<PAGE>
 
------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549


                                   FORM 10-Q

(Mark One)
 [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

       For the Quarterly Period Ended March 31, 1999

                                       or

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

       For the transition period ______________ to ________________

       Commission file number 0-20763

                             McLEODUSA INCORPORATED

             (Exact name of registrant as specified in its charter)

 
              Delaware                                  42-1407240
       (State of Incorporation)              (IRS Employer Identification No.)
 
      McLeodUSA Technology Park
           6400 C Street SW
            P.O. Box 3177
          Cedar Rapids, Iowa                            52406-3177
(Address of principal executive office)                 (Zip Code)
                                        
                                  319-364-0000
                        (Registrant's telephone number,
                              including area code)

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

  The number of shares outstanding of each class of the issuer's common stock as
of May 10, 1999:

     Common Stock Class A:  ($.01 par value)..........      74,801,022 shares

     Common Stock Class B:  ($.01 par value)..........              None

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

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>                                                                                               <C>
PART I.  Financial Information
------   ---------------------

Item 1.   Financial Statements...................................................................   3

          Consolidated Balance Sheets, March 31, 1999 (unaudited) and December 31, 1998..........   3

          Unaudited Consolidated Statements of Operations and Comprehensive Income
             for the three months ended March 31, 1999 and 1998..................................   4

          Unaudited Consolidated Statements of Cash Flows for the three months ended
             March 31, 1999 and 1998.............................................................   5

          Notes to Consolidated Financial Statements (unaudited).................................   6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations..   9

PART II.  Other Information
--------  -----------------

Item 1.   Legal Proceedings......................................................................  15

Item 6.   Exhibits and Reports on Form 8-K.......................................................  17

Signatures.......................................................................................  18
</TABLE>

                                       2
<PAGE>
 
                                     PART I
                             FINANCIAL INFORMATION
Item 1. Financial Statements
                    McLEODUSA INCORPORATED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                         (In thousands, except shares)
<TABLE>
<CAPTION>
                                                                                           March 31,      December 31,
                                                                                              1999            1998
                                                                                          ------------    -------------
                                                                                           (Unaudited)
<S>                                                                                       <C>             <C>
                                         ASSETS
Current Assets
 Cash and cash equivalents..............................................................   $  415,343       $  455,067
 Investment in available-for-sale securities............................................      278,676          136,585
 Trade receivables, net.................................................................      168,539          116,369
 Inventory..............................................................................       19,670           12,824
 Deferred expenses......................................................................       35,294           26,693
 Prepaid expenses and other.............................................................       56,696           45,654
                                                                                           ----------       ----------
  TOTAL CURRENT ASSETS..................................................................      974,218          793,192
                                                                                           ----------       ----------
Property and Equipment
 Land and building......................................................................       92,381           60,325
 Telecommunications networks............................................................      399,746          307,310
 Furniture, fixtures and equipment......................................................      166,091          138,349
 Networks in progress...................................................................      244,934          185,505
 Building in progress...................................................................       17,029           12,567
                                                                                           ----------       ----------
                                                                                              920,181          704,056
 Less accumulated depreciation..........................................................       91,590           74,310
                                                                                           ----------       ----------
                                                                                              828,591          629,746
                                                                                           ----------       ----------
Investments, Intangible and Other Assets
 Other investments......................................................................       38,937           35,870
 Goodwill, net..........................................................................      720,663          289,639
 Other intangibles, net.................................................................      197,417          112,379
 Other..................................................................................       76,554           64,371
                                                                                           ----------       ----------
                                                                                            1,033,571          502,259
                                                                                           ----------       ----------
                                                                                           $2,836,380       $1,925,197
                                                                                           ==========       ========== 
                                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
 Current maturities of long-term debt...................................................   $   10,276       $    8,236
 Contracts and notes payable............................................................          313            4,508
 Accounts payable.......................................................................       95,293           62,000
 Accrued payroll and payroll related expenses...........................................       13,904           13,579
 Other accrued liabilities..............................................................       77,634           63,849
 Deferred revenue, current portion......................................................       13,185           10,995
 Customer deposits......................................................................       23,422           16,789
                                                                                           ----------       ----------
  TOTAL CURRENT LIABILITIES.............................................................      234,027          179,956
                                                                                           ----------       ----------
Long-term Debt, less current maturities.................................................    1,776,475        1,245,170
                                                                                           ----------       ----------
Deferred Revenue, less current portion..................................................       16,464           16,798
                                                                                           ----------       ----------
Other long-term liabilities.............................................................       23,999           20,467
                                                                                           ----------       ----------
Stockholders' Equity
 Capital Stock:
  Common, Class A, $.01 par value; authorized 250,000,000 shares;
   issued and outstanding 1999 74,440,894 shares; 1998 63,679,175
   shares...............................................................................          744              637
  Common, Class B, convertible, $.01 par value; authorized 22,000,000
   shares; issued and outstanding 1999 and 1998 none....................................          ---              ---
 Additional paid-in capital.............................................................    1,078,307          716,475
 Accumulated deficit....................................................................     (300,123)        (252,647)
 Accumulated other comprehensive income.................................................        6,487           (1,659)
                                                                                           ----------       ----------
                                                                                              785,415          462,806
                                                                                           ----------       ----------
                                                                                           $2,836,380       $1,925,197
                                                                                           ==========       ==========
</TABLE>

