McLeodusa 8K Offering Memorandum, Solicitation of Consents and Acceptances and Disclosure Statement | SEC 7 Dec 01

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OFFERING MEMORANDUM, SOLICITATION
OF CONSENTS AND ACCEPTANCES AND DISCLOSURE STATEMENT

McLeodUSA Incorporated

Offers to Exchange Up To $560,000,000 and 56,813,984 Shares of Class A Common Stock for Its

10¹/2% Senior Discount Notes due March 1, 2007		9¹/4% Senior Notes due July 15, 2007
8³/8% Senior Notes due March 15, 2008		9¹/2% Senior Notes due November 1, 2008
8¹/8% Senior Notes due February 15, 2009		12% Senior Notes due July 15, 2008
11¹/2% Senior Notes due May 1, 2009		11³/8% Senior Notes due January 1, 2009

and Solicits Consents to Indenture Amendments and Acceptances of a Plan of Reorganization

THE EXCHANGE OFFER AND THE SOLICITATION PERIOD FOR CONSENTS TO THE INDENTURE AMENDMENTS AND FOR ACCEPTANCES OF THE PLAN OF REORGANIZATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 15, 2002, UNLESS EXTENDED. IT IS A CONDITION TO THE CONSUMMATION OF THE EXCHANGE OFFER THAT AT LEAST 95% OF THE AGGREGATE PRINCIPAL AND ACCRETED AMOUNT OF THE NOTES ARE VALIDLY TENDERED FOR EXCHANGE AND NOT WITHDRAWN.

We are offering to exchange up to an aggregate of:

(i) $560 million in cash; and

(ii) 56,813,984 shares of our Class A common stock, par value $.01 per share,

for any and all of the outstanding notes identified above.

The aggregate amount of Class A common stock to be issued to noteholders is equal to approximately 15% of the Class A common stock to be outstanding as of the closing of the exchange offer (assuming 100% of the notes are tendered and subject to dilution as herein described).

Our obligation to accept for exchange, and to exchange, notes validly tendered pursuant to the exchange offer is subject to the conditions described in this Offering Memorandum and Disclosure Statement. Upon consummation of the exchange offer, each noteholder that validly tenders notes will receive a pro rata portion of $560 million in cash and 56,813,984 shares of our Class A common stock based upon the ratio of (x) the principal and accreted amount of the notes tendered by such noteholder plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the exchange offer to (y) the principal and accreted amount of all outstanding notes plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the exchange offer.

We are also soliciting consents for amendments to the indentures pursuant to which the notes were issued to eliminate or amend substantially all the restrictive covenants contained in such indentures.

We may seek to consummate the restructuring described in this Offering Memorandum and Disclosure Statement under Chapter 11 of the United States Bankruptcy Code. Therefore, we are soliciting acceptances of a proposed plan of reorganization under Chapter 11 of the Bankruptcy Code under which the notes would be fully satisfied for the same consideration offered in the exchange offer.

Your acceptance of the exchange offer and the consent solicitation will not operate as an acceptance of the plan of reorganization. It is therefore important that you execute the enclosed ballot to accept the plan of reorganization. THE BOARD OF DIRECTORS OF MCLEODUSA HAS NOT AT THIS TIME TAKEN ANY CORPORATE ACTION APPROVING A BANKRUPTCY FILING OR IN FURTHERANCE THEREOF.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Offering Memorandum and Disclosure Statement is truthful or complete. Any representation to the contrary is a criminal offense.

The Information Agent for the exchange offer and Voting Agent for the acceptance solicitation is:		The Depositary for the exchange offer is:
Innisfree M&A Incorporated		The Bank of New York

See "Risk Factors" beginning on page 16 for a discussion of risks you should consider before tendering your notes or voting on the plan of reorganization.

The date of this Offering Memorandum and Disclosure Statement is December 7, 2001.

QUESTIONS AND ANSWERS

Q.

WHAT ARE YOU ASKING NOTEHOLDERS TO DO?

A.

We are requesting that noteholders:

•: exchange all outstanding notes for their pro rata share of $560 million in cash and 56,813,984 shares of our Class A common stock (approximately 15% of our Class A common stock expected to be outstanding upon the consummation of the exchange offer, subject to dilution);
•: consent to amendments to the indentures governing the notes to eliminate or amend substantially all the restrictive covenants contained in the indentures; and
•: vote for the bankruptcy plan described in this Offering Memorandum and Disclosure Statement that provides substantially the same consideration to noteholders as in the exchange offer.

Q.

WHY ARE YOU OFFERING TO EXCHANGE CASH AND CLASS A COMMON STOCK FOR OUTSTANDING NOTES IN THE EXCHANGE OFFER?

A.

The exchange offer is part of a larger strategic and operational restructuring through which we intend to reduce our outstanding debt, improve business practices and operational processes and improve our liquidity. We have determined that due to the significant uncertainties associated with our business plan, it is prudent that we address our capital structure and eliminate the debt service requirements of the notes. Otherwise, we believe that there is a risk of exhausting our available liquidity in the foreseeable future. While we considered other available restructuring alternatives, we believe that by offering noteholders a significant and immediate cash payment and an equity participation in a deleveraged enterprise having a committed sponsor, the restructuring provides the best available outcome for the noteholders given the circumstances.

Q.

HOW WILL YOU RAISE THE CASH NECESSARY TO COMPLETE THE EXCHANGE OFFER?

A.

We will raise the necessary cash by:

•: selling our directory publishing business for at least $535 million; and
•: selling to affiliates of Forstmann Little & Co. (Forstmann Little & Co., together with its affiliates, "Forstmann Little") mandatorily convertible preferred stock and warrants to purchase our Class A common stock for a total price of $100 million.

Q.: WHY ARE THE SHARES OF CLASS A COMMON STOCK TO BE ISSUED TO ME "SUBJECT TO DILUTION?"
A:: The new preferred stock to be purchased by Forstmann Little mandatorily converts into a number of shares of our Class A common stock equal to $100 million divided by an average of the Class A common stock's post-transaction trading prices, calculated by taking the closing price per share of Class A common stock on 10 randomly selected trading days during the 60-day period following consummation of the exchange offer, discarding the two highest and the two lowest prices and taking the mathematical average of the remaining six prices. Therefore, the exact number of shares of Class A common stock to be issued to Forstmann Little in connection with the restructuring cannot be determined until the end of such 60-day period. The Class A common stock is subject to dilution from future issuances of Class A common stock and securities convertible into or exercisable for our Class A common stock.

Q.

WHAT PERCENTAGE OF MCLEODUSA WILL NOTEHOLDERS OWN?

A:

Initially, the noteholders will own approximately 15% of our Class A common stock. Following the conversion of the new preferred stock issued to Forstmann Little, and assuming a post-restructuring equity value of $2.74 per share, the noteholders will own approximately 13.7% of our Class A common stock. This estimated value is based on a number of assumptions and is not intended to be an indication of future trading value. See "Valuation Analysis."

Q.

WHY ARE YOU SEEKING CONSENTS TO AMEND THE NOTES?

A.

We are requesting that noteholders agree to amendments to remove all covenants that restrict our operations. This will permit us to conduct our business without having to seek consents from the remaining noteholders before we take actions that we believe are in our best interests. The amendments will eliminate the restrictive covenants but will not remove our obligation to make regularly scheduled payments of principal and interest on any notes that are not tendered for exchange and that remain outstanding.

Q.

WHAT APPROVALS ARE REQUIRED FROM NOTEHOLDERS TO IMPLEMENT THE EXCHANGE OFFER AND AMEND THE NOTES?

A.

We need at least 95% of the aggregate principal and accreted amount of the notes to tender and not withdraw in order to implement the exchange offer and amend the notes. Noteholders who desire to tender their notes pursuant to the exchange offer are required to consent to the indenture amendments with respect to their notes. Noteholders who validly tender notes in the exchange offer will be deemed to have consented to the indenture amendments.

Q.

ARE THERE ANY OTHER CONDITIONS TO IMPLEMENTATION OF THE EXCHANGE OFFER?

A.

Yes:

•: our Series A, D and E preferred stockholders and our Class A common stockholders must vote in favor of several elements of the restructuring;
•: we must consummate the sale of our directory publishing business for at least $535 million;
•: we must consummate the sale of $100 million of new preferred stock and warrants to Forstmann Little; and
•: we must resolve all tax matters related to the restructuring in a manner satisfactory to us.

Q:: WHAT VOTES ARE NEEDED TO APPROVE THE OUT-OF-COURT RESTRUCTURING?
A:: The reclassification of the outstanding preferred stock into Class A common stock must be approved by the holders of a majority of each series of preferred stock, each voting as a separate class, and several additional elements of the out-of-court restructuring must be approved by holders of a majority of the outstanding shares of Class A common stock.
Q.: WHY ARE YOU ASKING NOTEHOLDERS TO CONSENT TO THE BANKRUPTCY PLAN IN ADDITION TO TENDERING THEIR OUTSTANDING NOTES IN THE EXCHANGE OFFER?
A.: We have prepared the bankruptcy plan as an alternate means to restructure our outstanding debt on terms that would result in the same consideration to noteholders as in the exchange offer. If we conclude that it would be more advantageous or expeditious to us, we may file a bankruptcy case under Chapter 11 of the Bankruptcy Code. However, no decision has been made at this time to

commence a bankruptcy case, and we reserve our right to pursue other strategic alternatives in the event the exchange offer is not consummated.

Q:

IF YOU FILE CHAPTER 11, HOW WILL THAT AFFECT YOUR BUSINESS?

A:

We are comprised of a large group of affiliated companies. If we commence Chapter 11 proceedings, we expect that only our parent holding company, and perhaps one non-operating subsidiary, would actually file petitions. Because our business is conducted primarily through our operating subsidiaries, our holding company does not have any material ongoing business. Thus, our actual business operations generally should not be affected by any Chapter 11 filing. It is our intention to continue operating in the ordinary course of business, including by paying employees, trade creditors and certain other creditors according to normal terms.

Q.

WHAT VOTES ARE NEEDED TO APPROVE THE BANKRUPTCY PLAN?

A.

The bankruptcy plan requires separate approval by each of the following classes:

•: the noteholders as a single class; and
•: the holders of Series A, D and E preferred stock as a single class.

The bankruptcy plan must be approved by holders of at least two-thirds in principal and accreted amount and a majority in number of those noteholders who vote on the bankruptcy plan, voting together as a single class, and by two-thirds in amount of shares of preferred stock, voting together as a single class. Only votes that are actually cast are counted in determining whether these thresholds are met.

Q.: WHAT ARE THE DIFFERENCES BETWEEN THE EXCHANGE OFFER AND THE BANKRUPTCY PLAN?
A.: There is no difference in the consideration to be received by noteholders in the exchange offer and the bankruptcy plan. However, if we consummate the restructuring through the exchange offer, principal on any notes not tendered will remain outstanding, interest obligations related to such notes will continue, and we may be exposed to certain adverse tax consequences. The voting thresholds for the bankruptcy plan are lower than the voting thresholds for the exchange offer.
Q.: WILL THE COMPANY MAKE UPCOMING INTEREST PAYMENTS ON THE NOTES?
A:: Interest payments are due on some of the notes in January 2002. We do not intend to make these scheduled payments when due, but will instead use the full grace periods under the indentures related to the notes.
Q:: WILL SHARES OF CLASS A COMMON STOCK AND SERIES A PREFERRED STOCK CONTINUE TO BE TRADED ON THE NASDAQ?
A:: Following the restructuring, we expect the Class A common stock to continue to trade on the Nasdaq under its current symbol. The Series A preferred stock will be converted into Class A common stock.
Q:: WHAT DOES OUR SPECIAL COMMITTEE AND BOARD OF DIRECTORS RECOMMEND?
A:: The special committee of our board of directors and the disinterested members of our board of directors unanimously recommend that you tender your notes and consent to the indenture amendments so that we can proceed with the restructuring.

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Q.

WHAT DOCUMENTS SHOULD I SUBMIT IF I AM A NOTEHOLDER?

A.

You should either:

•: follow the procedures of the Automated Tender Offer Program if your notes are held through The Depository Trust Company;
•: submit the enclosed color-coded letter of transmittal and consent for each series of outstanding notes that you wish to exchange:

BLUE for the 10¹/2% senior discount notes due 2007

GREEN for the 9¹/4% senior notes due 2007

PINK for the 8³/8% senior notes due 2008

GRAY for the 9¹/2% senior notes due 2008

YELLOW for the 8¹/8% senior notes due 2009

IVORY for the 12% senior notes due 2008

SALMON for the 11¹/2% senior notes due 2009

LILAC for the 11³/8% senior notes due 2009

together with the other documents described under "Procedures for Tendering and Consenting—How to Tender Notes and Deliver Consents;" or

•: follow the guaranteed delivery procedures described under "Tendering, Consenting and Voting Procedures—Guaranteed Delivery Procedures."

In addition, you should vote on the bankruptcy plan by submitting the enclosed ballot in accordance with the delivery instructions set forth on the back page of this Offering Memorandum and Disclosure Statement and the voting instructions included in the ballot. The ballots are color-coded for each series of outstanding notes as indicated above.

Q:: WHO CAN I CALL WITH QUESTIONS ABOUT TENDERING OR VOTING?
A:: If you have any questions about tendering your notes, consenting or voting on the bankruptcy plan or would like copies of any of the documents we refer to in this Offering Memorandum and Disclosure Statement, you should call Innisfree M&A Incorporated at (888) 750-5834, or banks and brokers should call collect at (212) 750-5833.

NONE OF (i) THE CLASS A COMMON STOCK OFFERED IN EXCHANGE FOR THE NOTES, (ii) THE EXCHANGE OFFER NOR (iii) THE PLAN OF REORGANIZATION HAS BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS ACCEPTANCE SOLICITATION IS BEING CONDUCTED TO OBTAIN SUFFICIENT ACCEPTANCES OF THE PLAN OF REORGANIZATIONPRIOR TO THE FILING OF A VOLUNTARY CASE UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. BECAUSE NO CHAPTER 11 CASE HAS YET BEEN COMMENCED, THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT AS CONTAINING ADEQUATE INFORMATION WITHIN THE MEANING OF SECTION 1125(A) OF THE BANKRUPTCY CODE. THE BOARD OF DIRECTORS OF MCLEODUSA HAS NOT AT THIS TIME TAKEN ANY CORPORATE ACTION APPROVING A BANKRUPTCY FILING OR IN FURTHERANCE THEREOF.

THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT CONSTITUTES NEITHER AN OFFER TO EXCHANGE NOR A SOLICITATION OF CONSENTS OR ACCEPTANCES IN ANY JURISDICTION IN WHICH, OR FROM ANY PERSON TO OR FROM WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION UNDER APPLICABLE FEDERAL SECURITIES OR STATE SECURITIES LAWS. THE DELIVERY OF THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT SHALL NOT UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR ANY ATTACHMENTS HERETO OR IN THE AFFAIRS OF MCLEODUSA OR ANY OF ITS SUBSIDIARIES SINCE THE DATE HEREOF.

PRIOR TO TENDERING, CONSENTING OR VOTING, NOTEHOLDERS ARE ENCOURAGED TO READ AND CONSIDER CAREFULLY THIS ENTIRE OFFERING MEMORANDUM AND DISCLOSURE STATEMENT, INCLUDING THE PLAN OF REORGANIZATION ANNEXED HERETO AS APPENDIX I AND THE MATTERS DESCRIBED IN THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT.

IN MAKING A DECISION IN CONNECTION WITH THE EXCHANGE OFFER, CONSENT SOLICITATION OR THE PLAN OF REORGANIZATION, NOTEHOLDERS MUST RELY ON THEIR OWN EXAMINATION OF MCLEODUSA AND THE TERMS OF THE EXCHANGE OFFER AND THE PLAN OF REORGANIZATION, INCLUDING THE MERITS AND RISKS INVOLVED. NOTEHOLDERS SHOULD NOT CONSTRUE THE CONTENTS OF THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE. EACH NOTEHOLDER SHOULD CONSULT WITH ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS WITH RESPECT TO ANY SUCH MATTERS CONCERNING THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT, THE EXCHANGE OFFER, THE SOLICITATIONS, THE PLAN OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREBY.

MCLEODUSA IS RELYING ON SECTION 3(A)(9) OF THE SECURITIES ACT OF 1933, AS AMENDED, TO EXEMPT THE EXCHANGE OFFER WITH RESPECT TO THE EXCHANGE OF THE NOTES FOR THE CLASS A COMMON STOCK. MCLEODUSA IS ALSO RELYING ON SECTION 18(B)(4)(C) OF THE SECURITIES ACT TO EXEMPT THE EXCHANGE OFFER AND THE ACCEPTANCE SOLICITATION FROM STATE SECURITIES LAW REQUIREMENTS.

CAUTIONARY STATEMENTS

Certain statements in this Offering Memorandum and Disclosure Statement may constitute "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Private Securities Litigation Reform Act of 1995, as the same may be amended from time to time (the "Act") or in releases made by the SEC. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of McLeodUSA, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words "estimate," "project," "intend," "expect," "believe," "may," "will," "would," "could," "should," "seeks," "plans," "scheduled to," "anticipates," or "intends," or the negative of these terms or other variations of these terms or comparable language, or by discussions of strategy or intentions, when used in connection with McLeodUSA, including its management. See "Unaudited Pro Forma Financial Information," "Projections of Certain Financial Data for In-Court Restructuring" and "Risk Factors." These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the Act, with the intention of obtaining the benefits of the "safe harbor" provisions of such acts. McLeodUSA cautions investors that any forward-looking statements made by McLeodUSA are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements with respect to McLeodUSA include, but are not limited to, the risks and uncertainties affecting its business described in the section of this Offering Memorandum and Disclosure Statement captioned "Risk Factors," as well as elsewhere in this Offering Memorandum and Disclosure Statement. McLeodUSA undertakes no obligation to update or revise any forward-looking statements for events or circumstances after the date on which such statement is made. New factors emerge from time to time, and it is not possible for McLeodUSA to predict all of such factors or the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

AVAILABLE INFORMATION

McLeodUSA is subject to the information and reporting requirements of the Exchange Act, and, in accordance therewith, files periodic reports, proxy statements and other information with the SEC. Such reports and other information filed with the SEC can be inspected and copied at the public reference facilities of the SEC at its principal office, located at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material also can be obtained by mail from the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains an Internet Web Site that contains reports, proxy and information statements and other information regarding McLeodUSA. The address of such site is: "http://www.sec.gov."

INCORPORATION BY REFERENCE

The following documents filed by McLeodUSA with the SEC are incorporated by reference and shall be deemed to be set forth herein:

•: Annual Report on Form 10-K for the fiscal year ended December 31, 2000;
•: Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
•: Current Report on Form 8-K dated May 2, 2001;
•: Current Report on Form 8-K dated May 30, 2001;
•: Quarterly Report on Form 10-Q for the quarter ended June 30, 2001;
•: Current Report on Form 8-K dated August 1, 2001;
•: Quarterly Report on Form 10-Q for the quarter ended September 30, 2001; and
•: Current Report on Form 8-K dated December 7, 2001.

All documents and reports filed by McLeodUSA with the SEC after the date of this Offering Memorandum and Disclosure Statement and prior to the termination of the Exchange Offer and consent and vote solicitation shall be deemed incorporated herein by reference and shall be deemed to be a part hereof from the date of filing of such documents and reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superceded for purposes of this Offering Memorandum and Disclosure Statement to the extent that a statement contained herein or in any subsequently filed document or report that also is or is deemed to be incorporated by reference herein modifies or supercedes such statement. Any such statement so modified or superceded shall not be deemed, except as so modified or superceded, to constitute a part of this Offering Memorandum and Disclosure Statement.

McLeodUSA will provide without charge, upon written or oral request, to each person to whom a copy of this Offering Memorandum and Disclosure Statement is delivered, a copy of any of the documents of McLeodUSA incorporated by reference herein (other than exhibits to such documents unless such exhibits are specifically incorporated by reference herein).

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TABLE OF CONTENTS

SUMMARY		1
RISK FACTORS		16
TERMS AND CONDITIONS OF THE EXCHANGE OFFER AND CONSENT SOLICITATION		27
PROCEDURES FOR TENDERING AND CONSENTING		34
BACKGROUND		40
RESTRUCTURING		43
VALUATION ANALYSIS		55
SUMMARY UNAUDITED HISTORICAL AND PRO FORMA CAPITALIZATION		57
UNAUDITED PRO FORMA FINANCIAL INFORMATION		58
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		62
SELECTED FINANCIAL DATA		65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		67
PROJECTIONS OF CERTAIN FINANCIAL DATA FOR IN-COURT RESTRUCTURING		79
BUSINESS		88
EMPLOYEES		97
PROPERTIES		97
LEGAL PROCEEDINGS		98
MANAGEMENT		99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		110
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		112
INDEMNIFICATION OF DIRECTORS AND OFFICERS		115
SECURITIES LAW MATTERS		116
DESCRIPTION OF CAPITAL STOCK		118
MARKET FOR MCLEODUSA'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS		120
THE PLAN		124
PROCEDURES FOR VOTING ON THE PLAN		163
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS		168
RECOMMENDATION AND CONCLUSION		174
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS		S-1
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS		S-2
APPENDICES
	Plan of Reorganization	I
	Liquidation Analysis	II

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SUMMARY

This Offering Memorandum and Disclosure Statement, the related letter of transmittal and consent and the ballot each contain important information which should be read carefully before any decision is made with respect to the exchange offer, the consent solicitation or the acceptance of the plan. The following summary therefore is qualified in its entirety by reference to, and should be read in conjunction with, the information appearing elsewhere in this Offering Memorandum and Disclosure Statement, the related letter of transmittal and consent and the ballot.

McLeodUSA

McLeodUSA Incorporated, a Delaware corporation ("McLeodUSA"), provides integrated communications services, including local services, primarily in 25 Midwest, Southwest, Northwest and Rocky Mountain states. McLeodUSA's principal executive offices are located at 6400 C Street SW, Cedar Rapids, Iowa 52406. Its telephone number is (319) 364-0000. For additional information concerning McLeodUSA and its business, financial position and prospects, see "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Properties."

Background

McLeodUSA has initiated a broad strategic and operational restructuring to re-focus its business on its core areas of expertise within its 25-state footprint, improve business discipline and processes and reduce the company's cost structure, all with a goal of eventually developing positive cash flow from operations. Key elements of the operational restructuring include reducing McLeodUSA's employee base, consolidating facilities, reducing capital expenditures, selling certain non-core assets and de-emphasizing certain unprofitable services. The operational initiatives present substantial challenges and require significant management time and resources to implement.

The circumstances that have prompted the operational restructuring have adversely affected McLeodUSA's revenue growth, profitability and cash flow and have raised questions about McLeodUSA's liquidity position. Given the magnitude of the operational restructuring, particularly in light of the uncertain general economic environment and the challenging conditions facing competitive telecommunications companies, prudence dictated that McLeodUSA address its highly leveraged balance sheet and develop a restructuring plan to reduce its debt load.

McLeodUSA formed an independent special committee of its board of directors, excluding management and persons affiliated with Forstmann Little, and retained outside advisors to assist in exploring alternatives for a financial restructuring. The special committee engaged in extensive discussions and negotiations with Forstmann Little to sponsor a comprehensive restructuring transaction that would result in a substantial deleveraging of McLeodUSA. A restructuring plan was designed (based on recent telecommunications company restructuring transactions) to provide noteholders with a large cash payment, which payment would not otherwise be available without the sponsorship of Forstmann Little and agreement by McLeodUSA's senior secured lenders.

Agreement with Senior Secured Lenders

Concurrently with the negotiations with Forstmann Little regarding a possible restructuring, McLeodUSA and Forstmann Little began discussions with representatives of McLeodUSA's senior secured lenders for support of a Forstmann Little sponsored restructuring involving a significant cash payment to noteholders. Any restructuring involving a payment to noteholders, other than regularly scheduled payments of principal and interest, requires majority consent under McLeodUSA's credit agreement. After substantial negotiations, McLeodUSA and its senior secured lenders agreed to amend the credit agreement to permit the restructuring. The key elements of the restructuring that induced McLeodUSA's senior secured lenders to allow the sale of McLeodUSA's directory publishing business ("Pubco") and the use of the proceeds therefrom to make a payment to the noteholders were (1) the

additional $100 million Forstmann Little investment, with $35 million applied to prepay the term loans under the credit agreement, (2) Forstmann Little's agreement to purchase Pubco for $535 million subject to completion of the restructuring and other customary closing conditions, (3) Forstmann Little's substantial continued involvement in the operations and corporate governance of McLeodUSA, (4) McLeodUSA's commitment to sell its Illinois independent local exchange carrier ("ICTC") following the completion of the restructuring and use the first $225 million in net proceeds to prepay the term loans under the credit agreement, (5) McLeodUSA's commitment to use the first $25 million of any additional net proceeds from the sale of Pubco to prepay the term loans under the credit agreement, (6) a permanent reduction of $140 million of revolving credit commitments under the credit agreement upon completion of the restructuring, (7) a 1% increase in the interest rates, (8) amendment and arranger fees and (9) modified financial and restrictive covenants under the credit agreement.

Any changes to the terms of the restructuring that are materially inconsistent with the restructuring approved by the senior secured lenders, or that have an adverse effect on the senior secured lenders, would require the majority consent of McLeodUSA's senior secured lenders. Specifically, the amendment to the credit agreement requires that Forstmann Little have approximately a 40% equity ownership stake in McLeodUSA upon consummation of the restructuring. McLeodUSA does not believe that its senior secured lenders would consent to any restructuring involving a cash payment to the noteholders without the substantial commitments provided by Forstmann Little and Forstmann Little's continued involvement in the operations of McLeodUSA and significant ownership position in the Class A common stock. In addition, there can be no assurance that Forstmann Little would invest $100 million in McLeodUSA unless the restructuring were consummated on substantially the same terms as those described in this Offering Memorandum and Disclosure Statement.

The operative effect of many of the amendments and waivers designed to permit the restructuring will terminate if McLeodUSA fails to satisfy certain "progress conditions" on a timely basis. One important progress condition is that the restructuring is consummated on or before August 1, 2002. The complete list of progress conditions is set forth in the amendment to the credit agreement which we filed as an exhibit to our Current Report on Form 8-K on December 7, 2001.

McLeodUSA expects to obtain an interim financing facility of up to $50 million as a debtor-in-possession financing facility in the event McLeodUSA pursues the restructuring through a Chapter 11 proceeding. In addition, McLeodUSA expects to obtain an exit financing facility upon consummation of a plan of reorganization under a Chapter 11 proceeding in an amount up to $160 million. Such exit financing facility will provide working capital for its future operations and be used to repay any amounts outstanding under any debtor-in-possession financing facility.

The Financial Restructuring

The material elements of the restructuring include:

•: Forstmann Little will purchase Pubco for $535 million, subject to higher bids and without a break-up fee. A nationally recognized investment banking firm has provided a fairness opinion on the purchase price and has commenced a marketing process to seek higher bids that was publicly announced on December 3, 2001. Forstmann Little's commitment is subject to consummation of the restructuring.
•: Forstmann Little will make a new money investment of $100 million for (i) new convertible preferred stock that is mandatorily convertible into Class A common stock at an average of the post-transaction trading price, as described elsewhere in this Offering Memorandum and Disclosure Statement, and (ii) new warrants to purchase approximately 5% of the Class A common stock at an exercise price equal to 150% of the average of the post-transaction trading price.

•: The notes will be exchanged for up to $560 million in cash, available from the sale of Pubco and $25 million of Forstmann Little's new money investment, and up to 56,813,984 shares of Class A common stock, representing approximately 15% of the Class A common stock following the restructuring (subject to dilution).
•: The outstanding Series A preferred stock, which has a liquidation preference, plus accrued dividends, of approximately $300 million, will be reclassified, on the same basis as the Series D and E preferred stock, into 44,883,856 shares of Class A common stock, representing approximately 11.9% of the Class A common stock following the restructuring (subject to dilution).
•: Forstmann Little's Series D and E preferred stock, which has an aggregate liquidation preference of $1 billion, will be reclassified into 151,515,152 shares of Class A common stock, representing approximately 40% of the Class A common stock following the restructuring (subject to dilution).
•: The outstanding Class A common stock will be diluted to approximately 33.1% of the Class A common stock following the restructuring (subject to dilution).

Summary of Restructuring Plan

Consideration

			Estimated Number of Shares and % Common Stock Ownership

	Cash
	Cash		Before Dilution			After Dilution(1)
Noteholders	$	560,000,000	56,813,984	15.0	%	56,813,984	13.7	%
Series A Preferred Stock			44,883,856	11.9	%	44,883,856	10.8	%
Series D Preferred Stock			104,166,667	27.5	%	104,166,667	25.1	%
Series E Preferred Stock			47,348,485	12.5	%	47,348,485	11.4	%
Class A Common Stock			125,546,898	33.1	%	125,546,898	30.2	%
New Preferred Stock			NA	NA		36,433,233	8.8	%

			378,759,890	100.0	%	415,193,123	100.0	%

Sources and Uses of Cash
($ in millions)

Sources
	Sale of Pubco	$	535
	Forstmann Little Investment		100
	Working Capital/Available Cash		25

		$	660

Uses
	Cash Payment to Noteholders	$	560
	Mandatory Pre-Payment on Term Loans		35
	Fees and Expenses		65

		$	660

(1): Estimated common stock ownership after giving effect to the mandatory conversion of the new convertible preferred stock issued to Forstmann Little at an assumed price per share equal to the reorganization equity value per share of $2.74 prior to dilution for warrants and the management incentive plan. See "Valuation Analysis."

While McLeodUSA believes the percentage estimates set forth above and referred to elsewhere in this Offering Memorandum and Disclosure Statement are helpful in describing the allocation of Class A common stock among the noteholders, preferred stockholders and current Class A common stockholders, there can be no assurance that actual allocations will correspond exactly to these estimated percentages.

After the Restructuring

Upon consummation of the restructuring and giving effect to the sale of non-core businesses set forth in McLeodUSA's strategic restructuring plan and as contemplated by the amendment to the credit agreement, McLeodUSA's operations will consist primarily of the sale of voice and data services to small and medium size businesses and residential customers ("CLEC") in its core 25 state footprint. To date, the retail CLEC operations of McLeodUSA have not generated positive cash flow in any quarterly period. In addition, the preponderance of historical EBITDA of McLeodUSA has been attributable to Pubco, ICTC and other non-core assets that McLeodUSA plans to sell. While the initiatives set forth in McLeodUSA's strategic plan are designed to result in the core retail CLEC business eventually operating profitably, there can be no assurance that these steps will be successful in the time and magnitude expected. Moreover, the remaining operations are expected to continue generating negative cash from operations until fiscal 2005, even if McLeodUSA achieves its targeted level of EBITDA, as a result of capital expenditures and projected interest on the remaining amounts due under the credit agreement. Completion of asset sales within a time frame and for aggregate amounts described in McLeodUSA's business plan and retention of access to the amounts that remain available to borrow under the amended credit agreement are critical in funding McLeodUSA's operations.

McLeodUSA is simultaneously pursuing the restructuring via two alternative mechanisms: (1) the out-of-court alternative and (2) the in-court alternative. Each of these alternatives is described in detail in this Offering Memorandum and Disclosure Statement. You are being requested to take action onboth alternatives.

Out-of-Court Alternative

The out-of-court restructuring is comprised of the following elements:

The Exchange Offer

The Offer:	McLeodUSA is:
	•	offering to exchange all of the notes for each noteholder's pro rata share of (1) $560 million in cash plus (2) 56,813,984 shares of Class A common stock, representing approximately 15% of the Class A common stock expected to be outstanding upon consummation of the exchange offer (subject to dilution); and
	•	seeking the approval of noteholders of the notes to certain amendments to the indentures pursuant to which the notes were issued.
	Upon consummation of the exchange offer, each noteholder that validly tenders notes will receive a pro rata portion of $560 million in cash and 56,813,984 shares of Class A common stock based upon the ratio of (x) the principal and accreted amount of the notes tendered by such noteholder plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the exchange offer to (y) the principal and accreted amount of all outstanding notes plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the exchange offer.

Consideration to Noteholders:

Upon the consummation of the exchange offer, noteholders who validly tender and do not withdraw their notes will receive the following consideration for each $1,000 face amount of notes:

			Distribution of Cash and Stock per $1,000 Face:
	Estimated Principal and Accrued Interest or Accreted Amount as of January 31, 2002		Distribution of Cash and Stock per $1,000 Face:
Issue			Cash(1)		Class A Shares(1)
10¹/2% Senior Discount Notes	$	495,850,024	$	182.51	18.52
12% Senior Notes		159,750,000	$	196.00	19.88
11¹/2% Senior Notes		216,037,500	$	189.33	19.21
9¹/4% Senior Notes		236,273,437	$	193.26	19.61
8³/8% Senior Notes		309,421,875	$	189.82	19.26
9¹/2% Senior Notes		307,125,000	$	188.41	19.11
11³/8% Senior Notes		799,765,625	$	196.25	19.91
8¹/8% Senior Notes		518,619,792	$	190.89	19.37

	$	3,042,843,253

(1): The table was prepared assuming that the exchange offer is consummated on February 1, 2002 and 100% of the notes are tendered. Any different date will result in differing amounts of accrued interest and therefore different amounts of cash and Class A common stock payable for each $1,000 face amount of notes.

Tender of Notes:		Noteholders who desire to tender their notes pursuant to the exchange offer are required to consent to the indenture amendments with respect to such notes. Noteholders who validly tender notes in the exchange offer will be deemed to have consented to the indenture amendments. See "Procedures for Tendering and Consenting—How to Tender Notes and Consent in the Exchange Offer."
Conditions:		Among other things, the consummation of the exchange offer is conditioned on at least 95% of the aggregate principal and accreted amount of the notes being validly tendered and not withdrawn prior to expiration of the exchange offer, favorable votes on the restructuring from McLeodUSA's preferred and common stockholders, consummation of the sale of Pubco, consummation of the sale of the new preferred stock and warrants to Forstmann Little and satisfactory resolution of certain tax matters. See "Terms and Conditions of the Exchange Offer and Consent Solicitation—Conditions to the Exchange Offer."
Fees and Expenses:		McLeodUSA will bear all expenses related to the exchange offer and the solicitations. No commission or other fee is being paid by McLeodUSA for soliciting the exchange offer or the solicitations. See "Restructuring—Estimated Fees and Expenses."

Certain Consequences of Failure to Consummate the Exchange Offer:		If McLeodUSA determines that it would be more advantageous or expeditious, McLeodUSA may commence a Chapter 11 bankruptcy case. Although in the event of a Chapter 11 filing McLeodUSA would seek to pay vendors in the ordinary course, a bankruptcy case could threaten McLeodUSA's trade vendor credit support and could cause McLeodUSA to lose customers because of concerns about McLeodUSA's operations. No decision has been made by McLeodUSA's board of directors to file a petition for relief under Chapter 11 of the Bankruptcy Code.
Termination:		McLeodUSA reserves the right to terminate the exchange offer at any time and for any reason without accepting any of the tendered notes.
The Consent Solicitation
Requisite Consents Required to Adopt the Indenture Amendments:		Noteholders who validly tender notes in the exchange offer will be deemed to have consented to the indenture amendments. The consummation of the exchange offer will result in receipt of consents sufficient for approval of the amendments to the indentures with respect to the notes.
Indenture Amendments:		The indenture amendments would:
		(i) delete covenants in the indentures relating to: McLeodUSA's obligation to maintain its property; the obligation to pay taxes and other similar claims; the noteholders' option to force McLeodUSA to repurchase the notes on a "change of control" of McLeodUSA (except with respect to the indenture governing the 11³/8% notes); limitations on McLeodUSA's ability to sell its assets and the assets of its subsidiaries (except with respect to the indenture governing the 11³/8% notes); limitations on the amount of indebtedness McLeodUSA and its subsidiaries as a group are allowed to have; limitations on the amount of indebtedness and preferred stock McLeodUSA's subsidiaries are allowed to issue; limitations on restricted payments; limitations on the incurrence or maintenance of liens; limitations on sale and leaseback transactions; limitations on restrictions on McLeodUSA's subsidiaries' ability distribute funds to McLeodUSA; limitations on the issuance and sale of capital stock by certain subsidiaries of McLeodUSA; limitations on McLeodUSA's ability to enter into transactions with its affiliates; the obligation to file reports with the SEC; and, with respect to the indenture governing the 9¹/4% notes, the noteholders' option to force McLeodUSA to repurchase the notes if a particular acquisition by McLeodUSA were not consummated (such acquisition was consummated in 1997);
		(ii) amend or waive provisions of the indentures relating to: restricted and unrestricted subsidiaries, merger, consolidation or sale of assets and events of default; and

		(iii) delete and amend certain definitions contained in the indentures, as appropriate, based on (i) and (ii) above.
		In addition, noteholders who tender their notes and consent to the indenture amendments will be deemed to have released and waived any and all claims they may have arising from any prior non-compliance by McLeodUSA under the indentures.
Supplemental Indentures:		McLeodUSA expects to cause the supplemental indentures that set forth the indenture amendments relating to the notes to be executed promptly upon the consummation of the exchange offer, provided the conditions to the exchange offer are satisfied. If the exchange offer is consummated, noteholders who do not exchange their notes in the exchange offer will be bound by the indenture amendments regardless of whether such noteholders consented thereto.

Special Meeting of Stockholders

As soon as practicable, McLeodUSA intends to call a special meeting of its stockholders to consider the restructuring and to vote on the following proposals, among other things:

•: the reclassification of the Series A preferred stock into Class A common stock on a basis of 39.05⁽¹⁾ shares of Class A common stock for each share of Series A preferred stock (based on the $250 liquidation preference per share of the Series A preferred stock plus accrued dividends);
•: the reclassification of the Series D and E preferred stock into Class A common stock on a basis of 378.79⁽¹⁾ shares of Class A common stock for each share of Series D and Series E preferred stock (based on the $2,500 liquidation preference per share of the Series D and Series E preferred stock);
•: a 5-to-1 reverse stock split of the outstanding Class A common stock;
•: the issuance of Class A common stock in the restructuring;
•: certain charter amendments (including opting out of Section 203 of the Delaware General Corporation Law); and
•: the adoption of a management incentive plan in connection with the restructuring.

(1): Conversion ratio is based on 627,734,497 shares of Class A common stock issued and outstanding as of November 5, 2001. Such conversion ratio would be adjusted to effect the post-transaction ownership levels set forth herein, to the extent the issued and outstanding shares differs.

The consummation of the out-of-court restructuring is conditioned upon both the approval of each of these proposals by the requisite vote of McLeodUSA's stockholders and the consummation of the exchange offer.

In-Court Alternative

If McLeodUSA consummates the exchange offer and receives the required stockholder approvals, McLeodUSA intends to implement the restructuring via the out-of-court alternative. However, if for any reason McLeodUSA determines that it would be more advantageous or expeditious, it will consider effectuating the restructuring by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and seeking court approval of the restructuring.

To facilitate court approval of the in-court alternative, McLeodUSA is soliciting acceptances of its plan of reorganization, a copy of which is attached hereto as Appendix I. The plan, if approved, would result in the same consideration to the noteholders as they would receive through the out-of-court restructuring.

MCLEODUSA HAS NOT MADE ANY DECISION AT THIS TIME TO COMMENCE ANY CHAPTER 11 CASE, AND RESERVES ALL OF ITS RIGHTS TO PURSUE ANY AND ALL OF ITS STRATEGIC ALTERNATIVES IN THE EVENT THE OUT-OF-COURT RESTRUCTURING IS NOT CONSUMMATED.

The Plan of Reorganization
Summary		The plan of reorganization provides for, among other things, the notes to be satisfied in full for the same consideration being offered in the exchange offer, as set forth above. Under the plan, all claims against and interests in McLeodUSA that will exist on the date McLeodUSA files any voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy Code are divided into classes, exclusive of certain claims, including DIP facility claims (as described herein), administrative claims, and priority tax claims, which are not required to be classified. The following summarizes the classification and treatment under the plan of the principal claims against and interests in McLeodUSA. See "The Plan—Summary of the Plan of Reorganization—Certain Matters Regarding Classification and Treatment of Claims and Interests."
Class 1 (secured lender claims)		Class 1 is unimpaired by the plan. The estimated percentage recovery to holders of secured lender claims is 100%.
Class 2 (other secured claims)		Class 2 is unimpaired by the plan. The estimated percentage recovery to holders of other secured claims is 100%.
Class 3 (non-tax priority claims)		Class 3 is unimpaired by the plan. The estimated percentage recovery to holders of non-tax priority claims is 100%.
Class 4 (general unsecured claims)		Class 4 is unimpaired by the plan. The estimated percentage recovery to holders of general unsecured claims is 100%.

Class 5 (Note claims)		Class 5 is impaired by the plan. Each holder of an allowed note claim is entitled to vote on the plan. On or as soon as reasonably practicable after the distribution date, each holder of an allowed note claim would receive its pro rata share of (A) $560 million in cash and (B) 56,813,984 shares of Class A common stock. The aggregate amount of Class A common stock to be issued to the noteholders is equal to approximately 15% of the Class A common stock to be outstanding as of the consummation of the plan subject to dilution for Class A common stock that will be issued upon conversion of new convertible preferred stock to be issued in connection with the exchange offer immediately after the 60th day after the closing of the exchange offer. The estimated value of this consideration is approximately $716 million.This valuation is based upon a number of assumptions and is subject to a number of significant qualifications and is not intended to be an indication of future trading value. See "Valuation Analysis."
Class 6 (preferred stock interests)		Class 6 is impaired by the plan. Preferred stock interests include the Series A preferred stock, the Series D preferred stock, and the Series E preferred stock and any accrued but unpaid dividends. Each holder of an allowed preferred stock interest is entitled to vote on the plan. On or as soon as reasonably practicable after the distribution date, each holder of an allowed preferred stock interest shall receive, in exchange for such interest, its share of Class A common stock of reorganized McLeodUSA on the effective date, pro rata with all other holders of preferred stock based upon the liquidation preferences and, if applicable, accrued and unpaid dividends of such preferred stock. The aggregate liquidation preference of the Series A preferred stock, including accrued and unpaid dividends, is estimated to be $296.2 million as of January 31, 2002. The aggregate liquidation preference of the Series D and E preferred stock is $1 billion. Based on such preferences, Series A preferred stock interests shall share, pro rata, 44,883,856 shares of Class A common stock (subject to dilution); Series D preferred stock interests shall share, pro rata, 104,166,667 shares of Class A common stock (subject to dilution); and Series E preferred stock interests shall share, pro rata, 47,348,485 shares of Class A common stock (subject to dilution). The estimated value of the Class A common stock to be delivered to the Series A preferred stock interests is approximately $123 million. The estimated value of the Class A common stock to be delivered to Series D and E preferred stock interests together is approximately $416 million.This valuation is based upon a number of assumptions and is subject to a number of significant qualifications and is not intended to be an indication of future trading value. See "Valuation Analysis."

Class 7 (Class A common stock interests)		Class 7 is impaired by the plan. Upon commencement of any Chapter 11 case, McLeodUSA will request entry of an order from the bankruptcy court stating that solicitation of votes from Class 7 is not required. On, or as soon as reasonably practicable after the distribution date, each holder of an allowed Class A common stock interest shall receive its pro rata share of approximately 125,546,898 shares of Class A common stock (subject to dilution). The estimated value of this Class A common stock as of the effective date is approximately $344 million.This valuation is based upon a number of assumptions and is subject to a number of significant qualifications and is not intended to be an indication of future trading value. See "Valuation Analysis."
Class 8 (options, warrants, call rights, puts or other agreements to acquire Class A common)		Class 8 is impaired by the plan. Upon the effective date of the plan, such rights shall be cancelled and of no further force or effect, and no holder of such rights shall be entitled to receive any distribution under the plan on account of such rights. Upon the effective date of the plan, however, McLeodUSA intends to implement a new management incentive plan. See "Restructuring—Management Incentive Plan."

Support for the Restructuring

Forstmann Little, as the holder of 100% of the Series D and Series E preferred stock with an aggregate liquidation preference of $1 billion, supports the restructuring and has executed a lock-up and voting agreement requiring Forstmann Little to vote in favor of the stockholder proposals relating to the restructuring and the plan.

McLeodUSA's executive officers and directors, as a group, beneficially own approximately 67,311,394 shares of Class A common stock. Such officers and directors have advised McLeodUSA that they intend to vote in favor of the restructuring, including the plan.

Recommendation of the Restructuring

The special committee considered a number of alternatives with respect to restructuring McLeodUSA's capital structure, held numerous lengthy meetings, discussed the restructuring with its advisors and engaged in extensive negotiations with representatives of Forstmann Little regarding the sale of Pubco and the restructuring. In addition, the special committee, through senior management, was involved in negotiations with representatives of McLeodUSA's senior secured lenders regarding amendments to the credit agreement. After considering the alternatives, and in light of these extensive negotiations, the special committee recommended the restructuring to McLeodUSA's board of directors.

The disinterested members of McLeodUSA's board of directors have unanimously approved the terms of the restructuring, including the terms of the exchange offer and consent solicitation contained in this Offering Memorandum and Disclosure Statement, upon the recommendation of the special committee. However, McLeodUSA's board of directors has not made any decision to commence a Chapter 11 case or approved the filing of a petition for relief under Chapter 11 of the Bankruptcy Code.

Risk Factors

Retention of the notes (following completion of the restructuring) is subject to a number of material risks, as is ownership of the shares of the Class A common stock. Prior to deciding whether to accept the exchange offer, consent to the proposed indenture amendments or vote on the plan, each noteholder should carefully consider all of the information contained in this Offering Memorandum and Disclosure Statement. Certain risks are set forth in detail under "Risk Factors."

Description of the Class A common stock
Authorized Shares:		2,000,000,000 shares of Class A common stock are authorized.
Par Value:		$.01 per share.
Voting Rights:		One vote per share.
Preemptive Rights:		None.
Dividends:		Payable at the discretion of the board of directors of McLeodUSA.
Board Representation:		The board of directors will consist of up to 15 members. Mr. Clark E. McLeod will continue to serve as the Chairman of the board of directors. Mr. Theodore J. Forstmann will continue to serve as the Chairman of the executive committee.
		McLeodUSA's bylaws will be amended as follows: (1) the board of directors will include at least five independent directors and the Chairman, Chief Executive Officer and Chief Financial Officer of McLeodUSA, and (2) the executive committee of the board of directors will consist of no more than seven members, and will include the Chairman of the board of directors, two designees of Forstmann Little, the Chief Executive Officer and the Chief Operating Officer of McLeodUSA.
Stock Options:		An amount of shares of Class A common stock equal to 15% of the shares to be outstanding immediately after conversion of the new convertible preferred stock to be issued to Forstmann Little in the restructuring after giving effect to the options will be reserved for issuance in connection with one or more incentive stock option plans.
Tendering, Consenting and Voting Procedures
Expiration Date:		The exchange offer and the solicitation period for consents and for acceptances of the plan will expire at 5:00 p.m., New York City time on January 15, 2002, unless extended by McLeodUSA. See "Procedures for Tendering and Consenting—Expiration Date, Extensions; Amendments."
How to Tender Notes and Consent to the Indenture Amendments in the Exchange Offer:		Noteholders electing to tender notes in the exchange offer and to consent to the indenture amendments should either: (i) complete and sign the applicable letter of transmittal and consent and:
		• have the signatures thereon guaranteed if required by Instruction 1 thereof; and
		• mail or deliver such letter of transmittal and consent together with the notes or a properly completed and duly executed notice of guaranteed delivery and consent and any other required documents to the depositary at one of the addresses set forth on the back cover of this Offering Memorandum and Disclosure Statement; or

		(ii) effect a tender of notes pursuant to the procedures for book-entry transfer as set forth under "Procedures for Tendering and Consenting—How to Tender Notes and Deliver Consents;" or
		(iii) request his/her broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such noteholder.
		Noteholders will not be obligated to pay any brokerage commissions or solicitation fees in connection with the exchange offer.
		Noteholders who tender (and do not withdraw) their notes are required to consent to the indenture amendments, and holders who submit a valid tender of notes in the exchange offer will be deemed to have consented to the indenture amendments.
Voting on the Plan of Reorganization:		The voting record date for purposes of determining noteholders that are eligible to vote on the plan is December 3, 2001. Noteholders are not required to tender their notes in the exchange offer in order to vote on the plan. To be counted, ballots must be duly completed, executed, and actually received no later than the expiration date. Noteholders electing to vote on the plan of reorganization should complete and sign the beneficial owner ballot and check the box entitled "Accepts" the plan or "Rejects" the plan, as appropriate. In all cases, the duly completed beneficial owner ballot must be mailed or delivered as specified in the beneficial owner ballot.
		Any beneficial holder whose notes are registered or held of record in the name of his broker, dealer, commercial bank, trust company or other nominee and who wishes to vote on the plan should complete a beneficial owner ballot and return such ballot to such nominee or directly to the voting agent, as instructed by such nominee. Nominees in turn must use the information contained in such beneficial owner ballots to complete master ballots, and must return all such master ballots to the voting agent.
		Noteholders who purchase notes after the voting record date, and who wish to vote on the plan, must arrange with their seller to receive a beneficial owner ballot from the noteholder of record.
		The voting deadline is January 15, 2002. All ballots tendered by the voting deadline may be utilized by McLeodUSA in connection with determining acceptances and rejections of the plan at any time, so long as the plan is consummated on or before August 1, 2002. Thus, all votes represented by such ballots shall be deemed continuously effective until such time.
		Under the Bankruptcy Code, for purposes of determining whether the requisite acceptances of the plan have been received, only holders who vote will be counted. Noteholders who do not send a duly completed and signed ballot will be deemed to have abstained with respect to the plan. Any ballot which is executed by a noteholder but does not indicate an acceptance or rejection of the plan will not be counted. In addition, any ballot which is executed by a noteholder and which indicates both acceptance and rejection of the plan will not be counted.

Withdrawal Rights and Revocation:		Noteholders may withdraw tenders and thereby revoke consents at any time until the expiration date. Noteholders may not revoke their consent without withdrawing their notes.
		As provided for herein, votes with respect to the plan may be changed only by a properly completed and timely submitted ballot that supercedes a prior properly completed and timely submitted ballot.
		See "Procedures for Tendering and Consenting—Withdrawal of Tenders and Revocations of Consents."
Acceptance of Notes and Delivery of Shares of Class A Common Stock and Cash:		Subject to the satisfaction or waiver of all conditions to the exchange offer, McLeodUSA will accept all notes validly tendered on or prior to the expiration date as promptly as practicable. The cash and the shares of Class A common stock will be delivered in exchange for the applicable notes accepted in the exchange offer promptly after the expiration date. See "Terms of the Exchange Offer—Acceptance of Notes, Delivery of Class A Common Stock and Payment." McLeodUSA reserves the right to terminate the exchange offer at any time without accepting any of the tendered notes.
Income Tax Consequences:		Exchanging noteholders should recognize gain (but not loss) as a result of the restructuring in an amount equal to the lesser of the gain they realize as a result of the restructuring or the amount of cash they receive in respect of their notes. McLeodUSA anticipates that, as a result of the restructuring, its net operating loss carryforwards will be substantially reduced or eliminated, and any remaining net operating losses will be subject to certain limitations. In addition, if the out-of-court restructuring is consummated, McLeodUSA will incur liability for federal alternative minimum tax and state income tax in connection with the restructuring. See "Certain United States Federal Income Tax Considerations." Resolution of all tax matters in a manner satisfactory to McLeodUSA is a condition to the completion of the exchange offer.
Market and Trading Information:		The shares of Class A common stock are listed on The Nasdaq National Market under the symbol "MCLD." No assurance can be given as to the prices at which they might be traded. See "Risk Factors—The Class A Common Stock Could Be Volatile, Increasing the Risk of Loss to Holders of Common Stock" and "Risk Factors—If McLeodUSA Class A Common Stock is Delisted, the Ability of Holders of Common Stock to Sell Their Shares Would Be Adversely Impacted."

Depositary, Information Agent and Voting Agent:

The Bank of New York has been appointed as depositary for the exchange offer and Innisfree M&A Incorporated has been appointed as the information agent for solicitation of consents and voting agent for the solicitation of acceptances of the plan. If you have any questions about tendering your notes, consenting or voting for the plan or would like copies of any of the documents we refer to in this Offering Memorandum and Disclosure Statement, you should call Innisfree M&A Incorporated at (888) 750-5834, or banks and brokers should call collect at (212) 750-5833.

RECENT DEVELOPMENTS

On December 7, 2001, McLeodUSA entered into an agreement to sell certain of its internet/data assets (formerly part of Splitrock Services, Inc.) and wholesale dial-up Internet Service Provider (ISP) customer base to Level 3 Communications, Inc. for $55 million plus the assumption of certain operating liabilities (the "Splitrock Disposition"). Under the terms of the agreement, Level 3 will purchase approximately 350 POPs (points of presence) across the U.S., the related facilities, equipment and underlying circuits, plus the wholesale ISP customer base. The transaction excludes fiber optic cable obtained under the existing IRU Agreement with Level 3 acquired by McLeodUSA in the Splitrock acquisition. The parties will also enter into operating agreements enabling McLeodUSA to continue providing service and support to customers in its 25 state footprint. The Splitrock Disposition is subject to customary closing conditions, and is expected to close prior to May 1, 2002.

SUMMARY UNAUDITED HISTORICAL AND PRO FORMA CAPITALIZATION

The following table sets forth the unaudited capitalization of McLeodUSA as of September 30, 2001, and as adjusted to give effect to the out-of-court restructuring and the Splitrock Disposition as though they had become effective on September 30, 2001. The adjustments giving effect to the out-of-court restructuring assume 100% of the notes are exchanged. If less than 95% of the notes are tendered and McLeod elects to waive the minimum tender condition and accept the tendered notes for exchange, such acceptance would have a material effect upon the information presented below. In such event McLeodUSA will update the information to reflect the actual amount of notes tendered and will provide such updated information to noteholders. The information presented below should be read in conjunction with the Consolidated Financial Statements-Unaudited Pro Forma Financial Information and related notes appearing elsewhere herein.

					September 30, 2001
					Historical			Total Pro Forma
					(unaudited)			(unaudited)
					(In millions, except shares)
Long-term debt (excludes current maturities)						3,694.0		747.9	(1)(2)
Redeemable convertible preferred stock
	Preferred, Series B, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical none; pro forma none					—		—
	Preferred, Series C, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical none; pro forma none					—		—
	Preferred, Series D, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical 275,000; pro forma none					104.0		—
	Preferred, Series E, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical 125,000; pro forma none					43.0		—

			Total redeemable convertible preferred stock			147.0		—

Stockholders' Equity
	Capital Stock:
		Preferred, Series A, $.01 par value: authorized, issued and outstanding historical 1,149,375 shares; pro forma none				—		—
		Common, Class A, $.01 par value; authorized 2,000,000,000 shares; issued and outstanding historical 626,950,228 shares; pro forma 415,036,271 shares				6.3		4.1
		Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares; issued and outstanding 2001 and pro forma none				—		—
Additional paid-in capital						3,843.2		4,092.9
Accumulated deficit						(3,621.1	)	(1,295.5	)
Accumulated other comprehensive income						(2.0	)	(2.0	)

			Total stockholders' equity			226.4		2,799.5	(1)

				Total capitalization and pro forma capitalization	$	4,067.4		3,547.4	(1)

(1): If the out-of-court restructuring is consummated at the 95% acceptance level, pro forma long-term debt (excluding current maturities), total pro forma stockholders' equity and total pro forma capitalization would be $893.1 million, $2,681.7 million and $3,574.8 million, respectively.
(2): McLeodUSA borrowed an additional $250 million under its credit agreement subsequent to September 30, 2001. As a result, pro forma long-term debt (excluding current maturities) upon consummation of the restructuring would be $997.9 million (assuming 100% tender) and $1,143.1 (assuming a 95% tender).

RISK FACTORS

Investment in the Class A common stock or retention of the notes following completion of the restructuring (whether shares of Class A common stock are issued in the out-of-court restructuring or the in-court restructuring) involves a high degree of risk. Prior to deciding whether to (a) tender notes and consent to the indenture amendments in the exchange offer and/or (b) vote to accept the plan, each noteholder should carefully consider all of the information contained in this Offering Memorandum and Disclosure Statement, especially the factors described or cross-referenced in the following paragraphs.

Implementing McLeodUSA's Operational Restructuring Involves Substantial Risks

There are substantial risks in implementing McLeodUSA's new operational strategy. These risks include:

•: spending significant resources and time on the divestiture of non-core assets rather than on the operational restructuring of McLeodUSA;
•: the operational restructuring entails significant business process changes throughout the organization, which may be disruptive;
•: difficulties arising from the slowing economy, which has adversely affected demand for competitive telecommunications services, may delay revenue growth and the time to profitability and positive cash flow;
•: the chance for adverse regulatory, legislative and other governmental developments during the course of the operational restructuring;
•: uncertainty surrounding McLeodUSA's restructuring increases the risk that McLeodUSA loses customers and leaves McLeodUSA open to more aggressive tactics of competitors;
•: potential difficulties in recruiting and retaining quality management to execute the new operational strategy; and
•: McLeodUSA may not have sufficient capital to invest in improved business systems to support a larger and more efficient enterprise.

One or more of these factors, individually or combined, could affect adversely McLeodUSA's ability to conduct its operations.

McLeodUSA Expects to Incur Significant Losses Over the Next Several Years

If McLeodUSA does not become profitable in the future, McLeodUSA could have difficulty obtaining funds to continue its operations. McLeodUSA has incurred net losses every year since McLeodUSA began operations. Since January 1, 1995, McLeodUSA's net losses applicable to Class A common stock have been as follows:

Period	Amount
1995	$	11.3 million
1996	$	22.3 million
1997	$	79.9 million
1998	$	124.9 million
1999	$	238.0 million
2000	$	531.7 million

McLeodUSA expects to incur significant operating losses during the next several years. If McLeodUSA is unable to operate profitably in the time frame expected, there may be adverse consequences to its business.

The Businesses that Will Remain Following the Restructuring Do Not Generate Positive Cash Flow

Upon consummation of the restructuring and giving effect to the sale of non-core businesses set forth in McLeodUSA's strategic restructuring plan and as contemplated by the credit agreement, McLeodUSA's operations will consist primarily of its retail CLEC business. To date, the retail CLEC operations of McLeodUSA have not generated positive cash flow in any quarterly period. In addition the preponderance of historical EBITDA of McLeodUSA has been attributable to Pubco, Illinois Consolidated Telephone Company ("ICTC") and other non-core assets that McLeodUSA plans to sell. While the initiatives set forth in McLeodUSA's strategic restructuring plan are designed to result in the CLEC business eventually operating profitably, there can be no assurance that these steps will be successful in the time and magnitude expected. Moreover, the remaining operations are expected to continue generating negative cash from operations until fiscal 2005, even if McLeodUSA achieves its targeted level of EBITDA, as a result of capital expenditures and projected interest on the remaining amounts due under the credit agreement. Completion of asset sales within a time frame and for aggregate amounts described in McLeodUSA's business plan and retention of access to the amounts that remain available to borrow under the amended credit agreement are critical in funding McLeodUSA's operations.

McLeodUSA Has a Risk of Inadequate Liquidity

Consummation of the restructuring and the third amendment to the credit agreement will impact the post-restructuring liquidity position of McLeodUSA in the following manner:

•: permanent reduction of the commitments under the revolving credit facility of $140 million;
•: higher interest rates;
•: divestiture of Pubco, which currently generates positive cash flow; and
•: required divestiture of ICTC, which currently generates positive cash flow, and application of the first $225 million of the proceeds of such divestiture to the prepayment of term loans.

Upon consummation of the restructuring, the operations of McLeodUSA will consist primarily of the existing retail CLEC operations of McLeodUSA, which have not generated positive cash flow in any quarterly period. One or more of these factors, individually or combined, could affect adversely McLeodUSA's ability to conduct its operations.

Although Forstmann Little is investing $100 million, after payments to noteholders, prepayments on the credit agreement, and fees and expenses related to the restructuring, McLeodUSA will not retain any proceeds from such investment and, in fact, anticipates using approximately $25 million of available cash to effect the restructuring.

Furthermore, the divestitures of non-core assets is a key component to McLeodUSA's future liquidity. Material variances from the expected level of proceeds received from non-core asset sales and the timing of the receipt of such proceeds would have an adverse effect on liquidity.

Finally, McLeodUSA may need additional capital to expand its business and develop new products, which may be difficult to obtain. Failure to obtain additional capital may preclude McLeodUSA from developing or enhancing its products, taking advantage of future opportunities, growing its business or responding to competitive pressures.

A Long And Protracted Restructuring Could Adversely Affect McLeodUSA's Business

The uncertainty surrounding a prolonged restructuring could have significant adverse affects on McLeodUSA's business.

Specifically:

•: To induce McLeodUSA's senior secured lenders to consent to the restructuring, McLeodUSA agreed that it would not borrow more than $50 million under its credit agreement until the later of (a) the date the restructuring is consummated, (b) the date McLeodUSA becomes a debtor in a bankruptcy case, and (c) the date McLeodUSA ceases to pursue the restructuring. McLeodUSA borrowed the entire $50 million on December 4, 2001. Therefore, McLeodUSA may not have sufficient liquidity to endure a prolonged restructuring.
•: It will be difficult to attract and retain key employees during a prolonged restructuring.
•: Uncertainty about the ultimate outcome of the restructuring could lead to the loss of customers and the tightening of trade credit.

If the Exchange Offer is Completed, Both the Tendering and Non-Tendering Noteholders Could Be Adversely Affected

Risks Particular to Non-Tendering Noteholders

Noteholders that do not to tender will not be entitled to receive any amount of the cash and common stock consideration delivered to tendering noteholders (except in the event that the restructuring is effected under the in-court restructuring in lieu of the out-of-court restructuring, in which case such holders will be entitled to receive such consideration as may be approved by the Bankruptcy Court).

If a noteholder does not tender and the out-of-court restructuring is consummated, McLeodUSA may leave such unexchanged Notes outstanding. With respect to such Notes not tendered, McLeodUSA also reserves the right, but is under no obligation, to purchase such Notes (whether pursuant to open market purchases, negotiated transactions or otherwise and whether for consideration similar to or different from that offered in the exchange offer), defease such Notes pursuant to the terms of the applicable indenture or as otherwise agreed with the holders of such Notes or to redeem such Notes in accordance with their terms. However, the credit agreement imposes restrictions on McLeodUSA's ability to do so.

The indenture amendments may have adverse consequences for noteholders that elect not to tender their Notes in the out-of-court restructuring since holders of Notes outstanding after the out-of-court restructuring closing date will not be entitled to the benefit of substantially all of the restrictive covenants and certain event of default provisions presently contained in the indentures, and may be subject to certain adverse tax consequences. See "Certain United States Federal Income Tax Considerations—Consequences to Noteholders—Consequences to Non-Exchanging Noteholders." The elimination of these restrictive covenants and other provisions would permit McLeodUSA to, among other things, incur indebtedness, pay dividends or make other payments that would otherwise have been restricted, and incur liens or make investments which would otherwise not have been permitted. See "Terms and Conditions of the Exchange Offer and Consent Solicitation—The Consent Solicitation." It is possible that any such actions that McLeodUSA would be permitted to take as a result of the indenture amendments will adversely affect the interests of the non-tendering noteholders.

To the extent Notes are tendered and accepted in the out-of-court restructuring, the trading market, if any, for the untendered Notes could be adversely affected.

If McLeodUSA determines that it is or will be unable to, or, that it is more advantageous or expeditious not to, complete the restructuring, McLeodUSA will consider all financial alternatives

available to it at such time, which may include implementing an alternative restructuring arrangement outside of bankruptcy. Any reorganization that may result could be on terms less favorable to the noteholders than the terms of the out-of-court restructuring or the in-court restructuring. If a protracted and non-orderly reorganization were to occur, there is a risk that the ability of the holders to recover their investments would be substantially delayed and more impaired than under the proposed restructuring.

Risks Particular to Tendering Noteholders

Noteholders who tender will receive cash and shares of Class A common stock but will lose all rights associated with the Notes. The indentures obligate McLeodUSA to pay noteholders a certain amount of annual interest. Noteholders of the Class A common stock will have no right to receive an annual payment of dividends. Moreover, cash dividend payments are prohibited under the terms of the credit agreement (other than in connection with certain employee benefit plans or to maintain certain licenses and franchises). Also, the Notes represent indebtedness rather than equity. As such, if McLeodUSA were to be liquidated, noteholders would be entitled to payment prior to holders of Class A common stock.

Finally, if McLeodUSA were to become a debtor in a case under the Bankruptcy Code within 90 days after the consummation of the exchange offer (or, with respect to any insiders specified in the Bankruptcy Code, within one year after consummation of the exchange offer) and certain other conditions are met, the consideration paid to noteholders in the exchange offer, absent one of the Bankruptcy Code defenses to avoidance, could be avoided as a preferential transfer and, to the extent avoided, the value of such consideration could be recovered from such noteholder and possibly from subsequent transferees.

The Class A Common Stock Could Be Volatile, Increasing the Risk of Loss to Holders of Common Stock

The market price of the Class A common stock could be subject to significant fluctuations in response to various factors and events including the depth and liquidity of the trading market for the Class A common stock and variations in McLeodUSA's operating results. In addition, the stock market in general, and the telecommunications sector specifically, in recent years have experienced broad price and volume fluctuations that have often been unrelated to the operating performance of the companies. Broad market fluctuations may also adversely affect the market price of the Class A common stock.

If McLeodUSA's Class A Common Stock is Delisted, the Ability of Holders of Common Stock to Sell Their Shares Would Be Adversely Impacted

It is possible that the Class A common stock will be delisted from The Nasdaq National Market. Officials of The Nasdaq Stock Market may, upon the issuance of this Offering Memorandum and Disclosure Statement, halt the quotation of the Class A common stock and begin an immediate review of McLeodUSA's entire financial situation, including the plan, the projected financial statements and the economic impact of any possible bankruptcy on the Class A common stock. If the results of a review are unfavorable, The Nasdaq Stock Market may notify McLeodUSA that it intends to delist the Class A common stock. McLeodUSA would object to any proposed delisting and seek a hearing, but there can be no guarantee that any such objection would be successful. If the Class A common stock is delisted, it would become difficult to make purchases and sales or obtain timely and accurate quotations with respect to trading of the Class A common stock.

Issuance of Additional Shares of Class A Common Stock After the Restructuring Will Dilute the Class A Common Stock

If the requisite votes in favor of the restructuring are received, the issuance of shares of Class A common stock to the noteholders and the holders of Series A, D and E preferred stock will result in dilution of the equity interests of the holders of Class A common stock. Moreover, the issuance of shares of Class A common stock or options to management and employees, the conversion of the new preferred stock or the exercise of the new warrant will result in additional dilution of the equity interests of the holders of the Class A common stock which could adversely affect the market price and the value of Class A common stock. There can be no assurance that McLeodUSA will not need to issue additional equity securities in the future in order to execute its business plan if it does not achieve its projected results or for other reasons, which could lead to further dilution to holders of the Class A common stock.

McLeodUSA's Future Operational and Financial Performance May Vary Materially from the Projections Included in this Offering Memorandum and Disclosure Statement

The projected financial information contained in this Offering Memorandum and Disclosure Statement is based on McLeodUSA's estimated results of operations based upon certain assumptions described more fully under "Unaudited Pro Forma Financial Information" and "Projections of Certain Financial Data" in this offering memorandum and disclosure statement. McLeodUSA does not as a matter of course make public projections as to future sales, earnings or other results. However, McLeodUSA's management, together with its financial advisor, has prepared the projected consolidated financial information set forth in this offering memorandum and disclosure statement to present the anticipated effects of the restructuring. These projections were not prepared with a view towards pubic disclosure or with a view towards complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of McLeodUSA's management, were prepared on a reasonable basis, reflect the best currently available estimates and adjustments and present, to the best of management's knowledge and belief, the course of action and the expected future financial performance of reorganized McLeodUSA after the effective date.

McLeodUSA does not intend to update or otherwise revise its projections to reflect events or circumstances existing or arising after the date of this Offering Memorandum and Disclosure Statement or to reflect the occurrence of unanticipated events. The independent public accountants for McLeodUSA have not examined or provided any other form of assurance on the projected financial information. Consequently, no person other than McLeodUSA assumes any responsibility for the projected financial information. The projected financial information necessarily is based upon numerous estimates and assumptions, including that McLeodUSA will successfully implement the restructuring on a timely basis and achieve the results described in the financial projections included in this Offering Memorandum and Disclosure Statement. These estimates and assumptions are inherently subject to significant business, economic and competitive uncertainties, contingencies and risks, many of which are beyond the control of McLeodUSA. Actual results may vary from these projections and the variations may be material. Financial projections are necessarily speculative in nature and one or more of the assumptions underlying these projections may prove not to be valid. The projections should not be regarded as a representation by McLeodUSA, any of its affiliates or any other person that the projections will be achieved. Noteholders are cautioned not to place undue reliance on the projected financial information contained in this Offering Memorandum and Disclosure Statement.

Adverse Treatment of Cancellation of Debt Income and Net Operating Losses May Adversely Impact McLeodUSA's Financial Position

McLeodUSA will realize substantial cancellation of debt ("COD") income as a result of the restructuring. Under the out-of-court restructuring, McLeodUSA will recognize this income for income tax purposes. McLeodUSA believes that it and its subsidiaries will have sufficient consolidated net operating losses and net operating loss carryovers ("NOLs") available for federal income tax purposes to offset this income (although some federal alternative minimum tax and state income tax liability will remain). McLeodUSA has estimated for purposes of its unaudited pro forma financial information presented herein that $46 million of current tax liability will result from the out-of-court restructuring. See "Unaudited Pro Forma Financial Information." However, whether McLeodUSA and its subsidiaries will have sufficient NOLs to fully offset the COD income recognized will depend upon a number of factors, including the amount of Notes that are tendered in the out-of-court restructuring, the amount of operating losses created by operations in 2001 and 2002, the value of the Class A common stock (determined at the time of the exchange) issued in exchange for Notes, the effect of any applicable limitations on McLeodUSA's ability to utilize NOLs (including certain of McLeodUSA's subsidiaries' NOLs that were created before such subsidiaries were acquired by McLeodUSA) and the timing and amount of gain or loss that McLeodUSA will recognize as a result of the divestiture of its non-core business and telecom assets. Accordingly, no assurances can be given that McLeodUSA will have sufficient NOLs available to offset all of the COD income that will be recognized in the out-of-court restructuring. If McLeodUSA and its subsidiaries do not have sufficient NOLs available to offset the COD income recognized in the out-of-court restructuring, McLeodUSA will recognize taxable income without a corresponding receipt of cash.

McLeodUSA believes that all or substantially all of its and its subsidiaries' NOLs will be utilized as a result of the COD income to be recognized in the out-of-court restructuring. McLeodUSA also believes that all of its NOLs will be eliminated as a result of COD income excluded in the in-court restructuring, although the NOLs of McLeodUSA's subsidiaries will not be eliminated as a result of such COD income in the in-court restructuring if McLeodUSA's position that the reduction in tax attributes resulting from the exclusion of such COD income should occur on a separate company basis is sustained. No assurances can be made in this regard. Because no COD income will be recognized in the in-court restructuring, McLeodUSA will not be liable for the federal alternative minimum tax or state income tax as a result of COD income realized in the in-court restructuring.

If an "ownership change" (as defined in Internal Revenue Code Section 382 ("Section 382")) occurs with respect to McLeodUSA's stock in connection with the restructuring, Section 382 may apply to limit the future ability of McLeodUSA and its subsidiaries to utilize any remaining NOLs generated before the ownership change and certain subsequently recognized "built-in" losses and deductions, if any, existing as of the date of the ownership change. McLeodUSA is likely to incur an ownership change as a result of the restructuring. McLeodUSA's ability to utilize new NOLs arising after the ownership change would not be affected. An ownership change generally occurs if certain persons or groups increase their aggregate ownership percentage in a corporation's stock by more than 50 percentage points in the shorter of any three-year period or the period since the last ownership change.

McLeodUSA believes that its most recent ownership change occurred in March, 2000 and that the Section 382 limitation arising from that ownership change does not impose material limitations on its ability to utilize its NOLs in connection with the restructuring. However, the determination of whether and when an ownership change occurs is inherently factual and depends in part on the values of McLeodUSA's outstanding stock on each measurement date (as defined for purposes of Section 382). If it were ultimately determined that McLeodUSA's most recent ownership change occurred on a different date (or that an ownership change occurs subsequent to the date hereof and prior to the consummation of the out-of-court restructuring), McLeodUSA's ability to utilize NOLs to offset the COD income

recognized in the out-of-court restructuring could be materially affected. See "Certain United States Federal Income Tax Considerations."

Failure to Raise Necessary Capital Could Restrict the Ability of McLeodUSA to Develop Its Network and Services and Engage in Strategic Acquisitions

McLeodUSA cannot assure that its capital resources will be sufficient to enable it to achieve operating profitability. Failure to generate or raise sufficient funds may require McLeodUSA to delay or abandon some of its expansion plans or expenditures, which could harm its business and competitive position.

McLeodUSA expects to meet these funding needs through various sources, including existing cash balances, existing lines of credit, prospective sales of selected assets, vendor financing and cash flow from future operations. The estimated aggregate capital expenditure requirements of McLeodUSA include the projected costs of:

•: expanding McLeodUSA's fiber optic communications network, including intra-city fiber optic networks;
•: adding voice and data switches;
•: constructing, acquiring, developing or improving telecommunications assets in existing and new markets; and
•: improving the business infrastructure to support a larger and more efficient telecommunications company.

McLeodUSA also requires substantial funds for general corporate and other expenses and may require additional funds for working capital fluctuations.

The third amendment to the credit agreement places restrictions on McLeodUSA's ability to make capital expenditures and engage in acquisitions.

McLeodUSA may meet any additional financial needs by issuing additional debt or equity securities or by borrowing funds under the credit agreement. McLeodUSA cannot assure that it will have timely access to additional financing sources on acceptable terms. McLeodUSA's ability to issue debt securities, borrow funds from additional lenders and participate in vendor financing programs are restricted under the terms of the third amendment, and there can be no assurance that the lenders thereunder will waive these restrictions if McLeodUSA needs additional financing beyond that permitted. If they do not, McLeodUSA may not be able to expand its markets, operations, facilities, network and services as it intends.

McLeodUSA's Dependence on the MegaBells to Provide Most of McLeodUSA's Communications Services Could Make It Harder for McLeodUSA to Offer Its Services at a Profit

The original seven regional Bell companies that resulted from the divestiture by AT&T in 1984 of its local telephone systems are now concentrated into four large incumbent "MegaBells." McLeodUSA depends on these MegaBells to provide much of McLeodUSA's core local and some long distance services and at the same time these MegaBells are McLeodUSA's largest local service competitors. Today, without using the communications facilities of these companies, McLeodUSA could not provide bundled local and long distance services to most of McLeodUSA's customers. Because of this dependence, McLeodUSA's communications services are highly susceptible to changes in the conditions for access to these facilities and to possible inadequate service quality provided by the MegaBells. Therefore, McLeodUSA may have difficulty offering its services on a profitable and competitive basis.

Qwest Communications International Inc. (successor to U S WEST Communications, Inc.) and SBC Communications Inc. (including its wholly-owned subsidiary Ameritech Corporation) are McLeodUSA's primary suppliers of network elements and communications services that allow McLeodUSA to transfer and connect calls. The communications facilities of McLeodUSA's suppliers allow McLeodUSA to provide local service, long distance service and private lines dedicated to its customers' use. If these MegaBells or other companies deny or limit McLeodUSA's access to their communications network elements or wholesale services, McLeodUSA may not be able to offer its communications services at profitable rates.

In order to interconnect McLeodUSA's network equipment and other communications facilities to network elements controlled by the MegaBells, McLeodUSA must first negotiate and enter into interconnection agreements with them. Interconnection obligations imposed on the MegaBells by the Telecommunications Act of 1996 have been and continue to be subject to a variety of legal proceedings, the outcome of which could affect McLeodUSA's ability to obtain interconnection agreements on acceptable terms. There can be no assurance that McLeodUSA will succeed in obtaining interconnection agreements on terms that would permit McLeodUSA to offer local services using McLeodUSA's own communications network facilities at profitable and competitive rates.

Actions by the MegaBells May Make it More Difficult for McLeodUSA to Offer Its Communications Services

The MegaBells have pursued and continue to pursue several measures that may make it more difficult for McLeodUSA to offer its communications services. McLeodUSA has challenged or is challenging these actions before the FCC or applicable state public utility commissions. McLeodUSA cannot assure that it will succeed in its challenges to these or other actions by the MegaBells that would prevent or deter McLeodUSA from using their service or communications network elements. If the MegaBells withdraw or limit McLeodUSA's access to services or charge McLeodUSA extraordinary charges or high prices relative to retail rates in any location, McLeodUSA may not be able to offer communications services in those locations, which would harm McLeodUSA's business.

McLeodUSA anticipates that the MegaBells will continue to pursue legislation in states within McLeodUSA's target market area to reduce state regulatory oversight over their rates and operations. If adopted, these initiatives could make it more difficult for McLeodUSA to challenge MegaBell actions in the future which could harm McLeodUSA's business.

The MegaBells are also actively pursuing federal legislative and regulatory initiatives to undermine the Telecommunications Act of 1996 requirement to open local networks including by limiting the MegaBells' obligations to provide access to their facilities and by allowing them to provide in-region long distance data services without satisfying the market-opening requirements. If successful, these initiatives could make it more difficult for us to compete with the MegaBells and to offer services on a profitable and competitive basis. In addition to the established long-distance telephone companies, recent regulatory decisions have allowed some of the MegaBells to offer long-distance services within their traditional local service areas in a growing number of states. The regional Bell companies are proving to be strong competitors in the long-distance market.

Competition in the Communications Services Industry Could Cause McLeodUSA to Lose Customers and Revenue and Make It More Difficult for McLeodUSA to Enter New Markets

McLeodUSA faces intense competition in all of its markets. This competition could result in loss of customers and lower revenue for McLeodUSA. It could also make it more difficult for McLeodUSA to enter new markets. Entrenched, traditional local telephone companies, including Qwest, SBC, BellSouth and Verizon, currently dominate their local communications markets and are gaining long distance market share in certain states (as discussed below). Three major competitors, AT&T, WorldCom and its MCI group and Sprint, dominate the long distance market. Hundreds of other

companies also compete in the long distance marketplace. Many companies, including AT&T, WorldCom and Sprint, also compete in the local and long distance marketplace.

Other competitors may include cable television providers, providers of communications network facilities dedicated to particular customers, microwave and satellite carriers, wireless telecommunications providers, private networks owned by large end-users, municipalities, electrical utilities and telecommunications management companies. Increasingly, McLeodUSA is subject to competition from Internet telephone and other IP-based telecommunications service providers, which are currently subject to substantially less regulation than competitive and traditional local telephone companies and are exempt from a number of taxes and regulatory charges that McLeodUSA is required to pay.

These and other firms may enter, and in some cases have entered, the markets where McLeodUSA focuses its sales efforts, which may create downward pressure on the prices for its services and negatively affect its returns. Many of McLeodUSA's existing and potential competitors have financial and other resources far greater than McLeodUSA's. In addition, the trend toward mergers and strategic alliances in the communications industry may strengthen some of McLeodUSA's competitors and could put McLeodUSA at a significant competitive disadvantage.

Many of McLeodUSA's competitors offer a greater range of communications services, or offer them in more geographic areas. For example, while McLeodUSA's target market covers 25 states, many of McLeodUSA's competitors are national or international in scope. Also, some of McLeodUSA's competitors offer wireless services, Internet content services, and other services. McLeodUSA's inability to offer as wide a range of services as many of its competitors or to offer them in as many locations, could result in McLeodUSA not being able to compete effectively against them.

For additional information, see "Business—Competition."

MegaBells' Being Allowed to Offer Bundled Local and Long Distance Services in McLeodUSA's Markets Could Cause McLeodUSA to Lose Customers and Revenue and Could Make It More Difficult for McLeodUSA to Enter New Markets

Presently the MegaBells are prohibited from offering interLATA long distance services to customers in their regions until they have shown compliance on a state-by-state basis with the Telecommunications Act of 1996. The MegaBells are attempting to show compliance and are seeking authority to offer in-region interLATA long distance service. SBC has obtained such authority in Texas, Oklahoma, Kansas, Missouri and Arkansas. Qwest has indicated its intention to seek authority in all 14 states where it provides local services. Verizon has obtained such authority in New York, Massachusetts, Connecticut and Pennsylvania and its application for such authority in Rhode Island is pending before the FCC. BellSouth's application for such authority in Georgia and Louisiana is pending. After obtaining authorization to provide interLATA services within a state, the MegaBells have generally been successful in gaining significant market share and forcing down prices in the market for such services.

The MegaBells are also seeking policy changes to reduce or eliminate the requirement that they open their local networks prior to offering interLATA services.

If the MegaBells, which have resources far greater than McLeodUSA's, are authorized to bundle interLATA long distance service and local service in McLeodUSA's markets before the MegaBell local markets are effectively open to competition, the MegaBells could cause McLeodUSA to lose customers and revenues and make it more difficult for McLeodUSA to compete in those markets. McLeodUSA expects that eventually the MegaBells will be permitted to offer interLATA services throughout the United States. As the MegaBells are allowed to offer in-region interLATA in an increasing number of states, McLeodUSA will find it increasingly difficult to compete with them.

Developments in the Wireless Telecommunications Industry Could Make It More Difficult for McLeodUSA to Compete

The wireless telecommunications industry is experiencing increasing competition and significant technological change. Wireless Internet services, high speed data services and other more advanced wireless services are also gaining in popularity. These developments may make it more difficult for McLeodUSA to gain and maintain its share of the communications market, which may facilitate the migration of wireline minutes to wireless services. McLeodUSA presently does not offer wireless services in its bundle of offered services. McLeodUSA could face additional competition from users of new wireless technologies including, but not limited to, currently unlicensed spectrum.

Many of the wireless carriers have financial and other resources far greater than McLeodUSA's and have more experience testing and deploying new or improved products and services. In addition, several wireless competitors operate or plan to operate wireless telecommunications systems that encompass most of the United States, which could give them a significant competitive advantage.

See "Business—Competition."

The Success of McLeodUSA's Communications Services Will Depend on McLeodUSA's Ability to Keep Pace with Rapid Technological Changes in McLeodUSA's Industry

Communications technology is changing rapidly. These changes influence the demand for McLeodUSA's services and the competition it faces. McLeodUSA needs to be able to anticipate these changes and to develop and bring to market new and enhanced products and services quickly enough for the changing market. This will determine whether McLeodUSA can continue to increase its revenue and number of subscribers and remain competitive.

The Loss of Key Personnel Could Weaken McLeodUSA's Technical and Operational Expertise, Delay McLeodUSA's Introduction of New Services or Entry into New Markets and Lower the Quality of McLeodUSA's Service

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

Clark E. McLeod, Chairman of McLeodUSA, Stephen C. Gray, President and Chief Executive Officer of McLeodUSA, and Chris A. Davis, Chief Operating and Financial Officer of McLeodUSA, each play an important role in the future success of McLeodUSA. Loss of these senior executives could adversely affect the financial condition of McLeodUSA.

Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay Installation of McLeodUSA's Networks and Interfere with McLeodUSA's Operations

To obtain access to rights-of-way needed to install McLeodUSA's fiber optic cable, McLeodUSA must reach agreements with state highway authorities, local governments, transit authorities, local telephone companies and other utilities, railroads, long distance carriers and other parties. The failure to obtain or maintain any rights-of-way could delay McLeodUSA's planned network expansion, interfere with McLeodUSA's operations and harm its business. For example, if McLeodUSA loses access to a right-of-way, McLeodUSA may need to spend significant sums to remove and relocate its facilities. See "Business—Regulation."

Government Regulation May Increase McLeodUSA's Cost of Providing Services, Slow McLeodUSA's Network Construction and Subject McLeodUSA's Services to Additional Competitive Pressures

McLeodUSA's facilities and services are subject to federal, state and local regulations. The time and expense of complying with these regulations could slow down McLeodUSA's network construction, increase its costs of providing services and subject McLeodUSA to additional competitive pressures. One of the primary purposes of the Telecommunications Act of 1996 was to open the local telephone services market to competition. While this has presented McLeodUSA with opportunities to enter local telephone markets, it also provides important benefits to the MegaBells, such as the ability, under specified conditions, to provide long distance service to customers in their respective regions. In addition, McLeodUSA needs to obtain and maintain licenses, permits and other regulatory approvals in connection with some of its services. Any of the following could harm McLeodUSA's business:

•: failure to comply with federal and state tariff requirements;
•: failure to maintain proper federal, state and municipal certifications or authorizations;
•: failure to comply with federal, state or local laws and regulations;
•: failure to obtain and maintain required licenses and permits;
•: burdensome license or permit requirements to operate in public rights-of-way; and
•: burdensome or adverse regulatory requirements.

Regulatory developments have enhanced the ability of other companies to compete against McLeodUSA, including by providing the MegaBells with increased pricing flexibility for many services, decreasing the MegaBells' access charges, and altering the manner in which local telephone services are supported by other services.

