireless traffic using the Company's
fiber optic network to interconnect wireless providers' cell sites or to connect
such sites to either the Company's switches or to switches of other providers of
wireline services. The Company has entered into agreements with five wireless
companies to provide access to several of the towers controlled by the Company.

         The statements in the foregoing paragraphs about the Company's plans to
own, develop, construct and operate a PCS system are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These plans may be revised, and the Company's actual wireless services
may differ materially from that indicated by its current plans, in each case as
a result of a variety of factors, including: (i) the availability of financing
and regulatory approvals; (ii) the number of potential customers in a target
market; (iii) the existence of strategic alliances or relationships; (iv)
technological, regulatory or other developments in the Company's business; (v)
changes in the competitive climate in which the Company operates; and (vi) the
emergence of future opportunities. See "--Risk Factors--Wireless Competition"
and "--Risk Factors--PCS System Implementation Risks."

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 products, the Company expects to be able to provide its
customers with a full range of telecommunications services using a combination
of its own network, the networks of the incumbent local exchange carriers and
the networks of other competitive carriers.

         In April 1995, as part of its overall business strategy, the Company
acquired MWR from MidAmerican. MWR, which is now part of McLeodUSA Network
Services, is a competitive access provider which owns and operates a fiber optic
network and offers special access and private line services to large businesses,
institutional customers and interexchange carriers, primarily in Des Moines,
Iowa. As a result of this strategic acquisition, the Company believes that it is
the only competitive access provider in the Des Moines market. The Company
believes the already-installed MWR network is an important aspect of its efforts
to become the first regional integrated telecommunications provider in the upper
Midwest.

         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 (the "Part III segments").
The majority of these fiber optic links, unlike the Part I and II segments of
the Iowa Communications Network, are not to be owned by the State of Iowa, but
are to be leased from a private entity, such as the Company. As of December 31,
1997, the Company had contracts to build and then lease capacity to the State of
Iowa on 224 of such segments. Under its lease agreements with the State of Iowa,
the Company is constructing a "fiber-rich" broadband 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 $25.8 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 the Company 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 may order additional DS-3 circuits at a mutually
agreed upon price.

         In September 1997, as a result of the CCI Acquisition, the Company
acquired approximately 900 route miles of fiber optic network facilities, parts
of which are currently connected to Ameritech unbundled loops pursuant to an
interconnection agreement. The Company believes that CCI's prior success in
serving end user local lines under the interconnection agreement will
substantially assist the Company's technical abilities in interconnection to the
unbundled loops of incumbent local exchange carriers.

                                       15
<PAGE>
 
         The Company has reached agreements with its electric utility
stockholders (MidAmerican and IES) and with Wisconsin Power and Light Company,
Illinois Power and Illinois Central Railroad that allow the Company 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 certain capacity on the Company's network. These agreements
give the Company access to rights-of-way in certain parts of Iowa, Illinois and
Wisconsin for installation of the Company's wireline and wireless networks. The
Company's access to these rights-of-way are expected to have a significant
positive impact on the Company's capital costs for network construction and the
speed with which the Company can construct its networks. The Company believes
that its strategic relationships with its electric utility stockholders and
other companies that own rights-of-way and infrastructure give it a significant
competitive advantage.

         Concurrently with construction of the Part III segments, the Company is
also installing low-cost network facilities that are expected to form a series
of fiber optic "self-healing rings" intended to enable the Company to provide
facilities-based local and long distance service to most significant cities and
towns in Iowa and in east central and southern Illinois. Thus, the Company
believes it is well positioned to become the first facilities-based regional
integrated provider of competitive telecommunications services in the upper
Midwest.

         As of December 31, 1997, the Company owned approximately 4,900 route
miles of fiber optic network and expects to construct approximately 5,500
additional route miles of fiber optic network during the next three years. The
Company will decide whether to begin construction of fiber optic network in a
market based on various economic factors, including: (i) the number of its
customers in a market, (ii) the anticipated operating cost savings associated
with such construction and (iii) any strategic relationships with owners of
existing infrastructure (e.g., utilities and cable operators).

Sales and Marketing

         Until June 1996, the Company directed its telecommunications sales
efforts primarily toward small and medium-sized businesses. In June 1996, the
Company began marketing its PrimeLine(R) services to residential customers.

         Marketing of the Company's integrated telecommunications services is
handled by a sales and marketing group composed of direct sales personnel and
telemarketers. The Company's sales force is trained to emphasize the Company's
customer focused sales and customer service efforts, including its
24-hours-per-day, 365-days-per-year customer service center, which a customer
may call with any question or problem regarding the Company's services. The
Company's employees answer customer service calls directly rather than requiring
customers to use an automated queried message system. The Company believes that
its emphasis on a "single point of contact" for meeting the customer's
telecommunications needs, as well as its ability to provide one fully integrated
monthly billing statement for local, long distance, 800, international, voice
mail, paging, Internet access and travel card service, is very appealing to its
prospective customers.

         Marketing of the Company's integrated telecommunications services to
business customers is conducted by direct sales personnel, located at the
Company's headquarters in Cedar Rapids, Iowa and in branch sales offices in
Iowa, Illinois, North Dakota, South Dakota, Minnesota, Wisconsin, Indiana,
Colorado and Wyoming.

         Marketing of the Company's integrated telecommunications services to
residential customers is conducted by telemarketers. The telemarketers emphasize
the PrimeLine(R) integrated package of telecommunications services and its
flat-rated per minute pricing structure for long distance service. The Company
uses Ruffalo Cody's information database to identify attractive sales
opportunities and pursues those opportunities through a variety of methods,
including calls from the Company's telemarketing personnel.

         The Company believes that its acquisition of McLeodUSA Publishing in
September 1996 and CCI in September 1997 enhanced the Company's sales and
marketing efforts of its residential services in several ways. First, these
acquisitions gave the Company an immediate presence in states where it was

                                       16
<PAGE>
 
initiating service (such as Indiana, Minnesota, Wisconsin, Colorado and Wyoming)
and also in states where it does not yet provide integrated telecommunications
service but expects to do so in the future (such as Idaho, Missouri, Montana and
Utah). Second, the Company believes that these acquisitions have increased the
Company's penetration of current markets and will help accelerate its entry into
new markets. Many of the telephone directories published and distributed by the
Company serve as "direct mail" advertising because they contain or will contain
detailed product descriptions and step-by-step instructions on the use of the
Company's telecommunications products. The Company believes that telephone
directories are commonly used sources of information that potentially provide
the Company with a long-term marketing presence in millions of households and
businesses that receive one of the Company's directories. By using the
directories to market its products, the Company can reach more customers than
would be possible if these acquisitions had not occurred. Third, the Company
believes that combining the McLeodUSA Publishing directories' distinctive
black-and-yellow motif with the trade name *McLeodUSA strengthens brand
awareness in all of the Company's markets.

         Sales and marketing of the Company's competitive access services are
handled as of the date hereof by a small sales staff located in Des Moines,
Iowa. These sales people work closely with the Company's network engineers to
design and market special access and private line services.

         In 1997, the Company expanded its telecommunications sales and
marketing efforts primarily by (i) opening new branch sales offices in North
Dakota, South Dakota, Minnesota, Colorado, Wisconsin, and Wyoming, (ii) as a
result of the CCI Acquisition, acquiring new branch sales offices and sales
personnel in Illinois, Indiana and Missouri, and (iii) continuing to expand its
sales and marketing efforts in Iowa and Illinois. Over the next several years,
depending on competitive and other factors, the Company also intends to begin
sales and marketing efforts in Montana, Idaho, Utah and Nebraska. See "Legal
Proceedings." The foregoing statements are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 and the
results of the Company's actual expansion efforts may be materially different,
depending on a variety of other factors, including: (i) the availability of
financing and regulatory approvals; (ii) the number of potential customers in a
target market; (iii) the existence of strategic alliances or relationships; (iv)
technological, regulatory or other developments in the Company's business; (v)
changes in the competitive climate in which the Company operates; and (vi) the
emergence of future opportunities.

Competition

         Wireline Competition. The telecommunications industry is highly
competitive. The Company faces intense competition from local exchange carriers,
including the Regional Bell Operating Companies (primarily U S WEST and
Ameritech) and the General Telephone Operating Companies, which currently
dominate their respective local telecommunications markets. The Company also
competes with long distance carriers in the provision of long distance services.
The long distance market is dominated by four major competitors, AT&T, MCI,
Sprint and WorldCom, Inc. ("WorldCom"). Hundreds of other companies also compete
in the long distance marketplace. Other competitors of the Company may include
cable television companies, competitive access providers, microwave and
satellite carriers, wireless telecommunications providers, teleports and private
networks owned by large end-users. In addition, the Company competes with the
Regional Bell Operating Companies and other local exchange carriers, numerous
direct marketers and telemarketers, equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business. Many of the Company's existing and potential competitors have
financial and other resources far greater than those of the Company.

         In addition, a continuing trend toward business combinations and
strategic alliances in the telecommunications industry may strengthen
competitors. For example, WorldCom acquired MFS Communications Company, Inc., a
competitive access provider, in December 1996 and Brooks Fiber Properties, Inc.
in January 1998. In late 1997, MCI and WorldCom announced an agreement to merge.
In January 1998, AT&T announced an agreement to acquire Teleport Communications
Group Inc. The ability of these or other competitors of the Company to enter
into strategic alliances could put the Company at a significant disadvantage.

         The Company may, in the future, face competition in the markets in
which it operates from one or more competitive access providers operating fiber
optic networks, in many cases in conjunction with the 

                                       17
<PAGE>
 
local cable television operator. Each of AT&T, MCI and Sprint has indicated its
intention to offer local telecommunications services, either directly or in
conjunction with other competitive access providers or cable television
operators. Like the Company, a number of companies, including MCI and AT&T,
currently hold certificates of public convenience and necessity to offer local
and long distance service in Iowa, Illinois and certain other states within the
Company's target markets. There can be no assurance that these firms, and
others, will not enter the small and mid-sized markets where the Company focuses
its sales efforts.

         The Company is largely dependent on incumbent local exchange carriers
to provide access service for the origination and termination of its toll long
distance traffic and interexchange private lines. Historically charges for such
access service have made up a significant percentage of the overall cost of
providing long distance service. On May 7, 1997, the FCC adopted changes to its
interstate access rules that, among other things, will reduce per-minute access
charges and substitute new per-line flat rate monthly charges. The FCC also
approved reductions in overall access rates, and established new rules to
recover subsidies to support universal service and other public policies. The
impact of these changes on the Company or its competitors is not yet clear. The
Company could be adversely affected if it does not experience access cost
reductions proportionally equivalent to those of its competitors. Insofar as new
Internet-based competitors continue to be exempt from these charges, they could
enjoy a significant cost advantage in this area.

         The Company also generally will be dependent on incumbent local
exchange carriers for provision of local telephone service through access to
local loops, termination service and, in some markets, central office switches
of such carriers. In addition, the Company intends to obtain the local telephone
services of the incumbent local exchange carriers on a wholesale basis and
resell that service to end users. Any successful effort by the incumbent local
exchange carriers to deny or substantially limit the Company's access to the
incumbent local exchange carrier's network elements or wholesale services would
have a material adverse effect on the Company's ability to provide local
telephone services. Although the Telecommunications Act imposes interconnection
obligations on incumbent local exchange carriers, there can be no assurance that
the Company will be able to obtain access to such network elements or services
at rates, and on terms and conditions, that permit the Company to offer local
services at rates that are both profitable and competitive.

         The Company's plans to provide additional local switched services are
dependent upon obtaining favorable interconnection agreements with local
exchange carriers. In August 1996, the FCC released the Interconnection Decision
implementing the interconnection portions of the Telecommunications Act. Certain
provisions of the Interconnection Decision implementing the interconnection
portions of the Telecommunications Act have been vacated by the U.S. Eighth
Circuit Court of Appeals, which may limit or delay the development of
competition in the local exchange switched services market. The U.S. Supreme
Court has granted certiorari on this matter and is scheduled to review the
decisions of the Eighth Circuit Court of Appeals during the 1998 term. There can
be no assurance that the Company will be able to obtain interconnection
agreements on terms acceptable to the Company.

         The Telecommunications Act provides the incumbent local exchange
carriers with new competitive opportunities. For example, under the
Telecommunications Act, the Regional Bell Operating Companies will, upon the
satisfaction of certain conditions, be able to offer interLATA long distance
services to local telephone service customers in their respective regions. The
Regional Bell Operating Companies are actively engaged in a process at the FCC
by which they are seeking to satisfy those conditions. Although the FCC has
rejected the first applications from Regional Bell Operating Companies for
interLATA authority, additional applications are expected to be filed and other
matters are on review in the courts. Separately, on December 31, 1997, the U.S.
District Court for the Northern District of Texas ruled that certain of these
conditions to the offering of long distance service by the Regional Bell
Operating Companies under the Telecommunications Act were unconstitutional. The
District Court stayed its own decision pending an appeal to the U.S. Fifth
Circuit Court of Appeals. The District Court's decision, if upheld on appeal,
would permit the Regional Bell Operating Companies to offer long distance
service within the regions in which they also provide local exchange service
without first having to demonstrate that they have opened their local market to
competitors. Such premature Regional Bell Operating Company entry into the
interLATA long distance market could have a material adverse effect on the
Company The Company believes that it has certain advantages over these companies
in providing its telecommunications services, including management's prior
experience in the competitive 

                                       18
<PAGE>
 
telecommunications industry and the Company's 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,
there can be no assurance that this increased competition will not have a
material adverse effect on the Company.

         Competition for local and special access telecommunications services is
based principally on price, quality, network reliability, customer service and
service features. The Company believes that its management expertise allows it
to compete effectively with the incumbent local exchange carriers. The Company
generally offers its business customers local exchange services at prices that
are substantially similar to the established retail local exchange carrier rates
for basic business service, while generally providing enhanced calling features
and a higher level of customer service. Long distance rates for a majority of
business customers are determined each month by using the Company's
sophisticated customer focused software to calculate the lowest long distance
rate available from among pricing plans of AT&T, MCI and Sprint that are
generally believed to be most popular with the Company's business customers, and
in certain cases, comparable rates specifically identified by a customer and
agreed to by the Company. The Company offers other long distance rates to
certain business customers based on the customer's particular needs. Residential
customers currently subscribing to the Company's integrated telecommunications
services generally receive local service prices that are substantially similar
to the published retail local exchange rates for basic service provided by the
incumbent local exchange carrier. Residential customers generally receive
flat-rate long distance pricing. The Company's fiber optic networks will 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 Regional Bell Operating
Companies, charge alternative providers such as the Company unreasonably high
fees for interconnection to the local exchange carriers' networks, significantly
lower their rates for access and private line services or offer significant
volume and term discount pricing options to their customers, the Company could
be at a significant competitive disadvantage. 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, shorter
cycles for new products and enhancements, and changes in consumer preferences
and expectations. The Company believes that 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, and wireless services become more diverse. The Company also believes
that providers of wireless services increasingly will offer, in addition to
products that supplement a customer's wireline communications (similar to
cellular telephone services in use today), wireline replacement products that
may result in wireless services becoming the customer's primary mode of
communication. Accordingly, the Company expects 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. The Company anticipates that in the future there could potentially
be eight wireless competitors in each of its 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 the Company's proposed PCS markets. In addition, the
company could face competition from mobile satellite services targeting business
customers which are under development.

         Competition with these or other providers of wireless
telecommunications services may be intense. Many of the Company's potential
wireless competitors have substantially greater financial, technical, marketing,
sales, manufacturing and distribution resources than those of the Company and
have significantly greater experience than the Company in testing new or
improved wireless telecommunications products and services. Some competitors,
particularly WCS carriers, are expected to market other services, such as cable
television access, with their wireless telecommunications service offerings. The
Company does not currently offer wireless cable television access. In addition,
several of the Company's 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.
There can be no assurance that the Company will be able to compete successfully
in this environment or that new technologies and products that are more
commercially effective than the Company's technologies and products will not be
developed. See "--Wireless Services."

                                       19
<PAGE>
 
Regulation

         Overview. The Company's services are subject to federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. State regulatory 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 the Company to obtain licenses, permits or franchises regulating use of
public rights-of-way necessary to install and operate its 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.

         The Company, through its subsidiaries, holds various federal and state
regulatory authorizations and often joins other industry members in seeking
regulatory reform at the federal and state levels to open additional
telecommunications markets to competition.

         The Company, through its wholly owned subsidiary McLeodUSA Network
Services, provides certain 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. The Company believes 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 as of the date hereof. Should such laws and/or regulatory
interpretations change in the future to reclassify McLeodUSA Network Services'
regulatory status, the Company believes that compliance with such
reclassification would not have a material adverse effect on the Company.

         The Company, through its wholly-owned subsidiaries, is subject to
certain federal and state regulatory requirements, including, in certain states,
bonding requirements, due to its direct marketing, telemarketing and
fund-raising activities.

         Federal Regulation. The Telecommunications Act became effective
February 8, 1996. The Telecommunications Act preempts state and local laws to
the extent that they prevent competitive entry into the provision of any
telecommunications service. Subject to this limitation, however, the state and
local governments retain most of their existing regulatory authority. The
Telecommunications Act imposes a variety of new duties on incumbent local
exchange carriers in order to promote competition in local exchange and access
services. Some smaller telephone companies may seek suspension or modification
of these duties, and some companies serving rural areas are exempt from these
duties. Some duties are also imposed on non-incumbent local exchange carriers,
such as the Company. The duties created by the Telecommunications Act include
the following:

     Reciprocal Compensation      Requires all local exchange carriers to
                                  complete calls originated by competing
                                  carriers under reciprocal arrangements at
                                  prices based on cost or through mutual
                                  exchange of traffic without explicit payment.

     Resale                       Requires all local exchange carriers to permit
                                  resale of their telecommunications services
                                  without unreasonable restrictions or
                                  conditions. In addition, incumbent local
                                  exchange carriers are required to offer
                                  wholesale versions of all retail services to
                                  other telecommunications carriers for resale
                                  at discounted rates, based on the costs
                                  avoided by the incumbent local carrier in the
                                  wholesale offering.

     Interconnection              Requires incumbent local exchange carriers to
                                  permit their competitors to interconnect with
                                  their facilities at any technically feasible
                                  point within their networks, on
                                  nondiscriminatory terms, at prices based on
                                  cost (which may include a reasonable profit).

                                       20
<PAGE>
 
                                  At the option of the carrier seeking
                                  interconnection, physical collocation of the
                                  requesting carrier's equipment in the
                                  incumbent local exchange carrier's premises
                                  must be offered, except where the incumbent
                                  local exchange carrier can demonstrate space
                                  limitations or other technical impediments to
                                  collocation.

     Unbundled Access             Requires incumbent local exchange carriers to
                                  provide nondiscriminatory access to unbundled
                                  network elements (including network
                                  facilities, equipment, features, functions,
                                  and capabilities) at any technically feasible
                                  point within their networks, on
                                  nondiscriminatory terms, at prices based on
                                  cost (which may include a reasonable profit).

     Number Portability           Requires all local exchange carriers to permit
                                  users of telecommunications services to retain
                                  existing telephone numbers without impairment
                                  of quality, reliability or convenience when
                                  switching from one telecommunications carrier
                                  to another.

     Dialing Parity               Requires all local exchange carriers to
                                  provide "1+" equal access to competing
                                  providers of telephone exchange service and
                                  toll service, and to provide nondiscriminatory
                                  access to telephone numbers, operator
                                  services, directory assistance, and directory
                                  listing, with no unreasonable dialing delays.

     Access to Rights-of-Way      Requires all local exchange carriers to permit
                                  competing carriers access to poles, ducts,
                                  conduits and rights-of-way at regulated
                                  prices.

         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, and that failure to achieve such
interconnection arrangements could have an adverse impact on the ability of the
Company or other entities to provide competitive local exchange services. Under
the Telecommunications Act, 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.
However, in July and October 1997, the U.S. Eighth Circuit Court of Appeals
vacated portions of the Interconnection Decision, including provisions
establishing a pricing methodology and a procedure permitting new entrants to
"pick and choose" among various provisions of existing interconnection
agreements. The U.S. Supreme Court has granted certiorari to review the
decisions of the Eighth Circuit Court of Appeals during the 1998 term. Although
these decisions and other legal proceedings do not prevent the Company from
negotiating interconnection agreements, they do create uncertainty about the
rules governing pricing, terms and conditions of interconnection agreements and
will likely delay the execution of these agreements.

         The Telecommunications Act also eliminates previous prohibitions on the
provision of interLATA long distance services by the Regional Bell Operating
Companies and the General Telephone Operating Companies. The Regional Bell
Operating Companies 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, the Regional Bell Operating Companies will be allowed to
provide long distance service within the regions in which they also provide
local exchange service ("in-region service") upon specific approval of the FCC
and satisfaction of other conditions, including a checklist of interconnection
requirements. On December 31, 1997, the U.S. District Court for the Northern
District of Texas ruled that certain of these conditions to the offering of long
distance service by the Regional Bell Operating Companies under the
Telecommunications Act were unconstitutional. The District Court stayed its own
decision pending an appeal to the U.S. Fifth Circuit Court of Appeals. The
District Court's decision, if upheld on appeal, would permit the Regional Bell
Operating Companies to offer long distance service within the regions in which
they also provide local exchange service without first having to demonstrate

                                       21
<PAGE>
 
that they have opened their local market to competitors. The Company could be
adversely affected if the Regional Bell Operating Companies (and particularly U
S WEST or Ameritech) are allowed to provide wireline interLATA long distance
services within their own regions before local competition is established.

         The Telecommunications Act imposes certain restrictions on the Regional
Bell Operating Companies in connection their entry into interLATA long distance
services. Among other things, for three years following entry (unless extended
thereafter by the FCC) the Regional Bell Operating Companies must pursue such
activities only through separate subsidiaries with separate books and records,
financing, management and employees. Affiliate transactions must be conducted on
a nondiscriminatory basis. The Telecommunications Act also provides that AT&T
and other major carriers serving more than 5% of the nation's presubscribed long
distance access lines are restricted, under certain conditions, from packaging
their long distance services with wholesale local services provided by a
Regional Bell Operating Company. These restrictions do not apply to the Company
because it does not serve more than 5% of the nation's presubscribed access
lines. In any event, these restrictions expire in February 1999, or sooner in
the event a Regional Bell Operating Company receives interLATA authority in a
given state.

         On May 8, 1997, the FCC issued an order to implement the provisions of
the Telecommunications Act relating to the preservation and advancement of
universal telephone service (the "Universal Service Order"). The Universal
Service Order affirmed the policy principles for universal telephone service set
forth in the Telecommunications Act, including quality service, affordable
rates, access to advanced services, access in rural and high-cost areas,
equitable and non-discriminatory contributions, specific and predictable support
mechanisms, and access to advanced telecommunications services for schools,
health care providers and libraries. The Universal Service Order added
"competitive neutrality" to the FCC's universal service principles by providing
that universal service support mechanisms and rules should not unfairly
advantage or disadvantage one provider over another, nor unfairly favor or
disfavor one technology over another. The Universal Service Order also requires
all telecommunications carriers providing interstate telecommunications
services, including the Company, to contribute to universal service support
based upon their respective telecommunications revenue.

         The FCC also imposes prior approval requirements on transfers of
control and assignments of operating authorizations. The FCC has the authority
to generally condition, modify, cancel, terminate or revoke operating authority
for failure to comply with federal laws and/or the rules, regulations and
policies of the FCC. Fines or other penalties also may be imposed for such
violations. There can be no assurance that the FCC or third parties will not
raise issues with regard to the Company's compliance with applicable laws and
regulations.

         The FCC, through the Initial Interconnection Decisions, has ordered the
Regional Bell Operating Companies and all but one of the other local exchange
carriers having in excess of $100 million in gross annual revenue for regulated
services to provide expanded interconnection to local exchange carrier central
offices to any competitive access provider, interexchange carrier or end user
seeking such interconnection for the provision of interstate access services. As
a result, the Company is able to reach most business customers in its
metropolitan service areas and can expand its potential customer base. The FCC
has imposed mandatory virtual collocation obligations on the local exchange
carriers. Virtual collocation is a service in which the local exchange carrier
leases or purchases equipment designated by the interconnector and exerts
complete physical control over this equipment, including central office
installation, maintenance and repair. Some local exchange carriers have
voluntarily filed tariffs making "physical collocation" available, enabling the
interconnector to place its equipment in the local exchange carriers central
office space. As noted above, the Telecommunications Act now requires most
incumbent local exchange companies to offer physical collocation.

         In connection with the Initial Interconnection Decisions, the FCC
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. Although no assurances are possible, the Company
anticipates that the FCC will grant local exchange carriers increasing pricing
flexibility as the number of interconnection agreements and competitors
increases.

                                      22
<PAGE>
 
         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 recently implemented changes to
its interstate access rules that result in restructuring of the access charge
system and changes in access charge rate levels. These changes reduce per-minute
access charges and substitute new per-line flat-rate monthly charges. These
actions, along with additional changes which may occur later this year and in
subsequent years, may reduce access rates, and hence the cost of providing long
distance service, especially to business customers. However, the impact of the
FCC's new decisions will not be known until those decisions are fully
implemented over the next several years, during which time those decisions may
be revised. 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 the Company will pay a fee calculated as a percentage of their revenues to
support these goals. The full implications of this decision also remain
uncertain and subject to change.

