US LEC CORP, 424B4, 1998-04-27

US LEC CORP
424B4, 1998-04-27
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

PROSPECTUS
(US LEC logo)

5,500,000 Shares

US LEC Corp.
Class A Common Stock
------------
The 5,500,000 shares of Class A Common Stock offered hereby are being sold
by US LEC Corp. (the "Company" or "US LEC"). Prior to this offering (the
"Offering"), there has not been a public market for the Class A Common Stock of
the Company. See "Underwriting" for information relating to factors considered
in determining the initial public offering price. The Class A Common Stock has
been conditionally approved for listing on the Nasdaq National Market under the
symbol "CLEC."
The Company has two classes of common stock, the Class A Common Stock and
the Class B Common Stock (collectively, the "Common Stock"). The rights of the
holders of the Class A Common Stock and the Class B Common Stock are
substantially identical, except that (i) holders of the Class A Common Stock
are entitled to one vote per share and holders of the Class B Common Stock are
entitled to 10 votes per share and, except as provided in clause (ii), holders
of both classes vote together as one class on all matters submitted to a vote
of stockholders, including the election of directors; (ii) holders of the Class
B Common Stock vote as a separate class to elect two members of the Company's
Board of Directors; and (iii) the Class B Common Stock, subject to the terms of
an agreement among the holders of Class B Common Stock, is fully convertible at
any time into Class A Common Stock, at the option of the holder, or
automatically upon transfer to a person other than an existing holder of Class
B Common Stock or his, her or its Permitted Transferee (as defined), on a
one-for-one basis. See "Description of Capital Stock."
After the Offering, Richard T. Aab, the Chairman, Chief Executive Officer
and a founder of US LEC, will own or otherwise control the vote of 100% of the
outstanding Class B Common Stock, representing approximately 94.8% of the total
voting power of the outstanding Common Stock. See "Risk Factors -- Control by
Single Stockholder," "Security Ownership of Management" and "Description of
Capital Stock."

See "Risk Factors" beginning on page 7 for a discussion of certain factors
which should be considered by potential investors.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share $ 15.00 $ 1.05 $ 13.95
Total (3) $ 82,500,000 $ 5,775,000 $ 76,725,000
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses, estimated at $900,000, which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 825,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $94,875,000, $6,641,250 and $88,233,750, respectively.
See "Underwriting."
------------
The shares of Class A Common Stock are being offered by the several
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that certificates for
the shares of Class A Common Stock offered hereby will be available for
delivery on or about April 29, 1998, at the office of Smith Barney Inc., 333
West 34th Street, New York, New York 10001 or through the facilities of The
Depository Trust Company.
------------
Salomon Smith Barney
Bear, Stearns & Co. Inc.
Wheat First Union
April 23, 1998

<PAGE>

US LEC's Network

(map appears here with plot points to be provided)

Richmond
Roanoke
Greensboro
Asheville
Knoxville
Nashville
Memphis
Tampa
Miami
Ft. Lauderdale
Orlando
Jacksonville
Atlanta
Columbia
Charleston / Myrtle Beach
Greenville / Spartanburg
Wilmington
Charlotte
Raleigh

Switch Activation Schedule
- ----------------------------

o Markets currently served

o Service to be initiated during
the remainder of 1998

o Service to be initiated in 1999

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>

PROSPECTUS SUMMARY

The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Prospectus Summary is qualified
in its entirety by, the more detailed information, including the consolidated
financial statements and notes thereto contained herein. The Company is the
successor to US LEC L.L.C., a Delaware limited liability company, that merged
into the Company on December 31, 1997. Unless the context otherwise requires,
the terms "US LEC" and the "Company" refer to US LEC Corp., a Delaware
corporation and its consolidated subsidiaries and the Company's predecessors,
US LEC L.L.C. and US LEC Corp., a Delaware corporation that was merged into US
LEC L.L.C. on December 31, 1996. Capitalized terms used in this Prospectus
which are not otherwise defined herein, have the meaning ascribed to them in
the Glossary included in this Prospectus. References herein to "EBITDA" refer
to net earnings (loss) before interest expense, income taxes, depreciation and
amortization. Information in this Prospectus, unless otherwise indicated,
assumes that the over-allotment option that has been granted to the
Underwriters in the Offering will not be exercised.

The Company

US LEC is a rapidly growing competitive local exchange carrier ("CLEC")
that provides switched local, long distance and enhanced telecommunications
services primarily to medium and large-sized organizations located in selected
markets in the southeastern United States. The Company was founded in June 1996
after passage of the Telecommunications Act of 1996 (the "Telecom Act"), which
enhanced the competitive environment for local exchange services. The Company
initiated service in Charlotte, North Carolina in March 1997, becoming one of
the first CLECs in North Carolina to provide switched local exchange services,
and subsequently initiated service in Raleigh and Greensboro, North Carolina
and in Atlanta, Georgia. As of February 28, 1998, the Company had 62,545
Equivalent Access Lines (as defined in the Glossary) in service. US LEC plans
to enter 15 new markets in Tennessee, Florida, South Carolina, Virginia and
North Carolina by the end of 1999. US LEC's objective is to become the primary
provider of switched local telecommunications services to its existing and
target customers.

Network Strategy

US LEC purchases and deploys switching equipment and leases fiber optic
transmission capacity from competitive access providers ("CAPs"), other CLECs
and incumbent local exchange carriers ("ILECs"). Management believes that this
switch-based, leased-transport strategy provides the Company with significant
competitive advantages. By owning its switches, the Company is able to better
configure its network to provide cost-effective and customized solutions for
its customers' telecommunications needs. By leasing transmission capacity, the
Company is able to (i) reduce the up-front capital expenditures required to
enter new markets, (ii) avoid the risk of "stranded" investment in
under-utilized fiber networks and (iii) enter markets and generate revenue and
positive cash flow more rapidly than if the Company first constructed its own
transmission facilities. Management believes that the availability of several
suppliers of fiber optic transmission facilities in each of the Company's
markets provides US LEC with negotiating leverage, vendor diversity and the
ability to offer customers enhanced reliability at a competitive price.

Market Opportunity

The Company focuses its primary sales efforts on
telecommunications-intensive organizations with at least 100 access lines,
including businesses, government agencies, other telecommunications companies
and value-added resellers ("VARs"). After completing its planned expansion, US
LEC will operate in 19 markets located in six contiguous states in the
southeastern United States -- one of the fastest growing regional markets for
business telecommunications services in the country. Within the Southeast, the
Company has selected its target markets based on a number of considerations,
including the number of potential customers and other competitors in such
markets and the presence of multiple transmission facility suppliers. Based on
the Company's study of state regulatory filings (the "Market Study"), in the
four markets presently served by the Company there were approximately 1.4
million business lines that generated approximately $2.1 billion in local
exchange and long distance revenues in 1996. The Market Study indicates that
the 19 markets in which management expects the

1
<PAGE>

Company to be operating by the end of 1999 had a total of approximately 4.1
million business lines that generated approximately $5.7 billion in local
exchange and long distance revenues in 1996. The local and long distance
revenue figures reported in the Market Study do not include revenue associated
with enhanced services and carrier access fees, which US LEC is pursuing as
part of its business plan.

Since commencing network operations, US LEC has achieved significant
growth in its Equivalent Access Lines in service and in the number of switched
minutes of use ("MOUs") carried over the Company's network. As indicated in the
following table, from March 1997 through February 1998, the Company increased
its number of Equivalent Access Lines in service at month-end from 288 to
62,545 and increased its monthly number of MOUs during the same period from
approximately 40,000 to approximately 450 million.

<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
------ ------ ------- ------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative Equivalent
Access Lines in Service (1):
Charlotte .................. 288 757 2,204 2,881 4,571 5,157 9,789 10,863 12,824 16,724
Raleigh .................... -- 168 624 1,206 1,948 3,012 5,715 9,590 13,935 19,017
Greensboro ................. -- -- -- -- -- -- -- -- 3,168 13,488
Atlanta .................... -- -- -- -- -- -- -- -- -- --
--- --- ----- ----- ----- ----- ----- ------ ------ ------
Totals ................... 288 925 2,828 4,087 6,519 8,169 15,504 20,453 29,927 49,229
=== === ===== ===== ===== ===== ====== ====== ====== ======
MOUs (in
thousands) (2) ............. 40 500 3,118 5,000 16,323 20,024 33,383 54,273 95,542 243,637
=== === ===== ===== ====== ====== ====== ====== ====== =======

<CAPTION>
1998
-------------------
Jan. Feb.
--------- ---------
<S> <C> <C>
Cumulative Equivalent
Access Lines in Service (1):
Charlotte .................. 24,943 27,027
Raleigh .................... 19,800 20,685
Greensboro ................. 14,203 14,689
Atlanta .................... -- 144
------ ------
Totals ................... 58,946 62,545
====== ======
MOUs (in
thousands) (2) ............. 446,386 450,000
======= =======
</TABLE>

- ----------
(1) As of the end of the month indicated. "Equivalent Access Lines" is a term
used by management to quantify the size of the Company's network. For a
detailed definition, see Glossary.

(2) MOUs indicate the number of local and long distance switched minutes of use
carried over the Company's network during the month indicated.

The Company's existing North Carolina operations generated positive EBITDA
of $200,264 during the month of December 1997, ten months after the Company
first initiated service in Charlotte. While EBITDA does not represent cash flow
or results of operations in accordance with generally accepted accounting
principles, it is a measure of financial performance commonly used in the
telecommunications industry. Management expects the Company to achieve similar
operating results in each of its new markets within a comparable time frame.
Management attributes US LEC's ability to achieve this performance primarily to
two factors. First, the Company's capital-efficient network strategy eliminates
the lengthy "build-out" period usually required to construct a fiber optic
transmission network, permitting the Company to quickly enter new markets and
rapidly generate revenue and positive cash flow. Second, US LEC's
telecommunications-intensive customers typically transmit a large amount of
switched traffic over the Company's network, resulting in efficient network
utilization and attractive operating margins.

Management

US LEC believes that the quality of its management team has been a
critical factor in the Company's successful entry into existing markets and
will be a key to the implementation of its strategy in entering additional
markets. The Company has assembled a proven management team with extensive
telecommunications experience in the deployment of local exchange, long
distance, cellular and international gateway services in emerging competitive
environments. The Company's seven executive officers have an average of over 15
years of experience in the telecommunication services industry. In 1982,
Richard T. Aab, US LEC's Chairman and Chief Executive Officer, co-founded ACC
Corp., a publicly traded international telecommunications company, and served
that company in various capacities, including Chairman and Chief Executive
Officer, through mid-1997. Tansukh V. Ganatra, US LEC's President and Chief
Operating Officer, served as ACC Corp.'s President, Chief Operating Officer,
and Vice President of Engineering and Operations over a ten-year period ending
in 1997. Prior to joining ACC Corp., Mr. Ganatra spent 19 years at Rochester
Telephone Corp. (now part of Frontier Corp.), most recently serving as Director
of Network Engineering. Other key US LEC executives have extensive experience
in telecommunications engineering, marketing, sales, operations and regulation.

2
<PAGE>

Business Strategy

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

o Deploy a Capital-Efficient Network. Management believes that US LEC is one of
the first CLECs to utilize a strategy of purchasing and deploying switching
equipment in each target market and leasing the required fiber optic
transmission capacity from CAPs, other CLECs and ILECs. Management believes
the Company's switch-based, leased-transport strategy enables it to enter
markets and generate revenue and positive cash flow more rapidly than if the
Company first constructed its own transmission facilities. This strategy
also reduces the up-front capital expenditures required to enter new markets
and avoids the risk of "stranded" investment in under-utilized fiber
networks. Management also believes that the Company's ability to align its
leased transmission costs with customer orders permits a higher return on
invested capital.

o Focus on a Southeastern Cluster of Operations. After completing its planned
expansion, the Company will operate in 19 markets located in six contiguous
states in the southeastern United States -- one of the fastest growing
regional markets for business telecommunications services in the country.
Within the Southeast, the Company has selected its target markets based on a
number of considerations, including the number of potential customers and
other competitors in such markets and the presence of multiple transmission
facility suppliers. Management believes that the Company's clustered network
will enable it to take advantage of regional calling patterns and capture an
increasing portion of customer traffic on its network. Management also
believes that by originating and terminating calls on its network, the
Company can achieve significant cost savings and potential pricing
advantages over its competition.

o Target Telecommunications-Intensive Customers. The Company focuses its primary
sales efforts on telecommunications-intensive organizations with at least 100
access lines, including businesses, government agencies, other
telecommunications companies and VARs. The volume of usage generated by the
Company's target customers allows the Company to efficiently concentrate the
telecommunications traffic of its customers on one or more leased T-1 lines.
In addition, the Company frequently is able to sell enhanced and long distance
services to complement its core local services. This further enhances network
utilization and improves margins, as fixed network costs are spread over a
larger base of MOUs.

o Install a Robust, Uniform Technology Platform. The Company has chosen the
5ESS(R)-2000 digital switch manufactured by Lucent Technologies, Inc.
("Lucent") to provide a consistent technology platform throughout its
network. The Lucent switch enables the Company to provide both local and
long distance services from a single platform. This uniform and advanced
switching platform enables the Company to (i) deploy features and functions
quickly throughout its entire network, (ii) expand switch capacity in a cost
effective manner, (iii) lower maintenance costs through reduced training and
spare part requirements and (iv) achieve direct connectivity to cellular and
personal communication system applications in the future.

o Employ a Direct Sales Force with Extensive Local Market Experience.
Management believes that the Company's success in a particular market is
enhanced by employing a direct sales force with extensive local market and
telecommunications sales experience. The Company employed this strategy in
building its existing sales forces in North Carolina and Georgia and intends
to continue implementing this strategy in other markets. Salespeople with
experience in a particular market provide the Company with extensive
knowledge of the Company's target customer base and in many cases already
have existing relationships with target customers. The experience and
relationships of these salespeople enable them to pre-sell the Company's
products and services prior to initiating network operations in a particular
market.

o Implement Efficient Provisioning Processes. Management believes that a
critical aspect of the success of a CLEC is timely and effective
provisioning systems, which includes the process of transitioning ILEC
customers to the Company's network. The Company focuses on implementing
effective and timely provisioning practices in each of its markets to
rapidly and efficiently transition customers from the ILEC to the Company
without disruption of the customer's operations. Management believes that
these practices provide the Company with a long-term competitive advantage
and enable it to implement services in its markets rapidly and to shorten
the time between receipt of the customer order and the generation of
revenue.

3
<PAGE>

The Offering

Class A Common Stock offered by
the Company....................... 5,500,000 shares

Common Stock to be outstanding after the Offering:
Class A Common Stock............. 9,355,000 shares (1)
Class B Common Stock............. 17,075,270 shares
Total.......................... 26,430,270 shares (1)

Use of Proceeds.................... The Company intends to use substantially
all of the net proceeds from the Offering
for capital expenditures relating to its
expansion into new markets. See "Use of
Proceeds."

Nasdaq National Market Symbol...... CLEC
- ----------
(1) Excludes 469,000 shares of Class A Common Stock issuable upon exercise of
outstanding warrants having exercise prices ranging from $2.86 to $10.00
per share, 182,800 shares issuable upon exercise of outstanding options
granted under the US LEC Corp. 1998 Omnibus Stock Plan (the "Stock Plan")
with an exercise price of $10.00 per share and 10,000 shares issuable upon
exercise of options to be granted under the Stock Plan at the completion
of the Offering with an exercise price equal to the initial public
offering price set forth on the cover page of this Prospectus. See
"Description of Capital Stock." Also excludes 360,000 shares issuable upon
the exercise of an option with an exercise price of $13.00 per share
conditionally granted under the Stock Plan to an individual who has
received an offer of employment from the Company. See "Management --
Directors and Executive Officers."

Risk Factors

See "Risk Factors" for a discussion of certain factors which should be
considered by prospective purchasers of the Class A Common Stock.

Address

The principal executive offices of the Company are located at 212 South
Tryon Street, Suite 1540, Charlotte, North Carolina 28281. The Company's
telephone number is (704) 319-1000.

4
<PAGE>

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The summary historical consolidated financial data presented below as of
December 31, 1996 and 1997, for the period from June 6, 1996 (inception) to
December 31, 1996 and for the year ended December 31, 1997 are derived from and
qualified by reference to the audited consolidated financial statements and
notes thereto of US LEC contained elsewhere in this Prospectus. The Company's
consolidated financial statements as of December 31, 1996 and 1997, for the
period from June 6, 1996 (inception) to December 31, 1996 and for the year
ended December 31, 1997, have been audited by Deloitte & Touche LLP,
independent public accountants. The summary historical financial data for each
quarter of 1997 have been derived from the unaudited interim consolidated
financial statements of the Company. In the opinion of management, the
unaudited interim consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. All of the data should be read in conjunction with and are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements and notes thereto of the Company contained elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
Period from Quarter Ended
June 6, 1996 ---------------------------------------------------------------
(Inception) to
December 31, March 31, June 30, September 30, December 31,
1996 1997 1997 1997 1997
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ..................................... $ -- $ 1,141 $ 228,620 $ 1,529,745 $ 4,698,155
Cost of services ............................ -- 423,093 314,828 1,075,183 2,387,897
------------- ------------ ----------- ------------ -------------
Gross margin ................................ -- (421,952) (86,208) 454,562 2,310,258
Selling, general and administrative ......... 941,743 1,049,130 1,047,940 1,294,115 2,726,152
Depreciation and amortization ............... 4,059 14,046 88,406 124,994 215,468
------------- ------------ ----------- ------------ -------------
Loss from operations ........................ (945,802) (1,485,128) (1,222,554) (964,547) (631,362)
Interest expense, net ....................... 16,861 66,556 108,021 101,326 78,953
------------- ------------ ----------- ------------ -------------
Net loss .................................... $ (962,663) $ (1,551,684) ($ 1,330,575) $ (1,065,873) $ (710,315)
============= ============ =========== ============ =============
Net loss per share .......................... $ (.06) $ (.09) $ (.07) $ (.06) $ (.04)
============= ============ =========== ============ =============
Weighted average shares outstanding ......... 17,310,000 17,310,000 17,832,750 19,075,500 20,239,500
============= ============ =========== ============ =============
Other Financial Data:
Capital expenditures ........................ $ 279,634 $ 1,798,152 $ 634,122 $ 828,903 $ 9,793,930
EBITDA (1) .................................. (941,743) (1,471,082) (1,134,148) (839,553) (415,894)
Net cash flow used in operating
activities ................................. (1,079,069) (1,043,972) (1,253,840) (1,168,631) (2,127,650)
Net cash flow provided by (used in)
investing activities ....................... (465,792) (1,598,152) (3,251,162) 1,303,141 (2,405,058)
Net cash flow provided by financing
activities ................................. 2,271,000 2,400,000 4,848,244 1,335,280 5,424,871
Operating Data:
Cumulative Equivalent Access Lines in
service (2) ................................ -- 288 4,087 15,504 49,229
MOUs (3) .................................... -- 40,000 8,618,000 69,730,000 393,452,000

<CAPTION>
Year Ended
December 31,
1997
---------------
<S> <C>
Statement of Operations Data:
Revenue ..................................... $ 6,457,661
Cost of services ............................ 4,201,001
------------
Gross margin ................................ 2,256,660
Selling, general and administrative ......... 6,117,337
Depreciation and amortization ............... 442,914
------------
Loss from operations ........................ (4,303,591)
Interest expense, net ....................... 354,856
------------
Net loss .................................... $ (4,658,447)
============
Net loss per share .......................... $ (.25)
============
Weighted average shares outstanding ......... 18,653,308
============
Other Financial Data:
Capital expenditures ........................ $ 13,055,107
EBITDA (1) .................................. (3,860,677)
Net cash flow used in operating
activities ................................. (5,594,093)
Net cash flow provided by (used in)
investing activities ....................... (5,951,231)
Net cash flow provided by financing
activities ................................. 14,008,395
Operating Data:
Cumulative Equivalent Access Lines in
service (2) ................................ 49,229
MOUs (3) .................................... 471,840,000
</TABLE>

<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------------------------------
As of
December 31, Pro Forma
1996 Actual Pro Forma (4) As Adjusted (4) (5)
------------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Current assets .................................. $1,067,662 $ 9,654,993 $ 9,654,993 $85,479,993
Working capital (deficiency) .................... 936,884 (2,268,883) (2,268,883) 73,556,117
Property and equipment, net ..................... 276,097 12,889,335 12,889,335 12,889,335
Total assets .................................... 1,466,835 22,680,681 22,680,681 98,505,681
Notes payable -- stockholders ................... 1,671,000 5,000,000 -- --
Total stockholders' equity (deficiency) ......... (334,943) 5,756,805 10,756,805 86,581,805
</TABLE>

5
<PAGE>

- ----------
(1) EBITDA consists of net earnings (loss) before interest expense, income
taxes, depreciation and amortization. It is a measure commonly used by
analysts, investors and other interested parties in the telecommunications
industry and is presented to assist in understanding the Company's
operating results. However, EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be considered an alternative to net income or (loss) as a measure of
performance or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.

