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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the transition period from _________ to _________

Commission file number 333-41723

BTI TELECOM CORP.
(Exact name of registrant as specified in its charter)

NORTH CAROLINA 56-2047220

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

4300 SIX FORKS ROAD, SUITE 500
RALEIGH, NORTH CAROLINA
(Address of principal executive offices)

27609
(Zip Code)

(800) 849-9100
(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.

No Par Value Common Stock 100,000,000 shares as of November 12, 1999
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BTI TELECOM CORP.

FORM 10-Q

INDEX

PAGE
NUMBER
-------

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 ........... 3
Consolidated Statements of Operations for the three-month and nine-month periods ended
September 30, 1998 and 1999 ......................................................... 4
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1998 and 1999 ......................................................... 5
Notes to Consolidated Financial Statements ........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk ..................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 16
Item 2. Changes in Securities and Use of Proceeds ..................................... 16
Item 6. Exhibits and Reports on Form 8-K .............................................. 16
Signatures ............................................................................ 17
Index to Exhibits ..................................................................... 18

BTI TELECOM CORP.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- --------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 12,767 $ 1,710
Restricted cash ..................................................................... 27,282 28,606
Accounts receivable, less allowance of $5,271 in 1998 and $5,701 in 1999............. 25,840 34,958
Accounts and notes receivable from related parties .................................. 344 469
Other current assets ................................................................ 1,551 1,548
---------- ----------
Total current assets .............................................................. 67,784 67,291
Equipment, furniture and fixtures:
Equipment, furniture and fixtures ................................................... 103,416 143,665
Construction in progress ............................................................ 27,052 47,678
Less: accumulated depreciation ...................................................... (28,508) (40,114)
---------- ----------
Total equipment, furniture and fixtures ........................................... 101,960 151,229
Other assets, net ................................................................... 13,929 16,385
Restricted cash, non-current ........................................................ 25,498 --
---------- ----------
Total assets ......................................................................... $ 209,171 $ 234,905
========== ==========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable .................................................................... $ 46,376 $ 56,092
Accrued expenses .................................................................... 3,461 4,754
Accrued interest .................................................................... 7,772 1,351
Shareholder note payable, current portion ........................................... 763 --
Other liabilities ................................................................... 4,813 8,209
---------- ----------
Total current liabilities ......................................................... 63,185 70,406
Long-term debt ...................................................................... 254,119 304,084
Other long-term liabilities ......................................................... 1,709 1,811
---------- ----------
Total liabilities ................................................................. 319,013 376,301
Shareholder's deficit:
Preferred stock, $.01 par value, authorized 10,000,000 shares, none issued and
outstanding ....................................................................... -- --
Common stock, no par value, authorized 500,000,000 shares, 100,000,000 issued and
outstanding in 1998 and 1999 ...................................................... 822 2,291
Accumulated deficit ................................................................. (110,664) (142,549)
Unearned compensation ............................................................... -- (1,138)
---------- ----------
Total shareholder's deficit ....................................................... (109,842) (141,396)
---------- ----------
Total liabilities and shareholder's deficit .......................................... $ 209,171 $ 234,905
========== ==========

See accompanying notes to consolidated financial statements.

BTI TELECOM CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ----------------------------
1998 1999 1998 1999
------------ ------------ ------------- --------------

Revenue ............................................... $ 51,684 $ 72,055 $ 157,490 $189,817
Cost of services ...................................... 36,609 49,639 114,457 126,952
--------- --------- --------- --------
Gross profit ........................................ 15,075 22,416 43,033 62,865
Selling, general and administrative expenses .......... 17,244 22,235 49,348 62,240
Depreciation and amortization ......................... 3,048 5,177 7,697 14,015
--------- --------- --------- --------
Loss from operations .................................. (5,217) (4,996) (14,012) (13,390)
Other income (expense):
Interest expense .................................... (6,334) (6,954) (19,085) (20,429)
Interest income ..................................... 1,196 593 4,665 2,010
--------- --------- --------- --------
Loss before taxes ..................................... (10,355) (11,357) (28,432) (31,809)
Income taxes .......................................... -- -- -- (5)
Net loss .............................................. $ (10,355) $ (11,357) $ (28,432) $(31,804)
========= ========= ========= ==========
Basic and diluted loss per share ...................... $ (0.10) $ (0.11) $ (0.28) $ (0.32)
========= ========= ========= ==========
Basic and diluted weighted average shares outstanding . 100,000 100,000 100,000 100,000
========= ========= ========= ==========

See accompanying notes to consolidated financial statements.

BTI TELECOM CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(IN THOUSANDS)

NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1998 1999
------------- -------------

