<PAGE>   1

===============================================================================




                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q


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


              FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

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


                 For the Transition Period From _____ to _____


                        Commission File Number 000-28467


                            Z-TEL TECHNOLOGIES, INC.
            ------------------------------------------------------
            (Exact Name of Registrant as Specified in its Charter)


                   Delaware                              59-3501119
       -------------------------------                ----------------
       (State of Other Jurisdiction of                (I.R.S. Employer
        Incorporation or Organization)             Identification Number)


                 601 South Harbour Island Boulevard, Suite 220
                              Tampa, Florida 33602
             ----------------------------------------------------
                    (Address of Principal Executive Offices)


                                 (813) 273-6261
             ----------------------------------------------------
             (Registrant's Telephone Number, Including Area Code)


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

         At November 13, 2000 the Registrant had outstanding 33,703,366 shares
of $.01 par value common stock.



===============================================================================

<PAGE>   2

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
                                     INDEX


                                                                           Page
                                                                           ----
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets at September 30, 2000
               and December 31, 1999                                         3

         Condensed Consolidated Statements of Operations for the
               three and nine month periods ended September 30, 2000
               and 1999                                                      4

         Condensed Consolidated Statements of Stockholders' Equity
               and Comprehensive Income for the nine month period
               ended September 30, 2000                                      5

         Condensed Consolidated Statements of Cash Flows for the nine
               month periods ended September 30, 2000 and 1999               6

         Notes to Condensed Consolidated Financial Statements                7

Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                    13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk         21

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                  21

Item 2.  Changes In Securities and Use of Proceeds

                 Recent Sales of Unregistered Securities                    22

Items 6. Exhibits and Reports on Form 8-K                                   23

SIGNATURES                                                                  25



                                       2
<PAGE>   3

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                            SEPTEMBER 30, DECEMBER 31,
                                                                2000          1999
                                                             ---------     ---------
                                                            (Unaudited)
<S>                                                          <C>           <C>

ASSETS
Current assets:
    Cash and cash equivalents                                $  23,383     $ 101,657
    Accounts receivable, net of allowance for doubtful
        accounts of approximately $5,250 at September 30,
        2000 and approximately $408 at December 31, 1999        52,719         4,245
    Prepaid expenses and other current assets                    5,088         2,304
                                                             ---------     ---------
      Total current assets                                      81,190       108,206

Property and equipment, net                                     55,014        28,549
Investments                                                      5,704            --
Intangible assets, net                                          64,738            --
Other                                                            3,388           922
                                                             ---------     ---------

      Total assets                                           $ 210,034     $ 137,677
                                                             =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued liabilities                 $  26,756     $   9,165
    Deferred revenue                                             6,047            --
    Current portion of long-term debt
        and capital lease obligations                            7,617         3,726
                                                             ---------     ---------
      Total current liabilities                                 40,420        12,891

Long-term debt and capital lease obligations                    13,923        10,408
                                                             ---------     ---------

      Total liabilities                                         54,343        23,299
                                                             ---------     ---------

Mandatorily convertible redeemable preferred stock,
         $.01 par value; 5,000,000 shares authorized;
         4,688,247 issued and outstanding (aggregate
         liquidation value of approximately $57,485
         at September 30, 2000)                                 40,657            --

Commitments and contingencies (Notes 6 and 8)

Stockholders' equity:
    Common stock, $.01 par value; 150,000,000
        shares authorized; 33,939,324 and 32,159,911
        shares issued; 33,659,649 and 31,880,236
        outstanding, respectively                                  339           322
    Notes receivable from stockholders                            (789)       (1,683)
    Unearned stock compensation                                   (121)       (2,487)
    Additional paid-in capital                                 222,003       167,637
    Accumulated deficit                                       (110,733)      (49,093)
    Accumulated other comprehensive income                       4,653            --
    Treasury stock, 279,675 shares at cost                        (318)         (318)
                                                             ---------     ---------

      Total stockholders' equity                               115,034       114,378
                                                             ---------     ---------