The legislative and regulatory environment in which McLeodUSA operates continues to undergo significant changes. Many of the developments discussed in this offering memorandum are subject to further legislative and regulatory actions as well as litigation and court review. There can be no assurance that McLeodUSA's business will not be adversely affected by future legislation, regulation or court decisions.

State and federal regulations to which McLeodUSA is subject require prior approval for a range of different corporate activities, such as transfers of direct and indirect control of authorized telecommunications carriers, certain corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and incurrence by carriers of significant debt obligations. McLeodUSA does not believe that the restructuring will effect a transfer of control over its regulated subsidiaries under most of the applicable standards, and therefore McLeodUSA does not believe that approval by the FCC and most state communications regulatory agencies is necessary. However, federal and state regulators could view some of the actions that McLeodUSA is taking in connection with the restructuring as requiring prior regulatory approval. The area of law applicable to these actions is subject to a range of possible interpretations by regulators and courts, and it is possible that McLeodUSA would be subjected to penalties if regulators determine that it should have obtained authorization prior to consummating the restructuring. If it becomes necessary to seek a regulatory approval before effectuating the restructuring, there is a risk that such approval may be delayed or denied.

Certificates of authority can generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law or the rules, regulations and policies of state regulatory authorities. Fines or other penalties also may be imposed for such violations. State utility commissions or third parties could raise issues with regard to McLeodUSA's compliance with applicable laws or regulations which could have a material adverse effect on McLeodUSA's business, results of operations and financial condition.

Risks Associated with the In-Court Restructuring

See "The Plan—Risk Factors."

TERMS AND CONDITIONS OF THE
EXCHANGE OFFER AND CONSENT SOLICITATION

The Exchange Offer

McLeodUSA, on the terms and subject to the conditions set forth in this Offering Memorandum and Disclosure Statement and the accompanying letter of transmittal and consent (the "Letter of Transmittal and Consent"), and notice of guaranteed delivery and consent ("Notice of Guaranteed Delivery and Consent"), as the same may be amended from time to time (collectively, the "Exchange Offer"), hereby offers up to an aggregate of:

•: $560 million in cash; and
•: 56,813,984 shares of Class A common stock, representing approximately 15% of the Class A common stock to be outstanding as of the closing of the Exchange Offer (subject to dilution),

for the entire principal amount of the following outstanding debt obligations of McLeodUSA:

•: the 10¹/2% Senior Discount Notes due March 1, 2007 (the "10¹/2% Notes");
•: the 9¹/4% Senior Notes due July 15, 2007 (the "9¹/4% Notes");
•: the 8³/8% Senior Notes due March 15, 2008 (the "8³/8% Notes");
•: the 9¹/2% Senior Notes due November 1, 2008 (the "9¹/2% Notes");
•: the 8¹/8% Senior Notes due February 15, 2009 (the "8¹/8% Notes");
•: the 12% Senior Notes due July 15, 2008 (the "12% Notes");
•: the 11¹/2% Senior Notes due May 1, 2009 (the "11¹/2% Notes"); and
•: the 11³/8% Senior Notes due January 1, 2009 (the "11³/8% Notes").

The 10¹/2% Notes, the 9¹/4% Notes, the 8³/8% Notes, the 9¹/2% Notes, the 8¹/8% Notes, the 12% Notes, the 11¹/2% Notes and the 11³/8% Notes are collectively referred to herein as the "Notes."

Subject to the terms and conditions of the Exchange Offer, each holder of Notes ("Noteholder") who validly tenders, and does not withdraw, its Notes, all as further described herein, shall receive its pro rata portion of $560 million in cash and 56,813,984 shares of Class A common stock based upon the ratio of (x) the principal and accreted amount of the Notes tendered by such Noteholder plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the Exchange Offer to (y) the principal and accreted amount of all Notes plus all accrued and unpaid interest thereon outstanding as of the day immediately preceding the closing of the Exchange Offer, an estimate of which is set forth in the table below, for each $1,000 face amount so tendered (the "Exchange Offer Consideration"). Notes that are exchanged as part of the Exchange Offer will be cancelled.

			Distribution of Cash and Stock per $1,000 Face:
	Estimated Principal and Accrued Interest or Accreted Amount as of January 31, 2002		Distribution of Cash and Stock per $1,000 Face:
Issue			Cash(1)		Class A Shares(1)
10¹/2% Notes	$	495,850,024	$	182.51	18.52
12% Notes		159,750,000	$	196.00	19.88
11¹/2% Notes		216,037,500	$	189.33	19.21
9¹/4% Notes		236,273,437	$	193.26	19.61
8³/8% Notes		309,421,875	$	189.82	19.26
9¹/2% Notes		307,125,000	$	188.41	19.11
11³/8% Notes		799,765,625	$	196.25	19.91
8¹/8% Notes		518,619,792	$	190.89	19.37

	$	3,042,843,253

(1): The table was prepared assuming that the Exchange Offer is consummated on February 1, 2002 and 100% of the Notes are tendered. Any different date will result in differing amounts of accrued interest and therefore different amounts of cash and Class A common stock payable for each $1,000 face amount of Notes tendered.

The Consent Solicitation

As a condition to the acceptance of the Exchange Offer, each Noteholder must consent to the amendments to the Indentures (as defined below) described below (the "Indenture Amendments") to:

•: that certain Indenture dated March 4, 1997 between McLeodUSA and The United States Trust Company of New York ("USTCNY"), as trustee, which sets forth the terms and provisions relating to the 10¹/2% Notes (the "10¹/2% Indenture");
•: that certain Indenture dated July 21, 1997 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 9¹/4% Notes (the "9¹/4% Indenture");
•: that certain Indenture dated March 16, 1998 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 8³/8% Notes (the "8³/8% Indenture");
•: that certain Indenture dated October 30, 1998 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 9¹/2% Notes (the "9¹/2% Indenture");
•: that certain Indenture dated February 22, 1999 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 8¹/8% Notes (the "8¹/8% Indenture");
•: that certain Indenture dated December 5, 2000 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 12% Notes (the "12% Indenture");
•: that certain Indenture dated December 5, 2000 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 11¹/2% Notes (the "11¹/2% Indenture"); and
•: that certain Indenture dated January 15, 2001 between McLeodUSA and USTCNY, as trustee, which sets forth the terms and provisions relating to the 11³/8% Notes, as supplemented by that certain First Supplemental Indenture between McLeodUSA and USTCNY dated as of January 15, 2001 (the "11³/8% Indenture").

The 10¹/2% Indenture, the 9¹/4% Indenture, the 8³/8% Indenture, the 9¹/2% Indenture, the 8¹/8% Indenture, the 12% Indenture, the 11¹/2% Indenture and the 11³/8% Indenture are from time to time collectively referred to herein as the "Indentures," and The Bank of New York, as successor trustee to USTCNY under each such Indenture, is referred to herein as the "Notes Trustee."

The Indenture Amendments constitute a single proposal and a tendering or consenting Noteholder must consent to the Indenture Amendments as an entirety and may not consent selectively with respect to certain of the Indenture Amendments. The primary purpose of the Indenture Amendments is to eliminate substantially all of the restrictive covenants in each of the Indentures and to modify certain of the event of default provisions and certain other provisions in each of the Indentures.

The Indenture Amendments will be embodied in an amendment to each of the Indentures in the form of a supplemental indenture (a "Supplemental Indenture"). The Supplemental Indentures will become effective upon execution by McLeodUSA and the Notes Trustee upon the consummation of the Exchange Offer. Thereafter, the Indenture Amendments will be binding on all non-tendering Noteholders. If the Exchange Offer is terminated or withdrawn, or the Notes are never accepted for purchase, the Supplemental Indentures will never become operative.

Pursuant to the terms of the Indentures, the Indenture Amendments require the written consent of the Noteholders of at least a majority in principal amount of the Notes outstanding under the applicable Indenture. The summaries of provisions of the Indentures set forth below are qualified in their entirety by reference to the full and complete terms contained in the Indentures. Capitalized terms used in this section "The Consent Solicitation" without definition shall have the meanings set forth in each of the Indentures.

Deletion of Covenants. The Indenture Amendments would delete in their entireties the provisions summarized below from each of the Indentures (or any existing supplements thereto, except with respect to the 11³/8% Indenture as indicated below):

•: Maintenance of Property. This provision currently requires McLeodUSA to maintain its property in working condition.
•: Payment of Taxes and Other Claims. This provision currently requires McLeodUSA to pay all taxes and other charges before they become delinquent.
•: Repurchase at the Option of Noteholders upon a Change of Control. This provision currently requires McLeodUSA, upon a Change of Control, to repurchase, at the option of a Noteholder, the Noteholder's Notes. The Indenture Amendments would not delete this provision from the 11³/8% Indenture.
•: Limitation on Asset Sales. This provision currently restricts McLeodUSA's ability to sell its assets, the shares of stock of any Restricted Subsidiary or the assets of any Restricted Subsidiary outside the ordinary course of business. The Indenture Amendments would not delete this provision from the 11³/8% Indenture.
•: Limitation on Consolidated Indebtedness. This provision currently restricts the ability of McLeodUSA and its Restricted Subsidiaries to incur indebtedness.
•: Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries. This provision currently restricts the ability of any Restricted Subsidiary of McLeodUSA to incur indebtedness or issue preferred stock.
•: Limitation on Restricted Payments. This provision currently restricts the ability of McLeodUSA and its Restricted Subsidiaries to make specified restricted payments, including restrictions on the payment of dividends, the redemption of capital stock, the redemption of obligations subordinate to the Notes and the making of investments.
•: Limitation on Liens. This provision restricts the ability of McLeodUSA and its Restricted Subsidiaries to create or permit to exist certain Liens on their assets and properties.
•: Limitation on Sale and Leaseback Transactions. This provision currently restricts the ability of McLeodUSA and its Restricted Subsidiaries from entering into certain Sale-Leaseback Transactions with respect to their assets and property.
•: Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. This provision currently restricts McLeodUSA and its Restricted Subsidiaries from creating or allowing encumbrances or restrictions to exist on any Restricted Subsidiary's ability to (i) pay dividends or make distributions on its capital stock, (ii) pay any Indebtedness or other obligation owed to McLeodUSA, (iii) make any loans or advances to McLeodUSA or any Restricted Subsidiary or (iv) transfer any of its property or assets to McLeodUSA or another Restricted Subsidiary.
•: Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries. This provision currently restricts the ability of McLeodUSA and the Restricted Subsidiaries to issue any capital stock of any Restricted Subsidiary.
•: Transactions with Affiliates. This provision currently restricts the ability of McLeodUSA and its Restricted Subsidiaries to engage in transactions with shareholders and affiliates of McLeodUSA.
•: Reports. This provision currently requires that McLeodUSA file annual and periodic reports with the SEC and the Notes Trustee.

In addition, with respect to the 9¹/4% Indenture, the Indenture Amendments would delete in its entirety the provision "Repurchase at the Option of Holders upon Failure to Consummate the CCI Transaction." Such provision became moot in September of 1997.

Modification of Covenants/Events of Default. The Indenture Amendments would modify the provisions summarized below:

•: Restricted and Unrestricted Subsidiaries. This provision would be modified by amending and restating the covenant as follows:

"(a) McLeodUSA may designate any Subsidiary (including a newly formed or newly acquired Subsidiary) of McLeodUSA or any of its Restricted Subsidiaries as either a Restricted Subsidiary or an Unrestricted Subsidiary.

"(b) The designation of a Subsidiary as a Restricted Subsidiary or an Unrestricted Subsidiary shall be made by the Board of Directors pursuant to a Board Resolution delivered to the Trustee and shall be effective as of the date specified in such Board Resolution, which shall not be prior to the date such Board Resolution is delivered to the Trustee."

•

Merger, Consolidation or Sale of Assets. This provision would be modified by:

•: removing the restrictions on incurring additional indebtedness in connection with a merger, consolidation or sale of assets;
•: removing the requirement to secure the Notes in connection with a merger, consolidation or sale of assets that involves the creation of a lien; and
•: removing the obligation to deliver an officer's certificate and opinion of counsel in connection with a merger, consolidation or sale of assets.

•

Events of Default. This provision would be modified by eliminating as an event of default under the Indentures:

•: any default in the performance, or breach, of covenants relating to (i) mandatory repurchase of the Notes at the option of the Noteholders in the event of a change of control of McLeodUSA, (ii) limitations on the ability of McLeodUSA and its subsidiaries to engage in any asset sales and (iii) a consolidation, merger, conveyance, lease or transfer involving McLeodUSA or its subsidiaries;
•: any default under any bond, debenture, note or other evidence of indebtedness of McLeodUSA or its subsidiaries (or under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidences any indebtedness of McLeodUSA or its subsidiaries);
•: any final judgment for the payment of money is entered against McLeodUSA or any of its subsidiaries;
•: the entry by a court of any order or judgement of bankruptcy or insolvency relating to any "Restricted Subsidiaries" of McLeodUSA; and
•: the commencement of a voluntary case or proceeding under the Bankruptcy Code by any "Restricted Subsidiaries" of McLeodUSA.

Deletion of Definitions. The Indenture Amendments would delete certain definitions from the Notes when references to such definitions would be eliminated as a result of the foregoing, and would also delete from the definition of "Subordinated Indebtedness" the reference to the section "Repurchase at the Option of Holders upon a Change of Control." The Indenture Amendments would also delete the definition of Change of Control, except where it is used in the 11³/8% Indenture.

McLeodUSA may become subject to covenants under indentures other than the Indentures, certain of which covenants may relate to similar subject matters as the covenants eliminated and modified pursuant to the Indenture Amendments. However, Noteholders will not be entitled to rely on the benefits or continued existence of the covenants contained in McLeodUSA's other indentures. McLeodUSA is seeking consents to all the Indenture Amendments as a single proposal. Accordingly, a consent purporting to consent to only some of the Indenture Amendments will not be valid.

The remaining sections of each of the Indentures will not be changed by the Indenture Amendments. Copies of the Indentures and the forms of the Supplemental Indentures are available from McLeodUSA upon request.

Adoption of the proposed Indenture Amendments may have adverse consequences for Noteholders that elect not to tender Notes in the Exchange Offer since Noteholders outstanding after the Exchange Offer Closing Date will not be entitled to the benefit of substantially all of the restrictive covenants and certain event of default provisions presently contained in the Indentures, and may be subject to certain adverse tax consequences. See "Certain United States Federal Income Tax Considerations—Consequences to Noteholders—Consequences to Non-Exchanging Noteholders." The elimination of these restrictive covenants and other provisions would permit McLeodUSA to, among other things, incur indebtedness, pay dividends or make other payments that would otherwise have been restricted, and incur liens or make investments which would otherwise not have been permitted. It is possible that any such actions that McLeodUSA would be permitted to take as a result of the Indenture Amendments to the Indentures will adversely affect the interests of the non-tendering Noteholders.

To the extent Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the untendered Notes could be adversely affected.

The completion, execution and delivery of the Letter of Transmittal and Consent or the Notice of Guaranteed Delivery and Consent by a Noteholder in connection with the tender of Notes will be deemed to constitute the consent of such tendering Noteholder to the Indenture Amendments. See "Procedure for Tendering and Consenting—How to Tender Notes and Deliver Consents."

Upon the Exchange Offer Closing Date and receipt of the Requisite Consents (as defined herein), McLeodUSA and the Note Trustee will execute the Supplemental Indentures.

Conditions to the Exchange Offer

Notwithstanding any other provisions of the Exchange Offer and in addition to (and not in limitation of) McLeodUSA's right to extend, amend or terminate the Exchange Offer at any time in its sole discretion, McLeodUSA's obligation to accept for exchange Notes validly tendered pursuant to the Exchange Offer is conditioned upon, among other things:

(a) receipt by McLeodUSA of valid unrevoked tenders of at least 95% of the aggregate principal and accreted amount of the Notes;

(b) receipt by McLeodUSA of consents from Noteholders of a majority of the principal amount of each series of Notes outstanding (the "Requisite Consents") to, and execution by McLeodUSA and the Notes Trustee of the Supplemental Indentures providing for, the Indenture Amendments;

(c) the Restructuring Proposals (as defined herein) are approved at the special meeting of McLeodUSA's stockholders to consider the Restructuring (as defined herein);

(d) the purchase by Forstmann Little of the New Preferred Stock and the New Warrants (each as defined herein);

(e) the consummation of the sale of Pubco to Forstmann Little or another buyer submitting a higher or otherwise better offer;

(f) resolution of all tax matters related to the Restructuring (as defined herein) in a manner satisfactory to McLeodUSA; and

(g) the general conditions to the Exchange Offer, which shall be deemed to have been satisfied unless any of the following conditions shall occur on or after the date of this Offering Memorandum and Disclosure Statement and prior to the acceptance for exchange of any Notes tendered pursuant to the Exchange Offer:

(i) there shall have occurred (A) any general suspension of, or limitation on prices for, trading in securities in the United States securities or financial markets, (B) a material impairment in the trading market for debt securities, (C) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States (whether or not mandatory), (D) any limitation (whether or not mandatory) by any governmental authority on, or other event having a reasonable likelihood of affecting, the extension of credit by banks or other lending institutions in the United States, (E) a commencement of a war, armed hostilities or other national or international crisis involving the United States or (F) any significant adverse change in the United States securities or financial markets generally or in the case of any of the foregoing existing on the date hereof, a material acceleration or worsening thereof;

(ii) there exists an order, statute, rule, regulation, executive order, stay, decree, judgment or injunction that shall have been enacted, entered, issued, promulgated, enforced or deemed applicable by any court or governmental, regulatory or administrative agency or instrumentality that, in the reasonable judgment of McLeodUSA, would or would be reasonably likely to prohibit, prevent or materially restrict or delay consummation of the Exchange Offer or the solicitations or that is, or is reasonably likely to be, materially adverse to the business, operations, properties, condition (financial or otherwise), assets, liabilities or prospects of McLeodUSA or its subsidiaries;

(iii) there shall have been instituted or be pending any action or proceeding before or by any court or governmental, regulatory or administrative agency or instrumentality, or by any other person, which challenges the making of the Exchange Offer or the solicitations or the Indenture Amendments or is reasonably likely to directly or indirectly prohibit, prevent, restrict or delay the consummation of the Exchange Offer or the solicitations or the Indenture Amendments or otherwise adversely affect in any material manner the Exchange Offer, the solicitations or the Indenture Amendments;

(iv) there exists, in McLeodUSA's sole judgment, any other actual or threatened legal impediment to the exchange of the Notes or the issuance of the Class A common stock or the New Preferred Stock (as defined herein) or payment of cash pursuant to the Exchange Offer or any other circumstances that would materially adversely affect the transactions contemplated by the Exchange Offer or the contemplated benefits of the Exchange Offer to McLeodUSA;

(v) there shall have occurred or be likely to occur an event or events which, in McLeodUSA's sole judgment, would or might prohibit, restrict or delay the consummation of the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to McLeodUSA or otherwise result in the consummation of the Exchange Offer not being in McLeodUSA's best interests; or

(iv) the Notes Trustee under the Indentures shall have objected in any respect to, or taken any action that would be reasonably likely to materially and adversely affect the

consummation of the Exchange Offer or the solicitations or McLeodUSA's ability to effect the Indenture Amendments, or shall have taken any action that challenges the validity or effectiveness of the procedures used by McLeodUSA in soliciting the consents (including the form thereof) or in the making of the Exchange Offer or the acceptance of the Notes or the consents or the issuance of Class A common stock and cash consideration in exchange for Notes.

The foregoing conditions are for the sole benefit of McLeodUSA and may be asserted by McLeodUSA regardless of the circumstances giving rise to any such condition (including any action or inaction by McLeodUSA) and may be waived by McLeodUSA, in whole or in part, at any time and from time to time. The failure by McLeodUSA at any time to exercise any of the foregoing rights will not be deemed a waiver of any other right and each right will be deemed an ongoing right which may be asserted at any time and from time to time.

McLeodUSA intends to submit the Restructuring Proposals for a vote at a special meeting of McLeodUSA's stockholders as soon as practicable. See "Background—Background of the Restructuring" and "Restructuring—Alternative Means for Implementing the Restructuring;" "—Out-of-Court Alternative;" and "—Special Meeting of Stockholders."

Termination

McLeodUSA reserves the right to terminate the Exchange Offer and the Restructuring, in the sole discretion of McLeodUSA, at any time and for any reason without accepting any of the tendered Notes. This right of termination is for the sole benefit of McLeodUSA and may be asserted by McLeodUSA regardless of the circumstances giving rise to such decision at any time.

Expiration Date

The Exchange Offer will expire at 5:00 p.m., New York City time, on January 15, 2002 unless extended (such time and date as the same may be extended, the "Expiration Date"). In order to receive the Exchange Offer Consideration pursuant to the Exchange Offer, Noteholders must tender their Notes (or provide for the tender of the Notes under the terms of the Notice of Guaranteed Delivery and Consent) prior to the Expiration Date.

Untendered Notes

If a Noteholder does not tender its Notes and the Exchange Offer is consummated, McLeodUSA may leave such unexchanged Notes outstanding. With respect to such Notes not tendered, McLeodUSA also reserves the right (but is under no obligation) to purchase such Notes (whether pursuant to open market purchases, negotiated transactions or otherwise and whether for consideration similar to or different from that offered in the Exchange Offer), to defease such Notes pursuant to the terms of each of the Indentures or as otherwise agreed with the Noteholder of such Notes or to redeem such Notes in accordance with their terms. In the event Notes that are not tendered in the Exchange Offer are left outstanding, Noteholders of such Notes may not be entitled to the benefit of substantially all of the restrictive covenants and certain event of default provisions presently contained in the Indentures because of the effects of the Indenture Amendments, and may be subject to certain tax consequences. See "Risk Factors—If the Exchange Offer is Completed, Both the Tendering and Non-Tendering Noteholders Could Be Adversely Affected—Risks Particular to Non-Tendering Noteholders" and "Certain United States Federal Income Tax Considerations—Consequences to Noteholders—Consequences to Non-Exchanging Noteholders."

PROCEDURES FOR TENDERING AND CONSENTING

General

The following summarizes the procedures to be followed by all Noteholders in tendering their Notes and delivering consents to the Indenture Amendments. The following does not describe the procedures for delivering Ballots or Master Ballots to vote to accept or reject the plan of reorganization (the "Plan"). For a description of the procedures for delivery by beneficial owners, nominees and securities clearing agencies of Ballots and Master Ballots, see "Procedures for Voting on the Plan."

Noteholders who tender Notes in the Exchange Offer in accordance with the procedures described below will be deemed to have delivered consents to the Indenture Amendments.

Noteholders who receive shares of McLeodUSA's Class A common stock pursuant to the Out-of-Court Restructuring will not be required to pay brokerage commissions or fees or, subject to the instructions in the applicable Letter of Transmittal and Consent, transfer taxes with respect to the receipt of shares of Class A common stock. McLeodUSA will pay all charges and expenses, other than certain applicable taxes, in connection with the Restructuring. See "Restructuring—Estimated Fees and Expenses" below.

Expiration Date, Extensions; Amendments

The Expiration Date is 5:00 p.m., New York City time on January 15, 2002, unless extended, in which case the Expiration Date will be such date to which the Expiration Date is extended. McLeodUSA, in its sole discretion, may extend the Expiration Date for any purpose including without limitation to permit the satisfaction or waiver of all conditions to the Exchange Offer.

In order to extend the Expiration Date, McLeodUSA will notify the Depositary of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Such announcement will state that McLeodUSA is extending the Exchange Offer and consent solicitation for a specified period or on a daily basis. Without limiting the manner in which McLeodUSA may choose to make a public announcement of any extension, amendment or termination of the Exchange Offer and consent solicitation, McLeodUSA will have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service or Business Wire.

McLeodUSA expressly reserves the right to (i) delay accepting any consents or Notes, to extend the Exchange Offer and consent solicitation periods or to terminate the Exchange Offer and consent solicitation and not accept consents or Notes, and (ii) amend or modify at any time, or from time to time, the terms of the Exchange Offer or the Plan in any respect. If McLeodUSA exercises any such right, McLeodUSA will give oral or written notice thereof to the Depositary and will make a public announcement thereof as promptly as practicable. The minimum period during which the Exchange Offer will remain open following material changes in the terms of such Exchange Offer or in the information concerning such Exchange Offer (other than a change in price or a change in percentage of Notes sought) will depend upon the facts and circumstances of such change, including the relative materiality of the terms or information changes. With respect to any change in consideration, a minimum ten business day extension period will be made to allow for adequate dissemination of such change. If any of the terms of the Exchange Offer are amended in a manner determined by McLeodUSA to constitute a material change adversely affecting any Noteholder, McLeodUSA will promptly disclose any such amendment in a manner reasonably calculated to inform the Noteholders of such amendment and McLeodUSA will extend the Exchange Offer and the consent solicitation for a time period which McLeodUSA in its discretion deems appropriate, depending upon the significance of

the amendment and the manner of disclosure to Noteholders, if the Exchange Offer and such consent solicitation would otherwise expire during such time period.

How to Tender Notes and Deliver Consents

A registered Noteholder can tender Notes by:

•: delivering a properly completed and duly executed Letter of Transmittal and Consent or manually signed facsimile thereof (or, in the case of a book-entry transfer, an Agent's Message (as defined herein)) and any other documents required by the Letter of Transmittal and Consent to the Depositary at the address set forth on the back cover page of this Offering Memorandum and Disclosure Statement, and
•: either delivering certificates representing the Notes to the Depositary or complying with the book-entry transfer procedures described under "—Book-Entry Transfers" below

prior to the Expiration Date. A registered Noteholder who cannot comply with these procedures on a timely basis or whose Notes are not immediately available may tender Notes pursuant to the guaranteed delivery procedures under "—Guaranteed Delivery Procedures" described below.

If the certificates for Notes are registered in the name of a person other than the signer of a Letter of Transmittal and Consent, then, in order to tender such Notes pursuant to the Exchange Offer, the certificates representing such Notes must be endorsed or accompanied by appropriate bond powers, signed exactly as the name or names of such Noteholder(s) appear on the certificates, with the signatures on the certificates or bond powers guaranteed as provided below. In the event such procedures are followed by a beneficial owner tendering Notes, the registered Noteholder(s) of such Notes must execute a valid consent in writing, because Notes may not be tendered without also consenting to the Indenture Amendments, and only registered Noteholders are entitled to delivery consents.

Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominees, or held through a book-entry transfer facility, and who wishes to tender Notes and deliver a consent to the Indenture Amendments should contact such registered Noteholder promptly and instruct such registered Noteholder to tender Notes on such beneficial owner's behalf. If such beneficial owner wishes to tender such Notes themselves, such beneficial owner must either make appropriate arrangements to register ownership of the Notes in such beneficial owner's name prior to completing and executing a Letter of Transmittal and Consent (and, where applicable, delivering such notes) or follow the procedures described in the immediately preceding paragraph.

The tender and consent by a Noteholder pursuant to one of the procedures set forth herein will constitute an agreement between such Noteholder and McLeodUSA in accordance with the terms and subject to the conditions set forth herein and in the applicable Letter of Transmittal and Consent. A Noteholder who tenders Notes pursuant to the Exchange Offer, will be deemed, by acceptance of the Exchange Offer, to consent to the Indenture Amendments. In addition, tendering Noteholders will also be deemed to have released and waived any and all claims they may have arising from any prior non-compliance by McLeodUSA under the Indentures.

The method of delivery of the Notes and applicable Letter of Transmittal and Consent and all other required documents to the Depositary is at the election and risk of each Noteholder. Except as otherwise provided herein, such delivery will be deemed made only when actually received by the Depositary. Instead of effecting delivery by mail, it is recommended that Noteholders use an overnight or hand delivery service. If Notes are sent by mail, registered mail, with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure timely delivery. No documents should be sent to McLeodUSA.

Book-Entry Transfers

The Depositary will establish an account with respect to the Notes at DTC promptly after the date of this Offering Memorandum and Disclosure Statement. The Depositary and DTC have confirmed that the Exchange Offer is eligible for DTC's Automatic Tender Offer Program ("ATOP"), whereby a financial institution that is a participant in DTC's system may make book-entry delivery of Notes and consents by causing DTC to (i) transfer Notes into the Depositary's account and (ii) electronically deliver consents with respect to such Notes. Tenders and deliveries of consents are effected through the ATOP procedures by delivery of an Agent's Message by DTC to the Depositary. "Agent's Message" means a message transmitted to, and received by, the Depositary and forming a part of a book-entry confirmation, which states that DTC has received an express acknowledgement from the participant in DTC tendering the Notes stating that DTC has received an express acknowledgement from the participant in DTC tendering Notes that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and Consent and McLeodUSA may enforce such agreement against the participant.

Pursuant to authority granted by DTC, any DTC participant which has Notes credited to its DTC account at any time (and thereby held of record by DTC's nominee) may directly provide Consent to the Indenture Amendments as though it were the registered Noteholder by so completing, executing and delivering the Letter of Transmittal and Consent or transmitting such Consent in accordance with DTC's ATOP procedures.

Although delivery of such Notes may be effected through book-entry delivery at DTC, in any case either (i) the Letter of Transmittal and Consent (or a manually signed facsimile thereof), with any required signature guarantees, or an Agent's Message, together with any other required documents, must be transmitted to and received by the Depositary prior to the Expiration Date or (ii) the guaranteed delivery procedures set forth below must be followed. Delivery of documents to DTC in accordance with DTC's procedures does not constitute delivery to the Depositary.

Signatures; Signature Guarantees

Signatures on each Letter of Transmittal and Consent must be guaranteed unless the Notes delivered pursuant thereto are delivered (i) by a registered Noteholder who has not completed the boxes on the Letter of Transmittal and Consent entitled "Special Delivery Instructions" or (ii) for the account of an Eligible Institution (as defined herein). In the event that signatures are required to be guaranteed, such guarantees must be by a firm that is a participant in the Securities Transfer Agents Medallion Program, or an "eligible guarantor institution" (as such term is defined in Rule 17Ad-15 under the Exchange Act) (an "Eligible Institution").

If the Letter of Transmittal and Consent with respect to any Notes is signed by a person other than the registered Noteholder of any certificate(s) listed therein, such certificate(s) must be endorsed or accompanied by appropriate bond powers signed exactly as the name or names of the registered Noteholder or Noteholders appear on the certificate(s).

If the Letter of Transmittal and Consent or any certificates, bond powers, stock powers or proxies are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by McLeodUSA, proper evidence satisfactory to McLeodUSA of their authority to so act must be submitted.

Interpretation

All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Notes will be resolved by McLeodUSA, whose determination will be final and

binding. McLeodUSA reserves the absolute right to reject any or all tenders and withdrawals of Notes that are not in proper form or the acceptance of which would, in the opinion of McLeodUSA or counsel for McLeodUSA, be unlawful. McLeodUSA also reserves the right to waive any irregularities or conditions of tenders, or consents as to particular Notes. McLeodUSA's interpretation of the terms and conditions of the Exchange Offer and applicable Letter of Transmittal and Consent will be final and binding. Unless waived, any irregularities in connection with tenders and withdrawals of Notes and deliveries and revocations of consents must be cured within such time as McLeodUSA shall determine. Neither McLeodUSA nor the Depositary shall be under any duty to give notification of defects in such tenders, withdrawals, deliveries or revocations or shall incur any liability for failure to give such notification. Tenders and withdrawals of Notes and deliveries and revocations of Consents will not be deemed to have been made until such irregularities have been cured or waived. Any Notes received by the Depositary that are not properly tendered or delivered and as to which the irregularities have not been cured or waived will be returned by the Depositary to the tendering Noteholders unless otherwise provided in the Letter of Transmittal and Consent as soon as practicable following the Expiration Date.

Amendment

Although it does not expect to do so, in the event McLeodUSA should increase the consideration offered for the Notes in the Exchange Offer, such increased consideration will be paid to all Noteholders whose Notes are accepted in the Exchange Offer, including those Notes tendered before the announcement of the increase. In the event that the consideration being offered in the Exchange Offer is increased or decreased, the Exchange Offer and the solicitation period for consents shall remain open for at least ten business days from the date that notice of an increase or decrease in the consideration offered is first published, sent or given to Noteholders.

Guaranteed Delivery Procedures

If a Noteholder desires to tender such Notes and the certificate(s) representing such Notes are not immediately available, or time will not permit such Noteholder's certificate(s) or other required documents to reach the Depositary prior to the Expiration Date, or if such Noteholder cannot complete the procedure for book-entry transfer on a timely basis, a tender may be effected if:

(a) the tender is made through an Eligible Institution;

(b) prior to the Expiration Date, the Depositary receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery and Consent (by telegram, telex, facsimile transmission, mail or hand delivery) setting forth the name and address of the Noteholder and the principal amount of Notes to be delivered stating that the delivery is being made thereby and guaranteeing that within three Nasdaq Stock Market trading days after the date of execution of the Notice of Guaranteed Delivery and Consent, the certificate(s) representing the Notes, the Letter of Transmittal and Consent, if applicable, and any other documents required thereby will be deposited by the Eligible Institution with the Depositary; and

(c) the certificate(s) for all tendered Notes, or a confirmation of a book entry transfer of such Notes into the Depositary's applicable account at a Book-Entry Transfer Facility as described above, the applicable Letter of Transmittal and Consent and all other documents required thereby are received by the Depositary within three Nasdaq Stock Market trading days after the date of execution of such Notice of Guaranteed Delivery and Consent.

Failure to complete the guaranteed delivery procedures outlined above will not, of itself, affect the validity of any Consent properly executed by a Noteholder who attempted to use the guaranteed delivery procedures.

Noteholders who wish both to vote on the Plan and to tender Notes using the procedures for guaranteed delivery should note that the delivery to the Depositary of a Notice of Guaranteed Delivery and Consent will not constitute a vote for Acceptance of the Plan. In order both to vote for Acceptance of the Plan and to tender using these procedures for guaranteed delivery, a Noteholder must (i) vote for Acceptance of the Plan by delivering to the Voting Agent, prior to 5:00 p.m., New York City time, on the Expiration Date, a properly completed and duly executed Ballot, (ii) deliver to the Depositary, prior to 5:00 p.m., New York City time, on the Expiration Date, a properly completed and duly executed Notice of Guaranteed Delivery and Consent substantially in the form provided by McLeodUSA, and (iii) comply with all other guaranteed delivery requirements set forth in this section, including without limitation the requirement that such Noteholder deliver to the Depositary, within three Nasdaq Stock Market trading days following the date of execution of such Notice of Guaranteed Delivery and Consent, a properly completed and duly executed Letter of Transmittal and Consent.

Withdrawal of Tenders and Revocations of Consents

Tenders of Notes may be withdrawn at any time prior to the Expiration Date. A valid withdrawal of Notes prior to the Expiration Date shall automatically constitute a revocation of consents with respect to such Notes and thereby render such consents invalid, null and void. A withdrawal of Notes tendered for exchange shall not have any effect on a vote for acceptance of the Plan with respect to such Notes. A revocation of a vote for acceptance of the Plan shall not have any effect on the tender, of or with respect to the Notes as to which a vote for acceptance of the Plan is revoked.

Any Noteholder who has tendered Notes, or who succeeds to the record ownership of Notes in respect of which such tenders previously been given, may withdraw such Notes by delivery of a written notice of withdrawal. To be effective, a written or facsimile transmission notice of withdrawal of a tender must (i) be timely received by the Depositary at one of its addresses specified on the back cover of this Offering Memorandum and Disclosure Statement before the Expiration Date, (ii) specify the name of the registered Noteholder to be withdrawn, (iii) contain the description of the Notes to be withdrawn, the certificate numbers shown on the particular certificates evidencing such Notes and the aggregate principal amount of such Notes, and (iv) be signed by such registered Noteholder in the same manner as the original signature on the applicable Letter of Transmittal and Consent (including any required signature guarantees), or be accompanied by documents of transfer sufficient to have the Notes Trustee under the Indentures register the transfer of such Notes into the name of the person withdrawing Notes or revoking consent. The signature(s) on the notice of withdrawal of any tendered Notes must be guaranteed by an Eligible Institution unless such Notes have been tendered (i) by a registered Noteholder who has not completed the boxes on the Letter of Transmittal and Consent entitled "Special Issuance Instructions" or "Special Delivery Instructions" or (ii) for the account of an Eligible Institution. If the Notes to be withdrawn have been delivered or otherwise identified to the Depositary, a signed notice of withdrawal is effective immediately upon receipt by the Depositary of written or facsimile transmission notice of withdrawal even if physical release is not yet effected.

Any Notes which have been tendered for exchange but which are not exchanged will be returned to the Noteholder thereof without cost to such Noteholder promptly following the Expiration Date. Properly withdrawn Notes may be returned to the Noteholder thereof without cost to such Noteholder promptly following the Expiration Date. Properly withdrawn Notes may be reentered at any time prior to the Expiration Date by following one of the procedures described under "How to Tender Notes and Consent in the Exchange Offer" above.

Acceptance of Notes, Delivery of Class A Common Stock and Payment

Subject to the satisfaction or waiver by McLeodUSA of the conditions to the Exchange Offer, the acceptance for exchange and payment of Notes validly tendered and not withdrawn and delivery of Class A common stock and payment of cash in exchange for the Notes will be made as promptly as

practicable after the Expiration Date. For purposes of the Exchange Offer, McLeodUSA will be deemed to have accepted for exchange validly tendered Notes if, as and when McLeodUSA gives oral or written notice thereof to the Depositary. Subject to the following paragraph and the other terms and conditions of the Exchange Offer, delivery of Class A common stock and payment of cash for Notes accepted pursuant to the Exchange Offer will be made by the Depositary as soon as practicable after receipt of such notice. The Depositary will act as agent for the tendering holders for the purposes of receiving Class A common stock and cash from McLeodUSA and transmitting the Class A common stock and cash to the tendering Noteholders. McLeodUSA will return any tendered Notes not accepted for exchange without expense to the tendering Noteholders as promptly as practicable following the Expiration Date.

Notwithstanding any other provision hereof, delivery of exchange consideration for Notes accepted for exchange pursuant to the Exchange Offer will in all cases be made only after timely receipt by the Depositary of (a) certificates for (or a timely book-entry confirmation with respect to) such Notes, (b) a Letter of Transmittal and Consent (or a manually signed facsimile thereof), properly completed and validly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and (c) any other documents required by the Letter of Transmittal and Consent and the instructions thereto. Accordingly, tendering Noteholders whose certificates for Notes or book-entry confirmation with respect to Notes are actually received by the Depositary after the Expiration Date may be paid later than other tendering holders.Under no circumstances will interest be paid on the exchange consideration to be paid by McLeodUSA because of any delay in making such delivery or otherwise.

All tendering Noteholders, by execution of the Letter of Transmittal and Consent (or facsimile thereof), waive any right to receive notice of acceptance of their Notes for exchange.

BACKGROUND

Background of the Restructuring

Prior to 2000, McLeodUSA grew rapidly utilizing a voice-centric strategy focused on gaining market share within a core region of 21 Midwest, Northwest and Rocky Mountain states. In the first quarter of 2000, McLeodUSA added to its voice offering a more data-centric, national-based strategy with the acquisition of Splitrock Services, Inc. ("Splitrock"), a facilities-based provider of data communications services. McLeodUSA undertook a number of additional steps as a result of this shift in strategy, announcing plans to build a national data network including assets from Splitrock and significantly increasing its personnel levels, capital expenditures and suite of available products. In the fourth quarter of 2000, McLeodUSA increased its core footprint from 21 states to 25 states with the acquisition of CapRock Communications Corp., which operated a competitive local exchange, or CLEC, business in Texas, Arkansas, Oklahoma and Louisiana, among others.

Earlier this year, it became clear that, due to certain factors, including but not limited to complications related to McLeodUSA's rapid growth and a downturn in economic conditions generally and the competitive telecommunications sector in particular, McLeodUSA was not meeting internal expectations in terms of profitability and cash flow. As a result, on August 1, 2001, McLeodUSA announced a series of steps to strengthen its senior management and position McLeodUSA for future growth. These steps included:

•: the addition of Chris A. Davis as Chief Operating and Financial Officer. Ms. Davis had most recently been Executive Vice President, Chief Financial and Administrative Officer for ONI Systems. From 1993 to 2000, she had been Executive Vice President, Chief Financial and Administrative Officer at Gulfstream Aerospace, the world's leading business jet aviation manufacturer;
•: the appointment of Theodore J. Forstmann as Chairman of the Executive Committee of the Board of Directors. Mr. Forstmann is the Founding Partner of Forstmann Little, a significant investor in McLeodUSA;
•: the addition of four current or former CEOs to the Board of Directors; and
•: the exchange of Forstmann Little's convertible preferred stock, which carried annual cash dividends of $35 million and a conversion price of $12.17, for new convertible preferred stock with no dividends and a conversion price of $6.10.

Upon joining McLeodUSA, Ms. Davis initiated a 90-day planning process to evaluate the strategic direction of McLeodUSA. Specifically, McLeodUSA:

•: evaluated McLeodUSA's strengths and available capital in order to focus its strategic direction;
•: initiated an analysis of McLeodUSA's business units for profitability and synergy with a potential revised strategic plan;
•: performed a complete organizational assessment to identify redundancies and operational inefficiencies;
•: conducted a zero-based review of all positions in McLeodUSA in order to properly staff McLeodUSA; and
•: conducted a review of the assets and the liabilities of McLeodUSA, including a detailed review of the balance sheet.

As a result of these steps, in September 2001, McLeodUSA's board of directors approved its corporate strategy to focus on voice and data services for small and medium-sized business and

residential customers within its 25-state footprint. In support of this strategy, McLeodUSA announced plans to take the following actions:

•: abandon the development of its national network and place the associated assets for sale;
•: sell other non-core assets and excess inventory;
•: de-emphasize certain unprofitable wholesale services;
•: reduce employment by approximately 15%;
•: consolidate 11 facilities into 3;
•: reduce planned capital expenditures from $400 million to $350 million for 2002; and
•: take a one-time charge in the third quarter of approximately $2.9 billion. Of this, $2.1 billion was associated with goodwill and other intangible assets which originated from numerous acquisitions, most notably Splitrock. In addition, McLeodUSA reduced long-lived assets and construction work-in-progress associated with Splitrock by approximately $260 million to appropriately mark those assets to fair value.

As part of the 90-day planning process, McLeodUSA also recognized that, as a result of its ambitious growth strategy of prior years, it had not implemented sufficient processes and discipline to effectively execute and manage the business. As a result, McLeodUSA implemented five Business Process Teams to improve processes in an organized fashion. These teams are focused on improving five key areas:

•: sales efficiency;
•: provisioning of services and customer installation;
•: customer billing and revenue assurance;
•: cash management; and
•: business forecasting and planning.

The significant strategic and operational steps taken since August 2001 have repositioned McLeodUSA for the future. At the same time, however, the evaluation process has highlighted the difficulty of implementing McLeodUSA's plans with its current capital structure. Key challenges include:

•

the slowing economy, which has adversely affected demand for telecommunications services;

•

implementing the revised strategy, which requires numerous significant improvements in business processes and discipline;

•

recruiting and retaining quality management to execute the revised strategy;

•

improving key operations of the core retail CLEC, which is currently unprofitable. These include

—: completing McLeodUSA's in-region network and deploying over $1 billion of network assets currently not in service,
—: activating over 30 local/long distance switches in order to carry long distance traffic over McLeodUSA's network,
—: migrating customers from the MegaBells' networks and switches to those of McLeodUSA and
—: simplifying products.

•: improving core business processes based on the work of the Business Process Teams.

These operational initiatives present substantial challenges and will require significant management time and resources to implement. While the time required to achieve the benefits, if any, of these initiatives is uncertain, it is expected to be substantial. Upon review of this difficult operating environment, the many business practices to be improved, McLeodUSA's highly leveraged capital structure and expected future operating losses, the Board of Directors began considering capital structure alternatives. Beginning in mid-October of 2001, McLeodUSA began discussions with Forstmann Little regarding the restructuring of McLeodUSA's capital structure (referred to herein as the "Restructuring"). McLeodUSA then formed a special committee of its Board of Directors, comprised of persons not affiliated with Forstmann Little and not members of McLeodUSA's management, and retained Houlihan Lokey Howard & Zukin Capital and Skadden, Arps, Slate, Meagher & Flom (Illinois) as outside advisors to assist in exploring alternatives for the Restructuring of its capital structure.

After the Restructuring

Upon consummation of the Restructuring and giving effect to the sale of non-core businesses set forth in McLeodUSA's strategic restructuring plan and as contemplated by the Third Amendment (as defined herein) to the Credit Agreement (as defined herein), McLeodUSA's operations will consist primarily of its core retail CLEC business. To date, the core retail CLEC operations of McLeodUSA have not generated positive cash flow in any quarterly period. In addition the preponderance of historical EBITDA of McLeodUSA has been attributable to Pubco, ICTC and other non-core assets that McLeodUSA plans to sell. While the initiatives set forth in the strategic restructuring plan are designed to result in the core retail CLEC business eventually operating profitably, there can be no assurance that these steps will be successful in the time and magnitude expected. Moreover, the remaining operations are expected to continue generating negative cash from operations until fiscal 2005, even if McLeodUSA achieves its targeted level of EBITDA, as a result of capital expenditures and projected interest on the remaining amounts due under the Credit Agreement. Completion of asset sales within a time frame and for aggregate amounts described in McLeodUSA's business plan and retention of access to the amounts that remain available to borrow under the Credit Agreement are critical in funding McLeodUSA's operations.

Agreement with Senior Secured Lenders

Concurrently with the negotiations with Forstmann Little regarding a possible Restructuring, McLeodUSA and Forstmann Little began discussions with representatives of McLeodUSA's senior secured lenders for support of a Forstmann Little sponsored Restructuring involving a significant cash payment to Noteholders. Any restructuring involving a payment to Noteholders, other than regularly scheduled payments of principal and interest, requires majority consent under McLeodUSA's Credit Agreement dated May 31, 2001 between McLeodUSA and certain lenders (as amended, the "Credit Agreement"). After substantial negotiations, McLeodUSA and its senior secured lenders agreed to amend the Credit Agreement to permit the Restructuring (the "Third Amendment"). The key elements of the Restructuring that induced McLeodUSA's senior secured lenders to allow the sale of Pubco and the use of the proceeds therefrom to make a payment to the Noteholders were (1) the additional $100 million Forstmann Little investment, with $35 million applied to prepay the term loans under the Credit Agreement, (2) Forstmann Little's commitment to purchase Pubco for $535 million subject only to completion of the Restructuring and other customary closing conditions, (3) Forstmann Little's substantial continued involvement in the operations and corporate governance of McLeodUSA, (4) McLeodUSA's commitment to sell ICTC and use the first $225 million in net proceeds to prepay the term loans under the Credit Agreement, (5) McLeodUSA's commitment to use the first $25 million of any additional net proceeds from the sale of Pubco to prepay the term loans, (6) a permanent reduction of $140 million of revolving credit commitments under the Credit Agreement upon

completion of the Restructuring, and (7) a 1.00% increase in interest rates, (8) amendment and arranger fees and (9) modification of financial and restrictive covenants under the Credit Agreement.

Any changes to the terms of the Restructuring that are materially inconsistent with the plan approved by the senior secured lenders, or that have an adverse effect on the senior secured lenders, would require the majority consent of McLeodUSA's senior secured lenders. Specifically, the Third Amendment requires that Forstmann Little have approximately a 40% ownership stake in McLeodUSA upon consummation of the Restructuring. McLeodUSA does not believe that its senior secured lenders would consent to any restructuring involving a payment to the Noteholders without the substantial commitments provided by Forstmann Little and Forstmann Little's continued involvement in the operations of McLeodUSA. In addition, there can be no assurance that Forstmann Little would invest $100 million in McLeodUSA unless the Restructuring were consummated on substantially the same terms as those described in this Offering Memorandum and Disclosure Statement.

The operative effects of many of the amendments and waivers contained in the Third Amendment will terminate if McLeodUSA fails to satisfy certain "progress conditions" on a timely basis. One important progress condition is that the Restructuring be completed on or before August 1, 2002. The complete list of progress conditions is set forth in the Third Amendment which we filed as an exhibit to our Current Report on Form 8-K on December 7, 2001.

McLeodUSA expects to obtain an interim financing facility of up to $50 million as a debtor-in-possession financing facility in the event McLeodUSA pursues the Restructuring through a Chapter 11 case. In addition, McLeodUSA expects to obtain an exit financing facility in an amount up to $160 million that would be available upon the consummation of a plan in a Chapter 11 case. The exit facility would be used to provide working capital for its future operations and to repay any amounts outstanding under any debtor-in-possession financing facility. While McLeodUSA has not yet obtained firm commitments for such facilities, it expects to obtain such commitments prior to filing a Chapter 11 case.

RESTRUCTURING

The Financial Restructuring

Together with its outside advisors, McLeodUSA considered a number of strategic alternatives with respect to a financial Restructuring. Management and the special committee engaged in extensive negotiations with Forstmann Little to sponsor a comprehensive transaction that would result in a substantial deleveraging of McLeodUSA. The proposed transaction will result in the elimination of $2.9 billion of note indebtedness, provide a substantial cash payment to Noteholders, require a $100 million new money investment from Forstmann Little and contemplate a substantial on-going involvement of Forstmann Little in the operations of McLeodUSA. Concurrently with such negotiations, McLeodUSA and Forstmann Little engaged in extensive negotiations with McLeodUSA's bank group under the Credit Agreement to obtain the Third Amendment to permit the Restructuring.

The material elements of the Restructuring are as follows:

Treatment of Notes

In full and complete satisfaction of McLeodUSA's obligations under the Notes, Noteholders will receive up to:

•: $560 million in cash, available from the sale of Pubco ($535 million) and a portion of Forstmann Little's new money investment ($25 million) which will be applied to the Notes, plus
•: 56,813,984 shares of the Class A common stock, representing approximately 15% of the Class A common stock as of the closing of the Exchange Offer, subject to dilution.

Upon consummation of the Exchange Offer, each Noteholder that validly tenders, and does not withdraw, Notes will receive a pro rata portion of $560 million of cash and 56,813,984 shares of Class A common stock based upon the ratio of (x) the principal and accreted amount of the Notes tendered by such Noteholder plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the exchange offer, to (y) the principal and accreted amount of all outstanding Notes plus all accrued and unpaid interest thereon as of the day immediately preceding the closing of the Exchange Offer.

Treatment of Preferred Stock

McLeodUSA's outstanding Series A, Series D and Series E preferred stock will be converted into 196,399,008 shares of Class A common stock, representing approximately 52% of the Class A common stock expected to be outstanding upon consummation of the Restructuring, subject to dilution. The pro rata distribution of this Class A common stock will be based on the relative liquidation preferences of and accrued dividends on, each of the series of outstanding preferred stock, resulting in the following distribution:

•: holders of the Series A preferred stock will receive their pro rata share of 44,883,856 shares of Class A common stock, representing approximately 11.9% of the Class A common stock expected to be outstanding upon consummation of the Restructuring, subject to dilution;
•: holders of the Series D preferred stock will receive their pro rata share of 104,166,667 shares of Class A common stock, representing approximately 27.5% of the Class A common stock expected to be outstanding upon consummation of the Restructuring, subject to dilution; and
•: holders of the Series E preferred stock will receive their pro rata share of 47,348,485 shares of Class A common stock, representing approximately 12.5% of the Class A common stock expected to be outstanding upon consummation of the Restructuring, subject to dilution.

Common Stock

On the effective date of the Restructuring, existing holders of the Class A common stock will have approximately 33.1% of the Class A common stock expected to be outstanding upon consummation of the Restructuring, subject to dilution.

Summary of Restructuring Plan

Consideration

	Cash		Estimated Number of Shares and % of Common Stock Ownership
			Before Dilution			After Dilution(1)
Noteholders	$	560,000,000	56,813,984	15.0	%	56,813,984	13.7	%
Series A Preferred Stock			44,883,856	11.9	%	44,883,856	10.8	%
Series D Preferred Stock			104,166,667	27.5	%	104,166,667	25.1	%
Series E Preferred Stock			47,348,485	12.5	%	47,348,485	11.4	%
Class A Common Stock			125,546,898	33.1	%	125,546,898	30.2	%
New Preferred Stock			NA	NA		36,433,233	8.8	%

			378,759,890	100.0	%	415,193,123	100.0	%

Sources and Uses of Cash
($ in millions)

Sources
	Sale of Pubco	$	535
	Forstmann Little Investment		100
	Working Capital/Available Cash		25

		$	660

Uses
	Cash Payment to Noteholders	$	560
	Mandatory Pre-Payment on Term Loans		35
	Fees and Expenses		65

		$	660

(1): Estimated common stock ownership after giving effect to the mandatory conversion of the new preferred stock issued to Forstmann Little at an assumed price per share equal to the reorganization equity value per share of $2.74 prior to dilution for warrants and the management incentive plan. See "Valuation Analysis."

While McLeodUSA believes the percentage estimates set forth above and referenced to elsewhere in this Offering Memorandum and Disclosure Statement are helpful in describing the allocation of Class A common stock among the Noteholders, preferred stockholders and current Class A common stockholders, there can be no assurance that actual allocations will correspond exactly to these estimated percentages.

Agreements with Forstmann Little

In order to raise the funds required to implement the Restructuring, McLeodUSA has entered into three agreements with Forstmann Little.

Stock Purchase Agreement

McLeodUSA Holdings, Inc. has entered into a Stock Purchase Agreement, dated as of December 3, 2001 (the "Stock Purchase Agreement"), which provides for the sale of Pubco to Pubco Acquisition Corp., an affiliate of Forstmann Little ("Pubco Acquisition"), for $535 million in cash. A copy of the Stock Purchase Agreement is filed as an exhibit to McLeodUSA's Current Report on Form 8-K filed with the SEC on December 7, 2001. The following summary of the Stock Purchase Agreement is qualified in its entirety by reference to the Stock Purchase Agreement.

The Stock Purchase Agreement contains customary representations, warranties, covenants, agreements and indemnities.

The Stock Purchase Agreement also provides McLeodUSA with the right to terminate the Stock Purchase Agreement to enter into an alternative agreement with a third party that provides for the sale of Pubco at a higher price, subject to certain conditions including the requirement that the consummation of the alternative transaction be conditioned upon the consummation of a capital restructuring that does not materially deviate from the terms of the Restructuring described in this Offering Memorandum and Disclosure Statement. No termination fees or other expenses are payable to Forstmann Little in connection with such a termination. McLeodUSA has retained a nationally

recognized investment banking firm to commence a marketing process in an effort to obtain a higher price and otherwise better bids for Pubco.

The Stock Purchase Agreement provides McLeodUSA with certain rights relating to future dispositions of Pubco. For two years after the consummation of the Stock Purchase Agreement, McLeodUSA has a right of first offer to purchase Pubco Acquisition. Generally, this right of first offer requires Pubco Acquisition to offer to sell Pubco to McLeodUSA prior to selling it to a third party. The Stock Purchase Agreement also provides that if Pubco Acquisition sells Pubco during the one year period after the consummation of the Stock Purchase Agreement, Pubco Acquisition will pay McLeodUSA 50% of the sales proceeds in excess of the price Pubco Acquisition paid for Pubco in the Stock Purchase Agreement, subject to certain adjustments.

The Stock Purchase Agreement also provides that Pubco Acquisition will enter into a Publishing, Branding and Operating Agreement, which provides for the continued publication of telephone directories for an initial term of five years following the consummation of the Stock Purchase Agreement.

The consummation of the Stock Purchase Agreement is subject to the following conditions:

•: no statute, rule, regulation, executive order, decree, or injunction shall have been enacted, entered, promulgated or enforced by any court or governmental entity which prohibits or restricts the consummation of the stock purchase;
•: all required consents, approvals, orders and permits of, and registrations, declarations and filings with, any governmental authority shall have been made or obtained, and any waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1974, as amended, shall have terminated or expired;
•: all conditions precedent to the consummation of the Restructuring shall have been satisfied and the Restructuring shall be occurring simultaneously;
•: the representations and warranties of the other party are true and correct as of the closing date as if made at and as of such date, except where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to "materiality" or "material adverse effect" set forth therein) would not, individually or in the aggregate, have a material adverse effect; and
•: the other party performed and complied in all material respects with all agreements, obligations, covenants and conditions contained in the Stock Purchase Agreement.

Publishing, Branding and Operating Agreement

One of the conditions to closing of the Stock Purchase Agreement is that McLeodUSA Publishing Company (the "Publisher"), McLeodUSA, McLeodUSA Telecommunications Services Inc., and Pubco Acquisition enter into a Publishing, Branding and Operating Agreement (the "Operating Agreement") in the form attached as an exhibit to the Stock Purchase Agreement. The following summary of the Operating Agreement is qualified in its entirety by reference to the form of Operating Agreement attached to the Stock Purchase Agreement which is filed as an exhibit to McLeodUSA's Current Report on Form 8-K filed with the SEC on December 7, 2001.

The Operating Agreement provides for the continued publication of telephone directories by the Publisher following the consummation of the Stock Purchase Agreement and in many ways documents the existing practices of the Publisher with respect to the publication of McLeod-branded telephone directories. The term of the Operating Agreement is five years (unless terminated earlier for cause, change of control, or by mutual agreement) with automatic one-year renewals thereafter unless a party elects not to renew and provides one years' notice.

The Operating Agreement grants the Publisher a license to use the principal McLeodUSA trademarks to publish telephone directories. It also requires the Publisher to publish certain telephone directories using those trademarks. Following the termination of the Operating Agreement, the Publisher will continue to own the right to publish a directory that looks like the directories it currently publishes (although it may not continue to use the McLeodUSA star).

The Operating Agreement prohibits McLeodUSA from competing with Pubco Acquisition and its subsidiaries during the term in its core businesses, and similarly prohibits Pubco Acquisition and its subsidiaries from competing with McLeodUSA during the term in its core businesses.

Preferred Stock and Warrant Purchase Agreement

McLeodUSA has entered into a Preferred Stock and Warrant Purchase Agreement, dated as of December 3, 2001 (the "Purchase Agreement"), which provides for the sale of preferred stock and warrants to Forstmann Little, for $100 million in cash. A copy of the Purchase Agreement is filed as an exhibit to McLeodUSA's Current Report on Form 8-K filed with the SEC on December 7, 2001. The following summary of the Purchase Agreement is qualified in its entirety by reference to the Purchase Agreement.

The Purchase Agreement provides for the issuance of Series F and Series G preferred stock (collectively, the "New Preferred Stock"). The Series F preferred stock is mandatorily convertible into shares of Class A common stock on the 60th day following the effective date of the Restructuring in an amount equal to (x) $10.00 divided by the average share price of Class A common stock calculated as the mathematical average of the closing price per share of Class A common stock on 10 randomly selected trading days during the 60-day period following the effective date of the Restructuring (excluding the 2 high and 2 low prices and taking an average of the remaining 6) multiplied by (y) 10 million shares. The Series G preferred stock provides Forstmann Little with the right to designate members of the Board of Directors and/or a non-voting observer to the Board of Directors as follows:

•: If Forstmann Little owns at least 40% of the shares of Class A common stock it will own upon consummation of the Restructuring, Forstmann Little will have the right to designate 2 members of the Board of Directors.
•: If Forstmann Little owns less than 40%, but more than 20%, of such shares, Forstmann Little will have the right to designate 1 member of the Board of Directors and 1 non-voting observer to the Board of Directors.
•: If Forstmann Little owns 20% or less, but at least 10%, of such shares, Forstmann Little will have the right to designate 1 non-voting observer to the Board of Directors.
•: If Forstmann Little owns less than 10% of such shares, Forstmann Little will have no rights to designate either members of the Board of Directors or non-voting observers to the Board of Directors.

The Series G preferred stock otherwise will not provide for any dividend, liquidation or other preferences.

The Purchase Agreement also provides for the sale of approximately 18.9 million new warrants (the "New Warrants") to affiliates of Forstmann Little. Each New Warrant entitles the holder to purchase one share of Class A common stock at an exercise price equal to 150% of the average share price of the Class A common stock, calculated as the mathematical average of the closing price per share of Class A common stock on 10 randomly selected trading days during the 60-day period following the effective date of the Restructuring (excluding the 2 high and 2 low prices and taking an average of the remaining 6) pursuant to a formula contained in the related warrant agreement.

Pursuant to their terms, the New Warrants expire on the fifth anniversary of the consummation of the Restructuring.

Assuming that the average price of Class A common stock is equal to the reorganization equity value per share upon the date of conversion of the New Preferred Stock, Forstmann Little would receive approximately 36.4 million shares of Class A common stock representing roughly 8.8% of all such stock outstanding prior to consideration of any management options.

The Purchase Agreement also provides Forstmann Little with the right to designate observers to the Board of Directors in connection with maintaining the venture capital operating company status of Forstmann Little's investment in McLeodUSA.

In addition to similar conditions as those contained in the Stock Purchase Agreement described above, the consummation is subject to certain additional conditions, including the condition that McLeodUSA's certificate of incorporation be amended to provide that McLeodUSA will not be governed by Section 203 of the Delaware General Corporation Law. McLeodUSA intends to submit a proposal to amend the certificate of incorporation to elect not to be governed by Section 203 at the special meeting of its stockholders to consider the Restructuring.

Upon the consummation of the Purchase Agreement, the existing transfer restrictions applicable to Forstmann Little's Series D and E preferred stock will terminate. Following the consummation of the Purchase Agreement, Forstmann Little may transfer shares of Class A common stock, preferred stock and warrants; provided that prior to the Standstill Termination Date (as defined below), Forstmann Little may not make any transfers (other than transfers to affiliates) to any person or group which is, or which Forstmann Little believes or should reasonably believe will seek to become, the beneficial owner of more than 50% of McLeodUSA's voting securities (a "Disqualified Transaction") without the consent of the Board of Directors of McLeodUSA, unless Forstmann Little provides McLeodUSA with a notice of setting forth the minimum cash price at which Forstmann Little would be prepared to sell the securities. McLeodUSA then has 45 days to purchase or cause a designee to purchase the securities. If no agreement providing for the purchase of the securities is entered into within 45 days, Forstmann Little has the right for 180 days to sell the securities to any person at a price no less than the price specified in the notice.

The "Standstill Termination Date" means the earlier of the third anniversary of the closing of the Purchase Agreement or the date Theodore J. Forstmann is removed, without his consent, as the Chairman of the Executive Committee of the Board of Directors.

During the period of time from the closing of the Purchase Agreement until the Standstill Termination Date, except as specifically approved in writing in advance by the Board of Directors, Forstmann Little shall not directly or indirectly:

•: acquire, or offer or agree to acquire, or become the beneficial owner of or obtain any rights in respect of, any capital stock of McLeodUSA;
•: solicit or participate in the solicitation of any person to acquire, offer to acquire or agree to acquire, by merger, tender offer, purchase or otherwise, McLeodUSA or initiate or become a participant in any stockholder proposal or election contest or induce others to initiate the same, or otherwise seek to advise or influence any person with respect to the voting of any voting securities of McLeodUSA; or
•: solicit or participate in the solicitation of any person to acquire, offer to acquire or agree to acquire, by merger, tender offer, purchase or otherwise, McLeodUSA or a substantial portion of its assets or more than 50% of its outstanding capital stock; provided, that, these restrictions do not apply to actions taken by Forstmann Little in connection with the sale of any of its own securities.

During the period from the closing of the Purchase Agreement until the Standstill Termination Date, Forstmann Little agrees to be present, in person or by proxy at all meetings of stockholders of McLeodUSA so that all of its voting securities are counted for purposes of determining the presence of a quorum at such meetings. During such period, Forstmann Little agrees to vote its securities in all elections of directors such that (i) at least five members of the Board of Directors are qualified as "independent directors" and (ii) the Chairman, the Chief Executive Officer, and the Chief Financial Officer of McLeodUSA are elected as members to the Board of Directors.

The Purchase Agreement also prohibits McLeodUSA from adopting or implementing any stockholders rights plan or "poison pill" as long as Forstmann Little holds 60% of the McLeodUSA securities (on a fully converted basis) it owned at the consummation of the Purchase Agreement. If Forstmann Little owns less than 60% of such securities or sells its securities in a Disqualified Transaction, McLeodUSA may adopt a rights plan subject to certain restrictions.

The consummation of the Purchase Agreement is subject to the same conditions as the Stock Purchase Agreement.

Management Incentive Plan

The Board of Directors has approved, subject to approval by the stockholders of McLeodUSA the adoption of the McLeodUSA 2001 Omnibus Equity Plan (the "Management Incentive Plan").

The Management Incentive Plan is intended to promote the interests of McLeodUSA and its stockholders by providing officers and other employees (including directors who are also employees) with appropriate incentives and rewards to encourage them to enter into and continue in the employ of McLeodUSA and to acquire a proprietary interest in the long-term success of McLeodUSA and to reward the performance of individual officers, other employees, consultants and nonemployee directors in fulfilling their personal responsibilities for long-range achievements.

The Management Incentive Plan is intended to provide performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "IRC"), which generally limits the deduction by an employer for compensation of certain covered officers. Under Section 162(m), certain compensation, including compensation based on the attainment of performance goals, may be disregarded for purposes of this deduction limit if certain requirements are met. Among the requirements for compensation to qualify for this exception is that the material terms pursuant to which the compensation is to be paid be disclosed to and approved by the stockholders in a separate vote prior to the payment. Accordingly, if the Management Incentive Plan is approved by stockholders and the other conditions of Section 162(m) relating to performance-based compensation are satisfied, compensation paid to covered officers pursuant to the Management Incentive Plan will not fail to be deductible under Section 162(m).

There are generally five types of awards that may be granted under the Management Incentive Plan: restricted stock options (including both ISOs and NQSOs (each as defined herein), phantom stock, stock bonus awards, and other awards (including stock appreciation rights). In addition, the Compensation Committee of the Board of Directors (the "Compensation Committee") may, in its discretion, make other awards valued in whole or in part by reference to, or otherwise based on, Class A common stock.

Credit Agreement Amendment

On May 31, 2000, the Company entered into $1.3 billion of Senior Secured Credit Facilities with a syndicate of financial institutions. In order to facilitate the Restructuring, McLeodUSA has entered into the Third Amendment. The following summary of the Third Amendment is qualified in its entirety by reference to the Third Amendment.

Under the Third Amendment, the lenders waived:

•: any bankruptcy and payment cross-defaults with respect to the Notes that may arise in connection with the Restructuring;
•: covenants respecting sales of assets in order to allow the sale of Pubco to proceed pursuant to the Restructuring and the use of $535 million of the proceeds therefrom to make a payment to the Noteholders; and
•: certain other covenants and other provisions of the Credit Agreement that would have restricted McLeodUSA's ability to enter into various transactions necessary to consummate the Restructuring.

In return for the lenders' consent to the Third Amendment, McLeodUSA agreed that the following amounts will be paid on a current basis during the Restructuring:

•: all interest, commitment fees, letter of credit participation fees and fronting fees when due pursuant to the terms of the Credit Agreement;
•: all fees and expenses payable to the agent under any debtor-in-possession facility, including the reasonable fees and disbursements of counsel; and
•: an amendment fee payable upon consummation of the Restructuring to each lender that agreed to the Third Amendment equal to 1.00% of the aggregate amount of each consenting lender's exposure under the Credit Agreement.

McLeodUSA also agreed to limit any additional borrowings under the Credit Agreement to $50 million until the Restructuring is completed pursuant to the Out-of-Court alternative discussed below, McLeodUSA files for Chapter 11 protection or McLeodUSA advises the lenders that it is no longer pursuing the Restructuring.

The waivers and modifications to the Credit Agreement described above will remain in effect so long as McLeodUSA is pursuing the Restructuring as outlined in this Offering Memorandum and Disclosure Statement unless McLeodUSA fails to satisfy any "progress condition" on a timely basis. The progress conditions include a requirement that the Restructuring be consummated on or before August 1, 2002. The progress conditions also require McLeodUSA to continue in good faith to seek consummation of the Restructuring prior to such date in the event bankruptcy proceedings are commenced with respect to McLeodUSA or any of its subsidiaries. Also if bankruptcy proceedings are commenced in connection with the Restructuring, orders respecting use of the lenders' cash collateral and approving any debtor-in-possession financing must be in the forms attached to the Third Amendment or otherwise in accordance with terms agreeable to the lenders.

McLeodUSA will be deemed to have breached a progress condition if any bankruptcy proceedings shall have been dismissed or converted to liquidation proceedings under Chapter 7 of the Bankruptcy Code, a trustee shall have been appointed, or the exclusive period during which McLeodUSA may file and propose a plan is not in full force and effect. McLeodUSA is restricted, during the course of any bankruptcy proceeding, from challenging the lenders' liens, and any such challenge raised by a third party must be dismissed before the effective date of the Restructuring or August 1, 2002 without adverse consequence to the lenders. Finally, no event shall have occurred in any such proceedings that would constitute an event of default under the Credit Agreement (other than those events of default waived in order to permit the Restructuring).

If the Restructuring is consummated pursuant to the Plan through Chapter 11 proceedings, the Plan must provide that the liens and claims of the lenders under the Credit Agreement will be

unimpaired. The Third Amendment also contains certain modifications to the Credit Agreement that will become effective only upon consummation of the Restructuring, including:

•: an agreement to use $35 million of Forstmann Little's new $100 million investment to prepay the term loans under the Credit Agreement;
•: an agreement that requires McLeodUSA to sell, or have entered into a contract to sell (which may be subject to regulatory approval and certain other customary closing conditions) Illinois Consolidated Telephone Company (or substantially all of its assets) within 14 months of the consummation of the Restructuring and to apply the first $225 million in proceeds from such sale to reduce McLeodUSA's outstanding obligations under the Credit Agreement. McLeodUSA is permitted to retain proceeds in excess of $225 million from such sale for working capital and general corporate purposes. If McLeodUSA does not complete the Illinois Consolidated Telephone Company sale within two years of the consummation of the Restructuring, $225 million of term loans under the credit agreement will be subject to additional interest of 1.50% per annum until such sale is completed;
•: an agreement to allow McLeodUSA to retain the proceeds of certain non-core asset sales;
•: the modification of various financial covenants and the addition of a capital expenditure limitation;
•: a 1.00% increase in the applicable rates of interest on the borrowings under the Credit Agreement and the establishment of certain prepayment premiums applicable to the Credit Agreement term loan repayments made in the first three years following the Restructuring;
•: an agreement that McLeodUSA may enter into an exit financing facility upon consummation of the Restructuring in an amount not to exceed $160 million, secured by liens on and security interests in the assets of McLeodUSA and its domestic subsidiaries superior to the liens securing the existing obligations under the Credit Agreement; and
•: additional limitations on the ability of McLeodUSA and its subsidiaries to incur third-party indebtedness and make additional investments.

If the Restructuring is consummated pursuant to the Out-of-Court Restructuring discussed below, the revolving loan commitment of the lenders under the Credit Agreement will be reduced by $140 million, which will reduce the current revolving credit commitment of the lenders to $310 million.

Finally, whether or not the Restructuring is consummated, McLeodUSA agreed in the Third Amendment to additional restrictions relating to the incurrence of third-party indebtedness and making of additional investments.

While the Third Amendment permits both a $50 million debtor-in-possession financing facility and a $160 million exit financing facility, McLeodUSA has not yet obtained firm commitments for such facilities. McLeodUSA expects to have such commitments prior to filing any case under Chapter 11 of the Bankruptcy Code.

Alternative Means for Implementing the Restructuring

McLeodUSA is simultaneously pursuing the Restructuring via two alternative mechanisms: (1) the out-of-court alternative and (2) the in-court alternative. Each of these alternatives is described in detail in this Offering Memorandum and Disclosure Statement. Noteholders are being requested to take action onboth mechanisms.

Out-of-Court Alternative

The out-of-court Restructuring (the "Out-of-Court Restructuring") is comprised of the following elements:

Exchange Offer and Consent Solicitation. Pursuant to this Offering Memorandum and Disclosure Statement, McLeodUSA is:

•: offering to exchange the Notes for each Noteholder's pro rata share of (i) $560 million in cash plus (ii) 56,813,984 shares of Class A common stock, representing approximately 15% of the Class A common stock expected to be outstanding upon consummation of the Exchange Offer, subject to dilution; and
•: seeking the approval of Noteholders to certain amendments to the Indentures. See "Terms and Conditions of the Exchange Offer and Consent Solicitation—The Consent Solicitation."

The terms of the Exchange Offer and consent solicitation are described in more detail in this Offering Memorandum and Disclosure Statement. Among other things, the consummation of the Exchange Offer is conditioned on at least 95% of the aggregate principal and accreted amount of the Notes being validly tendered and not withdrawn prior to the Expiration Date, favorable votes on the Restructuring from McLeodUSA's preferred and common stockholders, the consummation of the sale of Pubco and the consummation of the sale of the New Preferred Stock and the New Warrants. See "Terms and Conditions of the Exchange Offer and Consent Solicitation."

Special Meeting of Stockholders. The Out-of-Court Restructuring requires the approval of McLeodUSA's preferred and common stockholders. McLeodUSA intends to call a special meeting of its stockholders as soon as practicable to consider the Restructuring and to vote on the following proposals:

•: the reclassification of the Series A preferred stock into Class A common stock on a basis of 39.05⁽¹⁾ shares of Class A common stock for each share of Series A preferred stock (based on the $250 liquidation preference per share of the Series A preferred stock plus accrued dividends);
•: the reclassification of the Series D and E preferred stock into Class A common stock on a basis of 378.79⁽¹⁾ shares of Class A common stock for each share of Series D and Series E preferred stock (based on the $2,500 liquidation preference per share of the Series D and Series E preferred stock);
•: a 5-to-1 reverse stock split of the outstanding Class A common stock;
•: the issuance of Class A common stock in the Restructuring;
•: the amendment of the certificate of incorporation to provide that McLeodUSA shall not be subject to the provisions of Section 203 of the Delaware General Corporate Law; and
•: the adoption of the Management Incentive Plan (together with the five preceding proposals, the "Restructuring Proposals").

The Restructuring Proposals require the following stockholder votes:

•: the Series A reclassification requires the approval of the holders of a majority of the outstanding Series A preferred stock voting as a separate class and the approval of holders of a majority of the outstanding Class A common stock;

⁽¹⁾: The conversion ratio is based on 627,734,497 shares of Class A common stock issued and outstanding as of November 5, 2001. Such conversion ratio will be adjusted to effect the post-transaction ownership levels set forth herein, to the extent the issued and outstanding shares differs.

•: the Series D and E reclassification requires the approval of the holders of a majority of the outstanding Series D and E preferred stock each voting as a separate class and the approval of holders of a majority of the outstanding Class A common stock;
•: the reverse stock split and the amendment to the certificate of incorporation each require the approval of the holders of a majority of the outstanding Class A common stock; and
•: the remaining proposals require the approval of a majority of the Class A common stock present in person or by proxy at the special meeting.

The consummation of the Out-of-Court Restructuring is conditioned upon the approval of each of the Restructuring Proposals by the requisite vote of McLeodUSA's stockholders, as well as the consummation of the Exchange Offer.

In-Court Alternative

If McLeodUSA concludes that it would be more advantageous or expeditious, McLeodUSA may elect to effectuate the Restructuring by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and seeking court approval of the Restructuring.

To facilitate court approval of the in-court Restructuring (the "In-Court Restructuring"), McLeodUSA is soliciting acceptances of the Plan, a copy of which is attached hereto as Appendix I. The Plan contains the terms of the Restructuring as described in this Offering Memorandum and Disclosure Statement, which will, if approved, result in the same distributions as would be effectuated through the Out-of-Court Restructuring.

Support for the Restructuring

Forstmann Little, as the holder of 100% of the Series D and Series E preferred stock with an aggregate liquidation preference of $1 billion, supports the Restructuring and has executed a Lock-Up and Voting Agreement requiring Forstmann Little to vote in favor of the stockholder proposals relating to the Restructuring and the Plan.

McLeodUSA's executive officers and directors, as a group, directly own approximately 67.3 million shares of Class A common stock. Such officers and directors have advised McLeodUSA that they intend to vote in favor of the Restructuring, including the Plan.

Recommendation of the Restructuring

The special committee considered a number of alternatives with respect to Restructuring McLeodUSA's capital structure, held numerous lengthy meetings, discussed the Restructuring with its advisors, and engaged in extensive negotiations with representatives of Forstmann Little regarding the sale of Pubco and the Restructuring. In addition, the special committee, through senior management, was involved in negotiations with representatives of McLeodUSA's senior secured lenders regarding amendments to the Credit Agreement. After considering alternatives, and in light of these extensive negotiations, the special committee recommended the Restructuring to McLeodUSA's Board of Directors.

The disinterested members of McLeodUSA's Board of Directors have unanimously approved the terms of the Restructuring, including the terms of the Exchange Offer and consent solicitation contained in this Offering Memorandum and Disclosure Statement, upon the recommendation of the special committee. However, McLeodUSA's Board of Directors has not made any decision to commence a Chapter 11 case or approved the filing of a petition for relief under Chapter 11 of the Bankruptcy Code.

Estimated Fees and Expenses

McLeodUSA estimates that fees and expenses incurred in connection with the Restructuring will be approximately $65 million, consisting of:

•: $31.6 million of legal and financial advisors fees;
•: $28 million of arranger and amendment fees; and
•: $5.4 million of other fees and expenses.

McLeodUSA will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Offering Memorandum and Disclosure Statement and related documents to the beneficial owners of the Notes and in handling or forwarding tenders of their customers.

McLeodUSA anticipates that a substantial portion of the fees referenced above will be paid at the consummation of the Restructuring, which is estimated to be on or before March 31, 2002.

Certain Effects on Non-Tendering Noteholders

The Out-of-Court Restructuring will have certain adverse consequences to non-tendering Noteholders including the following: (i) if the Exchange Offer is consummated, the Indentures relating to the Notes will be amended to eliminate substantially all the covenant protection therein, (ii) the trading market for untendered Notes will become significantly more limited, which may adversely affect the liquidity and market price of the untendered Notes and (iii) non-tendering Noteholders may be deemed to have exchanged their "old" Notes for "new" Notes in a taxable exchange for United States federal income tax purposes.

If the Plan is accepted by all requisite classes and is consummated, Noteholders will receive the same consideration offered in the Exchange Offer regardless of whether such Noteholders voted to accept the Plan.

VALUATION ANALYSIS

McLeodUSA has been advised by Houlihan with respect to the reorganization equity value of reorganized McLeodUSA. The reorganization equity value, which includes McLeodUSA's operating business, the expected present value of certain non-core assets, and takes into account the estimated debt balances at and beyond the Effective Date (as defined herein), was estimated by Houlihan to be approximately $1.15 billion as of an assumed Effective Date of March 31, 2002 and giving effect to the divestiture of Pubco on the assumed Effective Date and to the divestiture of (1) ICTC and (2) McLeodUSA's South Dakota ILEC, CLEC and cable assets (collectively "DTG"), both of which are assumed to occur within 14 months of the Effective Date. The foregoing reorganization equity value (ascribed as of the date of this Offering Memorandum and Disclosure Statement) reflects, among other things, factors discussed below, current financial market conditions, and the inherent uncertainty as to the achievement of the Projections.

Based on the assumed reorganization equity value set forth above, the value of the 378.8 million shares of Class A common stock to be outstanding is estimated to be approximately $2.74 per share, after giving effect to the potentially dilutive impact of the New Warrants, New Preferred Stock, and the Management Incentive Plan. The foregoing valuation also reflects a number of assumptions, including a successful reorganization of McLeodUSA's business and finances in a timely manner, the amount of available cash, market conditions, and the Restructuring becoming effective in accordance with its terms on a basis consistent with the estimates and other assumptions discussed herein.

In preparing the estimated reorganization equity value, Houlihan: (a) reviewed certain historical financial information of McLeodUSA for recent years and interim periods; (b) reviewed certain internal financial and operating data of McLeodUSA and assisted in developing financial projections relating to its businesses and prospects; (c) met with certain members of senior management of McLeodUSA to discuss McLeodUSA's operations and future prospects; (d) reviewed publicly available financial data and considered the market values of public companies that Houlihan deemed generally comparable to the operating businesses of McLeodUSA; (e) reviewed the financial terms, to the extent publicly available, of certain acquisitions of companies that Houlihan believes were comparable to the operating businesses of McLeodUSA; (f) considered certain economic and industry information relevant to McLeodUSA's operating business; (g) visited certain of McLeodUSA's facilities; and (h) conducted such other analyses as Houlihan deemed appropriate under the circumstances. Although Houlihan conducted a review and analysis of McLeodUSA's business, operating assets and liabilities and business plans, Houlihan assumed and relied on the accuracy and completeness of all financial and other information furnished to it by McLeodUSA. No independent evaluations or appraisals of McLeodUSA's assets were sought or were obtained in connection therewith.

Estimates of reorganization equity value do not purport to be appraisals, nor do they necessarily reflect the values that might be realized if assets were sold. The estimates of reorganization equity value prepared by Houlihan assume that reorganized McLeodUSA continues as the owner and operator of its businesses and assets (other than Pubco, ICTC, DTG and other non-core assets assumed to be divested). Such estimates were developed solely for purposes of formulation of the Restructuring and the analysis of implied relative recoveries to creditors thereunder. Such estimates reflect computations of the estimated reorganization equity value of reorganized McLeodUSA through the application of various valuation techniques and do not purport to reflect or constitute appraisals, liquidation values or estimates of the actual market values that may be realized through the sale of any securities to be issued pursuant to the restructuring, which may be significantly different from the amounts set forth herein. The value of an operating business is subject to uncertainties and contingencies that are difficult to predict and will fluctuate with changes in factors affecting the financial conditions and prospects of such a business. As a result, the estimate of reorganization equity value set forth herein is not necessarily indicative of actual outcomes, which may be significantly more or less favorable than those set forth herein. Depending on the results of McLeodUSA's operations or

changes in the financial markets, Houlihan's valuation analysis as of the effective date may differ from that disclosed herein.

In addition, the valuation of newly-issued securities is subject to additional uncertainties and contingencies, all of which are difficult to predict. Actual market prices of such securities at issuance will depend upon, among other things, prevailing interest rates; conditions in the financial markets; the anticipated initial securities holdings of prepetition creditors, some of which may prefer to liquidate their investment rather than hold it on a long-term basis; and other factors that generally influence the prices of securities. Actual market prices of such securities also may be affected by other factors not possible to predict. Accordingly, the reorganization equity value estimated by Houlihan does not necessarily reflect, and should not be construed as reflecting, values that will be attained in the public or private markets. The equity value ascribed in the analysis does not purport to be an estimate of the post-reorganization market trading value. Such trading value may be materially different from the reorganization equity value ranges associated with Houlihan's valuation analysis.

SUMMARY UNAUDITED HISTORICAL AND PRO FORMA CAPITALIZATION

The following table sets forth the capitalization of McLeodUSA as of September 30, 2001, and as adjusted to give effect to the Out-of-Court Restructuring and the Splitrock Disposition as though they had become effective on September 30, 2001. The adjustments giving effect to the Restructuring assume 100% of the Notes are exchanged. If less than 95% of the Notes are tendered and McLeodUSA elects to waive the minimum tender condition and accept the tendered Notes for exchange, such acceptance would have a material effect upon the information presented below. In such event McLeodUSA will update the information to reflect the actual amount of Notes tendered and will provide such updated information to Noteholders. The information presented below should be read in conjunction with the Consolidated Financial Statements, the Unaudited Pro Forma Financial Information and related notes appearing elsewhere herein.

					September 30, 2001
(In millions, except shares)					Historical			Total Pro Forma
					(unaudited)			(unaudited)
Long-term debt (excludes current maturities)						3,694.0		747.9	(1)(2)
Redeemable convertible preferred stock
	Preferred, Series B, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical none; pro forma none					—		—
	Preferred, Series C, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical none; pro forma none					—		—
	Preferred, Series D, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical 275,000; pro forma none					104.0		—
	Preferred, Series E, redeemable, convertible, $.01 par value, authorized, issued and outstanding historical 125,000; pro forma none					43.0		—

			Total redeemable convertible preferred stock			147.0		—

Stockholders' Equity
	Capital Stock:
		Preferred, Series A, $.01 par value: authorized, issued and outstanding historical 1,149,375 shares; pro forma none				—		—
		Common, Class A, $.01 par value; authorized 2,000,000,000 shares; issued and outstanding historical 626,950,228 shares; pro forma 415,036,271 shares				6.3		4.1
		Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares; issued and outstanding historical and pro forma none				—		—
Additional paid-in capital						3,843.2		4,092.9
Accumulated deficit						(3,621.1	)	(1,295.5	)
Accumulated other comprehensive income						(2.0	)	(2.0	)

			Total stockholders' equity			226.4		2,799.5	(1)

				Total capitalization and pro forma capitalization	$	4,067.4		3,547.4	(1)

(1): If the Out-of-Court Restructuring is consummated at the 95% acceptance level, pro forma long-term debt (excluding current maturities), total pro forma stockholders' equity and total pro forma capitalization would be $893.1 million, $2,681.7 million and $3,574.8 million, respectively.
(2): McLeodUSA borrowed an additional $250 million under its Credit Agreement subsequent to September 30, 2001. As a result, pro forma long-term debt (excluding current maturities) upon consummation of the Restructuring would be $997.9 million (assuming 100% tender) and $1,143.1 million (assuming a 95% tender).

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2001 and the Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2000 and nine months ended September 30, 2001 have been prepared to give effect to the Out-of-Court Restructuring and the Splitrock Disposition for $55 million.