(2) As of the end of the period indicated. "Equivalent Access Lines" is a term
used by management to quantify the size of the Company's network. For a
detailed definition, see Glossary.

(3) MOUs indicate the number of local and long distance switched minutes of use
carried over the Company's network during the period indicated.

(4) Reflects the exchange of a note payable to a stockholder in the amount of
$5.0 million for 480,770 shares of Class B Common Stock on February 14,
1998. See "Certain Relationships and Related Transactions" and Note 9 to
the Company's consolidated financial statements for the year ended
December 31, 1997.

(5) Adjusted to reflect the sale of Class A Common Stock offered hereby
assuming no exercise of the Underwriters' over-allotment option, and after
deducting the Underwriters' Discounts and Commissions and estimated
expenses of the Offering. See "Use of Proceeds."

6
<PAGE>

RISK FACTORS

Prospective investors should consider carefully the following factors
together with the other information contained in this Prospectus:

Limited Operating History

US LEC was formed in June 1996, began generating revenue in March 1997 and
has a relatively small number of customers. Accordingly, prospective investors
have very limited historical operating and financial information upon which to
base an evaluation of the Company's performance and an investment in the Class
A Common Stock. Given the Company's limited operating history, there can be no
assurance that it will be able to compete successfully in the
telecommunications business, achieve or sustain profitability or generate
sufficient positive cash flow in the future to meet debt service, working
capital or other cash requirements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Risks Associated with Implementation of Growth Strategy

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

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

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

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

Interconnection Agreements. The Company has agreements for the
interconnection of its networks with the networks of the ILECs covering each
market in which US LEC either has or is currently installing a switching
platform. US LEC may be required to negotiate new, or renegotiate existing,
interconnection agreements as it enters new markets in the future, such as in
Virginia and Florida. In addition, as its existing interconnection agreements
expire, it will be required to negotiate extension or replacement agreements.
There can be no assurance that the Company will successfully negotiate such
other agreements for interconnection with the ILECs or renewals of existing
interconnection agreements on terms and conditions acceptable to the Company. A
decision by the United States Court of Appeals for the Eighth Circuit vacating
several of the FCC's rules creates uncertainty about the rules governing
pricing, terms and conditions of interconnection agreements. As a result of
this decision, which has been appealed to the U.S. Supreme Court, and a pending
review of this issue by the FCC, negotiating and enforcing such agreements
could become more difficult and protracted, and renegotiation of

7
<PAGE>

existing agreements could be required. See "Business -- Regulation -- Eighth
Circuit Court of Appeals Decision." The failure to negotiate and obtain
required interconnection agreements on terms and conditions acceptable to the
Company could have a material adverse effect on the Company's ability to
rapidly enter a particular market and on its operations in its existing
markets.

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

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

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

Uncertainties Related to Reciprocal Compensation

The Telecom Act requires ILECs to provide reciprocal compensation to a
CLEC for local traffic terminated on such CLEC's network. Notwithstanding this
requirement, a number of Regional Bell Operating Companies ("RBOCs") have taken
the position that traffic terminated to enhanced service providers ("ESPs"),
including information service providers such as internet service providers
("ISPs"), is not local traffic. CLECs have been generally successful in
challenging the RBOCs in public utility commission ("PUC") proceedings in
several states, including North Carolina (a proceeding that the Company
initiated) and Virginia. The PUCs in Florida, Georgia and Tennessee are
currently reviewing this issue. In Tennessee, the order of an administrative
law judge ruling in favor of a CLEC on this issue against BellSouth is subject
to review by the Tennessee PUC. If the Tennessee PUC affirms the order,
BellSouth will have up to 60 days to appeal it. The Company has joined the
proceeding in Tennessee as an intervening party and is considering doing so in
the Florida and Georgia proceedings. The Company is not aware of any current
proceedings involving this issue before the South Carolina PUC, the only other
state in the Company's current and proposed operating territory. In addition to
the various state PUC proceedings, this issue is under general review by the
FCC.

In August 1997, BellSouth Telecommunications, Inc. ("BellSouth") notified
the Company and other CLECs that it would not pay or collect reciprocal
compensation under interconnection agreements for traffic terminated to an ESP
or an ISP. The Company petitioned the North Carolina PUC to resolve this issue.
On February 26, 1998, the North Carolina PUC ruled that the reciprocal
compensation provision contained in the interconnection agreement between
BellSouth and the Company is fully applicable to traffic terminated to ESP and
ISP customers when the originating caller and the called number are associated
with the same calling area, and directed BellSouth to bill and pay reciprocal
compensation for all such calls. On March 27, 1998, BellSouth filed a motion
requesting (i) a stay of the order issued by the NC PUC, (ii) an extension of
the period during which BellSouth must file an appeal of the NC PUC order with
an intermediate state appeallate court and (iii) permission to deposit the
disputed amounts into an interest bearing escrow account under the control of
an agent acceptable to both parties. In an order dated March 31, 1998, the NC
PUC granted BellSouth's motion, thereby extending

8
<PAGE>

the appeal period to April 27, 1998. In addition, under the Telecom Act,
BellSouth may be entitled to seek review of the decision of the North Carolina
PUC by the United States District Court for the Eastern District of North
Carolina.

A significant portion of the Company's estimated total revenue for 1998
and 1999 is expected to be derived from reciprocal compensation from BellSouth
for traffic terminated on US LEC's network to ESPs and ISPs in North Carolina.
If a decision adverse to the Company is issued on any appeal or review of the
order of the North Carolina PUC, by the FCC or by one or more PUCs in other
southeastern states in which the Company currently operates or plans to operate
in the future, the ability of the Company to serve existing and future ESP and
ISP customers profitably would be limited, which could have a material adverse
effect on US LEC's operating results, financial condition and current strategy.

Dependence on Key Personnel

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

Reliance on Leased Capacity

A key element of US LEC's business and growth strategy is leasing fiber
optic transmission capacity instead of constructing its own transport
facilities. In implementing this strategy, the Company relies upon its ability
to lease capacity from CAPs, other CLECs and ILECs operating in its markets. In
order for this strategy to be successful, the Company must be able to negotiate
and renew satisfactory agreements with its fiber optic network providers, and
the providers must process provisioning requests on a timely basis, maintain
their networks in good working order and provide adequate capacity. Although US
LEC enters into agreements with its network providers that are intended to
ensure access to adequate capacity and timely processing of provisioning
requests, (and although US LEC's interconnection agreements with ILECs
generally provide that the Company's connection and maintenance orders will
receive attention at parity with the ILECs and other CLECs and that adequate
capacity will be provided), there can be no assurance that the ILECs and other
network providers will comply with their contractual (and, in the case of the
ILECs, legally required) network provisioning obligations, or that the
provisioning process will be completed for the Company's customers on a timely
and otherwise satisfactory basis. Furthermore, there can be no assurance that
the rates to be charged to US LEC under future interconnection agreements or
lease agreements with other providers will allow the Company to offer usage
rates low enough to attract a sufficient number of customers and operate its
networks at satisfactory margins.

Competition

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

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

9
<PAGE>

including brand name recognition, substantially greater than those of the
Company, as well as other competitive advantages over the Company.

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

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

Regulation

Although passage of the Telecom Act has resulted in increased
opportunities for companies that are competing with the ILECs, no assurance can
be given that changes in current or future regulations adopted by the FCC or
state regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. In addition, although the Telecom Act, as passed, conditions RBOCs'
provisioning of in-region long distance service on a showing that the local
market has been opened to competition, a United States District Court in Texas
has held these portions of the Telecom Act invalid. That decision has been
stayed pending appeal, and has been appealed to the United States Court of
Appeals for the Fifth Circuit. If the decision is upheld, it could (i) remove
the incentive RBOCs presently have to cooperate with companies like US LEC to
foster competitition within their service areas so that they can qualify to
offer in-region long distance by allowing RBOCs to offer such services
immediately and (ii) give the RBOCs the ability to offer "one-stop shopping"
for both long distance and local service. The Company cannot yet determine when
or how the Court will rule on this appeal. If the decision is reversed, there
can be no assurance that these ILECs will negotiate quickly with competitors
such as the Company for the required interconnection of the competitor's
networks with those of the ILEC or provisioning of services on a timely basis,
or that such interconnection agreements will be on terms acceptable to the
Company.

On May 8, 1997, the FCC released an order establishing a significantly
expanded federal telecommunications universal service program which both
increased the size of existing subsidies and created new subsidy funds to which
the Company may be required to contribute. These funds relate to subsidies for
certain services offered in high-cost areas or to low income subscribers,
schools, libraries and rural healthcare providers. As of December 31, 1997, the
Company was unable to quantify the payments, if any, that it will be required
to make for the year. Based upon preliminary guidance provided by the FCC
regarding the calculation of these payments, management believes that the
amount of any such payments will not be material for 1997. In the May 8 order,
the FCC also announced that it will soon revise its rules for subsidizing
service provided to consumers in high cost areas. The Company also may be
required to contribute to state-established funds.

The Telecom Act also governs interconnection, resale of ILEC services by
CLECs, lease of unbundled network elements and termination of traffic. On July
18, 1997, the United States Court of Appeals for the Eighth Circuit overturned
many of the rules the FCC had established pursuant to the Telecom Act. The
Eighth Circuit decision substantially limits the FCC's jurisdiction and expands
the state regulators' jurisdiction to set and enforce rules governing the
development of local competition. As a result, it is more likely that the rules
governing local competition will vary substantially from state to state. Most
states, however, have already begun to establish rules for local competition
that are consistent with the FCC rules overturned by the Eighth Circuit. If a
patchwork of state regulations were to develop, it could increase the Company's
costs of regulatory compliance and could make entry into, and conducting
business, in some markets more difficult and expensive than in others. The U.S.
Supreme Court has decided to review the Eighth Circuit's decision. There can be
no assurance as to how or when the U.S. Supreme Court will act on the appeals
or that the outcome of the appeals will not have a material adverse effect on
the Company. See "Business -- Regulation."

Negative Cash Flow and Operating Losses

The Company intends to satisfy most of its working capital needs through
cash generated from operations. To date, the Company has not generated positive
cash flow from its operations on a consolidated basis. Moreover, US LEC's
operations have resulted in net losses of $962,663 for the period from
inception (June 6, 1996)

10
<PAGE>

through December 31, 1996 and approximately $4.7 million for the year ended
December 31, 1997. There can be no assurance that the Company will achieve or
sustain profitability or generate positive cash flow in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Future Capital Requirements

Implementation of the Company's expansion plans will require significant
capital expenditures. The Company's principal capital expenditures relate to
the purchase and installation of its switching platform. The Company estimates
that the capital expenditures required to fund its expansion plans will
approximate $40 million in 1998 and $30 million in 1999. Management expects to
satisfy these capital requirements primarily with the net proceeds of this
Offering, although there can be no assurance that the actual capital
expenditures required to complete the Company's proposed expansion will not
exceed such estimated amounts. In addition, the actual amount and timing of the
Company's future capital expenditures may differ materially from the Company's
estimates as a result of, among other things, the ability of the Company to
meet its planned expansion schedule, the number of its customers and the
services for which they subscribe and regulatory, technological and competitive
developments in the Company's industry. Due to the uncertainty of these
factors, actual revenues and costs may vary from expected amounts, possibly to
a material degree, and such variations are likely to affect the Company's
planned capital expenditures.

The Company also will continue to evaluate revenue opportunities in other
southeastern markets as well as potential acquisitions and, as and when
attractive opportunities develop, the Company may elect to pursue such
opportunities. The Company expects to obtain the capital required to pursue
such opportunities from credit facilities and other borrowings, the sale of
additional equity or debt securities or cash generated from operations. There
can be no assurance, however, that the Company would be successful in raising
sufficient additional capital on acceptable terms or that the Company's
operations would produce sufficient positive cash flow to pursue such
opportunities should they arise. Failure to raise and generate sufficient funds
or unanticipated increases in capital requirements may require the Company to
delay or curtail its expansion plans, which could have a material adverse
effect on the Company's growth and its ability to compete in the
telecommunications services industry. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

Variability of Quarterly Operating Results

As a result of the significant expenses associated with the Company's
expansion into new markets, the Company anticipates that its operating results
will vary significantly from period to period.

Control by Single Stockholder

As of the date of this Prospectus, Richard T. Aab beneficially owns or
otherwise controls 100% of the outstanding shares of Class B Common Stock
representing approximately 97.8% of the Company's total voting power, without
giving effect to the Offering, and approximately 94.8% of the Company's total
voting power after giving effect to the Offering. In addition, holders of Class
B Common Stock are entitled to vote as a separate class to elect two members of
the Board of Directors and to vote with the holders of Class A Common Stock for
the election of other members of the Board of Directors. As a result, Mr. Aab
will be able to control the board and all stockholder decisions and, in
general, to determine (without the consent of the Company's other stockholders)
the outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of the Company's assets. Mr. Aab also has the power to
prevent or cause a change in control of the Company. See "Security Ownership of
Management" and "Description of Capital Stock."

Absence of Prior Public Market; Possible Volatility of Stock Price

Prior to the Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that an active trading market for
the Class A Common Stock will develop or be sustained after the Offering. The
initial public offering price of the Class A Common Stock has been determined
through negotiations with the representatives of the Underwriters. There can be
no assurance that future market prices for the Class A Common Stock will equal
or exceed the initial public offering price set forth on the cover page of this

11
<PAGE>

Prospectus. The market prices of securities of early stage telecommunications
companies similar to the Company have historically been highly volatile. See
"Underwriting." Future announcements concerning the Company or its competitors,
including quarterly results, technological innovations, services, government
legislation or regulation, and general market, economic and political
conditions, may have a significant effect on the market price of the Class A
Common Stock.

Substantial Dilution

Purchasers of the Class A Common Stock in the Offering will incur
immediate and substantial dilution in net tangible book value per share. As of
December 31, 1997, on a pro forma basis, the Company's existing stockholders
have paid an average price of $0.78 per share for their shares of Common Stock
compared to $15.00 per share for shares of Class A Common Stock purchased by
investors in the Offering. See "Dilution."

Potential Effect on Market Price of Future Sales of Shares

Upon completion of the Offering, 26,430,270 shares of Common Stock will be
outstanding. Of these shares, the 5,500,000 shares of Class A Common Stock sold
in the Offering will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except for any such
shares which may be acquired by an "affiliate" of the Company as that term is
defined in Rule 144 ("Rule 144") under the Securities Act. The remainder of the
outstanding shares of Class A Common Stock, and all of the shares of Class B
Common Stock outstanding after the Offering, will be "restricted securities" as
that term is defined in Rule 144. These shares of Class A Common Stock (and
shares of Class A Common Stock acquired upon the conversion of Class B Common
Stock by the current holders thereof) will begin to become eligible for sale in
the public market after December 31, 1998, subject to the volume, manner of
sale and other limitations of Rule 144.

The Company, its directors and executive officers, who, as of March 31,
1998, beneficially owned a total of 19,343,270 shares of Common Stock, have
agreed not to offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Class A
Common Stock or any securities convertible into, or exchangeable for, shares of
Class A Common Stock for a period of 180 days from the date of this Prospectus,
without the prior written consent of Smith Barney Inc., except under limited
circumstances. See "Underwriting."

Promptly after completion of the Offering, the Company intends to file a
Registration Statement on Form S-8 with the Commission to register 1,300,000
shares of Class A Common Stock reserved for issuance or sale under the Stock
Plan.

No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Class A Common Stock prevailing from time to time. Sales of
substantial amounts of Class A Common Stock (including shares issued upon the
exercise of outstanding stock options and warrants and conversion of shares of
Class B Common Stock), or the perception that such sales could occur, could
adversely affect the prevailing market prices of the Class A Common Stock. See
"Shares Eligible for Future Sale."

Risks Regarding Forward Looking Statements

The statements contained in this Prospectus and in associated filings by
the Company with the Securities and Exchange Commission (the "Commission")
which are not historical facts are "forward-looking statements" (as such term
is defined in the Private Securities Litigation Reform Act of 1995). These
statements are identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "estimates" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as
those relating to the Company's plans to enter new markets, its anticipation of
revenues from new markets, and statements regarding the development of the
Company's businesses, the markets for the Company's services and products, the
Company's anticipated capital expenditures, regulatory reform and other
statements contained herein regarding matters that are not historical facts,
are only predictions. No assurance can be given that the future results covered
by the forward-looking statements will be achieved. Such statements are subject
to risks, uncertainties and other factors which could cause actual events or
results to differ materially from future results indicated, expressed or
implied by such forward-looking statements. The

12
<PAGE>

most significant of such risks, uncertainties and other factors are discussed
under the heading "Risk Factors" beginning on page 7 of this Prospectus, and
prospective investors are urged to carefully consider such factors as a result
of risks facing the Company.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Class A Common Stock
in this Offering are estimated to be approximately $75,825,000 ($87,333,750 if
the Underwriters' over-allotment option is exercised in full) after deduction
of the Underwriters' Discounts and Commissions and estimated expenses payable
by the Company. The Company intends to use substantially all of the net
proceeds from the Offering for capital expenditures relating to its expansion
into new markets. In addition, the Company may use a portion of the proceeds of
the Offering for acquisitions, although the Company is not currently involved
in any acquisition negotiations. Pending such uses, the net proceeds to the
Company will be invested in short-term, investment grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."

DIVIDEND POLICY

The Company has not paid any cash dividends on its Common Stock. The
Company intends to retain future earnings, if any, to finance the operation and
expansion of its businesses and, therefore, does not anticipate paying any
dividends on the Common Stock in the foreseeable future.

13
<PAGE>

DILUTION

As of December 31, 1997, the pro forma net tangible book value of the
Company was $10,756,805 or $0.51 per share of Common Stock. Pro forma net
tangible book value per share represents the Company's net worth divided by
20,930,270 shares of Common Stock outstanding as of December 31, 1997, and
reflects the exchange of a $5.0 million note payable to a stockholder for
480,770 shares of Class B Common Stock in February 1998. See "Capitalization."
After giving effect to the sale by the Company of 5,500,000 shares of Class A
Common Stock pursuant to the Offering and after deducting the Underwriters'
Discounts and Commissions and estimated expenses of the Offering, the pro forma
as adjusted net tangible book value of the Company at December 31, 1997, was
$86,581,805, or $3.28 per share of Common Stock. Such amount represents an
immediate increase in pro forma net tangible book value of $2.77 per share of
Common Stock to the existing stockholders and an immediate dilution to new
investors of $11.72 per share of Common Stock. The following table illustrates
the dilution in pro forma net tangible book value per share to new investors:

<TABLE>
<S> <C> <C>
Initial public offering price ................................................... $ 15.00
Pro forma net tangible book value before the Offering ......................... $ 0.51
Increase in pro forma net tangible book value attributable to net proceeds of
the Offering ................................................................. 2.77
-------
Pro forma net tangible book value as adjusted for the Offering .................. 3.28
--------
Dilution to new investors ....................................................... $ 11.72
========
</TABLE>

The following table sets forth as of December 31, 1997, on a pro forma as
adjusted basis, the difference between the existing holders of Common Stock and
the purchasers of shares of Class A Common Stock in the Offering, with respect
to the number of shares of Common Stock purchased, the total consideration paid
and the average price per share of Common Stock paid:

<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
------------------------ -------------------------- Price
Number Percent Amount Percent Per Share
------------ --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 20,930,270 79.2% $16,307,115 16.5% $ 0.78
New investors ................. 5,500,000 20.8 82,500,000 83.5 15.00
---------- ----- ----------- -----
Total ...................... 26,430,270 100.0% $98,807,115 100.0%
========== ===== =========== =====
</TABLE>

The foregoing tables and discussions exclude shares of Class A Common
Stock issuable upon the exercise of outstanding warrants and options. See
"Management -- Omnibus Stock Plan," "Security Ownership of Management" and
"Notes to Consolidated Financial Statements." To the extent that outstanding
warrants or options are exercised in the future, there will be further dilution
to new investors.

14
<PAGE>

CAPITALIZATION

The following table sets forth certain information with respect to the
cash and cash equivalents and capitalization of the Company as of December 31,
1997. This table should be read in conjunction with the Selected Historical
Consolidated Financial and Operating Data and the audited consolidated
financial statements and notes thereto of US LEC included elsewhere in this
Prospectus. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Capital
Stock."