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

                                       3
<PAGE>
 
                    McLEODUSA INCORPORATED AND SUBSIDIARIES

    UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                               Three Months Ended
                                                                                                   March 31,
                                                                                              --------------------
                                                                                                1999       1998
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
Revenues:
 Telecommunications:
  Local and long distance...................................................................  $ 79,261   $ 61,658
  Local exchange services...................................................................    17,632     15,943
  Private line and data.....................................................................    16,922      9,385
  Network maintenance and equipment.........................................................     8,120      7,481
  Other telecommunications..................................................................     5,814      6,884
                                                                                              --------   --------
   Total telecommunications revenue.........................................................   127,749    101,351
 Directory..................................................................................    49,634     27,964
 Telemarketing..............................................................................     3,726      5,016
                                                                                              --------   --------
  TOTAL REVENUES............................................................................   181,109    134,331
Operating expenses:
 Cost of service............................................................................    92,459     75,045
 Selling, general and administrative........................................................    79,811     58,768
 Depreciation and amortization..............................................................    35,110     19,431
 Other......................................................................................       ---      1,900
                                                                                              --------   --------
  TOTAL OPERATING EXPENSES..................................................................   207,380    155,144
                                                                                              --------   --------
  OPERATING LOSS............................................................................   (26,271)   (20,813)
Nonoperating income (expense):
 Interest income............................................................................     8,260      4,613
 Interest (expense).........................................................................   (29,464)   (14,754)
 Other income...............................................................................        (1)       687
                                                                                              --------   --------
  TOTAL NONOPERATING INCOME (EXPENSE).......................................................   (21,205)    (9,454)
                                                                                              --------   --------
  LOSS BEFORE INCOME TAXES..................................................................   (47,476)   (30,267)
Income taxes................................................................................       ---        ---
                                                                                              --------   --------
  NET LOSS..................................................................................  $(47,476)  $(30,267)
                                                                                              ========   ========
Loss per common share.......................................................................  $  (0.72)  $  (0.49)
                                                                                              ========   ========
Weighted average common shares outstanding..................................................    66,121     62,227
                                                                                              ========   ========
 
Other comprehensive income, net of tax:
 Unrealized gains on securities:
  Unrealized holding gains arising during the period........................................     8,222      6,887
  Less:  reclassification adjustment for gains included in net income.......................       (76)      (812)
                                                                                              --------   --------
  TOTAL OTHER COMPREHENSIVE INCOME..........................................................     8,146      6,075
                                                                                              --------   --------
  COMPREHENSIVE LOSS........................................................................  $(39,330)  $(24,192)
                                                                                              ========   ========
</TABLE>

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

                                       4
<PAGE>
 
                    MCLEODUSA INCORPORATED AND SUBSIDIARIES

                UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                    Three Months Ended
                                                                                                         March 31,
                                                                                          ---------------------------------------
                                                                                                1999                   1998
                                                                                          ----------------       ----------------
<S>                                                                                       <C>                    <C>
Cash Flows from Operating Activities
 Net Loss...............................................................................        $ (47,476)             $ (30,267)
 Adjustments to reconcile net loss to net cash (used in) operating activities:
  Depreciation..........................................................................           17,985                 10,822
  Amortization..........................................................................           17,125                  8,609
  Accretion of interest on senior discount notes........................................            9,323                  8,418
  Changes in assets and liabilities, net of effects of acquisitions:
  (Increase) in trade receivables.......................................................          (17,031)                (6,243)
  (Increase) in inventory...............................................................           (4,961)                  (276)
  (Increase) in deferred expenses.......................................................              (21)                (1,189)
  Decrease (increase) in prepaid expenses and other.....................................            5,560                 (3,167)
  (Increase) in deferred line installation costs........................................           (2,546)                (3,439)
  Increase (decrease) in accounts payable and accrued expenses..........................          (29,452)                 3,321
  Increase (decrease) in deferred revenue...............................................              653                   (121)
  Increase in customer deposits.........................................................            2,600                  1,089
                                                                                                ---------              ---------
   NET CASH (USED IN) OPERATING ACTIVITIES..............................................          (48,241)              (12,443)
                                                                                                ---------              ---------
Cash Flows from Investing Activities
 Purchases of property and equipment....................................................          (84,945)               (41,458)
 Available-for-sale securities:
  Purchases.............................................................................         (262,021)              (390,483)
  Sales.................................................................................           72,793                142,936
  Maturities............................................................................           55,283                  6,976
 Acquisitions...........................................................................         (128,101)                (5,726)
 Other..................................................................................           (2,445)                (1,223)
                                                                                                ---------              ---------
   NET CASH (USED IN) INVESTING ACTIVITIES                                                       (349,436)              (288,978)
                                                                                                ---------              ---------
Cash Flows from Financing Activities
 Payments on contracts and notes payable................................................          (12,760)                (2,563)
 Net proceeds from long-term debt.......................................................          487,740                292,517
 Payments on long-term debt.............................................................         (118,500)                (2,289)
 Net proceeds from issuance of common stock.............................................            1,473                  1,080
                                                                                                ---------              ---------
   NET CASH PROVIDED BY FINANCING ACTIVITIES............................................          357,953                288,745
                                                                                                ---------              ---------
   NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................          (39,724)               (12,676)
Cash and cash equivalents:
 Beginning..............................................................................          455,067                331,941
                                                                                                ---------              ---------
 Ending.................................................................................        $ 415,343              $ 319,265
                                                                                                =========              =========
Supplemental Disclosure of Cash Flow Information:
 Cash payment for interest, net of interest capitalized 1999 $4,247,000;
  1998 $1,690,000.......................................................................          $19,395                $  362
                                                                                                  =======                ======
Supplemental Schedule of Noncash Investing and Financing Activities
 Capital leases incurred for the acquisition of property and equipment..................          $ 2,017                $1,728
                                                                                                  =======                ======
</TABLE>