The Out-of-Court Restructuring includes:

•: A 5-to-1 reverse stock split;
•: the sale of Pubco for cash proceeds of $535 million;
•: the issuance of New Preferred Stock and 18.9 million New Warrants to Forstmann Little in exchange for $100 million;
•: the conversion of the New Preferred Stock into shares of Class A common stock;
•: the elimination of all Notes for $560 million in cash and 15% of McLeodUSA's Class A common stock (subject to dilution); and
•: A $35 million prepayment of Term Loans A and B under the Credit Agreement.

The Splitrock Disposition relates to an agreement to sell certain of its internet/data assets (formerly part of Splitrock Services, Inc.) and wholesale dial-up Internet Service Provider (ISP) customer base to Level 3 Communications, Inc. for $55 million plus the assumption of certain operating liabilities. The Splitrock Disposition is subject to customary closing conditions, and is expected to close prior to May 1, 2002.

The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2001 was prepared as if the Out-of-Court Restructuring and the Splitrock Disposition had been consummated as of September 30, 2001. The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 30, 2000 and for the nine months ended September 30, 2001 were prepared as if the Out-of-Court Restructuring and the Splitrock Disposition had been consummated by January 1, 2000.

The pro forma adjustments are based on available information and upon certain assumptions McLeodUSA believes are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with "Selected Financial Data" and "Management's Discussion and Analysis of Results of Operations and Financial Condition" and McLeodUSA's consolidated financial statements and related notes thereto contained elsewhere in this document.

THESE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS OF MCLEODUSA HAD THE OUT-OF-COURT RESTRUCTURING DESCRIBED HEREIN BEEN CONSUMMATED ON THE RESPECTIVE DATES INDICATED AND ARE NOT INTENDED TO BE PREDICTIVE OF THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF MCLEODUSA AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.

McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(In millions except per share information)

			As of September 30, 2001
			Historical McLeodUSA			Adjustments for the Out-of-Court Restructuring			Pro Forma for the Out-of-Court Restructuring(9)			Adjustments for Splitrock Disposition(10)			Total Pro Forma
ASSETS
Current Assets:
	Cash and cash equivalents		$	67.0		$	(26.6	)(1)	$	40.4		$	55.0		$	95.4	(11)
	Other current assets			400.2			(148.0	)(2)		252.2			(.2	)		252.0

		Total Current Assets		467.2			(174.6	)		292.6			54.8			347.4
Property and equipment, net				2,680.5			(36.8	)(2)		2,643.7			(70.8	)		2,572.9
Intangible assets				1,491.2			(328.9	)(2)		1,162.3			—			1,162.3
Other assets				153.7			(46.9	)(3)		106.8			(1.4	)		105.4

		Total Assets	$	4,792.6		$	(587.2	)	$	4,205.4		$	(17.4	)	$	4,188.0

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities			$	692.7		$	(69.2	)(4)(8)	$	623.5		$	(15.4	)	$	608.1
Long-term debt, less current maturities				3,694.0			(2,944.1	)(5)		749.9			(2.0	)		747.9	(11)
Other long-term liabilities				32.5			—			32.5			—			32.5

		Total Liabilities		4,419.2			(3,013.3	)		1,405.9			(17.4	)		1,388.5

Redeemable convertible preferred stock				147.0			(147.0	)(6)		—			—			—

Stockholders' Equity:
	Preferred stock (Series A)			—			—			—			—			—
	Common stock			6.3			(2.2	)(7)		4.1			—			4.1
	Additional paid-in capital			3,843.2			249.7	(7)		4,092.9			—			4,092.9
	Retained earnings (deficit)			(3,621.1	)		2,325.6	(7)(8)		(1,295.5	)		—			(1,295.5	)
	Accumulated other comprehensive income			(2.0	)		—			(2.0	)		—			(2.0	)

		Total Stockholders' Equity		226.4			2,573.1			2,799.5			—			2,799.5

		Total Liabilities and Stockholders' Equity	$	4,792.6		$	(587.2	)	$	4,205.4		$	(17.4	)	$	4,188.0

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

McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share information)

				Year Ended December 31, 2000
				Historical McLeodUSA			Adjustments for the Out-of-Court Restructuring			Pro Forma for the Out-of-Court Restructuring			Adjustments for Splitrock Disposition(9)			Total Pro Forma
Operations Statement Data:
	Revenue			$	1,396.7		$	(253.9)	(1)	$	1,142.8		$	(102.3	)	$	1,040.5

	Operating expenses
		Cost of service (exclusive of depreciation shown separately below)			772.8			(88.8)	(1)		684.0			(103.0	)		581.0
		Selling, general and administrative			563.2			(122.0)	(1)		441.2			(19.4	)		421.8
		Depreciation and amortization			409.6			(32.4)	(1)		377.2			(121.9	)		255.3
		Other			—			—			—			—			—

			Total operating expenses		1,745.6			(243.2	)		1,502.4			(244.3	)		1,258.1

	Operating loss				(348.9	)		(10.7	)		(359.6	)		142.0			(217.6	)
	Interest income				47.8			(47.8)	(2)		—			—			—
	Interest expense				(151.4	)		151.4	(3)(8)		—			—	(10)		—	(12)
	Other nonoperating expense				(0.4	)					(0.4	)		0.3			(0.1	)
	Income taxes				—			—			—			—			—

	Net income (loss)				(452.9	)		92.9			(360.0	)		142.3			(217.7	)
	Extraordinary charge for early retirement of debt				(24.4	)		24.4	(4)		—			—			—

	Net income (loss)				(477.3	)		117.3			(360.0	)		142.3			(217.7	)
	Preferred stock dividends				(54.4	)		54.4	(6)		—			—			—

	Earnings applicable to common stock			$	(531.7	)	$	171.7		$	(360.0	)	$	142.3		$	(217.7	)

	Loss per common and common equivalent share			$	(0.95	)				$	(0.90	)				$	(0.54	)

	Weighted average common and common equivalent shares outstanding				558.4			(157.1	)(7)		401.3						401.3

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

McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share information)

				Nine Months Ended September 30, 2001
				Historical McLeodUSA			Adjustments for the Out-of-Court Restructuring			Pro Forma for the Out-of-Court Restructuring			Adjustments for Splitrock Disposition(9)			Total Pro Forma
Operations Statement Data:
	Revenue			$	1,357.1		$	(225.1)	(1)	$	1,132.0		$	(61.8	)	$	1,070.2

	Operating expenses
		Cost of service (exclusive of depreciation shown separately below)			791.5			(84.9)	(1)		706.6			(59.5	)		647.1
		Selling, general and administrative			517.4			(99.8)	(1)		417.6			(3.0	)		414.6
		Depreciation and amortization			471.4			(26.9)	(1)		444.5			(102.7	)		341.8
		Other			2,935.4			—			2,935.4			(2,020.3)	(11)		915.1

			Total operating expenses		4,715.7			(211.6	)		4,504.1			(2,185.5	)		2,318.6

	Operating loss				(3,358.6	)		(13.5	)		(3,372.1	)		2,123.7			(1,248.4	)
	Interest income				9.7			(9.7)	(2)		—			—			—
	Interest expense				(180.8	)		180.8	(3)(8)		—			—	(10)		—	(12)
	Other non-operating income				116.5			0.4	(1)		116.9			2.6			119.5
	Income taxes				—			—			—			—			—

	Net income (loss)				(3,413.2	)		158.0			(3,255.2	)		2,126.3			(1,128.9	)
	Gain on exchange of preferred stock				851.2			(851.2)	(5)		—			—			—
	Preferred stock dividends				(32.0	)		32.0	(6)		—			—			—

	Earnings applicable to common stock			$	(2,594.0	)	$	(661.2	)	$	(3,255.2	)	$	2,126.3		$	(1,128.9	)

	Loss per common and common equivalent share			$	(4.20	)				$	(7.88	)				$	(2.73	)

	Weighted average common and common equivalent shares outstanding				617.8			(204.6	)(7)		413.2						413.2

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

NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

General

The pro forma adjustments assume that the Out-of-Court Restructuring will be accomplished as outlined in this document and that the Splitrock Disposition will be consummated for $55 million in cash. The pro forma adjustments relating to the Out-of-Court Restructuring and the Splitrock Disposition are summarized in the following notes.

The Out-of-Court Restructuring assumes that the transaction will be consummated outside of a Chapter 11 case, which is contingent upon a number of conditions as outlined in this document. However, if the Out-of-Court Restructuring is not consummated, McLeodUSA may effect the transaction via the Plan for the reorganization of McLeodUSA under Chapter 11 of the Bankruptcy Code. If the Plan is used, McLeodUSA would implement the provisions of SOP 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." Under SOP 90-7, if the reorganization value of McLeodUSA is less than the amount of allowed claims and post petition liabilities and if holders of existing voting shares immediately before confirmation receive less than fifty percent of the voting shares of the emerging entity, fresh start accounting would apply. McLeodUSA believes that it would be required to adopt fresh start accounting upon an emergence from bankruptcy. The provisions of fresh start accounting would require that McLeodUSA revalue its assets and liabilities at fair value, reset its stockholders' equity using the reorganization value established in the bankruptcy, and record any applicable reorganization value in excess of amounts allocable to identifiable assets. In the event the Plan is used to affect the transaction, the amounts in the accompanying pro forma condensed consolidated financial statements would change materially to comply with SOP 90-7.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

The Unaudited Pro Forma Condensed Consolidated Balance Sheet includes estimated pro forma adjustments necessary to give effect to the Out-of-Court Restructuring as if it had occurred on September 30, 2001. The pro forma adjustments have been prepared on the basis that the Out-of-Court Restructuring will be accomplished outside of Chapter 11 proceedings. In the event the Plan is used to affect the transaction, the amounts in the accompanying pro forma condensed consolidated financial statements would change materially to comply with SOP 90-7. The assets of McLeodUSA would equal the enterprise value of the remaining businesses of McLeodUSA at emergence from Chapter 11 proceedings. McLeodUSA currently estimates that enterprise value would be approximately $2.65 billion and a leveraged net equity balance of approximately $1.15 billion. Any difference in enterprise value and pro forma assets would cause a change to the accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet by increasing or decreasing the extraordinary gain (retained earnings) with a corresponding offset to the value assigned to the common stock.

During the third quarter ended September 30, 2001, McLeodUSA wrote down all of the assets directly related to Splitrock to fair value as a result of an impairment analysis performed which was triggered by McLeodUSA's operational restructuring. The negotiated sales price for the Splitrock Disposition is $55 million which approximates the fair value of those net assets at September 30, 2001. As such, no gain or loss is expected on this transaction.

The pro forma adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet are described as follows:

1.: To reflect the cash proceeds of (a) $535 million and $100 million from the sale of Pubco and the issuance of new preferred stock and warrants, less (b) $560 million paid as partial consideration for the elimination of the Notes, $35 million to prepay Term Loans A and B

under the Credit Agreement, $65 million in transaction costs and $1.6 million of cash and cash equivalents at Pubco which are assumed to be retained by the buyer of Pubco.

2.: To reflect the sale of Pubco and the elimination of its assets and liabilities.
3.: To write-off the remaining unamortized financing fees related to the Notes resulting from the retirement of the Notes through the Out-of-Court Restructuring.
4.: To reflect the elimination of the accrued interest on the Notes ($57.5 million) and Pubco's current liabilities ($57.7 million) and to reflect an estimated current tax liability of $46.0 million (see note 8 below).
5.: To reflect the elimination of the Notes ($2,906.1 million), a prepayment of Term Loans A and B under the Credit Agreement ($35.0 million) and the elimination of Pubco's long-term debt ($3.0 million.)
6.: To reflect the conversion of the Preferred Stock to Class A common stock.
7.: To reflect the extraordinary gain on the extinguishment of indebtedness as a result of the retirement of the Notes and forgiveness of accrued interest in the Out-of-Court Restructuring, the gain on the sale of Pubco, the 5-to-1 reverse stock split, and the conversion of the Preferred Stock, Notes and New Preferred Stock to 196.4 million, 56.8 million and 36.4 million shares, respectively of Class A common stock.
8.: The unaudited pro forma information has been prepared based upon certain assumptions, estimates and positions taken with respect to taxes. It is possible that taxing authorities could disagree. If such authorities were to ultimately prevail, the amounts involved could be material.
9.: In the event that the Out-of-Court Restructuring is effected through the tender of 95% of the principal amount of the Notes, the Pro Forma Cash, Long-term debt (excluding current maturities), Total Assets and Total Stockholders' Equity would be $68.4 million, $895.2 million, $4,235.7 million and $2,681.7 million respectively.
10.: To reflect the Splitrock Disposition for $55 million in cash and the elimination of the associated assets and liabilities. See "Summary—Recent Developments."
11.: McLeodUSA borrowed an additional $250 million under its Credit Agreement subsequent to September 30, 2001. As a result total pro forma cash would be $345.4 million and total pro forma long term debt (less current maturities) would be $997.9 million (assuming 100% tender) and $1,143.1 million (assuming a 95% tender).

Unaudited Pro Forma Condensed Consolidated Statements of Operations

The Unaudited Pro Forma Condensed Consolidated Statements of Operations include adjustments necessary to give effect to the Out-of-Court Restructuring and the Splitrock Disposition as if the transactions had been consummated by January 1, 2000.

The pro forma adjustments for the year ended December 31, 2000 and the nine months ended September 30, 2001 are summarized as follows:

1.: To eliminate the operations of Pubco sold as part of the Out-of-Court Restructuring.
2.: To eliminate all interest income on cash and cash equivalents held during each of the periods under the assumption that all interest income was originally derived from cash proceeds provided by the Notes.

3.: To reflect the elimination of interest expense not capitalized and amortization of deferred financing fees and discounts of the Notes. All pro forma interest for the periods ending December 31, 2000 and September 30, 2001 of $57.4 million and $55.6 million, respectively, related to remaining debt is assumed capitalized and does not result in a charge to earnings.
4.: To eliminate the extraordinary charge for the early retirement of debt.
5.: To eliminate the gain on exchange of Preferred Stock for the nine months ended September 30, 2001 that was generated by the Exchange of Series B and Series C Preferred Shares for Series D and Series E Preferred Shares.
6.: To reflect the elimination of preferred share dividends related to the preferred stock.
7.: Reflects a 5-to-1 reverse stock split and the issuance of new shares as described in the Offering Memorandum.
8.: In the event that the Out-of-Court Restructuring is effected through the tender of 95% of the principal amount of Notes, the additional interest expense would be $14.3 million and $10.9 million for the periods ended December 31, 2000 and September 30, 2001, respectively, of which $7.7 million and $10.9 million may be capitalized.
9.: To eliminate the operations of Splitrock.
10.: Splitrock's interest expense of $9.4 million and $.2 million for the periods ending December 31, 2000 and September 30, 2001, respectively, would have been capitalized and the elimination does not result in a reduction of interest expense.
11.: To eliminate the portion of the restructure charge taken during September 2001 which specifically related to the write down of Splitrock's assets (including intangibles) which are currently being sold and associated goodwill.
12.: McLeodUSA borrowed an additional $250 million under its Credit Agreement subsequent to September 30, 2001. The additional pro forma interest from the borrowings would be $26.6 million and $15.3 million for the periods ended December 31, 2000 and September 30, 2001 respectively, of which $17.1 million and $15.3 million may be capitalized.

SELECTED FINANCIAL DATA

The following selected consolidated financial and operating data should be read in conjunction with "Business," "Unaudited Historical and Pro Forma Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements and related notes contained herein. The statement of operations and balance sheet data herein is derived from the audited financial statements of McLeodUSA.

Selected Consolidated Financial Data of McLeodUSA
(In millions, except per share data)

		For the Year Ended December 31,																		For the Nine-month Period Ending September 30, 2001
		1996			1997			1998			1999			2000			Total Pro Forma 2000			Historical			Total Pro Forma
																	(unaudited)			(unaudited)			(unaudited)
Operations Statement:
	Revenue	$	81.3		$	267.9		$	604.1		$	908.8		$	1,396.7		$	1,040.5		$	1,357.1		$	1,070.2

Operating Expenses:
	Cost of service (exclusive of depreciation expense shown separately below)		52.6			151.2			323.2			457.1			772.8			581.0			791.5			647.1
	Selling, general and administrative		46.0			148.2			260.9			392.7			563.2			421.8			517.4			414.6
	Depreciation and amortization		8.5			33.3			89.1			190.7			409.6			255.3			471.4			341.8
	Restructuring and other		2.4			4.6			5.6			—			—			—			2,935.4			915.1

	Total operating expenses		109.5			337.3			678.8			1,040.5			1,745.6			1,258.1			4,715.7			2,318.6

Operating loss			(28.2	)		(69.4	)		(74.7	)		(131.7	)		(348.9	)		(217.6	)		(3,358.6	)		(1,248,4	)
Interest income (expense), net			5.4			(12.0	)		(52.2	)		(94.2	)		(103.6	)		—			(171.1	)		—
Other income (expense)			0.5			1.5			2.0			5.6			(0.4	)		(0.1	)		116.5			119.5
Income taxes			—			—			—			—			—			—			—			—

Net loss before extraordinary charge			(22.3	)		(79.9	)		(124.9	)		(220.3	)		(452.9	)		(217.7	)		(3,413.2	)		(1,128.9	)
Extraordinary charge for early extinguishment of debt			—			—			—			—			(24.4	)		—			—			—

Net loss			(22.3	)		(79.9	)		(124.9	)		(220.3	)		(477.3	)		(217.7	)		(3,413.2	)		(1,128.9	)
Gain on exchange of Preferred Stock			—			—			—			—			—			—			851.2			—
Preferred stock dividends			—			—			—			(17.7	)		(54.4	)		—			(32.0	)		—

Loss applicable to common shares		$	(22.3	)	$	(79.9	)	$	(124.9	)	$	(238.0	)	$	(531.7	)	$	(217.7	)	$	(2,594.0	)	$	(1,128.9	)

Net loss per common share:
Loss before extraordinary charge		$	(0.09	)	$	(0.24	)	$	(0.33	)	$	(0.54	)	$	(0.91	)	$	(0.54	)	$	(4.20	)	$	(2.73	)
Extraordinary charge			—			—			—			—			(0.04	)		—			—			—

Loss per common share		$	(0.09	)	$	(0.24	)	$	(0.33	)	$	(0.54	)	$	(0.95	)	$	(0.54	)	$	(4.20	)	$	(2.73	)

Weighted average common shares outstanding			243.0			329.8			376.8			443.1			558.4			401.3			617.8			413.2

Selected Consolidated Financial Data of McLeodUSA

(In millions, except per share data)

		As of December 31,											As of September 30,2001
		1996		1997		1998		1999		2000			Historical			Total Pro Forma
													(unaudited)			(unaudited)
Balance Sheet Data:
	Current assets	$	224.4	$	517.9	$	793.2	$	1,569.5	$	562.8		$	467.2		$	347.4
	Working capital (deficit)	$	186.0	$	378.6	$	613.2	$	1,272.8	$	(283.6	)	$	(225.5	)	$	(260.7	)
	Property and equipment, net	$	92.1	$	373.8	$	629.7	$	1,270.0	$	3,019.1		$	2,680.5		$	2,572.9
	Total assets	$	453.0	$	1,345.7	$	1,925.2	$	4,203.1	$	7,365.6		$	4,792.6		$	4,188.0
	Long-term debt	$	2.6	$	613.4	$	1,245.2	$	1,763.8	$	2,732.2		$	3,694.0		$	747.9
	Redeemable convertible preferred stock	$	0	$	0	$	0	$	1,000.0	$	1,000.0		$	147.0		$	—
	Stockholders' equity	$	403.4	$	559.4	$	462.8	$	1,108.5	$	2,756.1		$	226.4		$	2,799.5

		For the Year Ended December 31,										For the Period Ending September 30, 2001
		1996		1997		1998		1999		2000		Historical
												(unaudited)
Other Financial Data:
	Capital expenditures, property, plant and equipment	$	79.8	$	179.3	$	290.0	$	580.0	$	1,239.4	$	578.4
	Business acquisitions	$	93.9	$	421.9	$	49.7	$	736.6	$	2,350.0	$	60.4

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

Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

McLeodUSA provides integrated communications services, including local services, primarily in 25 Midwest, Southwest, Northwest and Rocky Mountain states. McLeodUSA is a facilities-based telecommunications provider with, as of September 30, 2001, 393 Asynchronous Transfer Mode (ATM) switches, 58 voice switches, 437 collocations, 520 Digital Subscriber Line Access Multiplexers (DSLAMs), over 31,000 route miles of fiber optic cables and approximately 10,700 employees. The Class A common stock of McLeodUSA is traded on The Nasdaq Stock Market under the Symbol "MCLD."

McLeodUSA derives most of its revenue from its core competitive communications business and related communications services, including:

•: local and long distance services;
•: dial-up and dedicated Internet access services;
•: high speed Internet access services, such as services delivered using digital subscriber lines (DSL) and cable modems;
•: bandwidth leasing and collocation services;
•: facilities and services dedicated for a particular customer's use; and
•: value-added services such as virtual private networks and web hosting.

McLeodUSA derives additional communications services revenues from the following non-core, communications services:

•: telephone and computer sales, leasing, networking, service and installation; and
•: other communications services, including video, cellular, operator, payphone, mobile radio and paging services.

McLeodUSA also derives revenue from the following services related to its core business:

•: sale of advertising in print and electronic telephone directories; and
•: traditional local telephone company services in east central Illinois and southeast South Dakota.

The table set forth below summarizes our percentage of revenues from these sources:

	Year Ended December 31,						Quarter Ended September 30,
	2000		1999		1998		2001		2000
Communications services	74	%	66	%	62	%	79	%	76	%
Telephone directory services	18		23		24		15		16
Local exchange services	6		9		11		5		6
Telemarketing services	2		2		3		1		2

	100	%	100	%	100	%	100	%	100	%

McLeodUSA's principal operating expenses consist of cost of service; selling, general and administrative expenses ("SG&A"); and depreciation and amortization. Cost of service primarily includes local and long distance services purchased from certain MegaBells and interexchange carriers, the cost of providing local exchange services in the independent local exchange service areas, the cost of fiber related to bandwidth leasing and the cost of printing and distributing telephone directories. SG&A consists of sales and marketing, customer service and administrative expenses, including the costs associated with operating McLeodUSA's communications network. Depreciation and amortization include depreciation of McLeodUSA's communications network and equipment; amortization of goodwill and other intangibles related to its acquisitions; and amortization over the life of the customer contract of one-time direct installation costs associated with transferring customers' local line service from the MegaBells to McLeodUSA's local telecommunications service.

On September 28, 2001, McLeodUSA's Board of Directors approved a plan to revise its corporate strategy to focus primarily on providing voice and data services to small and medium size businesses and residential customers within McLeodUSA's 25-state footprint. As a result, McLeodUSA has abandoned its plans for a national network and will de-emphasize certain wholesale services. McLeodUSA's revised strategy is to focus company resources on its core competitive local exchange services. In connection with this revised corporate strategy McLeodUSA has decided to take the following actions:

•: Abandon the development of McLeodUSA's national network and place the associated assets for sale and, in addition, sell other non-core assets and excess inventory.
•: Reduce employment by approximately 15% and execute plans to consolidate certain existing facilities and eliminate certain others.
•: Reduce capital expenditure plans for 2002 from $400 million to $350 million, primarily focused on completing current construction work-in-process, augmenting existing capacity where needed, and new customer requirements.
•: Take charges of approximately $2.9 billion in the third quarter to reflect write-downs of goodwill and other long-lived assets, write off inventory and construction work-in-process for discontinued operations and establish a restructuring reserve for a reduction in force and facility consolidation.
•: Record charges to operating income of approximately $35 million in the third quarter associated with balance sheet adjustments to various accounts such as prepaid expenses, receivables and bad debt reserves.

As part of the revised corporate strategy, McLeodUSA has also established five cross-functional business process teams to strengthen business processes and bring improvements to the operations of McLeodUSA. These teams are focused on sales efficiencies, provisioning and customer installation, billing and revenue assurance, cash management and business forecasting and planning.

McLeodUSA has experienced operating losses since its inception as a result of efforts to build its customer base, develop and construct its communications network infrastructure, build its internal staffing, develop its systems and expand into new markets. While McLeodUSA will continue to focus on increasing its customer base and bringing its customer base onto its network, its focus will shift more towards improving its operating margins by grooming its network to deliver service in the most effective and efficient manner, as well as scaling back certain general and administrative functions. This approach could have a negative impact on McLeodUSA's revenue growth, but should better leverage its existing assets to produce more profitable revenues.

McLeodUSA may be forced to change its strategy to respond to a changing competitive environment and McLeodUSA cannot assure you that it will be able to maintain its operating margin. McLeodUSA cannot assure you that through its revised strategy it will be able to achieve or sustain profitability or positive cash flows.

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

Year Ended 2000 Compared with Year Ended 1999

Total revenue increased from $908.8 million for the year ended December 31, 1999 to $1,396.7 million for the year ended December 31, 2000, representing an increase of $487.9 million or 54%. Revenue from the sale of communication services accounted for $433.2 million of this increase, including $102.3 million contributed by Splitrock, acquired on March 30, 2000, $8.2 million from the acquisition of CapRock on December 7, 2000 and $88.0 million contributed by the inclusion of Dakota Telecommunications Group, Inc. ("DTG"), Ovation Communications, Inc., and Access Communications Holdings, Inc. for an entire year in 2000. The remaining increase of $234.7 million is attributed to the internal growth of competitive lines in service and customer base, which increased by approximately 314,000 lines or 54% and 86,700 customers or 43%, respectively. Local exchange services increased by $10.5 million over 1999, including $1.5 million contributed by DTG. Directory revenues increased $40.7 million from 1999 to 2000 due mainly to revenues from several individually insignificant directories acquired in 2000. Telemarketing revenues in 2000 increased $3.5 million when compared to 1999.

Cost of service increased from $457.1 million for 1999 to $772.8 million for 2000, representing an increase of $315.7 million or 69%. The increase in the cost of service was due primarily to the growth in McLeodUSA's communication services attributed to the increase in customers and lines in service. Cost of service includes local and long-distance services purchased from certain MegaBells and interexchange carriers, the cost of providing local exchange services to customers in ICTC's service area and the cost of operating McLeodUSA's fiber optic communications networks. The remaining increase is due to the acquisitions of Splitrock and CapRock, which contributed $103.0 million and $8.9 million, respectively, to the increase. Cost of service as a percentage of revenues increased from 50% for 1999 to 55% for 2000. This increase is the result of the cost of service for Splitrock and CapRock, as a percentage of their revenues from the date of acquisition through year end, totaling 101%. McLeodUSA's cost of sales after taking out Splitrock and CapRock remained fairly consistent with 1999 at 51%.

SG&A increased from $392.7 million for the year ended December 31, 1999 to $563.2 million for the year ended December 31, 2000, an increase of $170.5 million or 43%. The acquisitions of Ovation, DTG and Access in 1999 and Splitrock and CapRock in 2000 contributed $53.4 million to the increase. McLeodUSA's full-time equivalent employee base increased from approximately 8,100 to 9,500 or 17%

excluding Splitrock and CapRock. As a percentage of total revenues, SG&A expenses decreased from 43% in 1999 to 40% in 2000. Sales and marketing and customer support increased $85.6 million, including $4.2 million contributed by Splitrock and CapRock, due to an increase in sales volume and customer base. General and administrative expenses increased $84.9 million, including $19.3 million contributed by Splitrock and CapRock. The increase in general and administrative expenses is attributed to the additional costs to support our growth.

Depreciation and amortization expenses increased from $190.7 million for the year ended December 31, 1999 to $409.6 million for the year ended December 31, 2000, representing an increase of $218.9 million or 115%. This increase consisted of $121.9 million related to the acquisition of Splitrock, $12.2 million related to the acquisition of Ovation, DTG and Access in 1999 and $84.8 million due primarily to the growth of McLeodUSA's communications network.

Interest income increased from $42.6 million for the year ended December 31, 1999, to $47.8 million in 2000. This increase resulted from a higher average investment balance during 2000.

Gross interest incurred increased from $159.9 million for the year ended December 31, 1999 to $216.6 million in 2000. This increase was primarily a result of an increase of $34.2 million related to the senior secured credit facility, $10.7 related to the debt assumed in the acquisitions of Splitrock and CapRock, $5.9 million for the inclusion of an additional month and a half of interest related to the 8¹/8% senior notes and a $4.2 million increase in the accretion of interest on our 10¹/2% senior discount notes. Interest expense of approximately $65.2 million and $23.1 million was capitalized as part of McLeodUSA's construction of fiber optic communications network during 2000 and 1999, respectively.

Net loss applicable to common shares increased from $238.0 million for the year ended December 31, 1999 to $531.7 million for the year ended December 31, 2000, an increase of $293.7 million. This increase resulted primarily from the following five factors: (1) the expansion of McLeodUSA's local and long distance services, which requires significant expenditures, a substantial portion of which is incurred before the realization of revenues; (2) the increased depreciation expense related to the construction and expansion of our communications networks and amortization of intangibles related to acquisitions; (3) net interest expense on indebtedness to fund market expansion, network development and acquisitions; (4) dividends on preferred stock issued and (5) an extraordinary charge on the extinguishment of debt.

Year Ended 1999 Compared with Year Ended 1998

Total revenue increased from $604.1 million for the year ended December 31, 1998 to $908.8 million for the year ended December 31, 1999, representing an increase of $304.7 million or 50%. The increase was due to the acquisitions completed in 1999 and 1998 as well as the increase in local and long distance customers. Revenue from the sale of competitive telecommunications services accounted for $230.5 million of this increase, including $119.4 million contributed by Dakota Telecommunications Group, Inc., Ovation Communications, Inc., and Access Communications Holdings, Inc. which were acquired on March 5, 1999, March 31, 1999 and August 13, 1999, respectively. Local exchange services increased by $10.6 million over 1998, including $7.5 million contributed by DTG. Directory revenues increased $64.3 million from 1998 to 1999 due mainly to revenues from new directories acquired in 1999. Telemarketing revenues in 1999 decreased $0.7 million when compared to 1998.

Cost of service increased from $323.2 million for 1998 to $457.1 million for 1999, representing an increase of $133.9 million or 41%. This increase in cost of service was due primarily to the growth in our local and long distance communications services and to the acquisitions of DTG, Ovation and Access, which contributed an aggregate of $56.4 million to the increase. Cost of service as a percentage of revenue decreased from 54% for 1998 to 50% for 1999, as a result of these acquisitions and as a result of reductions in the cost of providing local and long distance services as a percentage of local and long distance communications revenue, which decreased from 75% in 1998 to 65% in 1999. This

decrease was primarily due to the realization of benefits associated with new wholesale line cost rate agreements with the MegaBells and reduced long distance costs resulting from migration of over 84% of customer long distance traffic to our fiber optic communications network.

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

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

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

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

Gross interest incurred increased from $88.9 million for the year ended December 31, 1998 to $159.9 million in 1999. This increase was primarily a result of an increase in the accretion of interest on McLeodUSA's 10¹/2% senior discount notes of $3.8 million and an increase of interest of $63.7 million as the result of the issuance of McLeodUSA's 9¹/4% senior notes, 8³/8% senior notes, 9¹/2% senior notes and 8¹/8% senior notes. Interest expense of approximately $23.1 million and $8.1 million was capitalized as part of McLeodUSA's construction of fiber optic communications network during 1999 and 1998, respectively. In addition, interest expense of approximately $2.6 million was capitalized as part of its operating facilities building construction and McLeodUSA's software development in 1998, with no corresponding amount in 1999.

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

Three Months Ended September 30, 2001 Compared with Three Months Ended September 30, 2000

McLeodUSA's total revenue grew $83.9 million or 23% in the quarter ended September 30, 2001. Communications services revenues accounted for $76.5 million of this increase, primarily comprised of increases in retail and wholesale revenues of $33.3 million and $35.2 million, respectively. The increase in retail revenues is driven by a 34% increase in its customer base from September 30, 2000 to September 30, 2001, excluding the customers added through the acquisition of CapRock Communications Corp. ("CapRock"). The increase to wholesale is largely due to the inclusion of CapRock wholesale fiber revenues in 2001. CapRock was not acquired until the fourth quarter of 2000.

Cost of service increased from $204.2 million for the three months ended September 30, 2000, to $271.4 million for the three months ended September 30, 2001, representing an increase of $67.2 million or 33%. Cost of service primarily includes local and long distance services purchased from certain MegaBells and interexchange carriers, the cost of providing local exchange services in the independent local exchange service areas, the cost of fiber related to bandwidth leasing, and the cost of printing and distributing telephone directories. Excluding McLeodUSA's wholesale dial-up internet business, identified as a non-core asset to be sold, its margins have dropped to 42%, from 44% during the quarter ended September 30, 2000, resulting from a decline in both long distance and access rates from the prior year.

SG&A increased from $147.3 million for the three months ended September 30, 2000 to $187.4 million for the three months ended September 30, 2001, an increase of $40.1 million or 27%. The increase was driven by bad debt expense of $26.4 million in the third quarter of 2001 versus $5.2 million in bad debt expense for the three months ended September 30, 2000 and is attributed to the acquisition of CapRock and the impact of the slowing economy. The remaining increase in SG&A is primarily due to the cost of additional resources to grow and support McLeodUSA's customer base. Excluding the incremental bad debt expense in the quarter ended September 30, 2001 of $21.2 million, McLeodUSA's SG&A has decreased as a percentage of revenues to 37% from 40% when comparing the third quarter of 2001 to the third quarter of 2000, and is due largely to reductions in personnel and elimination of duplicate facilities during the second and third quarters of 2001.

Depreciation and amortization expenses increased from $113.6 million for the three months ended September 30, 2000 to $167.2 million for the three months ended September 30, 2001. The increase is attributed to a higher depreciable asset base as a result of increased assets placed in service.

During the second quarter of 2001, McLeodUSA instituted a plan to reduce costs and focus operations on its core 25-state footprint. In conjunction with this plan, McLeodUSA recorded a $28.2 million charge for the reduction of its workforce by approximately 900 employees and the termination of leases associated with the abandonment of office and equipment space. During the third quarter of 2001, McLeodUSA decided on a comprehensive restructuring of its business. Under this restructuring McLeodUSA decided to (1) abandon its plans for a national network and place the associated assets for sale; (2) sell other non-core and non-operating assets; (3) further reduce the workforce by approximately 1,500 employees and (4) consolidate and eliminate certain existing duplicative facilities.

The third quarter restructuring resulted in a $2.9 billion charge to write down goodwill and other long-lived assets associated with the national network, other non-core assets and construction work-in-progress ($2.7 billion), provide for involuntary employee separations ($11.5 million), provide for facilities consolidations ($127.9 million) and other contractual commitments related to national network and software development projects ($60.9 million).

McLeodUSA also recorded a charge to operating income of approximately $35 million in the third quarter associated with balance sheet adjustments to various accounts such as prepaid expenses, receivables and bad debt reserves.

Included in the write down is approximately $2.1 billion in goodwill and other intangible assets which originated from numerous acquisitions, most notably Splitrock. In addition, McLeodUSA reduced long-lived assets and construction work-in-progress associated with Splitrock by approximately $260 million to appropriately mark those assets to fair value. As a result of abandoning McLeodUSA's plans for a national network, McLeodUSA has decided to offer for sale certain assets acquired in the Splitrock transaction and other businesses which are no longer considered core strategic businesses.

In addition to the operating assets above, McLeodUSA has reduced other long-lived assets and construction work-in-progress by $313.0 million to reflect the net realizable value of certain non-core

assets which McLeodUSA plans to actively market and sell over the next twelve months. These assets represented aproximately $8 million and $25 million of depreciation for the three and nine months periods ended September 30, 2001, and approximately $30 million of depreciation for the year ended December 31, 2000.

The following table shows the charges, uses and remaining liability by segment for the nine months ended September 30, 2001 (in millions):

Communications Services	Second quarter charges		Third quarter charges		Reductions through September 30, 2001		Remaining Liability
Goodwill and other intangible assets	$	—	$	2,123.8	$	2,123.8	$	—
Long-lived assets and construction work-in-progress		—		573.1		573.1		—
Employee separations		9.6		10.1		7.6		12.1
Facility closure costs		7.4		127.9		39.3		96.0
Other contractual commitments		—		60.9		—		60.9

Total	$	17.0	$	2,895.8	$	2,743.8	$	169.0

Other	Second quarter charges		Third quarter charges		Reductions through September 30, 2001		Remaining Liability
Employee separations		3.2		1.4		2.1		2.5
Facility closure costs		8.0		—		0.4		7.6

Total	$	11.2	$	1.4	$	2.5	$	10.1

The facilities closure costs above relate to both leased and owned facilities and include space which houses both equipment and personnel. McLeodUSA will terminate numerous technical facility leases (those facilities which house telecommunications equipment) and will consolidate 11 facilities which house personnel into 3 remaining locations.

Interest income decreased from $12.2 million for the three month period ended September 30, 2000, to $0.8 million for the same period in 2001 as a result of a lower average investment balance.

Gross interest expense increased from $59.6 million for the third quarter of 2000 to $90.8 million for the third quarter of 2001. The incremental $31.2 million of interest incurred relates to the additional draw of $175 million on McLeodUSA's Credit Agreement in July 2001, its 12% Notes, 11¹/2% Notes, and 11³/8% Notes, all outstanding for the entire quarter in 2001, partially offset by lower floating interest rates on the Tranche B term facility borrowing under the Credit Agreement. Interest expense of approximately $24.6 million and $18.9 million was capitalized as part of McLeodUSA's construction of fiber optic network during the third quarter of 2001 and 2000, respectively.

Other income increased to $39.7 million from a loss of $0.7 million for the three months ended September 30, 2000 resulting from the gain on the sale of certain assets, primarily McLeodUSA's remaining PCS licenses and available-for-sale equity investments.

Net loss applicable to common shares increased from $165.8 million for the three months ended September 30, 2000 to $2,262.0 million for the three months ended September 30, 2001, an increase of $2,096.2 million. This increase resulted primarily from the following factors: (1) the restructuring and asset impairment charges totaling $2,907.2 million; (2) the expansion of McLeodUSA's local and long distance services, which requires significant expenditures, a substantial portion of which is incurred before the realization of revenues; (3) the increased depreciation expense related to the construction and expansion of McLeodUSA's communications networks; and (4) net interest expense on indebtedness to fund market expansion and network development. These items were partially offset by the gain on the preferred stock exchange discussed in Note 8 to the September 30, 2001 financial statements.

Nine Months Ended September 30, 2001 Compared with Nine Months Ended September 30, 2000

Revenues increased by $370.4 million or 38% to $1,357.1 million during the nine months ended September 30, 2001. The increase in revenues is attributed to the growth in McLeodUSA's customer base, which has grown by 34% from September 30, 2000 excluding CapRock, as well as additional wholesale revenues associated with McLeodUSA's acquisition of CapRock. Directory revenues increased by $35.7 million to $221.0 million primarily through acquisitions.

Cost of service increased by $242.9 million to $791.5 million for the period ending September 30, 2001. Gross margins have declined from 44% during 2000 to 42% in 2001. The deterioration in margins is principally driven by lower long distance and access rates.

SG&A increased $113.5 million or 28% for the nine months ended September 30, 2001. The increase was driven by the incremental bad debt expense during the third quarter 2001, primarily as a result of the acquisition of CapRock and general market conditions. Excluding the third quarter 2001 incremental bad debt expense, SG&A decreased as a percentage of revenues from 41% to 37%, and is largely due to reductions in personnel and elimination of duplicative facilities during the second and third quarters of 2001. The remaining increase in SG&A is principally due to the cost of additional resources to grow and support McLeodUSA's customer base.

Depreciation and amortization expenses increased from $276.8 million for the nine months ended September 30, 2000 to $471.4 million for the nine months ended September 30, 2001, representing an increase of $194.6 million. The increase is attributed to a higher depreciable asset base as a result of continued infrastructure investment and increased assets placed in service.

Interest income decreased to $9.7 million for the period ended September 30, 2001, from $43.1 million for the same period in 2000. This decrease resulted from a lower average investment balance during 2001.

Gross interest expense increased from $156.1 million for the first nine months of 2000 to $269.9 million for the first nine months of 2001. This rise in gross interest expense is the result of increased borrowings primarily to finance capital expenditures for the expansion and installation of McLeodUSA's fiber optic communications network. McLeodUSA's total debt increased by $1.3 billion through the issuance of its 12%, 11¹/2%, and 11³/8% Notes totaling $1.1 billion and the draw of $175 million on McLeodUSA's Credit Agreement. Interest expense of approximately $89.0 million and $42.5 million was capitalized as part of McLeodUSA's construction of fiber optic network during the first nine months of 2001 and 2000, respectively.

Net loss applicable to common shares increased from $377.2 million in the first nine months of 2000 to $2,594.0 million during in the first nine months of 2001, an increase of $2,216.8 million. This increase resulted primarily from the following factors: (1) the restructuring and asset impairment charges totaling $2,935.4 million; (2) the expansion of McLeodUSA's local and long distance services, which requires significant expenditures, a substantial portion of which is incurred before the realization

of revenues; (3) the increased depreciation expense related to the construction and expansion of McLeodUSA's communications networks; and (4) net interest expense on indebtedness to fund market expansion and network development. These items were partially offset by the gain on preferred stock exchange discussed in Note 8 to the September 30, 2001 financial statements.

Liquidity and Capital Resources

Cash used in operating activities was $395.7 million for the nine months ended September 30, 2001. Cash was used to fund the incremental interest expense of $67.2 million caused by McLeodUSA's higher outstanding debt balance during 2001. Cash was also used to fund the decrease in accounts payable and accrued liabilities primarily to pay CapRock liabilities assumed in the acquisition.

Cash used in investing activities during 2001 totaled $458.9 million, compared to $267.2 million in the first nine months of 2000. Capital expenditures, totaling $578.4 million in 2001, continue to be McLeodUSA's primary use of capital resources to fund the expansion of its communications networks. McLeodUSA expects to significantly reduce its capital expenditures in 2002 due to its focus on market growth within McLeodUSA's 25-state footprint. This usage for capital expenditures was partially offset by proceeds of $125.6 million from the sale of McLeodUSA's PCS licenses and $136.6 million from the sale of other assets and equity securities.

Cash provided by financing activities totaled $902.3 million in 2001, compared to $265.9 million provided in the nine months ended September 30, 2000. The net cash proceeds from the increases in McLeodUSA's total debt from December 31, 2000 was primarily due to the issuance of its $750 million 11³/8% Notes and the draw of $175 million on McLeodUSA's Credit Agreement. Other net proceeds included $34.7 million from the issuance of common stock offset by payments on long-term debt and payments of preferred stock dividends of $15.4 million and $26.3 million in 2001 and 2000, respectively.

As of September 30, 2001, McLeodUSA's total debt was $3.7 billion, an increase of approximately $950 million from December 31, 2000. At September 30, 2001, McLeodUSA had available cash, cash equivalents and short-term investments of $67.1 million and $550 million available under McLeodUSA's Credit Agreement. In October 2001, McLeodUSA borrowed an additional $200 million under the Credit Agreement, leaving an undrawn committed balance of approximately $342 million.

In connection with the Third Amendment, McLeodUSA has agreed to limit its borrowings to $50 million until the earliest of (1) the date of any bankruptcy proceeding in which McLeodUSA is the debtor, (2) consummation of the Restructuring and (3) the date McLeodUSA determines not to proceed with the Restructuring. If the Restructuring is accomplished out-of-court the commitments under the Credit Agreement will be permanently reduced by $140 million upon consummation of the Restructuring, leaving McLeodUSA with approximately $150 million of undrawn availability under its Credit Agreement. If the Restructuring is effectuated in-court, McLeodUSA expects to obtain a $50 million debtor-in-possession facility to provide additional liquidity during the pendency of a bankruptcy case. In addition, McLeodUSA expects to obtain a new $160 million revolving credit facility upon consummation of an In-Court Restructuring. While McLeodUSA has not yet obtained firm commitments for such facilities, it expects to obtain such commitments prior to filing any case under Chapter 11 of the Bankruptcy Code. Regardless of whether the Restructuring is accomplished out-of-court or through a court approved plan of reorganization, McLeodUSA believes it would have sufficient liquidity from its remaining available borrowings under the revolving credit agreement if it is able to achieve the projections and dispose of assets at the times and in the amounts projected. On December 4, 2001 McLeodUSA borrowed $50 million under its Credit Agreement and consequently may not make further borrowings under its Credit Agreement while it is pursuing the Restructuring without the consent of its lenders.

McLeodUSA's ability to meet any additional capital needs by issuing additional debt securities or borrowing funds from one or more lenders although borrowings are limited by the terms of the Third

Amendment. However, subject to limitations contained in the Credit Agreement, McLeodUSA may take advantage of vendor financing arrangements available on terms that allow rates of return comparable to current capital projects and otherwise favorable to McLeodUSA. McLeodUSA cannot give any assurance that it will have timely access to additional debt or equity sources on acceptable terms.

Failure to generate or raise sufficient funds may require McLeodUSA to delay or abandon some of McLeodUSA's expansion plans or expenditures, which could have a material adverse effect on McLeodUSA's business, results of operations or financial condition. See "Risk Factors—Failure to Raise Necessary Capital Could Restrict the Ability of McLeodUSA to Develop Its Network and Services and Engage in Strategic Acquisitions."

Pursuant to an Exchange Agreement, dated September 30, 2001, (the "Exchange Agreement") McLeodUSA and the holders of the Series B and C preferred stock executed a one-for-one exchange of all 275,000 shares of Series B preferred stock and all 125,000 shares of Series C preferred stock (collectively referred to as the "Original Redeemable Preferred Shares") for 275,000 shares of Series D preferred stock and 125,000 shares of Series E preferred stock (collectively referred to as the "Series D and E Preferred Shares") in a non-cash transaction. As stated above, Forstmann Little affiliates own 100% of the Series D and E Preferred Shares. The provisions of the Series D and E Preferred Shares essentially mirror those of the Original Redeemable Preferred Shares except no dividends (other than the common equivalent dividend as provided for in the Original Redeemable Preferred Shares) will be paid on the Series D and E Preferred Shares and the Series D and E Preferred Shares shall be convertible into the shares of McLeodUSA's Class A common stock at a rate of (a) the liquidation preference of $2,500 per share divided by (b) $6.10 (unless subsequently adjusted). The Series D and E Preferred Shares rank on a parity with McLeodUSA's 6.75% Series A Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series A preferred stock"), with respect to dividend rights and rights on liquidation.

The exchange of the Original Redeemable Preferred Shares for the Series D and E Preferred Shares was based on the fair value of those securities at the date of the Exchange Agreement. For financial accounting purposes, the carrying value of the Original Redeemable Preferred Shares ($1.0 billion) over the fair value of the Series D and E Preferred Shares ($147.0 million) was recorded as a gain on preferred stock exchange, net of transaction costs, and has reduced McLeodUSA's reported net loss to arrive at net loss available to common stockholders for the period ended September 30, 2001. The Series D and E Preferred Shares are redeemable on a proportionally equal basis, in whole or in part, by the holders within 180 days following September 15, 2009. McLeodUSA can declare mandatory conversion after September 15, 2006 if the 60 day average market price of the Class A common stock exceeds the conversion price by at least 1%. The Series D and E Preferred Shares will accrete for book purposes to its liquidation value of $1 billion by September 15, 2009, using the effective interest method, which will reduce prospective earning available to common stockholders.

McLeodUSA elected not to declare the quarterly stock dividend on its Series A preferred stock that otherwise would have been payable on November 15, 2001. The dividend is payable in cash or in shares of McLeodUSA Class A common stock at a rate of $4.21875 per share of Series A preferred stock owned. The dividend will continue to accumulate at the rate of 6.75% annually. As of September 30, 2001, cumulative unpaid dividends totaled approximately $2.4 million.

As of December 3, 2001 based on McLeodUSA's business plan, capital requirements and growth projections as of that date, McLeodUSA estimates that it will spend no more than $475 million from September 30, 2001 through the end of 2002 on its planned capital expenditures. McLeodUSA's estimated aggregate capital expenditures include the projected costs of completing current construction work-in-progress, augmenting existing capacity and meeting new customer requirements.

McLeodUSA expects to have funds available for these needs from various sources, including existing cash balances, the existing McLeodUSA lines of credit, prospective sales of selected non-core assets and cash flow from future operations.

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

•: strategic acquisition costs and effects of acquisitions on McLeodUSA's business plan, capital requirements and growth projections;
•: unforeseen delays;
•: cost overruns;
•: engineering design changes;
•: changes in demand for McLeodUSA's services;
•: regulatory, technological or competitive developments;
•: new opportunities;
•: timely and satisfactory sale of non-core assets; and
•: implementation of the restructuring.

McLeodUSA also requires substantial funds for general corporate and other expenses and may require additional funds for working capital fluctuations.

Market Risk

At September 30, 2001, McLeodUSA recorded the marketable equity securities that it holds at a fair value of $3.6 million. These securities have exposure to price risk. A hypothetical ten percent adverse change in quoted market prices would amount to a decrease in the recorded value of investments of approximately $0.4 million. McLeodUSA believes its exposure to market price fluctuations on all other investments is nominal due to the short-term nature of its investment portfolio. Substantially all of its long-term debt obligations are fixed rate obligations which do not expose McLeodUSA to material future earnings or cash flow exposure from changes in interest rates. McLeodUSA's fixed rate debt trades at a significant discount to its face amount due in part to the volatility of the financial markets relating to the telecommunications industry. Under these circumstances, it is difficult to analyze the effect that a change in interest rates would have on the fair value of McLeodUSA's fixed rate debt. Because of the significant discounting of McLeodUSA's fixed rate debt, for reasons unrelated to interest rates, McLeodUSA does not believe that a hypothetical change of one percentage point in average interest rates would have a material effect on the fair value of McLeodUSA's fixed rate debt. McLeodUSA has variable rate debt of $575 million under the Tranche B term facility and $175 million under the Tranche A term facility of its bank credit agreement outstanding at September 30, 2001. If market interest rates average 1% more in subsequent quarters than the rates during the quarter ended September 30, 2001, quarterly interest expense would increase by $1.9 million. This amount was determined by calculating the effect of the hypothetical interest rate increase on McLeodUSA's variable rate debt for the quarter and does not assume changes in McLeodUSA's financial structure. McLeodUSA borrowed an additional $250 million under its Credit Agreement subsequent to September 30, 2001.

Effects of New Accounting Standards

Accounting for Business Combinations

In July 2001, the FASB issued SFAS No. 141, "Accounting for Business Combinations," effective for all business combinations initiated and made after June 30, 2001. SFAS 141 requires all business combinations be accounted for under the purchase method and establishes additional reporting requirements for business combinations. McLeodUSA currently accounts for all business combinations under the purchase method and does not expect adoption of this statement to have an effect on McLeodUSA's operations.

Accounting for Goodwill and Other Intangible Assets

In July 2001, the FASB issued SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Early implementation is not allowed. SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and for separately recognized (non-goodwill) intangible assets that have an indefinite useful life. Under this approach, goodwill and intangibles with indefinite lives will not be amortized, but will be periodically reviewed for impairment and expensed against earnings only in periods in which the recorded value exceeds the fair value. McLeodUSA has not yet quantified the impacts of adopting this statement, but it could result in a significant reduction in goodwill and intangibles, changes to amortization expense and the classification and recording of intangibles currently on the books, as well as any future acquisitions.

Accounting for Asset Retirement Obligations

In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the legal or contractual removal obligation is incurred. The statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. McLeodUSA is currently evaluating the impact that the statement will have on its financial position and the results of operations.

Accounting for the Impairment or Disposal of Long-Lived Assets

SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued in October, 2001. The statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. McLeodUSA is currently evaluating the impact that the statement will have on its financial position and the results of operations.

Inflation

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

PROJECTIONS OF CERTAIN FINANCIAL DATA
FOR IN-COURT RESTRUCTURING

In connection with a possible In-Court Restructuring, McLeodUSA's management analyzed the ability of McLeodUSA to meet its obligations upon consummation of such Restructuring with sufficient liquidity and capital resources to conduct its businesses. McLeodUSA's management also has developed McLeodUSA's business plan and prepared certain projections of McLeodUSA's operating profit, free cash flow and certain other items for the fiscal years 2002 through 2005 (the "Projection Period"). Such projections summarized below are based upon assumptions and have been adjusted to reflect the terms of a possible In-Court Restructuring, including the bankruptcy plan, certain subsequent events and additional assumptions, including those set forth below (as adjusted, the "Projections").

MCLEODUSA DOES NOT, AS A MATTER OF COURSE, PUBLISH ITS BUSINESS PLANS, BUDGETS OR STRATEGIES OR MAKE EXTERNAL PROJECTIONS OR FORECASTS OF ITS ANTICIPATED FINANCIAL POSITIONS OR RESULTS OF OPERATIONS. ACCORDINGLY, MCLEODUSA DOES NOT ANTICIPATE THAT IT WILL, AND DISCLAIMS ANY OBLIGATION TO, FURNISH UPDATED BUSINESS PLANS, BUDGETS OR PROJECTIONS TO NOTEHOLDERS PRIOR TO THE EFFECTIVE DATE OF ANY IN-COURT RESTRUCTURING OR TO INCLUDE SUCH INFORMATION IN DOCUMENTS REQUIRED TO BE FILED WITH THE SEC OR OTHERWISE MAKE SUCH INFORMATION PUBLICLY AVAILABLE.

The following forecast was not prepared with a view toward compliance with published guidelines of the SEC or the American Institute of Certified Public Accountants regarding forecasts. Arthur Andersen LLP, the independent auditors of McLeodUSA, have not examined, compiled or otherwise applied procedures to the forecast and, consequently, do not express an opinion or any other form of assurance with respect to the forecast. McLeodUSA believes, however, that the forecast data is measured on a basis consistent with generally accepted accounting principles ("GAAP") as applied to McLeodUSA's historical financial statements.

The Projections should be read in conjunction with the assumptions, qualifications and explanations set forth herein and the "Business," "Unaudited Historical and Pro Forma Capitalization," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the Consolidated Financial Statements (including the notes and schedules thereto) included in this Offering Memorandum and Disclosure Statement.

Principal Assumptions for the Projections

The Projections are based on, and assume the successful implementation of, McLeodUSA's business plan and the Restructuring. Both the business plan and the Projections reflect numerous assumptions, including various assumptions regarding the anticipated future performance of McLeodUSA, industry performance, general business and economic conditions and other matters, most of which are beyond the control of McLeodUSA. In addition, the assumptions take into account the uncertainty and disruption of business that accompany an In-Court Restructuring. Therefore, although the Projections are necessarily presented with numerical specificity, the actual results achieved during the Projection Period will vary from the projected results. These variations may be material. Accordingly, no representation can be or is being made with respect to the accuracy of the Projections or the ability of McLeodUSA or reorganized McLeodUSA to achieve the projected results of operations. See "Risk Factors."

Although McLeodUSA believes that the assumptions underlying the Projections, when considered on an overall basis, are reasonable in light of current circumstances, no assurance can be or is given that the Projections will be realized. In deciding whether to vote to accept or reject the bankruptcy plan, Noteholders must make their own determinations as to the reasonableness of such assumptions and the reliability of the Projections. See "Risk Factors." Moreover, the Projections were prepared solely in connection with a possible In-Court Restructuring. The assumptions underlying the expected

future results of operations in an In-Court Restructuring may not necessarily apply in an Out-of-Court Restructuring.

Additional information relating to the principal assumptions used in preparing the Projections is set forth below:

General Economic Conditions: The Projections take into account the current difficult economic environment which is negatively impacting the demand for communications services. The Projections assume that the general weakness in economic activity will continue to affect McLeodUSA's near term financial performance. Thereafter a return to a more favorable economic climate is expected, which will increase demand for retail and wholesale communications services.

Other General Assumptions: An In-Court Restructuring will also negatively impact McLeodUSA's near term performance by increasing customer uncertainty and by distracting management away from the day-to-day operation of the business to focus on taking the actions necessary to promote the long term stability of the enterprise. In addition, the divestitures contemplated by the operational restructuring will require a significant amount of management's time and attention. In connection with the operational restructuring process, the Projections contemplate the divestiture of a number of non-core businesses and assets. The associated revenue, costs, working capital and other assets and liabilities are excluded from the consolidated results at the time such divestitures are assumed to occur. The asset divestitures are projected to be a significant source of liquidity for McLeodUSA during the Projection Period. By the third quarter of 2003, McLeodUSA management expects to generate more than $250 million in cash proceeds from divestitures of non-core assets, not including the Pubco and ICTC divestitures.

Revenues: Revenue figures are an aggregation of revenues from the four lines of business within McLeodUSA: (1) communications services; (2) local exchange services; (3) directory; and (4) other. In connection with the Restructuring, Pubco will be sold, along with certain assets in each of the other four lines of business. The Projections also assume the sale of ICTC and DTG, both within 14 months of the completion of the Restructuring. As a result of lost sales from these businesses, overall sales will decline through 2003. Sales in McLeodUSA's core retail and wholesale businesses are projected to increase, however, as a result of the growth in customers and new communications access lines and increased usage of the Company's data products.

Cost of Service: Cost of service includes local and long distance services purchased from MegaBells and interexchange carriers, the cost of providing local exchange services to customers in the independent local exchange service areas, and the cost of operating McLeodUSA's own fiber optic communications networks. The cost of service will decline primarily as a result of the business units divested. In the remaining business units, the cost of service declines will also be driven by significant changes in the residential and business platform distributions. Specifically, there is projected to be a significant decline in resale business as a percent of total revenues, which will be replaced by the growth in on-switch business as a percent of total revenues. Providing service utilizing an on-switch platform generally is a lower cost alternative to resale.

Selling, General and Administrative Expense: Selling, general and administrative (SG&A) consists of sales, marketing, customer service and administrative expenses, including the costs associated with operating McLeodUSA's communications network. SG&A is projected to decline substantially as a percent of revenues due to a number of initiatives designed to reduce costs and re-focus McLeodUSA's operations on its 25-state footprint. These include a reduction in the workforce announced in the second and fourth quarters of 2001; sales force initiatives undertaken in the third and fourth quarters of 2001 which eliminated lower productivity sales representatives and sales support costs; and a near-term decline in sales commission, order management costs and network provisioning costs driven by a decrease in the rate of addition of new communications access lines. However, these declines will be partially offset by the cost of a customer retention program during an In-Court Restructuring.

Interest Expense: The Projections reflect the amended terms of the Credit Agreement that will be effective upon consummation of the Restructuring and the elimination of all note interest as a result of the Restructuring.

Income Taxes: The projections reflect that McLeodUSA is not anticipated to generate positive pretax income and therefore no income tax expense is reflected during the Projection Period.

Capital Expenditures: Capital expenditures are lower as a percent of revenue than historical levels principally due to the completion in 2000 and 2001 of the majority of the McLeodUSA's facilities based infrastructure investments.

Working Capital: Trade receivables, inventory, and accounts payable levels are projected according to historical relationships with respect to purchase and sales volumes.

Fresh-Start Reporting: The American Institute of Certified Public Accountants has issued a Statement of Position on Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (the "Reorganization SOP"). Because of the possibility that McLeodUSA may commence a proceeding under Chapter 11, the Projections have been prepared generally in accordance with the "fresh-start" reporting principles set forth in the Reorganization SOP, giving effect thereto as of March 31, 2002. The principal effects of the application of these fresh-start principles are summarized below:

For purposes of the Projections, it has been assumed the leveraged net equity balance as of the effective date of the plan of reorganization is $1.15 billion. The projections also assume that after giving effect to certain eliminations in connection with the reorganization, the fair value of reorganized McLeodUSA's fixed assets and other non-current assets will be equal to the projected net book value of such assets as of the effective date, except that the property, plant and equipment and goodwill accounts will be reduced accordingly.

The foregoing assumptions and resulting computations were made solely for purposes of preparing the Projections. Upon emergence from any Chapter 11 proceeding, McLeodUSA would be required to determine the amount by which its reorganization value as of the effective date exceeds, or is less than, the fair value of its assets as of the effective date of the plan. Such determination would be based upon the fair values at that time, which may be based on, among other things, a different methodology with respect to the valuation of McLeodUSA's value. In any event, such valuations, as well as the determination of the fair value of McLeodUSA's assets and the determination of its actual liabilities, would be made as of the effective date of the plan, and the changes between the amounts of any or all of the foregoing items as assumed in the Projections and the actual amounts thereof as of the effective date may be material.

Projections

The projected consolidated financial statements of McLeodUSA set forth below have been prepared based on the assumption that the effective date of the plan of reorganization would be March 30, 2002. Although McLeodUSA would seek to cause the effective date to occur as soon as practicable, there would be no assurance as to when the effective date actually would occur. The Reorganized McLeodUSA and Subsidiaries Projected Consolidated Balance Sheets as of March 30, 2002 (the "Projected Consolidated Opening and Closing Balance Sheet") set forth below present: (a) the projected consolidated financial position required to reflect confirmation and the consummation of the transactions contemplated by a plan of reorganization (collectively, the "Balance Sheet Adjustments"); and (b) the projected consolidated financial position of McLeodUSA after giving effect to the Balance Sheet Adjustments, as of March 30, 2002. The Balance Sheet Adjustments set forth in the columns captioned "Sale of Pubco," "Forstmann Little Investment," "Debt Restructuring" and "Fresh Start Accounting Adjustments" reflect the assumed effects of confirmation and the consummation of the transactions contemplated by a plan of reorganization plan, including the

settlement of various liabilities and related securities issuances, cash payments and borrowings. The various Balance Sheet Adjustments are described in greater detail in the Notes to the Projected Consolidated Opening and Closing Balance Sheet.

The Reorganized McLeodUSA and Subsidiaries Projected Consolidated Balance Sheets as of the end of fiscal years 2001 through 2005 set forth on the following pages present the projected consolidated position of McLeodUSA after giving effect to confirmation and the consummation of the transactions contemplated by the plan of reorganization, as of the end of each fiscal year in the Projection Period.

The Reorganized McLeodUSA and Subsidiaries Projected Consolidated Income Statement set forth below presents the projected consolidated results of operations for each fiscal year included in the Projection Period.

McLEODUSA INCORPORATED AND SUBSIDIARIES

PROJECTED CONSOLIDATED OPENING AND CLOSING BALANCE SHEET

(IN-COURT RESTRUCTURING)

		(Unaudited) (In Millions)
		March 30, 2002
		Projected Pre-Confirmation			Sale of Pubco			Forstmann Little Investment			Debt Restructuring			Fresh Start Accounting Adjustments			Projected Post-Confirmation
ASSETS
Current Assets
	Cash, cash equivalents, and available for sale securities	$	58.9		$	533.5	(1)	$	100.0	(3)	$	(595.0	)	$	—		$	97.4
	Trade receivables, net		297.0			(103.8	)(2)		—			—			—			193.1
	Inventory		13.3			—			—			—			—			13.3
	Deferred expenses		52.6			(52.6	)(2)		—			—			—			—
	Prepaid expense and other		24.9			(3.7	)(2)		—			—			—			21.2

	TOTAL CURRENT ASSETS		446.6			373.4			100.0			(595.0	)		—			325.0
Long-Term Assets
	Property, plant and equipment, net		2,580.0			(32.1	)(2)		—			—			(328.2	)(8)		2,219.7
	Goodwill and other intangibles, net		1,415.4			(320.9	)(2)		—			—			(1,094.5	)(8)		—
	Other investments		34.8			—			—			—			—			34.8
	Other long-term assets		116.9			—			—			(43.9	)(4)		—			73.0

	TOTAL LONG-TERM ASSETS		4,147.2			(353.0	)		—			(43.9	)		(1,422.7	)		2,327.5
TOTAL ASSETS		$	4,593.8		$	20.5		$	100.0		$	(638.9	)	$	(1,422.7	)	$	2,652.6

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Accounts payable	$	179.4		$	(24.6	)(2)	$	—		$	—		$	—		$	154.7
	Deferred revenue, less current portion		13.9			—			—			—			—			13.9
	Customer deposits		37.3			(31.8	)(2)		—			—			—			5.5
	Other current liabilities		412.0			(6.2	)(2)		—			(112.0	)(5)		—			293.7

	TOTAL CURRENT LIABILITIES		642.6			(62.7	)		—			(112.0	)		—			467.9
Long-Term Liabilities
	Long-term debt, including current maturities		3,966.6			(2.6	)(2)		—			(2,961.6	)(6)		—			1,002.5
	Deferred revenue, less current portion		14.7			—			—			—			—			14.7
	Other long-term liabilities		17.4			—			—			—			—			17.4

	TOTAL LONG-TERM LIABILITIES		3,998.8			(2.6	)		—			(2,961.6	)		—			1,034.7
Stockholders' Equity			(47.6	)		85.7	(2)		100.0			2,434.6	(7)		(1,422.7	)(8)		1,150.0
TOTAL LIABILITIES AND EQUITY		$	4,593.8		$	20.5		$	100.0		$	(638.9	)	$	(1,422.7	)	$	2,652.6

Notes to Projected Consolidated Opening and Closing Balance Sheet

(1): Proceeds received from the sale of Pubco are assumed to be $535 million. Pubco's estimated $1.5 million cash balance is reflected as a netting item from consolidated cash in this column. Proceeds are used to retire Notes in the Exchange Offer.
(2): Balance sheet adjustments to reflect the sale of Pubco.
(3): $100 million new money investment by Forstmann Little, in exchange for New Preferred Stock and New Warrants. Of this, $25 million will be used to retire Notes in the Restructuring, $35 million will be used to repay Term Loan A and Term Loan B loans under the Credit Agreement on a pro rata basis (see (6) below), and $40 million will remain with McLeodUSA.
(4): Elimination of deferred financing costs associated with the Notes.
(5): Elimination of accrued interest payable on the Notes.
(6): Elimination of the Notes in connection with the Restructuring ($2,926 million) and prepayment of Term Loan A and Term Loan B loans under the Credit Agreement on a pro rata basis ($35 million)
(7): All preferred stock will be converted into Class A common stock in connection with the Restructuring.
(8): "Fresh Start" accounting adjustments to reflect a leveraged net equity balance equal to the Reorganization Equity Value of $1.15 billion.

McLEODUSA INCORPORATED AND SUBSIDIARIES

PROJECTED CONSOLIDATED BALANCE SHEETS

(IN-COURT RESTRUCTURING)

		(Unaudited) (in Millions)
		2001		2002		2003		2004			2005
ASSETS
Current Assets
	Cash, cash equivalents, and available for sale securities	$	147.8	$	78.4	$	64.9	$	69.1		$	107.8
	Trade receivables, net		307.4		160.9		158.8		205.1			254.6
	Inventory		13.2		11.8		11.0		12.7			14.6
	Deferred expenses		51.3		—		—		—			—
	Prepaid expense and other		24.8		17.6		16.1		19.3			22.7

	TOTAL CURRENT ASSETS		544.5		268.8		250.8		306.2			399.8
Long-Term Assets
	Property, plant and equipment, net		2,682.0		1,871.3		1,160.6		810.6			433.1
	Goodwill and other intangibles, net		1,453.4		—		—		—			—
	Other investments		33.2		39.7		46.2		52.7			59.2
	Other long-term assets		119.5		71.0		68.4		65.8			63.3

	TOTAL LONG-TERM ASSETS		4,288.2		1,982.0		1,275.2		929.1			555.6
TOTAL ASSETS		$	4,832.7	$	2,250.7	$	1,526.0	$	1,235.3		$	955.4

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Accounts payable	$	184.7	$	131.9	$	124.9	$	137.6		$	147.6
	Deferred revenue, less current portion		13.9		13.9		13.9		13.9			13.9
	Customer deposits		37.2		3.8		2.9		3.4			4.0
	Other current liabilities		435.2		278.4		268.7		286.8			306.1

	TOTAL CURRENT LIABILITIES		671.0		427.9		410.4		441.8			471.7
Long-Term Liabilities
	Long-term debt, including current maturities		3,964.1		990.4		724.5		783.3			708.8
	Deferred revenue, less current portion		15.4		12.8		10.2		7.6			5.0
	Other long-term liabilities		17.4		12.4		11.3		13.5			15.9

	TOTAL LONG-TERM LIABILITIES		3,996.8		1,015.6		745.9		804.4			729.8
Stockholders' Equity			164.8		807.3		369.7		(10.9	)		(246.1	)
TOTAL LIABILITIES AND EQUITY		$	4,832.7	$	2,250.7	$	1,526.0	$	1,235.3		$	955.4

McLEODUSA INCORPORATED AND SUBSIDIARIES

PROJECTED CONSOLIDATED INCOME STATEMENT

(IN-COURT RESTRUCTURING)

		(Unaudited) (in Millions)
		2001			2002			2003			2004			2005
Revenues:
	Communications services	$	1,408.1		$	1,290.0		$	1,110.2		$	1,293.9		$	1,535.7
	Directory		302.7			79.0			—			—			—
	Local exchange services & other		108.2			98.8			—			—			—

TOTAL REVENUES			1,819.0			1,467.8			1,110.2			1,293.9			1,535.7
Operating Expenses:
	Cost of service		1,071.9			879.8			642.6			705.1			765.1
	Selling, general and administrative		665.4			449.8			355.7			376.2			393.9
	Depreciation and amortization		619.6			551.9			502.5			521.9			543.8
	Restructuring, asset impairment, and other charges		2,955.4			45.0			—			—			—

TOTAL OPERATING EXPENSES			5,312.3			1,926.5			1,500.8			1,603.2			1,702.9
OPERATING INCOME (LOSS)			(3,493.3	)		(458.7	)		(390.6	)		(309.3	)	��	(167.1	)
Nonoperating income (expense):
	Interest income		10.5			2.4			2.8			2.9			2.4
	Interest expense, net of amounts capitalized		(257.0	)		(100.2	)		(69.8	)		(74.2	)		(70.5	)
	Other income (expense)		116.8			1,199.1			20.0			—			—

TOTAL NONOPERATING INCOME (EXPENSE)			(129.8	)		1,101.3			(46.9	)		(71.3	)		(68.1	)
NET INCOME (LOSS)		$	(3,623.0	)	$	642.4		$	(437.5	)	$	(380.6	)	$	(235.2	)

McLEODUSA INCORPORATED AND SUBSIDIARIES

PROJECTED CONSOLIDATED CASH FLOW STATEMENT

(IN-COURT RESTRUCTURING)

		(Unaudited) (in Millions)
		2001			2002			2003			2004			2005
CASH FLOW STATEMENT
Cash Flows from Operating Activities
	Net Income	$	(3,623.0	)	$	642.4		$	(437.5	)	$	(380.6	)	$	(235.2	)
	Depreciation		392.8			516.6			502.5			521.9			543.8
	Amortization		226.8			35.3			—			—			—
	Accretion on senior discount notes		48.7			—			—			—			—
	Gain on sale of assets		(121.7	)		(2,330.1	)		(20.0	)		—			—
	Restructuring asset impairment and other charges		2,925.8			1,130.6			—			—			—
	Changes in assets & liabilities, net		(264.1	)		32.9			(5.4	)		(17.5	)		(22.5	)

	NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(414.8	)		27.7			39.6			123.8			286.1
Cash Flows From Investing Activities
	Purchases of property and equipment		(764.9	)		(240.5	)		(150.7	)		(171.9	)		(166.3	)
	Proceeds from sale of assets		170.8			667.0			350.0			—			—
	Other		(12.9	)		(13.8	)		(6.5	)		(6.5	)		(6.5	)

	NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES	��	(607.0	)		412.8			192.8			(178.4	)		(172.8	)
Cash Flows from Financing Activities
	Net proceeds from long-term debt		1,159.3			—			—			100.0			—
	Payments on long-term debt		(20.4	)		(610.0	)		(245.9	)		(41.1	)		(74.5	)
	Net proceeds from issuance of common stock		34.7			—			—			—			—
	Payments of preferred stock dividends		(26.3	)		—			—			—			—
	New investment in company		—			100.0			—			—			—

	NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		1,147.3			(510.0	)		(245.9	)		58.9			(74.5	)
Net Change in Cash and Cash Equivalents		$	125.5		$	(69.5	)	$	(13.5	)	$	4.3		$	38.7

BUSINESS

Overview

McLeodUSA provides integrated communications services, including local services, primarily in 25 Midwest, Southwest, Northwest and Rocky Mountain states. McLeodUSA is a facilities-based telecommunications provider with, as of September 30, 2001, 393 Asynchronous Transfer Mode (ATM) switches, 58 voice switches, 437 collocations, 520 Digital Subscriber Line Access Multiplexers (DSLAMs), over 31,000 route miles of fiber optic cables and approximately 10,700 employees. Its Class A common stock is traded under the symbol "MCLD."

McLeodUSA derives most of its revenue from its core competitive telecommunications and related communications services, including:

•: local and long distance services;
•: dial-up and dedicated Internet access services;
•: high speed Internet access services, such as services delivered using digital subscriber lines (DSL) and cable modems;
•: bandwidth leasing and collocation services;
•: facilities and services dedicated for a particular customer's use; and
•: value-added services such as virtual private networks and web hosting.

McLeodUSA derives additional communications services revenues from the following non-core, communications services:

•: telephone and computer sales, leasing, networking, service and installation; and
•: other communications services, including video, cellular, operator, payphone, mobile radio and paging services.

McLeodUSA also derives revenue from the following services related to its core business:

•: sale of advertising in print and electronic telephone directories; and
•: traditional local telephone company services in east central Illinois and southeast South Dakota.

For the three months ended September 30, 2001, McLeodUSA derived 79% of its total revenues from communications services (excluding traditional local telephone company services), 15% from its telephone directory business, 5% from traditional local telephone company services and 1% from other services.

The following chronology highlights some of the important events in the development of McLeodUSA's business:

Date		Event
November 1992		Began providing fiber optic maintenance services for the Iowa Communications Network, a fiber optic communications network that links many schools, libraries and other public buildings in the State of Iowa.
December 1993		Received regulatory approvals in Iowa and Illinois to offer local service along with long distance service.
June 1996		Completed its initial public offering of Class A common stock.
July 1996		Acquired Ruffalo, Cody & Associates, Inc., a telemarketing company.

September 1996		Acquired Telecom*USA Publishing Group, Inc., a telephone directory company.
September 1997		Acquired Consolidated Communications Inc., a diversified telecommunications company offering a variety of products and services, including local exchange and long distance services and telephone directory publishing.
February 1999		Acquired Talking Directories, Inc. and Info America Phone Books, Inc., related companies publishing and distributing telephone directories primarily in Michigan and Northwestern Ohio.
March 1999		Acquired Dakota Telecommunications Group, Inc., a diversified communications company offering a variety of products and services, including local exchange, long distance and data services and cable television operations.
		Acquired Ovation Communications, Inc., a diversified telecommunications company offering a variety of products and services, including local and network access, local and long distance telephone services and Internet access, which facilitated expansion into selected major metropolitan markets.
August 1999		Acquired Access Communications Holdings, Inc., a telecommunications company providing switch-based commercial and residential services, including traditional long distance service and an enhanced 800 product.
September 1999		Completed the sale of its Series B and C preferred stock to three Forstmann Little partnerships for $1 billion.
March 2000		Acquired Splitrock, a facilities-based provider of advanced data communications services.
May 2000		Completed its Credit Agreement in the amount of $1.3 billion.
December 2000		Acquired CapRock, a facilities-based integrated communications provider, primarily to small and medium-sized business and carrier customers in the Southwest.
September 2001		Revised its corporate strategy as discussed below.
		Exchanged its Series B and C preferred stock for Series D and E preferred stock eliminating annual cash dividends of $35 million.

McLeodUSA was incorporated as an Iowa corporation on June 6, 1991 and was reincorporated in the State of Delaware on August 1, 1993. McLeodUSA's principal executive offices are located at 6400 C. Street SW, Cedar Rapids, Iowa 52406. Its telephone number is (319) 364-0000.

McLeodUSA's Business Strategy

On September 28, 2001, McLeodUSA's Board of Directors approved a plan to revise its corporate strategy to focus primarily on providing voice and data services to small and medium size businesses and residential customers within its 25-state footprint. As a result McLeodUSA abandoned its plan for a national network and will de-emphasize certain wholesale services. In connection with this revised corporate strategy McLeodUSA has also decided to take the following actions:

•: abandon the development of a national network and place the associated assets for sale and, in addition, sell other non-core assets and excess inventory;
•: reduce employment by approximately 15% and execute plans to consolidate certain existing facilities and eliminate certain others;

•: reduce capital expenditure plans for 2002 from $400 million to $350 million, primarily focused on completing current construction work-in-process, augmenting existing capacity where needed, and new customer requirements;
•: take charges of approximately $2.9 billion in the third quarter to reflect write-downs of goodwill and other long-lived assets, write off inventory and construction work-in-process for discontinued operations and establish a restructuring reserve for a reduction in force and facility consolidation; and
•: record charges to operating income of approximately $35 million in the third quarter associated with balance sheet adjustments to various accounts such as prepaid expenses, receivables and bad debt reserves.

As part of the revised corporate strategy, McLeodUSA has also established five cross-functional business process teams to strengthen business processes and bring improvements to its operations. These teams are focused on sales efficiencies, provisioning and customer installation, billing and revenue assurance, cash management and business forecasting and planning.

Telecommunications Industry

Industry sources have estimated that the 2000 aggregate U.S. revenues for local, long distance, private line and data were approximately $200 billion. Of that total, just over half is represented by local service revenue. The communications industry is undergoing substantial changes due to statutory, regulatory and technological developments, changes in the competitive landscape, and mergers and acquisitions in the industry. The market for local exchange services consists of a number of distinct service components, including:

•: local network services, which generally include basic dial tone, local area charges, enhanced calling features and private line services (dedicated for a customer's use between locations); and
•: network access services, which consist of access provided by local exchange carriers to long distance communications network carriers.

Other related services include operator services, Internet access, calling cards, publication of "white page" and "yellow page" telephone directories and the sale of business telephone equipment.

Before 1984, AT&T largely monopolized local and long distance telephone services in the United States. In 1984, as the result of a court order approving a settlement agreement in an antitrust action, AT&T was required to divest its local telephone systems (the "Divestiture"). The Divestiture and subsequent related proceedings divided the country into 201 Local Access and Transport Areas ("LATAs"). As part of the Divestiture, AT&T's former local telephone systems were organized into seven independent regional Bell holding companies. The original seven regional Bell companies, together with GTE, which was the largest non-Bell telephone company at the time of the Divestiture, are now concentrated into four large incumbent "MegaBells." Those companies have the authority to provide local telephone service, local access service and intraLATA long distance service, but are required to demonstrate on a state-by-state basis that certain competitive conditions have been met

before being allowed to provide in-region interLATA service. SBC has obtained such authority in Texas, Oklahoma, Kansas, Missouri and Arkansas. Qwest has indicated its intention to seek authority in all 14 states where it provides local service. Verizon has obtained such authority in New York, Massachusetts, Connecticut and Pennsylvania and its application for such authority in Rhode Island is pending before the FCC. BellSouth's application for such authority in Georgia and Louisiana is pending. The MegaBells are likely to obtain additional authorizations in many states in the next few years. The MegaBells have generally been successful in gaining market share and driving down prices after obtaining such authority.

Opportunities to compete in the local exchange market expanded substantially on February 8, 1996, when the Telecommunications Act of 1996 was signed into law. The Telecommunications Act of 1996 eliminated state legal barriers to local exchange competition and required entrenched, traditional local exchange carriers to allow other providers of telecommunications services to purchase elements of their local communications network offerings and to interconnect with their communications facilities and equipment. In addition, entrenched, traditional local exchange carriers are obligated to provide local number portability and dialing parity upon request and make their local services available for resale by competitors. Entrenched, traditional local exchange carriers also are required to allow competitors nondiscriminatory access to poles, conduit space and other rights-of-way. A number of states have also taken additional regulatory and legislative action to open local communications markets to various degrees of competition.

According to the FCC, as of December 2000, CLECs provided 16.4 million, or 8.5% of the approximately 194 million in-service local telephone lines used by end-users, representing 97% growth in CLEC market size during the year 2000. About one-third of these lines are served over local loop facilities that the CLECs own.

Long distance carriers generated over $100 billion in toll revenues during 2000, according to the FCC. Local telephone companies provided about $8 billion in toll services during the same period, making the total long distance market approximately $108 billion.

The FCC estimates that high-speed (200 kbps or more in at least one direction) data lines connecting and homes small businesses to the Internet increased by 63% during the second half of 2000, to a total of 7.1 million lines (or wireless channels) in service by year-end.

Wireless communications continue to grow as an alternative to wireline service. Demand for wireless communications has grown rapidly over the past decade. According to the Cellular Telecommunications & Internet Association, the number of wireless telephone subscribers nationwide has grown from approximately 680,000 in 1986 to an estimated 118 million as of June 30, 2001, with annual growth of approximately 22% from June 2000 through June 2001.

McLeodUSA's Products and Services

Integrated Communications Services

As of December 31, 2000, McLeodUSA provided service, on a competitive retail basis, to about 1.1 million local lines in its markets, primarily to small and medium sized business customers in major metropolitan areas and in second and third tier markets, and to residential customers in second and third tier markets. Since beginning sales activities in January 1994, McLeodUSA has increased its revenue from the sale of local and long distance telecommunications services from $4.6 million for the year ended December 31, 1994 to $716.2 million for the year ended December 31, 2000.

McLeodUSA has received state regulatory approval to offer local switched services using its own communications network facilities in each of the 25 states in its footprint. The footprint includes:

Ohio
Indiana
Illinois
Michigan
Wisconsin

Texas
Oklahoma
Kansas
Missouri
Arkansas

Iowa
Minnesota
North Dakota
South Dakota
Nebraska

Montana
Wyoming
Colorado
Utah
Idaho

Arizona
New Mexico
Washington
Oregon
Louisiana

McLeodUSA has also received state regulatory authority to offer local services in most of the other 48 contiguous states. McLeodUSA intends to offer additional local switched services using its own network facilities, either alone or in combination with network elements purchased from existing telephone companies, in selected markets in its 25-state footprint.

McLeodUSA has interconnection agreements with Qwest in all states where Qwest is the traditional local service provider, with SBC (through its subsidiaries) in all states where Ameritech or Southwestern Bell Telephone Company is the traditional local service provider, and with Verizon (through its GTE entities) and BellSouth in certain states. These agreements allow McLeodUSA to resell services of these entities and to purchase unbundled network elements to connect its switching equipment and facilities to customers.

McLeodUSA provides long distance service in some areas by purchasing communications network capacity, in bulk, from national long distance carriers, and routing its customers' long distance traffic over this capacity. In many of its local footprint states, McLeodUSA carries most of its long distance traffic on its own network facilities. McLeodUSA's integrated communications services are further delineated as follows:

Business Services. End-user business customers can obtain integrated services and ancillary services, such as three-way calling and call transfer, directly from McLeodUSA in each of the cities and towns in which McLeodUSA offers communications services. Integrated business services include local and long distance services, dial-up and dedicated Internet access, lower-cost, high-speed Internet access services, such as DSL and cable modems, and value-added services such as virtual private networks and web hosting. We use our telemarketing sales personnel to sell communications services to small businesses.

Residential Services. McLeodUSA introduced its PrimeLine® service in 1996 and now offers that service to residential customers in various cities and towns in several selected states. McLeodUSA's traditional PrimeLine® service includes local and long distance telephone service. In most areas, PrimeLine® service also includes enhanced features such as three-way calling, call transfer, and consultation hold. McLeodUSA's customers can add voice mail, Internet access, and travel card services to their basic PrimeLine® service at incremental rates. We use our telemarketing sales personnel for sales of our PrimeLine® residential services.

Dedicated Facilities and Services. McLeodUSA provides, on a private carrier basis, a wide range of special access, private line, and data services to long distance carriers, government agencies, wireless service providers, and cable television and other end-user customers. These services include: (i) point of presence ("POP")-to-POP special access services which provide telecommunications lines that link the POPs of one long distance carrier to different long distance carriers in a market, allowing these POPs to exchange telecommunications traffic for transport to final destinations; (ii) end-user special access services, which provide telecommunications lines that connect an end-user such as a large business to the local POP of its selected long distance carrier; (iii) long distance carrier special access services which provide telecommunications lines that link a long distance carrier POP to the local central office; and (iv) private line services which provide telecommunications lines that connect various locations of a customer's operation to transmit internal voice, video and/or data traffic.

Network Maintenance Services. McLeodUSA also provides maintenance services on segments of the State of Iowa's fiber optic network on a 24-hour-per-day, 365-day-per-year basis, that consist of alarm monitoring, repair services, and cable location services.

Telephone Equipment and Computer Networking Services. Through a subsidiary, McLeodUSA sells, leases, installs and services telephone systems, primarily to small and medium sized businesses in Iowa, Illinois, Minnesota, South Dakota, North Dakota and Colorado. McLeodUSA also provides customized, integrated solutions for computing networks in several states. Such services typically include review of customer system requirements; selection, design and planning of components and networks; and operating and network support services. These non-core assets have been placed for sale.

Video Services. McLeodUSA owns and operates 37 cable television systems in southeastern South Dakota, northwestern Iowa, and southwestern Minnesota, many of which provide cable television service in combination with high-quality fiber-based telecommunications services. McLeodUSA also has a franchise in Cedar Rapids, Iowa pursuant to which it provides cable television service in combination with high quality fiber-based telecommunications services. In addition, McLeodUSA owns 85% of Greene County Partners, Inc., a cable television company which provides cable television services in several locations in Illinois and Michigan. These non-core assets are currently being marketed for sale.