<TABLE>
<CAPTION>
As of December 31, 1997
-------------------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (1)(2)
--------------- --------------- -------------------
<S> <C> <C> <C>
Cash and cash equivalents .......................... $ 3,189,210 $ 3,189,210 $ 79,014,210
============ ============ ============
Long-term debt (3) ................................. $ 5,000,000 $ -- $ --
------------ ------------ ------------
Stockholders' equity:
Class A Common Stock, $.01 par value, 72,924,728
shares authorized; 3,855,000 shares issued and
outstanding, actual; and 9,355,000 shares, as
adjusted for the Offering (4)(5) ................ 38,550 38,550 93,550
Class B Common Stock, $.01 par value, 17,075,272
shares authorized; 16,594,500 shares issued and
outstanding, actual; and 17,075,270 shares issued
and outstanding, pro forma (4) .................. 165,945 170,753 170,753
Additional paid-in capital ....................... 11,173,420 17,418,622 93,188,622
Accumulated deficit .............................. (5,621,110) (6,871,120) (6,871,120)
------------ ------------ ------------
Total stockholders' equity ......................... 5,756,805 10,756,805 86,581,805
------------ ------------ ------------
Total capitalization ............................... $ 10,756,805 $ 10,756,805 $ 86,581,805
============ ============ ============
</TABLE>

- ----------
(1) Reflects the exchange of a note payable to a stockholder in the amount of
$5.0 million for 480,770 shares of Class B Common Stock on February 14,
1998. See "Certain Relationships and Related Transactions" and Note 9 to
the Company's consolidated financial statements for the year ended
December 31, 1997.

(2) Adjusted to reflect the sale of Class A Common Stock offered hereby
assuming no exercise of the Underwriters' over-allotment option and after
deducting the Underwriters' Discounts and Commissions and estimated
expenses of the Offering.

(3) Consists of indebtedness to stockholder. See Note 4 to the audited
consolidated financial statements.

(4) The authorized shares of Class A Common Stock and Class B Common Stock as
of December 31, 1997 have been adjusted to reflect an amendment to the
Company's Certificate of Incorporation that decreased the authorized Class
A Common Stock and increased the authorized Class B Common Stock by
480,770 shares.

(5) Issued and outstanding Class A Common Stock excludes (i) 182,800 shares
issuable upon the exercise of outstanding options, none of which are
vested, (ii) 10,000 shares issuable upon exercise of options to be granted
upon completion of the Offering, (iii) 469,000 shares issuable upon the
exercise of outstanding and presently exercisable warrants and (iv)
16,594,500 (actual) and 17,075,270 (pro forma) shares issuable upon
conversion of outstanding shares of Class B Common Stock. See "Description
of Capital Stock." Also excludes 360,000 shares issuable upon the exercise
of an option conditionally granted to an individual who has received an
offer of employment from the Company. See "Management -- Directors and
Executive Officers."

15
<PAGE>

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected historical consolidated financial data presented below as of
December 31, 1996 and 1997, for the period from June 6, 1996 (inception) to
December 31, 1996 and for the year ended December 31, 1997 are derived from and
qualified by reference to the audited consolidated financial statements and
notes thereto of US LEC contained elsewhere in this Prospectus. The Company's
consolidated financial statements as of December 31, 1996 and 1997, for the
period from June 6, 1996 (inception) to December 31, 1996 and for the year
ended December 31, 1997, have been audited by Deloitte & Touche LLP,
independent public accountants. The selected historical financial data for each
quarter of 1997 have been derived from the unaudited interim consolidated
financial statements of the Company. In the opinion of management, the
unaudited interim consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. All of the data should be read in conjunction with and are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements and notes thereto of the Company contained elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
Period from Quarter Ended
June 6, 1996 ---------------------------------------------------------------
(Inception) to
December 31, March 31, June 30, September 30, December 31,
1996 1997 1997 1997 1997
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ..................................... $ -- $ 1,141 $ 228,620 $ 1,529,745 $ 4,698,155
Cost of services ............................ -- 423,093 314,828 1,075,183 2,387,897
------------- ------------ ------------ ------------ -------------
Gross margin ................................ -- (421,952) (86,208) 454,562 2,310,258
Selling, general and administrative ......... 941,743 1,049,130 1,047,940 1,294,115 2,726,152
Depreciation and amortization ............... 4,059 14,046 88,406 124,994 215,468
------------- ------------ ------------ ------------ -------------
Loss from operations ........................ (945,802) (1,485,128) (1,222,554) (964,547) (631,362)
Interest expense, net ....................... 16,861 66,556 108,021 101,326 78,953
------------- ------------ ------------ ------------ -------------
Net loss .................................... $ (962,663) $ (1,551,684) $ (1,330,575) $ (1,065,873) $ (710,315)
============= ============ ============ ============ =============
Net loss per share .......................... $ (.06) $ (.09) $ (.07) $ (.06) $ (.04)
============= ============ ============ ============ =============
Weighted average shares outstanding ......... 17,310,000 17,310,000 17,832,750 19,075,500 20,239,500
============= ============ ============ ============ =============
Other Financial Data:
Capital expenditures ........................ $ 279,634 $ 1,798,152 $ 634,122 $ 828,903 $ 9,793,930
EBITDA (1) .................................. (941,743) (1,471,082) (1,134,148) (839,553) (415,894)
Net cash flow used in operating
activities ................................. (1,079,069) (1,043,972) (1,253,840) (1,168,631) (2,127,650)
Net cash flow provided by (used in)
investing activities ....................... (465,792) (1,598,152) (3,251,162) 1,303,141 (2,405,058)
Net cash flow provided by financing
activities ................................. 2,271,000 2,400,000 4,848,244 1,335,280 5,424,871
Operating Data:
Cumulative Equivalent Access Lines
in service (2) ............................. -- 288 4,087 15,504 49,229
MOUs (3) .................................... -- 40,000 8,618,000 69,730,000 393,452,000

<CAPTION>
Year Ended
December 31,
1997
---------------
<S> <C>
Statement of Operations Data:
Revenue ..................................... $ 6,457,661
Cost of services ............................ 4,201,001
------------
Gross margin ................................ 2,256,660
Selling, general and administrative ......... 6,117,337
Depreciation and amortization ............... 442,914
------------
Loss from operations ........................ (4,303,591)
Interest expense, net ....................... 354,856
------------
Net loss .................................... $ (4,658,447)
============
Net loss per share .......................... $ (.25)
============
Weighted average shares outstanding ......... 18,653,308
============
Other Financial Data:
Capital expenditures ........................ $ 13,055,107
EBITDA (1) .................................. (3,860,677)
Net cash flow used in operating
activities ................................. (5,594,093)
Net cash flow provided by (used in)
investing activities ....................... (5,951,231)
Net cash flow provided by financing
activities ................................. 14,008,395
Operating Data:
Cumulative Equivalent Access Lines
in service (2) ............................. 49,229
MOUs (3) .................................... 471,840,000
</TABLE>

<TABLE>
<CAPTION>
As of As of December 31, 1997
December 31, -------------------------------------------------------
1996 Actual Pro Forma (4) As Adjusted (4)(5)
------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Current assets .................................. $1,067,662 $ 9,654,993 $ 9,654,993 $85,479,993
Working capital (deficiency) .................... 936,884 (2,268,883) (2,268,883) 73,556,117
Property and equipment, net ..................... 276,097 12,889,335 12,889,335 12,889,335
Total assets .................................... 1,466,835 22,680,681 22,680,681 98,505,681
Notes payable--stockholders ..................... 1,671,000 5,000,000 -- --
Total stockholders' equity (deficiency) ......... (334,943) 5,756,805 10,756,805 86,581,805
</TABLE>

16
<PAGE>

EBITDA is not a measurement of financial performance under generally
accepted accounting principles and should not be considered an alternative
to net income or loss as a measure of performance or to cash flow as a
measure of liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.

(2) As of the end of the period indicated. "Equivalent Access Lines" is a term
used by management to quantify the size of the Company's network. For a
detailed definition, see Glossary.

(3) MOUs indicate the number of local and long distance switched minutes of use
carried over the Company's network during the period indicated.

(5) Adjusted to reflect the sale of Class A Common Stock offered hereby
assuming no exercise of the Underwriters' over-allotment option and after
deducting the Underwriters' Discounts and Commissions and estimated
expenses of the Offering. See "Use of Proceeds."

17
<PAGE>

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

Overview

US LEC is a rapidly growing CLEC that provides switched local, long
distance and enhanced telecommunications services primarily to medium and
large-sized organizations located in selected markets in the southeastern
United States. The Company was founded in June 1996 after passage of the
Telecom Act, which enhanced the competitive environment for local exchange
services. The Company initiated service in Charlotte, North Carolina in March
1997, becoming one of the first CLECs in North Carolina to provide switched
local exchange services, and subsequently initiated service in Raleigh and
Greensboro, North Carolina and in Atlanta, Georgia. As of February 28, 1998,
the Company had 62,545 Equivalent Access Lines in service. US LEC plans to
enter 15 new markets in Tennessee, Florida, South Carolina, Virginia and North
Carolina by the end of 1999.

Since commencing network operations, US LEC has achieved significant
growth in its Equivalent Access Lines in service and in the number of MOUs
carried over the Company's network. As indicated in the following table, from
March 1997 through February 1998, the Company increased its number of
Equivalent Access Lines in service at month-end from 288 to 62,545 and
increased its monthly number of MOUs during the same period from approximately
40,000 to approximately 450 million:

<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
------ ------ ------- ------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative Equivalent
Access Lines in Service (1):
Charlotte ....................... 288 757 2,204 2,881 4,571 5,157 9,789 10,863 12,824 16,724
Raleigh ......................... -- 168 624 1,206 1,948 3,012 5,715 9,590 13,935 19,017
Greensboro ...................... -- -- -- -- -- -- -- -- 3,168 13,488
Atlanta ......................... -- -- -- -- -- -- -- -- -- --
--- --- ----- ----- ----- ----- ----- ------ ------ ------
Totals ......................... 288 925 2,828 4,087 6,519 8,169 15,504 20,453 29,927 49,229
=== === ===== ===== ===== ===== ====== ====== ====== ======
MOUs (in thousands) (2) ......... 40 500 3,118 5,000 16,323 20,024 33,383 54,273 95,542 243,637
=== === ===== ===== ====== ====== ====== ====== ====== =======

<CAPTION>
1998
-------------------
Jan. Feb.
--------- ---------
<S> <C> <C>
Cumulative Equivalent
Access Lines in Service (1):
Charlotte ....................... 24,943 27,027
Raleigh ......................... 19,800 20,685
Greensboro ...................... 14,203 14,689
Atlanta ......................... -- 144
------ ------
Totals ......................... 58,946 62,545
====== ======
MOUs (in thousands) (2) ......... 446,386 450,000
======= =======
</TABLE>

- ----------
(1) As of the end of the month indicated. "Equivalent Access Lines" is a term
used by management to quantify the size of the Company's network. For a
detailed description of the manner in which the Company determines its
Equivalent Access Lines, see the definition of this term in the Glossary
included as an Annex hereto.

(2) MOUs indicate the number of local and long distance switched minutes of use
carried over the Company's network during the month indicated.

The Company's existing North Carolina operations generated positive EBITDA
of $200,264 during the month of December 1997, ten months after the Company
first initiated service in Charlotte. While EBITDA does not represent cash flow
or results of operations in accordance with generally accepted accounting
principles, it is a measure of financial performance commonly used in the
telecommunications industry. Management expects the Company to achieve similar
operating results in each of its new markets within a comparable time frame.
Management attributes US LEC's ability to achieve this performance primarily to
two factors. First, the Company's capital-efficient network strategy eliminates
the lengthly "build-out" period usually required to construct a fiber optic
transmission network, permitting the Company to quickly enter new markets and
rapidly generate revenue and positive cash flow. Second, US LEC's
telecommunications-intensive customers typically transmit a large amount of
switched traffic over the Company's network, resulting in efficient network
utilization and attractive operating margins. See "Risk Factors -- Limited
Operating History," " -- Risks Associated With Implementation of Growth
Strategy" and " -- Negative Cash Flow and Operating Losses."

Factors Affecting Future Operations

Revenue. The Company's revenue is comprised of monthly recurring charges,
usage charges, and initial non-recurring charges. Monthly recurring charges
include the fees paid by customers for lines in service and additional features
on those lines. Monthly recurring charges are derived only from end user
customers. Usage charges consist of fees paid by end users for each call made,
fees paid by the ILEC as reciprocal compensation (which results from US LEC
terminating calls made by ILEC customers), and access charges paid by carriers

18
<PAGE>

for long distance traffic originated and terminated by US LEC. Usage charges
are derived from both end user customers and from other carriers. Initial
non-recurring charges are paid by end users, if applicable, for the
installation of service by the Company. See "Risk Factors -- Regulation."

A majority of the Company's revenue currently consists of reciprocal
compensation. This is the result of an imbalance of inbound and outbound
traffic due to the preponderance of inbound applications utilized by the
Company's customers. Specifically, the Company's customers have been generating
an increasing number of inbound MOUs as the demand for Internet services
continues to grow.

Reciprocal compensation and carrier access invoices are sent monthly to
the appropriate ILECs and long distance carriers according to standard industry
practices and in standard industry formats. During 1997, BellSouth disputed
that portion of the reciprocal compensation charges billed to it which it
believed was related to Internet access services. Due to uncertainty regarding
the outcome of this dispute, the Company has deferred $1,141,386 of revenue as
of December 31, 1997. See "Risk Factors -- Uncertainties Related to Reciprocal
Compensation" and "Business -- Regulation."

Cost of Services. Cost of services is currently comprised primarily of
leased transport charges and, to a lesser extent, reciprocal compensation
related to calls that originate with a US LEC customer and terminate on the
network of the ILEC or another CLEC. The Company's leased transport charges are
the lease payments incurred by US LEC for the fiber optic transmission
facilities used to connect the Company's customers to its switch and to connect
to the ILEC and other CLEC networks. The Company's strategy of leasing rather
than building its own fiber transport facilities results in the Company's cost
of services being a significant component of total costs. In addition, the
Company has to date been successful in negotiating lease agreements which
generally match the duration of its customer contracts, thereby allowing the
Company to avoid the risk of continuing expenses associated with transmission
facilities that are not being used by revenue generating customers. While the
majority of the Company's cost of services is comprised of leased transport
charges, management expects that over time outbound traffic and other usage
sensitive charges will become the major component of cost of services as the
Company begins to carry more of its customers' outbound calls.

Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses include selling and marketing costs,
customer service, billing, corporate administration, personnel and network
maintenance. Management expects the Company to incur significant selling and
marketing costs as it continues to expand its operations, a significant amount
of which will be incurred in a particular market before the switch becomes
operational and begins to generate revenue. Consequently, selling and marketing
expenses are expected to increase as a percentage of revenue until
implementation of the Company's expansion plan is substantially complete. US
LEC will incur other costs and expenses, including the costs associated with
the maintenance of its networks, administrative overhead, office leases and bad
debts. Management expects that these costs will grow significantly as the
Company expands its operations and that administrative overhead will be a large
portion of these expenses during the start-up phase in each of the Company's
new markets. However, management expects these expenses to become smaller as a
percentage of the Company's revenue as the Company increases its customer base.

Results of Operations

Although US LEC began operations on June 6, 1996, it did not generate
revenue in 1996, and, accordingly, any comparison of operating results between
1996 and 1997 would not be meaningful.

Year Ended December 31, 1997. During the year ended December 31, 1997, the
Company generated $6,457,661 of revenue. Cost of services totaled $4,201,001
and selling, general and administrative expenses during the period were
$6,117,337. Cost of services consisted primarily of leased transport and usage
based charges. Selling, general and administrative expenses were largely
comprised of payroll, selling and marketing costs, rents and professional fees.

Depreciation and amortization expense during the period was $442,914,
resulting primarily from network assets placed in service in the Company's
operational markets. Net interest expense for the year ended December 31, 1997
was $354,856, as interest incurred on the Company's borrowings exceeded
interest earned on

19
<PAGE>

investments. The Company's net loss for the year ended December 31, 1997
totaled $4,658,447. This was primarily due to the incurrence of operating
expenses prior to realizing any significant revenue, since the Company was
developing its markets during the year.

Period from June 6, 1996 (Inception) to December 31, 1996. During the
period ended December 31, 1996, the Company did not generate operating revenue.
Selling, general and administrative expenses were $941,743 resulting primarily
from payroll costs. The Company's net loss for the period ended December 31,
1996 was $962,663, resulting from operating expenses incurred for the initial
development of the Company's business.

Liquidity and Capital Resources

The competitive telecommunications services business is capital intensive.
The Company's existing operations have required and will continue to require
substantial capital expenditures for the purchase and installation of network
switches and related electronic equipment in order to provide switch-based
local exchange and long distance services in its markets, and will continue to
require cash to fund operating losses during the start-up phase of each market.
Specifically, the Company estimates that the cash required to fund capital
expenditures for its expansion plans will approximate $40 million and $30
million in 1998 and 1999, respectively. When the Company enters a new market,
the majority of its capital expenditures are related to acquiring and
installing the Lucent 5ESS(R)-2000 switch and paying the associated site
preparation costs (including air conditioning, power supply, backup generators
and fire suppression). Once the Company begins selling services on a particular
switch, there are incremental capital expenditures associated with expanding
the switch, primarily in the form of additional cards. These expenditures are
"success-based" in that they are incurred only in response to customer orders,
thereby ensuring a high level of utilization of the Company's network
infrastructure. The Company's capital expenditure requirements over the next
two years could change materially if the Company places in service
significantly more or significantly fewer access lines than it currently
anticipates.

In each fiscal quarter since its inception, the Company has generated
negative EBITDA and incurred net losses, although the Company's North Carolina
operations generated positive EBITDA of $200,264 during the month of December
1997. Management attributes the rapid generation of positive EBITDA in these
markets primarily to the Company's switch-based, leased transport network
strategy. Management expects that the Company will generate positive EBITDA on
a consolidated basis in the first quarter of 1998 and that positive cash flow
from existing markets will be greater than the cash used in initiating service
in new markets thereafter. However, there can be no assurance that the Company
will realize positive consolidated EBITDA or cash flow in this or future
periods. Until sufficient cash flow is generated, the Company will continue to
rely on financing activities for its cash requirements.

Management expects the Company's available cash, including the net
proceeds from the Offering and operating cash flow, will be sufficient to fund
its capital expenditures and working capital requirements through 1999,
although there can be no assurance that the amount of funds required to
complete the Company's expansion plans through the end of 1999 will not exceed
its currently estimated expenditures. See "Risk Factors -- Negative Cash Flow
and Operating Losses" and " -- Future Capital Requirements." To date, the
Company has funded its capital and liquidity requirements with approximately
$11.3 million in cash equity investments by Messrs. Aab and Ganatra, certain
other executive officers and private investors. In addition, Mr. Aab, Melrich
Associates, L.P. (an entity of which Mr. Aab is a general partner) and Mr.
Ganatra have loaned the Company $8.3 million, of which approximately $5.0
million was advanced in 1996 and 1997 and approximately $3.3 million was
advanced in January 1998. These loans are secured by substantially all of the
assets of the Company's operating subsidiaries in North Carolina and Georgia
which, as of December 31, 1997, represented substantially all of the Company's
assets. On February 14, 1998, Mr. Aab exchanged $5.0 million of these loans for
480,770 shares of Class B Common Stock. The balance of the loans mature on
January 16, 2003, subject to possible acceleration in the event of a change in
control of the Company, and bear interest, payable quarterly, at an annual rate
of 12%. As of December 31, 1997, the Company had cash and cash equivalents of
approximately $3.2 million and $79.0 million on a pro forma basis after giving
effect to the Offering. The Company will continue to evaluate revenue
opportunities in other southeastern markets as well as potential acquisitions,
and as attractive opportunities emerge, the Company may elect to pursue such
opportunities. The Company expects to obtain the capital required to pursue
such opportunities from credit facilities and other borrowings, the sale of
additional equity or debt securities or cash generated from operations. There
can be no assurance, however, that the Company would be successful in raising
sufficient additional capital on acceptable terms or that the Company's

20
<PAGE>

operations would produce sufficient positive cash flow to pursue such
opportunities should they arise. Failure to raise and generate sufficient funds
or unanticipated increases in capital requirements may require the Company to
delay or curtail its expansion plans, which could have a material adverse
effect on the Company's growth and its ability to compete in the
telecommunications services industry.

BUSINESS

General

Market Opportunity

According to FCC statistics, total revenue from local exchange services in
the United States was approximately $101 billion in 1996. Two years after the
Telecom Act established a competitive framework for local competition, more
than 100 CLECs have raised approximately $14 billion in capital and have signed
2,400 interconnection agreements. Although CLECs as a whole tripled their
customer lines in service in 1997 to 1.5 million, CLECs currently account for
only 2.6% of all local telephone revenues.