         In addition, the FCC and the courts are considering related questions
regarding the applicability of access charge and universal service fees to
Internet service providers. Currently such providers are not subject to these
expenses. However, the incumbent local exchange carriers and other parties argue
that this exemption unfairly advantages Internet service providers, particularly
when they provide data, voice or other services in direct competition with
conventional telecommunications. The Company is not in a position to determine
how access and universal service matters relating to Internet service providers
will be resolved, and whether or not such resolution will be harmful to its
competitive position.

         As of the date hereof, the Company does not offer PCS or cellular
services. In April and June 1997, the FCC granted the Company a total of 26 "D"
and "E" block frequency PCS licenses and in September 1997 the Company acquired
the CCI PCS License, giving the Company 27 PCS licenses in a total of 25 markets
covering areas of Iowa, Illinois, Minnesota, Nebraska and South Dakota. The
Company paid the FCC approximately $32.8 million for the 26 PCS licenses granted
by the FCC in April and June 1997. The Company's PCS licenses encompass
approximately 110,000 square miles and a population of approximately 6.9
million. The Company is beginning to design and engineer its proposed PCS
system. The Company expects to begin constructing its PCS network and offering
PCS services as part of its integrated telecommunications services over the next
several years.

         On April 28, 1997, the FCC informed the Company that it was the
successful bidder for four WCS licenses in the Major Economic Areas of
Milwaukee, Wisconsin, Minneapolis-St. Paul, Minnesota, Des Moines-Quad Cities,
Iowa/Illinois and Omaha, Nebraska. The Company filed an application for such
licenses on May 12, 1997. The Company was granted the WCS licenses on July 21,
1997. The Company intends to use the frequency blocks covered by such licenses
to provide certain fixed services such as wireless local loop, Internet access,
or meter reading.

         In general, applications for FCC radio licenses may be conditioned or
denied, and may be revoked after grant, if the FCC finds that an entity lacks
the requisite "character" qualification to be a licensee. In making that
determination, the FCC considers whether an applicant or licensee has been the
subject of adverse findings in a judicial or administrative proceeding
involving, among other things, the possession or sale of unlawful drugs, fraud,
antitrust violations or unfair competition, and has complied with the FCC's
ownership, bidding and build-out rules.

         All PCS licenses are granted 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. All PCS licensees are subject to certain
"build-out" requirements which require that a certain level of service be
available by specified times. Licensees that fail to meet the coverage
requirements may be subject to forfeiture of the license.

         The Communications Act of 1934, as amended (the "Communications Act"),
requires the FCC's prior approval of the assignment or transfer of control of a
PCS 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 

                                       23
<PAGE>
 
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.

         Under the Telecommunications Act, non-U.S. citizens or their
representatives, foreign governments or their representatives, or corporations
organized under the laws of a foreign country may not own, in the aggregate,
more than 20% of a company holding a common carrier radio license; or more than
25% of the parent of a common carrier radio licensee (unless the FCC determines
that the public interest would be served by allowing such indirect ownership).
Under the terms of the new World Trade Organization ("WTO") Basic
Telecommunication Agreement, which become effective on February 1, 1998,
however, the U.S. has committed to permit indirect foreign ownership of up to
100% and to streamline its processes for investment by WTO member countries. As
a result of its ownership of PCS licenses, the Company is required to comply
with these foreign ownership restrictions. In addition, the FCC has imposed
reporting requirements with respect to foreign affiliations between U.S.,
international and foreign telecommunications carriers, as well as reports of
certain investments by other foreign entities. Depending on the particular
foreign affiliate and its "home" market, the FCC may limit the size of the
foreign affiliate's investment in the U.S. carrier or subject the U.S. carrier
to dominant carrier regulation on one or more international routes. The Company,
through its subsidiaries, holds FCC authority to provide international services,
and therefore is also subject to the FCC's rules on foreign affiliations.

         Failure to comply with statutory requirements on foreign ownership of
companies holding radio licenses, or with the FCC's foreign affiliation
reporting requirements, may result in the FCC issuing an order to the entity
requiring divestiture of alien ownership to bring the entity into compliance
with the Communications Act and the FCC's rules. In addition, fines, a denial of
renewal or revocation of radio licenses are possible. The Restated Certificate
permits the Board of Directors of the Company (the "Board") to redeem any of the
Company's capital stock from stockholders to the extent necessary to prevent the
loss or secure the reinstatement of any license, operating authority or
franchise from any governmental authority. As of the date hereof, the Company
has no knowledge of any alien ownership or affiliation with foreign
telecommunications carriers in violation of the Communications Act or the FCC's
rules.

         Following the grant of a PCS license, existing licensees that operate
certain fixed microwave systems within the PCS license area 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, the Company may need
to relocate many of these incumbent 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 incumbent microwave user is
permitted to continue its operations until final FCC resolution of the matter.
In connection with its proposed PCS system, the Company estimates that it may be
required to relocate approximately 50 microwave links operated by approximately
19 different microwave licensees. 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) that will require investment in advanced technology over the next
few years.

         Wireless systems are also subject to certain 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 Company, through its wholly owned subsidiaries, is also subject to
rules governing telemarketing that have been promulgated by both the FCC and the
Federal Trade Commission (the 

                                       24
<PAGE>
 
"FTC"). The FCC and FTC telemarketing rules prohibit telemarketers from engaging
in certain deceptive telemarketing practices and require that telemarketers make
certain disclosures. For example, these telemarketing rules: prohibit the use of
autodialers that employ prerecorded voice messages without the prior express
consent of the dialed party; proscribe the facsimile transmission of unsolicited
advertisements; require telemarketers to disclose clear and conspicuous
information concerning quality, cost and refunds to a customer before a customer
makes a purchase; require telemarketers to compile lists of individuals who
desire not to be contacted; limit telemarketers to calling residences between
the hours of 8:00 a.m. and 9:00 p.m.; require telemarketers to explicitly
identify the seller and state the purpose of the call; and prohibit product
misrepresentations.

         State Regulation. McLeodUSA Telecommunications and two CCI subsidiaries
provide intrastate common carrier services and are subject to various state laws
and regulations. Most public utilities commissions subject providers such as the
Company to some form of certification requirement, which requires providers to
obtain authority from the state public utilities commission prior to the
initiation of service. In most states, including Iowa and Illinois, the Company
also is required to file tariffs setting forth the terms, conditions and prices
for services that are classified as intrastate. In those states, the Company
also is required to update or amend its tariffs when it adjusts its rates or
adds new products, and is subject to various reporting and record-keeping
requirements.

         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 and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to the Company's compliance with applicable laws or
regulations.

         The Company, through McLeodUSA Telecommunications, holds certificates
of authority to offer local services in incumbent Regional Bell Operating
Company exchanges in Iowa (resale and facilities-based authority), Illinois
(resale and facilities-based authority), Wisconsin (resale and facilities-based
authority), Minnesota (resale authority), North Dakota (resale authority), South
Dakota (resale and facilities-based authority), Colorado (resale authority),
Wyoming (resale authority), Idaho (resale and facilities-based authority),
Montana (resale authority), and Indiana (resale authority). The Company, through
CCTS, also holds certificates to offer local service in Illinois (resale and
facilities-based authority), Missouri (resale and facilities-based authority)
and Indiana (resale and facilities-based authority). The Company currently has
pending certification applications in North Dakota (facilities-based authority)
and Utah (resale and facilities-based authority). The Company intends to seek
regulatory approval to provide such resale and facilities-based services in all
states targeted by the Company when the economic terms of interconnection with
the incumbent local exchange company make the provision of local switched
services cost-effective. See"--Expansion of Certain Facilities-Based Services."
The Company is also authorized to offer long distance service in all 48 states
in the continental United States. The Company has obtained authority to offer
long distance service in such states, including states outside of its target
markets, because it believes this capability will enhance the Company's ability
to attract business customers that have offices outside of the Company's target
markets. The Company may also apply for authority to provide services in
non-Regional Bell Operating Company exchanges in its target market states and
other states in the futures. While the Company expects and intends to obtain the
necessary regulatory authority in each jurisdiction where it intends to operate,
there can be no assurance that each respective agency will grant the Company's
request for authority.

         Although the Telecommunications Act preempts the ability of states to
forbid local service competition, some states where the legality of such
competition was previously uncertain have not yet completed regulatory or
statutory actions to comply with the Telecommunications Act. Furthermore, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. In the last
several years, Iowa, Illinois, Minnesota, Wisconsin, Wyoming and North Dakota
have enacted broad changes in those states' 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. As a general matter, the states will 

                                       25
<PAGE>
 
play a central role in the development of local exchange competition. The
Company may face regulatory decisions that adversely affect its ability to
compete in any particular state.

         States also regulate the intrastate carrier access services of the
incumbent local exchange carriers. The Company is required to pay access charges
to originate and terminate its intrastate long distance traffic. The Company
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 charges created by the FCC. For example, certain
incumbent local exchange carriers are proposing that states create funds that
would be supported by potentially large payments by firms such as the Company
based on their total intrastate revenues. Another issue is use by certain
incumbent local exchange carriers, with the approval of state regulatory
agencies, of extended local area calling that converts otherwise competitive
intrastate toll service to local service. States also are or will be addressing
various intraLATA dialing parity issues that may affect competition. The
Company's business could be adversely affected by these or other developments.

         The Company believes that, as the degree of intrastate competition
increases, the 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 the Company's services with
revenues generated from non-competitive services, thereby allowing incumbent
local exchange carriers to offer competitive services at prices below the cost
of providing the service. The Company cannot predict the extent to which this
may occur or its impact on the Company's 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 the Company believes
ICTC is earning less than its authorized rate of return, there is no assurance
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 the Company.

         In addition, a substantial proportion of ICTC's revenues are derived
from access charges imposed on interexchange 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
revenues and gross margins, it could have a material adverse effect on the
Company.

         ICTC, as well as other former CCI subsidiaries, also hold state and
federal certificates and FCC licenses in connection with the operation of
wireline telecommunications services and paging services.

         The Company, through its wholly owned subsidiaries, engages in various
direct marketing, telemarketing and fund-raising activities. Most states have
laws that govern either direct marketing, telemarketing or fund-raising
activities. In states that regulate such activities, several types of
restriction have been imposed, either singly or in combination, including: (i)
pre-commencement and post-completion registration requirements; (ii) posting of
professional bonds; (iii) filing of operational contracts; (iv) imposing
statutory waiting periods; (v) requiring employee registration; and (vi)
prohibiting control over funds collected from such activities.

         Local Government Authorizations. The Company is required to obtain
construction permits and licenses and/or franchises to install and expand its
fiber optic networks using municipal rights-of-way. Some municipalities where
the Company has installed or anticipates constructing networks are proposing and
enacting ordinances regulating use of rights-of-way and imposing various fees in
connection with such use. In certain instances the Company has 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 those required
to be paid by the Company. To the extent that competitors do not pay the same
level of fees as the Company, the Company could be at a competitive
disadvantage. The Company anticipates that lawsuits may be filed by affected
parties. Failure to receive necessary permits on commercially reasonable terms,
the inability to obtain right-of-way authorization or license agreements and a
requirement that the Company remove its facilities or abandon its network in
place could have a material adverse effect on the Company.

                                       26
<PAGE>
 
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 the Company's actual
results to differ materially from those projected in any forward-looking
statements of the Company made by or on behalf of the Company, whether oral or
written. These forward-looking statements can be identified by use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. The Company wishes 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, among others, that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company.

         Limited Operating History; Operating Losses and Negative Cash Flow from
Operations. The Company began operations in 1992 and has only a limited
operating history upon which to base an evaluation of its performance. As a
result of operating expenses and development expenditures, the Company has
incurred significant operating and net losses to date. Net losses for 1995, 1996
and 1997 were approximately $11.3 million, $22.3 million and $79.9 million,
respectively. At December 31, 1997, the Company had an accumulated deficit of
$127.7 million. Although its revenue has increased substantially in each of the
last three years, the Company also has experienced significant increases in
expenses associated with the development and expansion of its fiber optic
network and its customer base. The Company expects to incur significant
operating losses during the next several years, while it develops its
businesses, constructs, installs and expands its fiber optic network and
develops and constructs a PCS system. There can be no assurance that the Company
will achieve or sustain profitability from operating activities in the future.
If the Company cannot achieve operating profitability from operating activities,
it may not be able to meet its debt service or working capital requirements,
which could have a material adverse effect on the Company. See "--Risk
Factors--Significant Capital Requirements," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         Significant Capital Requirements. Continued expansion of the Company's
operations, facilities, network and services will require significant capital
expenditures. As of December 31, 1997, the Company estimates that its aggregate
capital requirements for 1998, 1999 and 2000 will be approximately $750 million.
The Company's estimated capital requirements include the estimated cost of (i)
developing and constructing its fiber optic network, (ii) market expansion
activities, (iii) developing, constructing and operating a PCS system and (iv)
completing construction of its new corporate headquarters and associated
buildings. These capital requirements are expected to be funded, in large part,
out of the approximately $217.7 million in net proceeds from the Senior Note
Offering, approximately $148.9 million remaining from the Senior Discount Note
Offering, additional debt or equity issuances, and lease payments to the Company
for portions of the Company's networks.

         The Company may require additional capital in the future for business
activities related to those specified above and also for acquisitions, joint
ventures and strategic alliances, as well as to fund operating deficits and net
losses. These activities could require significant additional capital not
included in the foregoing estimated aggregate capital requirements.

         The Company's estimate of its 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 Company's actual
capital requirements may differ materially as a result of regulatory,
technological and competitive developments (including new opportunities) in the
Company's industry.

         The Company expects to meet its additional capital needs with the
proceeds from credit facilities and other borrowings, and additional debt and
equity issuances. As of the date hereof, the Company is negotiating with a major
bank to obtain one or more syndicated credit facilities. There can be no
assurance, however, that the Company will be successful in obtaining such credit
facilities on terms acceptable to the Company or at all, or that the Company
will otherwise be successful in producing 

                                       27
<PAGE>
 
sufficient cash flows or raising sufficient debt or equity capital to meet its
strategic objectives, or that such funds, if available at all, will be available
on a timely basis or on terms that are acceptable to the Company. Failure to
generate or raise sufficient funds may require the Company to delay or abandon
some of its future expansion plans or expenditures, which could have a material
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

         Uncertainties of Expansion. The Company is engaged in the expansion and
development of its network and services. The expansion and development of its
network and services will depend on, among other things, its ability to
partition the incumbent local exchange company's central office switch, enter
markets, design fiber optic network routes, install facilities, relocate
microwave licensees and obtain rights-of-way, building access, antenna sites and
any required government authorizations and/or permits, all in a timely manner,
at reasonable costs and on satisfactory terms and conditions. Implementation of
the Company's current and future expansion plans will also depend on factors
such as: (i) the availability of financing and regulatory approvals; (ii) the
number of potential customers in a target market; (iii) the existence of
strategic alliances or relationships; (iv) technological, regulatory or other
developments in the Company's business; (v) changes in the competitive climate
in which the Company operates; and (vi) the emergence of future opportunities.
There can be no assurance that the Company will be able to expand its existing
network or services. Furthermore, the Company's ability to manage its expansion
effectively also will require it to continue to implement and improve its
operating, financial and accounting systems and to expand, train and manage its
employees. The inability to manage its planned expansion effectively could have
a material adverse effect on the Company. Finally, if the Company's challenges
to the U S WEST Centrex Action (as defined below) fail and no favorable
settlement agreement is reached, there could be a material adverse effect on the
Company's planned expansions and business prospects. See "Legal Proceedings."

         Risks Associated With Acquisitions. As part of its business strategy,
the Company acquired CCI during 1997 and will continue to evaluate additional
strategic acquisitions and alliances principally relating to its current
operations. Such transactions commonly involve certain risks including, among
others: the difficulty of assimilating the acquired operations and personnel;
the potential disruption of the Company's ongoing business; the possible
inability of management to maximize the financial and strategic position of the
Company through the successful incorporation of acquired assets and rights into
the Company's service offerings and the maintenance of uniform standards,
controls, procedures and policies; the risks of entering markets in which the
Company has little or no direct prior experience; and the potential impairment
of relationships with employees or customers as a result of changes in
management. The Company may also encounter additional risks in connection with
the CCI Acquisition as a result of the size and complexity of CCI's operations.
There can be no assurance that the Company will be successful in overcoming
these risks or any other problems encountered in connection with the CCI
Acquisition or any future transactions. In addition, any such transactions could
materially adversely affect the Company's operating results due to dilutive
issuances of equity securities, the incurrence of additional debt and the
amortization of expenses related to goodwill and other intangible assets, if
any. See "--Recent Transactions."

         Failure of U S WEST to Furnish Call Detail Records. The Company depends
on certain call detail records provided by U S WEST with respect to long
distance services, and Ameritech with respect to local and long distance
services, in order to verify most of its customers' bills for these services.
The Company has in the past experienced certain omissions in the call detail
records it receives from U S WEST on a monthly basis. For example, during the
period from January 1997 through December 1997, U S WEST failed to furnish, on
average, monthly call detail records for approximately 1% of the long distance
calls placed by the Company's customers. Thus, the Company was unable to verify
with certainty that a given long distance call placed by a customer and known by
the Company to have been terminated by the Company's wholesale long distance
supplier was, in fact, placed by the customer. Absent such verification, the
Company does not bill its customers for the call. These call detail omissions
typically occur in connection with new customers of the Company.

         The Company does not believe this impediment to billing certain
customers for a small percentage of calls in a given month materially adversely
affects its relationships with or contractual obligations to its customers. The
failure to bill the customer does have a negative effect on the Company's gross
margins, because the Company incurs expenses for calls it does not bill.

                                       28
<PAGE>
 
         On July 7, 1997, U S WEST and the Company entered into an agreement
which requires U S WEST to set "flags" to capture call detail records on 95% of
the Company's converted lines within 36 hours of the time the line is converted
to the Company's service. In the event that U S WEST fails to meet that
standard, U S WEST is required to provide certain credits to the Company. There
can be no assurance, however, that U S WEST will not continue to experience
difficulties in furnishing complete call detail records to the Company, that the
percentage of call detail records not provided to the Company will not increase,
or that the resulting negative effect on gross margins will not have a material
adverse effect on the Company.

         PCS System Implementation Risks. The Company's proposed investment in
the ownership, development, construction and operation of a PCS system involves
a high degree of risk and substantial expenditures. There can be no assurance
that the Company will succeed in developing a PCS system or that, after
expending substantial amounts to develop such a system, the Company will achieve
or sustain profitability or positive cash flows from PCS operations. The
ownership, development, construction and operation of a PCS system could have a
material adverse effect on the Company.

         In the absence of FCC mandated technology protocols, the Company will
be required to choose from among several competing and potentially incompatible
digital protocol technologies in order to build and operate a PCS system. The
selection of a particular digital protocol technology could adversely affect the
ability of the Company to successfully offer PCS service. See "--Wireless
Services."

         The Company does not own or operate any facilities for providing
wireless telecommunication services to the public. The successful implementation
of a PCS system will require the Company to, among other things, lease or
acquire sites for base stations, construct the base stations, install the
necessary equipment and conduct system testing. The Company believes that the
successful implementation of a PCS system will also require that the Company
enter into "roaming" arrangements with PCS operators in other markets to enable
future subscribers to the Company's proposed PCS services to receive seamless
call transmission and reception throughout the United States. While the Company
is currently exploring possible roaming arrangements, the Company cannot predict
when, or whether, it will be able to enter into any such arrangement with other
PCS operators. Each stage of implementing PCS service involves various risks and
contingencies, many of which are not in the Company's control. In the event the
Company encounters delays or other problems, the Company's plans for providing
PCS services could be adversely affected.

         The Company's success in the implementation and operation of a PCS
system also is subject to other factors beyond the Company's control. These
factors include, without limitation, (i) changes in general and local economic
conditions, (ii) availability of equipment necessary to operate the PCS system,
(iii) changes in communications service rates charged by others, (iv) changes in
the supply and demand for PCS and the commercial viability of PCS systems as a
result of competing with wireline and wireless operators in the same geographic
area, (v) demographic changes that might negatively affect the potential market
for PCS, (vi) changes in the federal, state or local regulatory scheme affecting
the operation of PCS systems (including the enactment of new statutes and the
promulgation of changes in the interpretation or enforcement of existing or new
rules and regulations) and (vii) changes in PCS or competing wireless
technologies that have the potential of rendering obsolete the technology and
equipment that the Company intends to use to construct its PCS system. In
addition, the extent of the potential demand for PCS cannot be estimated with
any degree of certainty and may be less than the Company anticipates. See
"--Wireless Services" and "--Risk Factors--Rapid Technological Changes." There
can be no assurance that one or more of these factors will not have a material
adverse effect on the Company's ownership, development, construction or
operation of a PCS system.

         The Company will be required to abide by various FCC rules governing
PCS license holders, such as rules limiting the percentage of the Company's
capital stock that may be directly owned or voted by non-U.S. citizens, by a
foreign government or by a foreign corporation to 20%, and limiting indirect
foreign ownership to 25%, absent waiver by the FCC. See "--Regulation."
Furthermore, certain of the FCC rules require all PCS licensees to meet certain
buildout and population coverage requirements. Failure to comply with such
requirements could result in the imposition of fines on the Company by the FCC
or cause revocation or forfeiture of the Company's PCS licenses, even after the
Company has expended substantial amounts to develop a PCS system.

                                       29
<PAGE>
 
         The ownership, development, construction and operation of a PCS system
is expected to impose significant demands on the Company's management,
operational and financial resources. There can be no assurance that the Company
will be able to successfully manage the implementation and operation of a PCS
system. Any failure to effectively manage the implementation and operation of
any future PCS system (including deploying adequate systems, procedures and
controls in a timely manner) could have a material adverse effect on the
Company.

         Relocation of Fixed Microwave Licensees. Following the grant of a PCS
license, existing licensees that operate certain fixed microwave systems within
the PCS license area 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, the Company may need to relocate many of these incumbent
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 incumbent microwave user is permitted to continue its operations until final
FCC resolution of the matter. There can be no assurance that the Company will be
successful in reaching timely agreements with the existing microwave licensees
or that any such agreements will be on terms favorable to the Company. Any delay
in the relocation of such licensees may adversely affect the Company's ability
to commence timely commercial operation of a PCS system. Furthermore, depending
on the terms of such agreements, if any, the Company's ability to operate a PCS
system profitably may be adversely affected. In connection with its proposed PCS
system, the Company estimates that it may be required to relocate approximately
50 microwave links operated by approximately 19 different microwave licensees.
See "--Regulation."

         Dependence on Key Personnel. The Company's business is dependent upon a
small number of key executive officers, particularly Clark E. McLeod, the
Company's Chairman and Chief Executive Officer, and Stephen C. Gray, the
Company's President and Chief Operating Officer. As of the date hereof, the
Company does not have any term employment agreements with these employees. The
Company has entered into employment, confidentiality and non-competition
agreements with Messrs. McLeod and Gray and certain other key employees of the
Company providing for employment by the Company for an indefinite period,
subject to termination by either party (with or without cause) on 30 days' prior
written notice, and an agreement not to compete with the Company for a period of
one or two years, depending on the employee, following termination for cause or
voluntary termination of employment.

         There can be no assurance that the employment, confidentiality and
non-competition agreements will improve the Company's ability to retain its key
managers or employees or that the Company can attract or retain other skilled
management personnel in the future. The loss of the services of key personnel,
or the inability to attract additional qualified personnel, could have a
material adverse effect on the Company.

         Need to Obtain and Maintain Permits and Rights-of-Way. In order to
develop and construct its network, the Company must obtain authorization to
install facilities in the public rights-of-way from state highway authorities,
local governments and transit authorities, and in certain instances must also
obtain easements from private parties. The Company also enters into agreements
to utilize underground conduit and aerial pole space and other rights-of-way and
easements from entities such as local exchange carriers, other utilities,
railroads, and interexchange carriers. The Company has entered into long-term
agreements with its two principal electric utility stockholders, IES and
MidAmerican, pursuant to which the Company generally has access to the electric
utilities' rights-of-way and poles, primarily located in Iowa and Illinois, for
so long as the utilities maintain their franchises to provide electrical
services in a given locality. The Company has entered into similar long-term
agreements with Wisconsin Power and Light Company for access to rights-of-way
and poles primarily located in Wisconsin and with Illinois Power and Illinois
Central Railroad for access to rights-of-way and poles located in Illinois. IES
has entered into a definitive agreement of merger with WPL Holdings, Inc., the
parent of Wisconsin Power and Light Company, and with Interstate Power Company,
which merger is subject to certain regulatory and other approvals. There can be
no assurance that IES, MidAmerican, Wisconsin Power and Light Company, Illinois
Power, Illinois Central Railroad or the Company will be able to maintain
existing franchises, permits 

                                       30
<PAGE>
 
and rights-of-way or that the Company will be able to obtain and maintain any
other franchises, permits and rights-of-way needed to implement its business
plan on acceptable terms. Although the Company believes that its existing
arrangements will not be canceled and will be renewed as needed in the near
future, if any of the existing franchises, license agreements or rights-of-way
were terminated or not renewed and the Company were forced to remove its
facilities, such cancellation or non-renewal of certain of such arrangements
could have a material adverse effect on the Company. See "--Network Facilities"
and "--Regulation."