Other Communications Services. McLeodUSA provides pay telephone service, operator services, and paging services in some markets. In addition, McLeodUSA owns a minority interest in a partnership that provides cellular service in central Illinois.

Directory Services

In 2000, McLeodUSA published 234 proprietary "white page" and "yellow page" telephone directory titles and distributed approximately 26.7 million copies of these directories to local telephone subscribers in 26 states, including most of its target markets. In addition, all of its proprietary directories are accessible on the Internet. McLeodUSA also published 265 "white page" and "yellow page" telephone directory titles for other companies and distributed approximately 3.9 million copies of these directories to local telephone subscribers in 37 states and the U.S. Virgin Islands. McLeodUSA's telephone directory services generated 2000 revenues of nearly $250 million, primarily from the sale of advertising space in the directories. Under the Restructuring, McLeodUSA intends to sell this line of business, referred to herein as "Pubco," to Forstmann Little or such other entity that submits a higher and otherwise better offer.

Traditional Local Telephone Services

Through ICTC and Dakota Community Telephone, Inc., McLeodUSA provides traditional local exchange telephone service to subscribers in central Illinois and southeast South Dakota. As of December 31, 2000, ICTC operated in 37 exchanges, or service areas, the largest of which are in Mattoon, Charleston, and Effingham, Illinois, and had approximately 94,000 local access lines in its existing service areas. During 2001, ICTC sold 2 non-contiguous exchanges. ICTC offers a broad range of local exchange services, including long distance carrier access service, intraLATA toll service, local telephone service, local paging service, national directory assistance, and equipment leasing. ICTC also offers most of its local telephone subscribers custom calling features such as call waiting, call forwarding, conference calling, speed dialing, caller identification, and call blocking. Under the Restructuring, McLeodUSA intends to sell ICTC and use the first $225 million in proceeds to pay down obligations under its Credit Agreement.

As of December 31, 2000, Dakota Community Telephone served approximately 7,000 local service access lines in 9 telephone exchanges in southeastern South Dakota. Dakota Community Telephone provides a full range of communications products and services, including local dial tone and enhanced services, local private line and public telephone services, dedicated and switched data transmission

services, long distance telephone services, operator assisted calling services, Internet access and related services. These assets are currently being marketed for sale.

Network Facilities

As of December 31, 2000, McLeodUSA operated a network including 21,600 route miles of fiber optic cable and has expanded this fiber optic network to over 30,000 route miles as of September 30, 2001. As of December 31, 2000, more than 5,000 route miles were located within the cities and towns McLeodUSA serves or plans to serve. McLeodUSA is connected to over 1,200 buildings along its network.

When McLeodUSA acquired Splitrock in 2000, it acquired a broadband access network designed to provide coverage of approximately 90% of the population of the United States and that deploys asynchronous transfer mode (ATM) switches at every core, hub and remote POP. On December 7, 2001, McLeodUSA entered into an agreement to sell certain of these assets. See "Summary—Recent Developments."

Sales and Marketing

Marketing of McLeodUSA's integrated communications services to small and medium sized business customers is primarily conducted by direct sales personnel located in branch sales offices throughout our target market. In addition, McLeodUSA uses telemarketers to market these services to smaller business customers and those located in areas that are geographically remote. Sales activities in McLeodUSA's branch sales offices are organized and managed by region.

In 2000, McLeodUSA expanded its communications sales and marketing efforts in its target market area which now consists of 25 states. McLeodUSA continues its efforts to expand sales and marketing in all states where it is located. In addition, McLeodUSA believes its strategic acquisitions have enhanced its sales and marketing efforts and increased its penetration of existing markets. Acquisitions also help accelerate McLeodUSA entry into new markets. At the end of 2000 McLeodUSA had sales offices in 130 cities, compared to 110 sales offices at the end of 1999. In addition, the sales team selling core communications products to business customers increased to 1,250 at the end of 2000 from 800 at the end of 1999.

Marketing of McLeodUSA's PrimeLine® integrated communications services to residential customers is conducted by inside sales representatives. The telemarketers emphasize the PrimeLine® integrated package of communications services and its flat-rate per minute pricing structure for long distance service.

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

McLeodUSA has also developed and installed customer-focused software for providing integrated communications services. This software permits McLeodUSA to provide its customers one fully integrated monthly billing statement for local, long distance, 800, international, voice mail, paging, Internet access and travel card services, and additional services when available. McLeodUSA believes that its customer-focused software platform is an important element in the marketing of its communications services and gives it a competitive advantage in the marketplace.

McLeodUSA uses its telephone directories as direct mail advertising by including detailed product descriptions and information about its communications products in them. McLeodUSA believes that these telephone directories provide it with a long-term marketing presence in the millions of households and businesses that receive them. McLeodUSA also believes that combining its directories' distinctive black-and-yellow motif with the trade name McLeodUSA strengthens brand awareness in all of its markets. See "Restructuring—Agreements with Forstmann Little—Publishing, Branding and Operating Agreement."

Competition

The communications services industry is highly competitive. McLeodUSA faces intense competition from traditional local exchange carriers, which currently dominate their respective local telecommunications markets. McLeodUSA's long distance services also compete with the services of hundreds of other companies in the long distance marketplace in most states. AT&T, WorldCom (including its MCI group) and Sprint currently dominate the long distance market. McLeodUSA's local and long distance services also compete with the services of other CLECs in some markets. In addition, the number of states in McLeodUSA's footprint where MegaBells are authorized to provide long distance service with their local service offering has grown from one to five during 2001. Other competitors may include cable television companies, competitive access providers, microwave and satellite carriers, wireless telecommunications providers, and private networks owned by large end-users. In addition, McLeodUSA competes with other carriers, numerous direct marketers and telemarketers, equipment vendors and installers, and telecommunications management companies with respect to portions of its business. Many of its existing and potential competitors have financial and other resources far greater than McLeodUSA's.

Many of McLeodUSA's competitors offer a greater range of communications services, or offer them in more geographic areas. For example, while McLeodUSA's target market covers 25 states, many of McLeodUSA's competitors are national or international in scope. Also, some of McLeodUSA's competitors offer wireless services, Internet content services, and other services. McLeodUSA's inability to offer as wide a range of services as many of its competitors, or to offer them in as many locations, could result in McLeodUSA not being able to compete effectively against them.

Regulation

McLeodUSA's services are subject to federal, state and local regulation. The FCC has jurisdiction over McLeodUSA's facilities and services to the extent they are used to provide, originate or terminate interstate or international common carrier communications. State regulatory commissions retain jurisdiction over the same facilities and services to the extent they are used to originate or terminate intrastate common carrier communications. Through its subsidiaries, McLeodUSA holds various federal and state regulatory authorizations. McLeodUSA often joins other industry members in seeking regulatory reform at the federal and state levels to open additional telecommunications markets to competition.

In addition to providing services as a regulated common carrier, through McLeodUSA Network Services, McLeodUSA provides certain competitive access services as a private carrier on a substantially non-regulated basis. In general, a private carrier is one that provides service to customers on an individually negotiated contractual basis, as opposed to a common carrier that provides service to the public on the basis of generally available rates, terms and conditions. Some of McLeodUSA's wholly-owned subsidiaries are also subject to federal and state regulatory requirements, including, in some states, bonding requirements, due to its direct marketing, telemarketing, fund-raising activities and sale of prepaid calling cards.

The FCC classifies McLeodUSA (except McLeodUSA's two traditional local telephone companies) as a nondominant carrier, so its interstate and international rates are not subject to material federal regulation. All McLeodUSA telephone companies must offer interstate services at just and reasonable rates in a manner that is not unreasonably discriminatory. McLeodUSA is also required to make contributions to federal and state universal service support. The FCC does impose prior approval requirements on transfers of control and assignments of radio licenses and operating authorizations and on discontinuation of services. The FCC has the authority to condition, modify, cancel, terminate or revoke such licenses and authorizations for failure to comply with federal laws or the rules, regulations and policies. The FCC may also impose fines or other penalties for such violations. The FCC has levied substantial fines on some carriers for unauthorized changes in a customer's service provider, called slamming, and has recently increased the penalties for such violations.

McLeodUSA provides intrastate common carrier services and is subject to various state laws and regulations. Most public utility commissions subject providers like McLeodUSA to some form of certification requirement, which requires providers to obtain authority from the state public utility commission before initiating service. In most states, McLeodUSA is also required to file tariffs setting forth the terms, conditions and prices for common carrier services that are classified as intrastate. McLeodUSA is often required to update or amend these tariffs when it adjusts its rates or adds new common carrier services, which may require prior regulatory approval, and is subject to various reporting and record keeping requirements in these states. Some states impose service quality standards on its local service operations and require it to file reports showing its performance in meeting those standards.

While McLeodUSA's CLEC and long-distance businesses are subject to some government regulation, its two traditional local telephone businesses, in particular, are more highly regulated at both the federal and state levels.

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

McLeodUSA is required to obtain construction permits and licenses or franchises to install and expand its fiber optic communications networks using rights-of-way. Some local governments where it has installed or anticipates constructing networks are proposing and enacting ordinances regulating use of rights-of-way and imposing various fees in connection with such use. In some instances, McLeodUSA has negotiated interim agreements to authorize installation of facilities pending resolution of the fee issue. In some markets, McLeodUSA is objecting to or challenging various fees as improper. In many markets, the traditional local exchange carriers do not pay rights-of-way fees or pay fees that are substantially less than McLeodUSA's. McLeodUSA must also negotiate and enter into franchise agreements with local governments in order to operate its video services networks.

The Telecommunications Act of 1996 imposes a number of access and interconnection requirements on all local telephone companies, including CLECs, with additional requirements imposed on incumbent local telephone companies. These requirements are intended to ensure access to certain networks under reasonable rates, terms and conditions. Legislation is pending that could limit the MegaBells' obligations to provide access to their facilities and allow them to provide in-region long distance data services without satisfying existing market-opening requirements.

The FCC has adopted rules regulating the pricing of the provision of unbundled network elements by incumbent local telephone companies. Although the U.S. Supreme Court has upheld the FCC's authority to adopt such pricing rules, the specific pricing guidelines created by the FCC are the subject of additional continued litigation. In addition to proceedings regarding the FCC's pricing rules, the FCC's other interconnection requirements remain subject to further court and FCC proceedings. Recently, the FCC chairman indicated that the FCC plans to initiate a proceeding to review its rules requiring that the regional Bell telephone companies offer unbundled network elements to CLECs such as McLeodUSA. This proceeding may reduce such requirements, which could result in McLeodUSA being unable to provide some local exchange services profitably.

EMPLOYEES

As of September 30, 2001, McLeodUSA had more than 10,700 employees. Approximately 450 ICTC employees are covered by a collective bargaining agreement which expires November 15, 2002. McLeodUSA believes that its future success will depend on its continued ability to attract and retain highly skilled and qualified employees. McLeodUSA believes that its relations with its employees are good.

PROPERTIES

McLeodUSA's headquarters are located in Cedar Rapids, Iowa, on 314 acres it owns and on which it has developed an office complex known as McLeodUSA Technology Park. Its headquarters buildings consist of a one-story, 160,000-square-foot office building used primarily by Pubco; a two-story, 320,000-square-foot office building which also houses telephone switching and computer equipment; a 36,000-square-foot maintenance building and warehouse and a 55,000 square-foot Pubco distribution facility. McLeodUSA also owns a 60,000-square-foot office building in Mattoon, Illinois, and a 55,000-square-foot office building in Sioux Falls, South Dakota.

McLeodUSA also conducts business activities at many other locations, either leased or owned. These include facilities throughout the country used in connection with the construction and operation of its network, including over 400 POP sites as of December 31, 2000. Its locations also include 130 sales offices in its 25 state target markets as of December 31, 2000.

The following are some of the principal facilities at which McLeodUSA has business operations: 54,000 square feet of office space at its former headquarters in downtown Cedar Rapids, Iowa, under leases expiring in 2005; 80,000 square feet of office space in St. Louis, Missouri under a lease expiring in 2009; 100,000 square feet of office and warehouse space in Des Moines, Iowa under a lease expiring in 2015; 56,000 square feet of office space in Salt Lake City, Utah under a lease expiring in 2010; 95,000 square feet of office space in Houston, Texas under a lease expiring in 2009; 86,000 square feet of office space in Dallas, Texas under a lease expiring in 2007; and 80,000 square feet of office space in Tulsa, Oklahoma, which serves as the headquarters for McLeodUSA's network operations, under a lease expiring in 2004.

LEGAL PROCEEDINGS

On December 7, 2000, McLeodUSA acquired CapRock pursuant to an Agreement and Plan of Merger, dated October 2, 2000, in exchange for approximately 15.0 million shares of Class A common stock. Several class action complaints have been filed in the United States District Court for the Northern District of Texas on behalf of all purchasers of CapRock common stock during the period April 28, 2000 through July 6, 2000.

The lawsuits principally allege that, prior to its merger with McLeodUSA, CapRock made material misstatements or omissions of fact in violation of Section 10(b) of the Securities Exchange Act. Consolidated with these claims are allegations that CapRock's June 2000 registration statement for a public offering of common stock contained materially false and misleading statements and omitted certain material information about CapRock in violation of Section 11 of the Securities Act. The named defendants in these lawsuits include CapRock and certain of its officers and directors. The plaintiffs in the lawsuits seek monetary damages and other relief. The defendants intend to file a motion to dismiss at the appropriate time. McLeodUSA believes these lawsuits are without merit and intends to vigorously defend them.

On October 6, 2000, a class action complaint was filed in the County Court at Law of Dallas County, Texas on behalf of CapRock stockholders. This complaint names as defendants CapRock and each member of its board of directors prior to the merger of CapRock and McLeodUSA and principally alleges that the directors violated fiduciary duties owed to CapRock stockholders in connection with entering into the merger agreement. The plaintiffs in the lawsuit seek unspecified monetary damages. While plaintiffs also sought an injunction in their pleadings, no application for such an injunction was brought to the court. McLeodUSA believes the lawsuit is without merit and intends to vigorously defend the lawsuit.

McLeodUSA is not aware of any other material litigation against it. McLeodUSA does, however, have various legal proceedings pending against it or its subsidiaries or on its, or its subsidiaries behalf.

McLeodUSA is also involved in numerous regulatory proceedings before various public utility commissions and the FCC, particularly in connection with actions by the MegaBells.

McLeodUSA anticipates the MegaBells will continue to pursue legislation in states within its 25-state footprint to reduce state regulatory oversight over their rates and operations. The MegaBells are also actively pursuing major changes to the Telecommunications Act of 1996 which McLeodUSA believes would adversely affect competitive telecommunications service providers including McLeodUSA. If adopted, these initiatives could make it more difficult for McLeodUSA to challenge the MegaBells' actions, or to compete with the MegaBells, in the future.

There are no assurances that McLeodUSA will succeed in its challenges to these or other actions by the MegaBells that would prevent or deter McLeodUSA from successfully competing with the MegaBells. See "Risk Factors—McLeodUSA's Dependence on the MegaBells to Provide Most of McLeodUSA's Communications Services Could Make it Harder for McLeodUSA to Offer Its Services at a Profit."

MANAGEMENT

Directors and Executive Officers of McLeodUSA

The following table provides information concerning the directors and executive officers of McLeodUSA:

Name	Age	Position
Clark E. McLeod	54	Chairman, Director
Stephen C. Gray	42	President and Chief Executive Officer, Director
Chris A. Davis	51	Chief Operating and Financial Officer, Director
Richard A. Lumpkin	66	Vice Chairman, Director
Roy A. Wilkens	58	President and Chief Executive Officer—Network Services, Director
Arthur Christoffersen	55	President and Chief Executive Officer—Publishing Services
Randall Rings	39	Group Vice President—Law and Secretary
Thomas D. Bell, Jr.	52	Director
Edward D. Breen	45	Director
Peter H.O. Claudy	39	Director
Thomas M. Collins	74	Director
Theodore J. Forstmann	61	Director
Dale F. Frey	69	Director
Daniel R. Hesse	48	Director
James E. Hoffman	48	Director
Thomas H. Lister	37	Director
Peter V. Ueberroth	64	Director

Clark E. McLeod. Mr. McLeod founded McLeodUSA and serves as Chairman. He has served as Chairman and a director since its inception in June 1991. From June 1991 to August 2001, he also served as Chief Executive Officer. His previous business venture, Teleconnect, an Iowa-based long distance telecommunications company, was founded in January 1980. Mr. McLeod served as Chairman and Chief Executive Officer of Teleconnect from January 1980 to December 1988, and from December 1988 to August 1990, he served as President of Telecom*USA, the successor to Teleconnect following its merger with SouthernNet, Inc. in December 1988. By 1990, Telecom*USA had become America's fourth largest long distance telecommunications company with nearly 6,000 employees. MCI purchased Telecom*USA in August 1990 for $1.25 billion. Mr. McLeod serves on the board of directors of APAC Customer Services, Inc., a provider of customer relationship management services. Mr. McLeod is one of his designees to the Board of Directors. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."

Stephen C. Gray. Mr. Gray serves as President and Chief Executive Officer of McLeodUSA. He has served as Chief Executive Officer since January 2001, Chief Operating Officer since September 1992, President since October 1994 and a director since April 1993. Prior to joining McLeodUSA in 1992, Mr. Gray served from August 1990 to September 1992 as Vice President of Business Services at MCI, where he was responsible for MCI's local access strategy and for marketing and sales support of the Business Markets division. From February 1988 to August 1990, he served as

Senior Vice President of National Accounts and Carrier Services for Telecom*USA, where his responsibilities included sales, marketing, key contract negotiations and strategic acquisitions and combinations. Before joining Telecom*USA, Mr. Gray held a variety of management positions with Williams Telecommunications Company, a long distance telephone company. Mr. Gray is one of Mr. McLeod's designees to the Board of Directors. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."

Chris A. Davis. Ms. Davis has served McLeodUSA as Chief Operating and Financial Officer and a director since August 2001. Ms. Davis was most recently Executive Vice-President, Chief Financial and Administrative Officer for ONI Systems Corp., a leading optical networking equipment company. Previously, she spent seven years from 1993 to 2000, as Executive Vice-President, Chief Financial and Administrative Officer and a director at Gulfstream Aerospace Corporation, a General Dynamics Company. Prior to Gulfstream, Ms. Davis spent 17 years in increasingly senior operational and financial management positions at General Electric Company. She is a director of Cytec Industries, Inc. and Wolverine Tube, Inc.

Richard A. Lumpkin. Mr. Lumpkin has served as Vice Chairman and a director since September 1997. Mr. Lumpkin was elected as an officer and a director pursuant to the requirements of the merger agreement between McLeodUSA and Consolidated Communications Inc. ("CCI"). He has continued to serve as a director and is a nominee pursuant to the requirements of certain stockholder agreements. Mr. Lumpkin served as Chairman and Chief Executive Officer of CCI from 1990 to September 24, 1997, the date CCI was acquired by McLeodUSA. He continues to serve as Chairman, Chief Executive Officer and President of Illinois Consolidated Telephone Company ("ICTC"), a wholly-owned subsidiary of McLeodUSA. From its formation in 1984 to 1990, Mr. Lumpkin served as President of CCI. From 1968 to 1990, Mr. Lumpkin held various executive positions at ICTC, including Vice President of Operations and Treasurer. He is a director of Ameren Corporation, an electric utility holding company, First Mid-Illinois Bancshares, Inc., a bank holding company, and its wholly-owned subsidiary First Mid-Illinois Bank & Trust, a bank. Mr. Lumpkin is Chairman of the Board of Illuminet Holdings, Inc., a telecommunications company. He is also a former director and past president of the Illinois Telephone Association and the United States Telephone Association. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreement."

Roy A. Wilkens. Mr. Wilkens serves as President and Chief Executive Officer—Network Services, having joined McLeodUSA in January 2000. Mr. Wilkens has served as a director of McLeodUSA since June 1999. Mr. Wilkens was President of the Williams Pipeline Company when he founded WilTel Network Services as an operating unit of the Williams Companies, Inc., in 1985. He was Chief Executive Officer of WilTel Network Services from 1985 to 1997. In 1995, WilTel Network Services was acquired by LDDS Communications, which now operates under the name WorldCom. Mr. Wilkens served as Vice Chairman of WorldCom until his retirement in 1997. In 1992, Mr. Wilkens was appointed by President George H.W. Bush to the National Security Telecommunications Advisory Council. He also has served as chairman of both the Competitive Telecommunications Association (CompTel) and the National Telecommunications Network. Mr. Wilkens was a director of Splitrock Services, Inc. before its acquisition by McLeodUSA. He was also a director of Williams Communication Group, Inc., a provider of services and products to communications companies, before he resigned his position in December 2000. Mr. Wilkens is a director of The Management Network Group, Inc. (TMNG), a provider of consulting services to the telecommunications industry. Mr. Wilkens is one of Mr. McLeod's designees to the Board of Directors. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."

Arthur Christoffersen. Mr. Christoffersen has served McLeodUSA as President and Chief Executive Officer—Publishing Services since May 2001. He served as Group Vice President, Publishing Services, since September 1997. He joined McLeodUSA as Executive Vice President, Publishing

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

Randall Rings. Mr. Rings serves McLeodUSA as Group Vice President—Law and Secretary. He was named Group Vice President, Chief Legal Officer and Secretary of McLeodUSA in June 2000. He served as Vice President, Secretary and General Counsel from March 1998 to June 2000. From May 1996 to March 1998, he served as General Counsel of McLeodUSA Publishing, where he was responsible for its legal, legislative and regulatory affairs. Prior to 1996, Mr. Rings served as an Associate Attorney at March & McMillan, P.C., with a diverse legal practice which included business planning, commercial litigation, employment and environmental law, and representation of electric and telephone cooperatives. From November 1988 to June 1992, he served as Corporate Counsel to the Association of Illinois Electric Cooperatives, where he acted as its chief legal officer and advised electric and telephone cooperatives throughout Illinois on corporate, tax, employment and other legal matters.

Thomas D. Bell, Jr. Mr. Bell has served as a director of McLeodUSA since August 2001. From January 2001 to July 2001, when he retired, Mr. Bell was a Special Limited Partner of Forstmann Little & Co. Mr. Bell is the former Chairman and CEO of Young & Rubicam, a leading global marketing services firm. Earlier in his career, he was President and CEO of Burson-Marsteller, a leading public relations firm, and Executive Vice President of Ball Corporation. He is a director on the boards of Lincoln Financial Group and Cousins Properties Inc.

Edward D. Breen. Mr. Breen has served as a director of McLeodUSA since August 2001. Mr. Breen is Executive Vice President of Motorola and President of its Networks Sector and has been named to serve as President and Chief Operating Officer of Motorola, effective January 1, 2002. Mr. Breen served as Chairman, President and Chief Executive Officer of General Instrument Corporation from 1997 until it was acquired by Motorola in 2000. He is a director of CommScope, Inc. and will become a director of Motorola on January 1, 2002.

Peter H.O. Claudy. Mr. Claudy has served as a director of McLeodUSA since April 1999, during which time he has been the designee of M/C to the Board of Directors. Mr. Claudy is a general partner of M/C Partners and M/C Venture Partners, affiliates of Media/Communications Partners III Limited Partnership and M/C Investors, L.L.C., and has specialized in investing in telecommunications companies since 1991. He originated and held primary responsibility for the M/C equity investment in Ovation Communications, Inc., which was acquired by McLeodUSA in 1999. Mr. Claudy performs the same role for M/C Venture Partners' investment in, and serves on the board of, Florida Digital Network, a competitive local exchange carrier. He also serves as a director of Cavalier Telephone, a competitive local exchange carrier serving the state of Virginia, and Triad Cellular, a wireless telecommunications company. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."

Thomas M. Collins. Mr. Collins has served as a director of McLeodUSA since April 1993. Mr. Collins is Of Counsel at Shuttleworth & Ingersoll, P.C., a law firm in Cedar Rapids, Iowa, where he has practiced law since 1952. Mr. Collins was a director of Teleconnect and its successor, Telecom*USA, from 1985 to August 1990. He is also a director of APAC Customer Services, Inc., a provider of customer relationship management services.

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Theodore J. Forstmann. Mr. Forstmann has served as a director of McLeodUSA since September 1999. Mr. Forstmann is co-founder and senior partner of Forstmann Little & Co., a major New York private equity firm that has made numerous acquisitions and significant equity investments, returning billions to its investors. Forstmann Little's best-known acquisitions include Gulfstream Aerospace, General Instrument, Ziff-Davis Publishing, Community Health Systems, Yankee Candle Company, Dr. Pepper and Topps. Mr. Forstmann is a director of Community Health Systems and Yankee Candle Company. Mr. Forstmann is a designee to the Board of Directors of the holders of the Series D preferred stock.

Dale F. Frey. Mr. Frey has served as a director of McLeodUSA since August 2001. Mr. Frey is the former Vice President and Treasurer of General Electric Company. He served as Chairman of the Board and Chief Executive Officer of General Electric Investment Corporation, where he oversaw $75 billion in General Electric investments for 13 years until his retirement in 1997. Mr. Frey is a director of Yankee Candle Company, Aftermarket Technology Corp., Community Health Systems, Praxair, Inc., Roadway Express Inc., Invemed Catalyst Fund, Vantis Equity Associates and Aurora Capital.

Daniel R. Hesse. Mr. Hesse has served as a director of McLeodUSA since June 2000. Mr. Hesse has served as Chairman of Terabeam Corporation, a Seattle-based provider of proprietary fiber-less optic services, since September 2000 and President and Chief Executive Officer thereof since March 2000. He previously held numerous domestic and international positions at AT&T, including from May 1997 to March 2000 President and Chief Executive Officer of AT&T Wireless Services and Executive Vice President of AT&T. Prior thereto he served as General Manager for the AT&T Online Services Group. Mr. Hesse also previously served as President and Chief Executive Officer of AT&T Network Systems International, where he was responsible for all AT&T Network Systems activities (now Lucent Technologies) in Europe, the Middle East and Africa.

James E. Hoffman. Mr. Hoffman has served as a director of McLeodUSA since May 2000. Since April 1998, he has been President of Alliant Energy Resources, Inc., a wholly owned subsidiary of Alliant Energy Corporation, of which he is Executive Vice President—Business Development. Mr. Hoffman has responsibility for oversight of the non-regulated businesses of Alliant Energy, including energy, environment, transportation, trading and telecommunications. Mr. Hoffman previously served in various executive positions at Alliant Energy, having joined Alliant Energy in 1995. From 1990 to 1995, he was Chief Information Officer for MCI Communications. Before that he served as Executive Vice President of Telecom*USA. Mr. Hoffman is the designee of Alliant Energy to the Board of Directors. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."

Thomas H. Lister. Mr. Lister has served as a director of McLeodUSA since October 2001. In March 1993, Mr. Lister joined Forstmann Little & Co., and since February 1997, he has been a general partner of Forstmann Little & Co. Mr. Lister is a director of Community Health Systems. Mr. Lister is a designee to the Board of Directors of the holders of the Series D preferred stock.

Peter V. Ueberroth. Mr. Ueberroth has served as a director of McLeodUSA since August 2001. Mr. Ueberroth is the Managing Director of Contrarian Group, Inc., and Owner and Co-Chairman of The Pebble Beach Company. Previously, he was Commissioner of Major League Baseball and President of the Los Angeles Olympic Organizing Committee. Mr. Ueberroth serves on the boards of Ambassadors International, Bank of America Corporation, The Coca-Cola Company, and Hilton Hotels Corporation.

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Corporate Governance and Related Matters

The Board of Directors conducts its business through meetings and through its committees. The Executive Committee acts as a nominating committee for selecting candidates approved by the Board of Directors to stand for election as directors. Pursuant to McLeodUSA's bylaws, other candidates also may be nominated by any stockholder, provided such other nomination(s), together with the identity of the nominator and the number of shares of McLeodUSA stock owned, directly and indirectly, by the nominator, are submitted in writing to the Secretary of McLeodUSA no later than 90 days prior to the meeting of stockholders at which such directors are to be elected.

The Board of Directors has established an Executive Committee, an Audit Committee and a Compensation Committee. The Executive Committee was established in July 2000 and its current members are Messrs. McLeod, Gray, Forstmann, Breen, Fry and Lister and Ms. Davis. The Executive Committee performs duties and exercises powers delegated to it by the Board of Directors, including authority to approve certain asset sales and acquisitions.

The Audit Committee, among other things, recommends the firm to be appointed as independent public accountants to audit McLeodUSA's financial statements, discusses the scope and results of the audit with the independent public accountants, reviews with management and the independent public accountants McLeodUSA's interim and year-end operating results, considers the adequacy of McLeodUSA's internal accounting controls and audit procedures and reviews the non-audit services to be performed by the independent public accountants. The current members of the Audit Committee are Messrs. Collins, Hesse and Frey. In addition, the Board of Directors has determined that the members of the Audit Committee meet the independence requirements of the National Association of Securities Dealers.

The Compensation Committee reviews and recommends the compensation arrangements for management and administers the stock option plans and stock purchase plan. The current members of the Compensation Committee are Messrs. Bell, Breen, Lister and Ueberroth.

During the fiscal year ended December 31, 2000, the Board of Directors met or acted by unanimous consent eleven times. During the same period, the Executive Committee met twice, the Audit Committee met four times and the Compensation Committee met 12 times. During the fiscal year ended December 31, 2000, no director attended fewer than 75% of the total of all meetings of the Board of Directors and any committee on which the director served.

During 2001, as of December 6, 2001 the Board of Directors has met, or acted by unanimous consent, 12 times. During the same period of 2001 the Executive Committee has met four times, the Audit Committee has met five times and the Compensation Committee has met seven times.

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Executive Compensation

The following table sets forth a summary of the compensation paid during 2000, 1999 and 1998 for services rendered in all capacities to McLeodUSA and its subsidiaries by certain of McLeodUSA's past and present executive officers (collectively, the "Named Executive Officers"):

		Annual Compensation				Long Term Compensation Awards Securities Underlying Options
Name and Principal Position		Annual Compensation					All Other Compensation(1)
Name and Principal Position	Year	Salary		Bonus			All Other Compensation(1)
Clark E. McLeod Chairman, Co-Chief Executive Officer and Director	2000 1999 1998	$	397,692 250,000 228,077	$	166,651 142,000 122,732	3,000,000 0 600,000	$	1,883,400 1,883,200 1,883,200	(2) (2) (2)
Stephen C. Gray President, Co-Chief Executive Officer and Director	2000 1999 1998		397,692 250,000 228,077		166,651 142,000 122,732	6,000,000 3,000,000 600,000		3,400 3,200 3,200
Chris A. Davis Chief Operating and Financial Officer and Director(6)	—		—		—	—		—
Roy A. Wilkens President and Chief Executive Officer—Network Services and Director	2000 1999 1998		393,846 0 0		117,736 0 0	6,000,000 180,000 72,249		0 0 0
Blake O. Fisher, Jr. Group Vice President—Planning & Development	2000 1999 1998		179,999 175,000 176,193		236,288 102,680 92,607	120,000 360,000 210,000		3,400 342,690 3,200	(3)
J. Lyle Patrick Group Vice President—Finance & Accounting	2000 1999 1998		200,000 149,231 131,000		190,351 115,640 198,810	390,000 450,000 300,000		3,400 3,200 203,200	(4)(5)
Randall Rings Group Vice President—Law	2000 1999 1998		160,000 116,538 81,231		209,634 61,728 12,160	300,000 720,000 138,000		3,217 3,200 2,576

(1): Unless otherwise indicated, all other compensation represents matching contributions made by McLeodUSA to the McLeodUSA Incorporated 401(k) Plan on behalf of the applicable individual.
(2): Includes $1,880,000 of premiums paid on split dollar life insurance policies for the benefit of the McLeod Family 1998 Special Trust. For additional information, see "Certain Relationships and Related Transactions."
(3): Includes $339,490 paid by McLeodUSA to Blake O. Fisher, Jr. for reimbursement of relocation expenses.
(4): Mr. Patrick resigned as of July 31, 2001.
(5): Includes $200,000 paid by McLeodUSA to J. Lyle Patrick for reimbursement of relocation expenses.
(6): Ms. Davis joined McLeodUSA as Chief Operating and Financial Officer and Director in August 2001.

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Stock Option Grants in the 2000 Fiscal Year

The following table sets forth information relating to stock options granted during the fiscal year ended December 31, 2000 to the Named Executive Officers.

									Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
	Number of Securities Underlying Options Granted		Percent of Total Options Granted to Employees in Fiscal Year
Name					Exercise Price(1)
Name					Exercise Price(1)		Grant Date	Expiration Date	5%		10%
Clark E. McLeod	3,000,000	(2)(5)	5.74	%	$	17.5208	January 7, 2000	January 7, 2010	$	33,056,211	$	83,770,929
Stephen C. Gray	6,000,000	(2)(5)	11.49	%	$	17.5208	January 7, 2000	January 7, 2010	$	66,112,422	$	167,541,857
Chris A. Davis(6)	—		—			—	—	—		—		—
Roy A. Wilkens	6,000,000	(3)(5)	11.49	%	$	17.5208	January 7, 2000	January 7, 2010	$	66,112,422	$	167,541,857
Blake O. Fisher, Jr.	120,000	(4)	0.23	%	$	17.5208	January 7, 2000	January 7, 2010	$	1,322,248	$	3,350,837
J. Lyle Patrick	180,000 210,000	(4) (2)	0.34 0.40	% %	$ $	17.5208 17.5208	January 7, 2000 January 7, 2000	January 7, 2010 January 7, 2010	$ $	1,983,373 2,313,935	$ $	5,026,256 5,863,965
Randall Rings	120,000 180,000	(4) (2)	0.23 0.34	% %	$ $	17.5208 17.5208	January 7, 2000 January 7, 2000	January 7, 2010 January 7, 2010	$ $	1,322,248 1,983,373	$ $	3,350,837 5,026,256

(1): The exercise price indicated was the fair market value of a share of McLeodUSA's Class A common stock on the date of grant, as adjusted to reflect the three-for-one stock split effected in the form of a stock dividend distributed to McLeodUSA's stockholders on April 24, 2000.
(2): These options vest according to the following schedule: 100% at the end of three years.
(3): These options vest according to the following schedule:¹/3 per year for three years.
(4): These options vest according to the following schedule: 25% per year for four years.
(5): These options were cancelled during 2001.
(6): On August 29, 2001, Ms. Davis was granted 6 million options with an exercise price of $1.12 which vested 25% immediately and 25% per year for the next three years.

Fiscal Year-end Option Values

The following table sets forth information for each Named Executive Officer concerning the exercise of options during fiscal year 2000, the number of securities underlying unexercised options at the 2000 year-end and the year-end value of all unexercised in-the-money options held by such individuals.

				Number of Unexercised Options at Fiscal Year-end		Value of Unexercised In-the-Money Options at Fiscal Year-End(2)
Name	Shares Acquired on Exercise	Value Realized(1)		Number of Unexercised Options at Fiscal Year-end
Name	Shares Acquired on Exercise	Value Realized(1)		Exercisable	Unexercisable	Exercisable		Unexercisable
Clark E. McLeod	1,502,000	$	24,821,322	595,000	3,693,000	$	5,416,042	$	6,909,128
Stephen C. Gray	915,000	$	23,115,371	1,860,390	9,710,796	$	21,126,886	$	31,138,940
Chris A. Davis(3)	—		—	—	—		—		— —
Roy A. Wilkens	0		0	117,249	6,135,000	$	1,183,001	$	750,938
Blake O. Fisher, Jr.	620,320	$	12,148,103	752,552	916,500	$	7,992,797	$	7,173,313
J. Lyle Patrick	120,000	$	2,363,792	208,500	1,144,500	$	1,918,688	$	6,129,563
Randall Rings	20,304	$	360,533	65,946	1,104,750	$	554,454	$	6,245,031

(1): Represents the difference between the exercise price and the closing price of McLeodUSA's Class A common stock on The Nasdaq Stock Market on the day prior to the date of exercise.
(2): Represents the difference between the exercise price and the closing price of McLeodUSA's Class A common stock on The Nasdaq Stock Market on December 31, 2000.
(3): Ms. Davis did not join McLeodUSA or receive an option grant until August 2001.

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Bonus Plan and Other Benefit Programs

McLeodUSA has a contributory retirement plan (the "401(k) Plan") for its employees (including executive officers) age 21 and over with at least three months of service. The 401(k) Plan provides that each participant may contribute up to 15% of his or her salary (not to exceed the annual statutory limit). McLeodUSA generally makes matching contributions to each participant's account equal to 50% of the participant's contribution up to 2% of the participant's annual compensation. In addition McLeodUSA considers making a discretionary annual match of up to another 50% of the participant's contribution up to 2% of the participant's annual compensation. Thus, the total matching contribution can be up to 4% of the participant's annual compensation.

Compensation of Directors

McLeodUSA's directors who are also employees receive no directors' fees. Non-employee directors receive directors' fees of $1,000 for each Board of Directors and committee meeting attended in person and $500 for each Board of Directors and committee meeting attended by telephone. In addition, directors are reimbursed for reasonable out-of-pocket travel expenditures incurred in connection with their attendance at Board of Directors and committee meetings.

Directors are also eligible to receive grants of stock options under the Directors Stock Option Plan (the "Directors' Plan") and the 1996 Employee Stock Option Plan, as amended. Under McLeodUSA's Directors' Plan, an aggregate of 6,600,000 shares of Class A common stock are reserved for purchase pursuant to option grants to McLeodUSA's directors who are not officers or employees. Options for 4,810,000 shares of Class A common stock had been granted under the Directors' Plan and options to purchase 2,613,750 shares of Class A common stock had been exercised as of October 31, 2001. Each eligible director who commences service as a director is granted an initial option to purchase up to 120,000 shares of Class A common stock under the Directors' Plan. Each eligible director is also granted additional options to purchase up to 60,000 shares of Class A common stock after each subsequent annual meeting of stockholders under the Directors' Plan. In addition, eligible directors may be granted such discretionary options under the Directors' Plan, in addition to the foregoing options, as may be determined by the Board; provided that no more than an aggregate of 600,000 shares of Class A common stock may be granted as discretionary options. The Directors Stock Option Plan will terminate automatically on March 28, 2006, unless terminated earlier by the Board of Directors.

As of October 31, 2001, 1,770,000 options had been granted to non-employee directors under McLeodUSA's 1996 Employee Stock Option Plan, none of which have been exercised.

Other than the compensation described above, none of the directors received any compensation from McLeodUSA in 2001 in connection with their service as directors.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee is composed entirely of outside directors. The current members of the Compensation Committee are Thomas D. Bell, Jr., Edward D. Breen, Thomas Lister and Peter Ueberroth. During 2000 and 2001, the Compensation Committee consisted of Paul D. Rhines (January 1, 2000 through July 31, 2001), Thomas M. Collins (January 1, 2000 through October 23, 2001), Lee Liu (January 1, 2000 through May 31, 2000) and Erskine Bowles (May 31, 2000 through October 4, 2001). Mr. Liu retired from the Board of Directors on May 31, 2000. Mr. Rhines resigned from the Board of Directors effective July 31, 2001. Mr. Bowles resigned from the Board of Directors effective October 4, 2001.

During 2000 and for the period ending November 30, 2001, McLeodUSA paid 2060 Partnership, L.P. $243,900 and $320,709, respectively for the rental of office and parking spaces in

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Cedar Rapids, Iowa. 2001 Development Company, an Iowa corporation, is the general partner and 80% owner of 2060 Partnership, L.P. Alliant Energy and McLeodUSA own 54.56% and 3.03%, respectively of the outstanding stock of 2001 Development Company. The directors and officers of 2001 Development Company include Mr. Collins and James E. Hoffman, directors of McLeodUSA, and Clark E. McLeod, a director and executive officer of McLeodUSA. Mr. Lee Liu, a former Compensation Committee member, was Chairman of Alliant Energy until April 2000. Mr. Hoffman, a director of McLeodUSA, is Executive Vice President of Alliant Energy.

Mr. Collins is also a director of APAC Customer Services, Inc. ("APAC"). In March 2000, McLeodUSA entered into an agreement with APAC under which APAC provides sales, marketing and customer care services to McLeodUSA. McLeodUSA paid $30,722 in 2000 and $289,026 for the period ended November 30, 2001 to APAC under this agreement. APAC paid McLeodUSA $502,508 in 2000 and $353,654 for the period ended November 30, 2001 for telecommunications services. Clark E. McLeod, an executive officer and director of McLeodUSA, is also a director of APAC.

During 2000 and for the period ended November 30, 2001, McLeodUSA paid $199,980 and $124,453, respectively, to Shuttleworth & Ingersoll, P.C., a law firm in Cedar Rapids, Iowa, for legal services rendered (excluding funds processed through the escrow account of Shuttleworth & Ingersoll in 2000). McLeodUSA provides local and long distance telephone service for Shuttleworth & Ingersoll, P.C., for which McLeodUSA was paid $54,134 in 2000 and $36,792 for the period ended November 30, 2001. Thomas M. Collins is of counsel at Shuttleworth & Ingersoll, P.C.

For a description of certain other transactions, see "Certain Relationships and Related Transactions."

Employment, Confidentiality and Non-competition Contracts

McLeodUSA entered into executive employment agreements with Clark E. McLeod, Stephen C. Gray and Roy A. Wilkens on January 7, 2000 and with Chris A. Davis on August 1, 2001 (collectively, the "Executives"). These agreements set forth the terms and conditions for the respective employment of the Executives. The significant terms of the agreements are as follows:

•: Term. The term of each of the agreements with Messrs. McLeod, Gray and Wilkens runs until January 7, 2003. The term of the agreement with Ms. Davis runs until August 13, 2004.
•: Salary and Bonus Compensation. Each of the Executives receives an initial base annual salary of $400,000, subject to a potential increase each year based on competitive survey data. In addition, each Executive is entitled to bonus opportunities set at not less than 50% of the base annual salary.
•: Equity Compensation. In connection with the agreements, Mr. McLeod was granted an option to purchase 3,000,000 shares of Class A common stock and each of Messrs. Gray and Wilkens were granted an option to purchase 6,000,000 shares of Class A common stock each with an exercise price of $17.5208 per share. Ms. Davis was granted an option to purchase 6,000,000 shares of Class A common stock with an exercise price of $1.12 per share. Each option has an option exercise price equal to the fair market value of the common stock which, in accordance with McLeodUSA's 1996 Employee Stock Option Plan. Each of the options granted to Messrs. McLeod, Gray and Wilkens were voluntarily cancelled in 2001.
•: Split Dollar Life Insurance. Pursuant to Mr. McLeod's agreement, McLeodUSA pays a portion of the premiums on split dollar life insurance premiums for the benefit of the McLeod Family 1998 Special Trust. See "Certain Relationships and Related Transactions."
•: Other Benefits. Each Executive is eligible to participate in all of McLeodUSA's standard benefit plans.

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•: Noncompetition and Nonsolicitation. The Executives are bound by noncompetition and nonsolicitation covenants for the term of the agreements, and for an additional year in certain circumstances.
•: Severance Benefits. If an Executive terminates their employment for good reason or if McLeodUSA terminates such Executive's employment in breach of the agreement, the Executive is entitled to: (a) full salary through the date of termination and amounts due under any applicable compensation plan; (b) a liquidated damages payment approximately equal to the number of years (including partial years) remaining in the term of the agreement, multiplied by the Executive's salary and bonus on the date of termination; (c) full vesting of stock options granted during the term of the agreement, with such options to remain exercisable for four years; (d) continued health and related benefits for the remainder of the term of the agreement; and (e) a gross-up payment to cover excise tax payments due on the Executive's severance benefits.
•: Additional Compensation and Relocation Expenses. Ms. Davis was paid a one-time signing bonus of $5,000,000 as compensation for loss of unvested option shares of ONI Systems Corp. ("ONI"). In addition, the agreement provided that to the extent that Ms. Davis exercises any of her vested options to purchase ONI common stock and on the earliest possible date that she can sell shares of ONI common stock, she sells any shares acquired upon such exercises and the gross sale price is less than $24 per share, McLeodUSA shall make an additional payment to her of the difference between the sale price and $24, for up to 162,500 shares. Ms. Davis sold the ONI common stock in accordance with her agreement and was paid $3,186,398 for the difference between the sale price for such stock and $24 for all 162,500 shares which she sold. Pursuant to the terms of her Agreement, McLeodUSA paid $4.3 million to Ms. Davis to purchase her home in Los Gatos, CA, approximately $950,000 for reimbursement of related taxes and will reimburse her related relocation expenses.

McLeodUSA has agreements with most members of senior management, including the remaining Named Executive Officers (who are still employed by McLeodUSA), which govern matters of employment, nonsolicitation and noncompetition. These agreements typically provide that the applicable senior management employee may not compete with McLeodUSA during the term of his or her employment and for either a one or a two-year period following a termination for cause, a resignation or a voluntary termination of employment. The agreements also provide that employees subject to the agreements may not disclose any of McLeodUSA's confidential information while employed by McLeodUSA or thereafter. Certain agreements provide that the employee may not solicit McLeodUSA's customers or employees after leaving McLeodUSA's employment. The agreements have an indefinite term and may be terminated upon advance written notice by either party; provided, however, that the confidentiality and non-competition obligations will survive any such termination. As partial consideration for the execution of the employment, confidentiality, and non-competition agreements, McLeodUSA grants to the employees signing such agreements options to purchase shares of Class A common stock at exercise prices which are based on the fair market value of the Class A common stock on the date of grant. Such options are granted pursuant to McLeodUSA's 1996 Employee Stock Option Plan.

Change of Control Arrangements

McLeodUSA has entered into change-of-control agreements with its executive officers, including the Named Executive Officers, which provide for payments and benefits in connection with specified terminations of employment after a change of control of McLeodUSA. The change-of-control agreements terminate on December 31, 2006, unless a change of control has occurred during the six months preceding December 31, 2006, in which case the agreements terminate on December 31, 2007. If an executive who is a party to a change-of-control agreement terminates employment within six

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months after a change of control or, if within 24 months after a change of control, the executive's employment is terminated by McLeodUSA (other than for disability, cause, death or retirement) or by the executive following a material reduction in responsibilities or compensation:

•: the executive will be entitled to a lump sum payment equal to 24 times the executive's average monthly compensation during the 12 months immediately preceding the change of control or the date of termination, whichever average monthly compensation is higher;
•: all of the executive's outstanding options to purchase stock of McLeodUSA will become immediately exercisable in full; and
•: if the executive elects to continue coverage under the group health plan, McLeodUSA will continue to pay the employer portion of the premiums for such coverage for the longer of 24 months or the period of coverage provided by Section 4980B of the IRC.

An executive who is entitled to payment(s) pursuant to a change-of-control agreement is subject to a non-compete provision generally restricting the executive from competing with McLeodUSA for a two-year period after the termination of employment.

As discussed in the section above, the employment agreements with Clark E. McLeod, Stephen C. Gray, Chris A. Davis and Roy A. Wilkens provide for certain payments in the event of a termination of employment. These agreements and those agreements discussed above with members of senior management also contain noncompetition, nonsolicitation and confidentiality covenants that are effective after employment is terminated.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of September 30, 2001, unless otherwise noted, regarding the shares of common stock beneficially owned by each of McLeodUSA's directors, by each of its Named Executive Officers, by all directors and executive officers of McLeodUSA as a group, and by certain other beneficial owners of more than five percent (5%) of McLeodUSA's stock. Each such person has sole voting and dispositive power with respect to such shares of stock, except as otherwise indicated. For purposes of calculating the percentage of stock owned by each of the directors, executive officers and 5% stockholders of McLeodUSA, McLeodUSA has assumed that each such person has exercised all of his or its vested stock options and/or common share warrants for shares of stock and that such shares are issued and outstanding, and that no other persons have exercised options or common share warrants. The number of option shares includes shares of Class A common stock that the individuals named in the table have the right to acquire within 60 days from the Voting Record Date upon exercise of options.

	Beneficial Ownership
Five Percent Stockholders	Number of Option Shares	Number of Shares and Option Shares	Percent
Alliant Energy Investments, Inc.(1)(4)	—	56,201,576	9.0
Clark E. McLeod(2)	718,798	52,958,197	8.4
Wellington Management Company, LLP(3)	—	79,200,750	12.6
Officers and Directors
Clark E. McLeod(4)(5)	718,798	52,958,197	8.4
Richard A. Lumpkin(4)(6)	122,310	11,250,086	1.8
Stephen C. Gray(7)	2,229,762	4,022,877	*
Chris A. Davis	1,500,000	1,500,000	*
Roy A. Wilkens	162,249	1,344,367	*
Arthur L. Christoffersen	151,348	251,348	*
Randall Rings	140,947	152,989	*
Thomas D. Bell	—	—	*
Edward Breen	—	—	*
Erskine B. Bowles(10)	23,750	23,750	*
Thomas H. Lister(11)	—	—	*
Peter H.O. Claudy	38,750	38,750	*
Thomas M. Collins(9)	83,750	937,394	*
Theodore J. Forstmann(8)	23,750	23,750	*
Dale F. Frey	—	—	*
Daniel R. Hesse	17,500	17,500	*
James E. Hoffman	15,000	18,300	*
Peter V. Ueberroth	—	—	*
Directors and executive officers as a group (17 persons)	5,227,914	72,539,308	11.6

*: Less than 1%
(1): Includes 37,209,306 shares of Class A common stock of which Alliant Energy Investments, Inc. is the holder of record. Heartland Properties, Inc., a wholly owned subsidiary of Alliant Energy Investments, Inc., is the holder of record of 1,324,706 shares of Class A common stock. LNT Communications L.L.C., a limited liability company wholly owned by Alliant Energy Resources, Inc., a wholly owned subsidiary of Alliant Energy Corporation, is the record holder of 1,883,334 shares. 15,634,230 shares are held of record by MARIL & Co as nominee for Alliant Energy Resources, Inc. Alliant Energy Foundation, Inc., an independently chartered foundation which is affiliated with Alliant Energy Corporation, is the record holder of 150,000 shares of

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McLeodUSA Class A common stock. The address of Alliant Energy Corporation is 222 West Washington Avenue, P.O. Box 192, Madison, WI 53701.

(2): See "Security Ownership of Certain Beneficial Owners and Management—Officers and Directors."
(3): Wellington Management Company, LLP beneficially owns the shares in its capacity as investment adviser for its clients. No such client owns more than five percent of this class of securities except Vanguard Windsor Fund. The address of Wellington Management Company, LLP is 75 State Street, Boston, MA 02109. The amount of the beneficial ownership was disclosed on a Schedule 13F filed by Wellington Management Company, LLP on September 10, 2001.
(4): Richard A. Lumpkin and certain of his family members, Alliant Energy, M/C and Clark E. and Mary E. McLeod are parties to one or more stockholders' agreements, and accordingly, may constitute a group within the meaning of Section 13(d)(3) of the Exchange Act. As of the Voting Record Date, these stockholders beneficially owned an aggregate of 143,893,013 shares of Class A common stock, representing an ownership interest of 23%, including 718,798 and 122,310 shares that Messrs. McLeod and Lumpkin, respectively, have the right to acquire upon exercise of options, within 60 days from the Voting Record Date. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."
(5): Includes 23,300,431 shares of Class A common stock held of record by Mary E. McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared voting power and 11,383 shares of Class A common stock held by the McLeod Charitable Foundation for which both Mr. and Mrs. McLeod are directors and over which both have shared voting and dispositive power. Also includes 750,000 shares of Class A common stock held by the Clark E. McLeod Charitable Remainder Unitrust and 750,000 shares of Class A common stock held by the Mary E. McLeod Charitable Remainder Unitrust for which Mr. McLeod is a trustee and over which Mr. McLeod has shared voting and investment power. Mr. McLeod's address is c/o McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, IA 52406-3177.
(6): Includes 4,434,898 shares of Class A common stock held by various trusts for the benefit of the family of Mr. Lumpkin over which he has shared voting and investment power. Includes 4,568,606 shares of Class A common stock held by various trusts for the benefit of the family of Mr. Lumpkin over which he has shared investment power. Includes 2,246,582 shares of Class A common stock held by various trusts for the benefit of the family of Mr. Lumpkin over which he has sole voting and investment power.
(7): Includes 67,500 shares of Class A common stock held by various trusts for the benefit of the family of Mr. Gray over which he has shared voting and investment power.
(8): As of the Voting Record Date, 275,000 shares of McLeodUSA Series D preferred stock and 125,000 shares of McLeodUSA Series E preferred stock were issued and outstanding. Three limited partnerships affiliated with Forstmann Little & Co. are the beneficial owners of all of the outstanding shares of each of these series of preferred stock. Based on the conversion ratio as of the Voting Record Date, these preferred shares are convertible on or after September 15, 2004, or earlier under certain limited circumstances, into approximately 163.9 million common shares. Mr. Bowles resigned from the Board effective October 4, 2001. Mr. Lister was elected as the second designee of the Series D preferred stock on October 22, 2001. Messrs. Forstmann and Lister are general partners of Forstmann Little & Co. The address of Forstmann Little & Co is 767 Fifth Avenue, New York, NY 10153. The amount of beneficial ownership was disclosed on a Schedule 13D filed by the limited partnerships on October 2, 2001.
(9): Includes 853,644 shares of Class A common stock held by two trusts for the benefit of the family of Mr. Collins over which Mr. Collins has shared voting and investment power.
(10): Mr. Bowles resigned from the Board effective October 4, 2001.
(11): Mr. Lister was elected as the second designee of the Series D Preferred Stock on October 22, 2001.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

McLeodUSA has entered into various agreements with Orillion USA, Inc. (formerly InvenSys USA, Inc.) and several of its affiliates (collectively "Orillion") pursuant to which Orillion provides information technology development, programming and consulting services, and investment management services to McLeodUSA. Pursuant to these agreements, McLeodUSA paid Orillion approximately $2,349,356 in 2000 and $1,217,825 through November 30, 2001. The payments were principally related to a $4,000,000 license fee under a license and joint development agreement entered into in March 2000 by McLeodUSA and Orillion. Clark E. McLeod, an executive officer and director of McLeodUSA, was a director of Orillion USA, Inc. until his resignation in December 2000 and Roy A. Wilkens, an executive officer and director of McLeodUSA, is currently a director of Orillion USA, Inc.

McLeodUSA provides paging services, customer premise equipment ("CPE"), labor and services for CPE, long distance service, 800 service and private lines to First Mid-Illinois Bancshares. First Mid-Illinois Bancshares paid McLeodUSA $425,017 for these services in 2000 and $363,189 through November 30, 2001. In April 2000, McLeodUSA disposed of shares that it held in First Mid-Illinois Bancshares valued at approximately $1,168,000. Of the shares disposed, First Mid-Illinois paid $152,000 to McLeodUSA to redeem shares; the Lumpkin Foundation, Inc., a nonprofit corporation, paid $638,400 to McLeodUSA to purchase shares; shares valued at approximately $125,000 were gifted by McLeodUSA to the Lumpkin Foundation, consistent with historical charitable giving practices of McLeodUSA; and the balance of the shares were sold to a third party. The disposition of the shares was approved by the Board of Directors of McLeodUSA which determined that the transfer price was at fair market value. Richard A. Lumpkin, Margaret Lumpkin Keon and Mary Lumpkin Sparks own approximately 14.21%, 6.46% and 6.54% of the capital stock of First Mid-Illinois Bancshares, respectively. Richard A. Lumpkin, an executive officer and director of McLeodUSA, is also a director of First Mid-Illinois Bancshares.

McLeodUSA paid $1,136,235 in 2000 and $1,228,224 through November 30, 2001 to lease office space from various entities in which Richard A. Lumpkin, Margaret Lumpkin Keon and Mary Lumpkin Sparks have ownership interests. Their financial interest in these transactions totaled $565,506 in 2000 and $730,479 through November 30, 2001. Mr. Lumpkin is a director, executive officer and significant stockholder of McLeodUSA and Mrs. Keon and Mrs. Sparks are stockholders of McLeodUSA.

Illuminet Holdings, Inc. paid McLeodUSA $1,922,766 in 2000 and $1,640,978 through November 30, 2001 for the rental of building space and for DS-1 usage and transmission facilities in the form of private leased lines. McLeodUSA paid Illuminet $5,199,457 in 2000 and $5,709,495 through November 30, 2001 for database verification services and SS7 link services. Richard A. Lumpkin is the Chairman of the Board of Directors of Illuminet.

Ameren Corporation and Central Illinois Public Service Company collectively paid McLeodUSA $1,782,432 in 2000 and $1,157,096 through November 30, 2001 for private line services and long distance services. McLeodUSA paid Ameren and Central Illinois Public Service Company, collectively, $1,147,633 for electric utility services in 2000 and $1,125,796 through November 30, 2001. Richard A. Lumpkin is a director of Ameren Corporation, the parent company of Central Illinois Public Service Company.

Chris A. Davis receives an annual salary of $500,000 for providing advice and consulting services to Forstmann Little as a special limited partner thereof. Ms. Davis has the right to invest in Forstmann Little portfolio investments from time to time. Ms. Davis has informed McLeodUSA that she will not invest in either the purchase of Pubco or Forstmann Little's investments in McLeodUSA in connection with the restructuring. Ms. Davis has agreed to provide her advice related to the investment activities of the Forstmann Little debt and equity partnerships in a manner that does not interfere with the performance of her duties with McLeodUSA.

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McLeodUSA is a party to an agreement with Alliant Energy pursuant to which Alliant Energy grants McLeodUSA access to certain of Alliant Energy's towers, rights-of-way, conduits and poles in exchange for capacity on the McLeodUSA communications network. James Hoffman is, and Mr. Lee Liu (a former director of McLeodUSA and former Chairman of Alliant Energy) was from 1993 to 2000, the designee of Alliant Energy to McLeodUSA's Board of Directors. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements."

In November 2001, Ruffalo, Cody & Associates, a McLeodUSA subsidiary, entered into an agreement to sell substantially all of its assets to RCNEWCO, an Iowa Corporation. Clark E. McLeod is an indirect investor in RCNEWCO, with an ownership interest of approximately 7%.

During 2000 and the period ended November 30, 2001, McLeodUSA paid City Signal Communications $863,081 and $334,908, respectively, for network construction services. Peter H.O. Claudy, a director of McLeodUSA, is a director for City Signal Communications.

In 2000 and the period ended November 30, 2001, McLeodUSA paid $1,274,954 and $2,811,417, respectively, to The Management Network Group, Inc. ("TMNG") for telecommunications consulting services with TMNG. Roy A. Wilkens is a director of TMNG.

McLeodUSA paid Tachion Networks, Inc., a network equipment maker, $264,300 in 2000. Roy A. Wilkens is a director of Tachion Networks, Inc.

McLeodUSA paid Williams Communication Group, a provider of services and products to communications companies, $661,969 in 2000 and $1,236,567 through November 30, 2001. Roy A. Wilkens was a director of Williams Communication Group before he resigned his position in December 2000.

McLeodUSA paid Image Media Group, Inc., a promotional products supplier, $65,127 in 2000 and $156,916 for the period ended November 30, 2001. Arthur L. Christoffersen, a Company executive officer, is a director for Image Media Group.

The ownership of a jet aircraft worth approximately $6 million is held 95% by McLeodUSA, and 2% each by Messrs. Gray and Lumpkin. McLeodUSA and Messrs. Gray and Lumpkin are parties to a Joint Ownership Agreement by which they have agreed to share the operational expenses of the aircraft in proportion to their respective ownership interest in the aircraft. Messrs. Gray and Lumpkin are directors and executive officers of McLeodUSA.

In February 2000, McLeodUSA and C&M Consulting, L.L.C. ("C&M") jointly purchased a jet aircraft for a total price of approximately $39.5 million. McLeodUSA and C&M are parties to a Joint Ownership Agreement in which they have agreed to share the operational expenses of the aircraft in proportion to their ownership interests (25% by McLeodUSA and 75% by C&M). Clark E. McLeod and his wife, Mary E. McLeod, are the members of C&M.

In December 1998, McLeodUSA entered into a split dollar arrangement for life insurance policies on the joint lives of Clark and Mary McLeod. The McLeod Family 1998 Special Trust is sole owner and beneficiary of each policy. The McLeod Family 1998 Special Trust agreed to assign the policies to McLeodUSA as collateral for the payment by McLeodUSA of the premiums for these policies. No loans have been taken against these policies. In 2000, the premium payments paid by McLeodUSA on these policies totaled $1,880,000. The aggregate face amount of the policies is $113,000,000. McLeodUSA has agreed with Clark and Mary McLeod that one of the principal reasons for entering into this arrangement is to avoid any need for their heirs to liquidate their holdings of Class A common stock at or soon after the death of one or both of them. Clark and Mary McLeod have agreed to restrictions on their ability to sell or otherwise dispose of their shares of Class A common stock. See "Market for McLeodUSA's Common Equity and Related Stockholder Matters—Stockholders' Agreements." McLeodUSA also paid premiums of $138,257 and $71,000 in 2000, for a universal life

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policy on Clark and Mary McLeod with a face value of $13,500,000. McLeodUSA is the beneficiary of this policy.

McLeodUSA paid CommScope, Inc. $286,740 for equipment during the period ended November 30, 2001. Edward D. Breen, a director of McLeodUSA, is a director of CommScope, Inc.

In March 1996, the Board of Directors adopted a policy requiring that any material transactions between McLeodUSA and persons or entities affiliated with officers, directors or principal stockholders of McLeodUSA be on terms no less favorable to McLeodUSA than reasonably could have been obtained in arms' length transactions with independent third parties or be approved by a majority of disinterested directors.

Theodore J. Forstmann is a senior partner and Thomas H. Lister is a general partner of Forstmann Little & Co. Forstmann Little is party to several agreements related to the Restructuring. In addition, Dale F. Frey is an investor in Forstmann Little and serves on the Forstmann Little advisory board. See "Restructuring—Agreements with Forstmann Little."

For a description of certain other transactions, see "Management—Compensation Committee Interlocks and Insider Participation."

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INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law ("DGCL"), a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorneys' fees), as well as judgments, fines and settlements in non-derivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner such person reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended.

The Amended and Restated Certificate of Incorporation of McLeodUSA (the "McLeodUSA Certificate") contains provisions that provide that no director of McLeodUSA shall be liable for breach of fiduciary duty as a director except for (1) any breach of the director's duty of loyalty to McLeodUSA or its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (3) liability under Section 174 of the DGCL; or (4) any transaction from which the director derived an improper personal benefit. The McLeodUSA Certificate contains provisions that further provide for the indemnification of directors and officers to the fullest extent permitted by the DGCL. Under the Bylaws of McLeodUSA, McLeodUSA is required to advance expenses incurred by an officer or director in defending any such action if the director or officer undertakes to repay such amount if it is determined that the director or officer is not entitled to indemnification. In addition, McLeodUSA has entered into indemnity agreements with each of its directors pursuant to which McLeodUSA has agreed to indemnify the directors as permitted by the DGCL. McLeodUSA has obtained directors' and officers' liability insurance against certain liabilities, including liabilities under the Securities Act.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, McLeodUSA has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.

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SECURITIES LAW MATTERS

This section discusses certain securities law issues that are raised by the Exchange Offer and the Plan. This section should not be considered applicable to all situations or to all Noteholders. Noteholders should consult their own legal counsel with respect to these and other issues.

The Exchange Offer

McLeodUSA is relying on Section 3(a)(9) of the Securities Act to exempt the Exchange Offer from the registration requirements of such act. Section 3(a)(9) provides that the provisions of the Securities Act will not apply to "any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange." The Exchange Offer is also, pursuant to Section 18(b)(4)(C) of the Securities Act, exempt from state securities law requirements. Section 18(b)(4)(C) provides, among other things, that state securities laws will not apply to securities that are exempt from federal registration under Section 3(a)(9). McLeodUSA has no contract, arrangement, or understanding relating to, and will not, directly or indirectly, pay any commission or other remuneration to any broker, dealer, salesperson, agent, or any other person for soliciting votes to accept or reject the Exchange Offer. McLeodUSA has received assurances that no person will provide any information to Noteholders relating to the Exchange Offer other than to refer the Noteholders to the information contained in this Offering Memorandum and Disclosure Statement. In addition, no broker, dealer, salesperson, agent, or any other person, is engaged or authorized to express any statement, opinion, recommendation, or judgment with respect to the relative merits and risks of the Exchange Offer.

Issuance and Resale of the Class A Common Stock Outside of Bankruptcy

In the event that McLeodUSA completes the Out-of-Court Restructuring, McLeodUSA will rely on Sections 3(a)(9) and 18(b)(4)(C) of the Securities Act to exempt the issuance of the Class A common stock from federal and state registration requirements. Under current SEC interpretations, securities that are obtained in a Section 3(a)(9) exchange assume the same character (i.e. restricted or unrestricted) as the securities that have been surrendered. In this case, the Notes are unrestricted securities. The Class A common stock will therefore also be unrestricted and recipients who are not "affiliates" of McLeodUSA (as such term is defined in Rule 144 under the Securities Act) will therefore be able to resell the Class A common stock without registration. Recipients who are affiliates of McLeodUSA may resell their shares subject to the provisions of Rule 144, absent registration or another appropriate exemption.

Issuance and Resale of the Class A Common Stock Under the Plan

In the event that McLeodUSA completes the Restructuring pursuant to the Plan under Chapter 11 of the Bankruptcy Code, McLeodUSA also will rely on Section 1145 of the Bankruptcy Code, to the extent it is applicable, to exempt the issuance of the Class A common stock from the registration requirements of the Securities Act (and of any state securities or "blue sky" laws). Section 1145 exempts from registration the sale of a debtor's securities under a Chapter 11 plan if such securities are offered or sold in exchange for a claim against, or equity interest in, or a claim for an administrative expense in a case concerning, such debtor. In reliance upon this exemption, the Class A common stock generally will be exempt from the registration requirements of the Securities Act. Accordingly, recipients will be able to resell the Class A common stock without registration under the Securities Act or other federal securities laws, unless the recipient is an "underwriter" with respect to such securities, within the meaning of Section 1145(b) of the Bankruptcy Code. Section 1145(b) of the Bankruptcy Code defines "underwriter" as one who (a) purchases a claim with a view to distribution of any security to be received in exchange for the claim, or (b) offers to sell securities issued under a plan for the holders of such securities, or (c) offers to buy securities issued under a plan from persons receiving

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such securities, if the offer to buy is made with a view to distribution, or (d) is an "issuer" of the relevant security, as such term is used in Section 2(11) of the Securities Act.

Notwithstanding the foregoing, statutory underwriters may be able to sell securities without registration pursuant to the resale limitations of Rule 144 under the Securities Act which, in effect, permits the resale of securities received by statutory underwriters pursuant to a Chapter 11 plan, subject to applicable volume limitations, notice and manner of sale requirements, and certain other conditions. Parties which believe they may be statutory underwriters as defined in Section 1145 of the Bankruptcy Code are advised to consult with their own counsel as to the availability of the exemption provided by Rule 144.

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DESCRIPTION OF CAPITAL STOCK

Authorized and Outstanding Shares/The Reverse Stock Split

McLeodUSA's authorized capital stock currently consists of:

Capital Stock	Authorized	Outstanding as of November 5, 2001
Class A common stock	2 billion shares	627,734,497
Class B common stock	22 million shares	0
Series A preferred stock	1.15 million shares	1,149,375
Series D preferred stock	275,000 shares	275,000
Series E preferred stock	125,000 shares	125,000

Although McLeodUSA intends to effect a 5-to-1 reverse split of the Class A common stock as part of the Restructuring, the reverse stock split will not affect the number of authorized shares or the par value of the Class A common stock. The following table shows the principal effects of the reverse stock split, based on the shares of Class A common stock outstanding as of November 5, 2001:

		Before Reverse Stock Split	After Reverse Stock Split
Number of Shares of Class A common stock:
	Authorized	2,000,000,000	2,000,000,000
	Outstanding November 5, 2001	627,734,497	N/A
	Outstanding after completion of Restructuring (assuming 100% acceptance by Noteholders)	N/A	378,759,890

Common Stock

Each share of Class A common stock has one vote on all matters on which stockholders are entitled or permitted to vote, including the election of directors. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of the Class A common stock are entitled to share ratably in dividends declared by the Board of Directors out of funds legally available therefor. McLeodUSA does not expect to declare or pay cash dividends to holders of its Class A common stock in the foreseeable future. Upon liquidation or dissolution, subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of Class A common stock are entitled to share ratably in all assets available for distribution to stockholders. All of the outstanding shares of Class A common stock are fully paid and nonassessable.

Preferred Stock

The McLeodUSA certificate of incorporation authorizes the Board of Directors, from time to time and without further stockholder action, to provide for the issuance of up to 2,000,000 shares of preferred stock, in one or more series, and to fix the relative rights and preferences of the shares, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of September 30, 2001, 1,149,375 shares of Series A preferred stock, 275,000 shares of Series D preferred stock, and 125,000 shares of Series E preferred stock, were issued and outstanding. Because of its broad discretion to create and issue preferred stock and Class II preferred stock without stockholder approval, the Board of Directors could adversely affect the voting power of the holders of Class A common stock and, by issuing shares of preferred stock and Class II preferred stock with preferential voting, conversion or redemption rights, could discourage any attempt to obtain control of McLeodUSA.

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Series F Preferred Stock

Conversion. The Series F preferred stock is mandatorily convertible into shares of Class A common stock on the 60th day following the effective date of the Restructuring in an amount equal to (x) $10.00 divided by the average share price of Class A common stock calculated as the mathematical average of the closing price per share of Class A common stock on 10 randomly selected trading days during the 60-day period following the effective date of the Restructuring (excluding the 2 high and 2 low prices and taking an average of the remaining 6) multiplied by (y) 10 million shares.

Voting Rights. Other than as required by law, the Series F preferred stock has no voting rights.

Other Rights and Powers. Other than as set forth herein, the Series F preferred stock has no other relative, participating, optional or other special rights or powers.

Series G Preferred Stock

Voting Rights. Without the consent of Forstmann Little, McLeodUSA cannot (i) amend, alter or repeal any provision of the certificate of incorporation or the certificate of designation of the Series G preferred in any manner adverse to Series G or (ii) to authorize or issue any additional shares of Series G preferred stock. In addition, the Series G preferred stock votes as follows:

•: If Forstmann Little owns at least 40% of the Class A common stock it will own upon consummation of the Restructuring (the "Base Amount"), Forstmann Little will have the right to designate 2 members of the Board of Directors.
•: If Forstmann Little owns less than 40%, but more than 20%, of the Base Amount, Forstmann Little will have the right to designate 1 member of the Board of Directors and 1 non-voting observer to the Board of Directors.
•: If Forstmann Little owns 20% or less, but at least 10%, of the Base Amount, Forstmann Little will have the right to designate 1 non-voting observer to the Board of Directors.
•: If Forstmann Little owns less than 10% of the Base Amount, Forstmann Little will have no rights to designate either members of the Board of Directors or non-voting observers to the Board of Directors.

Other Rights and Powers. Other than as set forth herein, the Series G preferred stock has no other relative, participating, optional or other special rights or powers.

Restrictions on Transfer; Cancellation. Forstmann Little may not transfer any shares of Series G preferred stock. If any shares of Series G preferred stock are transferred, such shares will be immediately cancelled. At such time as Forstmann Little no longer beneficially owns at least 10% of the share of Class A common stock owned by it on the effective date of the Restructuring, or on a change of control of McLeodUSA, all shares of Series G preferred stock still outstanding will be immediately cancelled.

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MARKET FOR MCLEODUSA'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

McLeodUSA's Class A common stock is traded on The Nasdaq Stock Market. The Class A common stock is traded under the symbol MCLD. The following table sets forth the range of high and low closing prices for McLeodUSA's Class A common stock for the periods indicated, as reported by Nasdaq:

	2001		2000		1999
	High	Low	High	Low	High	Low
First Quarter	22.563	8.250	35.938	16.500	7.375	5.063
Second Quarter	10.290	2.180	29.500	13.688	10.319	7.281
Third Quarter	4.590	.270	25.125	10.500	14.250	7.542
Fourth Quarter (For 2001, as of December 3)	1.100	0.390	19.500	11.500	21.125	12.208

McLeodUSA has never paid a cash dividend on its Class A common stock and does not anticipate paying these dividends in the foreseeable future.

As of the Voting Record Date, there were approximately 6,566 holders of record of McLeodUSA's Class A common stock. The number of beneficial common stockholders of record as of that date was approximately 95,000.

On December 3, 2001, the day immediately prior to the date that McLeodUSA announced its intention to pursue a Restructuring, the closing sale price for the Class A common stock was $0.52 per share.

Stockholders' Agreements

On March 10, 2000, McLeodUSA entered into a further amendment and restatement of a stockholders' agreement originally entered into on November 18, 1998 with several of McLeodUSA's significant stockholders consisting of Alliant Energy Corporation and various of its affiliates, Clark and Mary McLeod, and Richard Lumpkin and various other parties related to Mr. Lumpkin.

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

•: until December 31, 2001, the parties will not sell any of McLeodUSA's equity securities, or any other securities convertible into or exchangeable for McLeodUSA's equity securities, without receiving the prior written consent of McLeodUSA's Board of Directors, except for transfers of the restricted securities specifically permitted by the agreement;
•: to the extent McLeodUSA's Board of Directors approves a transfer of McLeodUSA's equity securities by a party, the other parties are automatically granted transfer rights;
•: McLeodUSA's Board of Directors will determine on a quarterly basis the aggregate number, if any, of shares of Class A common stock, not to exceed in the aggregate 900,000 shares per quarter, that the parties may sell during designated trading periods following the release of McLeodUSA's quarterly financial results;
•: to the extent McLeodUSA's Board of Directors grants registration rights to a party in connection with a sale of McLeodUSA's securities by that party, it will grant similar registration rights to the other parties;
•: McLeodUSA's Board of Directors will determine for 2001 the aggregate number, if any, of shares of Class A common stock, not to exceed in the aggregate on a per year basis a number of

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shares equal to 15% of the total number of shares of Class A common stock beneficially owned by the parties as of December 31, 1998, to be registered by McLeodUSA under the Securities Act for sale by the parties;

•: in any underwritten offering of shares of Class A common stock, other than an offering on a registration statement on Form S-4 or Form S-8 or any other form which would not permit the inclusion of shares of Class A common stock owned by the parties, McLeodUSA's Board of Directors will determine the aggregate number, if any, of shares of Class A common stock, not to exceed on a per year basis a number of shares equal to 15% of the total number of shares of Class A common stock beneficially owned by the parties as of December 31, 1998, to be registered by McLeodUSA for sale by the parties in the offering;
•: McLeodUSA may subsequently determine not to register any shares of the parties under the Securities Act and may either not file a registration statement or otherwise withdraw or abandon a registration statement previously filed.

Under the further amended and restated November 1998 stockholders' agreement, as amended, each party also agreed, until it owns less than 7,500,000 shares of Class A common stock, to vote its shares and take all action within its power to:

•: establish the size of McLeodUSA's Board of Directors at up to 15 directors;
•: cause to be elected to McLeodUSA's Board of Directors one director designated by Alliant Energy for so long as it owns at least 7,500,000 shares of Class A common stock;
•: cause to be elected to McLeodUSA's Board of Directors three directors who are executive officers of McLeodUSA designated by Clark McLeod for so long as Clark and Mary McLeod collectively own at least 7,500,000 shares of Class A common stock;
•: cause Richard Lumpkin to be elected to McLeodUSA's Board of Directors for so long as Richard Lumpkin and various other parties related to Mr. Lumpkin collectively own at least 7,500,000 shares of Class A common stock;
•: cause to be elected to McLeodUSA's Board of Directors up to ten non-employee directors nominated by the Board.

The further amended and restated November 1998 stockholders' agreement terminates on December 31, 2001.

On March 10, 2000, McLeodUSA also entered into a further amendment and restatement of a stockholders' agreement originally entered into on January 7, 1999 with the parties to the stockholders' agreement described above and M/C Investors L.L.C. and Media/Communications Partners III Limited Partnership in connection with the acquisition by McLeodUSA of Ovation Communications, Inc.

The further amended and restated January 1999 stockholders' agreement provides that, until December 31, 2001, the M/C entities will not sell any equity securities, or any other securities convertible into or exchangeable for McLeodUSA's equity securities, received pursuant to McLeodUSA's acquisition of Ovation Communications, without receiving the prior written consent of McLeodUSA's Board of Directors, except for transfers of the restricted securities specifically permitted by the agreement. The further amended and restated January 1999 stockholders' agreement also contains various provisions intended to insure that the M/C entities and the parties to the further amended and restated November 1998 stockholders' agreement are treated on a basis generally similar to one another in connection with permitted sales and registration of McLeodUSA's securities under such agreements. In addition, for so long as the M/C entities own at least 7,500,000 shares of Class A common stock, the M/C entities have agreed to vote their shares in accordance with the voting agreement contained in the further amended and restated November 1998 stockholders' agreement, as

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amended, and the other parties have agreed to vote their shares to cause to be elected to McLeodUSA's Board of Directors one director designated by the M/C entities.

The further amended and restated January 1999 stockholders' agreement terminates on December 31, 2001.

Certain Charter Provisions

Classified Board

McLeodUSA's certificate of incorporation provides for the division of the McLeodUSA Board of Directors into three classes of directors, serving staggered three-year terms. McLeodUSA's certificate of incorporation further provides that the approval of the holders of at least two-thirds of the shares entitled to vote on the certificate of incorporation and the approval of a majority of the entire McLeodUSA Board of Directors are necessary for the alteration, amendment or repeal of specific sections of McLeodUSA's certificate of incorporation relating to the election and classification of the McLeodUSA Board of Directors, limitation of director liability, indemnification and the vote requirements for these amendments to the McLeodUSA certificate of incorporation. These provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of McLeodUSA.

Mandatory Redemption

McLeodUSA's certificate of incorporation empowers the McLeodUSA Board of Directors to redeem any of McLeodUSA's outstanding capital stock at a price determined by the McLeodUSA Board of Directors, which price will be at least equal to the lesser of:

•: fair market value, as determined in accordance with the McLeodUSA certificate of incorporation, or
•: in the case of a "Disqualified Holder," such holder's purchase price, if the stock was purchased within one year of such redemption,

to the extent necessary to prevent the loss or secure the reinstatement of any license, operating authority or franchise from any governmental agency. A "Disqualified Holder" is any holder of shares of stock of McLeodUSA whose holding of McLeodUSA's stock may result in the loss of, or failure to secure the reinstatement of, any license or franchise from any governmental agency held by McLeodUSA or any of its subsidiaries to conduct any portion of the business of McLeodUSA or any of its subsidiaries. Under the Telecommunications Act of 1996, non-U.S. citizens or their representatives, foreign governments or their representatives, or corporations organized under the laws of a foreign country may not own, in the aggregate, more than 20% of a common carrier licensee or more than 25% of the parent of a common carrier licensee if the FCC determines that the public interest would be served by prohibiting this ownership.

Unanimous Written Consent to Stockholder Action Without a Meeting

The McLeodUSA certificate of incorporation provides that no corporate stockholder action may be taken without a meeting of stockholders unless there is unanimous written consent of McLeodUSA's stockholders, except to the extent otherwise provided under the terms of any series of McLeodUSA's preferred stock.

Amendment of Bylaws

The McLeodUSA Board of Directors is expressly authorized and empowered to adopt, amend and repeal McLeodUSA's Bylaws.

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In connection with the Restructuring, holders of Class A common stock will be asked to vote on a proposal to amend to the certificate of incorporation to provide that McLeodUSA has elected not to be governed by Section 203 of the Delaware General Corporation Law. By virtue of being incorporated in Delaware, McLeodUSA is subject to the provisions of Section 203. Section 203 prohibits McLeodUSA from engaging in a business combination, such as a merger or consolidation, with any person who acquires 15% or more of the Class A common stock (an "interested stockholder") for three years, unless the McLeodUSA's Board of Directors approves the proposed business combination before the interested stockholder reaches the 15% threshold or if the business combination is approved by the Board of Directors and holders of at least two-thirds of Class A common stock not owned by the interested stockholder. Section 203 also permits stockholders to "opt-out" of its provisions by voting to amend its certificate of incorporation to provide that McLeodUSA elects not to be governed by Section 203. The amendment of the certificate of incorporation to opt out of Section 203 is a condition to Forstmann Little's obligation to consummate the Purchase Agreement.

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THE PLAN

MCLEODUSA HAS NOT COMMENCED A CHAPTER 11 CASE, NOR HAS IT TAKEN ANY CORPORATE ACTION AUTHORIZING THE COMMENCEMENT OF SUCH A CASE. HOWEVER, MCLEODUSA MAY, IF THE EXCHANGE OFFER CANNOT BE CONSUMMATED, COMMENCE A CHAPTER 11 CASE UNDER THE BANKRUPTCY CODE IN ORDER TO RESTRUCTURE ITS FINANCIAL AFFAIRS. THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT SOLICITS YOUR ADVANCE ACCEPTANCE OF THE PLAN, A COPY OF WHICH IS ATTACHED TO THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT AS APPENDIX I, AND CONTAINS IMPORTANT INFORMATION RELEVANT TO YOUR DECISION TO ACCEPT THE PLAN. PLEASE READ THE PLAN COMPLETELY AND CAREFULLY.

In order to enhance the likelihood that McLeodUSA will succeed in its Restructuring efforts, McLeodUSA has formulated the Plan for the reorganization of McLeodUSA under Chapter 11 of the Bankruptcy Code. The Plan generally provides the same benefits to McLeodUSA and Holders of the Notes as would the consummation of the Exchange Offer. In the event that sufficient tenders and consents have not been received from Noteholders to permit consummation of the Out-of-Court Restructuring, but sufficient Ballots signifying acceptance of the Plan, in the judgment of the Board of Directors of McLeodUSA, are received to confirm the Plan, McLeodUSA may file a voluntary petition under Chapter 11 of the Bankruptcy Code and use such acceptances to confirm the Plan. If the Plan is confirmed and consummated, all Noteholders would receive the same consideration in exchange for their Notes as they would have received in the Out-of-Court Restructuring, whether or not they vote for the acceptance of the Plan.

Glossary

Set forth below is a glossary of certain terms used in the description of the Plan. To the extent that terms are defined in the Glossary and also elsewhere in this Offering Memorandum and Disclosure Statement, for the purposes of this Section, the definitions in this Glossary shall be the controlling definitions. To the extent not defined in this Glossary or otherwise defined in this Offering Memorandum and Disclosure Statement, capitalized terms used in the description of the Plan have the meanings ascribed to such terms in Article I of the Plan.

Administrative Claim

means a Claim for costs and expenses of administration of the Chapter 11 Case Allowed under Section 503(b) or 1114(e)(2) of the Bankruptcy Code and entitled to priority pursuant to Section 507(a)(1) of the Bankruptcy Code, including, but not limited to: (a) any actual and necessary costs and expenses incurred after the Petition Date of preserving McLeodUSA's Estate and operating the businesses of McLeodUSA (such as wages, salaries, commissions for services and payments for inventories, leased equipment and premises) and Claims of governmental units for taxes (including tax audit Claims related to tax years commencing after the Petition Date, but excluding Claims relating to tax periods, or portions thereof, ending on or before the Petition Date); (b) compensation for legal, financial, advisory, accounting and other services and reimbursement of expenses Allowed by the Bankruptcy Court under Section 330, 331 or 503(b) of the Bankruptcy Code to the extent incurred prior to the Effective Date; (c) all fees and charges assessed against McLeodUSA's Estate under Section 1930, Chapter 123 of Title 28, United States Code; and (d) Claims under the DIP Credit Agreement.

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*Allowed*		means, when used in reference to a Claim or Interest within a particular Class, an Allowed Claim or Allowed Interest of the type described in such Class.
*Allowed Claim*		means a Claim or any portion thereof (a) that has been allowed by a Final Order, or (b) as to which, on or by the Effective Date, (i) no proof of claim has been filed with the Bankruptcy Court and (ii) the liquidated and noncontingent amount of which is Scheduled, other than a Claim that is Scheduled at zero, in an unknown amount, or as disputed, or (c) for which a proof of claim in a liquidated amount has been timely filed with the Bankruptcy Court pursuant to the Bankruptcy Code, any Final Order of the Bankruptcy Court or other applicable bankruptcy law, and as to which either (i) no objection to its allowance has been filed within the periods of limitation fixed by the Plan, the Bankruptcy Code or by any order of the Bankruptcy Court or (ii) any objection to its allowance has been settled, withdrawn, or denied by a Final Order, or (d) that is expressly allowed in a liquidated amount in the Plan.
*Allowed Interest*		means any interest that (a) is registered as of the Distribution Record Date in a stock register maintained by or on behalf of McLeodUSA and (b) is not a Disputed Interest.
*Amended Certificate of Incorporation and By-Laws*		means Reorganized McLeodUSA's certificate of incorporation and by-laws, as amended by the Plan.
*Ballot*		means each of the ballot forms distributed to each holder of an Impaired Claim or Impaired Interest on which the holder is to indicate acceptance or rejection of the Plan.
*Bank Agents*		means the agents under the Credit Agreement.
*Bankruptcy Code*		means the Bankruptcy Reform Act of 1978, as codified in Title 11 of the United States Code, 11 U.S.C. §§101-1330, as now in effect or hereafter amended.
*Bankruptcy Court*		means the United States District Court having jurisdiction over the Chapter 11 Case and, to the extent any reference is made pursuant to Section 157 of Title 28 of the United States Code or the General Order of the District Court pursuant to Section 151 of Title 28 of the United States Code, the bankruptcy unit of such District Court.
*Bankruptcy Rules*		means, collectively, the Federal Rules of Bankruptcy Procedure and the Official Bankruptcy Forms, as amended, the Federal Rules of Civil Procedure, as amended, as applicable to the Chapter 11 Case or proceedings therein, and the Local Rules of the Bankruptcy Court, as applicable to the Chapter 11 Case or proceedings therein, as the case may be.
*Bar Date*		means the date, if any, designated by the Bankruptcy Court as the last dates for filing proofs of Claim or Interest against McLeodUSA.
*Business Day*		means any day, other than a Saturday, Sunday or "legal holiday" (as defined in Bankruptcy Rule 9006(a)).