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

                                       5
<PAGE>
 
                     McLEODUSA INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Information as of and for the Three Months Ended
                      March 31, 1999 and 1998 is Unaudited)

Note 1: Basis of Presentation

        Interim Financial Information (unaudited): The financial statements and
notes related thereto as of March 31, 1999, and for the three month periods
ended March 31, 1999 and 1998, are unaudited, but in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and
results of operations. The operating results for the interim periods are not
indicative of the operating results to be expected for a full year or for other
interim periods. Certain information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to instructions,
rules and regulations prescribed by the Securities and Exchange Commission (the
"Commission"). Although the Company believes that the disclosures provided are
adequate to make the information presented not misleading, it recommends that
these consolidated condensed financial statements be read in conjunction with
the audited consolidated financial statements and the footnotes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed with the Commission on March 24, 1999.

Note 2: Supplemental Asset Data

        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.

        Trade Receivables:  The composition of trade receivables, net is as
follows:

<TABLE>
<CAPTION>
                                                                    March 31,                 December 31,
                                                                      1999                        1998
                                                                 -------------                ------------
                                                                              (In thousands)
<S>                                                              <C>                          <C>
Trade Receivables:
   Billed..................................................        $   138,280                   $110,587
   Unbilled................................................             57,793                     21,350
                                                                   -----------                  ---------
                                                                       196,073                    131,937
Allowance for doubtful accounts and discounts..............            (27,534)                   (15,568)
                                                                   -----------                  ---------
                                                                   $   168,539                  $ 116,369
                                                                   ===========                  =========
</TABLE>

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

        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 $21,611,000 and $16,356,000, at March 31, 1999 and December
31, 1998, respectively.

        Other intangibles: Other intangibles consist of customer lists and
noncompete agreements related to the Company's acquisitions, deferred line
installation costs incurred in the establishment of local access lines for
customers and franchise rights to provide cable services to customers in three
Illinois counties and in a Michigan city. The customer lists and noncompete
agreements are being amortized using the straight-line method over periods
ranging from 3 to 15 years. The deferred line installation costs are being
amortized using the straight-line method over 36 to 60 months, which
approximates the average lives of

                                       6
<PAGE>
 
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 $32,498,000 and
$25,066,000 at March 31, 1999 and December 31, 1998, respectively.

Note 3: Long-Term Debt

        On February 22, 1999, the Company completed a private offering of $500
million aggregate principal amount of 8 1/8% Senior Notes due February 15, 2009
(the "Senior Notes"). The Company received net proceeds of approximately $487.8
million from the Senior Notes offering. Interest on the Senior Notes will be
payable in cash semi-annually in arrears on August 15 and February 15 of each
year at a rate of 8 1/8% per annum, commencing August 15, 1999. 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 March 31,
1999, the Company had no outstanding subordinated indebtedness and had $1.2
billion outstanding indebtedness that would rank pari passu with the Senior
Notes. As of March 31, 1999, the Senior Notes had not been registered under the
Securities Act of 1933 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 agreed to file a registration statement with the Commission for the
registration of $500 million aggregate principal amount of 8 1/8% Senior Notes
due February 15, 2009 in exchange for the Senior Notes. On April 23, 1999 such
Registration Statement was filed. The indenture related to the Senior 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, make other restricted
payments, enter into sale and leaseback transactions, create liens, enter into
transactions with affiliates or related persons, or consolidate, merge or sell
all or substantially all of its assets.

Note 4: Acquisitions

        F.D.S.D. Rapid City Directories, Inc. (F.D.S.D): On March 17, 1998,
McLeodUSA Media Group acquired a telephone directory published by F.D.S.D. for a
cash purchase price of approximately $2.2 million.

        Bi-Rite Directories, Inc. (Bi-Rite): On March 20, 1998, McLeodUSA Media
Group acquired a telephone directory published by Bi-Rite for a cash purchase
price of approximately $3.7 million.

        Frontier Directory Co. of Nebraska, Inc.(Frontier): On January 14, 1999,
McLeodUSA Media Group acquired a telephone directory published by Frontier for a
cash purchase price of approximately $6.8 million.

        Talking Directories, Inc. (Talking Directories) and Info America Phone
Books, Inc. (Info America): On February 10, 1999, the Company acquired Talking
Directories in exchange for 2.6 million shares of its Class A common stock. In a
related and concurrent transaction, on February 10, 1999, the Company acquired
Info America in exchange for 1.2 million shares of its Class A common stock. The
Company also paid outstanding obligations of Talking Directories and Info
America of approximately $27 million.

        Dakota Telecommunications Group, Inc. (DTG): On March 5, 1999, the
Company acquired DTG in exchange for approximately one million shares of its
Class A common stock and the assumption of approximately $31 million in DTG
debt.