      Total liabilities and stockholders' equity             $ 210,034     $ 137,677
                                                             =========     =========
</TABLE>



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



                                       3
<PAGE>   4

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                                    Three Months Ended                 Nine Months Ended
                                                                       September 30,                     September 30,
                                                                  2000              1999            2000             1999
                                                              ------------     ------------     ------------     ------------
<S>                                                           <C>              <C>              <C>              <C>
Revenues                                                      $     54,415     $        745     $    108,548     $      2,170
                                                              ------------     ------------     ------------     ------------
Operating expenses:
    Network operations                                              33,032            2,039           67,999            3,831
    Sales and marketing                                             11,742            2,112           29,196            3,960
    Research and development                                         2,132            1,154            5,221            2,619
    General and administrative                                      24,429            5,204           55,768           10,191
    Depreciation and amortization                                    5,308            1,085           11,800            2,749
                                                              ------------     ------------     ------------     ------------

      Total operating expenses                                      76,643           11,594          169,984           23,350
                                                              ------------     ------------     ------------     ------------

      Operating loss                                               (22,228)         (10,849)         (61,436)         (21,180)
                                                              ------------     ------------     ------------     ------------

Nonoperating income (expense):
    Interest and other income                                          736               87            2,477              319
    Interest and other expense                                      (1,617)          (1,335)          (2,681)          (2,786)
                                                              ------------     ------------     ------------     ------------

      Total nonoperating expense                                      (881)          (1,248)            (204)          (2,467)
                                                              ------------     ------------     ------------     ------------
      Net loss                                                     (23,109)         (12,097)         (61,640)         (23,647)

      Less mandatorily convertible redeemable
           dividends and preferred stock accretion                  (1,257)            (368)          (1,257)            (974)
      Less beneficial conversion feature                            (7,358)                           (7,358)
                                                              ------------     ------------     ------------     ------------

      Net loss attributable to common stockholders            $    (31,724)    $    (12,465)    $    (70,255)    $    (24,621)
                                                              ============     ============     ============     ============

Weighted average common shares outstanding                      33,536,724       13,025,563       32,847,858       14,383,338
                                                              ============     ============     ============     ============

Basic and diluted net loss per share                          $      (0.95)    $      (0.96)    $      (2.14)    $      (1.71)
                                                              ============     ============     ============     ============
</TABLE>



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



                                       4
<PAGE>   5

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
                 STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                     (IN THOUSANDS, EXCEPT FOR SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                   Common Stock        Notes                                              Other             Total
                                -----------------   Receivable     Unearned    Additional                Compre-            Stock-
                                             Par       From          Stock      Paid-In   Accumulated    hensive  Treasury  holders'
                                 Shares     Value  Stockholders  Compensation   Capital     Deficit      Income     Stock   Equity
                               ----------   -----  ------------  ------------  ---------- -----------    ------     -----  --------
<S>                            <C>          <C>    <C>           <C>           <C>        <C>          <C>        <C>      <C>

Balances, December 31, 1999    31,880,236   $ 322    $(1,683)      $(2,487)     $167,637    $ (49,093)   $   --     $(318) $114,378
 Issuance of common stock
   for acquisition of Touch 1   1,100,000      11                                 39,275                                     39,286
 Issuance of common stock for
   exercise of stock options      679,413       6                                  2,091                                      2,097
 Repayment of Stockholders'
   note                                                  894                                                                    894
 Vesting of stock options
   granted below intrinsic
   value                                                             2,366        (2,873)                                      (507)
 Warrants extinguished with
  debt                                                                               655                                        655
 Mandatorily convertible
   redeemable dividends and
   preferred stock accretion                                                      (1,257)                                    (1,257)
 Warrants issued with
   preferred stock                                                                16,475                                     16,475