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*Cash*		means legal tender of the United States of America and equivalents thereof.
*Chapter 11 Case*		means the case under Chapter 11 of the Bankruptcy Code commenced by McLeodUSA in the Bankruptcy Court.
*Claim*		means a "claim" as defined in Section 101(5) of the Bankruptcy Code.
*Claims Objection Deadline*		means the first Business Day that is the latest of (a) 120 days after the Effective Date; (b) as to a particular Claim, 60 days after the filing of a proof of claim for, or request for payment of, such Claim; or (c) such later date as may be established by the Bankruptcy Court for cause shown by Reorganized McLeodUSA.
*Class*		means a category of holders of Claims or Interests, as described in Article II of the Plan.
*Confirmation Date*		means the date on which the Clerk of the Bankruptcy Court enters the Confirmation Order on the docket of the Bankruptcy Court.
*Class A Common Stock*		means that certain Class A common stock, par value $.01, issued by McLeodUSA prior to the Petition Date.
*Class 7 Solicitation Order*		means a Final Order of the Bankruptcy Court or other Court of competent jurisdiction providing that Class 7 is deemed to have rejected the Plan and is not entitled to vote on the Plan.
*Confirmation Hearing*		means the hearing held by the Bankruptcy Court pursuant to Section 1128 of the Bankruptcy Code to consider confirmation of the Plan, as such hearing may be adjourned or continued from time to time.
*Confirmation Order*		means the order of the Bankruptcy Court confirming the Plan pursuant to Section 1129 of the Bankruptcy Code.
*Credit Agreement*		means that certain Credit Agreement dated as of May 31, 2000, between McLeodUSA, as borrower, and the entities identified as the "Lenders" therein, as amended.
*DIP Credit Agreement*		means the credit facility to be entered into by McLeodUSA, as borrower, and those entities identified as "Lenders" therein, as amended, modified or supplemented, for the purpose of financing McLeodUSA's operations as debtor-in-possession in the Chapter 11 Case.
*DIP Facility Claims*		means a Claim of a DIP Lender for amounts outstanding under the DIP Credit Agreement.
*DIP Lenders*		means those entities identified as "Lenders" in the DIP Credit Agreement and their respective successors and assigns.

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*Dilution*		means dilution subsequent to the Effective Date (a) to the extent necessary to give effect to the exercise of any stock options or warrants or conversion of preferred stock to common stock or (b) otherwise as a result of the issuance of common stock, implementation of management incentive programs, or other action taken by the board of directors of Reorganized McLeodUSA, including, but not limited to, action taken in furtherance of the Management Incentive Plan.
*Disbursing Agent*		means Reorganized McLeodUSA, or any party designated by Reorganized McLeodUSA, to serve as disbursing agent under the Plan.
*Disputed Claim*		means a Claim, or any portion thereof, that is not an Allowed Claim and includes, without limitation, Claims that (a) have not been Scheduled by McLeodUSA or have been Scheduled at zero, or as contingent, unliquidated, or disputed, or (b) are the subject of an objection filed in the Bankruptcy Court and which objection has not been withdrawn or overruled by a Final Order of the Bankruptcy Court.
*Disputed Claim Amount*		means (a) with respect to contingent or unliquidated Claims, the amount estimated by the Bankruptcy Court for purposes of distributions in respect of such Claims in accordance with Section 502(c) of the Bankruptcy Code; or (b) the amount set forth in a timely Filed proof of claim.
*Disputed Claims Reserve*		means the reserve of Class A common stock established and maintained by Reorganized McLeodUSA on account of Disputed Claims.
*Disputed Interest*		means an interest, or any portion thereof, that is not an Allowed Interest and includes, without limitation, Interests that (a) have not been Scheduled by McLeodUSA or have been Scheduled at zero, or as contingent, unliquidated, or disputed, or (b) are the subject of an objection filed in the Bankruptcy Court and which objection has not been withdrawn or overruled by a Final Order of the Bankruptcy Court.
*Disputed Interest Amount*		means, with respect to a Disputed Interest, the number of shares set forth in a timely Filed proof of interest.
*Disputed Interest Reserve*		means the reserve of Class A common stock established and maintained by Reorganized McLeodUSA on account of Disputed Interests.
*Distribution Date*		means the date, within 30 days after the Effective Date, upon which the initial distributions will be made to holders of Allowed Claims and Allowed Interests.
*Distribution Record Date*		means the Confirmation Date.
*Effective Date*		means the Business Day the Plan becomes effective as provided in Article IX in the Plan.
*Estate*		means the estate of McLeodUSA created under Section 541 of the Bankruptcy Code.

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*Exit Facility*		means that certain exit revolving credit facility in the aggregate principal amount of $160 million to be provided to Reorganized McLeodUSA on the Effective Date pursuant to the terms of the New Credit Agreement.
*Exit Lenders*		means those entities identified as "Lenders" with respect to the Exit Facility in the New Credit Agreement and their respective successors and assigns.
*Fee Claim*		means an Administrative Claim under Section 330(a), 331, 503 or 1103 of the Bankruptcy Code for compensation of a Professional or other entity for services rendered or expenses incurred in the Chapter 11 Case on or prior to the Effective Date.
*File, Filed or Filing*		means file, filed or filing with the Bankruptcy Court or its authorized designee in the Chapter 11 Case.
*Final Order*		means an order or judgment, the operation or effect of which has not been stayed, reversed, or amended and as to which order or judgment (or any revision, modification, or amendment thereof) the time to appeal or seek review or rehearing has expired and as to which no appeal or petition for review or rehearing was filed or, if filed, remains pending.
*Forstmann Little*		means one or more of Forstmann Little & Co., Forstmann Little & Co. Equity Partnership—VII, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership—VIII, L.P., Forstmann Little & Co. Equity Partnership—V, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership—VI, L.P., and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership—VII, L.P. and their affiliates.
*General Unsecured Claim*		means a Claim that is not a Senior Secured Lender Claim, Other Secured Claim, Non-Tax Priority Claim, or Note Claim.
*Holder*		means an entity holding a Claim or Interest and, with respect to Note Claims, the beneficial holder as of the applicable Voting Record Date or any authorized agent who has completed and executed a Ballot or on whose behalf a Master Ballot has been completed and executed in accordance with the voting instructions.
*Impaired*		means, when used in reference to a Claim or Interest, a Claim or Interest that is impaired within the meaning of Section 1124 of the Bankruptcy Code.
*Indentures*		means the Indentures dated as of March 4, 1997, July 21, 1997, March 16, 1998, October 30, 1998, February 22, 1999, December 5, 2000, and January 15, 2001, between McLeodUSA, as issuer, and the Notes Trustee, as trustee, relating to the Notes, as amended from time to time.
*Litigation Claims*		means the claims, rights of action, suits or proceedings, whether in law or in equity, whether known or unknown, that McLeodUSA or its Estate may hold against any person.

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*Management Incentive Plan*		means a management incentive plan to be adopted by the board of directors of Reorganized McLeodUSA on the Effective Date in accordance with the terms herein described and in the Plan Supplement.
*Master Ballot*		means the ballot distributed to holders of record of the Notes to record the votes of the beneficial holders of the Notes.
*McLeodUSA*		means McLeodUSA Incorporated.
*McLeodUSA Holdings*		means McLeodUSA Holdings, Inc., a Delaware corporation.
*New Credit Agreement*		means that certain credit agreement governing the Exit Facility between Reorganized McLeodUSA, as borrower, those entities identified as guarantors in the New Credit Agreement, and the Exit Lenders.
*New Director Preferred Stock*		means 10 shares of new voting preferred stock of Reorganized McLeodUSA to be issued to Forstmann Little on the Effective Date with a $1.00 liquidation preference and the right to vote to elect two (2) directors and one (1) observer to Reorganized McLeodUSA's Board of Directors.
*New Preferred Stock*		means 10,000,000 shares of preferred stock of Reorganized McLeodUSA, each with a liquidation preference of $10.00, no dividend, and each of which shall be mandatorily convertible into shares of Class A common stock on the 60^th day following the Effective Date of the Plan in an amount equal to the liquidation preference divided by the average share price of the Class A common stock, calculated by taking the closing price per share of such Class A common stock on 10 randomly selected trading days during the 60-day period following the Effective Date of the Plan, discarding the two highest and the two lowest prices and taking the mathematical average of the remaining six prices.
*New Warrants*		means 18,937,995 (eighteen million nine hundred thirty-seven thousand nine hundred ninety-five) warrants, each of which (i) shall entitle its holder to purchase one share of Class A common stock at an exercise price equal to 150% of the average share price of the Class A common stock, calculated by taking the closing price per share of such Class A common stock on 10 randomly selected trading days during the 60-day period following the Effective Date of the Plan, discarding the two highest and the two lowest prices and taking the mathematical average of the remaining six prices, and (ii) shall expire on the fifth anniversary after the Effective Date.
*Non-Tax Priority Claim*		means a Claim, other than an Administrative Claim or Priority Tax Claim, that is entitled to priority in payment pursuant to Section 507(a) of the Bankruptcy Code.
*Note Claim*		means a Claim arising from or related to the Notes.
*Notes Trustee*		means The Bank of New York as successor trustee to the United States Trust Company of New York under the Indentures.

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*Notes*		means those certain (i) 10¹/2% Senior Discount Notes due March 1, 2007 issued by McLeodUSA under that certain Indenture dated March 4, 1997; (ii) 9¹/4% Notes due July 15, 2007 issued by McLeodUSA under that certain Indenture dated July 21, 1997; (iii) 8³/8% Notes due March 15, 2008 issued by McLeodUSA under that certain Indenture dated March 16, 1998; (iv) 9¹/2% Notes due November 1, 2008 issued by McLeodUSA under that certain Indenture dated October 30, 1998; (v) 8¹/8% Notes due February 15, 2009 issued by McLeodUSA under that certain Indenture dated February 22, 1999; (vi) 12% Notes due July 15, 2008 issued by McLeodUSA under that certain Indenture dated December 5, 2000; (vii) 11¹/2% Notes due May 1, 2009 issued by McLeodUSA under that certain Indenture dated December 5, 2000; and (viii) 11³/8% Notes due January 1, 2009 issued by McLeodUSA under that certain Indenture dated January 15, 2001.
*Old Preferred Stock*		means individually and collectively, as the case may be, the Series A preferred stock, the Series D preferred stock, and the Series E preferred stock, including the rights of any entity to purchase or demand the issuance of such stock, including (a) conversion, exchange, voting, participation, and dividend rights; (b) liquidation preferences; (c) stock options, warrants, and put rights; and (d) share-appreciation rights.
*Other Old Equity*		means all options, warrants, call rights, puts, awards, or other agreements to acquire Class A Common Stock outstanding immediately prior to the Petition Date.
*Other Secured Claim*		means a Claim that is secured by a lien on property in which McLeodUSA's Estate has an interest or that is subject to setoff under Section 553 of the Bankruptcy Code, to the extent of the value of the Claim holder's interest in the Estate's interest in such property or to the extent of the amount subject to setoff, as applicable, as determined pursuant to Section 506(a) of the Bankruptcy Code or, in the case of setoff, pursuant to Section 553 of the Bankruptcy Code.
*Petition Date*		means the date on which McLeodUSA files its Petition for relief commencing the Chapter 11 Case.
*Plan*		means this Chapter 11 plan of reorganization, including the Plan Supplement and all supplements, appendices and schedules thereto, either in its present form or as the same may be altered, amended or modified from time to time.
*Plan Supplement*		means the compilation of documents and form of documents specified in the Plan to be filed as set forth in Section 12.6 of the Plan.
*Priority Tax Claim*		means a Claim of a governmental unit of the kind specified in Sections 502(i) and 507(a)(8) of the Bankruptcy Code.

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*Preferred Stock and Warrant Purchase Agreement*		means that certain Purchase Agreement dated as of December 3, 2001, among McLeodUSA, Forstmann Little & Co. Equity Partnership—VII, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership—VIII, L.P., Forstmann Little & Co. Equity Partnership—V, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership—VI, L.P., and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership—VII, L.P., with respect to McLeodUSA's sale of the New Director Preferred Stock, the New Preferred Stock, and the New Warrants.
*Professional*		means (a) any professional employed in the Chapter 11 Case pursuant to Section 327 or 1103 of the Bankruptcy Code or otherwise and (b) any professional or other entity seeking compensation or reimbursement of expenses in connection with the Chapter 11 Case pursuant to Section 503(b)(4) of the Bankruptcy Code.
*Pubco*		means McLeodUSA Media Group, Inc., an Iowa corporation.
*Pubco Stock Purchase Agreement*		means that certain Stock Purchase Agreement dated as of December 3, 2001, between McLeodUSA Holdings, as seller, and Pubco Acquisition, as buyer, pursuant to which McLeodUSA Holdings has agreed to sell to Pubco Acquisition, and Pubco Acquisition has agreed to purchase from McLeodUSA Holdings, all of the outstanding shares of capital stock of Pubco.
*Reclassification*		means the reclassification of the Old Preferred Stock into Class A common stock to be effectuated with respect to Holders of Old Preferred Stock Interests under the Plan, based upon 627,734,497 shares of Class A common stock issued and outstanding, at a ratio of (i) 39.05 shares of Class A common stock for each share of Series A Preferred Stock (based on the $250 liquidation preference per share of the Series A Preferred Stock plus accrued dividends) and (ii) 378.79 shares of Class A common stock for each share of Series D or Series E Preferred Stock (based on the $2,500 liquidation preference per share of the Series D and Series E Preferred Stock).

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*Reinstated or Reinstatement*		means (i) leaving unaltered the legal, equitable, and contractual rights to which a Claim entitles the Holder of such Claim so as to leave such Claim unimpaired in accordance with Section 1124 of the Bankruptcy Code or (ii) notwithstanding any contractual provision or applicable law that entitles the Holder of such Claim to demand or receive accelerated payment of such Claim after the occurrence of a default (a) curing any such default that occurred before or after the Petition Date, other than a default of a kind specified in Section 365(b)(2) of the Bankruptcy Code; (b) reinstating the maturity of such Claim as such maturity existed before such default; (c) compensating the Holder of such Claim for any damages incurred as a result of any reasonable reliance by such Holder on such contractual provision or such applicable law; and (d) not otherwise altering the legal, equitable, or contractual rights to which such Claim entitles the Holder of such Claim.
*Reorganized McLeodUSA*		means McLeodUSA or any successors thereto by merger, consolidation, or otherwise, on or after the Effective Date.
*Reverse Stock Split*		means that 5-to-1 reverse stock split of the outstanding Class A common stock to be effectuated with respect to Holders of Class A Common Stock Interests under the Plan.
*Schedules*		means the schedules of assets and liabilities and the statements of financial affairs, if any, Filed by McLeodUSA pursuant to Section 521 of the Bankruptcy Code and Bankruptcy Rules, as such schedules have been or may be further modified, amended or supplemented in accordance with Bankruptcy Rule 1009 or orders of the Bankruptcy Court.
*Securities Act*		means the Securities Act of 1933, 15 U.S.C. §§77c-77aa, as now in effect or hereafter amended.
*Senior Secured Lender Claim*		means individually, a Claim of a Senior Secured Lender under the Credit Agreement and, collectively, the Claims of the Senior Secured Lenders under the Credit Agreement, including Claims for principal, accrued but unpaid interest through the Effective Date, and fees and expenses incurred by the Senior Secured Lenders. The Senior Secured Lender Claim shall be Allowed in an amount equal to the amount of principal and accrued but unpaid interest outstanding as of the Effective Date as agreed by McLeodUSA and the Bank Agents.
*Senior Secured Lenders*		means the entities identified as "Lenders" under the Credit Agreement and their respective successors and assigns.
*Series A Preferred Stock*		means that certain 6.75% Series A Cumulative Preferred Stock of McLeodUSA outstanding immediately prior to the Petition Date.
*Series D Preferred Stock*		means that certain Series D Convertible Preferred Stock of McLeodUSA outstanding immediately prior to the Petition Date.

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*Series E Preferred Stock*		means that certain Series E Convertible Preferred Stock of McLeodUSA outstanding immediately prior to the Petition Date.
*Solicitation Order*		means the order entered by the Bankruptcy Court, if any, establishing procedures with respect to the solicitation and tabulation of votes to accept or reject the Plan.
*Unimpaired Claim*		means a Claim that is not impaired within the meaning of Section 1124 of the Bankruptcy Code.
*Voting Deadline*		means January 15, 2002.
*Voting Record Date*		means December 3, 2001.

Reasons for the Solicitation; Recommendation

The Acceptance Solicitation is being conducted at this time in order to obtain (prior to the filing of a voluntary petition for reorganization of McLeodUSA under Chapter 11 of the Bankruptcy Code) the requisite acceptances. McLeodUSA anticipates that by conducting the acceptance solicitation in advance of commencing any Chapter 11 Case, the duration of the Chapter 11 Case will be significantly shortened, and the administration of the case, which otherwise can be lengthy, complex, and extremely expensive, will be greatly simplified, and much less costly.

Anticipated Events During the Chapter 11 Case

McLeodUSA may commence a bankruptcy case for any reason. If it chooses to do so, from and after the Petition Date, McLeodUSA will continue to operate its business and manage its properties as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.

McLeodUSA does not expect the Chapter 11 Case to be protracted. To expedite its emergence from Chapter 11, McLeodUSA intends to seek, among other things, the relief detailed below from the Bankruptcy Court on the Petition Date. If granted, this relief will facilitate the administration of the Chapter 11 Case. There can be no assurance, however, that the Bankruptcy Court will grant the requested relief.

(a): Applications for Retention of McLeodUSA's Professionals

McLeodUSA intends to seek retention of certain professionals to represent it and assist it in connection with any Chapter 11 Case. These professionals were intimately involved with the negotiation and development of the Restructuring and the Plan. These professionals include, among others: (i) Skadden, Arps, Slate, Meagher & Flom (Illinois) and its affiliates, as counsel for McLeodUSA; and (ii) Houlihan, Lokey, Howard & Zukin Capital as financial advisor to McLeodUSA. McLeodUSA also intends to seek authority to retain certain professionals to assist with the operation of McLeodUSA's businesses in the ordinary course; these so-called "ordinary course professionals" will not be involved in the administration of the Chapter 11 Case.

(b): Motion to Approve Combined Offering Memorandum and Disclosure Statement and Confirmation Hearing

McLeodUSA intends to seek an order scheduling a combined Confirmation Hearing and hearing on this Offering Memorandum and Disclosure Statement at which time McLeodUSA will seek approval of this Offering Memorandum and Disclosure Statement and confirmation of the Plan pursuant to Sections 1125, 1128 and 1129 of the Bankruptcy Code on the earliest date which is convenient for the Bankruptcy Court to conduct such hearing. At that time, McLeodUSA also will request the Bankruptcy Court to approve the prepetition solicitation of votes on the Plan.

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Pursuant to the Bankruptcy Rules, McLeodUSA must provide notice of the hearing to approve this Offering Memorandum and Disclosure Statement and confirmation of the Plan to creditors and equity holders. Because several classes of Claims are Unimpaired under the Plan and will pass through the Chapter 11 Case unaffected, McLeodUSA shall request that they be authorized to provide only publication notice of the events set forth above in several newspapers of national circulation to Holders of such Claims.

If, for some reason, Holders of Class 7 Class A Common Stock Interests do not vote in favor of the Plan, or if votes of such Holders are not solicited prior to the Petition Date, McLeodUSA may request the Bankruptcy Court to deem such Class to have rejected the Plan pursuant to the Class 7 Solicitation Order, thereby obviating the need for any further post-petition solicitation of such Holders. If, for some reason, Holders of Class 6 Old Preferred Stock Interests are not voted prior to the Petition Date, McLeodUSA reserves its rights to solicit votes from such Holders after commencement of a case.

(c): Motion to Continue Using Existing Cash Management Systems

Because McLeodUSA expects any Chapter 11 Case to be pending for less than two (2) months, and because of the administrative hardship that any operating changes would impose, McLeodUSA intends to seek authority to continue using its existing cash management system, bank accounts and business forms and to follow its internal investment and deposit guidelines. Absent the Bankruptcy Court's authorization of the continued use of the cash management system, cash flow among McLeodUSA and its subsidiaries would be impeded to the detriment of McLeodUSA's Estate and its creditors.

Continued use of its existing cash management system will facilitate McLeodUSA's smooth and orderly transition into any Chapter 11 proceeding, minimize the disruption of its businesses while in Chapter 11, and expedite its emergence from Chapter 11. As a result of set-up time and expenses, requiring McLeodUSA to adopt and implement a new cash management system would likely increase the costs of the Chapter 11 Case. For the same reasons, requiring McLeodUSA to cancel its existing bank accounts and establish new accounts or requiring McLeodUSA to create new business forms would only frustrate McLeodUSA's efforts to reorganize expeditiously.

(d): Motion for Authority to Pay Prepetition Employee Wages and Associated Benefits

McLeodUSA believes that it has a valuable asset in its work force and that any delay in paying prepetition compensation or benefits to its employees would destroy McLeodUSA's relationships with employees and irreparably harm employee morale at a time when the dedication, confidence and cooperation of McLeodUSA's employees is most critical. Accordingly, McLeodUSA will seek authority to pay compensation and benefits in the Chapter 11 Case which were accrued but unpaid as of the Petition Date.

(e): Debtor-in-Possession Financing

McLeodUSA will enter into the DIP Credit Agreement with its Lenders in connection with the Restructuring that will provide additional working capital secured by liens on McLeodUSA's assets senior to the liens securing the claims arising under the Credit Agreement which the Bankruptcy Court must approve in the event that McLeodUSA pursues the In-Court Alternative to the Restructuring. The DIP Credit Agreement authorizes borrowings of up to $50 million. As of the date of this Offering Memorandum and Disclosure Statement, McLeodUSA does not have a firm commitment for the DIP Credit Agreement. However, McLeodUSA expects to receive such a commitment prior to filing any Chapter 11 case.

(f): Timetable for Chapter 11 Case

Assuming that the Bankruptcy Court approves McLeodUSA's scheduled motion with respect to the Offering Memorandum and Disclosure Statement and Confirmation hearing, McLeodUSA anticipates

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that the Offering Memorandum and Disclosure Statement and Confirmation hearing would occur within approximately two (2) months of the Petition Date. There can be no assurance, however, that the Bankruptcy Court's orders to be entered on the Petition Date will permit the Chapter 11 Case to proceed as expeditiously as anticipated. If, for some reason, McLeodUSA solicits votes on the Plan from Holders of Class 6 Old Preferred Stock Interests after commencement of a Chapter 11 case, administration of the case could take longer than two (2) months.

Summary of the Plan of Reorganization

Overview of Chapter 11

Chapter 11 is the principal business reorganization Chapter of the Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized to reorganize its business for the benefit of itself, its creditors and interest holders. Another goal of Chapter 11 is to promote equality of treatment for similarly situated creditors and similarly situated interest holders with respect to the distribution of a debtor's assets. The commencement of a Chapter 11 case creates an estate that is comprised of all of the legal and equitable interests of the debtor as of the filing date. The Bankruptcy Code provides that the debtor may continue to operate its business and remain in possession of its property as a "debtor-in-possession."

The consummation of a plan of reorganization is the principal objective of a Chapter 11 case. A plan of reorganization sets forth the means for satisfying claims against and interests in a debtor. Confirmation of a plan of reorganization by the Bankruptcy Court makes the plan binding upon the debtor, any issuer of securities under the plan, any person or entity acquiring property under the plan and any creditor of or equity security holder in the debtor, whether or not such creditor or equity security holder (i) is impaired under or has accepted the plan or (ii) receives or retains any property under the plan. Subject to certain limited exceptions and other than as provided in the plan itself or the confirmation order, the confirmation order discharges the debtor from any debt that arose prior to the date of confirmation of the plan and substitutes therefor the obligations specified under the confirmed plan, and terminates all rights and interests of equity security holders.

THE REMAINDER OF THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE AND MEANS FOR IMPLEMENTATION OF THE PLAN, AND OF THE CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN (AS WELL AS THE EXHIBITS THERETO AND DEFINITIONS THEREIN), WHICH IS ANNEXED TO THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT AS APPENDIX I.

THE STATEMENTS CONTAINED IN THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT INCLUDE SUMMARIES OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN. THE STATEMENTS CONTAINED IN THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT DO NOT PURPORT TO BE PRECISE OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR DOCUMENTS REFERRED TO THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH DOCUMENTS FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.

THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN CONTROL THE ACTUAL TREATMENT OF CLAIMS AGAINST AND INTERESTS IN MCLEODUSA UNDER THE PLAN AND WILL, UPON OCCURRENCE OF THE EFFECTIVE DATE, BE BINDING UPON ALL HOLDERS OF CLAIMS AGAINST AND INTERESTS IN MCLEODUSA, THE ESTATES, REORGANIZED MCLEODUSA, ALL PARTIES RECEIVING PROPERTY UNDER THE PLAN, AND OTHER PARTIES IN INTEREST. IN THE EVENT OF ANY CONFLICT BETWEEN THIS OFFERING MEMORANDUM AND DISCLOSURE STATEMENT, ON THE

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ONE HAND, AND THE PLAN OR ANY OTHER OPERATIVE DOCUMENT, ON THE OTHER HAND, THE TERMS OF THE PLAN OR SUCH OTHER OPERATIVE DOCUMENT WILL CONTROL.

Creditors And Equity Interest Holders Entitled to Vote on the Plan

As more fully described below, the Plan designates separate classes of Claims against and Interests in McLeodUSA (other than DIP Facility Claims, Administrative Claims, and Priority Tax Claims). Only the holders of Impaired Class 5 Note Claims, Class 6 Old Preferred Stock Interests, and Class 7 Class A Common Stock Interests are being solicited. In addition to holders of DIP Facility Claims, Administrative Claims and Priority Tax Claims (which are not classified under the Plan), holders of Claims in Classes 1, 2, 3 and 4 are Unimpaired by the Plan, are not entitled to vote to accept or reject the Plan, and are deemed to have accepted the Plan. Class 8 Other Old Equity Interests are deemed to have rejected the Plan.

Bankruptcy Rule 3018(b) prescribes the conditions that must be satisfied in order to count the ballots solicited with respect to a plan of reorganization prior to the commencement of a Chapter 11 case. Bankruptcy Rule 3018(b) requires that (i) the Chapter 11 plan must have been disseminated to substantially all impaired creditors and equity security holders in the class(es) entitled to vote, (ii) the time prescribed for voting on the plan must not have been unreasonably short, and (iii) the solicitation must have been conducted in accordance with Section 1126(b) of the Bankruptcy Code, which requires that the solicitation be conducted in compliance with all applicable non-bankruptcy laws, rules, or regulations or, if there are no such applicable laws, rules or regulations, that the disclosure with respect to the plan contains "adequate information" as defined in Section 1125(a) of the Bankruptcy Code. Section 1125(a) defines "adequate information" as information of a kind and in sufficient detail as far as is reasonably practicable in light of the nature and history of a company and the condition of such company's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or equity interests of the relevant class to make an informed judgment about the plan of reorganization.

McLeodUSA believes that all of the requirements of Bankruptcy Rule 3018(b) will be satisfied. This Offering Memorandum and Disclosure Statement and the Plan, together with all of the accompanying materials, are being transmitted to Holders of Class 5 Note claims. McLeodUSA believes that this Offering Memorandum and Disclosure Statement contains adequate information (within the meaning of Section 1125(a)(1) of the Bankruptcy Code) for all holders of such Claims. McLeodUSA intends to transmit to Holders of Class 6 Old Preferred Stock Interests and Class 7 Class A Common Stock Interests a separate disclosure statement substantially similar to this Offering Memorandum and Disclosure Statement in order to solicit their votes on the Plan.

Certain Matters Regarding Classification and Treatment of Claims and Interests

Section 1123 of the Bankruptcy Code provides that a plan of reorganization must classify the claims and interests of a debtor's creditors and equity interest holders. In accordance with Section 1123, the Plan divides Claims and Interests into Classes and sets forth the treatment for each Class (other than DIP Facility Claims, Administrative Claims and Priority Tax Claims which, pursuant to Section 1123(a)(1), need not be and have not been classified). McLeodUSA is required, under Section 1122 of the Bankruptcy Code, to classify Claims against and Interests in McLeodUSA into Classes, each of which contain Claims and Interests that are substantially similar to the other Claims and Interests in such Class. McLeodUSA believes that the Plan has classified all Claims and Interests in compliance with the provisions of Section 1122, but once the Chapter 11 Case has been commenced, it is possible that a holder of a Claim or Interest may challenge McLeodUSA's classification of Claims and Interests and that the Bankruptcy Court may find that a different classification is required for the Plan to be confirmed. In that event, McLeodUSA intends, to the extent permitted by the Bankruptcy

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Code, the Plan and the Bankruptcy Court, to make such reasonable modifications of the classifications under the Plan to permit confirmation and to use the Acceptances of the Plan received in this Acceptance Solicitation for purposes of obtaining the approval of the reconstituted Class or Classes of which each accepting holder ultimately is deemed to be a member. Any such reclassification could adversely affect the Class in which such holder initially was a member, or any other Class under the Plan, by changing the composition of such Class and the vote required of that Class for approval of the Plan. Furthermore, a reclassification of a Claim or Interest after approval of the Plan could necessitate a resolicitation of Acceptances of the Plan.

The classification of Claims and Interests and the nature of distributions to members of each Class are summarized below. McLeodUSA believes that the consideration, if any, provided under the Plan to holders of Claims and Interests reflects an appropriate resolution of their Claims and Interests, taking into account the differing nature and priority (including applicable contractual subordination) of such Claims and Interests. The Bankruptcy Court must find, however, that a number of statutory tests are met before it may confirm the Plan. Many of these tests are designed to protect the interests of holders of Claims or Interests who are not entitled to vote on the Plan, or do not vote to accept the Plan, but who will be bound by the provisions of the Plan if it is confirmed by the Bankruptcy Court. The "cramdown" provisions of Section 1129(b) of the Bankruptcy Code, for example, permit confirmation of a Chapter 11 plan in certain circumstances even if the plan has not been accepted by all impaired classes of claims and interests. Although McLeodUSA believes that the Plan could be confirmed under Section 1129(b), there can be no assurance that the requirements of such section would be satisfied.

(a): Fee Claims

Fee Claims are Administrative Claims under Sections 330(a), 331, 503, or 1103 of the Bankruptcy Code for compensation of Professionals or other entities for professional services rendered or expenses incurred in the Chapter 11 Case on or prior to the Effective Date. All payments to Professionals for Fee Claims will be made in accordance with the procedures established by the Bankruptcy Code, the Bankruptcy Rules, the United States Trustee Guidelines and the Bankruptcy Court relating to the payment of interim and final compensation for services rendered and reimbursement of expenses. The Bankruptcy Court will review and determine all applications for compensation for services rendered and reimbursement of expenses.

In addition, Section 503(b) of the Bankruptcy Code provides for payment of compensation to (a) creditors, indenture trustees and other entities making a "substantial contribution" to a Chapter 11 case and (b) attorneys for and other professional advisors to such entities. The amounts, if any, which may be sought by entities for such compensation are not known by McLeodUSA at this time. Requests for compensation must be approved by the Bankruptcy Court after a hearing on notice at which McLeodUSA and other parties in interest may participate and, if appropriate, object to the allowance of any compensation and reimbursement of expenses.

(b): Administrative Claims

Administrative Claims are Claims for costs and expenses of administration of the Chapter 11 Case Allowed under Section 503(b) or 1114(e)(2) of the Bankruptcy Code and entitled to priority pursuant to Section 507(a)(1) of the Bankruptcy Code other than Fee Claims. Such Claims include (a) any actual and necessary costs and expenses incurred after the Petition Date of preserving McLeodUSA's Estate and operating the businesses of McLeodUSA (such as wages, salaries, commissions for services and payments for inventories, leased equipment and premises), and Claims of governmental units for taxes (including tax audit Claims related to tax years commencing after the Petition Date, but excluding Claims relating to tax periods, or portions thereof, ending on or before the Petition Date); (b) all fees and charges assessed against McLeodUSA's Estate under Section 1930, Chapter 123 of Title 28, United States Code; and (c) Claims under the DIP Credit Agreement.

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Each Administrative Claim shall be paid by McLeodUSA, at its election, (a) in full, in Cash, in such amounts as are incurred in the ordinary course of business by McLeodUSA, or in such amounts as such Administrative Claim is Allowed by the Bankruptcy Court upon the later of the Effective Date or the date upon which there is a Final Order allowing such Administrative Claim, (b) upon such other terms as may exist in the ordinary course of McLeodUSA's business or (c) upon such other terms as may be agreed upon between the Holder of such Administrative Claim and McLeodUSA.

The Confirmation Order will establish an Administrative Claims Bar Date for filing Administrative Claims, which date will be thirty (30) days after the Effective Date. Holders of Administrative Claims not paid prior to the Effective Date must submit proofs of Claim on or before such Administrative Claims Bar Date or be forever barred from doing so. The notice of Confirmation to be delivered pursuant to Bankruptcy Rules 3020(c) and 2002(f) will set forth such date and constitute notice of this Administrative Claims Bar Date. McLeodUSA, or Reorganized McLeodUSA, as the case may be, will have thirty (30) days (or such longer period as the Bankruptcy Court may allow) following the Administrative Claims Bar Date to review and object to such Administrative Claims before a hearing for determination of allowance of such Administrative Claims.

(c): Priority Tax Claims

Priority Tax Claims are Claims for taxes entitled to priority in payment under Sections 502(i) and 507(a)(8) of the Bankruptcy Code. The legal and equitable rights of the Holders of Priority Tax Claims are Unimpaired by the Plan. On or as soon as reasonably practicable after (i) the Distribution Date if such Priority Tax Claim is an Allowed Priority Tax Claim as of the Effective Date or (ii) the date on which such Priority Tax Claim becomes an Allowed Priority Tax Claim, each holder of an Allowed Priority Tax Claim shall receive in full satisfaction, settlement and release of and in exchange for such Allowed Priority Tax Claim, at the election of McLeodUSA, (A) Cash equal to the amount of such Allowed Priority Tax Claim; (B) such other treatment as to which McLeodUSA or Reorganized McLeodUSA and the holder of such Allowed Priority Tax Claims shall have agreed upon in writing; or (C) such Claim will be otherwise treated in any other manner such that it will not be Impaired pursuant to Section 1124 of the Bankruptcy Code;further provided, any Allowed Priority Tax Claim not due and owing on the Effective Date will be paid when such Claim becomes due and owing.

(d): Class 1—Senior Secured Lender Claims

The Senior Secured Lender Claims are the Claims of the Senior Secured Lenders under the Credit Agreement for principal, accrued but unpaid interest through the Effective Date, and fees and expenses incurred by the Senior Secured Lenders. The Senior Secured Lender Claims are Allowed Claims under the Plan in an amount as agreed by McLeodUSA and the Bank Agents by the Effective Date. The legal, equitable and contractual rights of the Holders of Allowed Senior Secured Lender Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(e): Class 2—Other Secured Claims

An Other Secured Claim is a Claim that is secured by a lien on property in which McLeodUSA's Estate has an interest or that is subject to setoff under Section 553 of the Bankruptcy Code, to the extent of the value of the Claim holder's interest in the Estate's interest in such property or to the extent of the amount subject to setoff, as applicable, as determined pursuant to Section 506(a) of the Bankruptcy Code or, in the case of setoff, pursuant to Section 553 of the Bankruptcy Code. The legal, equitable and contractual rights of the Holders of Allowed Other Secured Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(f): Class 3—Non-Tax Priority Claims

A Non-Tax Priority Claim means a Claim, other than an Administrative Claim or Priority Tax Claim, that is entitled to priority in payment pursuant to Section 507(a) of the Bankruptcy Code. The

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legal and equitable rights of the Holders of Non-Tax Priority Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(g): Class 4—General Unsecured Claims

A General Unsecured Claim is a Claim that is not a Senior Secured Lender Claim, Other Secured Claim, Non-Tax Priority Claim, or Note Claim. The legal, equitable and contractual rights of the Holders of Allowed General Unsecured Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(h): Class 5—Note Claims

Note Claims are the Claims of the Holders of the Notes arising from or related to the Notes. The Note Claims are Allowed Claims under the Plan in amounts to be agreed upon by McLeodUSA and the Notes Trustee by the Effective Date. On or as soon as reasonably practicable after the Distribution Date, each holder of an Allowed Note Claim shall receive, in full satisfaction, release, and discharge of its Allowed Note Claim, its pro rata share of (A) $560,000,000 (five hundred sixty million dollars) in Cash, plus (B) 56,813,984 (fifty-six million eight hundred thirteen thousand nine hundred eighty-four) shares of Class A common stock, subject to Dilution.

(i): Class 6—Old Preferred Stock Interests

Old Preferred Stock Interests means Interests, individually and collectively, as the case may be, with respect to the Series A preferred stock, the Series D preferred stock, and the Series E preferred stock, including the rights of any entity to purchase or demand the issuance of such Old Preferred Stock, including (a) conversion, exchange, voting, participation, and dividend rights; (b) liquidation preferences; (c) stock options, warrants, and put rights; and (d) share-appreciation rights. Old Preferred Stock Interests are Allowed Interests under the Plan. On or as soon as reasonably practicable after the Distribution Date, after effectuation of the Reclassification, (A) Holders of the Series A Preferred Stock shall receive, in full satisfaction, release, and discharge of their Allowed Series A Preferred Stock Interests, their pro rata share of 44,883,856 (forty-four million eight hundred eighty-three thousand eight hundred fifty-six) shares of Class A common stock; (B) Holders of the Series D Preferred Stock shall receive, in full satisfaction, release, and discharge of their Allowed Series D Preferred Stock Interests, their pro rata share of 104,166,667 (one hundred four million one hundred sixty-six thousand six hundred sixty-seven) shares of Class A common stock, and (C) Holders of the Series E Preferred Stock shall receive, in full satisfaction, release, and discharge of their Allowed Series E Preferred Stock Interests, their pro rata share of 47,348,485 (forty-seven million three hundred forty-eight thousand four hundred eighty-five) shares of Class A common stock, in each case subject to Dilution.

(j): Class 7—Class A Common Stock Interests

Class A Common Stock Interests means Interests, individually and collectively, as the case may be, with respect to the Class A Common Stock. Class A Common Stock Interests are Allowed Interests under the Plan. On or as soon as reasonably practicable after the Distribution Date, each Holder of an Allowed Class A Common Stock Interest shall receive, after effectuation of the Reverse Stock Split, in full satisfaction, release, and discharge of its Allowed Class A Common Stock Interests, its pro rata share of 125,546,899 (one hundred twenty-five million five hundred forty-six thousand eight hundred ninety-nine) shares of the Class A common stock, subject to Dilution.

(k): Class 8—Other Old Equity

Other Old Equity Interests means Interests, individually and collectively, as the case may be, with respect to any and all options, warrants, call rights, puts, awards, or other agreements to acquire Class A common stock outstanding immediately prior to the Petition Date. On the Effective Date, the Other Old Equity will be cancelled and the Holders of Other Old Equity shall not receive or retain any distribution on account of such Other Old Equity Interests under the Plan.

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(l): Special Provision Regarding Unimpaired Claims

Except as otherwise provided in the Plan, nothing shall affect McLeodUSA's or Reorganized McLeodUSA's rights and defenses, both legal and equitable, with respect to any Unimpaired Claims, including, but not limited to, all rights with respect to legal and equitable defenses to setoffs or recoupments against Unimpaired Claims.

Method of Distribution Under the Plan

(a): Sources of Cash for Plan Distributions

Except as otherwise provided in the Plan or the Confirmation Order, all Cash necessary for Reorganized McLeodUSA to make payments pursuant to the Plan shall be obtained from existing Cash balances, and the proceeds from the sale of Pubco, the New Preferred Stock, the New Director Preferred Stock and the New Warrants.

(b): Distributions for Claims or Interests Allowed as of the Effective Date

Except as otherwise provided herein or as ordered by the Bankruptcy Court, distributions to be made on account of Claims or Interests that are Allowed as of the Effective Date shall be made on the Distribution Date or as soon thereafter as is practicable. Any distribution to be made pursuant to the Plan shall be deemed as having been made on the Effective Date if such distribution is made on the Effective Date or as soon thereafter as is practicable. Any payment or distribution required to be made under the Plan on a day other than a Business Day shall be made on the next succeeding Business Day. Distributions on account of Claims or Interests that first become Allowed Claims or Interests after the Effective Date shall be made pursuant to Articles III, VI and VII of the Plan. Notwithstanding the date on which any distribution of securities is made to a Holder of a Claim or Interest that is an Allowed Claim or Allowed Interest on the Effective Date, as of the date of the distribution, such Holder shall be deemed to have the rights of a Holder of such securities distributed as of the Effective Date.

(c): Interest on Claims

Unless otherwise specifically provided for in the Plan or Confirmation Order, or required by applicable bankruptcy law, postpetition interest shall not accrue or be paid on any Claims, other than Senior Secured Lender Claims as provided in the Credit Agreement, and no Holder of a Claim shall be entitled to interest accruing on or after the Petition Date on any Claim.

(d): Distributions by Reorganized McLeodUSA

Reorganized McLeodUSA or the Disbursing Agent shall make all distributions required to be distributed under the Plan. However, distributions on account of Senior Secured Lender Claims shall be made to the Bank Agents, and distributions on account of Note Claims shall be made to the Notes Trustee. Reorganized McLeodUSA may employ or contract with other entities to assist in or make the distributions required by the Plan.

(e)

Delivery of Distributions and Undeliverable or Unclaimed Distributions

a.: Delivery of Distributions in General. Distributions to holders of Allowed Claims and Allowed Interests shall be made at the addresses set forth in McLeodUSA's records or as otherwise available to McLeodUSA, the Bank Agents, the Notes Trustee, or any other agent or servicer, unless such addresses are superseded by proofs of claim or transfers of claim filed pursuant to Bankruptcy Rule 3001.

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b.

Undeliverable and Unclaimed Distributions.

(1): Holding and Investment of Undeliverable and Unclaimed Distributions. If the distribution to any Holder of an Allowed Claim or Interest is returned to the Disbursing Agent as undeliverable or is otherwise unclaimed, no further distributions shall be made to such Holder unless and until the Disbursing Agent is notified in writing of such Holder's then current address.
(2): After Distributions Become Deliverable. Reorganized McLeodUSA shall make all distributions that have become deliverable or have been claimed since the Distribution Date as soon as practicable after such distribution has become deliverable.
(3): Failure to Claim Undeliverable Distributions. Any holder of an Allowed Claim or Interest that does not assert a claim pursuant to the Plan for an undeliverable or unclaimed distribution within one (1) year after the Effective Date shall be deemed to have forfeited its claim for such undeliverable or unclaimed distribution and shall be forever barred and enjoined from asserting any such claim for an undeliverable or unclaimed distribution against McLeodUSA or its Estate, Reorganized McLeodUSA, or their property. In such cases, any Cash for distribution on account of such claims for undeliverable or unclaimed distributions shall become the property of the Estate free of any restrictions thereon and notwithstanding any federal or state escheat laws to the contrary, subject to the liens of the Senior Secured Lenders. Any Class A common stock held for distribution on account of such Claim or Interest shall be canceled and of no further force or effect. Nothing contained in the Plan shall require any Disbursing Agent, including, but not limited to, Reorganized McLeodUSA, to attempt to locate any holder of an Allowed Claim or Interest.

(f): Record Date for Distributions

As of the close of business on the Distribution Record Date, the transfer register for the Notes, Old Preferred Stock, and the Class A common stock, as maintained by McLeodUSA, the Notes Trustee, any other applicable trustee or their respective agents shall be closed and the transfer of such securities or any interest thereon prohibited. The Disbursing Agent will have no obligation to recognize the transfer of, or the sale of any participation in, any Allowed Claim or Interest that occurs after the close of business on the Distribution Record Date, and will be entitled for all purposes herein to recognize and distribute only to those Holders of Allowed Claims and Interests who are Holders of such Claims or Interest, or participants therein, as of the close of business on the Distribution Record Date. The Disbursing Agent and Reorganized McLeodUSA shall instead be entitled to recognize and deal for all purposes under the Plan with only those record holders stated on any official register as of the close of business on the Distribution Record Date.

(g): Allocation of Plan Distributions Between Principal and Interest

To the extent that any Allowed Claim entitled to a distribution under the Plan is comprised of indebtedness and accrued but unpaid interest thereon, such distribution shall, for federal income tax purposes, be allocated to the principal amount of the Claim first and then, to the extent the consideration exceeds the principal amount of the claim, to the portion of such Claim representing accrued but unpaid interest.

(h): Means of Cash Payment

Payments of Cash made pursuant to the Plan shall be in U.S. dollars and shall be made, at the option and in the sole discretion of Reorganized McLeodUSA, by (a) checks drawn on or (b) wire transfers from a domestic bank selected by Reorganized McLeodUSA. Cash payments to foreign

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creditors may be made, at the option of Reorganized McLeodUSA, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction.

(i): Withholding and Reporting Requirements

In connection with the Plan and all distributions thereunder, Reorganized McLeodUSA shall comply with all withholding and reporting requirements imposed by any federal, state, local or foreign taxing authority, and all distributions hereunder shall be subject to any such withholding and reporting requirements. Reorganized McLeodUSA shall be authorized to take any and all actions that may be necessary or appropriate to comply with such withholding and reporting requirements. Notwithstanding any other provision of the Plan, (i) each Holder of an Allowed Claim or Interest that is to receive a distribution of Class A common stock, New Preferred Stock, New Director Preferred Stock or New Warrants pursuant to the Plan shall have sole and exclusive responsibility for the satisfaction and payment of any tax obligations imposed by any governmental unit, including income, withholding and other tax obligations, on account of such distribution, and (ii) no distribution shall be made to or on behalf of such Holder pursuant to the Plan unless and until such Holder has made arrangements satisfactory to Reorganized McLeodUSA for the payment and satisfaction of such tax obligations or has, to Reorganized McLeodUSA's satisfaction, established an exemption therefrom. Any Class A common stock, New Preferred Stock, New Director Preferred Stock or New Warrants to be distributed pursuant to the Plan shall, pending the implementation of such arrangements, be treated as undeliverable pursuant to Section 6.4 of the Plan.

(j): Setoffs

Reorganized McLeodUSA may, pursuant to Section 553 of the Bankruptcy Code or applicable nonbankruptcy law, but shall not be required to, set off against any Claim and the payments or other distributions to be made pursuant to the Plan in respect of such Claim, claims of any nature whatsoever that McLeodUSA or Reorganized McLeodUSA may have against the Holder of such Claim;provided, however, that neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by Reorganized McLeodUSA of any such claim that McLeodUSA or Reorganized McLeodUSA may have against such Holder.

(k): Surrender of Instruments or Securities

As a condition precedent to receiving any distribution pursuant to the Plan on account of an Allowed Claim or Interest, the Holder of such Claim or Interest shall tender the applicable instruments, securities or other documentation evidencing such Claim or Interest to Reorganized McLeodUSA or the Notes Trustee, as applicable, unless waived in writing by Reorganized McLeodUSA or the Notes Trustee. Any Class A common stock to be distributed pursuant to the Plan on account of any such Claim or Interest shall, pending such surrender, be treated as an undeliverable distribution pursuant to the Plan.

a.: Notes and Old Preferred Stock. Each Holder of a Note Claim or Old Preferred Stock Interest shall tender its Notes and Old Preferred Stock relating to such Claim or Interest to Reorganized McLeodUSA or the Notes Trustee or their agents, as applicable, in accordance with written instructions to be provided to such Holders by Reorganized McLeodUSA or the Notes Trustee as promptly as practicable following the Effective Date. Such instructions shall specify that delivery of such instruments will be affected, and risk of loss and title thereto will pass, only upon the proper delivery of such instruments with a letter of transmittal in accordance with such instructions. All surrendered Notes and Old Preferred Stock shall be marked as cancelled.
b.: Failure to Surrender Instruments. Any Holder of Note Claims or Old Preferred Stock Interests that fails to surrender or is deemed to have failed to surrender the applicable Notes or Old Preferred Stock required to be tendered hereunder within one year after

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the Effective Date shall have its Claim or Interest and its distribution pursuant to the Plan on account of such Notes or Old Preferred Stock discharged and shall be forever barred from asserting any such Claim or Interest against Reorganized McLeodUSA or its property. In such cases, any Class A common stock held for distribution on account of such Claim or Interest shall be disposed of pursuant to Section 6.4 of the Plan.

(l): Lost, Stolen, Mutilated or Destroyed Securities

In addition to any requirements under the Indentures or any other applicable agreement, any Holder of a Claim or Interest evidenced by a Note or Old Preferred Stock that has been lost, stolen, mutilated or destroyed shall, in lieu of surrendering such Note or Old Preferred Stock, deliver to Reorganized McLeodUSA or the Notes Trustee or their agents, as applicable: (i) evidence reasonably satisfactory to Reorganized McLeodUSA or the Notes Trustee of the loss, theft, mutilation or destruction; and (ii) such security or indemnity as may be required by Reorganized McLeodUSA or the Notes Trustee to hold Reorganized McLeodUSA or the Notes Trustee harmless from any damages, liabilities or costs incurred in treating such individual as a Holder of an Allowed Claim or Interest. Upon compliance with this section by a Holder of a Claim or Interest evidenced by a Note or Old Preferred Stock, such Holder shall, for all purposes under the Plan, be deemed to have surrendered such instrument.

Resolution of Disputed, Contingent and Unliquidated Claims and Interests

(a): Objection Deadline; Prosecution of Objections

No later than the Claims Objection Deadline (unless extended by an order of the Bankruptcy Court), McLeodUSA or Reorganized McLeodUSA, as the case may be, shall file objections to Claims and Interests with the Bankruptcy Court and serve such objections upon the Holders of each of the Claims and Interests to which objections are made,provided,however, that McLeodUSA and Reorganized McLeodUSA shall not object to Claims Allowed pursuant to the Plan. Nothing contained herein, however, shall limit Reorganized McLeodUSA's right to object to Claims or Interests, if any, filed or amended after the Claims Objection Deadline. McLeodUSA and Reorganized McLeodUSA shall be authorized to, and shall, resolve all Disputed Claims or Interests by withdrawing or settling such objections thereto, or by litigating to judgment in the Bankruptcy Court or such other court having jurisdiction the validity, nature and/or amount thereof.

(b): No Distributions Pending Allowance

Notwithstanding any other provision of the Plan, no payments or distributions shall be made with respect to all or any portion of a Disputed Claim or Interest unless and until all objections to such Disputed Claim or Interest have been settled or withdrawn or have been determined by Final Order and the Disputed Claim or Interest, or some portion thereof, has become an Allowed Claim or Interest.

(c): Disputed Claims Reserve; Disputed Interest Reserve

On the Effective Date (or as soon thereafter as is practicable), Reorganized McLeodUSA shall establish the Disputed Claims Reserve and the Disputed Interest Reserve by withholding from the initial distribution (i) with respect to the Disputed Claims Reserve, an amount of Class A common stock calculated as if all Class 5 Note Claims were Allowed Class 5 Note Claims in an amount equal to one hundred percent (100%) of the distributions to which Holders of Disputed Class 5 Note Claims would be entitled if their Claims were allowed in the Disputed Claim Amount; and (ii) with respect to the Disputed Interest Reserve, an amount of Class A common stock calculated as if all Class 6 Interests were Allowed Class 6 Interests and all Class 7 Interests were Allowed Class 7 Interests, respectively, in an amount equal to one hundred percent (100%) of the distributions to which Holders of Disputed Class 6 Interests or Disputed Class 7 Interests, respectively, would be entitled if their

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Interest was allowed in the Disputed Interest Amount;provided,however, that McLeodUSA and Reorganized McLeodUSA shall have the right to file a motion seeking to modify any Disputed Claim Amounts or Disputed Interest Amounts.

(d): Distributions After Allowance

Reorganized McLeodUSA shall make payments and distributions from the Disputed Claims Reserve or Disputed Interest Reserve, as appropriate, to the Holder of any Disputed Claim or Disputed Interest that has become an Allowed Claim or Interest, as soon as practicable after the date such Disputed Claim or Interest becomes an Allowed Claim or Interest. Such distributions shall be based upon the cumulative distributions that would have been made to the Holder of such Claim or Interest under the Plan if the Disputed Claim or Interest had been Allowed on the Effective Date and shall not be limited by the Disputed Claim Amounts or Disputed Interest Amounts previously reserved with respect to such Disputed Claim or Interest to the extent that additional amounts are available therefor from the Disputed Claims Reserve or the Disputed Interest Reserve, as appropriate, but only to the extent that such additional amounts have not yet been distributed to Holders of Allowed Claims or Interest. After a Final Order has been entered, or other final resolution has been reached, with respect to each Disputed Claim or Disputed Interest, any Class A common stock that remain in the Disputed Claims Reserve or Disputed Interest Reserve, as applicable, shall be distributed as applicable, pro rata, to (i) with respect to the Disputed Claims Reserve, Holders of Allowed Class 5 Claims; and (ii) with respect to the Disputed Interest Reserve, Holders of Allowed Class 6 Interests and Allowed Class 7 Interests. All distributions made under this Section shall be made as if such Allowed Class 5 Claim or Allowed Class Interest and Allowed Class 7 Interest had been Allowed on the Effective Date.

Means for Implementation of the Plan

(a): Continued Corporate Existence and Vesting of Assets in Reorganized McLeodUSA

After the Effective Date, Reorganized McLeodUSA shall continue to exist in accordance with the law in the jurisdiction in which it is incorporated and pursuant to its certificate or articles of incorporation and by-laws in effect prior to the Effective Date, except to the extent such certificate or articles of incorporation and by-laws are amended under the Plan. Except as otherwise provided in the Plan, on and after the Effective Date, all property of the Estate of McLeodUSA, including all claims, rights and causes of action and any property acquired by McLeodUSA or Reorganized McLeodUSA under or in connection with the Plan, shall vest in Reorganized McLeodUSA free and clear of all Claims, liens, charges, other encumbrances and Interests except with respect to Claims that are Unimpaired under the Plan. On and after the Effective Date, Reorganized McLeodUSA may operate its businesses and may use, acquire and dispose of property and compromise or settle any Claims without supervision of or approval by the Bankruptcy Court and free and clear of any restrictions of the Bankruptcy Code or the Bankruptcy Rules other than restrictions expressly imposed by the Plan or the Confirmation Order. Without limiting the foregoing, Reorganized McLeodUSA may pay the charges that it incurs on or after the Effective Date for Professionals' fees, disbursements, expenses or related support services without application to the Bankruptcy Court.

(b) Corporate Governance, Directors and Officers and Corporate Action

a.: Certificates of Incorporation and By-laws. The certificate or articles of incorporation and by-laws of McLeodUSA shall be amended as necessary to satisfy the provisions of the Plan and the Bankruptcy Code, and shall include, among other things, (i) pursuant to Section 1123(a)(6) of the Bankruptcy Code, a provision prohibiting the issuance of non-voting equity securities, but only to the extent required by Section 1123(a)(6) of the Bankruptcy Code; and (ii) authorize the issuance of Class A common stock, New Preferred Stock, New Director Preferred Stock, and New Warrants in amounts not less

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than the amounts necessary to permit the distributions thereof required or contemplated by the Plan. After the Effective Date, Reorganized McLeodUSA may amend and restate the Amended Certificates of Incorporation and Bylaws as permitted by applicable law.

b.: Directors and Officers of Reorganized McLeodUSA. Subject to any requirement of Bankruptcy Court approval pursuant to Section 1129(a)(5) of the Bankruptcy Code, as of the Effective Date, the initial officers of Reorganized McLeodUSA shall be the officers of McLeodUSA immediately prior to the Effective Date. On the Effective Date, the Board of Directors of Reorganized McLeodUSA will consist of up to fifteen (15) members. Mr. Clark E. McLeod will continue to serve as Chairman of the Board. Mr. Theodore J. Forstmann will continue to serve as the Chairman of the Executive Committee. McLeodUSA's by-laws will be amended as follows: (i) the Board of Directors will include at least five (5) independent directors and the Chairman, Chief Executive Officer, and Chief Operating Officer and (ii) the Executive Committee of the Board will consist of no more than seven (7) members and will include the designees of the New Director Preferred Stock, the Chairman, the Chief Executive Officer, and the Chief Operating Officer. Moreover, Reorganized McLeodUSA's charter shall be amended to opt out of the provisions of Section 203 of the Delaware General Corporation Law. Pursuant to Section 1129(a)(5) of the Bankruptcy Code, McLeodUSA will disclose, on or prior to the Confirmation Date, the identity and affiliations of any other person proposed to serve on the initial board of directors of Reorganized McLeodUSA, and, to the extent such person is an insider other than by virtue of being a director, the nature of any compensation for such person. The classification and composition of the board of directors of Reorganized McLeodUSA shall be consistent with the Amended Certificate of Incorporation and Bylaws. Each such director and officer shall serve from and after the Effective Date pursuant to the terms of the Amended Certificate of Incorporation and Bylaws, the other constituent documents of Reorganized McLeodUSA, and applicable law.
c.: Corporate Action. On the Effective Date, the adoption of the Amended Certificates of Incorporation or similar constituent documents, the selection of directors and officers for Reorganized McLeodUSA, and all other actions contemplated by the Plan shall be authorized and approved in all respects (subject to the provisions of the Plan). All matters provided for in the Plan involving the corporate structure of McLeodUSA or Reorganized McLeodUSA, and any corporate action required by McLeodUSA or Reorganized McLeodUSA in connection with the Plan, shall be deemed to have occurred and shall be in effect without any requirement of further action by the security holders or directors of McLeodUSA or Reorganized McLeodUSA. On the Effective Date, the appropriate officers of Reorganized McLeodUSA and members of the board of directors of Reorganized McLeodUSA are authorized and directed to issue, execute and deliver the agreements, documents, securities and instruments contemplated by the Plan in the name of and on behalf of Reorganized McLeodUSA.

(c) Effectuation of Reverse Stock Split and Reclassification; Issuance of New Securities

On or as soon as reasonably practicable after the Effective Date, Reorganized McLeodUSA shall effectuate the Reverse Stock Split and the Reclassification and, in accordance therewith and the terms of the Plan, issue and exchange, as necessary, for the benefit of Holders of Old Preferred Stock Interests and Class A Common Stock Interests, such shares of Class A common stock as required by the Plan. The conversion ratio of the Reclassification is based on 627,734,497 shares of Class A common stock issued and outstanding. Such conversion ratio will be adjusted to effect the Class A common stock ownership levels herein to the extent the number of issued and outstanding shares differ as of the Effective Date. Reorganized McLeodUSA shall issue for the benefit of Holders of Note

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Claims such shares of Class A common stock as required by the Plan. Also on the Effective Date, Reorganized McLeodUSA shall (i) issue to Forstmann Little the New Preferred Stock, (ii) issue to Forstmann Little 18,937,995 (eighteen million nine hundred thirty-seven thousand nine hundred ninety-five) New Warrants, and (iii) issue to Forstmann Little the Director Preferred Stock, in each case pursuant to the terms of the Preferred Stock and Warrant Purchase Agreement. The issuance of the Class A common stock, New Preferred Stock, New Director Preferred Stock, and New Warrants is authorized without the need for any further corporate action.

(d) New Credit Agreement

On the Effective Date, Reorganized McLeodUSA is authorized and directed to execute and deliver the New Credit Agreement to govern the Exit Facility. As of the date of this Offering Memorandum and Disclosure Statement, McLeodUSA does not have a commitment for the Exit Facility. However, McLeodUSA anticipates obtaining such a commitment on or before the Effective Date.

(e) Sale of Pubco

On the Effective Date, McLeodUSA Holdings shall sell to Pubco Acquisition, and Pubco Acquisition shall purchase from McLeodUSA Holdings, upon and pursuant to the terms of the Pubco Stock Purchase Agreement, all of the outstanding shares of capital stock of Pubco, subject to McLeodUSA Holdings' entry into a "Superior Combination," as defined in the Pubco Stock Purchase Agreement.

(f) Management Incentive Plan

On the Effective Date, Reorganized McLeodUSA shall be authorized and directed to establish and implement the Management Incentive Plan. An amount of shares of Class A common stock equal to 15% of the shares to be outstanding immediately after conversion of New Preferred Stock after giving effect to the options will be reserved for issuance under the Management Incentive Plan. The Management Incentive Plan may be amended or modified by the board of directors of Reorganized McLeodUSA in accordance with its terms and any such amendment or modification shall not require an amendment of this Plan.

Treatment of Executory Contracts and Unexpired Leases

(a) Assumption of Executory Contracts and Unexpired Leases

Immediately prior to the Effective Date, all executory contracts or unexpired leases of Reorganized McLeodUSA will be deemed assumed in accordance with the provisions and requirements of Sections 365 and 1123 of the Bankruptcy Code. Entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of such assumptions and rejections pursuant to Sections 365(a) and 1123 of the Bankruptcy Code. Each executory contract and unexpired lease assumed pursuant to the Plan shall revest in and be fully enforceable by Reorganized McLeodUSA in accordance with its terms, except as modified by the provisions of the Plan, or any order of the Bankruptcy Court authorizing and providing for its assumption or applicable federal law.

(b) Cure of Defaults of Assumed Executory Contracts and Unexpired Leases

Any monetary amounts by which each executory contract and unexpired lease to be assumed pursuant to the Plan is in default shall be satisfied, pursuant to Section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in Cash on the Effective Date or on such other terms as the parties to such executory contracts or unexpired leases may otherwise agree. In the event of a dispute regarding: (1) the amount of any cure payments, (2) the ability of Reorganized McLeodUSA or any

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assignee to provide "adequate assurance of future performance" (within the meaning of Section 365 of the Bankruptcy Code) under the contract or lease to be assumed, or (3) any other matter pertaining to assumption, the cure payments required by Section 365(b)(1) of the Bankruptcy Code shall be made following the entry of a Final Order resolving the dispute and approving the assumption.

(c) Indemnification of Directors, Officers and Employees

The obligations of McLeodUSA to indemnify any person or entity serving at any time on or prior to the Effective Date as one of its directors, officers or employees by reason of such person's or entity's service in such capacity, or as a director, officer or employee of any other corporation or legal entity, to the extent provided in McLeodUSA's constituent documents, or by a written agreement with McLeodUSA, or pursuant to applicable general corporation law, each as applicable, shall be deemed and treated as executory contracts that are assumed by Reorganized McLeodUSA pursuant to the Plan and Section 365 of the Bankruptcy Code as of the Effective Date. Accordingly, such indemnification obligations shall be treated as General Unsecured Claims and shall survive Unimpaired and unaffected by entry of the Confirmation Order, irrespective of whether such indemnification is owed for an act or event occurring before or after the Petition Date.

(d) Compensation and Benefit Programs

Except as otherwise expressly provided hereunder, all employment and severance policies, and all compensation and benefit plans, policies, and programs of McLeodUSA applicable to its employees, retirees and non-employee directors and the employees and retirees of its subsidiaries, including, without limitation, all savings plans, retirement plans, healthcare plans, disability plans, severance benefit plans, incentive plans, and life, accidental death and dismemberment insurance plans are treated as executory contracts under the Plan and on the Effective Date will be assumed pursuant to the provisions of Sections 365 and 1123 of the Bankruptcy Code. All employment contracts assumed pursuant to Section 8.4 of the Plan shall be deemed modified such that the transactions contemplated by the Plan shall not be a "change of control" as defined in the relevant employment contracts.

Confirmation and Consummation of the Plan

(a) Conditions to Confirmation

The Bankruptcy Court shall not enter the Confirmation Order unless and until the Confirmation Order shall be reasonably acceptable in form and substance to McLeodUSA and the Bank Agents.

(b) Conditions to Effective Date

The following are conditions precedent to the occurrence of the Effective Date:

a.

The Confirmation Order confirming the Plan, as such Plan may have been modified, shall have been entered and become a Final Order in form and substance reasonably satisfactory to McLeodUSA and shall provide that:

(1): McLeodUSA and Reorganized McLeodUSA are authorized and directed to take all actions necessary or appropriate to enter into, implement and consummate the contracts, instruments, releases, leases, indentures and other agreements or documents created in connection with the Plan;
(2): the provisions of the Confirmation Order are nonseverable and mutually dependent;
(3): Reorganized McLeodUSA is authorized (a) to issue the Class A common stock, New Preferred Stock, New Director Preferred Stock and New Warrants, (b) to establish and implement the Management Incentive Plan, and (c) to enter into the New Credit Agreement; and

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(4): the Class A common stock, New Preferred Stock, New Director Preferred Stock, and New Warrants issued under the Plan are exempt from registration under Section 3(a)(9) of the Securities Act of 1933 and comply with, or are otherwise exempt from, all other applicable securities laws and regulations.
b.: Reorganized McLeodUSA shall have credit availability under the Exit Facility in an amount acceptable to Reorganized McLeodUSA and the Bank Agents.
c.: The following agreements, in form and substance satisfactory to Reorganized McLeodUSA, shall have been executed and delivered, and all conditions precedent thereto shall have been satisfied:
(1): Amended Certificates of Incorporation and By-laws of Reorganized McLeodUSA;
(2): New Credit Agreement and all similar documents provided for therein or contemplated thereby;
(3): Pubco Stock Purchase Agreement; and
(4): Preferred Stock and Warrant Purchase Agreement.
d.: The Amended Certificates of Incorporation and By-laws of Reorganized McLeodUSA, as necessary, shall have been filed with the appropriate authority in accordance with such jurisdiction's corporation laws.
e.: All actions, documents and agreements necessary to implement the Plan shall have been effected or executed.
f.: The new board of directors of Reorganized McLeodUSA shall have been appointed.

(c) Waiver of Conditions

Each of the conditions set forth in the Plan may be waived in whole or in part by McLeodUSA, with the consent of the Bank Agents, without any other notice to parties in interest or the Bankruptcy Court and without a hearing. The failure to satisfy or waive a condition to the Effective Date may be asserted by McLeodUSA or Reorganized McLeodUSA regardless of the circumstances giving rise to the failure of such condition to be satisfied (including any action or inaction by McLeodUSA or Reorganized McLeodUSA). The failure of McLeodUSA or Reorganized McLeodUSA to exercise any of the foregoing rights shall not be deemed a waiver of any other rights, and each right shall be deemed an ongoing right that may be asserted at any time.

(d) Consequences of Non-Occurrence of Effective Date

If the Effective Date does not occur within ninety (90) days of the Confirmation Date, or by such later date, after notice and hearing, as is proposed by McLeodUSA, then upon motion by McLeodUSA and upon notice to such parties in interest as the Bankruptcy Court may direct, the Confirmation Order will be vacated by the Bankruptcy Court;provided, however, that, notwithstanding the filing of such motion, the Confirmation Order may not be vacated if the Effective Date occurs before the Bankruptcy Court enters an order granting such motion. If the Confirmation Order is vacated pursuant to Section 9.4 of the Plan, (a) the Plan shall be null and void in all respects; and (b) any settlement of Claims and Interests provided for hereby shall be null and void without further order of the Bankruptcy Court.

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Effect of Plan Confirmation

(a) Discharge of Claims and Termination of Interests

a.: Except as provided in the Confirmation Order, pursuant to Section 1141(d) of the Bankruptcy Code, the rights afforded under the Plan and the treatment of Claims and Interests under the Plan shall be in exchange for and in complete satisfaction, discharge and release of all Claims and termination of all Interests, including any interest accrued on Claims from the Petition Date. Except as provided in the Confirmation Order or the Plan, Confirmation shall (a) discharge McLeodUSA from all Claims and other debts that arose before the Confirmation Date and all debts of the kind specified in Section 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (i) a proof of claim based on such debt is filed or deemed filed pursuant to Section 501 of the Bankruptcy Code, (ii) a Claim based on such debt is allowed pursuant to Section 502 of the Bankruptcy Code or (iii) the holder of a Claim based on such debt has accepted the Plan; and (b) terminate all Interests and other rights of equity security holders in McLeodUSA.
b.: As of the Confirmation Date, except as provided in the Plan or the Confirmation Order, all entities shall be precluded from asserting against McLeodUSA, Reorganized McLeodUSA, their successors or their property, any other or further claims, debts, rights, causes of action, liabilities or equity interests based upon any act, omission, transaction or other activity of any nature that occurred prior to the Confirmation Date. In accordance with the foregoing, except as provided in the Plan or the Confirmation Order, the Confirmation Order shall be a judicial determination of discharge of all such claims and rights of equity security holders in McLeodUSA, pursuant to Sections 524 and 1141 of the Bankruptcy Code, and such discharge shall void any judgment obtained against McLeodUSA at any time to the extent that such judgment relates to a discharged Claim or Interest.

(b) Injunction

a.: Except as otherwise provided in the Plan, entities who have held, hold or may hold Claims against or Interests in McLeodUSA are (i) permanently enjoined from taking any of the following actions against the Estate or any of its property on account of any such Claims or Interests and (ii) permanently enjoined from taking any of the following actions against any of McLeodUSA, Reorganized McLeodUSA, or their property on account of such Claims or Interests: (A) commencing or continuing, in any manner or in any place, any action or other proceeding; (B) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order; (C) creating, perfecting or enforcing any lien or encumbrance; (D) asserting a setoff, right of subrogation or recoupment of any kind against any debt, liability or obligation due to McLeodUSA; and (E) commencing or continuing, in any manner or in any place, any action that does not comply with or is inconsistent with the provisions of the Plan;provided, however, that nothing contained herein shall preclude such persons from exercising their rights pursuant to and consistent with the terms of the Plan.
b.: By accepting distributions pursuant to the Plan, each holder of an Allowed Claim or Interest will be deemed to have specifically consented to the injunctions set forth in this Section.

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(c) Releases

a.: Releases by McLeodUSA. As of the Effective Date, for good and valuable consideration, the adequacy of which is hereby confirmed, McLeodUSA and Reorganized McLeodUSA in their individual capacities and as debtor-in-possession, will be deemed to forever release, waive and discharge all claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action and liabilities (other than the rights of McLeodUSA or Reorganized McLeodUSA to enforce the Plan and the contracts, instruments, releases, indentures and other agreements or documents delivered thereunder) whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or thereafter arising, in law, equity or otherwise that are based in whole or in part on any act, omission, transaction, event or other occurrence taking place on or prior to the Effective Date in any way relating to McLeodUSA, Reorganized McLeodUSA, the parties released pursuant to Section 10.4 of the Plan, the Chapter 11 Case, or the Plan or this Offering Memorandum and Disclosure Statement, and that could have been asserted by or on behalf of McLeodUSA or its Estate or Reorganized McLeodUSA against (i) the current and former directors, officers and employees of McLeodUSA (other than for money borrowed from or owed to McLeodUSA or its subsidiaries by any such directors, officers or employees as set forth in McLeodUSA's books and records) and McLeodUSA's agents and professionals, (ii) the Senior Secured Lenders and the Bank Agents, (iii) the DIP Lenders and agent, (iv) Forstmann Little, and (v) the respective affiliates, and current and former officers, directors, employees, agents, members, shareholders, and professionals of the foregoing.

McLeodUSA does not believe that it has any claims against any of the entities to be released under the Plan. Moreover, McLeodUSA believes that the releases are warranted under the circumstances. McLeodUSA's officers, directors, and employees all share an identity of interest with McLeodUSA such that a suit against them would be, in essence, a suit against McLeodUSA and/or would deplete assets of McLeodUSA. The Bank Agents and the Senior Secured Lenders were instrumental in agreeing to modify the Credit Agreement in order to accommodate the Restructuring, and therefore also share an identity of interest with McLeodUSA in seeing the Plan succeed and McLeodUSA reorganize. Forstmann Little has been instrumental in formulating the Restructuring and supporting McLeodUSA with significant additional liquidity through its agreement to the Reclassification and to purchase the New Preferred Stock, and therefore also has an identity of interest with McLeodUSA. The releasees also have made substantial contributions to the reorganization by designing and implementing the Restructuring. The releases are an integral part of the Restructuring and the Plan, and hence are necessary to the continued success of Reorganized McLeodUSA. Finally, the Plan provides a distribution to holders of Claims against and Interests in McLeodUSA in exchange for the releases. The distributions under the Plan would not be available in a liquidation and also may not be available under alternative scenarios. Thus, absent the support of the releases, McLeodUSA may have to pursue other alternatives that may not provide commensurate value to all constituencies.

b.: Releases by Holders of Claims and Interests. On the Effective Date, (i) each Holder of a Claim or Interest that voted to accept the Plan and (ii) to the fullest extent permissible under applicable law, as such law may be extended or interpreted subsequent to the Effective Date, all other Holders of Claims and Interests, in consideration for the obligations of McLeodUSA and Reorganized McLeodUSA under the Plan and the Cash, Class A common stock, New Preferred Stock, New Director Preferred Stock, New Warrants and other contracts, instruments, releases, agreements or documents to be delivered in

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connection with the Plan, each entity (other than a McLeodUSA) that has held, holds or may hold a Claim or Interest, as applicable, will be deemed to forever release, waive and discharge all claims, demands, debts, rights, causes of action or liabilities (other than the right to enforce McLeodUSA's or Reorganized McLeodUSA's obligations under the Plan, and the contracts, instruments, releases, agreements and documents delivered under the Plan), whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or thereafter arising, in law, equity or otherwise that are based in whole or in part on any act or omission, transaction, event or other occurrence taking place on or prior to the Effective Date in any way relating to McLeodUSA, the Chapter 11 Case, the Plan or the Offering Memorandum and Disclosure Statement against (i) the current and former directors, officers and employees of McLeodUSA (other than Claims or Interests unrelated to McLeodUSA) and McLeodUSA's agent and professionals, (ii) the Senior Secured Lenders and the Bank Agents, (iii) the DIP Lenders and agent, (iv) Forstmann Little, and (v) the respective affiliates, and current and former officers, directors, employees, agents, members, shareholders, and professionals of the foregoing.

(d) Exculpation and Limitation of Liability

Neither McLeodUSA, the Senior Secured Lenders, the Bank Agents, the DIP Lenders nor any of their respective present or former members, officers, directors, shareholders, employees, advisors, attorneys or agents acting in such capacity, shall have or incur any liability to, or be subject to any right of action by, any holder of a Claim or an Interest, or any other party in interest, or any of their respective agents, shareholders, employees, representatives, financial advisors, attorneys or affiliates, or any of their successors or assigns, for any act or omission in connection with, relating to, or arising out of, McLeodUSA's Chapter 11 Case, the pursuit of confirmation of the Plan, the consummation of the Plan, or the administration of the Plan or the property to be distributed under the Plan, except for their willful misconduct or gross negligence, and in all respects shall be entitled to rely reasonably upon the advice of counsel with respect to their duties and responsibilities under the Plan.

(e) Injunction Related to Releases and Exculpation.

The Confirmation Order will permanently enjoin the commencement or prosecution by any entity, whether directly, derivatively or otherwise, of any claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action or liabilities released pursuant to the Plan, including but not limited to the claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action or liabilities released in the Plan.

(f) Preservation of Rights of Action; Settlement of Litigation Claims

a.: Preservation of Rights of Action. Except as otherwise provided in the Plan, the Confirmation Order, or in any document, instrument, release or other agreement entered into in connection with the Plan, in accordance with Section 1123(b) of the Bankruptcy Code, McLeodUSA and its Estate shall retain the Litigation Claims. Reorganized McLeodUSA, as the successor in interest to McLeodUSA and the Estate, may enforce, sue on, settle or compromise (or decline to do any of the foregoing) any or all of the Litigation Claims. Notwithstanding the foregoing, McLeodUSA and Reorganized McLeodUSA shall not file, commence or pursue any claim, right or cause of action under Sections 544 through 550 of the Bankruptcy Code; provided, however, that notwithstanding any statute of limitations (including,

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without limitation, Section 544 of the Bankruptcy Code), McLeodUSA and Reorganized McLeodUSA shall have the right to assert or raise such causes of action (a) as defenses or counterclaims (up to the amount asserted in the Claims against McLeodUSA); and (b) in connection with the Claims objection process, in which case such causes of action can be raised as an objection to a Claim and not as defenses or counterclaims.

b.: Settlement of Litigation Claims. At any time after the Confirmation Date and before the Effective Date, notwithstanding anything in the Plan to the contrary, Reorganized McLeodUSA may settle any or all of the Litigation Claims with the approval of the Bankruptcy Court pursuant to Bankruptcy Rule 9019.

(g) Termination of Subordination Rights and Settlement of Related Claims

a.: The classification and manner of satisfying all Claims and Interests under the Plan take into consideration all subordination rights, if any, whether arising by contract or under general principles of equitable subordination, Section 510(b) or 510(c) of the Bankruptcy Code, or otherwise. All subordination rights that a Holder of a Claim or Interest may have with respect to any distribution to be made pursuant to the Plan will be discharged and terminated, and all actions related to the enforcement of such subordination rights will be permanently enjoined. Accordingly, distributions pursuant to the Plan to Holders of Allowed Claims or Allowed Interests will not be subject to payment to a beneficiary of such terminated subordination rights, or to levy, garnishment, attachment or other legal process by a beneficiary of such terminated subordination rights.
b.: Pursuant to Bankruptcy Rule 9019 and in consideration of the distributions and other benefits provided under the Plan, the provisions of the Plan will constitute a good faith compromise and settlement of all claims or controversies relating to the subordination rights that a Holder of a Claim or Interest may have or any distribution to be made pursuant to the Plan on account of such Claim or Interest. Entry of the Confirmation Order will constitute the Bankruptcy Court's approval, as of the Effective Date, of the compromise or settlement of all such claims or controversies and the Bankruptcy Court's finding that such compromise or settlement is in the best interests of McLeodUSA, Reorganized McLeodUSA, their respective properties, and holders of Claims and Interests, and is fair, equitable and reasonable.

Summary of Other Provisions of the Plan

The following paragraphs summarize certain other significant provisions of the Plan. The Plan should be referred to for the complete text of these and other provisions of the Plan.

(a) Exemption from Transfer Taxes

Pursuant to Section 1146(c) of the Bankruptcy Code, (a) the issuance, transfer or exchange of notes or equity securities under the Plan; (b) the creation of any mortgage, deed of trust, lien, pledge or other security interest; (c) the making or assignment of any lease or sublease; or (d) the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with, the Plan, including, without limitation, any merger agreements; agreements of consolidation, restructuring, disposition, liquidation or dissolution; deeds; bills of sale; and transfers of tangible property, will not be subject to any stamp tax, recording tax, personal property tax, real estate transfer tax, sales or use tax or other similar tax. Any transfers from McLeodUSA to Reorganized McLeodUSA or otherwise pursuant to the Plan shall not be subject to any such taxes, and the Confirmation Order shall direct the

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appropriate state or local governmental officials or agents to forgo the collection of any such tax or governmental assessment and to accept for filing and recordation any of the foregoing instruments or other documents without the payment of any such tax or governmental assessment. Unless the Bankruptcy Court orders otherwise, any of the foregoing transactions taken on or prior to the Effective Date shall be deemed to have been in furtherance of, or in connection with, the Plan.

(b) Cancellation of Notes and Old Preferred Stock

On the Effective Date, except as otherwise provided for herein, (i) the Notes, Old Preferred Stock, and any other notes, bonds (with the exception of surety bonds outstanding), Indentures or other instruments or documents evidencing or creating any indebtedness or obligations of McLeodUSA, except such notes or other instruments evidencing indebtedness or obligations of McLeodUSA that are Unimpaired, Reinstated, or amended and restated under the Plan, shall be cancelled, and (ii) the obligations of McLeodUSA under any agreements, Indentures or certificates of designation governing the Notes, Old Preferred Stock, and any other notes, bonds, indentures or other instruments or documents evidencing or creating any indebtedness or obligations of McLeodUSA, except such notes or other instruments evidencing indebtedness or obligations of McLeodUSA that are Unimpaired, Reinstated or amended and restated under the Plan, as the case may be, shall be discharged;provided, however, that each Indenture or other agreement that governs the rights of Notes Claims shall continue in effect solely for the purpose of allowing the Notes Trustee to make distributions on account of such Claims under the Plan.

(c) Effectuating Documents and Further Transactions

Each of McLeodUSA or Reorganized McLeodUSA, as appropriate, is authorized to execute, deliver, file or record such contracts, instruments, releases and other agreements or documents and take such actions as may be necessary or appropriate to effectuate, implement and further evidence the terms and conditions of the Plan and any notes or securities issued pursuant to the Plan.

(d) Revocation, Withdrawal or Non-Consummation

McLeodUSA reserves the right to revoke or withdraw the Plan prior to the Confirmation Date and to file subsequent plans of reorganization. If McLeodUSA revokes or withdraws the Plan, or if Confirmation or consummation does not occur, then (a) the Plan shall be null and void in all respects, (b) any settlement or compromise embodied in the Plan (including the fixing or limiting to an amount certain any Claim or Interest or Class of Claims or Interests), assumption or rejection of executory contracts or leases affected by the Plan, and any document or agreement executed pursuant to the Plan, shall be deemed null and void, and (c) nothing contained in the Plan, and no acts taken in preparation for consummation of the Plan, shall (i) constitute a waiver or release of any Claims by or against, or any Interests in, McLeodUSA or any other person, (ii) prejudice in any manner the rights of McLeodUSA or any other person, or (iii) constitute an admission of any sort by McLeodUSA or any other Person.

(e) Amendment or Modification of the Plan

Subject to Section 1127 of the Bankruptcy Code and, to the extent applicable, Sections 1122, 1123 and 1125 of the Bankruptcy Code, McLeodUSA reserves the right to alter, amend or modify the Plan with the consent of the Bank Agents at any time prior to or after the Confirmation Date but prior to the substantial consummation of the Plan. A Holder of a Claim or Interest that has accepted the Plan shall be deemed to have accepted the Plan, as altered, amended or modified, if the proposed alteration, amendment or modification does not materially and adversely change the treatment of the Claim or Interest of such Holder.

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(f) Plan Supplement

The Plan Supplement, which shall include certain exhibits, lists, schedules, or documents to be executed in connection with the Plan, shall be filed with the Bankruptcy Court not later than five (5) days prior to the Confirmation Hearing. Upon its filing, the Plan Supplement may be inspected in the office of the clerk of the Bankruptcy Court or its designee during normal business hours. Holders of Claims and Interests may obtain a copy of the Plan Supplement upon written request to McLeodUSA. The documents contained in the Plan Supplement shall be approved by the Bankruptcy Court pursuant to the Confirmation Order.

Confirmation and Consummation Procedure

The Bankruptcy Court may confirm the Plan only if it determines that the Plan complies with the technical requirements of Chapter 11, including, among other things, that (a) the Plan has properly classified Claims and Interests, (b) the Plan complies with applicable provisions of the Bankruptcy Code, (c) McLeodUSA has complied with applicable provisions of the Bankruptcy Code, (d) McLeodUSA has proposed the Plan in good faith and not by any means forbidden by law, (e) disclosure of "adequate information" as required by Section 1125 of the Bankruptcy Code has been made, (f) the Plan has been accepted by the requisite votes of all classes of Creditors and Interest Holders (except to the extent that "cramdown" is available under Section 1129(b) of the Bankruptcy Code), (g) the Plan is in the "best interests" of all Holders of Claims or Interests in an Impaired Class, and (h) all fees and expenses payable under 28 U.S.C. § 1930, as determined by the Bankruptcy Court at the Confirmation Hearing, have been paid or the Plan provides for the payment of such fees on the Effective Date. Under the Bankruptcy Code, the following steps must be taken to confirm the Plan.

The Confirmation Hearing

The Bankruptcy Court will schedule a hearing on the confirmation of the Plan. At that hearing the Bankruptcy Court will consider whether the Plan satisfies the various requirements of the Bankruptcy Code, including whether the Plan is feasible and whether the Plan is in the best interests of the Creditors and Holders of Interests in McLeodUSA. At that time, McLeodUSA will submit a report to the Bankruptcy Court concerning the votes for acceptance or rejection of the Plan by the parties entitled to vote thereon.

Section 1128(b) of the Bankruptcy Code provides that any party in interest may object to confirmation of the Plan. Any objection to confirmation of the Plan must be made in writing and filed with the Bankruptcy Court and served on all required parties by the objection deadlines set by the Bankruptcy Court. Unless an objection to confirmation is timely served and filed, it may not be considered by the Bankruptcy Court.

Confirmation

At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan only if all of the requirements of Section 1129 of the Bankruptcy Code are met. Among the requirements for confirmation of a plan are that the plan is (a) accepted by all impaired classes of claims and equity interests or, if rejected by an impaired class, that the plan "does not discriminate unfairly" and is "fair and equitable" as to such class, (b) feasible and (c) in the "best interests" of creditors and stockholders that are impaired under the plan.

