PROSPECTUS SUMMARY

         This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors," our audited consolidated financial statements and the other financial information appearing elsewhere in this prospectus, before making an investment decision.

Company Overview

        We provide internet protocol-based, or IP-based, communications services to small- and medium-sized enterprises, and traditional telephone services to commercial and residential customers. Our IP-based communications services are delivered over a high-speed broadband connection and consist of a wide variety of voice and data services, including local and long distance voice, internet access, email, virtual private networking, network security, conference calling, and high capacity private line services. We believe we provide a level of service and network and call reliability comparable to that of traditional phone networks, with significantly lower capital expenditures and operating costs. We also provide wholesale communications services to other communications services providers through our extensive network facilities, in which we have invested over $2.5 billion since our inception.

        Since January 2006, we have primarily targeted small- and medium-sized enterprise and multi-location customers within our geographic footprint with average monthly telecommunications bills of $500 to $5,000 per location. According to IDC, a leading provider of global information technology research and advice, approximately eight million small- and medium-sized enterprises, defined as businesses with less than 500 employees, will spend an aggregate of approximately $76.8 billion in 2007 for communications services in the United States. To address our target customers, we have shifted most of our sales resources from telemarketing to field and agent sales and have focused on geographic areas with potential enterprise customers who will use our services in multiple locations. As part of our strategy, we manage all aspects of our service offerings for our customers, including installation, provisioning, monitoring, proactive fault management and billing.

        We serve 67 metropolitan statistical areas, including 19 of the largest 50 MSAs, across 20 states in the Midwest, Rocky Mountain, Southwest and Northwest regions, representing 40% of the U.S. population. We deliver our services primarily over our private secure network using T-1 and higher connectivity. We have one of the largest facilities-based networks maintained by a competitive carrier in the United States, spanning approximately 13,000 intercity and 4,000 metropolitan local route miles and encompassing over one million intercity fiber miles and 500,000 fiber miles of metropolitan local fiber optic cable. In addition, we lease capacity from other carriers and space in approximately 650 regional Bell operating company central offices, known as collocations, where we place our network transmission equipment to access most of our customers' locations.

        Our team of senior executives has substantial experience in the telecommunications industry and extensive knowledge of our markets. Our management team is led by our Chief Executive Officer, Royce Holland, who has over 30 years of managerial experience, including over 18 years of experience in the telecommunications industry. Our executive management team includes key personnel who have held positions at leading major communications companies. Combined, our executive management team has over 150 years of telecommunications industry experience.

        As of December 31, 2006, we had nearly 1,600 employees serving approximately 101,900 residential telephone lines, 283,500 business lines and 14,300 T-1 circuits. For the year ended

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December 31, 2006, we had revenue of $544.7 million and incurred an operating loss of $15.3 million. At December 31, 2006, we had stockholders' equity of $217.1 million and an accumulated deficit of $28.3 million.

Our Strategy

        In January 2006, we emerged from Chapter 11 bankruptcy with a new chief executive officer, board of directors and equity ownership. At the same time, we shifted our business strategy to focus on providing services based on high-speed digital transmission connections, known as T-1 circuits, which we believe offer greater value to customers, increase customer retention and provide revenue growth opportunities for us.

        Elements of our new strategy include:

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Focusing on Small- and Medium-Sized Enterprise Customers.   We plan to continue to target enterprise customers with our IP-based integrated packages of voice and data services that we believe will generate greater revenue and profits per customer location than the residential and very small business customers which were our historic focus.



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Leveraging Our Network and Operational Infrastructure.   Our IP-based intercity fiber network enables us to provide our services with minimal incremental investment and maintain one of the lowest ratios of capital expenditures as a percentage of revenues within our industry. As of December 31, 2006, our average network utilization was approximately 50%, as measured by unused capacity in our switches and intercity fiber network.



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Improving Network Efficiency and Reducing Network Expenses.   We believe that our disciplined approach to sales, installation and service, together with our automated business processes, will allow us to further streamline our operations and maintain low operating costs. As part of our ongoing effort to evaluate and rationalize our network, we have reduced monthly recurring costs for electric power and cross-connects for our collocations, decommissioned collocations in areas with limited potential to capture target business customers, and eliminated excess leased network capacity.



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Expanding Our Field Sales Force and Agency Distribution Channels.   In early 2006, we shifted most of our sales resources from telemarketing to field and agent sales, which we believe are more effective in selling higher value services to our larger target customers. We have also expanded our field sales force to target small-and medium-sized enterprise and multi-location customers in geographies where we have network facilities.



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Providing Services that Meet the Needs of Our Customers.   Our goal is to provide services that improve our customers' daily productivity, simplify their networks and provide them with control of their networks. Since January 2006, our retail T-1 products are typically purchased under two or three year contracts, which we believe increases customer retention and provides revenue growth opportunities.



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Considering Potential Strategic Transactions.   We may supplement our organic growth by acquiring network assets and customers that overlay our existing network and allow us to realize cost synergies, gain market share or improve profitability. Alternatively, we may divest certain assets or markets that are no longer core to our business strategy.

        For a discussion of the industry in which we operate, please see "Business—Industry Overview."