        Ovation Communications, Inc. (Ovation): On March 31, 1999, pursuant to
the terms and conditions of an Agreement and Plan of Merger dated January 6,
1999 (the "Merger Agreement"), the Company issued approximately 5.6 million
shares of its Class A common stock and paid approximately $121.3 million cash to
the shareholders of Ovation in exchange for all of the outstanding capital stock
of Ovation in a transaction accounted for using the purchase method of
accounting. The total purchase price was approximately $310.2 million based on
the average closing price of the Company's Class A common stock five days before
and after the date of the Merger Agreement. The Company also assumed
approximately $95 million in Ovation debt.

                                       7
<PAGE>
 
The following table summarizes the purchase price allocations for the Company's
business acquisitions incurred in the three months ended March 31 1999 and 1998
(in thousands):

<TABLE>
<CAPTION>

                 Transaction Year:                                         1999           1998
                 ----------------                                          ----           ----
<S>                                                                      <C>             <C>
                 Cash purchase price                                     $128,101        $5,726
                 Promissory notes                                              --           190
                 Stock issued                                             347,108            --
                                                                         --------        ------
                                                                         $475,209        $5,916

                 Working capital acquired, net                           $(22,346)           --
                 Fair value of other assets acquired                      127,044            --
                 Intangibles                                              525,172        $5,916
                 Liabilities assumed                                     (154,661)           --
                                                                         --------        ------
                                                                         $475,209        $5,916
                                                                         ========        ======
</TABLE>

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

The unaudited consolidated results of operations for the three months ended
March 31, 1999 on a pro forma basis as though the above entities had been
acquired as of the beginning of the period is as follows (in thousands, except
per share data):

<TABLE>
<CAPTION>
                                                                                                         1999
                                                                                                         ----
<S>                                                                                                  <C>
     Revenue......................................................................................   $  208,889
     Net loss.....................................................................................      (53,627)
     Loss per common share........................................................................        (0.72)
</TABLE>

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

Note 5: Information by Business Segment

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

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

        Identifiable assets (excluding intersegment receivables) are the
Company's assets that are identified in each business segment. Corporate assets
primarily include cash and cash equivalents, investments in available-for-sale
securities, administrative headquarters and goodwill recorded primarily as a
result of the acquisition of Consolidated Communications, Inc. in 1997 and the
acquisition of DTG and Ovation in 1999.

        In the three months ended March 31, 1999 and 1998, no single customer or
group under common control represented 10% or more of the Company's sales.

Segment information for the three months ended March 31, 1999 and 1998 was as
follows (in thousands):

                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                         Telecommunications        Media         Corporate        Total
                                         ------------------        -----         ---------        -----
<S>                                      <C>                   <C>             <C>            <C>
1999
Revenues                                  $    131,315         $   49,794      $        --    $  181,109
                                          ===============================================================

EBITDA                                           5,843              9,215           (6,219)        8,839
Depreciation and amortization                  (19,540)            (9,574)          (5,996)      (35,110)
Interest Revenue                                   346                  9            7,905         8,260
Interest Expense                                (1,390)               (13)         (28,061)      (29,464)
Taxes and Other                                    276                (48)            (229)           (1)
                                          ---------------------------------------------------------------
Net Income (Loss)                              (14,465)              (411)         (32,600)      (47,476)
                                          ===============================================================

Total assets                                 1,034,612            389,930        1,411,838     2,836,380
Capital expenditures                           210,322            131,075          197,500       538,897
----------------------------------------------------------------------------------------------------------
1998
Revenues                                  $    106,367         $   27,964      $        --    $  134,331
                                          ===============================================================

EBITDA                                             569              2,394           (2,445)          518
Depreciation and amortization                  (11,577)            (2,284)          (5,570)      (19,431)
Interest Revenue                                   156                 16            4,441         4,613
Interest Expense                                (1,254)                --          (13,500)      (14,754)
Taxes and Other                                    719                (20)          (1,912)       (1,213)
                                          ---------------------------------------------------------------
Net Income (Loss)                              (11,387)               106          (18,986)      (30,267)
                                          ===============================================================

Total assets                                   410,915            180,319        1,042,982      1,634,216
Capital expenditures                            35,053              8,986            4,891         48,930
----------------------------------------------------------------------------------------------------------
</TABLE>

                                       9
<PAGE>
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         Statements included in this discussion relating, but not limited to,
future revenues, operating expenses, capital requirements, growth rates, cash
flows, operational performance, sources and uses of funds, acquisitions,
technological changes and development of a PCS system, are forward-looking
statements that involve certain risks and uncertainties. Factors that may cause
the actual results, performance, achievements or investments expressed or
implied by such forward-looking statements to differ materially from any future
results, performance, achievements or investments expressed or implied by such
forward-looking statements include, among other things, the availability of
financing and regulatory approvals, the number of potential customers in a
target market, the existence of strategic alliances and relationships,
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 and other factors more fully described under
the caption "Business--Risk Factors" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed with the Commission on March
24, 1999 and which section is incorporated herein by reference.

         Unless otherwise indicated, all dollar amounts in the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations that exceed $1 million have been rounded to one decimal place and all
dollar amounts less than $1 million have been rounded to the nearest thousand.