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(a) Unfair Discrimination and Fair and Equitable Tests

To obtain non-consensual confirmation of the Plan, it must be demonstrated to the Bankruptcy Court that the Plan "does not discriminate unfairly" and is "fair and equitable" with respect to each impaired, non-accepting Class. The Bankruptcy Code provides a non-exclusive definition of the phrase "fair and equitable." The Bankruptcy Code establishes tests for determining what is "fair and equitable" for secured creditors, unsecured creditors and equity holders, as follows:

a.: Secured Creditors. Either (i) each impaired secured creditor retains its liens securing its secured claim and receives on account of its secured claim deferred cash payments having a present value equal to the amount of its allowed secured claim, (ii) each impaired secured creditor realizes the "indubitable equivalent" of its allowed secured claim, or (iii) the property securing the claim is sold free and clear of liens, with such liens to attach to the proceeds of the sale and the treatment of such liens with respect to such proceeds to be as provided in clause (i) or (ii) of this subparagraph.
b.: Unsecured Creditors. Either (i) each impaired unsecured creditor receives or retains, under the plan, property of a value equal to the amount of its allowed claim or (ii) the holders of claims and interests that are junior to the claims of the dissenting class will not receive any property under the plan.
c.: Equity Interests. Either (i) each holder of an equity interest will receive or retain, under the plan, property of a value equal to the greatest of the fixed liquidation preference to which such holder is entitled, the fixed redemption price to which such holder is entitled, or the value of the interest or (ii) the holder of an interest that is junior to the non-accepting class will not receive or retain any property under the plan.

McLeodUSA reserves the right to pursue the Plan without having previously obtained sufficient acceptances of the Plan from Holders of Class A Common Stock Interests. In such case, McLeodUSA may request entry of the Class 7 Solicitation Order from the Bankruptcy Court that deems Class 7 Class A Common Stock Interests to have rejected the Plan, thereby obviating any further need to solicit votes from the Holders of such Interests. In such case, McLeodUSA will request confirmation of the Plan under Section 1129(b) of the Bankruptcy Code notwithstanding the deemed rejection of the Plan by Class 7. McLeodUSA believes that the Plan may be confirmed pursuant to the above-described "cramdown" provisions, over the deemed dissent of Holders of Interests in Class 7, in view of the treatment proposed for such Class. Specifically, McLeodUSA believes that the treatment under the Plan of the Holders of Interests in Class 7 satisfies the "fair and equitable" test since there is no class junior to such non-accepting Class that will receive or retain any property under the Plan. The same is true with respect to the Class 8 Other Old Equity Interests.

(b) Best Interests Test

With respect to each impaired Class of Claims and Interests, confirmation of the Plan requires that each Holder of a Claim or Interest either (a) accept the Plan or (b) receive or retain under the Plan property of a value, as of the Effective Date, that is not less than the value such Holder would receive or retain if McLeodUSA was liquidated under Chapter 7 of the Bankruptcy Code. To calculate the probable distribution to Holders of each impaired Class of Claims and Interests if McLeodUSA was liquidated under Chapter 7, a bankruptcy court must first determine the aggregate dollar amount that would be generated from McLeodUSA's assets if its Chapter 11 Case were converted to a Chapter 7 case under the Bankruptcy Code. This "liquidation value" would consist primarily of the proceeds from a forced sale of McLeodUSA's assets by a Chapter 7 trustee.

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The amount of liquidation value available to unsecured creditors would be reduced by, first, the claims of secured creditors to the extent of the value of their collateral, and, second, by the costs and expenses of liquidation, as well as by other administrative expenses and costs of both the Chapter 7 case and the Chapter 11 case. Costs of liquidation under Chapter 7 of the Bankruptcy Code would include the compensation of a trustee, as well as of counsel and other professionals retained by the trustee, asset disposition expenses, all unpaid expenses incurred by McLeodUSA in its Chapter 11 case (such as compensation of attorneys, financial advisors and accountants) that are allowed in the Chapter 7 case, litigation costs, and claims arising from the operations of McLeodUSA during the pendency of the Chapter 11 case. The liquidation itself would trigger certain priority claims that otherwise would be due in the ordinary course of business. Those priority claims would be paid in full from the liquidation proceeds before the balance would be made available to pay general claims or to make any distribution in respect of equity interests. The liquidation would also prompt the rejection of a large number of executory contracts and unexpired leases and thereby create a significantly higher number of unsecured creditors.

McLeodUSA believes that the Plan meets the "best interests of creditors" test of Section 1129(a)(7) of the Bankruptcy Code. McLeodUSA believes that the members of each Impaired Class will receive greater value under the Plan than they would in a liquidation. The Liquidation Analysis, a copy of which is attached hereto as Appendix III, provides that in the event of a liquidation as described therein, the proceeds available for Holders of General Unsecured Claims and Note Claims would be $83.6 million, resulting in a recovery of only 2.5%. The Liquidation Analysis provides that there would be no recovery to Holders of Old Preferred Stock Interests and Class A Common Stock Interests.

In contrast, under the Plan, Holders of General Unsecured Claims will receive a 100% recovery. It is estimated that Holders of Note Claims will receive a recovery of approximately 24%. Holders of Old Preferred Stock Interests are estimated to receive collective value of $539 million under the Plan, and Holders of Class A Common Stock Interests are estimated to receive collective value of $344 million under the Plan. Therefore, Holders of such Claims and such Interests will receive substantially more under the Plan than in a liquidation. Although McLeodUSA believes that the Plan meets the "best interests test" of Section 1129(a)(7) of the Bankruptcy Code, there can be no assurance that the Bankruptcy Court will determine that the Plan meets this test. THESE ESTIMATES OF VALUE ARE SUBJECT TO A NUMBER OF ASSUMPTIONS AND SIGNIFICANT QUALIFYING CONDITIONS. ACTUAL VALUES AND RECOVERIES COULD VARY MATERIALLY FROM THE ESTIMATES SET FORTH HEREIN. See "Valuation Analysis."

(c) Feasibility

The Bankruptcy Code requires that the Bankruptcy Court determine that confirmation of a Plan is not likely to be followed by liquidation or the need for further financial reorganization of McLeodUSA. For purposes of showing that the Plan meets this feasibility standard, McLeodUSA and Houlihan have analyzed the ability of Reorganized McLeodUSA to meet its obligations under the Plan and retain sufficient liquidity and capital resources to conduct its business.

McLeodUSA believes that with a significantly deleveraged capital structure, its business will be able to return to viability. The decrease in the amount of debt on McLeodUSA's balance sheet will improve McLeodUSA's cash flow and reduce its interest expense. McLeodUSA's liquidity also will be bolstered by its $160 million Exit Facility. To further support its belief in the feasibility of the Plan, McLeodUSA has relied upon Pro Forma Financial Projections for Fiscal Years 2001 through 2005 contained above (the "Projections"). The Projections indicate that Reorganized McLeodUSA should have sufficient cash flow to pay and service its debt obligations. Accordingly, McLeodUSA believes that the Plan complies with the financial feasibility standard of Section 1129(a)(11) of the Bankruptcy Code.

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Holders of Claims against and Interests in McLeodUSA are advised, however, that the Projections were not prepared with a view toward compliance with the published guidelines of the American Institute of Certified Public Accountants or any other regulatory or professional agency or body or generally accepted accounting principles. Furthermore, McLeodUSA's independent certified public accountants have not compiled or examined the Projections and accordingly do not express any opinion or any other form of assurance with respect thereto and assume no responsibility for the Projections.

The Projections also assume that (i) the Plan will be confirmed and consummated in accordance with its terms, (ii) there will be no material change in legislation or regulations, or the administration thereof, including telecommunications and environmental legislation or regulations, that will have an unexpected effect on the operations of Reorganized McLeodUSA, (iii) there will be no change in United States generally accepted accounting principles that will have a material effect on the reported financial results of Reorganized McLeodUSA, and (iv) there will be no material contingent or unliquidated litigation or indemnity claims applicable to Reorganized McLeodUSA. To the extent that the assumptions inherent in the Projections are based upon future business decisions and objectives, they are subject to change. In addition, although they are presented with numerical specificity and considered reasonable by McLeodUSA when taken as a whole, the assumptions and estimates underlying the Projections are subject to significant business, economic and competitive uncertainties and contingencies, many of which will be beyond the control of Reorganized McLeodUSA.

Accordingly, the Projections are only estimates that are necessarily speculative in nature. It can be expected that some or all of the assumptions in the Projections will not be realized and that actual results will vary from the Projections, which variations may be material and are likely to increase over time. The Projections should therefore not be regarded as a representation by McLeodUSA or any other person that the results set forth in the Projections will be achieved. In light of the foregoing, readers are cautioned not to place undue reliance on the Projections. The Projections should be read together with the information in this Offering Memorandum and Disclosure Statement entitled "Risk Factors," which sets forth important factors that could cause actual results to differ from those in the Projections.

McLeodUSA is subject to the informational requirements of the Exchange Act, as amended, and in accordance therewith files periodic reports and other information with the SEC relating to its business, financial statements and other matters. Such filings will not include projected financial information. McLeodUSA does not intend to update or otherwise revise the Projections, including any revisions to reflect events or circumstances existing or arising after the date of this Offering Memorandum and Disclosure Statement or to reflect the occurrence of unanticipated events, even if any or all of the underlying assumptions do not come to fruition. Furthermore, McLeodUSA does not intend to update or revise the Projections to reflect changes in general economic or industry conditions.

(d) Valuation Analysis

McLeodUSA has been advised by Houlihan with respect to the reorganization equity value of Reorganized McLeodUSA. The reorganization equity value, which includes McLeodUSA's operating business, the expected present value of certain non-operating assets, and the estimated debt balances at and beyond the Effective Date, were estimated by Houlihan to be approximately $1.15 billion as of an assumed Effective Date of March 31, 2002 and giving effect to the divestiture of Pubco on the consummation of the Restructuring and to the divestiture of ICTC and DTG, both of which are assumed to occur within 14 months of the Effective Date. The foregoing reorganization equity value (ascribed as of the date of this Offering Memorandum and Disclosure Statement) reflects, among other things, factors discussed below, current financial market conditions, and the inherent uncertainty as to the achievement of the Projections.

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Based on the assumed reorganization equity value set forth above, the value of the 378.8 million shares of Class A common stock to be outstanding under the Plan, after the Reclassification and Reverse Stock Split, is estimated to be approximately $2.74 per share, after giving effect to the potentially dilutive impact of the New Warrants, New Preferred Stock, and the Management Incentives. The foregoing valuation also reflects a number of assumptions, including a successful reorganization of McLeodUSA's business and finances in a timely manner, the amount of available cash, market conditions, and the Plan becoming effective in accordance with its terms on a basis consistent with the estimates and other assumptions discussed herein.

Estimates of reorganization equity value do not purport to be appraisals, nor do they necessarily reflect the values that might be realized if assets were sold. The estimates of reorganization equity value prepared by Houlihan assume that Reorganized McLeodUSA continues as the owner and operator of its businesses and assets. Such estimates were developed solely for purposes of formulation and negotiation of the Plan and the analysis of implied relative recoveries to creditors thereunder. Such estimates reflect computations of the estimated reorganization equity value of Reorganized McLeodUSA through the application of various valuation techniques and do not purport to reflect or constitute appraisals, liquidation values or estimates of the actual market values that may be realized through the sale of any securities to be issued pursuant to the Plan, which may be significantly different from the amounts set forth herein. The value of an operating business is subject to uncertainties and contingencies that are difficult to predict and will fluctuate with changes in factors affecting the financial conditions and prospects of such a business. As a result, the estimate of reorganization equity value set forth herein is not necessarily indicative of actual outcomes, which may be significantly more or less favorable than those set forth herein. Depending on the results of McLeodUSA's operations or changes in the financial markets, Houlihan's valuation analysis as of the effective date may differ from that disclosed herein.

In addition, the valuation of newly-issued securities is subject to additional uncertainties and contingencies, all of which are difficult to predict. Actual market prices of such securities at issuance will depend upon, among other things, prevailing interest rates; conditions in the financial markets; the anticipated initial securities holdings of prepetition creditors, some of which may prefer to liquidate their investment rather than hold it on a long-term basis; and other factors that generally influence the prices of securities. Actual market prices of such securities also may be affected by McLeodUSA's history in Chapter 11 or by other factors not possible to predict. Accordingly, the reorganization equity value estimated by Houlihan does not necessarily reflect, and should not be construed as reflecting, values that will be attained in the public or private markets. The equity value ascribed in the analysis does not purport to be an estimate of the post-reorganization market trading value. Such trading value

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may be materially different from the reorganization equity value ranges associated with Houlihan's valuation analysis.

Certain Other Legal Considerations

The Securities Act

McLeodUSA has not filed a registration statement under the Securities Act, or any other federal or state securities laws with respect to the Class A common stock, New Preferred Stock, New Director Preferred Stock, and the New Warrants that may be deemed to be offered by virtue of this solicitation. McLeodUSA is relying on Section 3(a)(9) and/or any other applicable section of the Securities Act and similar state law provisions to exempt McLeodUSA from registering the offer of any securities that may be deemed to be made pursuant to this solicitation.

(a) Exchange of Notes

Generally, the Securities Act prohibits the offer of securities to the public unless a registration statement has been filed with the SEC and the sale of securities until such registration statement has been declared effective by the SEC, unless an exemption from registration is available. The Exchange Offer constitutes an "offer" of securities under the Securities Act. However, McLeodUSA is availing itself of Section 3(a)(9) of the Securities Act which provides an exemption from registration for exchanges of securities Aby the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange." Accordingly, no filing with the SEC is being made with respect to the Exchange Offer.

McLeodUSA has nevertheless prepared this Offering Memorandum and Disclosure Statement which contains substantially the same information which would be required for a registration statement, including pro forma financial information, and is distributing this offering document to the Holders of the Notes. Because no filing with the SEC is required for the Exchange Offer, the SEC is not reviewing or commenting on the documents used in the Exchange Offer.

(b) Reclassification of Old Preferred Stock and Reverse Stock Split of Class A Common Stock

McLeodUSA intends to deliver to holders of the Series A preferred stock and the Class A common stock a proxy statement that describes the Reclassification and the Reverse Stock Split. Concurrently with delivery of this Offering Memorandum and Disclosure Statement, McLeodUSA is filing with the SEC a copy of the proxy, including a disclosure statement that is substantially similar to this Offering Memorandum and Disclosure Statement. After the proxy has been lodged with the SEC for ten (10) days as required under applicable law, McLeodUSA intends to distribute the proxy to holders of Old Preferred Stock and Class A common stock in order to solicit their votes on the Plan. During such ten-day period, during which time the proxy is a "preliminary" proxy, the SEC may review and comment on the proxy. The proxy becomes final after such ten-day period unless the SEC requires that changes or other modifications be made to the proxy or the SEC enjoins distribution of the proxy to holders of Old Preferred Stock and Class A common stock.

Registration

Holders of securities who are deemed to be "underwriters" within the meaning of Section 1145(b)(1) of the Bankruptcy Code or who may otherwise be deemed to be "underwriters" of, or to exercise "control" over, McLeodUSA within the meaning of Rule 405 of Regulation C under the Securities Act may, under certain circumstances, be able to sell their securities pursuant to the more limited safe harbor resale provisions of Rule 144 under the Securities Act. Generally, Rule 144 provides that, if certain conditions are met (e.g., one year holding period with respect to "restricted securities," volume limitations, manner of sale, availability of current information about the issuer, etc.), (a) any

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person who resells "restricted securities" and (b) any "affiliate" of the issuer of the securities sought to be resold will not be deemed to be an "underwriter" as defined in Section 2(11) of the Securities Act. Under paragraph (k) of Rule 144, the aforementioned conditions to resale will no longer apply to restricted securities sold for the account of a holder who is not an affiliate of McLeodUSA at the time of such resale and who has not been such during the three-month period next preceding such resale, so long as a period of at least two years has elapsed since the later of (i) the Effective Date and (ii) the date on which such holder acquired his or its securities.

Risk Factors

Disruption of McLeodUSA's Business

Commencement of a bankruptcy proceeding, even if only to confirm the plan, could adversely affect the relationship between McLeodUSA and its employees, customers and suppliers. If such relationships are adversely affected, McLeodUSA's working capital position and operating results could deteriorate materially. Such deterioration could adversely affect McLeodUSA's ability to consummate the plan.

Risk of Non-Confirmation of the Plan or of Possible Invalidation of the Solicitation

There can be no assurance that the Bankruptcy Court will decide that this Offering Memorandum and Disclosure Statement meets the disclosure requirements of the Bankruptcy Code or that the Acceptances are effective for the purpose of approving the Plan. Section 1126(b) of the Bankruptcy Code provides that the holder of a claim against, or interest in, a debtor who accepts or rejects a plan of reorganization before the commencement of a Chapter 11 case is deemed to have accepted or rejected such plan under the Bankruptcy Code so long as the solicitation of such acceptance was made in accordance with applicable non-bankruptcy law governing the adequacy of disclosure in connection with such solicitation, or, if such laws do not exist, such acceptance was solicited after disclosure of "adequate information," as defined in Section 1125 of the Bankruptcy Code. In addition, Bankruptcy Rule 3018(b) states that a holder of a claim or interest who has accepted or rejected a plan before the commencement of the case under the Bankruptcy Code shall not be deemed to have accepted or rejected the plan if the court finds after notice and a hearing that the plan was not transmitted in accordance with reasonable solicitation procedures.

This Offering Memorandum and Disclosure Statement is being presented in order to satisfy the foregoing requirements. McLeodUSA believes that its solicitation of votes to accept or reject the Plan is proper under applicable nonbankruptcy law, rules and regulations. McLeodUSA cannot be certain, however, that its solicitation of Acceptances or rejections will be approved by the Bankruptcy Court. If such approval is not obtained, then McLeodUSA may have to solicit votes to accept or reject the Plan from one or more classes of claims or interests that were not previously solicited. McLeodUSA also may have to seek to resolicit Acceptances, and, in such event, confirmation of the Plan could be delayed and possibly jeopardized.

Section 1122 of the Bankruptcy Code requires that the Plan classify claims against, and interests in, McLeodUSA. The Bankruptcy Code also provides that, except for certain claims classified for administrative convenience, the Plan may place a claim or interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. McLeodUSA believes that all claims and interests have been appropriately classified in the Plan. McLeodUSA has elected to separately classify General Unsecured Claims. This class is composed largely of trade creditors and does not include Note claims. Because McLeodUSA is a holding company and does not have any material operating assets, McLeodUSA believes that there are few, if any, General Unsecured Claims. However, in order to maximize the possibility of confirmation of the Plan as expeditiously as

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possible, McLeodUSA has determined, in the exercise of its business judgment, to leave all such claims Unimpaired under the Plan so that it may focus on restructuring the Notes.

To the extent that the Bankruptcy Court finds that a different classification is required for the Plan to be confirmed, McLeodUSA presently anticipates that it would seek (i) to modify the Plan to provide for whatever classification might be required for confirmation and (ii) to use the Acceptances received from any creditor or shareholder pursuant to this solicitation for the purpose of obtaining the approval of the class or classes of which such creditor or shareholder ultimately is deemed to be a member. Any such reclassification of creditors or shareholders, although subject to the notice and hearing requirements of the Bankruptcy Code, could adversely affect the class in which such creditor or shareholder was initially a member, or any other class under the Plan, by changing the composition of such class and the vote required for approval of the Plan.

There can be no assurance that the Bankruptcy Court, after finding that a classification was inappropriate and requiring a reclassification, would approve the Plan based upon such reclassification. Except to the extent that modification of classification in the Plan requires resolicitation, McLeodUSA will, in accordance with the Bankruptcy Code and the Bankruptcy Rules, seek a determination by the Bankruptcy Court that acceptance of the Plan by any Holder pursuant to this solicitation will constitute a consent to the Plan's treatment of such Holder regardless of the class as to which such Holder is ultimately deemed to be a member. McLeodUSA believes that under the Bankruptcy Rules, McLeodUSA would be required to resolicit votes for or against the Plan only when a modification adversely affects the treatment of the claim of any creditor or equity holder.

Modification of the Plan

McLeodUSA may seek to modify or amend the Plan at any time prior to the confirmation date in the manner provided for in Section 1127 of the Bankruptcy Code and Bankruptcy Rule 3019 or as otherwise permitted by law without additional disclosure pursuant to Section 1125 of the Bankruptcy Code, except as the Bankruptcy Court might otherwise require. The potential impact of any such amendment or modification on the holders of claims and interests cannot presently be foreseen, but may include a change in the economic impact of the Plan on some or all of the classes or a change in the relative rights of such classes. If any of the terms of the Plan are amended in a manner determined by McLeodUSA or the Bankruptcy Court, as appropriate, to constitute a material adverse change to the treatment of the claim of any creditor or the interest of any equity security holder, McLeodUSA will promptly disclose any such amendment in accordance with Bankruptcy Code Section 1127, Bankruptcy Rule 3019, and any order of the Bankruptcy Court.

McLeodUSA, prior to confirmation of the Plan, or prior to substantial consummation thereof, subject to the provisions of Section 1127 of the Bankruptcy Code and Bankruptcy Rule 3019, reserves the right to amend the terms of the Plan or waive any conditions thereto if and to the extent McLeodUSA determines that such amendments or waivers are necessary or desirable to consummate the plan. McLeodUSA will give all holders of claims and interests notice of such amendments or waivers as may be required by applicable law and the Bankruptcy Court. If, after receiving sufficient Acceptances but prior to confirmation of the Plan, McLeodUSA seeks to modify the Plan, McLeodUSA could only use such previously solicited Acceptances if (i) all classes of adversely affected creditors and interest holders accepted the modification in writing or (ii) the Bankruptcy Court determines, after notice to designated parties, that such modification was de minimis or purely technical or otherwise did not adversely change the treatment of Holders of accepting Claims and Interests. McLeodUSA reserves the right to use Acceptances of the Plan received in this solicitation to seek confirmation of the Plan under any case commenced under Chapter 11 of the Bankruptcy Code, whether such case is commenced by the filing of a voluntary or involuntary petition, subject to approval of the Bankruptcy Court.

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Withdrawal of the Plan

If a Chapter 11 petition is filed by or against McLeodUSA, McLeodUSA reserves the right not to file the Plan, or, if it files the Plan, to revoke and withdraw such Plan at any time prior to confirmation. If the plan is revoked or withdrawn, the Plan and the ballots will be deemed to be null and void. In such event, nothing contained in the Plan will be deemed to constitute a waiver or release of any claims by or against McLeodUSA, or interests of or in McLeodUSA, or any other person or to prejudice in any manner the rights of McLeodUSA or any other person.

If the Requisite Acceptances are not received or if the Plan is not confirmed, McLeodUSA may file its Chapter 11 petitions and attempt to formulate and propose a different plan or plans or reorganization. Such a plan or plan(s) might involve either a reorganization and continuation of McLeodUSA's businesses or an orderly liquidation of assets. However, McLeodUSA's business could suffer from increased costs, erosion of customer confidence, and liquidity difficulties if it remained a debtor-in-possession during a lengthy Chapter 11 process while trying to negotiate a plan of reorganization. McLeodUSA therefore believes that the Plan enables Holders of Claims and Interests to realize the greatest value under the circumstances and that, compared to any later alternative plan of reorganization, the Plan has the greatest chance to be confirmed and consummated.

Alternatives to Confirmation and Consummation of the Plan

McLeodUSA believes that the Plan affords Holders of Claims and Interests the potential for the greatest recovery and, therefore, is in the best interests of such Holders. If, however, the requisite acceptances of the Plan are not received, or the Plan is not confirmed and consummated, the theoretical alternatives include: (a) formulation of an alternative plan of reorganization or (b) liquidation of McLeodUSA under Chapter 7 or 11 of the Bankruptcy Code.

Alternative Plan(s) of Reorganization

As stated above, McLeodUSA may file a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code and seek, as promptly as practicable thereafter, confirmation of the Plan or any other restructuring in its sole discretion. McLeodUSA believes that the length of any bankruptcy proceedings commenced by McLeodUSA, including one seeking confirmation of the Plan, will be subject to considerable uncertainty and that the completion of such proceedings could be delayed for reasons beyond the control of McLeodUSA, including the need to solicit additional acceptances of the Plan after commencement of a case. Even if the Plan were uncontested, it is estimated that the Plan would take approximately two months to confirm and could take longer if post-petition solicitations are required. Furthermore, even if all classes of Impaired creditors and equity holders accept the Plan, the Plan may not be confirmed by the Bankruptcy Court. The Bankruptcy Court, which sits as a court of equity, may exercise substantial discretion. Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation and requires, among other things, that the confirmation of the Plan not be followed by a need for further financial reorganization and that the value of distributions to dissenting creditors and shareholders not be less than the value of distributions such creditors and shareholders would receive if McLeodUSA were liquidated under Chapter 7 of the Bankruptcy Code. Although McLeodUSA believes that the Plan will meet such tests, there can be no assurance that the Bankruptcy Court would reach the same conclusion.

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Liquidation Under Chapter 7 or Chapter 11

If no plan is confirmed and McLeodUSA commences bankruptcy proceedings, McLeodUSA may be forced to liquidate under Chapter 7 of the Bankruptcy Code pursuant to which a trustee would be elected or appointed to liquidate McLeodUSA's assets for distribution to creditors in accordance with the priorities established by the Bankruptcy Code. It is impossible to predict precisely how the proceeds of the liquidation would be distributed to the respective holders of Claims against or Interests in McLeodUSA.

As described above, however, McLeodUSA believes that in a liquidation under Chapter 7, before creditors received any distribution, additional administrative expenses involved in the appointment of a trustee or trustees and attorneys, accountants and other professionals to assist such trustees would cause a substantial diminution in the value of McLeodUSA's estate. The assets available for distribution to creditors would be reduced by such additional expenses and by Claims, some of which would be entitled to priority, which would arise by reason of the liquidation and from the rejection of leases and other executory contracts in connection with the cessation of operations and the failure to realize the greater going concern value of McLeodUSA's assets.

McLeodUSA also could be liquidated pursuant to the provisions of a Chapter 11 plan of reorganization. In a liquidation under Chapter 11, McLeodUSA's assets could be sold in an orderly fashion over a more extended period of time than in a liquidation under Chapter 7. Thus, a Chapter 11 liquidation might result in larger recoveries than in a Chapter 7 liquidation, but the delay in distributions could result in lower present values received and higher administrative costs. Because a trustee is not required in a Chapter 11 case, expenses for professional fees could be lower than in a Chapter 7 case. However, any distribution to the holders of Claims under a Chapter 11 liquidation plan probably would be delayed substantially.

Although preferable to a Chapter 7 liquidation, McLeodUSA believes that any alternative liquidation under Chapter 11 is a much less attractive alternative to creditors than the Plan because of the greater return McLeodUSA anticipates is provided by the Plan.

PROCEDURES FOR VOTING ON THE PLAN

Before voting to accept or reject the Plan, each Noteholder should carefully review the Plan attached as Apprendix 1 and described herein under "The Plan." All descriptions of the Plan set forth in this Offering Memorandum and Disclosure Statement are subject to the terms and conditions of the Plan. Instructions for voting on the Plan are set forth in the instructions contained in the enclosed beneficial owner ballots (and, in the case of nominees, master ballots which will be received at a later date).

Voting Deadline

The period during which beneficial owner ballots (the "Beneficial Owner Ballots") and master ballots (the "Master Ballots") will be accepted will terminate at 5:00 p.m., New York City time on January 15, 2001, unless and until McLeodUSA, in its sole discretion, extends the date until which Beneficial Owner Ballots and Master Ballots will be accepted, in which case the voting deadline will terminate at 5:00 p.m., New York City time on such extended date (the "Voting Deadline"). Except to the extent McLeodUSA so determines or as permitted by the Bankruptcy Court, Beneficial Owner Ballots or Master Ballots that are received after the Voting Deadline will not be counted or otherwise used by McLeodUSA in connection with McLeodUSA's request for confirmation of the Plan (or any permitted modification thereof).

McLeodUSA reserves the absolute right, at any time or from time to time, to extend, by oral or written notice to the Voting Agent, the period of time (on a daily basis, if necessary) during which

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Beneficial Owner Ballots and Master Ballots will be accepted for any reason including, but not limited to, determining whether or not requisite acceptances of the Plan have been received, by making a public announcement of such extension no later than 9:00 a.m. (New York City time) on the first business day next succeeding the previously announced Voting Deadline. Without limiting the manner in which McLeodUSA may choose to make any public announcement, McLeodUSA will not have any obligation to publish, advertise, or otherwise communicate any such public announcement, other than by issuing a news release through the Business Wire. There can be no assurance that McLeodUSA will exercise its right to extend the Voting Deadline. In the event that McLeodUSA commences a Chapter 11 case prior to the Voting Deadline, McLeodUSA may use acceptances received prior to the Voting Deadline to obtain consummation of the Plan.

Voting Procedures

McLeodUSA is providing copies of this Offering Memorandum and Disclosure Statement (including all exhibits and appendices) and related materials and, where appropriate, Beneficial Owner Ballots and Master Ballots (in either case, a "Solicitation Package"), to registered Noteholders. Registered Noteholders may include brokerage firms, commercial banks, trust companies, or other nominees. If such entities do not hold Notes for their own account, they must provide copies of the Solicitation Package (including the Beneficial Owner Ballots) to their customers and to beneficial owners of Notes. Any beneficial owner of Notes who has not received a Beneficial Owner Ballot should contact his, her or its nominee, or the Voting Agent.

Noteholders should provide all of the information requested by the Ballots. Noteholders should complete and return all Ballots received in the enclosed, self-addressed, postage paid envelope provided with each such Ballot.

The Voting Record Date for determining which Noteholders are entitled to vote on the Plan is December 3, 2001. The Notes Trustee willnot vote on behalf of the Noteholders. Noteholders must submit their own Ballots.

Beneficial Owners

(a) A beneficial owner holding Notes as record holder in its own name should vote on the Plan by completing and signing a Beneficial Owner Ballot and returning it directly to the Voting Agent on or before the Voting Deadline using the enclosed self-addressed, postage paid envelope.

(b) A beneficial owner holding Notes in "street name" through a nominee may vote on the Plan by one of the following two methods (as selected by such beneficial owner's nominee):

(i) Complete and sign the enclosed Beneficial Owner Ballot. Return the Ballot to your nominee as promptly as possible and in sufficient time to allow such nominee to process the Ballot and return it to the Voting Agent by the Voting Deadline. If no self-addressed, postage paid envelope was enclosed for this purpose, contact the Voting Agent for instructions; or

(ii) Complete and sign the pre-validated Beneficial Owner Ballot (as described below) provided to you by your nominee. Return the pre-validated Ballot to the Voting Agent by the Voting Deadline using the return envelope provided in the Solicitation Package.

Any Beneficial Owner Ballot returned to a nominee by a beneficial owner will not be counted for purposes of acceptance or rejection of the Plan until such nominee properly completes and delivers to the Voting Agent that Ballot or a Master Ballot that reflects the vote of such beneficial owner.

If any beneficial owner owns Notes through more than one nominee, such beneficial owner may receive multiple mailings containing the Beneficial Owner Ballots. The beneficial owner should execute a separate Beneficial Owner Ballot for each block of Notes that it holds through any particular nominee and return each Ballot to the respective nominee in the return envelope provided therewith.

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Beneficial owners who execute multiple Beneficial Owner Ballots with respect to Notes held through more than one nominee must indicate on each Beneficial Owner Ballot the names of ALL such other nominees and the additional amounts of such Notes so held and voted. If a beneficial owner holds a portion of the Notes through a nominee and another portion as a record holder, the beneficial owner should follow the procedures described in subparagraph (1) (a) above to vote the portion held of record and the procedures described in subparagraph (1) (b) above to vote the portion held through a nominee or nominees.

Nominees

A nominee that on the Voting Record Date is the registered holder of Notes for one or more beneficial owners can obtain the votes of the beneficial owners of such Notes, consistent with customary practices for obtaining the votes of securities held in "street name," in one of the following two ways:

(a): Pre-Validated Ballots

The nominee may "pre-validate" a Beneficial Owner Ballot by (i) signing the Ballot; (ii) indicating on the Ballot the name of the registered holder, the amount of Notes held by the nominee for the beneficial owner, and the account numbers for the accounts in which such Notes are held by the nominee; and (iii) forwarding such Beneficial Owner Ballot, together with the Offering Memorandum and Disclosure Statement, a pre-addressed, postage-paid return envelope addressed to, and provided by, the Voting Agent, and other materials requested to be forwarded, to the beneficial owner for voting. The beneficial owner must then complete the information requested on the Beneficial Owner Ballot, review the certifications contained on the Ballot, and return the Ballot directly to the Voting Agent in the pre-addressed, postage-paid return envelope so that it is RECEIVED by the Voting Agent before the Voting Deadline. A list of the beneficial owners to whom "pre-validated" Ballots were delivered should be maintained by nominees for inspection for at least one year from the Voting Deadline; or

(b): Master Ballots

If the nominee electsnot to prevalidate Ballots, the nominee may obtain the votes of beneficial owners by forwarding to the beneficial owners the unsigned Beneficial Owner Ballots, together with the Offering Memorandum and Disclosure Statement, a pre-addressed, postage-paid return envelope provided by, and addressed to, the nominee, and other materials requested to be forwarded. Each such beneficial owner must then indicate his, her or its vote on the Beneficial Owner Ballot, complete the information requested on the Ballot, review the certifications contained on the Ballot, execute the Ballot, and return the Ballot to the nominee. After collecting the Beneficial Owner Ballots, the nominee should, in turn, complete a Master Ballot compiling the votes and other information from the Beneficial Owner Ballots, execute the Master Ballot, and deliver the Master Ballot to the Voting Agent so that it is RECEIVED by the Voting Agent before the Voting Deadline. All Beneficial Owner Ballots returned by beneficial owners should either be forwarded to the Voting Agent (along with the Master Ballot) or retained by nominees for inspection for at least one year from the Voting Deadline.EACH NOMINEE SHOULD ADVISE ITS BENEFICIAL OWNERS TO RETURN THEIR BALLOTS TO THE NOMINEE BY A DATE CALCULATED BY THE NOMINEE TO ALLOW IT TO PREPARE AND RETURN THE MASTER BALLOT TO THE VOTING AGENT SO THAT IT IS RECEIVED BY THE VOTING AGENT BEFORE THE VOTING DEADLINE.

Securities Clearing Agencies

McLeodUSA expects that DTC, as a nominee holder of Notes, will arrange for its participants to vote by executing an omnibus proxy in favor of such participants. As a result of the omnibus proxy,

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such participants will be authorized to vote their Voting Record Date positions held in the name of such securities clearing agencies.

Miscellaneous

In the case of a vote on the Plan, all Ballots must be signed by the Noteholder of record or any person who has obtained a properly completed Ballot proxy from the record Noteholder on such date. For purposes of voting to accept or reject the Plan, the beneficial owners of Notes will be deemed to be the "holders" of the Claims represented by such Notes. Unless otherwise ordered by the Bankruptcy Court, Beneficial Owner Ballots or Master Ballots that are signed, dated and timely received, but on which a vote to accept or reject the Plan has not been indicated, will not be counted. McLeodUSA, in its sole discretion, may request that the Voting Agent attempt to contact such voters to cure any such defects in the Beneficial Owner Ballots or Master Ballots.

Under the Bankruptcy Code, for purposes of determining whether the requisite acceptances have been received from Noteholders, only Noteholders who actually vote will be counted. The failure of a Noteholder to deliver a duly executed Ballot will be deemed to constitute an abstention by such Noteholder with respect to voting on the Plan and such abstentions will not be counted as votes for or against the Plan.

Except as provided below, unless the Beneficial Owner Ballot or Master Ballot is timely submitted to the Voting Agent before the Voting Deadline together with any other documents required by such Beneficial Owner Ballot or Master Ballot, McLeodUSA may, in its sole discretion, reject such Beneficial Owner Ballot or Master Ballot as invalid, and therefore decline to utilize it in connection with seeking confirmation of the Plan.

Fiduciaries And Other Representatives

If a Beneficial Owner Ballot is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or another acting in a fiduciary or representative capacity, such person should indicate such capacity when signing and, unless otherwise determined by McLeodUSA, must submit proper evidence satisfactory to McLeodUSA of authority to so act. Authorized signatories should submit the separate Beneficial Owner Ballot of each beneficial owner for whom they are voting.

UNLESS THE BENEFICIAL OWNER BALLOT BEING FURNISHED IS TIMELY SUBMITTED TO THE VOTING AGENT ON A MASTER BALLOT OR PREVALIDATED BALLOT ON OR PRIOR TO THE VOTING DEADLINE, SUCH BALLOT WILL BE REJECTED AS INVALID AND WILL NOT BE COUNTED AS AN ACCEPTANCE OR REJECTION OF THE PLAN; PROVIDED, HOWEVER, THAT MCLEODUSA RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO REQUEST OF THE BANKRUPTCY COURT THAT ANY SUCH BALLOT BE COUNTED.

Parties In Interest Entitled To Vote

Under the Bankruptcy Code, only holders of claims or interests in "impaired" classes are entitled to vote on a plan. Under Section 1124 of the Bankruptcy Code, a class of claims or interests is deemed to be "impaired" under a plan unless (i) the plan leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder thereof or (ii) notwithstanding any legal right to an accelerated payment of such claim or interest, the plan cures all existing defaults (other than defaults resulting from the occurrence of events of bankruptcy) and reinstates the maturity of such claim or interest as it existed before the default.

If, however, the holder of an impaired claim or interest will not receive or retain any distribution under the plan on account of such claim or interest, the Bankruptcy Code deems such holder to have

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rejected the plan, and, accordingly, holders of such claims and interests do not actually vote on the plan. If a claim or interest is not impaired by the plan, the Bankruptcy Code deems the holder of such claim or interest to have accepted the plan and, accordingly, holders of such claims and interests are not entitled to vote on the plan.

Also, a holder of a claim or interest may vote to accept or to reject a plan only if the claim or interest is "allowed," which means generally that no party in interest has objected to such claim or interest. In the event of a dispute with respect to any Note claim, any vote to accept or reject the Plan cast with respect to such claim will not be counted for purposes of determining whether the Plan has been accepted or rejected unless the Bankruptcy Court orders otherwise.

A vote may be disregarded if the Bankruptcy Court determines, pursuant to Section 1126(e) of the Bankruptcy Code, that it was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code.

The Bankruptcy Code defines "acceptance" of a plan by a class of claims as acceptance by creditors in that class that hold at least two-thirds in dollar amount and more than one-half in number of the claims that cast ballots for acceptance or rejection of the plan. Acceptance of a plan by a class of interests requires acceptance by at least two-thirds of the amount of interests of such class that cast ballots for acceptance or rejection of the plan.

Agreements Upon Furnishing Ballots

The delivery of an accepting Beneficial Owner Ballot or Master Ballot pursuant to one of the procedures set forth above will constitute the agreement of the Noteholder with respect to such Ballot to accept (i) all of the terms of, and conditions to, this acceptance solicitation; and (ii) the terms of the Plan; provided, however, all parties in interest retain their right to object to confirmation of the Plan pursuant to Section 1128 of the Bankruptcy Code.

Change of Vote

Any party who has previously submitted to the Voting Agent prior to the Voting Deadline a properly completed Beneficial Owner Ballot or Master Ballot may revoke such Ballot and change its vote by submitting to the Voting Agent prior to the Voting Deadline a subsequent properly completed Beneficial Owner Ballot or Master Ballot for acceptance or rejection of the Plan.

A withdrawal of Notes tendered for exchange shall not have any effect on a vote for acceptance of the Plan with respect to such Notes. A change of vote for acceptance of the Plan shall not have any effect on the tender, or consent, of or with respect to the Notes as to which a vote on the Plan is changed.

Waivers of Defects, Irregularities, Etc.

Unless otherwise directed by the Bankruptcy Court, all questions as to the validity, form, eligibility (including time of receipt), acceptance, and revocation or withdrawals of Ballots will be determined by the Voting Agent and McLeodUSA in their sole discretion, which determination will be final and binding. McLeodUSA reserves the right to reject any and all Ballots not in proper form, the acceptance of which would, in the opinion of McLeodUSA or its counsel, be unlawful. McLeodUSA further reserves the right to waive any defects or irregularities or conditions of delivery as to any particular Ballot. The interpretation (including the Ballot and the respective instructions thereto) by McLeodUSA, unless otherwise directed by the Bankruptcy Court, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with deliveries of Ballots must be cured within such time as McLeodUSA (or the Bankruptcy Court) determines. Neither McLeodUSA nor any other person will be under any duty to provide notification of defects or irregularities with

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respect to deliveries of Ballots nor will any of them incur any liabilities for failure to provide such notification. Unless otherwise directed by the Bankruptcy Court, delivery of such Ballots will not be deemed to have been made until such irregularities have been cured or waived. Ballots previously furnished (and as to which any irregularities have not theretofore been cured or waived) will be invalidated.

Further Information; Additional Copies

If you have any questions or require further information about the voting procedures for voting your Notes or about the packet of material you received, or if you wish to obtain an additional copy of the Plan, this Offering Memorandum and Disclosure Statement, or any exhibits to such documents, please contact the Voting Agent.

Voting Agent

Innisfree M&A Incorporated has been appointed as Voting Agent for the acceptance solicitation. Questions and requests for assistance with respect to Ballots may be directed to the Voting Agent at one of its addresses and telephone numbers set forth on the back cover of this Offering Memorandum and Disclosure Statement.

Miscellaneous

McLeodUSA is not aware of any jurisdiction in which the solicitation is not in compliance with applicable law. If McLeodUSA becomes aware of any jurisdiction in which the solicitation would not be in compliance with applicable law, McLeodUSA will make a good faith effort to comply with any such law. If, after such good faith effort, McLeodUSA cannot comply with any such law, the solicitation will not be made to the Noteholder residing in such jurisdiction.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

A summary description of certain United States federal income tax consequences of the Restructuring to McLeodUSA and the Noteholders is provided below. This description is for informational purposes only and, due to a lack of definitive judicial or administrative authority or interpretation, substantial uncertainties exist with respect to various tax consequences, as discussed herein. No opinion of counsel has been sought or obtained with respect to any tax consequences of the Restructuring. No rulings or determinations of the Internal Revenue Service (the "IRS") or any other tax authorities have been sought or obtained with respect to the tax consequences of the Restructuring, and the discussion below is not binding upon the IRS or such other authorities. McLeodUSA is not making any representations regarding the particular tax consequences of the confirmation and consummation of the Restructuring as to any Noteholder, and is not rendering any form of legal opinion as to such tax consequences. No assurance can be given that the IRS would not assert, or that a court would not sustain, a different position from any discussed herein.

The discussion of United States federal income tax consequences below is based on the Internal Revenue Code of 1986, as amended, Treasury Regulations, judicial authorities, published positions of the Internal Revenue Service and other applicable authorities, all as in effect on the date of this document and all of which are subject to change or differing interpretations (possibly with retroactive effect).

Except to a limited extent, the following discussion does not address foreign, state or local tax consequences of the Restructuring, nor does it purport to address the United States federal income tax consequences of the Restructuring to special classes of taxpayers (e.g., banks and certain other financial institutions, insurance companies, tax-exempt organizations, Noteholders that are, or hold Notes through, pass-through entities, persons whose functional currency is not the United States dollar,

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foreign persons, dealers in securities or foreign currency, and persons holding Notes that are a hedge against, or that are hedged against, currency risk or that are part of a straddle, constructive sale or conversion transaction). Furthermore, the following discussion does not address United States federal taxes other than income taxes. The following discussion assumes that Noteholders hold their Notes as capital assets for United States federal income tax purposes.Noteholders must consult with their own tax advisors as to the federal income tax consequences of the Restructuring, as well as the effects of state, local, other federal and non-United States tax laws.

Consequences to McLeodUSA

Cancellation of Indebtedness Income

The exchange of Notes for Class A common stock and cash pursuant to the Out-of-Court Restructuring or the In-Court Restructuring will result in the cancellation of a portion of McLeodUSA's outstanding indebtedness. Under the Out-of-Court Restructuring, McLeodUSA will recognize cancellation of debt ("COD") income in an amount equal to the excess of the adjusted issue price of the indebtedness (including any accrued but unpaid interest) over the amount of cash and fair market value of the Class A common stock issued in exchange therefor. COD income may, however, generally be offset by net operating losses and net operating loss carryovers ("NOLs"). McLeodUSA believes that it will have sufficient NOLs to offset all or substantially all of the anticipated COD income for federal income tax purposes (although some liability for federal alternative minimum tax and state income tax will remain). McLeodUSA has estimated for purposes of its unaudited financial information presented herein that $46 million of current tax liability will result from the Out-of-Court Restructuring. See "Unaudited Pro Forma Financial Information." However, whether McLeodUSA will have sufficient NOLs to fully offset the COD income actually recognized will depend upon a number of factors, including the amount of Notes that are tendered in the Out-of-Court Restructuring, the amount of operating losses created by operations in 2001 and 2002, the value of the Class A common stock (determined at the time of the exchange) issued in exchange for Notes, the effect of any applicable limitations on McLeodUSA's ability to utilize NOLs (including certain of McLeodUSA's subsidiaries' NOLs that were created before such subsidiaries were acquired by McLeodUSA) and the timing and amount of gain or loss that McLeodUSA will recognize as a result of the divestiture of its non-core business and telecom assets. Accordingly, no assurances can be given that McLeodUSA will have sufficient NOLs to offset all of the COD income that will be recognized in the Out-of-Court Restructuring.

Under the In-Court Restructuring, McLeodUSA will be a debtor in a bankruptcy case at the time it realizes the COD income, and will therefore not be required to include such COD income in its gross income. Instead, McLeodUSA will be required to reduce certain of its tax attributes by the amounts of COD income so excluded. The required attribute reduction is generally applied to reduce the NOLs, to the extent of such NOLs, and certain other tax attributes of McLeodUSA and its property.

McLeodUSA believes that any reduction in tax attributes under the In-Court Restructuring will generally occur on a separate company basis, even though McLeodUSA and its subsidiaries file a consolidated federal income tax return. The IRS has recently taken the position, however, that consolidated NOLs must be reduced irrespective of the source of those losses. The current IRS position as to the impact of the attribute reduction rules on other tax attributes of consolidated group members is unclear.

Net Operating Losses

McLeodUSA believes that all or substantially all of the NOLs of McLeodUSA and its subsidiaries will be utilized as a result of COD income to be recognized in the Out-of-Court Restructuring.

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McLeodUSA also believes that all of its NOLs will be eliminated as a result of the exclusion of COD income realized in the In-Court Restructuring, although the NOLs of McLeodUSA's subsidiaries will not be reduced or eliminated as a result of such COD income in the In-Court Restructuring if McLeodUSA's position that the reduction in tax attributes should occur on a separate company basis, as discussed above, is sustained. As discussed below, in either the Out-of-Court Restructuring or the In-Court Restructuring, Section 382 of the IRC ("Section 382") may apply to limit the ability of McLeodUSA and its subsidiaries to utilize any remaining NOLs in future years.

When a corporation undergoes an ownership change, Section 382 generally limits the ability of the corporation to utilize historic NOLs and certain subsequently recognized "built-in" losses and deductions (i.e., losses and deductions that have economically accrued but are unrecognized as of the date of the ownership change) (the "Annual Section 382 Limitation"). An "ownership change" is generally defined as a more than 50 percentage point change in ownership during the shorter of (i) the three-year period ending on each date on which such change in ownership is tested (a "Measurement Date") or (ii) the period beginning on the day after the corporation's most recent previous ownership change and ending on the Measurement Date. As a general rule, the Annual Section 382 Limitation equals the product of the value of the stock of the corporation (with certain adjustments) immediately before the ownership change and the applicable "long-term tax-exempt rate" (4.74% for December, 2001). Subject to certain limitations, any unused portion of the Annual Section 382 Limitation may be available in subsequent years. A corporation must meet certain continuity of business enterprise requirements for at least two years following an ownership change in order to preserve the Annual Section 382 Limitation.

McLeodUSA believes that its most recent ownership change occurred in March, 2000, and that the Annual Section 382 Limitation arising from that ownership change does not impose material limitations on its ability to utilize its NOLs in connection with the Out-of-Court Restructuring. However, the determination of whether and when an ownership change occurs is inherently factual and depends in part on the values of McLeodUSA's outstanding stock on each Measurement Date. If it were ultimately determined that McLeodUSA's most recent ownership change occurred on a different date (or that an ownership change occurs subsequent to the date hereof and prior to the consummation of the Out-of- Court Restructuring), McLeodUSA's ability to utilize NOLs to offset the COD income recognized in the Out-of-Court Restructuring could be materially affected.

McLeodUSA believes that it is likely to undergo an additional ownership change as a result of the Out-of-Court Restructuring or the In-Court Restructuring, regardless of which is implemented. If that occurs, McLeodUSA's ability to utilize any NOLs that remain after the Out-of-Court Restructuring will be, and its ability to utilize certain subsequently recognized built in losses and deductions (if any) may be, subject to an Annual Section 382 Limitation, as described above. However, Section 382 provides an exception to the application of the Annual Section 382 Limitation for corporations under the jurisdiction of a court in a bankruptcy case (the "Bankruptcy Exception"). Under the In-Court Restructuring, the Bankruptcy Exception will apply to McLeodUSA if, as expected, its historic shareholders and creditors that held certain "qualified indebtedness" (as defined by regulation) prior to implementation of the In-Court Restructuring own more than 50% of the total voting power and total value of McLeodUSA's stock after such implementation. If the Bankruptcy Exception applies, McLeodUSA's ability to utilize NOLs arising prior to the effective date of the Plan and built in losses and deductions (if any) recognized after the effective date of the Plan will not be limited as described above. The Bankruptcy Exception could, however, reduce McLeodUSA's and its subsidiaries' pre-change NOLs that may be carried over to a post-change year for any interest paid or accrued on Notes in respect of which Class A common stock is issued. The Bankruptcy Exception also provides that a second ownership change occurring during the two-year period immediately following the first ownership change would eliminate any NOLs that arose before the first ownership change.

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Section 382 provides that a corporation under the jurisdiction of a Bankruptcy Court may elect out of the Bankruptcy Exception even if the corporation meets all of the requirements thereof. McLeodUSA believes the In-Court Restructuring will qualify for the Bankruptcy Exception but has not yet determined whether it would be advantageous to elect out of the Bankruptcy Exception. McLeodUSA will make a timely decision on the best course of action.

If McLeodUSA does not qualify for the Bankruptcy Exception or elects out of the Bankruptcy Exception as discussed above, a special rule under Section 382 applicable to corporations under the jurisdiction of a Bankruptcy Court that are not subject to the Bankruptcy Exception will apply in calculating McLeodUSA's Annual Section 382 Limitation in connection with the In-Court Restructuring. Under this special rule, the limitation will be calculated by reference to the lesser of the value of McLeodUSA's stock (with certain adjustments) immediately after the ownership change (as opposed to immediately before the ownership change, as discussed above) or the value of McLeodUSA's assets (determined without regard to liabilities) immediately before the ownership change. Although such calculation may substantially increase the Annual Section 382 Limitation, McLeodUSA's use of any NOLs and built-in losses and deductions (if any) remaining after the In-Court Restructuring may still be limited after the ownership change.

Federal Alternative Minimum Tax

Under current law, a corporation may incur alternative minimum tax liability even where NOLs and other tax attributes are sufficient to eliminate its taxable income as computed under the regular corporate income tax rules. McLeodUSA will be liable for the alternative minimum tax as a result of the utilization of NOLs to offset COD income recognized in the Out-of-Court Restructuring. However, because (as discussed above) no COD income will be recognized in the In-Court Restructuring, McLeodUSA will not be liable for the alternative minimum tax as a result of income realized in the In-Court Restructuring.

Certain legislative proposals currently being considered by Congress would eliminate the alternative minimum tax for corporations. As of the date hereof, it is unclear whether any such proposal will be enacted and, if enacted, have an effective date that applies to the Out-of-Court Restructuring.

Consequences to Noteholders

The United States federal income tax consequences of the Out-of-Court Restructuring and the In-Court Restructuring to Noteholders (including the character and amount of income, gain or loss recognized) will depend upon, among other things, (1) the manner in which a Noteholder acquired a Note; (2) the length of time the Note has been held; (3) whether the Note was acquired at a discount; (4) whether the Noteholder has taken a bad debt deduction with respect to the Note (or any portion thereof) in the current or prior years; (5) whether the Noteholder has previously included in income any accrued but unpaid interest with respect to the Note; (6) the Noteholder's method of tax accounting; and (7) whether the Note constitutes a "security" for federal income tax purposes. Therefore, Noteholders should consult their own tax advisors for information that may be relevant to their particular situations and circumstances and the particular tax consequences to them of the Out-of-Court Restructuring and the In-Court Restructuring.

As used herein, the term "United States Noteholder" means a Noteholder that is (i) a citizen or individual resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate whose income is includible in gross income for United States federal income tax purposes regardless of source, or (iv) a trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all

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substantial decisions of the trust, or (2) the trust was in existence on August 20, 1996 and properly elected to continue to be treated as a United States person. A "Non-United States Noteholder" is any Noteholder that is not a United States Noteholder.

Consequences to Exchanging Noteholders

The receipt of Class A common stock and cash in exchange for Notes pursuant to the Out-of-Court Restructuring or the In-Court Restructuring should be treated as a "recapitalization" for United States federal income tax purposes. Such treatment will depend upon, among other things, whether the Notes constitute "securities" for United States federal income tax purposes. The determination of whether a debt instrument constitutes a security depends upon an evaluation of the term and nature of the debt instrument. Generally, corporate debt instruments with maturities when issued of less than five years are not considered securities, while corporate debt instruments with maturities when issued of ten years or more are considered securities. McLeodUSA intends to take the position that the Notes are treated as securities for United States federal income tax purposes.

If the receipt of Class A common stock and cash in exchange for Notes pursuant to the Out-of-Court Restructuring or the In-Court Restructuring is treated as a recapitalization, a United States Noteholder will recognize gain, but not loss, with respect to the Notes surrendered in the Out-of-Court Restructuring or the In-Court Restructuring in an amount equal to the lesser of (x) the amount of gain realized (i.e., the excess of the amount of cash and fair market value of the Class A common stock received by such Noteholder in exchange for its Notes, over the adjusted tax basis of such Notes) and (y) the cash received by such Noteholder in the exchange. Any such gain recognized will generally be treated as capital gain, except to the extent that the cash and Class A common stock are received in exchange for accrued but unpaid interest or accrued market discount that, in either case, have not been previously taken into account under the Noteholder's method of accounting. The amount of any remaining accrued market discount not recognized in the exchange will generally be treated as ordinary income to the Noteholder upon a disposition of the Class A common stock received pursuant to the exchange. In addition, a Noteholder's aggregate tax basis in the Class A common stock received in the exchange will be equal to the aggregate tax basis in its Notes surrendered in exchange therefor, decreased by the amount of cash received and increased by the amount of any gain recognized. Such Noteholder's holding period for its Class A common stock received pursuant to the Out-of-Court Restructuring or the In-Court Restructuring will include the holding period of its Notes surrendered in exchange therefor, except that the holding period for Class A common stock received in respect of accrued interest will begin on the day following the Effective Date.

If, contrary to McLeodUSA's intended position, the receipt of Class A common stock and cash by Noteholders pursuant to the Out-of-Court Restructuring or the In-Court Restructuring is not treated as a recapitalization, the exchange of Notes for Class A common stock and cash would be fully taxable. As a result, a United States Noteholder would, except as described in the next sentence, generally recognize capital gain or loss for United States federal income tax purposes in an amount equal to the difference between (1) the amount of cash and fair market value on the Effective Date of the Class A common stock received in exchange for its Notes, and (2) the Noteholder's adjusted tax basis in its Notes. Any such gain recognized would generally be treated as ordinary income to the extent that the Class A common stock and cash are received in respect of accrued but unpaid interest or accrued market discount that, in either case, have not been previously taken into account under the Noteholder's method of accounting. A Noteholder recognizing a loss as a result of the Out-of-Court Restructuring or the In-Court Restructuring may be entitled to a bad debt deduction, either in the taxable year of the Effective Date or a prior taxable year. A Noteholder's tax basis in the Class A common stock received in exchange for its Notes would generally be equal to the fair market value of such stock on the Effective Date. Any gain or loss would be long-term gain or loss if the Noteholder's holding period for its Notes was more than one year on the Effective Date. The holding period for

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Class A common stock received pursuant to the Out-of-Court Restructuring or the In-Court Restructuring would begin on the day after the Effective Date.

Consequences to Non-Exchanging Noteholders

If the Out-of-Court Restructuring is implemented, some Noteholders may not exchange their Notes for cash and Class A common stock. Whether such Noteholders are treated as constructively exchanging their "old" Notes for "new" Notes as a result of the adoption of the Indenture Amendments depends on whether the adoption of the Indenture Amendments constitutes a "significant modification" of the Notes. This, in turn, will generally depend on whether the adoption of the Indenture Amendments results in a change in payment expectations with respect to the Notes. Although the matter is not free from doubt, McLeodUSA believes that the adoption of the Indenture Amendments should not result in a change in payment expectations and therefore should not constitute a "significant modification" (within the meaning of the applicable Treasury Regulations) in the terms of the Notes. Accordingly, for United States federal income tax purposes, the adoption of the Indenture Amendments should (i) not result in a deemed exchange of Notes by any Noteholder that does not exchange its Notes pursuant to the Out-of-Court Restructuring, and (ii) have no material United States income tax consequences to any such Noteholder. Even if the adoption of the Indenture Amendments were to constitute a deemed exchange of the Notes, under McLeodUSA's intended position regarding the treatment of such exchange as a recapitalization, Noteholders who do not exchange their Notes generally should not recognize any gain or loss as a result thereof (except as described in the previous paragraph). There can be no assurance that the IRS would not assert a different position, or that any position taken by the IRS would not be sustained. If an exchange were deemed to have occurred and such exchange did not qualify as a recapitalization, Noteholders would recognize gain or loss, if any, on such exchange, and would have a new holding period for the Notes. In addition, if the fair market value of the Notes at the time of such taxable exchange is materially less than their principal amount, the Notes deemed received in the taxable exchange may be treated as issued with original issue discount equal to such difference. Any original issue discount would be includible daily in the income of a Noteholder (regardless of whether such Noteholder is an accrual method taxpayer) on a constant yield-to-maturity basis over the remaining life the Notes. This means that each Noteholder would be required to include such original issue discount in gross income without a corresponding receipt of cash.

If the Indenture Amendments constitute a deemed exchange, the Notes deemed received in such exchange would likely be deemed issued with significant original issue discount. Accordingly, there would be limitations on McLeodUSA's ability to deduct a portion of the interest with respect to such Notes. In addition, McLeodUSA may be required to defer its deduction of any such original issue discount until it is actually paid.

Consequences to Non-United States Noteholders

Except as discussed below, a Non-United States Noteholder will generally not be subject to United States federal income tax with respect to Class A common stock and cash received in exchange for its Notes pursuant to the Out-of-Court Restructuring or the In-Court Restructuring unless, among other things, (a) such Noteholder is engaged in a trade or business in the United States to which income, gain or loss from the exchange is "effectively connected" for United States federal income tax purposes, or (b) in the case of an individual, such Noteholder is present in the United States for 183 days or more during the taxable year of the Effective Date, and certain other requirements are met. A Non-United States Noteholder may, however, be subject to United States federal withholding tax and information reporting with respect to the cash and fair market value of the Class A common stock received in respect of accrued interest or market discount.

173

Information Reporting and Backup Withholding

Certain payments, including the payments of cash in respect of Notes pursuant to the Out-of-Court Restructuring or the In-Court Restructuring, are generally subject to information reporting by the payor (the Disbursing Agent) to the IRS. Moreover, such reportable payments are subject to backup withholding under certain circumstances. Under the IRC's backup withholding rules, distributions or payments made pursuant to the Out-of-Court Restructuring or the In-Court Restructuring may be subject to backup withholding at the applicable rate, unless the Holder (a) comes within certain exempt categories (which generally include corporations) and, when required, demonstrates this fact or (b) provides a correct United States taxpayer identification number and certifies under penalty of perjury that the taxpayer identification number is correct and that the Holder is not subject to backup withholding because of a failure to report all dividend and interest income.

Payments or distributions made to a Non-United States Holder pursuant to the Out-of-Court Restructuring or the In-Court Restructuring will generally not be subject to backup withholding, provided that such Holder furnishes certification of its status as a Non-United States Holder (and any other required certifications), or is otherwise exempt from backup withholding. Generally, such certification is provided on IRS Form W-8BEN. Information reporting may apply to payments or distributions to a Non-United States Holder.

Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a Holder's United States federal income tax liability, and a Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing an appropriate claim for refund with the IRS.

RECOMMENDATION AND CONCLUSION

For all of the reasons set forth in this Offering Memorandum and Disclosure Statement, McLeodUSA believes that (i) exchange of its Notes for cash and shares of Class A common stock at the exchange rates set forth herein, and (ii) the consent to the amendments to the Indentures is preferable to all other alternatives. If McLeodUSA determines it is more advantageous and expeditious, McLeodUSA may commence a Chapter 11 case. In such event, McLeodUSA believes that the confirmation and consummation of the Plan will be preferable to other alternatives. Consequently, McLeodUSA urges (i) all Noteholders to tender such notes for exchange and to consent to the proposed Indenture Amendments to the Indentures, and (ii) all eligible Noteholders to vote to ACCEPT the Plan, and to complete and return their Letters of Transmittal and Consent and/or Notice of Guaranteed Delivery and Consent and the ballots so that they will be RECEIVED by the Depositary and the Voting Agent on or before 5:00 p.m., New York City Time, on January 15, 2002.

Dated: December 7, 2001
	MCLEODUSA INCORPORATED
	By:	/s/ CHRIS A. DAVIS Name: Chris A. Davis Title: Chief Operating and Financial Officer

174

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

MCLEODUSA INCORPORATED AND SUBSIDIARIES
Report of Independent Public Accountants		F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999		F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2000, 1999 and 1998		F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998		F-6
Notes to Consolidated Financial Statements		F-7
Consolidated Balance Sheets September 31, 2001 (unaudited) and December 31, 2000		F-33
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2001 and 2000		F-34
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000		F-35
Notes to Consolidated Financials Statements (unaudited)		F-36

F–1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
McLeodUSA Incorporated:

We have audited the accompanying consolidated balance sheets of McLeodUSA Incorporated (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of McLeodUSA Incorporated's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of McLeodUSA Incorporated and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.

Reference is made to Note 16 describing the Company's intended financial restructuring. The accompanying financial statements have been prepared on a going concern basis and do not reflect any adjustments that might result from an in-court consideration of the restructuring.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 29, 2001 (except with respect to
the matter discussed in Note 16, as to
which the date is December 6, 2001)

F–2

McLEODUSA INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In millions, except shares)

			December 31,
			2000			1999
ASSETS
Current Assets
	Cash and cash equivalents		$	15.7		$	326.9
	Investment in available-for-sale securities			64.7			934.1
	Trade receivables, net			354.0			183.8
	Inventory			25.1			27.5
	Deferred expenses			48.3			39.2
	Prepaid expenses and other			55.0			58.0

		Total current assets		562.8			1,569.5

Property and Equipment
	Land and building			118.4			85.1
	Telecommunications networks			1,411.4			635.9
	Furniture, fixtures and equipment			428.6			267.2
	Networks in progress			1,492.6			453.2
	Building in progress			5.1			1.2

				3,456.1			1,442.6
	Less accumulated depreciation			437.0			172.6

				3,019.1			1,270.0

Investments, Intangibles and Other Assets
	Other investments			29.2			35.9
	Goodwill, net			3,226.2			957.1
	Other intangibles, net			391.0			290.2
	Other			137.3			80.4

				3,783.7			1,363.6

Total Assets			$	7,365.6		$	4,203.1

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Current maturities of long-term debt		$	27.3		$	14.5
	Accounts payable			275.9			109.6
	Accrued payroll and payroll related expenses			43.0			26.2
	Other accrued liabilities			393.8			92.2
	Deferred revenue, current portion			52.6			24.1
	Customer deposits			53.8			30.1

		Total current liabilities		846.4			296.7
Long-Term Debt, less current maturities				2,732.2			1,763.8
Deferred Revenue, less current portion				12.1			15.8
Other Long-term liabilities				18.8			18.3

				3,609.5			2,094.6

Redeemable convertible preferred stock
	Preferred, Series B, redeemable, convertible, $.01 par value, authorized, issued and Outstanding 2000 275,000; 1999 275,000			687.5			687.5
	Preferred, Series C, redeemable, convertible, $.01 par value, authorized, issued and Outstanding 2000 125,000; 1999 125,000			312.5			312.5

				1,000.0			1,000.0

Stockholders' Equity
	Capital stock:
		Preferred, Series A, $.01 par value: authorized 1,150,000; issued and outstanding 2000 1,149,400 shares; 1999 1,150,000 shares		—			—
		Common, Class A, $.01 par value; authorized 2,000,000,000 shares; issued and outstanding 2000 606,596,945 shares and 1999 472,761,036 shares		6.1			4.8
		Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares; issued and outstanding 2000 none; 1999 none		—			—
	Additional paid-in capital			3,749.7			1,523.5
	Accumulated deficit			(1,027.1	)		(494.5	)
	Accumulated other comprehensive income			27.4			74.7

				2,756.1			1,108.5

Total Liabilities and Stockholders' Equity			$	7,365.6		$	4,203.1

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

F–3

McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In millions, except per share data)

				Year Ended December 31,
				2000			1999			1998
Revenue:
	Communications Services			$	1,035.7		$	602.5		$	372.0
	Local exchange services				88.9			78.4			67.8
	Directory				249.9			209.2			144.9
	Telemarketing				22.2			18.7			19.4

			Total revenue		1,396.7			908.8			604.1
Operating expenses:
	Cost of service (exclusive of depreciation shown separately below)				772.8			457.1			323.2
	Selling, general and administrative				563.2			392.7			260.9
	Depreciation and amortization				409.6			190.7			89.1
	Other				—			—			5.6

			Total operating expenses		1,745.6			1,040.5			678.8

			Operating loss		(348.9	)		(131.7	)		(74.7	)

Nonoperating income (expense):
	Interest income				47.8			42.6			26.0
	Interest (expense)				(151.4	)		(136.8	)		(78.2	)
	Other income (expense)				(0.4	)		5.6			2.0

			Total nonoperating expense		(104.0	)		(88.6	)		(50.2	)

			Loss before income taxes and extraordinary charge		(452.9	)		(220.3	)		(124.9	)
Income taxes					—			—			—

			Loss before extraordinary charge		(452.9	)		(220.3	)		(124.9	)
Extraordinary charge for early retirement of debt					(24.4	)		—			—

			Net loss		(477.3	)		(220.3	)		(124.9	)

Preferred stock dividend					(54.4	)		(17.7	)		—

			Net loss applicable to common shares	$	(531.7	)	$	(238.0	)	$	(124.9	)

Loss per common share:
		Loss before extraordinary charge		$	(0.91	)	$	(0.54	)	$	(0.33	)
		Extraordinary charge			(0.04	)		—			—

		Loss per common share		$	(0.95	)	$	(0.54	)	$	(0.33	)

Weighted average common shares outstanding					558.4			443.1			376.8

Other comprehensive income (loss):
	Unrealized gains on securities:
		Unrealized holding gains (losses) arising during the period		$	(46.1	)	$	83.4		$	3.0
		Less: Reclassification adjustment for losses (gains) included in net income			(1.2	)		(7.0	)		(2.2	)

			Total other comprehensive income (loss)		(47.3	)		76.4			0.8

			Comprehensive loss	$	(579.0	)	$	(161.6	)	$	(124.1	)

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

F–4

McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
(In millions, except shares)

		Common Stock
											Accumulated Other Comprehensive Income
						Additional Paid-In Capital		Accumulated Deficit
		Class A		Class B		Additional Paid-In Capital		Accumulated Deficit						Total
Balance, December 31, 1997			4.5		—		689.0		(131.6	)		(2.5	)		559.4
	Net loss		—		—		—		(124.9	)		—			(124.9	)
	Issuance of 1,353,785 shares of Class A common stock related to the exercise of stock options		—		—		3.7		—			—			3.7
	Issuance of 70,508 shares of Class A common stock in connection with the acquisition of NewCom Technologies, Inc. and NewCom OSP Services, Inc.		—		—		3.2		—			—			3.2
	Issuance of 151,019 shares of Class A common stock in connection with the acquisition of certain assets of Communications Cable-Laying Company, Inc.		—		—		6.0		—			—			6.0
	Issuance of 70,672 shares of Class A common stock in connection with the acquisition of certain assets of Inlet, Inc.		—		—		2.4		—			—			2.4
	Issuance of 82,602 shares of Class A common stock to participants in the 401(k) profit-sharing plans		—		—		2.6		—			—			2.6
	Issuance of 132,893 shares of Class A common stock to participants in the Employee Stock Purchase Plan		—		—		3.7		—			—			3.7
	Amortization of compensation expense related to stock options		—		—		5.9		—			—			5.9
	Other comprehensive income		—		—		—		—			0.8			0.8

Balance, December 31, 1998			4.5		—		716.5		(256.5	)		(1.7	)		462.8
	Net loss		—		—		—		(238.0	)		—			(238.0	)
	Issuance of 4,174,274 shares of Class A common stock related to the exercise of stock options		—		—		20.7		—			—			20.7
	Issuance of 25,397,456 shares of Class A common stock in connection with acquisitions.		0.3		—		487.7		—			—			488.0
	Issuance of 222,762 shares of Class A common stock to participants in the 401(k) profit-sharing plans		—		—		4.9		—			—			4.9
	Issuance of 313,909 shares of Class A common stock to participants in the Employee Stock Purchase Plan		—		—		4.4		—			—			4.4
	Issuance of 1,150,000 shares of Series A preferred stock		—		—		277.3		—			—			277.3
	Amortization of compensation expense related to stock options		—		—		6.9		—			—			6.9
	Issuance of 120,261 shares of Class A common stock to Series A preferred stockholders		—		—		5.1		—			—			5.1
	Other comprehensive income		—		—		—		—			76.4			76.4

Balance, December 31, 1999			4.8		—		1,523.5		(494.5	)		74.7			1,108.5
	Net loss		—		—		—		(531.7	)		—			(531.7	)
	Issuance of 23,162,175 shares of Class A common stock related to the exercise of stock options		0.2		—		52.0		—			—			52.2
	Issuance of 108,593,090 shares of Class A common stock in connection with acquisitions		1.0		—		2,133.2		(0.9	)		—			2,133.3
	Issuance of 208,229 shares of Class A common stock to participants in the 401(k) profit-sharing plans		—		—		3.9		—			—			3.9
	Issuance of 849,995 shares of Class A common stock to participants in the Employee Stock Purchase Plan		0.1		—		12.2		—			—			12.3
	Amortization of compensation expense related to stock options		—		—		5.5		—			—			5.5
	Issuance of 1,011,843 shares of Class A common stock to Series A preferred stockholders		—		—		19.4		—			—			19.4
	Other comprehensive income		—		—		—		—			(47.3	)		(47.3	)

Balance, December 31, 2000		$	6.1	$	—	$	3,749.7	$	(1,027.1	)	$	27.4		$	2,756.1

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

F–5

McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

					Year Ended December 31,
					2000			1999			1998
Cash Flows from Operating Activities
	Net loss				$	(477.3	)	$	(220.3	)	$	(124.9	)
	Adjustments to reconcile net loss to net cash (used in) operating activities:
		Depreciation				211.4			105.6			53.3
		Amortization				198.2			85.1			34.7
		Accretion of interest on senior discount notes				43.1			38.9			35.1
		Changes in assets and liabilities, net of effects of acquisitions:
			(Increase) in trade receivables			(63.4	)		(20.7	)		(6.4	)
			Decrease (Increase) in inventory			3.3			(12.7	)		(8.2	)
			(Increase) decrease in deferred expenses			(9.1	)		(4.0	)		0.9
			(Increase) decrease in prepaid expenses and other			63.2			10.2			(34.3	)
			(Increase) in other assets			(90.9	)		(27.2	)		(13.6	)
			Increase (decrease) in accounts payable and accrued expenses			(83.0	)		(16.9	)		32.2
			Increase in deferred revenue			11.0			10.5			4.6
			Increase in customer deposits			19.4			9.3			4.1

				Net cash used in operating activities		(174.1	)		(42.2	)		(22.5	)

Cash Flows from Investing Activities
	Purchase of property and equipment					(1,239.3	)		(599.7	)		(289.9	)
	Available-for-sale securities:
		Purchases				(599.8	)		(1,247.3	)		(607.4	)
		Sales				111.5			144.3			264.4
		Maturities				1,357.5			391.5			242.0
	Business acquisitions					(30.4	)		(230.8	)		(27.8	)
	Dividends received					4.2			—			—
	Other					1.7			(8.9	)		(5.2	)

				Net cash used in investing activities		(394.6	)		(1,550.9	)		(423.9	)

Cash Flows from Financing Activities
	Payments on contracts and notes payable					—			(26.2	)		(11.1	)
	Proceeds from long-term debt					565.6			485.8			583.9
	Payments on long-term debt					(345.3	)		(279.2	)		(10.9	)
	Net proceeds from issuance of common stock					64.5			18.0			7.7
	Net proceeds from preferred stock—Series A					—			278.1			—
	Net proceeds from preferred stock—Series B and C					(1.0	)		998.7			—
	Payments of preferred stock dividends					(26.3	)		(10.3	)		—

				Net cash provided by financing activities		257.5			1,464.9			569.6

				Net increase (decrease) in cash and cash equivalents		(311.2	)		(128.2	)		123.2
Cash and cash equivalents:
	Beginning					326.9			455.1			331.9

	Ending				$	15.7		$	326.9		$	455.1

Supplemental Disclosure of Cash Flow Information
	Cash payment for interest				$	148.4		$	108.8		$	37.7

Supplemental Schedule of Noncash Investing and Financing Activities
	Capital leases incurred for the acquisition of property and equipment				$	11.8		$	10.3		$	5.9

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

F–6

McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Significant Accounting Policies

Nature of business: McLeodUSA Incorporated (the "Company") is incorporated in Delaware and through its subsidiaries provides communications services to customers nationwide. The Company's business is highly competitive and is subject to various federal, state and local regulations.

The Company derives most of its revenue from its core business of providing communication services, including:

•: local and long distance services
•: dial and dedicated Internet access
•: higher bandwidth Internet access services, such as digital subscriber line (DSL) and cable modem
•: value-added services such as virtual private networks and web hosting
•: bandwidth leasing and colocation services
•: facilities and services dedicated for a particular customer's use
•: telephone and computer sales, leasing, networking, service and installation
•: other communications services, including video, cellular, operator, payphone, mobile radio and paging services

The Company also derives revenue from the following services related to our core business:

•: sale of advertising in print and electronic telephone directories
•: traditional local telephone company services in east central Illinois and southeast South Dakota
•: telemarketing services

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

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

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

Regulatory accounting: Illinois Consolidated Telephone Company ("ICTC") and Dakota Community Telephone, Inc., independent local exchange carriers (together the "ILECs") and wholly-owned subsidiaries of the Company, prepare their financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"). Management periodically reviews the criteria for applying these provisions to determine whether continuing application of SFAS No. 71 is appropriate. Management believes that such criteria are still being met and therefore has no current plans to change its method of accounting.

F–7

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

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

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

Trade receivables: Trade receivables include certain unbilled revenue from installment contracts related to the publication of telephone directories and recoverable costs not yet billed on network contracts. It is anticipated that a substantial portion of all such amounts at December 31, 2000 and 1999 will be collected within one year (see Note 2).

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

Property and equipment: Property and equipment is stated at cost. Network in progress includes construction costs, including interest, capitalized during the construction and installation of fiber optic telecommunications networks. These costs are considered in progress until the networks become operational at which time the costs are reclassified as telecommunications network assets. Interest expense was also capitalized as part of the construction of the Company's headquarters buildings and the development of the Company's software.

The ILECs' property and equipment for their regulated operations is summarized as follows at December 31, 2000 (in millions):

Telephone plant:
	In service	$	150.4
	Under construction		1.5

			151.9
	Less accumulated depreciation		(29.5	)

		$	122.4

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

F–8

The provision for depreciation of regulated property and equipment is based upon remaining life rates for property placed in service through 1980 and equal life rates for property additions placed in service after 1980. The regulated provision is equivalent to an annual composite rate of 6.85% for 2000.

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

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

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

Other investments: Other investments primarily includes approximately $20.8 million for a minority interest in a limited partnership which provides cellular services to customers in east central Illinois. The Company follows the equity method of accounting for this investment, which recognizes the Company's proportionate share of the income and losses accruing to it under the terms of its partnership agreement.

Goodwill: Goodwill resulting from the Company's acquisitions is being amortized over a range of 15 to 30 years using the straight-line method and the acquisitions are periodically reviewed for impairment based upon an assessment of future operations to ensure that it is appropriately valued. Accumulated amortization on goodwill totaled $185.4 million and $52.1 million at December 31, 2000 and 1999, respectively.

Other intangibles: Other intangibles consist of customer lists and noncompete agreements related to the Company's acquisitions, line installation costs incurred in the establishment of local access lines for customers and franchise rights to provide cable services to customers in three Illinois counties and in a Michigan city. The customer lists and noncompete agreements are being amortized using the straight-line method over periods ranging from 3 to 15 years. The deferred line installation costs are being amortized using the straight-line method over 36 to 60 months, which approximates the average lives of residential and business customer contracts. The franchise rights are being amortized using the straight-line method over periods ranging from 10 to 15 years. Accumulated amortization on the other intangibles totaled $113.0 million and $60.7 million at December 31, 2000 and 1999, respectively.

Impairment: In accordance with SFAS 121, whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable, we assess long-lived assets to be held and used for impairment. We recognize an impairment loss if the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset. The impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Income tax matters: The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between

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the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Net deferred tax assets are reduced by a valuation allowance when appropriate (see Note 6). Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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

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

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

The ILECs' prescribed rate of return on interstate access revenues for 2000 continues to be 11.25%, as it has been since the FCC's represcription order in December 1990. The FCC's rate of return rules also establishes a maximum for the overall interstate rate of return by allowing up to 0.25% over the prescribed rate, and also establishes a maximum rate of return for each individual access element by allowing up to 0.40% over the prescribed rate per element.

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

Revenues from directories are recorded upon publication.

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

Effective January 1, 2000, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB No. 101"), the Company changed its accounting for certain activation and reactivation fees charged to its customers and for certain inducements paid to acquire new customers. The Company now defers these fees and inducements and records the related revenue and reduction of revenue over the average customer contract periods rather than recording the revenues and charges when received or paid. This change in accounting policy did not have a material effect on results of operations or financial position.

Cost of service and deferred expenses: Cost of service includes local and long-distance services purchased from certain MegaBells and interexchange carriers, the cost of providing local exchange services to customers in the ILEC's service area and the cost of operating the Company's fiber optic telecommunications networks. Cost of service also includes production costs associated with the

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publication of directories and direct costs associated with telemarketing services and the sale and installation of telephone systems.

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

Key business suppliers: Qwest, Ameritech/SBC and Verizon are the Company's primary suppliers of non-owned local central office switching and local lines.

Stock options issued to employees: The Company follows the provisions of SFAS No. 123,Accounting for Stock-Based Compensation, which establishes a fair value based method for the financial reporting of its stock-based employee compensation plans. As permitted under SFAS 123, the Company measures compensation using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees. Under this method, compensation is measured as the difference between the market value of the stock on the grant date, less the amount required to be paid for the stock. The difference, if any, is charged to expense over the vesting period of the options.

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

Stock options issued to nonemployees: The Company uses the Black-Scholes model to determine the fair value of the stock options issued to nonemployees at the date of grant. This amount is amortized to expense over the vesting period of the options.

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

Fair value of financial instruments: The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of the instruments. The fair value of the Company's long-term debt is estimated to be $2.6 billion based on the quoted market rates for the same or similar issues or the current rates offered to the Company for debt with similar maturities.

Common stock splits: On June 30, 1999, the Company announced a two-for-one stock split in the form of a stock dividend on the Company's Class A common stock. The record date for the stock split was July 12, 1999 and the distribution of the additional shares took place on July 26, 1999. On February 29, 2000, the Company announced a three-for-one stock split in the form of a stock dividend on the Company's Class A common stock. The record date for the stock split was April 4, 2000 and the distribution of the additional shares took place on April 24, 2000. All share data in the consolidated financial statements and notes to the financial statements have been adjusted to reflect the stock splits.

Reclassifications: Certain items in the 1999 and 1998 consolidated financial statements have been reclassified to be consistent with the presentation in the 2000 consolidated financial statements.

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Note 2. Trade Receivables

The composition of trade receivables, net is as follows:

	December 31
	2000			1999
	(In millions)
Billed	$	323.4		$	165.7
Unbilled		120.4			59.5

		443.8			225.2
Less allowance for doubtful accounts and discounts		(89.8	)		(41.4	)

	$	354.0		$	183.8

Note 3. Investments

At December 31, 2000, the Company held $18.3 million and $44.3 million in corporate debt securities and marketable equity securities, respectively. At December 31, 1999, the Company held $1,123.8 million, $23.0 million and $89.7 million in corporate debt securities, United States Government and governmental agency securities and marketable equity securities, respectively. The Company has classified these securities as available-for-sale, and at December 31, 2000 and 1999, the debt securities' amortized cost approximates fair value. The marketable equity securities have been recorded at their fair market value at December 31, 2000. The available-for-sale securities have been classified as cash and cash equivalents, and investment in available-for-sale securities-current, with $2.1 million and $60.5 million, respectively, being recorded in each classification at December 31, 2000. Also reported in investments is $4.2 million of restricted cash held as collateral to support outstanding letters of credit assumed under the Splitrock acquisition. At December 31, 1999, $302.4 million and $934.1 million, were recorded as cash and cash equivalents and available-for-sale securities, respectively.

The contractual maturities of the available-for-sale securities of $18.3 million and $1,237 million in 2000 and 1999, respectively, are due within one year. Expected maturities will differ from contractual maturities because the issuers of certain debt securities have the right to call or prepay their obligations without any penalties. The amount classified as current assets on the accompanying balance sheets represent the expected maturities of the debt securities during the next year.

Note 4. Pledged Assets and Debt

On May 31, 2000, the Company entered into $1.3 billion of Senior Secured Credit Facilities (together the "Credit Facilities") with a syndicate of financial institutions. The credit facilities consist of (1) a seven year Senior Secured Revolving Facility with an aggregate principal amount of $450 million (the "Revolving Credit Facility"), (2) a seven year Senior Secured Multi-Draw Term Loan Facility with an aggregate principal amount of $275 million ("Tranche A Term Facility"), and (3) an eight year single draw Senior Secured Term Loan with an aggregate principal amount of $575 million ("Tranche B Term Facility"). The Tranche A Term Facility provides for multiple ($50 million minimum) draws for the first 24 months of the agreement at which time any undrawn commitments expire. At December 31, 2000, the Tranche B Term Facility was drawn in full and the balance of the Tranche A Term Facility and Revolving Credit Facility remained undrawn.

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The Credit Facilities are secured by (1) a first priority pledge of all the capital stock owned by the Company and by each subsidiary, and (2) a perfected first priority security interest in substantially all of the Company's tangible and intangible assets and, to the extent of $100 million, by the assets of each subsidiary. In addition, telecommunications assets acquired with proceeds or refinanced from the Credit Facilities serve as collateral.

Interest on the Credit Facilities is payable quarterly at LIBOR plus 1% to LIBOR plus 3.25% based on the Company's debt rating. At December 31, 2000, the Company's interest rates were LIBOR plus 2.25% on the Revolving Facility and Tranche A Term Facility, and LIBOR plus 3.0% on the Tranche B Term Facility (9.21% at December 31, 2000). A commitment fee of 0.5% to 1.0% per annum is charged on the undrawn portion of the commitment relating to the Revolving Facility and the Tranche A Term Facility. During 2000, the commitment fee on the unused portion of the Credit Facilities was $4.2 million.

Upon the acquisition of Splitrock Services, Inc., all of their 11.75% Senior Notes due 2008 remained outstanding. The debt was recorded by the Company at fair market value, as determined by quoted market prices on the date of acquisition. On July 11, 2000 the Company completed its offer, commenced on May 31, 2000, to purchase all of the outstanding Splitrock Senior Notes. The Company recognized an extraordinary charge of $24.4 million or $0.04 per share as a result of the repurchase. The cost to repurchase the notes was the aggregate of the principal amount of $260.9 million plus accrued interest and call premium of $55.4 million.

On October 30, 2000, in conjunction with the CapRock Communications Corp. acquisition, the Company made an offer to exchange (the "Exchange Offer") CapRock's $210 million 11.5% Senior Notes due May 1, 2009 and $150 million 12% Senior Notes due July 15, 2008 ("CapRock Senior Notes") for McLeodUSA. $210 million 11.5% Senior Notes due May 1, 2009 and $150 million 12% Senior Notes due July 15, 2008 (together the "McLeodUSA Exchange Notes"). The Company filed a registration statement with the SEC for the registration of the McLeodUSA Notes. The Exchange Offer was completed on December 14, 2000, at which time all of the CapRock Senior Notes were exchanged for the McLeodUSA Exchange Notes. Interest on $210 million of the McLeodUSA Exchange Notes is payable in cash semi-annually in arrears on May 1 and November 1, commencing May 1, 2001. Interest on $150 million of the McLeodUSA Exchange Notes is payable in cash semi-annually in arrears on January 15 and July 15, commencing January 15, 2001. The McLeodUSA Exchange Notes rankpari passu in right of payment with all existing and future senior unsecured indebtedness of the Company and rank senior in right of payment to all existing and future subordinated indebtedness.