OPERATING ACTIVITIES:
Net loss ......................................................................... $ (28,432) $ (31,804)
Adjustments to reconcile net loss to net cash used in by operating activities:
Depreciation ................................................................... 6,779 11,634
Amortization ................................................................... 918 2,381
Non-cash compensation related to stock options ................................. 35 332
Changes in operating assets and liabilities:
Accounts and notes receivable ................................................. (2,835) (9,118)
Accounts and notes receivable from related parties ............................ 60 (125)
Other assets .................................................................. (1,754) (185)
Accounts payable and accrued expenses ......................................... 10,688 11,010
Accrued interest expense ...................................................... (6,052) (6,422)
Advanced billings and other liabilities ....................................... 1,870 3,497
--------- ---------
Net cash used in operating activities ............................................ (18,723) (18,800)
INVESTING ACTIVITIES:
Change in restricted cash ........................................................ 25,019 24,175
Purchases of equipment, furniture and fixtures, net .............................. (48,378) (60,903)
Purchase of other assets ......................................................... (2,253) (3,188)
Settlement of options and FiberSouth stock repurchase obligation ................. (2,300) --
--------- ---------
Net cash used in investing activities ............................................ (27,912) (39,916)
FINANCING ACTIVITIES:
Net proceeds from long-term borrowings ........................................... -- 49,965
Decrease in other long-term liabilities .......................................... (770) (763)
Increase in deferred financing costs and other assets ............................ (874) (1,461)
Dividends paid ................................................................... -- (82)
--------- ---------
Net cash (used in) provided by financing activities .............................. (1,644) 47,659
--------- ---------
Decrease in cash and cash equivalents ............................................ (48,279) (11,057)
Cash and cash equivalents at beginning of period ................................. 67,009 12,767
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 18,730 $ 1,710
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................... $ 26,222 $ 28,306
========= =========

See accompanying notes to consolidated financial statements.

BTI TELECOM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 (UNAUDITED)

NOTE 1: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial information includes the accounts of BTI
Telecom Corp. and its wholly owned subsidiaries (the "Company" or "BTITC")
after elimination of intercompany transactions. The consolidated interim
financial statements of BTITC included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial reporting and in accordance with Securities and Exchange
Commission rules and regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have
been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (all of
which are of a normal and recurring nature) that are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. The results for any interim period are not necessarily
indicative of the results for any other period. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and the Company's Registration Statement on
Form S-1 filed with the SEC on July 16, 1999.

Preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
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.

Certain amounts in the September 30, 1998 Financial Statements have been
reclassified to conform to the September 30, 1999 presentation.

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. The Company adopted the
provisions of SOP 98-1 in its financial statements as of January 1, 1999.

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"), which requires that costs
related to start-up activities be expensed as incurred. The Company adopted the
provisions of SOP 98-5 in its financial statements as of January 1, 1999. Prior
to 1999, the Company expensed start-up costs and therefore, the adoption of SOP
98-5 will have no impact on the Financial Statements.

EQUIPMENT, FURNITURE AND FIXTURES

During the fourth quarter of 1997, the Company commenced construction on
certain capital projects, including its fiber optic network. Interest costs
associated with the construction of capital assets are capitalized. The total
amount capitalized for the nine-month periods ended September 30, 1999 and 1998
was $1.1 million and $1.5 million, respectively.

Costs associated with the fiber optic network are classified as
"Construction in Progress" in the accompanying consolidated balance sheets.
Upon completion of network segments, these costs will be transferred into
service and depreciated over their useful lives.

NOTE 2: LONG-TERM DEBT

Effective June 30, 1998, the Company amended and restated its $60.0 million
revolving credit facility to provide a $30.0 million revolving credit facility
and a $30.0 million capital expenditure facility (the "GE Capital Facilities").
Borrowings under the GE Capital Facilities are limited to a percentage of
eligible accounts receivable and eligible capital expenditures, respectively, as
defined in the loan agreement. The GE Capital Facilities are secured by the
grant of a first security interest in substantially all of the Company's assets
excluding the fiber optic network and related equipment and a second security
interest in the Fiber Optic Network and related equipment. The GE Capital
Facilities bear interest, at the Company's option, at either the 30, 60 or
90-day LIBOR rate or the prime rate, plus an applicable margin. This margin
varies, based on the Company's financial position, from 0.0% to 1.25% for
borrowings under the prime rate option and from 1.75% to 3.0% for borrowings
under the LIBOR option. The Company is also required to pay a fee of 0.375% per
year on the unused commitment. As of September 30, 1999, there was a total of
$28.1 million outstanding under the GE Capital Facilities, in addition to $0.1
million in outstanding letters of credit. The GE Capital Facilities contain
various financial covenants with which the Company must comply on a monthly and
quarterly basis.

BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: LONG-TERM DEBT -- (Continued)

On September 8, 1999, the Company obtained a credit facility from Bank of
America (the "Bank of America Facility"). Availability under the Bank of America
Facility is based on the amount of fiber optic network purchased from Qwest
Communications (see note 4) and purchases of related equipment from Nortel
Networks, Inc. Availability under the Bank of America Facility is limited to
$37.5 million until the Company raises at least $100.0 million in additional
equity financing, at which time the Bank of America Facility's availability will
increase to $60 million. Borrowings are secured by a first security interest in
the fiber optic network and related equipment and will bear interest, at the
Company's option, at either the 30, 60 or 90-day LIBOR rate or the prime rate
plus an applicable margin. This margin varies, based on the Company's financial
position and additional equity issuances, from 1.00% to 2.50% for borrowings
under the prime rate option and from 2.00% to 3.50% for borrowings under the
LIBOR option. The Company is also required to pay of fee of 1.5% per year on the
unused commitment. As of September 30, 1999, there was a total of $26.0 million
outstanding under the Bank of America Facility. The Bank of America Facility
contains various financial covenants with which the Company must comply on a
monthly and quarterly basis. Under The Bank of America Facility the Company also
granted Bank of America a second security interest in substantially all the
assets of the Company.

NOTE 3: INCOME TAXES

In September 1997, the Company converted from S corporation to C
corporation status for federal and state income tax purposes. As a result, the
Company became fully subject to federal and state income taxes. For the
three-month and nine-month periods ended September 30, 1999 and 1998, the
Company generated net losses. The Company has established a valuation allowance
for the net deferred tax assets associated with these net operating losses. As
such, there was no impact on the results from operations for net operating
losses generated during the three-month and nine-month periods ended September
30, 1999 and 1998. The Company will reduce the valuation allowance when, based
on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will be realized.