         Rapid Technological Changes. The telecommunications industry is subject
to rapid and significant changes in technology. While the Company believes that
for the foreseeable future these changes will neither materially adversely
affect the continued use of its fiber optic telecommunications network nor
materially hinder the Company's ability to acquire necessary technologies, the
effect of technological changes on the business of the Company, such as changes
relating to emerging wireline (including fiber optic) and wireline (including
broadband) transmission technologies, and use of the Internet for traditional
voice data or broadband communications, cannot be predicted. There can be no
assurance that technological developments in telecommunications will not have a
material adverse effect on the Company.

         Variability of Operating Results. As a result of the significant
expenses associated with the construction and expansion of its network and
services, including, without limitation, the acquisition of PCS licenses and the
development, construction and operation of a PCS system, the Company anticipates
that its operating results could vary significantly from period to period. Such
variability could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         Control of the Company. As of February 27, 1998, IES, MidAmerican,
Richard A. Lumpkin, certain members of his family and various trusts for the
benefit thereof, and Clark and Mary McLeod owned, directly or indirectly, in the
aggregate approximately 55% of the outstanding Class A Common Stock and voting
power of the Company. Accordingly, such stockholders collectively are able to
control the management policy of the Company and all fundamental corporate
actions, including mergers, substantial acquisitions and dispositions, and
election of the Board of Directors of the Company (the "Board"). IES,
MidAmerican, Richard A. Lumpkin, certain members of his family and various
trusts for the benefit thereof, and Mr. and Mrs. McLeod have entered into a
voting agreement with respect to the election of directors and other matters.
The Restated Certificate contains provisions that may make it more difficult to
effect a hostile takeover of the Company or to remove members of the Board.

         Volatility of Stock Price. Since the Class A Common Stock has been
publicly traded, the market price of the Class A Common Stock has fluctuated
over a wide range and may continue to do so in the future. See "Market for
Registrant's Common Equity and Related Stockholder Matters--Price Range of Class
A Common Stock." In the future, the market price of the Class A Common Stock
could be subject to significant fluctuations in response to various factors and
events, including, among other things: the depth and liquidity of the trading
market of the Class A Common Stock; quarterly variations in the Company's actual
or anticipated operating results or growth rates; changes in estimates by
analysts; market conditions in the industry; announcements by competitors;
regulatory and judicial actions; and general economic conditions. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations, which have particularly affected the market prices of the stocks
of high growth companies, and which may be unrelated to the operating
performance of particular companies. As a result of the foregoing, there can be
no assurance that the price of the Class A Common Stock will not continue to
fluctuate or will not decline.

         Increased Leverage; Restrictive Covenants. As of December 31, 1997, the
Company's total amount of indebtedness outstanding was $625.9 million and the
Company had stockholder's equity of $559.4 million. The level of the Company's
indebtedness could adversely affect the Company in a number of ways, including
the following: (i) the ability of the Company to obtain any necessary financing
in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (ii) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to,
changes in its business; (iii) the Company may be more highly leveraged than
some of its competitors, which may place it at a competitive disadvantage; and
(iv) the Company's degree of indebtedness may make it more vulnerable to a
downturn in its business or in the economy generally.

                                       31
<PAGE>
 
         The indenture governing the Senior Discount Notes and the Senior
Discount Exchange Notes (the "Senior Discount Note Indenture") and the indenture
governing the Senior Notes and the Senior Exchange Notes (the "Senior Note
Indenture") 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. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interest of the
Company.

         Dependence on Regional Bell Operating Companies; U S WEST Centrex
Action. See "Legal Proceedings--Dependence on Regional Bell Operating Companies;
U S WEST Centrex Action."

         Refusal of U S WEST to Improve its Processing of Service Orders. See
"Legal Proceedings--Refusal of U S WEST to Improve its Processing of Service
Orders."

         Competition.   See "--Competition."

         Regulation.   See "--Regulation."

         Year 2000 Date Conversion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Date Conversion."

Employees

         As of December 31, 1997, the Company employed a total of 4,588
full-time employees and 353 part-time employees. The Company believes that its
future success will depend on its continued ability to attract and retain highly
skilled and qualified employees. The Company believes that its relations with
its employees are good.

Executive Officers of the Company

         The following is a list of the executive officers of the Company as of
December 31, 1997, together with biographical summaries of their experience. The
ages of the persons set forth below are as of December 31, 1997.

<TABLE> 
<CAPTION> 

                   Name                      Age                       Position(s) with Company
                   ----                      ---                       ------------------------
<S>                                          <C>      <C> 
Clark E. McLeod                               51      Chairman, Chief Executive Officer and Director
Richard A. Lumpkin.........................   62      Vice Chairman and Director
Stephen C. Gray............................   39      President, Chief Operating Officer and Director
Blake O. Fisher, Jr........................   53      Chief Financial and Administrative Officer, Treasurer and
                                                      Director
Robert J. Currey...........................   52      Group President, Telecommunications Services and Director
Arthur L. Christoffersen...................   51      Group President, Publishing Services
Kirk E. Kaalberg  .........................   38      Executive Vice President, Network Services
Stephen K. Brandenburg.....................   45      Executive Vice President and Chief Information Officer
David M. Boatner...........................   49      Executive Vice President, Business Services
Albert P. Ruffalo..........................   51      Executive Vice President, Consumer Services
Casey D. Mahon.............................   45      Senior Vice President, General Counsel and Secretary
</TABLE> 


         Clark E. McLeod. Mr. McLeod founded the Company and has served as
Chairman, Chief Executive Officer and a director of the Company 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 

                                       32
<PAGE>
 
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 of the Company since September 1997. Mr. Lumpkin was elected as an
officer and a director of the Company pursuant to the requirements of the Merger
Agreement. He also has served as Chairman and Chief Executive Officer of ICTC
since September 1997. Mr. Lumpkin served as Chairman and Chief Executive Officer
of CCI from 1990 to September 24, 1997, the date CCI was acquired by the
Company. 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, its wholly owned subsidiary
Central Illinois Public Service Company, an electric utility, First Mid-Illinois
Bancshares, Inc., a bank holding company ("First Mid-Illinois Bancshares"), and
its wholly owned subsidiary First Mid-Illinois Bank & Trust, a bank. Mr. Lumpkin
is Chairman of the Board of Illuminet Holdings, Inc. ("Illuminet"), formerly
USTN Holdings, Inc., a telecommunications company.

         Stephen C. Gray. Mr. Gray has been Chief Operating Officer of the
Company since September 1992, President since October 1994 and a director since
April 1993. Mr. Gray is one of Mr. McLeod's nominees on the Board. Prior to
joining the Company, 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. Prior to joining Telecom*USA, from
September 1986 to February 1988, Mr. Gray held a variety of management positions
with Williams Telecommunications Company, a long distance telephone company.

         Blake O. Fisher, Jr. Mr. Fisher has served as a director of the Company
since October 1996, as Executive Vice President, Corporate Administration and
Chief Financial Officer from September 1996 through October 1997, as Chief
Financial and Administrative Officer since October 1997 and as Treasurer since
February 1996. Mr. Fisher also served as one of IES' nominees on the Board from
April 1993 to February 1996. He served as Executive Vice President and Chief
Financial Officer of IES, a diversified electric utility holding company, from
January 1991 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.

         Robert J. Currey. Mr. Currey has served as a director of the Company
since September 1997 and as Group President, Telecommunications Services from
October 1997 to March 6, 1998. Mr. Currey was elected as a director of the
Company pursuant to the requirements of the Merger Agreement. Mr. Currey served
as President of CCI from March 1990 to September 24, 1997, the date CCI was
acquired by the Company. From June 1988 to March 1990, Mr. Currey served as
Senior Vice President--Operations and Engineering of Citizens Utility Co., a
diversified utility company. From 1987 to 1988, he served as Executive Vice
President of US SPRINT, an interexchange carrier, and from 1984 to 1987, he
served as Senior Vice President--Operations for United Telecommunications, Inc.,
a telecommunications company. Prior to 1984, Mr. Currey served as an Assistant
Vice President with Ameritech, the regional holding company for Bell Companies
in five Midwestern states and also held a succession of management positions in
operations, personnel, labor relations and marketing. Mr. Currey resigned from
his position as an executive officer of the Company effective March 6, 1998.

         Arthur L. Christoffersen. Mr. Christoffersen has served as the
Company's Group President, Publishing Services since September 24, 1997. Mr.
Christoffersen served as Executive Vice President, Publishing Services from
September 20, 1996, the date the Company acquired McLeodUSA Publishing, until
September 24, 1997. 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 the Company in September 1996. From December 1987 to August 1990,
Mr. 

                                       33
<PAGE>
 
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.

         Kirk E. Kaalberg. Mr. Kaalberg has served since September 1996 as the
Company's Executive Vice President, Network Services where he is responsible for
the maintenance of the Iowa Communications Network and the design and
development of the Company's network and switching platforms. From March 1994 to
September 1996, Mr. Kaalberg served as Senior Vice President, Network Design and
Development and from January 1992 to February 1994, he served as Vice President
of the Company. From August 1990 to January 1992, Mr. Kaalberg served as a
senior manager of MCI, where he managed a 175-person conference calling,
financial and operations group. From August 1987 to August 1990, Mr. Kaalberg
was an employee of Teleconnect and its successor, Telecom*USA, where he was
responsible for business planning and management information systems project
prioritization. From 1983 to 1987, he held a variety of product management
positions with Banks of Iowa, Computer Services, Inc., a computer services
company, and Source Data Systems, a software company.

         Stephen K. Brandenburg. Mr. Brandenburg has served since September 1996
as Executive Vice President and Chief Information Officer of the Company, where
he is responsible for the design and deployment of the Company's internal
computing systems and operations. From June 1995 to September 1996, he served as
Senior Vice President, Intelligent Technologies and Systems of the Company.
Prior to joining the Company, Mr. Brandenburg served from August 1990 to June
1995 as Vice President, Revenue Management Systems at MCI, where he was
responsible for MCI's 1,400 person business markets traffic/call processing,
order/entry, billing and calling card operations. From 1987 to August 1990, he
served as Senior Vice President of Information Systems at Teleconnect and its
successor, Telecom*USA. Prior to joining Teleconnect, Mr. Brandenburg held a
variety of information systems positions with academic medical centers,
including the Mayo Medical Clinic and the University of Wisconsin.

         David M. Boatner. Mr. Boatner has served since September 1996 as
Executive Vice President, Business Services of the Company. From February 1996
to September 1996, he served as the Company's Senior Vice President, Sales and
Marketing. Prior to joining the Company, Mr. Boatner served from January 1995 to
February 1996 as Regional Vice President of Sales of WorldCom, a long distance
telecommunications company, where he was responsible for sales in the central,
western and southwest regions of the United States. From May 1989 to January
1995, Mr. Boatner served as Vice President for Commercial Sales of WilTel, Inc.,
a long distance telecommunications company which was acquired by WorldCom in
January 1995. Prior to joining WilTel, Inc., Mr. Boatner held a variety of
positions at AT&T and its Bell operating subsidiaries.

         Albert P. Ruffalo. Mr. Ruffalo has served as the Company's Executive
Vice President, Consumer Services since September 1996. Since August 1991 Mr.
Ruffalo has served as President and Chief Executive Officer of Ruffalo Cody,
which was acquired by the Company on July 15, 1996. From September 1990 to July
1991, Mr. Ruffalo served as President of MCI Direct, Inc., an indirect wholly
owned subsidiary of MCI. From 1983 to August 1990, Mr. Ruffalo held various
executive positions at Teleconnect and Telecom*USA Data Base Marketing Company,
an indirect wholly owned subsidiary of Telecom*USA, Teleconnect's successor.
From 1980 to 1983, Mr. Ruffalo was Marketing Manager of National Oats
Corporation, a grain distribution firm.

         Casey D. Mahon. Ms. Mahon served as Senior Vice President of the
Company from February 1996, Secretary from July 1993 and as General Counsel from
June 1993, each until January 31, 1998 when she resigned from her position as an
executive officer of the Company. Prior to joining the Company, she was engaged
in the private practice of law, with emphasis on telecommunications, regulatory
and corporate law.

Item 2.  Properties.

         The Company owns or leases offices and space in a number of locations,
primarily for sales offices and network equipment installations. In August 1996,
the Company purchased approximately 194 acres of farm land in southern Cedar
Rapids, Iowa for the development of an office complex, known as


                                      34
<PAGE>
 
the McLeodUSA Technology Park, upon which the Company has constructed a one-
story, 160,000 square foot building that serves as the Company's new
headquarters. As part of the second phase in the development of the McLeodUSA
Technology Park, the Company has completed construction of a 36,000 square foot
maintenance building and warehouse, and is constructing a two-story, 320,000
square foot office building which will also house some of the Company's
telephone switching and computer equipment. The total cost of the construction
of the Company's new corporate headquarters and associated buildings is
estimated to be approximately $35.6 million. The Company also purchased
approximately 120 acres of undeveloped land adjacent to the McLeodUSA Technology
Park for a purchase price of approximately $1.4 million in August 1997. As a
result of the CCI Acquisition, the Company also owns a 60,000 square foot office
building in Mattoon, Illinois, as well as other properties in central Illinois.
The Company also maintains 55,000 square feet of office space at its former
headquarters in Cedar Rapids, Iowa, under a lease expiring in March 2001. In
addition, the Company owns 88 acres of undeveloped farm and forest land in
southern Cedar Rapids, Iowa.

Item 3.  Legal Proceedings.

         The Company is not aware of any material litigation against the
Company. The Company is involved in numerous regulatory proceedings before
various public utilities commissions, particularly the Iowa Utilities Board, as
well as before the FCC.

         Dependence on Regional Bell Operating Companies; U S WEST Centrex
Action. The Company is dependent on the Regional Bell Operating Companies for
provision of most of its local and certain of its long distance services. As of
the date hereof, U S WEST and Ameritech are the Company's sole suppliers of
access to local central office switches or, in the case of customers served in
central Illinois, to local lines. The Company uses such access to partition the
local switch or transmit traffic over unbundled local line segments ("loops")
and thereby provide local service to its customers.

         The Company purchases access to local switches in the form of a product
generally known as "Centrex." Without such access, the Company could not, as of
the date hereof, provide bundled local and long distance services to most of its
customers, although it could provide stand-alone long distance service. Since
the Company believes its ability to offer bundled local and long distance
services is critical to its current sales efforts, any successful effort by U S
WEST or Ameritech to deny or substantially limit the Company's access to
partitioned switches would have a material adverse effect on the Company.

         On February 5, 1996, U S WEST filed tariffs and other notices
announcing its intention to limit future Centrex access to its switches by
Centrex customers (including the Company) throughout U S WEST's fourteen-state
service region, effective February 5, 1996 (the "U S WEST Centrex Action").
Although U S WEST stated that it would "grandfather" existing Centrex agreements
with the Company and permit the Company to continue to use U S WEST's central
office switches through April 29, 2005, it also indicated that it would not
permit the Company to expand to new cities and would severely limit the number
of new lines it would permit the Company to partition onto U S WEST's portion of
the switches in cities served by the Company.

         The Company has challenged, or is challenging, the U S WEST Centrex
Action before the public utilities commissions in certain of the states served
by U S WEST where the Company is doing business or plans to do business. The
Company's challenges to the U S WEST Centrex Action have as of the date hereof
been successful in Iowa, Minnesota, South Dakota, North Dakota and Colorado
although further appeals by U S WEST may be possible. In Wyoming, state
regulators rejected U S WEST's action, but the matter remains pending on appeal.
The Company has, however, been unsuccessful in its challenges to the U S WEST
Centrex Action in Nebraska and Idaho. In Nebraska, the Company and other parties
have appealed the order of the Nebraska Public Service Commission rejecting
complaints objecting to the U S WEST Centrex Action. As of the date hereof, the
appeal remains pending before the Nebraska Court of Appeals. In Utah, the
Company has requested that the Utah Public Utilities Commission reconsider its
order imposing temporary restrictions on Centrex resale. As of the date hereof,
the Company's request remains pending before the Utah Public Utilities
Commission.

         The Company anticipates that U S WEST will continue to appeal
unfavorable decisions by public utilities commissions with respect to the U S
WEST Centrex Action.

                                       35
<PAGE>
 
         In addition to the U S WEST Centrex Action, U S WEST has taken other
measures that may impede the Company's ability to use Centrex service to provide
its competitive local exchange services. For example, in January 1997, U S WEST
proposed to implement certain interconnection surcharges in several of the
states in its service region. On February 20, 1997, the Company and several
other parties filed a petition with the FCC objecting to U S WEST's proposal.
The petition was based on Section 252(d) of the Telecommunications Act, which
governs the pricing of interconnection and network elements. The Company
believes that U S WEST's proposal is an unlawful attempt to recover costs
associated with the upgrading of U S WEST's network, in violation of Section 252
of the Telecommunications Act. U S WEST filed an opposition to the Company's
petition with the FCC on March 3, 1997. The matter remains pending before the
FCC and various state public utilities commissions.

         There can be no assurance that the Company will ultimately succeed in
its legal challenges to the U S WEST Centrex Action or other actions by U S WEST
that have the effect of preventing or deterring the Company from using Centrex
service, or that these actions by U S WEST, or similar actions by other Regional
Bell Operating Companies, will not have a material adverse effect on the
Company. In any jurisdiction where U S WEST prevails, the Company's ability to
offer integrated telecommunications services would be impaired, which could have
a material adverse effect on the Company. See "Business--Competition."

         The Company also anticipates that U S WEST will seek various
legislative initiatives in states within the Company's target market area in an
effort to reduce state regulatory oversight over its rates and operations. There
can be no assurance that U S WEST will not succeed in such efforts or that any
such state legislative initiatives, if adopted, will not have a material adverse
effect on the Company.

         Refusal of U S WEST to Improve its Processing of Service Orders. As a
result of its significant use of the Centrex product to serve its customers in U
S WEST's service territories, the Company depends upon U S WEST to process
service orders placed by the Company to transfer new customers to the Company's
local service. U S WEST had imposed a limit of processing one new local service
order of the Company per hour for each U S WEST central office, creating a
significant backlog of local service orders of the Company. Furthermore,
according to the Company's records, U S WEST commits an error on one of every
three lines ordered by the Company, thereby further delaying the transition of
new customers to the Company's local service. The Company repeatedly requested
that U S WEST increase its local service order processing rate and improve the
accuracy of such processing, which U S WEST refused to do.

         On July 12, 1996, the Company filed a complaint with the Iowa Utilities
Board against U S WEST in connection with such actions. In an order issued on
October 10, 1996, the Iowa Utilities Board determined that U S WEST's limitation
on the processing of the Company's service orders constituted an unlawful
discriminatory practice under Iowa law. On February 14, 1997, the Iowa Utilities
Board further clarified that U S WEST must eliminate numerical limitations on
the Company's residential and business orders. U S WEST has subsequently agreed
to process the Company's service orders within a standard five-day period. There
can be no assurance, however, that the decision of, or any further action by,
the Iowa Utilities Board will adequately resolve the service order problems or
that such problems will not impair the Company's ability to expand or to attract
new customers, which could have a material adverse effect on the Company.

         Legal Challenges to the Interconnection Decision. The Company's plans
to provide local switched services are dependent upon obtaining favorable
interconnection agreements with local exchange carriers. In August 1996, the FCC
released the Interconnection Decision implementing the interconnection portions
of the Telecommunications Act. Certain provisions of the Interconnection
Decision were appealed to the U.S. Eighth Circuit Court of Appeals. In July and
October 1997, the U.S. Eighth Circuit Court of Appeals vacated portions of the
Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements. Although the
decisions vacating the Interconnection Decision do not prevent the Company from
negotiating interconnection agreements with local exchange carriers, they do
create uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements, and could make negotiating such agreements more
difficult and protracted. The U.S. Supreme Court has granted certiorari in this
matter and is scheduled to review the decisions of the U.S. Eighth Circuit Court
of Appeals during the 1998 term. There can be no assurance 

                                       36
<PAGE>
 
that the Company will be able to obtain interconnection agreements on terms
acceptable to the Company, or that the pending Supreme Court appeal will be
resolved on terms that promote local exchange competition as originally
contemplated by the FCC.

Item 4.  Submission of Matters to a Vote of Security Holders.

         None.

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

Price Range of Class A Common Stock

         The Company completed its initial public offering of Class A Common
Stock in June 1996, at a price per share of Class A Common Stock of $20.00. The
Class A Common Stock has been quoted on The Nasdaq Stock Market under the symbol
"MCLD" since June 11, 1996. Prior to June 11, 1996, no established public
trading market for the Class A Common Stock existed. The following table sets
forth for the periods indicated the high and low sales price per share of the
Class A Common Stock as reported by The Nasdaq Stock Market.

                 1996                                       High     Low
                 ----                                      ------   ------
         Second Quarter (from June 11, 1996).............  $26.75   $22.25
         Third Quarter...................................  $39.50   $23.50
         Fourth Quarter..................................  $34.50   $25.00
                                                                   
                 1997                                              
                 ----                                              
         First Quarter...................................  $28.75   $17.375
         Second Quarter..................................  $34.25   $16.375
         Third Quarter...................................  $40.00   $25.625
         Fourth Quarter..................................  $41.75   $32.00

         On February 27, 1998, the last reported sale price of the Class A
Common Stock on The Nasdaq Stock Market was $38.969 per share. On February 27,
1998, there were 656 holders of record of the Class A Common Stock and no
holders of record of the Company's Class B Common Stock, $.01 par value per
share (the "Class B Common Stock").

Dividend Policy

         The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying dividends in the foreseeable
future. The Company will effectively be prohibited from paying cash dividends
for the foreseeable future pursuant to restrictions contained in the Senior
Discount Note Indenture and the Senior Note Indenture. Future dividends, if any,
will be at the discretion of the Board and will depend upon, among other things,
the Company's operations, capital requirements and surplus, general financial
condition, contractual restrictions in financing agreements (including the
Senior Discount Note Indenture and the Senior Note Indenture) and such other
factors as the Board may deem relevant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

Recent Sales of Unregistered Securities

         During 1997, the Company offered and sold the following equity
securities that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"):

         (1) On July 15, 1996, the Company acquired Ruffalo Cody in a cash and
stock transaction valued at up to a maximum of approximately $19.9 million,
based on the average closing sales price of the Class A Common Stock on The
Nasdaq National Market at the time of the transaction. On July 15, 1996, $50,782
in cash and 113,387 shares of Class A Common Stock were placed into escrow to be
delivered to certain of the shareholders of Ruffalo Cody over a period of 18
months, contingent upon the 

                                       37
<PAGE>
 
fulfillment of certain conditions relating to Ruffalo Cody's ongoing revenues
from a material agreement with a major long distance carrier to provide
telemarketing services. The major long distance carrier terminated this
agreement, effective December 31, 1996. A total of $50,782 and 37,107 shares of
Class A Common Stock were distributed pursuant to the escrow agreement in
January 1997, 19,070 shares of Class A Common Stock were distributed pursuant to
the escrow agreement in April 1997, and the remaining 57,210 shares of Class A
Common Stock were canceled in June 1997.

         (2) On January 30, 1997, the Company acquired Digital Communications of
Iowa, Inc. ("Digital Communications") by means of a merger of Digital
Communications with and into a wholly owned subsidiary of the Company. Pursuant
to the merger, the Company issued an aggregate of 84,430 shares of Class A
Common Stock to the shareholders of Digital Communications in exchange for their
shares of Digital Communications common stock. The transaction was valued at
approximately $2.3 million based on the average closing sales price of the Class
A Common Stock on The Nasdaq National Market at the time of the transaction.

         (3) In June 1997, the Company issued 8,120,457 shares of Class A Common
Stock to IES upon conversion of 8,120,457 shares of Class B Common Stock owned
by IES. Shares of Class B Common Stock may be converted at any time at the
option of the holder into fully paid nonassessable shares of Class A Common
Stock at the rate of one share of Class A Common Stock for each share of Class B
Common Stock (as adjusted for stock splits, recombinations and similar events).

         (4) In May 1997, the Company issued 300,000 shares of Class A Common
Stock to IES Industries Charitable Foundation upon conversion of 300,000 shares
of Class B Common Stock owned by IES Industries Charitable Foundation.

         (5) In June 1997, the Company issued 6,905,472 shares of Class A Common
Stock to MidAmerican upon conversion of 6,905,472 shares of Class B Common Stock
owned by MidAmerican.

         (6) In May 1997, the Company issued 300,000 shares of Class A Common
Stock to MidAmerican Energy Foundation upon conversion of 300,000 shares of
Class B Common Stock owned by MidAmerican Energy Foundation.

         (7) On September 24, 1997, the Company acquired CCI by means of a
merger of CCI with and into a wholly owned subsidiary of the Company. Pursuant
to the merger, the Company paid approximately $155 million in cash and issued an
aggregate of 8,488,596 shares of Class A Common Stock to the shareholders of CCI
in exchange for their shares of CCI capital stock. The transaction was valued at
approximately $382.1 million based on the average closing sales price of the
Class A Common Stock on The Nasdaq National Market at the time of the
transaction. The purchase price also included approximately $3.4 million of
direct acquisition costs.

         (8) On October 15, 1997, the Company issued an aggregate of 55,500
shares of Class A Common Stock to OneTEL Corp. ("OneTEL") in exchange for
substantially all of the assets of OneTEL. The transaction was valued at
approximately $2 million based on the closing sales price of the Class A Common
Stock on The Nasdaq National Market at the time of the transaction.