The $210 million and $150 million CapRock Senior Notes were recorded by the Company upon acquisition, net of discounts of $7.7 million and $1.2 million, respectively. The fair market values were determined based upon quoted market prices on the date of acquisition. The discount will be amortized as a component of interest expense over the life of the senior notes to their $210 million and $150 million face values by May 1, 2009 and July 15, 2008, respectively.

On February 22, 1999, the Company completed a private offering of its 8¹/8% Senior Notes due February 15, 2009, for which the Company received net proceeds of approximately $485.8 million. All of the February 1999 privately placed Senior Notes were exchanged in July 1999 for publicly registered Senior Notes having the same principal amount and interest rate. Interest on the February 1999 Senior Notes is payable in cash semi-annually in arrears on August 15 and February 15. The February 1999 Senior Notes rankpari passu in right of payment with all existing and future senior unsecured

F–13

indebtedness of the Company and rank senior in right of payment to all existing and future subordinated indebtedness.

Covenants associated with most of the Company's debt impose operating and financial restrictions on the Company and its subsidiaries. These restrictions, among others, affect, and in certain cases significantly limit or prohibit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make distributions in respect of the Company's or such subsidiaries' capital stock, make other restricted payments, enter into sale and leaseback transactions, create liens upon assets, enter into transactions with affiliates or related persons, sell assets, or consolidate, merge or sell all or substantially all of their assets. These covenants also require the maintenance of certain financial covenants and minimum access service lines. These conditions were satisfied as of December 31, 2000.

The Company's debt consisted of the following at December 31, 2000 and 1999:

	2000		1999
	(In millions)
Tranche B Term Facility, variable rate due May 30, 2008	$	575.0	$	—
10¹/2% Senior Discount Notes due March 1, 2007		443.9		400.8
9¹/4% Senior Notes due July 15, 2007		225.0		225.0
8³/8% Senior Notes due March 15, 2008		300.0		300.0
9¹/2% Senior Notes due November 1, 2008		300.0		300.0
8¹/8% Senior Notes due February 15, 2009		500.0		500.0
11¹/2% Senior Notes due May 1, 2009		202.3		—
12% Senior Notes due July 15, 2008		148.8		—
Greene County Partners, Inc. senior notes due in quarterly payments of $450,000 bearing interest at 6.35% and maturing in April 2001		9.9		11.7
ICTC Series K, 8.620% First Mortgage Bonds due September 2022 (A)		10.0		10.0
ICTC Series L, 7.050% First Mortgage Bonds due October 2013 (A)		10.0		10.0
Capitalized Lease payable, due in various installments payments, bearing interest at 3.90% to 11.5%, with final payment due in December 2004		30.9		11.5
Note payable due in various annual installments, including interest at 8.25%, through 2006. Collateralized by publishing rights to purchased directories		0.5		0.5
Other long-term borrowings, due in various installments bearing interest at rates ranging from 0% to 9.75% through March 2004		3.1		3.5
Note Payable, bearing interest at 5%, due January, 2000		—		4.6
Incentive compensation agreements, due in various estimated amounts plus interest at 6.0% through January 2001		0.1		0.6

		2,759.5		1,778.2
Less current maturities		27.3		14.4

	$	2,732.2	$	1,763.8

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

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In 1996, the Company used a portion of the proceeds from the Company's initial public offering to pay off all existing indebtedness under three line of credit facilities, which were then canceled. Options to purchase shares of Class B common stock, $.01 par value, of the Company were granted to a stockholder which had guaranteed borrowings under two of the facilities. The Company used the Black-Scholes model to determine the value of the options, which was approximately $3.4 million, at the date of grant. This value was being amortized over the vesting period of the options. Upon cancellation of the credit facilities, the options' vesting schedule and amortization of the fair value of the options were terminated. A total of 4,687,500 and 7,804,128 Class B common stock options were outstanding at December 31, 2000 and December 31, 1999, respectively.

Principal payments required on the outstanding debt at December 31, 2000 are as follows (in millions):

2001	$	27.3
2002		14.4
2003		4.5
2004		6.6
2005		5.8
Later years		2,700.9

	$	2,759.5

Note 5. Leases and Commitments

Leases: The Company leases certain of its office and network facilities under noncancelable agreements which expire at various times through September 2022. These agreements require various monthly rentals plus the payment of applicable property taxes, maintenance and insurance. The Company also leases vehicles and equipment under both operating and capital lease agreements which expire at various times through January 2009 and require various monthly rentals. Amortization on the capitalized assets is included in depreciation expense. Interest rates are imputed at 3.9% to 11.5%.

F–15

The total minimum commitment at December 31, 2000 under the operating and capital leases mentioned above is as follows (in millions):

	Capital Leases		Operating Leases
2001	$	19.6	$	37.6
2002		13.8		29.9
2003		0.7		33.7
2004		0.1		31.7
2005		—		25.3
Remaining		—		79.3

		34.2		237.5

Less amount representing interest		3.3

Present value of net minimum lease payments		30.9
Less current portion of obligations under capital leases		16.5

Long-term obligations under capital leases		14.4

The total rental expense included in the consolidated statements of operations for 2000, 1999 and 1998 is approximately $59.1 million, $21.9 million, and $19.8 million, respectively, which also includes short-term rentals for office facilities.

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

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Note 6. Income Tax Matters

Net deferred taxes consist of the following components as of December 31, 2000 and 1999:

		2000		1999
		(In millions)
Deferred tax assets:
	Net operating loss carryforwards	$	586.1	$	214.0
	Accruals and reserves not currently deductible		48.3		35.9
	Deferred revenues		8.9		11.3
	Intangibles and other assets		9.1		8.5
	Other		10.2		5.1

			662.6		274.8
	Less valuation allowance		520.5		169.6

			142.1		105.2

Deferred tax liabilities:
	Property and equipment		60.6		64.3
	Other investments		21.3		15.9
	Differences in revenue recognition		3.9		9.6
	Deferred line installation cost		43.5		11.9
	Other		12.8		3.5

			142.1		105.2

		$	—	$	—

A valuation allowance has been recognized to offset the related net deferred tax assets due to the uncertainty of realizing the benefit of the loss carryforwards. The Company has available net operating loss carryforwards totaling approximately $1,357 million which expire in various amounts in the years 2008 to 2020.

The income tax rate differs from the U. S. Federal income tax rate for 2000, 1999 and 1998 due to the following:

		2000		1999		1998
"Expected" tax (benefit) rate		(35	)%	(35	)%	(35	)%
Percent increase (decrease) in income taxes resulting from:
	Change in valuation allowance	33		36		34
	Tax deductions due to exercises of incentive stock options	(9	)	(7	)	(2	)
	Goodwill amortization for stock purchases	11		5		6
	Other	0		1		(3	)

		—	%	—	%	—	%

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McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

Note 7. Stock-based Compensation Plans

At December 31, 2000, the Company has various stock-based compensation plans which are described below. Grants under the Company's stock option plans are accounted for in accordance with Accounting Principles Board (APB) Opinion No. 25 and related Interpretations. The Company granted a total of 9,922,128 stock options in January and February 1996 at an exercise price of $0.445 per share. The estimated aggregate fair market value of these options at the date of grant was later determined to exceed the aggregate exercise price by approximately $9,190,000. Additionally, in September 1997, the Company granted a total of 8,813,670 stock options at an exercise price of $4.08 per share. The aggregate fair market value of these options at the date of grant exceeded the aggregate exercise price by approximately $15,790,000. As a result, the Company is amortizing these amounts over the four-year vesting period of the options. Compensation cost of $4,995,000, $6,629,000, and $5,820,000 has been charged to income for the years ended December 31, 2000, 1999 and 1998, respectively, using the intrinsic value based method as prescribed by APB No. 25. Had compensation cost for all of the stock-based compensation plans been determined based on the grant date fair values of awards granted during 2000, 1999 and 1998, as prescribed by SFAS No. 123, reported net loss and loss per common share would have been as follows (in millions, except per share data):

	December 31,
	2000			1999			1998
Pro forma net loss	$	(744.4	)	$	(307.6	)	$	(151.2	)
Pro forma loss per common share		(1.33	)		(0.69	)		(0.40	)

1992, 1993 and 1995 Incentive Stock Option Plans: The Company has reserved 4,144,608 shares of its Class A common stock, $.01 par value ("Class A common stock"), for issuance to employees under the 1992, 1993 and 1995 Incentive Stock Option Plans. Options outstanding under these plans were granted at prices equal to the estimated fair market value on the dates of grant as determined by the Company's Board of Directors. Under the 1992 and 1993 plans, all options granted become exercisable at a rate of 25% per year, on a cumulative basis, and expire seven years after the date of grant. Under the 1995 plan, all options, except for options granted to the Company's chairman and chief executive officer, become exercisable at a rate of 25% per year, on a cumulative basis, beginning five years from the date of grant. The options granted to the Company's chairman and chief executive officer vest at a rate of 20% per year on a cumulative basis. All options granted under the 1995 plan expire ten years after the date of grant. These plans have been superseded by the 1996 Employee Stock Option Plan, and no future grants of options will be made under these plans.

1996 Employee Stock Option Plan: In 1997, the Company's stockholders approved an amendment to the 1996 Employee Stock Option Plan to increase the number of Class A common shares available under the plan to 225,000,000 shares from 27,150,000 shares. At December 31, 2000, after adjusting for option exercises, the Company has reserved 206,610,493 shares of Class A common stock for issuance under the plan, which supersedes the 1992, 1993 and 1995 Incentive Stock Option Plans. The exercise price for incentive stock options granted under this plan is no less than the fair market value, as defined in the Plan of the Company's Class A common stock on the date of the grant (or 110% of the fair market value if the grantee beneficially owns more than 10% of the outstanding Class A common stock). The options granted expire ten years after the grant date (or five years after the grant date if the grantee beneficially owns more than 10% of the outstanding Class A common stock) and vest over periods determined by the Compensation Committee. However, options will qualify as incentive stock options only to the extent that the aggregate exercise price for options that become first exercisable by

F–18

an employee in any calendar year does not exceed $100,000. The 1996 Plan will terminate in March 2006, unless terminated earlier by the Board of Directors.

In 2000, in connection with the Splitrock and CapRock acquisitions, the Company substituted 9,051,372 options under the 1996 Employee Stock Option Plan for options which were outstanding under Splitrock and CapRock option plans at the time of acquisition. The options were converted to the Company's plan based on a conversion ratio, which resulted in a different number of options and exercise price than the options originally granted by Splitrock or CapRock, but retained the same terms as the original grant, including the grant date, expiration date, vesting schedule and total exercise cost.

Directors' Stock Option Plan: The Company has reserved, after adjusting for option exercises, 3,986,250 shares of Class A common stock for issuance under the Directors' Plan to directors who are not officers or employees of the Company. The Director's Plan was adopted and approved by the stockholders in 1993. The Plan was amended and restated in 1996 to be a "formula" plan providing for an automatic grant of options to eligible directors. In 1999 a further amendment and restatement to the Plan was adopted and approved by stockholders. Under the Plan as currently amended and restated each eligible director who commences service after the 1999 amendment and restatement will be granted an initial option to purchase from 60,000 to 120,000 shares of Class A common stock, such amount to be determined by the Board of Directors in its discretion. Each such eligible director also will be granted an additional option to purchase up to 60,000 shares of Class A common stock after each subsequent annual meeting of the stockholders. In addition each eligible director may receive discretionary options to purchase shares of Class A common stock as may be determined by the Board of Directors in its discretion. However, no more than an aggregate of 600,000 shares of Class A common stock may be granted as discretionary options under the plan as currently amended and restated. Options granted under the Directors' Plan vest at a rate of 25% per year, on a cumulative basis, and expire seven years after the date of grant (ten years after the date of grant for options granted under the amended and restated plan). However, upon a change in control of the Company as defined in the Directors' Plan, all options will become fully exercisable. The Company has the right to repurchase any Class A common stock issued pursuant to the exercise of an option granted under this plan that is offered for sale to an individual who is not an employee or director of the Company. The Directors' Plan will terminate in March 2006, unless terminated earlier by the Board of Directors.

The fair value of each grant under the Company's stock option plans is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 2000, 1999 and 1998, respectively: no expected dividends, risk-free interest rates of 6.36%, 6.26% and 4.65%; price volatility of 90.52%, 68.44% and 59.39% and expected lives of 4 years for grants in 2000, 1999 and 1998.

Employee Stock Purchase Plan: Under the stock purchase plan, employees may purchase up to an aggregate of 6,000,000 shares of Class A common stock through payroll deductions. Employees of the Company who have been employed more than 90 days and who are regularly scheduled to work more than 20 hours per week are eligible to participate in the plan, provided that they own less than five percent of the total combined voting power of all classes of stock of the Company. The purchase price for each share will be determined by the Compensation Committee, but may not be less than 85% of the closing price of the Class A common stock on the first or last trading day of the applicable purchase period, whichever is lower. No employee may purchase in any calendar year Class A common stock having an aggregate fair value in excess of $25,000 as determined by the closing price of the

F–19

Class A common stock on the first trading day of the relevant purchase period or periods. Upon termination of employment, an employee other than a participating employee who is subject to Section 16(b) under the Securities Exchange Act of 1934, as amended, will be refunded all moneys in his or her account and the employee's option to purchase shares will terminate. The plan will terminate in March 2006, unless terminated earlier by the Board of Directors. The Company implemented this plan effective February 1, 1997. Under the plan, the Company sold 849,995 shares of Class A common stock in 2000, 941,727 shares in 1999 and 797,358 shares in 1998. The fair value of the employees' purchase rights was calculated for disclosure purposes using the Black-Scholes model with the following assumptions: an expected life of 6 months in 2000 and 12 months in both 1999 and 1998; a risk-free interest rate of 6.36% in 2000, 6.26% in 1999 and 4.65% in 1998; expected volatility of 90.52% in 2000, 68.44% in 1999 and 59.39% in 1998; and no expected dividends. The weighted average fair value of each purchase right granted in 2000 was $7.25, in 1999 was $6.05 and in 1998 was $5.38.

A summary of the status of the Company's stock option plans as of and for the years ended December 31, 2000, 1999 and 1998 is as follows (in thousands, except price data):

		Shares		Weighted- Average Exercise Price
Outstanding at January 1, 1998		63,648		$	2.40
	Granted	37,638			5.21
	Exercised	(8,238	)		0.45
	Forfeited	(19,422	)		5.98

Outstanding at December 31, 1998		73,626			3.12
	Granted	44,961			7.33
	Exercised	(12,483	)		1.87
	Forfeited	(4,830	)		5.36

Outstanding at December 31, 1999		101,274			4.99

	Granted	43,190			19.03
	Substituted and converted in connection with acquisitions	9,051			9.55
	Exercised	(19,438	)		2.61
	Forfeited	(7,176	)		11.44

Outstanding at December 31, 2000		126,901			10.08

	Number of Options
	2000		1999		1998
Exercisable, end of year		31,938		21,279		16,656

Weighted-average fair value per option of options granted during the year	$	12.48	$	4.11	$	3.03

F–20

McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

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

Other pertinent information related to the options outstanding at December 31, 2000 is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
$0.13 to $0.70	5,613,277	3.5	$	0.45	4,600,777	$	0.47
$0.71 to $2.96	9,649,745	6.1		2.89	3,066,702		2.74
$3.10 to $4.96	26,683,083	7.5		4.26	10,822,652		4.28
$5.02 to $7.50	25,905,303	8.0		6.30	6,465,261		6.11
$7.51 to $11.25	13,969,322	8.5		8.25	3,490,235		8.32
$11.26 to $16.87	7,308,031	9.1		13.88	2,173,953		14.02
$17.25 to $17.54	24,587,479	3.9		17.52	27,181		17.28
$17.55 to $20.46	9,656,333	9.2		20.42	165,950		18.28
$20.47 to $30.70	2,531,150	9.2		22.22	132,829		23.15
$30.71 to $124.48	996,859	8.8		71.99	992,017		72.09

	126,900,582	7.0	$	10.08	31,937,557	$	7.33

In addition, options to purchase shares of Class B common stock were granted to a stockholder which had guaranteed borrowings under certain credit facilities which were paid off with a portion of the proceeds from the Company's initial public offering. Those options which are still held by the stockholder have an exercise price of $0.2444 and were fully vested at December 31, 2000.

Note 8. Capital Stock Information and Stockholders' Agreements

Authorized Capital Stock. Under the certificate of incorporation, the Company has the authority to issue 2,034,000,000 shares of capital stock, consisting of 2,000,000,000 shares of Class A common stock, par value $.01 per share; 22,000,000 shares of Class B common stock, par value $.01 per share; 2,000,000 shares of serial preferred stock, par value $.01 per share; and 10,000,000 shares of Class II serial preferred stock, par value $.001 per share.

Redeemable Convertible Preferred Stock: Pursuant to a Stock Purchase Agreement dated August 30, 1999 (the "Stock Purchase Agreement"), the Company issued on September 15, 1999 (the "Issue Date") 275,000 shares of Series B preferred stock, par value $.01 per share, ("Series B preferred stock") and 125,000 shares of Series C preferred stock, par value $.01 per share, ("Series C preferred stock" and together with the Series B preferred stock, the "Preferred Shares") through a private offering. Net proceeds from the financing amounted to approximately $1 billion. The Preferred Shares are redeemable on a proportionally equal basis, in whole or in part, by the Company at any time following the seventh anniversary of the Issue Date, or by the holders within 180 days following the tenth anniversary of the Issue Date. The Preferred Shares are convertible on a proportionally equal basis, at the Series B holders option, in whole or in part at any time into Class A Common Stock. Shares of each series will have a liquidation preference of $2,500.00 per share plus accrued and unpaid dividends, if any, and will be convertible into shares of the Company's Class A common stock at a rate of (a) the liquidation preference divided by (b) $12.16667. Each share of Series B preferred stock is

F–21

entitled to receive a quarterly dividend of approximately $31.82. Dividends are cumulative and payable quarterly on March 31, June 30, September 30, and December 31. If prior to the fifth anniversary of the Issue Date the Company pays a dividend on its Class A common stock, par value $.01 per share ("Class A common stock"), holders of the Preferred Shares shall be entitled to receive an equivalent dividend calculated on a common stock equivalent basis as if the Preferred Shares had been converted into Class A common stock. Holders of Series B preferred stock are not entitled to voting rights other than the right to vote as a series for the election of two additional members to the Board of Directors. Board representation decreases as the outstanding shares of the Series B preferred stock decreases. Holders of Series C preferred stock are not entitled to voting rights other than the right to vote as a series for the election of one observer to the Board of Directors. Board representation decreases as the outstanding shares of the Series C preferred stock decreases. The Series B and Series C preferred stock rank on a parity with the company's 6.75% Series A cumulative convertible preferred stock, par value $.01 per share (the "Series A preferred stock"), with respect to dividend rights and rights on liquidation.

Cumulative Convertible Preferred Stock: The Company issued one million shares of its Series A preferred stock on August 11, 1999 and an additional 150,000 shares on August 23, 1999. Holders of Series A preferred stock are entitled to receive cumulative dividends at an annual rate of 6.75% of the liquidation preference payable quarterly on each February 15, May 15, August 15 and November 15. The quarterly dividend is $4.21875 per share, payable at the Company's option in cash or shares of its Class A common stock. Series A preferred stock is convertible at the option of its holder, unless previously redeemed, at any time after the issue date, into shares of its Class A common stock at a conversion rate of 25.79979 shares of Class A common stock for each share of Series A preferred stock (representing a conversion price of $9.69 per share of Class A common stock), subject to adjustment in certain events. In addition, if on or after August 15, 2002, the closing price of its Class A common stock has equaled or exceeded 135% of the conversion price for at least 20 out of 30 consecutive business days, the Company will have the option to convert all of the Series A preferred stock into Class A common stock at the then current conversion rate. The holders of the Series A preferred stock will not be entitled to any voting rights unless payments of dividends on the Series A preferred stock are in arrears and unpaid for an aggregate of six or more quarterly dividend payments.

Stockholders' Agreements: The Company has various agreements with significant stockholders, which among other things, restrict the sale of equity securities without the prior written consent of the Company and establish certain representation on the board of directors for certain significant stockholders. These Agreements terminate at various dates through December 31, 2002.

Note 9. Change-of-Control Agreements

Change-of-Control Agreements: The Company has entered into change-of-control agreements with certain executive employees, which provide for certain payments in connection with termination of employment after a change of control (as defined within the agreements) of the Company. The change-of-control agreements terminate on December 31, 2006 unless a change of control occurs during the six-month period prior to December 31, 2006, in which case the agreements terminate on December 31, 2007. The agreements provide that if an executive terminates his or her employment within six months after a change of control or if the executive's employment is terminated within 24 months after a change of control in accordance with the terms and conditions set forth in the

F–22

agreements, the executive will be entitled to certain benefits. The benefits include cash compensation, immediate vesting of outstanding stock options and coverage under the Company's group health plan.

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

Note 10. Retirement Plans and Postretirement Benefits

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

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

F–23

The change in benefit obligations and the change in plan assets for 2000 and 1999, and the components of net periodic benefit costs and the weighted-average assumptions for 2000, 1999 and 1998, are as follows (in millions):

	Pension Benefits						Postretirement Benefits
	2000			1999			2000			1999
Change in benefit obligations
Benefit obligation at beginning of year	$	41.3		$	45.1		$	5.5		$	4.6
Service cost		.7			.8			.1			.1
Interest cost		3.0			2.9			.4			.4
Benefits paid		(2.1	)		(2.8	)		(.2	)		(.2	)
Actuarial gains		(.4	)		(4.7	)		(.2	)		.6

Benefit obligation at end of year	$	42.5		$	41.3		$	5.6		$	5.5

Change in plan assets	��
Fair value of plan assets at beginning of year	$	54.4		$	52.2		$	—		$	—
Actual return on plan assets		1.7			5.0			—			—
Employer contributions		—			—			.2			.2
Benefits paid		(2.1	)		(2.8	)		(.2	)		(.2	)

Fair value of plan assets at end of year	$	54.0		$	54.4		$	—		$	—

Funded status	$	11.5		$	13.1		$	(5.5	)	$	(5.5	)
Unrecognized net actuarial gain		(16.7	)		(18.6	)		(3.0	)		(3.0	)
Unrecognized prior service cost		3.5			4.0			(1.9	)		(2.0	)
Unrecognized transition (asset) or obligation		(.1	)		(.1	)		3.6			3.9

Accrued benefit cost	$	(1.8	)	$	(1.6	)	$	(6.8	)	$	(6.6	)

	Pension Benefits									Postretirement Benefits
	2000			1999			1998			2000			1999			1998
Components of net periodic benefit costs
Service cost	$	.7		$	.8		$	.7		$	.1		$	.1		$	.1
Interest cost		3.0			2.9			3.9			.4			.4			.4
Expected return on plan assets		(4.2	)		(4.1	)		(5.0	)		—			—			—
Amortization of prior service costs		.5			.5			.5			(.2	)		(.2	)		(.2	)
Amortization of transitional obligation		—			—			—			.4			.4			.4
Recognized actuarial gain		(1.1	)		(.9	)		(1.7	)		(.2	)		(.1	)		(.2	)

Net periodic benefit cost	$	(1.1	)	$	(.8	)	$	(1.6	)	$	.5		$	.6		$	.5

Weighted-average assumption as of December 31
Discount rate		7.5	%		7.5	%		7	%		7.5	%		7.5	%		7	%
Expected return on plan assets		8	%		8	%		8	%		—			—			—
Rate of compensation increase		5	%		5	%		5	%		5	%		5	%		5	%

F–24

McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

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

The postretirement benefit obligation is calculated assuming that health-care costs increased by 8.0% in 2000 and 7.5% in 2001, and that the rate of increase thereafter (the health-care cost trend rate) will decline to 5% in 2006 and subsequent years. The health-care cost trend rate has a significant effect on the amounts reported for costs each year as well as on the accumulated postretirement benefit obligation. For example, a one percentage point increase each year in the health-care trend rate would have the following effects:

(in millions)		One Percentage Point Increase			One Percentage Point Decrease
Effect on total of service and interest cost components in 2000		$	0.04		$	0.04
Effect on year-end 2000 postretirement benefit obligations		$	0.4		$	(0.4)

The weighted average discount rate used in determining the benefit obligation was 7.5% in 2000.

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

Prior to January 1, 2000, pension benefits for substantially all employees of DTG were provided through the National Telephone Cooperative Association Retirement and Security Program (a defined benefit plan) and Savings Plan (a defined contribution plan) (together the "NTCA Plans"). On January 1, 2000, employees of DTG were given the option of remaining in the NTCA Plans or joining the Company's 401(k) profit-sharing plan. Substantially all employees elected to participate in the Company's 401(k) profit-sharing plan. The Company continues to make annual contributions to the NTCA Plans equal to the amounts accrued for pension expense on the remaining employees. The Retirement and Security Program is a multi-employer plan and the accumulated benefits and plan assets are not determined or allocated separately by the individual employer. The total pension costs for 2000 and 1999 were $33,000 and $393,000.

The Company also has various 401(k) profit-sharing plans available to eligible employees. The Company contributed Company stock valued at approximately $3.9 million, $3.0 million and $2.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. An additional discretionary 1998 contribution of stock valued at $1.5 million was also made.

In addition the Company has a nonqualified deferred compensation plan, which allows selected employees to defer a portion of any compensation received. Those deferred amounts are invested in various funds at December 31, 2000 to provide assets and accumulated earnings to offset the deferred compensation amounts due to the participating employees.

Note 11. Acquisitions

Talking Directories, Inc. (Talking Directories) and Info America Phone Books, Inc. (Info America): On February 10, 1999, the Company acquired Talking Directories in exchange for 15.3 million shares of its Class A common stock. In a related and concurrent transaction, on February 10, 1999, the Company acquired Info America in exchange for 7.2 million shares of its Class A common stock. The Company also paid outstanding obligations of Talking Directories and Info America of approximately $27 million.

F–25

Dakota Telecommunications Group, Inc. (DTG): On March 5, 1999, the Company acquired DTG in exchange for approximately 5.7 million shares of its Class A common stock, and the assumption of approximately $31 million in DTG debt.

Ovation Communications, Inc. (Ovation): On March 31, 1999, the Company acquired Ovation in exchange for approximately 33.6 million shares of its Class A common stock, and the payment of approximately $121.3 million in cash to the stockholders of Ovation. The total purchase price was approximately $310.2 million based on the average closing price of the Company's Class A common stock five days before and after the date of the acquisition agreement. The Company also assumed approximately $105.6 million in Ovation debt.

Access Communications Holdings, Inc. (Access) and S.J. Investments Holdings, Inc. (SJIH): On August 14, 1999, the Company acquired Access and SJIH in exchange for approximately 11.6 million shares of its Class A common stock, and the payment of $48.3 million in cash to the stockholders of Access and SJIH. The Company also assumed approximately $96.7 million in Access and SJIH debt.

Splitrock Services, Inc. (Splitrock): On March 30, 2000, the Company acquired Splitrock pursuant to the Amended Plan of Merger dated February 11, 2000, in exchange for approximately 93.2 million shares of Class A common stock. The total purchase price was approximately $2.3 billion based on the average closing price of the Company's Class A common stock five days before and after January 6, 2000, the initial date of the Merger Agreement. Approximately $261 million in Splitrock debt remained outstanding after the closing. This debt has been paid off (Note 4). The purchase price includes approximately $29.4 million of direct acquisition costs.

CapRock Communications Corp. (CapRock): On December 7, 2000, the Company acquired CapRock pursuant to an Agreement and Plan of Merger, dated October 2, 2000, in exchange for approximately 15.0 million shares of Class A common stock. The total purchase price was approximately $579 million based on average closing price of the Company's Class A common stock for the ten trading days beginning five days prior to October 2, 2000, the date the merger agreement was announced, and ending four days after such announcement, plus the principal amount of outstanding CapRock senior notes of $360 million. The purchase includes approximately $11 million of costs directly attributed to the merger.

F–26

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

Transaction Year:	2000			1999			1998
Cash purchase price	$	30.4		$	230.8		$	27.8
Acquisition costs		112.2			8.7			0.2
Contracts payable		—			3.0			9.3
Option agreements		103.3			0.8			—
Promissory notes		59.1			14.8			1.0
Stock issued		2,045.0			480.2			11.4
Note received		—			(1.6	)		—

	$	2,350.0		$	736.7		$	49.7

Working capital acquired, net	$	(88.1	)	$	(16.4	)	$	(0.1	)
Fair value of other assets acquired		765.3			133.0			13.5
Goodwill and other intangibles		2,318.1			874.0			38.7
Liabilities assumed		(645.3	)		(253.9	)		(2.4	)

	$	2,350.0		$	736.7		$	49.7

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

The unaudited consolidated results of operations for the years ended December 31, 2000 and 1999 on a pro forma basis as though the above entities had been acquired as of the beginning of the respective periods are as follows:

	2000			1999
	(In millions, except per share data)
Revenue	$	1,685.8		$	1,273.7
Net loss applicable to common shares		(616.9	)		(351.2	)
Loss per common share		(1.04	)		(0.62	)

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

Note 12. Related Party Transactions

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

The Company provided and purchased services from various companies, the principals of which are stockholders or directors of McLeodUSA Incorporated or are affiliates. Revenues from services provided totaled $6.1 million, $4.2 million and $3.7 million and services purchased, primarily rent, legal

F–27

services and database verification services, totaled $20.6 million, $5.0 million and $3.1 million for the years ended December 31, 2000, 1999 and 1998, respectively.

In December 1998, the Company entered into a split dollar arrangement for life insurance policies owned by the McLeod Family 1998 Special Trust (the "Owner") on the joint lives of Clark and Mary McLeod (the "McLeods"). The Owner agreed to assign the policies to the Company as collateral for the premium payments. No loans have been taken against these policies. The premium payments paid by the Company totaled $1.9 million in both 2000 and 1999. The aggregate face amount of the policies is $113 million. The McLeod Family 1998 Special Trust is sole owner and beneficiary of each policy. The Company has agreed with Clark and Mary McLeod that one of the principal reasons for entering into this arrangement is to avoid the need for their heirs to liquidate their holdings of Class A common stock at or soon after the death of one or both of them. Clark and Mary McLeod have agreed to restrictions on their ability to sell or otherwise dispose of their shares of Class A common stock. The Company also paid premiums of $71,000 in both 2000 and 1999 for a universal life policy on Clark and Mary McLeod with a face value of $13.5 million. The Company is the beneficiary of this policy.

Note 13. Quarterly Data—(Unaudited)

The following tables include summarized quarterly financial data for the years ended December 31:

		Quarters
		First			Second			Third			Fourth
		(In millions, except per share data)
2000:
	Revenue	$	288.3		$	331.8		$	366.6		$	410.0
	Operating loss		(42.6	)		(101.5	)		(98.5	)		(106.3	)
	Net loss		(58.5	)		(125.7	)		(152.2	)		(140.9	)
	Loss applicable to common shares		(72.1	)		(139.3	)		(165.8	)		(154.5	)
	Loss per common share		(0.15	)		(0.24	)		(0.28	)		(0.26	)
1999:
	Revenue	$	181.1		$	222.7		$	241.1		$	263.9
	Operating loss		(26.3	)		(32.5	)		(36.7	)		(36.2	)
	Net loss		(47.5	)		(61.4	)		(58.4	)		(53.0	)
	Loss applicable to common shares		(47.5	)		(61.4	)		(62.5	)		(66.6	)
	Loss per common share		(0.12	)		(0.14	)		(0.14	)		(0.14	)
1998:
	Revenue	$	134.3		$	155.7		$	148.6		$	165.5
	Operating loss		(20.8	)		(17.3	)		(21.3	)		(15.3	)
	Net loss		(30.3	)		(29.8	)		(33.0	)		(31.8	)
	Loss applicable to common shares		(30.3	)		(29.8	)		(33.0	)		(31.8	)
	Loss per common share		(0.08	)		(0.08	)		(0.09	)		(0.08	)

F–28

McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

Note 14: Information by Business Segment

The Company operates predominantly in three reportable operating segments: (1) providing telecommunications and related services, such as local and long distance service and expanding fiber optic network; (2) selling advertising space in telephone directories, and publishing and distributing directories to local area subscribers; and (3) providing end-to-end data communications. These business segments have separate management teams and infrastructures that offer different products and services.

The acquisition of Splitrock on March 30, 2000 introduced our third business segment, end-to-end data communications services. Since the data segment was not part of McLeodUSA prior to March 30, 2000, the table below does not reflect any data activity in 1999 and 1998.

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

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

In 2000, 1999 and 1998, no single customer or group under common control represented 10% or more of the Company's sales.

F–29

Segment information for the years 2000, 1999 and 1998 was as follows (in millions):

	Telecommunications			Directory			Data			Corporate			Total
2000
Revenues	$	1,040.5		$	253.9		$	102.3		$	—		$	1,396.7

EBITDA		68.3			43.2			(20.1	)		(30.6	)		60.8
Depreciation and amortization		(187.8	)		(32.4	)		(38.8	)		(150.6	)		(409.6	)
Interest Income		1.1			.6			1.1			45.0			47.8
Interest Expense		(4.7	)		—			(9.4	)		(137.3	)		(151.4	)
Other		(.3	)		(.1	)		(.3	)		.2			(.5	)

Net Income (Loss)		(123.4	)		11.3			(67.5	)		(273.3	)		(452.9	)

Total assets		3,110.2			521.1			277.5			3,456.8			7,365.6
Capital expenditures		1,707.3			66.5			94.1			1,721.5			3,589.4
1999
Revenues	$	697.5		$	211.3			N/A		$	—		$	908.8

EBITDA		44.4			33.8			N/A			(19.2	)		59.0
Depreciation and amortization		(117.8	)		(30.0	)		N/A			(42.9	)		(190.7	)
Interest Income		1.9			—			N/A			40.7			42.6
Interest Expense		(6.4	)		(.7	)		N/A			(129.7	)		(136.8	)
Other		7.0			(.1	)		N/A			(1.3	)		5.6

Net Income (Loss)		(70.9	)		3.0			N/A			(152.4	)		(220.3	)

Total assets		1,729.6			441.3			N/A			2,032.2			4,203.1
Capital expenditures		716.9			217.2			N/A			382.5			1,316.6
1998
Revenues	$	459.2		$	144.9			N/A		$	—		$	604.1

EBITDA		13.1			18.8			N/A			(11.9	)		20.0
Depreciation and amortization		(56.1	)		(9.8	)		N/A			(23.2	)		(89.1	)
Interest Income		.9			.1			N/A			25.0			26.0
Interest Expense		(5.2	)		—			N/A			(73.0	)		(78.2	)
Other		(4.0	)		(.1	)		N/A			.5			(3.6	)

Net Income (Loss)		(51.3	)		9.0			N/A			(82.6	)		(124.9	)

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

F–30

Note 15: Effects of New Accounting Standards

Accounting for Derivative Instruments and Hedging Activities

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that entities recognize all derivatives as either assets or liabilities at fair market value on the balance sheet. The Company does not currently hold any derivative instruments or engage in hedging activities. As such, the adoption of SFAS 133 as of January 1, 2001 had no effect on the Company's operations.

Business Combinations and Intangible Assets—Accounting for Goodwill

On February 14, 2001, the FASB issued an Exposure Draft "Business Combinations and Intangible Assets—Accounting for Goodwill." The Exposure Draft requires the use of a non-amortization approach to account for purchased goodwill and for separately recognized (non-goodwill) intangible assets that have an indefinite useful economic life. Under this approach, goodwill and intangibles would not be amortized, but would be written down and expensed against earnings only in periods in which the recorded value exceeds the fair value. The Company has not yet quantified the impacts of adopting the new Exposure Draft, but it could result in significant changes to amortization expense and the classification and recording of intangibles currently on the books, as well as any future acquisitions.

Note 16: Subsequent Events

$750 million 11³/8% Senior Notes.

On January 16, 2001 the Company completed a public offering of $750 million aggregate principal amount of its 11³/8% Senior Notes due January 1, 2009 (the "January 2001 Senior Notes"), yielding net proceeds of approximately $734.3 million. Interest on the January 2001 Senior Notes will be payable in cash semi-annually in arrears on January 1 and July 1 of each year, commencing July 1, 2001.

Operational Restructuring

Beginning in August 2001, the Company developed and began implementing a plan designed to re-focus its business on its core areas of expertise. During September 2001, the Company's Board of Directors approved a plan to implement a number of significant changes to its operations as part of its restructuring efforts. In particular, the Company's plan established that it will:

•: focus its business on its core, 25-state footprint located in the Midwestern and Western United States,
•: abandon its national data network,
•: reduce its employment force by approximately 15%
•: reduce the number of its facilities from a total of 11 to 3
•: reduce its capital expenditures in 2002
•: divest non-core business assets.

F–31

As a result of the operational restructuring, the Company recorded a $2.9 billion charge during September 2001. The charge primarily resulted from the write-down of goodwill and other long-lived assets.

Financial Restructuring

Under the terms and conditions of its proposed exchange offer and consent solicitation, the Company intends to restructure its existing capital structure. Following is a summary of the major features of the restructuring. The Company's Senior Secured Credit Facilities would be amended; its Senior Notes would be exchanged for shares of Class A common stock and cash (the "exchange offer"); upon shareholder approval, its Series A, D and E preferred stock would be reclassified into a certain number of shares of common stock; and upon shareholder approval, its existing shares of Class A common stock will be reclassified in to a lesser number of Class A common shares. In addition, the Company would raise $635 million from (1) the sale of its directory publishing business for not less than $535 million and (2) the sale of preferred stock and warrants for $100 million, with $560 million in proceeds to be paid to holders of Senior Notes.

The Company is pursuing this restructuring via two alternative methods simultaneously, an out-of-court alternative and an in-court alternative. If the exchange offer is consummated and the required shareholder approvals are obtained, the Company will implement the restructuring via the out-of-court alternative. However, if the exchange offer is not consummated or the required shareholder approvals are not received, the Company will consider effectuating the restructuring by filing a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code.

In addition, there could be substantial additional write offs of goodwill and other intangible assets as a result of the adoption of SFAS 141 "Accounting for Business Combinations" and SFAS 142 "Accounting for Goodwill and Other Intangible Assets" or the adoption of fresh start accounting under the in-court alternative.

The accompanying financial statements have been prepared on a going concern basis and do not include any adjustments that might result if the in-court alternative is elected.

Splitrock Disposition

F–32

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)

			September 30, 2001			December 31, 2000
			(Unaudited)
ASSETS
Current Assets
	Cash and cash equivalents		$	63.4		$	15.7
	Investment in available-for-sale securities			3.6			64.7
	Trade receivables, net			314.0			337.8
	Inventory			14.9			25.1
	Deferred expenses			47.9			48.3
	Prepaid expenses and other			23.4			55.0

		TOTAL CURRENT ASSETS		467.2			546.6

Property and equipment
	Land and buildings			117.9			118.4
	Communications networks			1,656.7			1,411.4
	Furniture, fixtures and equipment			498.1			428.6
	Networks in progress			1,057.8			1,497.7

				3,330.5			3,456.1
Less accumulated depreciation				650.0			437.0

				2,680.5			3,019.1

Investments, Intangibles and Other Assets
	Other investments			31.6			29.2
	Goodwill, net			1,092.7			3,226.2
	Other intangibles, net			398.5			391.0
	Other			122.1			137.3

				1,644.9			3,783.7

			$	4,792.6		$	7,349.4

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Current maturities of long-term debt		$	12.6		$	27.3
	Accounts payable			192.6			275.9
	Accrued payroll and payroll related expenses			39.5			43.0
	Other accrued liabilities			393.8			393.8
	Deferred revenue, current portion			19.0			36.4
	Customer deposits			35.2			53.8

		TOTAL CURRENT LIABILITIES		692.7			830.2
Long-term debt, less current maturities				3,694.0			2,732.2
Deferred revenue, less current portion				16.0			12.1
Other long-term liabilities				16.5			18.8

				4,419.2			3,593.3

Redeemable convertible preferred stock
	Preferred, Series B, redeemable, convertible, $.01 par value, authorized, issued and outstanding 2001 none; 2000 275,000			—			687.5
	Preferred, Series C, redeemable, convertible, $.01 par value, authorized, issued and outstanding 2001 none; 2000 125,000			—			312.5
	Preferred, Series D, redeemable, convertible, $.01 par value, authorized, issued and outstanding 2001 275,000; 2000 none			104.0			—
	Preferred, Series E, redeemable, convertible, $.01 par value, authorized, issued and outstanding 2001 125,000; 2000 none			43.0			—

				147.0			1,000.0

Stockholders' Equity
	Capital Stock:
		Preferred, Series A, $.01 par value: authorized, issued and outstanding 2001 1,149,375 shares; 2000 1,149,400 shares		—			—
		Common, Class A, $.01 par value; authorized 2,000,000,000 shares; issued and outstanding 2001 626,950,228 shares; 2000 606,596,945 shares		6.3			6.1
		Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares; issued and outstanding 2001 and 2000 none		—			—
	Additional paid-in capital			3,843.2			3,749.7
	Accumulated deficit			(3,621.1	)		(1,027.1	)
	Accumulated other comprehensive income			(2.0	)		27.4

				226.4			2,756.1

			$	4,792.6		$	7,349.4

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

F–33

McLEODUSA INCORPORATED AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In millions, except per share data)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2001			2000			2001			2000
Revenues:
	Communications services		$	354.7		$	278.2		$	1,057.6		$	721.6
	Local exchange services			21.2			21.6			64.1			63.8
	Directory			69.8			60.7			221.0			185.3
	Other			4.8			6.1			14.4			16.0

		TOTAL REVENUES		450.5			366.6			1,357.1			986.7
Operating expenses:
	Cost of service (exclusive of depreciation shown separately below)			271.4			204.2			791.5			548.6
	Selling, general and administrative			187.4			147.3			517.4			403.9
	Depreciation and amortization			167.2			113.6			471.4			276.8
	Restructuring, asset impairment and other charges			2,907.2			—			2,935.4			—

		TOTAL OPERATING EXPENSES		3,533.2			465.1			4,715.7			1,229.3

		OPERATING LOSS		(3,082.7	)		(98.5	)		(3,358.6	)		(242.6	)
Nonoperating income (expense):
	Interest income			0.8			12.2			9.7			43.1
	Interest expense, net of amounts capitalized			(66.2	)		(40.7	)		(180.8	)		(113.6	)
	Other income (expense)			39.7			(0.7	)		116.5			1.2

		TOTAL NONOPERATING EXPENSE		(25.7	)		(29.2	)		(54.6	)		(69.3	)

		LOSS BEFORE EXTRAORDINARY CHARGE		(3,108.4	)		(127.7	)		(3,413.2	)		(311.9	)
Extraordinary charge on early retirement of debt				—			(24.5	)		—			(24.5	)

	NET LOSS			(3,108.4	)		(152.2	)		(3,413.2	)		(336.4	)
Gain on exchange of preferred stock				851.2			—			851.2			—
Preferred stock dividend				(4.8	)		(13.6	)		(32.0	)		(40.8	)

	NET LOSS APPLICABLE TO COMMON SHARES		$	(2,262.0	)	$	(165.8	)	$	(2,594.0	)	$	(377.2	)

Loss per common share:
	Loss before extraordinary charge		$	(3.62	)	$	(0.24	)	$	(4.20	)	$	(0.65	)
	Extraordinary charge			—			(0.04	)		—			(0.04	)

	Loss per common share		$	(3.62	)	$	(0.28	)	$	(4.20	)	$	(0.69	)

Weighted average common shares outstanding				625.5			583.3			617.8			547.3

Other comprehensive loss, net of tax:
	Unrealized holding losses arising during the period			(3.8	)		(30.5	)		(5.6	)		(21.1	)
		Less: reclassification adjustment for gains included in net income		10.5			(0.5	)		23.8			1.8

		TOTAL OTHER COMPREHENSIVE LOSS		(14.3	)		(30.0	)		(29.4	)		(22.9	)

		COMPREHENSIVE LOSS	$	(2,276.3	)	$	(195.8	)	$	(2,623.4	)	$	(400.1	)

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

F–34

McLEODUSA INCORPORATED AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

					Nine Months Ended September 30,
					2001			2000
Cash Flows from Operating Activities
	Net loss				$	(3,413.2	)	$	(336.4	)
	Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
		Depreciation				280.0			142.7
		Amortization				191.4			134.1
		Accretion of interest on senior discount notes				36.1			31.7
		Gain on the sale of assets				(121.7	)		—
		Restructuring, asset impairment and other charges				2,926.8			—
		Changes in assets and liabilities, net of acquisitions:
			Trade receivables			(26.3	)		(59.0	)
			Inventory			10.2			(3.2	)
			Deferred expenses			0.4			(3.6	)
			Prepaid expenses and other			8.5			49.2
			Accounts payable and accrued expenses			(255.8	)		32.0
			Deferred revenue			(13.5	)		23.1
			Customer deposits			(18.6	)		17.4

				NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(395.7	)		28.0

Cash Flows from Investing Activities
	Purchases of property and equipment					(578.4	)		(876.5	)
	Other assets					(47.6	)		(32.4	)
	Available-for-sale securities:
		Purchases				(69.6	)		(556.9	)
		Sales				129.4			34.4
		Maturities				—			1,232.3
	Proceeds from the sale of assets					132.8			—
	Business acquisitions					(21.8	)		(25.3	)
	Other					(3.7	)		(42.8	)

			NET CASH USED IN INVESTING ACTIVITIES			(458.9	)		(267.2	)

Cash Flows from Financing Activities
	Net proceeds from long-term debt					909.3			554.6
	Payments on long-term debt					(15.4	)		(313.2	)
	Net proceeds from issuance of common stock					34.7			42.0
	Payments of preferred stock dividends					(26.3	)		(17.5	)

			NET CASH PROVIDED BY FINANCING ACTIVITIES			902.3			265.9

			NET INCREASE IN CASH AND CASH EQUIVALENTS			47.7			26.7
Cash and cash equivalents:
	Beginning					15.7			326.9

	Ending				$	63.4		$	353.6

Supplemental Disclosure of Cash Flow Information:
	Cash payment for interest				$	216.8		$	117.6

Supplemental Schedule of Noncash Investing and Financing Activities
	Capital leases incurred for the acquisition of property and equipment				$	9.8		$	7.7

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

F–35

McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of and for the Three and Nine Months Ended
September 30, 2001 and 2000 is Unaudited)

Note 1:Basis of Presentation

Interim Financial Information (unaudited): The financial statements and related notes as of September 30, 2001, and for the three and nine month periods ended September 30, 2001 and 2000, are unaudited, but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations. The operating results for the interim periods are not indicative of the operating results to be expected for a full year or for other interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission ("SEC"). Although management believes that the disclosures provided are adequate to make the information presented not misleading, management recommends that you read these consolidated condensed financial statements in conjunction with the audited consolidated financial statements and the related footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the SEC on March 30, 2001.

Reclassifications: Certain items in the consolidated balance sheet for the period ending December 31, 2000 have been reclassified to be consistent with the presentation in the September 30, 2001 unaudited financial statements.

Note 2:Supplemental Asset Data

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

		September 30, 2001			December 31, 2000
		(In millions)
Trade Receivables:
	Billed	$	344.1		$	323.4
	Unbilled		86.3			120.4

			430.4			443.8
Allowance for doubtful accounts and discounts			(116.4	)		(106.0	)

		$	314.0		$	337.8

Note 3:Acquisitions

Intelispan, Inc.: On May 31, 2001, we acquired Intelispan, Inc., which provides managed network services to customers, in exchange for approximately 3.4 million shares of its Class A common stock. The total purchase price was approximately $37.8 million based on the average closing price of the Company's Class A common stock for the ten trading days beginning five days prior to and ending four days after the announcement of the merger agreement.

One Source PhoneGuide Inc.: On January 19, 2001, we acquired a directory company, One Source PhoneGuide Inc., for cash consideration and promissory notes totaling approximately $26.6 million.

F–36

Splitrock Services, Inc. (Splitrock): On March 30, 2000, the Company acquired Splitrock pursuant to the Amended Plan of Merger dated February 11, 2000, in exchange for approximately 93.2 million shares of Class A common stock. The total purchase price was approximately $2.3 billion based on the average closing price of the Company's Class A common stock five days before and after January 6, 2000, the initial date of signing the Merger Agreement. Approximately $261 million in Splitrock debt remained outstanding after the closing. This debt has been retired.

CapRock Communications Corp. (CapRock): On December 7, 2000, the Company acquired CapRock pursuant to an Agreement and Plan of Merger, dated October 2, 2000, in exchange for approximately 15.0 million shares of Class A common stock. The total purchase price was approximately $579 million based on the average closing price of the Company's Class A common stock for the ten trading days beginning five days prior to October 2, 2000, the date the merger was announced, plus the principal amount of outstanding CapRock senior notes of $360 million. These CapRock senior notes were exchanged for senior notes of the Company.

The following table summarizes the purchase price allocations for business acquisitions in the nine months ended September 30, 2001 and 2000 (in millions):

Transaction Year:	2001			2000
Cash purchase price	$	21.8		$	25.4
Acquisition costs		0.9			43.7
Promissory notes		4.8			56.7
Stock issued		37.8			1,838.3
Option agreements		—			103.3

	$	65.3		$	2,067.4

Working capital acquired, net	$	(0.7	)	$	15.8
Fair value of other assets acquired		4.0			184.5
Intangibles		62.0			2,157.8
Liabilities assumed		—			(290.7	)

	$	65.3		$	2,067.4

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

The following is the unaudited consolidated results of operations for the nine months ended September 30, 2000 on a pro forma basis as though Splitrock and CapRock had been acquired as of January 1, 2000 (in millions, except per share data):

Revenue	$	1,208.7
Net loss applicable to common shares		(422.1	)
Loss per common share		(0.71	)

F–37

Note 4: Restructuring and Impairment Charges

During the second quarter of 2001, the Company instituted a plan to reduce costs and focus operations on its core 25 state footprint. In conjunction with this plan, the Company recorded a $28.2 million charge for the reduction of its workforce by approximately 900 employees and the termination of leases associated with the abandonment of office and equipment space. During the third quarter of 2001, the Company decided on a comprehensive restructuring of its business. Under this restructuring the Company decided to (1) abandon its plans for a national network and place the associated assets up for sale; (2) sell other non-core and non-operating assets; (3) further reduce the workforce by approximately 1,500 employees and (4) consolidate and eliminate certain existing duplicative facilities.

The Company also recorded a charge to operating income of approximately $35 million in the third quarter associated with balance sheet adjustments to various accounts such as prepaid expenses, receivables and bad debt reserves.

Included in the write down is approximately $2.1 billion in goodwill and other intangible assets which originated from numerous acquisitions, most notably Splitrock. In addition, the Company reduced long-lived assets and construction work-in-progress associated with Splitrock by approximately $260 million to appropriately mark those assets to fair value. As a result of abandoning the Company's plans for a national network, the Company has decided to sell certain assets acquired in the Splitrock transaction and other businesses which are no longer considered core strategic businesses.

In addition to the operating assets above, the Company has reduced other long-lived assets and construction work-in-progress by $313.0 million to reflect the net realizable value of certain non-core assets which the Company plans to actively market and sell over the next twelve months. These assets represented approximately $8 million and $25 million of depreciation for the three and nine month periods ended September 30, 2001 and approximately $30 million of depreciation for the year ended December 31, 2001.

F–38

The following table shows the charges, uses and remaining liability by segment for the nine months ended September 30, 2001 (in millions):

Communication Services	Second quarter charges		Third quarter charges		Reductions through September 30, 2001		Remaining liability
Goodwill and other intangible assets	$	—	$	2,123.8	$	2,123.8	$	—
Long-lived assets and construction work-in-progress		—		573.1		573.1		—
Employee separations		9.6		10.1		7.6		12.1
Facility closure costs		7.4		127.9		39.3		96.0
Other contractual commitments		—		60.9		—		60.9

Total	$	17.0	$	2,895.8	$	2,743.8	$	169.0

Other	Second quarter charges		Third quarter charges		Reductions through September 30, 2001		Remaining liability
Employee separations	$	3.2	$	1.4	$	2.1		2.5
Facility closure costs		8.0		—		0.4		7.6

Total	$	11.2	$	1.4	$	2.5	$	10.1

The facilities closure costs reflected above, relate to both leased and owned facilities and include space which houses both equipment and personnel. We will terminate numerous technical facility leases (those facilities which house telecommunications equipment) and will consolidate 11 facilities which house administrative, technical and service personnel into 3 remaining locations.

Note 5: Information by Business Segment

The Company operates predominantly in two reportable operating segments: (1) Communications Services: providing communications and related services, such as local and long distance service, providing end-to-end data communications, telecommunications network sales and expanding fiber optic network; and (2) Directory: selling advertising space in telephone directories, and publishing and distributing directories to local area subscribers. These business segments have separate management teams and infrastructures that offer different products and services.

The Company previously reported under three operating segments after the acquisition of Splitrock on March 30, 2000. The former Splitrock entity operations were reported under the Data segment. Due to changes in the Company's structure and the way it evaluates performance, the Data segment has been combined with the Communications Services segment. The three and nine month periods ended September 30, 2000 have been restated for this change.

F–39

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

In 2001 and 2000, no single customer or group under common control represented 10% or more of the Company's sales.

Segment information for the three and nine months ended September 30, 2001 and 2000 was as follows (in millions):

	Communications Services			Directory			Other			Total
Three months ended September 30, 2001
Revenues	$	380.7		$	69.8		$	—		$	450.5

EBITDA	$	(11.9	)	$	11.3		$	(7.7	)	$	(8.3	)
Depreciation and Amortization		(109.8	)		(8.9	)		(48.5	)		(167.2	)
Interest Income		—			—			0.8			0.8
Interest Expense		(1.3	)		—			(64.9	)		(66.2	)
Restructuring Charge and Other		(2,895.8	)		—			(11.4	)		(2,907.2	)
Taxes and Other		4.3			—			35.4			39.7

Net Income (Loss)	$	(3,014.5	)	$	2.4		$	(96.3	)	$	(3,108.4	)

Nine months ended September 30, 2001
Revenues	$	1,136.1		$	221.0		$	—		$	1,357.1

EBITDA	$	23.3		$	40.4		$	(15.5	)	$	48.2
Depreciation and Amortization		(293.5	)		(26.9	)		(151.0	)		(471.4	)
Interest Income		0.3			0.1			9.3			9.7
Interest Expense		(3.3	)		—			(177.5	)		(180.8	)
Restructuring Charge and Other		(2,912.6	)		—			(22.8	)		(2,935.4	)
Taxes and Other		(2.4	)		(0.3	)		119.2			116.5

Net Income (Loss)	$	(3,188.2	)	$	13.3		$	(238.3	)	$	(3,413.2	)

As of September 30, 2001
Total assets	$	2,986.7		$	515.5		$	1,290.4		$	4,792.6
Three months ended September 30, 2001
Capital expenditures, including acquisitions	$	120.3		$	0.6		$	4.7		$	125.6
Nine months ended September 30, 2001
Capital expenditures, including acquisitions	$	538.3		$	32.4		$	68.1		$	638.8

F–40

McLEODUSA INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

(Information as of and for the Three and Nine Months Ended
September 30, 2001 and 2000 is Unaudited)

	Communications Services			Directory			Other			Total
Three months ended September 30, 2000
Revenues	$	304.7		$	61.9		$	—		$	366.6

EBITDA	$	14.9		$	9.5		$	(9.3	)	$	15.1
Depreciation and Amortization		(62.1	)		(8.6	)		(42.9	)		(113.6	)
Interest Income		0.5			0.1			11.6			12.2
Interest Expense		(1.7	)		—			(39.0	)		(40.7	)
Taxes and Other		(1.4	)		—			0.7			(0.7	)

Net Income (Loss) before extraordinary charge		(49.8	)		1.0			(78.9	)		(127.7	)
Extraordinary charge								(24.5	)		(24.5	)

Net Income (Loss)	$	(49.8	)	$	1.0		$	(103.4	)	$	(152.2	)

Nine months ended September 30, 2000
Revenues	$	798.6		$	188.1		$	—		$	986.7

EBITDA	$	21.8		$	36.0		$	(23.6	)	$	34.2
Depreciation and Amortization		(151.7	)		(23.6	)		(101.5	)		(276.8	)
Interest Income		1.8			0.5			40.8			43.1
Interest Expense		(11.8	)		—			(101.8	)		(113.6	)
Taxes and Other		(5.0	)		(0.1	)		6.3			1.2

Net Income (Loss) before extraordinary charge		(144.9	)		12.8			(179.8	)		(311.9	)
Extraordinary charge								(24.5	)		(24.5	)

Net Income (Loss)	$	(144.9	)	$	12.8		$	(204.3	)	$	(336.4	)

As of September 30, 2000
Total assets	$	2,523.5		$	498.9		$	3,647.3		$	6,669.7
Three months ended September 30, 2000
Capital expenditures, including acquisitions	$	308.5		$	16.2		$	7.2		$	331.9
Nine months ended September 30, 2000
Capital expenditures, Including acquisitions	$	860.6		$	59.2		$	2,024.9		$	2,944.7

Note 6: Effects of New Accounting Standards

Accounting for Business Combinations

In July 2001, the FASB issued SFAS No. 141, "Accounting for Business Combinations," effective for all business combinations initiated and made after June 30, 2001. SFAS 141 requires all business combinations be accounted for under the purchase method and establishes additional reporting requirements for business combinations. The Company currently accounts for all business combinations under the purchase method and does not expect adoption of this statement to have an effect on the Company's operations.

F–41

Accounting for Goodwill and Other Intangible Assets

In July 2001, the FASB issued SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Early implementation is not allowed. SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and for separately recognized (non-goodwill) intangible assets that have an indefinite useful life. Under this approach, goodwill and intangibles with indefinite lives will not be amortized, but will be periodically reviewed for impairment and expensed against earnings only in periods in which the recorded value exceeds the fair value. The Company has not yet quantified the impacts of adopting this statement, but it could result in significant changes to amortization expense and the classification and recording of intangibles currently on the books, as well as any future acquisitions.

Accounting for Asset Retirement Obligations

In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the legal or contractual removal obligation is incurred. The statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the impact that the statement will have on its financial position and the results of operations.

Accounting for the Impairment or Disposal of Long-Lived Assets

SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"was issued in October, 2001. The statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company is currently evaluating the impact that the statement will have on its financial position and the results of operations.

Note 7: Asset Sales

During the third quarter, the Company received aggregate net proceeds of $53.6 million and recorded gains of $40.8 million related to sales of its remaining PCS licenses, available-for-sale equity securities and two incumbent local telephone service exchanges.

Note 8: Redeemable Convertible Preferred Stock

Pursuant to an Exchange Agreement, dated September 30, 2001, (the "Exchange Agreement") the Company and the holders of the Series B and C Preferred Shares executed a one-for-one exchange of all 275,000 shares of Series B Preferred and all 125,000 shares of Series C Preferred (collectively referred to as the "Original Redeemable Preferred Shares") for 275,000 shares of Series D Preferred and 125,000 shares of Series E Preferred (collectively referred to as the "New Redeemable Preferred Shares") in a non-cash transaction. The provisions of the New Redeemable Preferred Shares essentially mirror those of the Original Redeemable Preferred Shares except no dividends (other than the common equivalent dividend as provided for in the Original Redeemable Preferred Shares) will be paid on the New Redeemable Preferred Shares and the New Redeemable Preferred Shares shall be

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convertible into the shares of the Company's Class A common stock at a rate of (a) the liquidation preference of $2,500 per share divided by (b) $6.10 (unless subsequently adjusted). The New Redeemable Preferred Shares rank on a parity with the Company's 6.75% Series A Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), with respect to dividend rights and rights on liquidation.

The exchange of the Original Redeemable Preferred Shares for the New Redeemable Preferred Shares was based on the fair value of those securities at the date of the Exchange Agreement. For financial accounting purposes, the carrying value of the Original Redeemable Preferred Shares ($1.0 billion) over the fair value of the New Redeemable Preferred Shares ($147.0 million) was recorded as a gain on preferred stock exchange, net of transaction costs, and has reduced the Company's reported net loss to arrive at net loss available to common stockholders for the period ended September 30, 2001. The New Redeemable Preferred Shares are redeemable on a proportionally equal basis, in whole or in part, by the holders within 180 days following September 15, 2009. The Company can declare mandatory conversion after September 15, 2006 if the 60 day average market price of the Class A common stock exceeds the conversion price by at least 1%. The New Redeemable Preferred Shares will accrete for book purposes to its liquidation value of $1 billion by September 15, 2009, using the effective interest method, which will reduce prospective earnings available to common stockholders.

Note 9: Cumulative Convertible Preferred Stock

The Company elected not to declare the quarterly stock dividend on its 6.75% Series A Cumulative Convertible Preferred Stock that otherwise would have been payable on November 15, 2001. The dividend is payable in cash or in shares of McLeodUSA Class A Common Stock at a rate of $4.21875 per share of Series A Preferred Stock owned. The dividend will continue to accumulate at the rate of 6.75% annually. As of September 30, 2001, cumulative unpaid dividends totaled approximately $2.4 million.

Note 10: Subsequent Events

Debt Draws

On October 19, 2001, the Company drew an additional $200 million under its $1.3 billion Secured Credit Facility, leaving an undrawn committed balance of approximately $342 million as of November 14, 2001. In the Third Amendment to the Secured Credit Facility the Company agreed that it would not draw more than $50 million between the date of the Third Amendment and the earlier of (1) consummation of the restructuring described below, (2) the time the Company becomes a debtor in a case under Chapter 11 of the Bankruptcy Code and (3) the date the Company advises its lenders that it is no longer pursuing the Restructuring. On December 4, 2001, the Company drew the entire $50 million.

Financial Restructuring

Under the terms and conditions of its proposed exchange offer and consent solicitation the Company intends to restructure its existing capital structure. Following is a summary of the major features of the restructuring. The Company's Senior Secured Credit Facilities would be amended; its Senior Notes would be exchanged for shares of Class A common stock and cash (the "exchange offer"); upon shareholder approval, its Series A, D and E preferred stock would be reclassified into a

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certain number of shares of common stock; and upon shareholder approval, its existing shares of Class A common stock will be reclassified in to a lesser number of Class A common shares. In addition, the Company would raise $635 million from (1) the sale of its directory publishing business for not less than $535 million and (2) the sale of preferred stock and warrants for $100 million, with $560 million in proceeds to be paid to holders of Senior Notes.

In addition, there could be substantial additional write offs of goodwill and other intangibles as a result of the adoption of SFAS 141 and SFAS 142 or the adoption of fresh start accounting under the in-court alternative.

The accompanying financial statements have been prepared on a going concern basis and do not include any adjustments that might result if the in-court alternative is elected.

Splitrock Disposition

On December 7, 2001, McLeodUSA entered into an agreement to sell certain of its internet/data assets (formerly part of Splitrock Services) and wholesale dial-up Internet Service Provider (ISP) customer base to Level 3 Communications, Inc. for $55 million plus the assumption of certain operating liabilities (the "Splitrock Disposition"). Under the terms of the agreement, Level 3 will purchase approximately 350 POPs (points of presence) across the U.S., the related facilities, equipment and underlying circuits, plus the wholesale ISP customer base. The transaction excludes fiber optic cable obtained under the existing IRU Agreement with Level 3 acquired by McLeodUSA in the Splitrock acquisition. The parties will also enter into operating agreements enabling McLeodUSA to continue providing service and support to customers in its 25 state footprint. The Splitrock Disposition is subject to customary closing conditions, and is expected to close prior to May 1, 2002.

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of McLeodUSA Incorporated:

We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements of McLeodUSA Incorporated included in this Form 10-K, and have issued our report thereon dated January 29, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental Schedule II—Valuation and Qualifying Accounts ("Schedule II") is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The Schedule II has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 29, 2001

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MCLEODUSA INCORPORATED
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Column A		Column B		Column C Additions					Column D		Column E
Description		Balance at Beginning of Period		Charged to Cost and Expenses			Charged to Other Accounts(4)		Deductions		Balance at End of Period
Year Ended December 31, 1998:
	Allowance for doubtful accounts and discounts	$	11,951,000	$	19,620,000	(1)	$	—	$	16,003,000	$	15,568,000
	Valuation reserve on deferred tax assets		29,532,000		49,024,000			—		—		78,556,000

		$	41,483,000	$	68,644,000		$	—	$	16,003,000	$	94,124,000

Year Ended December 31, 1999:
	Allowance for doubtful accounts and discounts	$	16,568,000	$	20,412,000	(2)	$	7,015,000	$	1,580,000	$	41,415,000
	Valuation reserve on deferred tax assets		78,556,000		91,037,000			—		—		169,593,000

		$	94,124,000	$	111,449,000		$	7,015,000	$	1,580,000	$	211,008,000

Year Ended December 31, 2000:
	Allowance for doubtful accounts and discounts	$	41,415,000	$	35,221,000	(3)	$	22,243,000	$	9,122,000	$	89,757,000
	Valuation reserve on deferred tax assets		169,593,000		350,952,000			—		—		520,545,000

		$	211,008,000	$	386,173,000		$	22,243,000	$	9,122,000	$	610,302,000

(1): Includes $15,000 of allowance for doubtful accounts and discounts related to acquisitions during the year.
(2): Includes $1,296,000 of allowance for doubtful accounts and discounts related to acquisitions during the year.
(3): Includes $5,753,000 of allowance for doubtful accounts and discounts related to acquisitions during the year.
(4): Represents the balance of the Allowance for doubtful accounts and discounts of acquired businesses which were added to the Allowance for doubtful accounts at the time of acquisition.

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APPENDIX I

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE


	)
In re:	)	Chapter 11
	)
MCLEODUSA INCORPORATED,	)	Case No.
	)
Debtor.	)
	)

PLAN OF REORGANIZATION
OF MCLEODUSA INCORPORATED

David S. Kurtz (IL 03126561)
Mark A. McDermott (IL 06209460)
SKADDEN ARPS SLATE MEAGHER
& FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
(312) 407-0700

Gregg M. Galardi (I.D. No. 2991)
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
(302) 651-3000

ATTORNEYS FOR
MCLEODUSA INCORPORATED
Dated: Wilmington, Delaware
, 2002

TABLE OF CONTENTS

				Page
INTRODUCTION				1
ARTICLE I
	DEFINED TERMS AND RULES OF INTERPRETATION			1
	A. Scope of Definitions; Rules of Construction			1
		1.1	Administrative Claim	1
		1.2	Allowed	1
		1.3	Allowed Claim	1
		1.4	Allowed Interest	2
		1.5	Amended Certificate of Incorporation and By-Laws	2
		1.6	Ballot	2
		1.7	Bank Agents	2
		1.8	Bankruptcy Code	2
		1.9	Bankruptcy Court	2
		1.10	Bankruptcy Rules	2
		1.11	Bar Date	2
		1.12	Business Day	2
		1.13	Cash	2
		1.14	Chapter 11 Case	2
		1.15	Claim	2
		1.16	Claims Objection Deadline	2
		1.17	Class	2
		1.18	Class A Common Stock	2
		1.19	Class 7 Solicitation Order	2
		1.20	Confirmation Date	2
		1.21	Confirmation Hearing	3
		1.22	Confirmation Order	3
		1.23	Credit Agreement	3
		1.24	DIP Credit Agreement	3
		1.25	DIP Lenders	3
		1.26	Dilution	3
		1.27	Disbursing Agent	3
		1.28	Disclosure Statements	3
		1.29	Disputed Claim	3
		1.30	Disputed Claim Amount	3
		1.31	Disputed Claims Reserve	3
		1.32	Disputed Interest	3
		1.33	Disputed Interest Amount	3
		1.34	Disputed Interest Reserve	3
		1.35	Distribution Date	4
		1.36	Distribution Record Date	4
		1.37	Effective Date	4
		1.38	Estate	4
		1.39	Exit Facility	4
		1.40	Exit Lenders	4
		1.41	Fee Claim	4
		1.42	File, Filed or Filing	4
		1.43	Final Order	4

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	1.44	Forstmann Little	4
	1.45	General Unsecured Claim	4
	1.46	Holder	4
	1.47	Impaired	4
	1.48	Indentures	4
	1.49	Litigation Claims	4
	1.50	Management Incentive Plan	4
	1.51	Master Ballot	5
	1.52	McLeodUSA	5
	1.53	McLeodUSA Holdings	5
	1.54	New Credit Agreement	5
	1.55	New Director Preferred Stock	5
	1.56	New Preferred Stock	5
	1.57	New Warrants	5
	1.58	Non-Tax Priority Claim	5
	1.59	Note Claim	5
	1.60	Notes Trustee	5
	1.61	Notes	5
	1.62	Other Old Equity	5
	1.63	Old Preferred Stock	6
	1.64	Other Secured Claim	6
	1.65	Petition Date	6
	1.66	Plan	6
	1.67	Plan Supplement	6
	1.68	Priority Tax Claim	6
	1.69	Preferred Stock and Warrant Purchase Agreement	6
	1.70	Professional	6
	1.71	Pubco	6
	1.72	Pubco Acquisition	6
	1.73	Pubco Stock Purchase Agreement	6
	1.74	Reclassification	6
	1.75	Reinstated or Reinstatement	7
	1.76	Reorganized McLeodUSA	7
	1.77	Reverse Stock Split	7
	1.78	Schedules	7
	1.79	Securities Act	7
	1.80	Senior Secured Lender Claim	7
	1.81	Senior Secured Lenders	7
	1.82	Series A Preferred Stock	7
	1.83	Series D Preferred Stock	7
	1.84	Series E Preferred Stock	7
	1.85	Solicitation Order	7
	1.86	Unimpaired Claim	7
	1.87	Voting Deadline	7
	1.88	Voting Record Date	7
B. Rules of Interpretation			8
C. Computation of Time			8
D. Governing Law			8

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ARTICLE II
	CLASSIFICATION OF CLAIMS AND INTERESTS			8
		2.1	Unclassified Claims	8
		2.2	Unimpaired Classes of Claims	8
		2.3	Impaired Class of Claims	9
		2.4	Impaired Classes of Interests	9
ARTICLE III
	TREATMENT OF CLAIMS AND INTERESTS			10
		3.1	Unclassified Claims	10
		3.2	Unimpaired Classes of Claims	10
		3.3	Impaired Class of Claims	11
		3.4	Impaired Classes of Interests	11
		3.5	Special Provision Regarding Unimpaired Claims	11
ARTICLE IV
	MEANS FOR IMPLEMENTATION OF THE PLAN			11
		4.1	Continued Corporate Existence and Vesting of Assets in Reorganized McLeodUSA	11
		4.2	Corporate Governance, Directors and Officers, and Corporate Action	12
		4.3	Effectuating Documents and Further Transactions	13
		4.4	Sale of Pubco	13
		4.5	Cancellation of Notes and Old Preferred Stock	13
		4.6	Effectuation of Reverse Stock Split and Reclassification; Issuance of New Securities	13
		4.7	New Credit Agreement	13
		4.8	Management Incentive Plan	13
		4.9	Sources of Cash for Plan Distributions	14
		4.10	Exemption from Transfer Taxes	14
ARTICLE V
	ACCEPTANCE OR REJECTION OF THE PLAN			14
		5.1	Classes Entitled to Vote	14
		5.2	Acceptance by Impaired Classes	14
		5.3	Cramdown	14
ARTICLE VI
	PROVISIONS GOVERNING DISTRIBUTIONS			15
		6.1	Distributions for Claims or Interests Allowed as of the Effective Date	15
		6.2	Interest on Claims	15
		6.3	Distributions by Reorganized McLeodUSA	15
		6.4	Delivery of Distributions and Undeliverable or Unclaimed Distributions	15
		6.5	Record Date for Distributions	16
		6.6	Allocation of Plan Distributions Between Principal and Interest	16
		6.7	Means of Cash Payment	16
		6.8	Withholding and Reporting Requirements	16
		6.9	Setoffs	16
		6.10	Surrender of Instruments or Securities	17
		6.11	Lost, Stolen, Mutilated or Destroyed Securities	17

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ARTICLE VII
	PROCEDURES FOR RESOLVING DISPUTED, CONTINGENT AND UNLIQUIDATED CLAIMS AND INTERESTS				17
			7.1	Objection Deadline; Prosecution of Objections	17
			7.2	No Distributions Pending Allowance	18
			7.3	Disputed Claims Reserve; Disputed Interest Reserve	18
			7.4	Distributions After Allowance	18
ARTICLE VIII
	TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES				18
			8.1	Assumption of Executory Contracts and Unexpired Leases	18
			8.2	Cure of Defaults of Assumed Executory Contracts and Unexpired Leases	19
			8.3	Indemnification of Directors, Officers and Employees	19
			8.4	Compensation and Benefit Programs	19
ARTICLE IX
	CONFIRMATION AND CONSUMMATION OF THE PLAN				19
			9.1	Conditions to Confirmation	19
			9.2	Conditions to Effective Date	20
			9.3	Waiver of Conditions	20
			9.4	Consequences of Non-Occurrence of Effective Date	21
ARTICLE X
	EFFECT OF PLAN CONFIRMATION				22
			10.1	Binding Effect	22
			10.2	Discharge of Claims and Termination of Interests	22
			10.3	Injunction	22
			10.4	Releases	22
			10.5	Exculpation and Limitation of Liability	23
			10.6	Injunction Related to Releases and Exculpation	23
			10.7	Preservation of Rights of Action; Settlement of Litigation Claims	24
			10.8	Termination of Subordination Rights and Settlement of Related Claims	24
			10.9	Term of Bankruptcy Injunction or Stays	24
ARTICLE XI
	RETENTION OF JURISDICTION				24
ARTICLE XII
	MISCELLANEOUS PROVISIONS				26
			12.1	Bar Date for Administrative Claims	26
			12.2	Payment of Statutory Fees	26
			12.3	Amendment or Modification of the Plan	26
			12.4	Severability of Plan Provisions	26
			12.5	Successors and Assigns	26
			12.6	Plan Supplement	27
			12.7	Revocation, Withdrawal or Non-Consummation	27
			12.8	Notice	27
			12.9	Governing Law	28
			12.10	Tax Liability	28
			12.11	Schedules	28
			12.12	Jurisdiction over Reorganized McLeodUSA	28
			12.13	Filing of Additional Documents	28
EXHIBIT A					A-1
		MANAGEMENT INCENTIVE PLAN			A-1

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INTRODUCTION

McLeodUSA Incorporated ("McLeodUSA") proposes the following plan of reorganization (the "Plan") for the resolution of the outstanding claims against and interests in McLeodUSA. Reference is made to (i) the Offering Memorandum, Solicitation of Consents and Acceptances and Disclosure Statement and (ii) the Proxy/Disclosure Statement and Solicitation of Consents and Acceptances (collectively, the "Disclosure Statements"), distributed contemporaneously herewith, for a discussion of McLeodUSA's history, business, properties and operations, projections for those operations, risk factors, a summary and analysis of the Plan, and certain related matters including, among other things, the securities to be issued under the Plan. Subject to certain restrictions and requirements set forth in Section 1127 of the Bankruptcy Code and Bankruptcy Rule 3019, McLeodUSA reserves the right to alter, amend, modify, revoke or withdraw this Plan prior to its substantial consummation.

ARTICLE I

DEFINED TERMS AND RULES OF INTERPRETATION

A. Scope of Definitions; Rules of Construction

For purposes of this Plan, except as expressly provided or unless the context otherwise requires, all capitalized terms not otherwise defined shall have the meanings ascribed to them in Article I of this Plan. Any term used in this Plan that is not defined herein, but is defined in the Bankruptcy Code or the Bankruptcy Rules, shall have the meaning ascribed to that term in the Bankruptcy Code or the Bankruptcy Rules. Whenever the context requires, such terms shall include the plural as well as the singular number, the masculine gender shall include the feminine, and the feminine gender shall include the masculine.

1.1 Administrative Claim means a Claim for costs and expenses of administration of the Chapter 11 Case Allowed under Section 503(b) or 1114(e)(2) of the Bankruptcy Code and entitled to priority pursuant to Section 507(a)(1) of the Bankruptcy Code, including, but not limited to: (a) any actual and necessary costs and expenses incurred after the Petition Date of preserving McLeodUSA's Estate and operating the businesses of McLeodUSA (such as wages, salaries, commissions for services and payments for inventories, leased equipment and premises) and Claims of governmental units for taxes (including tax audit Claims related to tax years commencing after the Petition Date, but excluding Claims relating to tax periods, or portions thereof, ending on or before the Petition Date); (b) compensation for legal, financial, advisory, accounting and other services and reimbursement of expenses Allowed by the Bankruptcy Court under Section 330, 331 or 503(b) of the Bankruptcy Code to the extent incurred prior to the Effective Date; (c) all fees and charges assessed against McLeodUSA's Estate under Section 1930, Chapter 123 of Title 28, United States Code; and (d) Claims under the DIP Credit Agreement.

1.2 Allowed means, when used in reference to a Claim or Interest within a particular Class, an Allowed Claim or Allowed Interest of the type described in such Class.

1.3 Allowed Claim means a Claim or any portion thereof (a) that has been allowed by a Final Order, or (b) as to which, on or by the Effective Date, (i) no proof of claim has been filed with the Bankruptcy Court and (ii) the liquidated and noncontingent amount of which is Scheduled, other than a Claim that is Scheduled at zero, in an unknown amount, or as disputed, or (c) for which a proof of claim in a liquidated amount has been timely filed with the Bankruptcy Court pursuant to the Bankruptcy Code, any Final Order of the Bankruptcy Court or other applicable bankruptcy law, and as to which either (i) no objection to its allowance has been filed within the periods of limitation fixed by the Plan, the Bankruptcy Code or by any order of the Bankruptcy Court or (ii) any objection to its

I–1

allowance has been settled, withdrawn, or denied by a Final Order, or (d) that is expressly allowed in this Plan.

1.4 Allowed Interest means any Interest that (a) is registered as of the Distribution Record Date in a stock register maintained by or on behalf of McLeodUSA and (b) is not a Disputed Interest.

1.5 Amended Certificate of Incorporation and By-Laws means Reorganized McLeodUSA's certificate of incorporation and by-laws, as amended by the Plan or in accordance therewith.

1.6 Ballot means each of the ballot forms distributed to each holder of an Impaired Claim or Impaired Interest on which the holder is to indicate acceptance or rejection of this Plan.

1.7 Bank Agents means the agents under the Credit Agreement.

1.8 Bankruptcy Code means the Bankruptcy Reform Act of 1978, as codified in Title 11 of the United States Code, 11 U.S.C. §§ 101-1330, as now in effect or hereafter amended.

1.9 Bankruptcy Court means the United States District Court having jurisdiction over the Chapter 11 Cases and, to the extent any reference is made pursuant to Section 157 of Title 28 of the United States Code or the General Order of the District Court pursuant to Section 151 of Title 28 of the United States Code, the bankruptcy unit of such District Court.

1.10 Bankruptcy Rules means, collectively, the Federal Rules of Bankruptcy Procedure and the Official Bankruptcy Forms, as amended, the Federal Rules of Civil Procedure, as amended, as applicable to the Chapter 11 Case or proceedings therein, and the Local Rules of the Bankruptcy Court, as applicable to the Chapter 11 Case or proceedings therein, as the case may be.

1.11 Bar Date means the date, if any, designated by the Bankruptcy Court as the last date for filing proofs of Claim or Interest against McLeodUSA.

1.12 Business Day means any day, other than a Saturday, Sunday or "legal holiday" (as defined in Bankruptcy Rule 9006(a)).

1.13 Cash means legal tender of the United States of America and equivalents thereof.

1.14 Chapter 11 Case means the case under Chapter 11 of the Bankruptcy Code commenced by McLeodUSA in the Bankruptcy Court.

1.15 Claim means a "claim" as defined in Section 101(5) of the Bankruptcy Code.

1.16 Claims Objection Deadline means the first Business Day that is the latest of (a) 120 days after the Effective Date; (b) as to a particular Claim, 60 days after the filing of a proof of claim for, or request for payment of, such Claim; or (c) such later date as may be established by the Bankruptcy Court for cause shown by Reorganized McLeodUSA.

1.17 Class means a category of holders of Claims or Interests, as described in Article II of this Plan.

1.18 Class A Common Stock means that certain Class A common stock, par value $.01, authorized by McLeodUSA prior to the Petition Date.

1.19 Class 7 Solicitation Order means a Final Order of the Bankruptcy Court or other Court of competent jurisdiction providing that Class 7 is deemed to have rejected the Plan and is not entitled to vote on the Plan.

1.20 Confirmation Date means the date on which the Clerk of the Bankruptcy Court enters the Confirmation Order on the docket of the Bankruptcy Court.

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1.21 Confirmation Hearing means the hearing held by the Bankruptcy Court pursuant to Section 1128 of the Bankruptcy Code to consider confirmation of this Plan, as such hearing may be adjourned or continued from time to time.

1.22 Confirmation Order means the order of the Bankruptcy Court confirming this Plan pursuant to Section 1129 of the Bankruptcy Code.

1.23 Credit Agreement means that certain Credit Agreement dated as of May 31, 2000, between McLeodUSA, as borrower, and the entities identified as the "Lenders" therein, as amended.

1.24 DIP Credit Agreement means the credit facility to be entered into by McLeodUSA, as borrower, and those entities identified as "Lenders" therein, as amended, modified or supplemented, for the purpose of financing McLeodUSA's operations as debtor-in-possession in the Chapter 11 Case.

1.25 DIP Lenders means those entities identified as "Lenders" in the DIP Credit Agreement and their respective successors and assigns.

1.26 Dilution means dilution subsequent to the Effective Date (a) to the extent necessary to give effect to the exercise of any stock options or warrants or conversion of preferred stock to common stock or (b) otherwise as a result of the issuance of common stock, implementation of management incentive programs, or other action taken by the board of directors of Reorganized McLeodUSA, including, but not limited to, action taken in furtherance of the Management Incentive Plan.

1.27 Disbursing Agent means Reorganized McLeodUSA, or any party designated by Reorganized McLeodUSA, to serve as disbursing agent under the Plan.

1.28 Disclosure Statements means (i) that certain Offering Memorandum, Solicitation of Consents and Acceptances and Disclosure Statement distributed to Holders of Note Claims and (ii) that certain Proxy/Disclosure Statement and Solicitation of Acceptances prepared for Holders of Old Preferred Stock Interests and Class A Common Stock Interests.

1.29 Disputed Claim means a Claim, or any portion thereof, that is not an Allowed Claim and includes, without limitation, Claims that (a) have not been Scheduled by McLeodUSA or have been Scheduled at zero, or as contingent, unliquidated, or disputed, or (b) are the subject of an objection filed in the Bankruptcy Court and which objection has not been withdrawn or overruled by a Final Order of the Bankruptcy Court.

1.30 Disputed Claim Amount means (a) with respect to contingent or unliquidated Claims, the amount estimated by the Bankruptcy Court for purposes of distributions in respect of such Claims in accordance with Section 502(c) of the Bankruptcy Code; or (b) the amount set forth in a timely Filed proof of claim.

1.31 Disputed Claims Reserve means the reserve of Class A Common Stock established and maintained by Reorganized McLeodUSA on account of Disputed Claims.

1.32 Disputed Interest means an Interest, or any portion thereof, that is not an Allowed Interest and includes, without limitation, Interests that (a) have not been Scheduled by McLeodUSA or have been Scheduled at zero, or as contingent, unliquidated, or disputed, or (b) are the subject of an objection filed in the Bankruptcy Court and which objection has not been withdrawn or overruled by a Final Order of the Bankruptcy Court.

1.33 Disputed Interest Amount means, with respect to a Disputed Interest, the number of shares set forth in a timely Filed proof of interest.

1.34 Disputed Interest Reserve means the reserve of Class A Common Stock established and maintained by Reorganized McLeodUSA on account of Disputed Interests.

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1.35 Distribution Date means the date, within 30 days after the Effective Date, upon which the initial distributions will be made to holders of Allowed Claims and Allowed Interests.

1.36 Distribution Record Date means the Confirmation Date.

1.37 Effective Date means the Business Day the Plan becomes effective as provided in Article IX hereof.

1.38 Estate means the estate of McLeodUSA created under Section 541 of the Bankruptcy Code.

1.39 Exit Facility means that certain exit revolving credit facility in the aggregate principal amount of $160 million to be provided to Reorganized McLeodUSA on the Effective Date pursuant to the terms of the New Credit Agreement.

1.40 Exit Lenders means those entities identified as "Lenders" with respect to the Exit Facility in the New Credit Agreement and their respective successors and assigns.

1.41 Fee Claim means an Administrative Claim under Section 330(a), 331, 503 or 1103 of the Bankruptcy Code for compensation of a Professional or other entity for services rendered or expenses incurred in the Chapter 11 Case on or prior to the Effective Date.

1.42 File, Filed, or Filing means file, filed or filing with the Bankruptcy Court or its authorized designee in the Chapter 11 Case.

1.43 Final Order means an order or judgment, the operation or effect of which has not been stayed, reversed, or amended and as to which order or judgment (or any revision, modification, or amendment thereof) the time to appeal or seek review or rehearing has expired and as to which no appeal or petition for review or rehearing was filed or, if filed, remains pending.