NOTE 4: COMMITMENTS

During 1997, the Company signed a contract for the indefeasible right to
use certain optical fibers in a communications system. Commitments to purchase
optical fibers under this contract total approximately $51.0 million, $42.3
million of which was fulfilled through September 30, 1999. Costs associated
with fiber optic network segments under construction are classified as
"Construction in progress" in the accompanying consolidated balance sheets.
Upon completion of network segments, these costs will be transferred into
service and depreciated over their useful lives. The remaining commitments
extend through the end of 1999. In addition, the Company has made certain other
commitments for the purchase of equipment in connection with its capital
program.

NOTE 5: CONTINGENCIES

On September 14, 1998, Gulf Communications, LLC (the "Plaintiff") filed a
lawsuit which is now pending in the United States District Court for the
Northern District of Texas. The Plaintiff alleges breach of contract, negligent
misrepresentation and fraud in the inducement. The Plaintiff seeks monetary
damages, although a specific amount has not been plead. The Company is
vigorously defending this litigation. Because discovery is ongoing, and due to
the uncertainties inherent in the litigation process, the Company is unable to
predict the likelihood of an unfavorable outcome. The costs of defense and
final resolution of this issue could result in the Company recording an
obligation which could have an adverse effect on the Company.

ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The matters discussed throughout this Form 10-Q, except for historical
facts contained herein, may be forward-looking in nature, or "forward-looking
statements." Actual results may differ materially from the forecasts or
projections presented. Forward-looking statements are identified by such words
as "expects," "anticipates," "believes," "intends," "plans" and variations of
such words and similar expressions. BTI Telecom Corp. and its wholly owned
susidiaries (the "Company") believes that its primary risk factors include, but
are not limited to: high leverage; the ability to service debt; significant
capital requirements; ability to manage growth; business development and
expansion risks; competition; and changes in laws and regulatory policies. Any
forward-looking statements in the September 30, 1999 Form 10-Q should be
evaluated in light of these important risk factors. For additional disclosure
regarding risk factors refer to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission (File No. 333-83101).

BUSINESS OF THE COMPANY

OVERVIEW

BTI Telecom Corp., which began operations in 1983 as Business Telecom,
Inc. ("BTI"), is a provider of telecommunications services in the southeastern
United States. We currently offer integrated telecommunications services,
including long distance, local, data, Internet access and other enhanced
services, primarily to small and medium-sized business customers. In addition,
we offer wholesale telecommunications services, including switched, dedicated
access, special access and prepaid calling card services, primarily to
telecommunications carriers. We also market high bandwidth services on our
fiber optic network. We currently have sales offices in 23 markets located
primarily in the southeastern United States.

We operate long distance switching centers in Atlanta, Dallas, New York,
Orlando and Raleigh, and began offering local exchange services in November
1997 primarily on a resale basis. However, we are in the process of
transitioning customers onto our own facilities and have installed Lucent
5E2000 local switches in Raleigh, Charlotte, Greensboro and Wilmington, North
Carolina; Columbia and Greenville, South Carolina; Orlando and Jacksonville,
Florida; and Atlanta, Georgia. We are currently installing a local switch in
Tampa, Florida. In addition to these local switches, we have co-located digital
loop carriers in 48 incumbent local exchange carrier central offices in order
to provide more cost-effective local services to our business customers. These
co-locations should also facilitate our future data service product offerings,
as they should allow for more rapid deployment of digital subscriber line (DSL)
services. As of September 30, 1999 we had sold over 84,000 access lines, of
which 75,300 were in service. Approximately 23% of these lines in service were
facilities-based. In addition, over 98% of BTI's access lines are non-ISP
lines.

We operate a fiber optic network, consisting of owned and leased
transmission capacity, concentrated in the southeastern United States. In
October 1997, we entered into an agreement with Qwest Communications to acquire
an indefeasible right to use approximately 3,300 route miles of fiber optic
network from New York to Miami and Atlanta to Nashville. As of September 30,
1999 we had over 1,100 route miles of this network in service and expect the
network to be substantially completed during the first quarter of 2000. In
addition to carrying our own traffic, this network allows us to market excess
fiber capacity to other telecommunication companies. We have also installed
seven frame relay switches within our network to enhance our current and future
data service offerings.

On July 16, 1999, we filed a Registration Statement on Form S-1 (File No.
333-83101) with the SEC for a public offering of approximately $125,000,000
worth of our Common Stock (our "initial public offering"). In addition to the
ongoing monitoring of public market conditions with its investment bankers, BTI
has closely watched the recent significant investments within the
telecommunications sector by private equity funds. As a result, in September,
BTI retained an investment bank to evaluate private equity placement
opportunities.

RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

REVENUE

Revenue for the third quarter of 1999 was $72.1 million, representing an
increase of 39.4% as compared to the same period in 1998. The $20.4 million
increase during the three months ended September 30, 1999 as compared to the
same period in 1998 is attributable to increases in integrated retail voice
services revenues of $6.0 million, wholesale services revenues of $11.7 million
and data services revenue of $2.7 million. Retail services revenue, while up
from the same period in 1998, was adversely affected by two Southeastern
hurricanes during September 1999. The increase in integrated retail voice
services revenue consisted primarily of increases in local services revenue of
$6.7 million, partially offset by decreases in traditional long distance revenue
of $0.7 million. The decrease in long distance revenue primarily resulted from
price compression, as third quarter 1999 retail long distance minutes actually
increased 7.5% over the same period in 1998. In addition, we are selling a
bundled retail product which combines lower long distance rates with
facilities-based local service to strengthen sales of our facilities-based local
product. Overall gross margins on these customers are maintained or improved,

despite the fact this bundled product includes a lower rate per minute for long
distance. The improved margins are achieved because we avoid access charges
on long distance calls placed by our customers and have the ability to bill
other telecommunication carriers access charges for the use of our local
network. The success of this concept is demonstrated by the fact that we are
providing long distance service to over 92% of our local service customers.
Local services revenue increased from 11.9% of integrated retail voice services
in the third quarter of 1998 to 27.7% for the same period in 1999. Wholesale
services revenue was up largely due to the increase in sales of prepaid calling
card services of $13.1 million over the third quarter 1998, which was partially
offset by decreases in switched wholesale services of $1.4 million. The increase
in data services revenue is attributable to the additional Internet, frame relay
and private line services we are providing to business customers as well as
other telecommunication carriers.

COST OF SERVICES

Cost of services represented 68.9% of revenue for the three-month period
ended September 30, 1999, as compared to 70.8% for the same period in 1998. The
lower cost of services percentage for the three-month period ended September 30,
1999 reflects the effects of various improvements in our cost components,
partially offset by changes in our revenue mix. The changes in our revenue mix
consisted of increases in integrated retail voice services accompanied
by larger increases in wholesale services revenue. Within wholesale services,
overall margins on our prepaid calling card services decreased due to changes in
user calling patterns. However, we have implemented pricing changes on this
product that should improve its margins by the first quarter of 2000. In
addition, as we have installed more local switches and converted local resale
customers to facilities-based services, our local service margins have improved.

Expansion of our fiber optic network, the continuing effect of access
charge reforms and rate decreases from our underlying service providers have
also improved our margin percentages. In addition to adding revenues from
capacity sales to other telecommunication providers, our fiber optic network
provides for cost savings throughout the network. However, cost savings from our
fiber optic network were less than originally anticipated during the third
quarter due largely to vendor delays in the delivery of additional network
segments. During the three months ended September 30, 1999 we deployed 260 miles
of our fiber optic network, increasing our total fiber route miles to 1,200.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses in the third quarter of 1999
were $22.2 million, or 30.9% of revenue, as compared to $17.2 million, or 33.4%
of revenue, in the same period in 1998. The increase in the amount of selling,
general and administrative expenses is largely attributable to the significant
investments in human resources and increased marketing and advertising efforts
associated with the continued expansion of our local and data services and
deployment of our fiber optic network. However, our revenue growth has outpaced
our spending in these areas resulting in the decrease in selling, general and
administrative expenses as a percent of revenue. The investments in
infrastructure and support provide us with the ability to continue to expand
into new markets, maximize customer retention and provide for growth.

Depreciation and amortization was $5.2 million in the three months ended
September 30, 1999, representing an increase of 69.8% over the same period in
the previous year. This increase is primarily due to capital expenditures
related to the expansion of our network operations centers, fiber network and
support infrastructure to accommodate increased traffic volume and expanded
service offerings.

OTHER INCOME (EXPENSE)

Interest expense was $7.0 million for the three-month period ending
September 30, 1999, compared to $6.3 million in the same period of the previous
year. The $0.7 million increase is primarily attributable to increased
borrowings under our credit facilities during the third quarter of 1999
compared to the third quarter of 1998. In addition to interest expense
recognized during the quarter, we capitalized $0.5 million of interest expense
associated with the construction of our network in the three months ended
September 30, 1999, as compared to $0.4 million for the same period in 1998.

Interest income decreased from $1.2 million in the three-month period
ended September 30, 1998 to $0.6 million in the three months ended September
30, 1999. This decrease resulted from lower restricted and non-restricted cash
balances during 1999.

EBITDA

EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization and other non-cash charges. EBITDA is a common
measurement of a company's ability to generate cash flow from operations.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to net income
as a measure of performance or to cash flows as a measure of liquidity.

EBITDA for the three months ended September 30, 1999 was $0.2 million.
This represents an improvement of $2.4 million over the EBITDA loss of $2.2
million during the same period in 1998. The increase in EBITDA during 1999 was
attributable to the overall revenue and gross margin improvement over the same
period in 1998. These improvements were partially offset by the effects of two
hurricanes in September 1999, and the changes in customer calling patterns
associated with our prepaid phone card program. Management believes
the short-term effects of these factors will not adversely impact the long-term
success and strategy of the Company.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

REVENUE

Revenue for the nine months ended September 30, 1999 was $189.8 million,
representing an increase of 20.5% as compared to the same period in 1998. The
$32.3 million increase in total revenue on a year-to-date basis is attributable
to increases in integrated retail voice services revenue of $19.1 million,
wholesale long distance services revenue of $5.9 million and data services
revenue of $7.3 million. The increase in integrated retail voice services
consists of an increase in local services of $20.4 million partially offset by
a decrease in retail long distance of $1.4 million from $82.2 million to $80.8
million. This decrease in retail long distance was primarily a result of the
effect of price compression, as demonstrated by the fact that retail long
distance minutes increased by 8.1% during the same period. Local services
revenue growth was driven by the continued success of our bundled product
offerings since introducing local services in the fourth quarter of 1997. A
large portion of the increase in wholesale long distance revenues from 1998 to
1999 is attributable to dramatically increased sales of prepaid calling card
services of $23.5 million on a year-to-date basis. The increase in our data
services revenue resulted primarily from sales of private line and competitive
access services, a portion of which are on our fiber network. As a percentage of
revenue, retail services revenue remained constant at approximately 56%. At the
same time, wholesale services revenue decreased from 36.0% of revenue to 32.9%
of revenue and data services increased from 7.8% to 10.3% of revenue.