         (9) On December 31, 1997, the Company issued an aggregate of 140,000
shares of Class A Common Stock to Colorado Directory Company, LLC ("Colorado
Directory") in exchange for substantially all of the assets of Colorado
Directory. The transaction was valued at approximately $4.5 million based on the
closing sales price of the Class A Common Stock on The Nasdaq National Market at
the time of the transaction.

         See "Executive Compensation" for information regarding the grant of
options to purchase shares of Class A Common Stock to certain employees pursuant
to the Company's 1996 Employee Stock Option Plan as partial consideration for
the execution of employment, confidentiality and non-competition agreements.

         Each 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 

                                       38
<PAGE>
 
transactions by an issuer not involving any public offering. The recipients of
securities in each 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 transactions. All recipients had adequate access to
information about the Company through their relationship with the Company or
through information about the Company made available to them.

                                       39
<PAGE>
 
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," the Consolidated Financial Statements of the Company, the notes
thereto and the other financial data contained elsewhere in this Form 10-K.
<TABLE> 
<CAPTION> 
                                                             (In thousands except per share data)

                                                             Year Ended December 31,
                                         ---------------------------------------------------------------------------  
                                             1993            1994         1995(1)(2)     1996(1)(3)   1997(1)(4)(5)
                                          ----------      ----------      ----------     ----------   -------------
<S>                                       <C>             <C>             <C>            <C>          <C> 
Operations Statement Data:
   Revenue..........................     $   1,550       $   8,014       $  28,998       $  81,323     $  267,886
                                         ---------       ---------       ---------       ---------     ----------
   Operating expenses:
     Cost of service................         1,528           6,212          19,667          52,624        155,430
     Selling, general and
        Administrative..............         2,390          12,373          18,054          46,044        143,918
     Depreciation and
        Amortization................           235             772           1,835           8,485         33,275
     Other..........................            --              --              --           2,380          4,632
                                         ---------       ---------       ---------       ---------     ----------
     Total operating
        Expenses....................         4,153          19,357          39,556         109,533        337,255
                                         ---------       ---------       ---------       ---------     ----------
   Operating loss...................        (2,603)        (11,343)        (10,558)        (28,210)       (69,369)
   Interest income (expense),
     Net............................           163             (73)           (771)          5,369        (11,967)
     Other income...................            --              --              --             495          1,426
   Income taxes.....................            --              --              --              --             --
                                         ---------       ---------       ---------       ---------     ----------
   Net loss.........................     $  (2,440)      $ (11,416)      $ (11,329)      $ (22,346)    $  (79,910)
                                         =========       =========       =========       =========     ==========
   Loss per common share............     $    (.17)      $    (.53)      $    (.40)      $    (.55)    $    (1.45)
                                         =========       =========       =========       =========     ==========
                                                                                                      
   Weighted average common
     Shares outstanding.............        14,761          21,464          28,004          40,506         54,974
                                         =========       =========       =========       =========     ==========
<CAPTION> 

                                                                        December 31,
                                         --------------------------------------------------------------------------- 
                                             1993            1994         1995(1)(6)     1996(1)(7)   1997(1)(5)(8)
                                          ----------      ----------      ----------     ----------   -------------
<S>                                       <C>             <C>             <C>            <C>          <C> 
Balance Sheet Data:
   Current assets...................     $   7,077       $   4,862       $   8,507       $ 224,401     $  517,869
   Working capital (deficit)........     $   5,962       $   1,659       $  (1,208)      $ 185,968     $  378,617
   Property and equipment, net......     $   1,958       $   4,716       $  16,119       $  92,123     $  373,804
   Total assets.....................     $   9,051       $  10,687       $  28,986       $ 452,994     $1,345,652
   Long-term debt...................            --       $   3,500       $   3,600       $   2,573     $  613,384
   Stockholders' equity ............     $   7,936       $   3,291       $  14,958       $ 403,429     $  559,379

<CAPTION> 
                                                                   Year Ended December 31,
                                        -----------------------------------------------------------------------------
                                            1993            1994         1995(1)(2)      1996(1)(3)    1997(1)(5)(8)
                                         ----------      ----------      ----------      ----------    -------------
<S>                                       <C>             <C>             <C>            <C>          <C> 
Other Financial Data:
   Capital expenditures, includ-
     ing business acquisitions......     $   2,052       $   3,393       $  14,697       $ 173,782     $  601,137
   EBITDA(9)........................     $  (2,368)      $ (10,571)      $  (8,723)      $ (17,345)    $  (31,462)
</TABLE> 

(1) The acquisitions of MWR, Ruffalo Cody, McLeodUSA Publishing and CCI in April
    1995, July 1996, September 1996 and September 1997, respectively, affect the
    comparability of the historical data presented to the historical data for
    prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) Includes operations of Ruffalo Cody from July 16, 1996 to December 31, 1996
    and operations of McLeodUSA Publishing from September 21, 1996 to December
    31, 1996. 
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the issuance of the Senior Discount Notes on March 4, 1997 and the
    Senior Notes on July 21, 1997. 
(6) Includes MWR, which was acquired by the Company on April 28, 1995. 
(7) Includes Ruffalo Cody and McLeodUSA Publishing, which were acquired by the
    Company on July 15, 1996 and September 20, 1996, respectively.
(8) Includes CCI, which was acquired by the Company on September 24, 1997.
(9) EBITDA consists of operating loss before depreciation, amortization and
    other nonrecurring operating expenses. The Company has 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.

                                       40
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

         The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto and
the other financial data appearing elsewhere in this Form 10-K.

Overview

         The Company derives its revenue from (i) the sale of "bundled" local
and long distance telecommunications services to end users, (ii)
telecommunications network maintenance services and telephone equipment sales,
service and installation, (iii) special access, private line and data services,
(iv) the sale of advertising space in telephone directories, (v) local exchange
services through the operation of an independent local exchange company, ICTC,
acquired as part of the CCI Acquisition, (vi) telemarketing services and (vii)
other telecommunications services, including cellular, operator, payphone and
paging services. The Company began providing local exchange services and other
telecommunication services as a result of the CCI Acquisition in September 1997,
telephone directory advertising as a result of its acquisition of McLeodUSA
Publishing in September 1996, and telemarketing services as a result of its
acquisition of Ruffalo Cody in July 1996. The table set forth below summarizes
the Company's percentage of revenues from these sources:
<TABLE> 
<CAPTION> 
                                                                            Year Ended December 31,
                                                                  -----------------------------------------
                                                                     1995            1996          1997(1)
                                                                   --------        --------      ---------
<S>                                                                <C>             <C>           <C> 
Local and long distance telecommunications services...........        74%             51%             41%
Network maintenance and equipment services....................        17               7               8
Special access, private line and data services................         9              13               6
Telephone directory advertising...............................        --              19              30
Local exchange services (ICTC)................................        --              --               6
Telemarketing services........................................        --              10               5
Other telecommunications services.............................        --              --               4
                                                                    ----            ----            ----
                                                                     100%            100%            100%
                                                                    ====            ====            ====
</TABLE> 
------------------------
(1)  Includes revenues from CCI from September 25, 1997 through December 31, 
     1997.

         The Company began offering "bundled" local and long distance services
to business customers in January 1994. At the end of 1995, the Company began
offering, on a test basis, long distance services to residential customers. In
June 1996, the Company began marketing and providing to residential customers in
Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of
telecommunications services, marketed under the name PrimeLine(R), that includes
local and long distance service, voice mail, paging, Internet access and travel
card services. During 1997, the Company expanded the states in which it offers
service to business customers to include Iowa, Illinois, Indiana, Minnesota,
Wisconsin, North Dakota, South Dakota, Colorado and Wyoming. During 1997, the
Company also expanded its PrimeLine(R) service to certain additional cities in
Iowa and Illinois and began offering the service to customers in North Dakota,
South Dakota, Wisconsin and Colorado. The Company plans to continue its efforts
to market and provide local, long distance and other telecommunications services
to business customers and market its PrimeLine(R) service to residential
customers. The Company believes its efforts to market its integrated
telecommunications services have been enhanced by its July 1996 acquisition of
Ruffalo Cody, which specializes in direct marketing and telemarketing services,
including telecommunications sales, its September 1996 acquisition of McLeodUSA
Publishing, which publishes and distributes competitive "white page" and "yellow
page" telephone directories in nineteen states in the midwestern and Rocky
Mountain regions of the United States, including most of the Company's target
markets, and its September 1997 acquisition of CCI, including its subsidiary
CCD, which publishes and distributes "white page" and "yellow page" telephone
directories in 38 states and the United States Virgin Islands.

         In September 1997, the Company completed the CCI Acquisition. For the
period January 1997 through September 24, 1997, CCI had revenues of $194.3
million and net income of $5.6 million. As a result of the CCI Acquisition, the
Company now owns all of the former CCI subsidiaries, including ICTC, an
independent local exchange carrier which was serving with over 89,000 access
lines in east central 

                                       41
<PAGE>
 
Illinois as of December 31, 1997; CCTS, a competitive local exchange carrier
which was offering integrated local, long distance and other telecommunications
services to over 6,700 customers in central and southern Illinois and in Indiana
as of December 31, 1997; CCD, a telephone directory company that as of December
31, 1997 was publishing and distributing over 4 million competitive annual
"white page" and "yellow page" telephone directories; an operator service
company; an inmate pay-phone company; a full service telemarketing agency; a
majority interest in a cable television company serving customers in Greene,
Sangamon and Menard counties in Illinois and Benton Harbor, Michigan; and a
minority interest in a cellular telephone partnership serving parts of east
central Illinois. The Company believes the CCI Acquisition will allow it to
enhance its efforts to offer its telecommunications services in adjoining target
markets including expansion into Indiana and Missouri, states where CCI provided
telecommunications services.

         The Company's 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
two Regional Bell Operating Companies, costs to terminate the long distance
calls of the Company's customers through interexchange carriers, costs of
printing and distributing the telephone directories published by McLeodUSA
Publishing and CCD, costs associated with maintaining the Iowa Communications
Network and costs associated with operating the Company's network. The Iowa
Communications Network is a fiber optic network that links certain of the State
of Iowa's schools, libraries and other public buildings. SG&A consists of sales
and marketing, customer service and administrative expenses. Depreciation and
amortization include depreciation of the Company's telecommunications network
and equipment; amortization of goodwill and other intangibles related to the
Company's acquisitions, amortization expense related to the excess of estimated
fair market value in aggregate of certain options over the aggregate exercise
price of such options granted to certain 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 the Company's local telecommunications service.

         As the Company expands into new markets, both cost of service and SG&A
will increase. The Company expects to incur cost of service and SG&A expenses
prior to 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 the
Company to build a customer base large enough to generate sufficient revenue to
offset such fixed costs and marketing expenses.

         In January and February 1996, the Company granted options to purchase
an aggregate of 965,166 and 688,502 shares of its Class A Common Stock,
respectively, at an exercise price of $2.67 per share, to certain directors,
officers and other employees. The estimated fair market value of these options,
in the aggregate, at the date of grant was later determined to exceed the
aggregate exercise price by approximately $9.2 million. Additionally, in
September 1997, the Company granted options to purchase an aggregate of
1,468,945 shares of its Class A Common Stock at an exercise price of $24.50 to
certain employees of CCI. The fair market value of these options, in the
aggregate, at the date of grant exceeded the aggregate exercise price by
approximately $15.8 million. These amounts are being amortized on a monthly
basis over the four-year vesting period of the options.

         The Company has experienced operating losses since its inception as a
result of efforts to build its customer base, develop and construct its network
infrastructure, build its internal staffing, develop its systems and expand into
new markets. The Company expects to continue to focus on increasing its customer
base and geographic coverage. Accordingly, the Company expects that its cost of
service, SG&A and capital expenditures will continue to increase significantly,
all of which may have a negative impact on operating results. As a result of the
CCI Acquisition, the Company anticipates a reduction in operating losses and the
generation of positive cash flows from operations in the future. The anticipated
financial benefits from the CCI Acquisition are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
financial benefits the Company will actually derive from the CCI Acquisition may
differ materially as a result of a variety of factors, including technological,
regulatory or other developments in the Company's business, the difficulty of
assimilating CCI's operations and personnel, the possible inability of
management to maximize the financial and strategic position of the Company
through successful incorporation of CCI into the Company's operations, and the
risks of entering markets in which the Company has little or no direct prior
experience. In addition, the 

                                       42
<PAGE>
 
projected increases in capital expenditures will continue to generate negative
cash flows from construction activities during the next several years while the
Company installs and expands its fiber optic network and develops and constructs
its proposed PCS system. The Company may also be forced to change its pricing
policies to respond to a changing competitive environment, and there can be no
assurance that the Company will be able to maintain its operating margin. There
can be no assurance that growth in the Company's revenue or customer base will
continue or that the Company will be able to achieve or sustain profitability or
positive cash flows.

         The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has 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 carryforwards. The Company will reduce the valuation
allowance when, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets will be realized.

Year Ended 1997 Compared with Year Ended 1996

         Revenue was $267.9 million for the year ended December 31, 1997, an
increase of $186.6 million or 229% from $81.3 million for 1996. This increase
was due to the many acquisitions completed in 1997 and 1996 as well as the
increase in local and long distance customers. Revenue from the sale of local
and long distance telecommunications services accounted for $68.6 million of the
increase, including $23.1 million contributed by CCI from September 25, 1997 to
December 31, 1997. Local exchange services generated by ICTC represented $16.1
million for the period from September 25, 1997 to December 31, 1997, for which
there were no corresponding 1996 revenues. Private line and data revenues
accounted for $6.9 million of increased revenues over 1996 which was primarily
attributable to the CCI Acquisition. Network maintenance and equipment revenue
increased $15.0 million over 1996 due to the acquisitions of Digital
Communications, ESI Communications and CCI. Other telecommunications revenue,
which was due entirely to the CCI Acquisition, represented $9.9 million of 1997
revenues with no corresponding 1996 amount. Directory revenues increased $65.9
million from 1996 to 1997 and were due to a full year of McLeodUSA Publishing
revenues in 1997 and the acquisition of CCD on September 24, 1997. The increase
in telemarketing revenues from 1996 to 1997 of $4.1 million was due almost
entirely to the CCI Acquisition.

         Cost of service increased from $52.6 million for the year ended
December 31, 1996 to $155.4 million for the year ended December 31, 1997,
representing an increase of $102.8 million or 195%. This increase in cost of
service was due primarily to the growth in the Company's local and long distance
telecommunications services and to the acquisitions of Ruffalo Cody, McLeodUSA
Publishing, Digital Communications, ESI Communications and CCI, which
contributed an aggregate of $62.2 million to the increase. Cost of service as a
percentage of revenue decreased from 65% for the year ended December 31, 1996 to
58% for the year ended December 31, 1997, primarily as a result of the effect of
these acquisitions. The cost of providing local and long distance services as a
percentage of local and long distance telecommunications revenue increased from
70% for the year ended December 31, 1996 to 73% for the year ended December 31,
1997, primarily as a result of increased line costs associated with the
Company's accelerated expansion into new markets.

         SG&A increased from $46 million for the year ended December 31, 1996 to
$143.9 million for the year ended December 31, 1997, an increase of $97.9
million or 213%. The acquisitions of Ruffalo Cody, McLeodUSA Publishing, Digital
Communications, ESI Communications and CCI contributed an aggregate of $54.3
million to the increase. Also contributing to this increase were increased costs
of $43.6 million primarily related to expansion of selling, customer support and
administration activities to support the Company's growth.

         Depreciation and amortization expenses increased from $8.5 million for
the year ended December 31, 1996 to $33.3 million for the year ended December
31, 1997, representing an increase of $24.8 million or 292%. The increase was
primarily due to $14.3 million related to the acquisitions of Ruffalo Cody,
McLeodUSA Publishing, Digital Communications, ESI Communications and CCI, and
$3.8 million due primarily to the growth of the Company's network in 1997.

                                       43
<PAGE>
 
         Other operating expenses in 1997 represented the realization of a
purchase accounting adjustment related to the capitalization of costs associated
with McLeodUSA Publishing and CCD directories in progress at the time of the
acquisitions.

         Interest income increased from $6 million for the year ended December
31, 1996 to $22.7 million for the year ended December 31, 1997. This increase
resulted from increased earnings on investments made with a portion of the
proceeds from the Company's offerings of Class A Common Stock in June and
November 1996 and from the private offerings of the Senior Discount Notes and
the Senior Notes in March 1997 and July 1997, respectively.

         Gross interest expense increased from $869,000 for the year ended
December 31, 1996 to $39.1 million for the year ended December 31, 1997. This
increase was primarily a result of accretion of interest on the Senior Discount
Exchange Notes of $26.8 million and accrual of interest on the Senior Notes of
$9.5 million. Interest expense of approximately $4.4 million and $204,000 was
capitalized as part of the Company's construction of fiber optic network during
the years ended December 31, 1997 and 1996, respectively.

         Net loss increased from $22.3 million for the year ended December 31,
1996 to $79.9 million for the year ended December 31, 1997, an increase of $57.6
million. This increase resulted primarily from the following three factors: the
construction and expansion of the Company's network which require significant
expenditures, a substantial portion of which is incurred before the realization
of revenues; the increased depreciation expense related to those networks and
amortization of intangibles related to acquisitions; and net interest expense on
indebtedness to fund market expansion, network development and acquisitions.

         Operating loss before depreciation, amortization and other
non-recurring operating expenses increased from a negative $17.3 million for the
year ended December 31, 1996 to a negative $31.5 million for the year ended
December 31, 1997, an increase of $14.2 million. The change reflected the
increase in the operating loss incurred in 1997 due primarily to the expansion
of the Company's local, long distance and other telecommunications services as
described above.

Year Ended 1996 Compared with Year Ended 1995

         Revenue increased from $29 million for the year ended December 31, 1995
to $81.3 million for the year ended December 31, 1996, representing an increase
of $52.3 million or 180%. Revenue from the sale of local and long distance
telecommunications services accounted for $19.9 million of this increase.
Included in the year ended December 31, 1996 revenue was $8.6 million of revenue
from Ruffalo Cody, which was acquired on July 15, 1996, and $15.1 million in
revenue from McLeodUSA Publishing, which was acquired on September 20, 1996.
Excluding these acquisitions, 1996 revenue would have been $57.6 million.

         Cost of service increased from $19.7 million for the year ended
December 31, 1995 to $52.6 million for the year ended December 31, 1996, an
increase of $32.9 million or 168%. This increase in cost of service was due
primarily to the growth in the Company's local and long distance
telecommunications services and to the acquisitions of Ruffalo Cody and
McLeodUSA Publishing, which contributed $4.5 million and $6.7 million,
respectively, to the increase. Cost of service as a percentage of revenue
decreased from 68% to 65%, primarily as a result of the effect of these
acquisitions. The cost of providing local and long-distance services as a
percentage of local and long distance telecommunications revenue increased from
68% for the year ended December 31, 1995 to 70% for the year ended December 31,
1996, primarily as a result of an increased number of higher volume,
price-sensitive customers and increased local line costs associated with
expansion into new markets.

         SG&A increased from $18.1 million for the year ended December 31, 1995
to $46 million for the year ended December 31, 1996, an increase of $27.9
million or 155%. The acquisitions of Ruffalo Cody and McLeodUSA Publishing
contributed $3.3 million and $7.3 million, respectively, to the increase.
Increased costs of $17.3 million related to expansion of selling, customer
support and administration activities to support the Company's growth also
contributed to this increase.

                                       44
<PAGE>
 
         Depreciation and amortization expenses increased from $1.8 million for
the year ended December 31, 1995 to $8.5 million for the year ended December 31,
1996, an increase of $6.7 million or 362%. This increase consisted of $2.1
million related to the acquisitions of Ruffalo Cody and McLeodUSA Publishing;
amortization expense of $2 million related to the excess of estimated aggregate
fair market value of certain options over the aggregate exercise price of such
options granted to certain officers, other employees, and directors; and $2.6
million due primarily to the growth of the Company's network in 1996.

         Other operating expense in 1996 represented the realization of a
purchase accounting adjustment related to the capitalization of costs associated
with directories in progress at the time the Company acquired McLeodUSA
Publishing.

         The Company had net interest income of $5.4 million for the year ended
December 31, 1996 compared to net interest expense of $771,000 for the year
ended December 31, 1995 as a result of earnings on investments made with a
portion of the proceeds of the Company's public offerings of Class A Common
Stock during 1996 and decreased interest expense on reduced borrowings as a
result of the Company's repayment of all amounts outstanding under a bank credit
facility maintained by the Company from May 1994 until June 1996 (the "Credit
Facility") with a portion of the net proceeds from the Company's initial public
offering of Class A Common Stock. The Company also had other non-operating
income of $495,000 for the year ended December 31, 1996.

         Net loss increased from $11.3 million for the year ended December 31,
1995 to $22.3 million for the year ended December 31, 1996, an increase of $11
million. This increase resulted primarily from the expansion of the local and
long distance businesses, amortization and other operating expenses related to
the acquisitions of Ruffalo Cody and McLeodUSA Publishing and amortization
expense related to stock options granted to certain officers, other employees
and directors. The development of the Company's business and the construction
and expansion of its network require significant expenditures, a substantial
portion of which is incurred before the realization of revenues.

         Operating loss before depreciation, amortization and other
non-recurring operating expenses increased from a negative $8.7 million for the
year ended December 31, 1995 to a negative $17.3 million for the year ended
December 31, 1996, an increase of $8.6 million. The change reflected the
increase in the operating loss incurred in 1996 due primarily to the expansion
of the Company's local, long distance and other telecommunications services and
the factors described above.

Year Ended 1995 Compared with Year Ended 1994

         Revenue increased from $8 million in 1994 to $29 million in 1995,
representing an increase of $21 million or 262%. Revenue from the increase in
the sale of local and long distance telecommunications services accounted for
$16.9 million of this increase. Revenue from telecommunications network
maintenance services was $4.9 million in 1995. The Company acquired MWR, a
competitive access provider that offers most of the Company's special access and
private line services, in April 1995 in an acquisition accounted for as a
purchase. MWR represented $1.6 million of the Company's revenue in 1995.

         Cost of service increased from $6.2 million in 1994 to $19.7 million in
1995, an increase of $13.5 million or 217%. This increase in cost of service
resulted primarily from costs for providing local and long distance services.
Cost of service as a percentage of revenue decreased from 78% in 1994 to 68% in
1995, principally as a result of certain economies of scale.

         SG&A increased from $12.4 million in 1994 to $18.1 million in 1995, an
increase of $5.7 million or 46%. This increase was due to increased compensation
resulting from selling and customer support activities of $2.8 million,
additional administrative personnel expense of $1.6 million and associated costs
of $1.3 million required to handle the growth experienced primarily in local and
long distance revenues.

         Depreciation and amortization expenses increased from $772,000 in 1994
to $1.8 million in 1995, an increase of $1 million or 138%. This increase
consisted of depreciation of $362,000 related to the additional fiber optic
network purchased and built during 1995; $304,000 of depreciation related to
capital costs associated with the growth of the Company; $266,000 resulting from
the amortization of one-time 

                                       45
<PAGE>
 
installation costs primarily associated with transferring customers' local line
service from the Regional Bell Operating Companies to the Company's
telemanagement service; and amortization of goodwill of $117,000 related to the
Company's acquisition of MWR in 1995.

         Net interest expense increased from $73,000 in 1994 to $771,000 in
1995. This net increase resulted from an increase in interest expense of
$692,000 due to the need for additional secured debt in 1995 to fund the
Company's growth and operating losses and a decrease in interest income of
$6,000 resulting from reduced investment of funds due to the use of funds needed
to satisfy working capital needs.

         The Company's net loss decreased from $11.4 million in 1994 to $11.3
million in 1995, a decrease of $87,000. This decrease resulted from the ability
of the Company to generate additional service income while reducing customer
acquisition and support costs as a percentage of service income.

         Operating loss before depreciation, amortization and other
non-recurring operating expenses improved from a negative $10.6 million in 1994
to a negative $8.7 million in 1995, an improvement of $1.9 million. The
improvement reflected the decrease in the net loss and the increase in
depreciation and amortization in 1995 resulting from the capital expenditures
necessary to support the Company's revenue growth.

Liquidity and Capital Resources

         The Company's total assets increased from $453 million at December 31,
1996 to $1.3 billion at December 31, 1997, primarily due to the net proceeds of
approximately $506.6 million from the Company's private offerings of the Senior
Discount Notes and the Senior Notes in March 1997 and July 1997, respectively,
and the acquisition of CCI in September 1997. At December 31, 1997, the
Company's current assets of $517.9 million exceeded its current liabilities of
$139.3 million, providing working capital of $378.6 million, which represents an
increase of $192.6 million compared to December 31, 1996 primarily attributable
to the net proceeds from the private offerings of the Senior Discount Notes and
the Senior Notes. At December 31, 1996, the Company's current assets of $224.4
million exceeded current liabilities of $38.4 million, providing working capital
of $186 million.