1.44 Forstmann Little means one or more of Forstmann Little & Co., Forstmann Little & Co. Equity Partnership-VII, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P., Forstmann Little & Co. Equity Partnership-V, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VI, L.P., and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VII, L.P. or their affiliates.

1.45 General Unsecured Claim means a Claim that is not a Senior Secured Lender Claim, Other Secured Claim, Non-Tax Priority Claim, or Note Claim.

1.46 Holder means an entity holding a Claim or Interest and, with respect to Note Claims, the beneficial holder as of the applicable Voting Record Date or any authorized agent who has completed and executed a Ballot or on whose behalf a Master Ballot has been completed and executed in accordance with the voting instructions.

1.47 Impaired means, when used in reference to a Claim or Interest, a Claim or Interest that is impaired within the meaning of Section 1124 of the Bankruptcy Code.

1.48 Indentures means the Indentures dated as of March 4, 1997, July 21, 1997, March 16, 1998, October 30, 1998, February 22, 1999, December 5, 2000, and January 15, 2001, between McLeodUSA, as issuer, and the Note Trustee, as trustee, relating to the Notes, as amended from time to time.

1.49 Litigation Claims means the claims, rights of action, suits or proceedings, whether in law or in equity, whether known or unknown, that McLeodUSA or its Estate may hold against any person.

1.50 Management Incentive Plan means a management incentive plan to be adopted by the board of directors of Reorganized McLeodUSA on the Effective Date in accordance with the terms described in the Disclosure Statements, the Plan Supplement and Section 4.8 of the Plan.

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1.51 Master Ballot means the ballot distributed to nominees or holders of record of the Notes, the Old Preferred Stock, or the Class A Common Stock, as applicable, to record the votes, if any, of the beneficial holders of such instruments.

1.52 McLeodUSA means McLeodUSA Incorporated.

1.53 McLeodUSA Holdings means McLeodUSA Holdings, Inc., a Delaware corporation.

1.54 New Credit Agreement means that certain credit agreement governing the Exit Facility between Reorganized McLeodUSA, as borrower, those entities identified as guarantors in the New Credit Agreement, and the Exit Lenders.

1.55 New Director Preferred Stock means 10 shares of new voting preferred stock of Reorganized McLeodUSA to be issued to Forstmann Little on the Effective Date with a $1.00 liquidation preference and the right to vote to elect two (2) directors and one (1) observer to Reorganized McLeodUSA's board of directors.

1.56 New Preferred Stock means 10,000,000 (ten million) shares of preferred stock of Reorganized McLeodUSA, each with a liquidation preference of $10.00, no dividend rights, and each of which shall be mandatorily convertible into shares of Class A Common Stock on the 60^th day following the Effective Date of the Plan in an amount equal to the liquidation preference divided by the average share price of the Class A Common Stock, calculated by taking the closing price per share of such Class A Common Stock on 10 randomly selected trading days during the 60-day period following the Effective Date of the Plan, discarding the two highest and the two lowest prices and taking the mathematical average of the remaining six prices.

1.57 New Warrants means 18,937,995 (eighteen million nine hundred thirty-seven thousand nine hundred ninety-five) warrants, each of which (i) shall entitle its holder to purchase one share of Class A Common Stock at an exercise price equal to 150% of the average share price of the Class A Common Stock, calculated by taking the closing price per share of such Class A Common Stock on 10 randomly selected trading days during the 60-day period following the Effective Date of the Plan, discarding the two highest and the two lowest prices and taking the mathematical average of the remaining six prices, and (ii) shall expire on the fifth anniversary after the Effective Date.

1.58 Non-Tax Priority Claim means a Claim, other than an Administrative Claim or Priority Tax Claim, that is entitled to priority in payment pursuant to Section 507(a) of the Bankruptcy Code.

1.59 Note Claim means a Claim arising from or related to the Notes.

1.60 Notes Trustee means The Bank of New York as successor trustee to the United States Trust Company of New York under the Indentures.

1.61 Notes means those certain (i) 10¹/2% Senior Discount Notes due March 1, 2007 issued by McLeodUSA under that certain Indenture dated March 4, 1997; (ii) 9¹/4% Senior Notes due July 15, 2007 issued by McLeodUSA under that certain Indenture dated July 21, 1997; (iii) 8³/8% Senior Notes due March 15, 2008 issued by McLeodUSA under that certain Indenture dated March 16, 1998; (iv) 9¹/2% Senior Notes due November 1, 2008 issued by McLeodUSA under that certain Indenture dated October 30, 1998; (v) 8¹/8% Senior Notes due February 15, 2009 issued by McLeodUSA under that certain Indenture dated February 22, 1999; (vi) 12% Senior Notes due July 15, 2008 issued by McLeodUSA under that certain Indenture dated December 5, 2000; (vii) 11¹/2% Senior Notes due May 1, 2009 issued by McLeodUSA under that certain Indenture dated December 5, 2000; and (viii) 11³/8% Senior Notes due January 1, 2009 issued by McLeodUSA under that certain Indenture dated January 15, 2001.

1.62 Other Old Equity means all options, warrants, call rights, puts, awards, or other agreements to acquire Class A Common Stock outstanding immediately prior to the Petition Date.

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1.63 Old Preferred Stock means individually and collectively, as the case may be, the Series A Preferred Stock, the Series D Preferred Stock, and the Series E Preferred Stock, including the rights of any entity to purchase or demand the issuance of such stock, including (a) conversion, exchange, voting, participation, and dividend rights; (b) liquidation preferences; (c) stock options, warrants, and put rights; and (d) share-appreciation rights.

1.64 Other Secured Claim means a Claim that is secured by a lien on property in which McLeodUSA's Estate has an interest or that is subject to setoff under Section 553 of the Bankruptcy Code, to the extent of the value of the Claim holder's interest in the Estate's interest in such property or to the extent of the amount subject to setoff, as applicable, as determined pursuant to Section 506(a) of the Bankruptcy Code or, in the case of setoff, pursuant to Section 553 of the Bankruptcy Code.

1.65 Petition Date means the date on which McLeodUSA files its petition for relief commencing the Chapter 11 Case.

1.66 Plan means this Chapter 11 plan of reorganization, including the Plan Supplement and all supplements, appendices and schedules thereto, either in its present form or as the same may be altered, amended or modified from time to time.

1.67 Plan Supplement means the compilation of documents and form of documents specified in the Plan to be filed as set forth in Section 12.6 hereof.

1.68 Priority Tax Claim means a Claim of a governmental unit of the kind specified in Sections 502(i) and 507(a)(8) of the Bankruptcy Code.

1.69 Preferred Stock and Warrant Purchase Agreement means that certain Purchase Agreement dated as of December 3, 2001, among McLeodUSA, Forstmann Little & Co. Equity Partnership-VII, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P., Forstmann Little & Co. Equity Partnership-V, L.P., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VI, L.P., and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VII, L.P., with respect to McLeodUSA's sale of the New Director Preferred Stock, the New Preferred Stock, and the New Warrants.

1.70 Professional means (a) any professional employed in the Chapter 11 Case pursuant to Section 327 or 1103 of the Bankruptcy Code or otherwise and (b) any professional or other entity seeking compensation or reimbursement of expenses in connection with the Chapter 11 Case pursuant to Section 503(b)(4) of the Bankruptcy Code.

1.71 Pubco means McLeodUSA Media Group, Inc., an Iowa corporation.

1.72 Pubco Acquisition means Pubco Acquisition Corp., a Delaware corporation.

1.73 Pubco Stock Purchase Agreement means that certain Stock Purchase Agreement dated as of December 3, 2001, between McLeodUSA Holdings, Inc., as seller, and Pubco Acquisition, as buyer, pursuant to which McLeodUSA Holdings has agreed to sell to Pubco Acquisition, and Pubco Acquisition has agreed to purchase from McLeodUSA Holdings, all of the outstanding shares of capital stock of Pubco.

1.74 Reclassification means the reclassification of the Old Preferred Stock into Class A Common Stock to be effectuated with respect to Holders of Old Preferred Stock Interests under the Plan, based upon 627,734,497 shares of Class A Common Stock issued and outstanding, at a ratio of (i) 39.05 shares of Class A Common Stock for each share of Series A Preferred Stock (based on the $250 liquidation preference per share of the Series A Preferred Stock plus accrued dividends) and

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(ii) 378.79 shares of Class A Common Stock for each share of Series D or Series E Preferred Stock (based on the $2,500 liquidation preference per share of the Series D and Series E Preferred Stock).

1.75 Reinstated orReinstatement means (i) leaving unaltered the legal, equitable, and contractual rights to which a Claim entitles the Holder of such Claim so as to leave such Claim unimpaired in accordance with Section 1124 of the Bankruptcy Code or (ii) notwithstanding any contractual provision or applicable law that entitles the Holder of such Claim to demand or receive accelerated payment of such Claim after the occurrence of a default (a) curing any such default that occurred before or after the Petition Date, other than a default of a kind specified in Section 365(b)(2) of the Bankruptcy Code; (b) reinstating the maturity of such Claim as such maturity existed before such default; (c) compensating the Holder of such Claim for any damages incurred as a result of any reasonable reliance by such Holder on such contractual provision or such applicable law; and (d) not otherwise altering the legal, equitable, or contractual rights to which such Claim entitles the Holder of such Claim.

1.76 Reorganized McLeodUSA means McLeodUSA or any successors thereto by merger, consolidation, or otherwise, on or after the Effective Date.

1.77 Reverse Stock Split means that certain five-to-one reverse stock split of the outstanding Class A Common Stock to be effectuated with respect to Holders of Class A Common Stock Interests under the Plan.

1.78 Schedules means the schedules of assets and liabilities and the statements of financial affairs, if any, Filed by McLeodUSA pursuant to Section 521 of the Bankruptcy Code and Bankruptcy Rules, as such schedules have been or may be further modified, amended or supplemented in accordance with Bankruptcy Rule 1009 or orders of the Bankruptcy Court.

1.79 Securities Act means the Securities Act of 1933, 15 U.S.C. §§ 77c-77aa, as now in effect or hereafter amended.

1.80 Senior Secured Lender Claim means individually, a Claim of a Senior Secured Lender under the Credit Agreement and, collectively, the Claims of the Senior Secured Lenders under the Credit Agreement, including Claims for principal, accrued but unpaid interest through the Effective Date, and fees and expenses incurred by the Senior Secured Lenders. The Senior Secured Lender Claim shall be Allowed in an amount equal to the amount of principal and accrued but unpaid interest outstanding as of the Effective Date as agreed by McLeodUSA and the Bank Agents.

1.81 Senior Secured Lenders means the entities identified as "Lenders" under the Credit Agreement and their respective successors and assigns.

1.82 Series A Preferred Stock means that certain 6.75% Series A Cumulative Preferred Stock of McLeodUSA outstanding immediately prior to the Petition Date.

1.83 Series D Preferred Stock means that certain Series D Convertible Preferred Stock of McLeodUSA outstanding immediately prior to the Petition Date.

1.84 Series E Preferred Stock means that certain Series E Convertible Preferred Stock of McLeodUSA outstanding immediately prior to the Petition Date.

1.85 Solicitation Order means the order entered by the Bankruptcy Court, if any, establishing procedures with respect to the solicitation and tabulation of votes to accept or reject this Plan.

1.86 Unimpaired Claim means a Claim that is not impaired within the meaning of Section 1124 of the Bankruptcy Code.

1.87 Voting Deadline means January 15, 2002.

1.88 Voting Record Date means December 3, 2001.

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B. Rules of Interpretation

For purposes of the Plan, (a) any reference in the Plan to a contract, instrument, release, indenture, or other agreement or document's being in a particular form or on particular terms and conditions means that such document shall be substantially in such form or substantially on such terms and conditions, (b) any reference in the Plan to an existing document or exhibit filed or to be filed means such document or exhibit as it may have been or may be amended, modified, or supplemented, (c) unless otherwise specified, all references in the Plan to Sections, Articles, Schedules, and Exhibits are references to Sections, Articles, Schedules, and Exhibits of or to the Plan, (d) the words "herein" and "hereto" refer to the Plan in its entirety rather than to a particular portion of the Plan, (e) captions and headings to Articles and Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the interpretation of the Plan, and (f) the rules of construction set forth in Section 102 of the Bankruptcy Code and in the Bankruptcy Rules shall apply.

C. Computation of Time

In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply.

D. Governing Law

Unless a rule of law or procedure is supplied by federal law (including the Bankruptcy Code and Bankruptcy Rules), the laws of (i) the State of Delaware shall govern the construction and implementation of the Plan and any agreements, documents, and instruments executed in connection with the Plan and (ii) the laws of the state of incorporation of McLeodUSA shall govern corporate governance matters with respect to McLeodUSA, in either case without giving effect to the principles of conflicts of law thereof.

ARTICLE II

CLASSIFICATION OF CLAIMS AND INTERESTS

All Claims and Interests, except Administrative Claims and Priority Tax Claims, are placed in the Classes set forth below. In accordance with Section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and Priority Tax Claims, as described below, have not been classified. A Claim or Interest is placed in a particular Class only to the extent that the Claim or Interest falls within the description of that Class and is classified in other Classes to the extent that any portion of the Claim or Interest falls within the description of such other Classes. A Claim or Interest is also placed in a particular Class for the purpose of receiving distributions pursuant to the Plan only to the extent that such Claim or Interest is an Allowed Claim or Interest in that Class and such Claim or Interest has not been paid, released or otherwise settled prior to the Effective Date.

2.1 Unclassified Claims.

(a): Administrative Claims.
(b): Priority Tax Claims.

2.2 Unimpaired Classes of Claims.

(a): Class 1: Class 1 consists of all Senior Secured Lender Claims.
(b): Class 2: Class 2 consists of all Other Secured Claims.
(c): Class 3: Class 3 consists of all Non-Tax Priority Claims.
(d): Class 4: Class 4 consists of all General Unsecured Claims.

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2.3 Impaired Class of Claims.

(a): Class 5: Class 5 consists of all Note Claims.

2.4 Impaired Classes of Interests.

(a): Class 6: Class 6 consists of all Old Preferred Stock Interests.
(b): Class 7: Class 7 consists of all Class A Common Stock Interests.
(c): Class 8: Class 8 consists of all Other Old Equity.

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ARTICLE III

TREATMENT OF CLAIMS AND INTERESTS

3.1 Unclassified Claims.

(a) Administrative Claims. Subject to the provisions of Sections 330(a), 331 and 503(b) of the Bankruptcy Code, each Administrative Claim shall be paid by McLeodUSA, at its election, (a) in full, in Cash, in such amounts as are incurred in the ordinary course of business by McLeodUSA, or in such amounts as such Administrative Claim is Allowed by the Bankruptcy Court upon the later of the Effective Date or the date upon which there is a Final Order allowing such Administrative Claim, (b) upon such other terms as may exist in the ordinary course of McLeodUSA's business, or (c) upon such other terms as may be agreed upon between the Holder of such Administrative Claim and McLeodUSA.

(i) Professional Fees. All final applications for Professional Fees for services rendered in connection with the Chapter 11 Case prior to the Confirmation Date shall be filed no later than thirty (30) days after the Effective Date.

(ii) Claims Under the DIP Credit Agreement. On the Effective Date, all amounts outstanding under the DIP Credit Agreement shall be paid in full (A) in Cash or (B) as provided in the DIP Credit Agreement and the New Credit Agreement.

(b) Priority Tax Claims. The legal and equitable rights of the Holders of Priority Tax Claims are Unimpaired by the Plan. On, or as soon as reasonably practicable after (i) the Distribution Date if such Priority Tax Claim is an Allowed Priority Tax Claim as of the Effective Date or (ii) the date on which such Priority Tax Claim becomes an Allowed Priority Tax Claim, each holder of an Allowed Priority Tax Claim shall receive in full satisfaction, settlement and release of, and in exchange for such Allowed Priority Tax Claim, at the election of McLeodUSA, (A) Cash equal to the amount of such Allowed Priority Tax Claim; (B) such other treatment as to which McLeodUSA or Reorganized McLeodUSA and the holder of such Allowed Priority Tax Claim shall have agreed upon in writing; or (C) such other treatment that it will not be Impaired pursuant to Section 1124 of the Bankruptcy Code;further provided, any Allowed Priority Tax Claim not due and owing on the Effective Date will be paid in accordance with this section when such Claim becomes due and owing.

3.2 Unimpaired Classes of Claims.

(a) Class 1: Senior Secured Lender Claims. The Senior Secured Lender Claims are Allowed Claims under the Plan in an amount to be agreed upon by McLeodUSA and the Bank Agents by the Effective Date. The legal, equitable and contractual rights of the Holders of Allowed Senior Secured Lender Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(b) Class 2: Other Secured Claims. The legal, equitable and contractual rights of the Holders of Allowed Other Secured Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(c) Class 3. Non-Tax Priority Claims. The legal, equitable and contractual rights of the Holders of Allowed Non-Tax Priority Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

(d) Class 4: General Unsecured Claims. The legal, equitable and contractual rights of the Holders of Allowed General Unsecured Claims are Unimpaired by the Plan and all such Claims shall be Reinstated on the Effective Date.

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3.3 Impaired Class of Claims.

(a) Class 5: Note Claims. The Note Claims are Allowed Claims under the Plan in amounts to be agreed upon by McLeodUSA and the Note Trustee by the Effective Date. On or as soon as reasonably practicable after the Distribution Date, each holder of an Allowed Note Claim shall receive, in full satisfaction, release, and discharge of its Allowed Note Claim, its pro rata share of (A) $560,000,000 (five hundred sixty million dollars) in Cash, plus (B) 56,813,984 (fifty-six million eight hundred thirteen thousand nine hundred eighty-four) shares of Class A Common Stock, subject to Dilution.

3.4 Impaired Classes of Interests.

(a) Class 6: Old Preferred Stock Interests. Old Preferred Stock Interests are Allowed Interests under the Plan. On or as soon as reasonably practicable after the Distribution Date, after effectuation of the Reclassification, (A) Holders of the Series A Preferred Stock shall receive, in full satisfaction, release, and discharge of their Allowed Series A Preferred Stock Interests, their pro rata share of 44,883,856 (forty-four million eight hundred eighty-three thousand eight hundred fifty-six) shares of Class A Common Stock; (B) Holders of the Series D Preferred Stock shall receive, in full satisfaction, release, and discharge of their Allowed Series D Preferred Stock Interests, their pro rata share of 104,166,667 (one hundred four million one hundred sixty-six thousand six hundred sixty-seven) shares of Class A Common Stock; and (C) Holders of the Series E Preferred Stock shall receive, in full satisfaction, release, and discharge of their Allowed Series E Preferred Stock Interests, their pro rata share of 47,348,485 (forty-seven million three hundred forty-eight thousand four hundred eighty-five) shares of Class A Common Stock, in each case subject to Dilution.

(b) Class 7: Class A Common Stock Interests. Class A Common Stock Interests are Allowed Interests under the Plan. On or as soon as reasonably practicable after the Distribution Date, each Holder of an Allowed Class A Common Stock Interest shall receive, after effectuation of the Reverse Stock Split, in full satisfaction, release, and discharge of its Allowed Class A Common Stock Interests, its pro rata share of 125,546,899 (one hundred twenty-five million five hundred forty-six thousand eight hundred ninety-nine) shares of Class A Common Stock, subject to Dilution.

(c) Class 8: Other Old Equity. On the Effective Date, the Other Old Equity will be cancelled and the Holders of Other Old Equity shall not receive or retain any distribution on account of such Other Old Equity Interests under the Plan.

3.5 Special Provision Regarding Unimpaired Claims. Except as otherwise provided in the Plan, nothing shall affect McLeodUSA's or Reorganized McLeodUSA's rights and defenses, both legal and equitable, with respect to any Unimpaired Claims, including, but not limited to, all rights with respect to legal and equitable defenses to setoffs or recoupments against Unimpaired Claims.

ARTICLE IV

MEANS FOR IMPLEMENTATION OF THE PLAN

4.1 Continued Corporate Existence and Vesting of Assets in Reorganized McLeodUSA. After the Effective Date, Reorganized McLeodUSA shall continue to exist in accordance with the law in the jurisdiction in which it is incorporated and pursuant to its certificate or articles of incorporation and by-laws in effect prior to the Effective Date, except to the extent such certificate or articles of incorporation and by-laws are amended under this Plan. Except as otherwise provided in the Plan, on and after the Effective Date, all property of the Estate of McLeodUSA, including all claims, rights and causes of action and any property acquired by McLeodUSA or Reorganized McLeodUSA under or in connection with the Plan, shall vest in Reorganized McLeodUSA free and clear of all Claims, liens, charges, other encumbrances and Interests except with respect to Claims that are Unimpaired under

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the Plan. On and after the Effective Date, Reorganized McLeodUSA may operate its businesses and may use, acquire and dispose of property and compromise or settle any Claims without supervision of or approval by the Bankruptcy Court and free and clear of any restrictions of the Bankruptcy Code or the Bankruptcy Rules other than restrictions expressly imposed by the Plan or the Confirmation Order. Without limiting the foregoing, Reorganized McLeodUSA may pay the charges that it incurs on or after the Effective Date for Professionals' fees, disbursements, expenses or related support services without application to the Bankruptcy Court.

4.2 Corporate Governance, Directors and Officers, and Corporate Action.

(a) Certificates of Incorporation and By-laws. The certificate or articles of incorporation and by-laws of McLeodUSA shall be amended as necessary to satisfy the provisions of the Plan and the Bankruptcy Code, and shall include, among other things, (i) pursuant to Section 1123(a)(6) of the Bankruptcy Code, a provision prohibiting the issuance of non-voting equity securities, but only to the extent required by Section 1123(a)(6) of the Bankruptcy Code; and (ii) authorize the issuance of Class A Common Stock, New Preferred Stock, New Director Preferred Stock, and New Warrants in amounts not less than the amounts necessary to permit the distributions thereof required or contemplated by the Plan. After the Effective Date, Reorganized McLeodUSA may amend and restate the Amended Certificates of Incorporation and Bylaws as permitted by applicable law.

(b) Directors and Officers of Reorganized McLeodUSA. Subject to any requirement of Bankruptcy Court approval pursuant to Section 1129(a)(5) of the Bankruptcy Code, as of the Effective Date, the initial officers of Reorganized McLeodUSA shall be the officers of McLeodUSA immediately prior to the Effective Date. On the Effective Date, the Board of Directors of Reorganized McLeodUSA will consist of up to fifteen (15) members. Mr. Clark E. McLeod will continue to serve as Chairman of the Board of Directors. Mr. Theodore J. Forstmann will continue to serve as the Chairman of the Executive Committee. McLeodUSA's bylaws will be amended as follows: (i) the Board of Directors will include at least five (5) independent directors and the Chairman, Chief Executive Officer, and Chief Operating Officer, and (ii) the Executive Committee of the Board of Directors will consist of no more than seven (7) members and will include the designees of the New Director Preferred Stock, the Chairman, the Chief Executive Officer, and the Chief Operating Officer. Moreover, Reorganized McLeodUSA's charter shall be amended to opt out of the provisions of Section 203 of the Delaware General Corporation Law. Pursuant to Section 1129(a)(5) of the Bankruptcy Code, McLeodUSA will disclose, on or prior to the Confirmation Date, the identity and affiliations of any other person proposed to serve on the initial board of directors of Reorganized McLeodUSA, and, to the extent such person is an insider other than by virtue of being a director, the nature of any compensation for such person. The classification and composition of the board of directors of Reorganized McLeodUSA shall be consistent with the Amended Certificate of Incorporation and Bylaws. Each such director and officer shall serve from and after the Effective Date pursuant to the terms of the Amended Certificate of Incorporation and Bylaws, the other constituent documents of Reorganized McLeodUSA, and applicable law.

(c) Corporate Action. On the Effective Date, the adoption of the Amended Certificates of Incorporation and Bylaws or similar constituent documents, the selection of directors and officers for Reorganized McLeodUSA, and all other actions contemplated by the Plan shall be authorized and approved in all respects (subject to the provisions of the Plan). All matters provided for in the Plan involving the corporate structure of McLeodUSA or Reorganized McLeodUSA, and any corporate action required by McLeodUSA or Reorganized McLeodUSA in connection with the Plan, shall be deemed to have occurred and shall be in effect without any requirement of further action by the security holders or directors of McLeodUSA or Reorganized McLeodUSA. On the Effective Date, the appropriate officers of Reorganized McLeodUSA and members of the board of directors of Reorganized McLeodUSA are authorized and directed to issue, execute and deliver the agreements,

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documents, securities and instruments contemplated by the Plan in the name of and on behalf of Reorganized McLeodUSA.

4.3 Effectuating Documents and Further Transactions. Each of McLeodUSA or Reorganized McLeodUSA, as appropriate, is authorized to execute, deliver, file or record such contracts, instruments, releases and other agreements or documents and take such actions as may be necessary or appropriate to effectuate, implement and further evidence the terms and conditions of the Plan and any notes or securities issued pursuant to the Plan.

4.4 Sale of Pubco. On the Effective Date, McLeodUSA Holdings shall sell to Pubco Acquisition, and Pubco Acquisition shall purchase from McLeodUSA Holdings, upon and pursuant to the terms of the Pubco Stock Purchase Agreement, all of the outstanding shares of capital stock of Pubco, subject to McLeodUSA Holding's entry into a "Superior Combination," as defined in the Pubco Stock Purchase Agreement.

4.5 Cancellation of Notes and Old Preferred Stock. On the Effective Date, except as otherwise provided for herein, (i) the Notes, Old Preferred Stock, and any other notes, bonds (with the exception of surety bonds outstanding), Indentures or other instruments or documents evidencing or creating any indebtedness or obligations of McLeodUSA, except such notes or other instruments evidencing indebtedness or obligations of McLeodUSA that are Unimpaired, Reinstated, or amended and restated under the Plan, shall be cancelled, and (ii) the obligations of McLeodUSA under any agreements, Indentures or certificates of designation governing the Notes, Old Preferred Stock, and any other notes, bonds, indentures or other instruments or documents evidencing or creating any indebtedness or obligations of McLeodUSA, except such notes or other instruments evidencing indebtedness or obligations of McLeodUSA that are Unimpaired, Reinstated or amended and restated under the Plan, as the case may be, shall be discharged;provided, however, that each Indenture or other agreement that governs the rights of Note Claims shall continue in effect solely for the purpose of allowing the Notes Trustee to make distributions on account of such Claims under the Plan.

4.6 Effectuation of Reverse Stock Split and Reclassification; Issuance of New Securities. On or as soon as reasonably practicable after the Effective Date, Reorganized McLeodUSA shall effectuate the Reverse Stock Split and the Reclassification and, in accordance therewith and the terms of the Plan, issue and exchange, as necessary, for the benefit of Holders of the Old Preferred Stock Interests and Class A Common Stock Interests, such shares of Class A Common Stock as required by Section 3.4 of the Plan. The conversion ratio of the Reclassification shall be based on 627,734,497 shares of Class A Common Stock,provided however, that the conversion ratio will be adjusted, as necessary, to reflect the proportionate distributions of Class A Common Stock under the Plan to the extent the actual number of issued and outstanding shares of Class A Common Stock differs from that stated herein as of the Effective Date. Reorganized McLeodUSA shall issue, for the benefit of Holders of Note Claims, such shares of Class A Common Stock as required by Section 3.3 of the Plan. Also on the Effective Date, Reorganized McLeodUSA shall (i) issue to Forstmann Little the New Preferred Stock, (ii) issue to Forstmann Little 18,937,995 (eighteen million nine hundred thirty-seven thousand nine hundred ninety-five) New Warrants, and (iii) issue to Forstmann Little the New Director Preferred Stock, in each case pursuant to the terms of the Preferred Stock and Warrant Purchase Agreement. The issuance of the Class A Common Stock, New Preferred Stock, New Director Preferred Stock, and New Warrants is authorized without the need for any further corporate action.

4.7 New Credit Agreement. On the Effective Date, Reorganized McLeodUSA is authorized and directed to execute and deliver the New Credit Agreement to govern the Exit Facility.

4.8 Management Incentive Plan. On the Effective Date, Reorganized McLeodUSA shall be authorized and directed to establish and implement the Management Incentive Plan. An amount of shares of Class A Common Stock equal to 15% of the shares to be outstanding immediately after the conversion of the New Preferred Stock after giving effect to the options will be reserved for issuance

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under the Management Incentive Plan. The Management Incentive Plan may be amended or modified by the board of directors of Reorganized McLeodUSA in accordance with its terms and any such amendment or modification shall not require an amendment of this Plan.

4.9 Sources of Cash for Plan Distributions. Except as otherwise provided in the Plan or the Confirmation Order, all Cash necessary for Reorganized McLeodUSA to make payments pursuant to the Plan shall be obtained from existing Cash balances, and the proceeds from the sale of Pubco, the New Preferred Stock, the New Director Stock, and the New Warrants.

4.10 Exemption from Transfer Taxes. Pursuant to Section 1146(c) of the Bankruptcy Code, (a) the issuance, transfer or exchange of notes or equity securities under the Plan; (b) the creation of any mortgage, deed of trust, lien, pledge or other security interest; (c) the making or assignment of any lease or sublease; or (d) the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with, the Plan, including, without limitation, any merger agreements; agreements of consolidation, restructuring, disposition, liquidation or dissolution; deeds; bills of sale; and transfers of tangible property, will not be subject to any stamp tax, recording tax, personal property tax, real estate transfer tax, sales or use tax or other similar tax. Any transfers from McLeodUSA to Reorganized McLeodUSA or otherwise pursuant to the Plan shall not be subject to any such taxes, and the Confirmation Order shall direct the appropriate state or local governmental officials or agents to forgo the collection of any such tax or governmental assessment and to accept for filing and recordation any of the foregoing instruments or other documents without the payment of any such tax or governmental assessment. Unless the Bankruptcy Court orders otherwise, any of the foregoing transactions taken on or prior to the Effective Date shall be deemed to have been in furtherance of, or in connection with, the Plan.

ARTICLE V

ACCEPTANCE OR REJECTION OF THE PLAN

5.1 Classes Entitled to Vote. Classes 1, 2, 3, and 4 are Unimpaired under the Plan, are deemed to have accepted the Plan, and are not entitled to vote on the Plan. Classes 5 and 6 are Impaired and are entitled to vote on the Plan. If the Class 7 Solicitation Order is entered, Class 7 will be deemed to have rejected the Plan and will not be entitled to vote on the Plan. Class 8 is deemed to have rejected the Plan and is not entitled to vote on the Plan.

5.2 Acceptance by Impaired Classes. An Impaired Class of Claims shall have accepted the Plan if (a) the Holders (other than any holder designated under Section 1126(e) of the Bankruptcy Code) of at least two-thirds (²/3) in amount of the Allowed Claims actually voting in such Class have voted to accept the Plan and (b) the Holders (other than any holder designated under Section 1126(e) of the Bankruptcy Code) of more than one-half (¹/2) in number of the Allowed Claims actually voting in such Class have voted to accept the Plan. An Impaired Class of Interests shall have accepted the Plan if the Holders (other than any holder designated under Section 1126(e) of the Bankruptcy Code) of at least two-thirds (²/3) in amount of the Allowed Interests actually voting in such Class have voted to accept the Plan.

5.3 Cramdown. McLeodUSA will request Confirmation of the Plan, as it may be modified from time to time, under Section 1129(b) of the Bankruptcy Code with respect to any Class which rejects, or is deemed to have rejected, the Plan.

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ARTICLE VI

PROVISIONS GOVERNING DISTRIBUTIONS

6.1 Distributions for Claims or Interests Allowed as of the Effective Date. Except as otherwise provided herein or as ordered by the Bankruptcy Court, distributions to be made on account of Claims or Interests that are Allowed as of the Effective Date shall be made on the Distribution Date or as soon thereafter as is practicable. Any distribution to be made pursuant to this Plan shall be deemed as having been made on the Effective Date if such distribution is made on the Effective Date or as soon thereafter as is practicable. Any payment or distribution required to be made under the Plan on a day other than a Business Day shall be made on the next succeeding Business Day. Distributions on account of Claims or Interests that first become Allowed Claims or Interests after the Effective Date shall be made pursuant to Articles III, VI and VII of this Plan. Notwithstanding the date on which any distribution of securities is made to a Holder of a Claim or Interest that is an Allowed Claim or Allowed Interest on the Effective Date, as of the date of the distribution, such Holder shall be deemed to have the rights of a Holder of such securities distributed as of the Effective Date.

6.2 Interest on Claims. Unless otherwise specifically provided for or contemplated in the Plan or Confirmation Order, or required by applicable bankruptcy law, postpetition interest shall not accrue or be paid on any Claims, other than Senior Secured Lender Claims as provided in the Credit Agreement, and no Holder of a Claim shall be entitled to interest accruing on or after the Petition Date on any Claim.

6.3 Distributions by Reorganized McLeodUSA. Reorganized McLeodUSA or the Disbursing Agent shall make all distributions required to be distributed under the Plan. However, distributions on account of Senior Secured Lender Claims shall be made to the Bank Agents, and distributions on account of Note Claims shall be made to the Notes Trustee. Reorganized McLeodUSA may employ or contract with other entities to assist in or make the distributions required by the Plan.

6.4 Delivery of Distributions and Undeliverable or Unclaimed Distributions.

(a) Delivery of Distributions in General. Distributions to holders of Allowed Claims and Allowed Interests shall be made at the addresses set forth in McLeodUSA's records or as otherwise available to McLeodUSA, the Bank Agents, the Notes Trustee, or any other agent or servicer, unless such addresses are superseded by any proofs of claim or transfers of claim that may be filed pursuant to Bankruptcy Rule 3001.

(b) Undeliverable and Unclaimed Distributions.

(i) Holding and Investment of Undeliverable and Unclaimed Distributions. If the distribution to any Holder of an Allowed Claim or Interest is returned to the Disbursing Agent as undeliverable or is otherwise unclaimed, no further distributions shall be made to such Holder unless and until the Disbursing Agent is notified in writing of such Holder's then current address.

(ii) After Distributions Become Deliverable. Reorganized McLeodUSA shall make all distributions that have become deliverable or have been claimed since the Distribution Date as soon as practicable after such distribution has become deliverable.

(iii) Failure to Claim Undeliverable Distributions. Any holder of an Allowed Claim or Interest that does not assert a claim pursuant to the Plan for an undeliverable or unclaimed distribution within one (1) year after the Effective Date shall be deemed to have forfeited its claim for such undeliverable or unclaimed distribution and shall be forever barred and enjoined from asserting any such claim for an undeliverable or unclaimed distribution against McLeodUSA or its Estate, Reorganized McLeodUSA, or their property. In such cases, any

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Cash for distribution on account of such claims for undeliverable or unclaimed distributions shall become the property of the Estate free of any restrictions thereon and notwithstanding any federal or state escheat laws to the contrary, subject to the liens of the Senior Secured Lenders. Any Class A Common Stock held for distribution on account of such Claim or Interest shall be canceled and of no further force or effect. Nothing contained in the Plan shall require any Disbursing Agent, including, but not limited to, Reorganized McLeodUSA, to attempt to locate any holder of an Allowed Claim or Interest.

6.5 Record Date for Distributions. As of the close of business on the Distribution Record Date, the transfer register for the Notes, Old Preferred Stock, and the Class A Common Stock, as maintained by McLeodUSA, the Notes Trustee, any other applicable trustee or their respective agents shall be closed and the transfer of such securities or any interest thereon prohibited. The Disbursing Agent will have no obligation to recognize the transfer of, or the sale of any participation in, any Allowed Claim or Interest that occurs after the close of business on the Distribution Record Date, and will be entitled for all purposes herein to recognize and distribute only to those Holders of Allowed Claims and Interests who are Holders of such Claims or Interest, or participants therein, as of the close of business on the Distribution Record Date. The Disbursing Agent and Reorganized McLeodUSA shall instead be entitled to recognize and deal for all purposes under the Plan with only those record holders stated on any official register as of the close of business on the Distribution Record Date.

6.6 Allocation of Plan Distributions Between Principal and Interest. To the extent that any Allowed Claim entitled to a distribution under the Plan is comprised of indebtedness and accrued but unpaid interest thereon, such distribution shall, for federal income tax purposes, be allocated to the principal amount of the Claim first and then, to the extent the consideration exceeds the principal amount of the claim, to the portion of such Claim representing accrued but unpaid interest.

6.7 Means of Cash Payment. Payments of Cash made pursuant to the Plan shall be in U.S. dollars and shall be made, at the option and in the sole discretion of Reorganized McLeodUSA, by (a) checks drawn on or (b) wire transfer from a domestic bank selected by Reorganized McLeodUSA. Cash payments to foreign creditors may be made, at the option of Reorganized McLeodUSA, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction.

6.8 Withholding and Reporting Requirements. In connection with the Plan and all distributions thereunder, Reorganized McLeodUSA shall comply with all withholding and reporting requirements imposed by any federal, state, local or foreign taxing authority, and all distributions hereunder shall be subject to any such withholding and reporting requirements. Reorganized McLeodUSA shall be authorized to take any and all actions that may be necessary or appropriate to comply with such withholding and reporting requirements. Notwithstanding any other provision of the Plan, (i) each Holder of an Allowed Claim or Interest that is to receive a distribution of Class A Common Stock, New Preferred Stock, New Director Preferred Stock, or New Warrants pursuant to the Plan shall have sole and exclusive responsibility for the satisfaction and payment of any tax obligations imposed by any governmental unit, including income, withholding and other tax obligations, on account of such distribution, and (ii) no distribution shall be made to or on behalf of such Holder pursuant to the Plan unless and until such Holder has made arrangements satisfactory to Reorganized McLeodUSA for the payment and satisfaction of such tax obligations or has, to Reorganized McLeodUSA's satisfaction, established an exemption therefrom. Any Class A Common Stock, New Preferred Stock, New Director Preferred Stock, or New Warrants to be distributed pursuant to the Plan shall, pending the implementation of such arrangements, be treated as undeliverable pursuant to Section 6.4 hereof.

6.9 Setoffs. Reorganized McLeodUSA may, pursuant to Section 553 of the Bankruptcy Code or applicable nonbankruptcy law, but shall not be required to, set off against any Claim and the payments or other distributions to be made pursuant to the Plan in respect of such Claim, claims of any nature whatsoever that McLeodUSA or Reorganized McLeodUSA may have against the Holder of such

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Claim;provided, however, that neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by Reorganized McLeodUSA of any such claim that McLeodUSA or Reorganized McLeodUSA may have against such Holder.

6.10 Surrender of Instruments or Securities. As a condition precedent to receiving any distribution pursuant to the Plan on account of an Allowed Claim or Interest, the Holder of such Claim or Interest shall tender the applicable instruments, securities or other documentation evidencing such Claim or Interest to Reorganized McLeodUSA or the Notes Trustee or their agents, as applicable, unless waived in writing by Reorganized McLeodUSA or the Notes Trustee. Any Class A Common Stock to be distributed pursuant to the Plan on account of any such Claim or Interest shall, pending such surrender, be treated as an undeliverable distribution pursuant to Section 6.4(b) of the Plan.

(a) Notes and Old Preferred Stock. Each Holder of a Note Claim or Old Preferred Stock Interest shall tender its Notes and Old Preferred Stock relating to such Claim or Interest to Reorganized McLeodUSA or the Notes Trustee or their agents, as applicable, in accordance with written instructions to be provided to such Holders by Reorganized McLeodUSA or the Notes Trustee as promptly as practicable following the Effective Date. Such instructions shall specify that delivery of such instruments will be affected, and risk of loss and title thereto will pass, only upon the proper delivery of such instruments with a letter of transmittal in accordance with such instructions. All surrendered Notes and Old Preferred Stock shall be marked as cancelled.

(b) Failure to Surrender Instruments. Any Holder of Note Claims or Old Preferred Stock Interests that fails to surrender or is deemed to have failed to surrender the applicable Notes or Old Preferred Stock required to be tendered hereunder within one year after the Effective Date shall have its Claim or Interest and its distribution pursuant to the Plan on account of such Notes or Old Preferred Stock discharged and shall be forever barred from asserting any such Claim or Interest against Reorganized McLeodUSA or its property. In such cases, any Class A Common Stock held for distribution on account of such Claim or Interest shall be disposed of pursuant to Section 6.4 hereof.

6.11 Lost, Stolen, Mutilated or Destroyed Securities. In addition to any requirements under the Indentures or any other applicable agreement, any Holder of a Claim or Interest evidenced by a Note or Old Preferred Stock that has been lost, stolen, mutilated or destroyed shall, in lieu of surrendering such Note or Old Preferred Stock, deliver to Reorganized McLeodUSA or the Notes Trustee or their agents, as applicable: (i) evidence reasonably satisfactory to Reorganized McLeodUSA or the Notes Trustee of the loss, theft, mutilation or destruction; and (ii) such security or indemnity as may be required by Reorganized McLeodUSA or the Notes Trustee to hold Reorganized McLeodUSA or the Notes Trustee harmless from any damages, liabilities or costs incurred in treating such individual as a Holder of an Allowed Claim or Interest. Upon compliance with this Article VI by a Holder of a Claim or Interest evidenced by a Note or Old Preferred Stock, such Holder shall, for all purposes under the Plan, be deemed to have surrendered such instrument.

ARTICLE VII

PROCEDURES FOR RESOLVING DISPUTED,
CONTINGENT AND UNLIQUIDATED CLAIMS AND INTERESTS

7.1 Objection Deadline; Prosecution of Objections. No later than the Claims Objection Deadline (unless extended by an order of the Bankruptcy Court), McLeodUSA or Reorganized McLeodUSA, as the case may be, shall file objections to Claims and Interests with the Bankruptcy Court and serve such objections upon the Holders of each of the Claims and Interests to which objections are made, provided, however, that McLeodUSA and Reorganized McLeodUSA shall not object to Claims Allowed pursuant to that Plan. Nothing contained herein, however, shall limit Reorganized McLeodUSA's right to object to Claims or Interests, if any, filed or amended after the Claims

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Objection Deadline. McLeodUSA and Reorganized McLeodUSA shall be authorized to, and shall, resolve all Disputed Claims or Interests by withdrawing or settling such objections thereto, or by litigating to judgment in the Bankruptcy Court or such other court having jurisdiction the validity, nature and/or amount thereof.

7.2 No Distributions Pending Allowance. Notwithstanding any other provision of the Plan, no payments or distributions shall be made with respect to all or any portion of a Disputed Claim or Interest unless and until all objections to such Disputed Claim or Interest have been settled or withdrawn or have been determined by Final Order and the Disputed Claim or Interest, or some portion thereof, has become an Allowed Claim or Interest.

7.3 Disputed Claims Reserve; Disputed Interest Reserve. On the Effective Date (or as soon thereafter as is practicable), Reorganized McLeodUSA shall establish the Disputed Claims Reserve and the Disputed Interest Reserve by withholding from the initial distribution (i) with respect to the Disputed Claims Reserve, an amount of Class A Common Stock calculated as if all Class 5 Claims were Allowed Class 5 Claims in an amount equal to one hundred percent (100%) of the distributions to which Holders of Disputed Class 5 Claims would be entitled if their Claims were allowed in the Disputed Claim Amount; and (ii) with respect to the Disputed Interest Reserve, an amount of Class A Common Stock calculated as if all Class 6 Interests were Allowed Class 6 Interests and all Class 7 Interests were Allowed Class 7 Interests in an amount equal to one hundred percent (100%) of the distributions to which Holders of Disputed Class 6 Interests or Disputed Class 7 Interests would be entitled if their Interest was allowed in the Disputed Interest Amount; provided, however, that McLeodUSA and Reorganized McLeodUSA shall have the right to file a motion seeking to modify any Disputed Claim Amounts or Disputed Interest Amounts.

7.4 Distributions After Allowance. Reorganized McLeodUSA shall make payments and distributions from the Disputed Claims Reserve or Disputed Interest Reserve, as appropriate, to the holder of any Disputed Claim or Disputed Interest that has become an Allowed Claim or Interest, as soon as practicable after the date such Disputed Claim or Interest becomes an Allowed Claim or Interest. Such distributions shall be based upon the cumulative distributions that would have been made to the Holder of such Claim or Interest under the Plan if the Disputed Claim or Interest had been Allowed on the Effective Date and shall not be limited by the Disputed Claim Amounts or Disputed Interest Amounts previously reserved with respect to such Disputed Claim or Interest to the extent that additional amounts are available therefor from the Disputed Claims Reserve or the Disputed Interest Reserve, as appropriate, but only to the extent that such additional amounts have not yet been distributed to holders of Allowed Claims or Interest. After a Final Order has been entered, or other final resolution has been reached, with respect to each Disputed Claim or Disputed Interest, any Class A Common Stock that remains in the Disputed Claims Reserve or Disputed Interest Reserve, as applicable, shall be distributed as applicable, pro rata, to (i) with respect to the Disputed Claims Reserve, Holders of Allowed Class 5 Claims; and (ii) with respect to the Disputed Interest Reserve, Holders of Allowed Class 6 Interests and Allowed Class 7 Interests. All distributions made under this Section 8.4 shall be made as if such Allowed Class 5 Claim or Allowed Class 6 Interest and Allowed Class 7 Interest had been Allowed on the Effective Date.

ARTICLE VIII

TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES

8.1 Assumption of Executory Contracts and Unexpired Leases. Immediately prior to the Effective Date, all executory contracts or unexpired leases of Reorganized McLeodUSA will be deemed assumed in accordance with the provisions and requirements of Sections 365 and 1123 of the Bankruptcy Code. Entry of the Confirmation Order by the Bankruptcy Court shall constitute approval of such

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assumptions and rejections pursuant to Sections 365(a) and 1123 of the Bankruptcy Code. Each executory contract and unexpired lease assumed pursuant to this Article VIII shall revest in and be fully enforceable by Reorganized McLeodUSA in accordance with its terms, except as modified by the provisions of the Plan, or any order of the Bankruptcy Court authorizing and providing for its assumption or applicable federal law.

8.2 Cure of Defaults of Assumed Executory Contracts and Unexpired Leases. Any monetary amounts by which each executory contract and unexpired lease to be assumed pursuant to the Plan is in default shall be satisfied, pursuant to Section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in Cash on the Effective Date or on such other terms as the parties to such executory contracts or unexpired leases may otherwise agree. In the event of a dispute regarding: (1) the amount of any cure payments, (2) the ability of Reorganized McLeodUSA or any assignee to provide "adequate assurance of future performance" (within the meaning of Section 365 of the Bankruptcy Code) under the contract or lease to be assumed, or (3) any other matter pertaining to assumption, the cure payments required by Section 365(b)(1) of the Bankruptcy Code shall be made following the entry of a Final Order resolving the dispute and approving the assumption.

8.3 Indemnification of Directors, Officers and Employees. The obligations of McLeodUSA to indemnify any person or entity serving at any time on or prior to the Effective Date as one of its directors, officers or employees by reason of such person's or entity's service in such capacity, or as a director, officer or employee of any other corporation or legal entity, to the extent provided in McLeodUSA's constituent documents, or by a written agreement with McLeodUSA, or pursuant to applicable general corporation law, each as applicable, shall be deemed and treated as executory contracts that are assumed by Reorganized McLeodUSA pursuant to the Plan and Section 365 of the Bankruptcy Code as of the Effective Date. Accordingly, such indemnification obligations shall be treated as General Unsecured Claims and shall survive Unimpaired and unaffected by entry of the Confirmation Order, irrespective of whether such indemnification is owed for an act or event occurring before or after the Petition Date.

8.4 Compensation and Benefit Programs. Except as otherwise expressly provided hereunder, all employment and severance policies, and all compensation and benefit plans, policies, and programs of McLeodUSA applicable to its employees, retirees and non-employee directors and the employees and retirees of its subsidiaries, including, without limitation, all savings plans, retirement plans, healthcare plans, disability plans, severance benefit plans, incentive plans, and life, accidental death and dismemberment insurance plans are treated as executory contracts under the Plan and on the Effective Date will be assumed pursuant to the provisions of Sections 365 and 1123 of the Bankruptcy Code. All employment contracts assumed pursuant to this Section 8.4 shall be deemed modified such that the transactions contemplated by the Plan shall not be a "change of control" as defined in the relevant employment contracts.

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ARTICLE IX

CONFIRMATION AND CONSUMMATION OF THE PLAN

9.1 Conditions to Confirmation. The Bankruptcy Court shall not enter the Confirmation Order unless and until the Confirmation Order shall be reasonably acceptable in form and substance to McLeodUSA.

9.2 Conditions to Effective Date. The following are conditions precedent to the occurrence of the Effective Date:

(a) The Confirmation Order confirming the Plan, as such Plan may have been modified, shall have been entered and become a Final Order in form and substance reasonably satisfactory to McLeodUSA and shall provide that:

(i) McLeodUSA and Reorganized McLeodUSA are authorized and directed to take all actions necessary or appropriate to enter into, implement and consummate the contracts, instruments, releases, leases, indentures and other agreements or documents created in connection with the Plan;

(ii) the provisions of the Confirmation Order are nonseverable and mutually dependent;

(iii) Reorganized McLeodUSA is authorized (a) to issue Class A Common Stock, New Preferred Stock, New Director Preferred Stock and New Warrants, (b) to establish and implement the Management Incentive Plan, and (c) to enter into the New Credit Agreement; and

(iv) the Class A Common Stock, New Preferred Stock, New Director Preferred Stock, and New Warrants issued under the Plan are exempt from registration under Section 3(a)(9) of the Securities Act of 1933 and comply with, or are otherwise exempt from, all other applicable securities laws and regulations.

(b) Reorganized McLeodUSA shall have credit availability under the Exit Facility in an amount acceptable to Reorganized McLeodUSA and the Bank Agents.

(c) The following agreements, in form and substance satisfactory to Reorganized McLeodUSA, shall have been executed and delivered, and all conditions precedent thereto shall have been satisfied:

(i) Amended Certificates of Incorporation and By-laws of Reorganized McLeodUSA;

(ii) New Credit Agreement and all similar documents provided for therein or contemplated thereby;

(iii) Pubco Stock Purchase Agreement; and

(iv) Preferred Stock and Warrant Purchase Agreement.

(d) The Amended Certificates of Incorporation and By-laws of Reorganized McLeodUSA, as necessary, shall have been filed with the appropriate authority in accordance with such jurisdiction's corporation laws.

(e) All actions, documents and agreements necessary to implement the Plan shall have been effected or executed.

(f) The new board of directors of Reorganized McLeodUSA shall have been appointed.

9.3 Waiver of Conditions. Each of the conditions set forth in section 9.2 above may be waived in whole or in part by McLeodUSA, with the consent of the Bank Agents, without any other notice to

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parties in interest or the Bankruptcy Court and without a hearing. The failure to satisfy or waive a condition to the Effective Date may be asserted by McLeodUSA or Reorganized McLeodUSA regardless of the circumstances giving rise to the failure of such condition to be satisfied (including any action or inaction by McLeodUSA or Reorganized McLeodUSA). The failure of McLeodUSA or Reorganized McLeodUSA to exercise any of the foregoing rights shall not be deemed a waiver of any other rights, and each right shall be deemed an ongoing right that may be asserted at any time.

9.4 Consequences of Non-Occurrence of Effective Date. If the Effective Date does not occur within ninety (90) days of the Confirmation Date, or by such later date, after notice and hearing, as is proposed by McLeodUSA, then upon motion by McLeodUSA and upon notice to such parties in interest as the Bankruptcy Court may direct, the Confirmation Order will be vacated by the Bankruptcy Court;provided, however, that, notwithstanding the filing of such motion, the Confirmation Order may not be vacated if the Effective Date occurs before the Bankruptcy Court enters an order granting such motion. If the Confirmation Order is vacated pursuant to this Section 9.4, (a) the Plan shall be null and void in all respects; and (b) any settlement of Claims and Interests provided for hereby shall be null and void without further order of the Bankruptcy Court.

ARTICLE X

EFFECT OF PLAN CONFIRMATION

10.1 Binding Effect. The Plan shall be binding upon and inure to the benefit of McLeodUSA, all present and former holders of Claims and Interests, and their respective successors and assigns, including, but not limited to, Reorganized McLeodUSA.

10.2 Discharge of Claims and Termination of Interests.

(a) Except as provided in the Confirmation Order, pursuant to Section 1141(d) of the Bankruptcy Code, the rights afforded under this Plan and the treatment of Claims and Interests under this Plan shall be in exchange for and in complete satisfaction, discharge and release of all Claims and termination of all Interests, including any interest accrued on Claims from the Petition Date. Except as provided in the Confirmation Order or the Plan, Confirmation shall (a) discharge McLeodUSA from all Claims and other debts that arose before the Confirmation Date and all debts of the kind specified in Section 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (i) a proof of claim based on such debt is filed or deemed filed pursuant to Section 501 of the Bankruptcy Code, (ii) a Claim based on such debt is allowed pursuant to Section 502 of the Bankruptcy Code or (iii) the holder of a Claim based on such debt has accepted the Plan; and (b) terminate all Interests and other rights of equity security holders in McLeodUSA.

(b) As of the Confirmation Date, except as provided in this Plan or the Confirmation Order, all entities shall be precluded from asserting against McLeodUSA, Reorganized McLeodUSA, their successors or their property, any other or further claims, debts, rights, causes of action, liabilities or equity interests based upon any act, omission, transaction or other activity of any nature that occurred prior to the Confirmation Date. In accordance with the foregoing, except as provided in this Plan or the Confirmation Order, the Confirmation Order shall be a judicial determination of discharge of all such claims and rights of equity security holders in McLeodUSA, pursuant to Sections 524 and 1141 of the Bankruptcy Code, and such discharge shall void any judgment obtained against McLeodUSA at any time to the extent that such judgment relates to a discharged Claim or Interest.

10.3 Injunction.

(a) Except as otherwise provided in the Plan, entities who have held, hold or may hold Claims against or Interests in McLeodUSA are (i) permanently enjoined from taking any of the following actions against the Estate or any of its property on account of any such Claims or Interests

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and (ii) permanently enjoined from taking any of the following actions against any of McLeodUSA, Reorganized McLeodUSA, or their property on account of such Claims or Interests: (A) commencing or continuing, in any manner or in any place, any action or other proceeding; (B) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order; (C) creating, perfecting or enforcing any lien or encumbrance; (D) asserting a setoff, right of subrogation or recoupment of any kind against any debt, liability or obligation due to McLeodUSA; and (E) commencing or continuing, in any manner or in any place, any action that does not comply with or is inconsistent with the provisions of the Plan;provided, however, that nothing contained herein shall preclude such persons from exercising their rights pursuant to and consistent with the terms of this Plan.

(b) By accepting distributions pursuant to the Plan, each holder of an Allowed Claim or Interest will be deemed to have specifically consented to the injunctions set forth in this Section.

10.4 Releases.

(a) Releases by McLeodUSA. As of the Effective Date, for good and valuable consideration, the adequacy of which is hereby confirmed, McLeodUSA and Reorganized McLeodUSA in their individual capacities and as debtor in possession, will be deemed to forever release, waive and discharge all claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action and liabilities (other than the rights of McLeodUSA or Reorganized McLeodUSA to enforce the Plan and the contracts, instruments, releases, indentures and other agreements or documents delivered thereunder) whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or thereafter arising, in law, equity or otherwise that are based in whole or in part on any act, omission, transaction, event or other occurrence taking place on or prior to the Effective Date in any way relating to McLeodUSA, Reorganized McLeodUSA, the parties released pursuant to this Section 10.4, the Chapter 11 Case, or the Plan or the Disclosure Statements, and that could have been asserted by or on behalf of McLeodUSA or its Estate or Reorganized McLeodUSA against (i) the current and former directors, officers and employees of McLeodUSA (other than for money borrowed from or owed to McLeodUSA or its subsidiaries by any such directors, officers or employees as set forth in McLeodUSA's books and records) and McLeodUSA's agent, and professionals; (ii) the Senior Secured Lenders and the Bank Agents, (iii) the DIP Lenders and agent, (iv) Forstmann Little, and (v) the respective affiliates and current and former officers, directors, employees, agents, members, shareholders, and professionals of the foregoing.

(b) Releases by Holders of Claims and Interests. On the Effective Date, (i) each Holder of a Claim or Interest that voted to accept the Plan and (ii) to the fullest extent permissible under applicable law, as such law may be extended or interpreted subsequent to the Effective Date, all other Holders of Claims and Interests, in consideration for the obligations of McLeodUSA and Reorganized McLeodUSA under the Plan and the Cash, Class A Common Stock, New Preferred Stock, New Director Preferred Stock, New Warrants and other contracts, instruments, releases, agreements or documents to be delivered in connection with the Plan, each entity (other than McLeodUSA) that has held, holds or may hold a Claim or Interest, as applicable, will be deemed to forever release, waive and discharge all claims, demands, debts, rights, causes of action or liabilities (other than the right to enforce McLeodUSA's or Reorganized McLeodUSA's obligations under the Plan, and the contracts, instruments, releases, agreements and documents delivered under the Plan), whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or thereafter arising, in law, equity or otherwise that are based in whole or in part on any act or omission, transaction, event or other occurrence taking place on or prior to the Effective Date in any way relating to McLeodUSA, the Chapter 11 Case, the Plan or the Disclosure Statements against (i) the current and former directors, officers and employees of McLeodUSA (other than Claims or Interests unrelated to McLeodUSA) and McLeodUSA's agent and professionals; (ii) the Senior Secured Lenders and the Bank Agents, (iii) the DIP Lenders and agent, (iv) Forstmann Little, and (v) the

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respective affiliates and current and former officers, directors, employees, agents, members, shareholders, and professionals of the foregoing.

10.5 Exculpation and Limitation of Liability. Neither McLeodUSA, the Senior Secured Lenders, the Bank Agents, the DIP Lenders nor any of their respective present or former members, officers, directors, shareholders, employees, advisors, attorneys or agents acting in such capacity, shall have or incur any liability to, or be subject to any right of action by, any holder of a Claim or an Interest, or any other party in interest, or any of their respective agents, shareholders, employees, representatives, financial advisors, attorneys or affiliates, or any of their successors or assigns, for any act or omission in connection with, relating to, or arising out of, McLeodUSA's Chapter 11 Case, the pursuit of confirmation of the Plan, the consummation of the Plan, or the administration of the Plan or the property to be distributed under the Plan, except for their willful misconduct or gross negligence, and in all respects shall be entitled to rely reasonably upon the advice of counsel with respect to their duties and responsibilities under the Plan.

10.6 Injunction Related to Releases and Exculpation. The Confirmation Order will permanently enjoin the commencement or prosecution by any entity, whether directly, derivatively or otherwise, of any claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action or liabilities released pursuant to the Plan, including but not limited to the claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action or liabilities released in Sections 10.4 and 10.5 of the Plan.

10.7 Preservation of Rights of Action; Settlement of Litigation Claims.

(a) Preservation of Rights of Action. Except as otherwise provided in the Plan, the Confirmation Order, or in any document, instrument, release or other agreement entered into in connection with the Plan, in accordance with Section 1123(b) of the Bankruptcy Code, McLeodUSA and its Estate shall retain the Litigation Claims. Reorganized McLeodUSA, as the successor in interest to McLeodUSA and the Estate, may enforce, sue on, settle or compromise (or decline to do any of the foregoing) any or all of the Litigation Claims. Notwithstanding the foregoing, McLeodUSA and Reorganized McLeodUSA shall not file, commence or pursue any claim, right or cause of action under Sections 544 through 550 of the Bankruptcy Code; provided, however, that notwithstanding any statute of limitations (including, without limitation, Section 544 of the Bankruptcy Code), McLeodUSA and Reorganized McLeodUSA shall have the right to assert or raise such causes of action (a) as defenses or counterclaims (up to the amount asserted in the Claims against McLeodUSA); and (b) in connection with the Claims objection process, in which case such causes of action can be raised as an objection to a Claim and not as defenses or counterclaims.

(b) Settlement of Litigation Claims. At any time after the Confirmation Date and before the Effective Date, notwithstanding anything in this Plan to the contrary, Reorganized McLeodUSA may settle any or all of the Litigation Claims with the approval of the Bankruptcy Court pursuant to Bankruptcy Rule 9019.

10.8 Termination of Subordination Rights and Settlement of Related Claims.

(a) The classification and manner of satisfying all Claims and Interests under the Plan take into consideration all subordination rights, if any, whether arising by contract or under general principles of equitable subordination, Section 510(b) or 510(c) of the Bankruptcy Code, or otherwise. All subordination rights that a Holder of a Claim or Interest may have with respect to any distribution to be made pursuant to the Plan will be discharged and terminated, and all actions related to the enforcement of such subordination rights will be permanently enjoined. Accordingly, distributions pursuant to the Plan to Holders of Allowed Claims or Allowed Interests will not be subject to payment to a beneficiary of such terminated subordination rights, or to levy, garnishment, attachment or other legal process by a beneficiary of such terminated subordination rights.

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(b) Pursuant to Bankruptcy Rule 9019 and in consideration of the distributions and other benefits provided under the Plan, the provisions of the Plan will constitute a good faith compromise and settlement of all claims or controversies relating to the subordination rights that a Holder of a Claim or Interest may have or any distribution to be made pursuant to the Plan on account of such Claim or Interest. Entry of the Confirmation Order will constitute the Bankruptcy Court's approval, as of the Effective Date, of the compromise or settlement of all such claims or controversies and the Bankruptcy Court's finding that such compromise or settlement is in the best interests of McLeodUSA, Reorganized McLeodUSA, their respective properties, and holders of Claims and Interests, and is fair, equitable and reasonable.

10.9 Term of Bankruptcy Injunction or Stays. All injunctions or stays provided for in the Chapter 11 Case under Section 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date.

ARTICLE XI

RETENTION OF JURISDICTION

Pursuant to Sections 105(c) and 1142 of the Bankruptcy Code and notwithstanding entry of the Confirmation Order and the occurrence of the Effective Date, the Bankruptcy Court will retain exclusive jurisdiction over all matters arising out of, and related to, the Chapter 11 Case and the Plan to the fullest extent permitted by law, including, among other things, jurisdiction to:

(a) Allow, disallow, determine, liquidate, classify, estimate or establish the priority or secured or unsecured status of any Claim or Interest, including the resolution of any request for payment of any Administrative Claim and the resolution of any objections to the allowance or priority of Claims or Interests;

(b) Resolve any matters related to the assumption, assumption and assignment, or rejection of any executory contract or unexpired lease to which McLeodUSA is a party or with respect to which McLeodUSA or Reorganized McLeodUSA may be liable and to hear, determine and, if necessary, liquidate any Claims arising therefrom;

(c) Ensure that distributions to holders of Allowed Claims and Allowed Interests are accomplished pursuant to the provisions of the Plan;

(d) Decide or resolve any motions, adversary proceedings, contested or litigated matters and any other matters and grant or deny any applications involving McLeodUSA that may be pending on the Effective Date;

(e) Enter such orders as may be necessary or appropriate to implement or consummate the provisions of the Plan and all contracts, instruments, releases and other agreements or documents created in connection with the Plan, the Disclosure Statements or the Confirmation Order;

(f) Resolve any cases, controversies, suits or disputes that may arise in connection with the consummation, interpretation or enforcement of the Plan or any contract, instrument, release or other agreement or document that is executed or created pursuant to the Plan, or any entity's rights arising from or obligations incurred in connection with the Plan or such documents;

(g) Modify the Plan before or after the Effective Date pursuant to Section 1127 of the Bankruptcy Code or modify the Disclosure Statements, the Confirmation Order or any contract, instrument, release or other agreement or document created in connection with the Plan, the Disclosure Statements or the Confirmation Order, or remedy any defect or omission or reconcile any inconsistency in any Bankruptcy Court order, the Plan, the Disclosure Statements, the Confirmation Order or any contract, instrument, release or other agreement or document created in connection with

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the Plan, the Disclosure Statements or the Confirmation Order, in such manner as may be necessary or appropriate to consummate the Plan;

(h) Hear and determine all applications for compensation and reimbursement of expenses of Professionals under the Plan or under Sections 330, 331 503(b), and 1103 of the Bankruptcy Code,provided, however, that from and after the Effective Date, the payment of fees and expenses of Reorganized McLeodUSA, including counsel fees, shall be made in the ordinary course of business and shall not be subject to the approval of the Bankruptcy Court.

(i) Issue injunctions, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any entity with consummation, implementation or enforcement of the Plan or the Confirmation Order;

(j) Hear and determine causes of action by or on behalf of McLeodUSA or Reorganized McLeodUSA;

(k) Hear and determine matters concerning state, local and federal taxes in accordance with Sections 346, 505 and 1146 of the Bankruptcy Code;

(l) Enter and implement such orders as are necessary or appropriate if the Confirmation Order is for any reason or in any respect modified, stayed, reversed, revoked or vacated or distributions pursuant to the Plan are enjoined or stayed;

(m) Determine any other matters that may arise in connection with or relate to the Plan, the Disclosure Statements, the Confirmation Order or any contract, instrument, release or other agreement or document created in connection with the Plan, the Disclosure Statements or the Confirmation Order;

(n) Enforce all orders, judgments, injunctions, releases, exculpations, indemnifications and rulings entered in connection with the Chapter 11 Case;

(o) Hear and determine all matters related to (i) the property of the Estate from and after the Confirmation Date and (ii) the activities of Reorganized McLeodUSA;

(p) Hear and determine such other matters as may be provided in the Confirmation Order or as may be authorized under the Bankruptcy Code; and

(q) Enter an order closing the Chapter 11 Case.

ARTICLE XII

MISCELLANEOUS PROVISIONS

12.1 Bar Date for Administrative Claims. The Confirmation Order will establish an Administrative Claims Bar Date for filing Administrative Claims, except for Claims under the DIP Credit Agreement as provided in Article 3.1(a)(ii) hereof, which date will be thirty (30) days after the Effective Date. Holders of Administrative Claims not paid prior to the Effective Date shall submit proofs of Claim on or before such Administrative Claims Bar Date or forever be barred from doing so. The notice of Confirmation to be delivered pursuant to Bankruptcy Rules 3020(c) and 2002(f) will set forth such date and constitute notice of this Administrative Claims Bar Date. McLeodUSA and Reorganized McLeodUSA shall have thirty (30) days (or such longer period as may be allowed by order of the Bankruptcy Court) following the Administrative Claims Bar Date to review and object to such Administrative Claims before a hearing for determination of allowance of such Administrative Claims.

12.2 Payment of Statutory Fees. All fees payable pursuant to Section 1930 of Title 28, United States Code, as determined by the Bankruptcy Court at the Confirmation Hearing, shall be paid on the Effective Date.

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12.3 Amendment or Modification of the Plan. Subject to Section 1127 of the Bankruptcy Code and, to the extent applicable, Sections 1122, 1123 and 1125 of the Bankruptcy Code, McLeodUSA reserves the right to alter, amend or modify the Plan with the consent of the Bank Agents at any time prior to or after the Confirmation Date but prior to the substantial consummation of the Plan. A Holder of a Claim or Interest that has accepted the Plan shall be deemed to have accepted the Plan, as altered, amended or modified, if the proposed alteration, amendment or modification does not materially and adversely change the treatment of the Claim or Interest of such Holder.

12.4 Severability of Plan Provisions. If, prior to the Confirmation Date, any term or provision of the Plan is determined by the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court will have the power to alter and interpret such term or provision to make it valid or enforceable to the maximum extent practicable, consistent with the original purpose of the term or provision held to be invalid, void or unenforceable, and such term or provision will then be applicable as altered or interpreted. Notwithstanding any such holding, alteration or interpretation, the remainder of the terms and provisions of the Plan will remain in full force and effect and will in no way be affected, impaired or invalidated by such holding, alteration or interpretation. The Confirmation Order will constitute a judicial determination that each term and provision of the Plan, as it may have been altered or interpreted in accordance with the foregoing, is valid and enforceable pursuant to its terms.

12.5 Successors and Assigns. The Plan shall be binding upon and inure to the benefit of McLeodUSA and its successors and assigns, including, without limitation, Reorganized McLeodUSA. The rights, benefits and obligations of any entity named or referred to in the Plan shall be binding on, and shall inure to the benefit of any heir, executor, administrator, successor or assign of such entity.

12.6 Plan Supplement. The Plan Supplement, which shall include certain exhibits, lists, schedules, or documents to be executed in connection with the Plan, shall be filed with the Bankruptcy Court not later than five (5) days prior to the Confirmation Hearing. Upon its filing, the Plan Supplement may be inspected in the office of the clerk of the Bankruptcy Court or its designee during normal business hours. Holders of Claims and Interests may obtain a copy of the Plan Supplement upon written request to McLeodUSA. The documents contained in the Plan Supplement shall be approved by the Bankruptcy Court pursuant to the Confirmation Order.

12.7 Revocation, Withdrawal or Non-Consummation. McLeodUSA reserves the right to revoke or withdraw the Plan prior to the Confirmation Date and to file subsequent plans of reorganization. If McLeodUSA revokes or withdraws the Plan, or if Confirmation or consummation does not occur, then (a) the Plan shall be null and void in all respects, (b) any settlement or compromise embodied in the Plan (including the fixing or limiting to an amount certain any Claim or Interest or Class of Claims or Interests), assumption or rejection of executory contracts or leases affected by the Plan, and any document or agreement executed pursuant to the Plan, shall be deemed null and void, and (c) nothing contained in the Plan, and no acts taken in preparation for consummation of the Plan, shall (i) constitute a waiver or release of any Claims by or against, or any Interests in, McLeodUSA or any other person, (ii) prejudice in any manner the rights of McLeodUSA or any other person, or (iii) constitute an admission of any sort by McLeodUSA or any other Person.

12.8 Notice. All notices, requests and demands to or upon McLeodUSA or Reorganized McLeodUSA, to be effective, shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when actually delivered or, in the case of notice by facsimile transmission, when received and telephonically confirmed, addressed as follows:

MCLEODUSA INCORPORATED
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
Telephone: (319) 790-7770

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Facsimile: (319) 790-7008
Attn: Chris A. Davis

with copies to:

SKADDEN ARPS SLATE
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
Telephone: (312) 407-0700
Facsimile: (312) 407-0411
Attn: David S. Kurtz, Esq.

12.9 Governing Law. Except to the extent the Bankruptcy Code, the Bankruptcy Rules or other federal law is applicable, or to the extent an exhibit or schedule to the Plan provides otherwise, the rights and obligations arising under this Plan shall be governed by, and construed and enforced in accordance with, the laws of the state of Delaware, without giving effect to the principles of conflicts of law of such jurisdiction.

12.10 Tax Liability. Reorganized McLeodUSA is hereby authorized to request an expedited determination under section 505(b) of the Bankruptcy Code of the tax liability of McLeodUSA for all taxable periods ending after the Petition Date through, and including, the Effective Date.

12.11 Schedules. All exhibits and schedules to the Plan and the Plan Supplement are incorporated hereby and are made a part of the Plan as if set forth in full herein.

12.12 Jurisdiction over Reorganized McLeodUSA. Notwithstanding the jurisdiction retained in Article XI hereof, from and after the Effective Date, the Bankruptcy Court shall not have the power to issue any order which modifies the Class A Common Stock, New Preferred Stock, New Director Preferred Stock, New Warrants or the rights of the Holders thereof.

12.13 Filing of Additional Documents. On or before substantial consummation of the Plan, McLeodUSA shall File such agreements and other documents as may be necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan.

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Dated: Wilmington, Delaware
, 2002

		Respectfully submitted, MCLEODUSA INCORPORATED
		By:
		Name: Chris A. Davis Title:Chief Operating & Financial Officer
		Counsel:
		David S. Kurtz (IL 03126561) Mark A. McDermott (IL 06209460) SKADDEN ARPS SLATE MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606-1285 (312) 407-0700
		Gregg M. Galardi (I.D. No. 2991) SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP One Rodney Square P.O. Box 636 Wilmington, Delaware 19899-0636 (302) 651-3000
		ATTORNEYS FOR MCLEODUSA INCORPORATED

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Appendix II
LIQUIDATION ANALYSIS

The Bankruptcy Code requires that each Holder of an Impaired Claim or Interest either (a) accept the Plan or (b) receive or retain under the Plan property of a value, as of the Effective Date of the Plan, that is not less than the value such Holder would receive or retain if McLeodUSA was liquidated under Chapter 7 of the Bankruptcy Code on the Effective Date. The first step in determining whether this test has been met is to determine the dollar amount that would be generated from the liquidation of McLeodUSA's assets and properties in the context of a Chapter 7 liquidation case. The gross amount of cash available would be the sum of the proceeds from the disposition of McLeodUSA's assets and the cash held by McLeodUSA at the time of the commencement of the Chapter 7 case. Such amount is reduced by the amount of any claims secured by such assets, the costs and expenses of the liquidation, and such additional administrative expenses that may result from the termination of McLeodUSA's businesses and the use of Chapter 7 for the purposes of liquidation. Any remaining net cash would be allocated to creditors and shareholders in strict priority in accordance with Section 726 of the Bankruptcy Code. For the purposes of this liquidation analysis, it is assumed that McLeodUSA is liquidated on a consolidated basis. If the businesses were to be liquidated on an individual basis, different recoveries for creditors may result. A general summary of the assumptions used by McLeodUSA and Houlihan in preparing this Liquidation Analysis follows. The more specific assumptions are discussed below.

Estimate of Net Proceeds

Estimates were made of the cash proceeds which might be realized from the liquidation of McLeodUSA's assets. The liquidation assumes that the non-competitive telecom businesses are sold as going-concerns, although the Chapter 7 context would impose incremental discounts to the sale price. CLEC assets would be liquidated on a piecemeal basis. In assessing the book value of all assets liquidated, the non-CLEC telecommunications assets are excluded, as these are assumed to be included in the going-concern sale. The Chapter 7 liquidation period is assumed to commence on December 31, 2001 and to last eighteen months following the appointment of a Chapter 7 trustee. It is assumed that agreements to sell substantially all of the assets would be obtained by September 2002, but regulatory approvals for the sale of ICTC and DTG would delay the closing of the case until June 2003. Recoveries to creditors are presented on an undiscounted basis. For purposes of the analysis, estimated balances at December 31, 2001 were used to estimate recoveries. There can be no assurance that the liquidation would be completed in a limited time frame nor is there any assurance that the recoveries assigned to the assets would in fact be realized. Under Section 704 of the Bankruptcy Code, an appointed trustee must, among other duties, collect and convert the property of the estate as expeditiously as is compatible with the best interests of the parties-in-interest. The liquidation analysis assumes that there would be pressure to complete the sales process within eighteen months.

Estimate of Costs

McLeodUSA's cost of liquidation under Chapter 7 would include fees payable to a Chapter 7 trustee, as well as those which might be payable to attorneys and other professionals that such a trustee may engage. Further, costs of liquidation would include any obligations and unpaid expenses incurred by McLeodUSA until conclusion of its Chapter 7 case.

Additional claims would arise by reason of the breach or rejections or obligations incurred under executory contracts or leases entered into by McLeodUSA. It is possible that in a Chapter 7 case, the wind-down expenses may be greater or less than the estimated amount. Such expenses are in part dependent on the length of time of the liquidation.

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Distribution of Net Proceeds under Absolute Priority

The foregoing types of claims, costs, expenses, fees and such other claims that may arise in a liquidation case would be paid in full from the liquidation proceeds before the balance of those proceeds would be made available to unsecured claims. Under the absolute priority rule, no junior creditor would receive any distribution until all senior creditors are paid in full. McLeodUSA believes that in a Chapter 7 case, general unsecured creditors would receive ade minimus recovery.

After consideration of the effects that a Chapter 7 liquidation would have on the ultimate proceeds available for distribution to creditors, including (i) the increased costs and expenses of a liquidation under Chapter 7 arising from fees payable to a trustee in a bankruptcy and professional advisors to such trustee, (ii) the erosion in value of assets in a Chapter 7 case in the context of the expeditious liquidation required under Chapter 7 and the forced sales atmosphere that would likely prevail, and (iii) substantial increase in claims which would be satisfied on a prior basis, MCLEODUSA HAS DETERMINED, AS SUMMARIZED ON THE FOLLOWING CHART, THAT CONFIRMATION OF THE PLAN WILL PROVIDE EACH CREDITOR AND EQUITY HOLDER WITH A RECOVERY THAT IS NOT LESS THAN IT WOULD RECEIVE PURSUANT TO A LIQUIDATION OF MCLEODUSA UNDER CHAPTER 7 OF THE BANKRUPTCY CODE.

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MCLEODUSA
LIQUIDATION ANALYSIS

($ in thousands)


Proceeds
	Cash	$	147,837
	Accounts Receivable		116,635
	Inventory		1,325
	Prepaid Expenses		2,111
	Property, Plant & Equipment		443,888
	Long-Term Investments		—
	PCS Licenses		786
	Other Long-Term Assets		5,305
	Proceeds from Sale of Non-CLEC Telecom Businesses and/or Assets		822,024

Total Proceeds		$	1,539,911

Less:
	Wind-Down Operating Costs	$	330,313
	Trustee Fees		30,798
	Professional Fees		25,000
	Stay/Other Bonuses		25,000
Proceeds Available for Payment of Secured Claims		$	1,128,801

		Claim		Recovery		Percentage Recovery
Secured Claims:
	Revolver	$	150,000	$	150,000	100.0%
	Tranche A Term Loan		275,000		275,000	100.0%
	Tranche B Term Loan		575,000		575,000	100.0%
	Other Senior Debt		45,221		45,221	100.0%

Total		$	1,045,221	$	1,045,221	100.0%
Proceeds Available for Payment of General Unsecured Claims		$	83,580

		Claim		Recovery		Percentage Recovery
General Unsecured Claims:
	Notes and Accrued Interest	$	3,042,843	$	74,946	2.5%
	Accounts Payable		160,087		3,943	2.5%
	Lease Rejection and Other Unsecured Claims		50,000		1,232	2.5%
	Customer Deposits		5,384		123	2.5%
	Other Current Liabilities		135,052		3,326	2.5%

Total		$	3,393,366	$	83,580	2.5%
Proceeds Available for Distribution to Residual Stakeholders			—

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Notes to Liquidation Analysis

Cash

Consists of all cash in banks or operating accounts and cash held at divisions and is assumed to be fully recoverable.

Accounts receivable

Accounts receivable primarily consist of various customer and trade receivables. Multiple billing systems, past bad-debt experiences, the effect of a Chapter 7 liquidation, and the specific direct costs that would have to be incurred to collect on receivables would adversely impact the recovery on receivables. As such, an estimated 65% recovery is applied to the estimated amount outstanding at December 31, 2001 that pertains to the CLEC business. The other receivables of the non-CLEC telecom businesses are assumed to be included in the going-concern sale of such entities.

Inventories

Inventories are comprised primarily of various telecommunications equipment. An estimated recovery of 10% of cost was applied based on the prevailing market prices.

Prepaid expenses

Prepaid expenses consist primarily of prepaid parts and supplies, insurance, licenses, rent, interest, and other items. A recovery of 10% was assumed for most items, excluding prepaid insurance and interest, for which no recovery was assumed.

Property & equipment, net

Property and equipment is composed of land and improvements; buildings and improvements; furniture; fixtures and office equipment; telecommunications networks; software development; and networks in the process of being completed. The recovery on telecommunications assets is estimated based on the prevailing market prices in a liquidation context (10-15% of cost), with a premium attributable to the high level of market penetration in many states where McLeodUSA operates. Land and buildings were assumed to receive a 25% recovery, furniture and fixtures 10%, and software development was ascribed no value.

Long-Term Investments

This account represents EBITDA from Greene County Cable that is non-cash and is amortized on a quarterly basis. No proceeds are assumed to be generated.

PCS Licenses

A recovery of 10% was used to estimate the total proceeds, based on the assumed implied marketability of these assets in a Chapter 7 context.

Other long-term assets

Other current assets consist primarily of fiber assets. A 10% recovery is estimated consistent with current market rates for such assets.

Proceeds from Non-CLEC Telecommunications Business

Proceeds in this category represent the amounts generated from the sale of McLeodUSA's non-CLEC telecommunications related businesses, including its directory publishing business, an Illinois

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ILEC, a South Dakota ILEC, and its Splitrock business. These sales are assumed to be completed by September 2002, but the closings on the two ILECs are assumed to be delayed until June 2003 due to required regulatory approval. Professional and legal fees incurred to complete such sales, as well as brokerage fees and other transaction costs, were assumed to be equal to 7.5% of the gross proceeds.

Wind-down operating costs

Ongoing operating expenses consist of corporate overhead and occupancy costs to be incurred during the Chapter 7 liquidation period. McLeodUSA assumes that the liquidation would occur over an eighteen-month period and that such expenses, costs and overhead would decrease over time, especially after September 2002 when agreements are assumed to be reached for the sale of all of the assets. Any positive income from operating businesses generated during this time was assumed to offset wind-down operating costs.

Trustee & professional fees

Based on McLeodUSA's review of the nature of these costs and the outcomes of similar liquidations, fees were estimated at $55 million. This figure is comprised of $30 million of trustee fees (2.0% of the proceeds available for distribution) and $25 million of other professional fees. The amount of professional fees is related to the large size and complexity of the liquidation.

Severance /stay bonuses

Estimated severance and stay bonus amounts are based on other telecommunications restructurings/liquidations.

Secured Lender Claims

Secured Lender Claims consist of a $150 million revolver, a $275 million Tranche A term loan, a $575 million Tranche B term loan, and $45.2 million in other senior secured debt (including capitalized leases, ICTC mortgage notes, and other miscellaneous debt).

General Unsecured Claims

General unsecured claims consist of $3.042 billion of the Notes, $184.7 million of accounts payable estimated at the time of filing, $50 million of lease rejection and other unsecured claims, $37.1 million of customer deposits, and $141.3 million of other current liabilities. Moreover, McLeodUSA believes that the value of any distributions from the liquidation proceeds to each class of allowed claims in a Chapter 7 liquidation may not occur for a substantial period of time. In this regard, it is possible that distribution of the proceeds of the liquidation could be delayed for a year or more after the completion of such liquidation in order to resolve the claims and prepare for distributions. In the event litigation were necessary to resolve claims asserted in the Chapter 7 case, the delay could be further prolonged and administrative expenses further increased. The effects of this delay on the value of distributions under the hypothetical liquidation have not been considered.

MCLEODUSA'S LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS THAT MAY BE GENERATED AS A RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE ASSETS OF MCLEODUSA. Underlying the liquidation analysis are a number of estimates and assumptions that are inherently subject to significant economic, competitive and operational uncertainties and contingencies beyond the control of McLeodUSA or a Chapter 7 trustee. In addition, various liquidation decisions upon which certain assumptions are based are subject to change. Therefore, there can be no assurance that the assumptions and estimates employed in determining the liquidation values of McLeodUSA's assets will result in an accurate estimate of the proceeds that would be realized were McLeodUSA to undergo an actual liquidation. The actual amounts of claims against

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the estate could vary significantly from the estimate set forth herein, depending on the claims asserted during the pendency of the Chapter 7 case. Moreover, this liquidation analysis does not include liabilities that may arise as a result of litigation, certain new tax assessments, or other potential claims. This analysis also does not include potential recoveries from avoidance actions. No value was assigned to additional proceeds that might result from the sale of certain items with intangible value. Therefore, the actual liquidation value of McLeodUSA could vary materially from the estimates provided herein.

The liquidation analysis set forth herein was based on the estimated values of McLeodUSA's assets on December 31, 2001. To the extent operations through such date are different than estimated, the asset values may change. These values have not been subject to any review, compilation or audit by any independent accounting firm.

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McLeodUSA has appointed Innisfree M&A Incorporated as (i) the information agent for the exchange offer and (ii) voting agent for acceptances of the proposed plan of reorganization. All inquiries relating to this offering circular and the transactions contemplated hereby should be directed to the information agent at the telephone numbers and address set forth below.

501 Madison Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Collect: (212) 750-5833
or
All Others Call Toll Free: (888) 750-5834

McLeodUSA has appointed The Bank of New York as the Depositary for the exchange offer. All completed letters of transmittal and agent's messages should be directed to the Depositary at one of the addresses set forth below. All questions regarding the procedures for tendering in the exchange offer and requests for assistance in tendering your Notes should also be directed to the Depositary at one of the following telephone numbers and addresses:

By Mail: The Bank of New York c/o United States Trust Company of New York P.O. Box 844 Cooper Station New York, New York 10276-0844 Attn: Corporate Trust Services (registered or certified mail recommended)		By Overnight Courier and By Hand before 4:30 p.m.: The Bank of New York c/o United States Trust Company of New York 770 Broadway, 13^th Floor New York, New York 10003 Attn: Corporate Trust Services		By Hand after 4:30 p.m: The Bank of New York c/o United States Trust Company of New York 111 Broadway, Lower Level New York, New York 10006 Attn: Corporate Trust Services
		By Facsimile: (212) 420-6211 Attn: Customer Service Confirm by Telephone: (800) 548-6565

Delivery of a letter of transmittal and consent or agent's message to an address other than the address listed above or transmission of instructions by facsimile other than as set forth above is not valid delivery of the letter of transmittal and consent or agent's message.

Requests for additional copies of this Offering Memorandum and Disclosure Statement, McLeodUSA's Third Quarter 2001 Quarterly Report on Form 10-Q, McLeodUSA's 2000 Annual Report on Form 10-K, the enclosed Letter of Transmittal and Consent or the enclosed Notice of Guaranteed Delivery and Consent may be directed to either the Depositary or the Information Agent at the respective telephone numbers and addresses listed above.

QuickLinks

McLeodusa Inactive 8-KOffering Memorandum, Solicitation of Consents and Acceptances and Disclosure Statement