Overview

         We derive our revenue from:

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

         .    the sale of advertising space in telephone directories

         .    traditional local telephone company services in east central
              Illinois and southeast South Dakota

         .    special access, private line and data services

         .    communications network maintenance services and telephone
              equipment sales, leasing, service and installation

         .    telemarketing services

         .    other communications services, including video, computer
              networking, cellular, operator, payphone, mobile radio and paging
              services

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

<TABLE>
<CAPTION>
                                                                    Quarter Ended March 31,
                                                                    ------------------------
                                                                      1999            1998
                                                                    --------        --------
<S>                                                                 <C>             <C>
     Local and long distance communications services............       44%             46%
     Telephone directory advertising............................       27              21
     Traditional local telephone company services...............       10              12
     Special access, private line and data services.............        9               7
     Network maintenance and equipment services.................        5               5
     Telemarketing services.....................................        2               4
     Other communications services..............................        3               5
                                                                     ----            ----
                                                                      100%            100%
                                                                      ===             ===
</TABLE>

                                       10
<PAGE>
 
         We began offering local and long distance services to business
customers in January 1994. At the end of 1995, we began offering, on a test
basis, long distance services to residential customers. In June 1996, we began
marketing and providing to residential customers in Cedar Rapids, Iowa and Iowa
City, Iowa an integrated package of communications services that includes local
and long distance service, voice mail, Internet access and travel card services.
Since June 1996, we have expanded the states in which we offer service to
business customers to include Iowa, Illinois, Indiana, Michigan, Minnesota,
Nebraska, Wisconsin, North Dakota, South Dakota, Colorado, Missouri and Wyoming.
We also expanded our residential service to additional cities in Iowa and
Illinois and began offering the service to customers in North Dakota, South
Dakota, Wisconsin, Wyoming, Colorado, Missouri and Michigan. We plan to continue
our efforts to market and provide local, long distance and other communications
services to business customers and market our service to residential customers.

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

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

         In January and February 1996, we granted options to purchase an
aggregate of 965,166 and 688,502 shares of our Class A common stock,
respectively, at an exercise price of $2.67 per share, to some of our 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, we granted options to purchase an aggregate of 1,468,945 shares
of our Class A common stock at an exercise price of $24.50 to some 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.

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

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

                                       11
<PAGE>
 
         We have generated net operating losses since our inception and,
accordingly, have incurred no income tax expense. We have reduced the net
deferred tax assets generated by these losses by a valuation allowance which
offsets the net deferred tax asset due to the uncertainty of realizing the
benefit of the tax loss carry forwards. We will reduce the valuation allowance
when, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will be realized.

Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998

         Total revenue increased from $134.3 million for the three months ended
March 31, 1998 to $181.1 million for the three months ended March 31, 1999,
representing an increase of $46.8 million or 35%. Revenue from the sale of local
and long distance telecommunications services accounted for $17.6 million of the
increase. Local exchange services generated $1.7 of additional revenues over
1998. Private line and data revenues accounted for $7.5 million of increased
revenues over 1998. Network maintenance and equipment revenue increased $0.6
million over 1998. Other telecommunications revenue decreased $1.0 million when
compared to the same period in 1998. Directory revenues increased $21.7 million
from the first quarter of 1998 to the first quarter of 1999 due to revenues from
new directories acquired in the last three-quarters of 1998 and the first
quarter of 1999. Telemarketing revenues decreased $1.3 million in the first
quarter of 1999 when compared to the first quarter of 1998.

         Cost of service increased from $75.0 million for the three months ended
March 31, 1998, to $92.5 million for the three months ended March 31, 1999,
representing an increase of $17.5 million or 23%. This increase in cost of
service was due primarily to the growth in the Company's local and long distance
telecommunications services. Cost of service as a percentage of revenue
decreased from 56% for the three months ended March 31, 1998 to 51% for the
three months ended March 31, 1999, primarily due to the realization of benefits
associated with new wholesale line cost rate agreements with the regional Bell
operating companies and reduced long distance costs resulting from migration of
over 60% of customer long distance traffic to our fiber optic communications
network.

         SG&A increased from $58.8 million for the three months ended March 31,
1998 to $79.8 million for the three months ended March 31, 1999, an increase of
$21.0 million or 36%. The acquisitions of Talking Directories Inc. and Info 
America Phone Books, Inc. (collectively, "Talking Directories") and Dakota 
Telecommunications Group, Inc. contributed an aggregate of $7.9 million to the
increase. Also contributing to this increase were increased costs of $13.1
million related primarily to expansion of selling, customer support and
administration activities to support the Company's growth.

         Depreciation and amortization expenses increased from $19.4 million for
the three months ended March 31, 1998 to $35.1 million for the three months
ended March 31, 1999, representing an increase of $15.7 million or 81%. This
increase consisted of $6.9 million related to the acquisitions of Talking
Directories and DTG and $8.8 million due primarily to the growth of the
Company's network.

         Interest income increased from $4.6 million for the three-month period
ended March 31, 1998, to $8.3 million for the same period in 1999. This increase
resulted from increased earnings on investments made with the remaining proceeds
from the Company's debt offerings in March and October 1998 and the proceeds
from the Company's private offering of $500 million aggregate principal amount 
of 8 1/8% Senior Notes due February 15, 2009 (the "8 1/8% Senior Notes") in
February 1999.

         Gross interest expense increased from $14.8 million for the first
quarter of 1998 to $29.5 million for the first quarter of 1999. This increase
was primarily a result of an increase in the accretion of interest on our 10
1/2% senior discount notes of $0.9 million and an increase of interest of $16.3
million primarily as the result of the issuance of our 83/8% senior notes, 9
1/2% senior notes and 81/8% senior notes. Interest expense of approximately $4.2
and $1.7 million was capitalized as part of the Company's construction of fiber
optic network during the first quarter of 1999 and 1998, respectively.