After completing its planned expansion, US LEC will operate in 19 markets
located in six contiguous states in the southeastern United States -- one of
the fastest growing regional markets for business telecommunications services
in the country. Based on the Company's Market Study, in the four markets
presently served by the Company there were approximately 1.4 million business
lines that generated approximately $2.1 billion in local exchange and long
distance revenues in 1996. The Market Study indicates that the 19 markets in
which management expects the Company to be operating by the end of 1999 had a
total of approximately 4.1 million business lines that generated approximately
$5.7 billion in local exchange and long distance revenues in 1996. These local
and long distance revenue figures do not include revenues associated with
enhanced services and carrier access fees, which US LEC is pursuing as part of
its business plan. The following table sets forth certain information from the
Market Study regarding the markets in which US LEC currently operates and the
markets it plans to enter by the end of 1999.

21
<PAGE>

<TABLE>
<CAPTION>
1996 Market Data
-------------------------------------------------------
Revenue ($) (millions)
Number of ---------------------------------------
Launch Period Business Lines Local Long Distance Total
------------------ ---------------- ------- --------------- --------
(thousands)
<S> <C> <C> <C> <C> <C>
Current Markets:
Charlotte, NC ................... March 1997 203 119 186 305
Raleigh, NC ..................... April 1997 196 115 180 295
Greensboro, NC .................. October 1997 138 81 127 208
Atlanta, GA ..................... February 1998 847 497 777 1,274
--- --- --- -----
Subtotal ....................... 1,384 812 1,270 2,082
Planned Markets:
Tennessee
Memphis ......................... 1st Quarter 1998 192 102 160 262
Knoxville ....................... 2nd Quarter 1998 72 39 60 99
Nashville ....................... 2nd Quarter 1998 155 83 129 212
Florida
Orlando ......................... 3rd Quarter 1998 355 170 266 436
Miami ........................... 3rd Quarter 1998 482 219 343 562
Tampa ........................... 4th Quarter 1998 421 208 325 533
Ft. Lauderdale .................. 4th Quarter 1998 329 150 234 384
Jacksonville .................... 1st Quarter 1999 187 85 133 218
South Carolina
Charleston/Myrtle Beach ......... 1st Quarter 1999 90 59 93 152
Greenville/Spartanburg .......... 1st Quarter 1999 96 62 97 159
Columbia ........................ 3rd Quarter 1999 95 62 96 158
Virginia
Richmond ........................ 2nd Quarter 1999 154 91 142 233
Roanoke ......................... 2nd Quarter 1999 46 27 42 69
North Carolina
Wilmington ...................... 3rd Quarter 1999 35 21 32 53
Asheville ....................... 4th Quarter 1999 29 17 27 44
----- --- ----- -----
Subtotal ....................... 2,738 1,395 2,179 3,574
----- ----- ----- -----
Total ........................ 4,122 2,207 3,449 5,656
===== ===== ===== =====
</TABLE>

Business Strategy

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

22
<PAGE>

Company has selected its target markets based on a number of considerations,
including the number of potential customers and other competitors in such
markets and the presence of multiple transmission facility suppliers.
Management believes that the Company's clustered network will enable it to
take advantage of regional calling patterns and capture an increasing portion
of customer traffic on its network. Management also believes that by
originating and terminating calls on its network, the Company can achieve
significant cost savings and potential pricing advantages over its
competition.

o Target Telecommunications-Intensive Customers. The Company focuses its primary
sales efforts on telecommunications-intensive organizations with at least 100
access lines, including businesses, government agencies, other
telecommunications companies and VARs. The volume of usage generated by the
Company's target customers allows the Company to efficiently concentrate the
telecommunications traffic of its customers on one or more leased T-1 lines.
In addition, the Company frequently is able to sell enhanced and long distance
services to complement its core local services. This further enhances network
utilization and thereby improves margins, as fixed network costs are spread
over a larger base of MOUs.

o Install a Robust, Uniform Technology Platform. The Company has chosen the
5ESS(R)-2000 digital switch manufactured by Lucent to provide a consistent
technology platform throughout its network. The Lucent switch enables the
Company to provide both local and long distance services from a single
platform. This uniform and advanced switching platform will enable the
Company to (i) deploy features and functions quickly throughout its entire
network, (ii) expand switch capacity in a cost effective manner, (iii) lower
maintenance costs through reduced training and spare part requirements and
(iv) achieve direct connectivity to cellular and personal communication
system applications in the future.

US LEC's Network

After completing its planned expansion, the Company will operate in 19
markets located in six contiguous states in the southeastern United States --
one of the fastest growing regional markets for business telecommunications
services in the country. Within the Southeast, the Company has selected its
target markets based on a number of considerations, including the number of
potential customers and other competitors in such markets and the presence of
multiple transmission facility suppliers. Management believes that the
Company's clustered network will enable it to take advantage of regional
calling patterns and capture an increasing portion of customer traffic on its
network. Management also believes that by originating and terminating calls on
its network, the Company can achieve significant cost savings and potential
pricing advantages over its competition.

US LEC purchases and deploys switching equipment and leases fiber optic
transmission capacity from CAPS, other CLECs and ILECs. Management believes
that this switch-based, leased-transport strategy provides the Company with
significant competitive advantages. By owning its switches, the Company is able
to better configure its network to provide cost-effective and customized
solutions for its customers' telecommunications needs. By leasing transmission
capacity, the Company is able to (i) reduce the up-front capital expenditures
required to enter new markets, (ii) avoid the risk of "stranded" investment in
under-utilized fiber networks and (iii) enter markets and generate revenue and
positive cash flow more rapidly than if the Company constructed

23
<PAGE>

its own transmission facilities. Management believes that the availability of
several suppliers of fiber optic transmission facilities in each of the
Company's markets provides US LEC with negotiating leverage, vendor diversity
and the ability to offer customers enhanced reliability at a competitive price.

US LEC provides its customers with inbound and outbound telecommunications
services over its switch-based, leased-transport network. Calls originating
with a US LEC customer are transported over leased lines to the US LEC switch
and can either be terminated directly on the Company's network or they can be
routed to a long distance carrier, the ILEC or another CLEC, depending on the
location of the call recipient. Similarly, calls originating from the public
switched telephone network and destined for a US LEC customer are routed
through the US LEC switch and delivered to call recipients via leased
transmission facilities. A diagram of the Company's typical network layout is
presented in the following figure:

Off-Net
Customer
(building appears here)

Leased
Transport
From ILEC
SONET Ring
On-Net Fiber Transport US LEC(R)icon ILEC
Customer Leased From CAP Central
(building Office
appears here)
ILEC
Access
Tandem

Public
IXC Switched Telephone
Network

24
<PAGE>

Uniform Technology Platform. The Company is implementing a consistent
technology platform based on the Lucent 5ESS(R)-2000 digital switch throughout
its network. Unlike traditional long distance or local switches deployed by
many of the Company's competitors, the Lucent switch enables the Company to
provide local and long distance services from a single platform. This uniform
and advanced switch platform enables the Company to (i) deploy features and
functions quickly in all of its networks, (ii) expand switch capacity in a cost
effective manner and (iii) lower maintenance costs through reduced training and
spare parts requirements. In addition, the scalability and capacity of the
Lucent switches enable the Company to accommodate the increased volume of
on-net traffic that is anticipated to result from the Company's clustered
network strategy and will facilitate direct connectivity to cellular and
personal communication system applications in the future.

Leasing of Transmission Capacity. As part of its capital efficient network
structure, the Company's transmission facilities are leased from CAPs, other
CLECs and ILECs. In general, US LEC seeks to lease fiber optic transmission
facilities from multiple sources in each of its current and target markets.
Management believes that this type of broad coverage of the markets in which it
operates results in the following advantages:

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

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

o enhanced reliability at competitive prices;

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

o the opportunity for the Company's network to provide backhaul carriage
for other telecommunications service providers, such as long distance and
wireless carriers.

Interconnection. The Company has entered into an interconnection agreement
with BellSouth that covers all states in BellSouth's operating area, which
includes markets in North Carolina, Georgia and Tennessee. The BellSouth
agreement expires in November 1998. US LEC also has entered into
interconnection agreements with GTE and Sprint that cover other markets in
North Carolina. These agreements expire in March 1999 and October 1999,
respectively. The Company is currently negotiating interconnection agreements
with GTE and Sprint for Florida and Sprint for Tennessee. Furthermore, the
Company is currently negotiating a new interconnection agreement with
BellSouth, which will have a term of three years. Management believes that
interconnection arrangements between the ILECs and other CLECs or the Company
will be in place at appropriate times in other markets that the Company may
enter. Interconnection agreements between the Company (or other CLECs) and
ILECs are subject to approval of the relevant PUC, and under the terms of the
Telecom Act, each ILEC which is subject to the Telecom Act is required to
negotiate an interconnection agreement with the Company (and with other CLECs).
See "Business -- Regulation." Where an interconnection agreement cannot be
reached on terms and conditions satisfactory to the Company, the Company may
pursue binding arbitration of any disputes before the state utility commissions
as provided under the Telecom Act. There can be no assurance, however, that the
Company will be able to negotiate interconnection agreements on terms and
conditions satisfactory to the Company or to renew existing interconnection
agreements as they expire. However, a decision by the United States Court of
Appeals for the Eighth Circuit vacating several of the FCC's rules creates
uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements. As a result of this decision, which has been
appealed to the Supreme Court, and a pending review of this issue by the FCC,
negotiation and enforcement of such agreements could become more difficult and
protracted, and renegotiation of existing agreements could be required.

Products and Services

The Company's products and services are designed to appeal to the
sophisticated telecommunications needs of its target customers.

Local Services. The Company provides local dial-tone services to
customers, which allows them to complete calls in a free calling area and to
access a long distance calling area. Local services and long distance services
can be bundled together using the same transport facility. The Company's
network is designed to allow a

25
<PAGE>

customer to easily increase or decrease capacity and alter enhanced services as
the telecommunications requirements of the business change. In addition to its
core local services, the Company also provides access to third party directory
assistance and operator services.

Long Distance Services. US LEC provides domestic and international long
distance services for completing intrastate, interstate and international
calls. Long distance service is offered as an additional service to the
Company's local exchange customers. Long distance calls which do not terminate
on the Company's network are passed to long distance carriers which route the
remaining portion of the call. The Company's ability to integrate local and
long distance services allows it to aggregate customers' monthly recurring,
local usage and long distance charges on a single, consolidated invoice.

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

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

o Data Networking Services -- The Company can provide high-speed,
broadband services to use for data and internet access such as
Integrated Services Digital Network (ISDN) and Primary Rate Interface
(PRI).

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

Sales and Marketing

Sales. US LEC is building a highly motivated and experienced direct sales
force. The Company recruits salespeople with strong sales backgrounds in its
existing and target markets, including salespeople from long distance
companies, telecommunications equipment manufacturers, network systems
integrators and ILECs. The Company expanded its sales force from four
salespeople at December 31, 1996 to 23 salespeople at December 31, 1997, and
management expects to further increase the Company's sales force to over 100
salespeople by the end of 1998. The Company plans to continue to attract and
retain highly qualified salespeople by offering them an opportunity to work
with an experienced management team in an entreprenurial environment and to
participate in the potential economic rewards made available through a
results-oriented compensation program that emphasizes sales commissions.

During the months prior to initiating service in a new market, the
Company's salespeople begin pre-selling the Company's services to target
customers. This pre-selling effort is designed to shorten the period between
the availability of service and the receipt of a customer order and to generate
customers in each market who may enter into service agreements before the local
US LEC network becomes operational.

The Company also retains an independent sales agent to identify ISPs and
other potential users of the Company's services. If one of these potential
users becomes a US LEC customer, the Company pays the sales agent a commission
based on the reciprocal compensation that US LEC receives from traffic
terminated to that customer.

Marketing. In its existing markets, US LEC seeks to position itself as a
high quality alternative to ILECs for local telecommunication services by
offering network reliability and superior customer support at competitive
prices. The Company intends to build its reputation and brand identity by
working closely with its customers to develop services tailored to their
particular needs and by implementing targeted advertising and promotional
efforts, which will be gradually expanding to mass media.

Customer Service. Management believes that the Company's ability to
provide superior customer service is a key factor in acquiring new customers
and reducing churn of existing customers. The Company has developed a customer
service strategy that is designed to effectively meet the service requirements
of its target customers. The principal salesperson for each customer provides
the first line of customer service by identifying and resolving any customer
concerns. An account development representative is assigned to each customer to
supervise all

26
<PAGE>

aspects of customer relations, including account collections and complaint
resolution, and to provide a single point of contact for all customer service
issues. The Company also employs a staff of locally-based customer service
representatives who efficiently provide real time problem identification and
resolution and superior customer service.

Billing. US LEC outsources the preparation of customer bills, which are
available in a variety of formats that can be tailored to a customer's specific
needs. For example, the Company can provide account codes that enable a
customer to track expenses by employee, department or division. Codes also can
be used to restrict calling by individuals to help the customer manage costs.
The Company plans to implement an internal computerized billing system during
the second quarter of 1998 that is expected to enhance flexibility and reduce
costs associated with the billing function.

Regulation

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

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

Federal Legislation. The Company must comply with the requirements of
common carriage under the Communications Act of 1934, as amended (the
"Communications Act"). The Telecom Act, enacted on February 8, 1996,
substantially revised the Communications Act. The Telecom Act establishes a
regulatory framework for the introduction of local competition throughout the
United States and is intended to reduce unnecessary regulation to the greatest
extent possible. Among other things, the Telecom Act preempts, after notice and
an opportunity for comment, any state or local government from prohibiting any
entity from providing telecommunications service. This provision invalidated
prohibitions on entry found in almost half of the states in the country at the
time the Telecom Act was passed.

The Telecom Act also establishes a dual federal-state regulatory scheme
for eliminating other barriers to competition faced by competitors to the ILECs
and other new entrants into the local telephone market. Specifically, the
Telecom Act imposes on ILECs certain interconnection obligations, some of which
are to be implemented by FCC regulations. The Telecom Act contemplates that
states will apply the federal regulations and oversee the implementation of all
aspects of interconnection not subject to FCC jurisdiction as they oversee
interconnection negotiations between ILECs and their new competitors.

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

The state PUCs have an even more significant responsibility in
implementing the Telecom Act. Specifically, the states have authority to
establish interconnection pricing, including unbundled loop charges, reciprocal
compensation and wholesale pricing. The states are also charged under the
Telecom Act with overseeing the arbitration process for resolving
interconnection negotiation disputes between CLECs and the ILECs and must
approve interconnection agreements. See " -- BellSouth North Carolina PUC
Proceeding" for a discussion of the Company's action before the North Carolina
PUC related to its interconnection agreement with BellSouth.

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

27
<PAGE>

table summarizes the interconnection rights granted by the Telecom Act that are
most important to the achievement of the Company's goals and the Company's
belief as to the anticipated effect of the new requirements, if implemented in
the manner in which the Company believes Congress intended. There can be no
assurance that these statutory provisions will be implemented in this fashion
due to the currently-pending appeals of the FCC's implementing rules and court
decisions regarding those rules.

<TABLE>
<CAPTION>
Issue Definition Anticipated Effect
- -------------------- ----------------------------------------------- ---------------------------------------------
<S> <C> <C>
Interconnection Efficient network interconnection, through Allows a CLEC to service and terminate calls
physical or virtual co-location or purchase to and from customers connected to other
of network elements to transfer calls back networks
and forth between ILECs and competitive
networks (including 911, 0 +, directory assis-
tance, etc.)

Local Loop Allows competitors to selectively gain access Reduces the capital and operating costs of a
Unbundling to ILEC wires which connect ILEC central CLEC to serve customers not directly con-
offices with customer premises or CLEC's nected to its networks
central office (if applicable)

Reciprocal Mandates payment for local traffic exchanges Enables CLECs to recover cost of terminat-
Compensation between ILECs and competitors ing ILEC-originated traffic

Number Portability Allows customers to change local carriers Allows customers to switch to a CLEC's local
without changing numbers; true portability service without changing phone numbers
allows incoming calls to be routed directly
to a competitor. Interim portability allows
incoming calls to be routed through the ILEC
to a competitor at the economic equivalent
of true portability

Dialing Parity Allows customers to access CLEC without Allows customers to access CLEC on same
dialing access codes basis as ILEC

Access to Phone Mandates assignment of new telephone num- Allows CLECs to provide telephone num-
Numbers bers to competitive telecommunications pro- bers to new customers on the same basis as
vider's customers on non-discriminatory terms the ILEC

Resale ILECs must establish wholesale rates for the Promotes resale activities by CLECs
services they offer at retail
</TABLE>

The Company expects to receive a significant portion of its initial
revenue in a given market from the ILEC in the form of reciprocal compensation
payments due to the Company's ESP and ISP customers receiving more calls than
they make. Several ILECs have challenged the applicability of the reciprocal
compensation scheme to ISP traffic. For a discussion see " -- State Regulation"
and " -- BellSouth North Carolina PUC Proceeding."

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

In addition, the Telecom Act, as passed, provided that ILECs that are
subsidiaries of RBOCs could not offer in-region, long distance services across
LATAs until they had demonstrated that (i) they have entered into an

28
<PAGE>

approved interconnection agreement with a facilities-based CLEC or that no such
CLEC has requested interconnection as of a statutorily determined deadline,
(ii) they have satisfied a 14-element checklist designed to ensure that the
ILEC is offering access and interconnection to all local exchange carriers on
competitive terms and (iii) the FCC has determined that in-region, inter-LATA
approval is consistent with the public interest, convenience and necessity.
Recently, a U.S. District Court ruled that these RBOC-specific provisions were
unconstitutional. See " -- U.S. District Court Decision."

Federal Regulation and Related Proceedings. The Telecom Act gives the FCC
the authority to forebear from regulating companies if it finds such regulation
does not serve the public interest, and directs the FCC to review its
regulations for continued relevance on a regular basis. As a result of this
directive, a number of the regulations that historically applied to CLECs have
been and may continue to be eliminated in the future. While it is therefore
expected that a number of regulations that were developed prior to the Telecom
Act will be eliminated in time, those which apply to the Company at present are
discussed below. Pursuant to its authority to forebear, the FCC has adopted
orders eliminating tariff filing requirements for non-dominant carriers
providing interstate access and domestic interstate long distance services.
However, on February 13, 1997, the United States Court of Appeals for the
District of Columbia granted motions for stay of the FCC order detariffing
domestic interstate long distance service pending judicial review of that
order. The result of this stay is that carriers must continue to file tariffs
for interstate long distance services. Tariff filing requirements remain in
place for international traffic. US LEC has filed federal interstate long
distance, interstate access and international tariffs.

In addition to its forbearance activities, the FCC also has proposed
reducing the level of regulation that applies to the ILECs, and increasing
their ability to respond quickly to competition from the Company and others.
For example, in accordance with the Telecom Act, the FCC has applied
"streamlined" tariff regulation to the ILECs, which greatly accelerates the
time prior to which changes to tariffed service rates may take effect, and has
eliminated the requirement that ILECs obtain FCC authorization before
constructing new domestic facilities. These actions will allow ILECs to change
service rates more quickly in response to competition. Similarly, the FCC has
proposed affording significant new pricing flexibility to ILECs subject to
price cap regulation. To the extent such increased pricing flexibility is
provided, the Company's ability to compete with ILECs for certain service may
be adversely affected. In addition, a U.S. District Court in Texas recently
invalidated certain provisions of the Telecom Act which prohibited the RBOCs
from engaging in certain manufacturing and marketing activities and conditioned
RBOC provision of in-region long distance service upon a demonstration that the
local market had been opened to competition. This decision has been stayed, and
has been appealed to the United States Court of Appeals for the Fifth Circuit.
See " -- U.S. District Court Decision."

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

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

On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service program which subsidized certain eligible
services. For example, the FCC established new subsidies for services provided
to qualifying schools and libraries with an annual cap of $2.25 billion and for
services provided to rural

29
<PAGE>

health care providers with an annual cap of $400 million. The FCC also expanded
the federal subsidies to low-income consumers and consumers in high-cost areas.
Providers of interstate telecommunications service, such as the Company, as
well as certain other entities, must pay for these programs. The Company's
share of the schools, libraries and rural health care funds will be based on
its share of the total industry telecommunications service and certain defined
telecommunications end user revenues. The Company's share of all other federal
subsidy funds will be based on its share of the total interstate
telecommunications service and certain defined telecommunications end user
revenues. As of December 31, 1997, the Company was unable to quantify the
payments, if any, that it will be required to make for the year. Based upon
preliminary guidance provided by the FCC regarding the calculation of these
payments, management believes that the amount of any such payments will not be
material for 1997. In the May 8 order, the FCC also announced that it will soon
revise its rules for subsidizing service provided to consumers in high cost
areas. Several parties have appealed the May 8 order. Such appeals have been
consolidated and transferred to the United States Court of Appeals for the
Fifth Circuit where they are currently pending. In addition, on July 3, 1997,
several ILECs filed a petition for stay of the May 8 order with the FCC. That
petition is also pending.