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Company History

        We were founded in 1993 with a strategy to serve residential and small business customers in the Midwest by reselling the local and long distance voice services of other carriers. Through August 2001, we grew rapidly, acquired numerous businesses, and focused on the construction of local and long distance voice networks and a national data network. As a result of the subsequent slowdown in the telecommunications industry and the national economy, and the burden of approximately $4.0 billion in debt we had incurred to finance our growth, we filed for Chapter 11 bankruptcy in January 2002. As part of our first plan of reorganization, pre-Chapter 11 noteholders received $670 million in cash and new preferred stock, and all other outstanding equity securities were exchanged for new common stock. We emerged from Chapter 11 in April 2002 with approximately $950 million in debt and a revised strategic plan that attempted to focus on profitable revenue growth but still within the residential and small business markets.

        Following our first bankruptcy, our revenues continued to decline because of continuing weakness in segments of the telecommunications industry; the fact that our target residential and small business customers generally sought commoditized services from the lowest cost provider and exhibited high turnover; reduction in demand for long distance services among our retail customer base; and increased competition from the regional Bell operating companies and reductions in access rates and intercarrier compensation due to regulatory changes. In light of our inability to achieve new revenue growth in excess of existing customer turnover and ultimately to generate enough operating cash flow to service our remaining debt, we filed for Chapter 11 bankruptcy again in October 2005. Upon emergence on January 6, 2006, all outstanding equity securities were cancelled without consideration, and our creditors received all of our new common stock. Since that time, our common stock has not been publicly traded.

        As a result of our two bankruptcies, equity securities (including securities issued in acquisitions) with an aggregate issuance price of approximately $5.0 billion were cancelled, and an aggregate of approximately $3.1 billion in indebtedness was cancelled.

        We believe our new business strategy and capital structure address many of the past difficulties which resulted in our Chapter 11 filings:

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We have significantly deleveraged our balance sheet, reducing our total debt from $777.3 million at December 31, 2005 to $120.0 million at December 31, 2006.



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We generated positive cash flow during 2006, and had $64.8 million of cash on hand at December 31, 2006.



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Operationally, we reduced sales, general and administrative expenses by 16% from 2005 to 2006, and successfully shifted our sales focus to higher value enterprise customers. From the fourth quarter of 2005 to the fourth quarter of 2006, sales of T-1 based services grew from 37% of new sales to 73% of new sales, and monthly churn for T-1 based services decreased from 1.5% to 1.2%.

Risks Associated with Our Business

        Our business is subject to numerous risks and uncertainties, as more fully described under "Risk Factors" beginning on page 9, which you should carefully consider before purchasing our common stock. For example:

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We have never been profitable and we may not be profitable in the future.

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We face intense and growing competition from other providers of communications services that have significantly greater resources than we do.



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We may not be successful in implementing our new business strategy, including the consummation of future acquisitions or divestitures or the integration of acquired businesses.



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Our historic financial difficulties, including our two bankruptcies, have adversely affected our image, ability to compete, liquidity and financial results.



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Government regulation may increase our costs, decrease our revenues, adversely impact our ability to provide services and/or subject our services to additional competitive pressures.



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We are dependent on the regional Bell operating companies from whom we lease collocations, portions of our local transport networks and the vast majority of the wires, known as "last mile" circuits, connecting our network transmission equipment to our customers' locations.

        In addition, the ability of new investors to influence corporate matters may be limited because a small number of stockholders will beneficially own a substantial amount of our common stock following this offering. After giving effect to this offering, assuming no exercise by the underwriters of their over-allotment option, affiliates of Fidelity Investments will beneficially own     % of our common stock, affiliates of Wayzata Investment Partners LLC will beneficially own    % of our common stock, and affiliates of Jefferies & Company, Inc., one of the managing underwriters of this offering, will beneficially own    % of our common stock.

Recent Developments

        On March 9, 2007, we completed the sale of our ATS business for a purchase price of approximately $16 million. ATS provides cable television services in and around Cedar Rapids and Marion, Iowa, and was not core to our continuing telecommunications business.

        On March 23, 2007, we signed an agreement to acquire the Chicago-area customer base and related assets of Mpower Communications Corp. for approximately $17.3 million in cash. The acquisition is subject to obtaining customary regulatory approvals and is expected to close in the quarter ending June 30, 2007. Until closing, we will assist Mpower in managing its Chicago-area assets in exchange for a management fee that will be calculated based on monthly cash flow from Mpower's operations.

        On March 26, 2007, we filed a Registration Statement on Form S-4 pursuant to which we plan to offer to exchange all of our outstanding 10 ¹ / 2 % notes, which we originally issued in a private placement transaction in October 2006, for new 10 ¹ / 2 % notes that are identical to the old notes except that the new notes will be freely transferable. On April 6, 2007, we provided notice that $16 million in aggregate principal amount of 10 ¹ / 2 % notes would be redeemed on May 8, 2007 out of the ATS proceeds, and we intend to use a portion of the net proceeds of this offering to redeem up to an additional $26 million in aggregate principal amount of 10 ¹ / 2 % notes, as more fully described under "Use of Proceeds" beginning on page 30. As of the date of this prospectus, affiliates of Jefferies & Company, Inc. own approximately $4.0 million in principal amount of our 10 ¹ / 2 % notes and will benefit from these redemptions.

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Our Corporate Information

        We were incorporated in Delaware as McLeod, Inc. in 1993 and changed our name to McLeodUSA Incorporated in 1997. Our principal executive offices are located at One Martha's Way, Hiawatha, Iowa 52233, and our telephone number is (319) 790-7800. Our website address is www.mcleodusa.com. We have included our website address as an inactive textual reference only. The information contained on, or that can be accessed through, our website is not a part of this prospectus.

        In this prospectus, unless otherwise stated or the context otherwise requires, references to "McLeodUSA," "we," "us," "our" and similar references refer to McLeodUSA Incorporated.

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