Net Loss                                                                                      (61,640)                      (61,640)
 Foreign currency translation
   adjustment                                                                                                (1)                 (1)
 Unrealized Gain on
   Investments                                                                                            4,654               4,654
                                                                                                                           --------
 Comprehensive Income                                                                                                       (56,987)
                               ----------   -----    -------        ------      --------   ----------    ------     -----  --------
 Balances, September 30, 2000  33,659,649   $ 339    $  (789)       $ (121)     $222,003   $ (110,733)   $4,653     $(318) $115,034
                               ==========   =====    =======        ======      ========   ==========    ======     =====  ========

</TABLE>



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



                                       5
<PAGE>   6

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                                  Nine Months Ended
                                                                    September 30,
                                                               ----------------------
                                                                  2000         1999
                                                               ---------     --------
<S>                                                            <C>           <C>

Cash flows from operating activities:
Net loss                                                       $ (61,640)    $(23,647)
                                                               ---------     --------
Adjustments to reconcile net loss to net cash used in
     operating activities:
   Depreciation and amortization                                  11,800        2,749
   Amortization of commitment fee                                               2,192
   Provision for bad debts                                         4,842          859
   Loss on sale of assets                                            572
   Change in operating assets and liabilities:
     Increase in accounts receivable                             (45,845)      (1,452)
     Increase in prepaid expenses and other assets                (3,994)      (1,467)
     Increase in accounts payable and accrued liabilities          9,427        4,764
     Increase in deferred revenue                                  5,529           --
     Other                                                          (575)         102
                                                               ---------     --------
        Total adjustments                                        (18,244)       7,747
                                                               ---------     --------
        Net cash used in operating activities                    (79,884)     (15,900)
                                                               ---------     --------

Cash flows from investing activities:
   Proceeds from sale and leaseback transaction                       --       13,768
   Proceeds from sale of receivables                                 766
   Purchases of property and equipment                           (26,257)     (10,665)
   Investment in securities                                       (1,050)          --
   Purchase of Touch 1, net of cash acquired                      (8,955)          --
                                                               ---------     --------
        Net cash provided by (used in) investing activities      (35,496)       3,103
                                                               ---------     --------
Cash flows from financing activities:
   Proceeds from issuance of mandatorily convertible
     redeemable preferred stock                                   55,875       10,000
   Proceeds from issuance of common stock                          2,097           --
   Proceeds from notes receivable                                    894           --
   Payments on long-term debt and capital lease obligations      (21,760)      (2,494)
                                                               ---------     --------
        Net cash provided by financing activities                 37,106        7,506
                                                               ---------     --------

Net decrease in cash and cash equivalents                        (78,274)      (5,291)
Cash and cash equivalents, beginning of period                   101,657        7,973
                                                               ---------     --------

Cash and cash equivalents, end of period                       $  23,383     $  2,682
                                                               =========     ========
Non-cash investing and financing activities:
   Mandatorily convertible redeemable dividends and
     preferred stock accretion                                     1,257          974
                                                               =========     ========
   Beneficial conversion                                           7,358           --
                                                               =========     ========
Acquisition of Touch 1
   Assets acquired, net of cash                                $  85,967     $     --
   Liabilities assumed                                         $  37,979     $     --
   Cash acquired                                               $   1,168     $     --
   Assets acquired in exchange for common stock                $  40,201     $     --

</TABLE>


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



                                       6
<PAGE>   7

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.       NATURE OF BUSINESS

         DESCRIPTION OF BUSINESS

         Z-Tel Technologies, Inc. and subsidiaries ("Z-Tel" or the "Company")
         incorporated in Delaware on January 15, 1998 as Olympus
         Telecommunications Group, Inc. In March 1998, Olympus
         Telecommunications Group, Inc. changed its name to Z-Tel Technologies,
         Inc. Z-Tel Technologies, Inc. is the parent company, and has no other
         operations. The Company has eight wholly owned subsidiaries: Z-Tel
         Communications, Inc., Z-Tel Business Networks, Inc., Z-Tel Holdings,
         Inc., Z-Tel Communications of Virginia, Inc., Z-Tel, Inc., Z-Tel
         Network Services, Inc., Z-Tel Investments, Inc. and Touch 1
         Communications, Inc.