         Net cash used in operating activities totaled $8.8 million for the year
ended December 31, 1997 and $11.8 million for the year ended December 31, 1996.
During the year ended December 31, 1997, cash for operating activities was used
primarily to fund the Company's net loss of $79.9 million for such period. The
Company also required cash to fund the growth in accounts receivable and
deferred line installation costs of $15.9 million and $9.7 million,
respectively, as a result of the expansion of the Company's local and long
distance telecommunications services, offset by increases in accounts payable
and accrued expenses of $27.1 million, deferred revenues of $7.2 million and
customer deposits of $3 million. During the year ended December 31, 1996, cash
for operating activities was used primarily to fund the Company's net loss of
$22.3 million for such period. The Company also required cash to fund the growth
in trade receivables of $9.3 million offset by an increase in deferred revenue
of $9.5 million.

         Net cash used in investing activities totaled $242.8 million during the
year ended December 31, 1997 and $283.1 million during the year ended December
31, 1996. The expansion of the Company's local and long distance
telecommunications services, development and construction of the Company's fiber
optic telecommunications networks and other capital expenditures resulted in
purchases of equipment and fiber optic cable and other property and equipment
totaling $151.3 million and $70.3 million during the years ended December 31,
1997 and 1996, respectively.

         In April and June 1997, the FCC granted the Company 26 "D" and "E"
block frequency PCS licenses and in September 1997 the Company acquired the CCI
PCS License, giving the Company 27 PCS licenses in a total of 25 markets
covering areas of Iowa, Illinois, Minnesota, Nebraska and South Dakota. The
Company paid the FCC an aggregate of approximately $32.8 million for the 26 PCS
licenses granted to the Company by the FCC in April and June 1997. The Company
made a deposit of $4.8 million with the FCC at the beginning of the bidding
process in 1996 and paid approximately $28 million during 1997 for the 26 PCS
licenses. CCI paid the FCC for the CCI PCS License prior to the CCI Acquisition.

                                       46
<PAGE>
 
The Company will be required to make significant additional expenditures to
develop, construct and operate a PCS system.

         The Company used cash of $23.5 million to acquire substantially all of
the assets of ESI Communications and related entities in June 1997 and certain
telephone directories published by Fronteer Financial Holding, Inc., Indiana
Directories, Inc., Smart Pages Inc. and Yellow Pages Publishers, Inc. in
February 1997, March 1997, September 1997 and September 1997, respectively.

         On September 24, 1997, the Company issued an aggregate of 8,488,586
shares of Class A Common Stock 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
sales price of the Class A Common Stock on The Nasdaq National Market five days
before and after the date of the Merger Agreement. The total purchase price
includes approximately $3.4 million of estimated direct acquisition costs.

         These uses of cash for investing activities during the year ended
December 31, 1997 were partially offset by net proceeds of $120.2 million from
the sales and maturities of available-for-sale securities.

         Net cash received from financing activities was $487 million during the
year ended December 31, 1997, primarily as a result of the Company's private
offerings of the Senior Discount Notes in March 1997 and the Senior Notes in
July 1997. Cash received from financing activities during the year ended
December 31, 1996 was $391.4 million and was primarily obtained from the
Company's public offerings of Class A Common Stock in June and November 1996.
The Company paid off and canceled the Credit Facility in June 1996 with a
portion of the proceeds from its initial public offering.

         On March 4, 1997, the Company completed a private offering of the
Senior Discount Notes. The Senior Discount Notes were issued at an original
issue discount in which the Company received approximately $288.9 million in net
proceeds. All of the Senior Discount Notes were exchanged for Senior Discount
Exchange Notes pursuant to the Senior Discount Note Exchange Offer, which
expired on August 24, 1997. The form and terms of the Senior Discount Exchange
Notes are identical in all material respects to the form and terms of the Senior
Discount Notes except that (i) the Senior Discount Exchange Notes have been
registered under the Securities Act and (ii) holders of the Senior Discount
Exchange Notes are not entitled to certain rights under a registration agreement
relating to the Senior Discount Notes. The Senior Discount Exchange Notes
accrete from March 4, 1997 at a rate of 10 1/2% per year, compounded
semi-annually to an aggregate principal amount of $500 million by March 1, 2002.
As of December 31, 1997, the accreted balance of the Senior Discount Exchange
Notes was $326.8 million. Interest will not accrue on the Senior Discount
Exchange Notes prior to March 1, 2002. Thereafter, interest will accrue at a
rate of 10 1/2% per annum and will be payable in cash semi-annually in arrears
on March 1 and September 1 of each year, commencing September 1, 2002. The
Senior Discount Exchange Notes are redeemable, at the option of the Company, in
whole or in part, at any time on or after March 1, 2002, at 105.25% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of their principal amount at maturity, plus accrued and unpaid interest, on
or after March 1, 2005. In the event of certain equity investments in the
Company by certain strategic investors on or before March 1, 2000, the Company
may, at its option, use all or a portion of the net proceeds therefrom to redeem
up to a maximum of 33 1/3% of the original principal amount of the Senior
Discount Exchange Notes at a redemption price of 110.5% of the accreted value
thereof. In addition, in the event of a Change of Control (as defined in the
Senior Discount Note Indenture) of the Company, each holder of Senior Discount
Exchange Notes will have the right to require the Company to repurchase all or
any part of such holder's Senior Discount Exchange Notes at a purchase price
equal to 101% of the accreted value thereof prior to March 1, 2002, or 101% of
the principal amount thereof plus accrued and unpaid interest, if any, on or
after March 1, 2002. The Senior Discount Exchange Notes will mature on March 1,
2007.

         On July 21, 1997, the Company completed a private offering of the
Senior Notes in which the Company received net proceeds of approximately $217.7
million. All of the Senior Notes were exchanged for Senior Exchange Notes
pursuant to the Senior Note Exchange Offer, which expired on January 9, 1998.
The form and terms of the Senior Exchange Notes are identical in all material
respects to the form and terms of the Senior Notes except that (i) the Senior
Exchange Notes have been registered under the 

                                      47
<PAGE>
 
Securities Act and (ii) holders of the Senior Exchange Notes are not entitled to
certain rights under a registration agreement relating to the Senior Notes.
Interest on the Senior Exchange Notes accrues at the rate of 9 1/4% per annum
and is payable in cash semi-annually in arrears on July 15 and January 15,
commencing January 15, 1998. The Senior Exchange Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after July 15,
2002 at 104.625% 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 July 15, 2005. In the event of certain
equity investments in the Company by certain strategic investors on or before
July 15, 2000, the Company may, at its option, use all or a portion of the net
proceeds from such sale to redeem up to 33 1/3% of the original principal amount
of the Senior Exchange Notes at a redemption price equal to 109.25% of the
principal amount of the Senior Exchange Notes plus accrued and unpaid interest
thereon, if any, to but excluding the redemption date, provided that at least 66
2/3% of the original principal amount of the Senior Exchange 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 Senior Note Indenture) of
the Company, each holder of Senior Exchange Notes shall have the right to
require the Company to repurchase all or any part of such holder's Senior
Exchange Notes at a purchase price equal to 101% of the principal amount of the
Senior Exchange Notes tendered by such holder plus accrued and unpaid interest,
if any, to any Change of Control Payment Date (as defined in the Senior Note
Indenture). The Senior Exchange Notes will mature on July 15, 2007.

         The Senior Discount Exchange Notes and the Senior Exchange Notes are
senior unsecured obligations of the Company ranking pari passu in right of
payment with all other existing and future senior unsecured obligations of the
Company and senior to all existing and future subordinated debt of the Company.
The Senior Discount Exchange Notes and the Senior Exchange Notes are effectively
subordinated to all existing and future secured indebtedness of the Company and
its subsidiaries to the extent of the value of the assets securing such
indebtedness. The Senior Discount Exchange Notes and the Senior Exchange Notes
also are effectively subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's subsidiaries.

         The Senior Discount Note Indenture and the Senior Note Indenture 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, redeem 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.
There can be no assurance that such covenants will not adversely affect the
Company's ability to finance its future operations or capital needs or to engage
in other business activities that may be in the interests of the Company.

         As of December 31, 1997, the Company estimates that its aggregate
capital requirements for 1998, 1999 and 2000 will be approximately $750 million.
The Company's estimated capital requirements include the estimated cost of (i)
developing and constructing its fiber optic network, which in the future is
expected to include the installation of intra-city fiber networks, (ii) market
expansion activities, (iii) developing, constructing and operating a PCS system
and (iv) completing construction of its new corporate headquarters and
associated buildings. These capital requirements are expected to be funded, in
large part, out of the approximately $217.7 million in net proceeds from the
Senior Note Offering, approximately $148.9 million in net proceeds remaining
from the Senior Discount Note Offering, additional debt and equity issuances and
lease payments to the Company for portions of the Company's networks.

         The Company may require additional capital in the future for business
activities related to those specified above and also for acquisitions, joint
ventures and strategic alliances, as well as to fund operating deficits and net
losses. These activities could require significant additional capital not
included in the foregoing estimated aggregate capital requirements.

         The Company's estimate of its 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 Company's actual
capital requirements may differ materially as a result of regulatory,
technological and competitive developments (including new opportunities) in the
Company's industry.

                                      48
<PAGE>
 
         The Company expects to meet its additional capital needs with the
proceeds from credit facilities and other borrowings, and additional debt and
equity issuances. As of the date hereof, the Company is negotiating with a major
bank to obtain one or more syndicated credit facilities. There can be no
assurance, however, that the Company will be successful in obtaining such credit
facilities on terms acceptable to the Company or at all, or that the Company
will otherwise be successful in producing sufficient cash flows or raising
sufficient debt or equity capital to meet its strategic objectives, or that such
funds, if available at all, will be available on a timely basis or on terms that
are acceptable to the Company. Failure to generate or raise sufficient funds may
require the Company to delay or abandon some of its future expansion plans or
expenditures, which could have a material adverse effect on the Company. See
"Business--Risk Factors--Significant Capital Requirements."

Market Risk

         At December 31, 1997, marketable equity securities of the Company are
recorded at fair value of $27.5 million. The marketable equity securities held
by the Company 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 $2.8 million. The Company believes its exposure
to market rate fluctuations on all other investments is nominal due to the
short-term nature of its investment portfolio.

         The Company has no material future earnings or cash flow exposures from
changes in interest rates on its long-term debt obligations, as substantially
all of the Company's long-term debt obligations are fixed rate obligations.

Year 2000 Date Conversion

         The Company is currently working to verify system readiness for the
processing of date-sensitive information by the Company's computerized
information systems. The year 2000 problem impacts computer programs and
hardware timers using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive functions may
recognize a date using "00" as the year 1900 rather than 2000, which could
result in miscalculations or system failures. The Company has recently initiated
a review of its computer systems and programs to determine which, if any,
systems and programs are not capable of recognizing the year 2000 and to verify
system readiness for the millennium date change. The Company is in the process
of confirming with its key vendors that they will be Year 2000 ready. The total
cost of addressing potential problems, which will be expensed as incurred, are
not known as of the date hereof. Based on preliminary information, however, such
costs are not currently expected to have a material adverse effect on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company, its customers or vendors are unable to resolve
such processing issues in a timely manner, it could have a material adverse
effect on future operations. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner. While the Company's efforts are designed to be successful, because of
the complexity of the Year 2000 issues and the interdependence of organizations
using computer systems, there can be no assurance that the Company's efforts or
those of a third party with which the Company interacts will be satisfactorily
completed in a timely fashion.

Effects of New Accounting Standards

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130"). This pronouncement, effective for calendar year 1998
financial statements, requires comprehensive income and its components to be
reported either in a separate financial statement, combined and included with
the statement of income or included in a statement of changes in stockholders'
equity. Comprehensive income includes all changes in equity during a period
except those resulting from investment by owners and distribution to owners. The
impact on the Company's financial statements as a result of adopting SFAS 130 is
not expected to be material.

         Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"). This 

                                      49
<PAGE>
 
pronouncement, also effective for calendar year 1998 financial statements,
requires reporting segment information consistent with the way executive
management of an entity disaggregates its operations internally to assess
performance and make decisions regarding resource allocations. Among information
to be disclosed, SFAS 131 requires an entity to report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets.
SFAS 131 also requires reconciliations of total segment revenues, total segment
profit or loss and total segment assets to the corresponding amounts shown in
the entity's consolidated financial statements. The Company is in the process of
identifying reportable segments and has not yet determined the effect of
implementing SFAS 131.

Inflation

         The Company does not believe that inflation has had a significant
impact on the Company's consolidated operations.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

         At December 31, 1997, marketable equity securities of the Company are
recorded at fair value of $27.5 million. The marketable equity securities held
by the Company 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 $2.8 million. The Company believes its exposure
to market rate fluctuations on all other investments is nominal due to the
short-term nature of its investment portfolio.

         The Company has no material future earnings or cash flow exposures from
changes in interest rates on its long-term debt obligations, as substantially
all of the Company's long-term debt obligations are fixed rate obligations.

Item 8.  Financial Statements and Supplementary Data.

         The Consolidated Financial Statements of the Company, including the
Company's Consolidated Balance Sheets as of December 31, 1997 and 1996,
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995, Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995, Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995, and Notes to Consolidated
Financial Statements, together with a report thereon of Arthur Andersen LLP,
dated January 28, 1998, are attached hereto as pages F-1 through F-26.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

         On March 27, 1997, the Company engaged the accounting firm of Arthur
Andersen LLP as the Company's principal independent accountants, to replace
McGladrey & Pullen, LLP, the Company's former independent accountants, effective
with such engagement. The decision to change independent accountants was made
following a review of competitive proposals submitted by Arthur Andersen LLP and
two other major public accounting firms, and was recommended by the Audit
Committee of the Board of Directors and approved by the Board. McGladrey &
Pullen, LLP did not resign and did not decline to stand for re-election.

         During the fiscal years ended December 31, 1996 and 1995, and the
interim period between December 31, 1996 and March 27, 1997, there were no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused McGladrey & Pullen, LLP to make reference in
their report to such disagreements if not resolved to their satisfaction.

         McGladrey & Pullen, LLP's reports on the financial statements of the
Company for the fiscal years ended December 31, 1996 and 1995 contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.

                                      50
<PAGE>
 
         The Company provided McGladrey & Pullen, LLP with a copy of this
disclosure and requested that McGladrey & Pullen, LLP furnish it with a letter
addressed to the Securities and Exchange Commission (the "Commission") stating
whether it agrees with the above statements. (A copy of the McGladrey & Pullen,
LLP letter addressed to the Commission is filed as Exhibit 16.1 to this Form
10-K).

                                    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 the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 27, 1998 (the
"Proxy Statement"), to be filed within 120 days after the end of the Company's
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 of the Company."


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 the Company's 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 the Company's
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 the
Company's fiscal year, which information is incorporated herein by reference.


                                      51
<PAGE>
 
                                     PART IV

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

         (a)(1) The following Consolidated Financial Statements of the Company
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, 1997 and 1996.

                Consolidated Statements of Operations for the years ended
                December 31, 1997, 1996 and 1995.

                Consolidated Statements of Stockholders' Equity for the years
                ended December 31, 1997, 1996 and 1995.

                Consolidated Statements of Cash Flows for the years ended
                December 31, 1997, 1996 and 1995.

                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 Commission either have been included in the
Consolidated Financial Statements of the Company 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 April 28, 1995
                     among Midwest Capital Group Inc., MWR Telecom, Inc. and
                     McLeod, Inc. (Filed as Exhibit 2.1 to Registration
                     Statement on Form S-1, File No. 333-3112 ( "Initial Form
                     S-1 "), and incorporated herein by reference).

        2.2          Agreement and Plan of Reorganization dated as of July 12,
                     1996 among Ruffalo, Cody & Associates, Inc., certain
                     shareholders of Ruffalo, Cody & Associates, Inc. and
                     McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form
                     8-K, File No. 0-20763, filed with the Commission on July
                     29, 1996 and incorporated herein by reference). 
        
        2.3          Agreement and Plan of Reorganization dated as of August 15,
                     1996 among Telecom*USA Publishing Group, Inc. and McLeod,
                     Inc. (Filed as Exhibit 2 to Current Report on Form 8-K,
                     File No. 0-20763, filed with the Commission on August 26,
                     1996 and incorporated herein by reference).

        2.4          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).


                                      52
<PAGE>
 
       Exhibit 
       Number                         Exhibit Description
       -------                        ------------------

        2.5          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).

        2.6          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).

        3.1          Amended and Restated Certificate of Incorporation of
                     McLeod, Inc. (Filed as Exhibit 3.1 to Initial Form S-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.

        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 10 1/2% 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 10 1/2% 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 10 1/2% 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          Registration Agreement dated March 4, 1997 among McLeod,
                     Inc., Salomon Brothers Inc. and Morgan Stanley & Co.
                     Incorporated. (Filed as Exhibit 4.5 to the 1996 Form 10-K
                     and incorporated herein by reference).

        4.6          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).

        4.7          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).

        4.8          Form of 10 1/2% 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).


                                      53
<PAGE>
 
       Exhibit  
       Number                        Exhibit Description
       -------                       -------------------

        4.9          Indenture dated as of July 21, 1997 between McLeodUSA
                     Incorporated and United States Trust Company of New York,
                     as Trustee, relating to the 9 1/4% Senior Notes Due 2007 of
                     McLeodUSA Incorporated. (Filed as Exhibit 4.9 to the July
                     1997 Form S-4 and incorporated herein by reference).

        4.10         Form of Initial Global 9 1/4% Senior Note Due 2007 of
                     McLeodUSA Incorporated (Filed as Exhibit 4.10 to the July
                     1997 Form S-4 and incorporated by reference).

        4.11         Registration Agreement dated July 21, 1997 among McLeodUSA
                     Incorporated, Salomon Brothers Inc., Morgan Stanley Dean
                     Witter and Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11
                     to the July 1997 Form S-4 and incorporated herein by
                     reference).

        4.12         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 thereto. (Filed as Exhibit 4.12 to the July 1997
                     Form S-4 and incorporated herein by reference).

        4.13         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., Clarke E. McLeod, Mary E. McLeod and
                     Richard A. Lumpkin on behalf of each of the shareholders of
                     Consolidated Communications Inc. listed on Schedule 1
                     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).

        4.14         Form of 9 1/4% Senior Exchange Note due 2007 of McLeodUSA
                     Incorporated (contained in the Indenture filed as Exhibit
                     4.9 to the July 1997 Form S-4 and incorporated herein by
                     reference).

        10.1         Credit Agreement dated as of May 16, 1994 among McLeod,
                     Inc., McLeod Network Services, Inc., McLeod Telemanagement,
                     Inc., McLeod Telecommunications, Inc. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.1 to Initial
                     Form S-1 and incorporated herein by reference).

        10.2         First Amendment to Credit Agreement dated as of June 17,
                     1994 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc. and The First National Bank of Chicago. (Filed as
                     Exhibit 10.2 to Initial Form S-1 and incorporated herein by
                     reference).

        10.3         Second Amendment to Credit Agreement dated as of December
                     1, 1994 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc. and The First National Bank of Chicago. (Filed as
                     Exhibit 10.3 to Initial Form S-1 and incorporated herein by
                     reference).

       10.4          Third Amendment to Credit Agreement dated as of May 31,
                     1995 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc., MWR Telecom, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.4 to Initial Form S-1 and
                     incorporated herein by reference).

       10.5          Fourth Amendment to Credit Agreement dated as of July 28,
                     1995 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc., MWR Telecom, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.5 to Initial Form S-1 and
                     incorporated herein by reference).

       10.6          Fifth Amendment to Credit Agreement dated as of October 18,
                     1995 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc., MWR Telecom, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.6 to Initial Form S-1 and
                     incorporated herein by reference).


                                      54
<PAGE>
 
      Exhibit         
      Number                         Exhibit Description
      -------                        -------------------

       10.7          Sixth Amendment to Credit Agreement dated as of March 29,
                     1996 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telecommunications, Inc., MWR Telecom, Inc. and The
                     First National Bank of Chicago. (Filed as Exhibit 10.7 to
                     Initial Form S-1 and incorporated herein by reference).

       10.8          Security Agreement dated as of May 16, 1994 among McLeod,
                     Inc., McLeod Network Services, Inc., McLeod Telemanagement,
                     Inc., McLeod Telecommunications, Inc. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.8 to Initial
                     Form S-1 and incorporated herein by reference).

       10.9          First Amendment to Security Agreement dated as of December
                     1, 1994 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc. and The First National Bank of Chicago. (Filed as
                     Exhibit 10.9 to Initial Form S-1 and incorporated herein by
                     reference).

       10.10         Support Agreement dated as of December 1, 1994 among IES
                     Diversified Inc., McLeod, Inc., McLeod Network Services,
                     Inc., McLeod Telemanagement, Inc., McLeod
                     Telecommunications, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.10 to Initial Form S-1 and
                     incorporated herein by reference).

       10.11         Agreement Regarding Support Agreement dated December 1994
                     between McLeod, Inc. and IES Diversified Inc. (Filed as
                     Exhibit 10.11 to Initial Form S-1 and incorporated herein
                     by reference).

       10.12         Agreement Regarding Guarantee dated May 16, 1994 between
                     McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit
                     10.12 to Initial Form S-1 and incorporated herein by
                     reference).

       10.13         Joinder to and Assumption of Credit Agreement dated as of
                     April 28, 1995 between McLeod Merging Co. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.13 to
                     Initial Form S-1 and incorporated herein by reference).

       10.14         Joinder to and Assumption of Security Agreement dated as of
                     April 28, 1995 between McLeod Merging Co. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.14 to
                     Initial Form S-1 and incorporated herein by reference).

       10.15         Letter from The First National Bank of Chicago to James L.
                     Cram dated April 28, 1995 regarding extension of the
                     termination date under the Credit Agreement. (Filed as
                     Exhibit 10.15 to Initial Form S-1 and incorporated herein
                     by reference).

       10.16         Credit Agreement dated as of March 29, 1996 among McLeod,
                     Inc., McLeod Network Services, Inc., McLeod Telemanagement,
                     Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc.
                     and The First National Bank of Chicago. (Filed as Exhibit
                     10.16 to Initial Form S-1 and incorporated herein by
                     reference).

       10.17         Agreement for Construction Related Services dated as of
                     October 17, 1995 between City Signal Fiber Services, Inc.
                     and McLeod Network Services, Inc. (Filed as Exhibit 10.17
                     to Initial Form S-1 and incorporated herein by reference).

       10.18         Construction Services Agreement dated March 27, 1996
                     between City Signal Fiber Services, Inc. and McLeod Network
                     Services, Inc. (Filed as Exhibit 10.18 to Initial Form S-1
                     and incorporated herein by reference).

       10.19         Fiber Optic Use Agreement dated as of February 14, 1996
                     between McLeod Network Services, Inc. and Galaxy Telecom,
                     L.P. (Filed as Exhibit 10.19 to Initial Form S-1 and
                     incorporated herein by reference).

       10.20         Agreement dated as of July 11, 1994 between McLeod Network
                     Services, Inc. and KLK Construction. (Filed as Exhibit
                     10.20 to Initial Form S-1 and incorporated herein by
                     reference).

                                      55
<PAGE>
 
       Exhibit
       Number                         Exhibit Description  
       ------                         -------------------

       10.21         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).

       10.22         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).

       10.23         Contract dated September 5, 1995 between Iowa
                     Telecommunications and Technology Commission and MWR
                     Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1
                     and incorporated herein by reference).

       10.24         Contract dated June 27, 1995 between Iowa National Guard
                     and McLeod Network Services, Inc. (Filed as Exhibit 10.24
                     to Initial Form S-1 and incorporated herein by reference).

       10.25         Addendum Number One to Contract dated September 5, 1995
                     between Iowa National Guard and McLeod Network Services,
                     Inc. (Filed as Exhibit 10.25 to Initial Form S-1 and
                     incorporated herein by reference).

       10.26         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).

       10.27         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).

       10.28         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).

       10.29         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).

       10.30         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).

       10.31         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).

        10.32        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).

        10.33        Uniform Purchase Agreement dated July 22, 1993 between
                     McLeod, Inc. and Hill's Maple Crest Farms Partnership.
                     (Filed as Exhibit 10.33 to Initial Form S-1 and
                     incorporated herein by reference).

        10.34        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).

        10.35        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).

                                      56
<PAGE>
 
       Exhibit 
       Number                         Exhibit Description
       -------                        -------------------

        10.36        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).

        10.37        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).

        10.38        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).

        10.39        Agreement dated August 4, 1995 between Vadacom, Inc. and
                     McLeod Telemanagement, Inc. (Filed as Exhibit 10.39 to
                     Initial Form S-1 and incorporated herein by reference).

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

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

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

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

       10.44         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).

       10.45         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).

       10.46         Agreement dated April 28, 1995 among McLeod, Inc., McLeod
                     Telecommunications, Inc., McLeod Telemanagement, Inc.,
                     McLeod Network Services, Inc. and Clark E. McLeod. (Filed
                     as Exhibit 10.46 to Initial Form S-1 and incorporated
                     herein by reference).

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

        10.48        Amendment to Contract Addendum A to Contract No. 2102 dated
                     March 31, 1993 between the Iowa Department of General
                     Services and McLeod Telecommunications, Inc. (Filed as
                     Exhibit 10.48 to Initial Form S-1 and incorporated herein
                     by reference).

        10.49        Construction Services Agreement dated June 30, 1995 between
                     MFS Network Technologies, Inc. and MWR Telecom, Inc. (Filed
                     as Exhibit 10.49 to Initial Form S-1 and incorporated
                     herein by reference).

        10.50        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).

        10.51        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).

        10.52        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).

                                      57
<PAGE>
 
       Exhibit
       Number                        Exhibit Description
       -------                       -------------------

        10.53        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).