         Net loss increased from $30.3 million for the three months ended March
31, 1998 to $47.5 million for the three months ended March 31, 1999, an increase
of $17.2 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 the
construction and expansion of our communications

                                       12
<PAGE>
 
networks and amortization of intangible related to acquisitions; and net
interest expense on indebtedness to fund market expansion, network development
and acquisitions.

Liquidity and Capital Resources

         Our total assets increased from $1.9 billion at December 31, 1998 to
$2.8 billion at March 31, 1999, primarily due to the net proceeds of
approximately $487.8 million from our private offering of the 8 1/8% senior
notes in February 1999 and to the net assets of approximately $475.2 million
acquired from Talking Directories, DTG and Ovation Communications, Inc.
("Ovation"). At March 31, 1999, the Company's current assets of $974.2 million
exceeded its current liabilities of $234.0 million, providing working capital of
$740.2 million, which represents an increase of $127.0 million compared to
December 31, 1998 primarily attributable to the net proceeds from the Senior
Notes. At December 31, 1998, the Company's current assets of $793.2 million
exceeded current liabilities of $180.0 million, providing working capital of
$613.2 million.

         The net cash used in operating activities totaled $48.2 million for the
three months ended March 31, 1999 and $12.4 million for the three months ended
March 31, 1998. During the three months ended March 31, 1999, cash used in
operating activities was used primarily to fund the Company's net loss of $47.5
million for such period. As a result of the expansion of our local and long
distance communications services, we also required cash to fund:

         .     growth in trade receivables of $17.0 million
         .     growth in inventory of $5.0 million
         .     deferred line installation costs of $2.5 million
         .     decreases in accounts payable and accrued expenses of $29.5
               million

These amounts were partially offset by:

         .     decreases in prepaid and other expenses of $5.6 million
         .     increases in deferred revenue of $0.7 million
         .     increases in customer deposits of $2.6 million
         .     cumulative non-cash expenses of $44.4 million

         Net cash used in investing activities totaled $349.4 million during the
three months ended March 31, 1999 and $289.0 million during the three months
ended March 31, 1998. The expansion of our local and long distance
communications services, development and construction of our fiber optic
communications networks and other capital expenditures resulted in purchases of
equipment and fiber optic cable and other property and equipment totaling $84.9
million and $41.5 million during the three months ended March 31, 1999 and 1998,
respectively. We also used cash of $262.0 million to acquire available-for-sale
securities during the three months ended March 31, 1999, offset by proceeds from
sales and maturities of available-for-sale securities of $128.1 million during
the period. During the three months ended March 31, 1998, the cash used in
investing activities of $390.5 was partially offset by net proceeds of $149.9
million from the sales and maturities of available-for-sale securities.

         During the three months ended March 31, 1999, we used an aggregate of
$128.1 million cash to acquire:

         .     directories from Frontier Directory Co. of Nebraska, Inc. in
               January 1999
         .     the assets of Talking Directories in February 1999
         .     the assets of DTG in March 1999
         .     the assets of Ovation in March 1999

         Net cash received from financing activities was $358.0 million during
the three months ended March 31, 1999, primarily as a result of our private
offering of our 8 1/8% senior notes in February 1999. Net cash received from
financing activities during the three months ended March 31, 1998 was $288.7
million and was primarily obtained from our private offering of our 8 3/8%
senior notes in March 1998.

                                       13
<PAGE>
 
         On Februray 22, 1999, we completed a private offering of $500 million
aggregate principal amount of our 8 1/8% senior notes in which we received net
proceeds of approximately $487.7 million. Interest on the 8 1/8% senior notes
accrues at the rate of 8 1/8% per annum and is payable in cash semi-annually in
arrears on February 15 and August 15, starting August 15, 1999. The 8 1/8%
senior notes are redeemable at our option, in whole or in part, at any time on
or after February 15, 2004 at 104.063% of their principal amount at maturity,
plus accrued and unpaid interest, declining to 100.000% of their principal
amount at maturity, plus accrued and unpaid interest, on or after February 15,
2007. In the event of specified equity investments in McLeodUSA by specified
strategic investors on or before February 15, 2002, we may, at our 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 8 1/8% senior notes at a redemption price
equal to 108.125% of their principal amount plus accrued and unpaid interest, if
any, to but excluding the redemption date, provided that at least 66 2/3% of the
original principal amount of the 8 1/8% senior notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event of
a "Change of Control" (as defined in the indenture governing the 8 1/8% senior
notes) of McLeodUSA, each holder of 8 1/8% senior notes will have the right to
require us to repurchase all or any part of such holder's 8 1/8% senior notes at
a purchase price equal to 101% of the principal amount of the 8 1/8% senior
notes tendered by such holder plus accrued and unpaid interest, if any, to any
"Change of Control Payment Date" (as defined in the indenture governing the 8
1/8% senior notes). The 8 1/8% senior notes will mature on February 15, 2009.

         Our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior
notes, 9 1/2% senior notes and 8 1/8% senior notes are senior unsecured
obligations of McLeodUSA ranking pari passu in right of payment with all other
existing and future senior unsecured obligations of McLeodUSA and senior to all
existing and future subordinated debt of McLeodUSA. The 10 1/2% senior discount
notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8%
senior notes are effectively subordinated to all existing and future secured
indebtedness of McLeodUSA and our subsidiaries to the extent of the value of the
assets securing such indebtedness. The 10 1/2% senior discount notes, 9 1/4%
senior notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes
also are effectively subordinated to all existing and future third-party
indebtedness and other liabilities of our subsidiaries.