In a combined Report and Order and Notice of Proposed Rulemaking released
on December 24, 1996, the FCC made changes and proposed further changes in the
interstate access charge structure. In the Report and Order, the FCC removed
restrictions on an ILEC's ability to lower access prices and relaxed the
regulation of new switched access services in those markets where there are
other providers of access services. If this increased pricing flexibility is
not effectively monitored by federal regulators, it could have a material
adverse effect on the Company's ability to compete in providing interstate
access services. On May 16, 1997, the FCC released an order revising its access
charge rate structure. The new rules substantially increase the costs that
ILECs subject to the FCC's price cap rules ("price cap LECs") recover through
monthly, non-traffic sensitive access charges and substantially decrease the
costs that price cap LECs recover through traffic sensitive access charges. In
the May 16 order, the FCC also announced its plan to bring interstate access
rate levels more in line with cost. The plan will include rules to be
established sometime this year that grant price cap LECs increased pricing
flexibility upon demonstrations of increased competition (or potential
competition) in relevant markets. The manner in which the FCC implements this
approach to lowering access charge levels will have a material effect on the
Company's ability to compete in providing interstate access services. Several
parties have appealed the May 16 order. Those appeals have been consolidated
and transferred to the United States Court of Appeals for the Eighth Circuit
where they are currently pending.

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

The Company anticipates that the FCC will initiate a number of additional
proceedings, of its own volition and as a result of requests from CLECs and
others, as a result of the Telecom Act. While the Eighth Circuit's decision in
the appeal of the August 8, 1996 order limits the FCC's jurisdiction over the
local competition provisions of the Telecom Act and while the decision of the
U.S. District Court for the Northern District of Texas has held that the
RBOC-specific provisions of the Telecom Act are unconstitutional and this issue
has been raised in other proceedings (see above and below), such proceedings
may nonetheless further define and construe the Telecom Act's terms.

The FCC also requires carriers to file periodic reports concerning
carriers interstate circuits and deployment of network facilities. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non-dominant carriers, although it has the
power to do so. The FCC also imposes prior approval requirements on transfers
of control and assignments of operating authorizations. The FCC has the
authority to generally condition, modify, cancel, terminate, or revoke
operating authority for failure to comply with federal laws or rules,
regulations and policies of the FCC. Fines or other penalties also may be
imposed for

30
<PAGE>

such violations. There can be no assurance that the FCC or third parties will
not raise issues with regard to the Company's compliance with applicable laws
and regulations.

Eighth Circuit Court of Appeals Decision. Various parties, including ILECs
and state PUCs, requested that the FCC reconsider its own rules and/or filed
appeals of the FCC's August 8, 1996 order in various U.S. Courts of Appeal.
Also, several parties petitioned the FCC and the courts to stay the
effectiveness of the FCC's rules included in the FCC's order, pending a ruling
on the appeals. The appeals were consolidated and transferred to the U.S. Court
of Appeals for the Eighth Circuit.

On July 18, 1997, the Eighth Circuit overturned the pricing rules
established in the August 8, 1996 order, except those applicable to commercial
mobile radio service providers. The Eighth Circuit held that, in general, the
FCC does not have jurisdiction over prices for interconnection, resale, leased
unbundled network elements and traffic termination. The Eighth Circuit also
overturned the FCC's "pick and choose" rules as well as certain other FCC rules
implementing the Telecom Act's local competition provisions. In addition, the
Eighth Circuit decision substantially limits the FCC's authority to enforce the
local competition provisions of the Telecom Act. The FCC and others have
appealed the Eight Circuit decision to the U.S. Supreme Court, and the U.S.
Supreme Court granted certiorari on January 26, 1998.

In the short term, management believes that the Eighth Circuit decision
will not have a material adverse effect on the Company, because it already has
interconnection agreements in place, or expects to have such agreements in
place, under the provisions of the FCC's order and the Telecom Act which were
not invalidated by the Court. The decision does not delay the implementation of
the Telecom Act by the parties and by the state PUCs, but rather eliminates the
guidance on pricing and most favored nation procedures as well as other issues
that the FCC sought to provide to the parties and the state PUCs. However,
since the Eighth Circuit decision creates uncertainty about the rules governing
pricing, terms and conditions of interconnection agreements, it could make
negotiation and enforcement of such agreements more difficult and protracted,
and may require renegotiation of existing agreements. In the long term, the
Eighth Circuit's decision makes it more likely that the rules governing local
competition will vary from state to state. Most states have already begun to
establish rules for local competition that are consistent with the FCC rules
overturned by the Eighth Circuit. If a patchwork of state regulations were to
develop, it could increase the Company's costs of regulatory compliance and
could make competitive entry in some markets more difficult and expensive than
in others.

U.S. District Court Decision. On July 2, 1997, SBC and its local exchange
carrier subsidiaries filed a lawsuit in the United States District Court for
the Northern District of Texas challenging on U.S. Constitutional grounds the
Telecom Act restrictions applicable to the RBOCs only. The plaintiffs in the
case sought both a declaratory judgment and an injunction against the
enforcement of the challenged provisions. On December 31, 1997, this U.S.
District Court ruled that Sections 271-275 of the Telecom Act were
unconstitutional on the grounds that these sections constituted a "bill of
attainder." Based on this U.S. District Court ruling, the RBOCs that are
parties to this proceeding could technically re-enter the inter-LATA long
distance market immediately. The FCC and long distance carriers requested a
stay of the decision, which has been granted. The decision of the U.S. District
Court has been appealed to the U.S. Court of Appeals for the Fifth Circuit, and
the resulting decision could be appealed to the U.S. Supreme Court. In
addition, BellSouth has appealed to the U.S. Court of Appeals for the D.C.
Circuit the FCC's prior decisions denying BellSouth's applications to provide
in-region long distance service in South Carolina and Louisiana. BellSouth
challenged the decisions on the same grounds on which SBC challenged Sections
271-275 of the Telecom Act. On January 14, 1998, the North Carolina PUC gave
BellSouth approval to file with the FCC to provide long distance services in
North Carolina, provided it first improves its operating support systems and
performance measures.

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<PAGE>

State Regulation. The Company is certified by the appropriate state PUCs as
follows:

<TABLE>
<CAPTION>
State Order Dated Telecommunication Services
- ---------------- -------------------- ------------------------------------------------------------------------
<S> <C> <C>
North Carolina September 27, 1996 local exchange, exchange access, and intrastate interexchange long
distance
Georgia August 5, 1997 local exchange (interim)
December 16, 1997 long distance (interim) and intrastate interexchange alternate operator
services (interim)
Virginia September 8, 1997 intrastate local exchange and exchange access, no certification
required for long distance
Tennessee September 18, 1997 local exchange, exchange access and interexchange
South Carolina November 10, 1997 resale and facilities-based local exchange, exchange access and
intrastate interexchange
Florida December 22, 1997 local exchange (order now final)
February 16, 1998 long distance (order now final)
</TABLE>

These are all of the states in which the Company operates or currently
intends to begin operations in 1998 or 1999. To the extent that an area within
a state in which the Company operates is served by a small (in line counts) or
rural ILEC not currently subject to competition, the Company may not have
authority to service those areas at this time. Most states regulate entry into
local exchange and other intrastate service markets, and states' regulation of
CLECs vary in their regulatory intensity. The majority of these states mandate
that companies seeking to provide local exchange and other intrastate services
apply for and obtain the requisite authorization from a PUC. This authorization
process generally requires the carrier to demonstrate that it has sufficient
financial, technical, and managerial capabilities and that granting the
authorization will serve the public interest.

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

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

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

BellSouth North Carolina PUC Proceeding. The Company has petitioned the
North Carolina Utilities Commission ("NC PUC") to resolve a dispute between the
Company and BellSouth related to their interconnection agreement, dated
November 29, 1996 and approved in North Carolina by the NC PUC by an order
dated January 29, 1997 (effective November 20, 1996). In August 1997, BellSouth
issued a memorandum to the Company in which BellSouth announced its unilateral
decision to neither bill nor pay reciprocal charges for traffic terminated by a
CLEC or BellSouth to ESPs including ISPs. The Company believes this memorandum
was sent to all CLECs who have an interconnection agreement with BellSouth.
BellSouth based its announcement on the theory that such traffic is not
"local," and therefore not subject to reciprocal compensation. On October 24,
1997, the Company filed a petition with the NC PUC seeking an order which,
among other things, would direct

32
<PAGE>

BellSouth to pay reciprocal compensation for all local traffic terminated on
the Company's network, including traffic terminated by US LEC to its customers
which are ESPs or ISPs. The petition, among other things, also noted that
similar positions recently had been taken by other RBOCs in other states; that
disputes between those RBOCs and the CLECs regarding ESP and ISP traffic had
been the subject of arbitration and/or complaint proceedings in at least eight
states; and that, as of the date of the petition, the respective PUCs in all
eight states had ordered the payment of reciprocal compensation for traffic
terminated by the CLEC to ESPs and ISPs. As of February 13, 1998, twelve states
(including Virginia) have ordered the payment by an RBOC of reciprocal
compensation for traffic terminated by a CLEC to an ESP or ISP. The FCC is also
generally considering the issue of reciprocal compensation to ISPs/ESPs, and
the Eighth Circuit is considering an appeal of the FCC's decision not to impose
access charges on ISPs. There can be no assurance that the payment of
reciprocal compensation for ISP traffic will be maintained. A determination
that such traffic is not subject to reciprocal compensation would have a
material adverse effect on the Company.

On February 26, 1998, the North Carolina PUC ruled that the reciprocal
compensation provision contained in the interconnection agreement between
BellSouth and the Company is fully applicable to traffic terminated to ESP and
ISP customers when the originating caller and the called number are associated
with the same calling area, and directed BellSouth to bill and pay reciprocal
compensation for all such calls. On March 27, 1998, BellSouth filed a motion
requesting (i) a stay of the order issued by the NC PUC, (ii) an extension of
the period during which BellSouth must file an appeal of the NC PUC order with
an intermediate state appeallate court and (iii) permission to deposit the
disputed amounts into an interest bearing escrow account under the control of
an agent acceptable to both parties. In an order dated March 31, 1998, the NC
PUC granted BellSouth's motion, thereby extending the appeal period to April
27, 1998. In addition, under the Telecom Act, BellSouth may be entitled to seek
review of the decision of the North Carolina PUC by the United States District
Court for the Eastern District of North Carolina.

While the Company believes that it will ultimately be successful on any
appeal or review of this proceeding, there can be no assurances in this regard,
and it is possible that an adverse result could occur if an appeal or other
review is sought. A final determination that such traffic is not eligible for
reciprocal compensation would have a material adverse effect on the Company. In
addition to this proceeding, PUCs in Tennessee, Georgia and Florida are
currently reviewing this issue. See "Risk Factors -- Uncertainties Related to
Reciprocal Compensation."

Competition

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

ILECs. In each market served by its networks, the Company faces, and
expects to continue to face, significant competition from the ILECs, which
currently dominate their local telecommunications markets.

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

Other Competitors. The Company also faces, and expects to continue to
face, competition from other potential competitors in certain of the markets in
which the Company offers its services. In addition to the ILECs and CAPs,
potential competitors capable of offering switched local and long distance
services include long distance carriers, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end-users. Many of these potential competitors enjoy
competitive advantages based upon existing relationships with subscribers and
vast financial resources.

33
<PAGE>

The Company believes that the Telecom Act as well as a recent series of
completed and proposed transactions between ILECs and long distance companies
and cable companies increase the likelihood that barriers to local exchange
competition will be removed. The Telecom Act, as passed, conditioned the
provision of in-region, inter-LATA services by RBOCs upon a demonstration that
the market in which an RBOC seeks to provide such services has been opened to
competition. When ILECs that are RBOC subsidiaries are permitted to provide
such services, they will be in a position to offer single source service. ILECs
that are not RBOC subsidiaries may offer single source service presently. As a
result of a U.S. District Court's invalidation of Sections 271-275 of the
Telcom Act, RBOCs that were parties to that proceeding also may have this
ability presently. In addition, BellSouth has appealed the FCC's prior decision
denying BellSouth's application to provide in-region long distance service in
South Carolina. BellSouth challenged the decision on the same basis used by SBC
to invalidate Sections 271-275 of the Telecom Act. See "Business -- Regulation
- -- U.S. District Court Decision."

A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. In addition, many of the Company's existing and potential competitors
have financial, personnel and other resources, including brand name
recognition, significantly greater than those of the Company.

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

Properties

The Company leases all of its administrative and sales offices and its
switch sites. The various leases expire in years ranging from 2000 to 2003. All
have renewal options. Additional office space and switch sites will be leased
or otherwise acquired as the Company's operations and networks are expanded and
as new networks are constructed.

Employees

As of December 31, 1997, the Company employed 78 people. The Company
expects to employ approximately 270 people by the end of 1998. The Company
considers its employee relations to be good. None of the employees of the
Company is covered by a collective bargaining agreement.

Servicemarks, Trademarks and Trade Names

The Company uses "US LEC" as its primary servicemark and has developed a
proprietary logo. In October 1996, the Company filed for federal servicemark
and trademark protection of US LEC and its logo. The application for the
servicemark "US LEC" has matured to federal registration on the supplemental
register. The servicemark application for the logo has matured to registration
on the principal register.

Legal Proceedings

The Company is not currently a party to any legal proceedings, other than
the NC PUC proceeding relating to reciprocal compensation from BellSouth for
ISP and ESP traffic. See "Business -- Regulation -- BellSouth North Carolina
PUC Proceeding."

34
<PAGE>

MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information regarding the executive
officers and directors of US LEC. Directors of the Company are elected annually
at the annual meeting of stockholders. The backgrounds and business experience
of the Company's executive officers and directors are described following the
table.

<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- ----- ---------------------------------------------------------
<S> <C> <C>
Richard T. Aab 49 Chairman, Chief Executive Officer and Director (Class B
Director)
Tansukh V. Ganatra 54 President, Chief Operating Officer and Director (Class B
Director)
David N. Vail 41 Executive Vice President -- Finance and Chief Financial
Officer
David C. Conner 40 Executive Vice President -- Engineering and Operations
Gary D. Grefrath 57 Executive Vice President -- Administration
Michael K. Simmons 39 Executive Vice President -- Sales
Craig K. Simpson 34 Senior Vice President -- Corporate Development
David M. Flaum * 45 Director (Class A Director)
Steven L. Schoonover * 52 Director (Class A Director)
</TABLE>

- ----------
* Indicates a member of the Audit Committee.

Richard T. Aab co-founded US LEC in June 1996 and has served as its
Chairman and Chief Executive Officer and as a Director since that time. In
1982, he co-founded ACC Corp., which is a publicly-traded international
telecommunications company currently under agreement to be acquired by Teleport
Communications Group, Inc. for approximately $1.1 billion. Between 1982 and
1997, Mr. Aab held various positions with ACC Corp. including Chairman, Chief
Executive Officer and Director. Under Mr. Aab's leadership, ACC Corp.
participated in the introduction of competition into local and long distance
telecommunications markets in the United States, Canada and the United Kingdom.

Tansukh V. Ganatra co-founded US LEC in June 1996 and has served as its
President and Chief Operating Officer and as a Director since that time. Mr.
Ganatra is a specialist in the field of intelligent switching technology and
transport network systems. From 1987 to 1997, Mr. Ganatra held various
positions with ACC Corp., including serving as its President and Chief
Operating Officer. Prior to joining ACC Corp., Mr. Ganatra held various
positions during a 19-year career with Rochester Telephone Corp. (now Frontier
Corp.), culminating with the position of Director of Network Engineering.

David N. Vail has been US LEC's Executive Vice President -- Finance and
Chief Financial Officer since August 1997. Prior to joining US LEC, Mr. Vail
served as the controller for Harris Beach & Wilcox LLP, a multi-state law firm
based in Rochester, New York, from 1986 to May 1997. From 1984 to 1986, Mr.
Vail served as Controller for Voit Corporation, a publicly-traded sporting
goods manufacturer. Prior to his tenure with Voit Corporation, Mr. Vail spent
six years in public accounting with Naramore, Niles and Company, CPAs and
Deloitte & Touche LLP. Mr. Vail is a Certified Public Accountant. Mr. Vail has
tendered his resignation for personal reasons. He has agreed to continue
serving in his current position until a successor is hired.

David C. Conner has been US LEC's Executive Vice President -- Engineering
and Operations since November 1996. From 1990 until he joined US LEC, Mr.
Conner served in various positions with ACC Corp. including Vice President of
Engineering and Operations for one of its cellular operations and Operations
Director for its long distance operations in the United Kingdom. From May 1985
until October 1990, Mr. Conner served in various positions with Rochester
Telephone Corp. (now Frontier Corp.), including several positions in operations
and management information systems. At Rochester Telephone Corp., Mr. Conner
had significant responsibility in the development of operational support
systems, the development and operation of its network control center and the
coordination of installation and repair of facilities.

Gary D. Grefrath has been US LEC's Executive Vice President --
Administration since August 1996. Prior to joining US LEC, Mr. Grefrath was
employed by Rochester Telephone Corp. (now Frontier Corp.) since 1969,

35
<PAGE>

where he held various positions and most recently was responsible for
management of major areas of administration for that company. He was also
responsible for the preparation of tariff filings with the State of New York
and the FCC and for all service and contractual relations with interexchange
carriers.

Michael K. Simmons has been US LEC's Executive Vice President -- Sales
since October 1996. Prior to joining US LEC, Mr. Simmons was employed by Time
Warner Communications from December 1993 to October 1996 as its Vice President
and General Manager of western North Carolina operations. From August 1983 to
December 1993, Mr. Simmons was branch manager for MCI Communications Corp's.
("MCI") western North Carolina region and also held various sales, marketing
and management positions in four states.

Craig K. Simpson joined US LEC in February 1997 as its Vice President --
Marketing, was promoted to Senior Vice President -- Corporate Development in
August 1997 and has since served in this capacity. Prior to joining US LEC, Mr.
Simpson was employed by MCI from 1989 to February 1997, where he most recently
served as carrier manager for its North Carolina operations. In that capacity,
Mr. Simpson was responsible for sales to interexchange carriers, CLECs and
independent telephone companies. From 1985 to 1988, Mr. Simpson was employed by
Unisys Corporation in its computer mainframe sales and marketing division.

Steven L. Schoonover was elected to US LEC's Board of Directors in January
1998. Mr. Schoonover is President and Chief Executive Officer of CellXion,
Inc., which specializes in construction, installation and management of
cellular telephone and personal communications systems. From 1990 until its
sale in November 1997 to Telephone Data Systems, Inc., Mr. Schoonover served as
President of Blue Ridge Cellular, Inc., a full-service cellular telephone
company. From 1983 to 1996, he served in various positions, including President
and Chief Executive Officer, with Fibrebond Corporation, a firm involved in
site development, shelter and tower construction for the cellular
telecommunications industry.

David M. Flaum was elected to US LEC's Board of Directors in January 1998.
Mr. Flaum has served as President of Flaum Management Company, Inc. ("Flaum
Management"), a real estate development firm based in Rochester, New York,
since 1985, and President of The Hague Corporation, a commercial real estate
management firm, since 1993. Flaum Management is active in the development of
retail centers, office buildings and high technology facilities in the eastern
United States.

The Company has made an offer of employment to an individual to become an
Executive Vice President. If the offer of employment is accepted by June 30,
1998, such individual would receive an annual base salary of $150,000 and be
granted an option to purchase 360,000 shares of Class A Common Stock, vesting
in equal installments over a four year period, at an exercise price of $13.00
per share.

Election of Directors

The Company's Bylaws provide that the Board of Directors shall consist of
at least three members and no more than eleven members. Pursuant to the
Company's Certificate of Incorporation, so long as there are any shares of
Class B Common Stock outstanding, holders of Class B Common Stock will have the
right to elect two members to the Company's Board of Directors. In addition,
the holders of Class A Common Stock and Class B Common Stock vote together as
one class for the election of the other members of the Company's Board of
Directors.