COST OF SERVICES

Cost of services represented 66.9% of revenue for the nine-month period
ended September 30, 1999, as compared to 72.7% for the same period in 1998. The
lower cost of services percentage for the nine-month period ended September 30,
1999 reflects the effects of various improvements in our cost components,
partially offset by changes in our revenue mix. Within wholesale services,
prepaid calling card services revenue has increased while margins have
decreased due to changes in our user calling patterns. Offsetting this increase
in cost of services margin, but also within the wholesale services area, there
has been a significant decrease in international termination services. These
international termination services have lower margin percentages than other
wholesale services. The decreased volume of this international traffic has
resulted in a lower overall cost of services percentages. In addition, we
experienced an increase in the percentage of local services provided through our
facilities, which produce a higher margin than those services provided on a
resale basis.

Expansion of our fiber optic network, the continuing effect of access
charge reform and rate decreases from our underlying service providers have also
improved our margin percentages. In addition to adding revenues from capacity
sales to other telecommunication providers, our fiber optic network provides for
cost savings throughout the network. However, cost savings from our network were
less than originally anticipated during the nine months ended September 30, 1999
due largely to vendor delays in the delivery of additional network segments.
During the nine months ended September 30, 1999, we deployed 700 route miles of
our fiber optic network, increasing our total fiber route miles to 1,200. We
expect our cost of services as a percentage of revenues to continue to decrease
as we deploy more of our fiber optic network and continue to increase the
percentage of local customers with facilities-based local service.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses on a year-to-date basis were
$62.2 million, or 32.8% of revenue, in 1999 as compared to $49.3 million, or
31.3% of revenue, in 1998. The increase in selling, general and administrative
expenses was attributable to the significant investments in human resources and
increased marketing and advertising efforts associated with the continued
expansion of our local and data services and deployment of our fiber optic
network. Because these investments often occur in advance of the realization of
significant revenue from local services, they have the effect of increasing
selling, general and administrative expenses as a percentage of revenue. These
investments in infrastructure and support are intended to provide us with the
ability to continue to expand into new markets, maximize customer retention and
provide for growth

Depreciation and amortization was $14.0 million and $7.7 million in the
nine months ended September 30, 1999 and September 30, 1998, respectively. This
82.1% increase is primarily due to capital expenditures related to the
expansion of

our network operations centers, fiber optic network and support
infrastructure to accommodate increased traffic volume and expanded service
offerings.

OTHER INCOME (EXPENSE)

Interest expense increased from $19.1 million for the nine months ended
September 30, 1998 to $20.4 million for the nine months ending September 30,
1999. The $1.3 million increase is primarily attributable to increased
borrowings under our credit facilities during the first nine months of 1999
compared to 1998. In addition, we capitalized $1.5 million of interest expense
associated with the construction of our network in the nine months ended
September 30, 1999, as compared to $1.1 million for the same period in 1998.

Interest income decreased from $4.7 million in the nine-month period ended
June 30, 1998 to $2.0 million in the nine months ended September 30, 1999. This
decrease resulted from lower restricted and non-restricted cash balances during
1999.

EBITDA

EBITDA for the nine months ended September 30, 1999 was $1.0 million. This
represents an improvement of $7.3 million over the EBITDA loss of $6.3 million
during the same period in 1998. The increase in EBITDA during 1999 was
attributable to the overall revenue and gross margin improvement over the same
period in 1998. These improvements were partially offset by the changes in
customer calling patterns associated with our prepaid phone card program.
Management believes the short-term effects of these calling pattern changes will
not adversely impact the long-term success and strategy of the Company.

INCOME TAXES

We generated net losses for the three and nine-month periods ended
September 30, 1999 and 1998. Based upon management's plans to expand the
business through the construction and expansion of its networks, customer base
and product offerings, this trend is expected to continue. Given these
circumstances, we have established a valuation allowance of the net deferred
tax assets associated with these net operating losses. As such, there was no
impact on the results from operations for net operating losses generated during
the three and nine-month periods ended September 30, 1999 and 1998. We will
reduce the valuation allowance when, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax assets
will be realized.

Throughout the period of time that BTI was an S corporation, income,
losses and credits were passed through directly to shareholders and the
shareholders were provided, in the form of dividends, the funds necessary to
meet tax obligations arising from income earned by BTI. We have indemnified
those shareholders for any additional tax obligations arising from the income
earned by BTI while it was an S corporation. We believe that any such
reimbursements will not have a material effect on our financial condition or
results of operations.

LIQUIDITY AND CAPITAL RESOURCES

REVIEW OF CASH FLOW ACTIVITY

During the first nine months of 1999 we used $18.8 million of cash to fund
operating activities as compared to $18.7 million during the first nine months
of 1998. Non-cash expenses such as depreciation and amortization partially
offset net losses for the nine-month periods ending September 30, 1998 and 1999
of $28.4 million and $31.8 million, respectively. The $0.1 million increase in
cash used in operations primarily consisted of net changes in accounts and
notes receivable, accounts payable, and other accruals and deferrals from the
nine-month period ending September 30, 1998 to the nine-month period ending
September 30, 1999.