         Z-Tel is an emerging provider of advanced, integrated
         telecommunications services targeted to residential subscribers. Z-Tel
         offers local and long distance telephone services in combination with
         enhanced communication features accessible through the telephone or
         the Internet. Z-Tel offers its Z-Line Home Edition service in New
         York, Texas, Massachusetts, Pennsylvania, Georgia, Oregon, Maryland,
         California, and Illinois. Z-Tel also provides long-distance
         telecommunications services to customers nationally.

2.       BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
         have been prepared by the Company in accordance with generally
         accepted accounting principles for interim financial information and
         are in the form prescribed by the Securities and Exchange Commission
         in instructions to Form 10-Q and Article 10 of Regulation S-X.
         Accordingly, they do not include all of the information and footnotes
         required by generally accepted accounting principles for complete
         financial statements. The interim unaudited financial statements
         should be read in conjunction with the audited financial statements of
         the Company as of and for the year ended December 31, 1999, included
         in the Company's Annual Report on Form 10-K. In the opinion of
         management, all adjustments considered necessary for a fair
         presentation have been included. Operating results for the three and
         nine months ended September 30, 2000 are not necessarily indicative of
         the results that may be expected for the year ending December 31,
         2000.

         Certain amounts in the prior period's consolidated financial
         statements have been reclassified to conform to the current period
         presentation.


         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Company and its wholly owned subsidiaries. All intercompany accounts
         and transactions have been eliminated.

         INVESTMENTS

         Included in investments are available for sale securities and
         investments accounted for utilizing the cost method of accounting for
         those investments without a readily identifiable market. In accordance
         with Statement of Financial Accounting Standards Board No. 115,



                                       7
<PAGE>   8

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)



         "Accounting for Certain Investments in Debt and Equity Securities"
         securities that are available for sale are reported at fair value with
         changes in the fair value from period to period included as a separate
         component of comprehensive income in equity. At September 30, 2000, the
         Company had approximately $5.3 and $0.4 million in available for sale
         securities and investments accounted for at cost, respectively. There
         was an increase of approximately $4.7 million in fair value, using the
         specific identification method for calculating the unrealized gain, for
         the nine months ended September 30, 2000 recorded as a separate
         component of comprehensive income in equity.

         NEW ACCOUNTING PRONOUNCEMENTS

         In December 1999, the SEC issued Staff Accounting Bulletin No. 101
         ("SAB 101"), "Revenue Recognition in Financial Statements." While not
         intended to change current literature related to revenue recognition,
         SAB 101 provides additional guidance on revenue recognition policies
         and procedures. The Company believes that its current accounting
         policies and procedures related to revenue recognition comply with SAB
         101.

         In March 2000, the Financial Accounting Standards Board ("FASB")
         released FIN 44, "Accounting for Certain Transactions involving Stock
         Compensation, an interpretation of APB Opinion No. 25," which provides
         clarification of Opinion 25 for certain issues such as the
         determination of an employee, the criteria for determining whether a
         plan qualifies as a non-compensatory plan, the accounting consequences
         of various modifications to the terms of a previously fixed stock
         option or award, and the accounting for an exchange of stock
         compensation awards in a business combination. The Company believes
         that its practices are in conformity with this guidance, and therefore
         FIN 44 has not had a material impact on the Company's consolidated
         financial statements.

         In June 1998, the FASB released Statement of Financial Account
         Standards ("SFAS No. 133"), "Accounting for Derivative Instruments and
         Hedging Activities." SFAS No. 133 establishes the accounting and
         reporting standards for derivative instruments, including certain
         derivative instruments embedded in other contracts, and for hedging
         activities. It requires that an entity recognize all derivatives as
         either assets or liabilities in the statement of financial position and
         measure those instruments at fair value. SFAS No. 133 is effective for
         fiscal quarters of fiscal years beginning after June 15, 2000. The
         Company believes that the adoption of SFAS No. 133 will not have a
         material impact on the Company's consolidated financial statements.