<PAGE>

Executive Compensation

The following table sets forth, for the year ended December 31, 1997,
individual compensation information for the Chairman and Chief Executive
Officer, the President and Chief Operating Officer and each of the other
executive officers of US LEC who received compensation in excess of $100,000
during the year (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation ($) (1)
- -------------------------------------- ------ ------------ ----------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C>
Richard T. Aab
Chairman and Chief
Executive Officer .................. 1997 -- -- -- --
Tansukh V. Ganatra
President and Chief
Operating Officer .................. 1997 6,750 -- 7,968 (2) 423
Michael K. Simmons
Executive Vice President --
Sales .............................. 1997 129,459 37,500 -- 423
Gary D. Grefrath
Executive Vice President --
Administration ..................... 1997 81,012 25,000 -- 264
David C. Conner
Executive Vice President --
Engineering and Operations ......... 1997 79,785 25,000 -- 260
</TABLE>

- ----------
(1) Consists of premiums paid by the Company for term life insurance for the
Named Executive Officer.

(2) Consists of automobile lease payments.

The Board of Directors has determined that base salaries for the Company's
executive officers for 1998 will be as follows: Mr. Aab -- $160,000; Mr.
Ganatra -- $150,000; Mr. Simmons -- $125,000; Mr. Grefrath -- $95,000; Mr.
Conner -- $95,000; Mr. Vail -- $95,000; and Mr. Simpson -- $90,000. See
"Management -- Directors and Executive Officers" and "Certain Relationships and
Related Transactions."

Compensation of Directors

Following completion of the Offering, US LEC intends to pay its directors
who are not officers or employees ("Outside Directors") an annual retainer of
$5,000 and a fee of $1,000 for each meeting of the Board of Directors and $500
for each meeting of any committee thereof attended. The Company also will
reimburse each director for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors and any of its committees.
Immediately upon completion of the Offering, each of the Company's two Outside
Directors will be granted nonqualified stock options under the Stock Plan
covering 5,000 shares of Class A Common Stock with an exercise price equal to
the initial public offering price of the Class A Common Stock.

Omnibus Stock Plan

The Company adopted the US LEC Corp. 1998 Omnibus Stock Plan in January
1998 (the "Stock Plan"). The Stock Plan is intended to enable the Company to
recruit, reward, retain and motivate employees and to attract and retain
outside directors, agents and consultants on a basis competitive with industry
practices. The Company has reserved 1,300,000 shares of Class A Common Stock
for issuance under the Stock Plan.

The Stock Plan will be administered by the Board of Directors or the
Compensation Committee of the Board of Directors (such committee or the Board
of Directors itself, as applicable, is hereinafter referred to as the
"Committee"). Awards under the Stock Plan may include, but are not limited to,
stock options, stock appreciation rights, restricted stock, performance awards,
or other stock-based awards, such as stock units, securities convertible into
stock, phantom securities and dividend equivalents. The Committee has sole
authority and discretion under the Stock Plan to (i) designate eligible
participants and (ii) determine the types of awards to be

37
<PAGE>

granted and the conditions and limitations applicable to such awards, if any,
including the acceleration of vesting or exercise rights upon a Change in
Control of the Company (as defined in the Stock Plan). The awards may be
granted singly or together with other awards, or as replacement of, in
combination with, or as alternatives to, grants or rights under the Stock Plan
or other employee benefit plans of US LEC. Awards under the Stock Plan may be
issued based on past performance, as an incentive for future efforts or
contingent upon the future performance of the Company.

Options granted under the Stock Plan must be exercised within the period
fixed by the Committee, which may not exceed 10 years from the date of the
option grant, or in the case of incentive stock options granted to any 10%
stockholder, five years from the date of the option grant. Options may be made
exercisable in whole or in installments, as determined by the Committee. Except
as authorized by the Committee, options will not be transferable other than by
will or the laws of descent and distribution and, during the lifetime of an
optionee, may be exercised only by the optionee. The option price will be
determined by the Committee. However, the option price for incentive stock
options may not be less than the market value of the Class A Common Stock on
the date of grant of the option and the option price for incentive stock
options granted to any 10% stockholder may not be less than 110% of the market
value of the Class A Common Stock on the date of grant. Unless otherwise
designated by the Committee as "incentive stock options" intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended, options
granted under the Stock Plan are intended to be "nonqualified stock options."

The Committee has granted incentive stock options covering 182,800 shares
of Class A Common Stock to substantially all employees of the Company who are
not executive officers. These options vest annually in four equal installments
beginning in the first quarter of 1999 and the exercise price is $10.00 per
share. Immediately upon completion of the Offering, the Committee intends to
grant nonqualified stock options covering 5,000 shares of Class A Common Stock
to each of the Company's two Outside Directors at an exercise price equal to
the initial public offering price of the Class A Common Stock. The Committee
also has conditionally granted an option under the Stock Plan to purchase
360,000 shares of Class A Common Stock at an exercise price of $13.00 per share
to an individual who has received an offer of employment from the Company. See
"Management -- Directors and Executive Officers."

Promptly after completion of the Offering, the Company intends to register
the shares of Class A Common Stock reserved for issuance under the Stock Plan
under the Securities Act. See "Shares Eligible for Future Sale."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

At January 31, 1998, the Company's indebtedness to Messrs. Aab and
Ganatra, and Melrich Associates, L.P. ("Melrich"), an entity of which Mr. Aab
is a general partner, was $8,289,150. The borrowings were allocated as follows:
Mr. Aab ($5,000,000), Mr. Ganatra ($1,000,000) and Melrich ($2,289,150). On
February 14, 1998, the entire principal amount of the loan payable to Mr. Aab
was exchanged for 480,770 shares of Class B Common Stock. The terms of the
loans outstanding to Mr. Ganatra and Melrich currently provide for interest at
an annual rate of 12% per annum, payable quarterly and a due date of January
16, 2003. The Company's operating subsidiaries in North Carolina and Georgia
have guaranteed the payment of the loans and granted to Mr. Ganatra and Melrich
a security interest in substantially all of such subsidiaries' assets.
Management believes that the terms of these loan transactions were no less
favorable to the Company than could be arranged with unrelated lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Under a consulting agreement between US LEC and a limited liability
company owned in its entirety by Mr. Aab, the limited liability company
provided strategic, financial planning and other consulting services to US LEC
in 1997 for a fee $125,000. Under a consulting agreement with a limited
partnership controlled by Mr. Ganatra, the limited partnership provided general
business and operations advice to the Company in exchange for a fee of $50,000.
These agreements were terminated on December 31, 1997. Management believes that
the terms of these consulting agreements were no less favorable to the Company
than could have been arranged with unrelated third parties.

In January 1998, the Company agreed to purchase a Carrier Access Billing
System and related software and support systems from Global Vista
Communications, LLC ("Global") for $397,500. Mr. Aab owns a 44% equity

38
<PAGE>

interest in Global, but does not control the company and is not active in its
management. Management believes that the quality and pricing of these systems
were comparable to systems available from unrelated vendors.

SECURITY OWNERSHIP OF MANAGEMENT

As of March 31, 1998, there were 59 holders of record of the Common Stock.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of March 31, 1998 and as
adjusted to reflect the sale of shares of Class A Common Stock in the Offering,
by (i) each director of the Company, (ii) each of the Named Executive Officers,
(iii) each person known by the Company to beneficially own 5% or more of the
outstanding shares of any class of Common Stock and (iv) all directors and
executive officers of US LEC as a group.

<TABLE>
<CAPTION>
Prior to the Offering (1)
----------------------------------------
Amount and Percent of Percent of
Name and Address Title of Nature of Percent Total Shares Total Voting
of Beneficial Owner Class Ownership (2) of Class Outstanding Power
- ----------------------------------------- ---------- ------------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Richard T. Aab .......................... Class B 17,075,270(3) 100.0% 81.6% 97.8%
Joyce M. Aab ............................ Class B 4,309,500(3) 25.2% 20.6% 24.7%
Tansukh V. Ganatra ...................... Class B 4,044,000(4) 23.7% 19.3% 23.2%
David C. Conner ......................... Class A 660,000(5) 17.1% 3.2% *
Gary D. Grefrath ........................ Class A 504,000 13.1% 2.4% *
Michael K. Simmons ...................... Class A 567,000(6) 14.7% 2.7% *
David N. Vail ........................... Class A 183,000(7) 4.6% * *
David M. Flaum .......................... Class A 180,000 4.7% * *
Steven L. Schoonover .................... Class A -- -- -- --
Craig K. Simpson ........................ Class A 174,000(8) 4.3% * *
All directors and executive officers as a
group (9 persons) ...................... Class A 2,268,000 54.2% 10.7% 1.3%
Class B 17,075,270 100.0% 81.6% 97.8%

<CAPTION>
After the Offering (1)
---------------------------------------
Percent of Percent of
Name and Address Percent Total Shares Total Voting
of Beneficial Owner of Class Outstanding Power
- ----------------------------------------- ---------- -------------- -------------
<S> <C> <C> <C>
Richard T. Aab .......................... 100.0% 64.6% 94.8%
Joyce M. Aab ............................ 25.2% 16.3% 23.9%
Tansukh V. Ganatra ...................... 23.7% 15.3% 22.5%
David C. Conner ......................... 7.1% 2.5% *
Gary D. Grefrath ........................ 5.4% 1.9% *
Michael K. Simmons ...................... 6.1% 2.1% *
David N. Vail ........................... 1.9% * *
David M. Flaum .......................... 1.9% * *
Steven L. Schoonover .................... -- -- --
Craig K. Simpson ........................ 1.8% * *
All directors and executive officers as a
group (9 persons) ...................... 23.4% 8.5% 1.3%
100.0% 64.6% 94.8%
</TABLE>

- ----------
(1) An "*" indicates less than one percent.

(2) In accordance with Commission rules, each beneficial owner's holdings have
been calculated assuming full exercise of outstanding warrants and options
exercisable by such holder within 60 days after March 31, 1998, but no
exercise of outstanding warrants and options held by any other person. The
table set forth above assumes that the over-allotment option is not
exercised by the Underwriters. Except as otherwise indicated, each person
named in this table has sole voting and dispositive power with respect to
the shares of Common Stock beneficially owned by such person.

(3) Includes 4,309,500 shares held by Melrich. Mr. Aab and his wife, Joyce M.
Aab, are the sole general partners of Melrich and share voting and
dispositive power with respect to these shares. Also includes 4,044,000
shares held by Mr. Ganatra and Super STAR Limited Partnership as to which
Mr. Aab holds voting power. Mr. and Mrs. Aab's address is 212 South Tryon
Street, Suite 1540, Charlotte, NC 28281.

(4) Includes 3,750,000 shares held by Super STAR Associates Limited
Partnership. Mr. Ganatra, the majority general partner, has dispositive
power with respect to these shares. Mr. Ganatra's address is 212 South
Tryon Street, Suite 1540, Charlotte, NC 28281.

(5) Includes 165,000 shares owned by Mr. Conner's wife, as to which he is
deemed to share voting and dispositive power.

(6) Includes 247,500 shares held by Michael K. Simmons Family Limited
Partnership as to which Mr. Simmons, the sole general partner, has voting
and dispositive power.

(7) Includes 165,000 shares subject to a presently exercisable warrant held by
Mr. Vail.

(8) Includes 165,000 shares subject to a presently exercisable warrant held by
Mr. Simpson.

39
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

The authorized capital stock of the Company consists of: (i) 90,000,000
shares of common stock, $.01 par value per share (the "Common Stock"), which is
divided into two classes consisting of 72,924,728 shares of Class A Common
Stock (3,855,000 shares of which were outstanding as of the date of this
Prospectus) and 17,075,272 shares of Class B Common Stock (17,075,270 shares of
which were outstanding as of the date of this Prospectus); and (ii) 10,000,000
shares of preferred stock, $.01 par value per share (the "Preferred Stock"),
none of which are issued and outstanding. Effective upon completion of the
Offering, 9,355,000 shares of Class A Common Stock will be issued and
outstanding, 17,075,270 shares of Class B Common Stock will be issued and
outstanding and no shares of Preferred Stock will be issued and outstanding. In
addition, 1,300,000 shares of Class A Common Stock are reserved for issuance
under the Stock Plan, 469,000 shares of Class A Common Stock are reserved for
issuance under presently exercisable warrants and 17,075,270 shares of Class A
Common Stock are reserved for issuance upon conversion of the Class B Common
Stock.

The following summary of certain provisions of the Company's Certificate
of Incorporation ("Certificate") and Bylaws does not purport to be complete and
is subject to, and qualified in its entirety by, reference to the Certificate
and Bylaws of the Company, copies of which have been filed as exhibits to the
registration statement of which this Prospectus is a part.

Common Stock

The shares of Class A Common Stock and Class B Common Stock are identical
in all respects, except for voting rights and certain conversion rights with
respect to the shares of Class B Common Stock which are described herein.
Shares of Class B Common Stock may be owned only by the holders of Class B
Common Stock as of the date of this Prospectus and their Permitted Transferees
(as defined in the Certificate). Any shares of Class B Common Stock transferred
to any other person automatically convert into shares of Class A Common Stock
on a one-for-one basis. Each share of Class B Common Stock may be converted, at
any time at the option of the holder thereof, into one share of Class A Common
Stock, subject to the rights of other holders of Class B Common Stock under the
Class B Stockholders Agreement. The Class A Common Stock and the Class B Common
Stock are entitled to vote on all matters which come before the stockholders,
voting together as a single class on all matters, except as described below and
as otherwise required by law. Each share of Class A Common Stock has one vote
and each share of Class B Common Stock has 10 votes on all matters on which
holders of Common Stock are entitled to vote. Holders of the Class B Common
Stock are also entitled by the Certificate and Bylaws to approve certain
amendments to the Certificate or the Bylaws.

The Certificate provides that the Board of Directors shall have two
classes of directors: (i) "Class B Directors," of which there shall be two at
all times during which shares of Class B Common Stock are issued and
outstanding, and (ii) "Class A Directors," who are all directors other than the
Class B Directors. The Class B Directors are elected solely by majority vote of
the holders of Class B Common Stock voting as a separate class. The Class A
Directors are elected by holders of all shares of the Company's capital stock
entitled to vote thereon, voting as a single class, including both shares of
Class A Common Stock and shares of Class B Common Stock. Any Class A Director
may be removed, with or without cause (except as otherwise provided by law), by
the vote of a majority of all votes entitled to be cast in the election of
Class A Directors. However, Class B Directors may be removed only by the
holders of a majority of the shares of Class B Common Stock, and may be removed
with or without cause.

Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally
available therefor, subject to the preferential dividend rights of any
outstanding shares of Preferred Stock. Any dividends declared which are payable
on the Common Stock shall be payable at the same rate on both classes of Common
Stock. Upon the liquidation, dissolution or winding-up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive, subscription or redemption rights.
All the outstanding shares of Common Stock are fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject
to, and may be adversely affected by, the rights of the holders of shares of
any series of Preferred Stock that the Company may designate and issue in the
future.

40
<PAGE>

Agreement Among Class B Stockholders

The holders of the Class B Common Stock entered into an agreement on
January 1, 1998 (the "Class B Stockholders Agreement") pursuant to which, among
other things, they agreed to grant to Mr. Aab an irrevocable proxy to vote all
of their shares of Class B Common Stock, and Mr. Aab has agreed to vote the
shares of Class B Common Stock covered by the proxy to elect Mr. Ganatra as a
director. In addition, the Class B Stockholders Agreement provides that if a
party to the agreement proposes to sell or otherwise transfer shares of Class B
Common Stock to anyone other than a Permitted Transferee (such as lineal
descendants of the Class B Stockholders, trusts for the benefit of such holders
and descendants, and corporations, partnerships and other entities and business
organizations controlled by the Class B Stockholders), the other holders of
Class B Common Stock who are parties to the Class B Stockholders Agreement
would have a right to acquire the shares of Class B Common Stock that are
proposed to be sold or transferred. The Class B Stockholders Agreement also
provides that if a party to the agreement proposes to convert his, her or its
shares of Class B Common Stock into shares of Class A Common Stock, the other
parties to the Class B Stockholders Agreement have the right to purchase the
shares of Class B Common Stock proposed to be converted or to exchange shares
of Class A Common Stock for such shares. The Class B Stockholders Agreement has
an initial term of ten years.

Preferred Stock

Under the terms of the Certificate, the Board of Directors of the Company
is authorized to issue shares of Preferred Stock in one or more series without
stockholder approval, subject to any limitations prescribed by law. Each series
of Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation privileges, as shall be determined by the
Board of Directors. The purpose of authorizing the Board of Directors to issue
Preferred Stock and determine its rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company. No shares of Preferred Stock have been issued or authorized for
issuance, and there are no agreements or undertakings relating to the issuance
of shares of Preferred Stock.

Board of Directors

Under the terms of the Certificate and the Bylaws, the Board of Directors
consists of at least three directors and no more than eleven directors. As
noted above, at all times when shares of Class B Common Stock are outstanding,
the two directors who are designated as "Class B Directors" are elected by the
holders of a majority of the shares of the Class B Common Stock voting as a
separate class, and Class B Directors may only be removed by the affirmative
vote of a majority of the holders of the Class B Common Stock.

The Bylaws provide that if at any time the number of directors is seven or
more, the terms of the Class A Directors shall be staggered and the Class A
Directors shall be grouped into three classes of nearly equal size. If the
Class A Directors are staggered, the first staggered class shall be elected for
an initial three year term, the second staggered class shall be elected for an
initial two year term and the third staggered class shall be elected for an
initial one year term. Thereafter, at each annual meeting of stockholders,
directors shall be elected to fill the seats of the staggered class of Class A
Directors whose term then expires shall be elected for three year terms. If the
terms of office of the Class A Directors are staggered, then the Class A
Directors may be removed only for cause during the term for which they have
been elected.

Warrants

The Company has issued warrants to three of its employees which entitle
them to acquire an aggregate of 345,000 shares of Class A Common Stock at an
exercise price of $2.86 per share. These warrants may be exercised, in whole or
in part, at any time prior to August 4, 2000 (with respect to 330,000 shares)
or prior to November 10, 2000 (with respect to 15,000 shares). The Company has
also issued a warrant to a sales agent which entitles him to acquire 99,000
shares of Class A Common Stock at an exercise price of $2.86 per share with an
expiration date of August 1, 2000 and a warrant to a consultant which entitles
him to acquire 25,000 shares of Class A Common Stock at an exercise price of
$10.00 per share with an expiration date of January 1, 2001. These warrants may
be exercised, in whole or in part, at any time prior to their expiration dates.

41
<PAGE>

Certain Charter and Statutory Provisions

Article VIII of the Certificate provides that the Company shall indemnify
all directors and officers to the full extent permitted by the General
Corporation Law of the State of Delaware (the "Delaware Law"), or any other
applicable laws as now or hereafter in effect. In addition, the Certificate
authorizes the Company to enter into one or more agreements with any person
which provide for indemnification greater or different than that provided in
its Certificate.

Section 145 of the Delaware Law permits a corporation to indemnify its
directors and officers against expenses (including attorney's fees), judgments,
fines and amounts paid in settlements actually and reasonably incurred by them
in connection with any action, suit or proceeding, whether criminal or civil,
brought by a third party if such directors or officers acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful.

In addition, Section 102 of the Delaware Law provides that a corporation
may include in its certificate of incorporation a provision eliminating or
limiting the personal liability of directors for monetary damages for breach of
fiduciary duty, provided that such provision shall not eliminate or limit the
liability of a director: (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders; (ii) for acts or omissions not in good
faith that involve intentional misconduct or a knowing violation of the law;
(iii) for conduct leading to unlawful distributions by the corporation; or (iv)
for any transaction from which the director derived an improper personal
benefit. The Certificate includes such a provision. The effect of this
provision is to eliminate the rights of the Company and its stockholders
(through stockholder's derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of fiduciary duty of care as a
directory (including breaches resulting from negligent or grossly negligent
behavior) except in situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief (such as an injunction or rescission) in
the event of a breach of a director's duty of care.

Following the Offering, the Company will also be subject to the provisions
of Section 203 of the Delaware Law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
(i) prior to such date the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction that resulted in such person becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding, for
purposes of determining the number of shares outstanding, shares owned by
certain directors or certain employee stock plans), or (iii) on or after the
date the stockholder became an interested stockholder, the business combination
is approved by the board of directors and authorized by the affirmative vote
(and not by written consent) of at least two-thirds of the outstanding voting
stock excluding that stock owned by the interested stockholder. For the
purposes of Section 203, a "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder, as well as any transaction that has the effect of increasing the
interested stockholder's proportionate share ownership in the corporation. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation) together with
affiliates and associates owns (or, as an affiliate or associate, within three
years prior, did own) 15% or more of the corporation's outstanding voting
stock.