         The indentures governing our 10 1/2% senior discount notes, 9 1/4%
senior notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes
impose operating and financial restrictions on us and our subsidiaries. These
restrictions affect, and in many cases significantly limit or prohibit, among
other things, our and our subsidiaries' ability to:

         .     incur additional indebtedness
         .     pay dividends or make distributions in respect of our or our
               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
         .     consolidate, merge or sell all or substantially all of our assets

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

         As of March 31, 1999 based on our business plan, capital requirements
and growth projections as of that date, we estimated that we would require
approximately $1.3 billion through 2001. Our estimated aggregate capital
requirements include the projected costs of:

         .     building our fiber optic communications network, including intra-
               city fiber optic communications networks

         .     expanding operations in existing and new markets

         .     developing wireless services

         .     funding general corporate expenses

                                       14
<PAGE>
 
         .     completing recent and pending acquisitions

         .     constructing, acquiring, developing or improving
               telecommunications assets

         The estimated costs and incremental capital needs associated with the
acquisitions of Talking Directories, DTG and Ovation are included in our
estimated aggregate capital requirements.

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

         .     approximately $674.3 million of cash and investments on hand at
               March 31, 1999

         .     additional issuances of debt or equity securities

         .     projected operating cash flow

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

         .     strategic acquisition costs and effects of acquisitions on our
               business plan, capital requirements and growth projections

         .     unforeseen delays

         .     cost overruns

         .     engineering design changes

         .     changes in demand for our services

         .     regulatory, technological or competitive developments

         .     new opportunities

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

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

         Failure to generate or raise sufficient funds may require us to delay
or abandon some of our expansion plans or expenditures, which could have a
material adverse effect on our business, results of operations or financial
condition. See "Business--Risk Factors--Failure to Raise Necessary Capital Could
Restrict Our Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions" in the Company's Annual Report on Form 10-K.

Market Risk

         At March 31, 1999, we recorded the marketable equity securities that we
hold at a fair value of $38.8 million. These securities have exposure to price
risk. A hypothetical ten percent adverse change in quoted market prices would
amount to a decrease in the recorded value of investments of approximately $4
million. We believe our exposure to market price fluctuations on all other
investments is nominal due to the short-term nature of our investment portfolio.

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

                                       15
<PAGE>
 
Year 2000 Date Conversion

         We are currently verifying system readiness for the processing of
date-sensitive information by our computerized information systems. The Year
2000 problem impacts computer programs and hardware timers using two digits
(rather than four) to define the applicable year. Some of our programs and
timers 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.

         We are reviewing our IT and non-IT computer systems and programs to
determine which are not capable of recognizing the Year 2000 and to verify
system readiness for the millennium date. The review covers all of our
operations and is centrally managed. The review includes:

         1.   increasing employee awareness and communication of Year 2000
              issues

         2.   inventorying hardware, software and data interfaces and confirming
              Year 2000 readiness of key vendors

         3.   identifying mission-critical components for internal systems,
              vendor relations and other third parties

         4.    estimating costs for remediation

         5.    estimating completion dates

         6.    testing and verifying systems

         7.    remediating any identified problems by correcting or replacing
               systems or components

         8.    implementing the remediation plan

         9.    developing contingency plans

         10.   training for contingency plans


         We have completed more than 98% of the activities required for the
first five of these steps, more than 70% of the activities required for the 
sixth, seventh and eighth steps and approximately 25% of the activities 
required for the ninth step. We are in the initial stages of performing the 
activities required to complete the remaining step and have begun to develop 
contingency plans to handle our most reasonably likely worst case Year 2000 
scenarios. The completion percentages do not include information for pending 
or recently completed acquisitions. The review and related Year 2000 activities
have not caused us to defer or forego, to any material degree, any other 
critical IT project.

         We estimate that our Year 2000 readiness costs will not exceed $8.2
million. We generally expense these costs as incurred. As of April 30, 1999, we
had incurred costs of $3.2 million in connection with our Year 2000 readiness
activities.

         Our estimate of our Year 2000 readiness costs is a forward-looking
statement within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Costs, results, performance and
effects of Year 2000 activities described in those forward-looking statements
may differ materially from actual costs, results, performance and effects in the
future due to the interrelationship and interdependence of our computer systems
and those of our vendors, material service providers, customers and other third
parties.

         We have not yet fully identified our most reasonably likely worst case
Year 2000 scenarios. We continue to contact our vendors, suppliers and third
parties with which we have material relationships, regarding their state of
readiness. This activity is focused primarily on mission critical systems and
key business suppliers. U S WEST, Ameritech and Southwestern Bell are our
primary suppliers of local central office switching and local lines. Until we
have received and analyzed substantial responses from them we will have
difficulty determining our worst case scenarios.

         We have begun to develop contingency plans to handle worst case
scenarios, to the extent they can be identified fully. We intend to complete our
contingency planning after completing our determination of worst case scenarios.
Completion of these activities depends upon the responses to the inquiries we
have made of our major vendors, material service providers and third parties
with which we have material

                                       16
<PAGE>
 
relationships. We have also begun work on contingency plans for some systems
identified as critical to our operations.