Cash used in investing activities during the first nine months of 1998 and
1999 amounted to $27.9 million and $39.9 million, respectively. The primary
investment for both periods was capital expenditures. The increase in net
capital expenditures from $48.4 million in the first nine months of 1998 to
$60.9 million in the first nine months of 1999 primarily resulted from the
deployment of the our fiber optic network and purchases of equipment for the
development of our facilities-based local service business. Cash used in
investing activities also includes the capitalization of line access fees,
which represent installation charges paid primarily to the incumbent local
exchange carriers ("ILECs") for securing additional leased fiber optic
facilities. In May 1998, the Company satisfied stock and option repurchase
obligations to a former employee. These obligations arose as a result of the
assumption of stock repurchase obligations in connection with the September
1997 acquisition of the fiber optic assets of FiberSouth and under the 1994
Stock Plan. In settlement of these obligations, the

Company made a $2.3 million cash payment to the former employee. This
transaction is reflected as an adjustment to equity and represents a
reallocation of the original FiberSouth purchase price. Cash used for
investments was offset in part by the provision of $25.0 million and $24.2
million of cash from the restricted cash accounts for the nine-month periods
ending September 30, 1998 and 1999, respectively. This results from our use
of restricted cash to fund interest obligations on the Senior Notes in
March and September of 1998 and 1999. The restricted cash balance as of
September 30, 1999 includes proceeds from the Senior Note offering placed in
escrow to secure the next two scheduled interest payments.

Cash used in financing activities was $1.6 million for the first nine
months of 1998 due primarily to payments made on the shareholder note payable
and certain capitalized costs associated with financing. During the first nine
months of 1999, financing activities provided us with $47.7 million of cash,
primarily as a result of net borrowings on long-term credit facilities. The
dividends paid during 1999 were to provide funds for tax obligations owed by
BTI's shareholder as a result of net income during the period in which BTI was
an S Corporation for income tax purposes. These reimbursements were in
accordance with the indemnification provisions of the shareholders' agreement
that was terminated in 1997.

DEBT

10 1/2% SENIOR NOTES. On September 22, 1997, we issued $250.0 million
principal amount of 10 1/2% Senior Notes (the "Senior Notes") due 2007. Interest
on the Senior Notes is payable semiannually in cash, on each March 15 and
September 15.

The Senior Notes are unsubordinated indebtedness equal in right of payment
with all of our existing and future unsubordinated indebtedness. Approximately
$74.1 million of the net proceeds from the sale of the Senior Notes was used to
purchase U.S. government securities to secure and fund the balance of the first
six interest payments on the Senior Notes, which are held as restricted cash.
The Senior Notes will mature on September 15, 2007.

Upon a change in control, as defined in the indenture governing the Senior
Notes, we will be required to make an offer to purchase the Senior Notes at a
purchase price equal to 101% of their principal amount, plus accrued interest.

The indenture governing the Senior Notes contains certain covenants that
affect, and in certain cases significantly limit or prohibit, among other
things, our ability to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations. If we fail to comply with these
covenants, our obligation to repay the Senior Notes may be accelerated.
However, these limitations are subject to a number of important qualifications
and exceptions. In particular, while the indenture restricts our ability to
incur additional indebtedness by requiring compliance with specified leverage
ratios, notwithstanding these restrictions, it permits us to incur an unlimited
amount of additional indebtedness to finance the acquisition of equipment,
inventory and network assets and up to $100.0 million of additional
indebtedness for general corporate purposes.

GE CAPITAL CREDIT FACILITIES. Our wholly owned subsidiary, BTI, has a
credit agreement with GE Capital (the "GE Capital Facilities") providing for
the following facilities:

o A $30.0 million revolving credit facility; and
o A $30.0 million note facility.

We amended these facilities effective June 30, 1998 to provide us with
additional operating flexibility. Borrowings under the GE Capital Facilities
are based on a percentage of eligible accounts receivable in the case of the
revolving facility and eligible capital expenditures in the case of the note
facility. The proceeds from both GE Capital Facilities can be used for working
capital, capital expenditures and for general corporate purposes. At September
30, 1999, we had an aggregate of $28.1 million outstanding under these
facilities, in addition to $0.1 million in letters of credit. The GE Capital
Facilities mature on September 22, 2002.

Amounts drawn under the GE Capital Facilities bear interest, at our
option, at either a floating rate equal to prime or at 30-, 60- or 90-day LIBOR
rates, as we choose, plus, in each case, a percentage rate that fluctuates,
based on the ratio of our total debt to EBITDA, from 0.0% to 1.25% for
borrowings at prime and from 1.75% to 3.0% for borrowings at LIBOR. We are also
required to pay a fee of 0.375% per year on the unused portion of the GE
Capital Facilities.

BTI's obligations under the GE Capital Facilities are guaranteed by BTITC
and are secured by a first-priority lien on all current and future assets of
BTI and our other subsidiaries, excluding the fiber optic network and related
equipment, and our pledge of the stock of BTI and any intercompany notes.

Under the GE Capital Facilities, we have agreed, among other things, to
achieve minimum EBITDA targets, meet minimum interest coverage ratios and not
exceed the limits set for capital expenditures in the credit agreement. We have
agreed to, among other things, limits on our ability to incur debt, create
liens, pay dividends, make distributions or stock repurchases, engage in
transactions with affiliates, sell assets and engage in merger and acquisitions,
except as specifically permitted under the credit agreement. The Bank of America
Facility also includes a covenant whereby the Company is required to raise
additional equity financing of $135 million by March 31, 2000. In addition,
these facilities contain affirmative covenants, including, among others,
covenants requiring maintenance of corporate existence, licenses and insurance,
payments of taxes and the delivery of financial and other information. We are
currently in compliance with these covenants, as amended. However, we might not
be able to continue meeting these covenants or, if required, obtain additional
financing on acceptable terms. Our failure to do so may have a material adverse
impact on our business and operations.