Section 203, however, expressly exempts from the requirements described
above any business combination by a corporation with an interested stockholder
who became an interested stockholder at a time when the section did not apply
to the corporation. It further provides that its provisions shall not apply if
the corporation does not have a class of voting stock that (i) is listed on a
national securities exchange, (ii) authorized for quotation on the Nasdaq
National Market or (iii) held of record by more than 2,000 stockholders (unless
any of the foregoing results from a transaction in which a person becomes an
interested stockholder). Mr. Aab, Melrich, Mr. Ganatra and Super STAR
Associates Limited Partnership became interested stockholders prior to the
Offering at a time when such exemption from the provisions of Section 203
applied to the Company. Accordingly, future transactions between the Company
and such persons and entities will not be subject to the requirements of
Section 203.

42
<PAGE>

Listing

The Class A Common Stock has been conditionally approved for listing on
the Nasdaq National Market under the symbol "CLEC."

Transfer Agent and Registrar

First Union National Bank, Charlotte, North Carolina will be the transfer
agent and registrar for the Class A Common Stock (the "Transfer Agent").

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, 9,355,000 shares of Class A Common Stock
will be outstanding, excluding (i) 182,800 shares reserved for issuance upon
exercise of options that have been granted under the Stock Plan, none of which
are currently vested, (ii) 10,000 shares issuable upon exercise of options to
be granted under the Stock Plan at the completion of the Offering, (iii)
469,000 shares reserved for issuance upon exercise of presently exercisable
warrants, (iv) 360,000 shares reserved for issuance upon exercise of an option
conditionally granted under the Stock Plan and (v) 17,075,270 shares reserved
for issuance upon conversion of Class B Common Stock. Of these shares, the
5,500,000 shares of Class A Common sold in the Offering will be freely tradable
without restriction or further registration under the Securities Act, except
for any shares purchased by an "affiliate" (as defined in the Securities Act)
of the Company, which will be subject to the resale limitations of Rule 144
("Rule 144") under the Securities Act. The remaining shares of Class A Common
Stock outstanding and all of the shares of Class B Common Stock outstanding
will be "restricted securities" as that term is defined in Rule 144, and may in
the future be sold without restriction under the Securities Act to the extent
permitted by Rule 144 or any applicable exemption under the Securities Act.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus a person (or persons whose shares are aggregated)
who has beneficially owned its, his or her restricted securities (as that term
is defined in Rule 144) for at least one year from the date such securities
were acquired from the Company or an affiliate of the Company would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) one percent of the then outstanding shares of the Class A
Common Stock and (ii) the average weekly trading volume of the Class A Common
Stock during the four calendar weeks preceding a sale by such person. Sales
under Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. Under Rule 144, however, a person who has held restricted securities
for a minimum of two years from the later of the date such securities were
acquired from the Company or an affiliate of the Company and who is not, and
for the three months prior to the sale of such restricted securities has not
been, an affiliate of the Company, is free to sell such shares of Class A
Common Stock without regard to the volume, manner-of-sale and the other
limitations contained in Rule 144. The foregoing summary of Rule 144 is not
intended to be a complete discussion thereof.

Of the outstanding shares of Class A Common Stock that will be "restricted
securities," all of such shares will be eligible for sale in the public market
subject to the volume, manner of sale and other limitations of Rule 144
described below after December 31, 1998. The 17,075,270 shares of Class B
Common Stock outstanding upon completion of the Offering will also be
restricted securities. Each share of Class B Common Stock may be converted at
any time by the holder thereof into one share of Class A Common Stock, subject
to the rights of other holders of Class B Common Stock under the Class B
Stockholders Agreement. If any shares of Class B Common Stock are converted by
the current holders into shares of Class A Common Stock, the holding period of
the shares of Class A Common Stock could, under the provisions of Rule 144, be
tacked with the holding period of the Class B Common Stock such that 16,594,500
of such shares will be eligible for sale in the public market after December
31, 1998 and the remainder will be eligible for sale in the public market after
February 14, 1999 subject to the volume, manner of sale and other limitations
of Rule 144.

The Company, its directors and executive officers, who will beneficially
own, as of the completion of this Offering, an aggregate of 2,268,000 shares of
Class A Common Stock (or presently exercisable warrants to purchase Class A
Common Stock) and 17,075,270 shares of Class B Common Stock (which, subject to
the terms of the Class B Stockholders Agreement, may be converted at any time
into shares of Class A Common Stock

43
<PAGE>

and, pursuant to the Certificate, automatically convert into shares of Class A
Common Stock as a result of certain transfers), have each agreed not to offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly, or
announce an offering of, any shares of Class A Common Stock or any securities
convertible into, or exchangeable for, shares of Class A Common Stock for a
period of 180 days from the date of this Prospectus, without the prior written
consent of Smith Barney Inc. except under limited circumstances.

Promptly upon completion of the Offering, the Company intends to file a
Registration Statement on Form S-8 with the Commission to register 1,300,000
shares of Class A Common Stock reserved for issuance or sale under the Stock
Plan. As of March 31, 1998, there were outstanding options to purchase a total
of 182,800 shares of Class A Common Stock, none of which were vested, and
outstanding and presently exercisable warrants to purchase a total of 469,000
shares of Class A Common Stock. In addition, the Board of Directors has granted
an option to purchase 360,000 shares of Class A Common Stock that is
conditioned upon acceptance of an offer of employment and options to purchase
10,000 shares of Class A Common Stock that are conditioned upon completion of
the Offering. Following such registration, all shares of Class A Common Stock
issuable upon the exercise of options granted under the Stock Plan will be
freely tradable without restriction under the Securities Act, unless such
shares are held by an affiliate of the Company.

Prior to the Offering, there has been no established market for the Class
A Common Stock, and no predictions can be made about the effect, if any, that
market sales of shares of Class A Common Stock or the availability of such
shares for sale will have on the market price prevailing from time to time.
Nevertheless, the actual sale of, or the perceived potential for the sale of,
Class A Common Stock in the public market may have an adverse effect on the
market price for the Class A Common Stock.

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), for whom Smith Barney Inc., Bear, Stearns & Co. Inc. and Wheat
First Union, a division of Wheat First Securities, Inc., are acting as
representatives (the "Representatives"), and each of the Underwriters has
severally agreed to purchase from the Company the aggregate number of shares of
Class A Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
Number of
Underwriters Shares
- --------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc. ........................................... 1,808,000
Bear, Stearns & Co. Inc. .................................... 1,808,000
Wheat First Securities, Inc. ................................ 904,000
BT Alex. Brown Incorporated ................................. 100,000
Credit Lyonnais Securities (USA), Inc. ...................... 100,000
Deutsche Morgan Grenfell Inc. ............................... 100,000
Donaldson, Lufkin & Jenrette Securities Corporation ......... 100,000
PaineWebber Incorporated .................................... 100,000
Essex Capital Markets Inc. .................................. 60,000
Interstate/Johnson Lane Corporation ......................... 60,000
Janney Montgomery Scott Inc. ................................ 60,000
Kaufman Bros., L.P. ......................................... 60,000
Ragen Mackenzie Incorporated ................................ 60,000
Redwine & Company, Inc. ..................................... 60,000
The Robinson-Humphrey Company, LLC .......................... 60,000
Scott & Stringfellow, Inc. .................................. 60,000
---------
Total ................................................... 5,500,000
=========
</TABLE>

The Company has been advised by the Representatives that the several
Underwriters propose initially to offer the shares of Class A Common Stock to
the public at the Price to Public set forth on the cover page of this

44
<PAGE>

Prospectus, and to certain dealers at such price less a discount not in excess
of $0.63 per share. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $0.10 per share on sales to certain other dealers.
After the initial public offering, the public offering price and such
concessions may be changed.

The Company has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to 825,000 additional
shares of Class A Common Stock to cover over-allotments, if any, at the Price
to the Public set forth on the cover page of this Prospectus less the
Underwriting Discount. To the extent that the Underwriters exercise such
option, in whole or in part, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment.

The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Class A Common Stock listed above are subject to
certain conditions set forth therein. The Underwriters are committed to
purchase all of the Class A Common Stock offered by this Prospectus (other than
those covered by the Underwriters' overallotment option described in the
immediately preceding paragraph), if any are purchased. In the event of default
by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the non-defaulting Underwriters may
be increased or the Underwriting Agreement may be terminated. The obligations
of the Underwriters under the Underwriting Agreement are several and may be
terminated in their discretion upon the occurrence of certain stated events
including if certain events have occurred the effect of which on financial
markets is such as to make it, in the judgment of the Underwriters,
impracticable or inadvisable to proceed with the Offering.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.

The Company and its directors and executive officers have each agreed with
the Underwriters that they will not offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce an offering of, any
shares of Class A Common Stock or any securities convertible into, or
exchangeable for, shares of Class A Common Stock for a period of 180 days from
the date of this Prospectus, without the prior written consent of Smith Barney
Inc., except (a) in the case of the Company, (i) grants of options and
issuances and sales of Class A Common Stock issued pursuant to the Stock Plan,
(ii) issuances of Class A Common Stock upon the conversion of shares of Class B
Common Stock or the exercise of warrants outstanding on the date of the
Underwriting Agreement, (iii) issuances of Class A Common Stock or securities
convertible into Class A Common Stock in connection with acquisitions; provided
that the recipients of such securities agree in writing with Smith Barney Inc.
to be bound by the unexpired term of such agreement not to sell or (iv) grants
of warrants to purchase up to 100,000 shares of Class A Common Stock; provided
that the recipients of such warrants agree in writing with Smith Barney Inc. to
be bound by the unexpired term of such agreement not to sell; and (b) in the
case of directors and executive officers, shares of Class A Common Stock
disposed of as bona fide gifts or pledges where the recipients of such gifts or
the pledgees, as the case may be, agree in writing with Smith Barney Inc. to be
bound by the terms of such agreement.

At the request of the Company, the Underwriters have reserved up to
385,000 shares of Class A Common Stock for sale at the Price to Public set
forth on the cover page of this Prospectus to certain officers, directors,
employees and other persons designated by the Company. The number of shares of
Class A Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.

The Representatives have informed the Company that they do not expect
sales to accounts over which they exercise discretionary authority to exceed
five percent of the total number of shares of Class A Common Stock sold in the
Offering.

Prior to the Offering, there has been no public market for the Class A
Common Stock. Accordingly, the initial public offering price for the Class A
Common Stock has been determined by negotiation among the Company and the
Representatives. Among the factors considered in determining the initial public
offering price of

45
<PAGE>

the Class A Common Stock, in addition to prevailing market conditions, were the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses. There can be no assurance that the price at
which shares of Class A Common Stock will sell in the public market after the
Offering will not be lower than the price at which they are sold in the
Offering by the Underwriters.

The Class A Common Stock has been conditionally approved for listing on
the Nasdaq National Market under the symbol "CLEC."

In connection with the Offering, the Underwriters may purchase and sell
the Class A Common Stock in the open market in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These transactions may include over-allotment and stabilizing transactions and
purchases to cover syndicate short positions created in connection with the
Offering. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Class A
Common Stock; and syndicate short positions involve the sale by the
Underwriters of a greater number of shares of Class A Common Stock than they
are required to purchase from the Company in the Offering. The Underwriters
also may impose a penalty bid, whereby selling discounts allowed to syndicate
members or other broker-dealers in respect of the securities sold in the
Offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market in the over-the-counter market or otherwise.

LEGAL MATTERS

The validity of the Class A Common Stock will be passed upon for the
Company by Moore & Van Allen, PLLC, Charlotte, North Carolina and for the
Underwriters by Paul, Hastings, Janofsky & Walker LLP, New York, New York.

EXPERTS

The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent public accountants, as stated in their
report appearing herein; and are included in reliance upon the report of said
firm given upon their authority as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-1, Commission
File No. 333-46341, under the Securities Act with the Commission with respect
to the shares of Class A Common Stock offered by the Offering. This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Class A Common Stock, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or any other document to which reference is
made are necessarily summaries thereof, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.

The Company has not previously been subject to the reporting requirements
of the Exchange Act. Upon completion of the Offering, the Company will be
subject to the informational requirements of the Exchange Act and in accordance
therewith will be required to file periodic reports and other information with
the Commission. Copies of the Registration Statement, periodic reports and
other information filed by the Company with the Commission may be inspected
without charge. Copies of such material may also be obtained at prescribed
rates at the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, DC 20549, or at its regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. In addition,
the Commission

46
<PAGE>

maintains a website that contains periodic reports and other information filed
by the Company via the Commission's Electronic Data Gathering and Retrieval
System. This website can be accessed at www.sec.gov. Copies of such material
can be also be obtained from the Company upon request by contacting the Company
at its principal executive office.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.

47
<PAGE>

GLOSSARY

CAP -- Competitive access provider.

CLEC -- Competitive local exchange carrier.

Communications Act -- Communications Act of 1934, as amended.

DS-0, DS-1, DS-3, T-1, T-3 -- These are the standard circuit capacity
classifications which are distinguishable by bit rate. Each of these
transmission services can be provided using the same type of fiber optic cable
or other transmission medium, but offer different bandwidth (that is,
capacity), depending upon the individual needs of the end-user. A DS-0 is a
dedicated circuit that is considered to meet the requirements of usual business
communications, with transmission capacity of up to 64 kilobits of bandwidth
per second (that is, a voice grade equivalent circuit). This service offers a
basic low capacity dedicated digital line for connecting telephones, fax
machines, personal computers and other telecommunications equipment. A DS-1 is
a high speed digital circuit typically linking high volume customer locations
to long distance carriers or other customer locations. Typically utilized for
voice transmissions as well as the interconnection of local area networks, DS-1
service accommodates transmission speeds of up to 1.544 megabits per second,
which is equivalent to 24 DS-0 circuits or 24 voice grade equivalent circuits.
DS-3 service provides a very high capacity digital circuit with transmission
capacity of 45 megabits per second, which is equivalent to 28 DS-1 circuits or
672 voice grade equivalent circuits. This is a digital service used by long
distance carriers for central office connections and by some large commercial
users to link multiple sites. T-1 is synonymous with DS-1 and T-3 is synonymous
with DS-3.

EBITDA -- Net earnings (loss) before interest expense, income taxes,
depreciation and amortization.

ESP -- Enhanced service provider.

Equivalent Access Lines -- This term is used by management to quantify the
size of the Company's network. It is based on the number of customer lines and
Trunks and the utilization of those lines and Trunks during the "busy hour."
The "busy hour" refers to the hour of the day when line usage is at its highest
level. The Company calculates its Equivalent Access Lines by multiplying the
number of its Trunks in service by six and adding to the result to the number
of its separate access lines in service. The decision to use six as the
multiplier is based on management's experience, which indicates that the
typical business access line is in use for approximately 400 seconds during the
busy hour (or approximately 11.1% of capacity during the busy hour) and a
typical business Trunk is in use for approximately 2,400 seconds during the
busy hour (or approximately 66.7% of capacity during the busy hour), or
approximately six times use during the busy hour of a typical business line.

FCC -- The United States Federal Communications Commission.

ILEC -- Incumbent local exchange carrier.

ISP -- Internet service provider.

Interconnect -- Connection of a telecommunications device or service to
the public switched telephone network.

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

LATA (Local Access and Transport Area) -- one of approximately 200 local
geographic areas in the United States within which a local telephone company
may offer telecommunications services.

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.

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.

MOU -- Minutes of use.

NC PUC -- North Carolina Public Utilities Commission.

PUC -- Public Utilities Commission.

48
<PAGE>

RBOC -- Regional bell operating company.

Reciprocal Compensation -- The compensation paid to and from a CLEC and
the ILEC for termination of a local call on each other's networks.

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

Switched Services -- Transmission of switched calls through the local
switched network.

Telecom Act -- Telecommunications Act of 1996.

Trunk -- A DS-0 which concentrates subscriber lines. A trunked system
combines multiple channels with unrestricted access in such a manner that user
demands for channels are automatically "queued" and then allocated to the first
available channel.

VAR -- Value added reseller.

49
<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>

INDEX TO FINANCIAL STATEMENTS

US LEC CORP. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Page
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT ............................................................ F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1997 ........................... F-3
Consolidated Statements of Operations for the Period From June 6, 1996 (Inception) to
December 31, 1996 and the Year Ended December 31, 1997 ................................ F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the Period From June
6, 1996 (Inception) to December 31, 1996 and the Year Ended December 31, 1997 ....... F-5
Consolidated Statements of Cash Flows for the Period From June 6, 1996 (Inception) to
December 31, 1996 and the Year Ended December 31, 1997 ................................ F-6
Notes to Consolidated Financial Statements ............................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
US LEC Corp.
Charlotte, North Carolina

We have audited the accompanying consolidated balance sheets of US LEC
Corp. (the "Company") and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the period from June 6, 1996 (inception) to
December 31, 1996 and the year 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 our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of US LEC Corp. and subsidiaries as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for the period from June 6, 1996 (inception) to December 31, 1996 and the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP

February 4, 1998
Charlotte, North Carolina

F-2
<PAGE>

US LEC CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 1996 and 1997 (Note 1)

<TABLE>
<CAPTION>
1996 1997
------------- ---------------
<S> <C> <C>
ASSETS (Note 4)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) ............................ $ 726,139 $ 3,189,210
Certificates of deposit (Note 2) .............................. -- 349,473
Accounts receivable (Note 2) .................................. -- 6,005,742
Due from stockholder (Note 6) ................................. 200,000 --
Prepaid expenses and other assets ............................. 141,523 110,568
---------- ------------
Total current assets ...................................... .. 1,067,662 9,654,993
PROPERTY AND EQUIPMENT, NET (Notes 2 and 3) ..................... 276,097 12,889,335
OTHER ASSETS .................................................... 123,076 136,353
---------- ------------
TOTAL ASSETS .................................................... $1,466,835 $ 22,680,681
========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable .............................................. $ 48,125 $ 8,200,926
Deferred revenue .............................................. -- 1,141,386
Accrued network costs ......................................... -- 1,864,659
Accrued interest payable -- related party ..................... 16,861 282,311
Accrued expenses -- other ..................................... 65,792 434,594
---------- ------------
Total current liabilities ................................. .. 130,778 11,923,876
---------- ------------
NOTES PAYABLE -- STOCKHOLDERS (Notes 4 and 9) ................... 1,671,000 5,000,000
---------- ------------
COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 8 and 9):
Common stock -- Class A, $.01 par value (73,405,498 authorized
shares, 3,855,000 outstanding at December 31, 1997) .......... -- 38,550
Common stock -- Class B, $.01 par value (16,594,502 authorized
shares, 16,594,500 outstanding at December 31, 1997) ......... -- 165,945
Members' units -- voting (10,000 units outstanding as of
December 31, 1996) ........................................... 600,000 --
Members' units -- nonvoting (1,540 units outstanding as of
December 31, 1996) ........................................... 27,720 --
Additional paid-in capital .................................... -- 11,173,420
Accumulated deficit ........................................... (962,663) (5,621,110)
---------- ------------
Total stockholders' equity (deficiency) ................... .. (334,943) 5,756,805
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) .................................................. $1,466,835 $ 22,680,681
========== ============
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

US LEC CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The Period from June 6, 1996 (Inception)
to December 31, 1996 and the Year Ended December 31, 1997 (Note 1)

<TABLE>
<CAPTION>
1996 1997
------------- ---------------
<S> <C> <C>
Revenue (Note 2) .......................................... $ -- $ 6,457,661
Cost of Services .......................................... -- 4,201,001
---------- ------------
Gross Margin .............................................. -- 2,256,660
Selling, General and Administrative ....................... 941,743 6,117,337
Depreciation and Amortization ............................. 4,059 442,914
---------- ------------
Loss from Operations ...................................... (945,802) (4,303,591)
Interest Income ........................................... -- (65,660)
Interest Expense (Note 4) ................................. 16,861 420,516
---------- ------------
Net Loss .................................................. $ (962,663) $ (4,658,447)
========== ============
Net Loss Per Share -- Basic and diluted (Note 2) .......... $ (.06) $ (.25)
========== ============
Weighted Average Shares Outstanding ....................... 17,310,000 18,653,308
========== ============
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

US LEC CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

The Period from June 6, 1996 (Inception)
to December 31, 1996 and the Year Ended December 31, 1997 (Notes 1 and 8)

<TABLE>
<CAPTION>
Common Stock Common Stock Common Stock/
Class A Class B Voting Units(1)
----------------------- ------------------------ ----------------------------
Shares Amount Shares Amount Shares Amount
------------ ---------- ------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 6, 1996
(INCEPTION) ........................... -- $ -- -- $ -- -- $ --
Issuance of voting shares/units ....... -- -- -- -- 10,000 600,000
Shares/units granted to employees ..... -- -- -- -- -- --
Net loss .............................. -- -- -- -- -- --
--------- ------- ---------- -------- ------- -------------
BALANCE (DEFICIENCY),
DECEMBER 31, 1996 ..................... -- -- -- -- 10,000 600,000
Issuance of nonvoting units ........... -- -- -- -- -- --
Issuance of voting units .............. -- -- -- -- 1,063 4,554,995
Issuance of warrants .................. -- -- -- -- -- --
Contribution to capital ............... -- -- -- -- -- --
Exchange of limited liability
company units for C Corporation
shares ............................... 3,855,000 38,550 16,594,500 165,945 (11,063) (5,154,995)
Net loss .............................. -- -- -- -- -- --
--------- ------- ---------- -------- ------- -------------
BALANCE, DECEMBER 31, 1997 ............ 3,855,000 $38,550 16,594,500 $165,945 -- $ --
========= ======= ========== ======== ======= =============

<CAPTION>
Common Stock/
Nonvoting Units(1) Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 6, 1996
(INCEPTION) ........................... -- $ -- $ -- $ -- $ --
Issuance of voting shares/units ....... -- -- -- -- 600,000
Shares/units granted to employees ..... 1,540 27,720 -- -- 27,720
Net loss .............................. -- -- -- (962,663) (962,663)
----- ------------- ----------- ------------ ----------
BALANCE (DEFICIENCY),
DECEMBER 31, 1996 ..................... 1,540 27,720 -- (962,663) (334,943)
Issuance of nonvoting units ........... 1,030 4,413,550 -- -- 4,413,550
Issuance of voting units .............. -- -- -- -- 4,554,995
Issuance of warrants .................. -- -- 70,800 -- 70,800
Contribution to capital ............... -- -- 1,710,850 -- 1,710,850
Exchange of limited liability
company units for C Corporation
shares ............................... (2,570) (4,441,270) 9,391,770 -- --
Net loss .............................. -- -- -- (4,658,447) (4,658,447)
------ ------------- ----------- ------------ ----------
BALANCE, DECEMBER 31, 1997 ............ -- $ -- $11,173,420 $ (5,621,110) $5,756,805
====== ============= =========== ============ ==========
</TABLE>

- -------
(1) On December 31, 1996, all S Corporation common shares were converted into
limited liability company units based on a one-for-one conversion ratio of
units for each share. On December 31, 1997, all limited liability units
were converted into C Corporation common shares based upon a conversion
ratio of 1,500 shares for each unit.