        10.54        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).

        10.55        McLeod, Inc. 1996 Employee Stock Option Plan, as amended.

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

        10.57        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).

        10.58        License Agreement dated April 24, 1996 between PageMart,
                     Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.58 to
                     Initial Form S-1 and incorporated herein by reference).

        10.59        Assignment of Purchase Agreement dated August 15, 1996
                     between Ryan Properties, Inc. and McLeod, Inc. (Filed as
                     Exhibit 10.59 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.60        Assignment of Purchase Agreement dated August 14, 1996
                     between Ryan Properties, Inc. and McLeod, Inc. (Filed as
                     Exhibit 10.60 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.61        Asset Purchase Agreement dated September 4, 1996 between
                     Total Communication Services, Inc. and McLeod
                     Telemanagement, Inc. (Filed as Exhibit 10.61 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.62        First Amendment to Asset Purchase Agreement dated September
                     30, 1996 between Total Communication Services, Inc. and
                     McLeod Telemanagement, Inc. (Filed as Exhibit 10.62 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

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

        10.64        Amended and Restated Credit Agreement dated as of May 5,
                     1995 among Telecom*USA Publishing Group, Inc., Telecom*USA
                     Publishing Company and Telecom*USA 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).

        10.65        First Amendment to Amended and Restated Credit Agreement
                     dated as of January 31, 1996 by and between Telecom*USA
                     Publishing Group, Inc., Telecom*USA Publishing Company and
                     Telecom*USA 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).

        10.66        Lease Agreement dated as of September 26, 1994 between Ryan
                     Properties, Inc. and Ruffalo, Cody & Associates, Inc.
                     (Filed as Exhibit 10.66 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.67        First Lease Amendment dated as of April 12, 1995 between
                     Ryan Properties, Inc. and Ruffalo, Cody & Associates, Inc.
                     (Filed as Exhibit 10.67 to the November 1996 Form S-1 and
                     incorporated herein by reference).

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

                                      58
<PAGE>
 
     Exhibit
      Number                        Exhibit Description
     -------                        -------------------

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

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

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

        10.72        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).

        10.73        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).

        10.74        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).

        10.75        Option Agreement dated April 27, 1995 between Fronteer
                     Directory Company, Inc. and Telecom*USA Publishing Company.
                     (Filed as Exhibit 10.75 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.76        Promissory Note dated May 5, 1995 between Telecom*USA
                     Publishing Company and Fronteer Directory Company, Inc.
                     (Filed as Exhibit 10.76 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.77        Security Agreement dated May 5, 1995 between Telecom*USA
                     Publishing Company and Fronteer Directory Company, Inc.
                     (Filed as Exhibit 10.77 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.78        Design/Build Construction Contract dated September 17, 1996
                     between Ryan Construction Company of Minnesota, Inc. and
                     McLeod, Inc. (Filed as Exhibit 10.78 to the November 1996
                     Form S-1 and incorporated herein by reference).

        10.79        Guaranty Agreement dated as of October 17, 1996 by McLeod,
                     Inc. in favor of Kirkwood Community College. (Filed as
                     Exhibit 10.79 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.80        Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod
                     Telemanagement, Inc. (Filed as Exhibit 10.80 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.81        Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod
                     Telecommunications, Inc. (Filed as Exhibit 10.81 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.82        Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod
                     Network Services, Inc. (Filed as Exhibit 10.82 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.83        Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod,
                     Inc. (Filed as Exhibit 10.83 to the November 1996 Form S-1
                     and incorporated herein by reference).

        10.84        Change Order No. 1 to the Construction Services Agreement
                     dated November 22, 1995 by and between MWR TeIecom, Inc.
                     and MFS Network Technologies, Inc. (Filed as Exhibit 10.84
                     to the November 1996 Form S-1 and incorporated herein by
                     reference).

                                       59
<PAGE>
 
     Exhibit
      Number                        Exhibit Description
     -------                        -------------------

        10.85        Change Order No. 2 to the Construction Services Agreement
                     dated August 14, 1996 between MWR Telecom, Inc. and MFS
                     Network Technologies, Inc. (Filed as Exhibit 10.85 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.86        Change Order No. 3 to the Construction Services Agreement
                     dated October 31, 1996 between MWR Telecom, Inc. and MFS
                     Network Technologies, Inc. (Filed as Exhibit 10.86 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.87        Independent Contractor Sales Agreement dated May, 1995
                     between Sprint Communications Company L.P. and Ruffalo,
                     Cody & Associates, Inc. (Filed as Exhibit 10.87 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.88        Second Amendment to Asset Purchase Agreement dated October
                     31, 1996 between Total Communication Services, Inc. and
                     McLeod Telemanagement, Inc. (Filed as Exhibit 10.88 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.89        Escrow Agreement dated July 15, 1996 among McLeod, Inc.,
                     certain shareholders of Ruffalo, Cody & Associates, Inc.,
                     Albert P. Ruffalo and Norwest Bank N.A. (Filed as Exhibit
                     10.89 to the November 1996 Form S-1 and incorporated herein
                     by reference).

        10.90        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).

        10.91        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).

        10.92        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).

        10.93        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).

       +10.94        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).

        10.95        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).

        10.96        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).

        10.97        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).

        10.98        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).

                                       60
<PAGE>
 
     Exhibit
      Number                        Exhibit Description
     -------                        -------------------

        10.99        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)

        10.100       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)

        11.1         Statement regarding Computation of Per Share Earnings.

        16.1         Letter regarding Change in Certifying Accountant.

        21.1         Subsidiaries of McLeodUSA Incorporated.

        23.1         Consent of Arthur Andersen LLP.

        27.1         Financial Data Schedule

        99.1         Purchase Agreement dated as of August 15, 1996 between Iowa
                     Land and Building Company and Ryan Properties, Inc. (Filed
                     as Exhibit 99.1 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        99.2         Purchase Agreement dated as of June 28, 1996 between Donald
                     E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek and Ryan
                     Properties, Inc. (Filed as Exhibit 99.2 to the November
                     1996 Form S-1 and incorporated herein by reference).

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

         (b)      Reports on Form 8-K.

         On October 9, 1997, the Company filed a Current Report on Form 8-K to
report the acquisition on September 24, 1997 of CCI in exchange for 8,488,596
shares of Class A Common Stock and approximately $155 million in cash. The Form
8-K included the relevant financial statements of CCI. The Form 8-K was amended
on November 24, 1997 to include the relevant pro forma financial information for
the Company.

         (c)      Exhibits.

         The Company hereby files 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
the Consolidated Financial Statements of the Company or notes thereto.

                                       61
<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 the Company to connect its
network to the LECs 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
pursuant to 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 lines 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).

         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.
Portions of this order have been vacated by the U.S. Eighth Circuit Court of
Appeals.

         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 

                                       62
<PAGE>
 
LATAs; the State of Illinois contains all or part of 17 LATAs. There are
approximately 200 LATAs in the United States.

         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.

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

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

         Reciprocal compensation--The same compensation of a new competitive
local exchange carrier for termination of a local call by the local exchange
carrier on its network, as the new competitor pays the local exchange carrier
for termination of local calls on the local exchange carrier 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.

         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.

                                       63
<PAGE>
 
         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.

                                       64
<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 6, 1998


         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 and on the dates indicated.

<TABLE> 
<CAPTION> 

              Signature                                      Title                                  Date
              ---------                                      -----                                  ----
<S>                                     <C>                                                     <C> 
         /s/ Clark E. McLeod            Chairman, Chief Executive Officer and Director          March 6, 1998
------------------------------------       (Principal Executive Officer) 
         Clark E. McLeod                   

         /s/ Richard A. Lumpkin         Vice Chairman and Director                              March 6, 1998
------------------------------------
         Richard A. Lumpkin

         /s/ Stephen C. Gray            President, Chief Operating Officer and Director         March 6, 1998
------------------------------------
         Stephen C. Gray

       /s/ Blake O. Fisher, Jr.         Chief Financial and Administrative Officer,             March 6, 1998
------------------------------------        Treasurer and Director (Principal Financial 
       Blake O. Fisher, Jr.                 Officer)                                     
                                           

      /s/ Joseph H. Ceryanec            Vice President, Finance, Corporate Controller           March 6, 1998
------------------------------------        and Principal Accounting Officer (Principal
      Joseph H. Ceryanec                    Accounting Officer)                         
                                           

       /s/ Thomas M. Collins            Director                                                March 6, 1998
------------------------------------
       Thomas M. Collins

       /s/ Robert J. Currey             Director                                                March 6, 1998
------------------------------------
       Robert J. Currey

              /s/ Lee Liu               Director                                                March 6, 1998
------------------------------------
              Lee Liu

         /s/ Paul D. Rhines             Director                                                March 6, 1998
------------------------------------
         Paul D. Rhines

     /s/ Ronald W. Stepien              Director                                                March 6, 1998
---------------------------
     Ronald W. Stepien
</TABLE> 

                                      65
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 

MCLEODUSA INCORPORATED AND SUBSIDIARIES
<S>                                                                                                          <C> 
Report of Independent Public Accountants...................................................................  F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996...............................................  F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.................  F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.......  F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.................  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 and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.



                                     ARTHUR ANDERSEN LLP



Chicago, Illinois
January 28, 1998

                                      F-2
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                         (In thousands, except shares)

<TABLE> 
<CAPTION> 
                                                                                                December 31,
                                                                                          ------------------------
                                                                                             1997          1996
                                                                                          ----------    ----------
<S>                                                                                       <C>           <C> 
                                          ASSETS
Current Assets
    Cash and cash equivalents...........................................................  $  331,941    $   96,480
    Investment in available-for-sale securities.........................................      34,696        80,518
    Trade receivables, net..............................................................     108,472        27,560
    Inventory...........................................................................       3,992         1,600
    Deferred expenses...................................................................      27,641        12,156
    Prepaid expenses and other..........................................................      11,127         6,087 
                                                                                          ----------    ----------
        Total current assets............................................................     517,869       224,401
                                                                                          ----------    ----------
                                                                                             

Property and Equipment
    Land and building...................................................................      35,420         2,246
    Telecommunications networks.........................................................     198,046        32,041
    Furniture, fixtures and equipment...................................................      70,579        22,302
    Networks in progress................................................................      81,432        35,481
    Building in progress................................................................      10,002         6,103
                                                                                          ----------    ----------
                                                                                             395,479        98,173
    Less accumulated depreciation.......................................................      21,675         6,050
                                                                                          ----------    ----------
                                                                                             373,804        92,123
                                                                                          ----------    ----------

Investments, Intangibles and Other Assets
    Investment in available-for-sale securities.........................................         --         47,474
    Other investments...................................................................      30,189           250
    Goodwill, net.......................................................................     273,359        57,012
    Other intangibles, net..............................................................      97,935        25,915
    Other...............................................................................      52,496         5,819 
                                                                                             453,979       136,470
                                                                                          ----------    ----------
                                                                                             
                                                                                          $1,345,652    $  452,994
                                                                                          ==========    ==========

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
    Current maturities of long-term debt................................................  $    6,004    $      793
    Contracts and notes payable.........................................................       6,556           --
    Accounts payable....................................................................      45,354        15,807
    Accrued payroll and payroll related expenses........................................      21,454         7,259
    Other accrued liabilities...........................................................      36,793         3,095
    Deferred revenue, current portion...................................................      10,381         1,793
    Customer deposits...................................................................      12,710         9,686
                                                                                          ----------    ----------
        Total current liabilities.......................................................     139,252        38,433
                                                                                          ----------    ----------
Long-Term Debt, less current maturities.................................................     613,384         2,573
                                                                                          ----------    ----------
Deferred Revenue, less current portion..................................................      12,664         8,559
                                                                                          ----------    ----------
Other Long-term liabilities.............................................................      20,973           --
                                                                                          ----------    ----------

Stockholders' Equity
    Capital stock:
        Common, Class A, $.01 par value; authorized 250,000,000 shares; issued and
          outstanding 1997 61,799,412 shares and 1996 36,172,817 shares.................         618           362
        Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares;
          issued and outstanding 1997 none; 1996 15,625,929 shares......................         --            156
    Additional paid-in capital..........................................................     688,964       450,736
    Accumulated deficit.................................................................
                                                                                            (127,735)      (47,825)
    Unrealized loss on investments held by Consolidated Communications, Inc. ("CCI"). ..      (2,468)          --
                                                                                          ----------    ----------
                                                                                             559,379       403,429
                                                                                          ----------    ----------
                                                                                          $1,345,652    $  452,994
                                                                                          ==========    ==========
</TABLE> 

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

                                      F-3
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE> 
<CAPTION> 

                                                                                     Year Ended December 31,

                                                                                1997         1996         1995
                                                                              --------     --------     --------
<S>                                                                          <C>          <C>          <C> 
Revenue:
   Telecommunications:
     Local and long distance ............................................    $ 110,023    $  41,399    $  21,474
     Local exchange services.............................................       16,117           --           --
     Private line and data...............................................       17,174       10,272        2,551
     Network maintenance and equipment...................................       20,965        5,936        4,973
     Other telecommunications............................................        9,907           --           --
                                                                             ---------    ---------    ---------
          Total telecommunications revenue...............................      174,186       57,607       28,998
   Directory.............................................................       81,055       15,152           --
   Telemarketing.........................................................       12,645        8,564           --
                                                                             ---------    ---------    ---------
          Total revenue..................................................      267,886       81,323       28,998

Operating expenses:
   Cost of service.......................................................      155,430       52,624       19,667
   Selling, general and administrative...................................      143,918       46,044       18,054
   Depreciation and amortization.........................................       33,275        8,485        1,835
   Other.................................................................        4,632        2,380           --
                                                                             ---------    ---------    ---------
          Total operating expenses.......................................      337,255      109,533       39,556
                                                                             ---------    ---------    ---------

          Operating loss.................................................      (69,369)     (28,210)     (10,558)
                                                                             ---------    ---------    ---------

Nonoperating income (expense):
   Interest income.......................................................       22,660        6,034          139
   Interest (expense)....................................................      (34,627)        (665)        (910)
   Other income..........................................................        1,426          495           --
                                                                             ---------    ---------    ---------
          Total nonoperating income (expense)............................      (10,541)       5,864         (771)
                                                                             ---------    ---------    ---------

          Loss before income taxes.......................................      (79,910)     (22,346)     (11,329)

Income taxes.............................................................            --          --           --
                                                                             ---------    ---------    ---------
          Net loss.......................................................    $ (79,910)   $ (22,346)   $ (11,329)
                                                                             =========    =========    =========
Loss per common share....................................................    $   (1.45)   $   (0.55)   $   (0.40)
                                                                             =========    =========    =========
Weighted average common shares outstanding...............................       54,974       40,506       28,004
                                                                             =========    =========    =========
</TABLE> 


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

                                      F-4
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 Years Ended December 31, 1997, 1996 and 1995
                         (In thousands, except shares)

<TABLE> 
<CAPTION> 

                                                   Common Stock        Additional               Unrealized
                                                   ------------         Paid-In    Accumulated   Loss on     Treasury
                                               Class A     Class B      Capital      Deficit    Investments    Stock        Total
                                              ---------   ---------   ----------   ----------   ----------   ----------   ----------
<S>                                           <C>         <C>         <C>          <C>          <C>          <C>          <C> 
Balance, December 31, 1994....................$     145   $      76   $   17,253   $  (14,150)  $       --   $      (33)  $   3,291
  Net loss....................................       --          --           --      (11,329)          --           --     (11,329)
  Issuance of 1,908,600 shares of Class A
    common stock..............................       19          --        4,278           --           --           --       4,297
  Issuance of 4,279,414 shares of Class B
    common stock..............................       --          43        9,652           --           --           --       9,695
  Issuance of 3,676,058 shares of Class B
    common stock in connection with the
    acquisition of MWR Telecom Inc............       --          37        8,296           --           --           --       8,333
  Reissuance of 22,500 shares of treasury
    stock.....................................       --          --            6           --           --           33          39
  Amortization of fair value of stock options
    issued to nonemployees....................       --          --          632           --           --           --         632
                                              ---------   ---------   ----------   ----------   ----------   ----------   ----------
Balance, December 31, 1995....................      164         156       40,117      (25,479)          --           --      14,958
  Net loss....................................       --          --           --      (22,346)          --           --     (22,346)
  Issuance of 19,424,316 shares of Class A
    common stock..............................      194          --      396,020           --           --           --     396,214
  Issuance of 361,420 shares of Class A common
    stock in connection with the acquisition
    of Ruffalo, Cody & Associates, Inc........        4          --        8,941           --           --           --       8,945
  Options to purchase 158,009 shares of Class A
    common stock granted in connection with the
    acquisition of Ruffalo, Cody & Associates, 
    Inc., less cash to be received upon 
    exercise of options.......................       --          --        3,301           --           --           --      3,301
  Amortization of fair value of stock options
    issued to nonemployees....................       --          --          341           --           --           --        341
  Amortization of compensation expense related to
    stock options.............................       --          --        2,016           --           --           --      2,016
                                              ---------   ---------   ----------   ----------   ----------   ----------   ----------
Balance, December 31, 1996....................      362         156      450,736      (47,825)          --           --     403,429
  Net loss....................................       --          --           --      (79,910)          --           --     (79,910)
  Issuance of 1,137,883 shares of Class A
    common stock..............................       11          --          881           --           --           --         892
  Release of 56,177 shares of Class A common
    stock from escrow.........................        1          --        1,346           --           --           --       1,347
  Issuance of 84,430 shares of Class A common
    stock in connection with the acquisition of       
    Digital Communications of Iowa, Inc.......        1          --        2,249           --           --           --       2,250 
  Issuance of 8,488,596 shares of Class A
    common stock in connection with the
    acquisition of CCI........................       85          --      223,590           --           --           --     223,675
  Issuance of 55,500 shares of Class A common
    stock in connection with the acquisition of
    certain assets of OneTEL Corp.............        1          --        1,962           --           --           --       1,963
  Issuance of 140,000 shares of Class A
    common stock in connection with the
    acquisition of ownership interests of
    Colorado Directory Company LLC............        1          --        4,479           --           --           --       4,480
  Issuance of 38,080 shares of Class A common
    stock to participants in the Employee Stock
    Purchase Plan.............................       --          --          728           --           --           --         728
  Conversion of 15,625,929 shares of Class B
    common stock to 15,625,929 shares of Class A
    common stock..............................      156        (156)          --           --           --           --          --
  Amortization of compensation expense related to
    stock options.............................       --          --        2,993           --           --           --       2,993
  Adjustment to record investments in available-
    for-sale securities at fair market value..       --          --           --           --       (2,468)          --      (2,468)
                                              ---------   ---------   ----------   ----------   ----------   ----------   ----------
Balance, December 31, 1997....................$     618   $      --   $  688,964   $ (127,735)  $   (2,468)  $       --   $ 559,379
                                              =========   =========   ==========   ==========   ==========   ==========   ==========

</TABLE> 

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

                                      F-5
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)


<TABLE> 
<CAPTION> 
                                                                                           Year Ended December 31,
                                                                                         1997         1996          1995
                                                                                     -----------   -----------   ----------- 
<S>                                                                                  <C>           <C>           <C> 
Cash Flows from Operating Activities
  Net loss........................................................................   $  (79,910)   $   (22,346)  $   (11,329)
  Adjustments to reconcile net loss to net cash (used in) operating activities:
    Depreciation..................................................................       17,622          3,944         1,299
    Amortization..................................................................       15,653          4,882         1,168
    Accretion of interest on senior discount notes................................       26,754            --            --
    Changes in assets and liabilities, net of effects of acquisitions:                                          
      (Increase) in trade receivables.............................................      (15,937)        (9,317)       (3,575)
      (Increase) in inventory.....................................................         (773)            (2)         (269)
      Decrease in deferred expenses...............................................        1,218          1,966           --
      (Increase) in deferred line installation costs..............................       (9,669)        (1,289)         (806)
      Increase in accounts payable and accrued expenses...........................       27,117          3,192         4,084
      Increase in deferred revenue................................................        7,186          9,505             9
      Increase in customer deposits...............................................        3,024          1,366            11
      Other, net..................................................................       (1,041)        (3,703)          (70)
                                                                                     -----------   -----------   ----------- 
        Net cash (used in) operating activities...................................       (8,756)       (11,802)       (9,478)
                                                                                     -----------   -----------   ----------- 

Cash Flows from Investing Activities
  Purchase of property and equipment..............................................      (151,280)      (70,290)       (5,272)
  Available-for-sale securities:                                                                                 
    Purchases.....................................................................      (115,985)     (207,681)          --
    Sales.........................................................................       102,368        17,577           --
    Maturities....................................................................       133,817        62,389           --
  Business acquisitions...........................................................      (181,892)      (80,081)          --
  Deposits on PCS licenses........................................................       (27,975)       (4,889)          --
  Other...........................................................................        (1,863)         (133)         (266)
                                                                                     -----------   -----------   ----------- 
        Net cash (used in) investing activities...................................      (242,810)     (283,108)       (5,538)
                                                                                     -----------   -----------   ----------- 

Cash Flows from Financing Activities
  Proceeds from line of credit agreements.........................................           --         55,925        42,200
  Payments on line of credit agreements...........................................           --        (59,825)      (42,100)
  Payments on contracts and notes payable.........................................       (18,967)          --            --
  Proceeds from long-term debt....................................................       506,626         2,060           --
  Payments on long-term debt......................................................        (2,252)       (2,065)          --
  Net proceeds from issuance of common stock......................................         1,620       396,214        13,992
  Reissuance of treasury stock....................................................           --            --             39
  Other...........................................................................                              
                                                                                             --           (919)          885
                                                                                     -----------   -----------   ----------- 

        Net cash provided by financing activities.................................       487,027       391,390        15,016
                                                                                     -----------   -----------   ----------- 

        Net increase (decrease) in cash and cash equivalents......................       235,461        96,480           --
Cash and cash equivalents:
  Beginning.......................................................................        96,480            --           --
                                                                                     -----------   -----------   ----------- 

  Ending..........................................................................   $   331,941   $    96,480   $       --
                                                                                     ===========   ===========   =========== 

Supplemental Disclosure of Cash Flow Information
  Cash payment for interest, net of interest capitalized 1997 $4,440; 1996 $204,
    1995 $62......................................................................   $     1,764   $       300   $       261
                                                                                     ===========   ===========   =========== 
Supplemental Schedule of Noncash Investing and Financing Activities
  Release of 56,177 shares of Class A common stock from escrow ...................   $     1,347
                                                                                     ===========   

  Capital leases incurred for the acquisition of property and equipment ..........   $     3,367
                                                                                     ===========   
</TABLE> 

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

                                      F-6
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Nature of Business and Significant Accounting Policies

     Nature of business: The Company is a diversified telecommunications
company, incorporated in Delaware, that provides a broad range of products and
services to business customers in Iowa, Illinois, North Dakota, South Dakota,
Minnesota, Indiana, Colorado and Wyoming and residential customers in Iowa,
Illinois, North Dakota, South Dakota, Wisconsin and Colorado. The Company's
services primarily include local and long-distance telecommunications services,
telecommunications network maintenance services and telephone equipment sales,
service and installation, private line and data services, the sale of
advertising space in telephone directories, the operation of an independent
local exchange company, 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"). The provisions of SFAS No. 71 require,
among other things, that regulated enterprises reflect rate actions of
regulators in their financial statements, when appropriate. These rate actions
can provide reasonable assurance of the existence of an asset, reduce or
eliminate the value of an asset, or impose a liability on a regulated
enterprise. SFAS No. 71 also specifies that the actions of a regulator can
eliminate only liabilities imposed by the regulator.

     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, net of the related deferred
tax effect, are reported as a component of stockholders' equity. Realized gains
and losses are determined on the basis of the specific securities sold.

     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, 1996 and 1997 will be collected within one
year (see Note 2).

                                      F-7
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1.   Nature of Business and Significant Accounting Policies--(Continued)

     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.

     Property and equipment: Property and equipment is stated at cost.
Construction costs, including interest, are capitalized during the installation
of fiber optic telecommunications networks and the construction of the Company's
headquarters buildings.

     ICTC's property and equipment for its regulated operations is summarized as
follows at December 31, 1997 (in thousands):

        Telephone plant:
          In service............................................   $ 91,274
          Under construction....................................      2,228
                                                                -----------
                                                                     93,502
          Less accumulated depreciation.........................       (619)
                                                                -----------
                                                                   $ 92,883
                                                                ===========

     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 1997.

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

                                                                     Years
                                                                     -----   
        Buildings.................................................    20-39
        Telecommunications networks...............................     5-15
        Furniture, fixtures and equipment.........................     2-10

     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.

     Other investments: Other investments primarily includes $21,772,000 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 is
periodically reviewed for impairment based upon an assessment of future
operations to ensure that it is appropriately valued. Accumulated amortization
on goodwill totaled $5,834,000 and $1,049,000, at December 31, 1997 and 1996,
respectively.

                                      F-8
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1.   Nature of Business and Significant Accounting Policies--(Continued)

     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 $9,158,000 and $1,830,000 at December 31, 1997 and 1996,
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.

     As allowed by the FCC, ICTC's presubscribed rate of return on interstate
access revenues for 1997 was 11.25%. The FCC further restricted overall
interstate revenues to a maximum 11.50% rate of return on related investments,
or to a maximum of 11.65% rate of return on related investments per any
individual rate 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.