         If we, our major vendors, our material service providers or our
customers fail to address Year 2000 issues in a timely manner, such failure
could have a material adverse effect on our business, results of operations and
financial condition. We depend on local exchange carriers, primarily the
regional Bell operating companies, to provide most of our local and some of our
long distance services. To the extent U S WEST, Ameritech or Southwestern Bell
fail to address Year 2000 issues which might interfere with their ability to
fulfill their obligations to us, such interference could have a material adverse
effect on our future operations. If other telecommunications carriers are unable
to resolve Year 2000 issues, it is likely that we will be affected to a similar
degree as others in the telecommunications industry.

Effects of New Accounting Standards

         In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.

         SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS 133 as of the beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied
to (a) derivative instruments and (b) derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 (and, at the company's election, before January 1, 1998).

         We do not expect the impact of the adoption of SFAS 133 to be material
to our results of operations as we do not currently hold any derivative
instruments or engage in hedging activities.

Inflation

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

                                       17
<PAGE>
 
                                     PART II
                                OTHER INFORMATION

Item 1.  Legal Proceedings

         We are not aware of any material litigation against McLeodUSA. We are
involved in numerous regulatory proceedings before various public utility
commissions and the FCC, particularly in connection with actions by the regional
Bell operating companies. For example, on February 5, 1996, U S WEST filed
tariffs and other notices with the public utility commissions in its
fourteen-state service region to limit future Centrex access to its switches.
Under the terms of these tariffs and other notices, U S WEST would permit us to
use its central office switches until April 2005, but would not allow us to
expand to new cities and would severely limit the number of new lines we could
partition onto U S WEST's switches in cities we serve.

         We have challenged, or are challenging, this action by U S WEST in many
of the states where we do business or plan to do business. We have succeeded in
blocking this action in Iowa, Minnesota, South Dakota, North Dakota and
Colorado, although U S WEST could take further legal action in some of these
states. In Montana, Nebraska and Idaho, however, similar challenges to this
action have not succeeded. In Wyoming and Utah, challenges to this action remain
pending.

         U S WEST has introduced other measures that may make it more difficult
or expensive for us to use Centrex service. In January 1997, U S WEST proposed
interconnection surcharges in several of the states in its service region. In
February 1997, we joined other parties in filing a petition with the FCC
objecting to this proposal based on our belief that it violates several
provisions of the Telecommunications Act of 1996. The matter remains pending
before the FCC and various state public utility commissions.

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

         We cannot assure you we will succeed in our challenges to these or
other actions by U S WEST that would prevent or deter us from using U S WEST's
Centrex service or network elements. If U S WEST successfully withdraws or
limits our access to Centrex services in any jurisdiction, we may not be able to
offer integrated communications services in that jurisdiction, which could have
a material adverse effect on our business, results of operations and financial
condition. See "Business--Risk Factors--Our Dependence on Regional Bell
Operating Companies to Provide Most of Our Communications Services Could Make it
Harder for Us to Offer Our Services at a Profit" and "Business--Risk
Factors--Actions by U S WEST May Make it More Difficult for Us to Offer Our
Communications Services" in the Company's Annual Report on Form 10-K.

Item 2.  Changes in Securities and Use of Proceeds

         On February 10, 1999, the Company acquired Talking Directories in
exchange for 2,556,391 million shares of its Class A common stock. In a related
and concurrent transaction, on February 10, 1999, the Company acquired Info
America in exchange for 1,203,007 shares of its Class A common stock. The
Company also paid outstanding obligations of Talking Directories and Info
America of approximately $27 million.

         The issuance of securities described above was made in reliance upon 
the exemption from registration provided by Section 4(2) of the Securities Act 
or Regulation D promulgated thereunder for transactions by an issuer not 
involving any public offering. The recipients of securities in 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 us 
through their relationship with us or through information about us made 
available to them.

                                       18
<PAGE>
 
Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

      Exhibit 
      -------
      Number      Exhibit Description
      ------      -------------------
       11.1       Statement regarding computation of loss per common share.

       27.1       Financial Data Schedule.


         (b)      Reports on Form 8-K

         On January 14, 1999, the Company filed a Current Report on Form 8-K
announcing the Company entered into an Agreement and Plan of Merger with Ovation
Communications, Inc., a Delaware Corporation.

         On February 3, 1999, the Company filed a Current Report on Form 8-K to
report results for the fourth quarter and fiscal year 1998.

         On February 11, 1999, the Company filed a Current Report on Form 8-K to
announce plans to raise approximately $250 million in a proposed private senior
note offering. 

         On February 16, 1999, the Company filed a Current Report on Form 8-K to
announce an increase in the amount of debt to be raised from $250 million to
approximately $500 million.

         On February 26, 1999, the Company filed a Current Report on Form 8-K to
report the February 10, 1999, acquisition by merger of Talking Directories, Inc.
and Info America Phone Books, Inc.

                                       19
<PAGE>
 
                                   SIGNATURES

         Pursuant to the requirements 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
                                      (registrant)



Date:  May 13, 1999                   By:          /s/ Stephen C. Gray
                                          ____________________________________
                                                     Stephen C. Gray
                                          President and Chief Operating Officer



Date:  May 13, 1999                   By:          /s/ J. Lyle Patrick
                                          ____________________________________
                                                     J. Lyle Patrick
                                                 Chief Financial Officer

                                       20
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                   Sequentially
     Exhibit                                                                         Numbered
     Number    Exhibit Description                                                    Page
     -------   -------------------                                                 ------------
<S>            <C>                                                                 <C>
      11.1     Statement regarding computation of loss per common share.
      27.1     Financial Data Schedule.
</TABLE>