See notes to consolidated financial statements.

F-5
<PAGE>

US LEC CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The Period from June 6, 1996 (Inception)
to December 31, 1996 and the Year Ended December 31, 1997 (Note 1)

<TABLE>
<CAPTION>
1996 1997
-------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ..................................................................... $ (962,663) $ (4,658,447)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .............................................. 4,059 442,914
Stock compensation ......................................................... 27,720 70,800
Changes in assets and liabilities which provided (used) cash:
Accounts receivable ....................................................... -- (6,005,742)
Prepaid expenses and other assets ......................................... (141,523) 30,955
Other assets .............................................................. (123,598) (14,322)
Accounts payable .......................................................... 34,283 899,452
Deferred revenue .......................................................... -- 1,141,386
Accrued expenses -- other ................................................. 65,792 368,802
Accrued network costs ..................................................... -- 1,864,659
Accrued interest payable -- related party ................................. 16,861 265,450
------------ ------------
Total adjustments ........................................................ (116,406) (935,646)
------------ ------------
Net cash used in operating activities .................................... (1,079,069) (5,594,093)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment ........................................... (265,792) (5,801,758)
Certificates of deposit ...................................................... -- (349,473)
(Advances to) repayments from stockholder .................................... (200,000) 200,000
------------ ------------
Net cash used in investing activities .................................... (465,792) (5,951,231)
------------ ------------
FINANCING ACTIVITIES:
Issuance of common shares and limited liability company units ................ 600,000 8,968,545
Contribution to capital ...................................................... -- 1,710,850
Proceeds from notes payable -- stockholders .................................. 1,671,000 4,289,150
Repayment of notes payable -- stockholders ................................... -- (960,150)
------------ ------------
Net cash provided by financing activities ................................ 2,271,000 14,008,395
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................... 726,139 2,463,071
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ -- 726,139
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 726,139 $ 3,189,210
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES -- Cash paid for interest .................. $ -- $ 672
============ ============
SUPPLEMENTAL NON CASH INVESTING AND FINANCING
ACTIVITIES -- During 1997, accrued interest of $54,544 due to stockholders
was converted into voting equity. At December 31, 1996 and 1997, $13,842
and $7,267,191, respectively, of property and equipment additions are
included in outstanding accounts payable.
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

US LEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Period From June 6, 1996 (Inception) to December 31, 1996 and Year Ended
December 31, 1997

1. ORGANIZATION AND NATURE OF BUSINESS

The consolidated financial statements include the accounts of US LEC Corp.
(the "Company") and its six subsidiaries, of which two are wholly owned and
four are 99% owned. All significant intercompany transactions and balances have
been eliminated. The Company was incorporated in 1996 as an S Corporation.
Effective December 31, 1996, US LEC Corp. was converted to a limited liability
company ("US LEC L.L.C.") through an exchange of the S Corporation common stock
for voting and nonvoting units of US LEC L.L.C. On December 31, 1997, in
anticipation of a planned initial public offering of common stock, the Company
became a C Corporation through a merger of US LEC L.L.C. into the Company and
the exchange of all of the limited liability company units into shares of Class
A and Class B Common Stock.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition -- The Company recognizes revenue on
telecommunications and enhanced communications services in the period that the
service is provided. Revenue is presented net of amounts which are rebated to
end user customers and outside sales agents pursuant to telecommunications
service contracts. Revenue on billings to customers in advance of providing
services is deferred and recognized when earned. At December 31, 1997, deferred
revenue primarily represents billings which are subject to review by a state
public utilities commission (see Note 5).

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

Certificates of Deposit -- Certificates of deposit are carried at cost.
These certificates mature during 1998, and serve as collateral for letters of
credit related to certain office leases.

Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets.

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

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

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

Fair Value of Financial Instruments -- As of December 31, 1996 and 1997,
the fair values of the Company's financial instruments, including cash
equivalents, certificates of deposit, receivables, accounts payable and notes
payable to stockholders approximate their carrying values.

Income Taxes -- The Company was organized as an S Corporation for the
period from inception to December 31, 1996, and as a limited liability company
for the period from January 1, 1997 to December 31, 1997, on which date it was
converted to C Corporation status. Accordingly, no provision (benefit) for
income taxes is

F-7
<PAGE>

US LEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

necessary for 1996 and 1997 since income taxes were the responsibility of the
individual S Corporation stockholders or limited liability company members. On
a pro forma basis, had the Company been structured as a C Corporation since
inception, there would have been no change in the net loss or net loss per
share for each period presented. At December 31, 1997, deferred tax assets and
liabilities related to the conversion to a C Corporation are not significant.

Concentration of Risk -- The Company is exposed to concentration of credit
risk principally from trade accounts receivable. At December 31, 1997, the
Company's trade customers are located in North Carolina. The Company performs
ongoing credit evaluations of its customers but does not require collateral to
support customer receivables. Credit risk is reduced by the fact that the
Company's most significant trade receivables are from large, well-established
telecommunications entities. At December 31, 1997, no allowance for doubtful
receivables is considered necessary.

The Company is dependent upon certain suppliers for the provision of
telecommunications services to its customers. The Company has executed
interconnection agreements for all of its current operating networks, and these
agreements expire at various dates in 1998 and 1999. Management believes that
suitable interconnection agreements can be negotiated in the future and,
accordingly, does not expect any disruption of services.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. Actual results could differ from those estimates.
A significant estimate relates to the accrual of network costs payable to other
telecommunications entities. Any difference between the ultimate payments made
and the accrual would be recorded at the time of payment.

Advertising -- The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $22,311 and $136,935 for 1996 and
1997, respectively.

Net Loss Per Share -- Net loss per share has been calculated in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. The weighted average shares outstanding used in the calculation have
been determined by giving retroactive effect to the conversion to C Corporation
status which occurred on December 31, 1997 (based on the share conversion
ratios utilized in the conversion from a limited liability company). The effect
on diluted loss per share of outstanding stock warrants to purchase 444,000
common shares is antidilutive for the year ended December 31, 1997. Securities
and Exchange Commission Staff Accounting Bulletin No. 98 requires that equity
instruments granted at nominal amounts for periods prior to the filing of the
registration statement be included in the calculation of per share data as if
outstanding for all periods presented. Accordingly, the weighted average shares
used in the calculation of basic and diluted loss per share in 1996 includes
2,310,000 shares (1,540 limited liability company units) granted in 1996 to
employees, as if such shares were outstanding for the entire period.

3. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
----------- --------------
<S> <C> <C>
Telecommunications switching and other equipment ......... $212,259 $11,790,370
Office equipment, furniture and other .................... 67,375 774,536
Leasehold improvements ................................... -- 769,835
-------- -----------
279,634 13,334,741
Less accumulated depreciation and amortization ........... (3,537) (445,406)
-------- -----------
Total .................................................... $276,097 $12,889,335
======== ===========
</TABLE>

F-8
<PAGE>

US LEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

4. NOTES PAYABLE -- STOCKHOLDERS

The Company's majority stockholder has loaned an aggregate of $5,000,000
to the Company as of December 31, 1997 ($710,850 as of December 31, 1996).
Interest charged through 1997 was at prime plus 2% (10.5% per annum at December
31, 1997). In January 1998, an entity controlled by this stockholder loaned an
additional $2,289,150 to the Company. Interest on both loans will be at 12% per
annum, payable on a quarterly basis, with principal due in January 2003. (See
Note 9)

Another stockholder loaned the Company an aggregate of $960,150 in 1996,
with interest at prime plus 2%. These loans were repaid in 1997. In January
1998, this stockholder loaned $1,000,000 to the Company, with interest at 12%
per annum, payable on a quarterly basis, with principal due in January 2003.

Substantially all of the Company's assets are pledged as collateral on
such stockholder loans. Interest expense to related parties was $16,861 in 1996
and $419,814 in 1997.

5. COMMITMENTS AND CONTINGENCIES

Leases -- The Company leases office premises in various locations under
operating lease arrangements. Most of these leases have renewal options. Total
rent expense amounted to $12,331 and $180,414 in 1996 and 1997, respectively.

Future minimum rental payments under operating leases having initial or
remaining noncancelable lease terms in excess of one year (including leases
entered into in 1998) are as follows:

<TABLE>
<S> <C>
1998 ................. $ 795,000
1999 ................. 901,000
2000 ................. 813,000
2001 ................. 700,000
2002 ................. 609,000
Thereafter ........... 578,000
----------
Total ................ $4,396,000
==========
</TABLE>

Purchase Commitments -- At December 31, 1997, the Company has outstanding
commitments to purchase network equipment with an aggregate cost of $8,844,880.

FCC Subsidy -- On May 8, 1997, the FCC released an order establishing a
significantly expanded federal telecommunications universal service program
which both increased the size of existing subsidies and created new subsidy
funds with respect to certain services offered in high-cost areas or to low
income subscribers, schools, libraries, and rural healthcare providers. In the
May 8 order, the FCC also announced that it will soon revise its rules for
subsidizing service provided to consumers in high cost areas. The Company also
may be required to contribute to state-established funds. As of December 31,
1997, the Company was unable to quantify the subsidy payments it may be
required to make for the year. However, management believes that any such
subsidy payments relating to periods through 1997 will not have a material
effect on the Company's financial position or results of operations.

BellSouth Proceeding -- A portion of the Company's revenue is derived from
reciprocal compensation payments from incumbent local exchange carriers
("ILEC's") such as BellSouth Telecommunications, Inc. ("BellSouth"). Management
believes that such payments are due pursuant to its ILEC interconnection
agreements when, in the aggregate, the Company's customers receive more calls
from the ILEC's customers than they make to the ILEC's customers. However, in
August 1997 BellSouth indicated that it was not obligated to make such payments
to the Company with respect to calls made to certain customers, principally
internet service providers. In October 1997, the Company filed a petition with
the public utilities commission ("PUC") in North Carolina seeking an order to
compel BellSouth to make the reciprocal compensation payments. It is expected
that the PUC will issue a

F-9
<PAGE>

US LEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

5. COMMITMENTS AND CONTINGENCIES -- Continued

ruling in the first quarter of 1998, but such ruling may be subject to appeal.
Management believes that the Company will ultimately be successful in this
proceeding, but a final determination that the Company is not eligible for
reciprocal compensation with respect to such calls could have a material
adverse effect on the Company's financial condition and future results of
operations.

Since reciprocal compensation earned during 1997 is subject to the ruling
to be issued by the PUC in North Carolina, the Company has deferred recognition
of a significant portion ($1,141,386) of such revenue at December 31, 1997.

6. RELATED PARTIES

During the year ended December 31, 1997, the Company received services
under consulting agreements with two entities each controlled by Company
stockholders. Payments under these agreements totaled $175,000, comprised of
$125,000 and $50,000, respectively. Company management believes that these
transactions were under terms no less favorable to the Company than could be
arranged with unrelated parties. In 1996 the Company advanced $200,000 to its
majority stockholder. The amount was repaid in January 1997.

7. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) profit-sharing plan under which employees can
contribute up to 15% of their annual salary. Employees are eligible for
participation after completing 1,000 hours of service within a 12-month period.
The Company may make a discretionary contribution. However, no such
contributions have been made for the period from inception to December 31,
1997.

8. STOCKHOLDERS' EQUITY

Common Stock -- The Company has authorized two classes of common stock,
Class A and Class B. The rights of holders of the Class A Common Stock and the
Class B Common Stock are substantially identical, except that (i) holders of
the Class A Common Stock are entitled to one vote per share and holders of the
Class B Common Stock are entitled to 10 votes per share; (ii) holders of the
Class B Common Stock vote as a separate class to elect two members of the
Company's Board of Directors in addition to voting with the holders of Class A
Common Stock in the election of the other members of the Board of Directors;
and (iii) the Class B Common Stock is fully convertible at any time into Class
A Common Stock, at the option of the holder, or automatically upon transfer to
certain third persons, on a one-for-one basis. Pursuant to an agreement among
the Class B stockholders, if a Class B stockholder proposes to sell or transfer
Class B Common Stock to anyone other than a permitted transferee (as defined in
the agreement), the other Class B stockholders who are parties to the agreement
would have a right to acquire the Class B Common Stock that is proposed to be
sold or transferred.

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

Capital Contribution -- During 1997, the Company's majority stockholder
contributed an aggregate of $1,710,850 to additional paid-in capital.

Employee Stock Grants -- In 1996, as part of the Company's organizational
activities, an aggregate of 1,540 non-voting limited liability company units
were issued to induce certain employees to join the Company. The Company
recorded compensation expense of $27,720 in 1996 for these units, based on the
estimated fair value at the time the units were issued.

F-10
<PAGE>

US LEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

8. STOCKHOLDERS' EQUITY -- Continued

Warrants -- During 1997, the Company issued warrants to three employees to
purchase an aggregate of 345,000 shares of Class A Common Stock and a warrant
to an outside sales agent to purchase 99,000 shares of Class A Common Stock.
All of these warrants are fully vested and are exercisable at $2.86 per share
for a three-year period from the date of issuance. None of these warrants have
been exercised at December 31, 1997.

Management believes that the employee warrants issued through October 1997
are noncompensatory based upon an internal valuation of their fair value. The
exercise price of those warrants is the same as the issuance price in 1997 of
shares to numerous outside investors. In November 1997, the Company granted to
an employee a warrant to purchase 15,000 shares of Class A Common Stock at an
exercise price of $2.86 per share. Management estimated the fair value of the
warrant granted in November to be $6.00 per share. As a result, compensation of
$47,100 has been charged to expense relating to the difference between the fair
value and the exercise price of the warrant on the date of grant. In addition,
in January 1998 the Company issued a warrant to a consultant to purchase 25,000
shares of Class A Common Stock at $10 per share, exercisable at any time
through January 1, 2001. The Company will record compensation expense of
$75,000 in the first quarter of 1998 associated with the warrant issued in
January 1998.

Had compensation cost for the employee warrants issued in 1997 been
determined based on the fair value at the grant date in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's 1997 net loss
and net loss per share would have been $4,737,436 and $.25, respectively. The
Company estimated the fair value of the warrants using the Black-Scholes model
assuming no dividend yield or volatility, a risk-free interest rate of 6.0% and
an expected life of 18 months for each of the warrants. For the warrant issued
in 1997 to the outside sales agent, the fair value charged to expense was
$23,700. The weighted average remaining contractual life of warrants
outstanding at December 31, 1997 is 32 months.

Stock Option Plan -- In January 1998, the Company adopted the US LEC
Corp. 1998 Omnibus Stock Plan (the "Stock Plan"). Under this plan, 650,000
shares of Class A Common Stock have been reserved for issuance of stock
options, stock appreciation rights, restricted stock, performance awards or
other stock-based awards. Options granted under the Stock Plan are to be at
exercise prices as determined by the Compensation Committee of the Board of
Directors. For incentive stock options the option price may not be less than
the market value of the Class A Common Stock on the date of grant (110% of
market value for greater than 10% stockholders).

In January 1998, the Company granted incentive stock options to
substantially all employees to purchase an aggregate of 182,800 shares of Class
A Common Stock at $10 per share, which options vest annually in four equal
installments beginning in January 1999. The Company will record deferred
compensation of $548,400 in the first quarter of 1998 associated with these
options which will be amortized, beginning in the first quarter of 1998, to
compensation expense over the four-year vesting period. Also, upon completion
of a planned initial public offering of the Class A Common Stock, the Company
intends to grant nonqualified options to purchase 5,000 shares of Class A
Common Stock at the initial public offering price to each of the Company's two
outside directors.

9. SUBSEQUENT EVENTS (UNAUDITED)

On February 14, 1998, the Company's majority stockholder exchanged
$5,000,000 of loans to the Company for 480,770 shares of Class B Common Stock.
The fair value of the Class B Common Stock issued in the exchange was
$1,250,000 in excess of the carrying value of the debt. Accordingly, the
difference between the carrying value of the debt and the fair value of the
Class B Common Stock issued in the exchange will be recorded as a dividend to
the majority shareholder in the first quarter of 1998. Effective April 21,
1998, the shares reserved under the Stock Plan were increased from 650,000 to
1,300,000.

********

F-11
<PAGE>

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

No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offer contained herein, and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Company or by any of the Underwriters. This Prospectus
does not constitute an offer of any securities other than those to which it
relates or an offer to sell, or a solicitation of an offer to buy, those to
which it relates in any state to any person to whom it is not lawful to make
such offer in such state. The delivery of this Prospectus at any time does not
imply that the information herein is correct as of any time subsequent to its
date.
--------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary ........................................ 1
Risk Factors .............................................. 7
Use of Proceeds ........................................... 13
Dividend Policy ........................................... 13
Dilution .................................................. 14
Capitalization ............................................ 15
Selected Historical Consolidated Financial and
Operating Data ......................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 18
Business .................................................. 21
Management ................................................ 35
Certain Relationships and Related Transactions ............ 38
Security Ownership of Management .......................... 39
Description of Capital Stock .............................. 40
Shares Eligible for Future Sale ........................... 43
Underwriting .............................................. 44
Legal Matters ............................................. 46
Experts ................................................... 46
Available Information ..................................... 46
Glossary .................................................. 48
Index to Financial Statements ............................. F-1
</TABLE>

Until May 19, 1998 (25 days after the commencement of the Offering), all
dealers effecting transactions in the Class A Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.

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

5,500,000 Shares

US LEC Corp.

Class A Common Stock

(US LEC logo appears here)

-----------------
PROSPECTUS

April 23, 1998

-----------------
Salomon Smith Barney

Bear, Stearns & Co. Inc.

Wheat First Union

<PAGE>

MOORE & VAN ALLEN, PLLC

Attorneys at Law
NationsBank Corporate Center
100 North Street, Floor 47
Charlotte, North Carolina 28202-4003
(704) 331-1000

April 27, 1998
VIA EDGAR
Securities and Exchange Commission
Division of Corporation Finance
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549

RE: US LEC Corp. Registration Statement on Form S-1
(File No. 333-46341)

Ladies and Gentlemen:

On behalf of US LEC Corp. (the "Company"), we hereby transmit for filing
with the Commission, pursuant to Rule 424(b)(4), the final prospectus
distributed in connection with the above-referenced Registration Statement. If
the staff has questions concerning this filing, please call the undersigned at
(704) 331-1040.

Sincerely,

MOORE & VAN ALLEN, PLLC

/s/ B.T. ATKINSON
--------------------------------
B.T. Atkinson