                                      F-9
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1.   Nature of Business and Significant Accounting Policies--(Continued)

     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.

     Stock options issued to employees: In fiscal year 1996, the Company 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. However, as allowed by the new
standard, the Company has elected to continue to measure 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 (see Note 8). 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.

     Loss per common share: In December 1997, the Company adopted the provisions
of SFAS No. 128, Earnings per Share, which specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock. Loss per common share has been computed using
the weighted average number of shares of common stock outstanding after giving
effect to the recapitalization in 1996 (see Note 8) and has been restated
according to the provisions of SFAS No. 128. 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. The fair value of the Company's investment in available-for-sale
securities is disclosed in Note 3. 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 $25.3 million carrying amount of unquoted
investments at December 31, 1997, 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 $661 million 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 1996 consolidated financial
statements have been reclassified to be consistent with the classification in
the 1997 consolidated financial statements.

                                      F-10
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 2.   Trade Receivables

     The composition of trade receivables, net is as follows:

<TABLE> 
<CAPTION> 

                                                                                            December 31,
                                                                                       ---------------------
                                                                                         1997         1996
                                                                                       --------     --------
                                                                                           (In thousands)
        <S>                                                                            <C>          <C> 
        Billed......................................................................   $ 86,309     $ 22,846
        Unbilled....................................................................     34,114        8,613
                                                                                       --------     --------
                                                                                        120,423       31,459
     Less allowance for doubtful accounts and discounts.............................    (11,951)      (3,899)
                                                                                       --------     --------
                                                                                       $108,472     $ 27,560
                                                                                       ========     ========
</TABLE> 

Note 3.   Investments

     At December 31, 1997, the Company held $4,493,000, $94,341,000 and
$27,491,000 in repurchase agreements, corporate debt securities and marketable
equity securities, respectively. At December 31, 1996, the Company held
$147,439,000, $54,759,000 and $7,850,000 in corporate debt securities, United
States Government and governmental agency securities and mortgage-backed
securities, respectively. The Company has classified these securities as
available-for-sale, and at December 31, 1997 and 1996, the debt securities'
amortized cost approximates fair value. The marketable equity securities have
been recorded at their fair market value at December 31, 1997. The
available-for-sale securities have been classified as cash and cash equivalents,
investment in available-for-sale securities-current and investment in
available-for-sale securities-long-term, with $91,629,000, $34,696,000 and none,
respectively, being recorded in each classification at December 31, 1997. At
December 31, 1996, $82,056,000, $80,518,000 and $47,474,000, respectively, were
recorded in each classification.

     The contractual maturities of the available-for-sale securities are as
follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                                            December 31,
                                                                                      ----------------------
                                                                                         1997         1996
                                                                                      ---------    ---------
     <S>                                                                              <C>          <C> 
     Due within one year........................................................      $ 126,325    $ 161,205
     Due after one year through three years.....................................            --        40,731
     Due after three years......................................................            --           262
     Mortgage-backed securities.................................................            --         7,850
                                                                                      ---------    ---------
                                                                                      $ 126,325    $ 210,048
</TABLE> 

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

                                      F-11
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4.   Pledged Assets and Debt

     Debt offerings: On March 4, 1997, the Company completed a private offering
of 10 1/2% Senior Discount Notes (the "Senior Discount Notes") due March 1, 2007
at an original issue discount in which the Company received approximately $288.9
million in net proceeds. The Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the registration of $500 million
principal amount at maturity of 10 1/2% Senior Discount Notes due March 1, 2007
(the "Senior Discount Exchange Notes") to be offered in exchange for the Senior
Discount Notes (the "Senior Discount Exchange Offer"). The registration
statement was declared effective by the SEC on July 28, 1997 and the Senior
Discount Exchange Offer was commenced. The Senior Discount Exchange Offer
expired on August 24, 1997, at which time all of the Senior Discount Notes were
exchanged for the Senior Discount Exchange Notes. The form and terms of the
Senior Discount Exchange Notes are identical in all material respects to the
form and terms of the Senior Discount Notes except that (i) the Senior Discount
Exchange Notes have been registered under the Securities Act of 1933 (the
"Securities Act") and (ii) holders of the Senior Discount Exchange Notes are not
entitled to certain rights under a registration agreement relating to the Senior
Discount Notes. The Senior Discount Exchange 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 of the Company. The Senior Discount Exchange Notes
accrete interest at a rate of 10 1/2% per year, compounded semi-annually, to an
aggregate principal amount of $500 million by March 1, 2002. Interest will not
accrue on the Senior Discount Exchange Notes for five years, after which time
the Senior Discount Exchange Notes will accrue interest at 10 1/2%, payable
semi-annually. The indenture related to the Senior Discount Exchange Notes
contains certain covenants which, among other things, restrict the ability of
the Company to incur additional indebtedness, pay dividends or make
distributions of the Company's or its subsidiaries' stock, enter into sale and
leaseback transactions, create liens, enter into transactions with affiliates or
related persons, or consolidate, merge or sell all of its assets.

     On July 21, 1997, the Company completed a private offering of $225 million
aggregate principal amount of 9 1/4% Senior Notes due July 15, 2007 (the "Senior
Notes"). The Company received net proceeds of approximately $217.7 million from
the Senior Note offering. Interest on the Senior Notes is payable in cash
semi-annually in arrears on July 15 and January 15 of each year at a rate of 9
1/4% per annum, commencing January 15, 1998. The 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 of the Company. As of December 31, 1997, the Senior
Notes had not been registered under the Securities Act and therefore cannot be
offered for resale, resold or otherwise transferred unless so registered or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Company has filed a registration statement with
the SEC for the registration of $225 million aggregate principal amount of 9
1/4% Senior Notes due July 15, 2007 (the "Exchange Notes") to be offered in
exchange for the Senior Notes (the "Exchange Offer"). The registration statement
was declared effective by the SEC on December 1, 1997, and the Exchange Offer
was commenced on December 2, 1997. The Exchange Offer expired on January 9,
1998, at which time all of the Senior Notes were exchanged for the Exchange
Notes. The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Senior Notes except that (i) the Exchange
Notes have been registered under the Securities Act and (ii) holders of the
Exchange Notes will not be entitled to certain rights under a registration
agreement relating to the Senior Notes. The indentures relating to the Senior
Notes and the Exchange Notes contain certain covenants which are materially the
same as the covenants relating to the Senior Discount Exchange Notes.

                                      F-12
<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, 1997 and
     1996:

<TABLE> 
<CAPTION> 
                                                                                            1997       1996
                                                                                         ---------- ---------  
                                                                                            (In thousands)
<S>                                                                                      <C>        <C> 
     Contracts payable, unsecured, non-interest bearing, due in various installments
        with the final payment to be made in 1998....................................... $    1,056 $    --
     Notes payable, banks, bearing interest at 6.1875%, due in various installments
        through October 1997 (A)........................................................      5,500      --  
                                                                                         ---------- ---------  
                                                                                         $    6,556 $    --   
                                                                                         ========== =========  

     10 1/2% Senior Discount Notes...................................................... $  326,754 $ 
     9 1/4% Senior Notes...............................................................     225,000      --
     CCI unsecured senior notes payable, with semiannual interest payments
        at 7.75% payable April 1 and October 1. Annual principal payments
        of $1,428,571 are due beginning October 1, 1998 until maturity in
        October 2004....................................................................     10,000      --
     CCI Series A Senior Unsecured Notes, with semiannual interest payments
        at 6.83% payable June 1 and December 1. Annual principal payments of
        $909,091 are due beginning December 1, 2001 until maturity in
        December 2010...................................................................     10,000      --
     CCI Series B Senior Unsecured Notes, with semiannual interest payments
        at 6.71% payable June 1 and December 1. Annual principal payments
        of $454,546 are due beginning December 1, 2001 until maturity in
        December 2010...................................................................      5,000      --
     Greene County Partners, Inc. senior notes due in quarterly payments of
        $450,000 bearing interest at 6.35% and maturing in April 2001...................     15,300      --
     ICTC Series K, 8.620% First Mortgage Bonds due September 2022 (B)..................     10,000      --
     ICTC Series L, 7.050% First Mortgage Bonds due October 2013 (B)....................     10,000      --
     Note payable, due January 1, 1997, including interest at 6.625%.
        Collateralized by a second lien on publishing rights to purchased
        Directories.....................................................................       --        500
     Contracts payable, to finance company, due in various monthly
        payments, including interest at 3.90%, through March 2000,
        collateralized by equipment with a depreciated cost of
        $2,915,000 at September 30, 1997................................................      2,637      --
     Note payable due in various annual installments, including
        interest at 8.25%, through 2006. Collateralized by publishing
        rights to purchased directories.................................................        995    1,008
     Other long-term borrowings, due in various installments
        bearing interest at rates ranging from 0% to 8.625%
        through March 2004..............................................................      2,092      248
     Incentive compensation agreements, due in various
        estimated amounts plus interest at 6.0% through
        January 2001 (See Note 11)......................................................      1,610    1,610
                                                                                         ---------- ---------  
                                                                                            619,388    3,366 
     Less current maturities............................................................      6,004      793 
                                                                                         ---------- ---------  
                                                                                         $  613,384 $  2,573  
                                                                                         ========== =========       
</TABLE> 

(A)  CCI and ICTC have various short-term line of credit agreements with certain
     financial institutions totaling $25,000,000 of which $5,500,000 in
     borrowings were outstanding at December 31, 1997.

(B)  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.

                                      F-13
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4.   Pledged Assets and Debt--(Continued)

      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 cancelled. 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 $3,400,000, 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. At December 31, 1997 and 1996,
      a total of 1,300,688 Class B common stock options are outstanding.

      The credit facilities required interest payments and facility fees to be
      paid at various rates. Due to the inclusion of the amortization of the
      fair value of these options in interest expense, the effective average
      interest rate on the borrowings under these credit facilities was
      approximately 15% and 27% for the years ended December 31, 1996 and 1995,
      respectively.

     Principal payments required on the outstanding debt at December 31, 1997
are as follows (in thousands):

          1998..............................................       $  6,004
          1999..............................................          5,191
          2000..............................................          5,417
          2001..............................................         13,071
          2002..............................................          3,111
          Later years.......................................        586,594
                                                                   --------
                                                                   $619,388
                                                                   ========

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
December 2003 and require various monthly rentals.

     The total minimum rental commitment at December 31, 1997 under the leases
mentioned above is as follows (In thousands):

          1998..............................................       $ 13,738
          1999..............................................         10,197
          2000..............................................          4,480
          2001..............................................          2,765
          2002..............................................          1,918
          Thereafter........................................          2,987
                                                                   --------
                                                                   $ 36,085
                                                                   ========

     The total rental expense included in the consolidated statements of
operations for 1997, 1996 and 1995 is approximately $8,060,000, $3,640,000 and
$1,558,000, respectively, which also includes short-term rentals for office
facilities.

                                      F-14
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 5.   Leases and Commitments--(Continued)

     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, 1997, the contracts call for
the construction of 224 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 $25,760,000 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, 1997, 1996 and 1995, revenue of $1,794,000,
$445,000 and none, respectively, had been recognized under these contracts.

     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 $11,339,000. 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 as follows (In thousands):

            1998..............................................    $ 7,416
            1999..............................................      3,923
                                                                  -------
                                                                  $11,339
                                                                  =======

     Buildings: In August 1996, the Company purchased approximately 194 acres of
land on which the Company is constructing its headquarters and associated
buildings. Of the land purchased, approximately 75 acres was purchased from a
subsidiary of a stockholder for approximately $692,000. At December 31, 1997,
the total remaining contracted commitments on the building in progress, is
approximately $15.1 million.

                                      F-15
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 6.   Income Tax Matters

     Net deferred taxes consist of the following components as of December 31,
1997 and 1996:

<TABLE> 
<CAPTION> 
                                                                                              1997          1996
                                                                                             -------      --------
                                                                                                (In thousands)
     <S>                                                                                     <C>          <C> 
     Deferred tax assets:
        Net operating loss carryforwards............................................         $60,335      $ 19,419
        Accruals and reserves not currently deductible..............................          15,910         4,033
        Deferred revenues...........................................................           7,093           285
        Intangibles and other assets................................................           3,669           --
        Other.......................................................................           2,125           571
                                                                                             -------      --------
                                                                                              89,132        24,308
        Less valuation allowance....................................................          29,532        16,211
                                                                                             -------      --------
                                                                                              59,600         8,097
                                                                                             -------      --------
     Deferred tax liabilities:
        Property and equipment......................................................          24,620         2,202
        Other investments...........................................................          15,333           --
        Differences in revenue recognition..........................................          12,140           --
        Deferred line installation cost.............................................           3,945           833
        Other intangibles...........................................................           3,318         3,698
        Other..........................................................................          244         1,364
                                                                                             -------      --------
                                                                                              59,600         8,097
                                                                                             -------      --------
                                                                                             $    --      $     --
                                                                                             =======      ========
</TABLE> 

     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 $150.1 million which expire in various amounts in the
years 2008 to 2017.

     The income tax rate differs from the U. S. Federal income tax rate for
1997, 1996 and 1995 due to the following:

<TABLE> 
<CAPTION> 
                                                                                  1997      1996       1995
                                                                               ---------  --------  ---------
     <S>                                                                       <C>        <C>       <C> 
      "Expected"  tax (benefit) rate.........................................     (35)%     (35)%      (35)%
     Percent increase (decrease) in income taxes resulting from:
          Change in valuation allowance......................................      15        35         27
          Tax deductions due to exercises of incentive stock options.........      (2)       (9)        --
          Net deferred liability balance purchased in CCI
             transaction (see Note 11).......................................      21        --         --
          Other..............................................................       1         9          8
                                                                                -----     -----      -----
                                                                                   --%        --%       --%
                                                                                =====     ======     =====
</TABLE> 

                                      F-16
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7.   Stock-based Compensation Plans

     At December 31, 1997, 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 1,653,688
stock options in January and February 1996 at an exercise price of $2.67 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 1,468,945 stock options at an exercise price of $24.50 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 $2,993,000 and $2,016,000 has been charged to income for
the year ended December 31, 1997 and 1996, 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 1997,1996 and 1995, as prescribed by SFAS No.
123, reported net loss and loss per common share would have been as follows (in
thousands, except per share data):

                                                      December 31,
                                            1997         1996          1995
                                         ----------   -----------   ----------
                                        
     Pro forma net loss.................  $(93,855)     $(24,776)    $(11,646)
     Pro forma loss per common share....     (1.71)        (0.61)       (0.42)

     1992, 1993 and 1995 Incentive Stock Option Plans: The Company has reserved
4,215,557 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 37,500,000 shares
from 4,525,000 shares. At December 31, 1997, after adjusting for option
exercises, the Company has reserved 37,396,370 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 options granted under
this plan is the fair market value of the Company's Class A common stock on the
day before the grant date (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, no more than $100,000 worth of stock covered by the options
may become exercisable in any calendar year by an individual employee. The 1996
Plan will terminate in March 2006, unless terminated earlier by the Board of
Directors.

                                      F-17
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7.   Stock-based Compensation Plans --(Continued)

     Directors' Stock Option Plan: The Company has reserved 478,124 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 and amended and restated on March 28, 1996
to be a "formula" plan providing for an automatic grant of options to eligible
directors. Each eligible director who commences service on the Board of
Directors after the amendment and restatement of the plan will be granted an
initial option to purchase 10,000 shares of Class A common stock. An additional
option to purchase 5,000 shares of Class A common stock will be granted after
each of the next two annual meetings to each eligible director who remains for
the two-year period. 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 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 1997, 1996 and 1995,
respectively: no expected dividends, risk-free interest rates of 5.48%, 6.08%
and 6.30%; price volatility of 48.63% in 1997 and 40% in 1996 and 1995 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 1,000,000 shares of Class A common stock through
payroll deductions. Employees of the Company who have been employed more than
six months 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 90% of the closing price of the
Class A common stock on the first or last trading day of the payroll deduction
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 monies 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 38,080
shares of Class A common stock 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 11 months; a risk-free
interest rate of 5.40%; expected volatility of 48.63%; and no expected
dividends. The fair value of each purchase right granted in 1997 was $6.35.

                                      F-18
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7.   Stock-based Compensation Plans --(Continued)

     A summary of the status of the Company's stock option plans as of and for
the years ended December 31, 1997, 1996 and 1995 is as follows (In thousands,
except price data):

<TABLE> 
<CAPTION> 
                                                                                                   Weighted-
                                                                                                    Average
                                                                                                   Exercise
                                                                                        Shares       Price
                                                                                      ---------    ---------
<S>                                                                                   <C>          <C> 
     Outstanding at January 1, 1995.............................................          3,122      $   0.82
          Granted...............................................................          2,006          2.18
          Exercised.............................................................            (11)         0.29
          Forfeited.............................................................           (248)         1.75
                                                                                         ------
     Outstanding at December 31, 1995...........................................          4,869          1.33
          Granted...............................................................          3,502         13.14
          Exercised.............................................................           (491)         1.30
          Forfeited.............................................................           (336)         7.64
                                                                                         ------
     Outstanding at December 31, 1996...........................................          7,544          6.54
          Granted...............................................................          6,674         26.72
          Exercised.............................................................         (1,138)         1.15
          Forfeited.............................................................         (2,472)        29.74
                                                                                         ------
     Outstanding at December 31, 1997...........................................         10,608         14.40
                                                                                         ======
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                      Number of Options
                                                                                      -----------------
                                                                                   1997       1996      1995
                                                                                 ------     ------    ------
<S>                                                                              <C>        <C>       <C> 

     Exercisable, end of year................................................     2,397      2,324     1,581
                                                                                 ======     ======    ======
     Weighted-average fair value per option of options granted
        during the year......................................................    $12.24     $ 5.74    $ 0.86
                                                                                 ======     ======    ======
</TABLE> 

     Other pertinent information related to the options outstanding at December
31, 1997 is as follows (In thousands except life and price data):

<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> 
$0.27 to $1.47...................         1,618            2.54          $  0.79         1,516       $  0.74
$1.73 to $2.93...................         2,958            5.08             2.40           842          2.31
$4.29 to $9.30...................            52            6.65             7.34            27          5.69
$17.75 to $24.75.................         4,426            9.31            20.76            11         20.23
$27.50 to $35.25.................         1,554            9.83            33.58             1         28.82
                                        -------                                        -------
                                         10,608            7.15            14.40         2,397          1.45
                                        =======                                        =======
</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 (see Note 8) and subsequently cancelled. These options have a
weighted-average exercise price of $1.79 and are fully vested at December 31,
1997.

                                      F-19
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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. In March 1996,
the Company's Board of Directors had authorized an increase in the authorized
Class A common stock to 75,000,000 shares of $.01 par value stock from
15,000,000 shares of $.01 par value stock and an increase in the authorized
Class B common stock to 22,000,000 shares of $.01 par value stock from
15,000,000 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. No preferred shares were issued or
outstanding at December 31, 1997. Also in March 1996, the Board of Directors
declared a 3.75 to 1 stock split for both the Class A and Class B common stock
which was effected in the form of a stock dividend. All references to share and
per share amounts give retroactive effect to this stock split and
recapitalization.

     Stockholders' Agreement: Certain of the Company's principal stockholders
have entered into a Stockholders' Agreement, which amended and restated a prior
Investor Agreement, and became effective on September 24, 1997. This agreement
provides for the election of directors designated by certain principal
stockholders and prevents certain principal stockholders from disposing of any
equity securities of the Company for a period of one year unless consented to by
the Board of Directors. In addition, certain principal stockholders agreed that
for a period of two years they will not acquire any securities or options issued
by the Company, except as allowed by previous agreements or by the Board of
Directors.

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.

                                      F-20
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

     The components of pension cost for 1997 are as follows (In thousands):

     Service costs--benefits earned during the period...........  $    655
     Interest cost on projected benefit obligation..............       944
     Actual return on plan assets...............................    (2,085)
     Net amortization and deferral..............................     1,035
                                                                  --------
        Net pension cost........................................  $    549
                                                                  ========
                                                                
The funded status of the pension plans as of December 31, 1997 
is as follows (In thousands): 
                                                                
     Actuarial present value of accumulated benefit obligation: 
        Vested    ..............................................  $ 45,735
        Nonvested                                                      580
                                                                  --------
          Total   ..............................................    46,315
     Additional benefits........................................     5,805
                                                                  --------
     Actuarial present value of projected benefit obligation....    52,120
     Plan assets at fair value..................................    65,694
                                                                  --------
     Plan assets in excess of projected benefit obligation......   (13,574)
     Unrecognized transition obligation.........................       157
     Unrecognized prior service cost............................    (3,425)
     Unrecognized gain on assets................................    22,963
                                                                  --------
          Accrued liability for pensions........................  $  6,121
                                                                  ========

     The assets of the plans consist primarily on equity and fixed income
securities. Actuarial assumptions used to calculate the projected benefit
obligation were a 7% discount rate, a 8% rate of return on plan assets, and an
estimated 5% future compensation level increase.

     In 1997, the Company offered salaried plan participants a choice between
transferring their plan assets to the hourly defined benefit plan or
participating in the 1996 Employee Stock Option Plan, as the salaried defined
benefit plan will be terminated effective April 1, 1998. This plan change
substantially reduced the expected future benefits under the defined benefits
pension plans and has been reflected in the above amounts. 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. Cash payments were
approximately $297,000 in 1997.

                                      F-21
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10.   Retirement Plans and Postretirement Benefits--(Continued)

     The components of postretirement benefit costs for 1997 are as follows (In
thousands):

<TABLE> 
<S>                                                                                                    <C> 
     Service costs--benefits earned during the period..............................................        163
     Interest cost on projected benefit obligation................................................         156
     Actual return on plan assets.................................................................          --
     Net amortization and deferral................................................................          97
                                                                                                       -------
        Net postretirement benefit cost...........................................................     $   416
                                                                                                       =======

     The funded status of the postretirement benefit plans as of December 31, 1997 is as follows (In thousands):

     Fair value of plan assets....................................................................          --
     Accumulated benefit obligation:
        Retirees and beneficiaries................................................................       2,306
        Fully eligible active employees...........................................................         986
        Other active employees....................................................................       1,706
                                                                                                       -------
          Total accumulated postretirement benefit obligation.....................................       4,998
                                                                                                       -------
     Accumulated benefit obligation in excess of plan assets......................................       4,998
     Unrecognized transition obligation (being amortized over 20 years)...........................      (4,733)
     Unrecognized net gain........................................................................       5,852
                                                                                                       -------
          Accrued postretirement benefit cost.....................................................     $ 6,117
                                                                                                       =======
</TABLE> 

     The postretirement benefit obligation is calculated assuming that
health-care costs will increase by 8% in 1998, and that the rate of increase
thereafter (the health-care cost trend rate) will decline to 5% in 2004 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 increase the accumulated
postretirement benefit obligation as of December 31, 1998 by approximately
$347,000 and the aggregate of the service and interest cost components of the
net periodic postretirement benefit cost by approximately $62,000. The weighted
average discount rate used in determining the benefit obligation was 7% in 1997.

     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.

     CCI also 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, 1997 to provide
assets and accumulated earnings to offset the deferred compensation amounts due
to the participating employees.

     In addition, the Company has various 401(k) profit-sharing plans available
to eligible employees. The Company's contributions to the plans are
discretionary. The Company contributed approximately $1,252,000, $242,000 and
$44,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

                                      F-22
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 11.   Acquisitions

     MWR Telecom, Inc. (MWR): On April 28, 1995, the Company issued 3,676,058
shares or approximately $8.3 million of the Company's Class B common stock in
exchange for all of the outstanding common stock of MWR. MWR provides fiber
optics telecommunication services between interexchange carriers and their
customers in the Des Moines, Iowa area. In addition, the Company granted an
option to the seller to purchase 3,529,414 shares of Class B common stock for
$2.27 per share. This option was exercised on June 15, 1995.

     Ruffalo, Cody & Associates, Inc. (Ruffalo Cody): On July 15, 1996, the
Company acquired Ruffalo Cody for a total purchase price of approximately $17.3
million, which consisted of approximately $5.1 million in cash (including
approximately $243,000 in direct acquisition costs), 361,420 shares of Class A
common stock and 158,009 options to purchase shares of Class A common stock
granted to the holders of Ruffalo Cody options. An additional $50,782 in cash
and 56,177 shares of Class A common stock were delivered to certain stockholders
of Ruffalo Cody upon fulfillment certain conditions relating to ongoing revenues
from an agreement with a major long distance carrier to provide telemarketing
services. The long distance carrier terminated this contract effective December
31, 1996.

     McLeodUSA Publishing: On September 20, 1996, the Company acquired McLeodUSA
Publishing for a total purchase price of approximately $76.1 million, which
consisted of approximately $74.5 million in cash (including approximately
$436,000 in direct acquisition costs) and $1.6 million resulting from the
Company entering into an incentive compensation program with all holders of
nonvested McLeodUSA Publishing options, which provides for payments to be made
to these individuals on January 1 of the year following the year in which the
corresponding options would have vested.

     Total Communications Systems, Inc. (TCSI): On December 9, 1996, the Company
purchased the customer base and certain other assets of TCSI for a cash purchase
price of approximately $534,000.

     Digital Communications of Iowa, Inc. (DCI): In January 1997, the Company
issued 84,430 shares of Class A common stock in exchange for all the outstanding
shares of DCI, in a transaction accounted for as a purchase. The total purchase
price was approximately $2.3 million based on the average closing market price
of the Company's Class A common stock at the time of the acquisition.