BANK OF AMERICA CREDIT FACILITIES. On September 8, 1999, we obtained a
credit facility from Bank of America (the "Bank of America Facility").
Availability under the Bank of America Facility is based on the amount of fiber
optic network purchased from Qwest Communications and purchases of related
equipment from Nortel Networks, Inc. Availability under the Bank of America
Facility is limited to $37.5 million until the Company raises at least $100
million in additional equity financing, at which time the Bank of America
Facility's availability will increase to $60 million. The proceeds from the Bank
of America Facility can be used for working capital and to fund our fiber optic
network and related infrastructure. At September 30, 1999, there was a total of
$26.0 million outstanding under the Bank of America Facility. The Bank of
America Facility matures on September 22, 2002.

The Bank of America Facility will bear interest, at our option, at either
the 30-, 60- or 90-day LIBOR rate or the prime rate plus an applicable margin.
This margin varies, based on our financial position and additional equity
issuances, from 1.00% to 2.50% for borrowings under the prime rate option and
from 2.00% to 3.50% for borrowings under the LIBOR option.

BTI's obligations under the Bank of America Facility are guaranteed by
BTITC and are secured by a first security interest in BTI's fiber optic network
and related equipment and a second security interest in substantially all of the
remaining assets of BTI.

Under the Bank of America Facility, we have agreed, among other things, to
achieve minimum EBITDA targets, meet minimum interest coverage ratios and not
exceed the limits set for capital expenditures in the credit agreement. We have
also agreed to, among other things, limits on our ability to incur debt, create
liens, pay dividends, make distributions or stock repurchases, engage in
transactions with affiliates, sell assets and engage in mergers and
acquisitions, except as specifically permitted under the credit agreement. The
Bank of America Facility also includes a covenant whereby the Company is
required to raise additional equity financing of $135 million by March 31, 2000.
In addition, the Bank of America Facility contains affirmative covenants,
including, among others, covenants requiring maintenance of corporate existence,
licenses and insurance, payments of taxes, and the delivery of financial and
other information. We are currently in compliance with these covenants as
amended. However, we might not be able to continue meeting these covenants or,
if required, obtain additional financing on acceptable terms. Our failure to do
so may have a material adverse impact on our business and operations.

CAPITAL SPENDING

The Company is presently exploring opportunities to raise additional equity
through the public or private market. Given our planned issuance of equity
capital, we currently estimate that our aggregate capital expenditures will be
between $110 and $120 million for the 15 month period ended 12/31/99. Presently
we have outstanding commitments of less than $5 million related to the Company's
fiber optic network. We also expect to make substantial capital expenditures
after 2000. Capital expenditures will be primarily for:

o the purchase and installation of switches, electronics, fiber, co-location
facilities and other technologies in existing networks and in additional
networks to be constructed in our service areas;

o market expansion, including new sales offices;

o the continued development of our existing operations centers to service
anticipated increased traffic volumes and increased geographic areas; and

o expenditures with respect to our management information systems and
customer support infrastructure.

The actual amount and timing of our capital requirements may differ
materially from these estimates as a result of, among other things:

o the cost of the development of our networks in each of our markets;

o a change in or inaccuracy of our development plans or projections;

o a change in the schedule or extent of our roll-out plan;

o the extent of price and service competition for telecommunication services
in our markets;

o the demand for our services;

o regulatory and technological developments, including additional market
developments and new opportunities, in the telecommunications industry;

o an inability to borrow under our credit facilities; and

o the consummation of acquisitions, joint ventures or strategic alliances.

Although there can be no assurance, we believe that proceeds from
equity issuance, together with cash on hand, borrowings expected to be
available under our credit facilities and cash flow from operations, will be
sufficient to expand our business as currently planned. In the even our plans
change or prove to be inaccurate, these funds might be insufficient. We might
also require additional capital in the future (or sooner than currently
anticipated) for new business activities related to our current and planned
businesses, or if we decide to make additional acquisitions or enter into joint
ventures and strategic alliances.

Sources of additional capital could include public and private equity
offerings and, subject to compliance with the provisions in the indenture
governing the 10 1/2% Senior Notes and our credit facilities, debt financings.
Additional financing might not be available, or it might not be available on
terms acceptable to us and within the restrictions contained in our existing
financing agreements. Failure to generate or obtain sufficient funds could
result in delay or abandonment of some or all of our development and expansion
plans.

YEAR 2000 ISSUES

Beginning in 1996, we conducted a thorough review of our information
technology and operating systems and non-information technology systems, as
well as the systems of our major customers, suppliers, and third party network
service providers to ensure that the systems would properly recognize the Year
2000. We also reviewed internally developed software. As a result of this
assessment, we developed a thorough plan to address the Year 2000 issue. A
project manager and significant other programming and operational staff are
dedicated to the plan's implementation. The Year 2000 plan includes the
wide-ranging assessment of the Year 2000 problems that may affect us, the
development of remedies to address the problems discovered in the assessment
phase, testing of the remedies and the preparation of contingency plans.

We began implementing the plan in 1997. Implementation was completed in
the third quarter of 1999. We have also completed the evaluation, remediation
and testing phases of the Year 2000 plan. All major business-critical systems
were tested and Year 2000 compliant as of September 30, 1999. In that regard,
we have received assurances or written agreements from significant vendors that
their systems are already Year 2000 compliant. These vendors include our major
suppliers of switching equipment, fiber optic electronics, and billing and
customer care systems. We believe that these systems represent our most
critical business systems. All other systems were in compliance as of September
30, 1999. We have completed testing the systems and applications that have been
corrected or reprogrammed.

As part of the Year 2000 plan, we sought information from our other
significant hardware, software and other equipment vendors, third party network
providers, other material service providers and material customers regarding
their development and implementation of plans to become Year 2000 compliant. To
date these parties have indicated that they are implementing procedures to
ensure that their computer systems will be Year 2000 compliant by December 31,
1999.

We have developed contingency plans to deal with potential Year 2000
related business interruptions that may occur. These contingency plans are
designed to address the most reasonably likely worst-case scenarios based upon
the responses of vendors, service providers and customers to our requests for
Year 2000 compliance information.

Through September 30, 1999, we spent approximately $2.0 million on
Year 2000 projects and activities. The estimated total cost for Year 2000
projects and activities is $2.8 million, excluding capital expenditures. Most
of these capital expenditures, which include both equipment and software, will
not only provide for Year 2000 compliance but are also expected to enhance
operations. In most cases, the expenditures for system modifications will be
merely an acceleration of previously planned improvements. Year 2000 project
costs are being funded through operations and existing credit facilities and
are not expected to have a material effect on our financial condition or
results from operations. We believe we have an effective program in place to
resolve the Year 2000 issue in a timely manner. However, it is not possible to
anticipate all

possible future outcomes, especially when third parties are involved. Failure
by us and/or our major vendors, third party network service providers or other
material service providers or customers to adequately address their respective
Year 2000 issues in a timely manner could have a material adverse effect on our
business, results of operations and financial condition.

NEW ACCOUNTING PRONOUNCEMENTS

In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". We expect to adopt SFAS No. 133 effective
January 1, 2000. We do not expect any significant additional disclosure
requirements or other financial statement impacts to result from the adoption
of SFAS No. 133.

Certain amounts in the September 30, 1998 Financial Statements have been
reclassified to conform to the September 30, 1999 presentation.

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use", which requires
the capitalization of certain costs incurred in connection with developing or
obtaining software for internal-use. We adopted the provisions of SOP 98-1 in
our financial statements as of January 1, 1999.

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities", which requires that costs related to start-up
activities be expensed as incurred. We adopted the provisions of SOP 98-5 in
our financial statements as of January 1, 1999. Prior to 1999, we expensed
start-up costs and therefore the adoption of SOP 98-5 will have no impact on
our financial statements.

ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

The majority of our debt, which consists of $250.0 million of the 10 1/2%
Senior Notes, bears interest at a fixed rate. Although the actual service
requirements of this debt are fixed, changes in interest rates generally could
put us in a position of paying interest that differs from then existing market
rates. The remainder of our debt consists of the GE Capital Facilities and the
Bank of America Facility, which bear interest at variable rates based upon
market conditions and our financial position. As of September 30, 1999,
borrowings under these facilities totaled $54.1 million. We have not engaged in
any hedging transactions related to these facilities. As market conditions and
outstanding borrowings under these facilities change, we intend to continue to
evaluate the advisability of hedging transactions.

PART II -- OTHER INFORMATION

ITEM 1 -- LEGAL PROCEEDINGS

On September 14, 1998, Gulf Communications, L.L.C. filed suit against us
alleging breach of a telecommunications services agreement for the termination
of long distance traffic. Gulf contends that the agreement requires us to
terminate a specified number of minutes per month and that we did not fulfill
our alleged commitment. Gulf also alleges fraud in the inducement of the
agreement and seeks an unspecified amount of actual and punitive damages, plus
interest, attorneys' fees and costs. We intend to vigorously defend ourselves
against Gulf's claims. Discovery is ongoing. Defending this lawsuit may be
expensive and time-consuming and, regardless of whether the outcome is
favorable to us, could divert substantial financial, management and other
resources from our business. An adverse outcome could subject us to significant
liability.

Except as described above, we are not a party to any pending legal
proceedings that we believe would, individually or in the aggregate, have a
material adverse effect on our financial condition or results of operations.

ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS

For the three months ended September 30, 1999, we granted options to
purchase an aggregate of 93,988 shares of our common stock to 7 employees and
directors. As a result, for the nine months ended September 30, 1999, we have
granted options to purchase an aggregate of 543,488 shares of our common stock
to 70 employees and directors. The offering of these securities was deemed to
be exempt from registration under Section 4(2) of, or Rule 701 promulgated
under the Securities Act as transactions by an issuer not involving a public
offering.

ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K

(a) See Exhibit Index

(b) Reports on Form 8-K filed during the quarter: None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

BTI TELECOM CORP.
----------------------------------------
(REGISTRANT)

Dated: November 15, 1999

By: /S/ BRIAN BRANSON
----------------------------------------
BRIAN BRANSON
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------------ -------------------------------------------------------------------------------------

10.17 Fourth Amendment to the GE Capital Agreement.
10.18 Loan Agreement, entered into on September 8, 1999 between Business Telecom, Inc.
and Bank of America, National Association and the other financial institutions party
hereto from time to time as lenders and Bank of America, National Association as
Agent.
10.19 First Amendment to the Bank of America Credit Facility
10.20 Fifth Amendment to the GE Capital Loan Agreement
27 Financial Data Schedule