     Fronteer Financial Holdings, Ltd. (Fronteer): In January 1997, McLeodUSA
Publishing exercised its option to acquire six directories from Fronteer for a
total cash purchase price of approximately $3.9 million.

     Indiana Directories, Inc. (Indiana Directories): On March 31, 1997,
McLeodUSA Publishing acquired 26 telephone directories published by Indiana
Directories for a total cash purchase price of approximately $10 million.

     ESI Communications, Inc. (ESI): On June 10, 1997, the Company acquired
substantially all of the assets of ESI and related entities for an total cash
purchase price of approximately $15.2 million.

     Smart Pages, Inc. and Yellow Pages Publishers, Inc. (Smart Pages): On
September 22, 1997, McLeodUSA Publishing acquired 2 telephone directories
published by Smart Pages, Inc. and Yellow Pages Publishers, Inc. ("Smart Pages")
at a purchase price to be determined based on the sum of the revenues derived
from the last Smart Pages editions of the directories. The purchase price is
currently estimated to be approximately $2 million.

                                     F-23
<PAGE>
 
                     MCLEODUSA INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 11.   Acquisitions--(Continued)

     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 8,488,586 shares of Class A Common Stock 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.

     OneTEL Corp. (OneTEL): On October 15, 1997, the Company issued 55,500
shares of Class A common stock as consideration for certain assets of OneTEL.
The total purchase price was approximately $2 million based on the closing price
of the Company's Class A common stock on the purchase date.

     Colorado Directory Company LLC (Colorado Directory): On December 31, 1997,
the Company issued 140,000 shares of Class A common stock as consideration for
all of the outstanding membership and ownership interests of Colorado Directory.
The total purchase price was approximately $4.5 million based on the closing
price of the Company's Class A common stock on the purchase date.

     The following table summarizes the purchase price allocations for the
Company's business acquisitions:

<TABLE> 
<CAPTION> 

Transaction Year       1995             1996                                                1997
                       ----   ---------------------------   ----------------------------------------------------------------------
                              Ruffalo   McLeodUSA                             Indiana             Smart                    Colorado
                        MWR    Cody     Publishing   TCSI    DCI   Fronteer  Directories   ESI    Pages    CCI    OneTEL   Directory
                       ----   -------   ----------   ----    ---   --------  -----------   ---    -----    ---    ------   ---------
                                                                     (In thousands)
<S>                  <C>      <C>       <C>          <C>   <C>     <C>        <C>        <C>      <C>     <C>      <C>        <C>  
Cash purchase price. $   --   $ 4,808   $   74,060   $534  $  --   $  1,500   $    6,000 $15,228  $  749  $155,000 $    --    $   --
Acquisition costs...     --       243          436     --     29         --           --      --      --     3,379       7        --
Incentive agreements     --        --        1,610     --     --         --           --      --      --        --      --        --
Contracts payable...     --        --           --     --     --      1,867        4,031      --   1,124        --      --        --
Option agreement....     --        --           --     --     --        500           --      --      --        --      --        --
Promissory note.....     --        --           --     --     --         --           --      --     100        --      --        --
Stock issued........  8,333     8,945           --     --  2,250         --           --      --      --   223,675   1,963     4,480
Options to purchase
Class A common stock     --     3,911           --     --     --         --           --      --      --        --      --        --
Less cash to be
received upon option          
exercise............     --      (610)          --     --     --         --           --      --      --        --      --        --
                     ------   -------   ----------   ---- ------   --------   ---------- ------- -------  -------- -------   -------
                     $8,333   $17,297   $   76,106   $534 $2,279   $  3,867   $   10,031 $15,228 $ 1,973  $382,054 $ 1,970   $ 4,480
                     ======   =======   ==========   ==== ======   ========   ========== ======= =======  ======== =======   =======
Working capital
acquired, net....... $  393   $   758   $    8,367   $ 13 $  543   $     --   $      --  $ 2,170 $    --  $ 39,384 $  (300)  $    --
Fair value of other
assets acquired.....  5,298     1,379        4,408     30    658         --         150      493      --   173,045      --        55
Intangibles.........  2,642    15,160       64,315    491  1,118      3,867       9,881   13,336   1,973   251,168   2,270     4,425
Liabilities assumed.     --        --         (984)    __    (40)        --          --     (771)     --   (81,543)     --        --
                     ------   -------   ----------   ---- ------   --------   ---------- ------- -------  -------- -------   -------
                     $8,333   $17,297   $   76,106   $534 $2,279   $  3,867   $   10,031 $15,228 $ 1,973  $382,054 $ 1,970   $ 4,480
                     ======   =======   ==========   ==== ======   ========   ========== ======= =======  ======== =======   =======
</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.

                                     F-24
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 11.   Acquisitions--(Continued)

     The unaudited consolidated results of operations for the years ended
December 31, 1997 and 1996 on a pro forma basis as though the above entities had
been acquired as of the beginning of the respective periods are as follows:

                                                            1997        1996
                                                         ---------   --------- 
                                                             (In thousands,
                                                         except per share data)
     Revenue............................................  $471,436    $397,508
     Net loss...........................................   (86,530)    (19,864)
     Loss per common share..............................     (1.57)      (0.49)

     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 $53,000, $254,000 and
$103,000 and services purchased, primarily rent and legal services, totaled
$1,732,000, $934,000 and $675,000, for the years ended December 31, 1997, 1996
and 1995, respectively.

     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 to be used as a support facility for its fiber optic
network, from a stockholder for a cash purchase price of $500,000.

     In addition, at December 31, 1997 the Company has two $75,000 notes
receivable from officers. The notes bear interest at the applicable federal
interest rate for mid-term loans and require interest-only payments for two
years and then annual $25,000 payments plus interest until paid in full.


                                     F-25
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 (1)
                                                                    -------   --------   -------  -----------
                                                                      (In thousands, except per share data)
     <S>                                                           <C>        <C>        <C>        <C> 
     1997:
        Revenue..................................................  $ 35,747   $ 46,523   $ 49,325   $136,291
        Operating loss...........................................   (15,168)   (15,668)   (20,074)   (18,459)
        Net loss.................................................   (13,355)   (16,496)   (23,705)   (26,354)
        Loss per common share....................................     (0.26)     (0.31)     (0.45)     (0.43)

     1996:
        Revenue..................................................  $ 12,488   $ 13,918   $ 19,091  $  35,826
        Operating loss...........................................    (4,076)    (4,791)    (7,689)   (11,654)
        Net loss.................................................    (4,340)    (4,543)    (4,535)    (8,928)
        Loss per common share....................................     (0.14)     (0.13)     (0.10)     (0.18)
</TABLE> 

(1)  The fourth quarter 1997 results include the operations of CCI, which was
     acquired on September 24, 1997.


                                     F-26
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of 
McLeodUSA Incorporated:

         We have audited, in accordance with generally accepted auditing
standards, the financial statements of McLeodUSA Incorporated included in this
Form 10-K, and have issued our report thereon dated January 28, 1998. 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 28, 1998

                                      S-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, 1995:
   Allowance for uncollectible accounts
     and discounts.........................   $    84,000   $   135,000     $       --   $       --    $   219,000
   Valuation reserve on deferred tax assets     5,411,000     3,007,000             --           --      8,418,000
                                              -----------   -----------     -----------  -----------   -----------
                                              $ 5,495,000   $ 3,142,000     $       --   $       --    $ 8,637,000
                                              ===========   ===========     ===========  ===========   ===========
Year Ended December 31, 1996:
   Allowance for doubtful accounts
     and discounts.........................   $   219,000   $3,680,000(1)   $       --   $       --    $ 3,899,000
   Valuation reserve on deferred tax assets     8,418,000     7,793,000             --           --     16,211,000
                                              -----------   -----------     -----------  -----------   -----------
                                              $ 8,637,000   $11,473,000     $       --   $       --    $20,110,000
                                              ===========   ===========     ===========  ===========   ===========
Year Ended December 31, 1997:
   Allowance for doubtful accounts
     and discounts.........................   $ 3,899,000   $8,052,000(2)   $       --   $       --    $11,951,000
   Valuation reserve on deferred tax assets    16,211,000    10,630,000             --           --     26,841,000
                                              -----------   -----------     -----------  -----------   -----------
                                              $20,110,000   $18,682,000     $       --   $       --    $38,792,000
                                              ===========   ===========     ===========  ===========   ===========

</TABLE> 

(1) Includes $2,768,000 of allowance for doubtful accounts and discounts
    related to acquisitions during the year.
(2) Includes $4,809,000 of allowance for doubtful accounts and discounts related
    to acquisitions during the year.


                                      S-2
<PAGE>
 
                               INDEX TO EXHIBITS

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

        2.1          Agreement and Plan of Reorganization dated April 28, 1995
                     among Midwest Capital Group Inc., MWR Telecom, Inc. and
                     McLeod, Inc. (Filed as Exhibit 2.1 to Registration
                     Statement on Form S-1, File No. 333-3112 ( "Initial Form
                     S-1 "), and incorporated herein by reference).

        2.2          Agreement and Plan of Reorganization dated as of July 12,
                     1996 among Ruffalo, Cody & Associates, Inc., certain
                     shareholders of Ruffalo, Cody & Associates, Inc. and
                     McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form
                     8-K, File No. 0-20763, filed with the Commission on July
                     29, 1996 and incorporated herein by reference).

        2.3          Agreement and Plan of Reorganization dated as of August 15,
                     1996 among Telecom*USA Publishing Group, Inc. and McLeod,
                     Inc. (Filed as Exhibit 2 to Current Report on Form 8-K,
                     File No. 0-20763, filed with the Commission on August 26,
                     1996 and incorporated herein by reference).

        2.4          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).

        2.5          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).

        2.6          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).

        3.1          Amended and Restated Certificate of Incorporation of
                     McLeod, Inc. (Filed as Exhibit 3.1 to Initial Form S-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.

        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 10 1/2% 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 10 1/2% 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).
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

        4.4          Form of Certificated 10 1/2% 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          Registration Agreement dated March 4, 1997 among McLeod,
                     Inc., Salomon Brothers Inc. and Morgan Stanley & Co.
                     Incorporated. (Filed as Exhibit 4.5 to the 1996 Form 10-K
                     and incorporated herein by reference).

        4.6          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).

        4.7          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).

        4.8          Form of 10 1/2% 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).

        4.9          Indenture dated as of July 21, 1997 between McLeodUSA
                     Incorporated and United States Trust Company of New York,
                     as Trustee, relating to the 9 1/4% Senior Notes Due 2007 of
                     McLeodUSA Incorporated. (Filed as Exhibit 4.9 to the July
                     1997 Form S-4 and incorporated herein by reference).

        4.10         Form of Initial Global 9 1/4% Senior Note Due 2007 of
                     McLeodUSA Incorporated (Filed as Exhibit 4.10 to the July
                     1997 Form S-4 and incorporated by reference).

        4.11         Registration Agreement dated July 21, 1997 among McLeodUSA
                     Incorporated, Salomon Brothers Inc., Morgan Stanley Dean
                     Witter and Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11
                     to the July 1997 Form S-4 and incorporated herein by
                     reference).

        4.12         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 thereto. (Filed as Exhibit 4.12 to the July 1997
                     Form S-4 and incorporated herein by reference).

        4.13         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., Clarke E. McLeod, Mary E. McLeod and
                     Richard A. Lumpkin on behalf of each of the shareholders of
                     Consolidated Communications Inc. listed on Schedule 1
                     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).

        4.14         Form of 9 1/4% Senior Exchange Note due 2007 of McLeodUSA
                     Incorporated (contained in the Indenture filed as Exhibit
                     4.9 to the July 1997 Form S-4 and incorporated herein by
                     reference).

        10.1         Credit Agreement dated as of May 16, 1994 among McLeod,
                     Inc., McLeod Network Services, Inc., McLeod Telemanagement,
                     Inc., McLeod Telecommunications, Inc. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.1 to Initial
                     Form S-1 and incorporated herein by reference).

        10.2         First Amendment to Credit Agreement dated as of June 17,
                     1994 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc. and The First National Bank of Chicago. (Filed as
                     Exhibit 10.2 to Initial Form S-1 and incorporated herein by
                     reference).

                                       2
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

        10.3         Second Amendment to Credit Agreement dated as of December
                     1, 1994 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc. and The First National Bank of Chicago. (Filed as
                     Exhibit 10.3 to Initial Form S-1 and incorporated herein by
                     reference).

        10.4         Third Amendment to Credit Agreement dated as of May 31,
                     1995 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc., MWR Telecom, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.4 to Initial Form S-1 and
                     incorporated herein by reference).

        10.5         Fourth Amendment to Credit Agreement dated as of July 28,
                     1995 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc., MWR Telecom, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.5 to Initial Form S-1 and
                     incorporated herein by reference).

        10.6         Fifth Amendment to Credit Agreement dated as of October 18,
                     1995 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc., MWR Telecom, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.6 to Initial Form S-1 and
                     incorporated herein by reference).

        10.7         Sixth Amendment to Credit Agreement dated as of March 29,
                     1996 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telecommunications, Inc., MWR Telecom, Inc. and The
                     First National Bank of Chicago. (Filed as Exhibit 10.7 to
                     Initial Form S-1 and incorporated herein by reference).

        10.8         Security Agreement dated as of May 16, 1994 among McLeod,
                     Inc., McLeod Network Services, Inc., McLeod Telemanagement,
                     Inc., McLeod Telecommunications, Inc. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.8 to Initial
                     Form S-1 and incorporated herein by reference).

        10.9         First Amendment to Security Agreement dated as of December
                     1, 1994 among McLeod, Inc., McLeod Network Services, Inc.,
                     McLeod Telemanagement, Inc., McLeod Telecommunications,
                     Inc. and The First National Bank of Chicago. (Filed as
                     Exhibit 10.9 to Initial Form S-1 and incorporated herein by
                     reference).

        10.10        Support Agreement dated as of December 1, 1994 among IES
                     Diversified Inc., McLeod, Inc., McLeod Network Services,
                     Inc., McLeod Telemanagement, Inc., McLeod
                     Telecommunications, Inc. and The First National Bank of
                     Chicago. (Filed as Exhibit 10.10 to Initial Form S-1 and
                     incorporated herein by reference).

        10.11        Agreement Regarding Support Agreement dated December 1994
                     between McLeod, Inc. and IES Diversified Inc. (Filed as
                     Exhibit 10.11 to Initial Form S-1 and incorporated herein
                     by reference).

        10.12        Agreement Regarding Guarantee dated May 16, 1994 between
                     McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit
                     10.12 to Initial Form S-1 and incorporated herein by
                     reference).

        10.13        Joinder to and Assumption of Credit Agreement dated as of
                     April 28, 1995 between McLeod Merging Co. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.13 to
                     Initial Form S-1 and incorporated herein by reference).

        10.14        Joinder to and Assumption of Security Agreement dated as of
                     April 28, 1995 between McLeod Merging Co. and The First
                     National Bank of Chicago. (Filed as Exhibit 10.14 to
                     Initial Form S-1 and incorporated herein by reference).

        10.15        Letter from The First National Bank of Chicago to James L.
                     Cram dated April 28, 1995 regarding extension of the
                     termination date under the Credit Agreement. (Filed as
                     Exhibit 10.15 to Initial Form S-1 and incorporated herein
                     by reference).

                                       3
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

       10.16         Credit Agreement dated as of March 29, 1996 among McLeod,
                     Inc., McLeod Network Services, Inc., McLeod Telemanagement,
                     Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc.
                     and The First National Bank of Chicago. (Filed as Exhibit
                     10.16 to Initial Form S-1 and incorporated herein by
                     reference).

       10.17         Agreement for Construction Related Services dated as of
                     October 17, 1995 between City Signal Fiber Services, Inc.
                     and McLeod Network Services, Inc. (Filed as Exhibit 10.17
                     to Initial Form S-1 and incorporated herein by reference).

       10.18         Construction Services Agreement dated March 27, 1996
                     between City Signal Fiber Services, Inc. and McLeod Network
                     Services, Inc. (Filed as Exhibit 10.18 to Initial Form S-1
                     and incorporated herein by reference).

       10.19         Fiber Optic Use Agreement dated as of February 14, 1996
                     between McLeod Network Services, Inc. and Galaxy Telecom,
                     L.P. (Filed as Exhibit 10.19 to Initial Form S-1 and
                     incorporated herein by reference).

       10.20         Agreement dated as of July 11, 1994 between McLeod Network
                     Services, Inc. and KLK Construction. (Filed as Exhibit
                     10.20 to Initial Form S-1 and incorporated herein by
                     reference).

       10.21         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).

       10.22         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).

       10.23         Contract dated September 5, 1995 between Iowa
                     Telecommunications and Technology Commission and MWR
                     Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1
                     and incorporated herein by reference).

       10.24         Contract dated June 27, 1995 between Iowa National Guard
                     and McLeod Network Services, Inc. (Filed as Exhibit 10.24
                     to Initial Form S-1 and incorporated herein by reference).

       10.25         Addendum Number One to Contract dated September 5, 1995
                     between Iowa National Guard and McLeod Network Services,
                     Inc. (Filed as Exhibit 10.25 to Initial Form S-1 and
                     incorporated herein by reference).

       10.26         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).

       10.27         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).

       10.28         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).

       10.29         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).

                                       4
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

       10.30         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).

       10.31         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).

       10.32         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).

       10.33         Uniform Purchase Agreement dated July 22, 1993 between
                     McLeod, Inc. and Hill's Maple Crest Farms Partnership.
                     (Filed as Exhibit 10.33 to Initial Form S-1 and
                     incorporated herein by reference).

       10.34         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).

       10.35         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).

       10.36         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).

       10.37         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).

       10.38         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).

       10.39         Agreement dated August 4, 1995 between Vadacom, Inc. and
                     McLeod Telemanagement, Inc. (Filed as Exhibit 10.39 to
                     Initial Form S-1 and incorporated herein by reference).

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

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

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

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

       10.44         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).

       10.45         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).

       10.46         Agreement dated April 28, 1995 among McLeod, Inc., McLeod
                     Telecommunications, Inc., McLeod Telemanagement, Inc.,
                     McLeod Network Services, Inc. and Clark E. McLeod. (Filed
                     as Exhibit 10.46 to Initial Form S-1 and incorporated
                     herein by reference).

                                       5
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

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

        10.48        Amendment to Contract Addendum A to Contract No. 2102 dated
                     March 31, 1993 between the Iowa Department of General
                     Services and McLeod Telecommunications, Inc. (Filed as
                     Exhibit 10.48 to Initial Form S-1 and incorporated herein
                     by reference).

        10.49        Construction Services Agreement dated June 30, 1995 between
                     MFS Network Technologies, Inc. and MWR Telecom, Inc. (Filed
                     as Exhibit 10.49 to Initial Form S-1 and incorporated
                     herein by reference).

        10.50        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).

        10.51        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).

        10.52        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).

        10.53        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).

        10.54        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).

        10.55        McLeod, Inc. 1996 Employee Stock Option Plan, as amended.

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

        10.57        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).

        10.58        License Agreement dated April 24, 1996 between PageMart,
                     Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.58 to
                     Initial Form S-1 and incorporated herein by reference).

        10.59        Assignment of Purchase Agreement dated August 15, 1996
                     between Ryan Properties, Inc. and McLeod, Inc. (Filed as
                     Exhibit 10.59 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.60        Assignment of Purchase Agreement dated August 14, 1996
                     between Ryan Properties, Inc. and McLeod, Inc. (Filed as
                     Exhibit 10.60 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        10.61        Asset Purchase Agreement dated September 4, 1996 between
                     Total Communication Services, Inc. and McLeod
                     Telemanagement, Inc. (Filed as Exhibit 10.61 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

        10.62        First Amendment to Asset Purchase Agreement dated September
                     30, 1996 between Total Communication Services, Inc. and
                     McLeod Telemanagement, Inc. (Filed as Exhibit 10.62 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

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

                                       6
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

       10.64         Amended and Restated Credit Agreement dated as of May 5,
                     1995 among Telecom*USA Publishing Group, Inc., Telecom*USA
                     Publishing Company and Telecom*USA 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).

       10.65         First Amendment to Amended and Restated Credit Agreement
                     dated as of January 31, 1996 by and between Telecom*USA
                     Publishing Group, Inc., Telecom*USA Publishing Company and
                     Telecom*USA 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).

       10.66         Lease Agreement dated as of September 26, 1994 between Ryan
                     Properties, Inc. and Ruffalo, Cody & Associates, Inc.
                     (Filed as Exhibit 10.66 to the November 1996 Form S-1 and
                     incorporated herein by reference).

       10.67         First Lease Amendment dated as of April 12, 1995 between
                     Ryan Properties, Inc. and Ruffalo, Cody & Associates, Inc.
                     (Filed as Exhibit 10.67 to the November 1996 Form S-1 and
                     incorporated herein by reference).

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

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

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

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

       10.72         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).

        10.73        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).

        10.74        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).

       10.75         Option Agreement dated April 27, 1995 between Fronteer
                     Directory Company, Inc. and Telecom*USA Publishing Company.
                     (Filed as Exhibit 10.75 to the November 1996 Form S-1 and
                     incorporated herein by reference).

       10.76         Promissory Note dated May 5, 1995 between Telecom*USA
                     Publishing Company and Fronteer Directory Company, Inc.
                     (Filed as Exhibit 10.76 to the November 1996 Form S-1 and
                     incorporated herein by reference).

       10.77         Security Agreement dated May 5, 1995 between Telecom*USA
                     Publishing Company and Fronteer Directory Company, Inc.
                     (Filed as Exhibit 10.77 to the November 1996 Form S-1 and
                     incorporated herein by reference).

       10.78         Design/Build Construction Contract dated September 17, 1996
                     between Ryan Construction Company of Minnesota, Inc. and
                     McLeod, Inc. (Filed as Exhibit 10.78 to the November 1996
                     Form S-1 and incorporated herein by reference).

                                       7
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

       10.79         Guaranty Agreement dated as of October 17, 1996 by McLeod,
                     Inc. in favor of Kirkwood Community College. (Filed as
                     Exhibit 10.79 to the November 1996 Form S-1 and
                     incorporated herein by reference).

       10.80         Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod
                     Telemanagement, Inc. (Filed as Exhibit 10.80 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.81         Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod
                     Telecommunications, Inc. (Filed as Exhibit 10.81 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.82         Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod
                     Network Services, Inc. (Filed as Exhibit 10.82 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.83         Industrial New Jobs Training Agreement dated as of October
                     31, 1996 between Kirkwood Community College and McLeod,
                     Inc. (Filed as Exhibit 10.83 to the November 1996 Form S-1
                     and incorporated herein by reference).

       10.84         Change Order No. 1 to the Construction Services Agreement
                     dated November 22, 1995 by and between MWR TeIecom, Inc.
                     and MFS Network Technologies, Inc. (Filed as Exhibit 10.84
                     to the November 1996 Form S-1 and incorporated herein by
                     reference).

       10.85         Change Order No. 2 to the Construction Services Agreement
                     dated August 14, 1996 between MWR Telecom, Inc. and MFS
                     Network Technologies, Inc. (Filed as Exhibit 10.85 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.86         Change Order No. 3 to the Construction Services Agreement
                     dated October 31, 1996 between MWR Telecom, Inc. and MFS
                     Network Technologies, Inc. (Filed as Exhibit 10.86 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.87         Independent Contractor Sales Agreement dated May, 1995
                     between Sprint Communications Company L.P. and Ruffalo,
                     Cody & Associates, Inc. (Filed as Exhibit 10.87 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.88         Second Amendment to Asset Purchase Agreement dated October
                     31, 1996 between Total Communication Services, Inc. and
                     McLeod Telemanagement, Inc. (Filed as Exhibit 10.88 to the
                     November 1996 Form S-1 and incorporated herein by
                     reference).

       10.89         Escrow Agreement dated July 15, 1996 among McLeod, Inc.,
                     certain shareholders of Ruffalo, Cody & Associates, Inc.,
                     Albert P. Ruffalo and Norwest Bank N.A. (Filed as Exhibit
                     10.89 to the November 1996 Form S-1 and incorporated herein
                     by reference).

       10.90         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).

       10.91         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).

       10.92         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).

                                       8
<PAGE>
 
      Exhibit
      Number                          Exhibit Description
      ------                          -------------------

        10.93        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).

       +10.94        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).

        10.95        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).

        10.96        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).

        10.97        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).

        10.98        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).

        10.99        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)

        10.100       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)

        11.1         Statement regarding Computation of Per Share Earnings.
                     
        16.1         Letter regarding Change in Certifying Accountant.
                     
        21.1         Subsidiaries of McLeodUSA Incorporated.
                     
        23.1         Consent of Arthur Andersen LLP.
                     
        27.1         Financial Data Schedule
                     
        99.1         Purchase Agreement dated as of August 15, 1996 between Iowa
                     Land and Building Company and Ryan Properties, Inc. (Filed
                     as Exhibit 99.1 to the November 1996 Form S-1 and
                     incorporated herein by reference).

        99.2         Purchase Agreement dated as of June 28, 1996 between Donald
                     E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek and Ryan
                     Properties, Inc. (Filed as Exhibit 99.2 to the November
                     1996 Form S-1 and incorporated herein by reference).

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

                                       9