3.       ACQUISITION OF TOUCH 1

         The Company completed the acquisition of Touch 1 Communications, Inc.
         ("Touch 1"), a reseller of long distance service to subscribers
         throughout the United States, on April 14, 2000. Touch 1 is the parent
         Company to its two wholly owned subsidiaries direcTel, Inc., and
         direcCONNECT, Inc. The purchase price for Touch 1 consisted of 1.1
         million shares of the Company's common stock at a price of $35.71 per
         share, approximately $9.0 million in cash, and $1.0 million in
         transaction and related fees. The acquisition of Touch 1 was accounted
         for using the purchase method of accounting and, accordingly, the
         results of operations of Touch 1 for the period from April 1, 2000
         (the closing date for accounting



                                       8
<PAGE>   9

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)


         purposes) are included in the accompanying condensed consolidated
         financial statements. The acquisition of Touch 1 resulted in
         approximately $67.0 million of intangible assets. The intangible assets
         are composed of approximately $9.2 million for customer lists and
         approximately $57.8 million for goodwill, being amortized, on the
         straight line basis, over periods of five and twenty years,
         respectively. The Company recorded approximately $1.2 and $2.4 million
         of amortization of the intangible assets for the three and nine
         months ended September 30, 2000, respectively.

         The following unaudited pro forma information presents a summary of
         our consolidated results of operations as if the acquisition had
         occurred at the beginning of the periods presented.

                                                           Nine Months
         In thousands, except per share date              September 30,
         -----------------------------------            ----------------
                                                        2000        1999
                                                        ----        ----

         Revenues                                     $127,462   $ 50,355
         Net loss                                      (60,013)   (14,645)
         Net loss attributable to
           common stockholders                         (68,628)   (15,619)
         Loss per share                                  (1.81)     (1.11)

         The pro forma condensed consolidated financial information is not
         necessarily indicative of what Z-Tel's results of operations would
         have been had the acquisition been completed at the beginning of the
         period presented or the future results of the Company's operations.

4.       ACCOUNTS RECEIVABLE AGREEMENT

         In July 2000, the Company entered into an accounts receivable agreement
         with RFC Capital Corporation, a division of Textron, Inc., ("RFC")
         providing for the sale of certain of the Company's accounts receivable
         to RFC. RFC has agreed to purchase up to $25.0 million of the Company's
         accounts receivable, with provisions for a commitment of up to $50.0
         million, subject to successful syndication of the receivables sales
         program by RFC. Z-Tel has sold approximately $1.3 million of
         receivables, for net proceeds of approximately $0.8 million, during the
         third quarter of 2000.

5.       MANDATORILY CONVERTIBLE REDEEMABLE PREFERRED STOCK

         In July 2000, the Company filed a Certificate of Designation
         authorizing the issuance of 5.0 million shares of Series D convertible
         preferred stock ("Series D Preferred"). The Company has received
         aggregate proceeds of approximately $56.3 million in connection with
         the sale of 4,688,247 shares of Series D Preferred at a price of
         $12.00. The deal costs associated with the transaction were
         approximately $0.4 million. The Series D Preferred is convertible at a
         conversion price of $12.00, which price is subject to adjustment, into
         common stock at the option of the holder (i.e., initially convertible
         on a one-for-one basis); however, there are certain circumstances that
         provide for a forced conversion of the




                                       9
<PAGE>   10


                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

         stock by the Company. Series D Preferred is mandatorily redeemable 8
         years from the original issue date, has an 8% cumulative dividend
         payable at times in cash and at times in-kind with additional Series D
         Preferred and has certain liquidation preferences and voting rights.
         Each purchaser of Series D Preferred received a warrant to purchase a
         number of shares of Z-Tel common stock equal to one-half of the amount
         of Series D Preferred purchased by such investor. Each warrant is
         exercisable at a price of $13.80 per share subject to certain
         adjustments.

         In accordance with Emerging Issues Task Force 98-5, "Accounting for
         Convertible Securities with Beneficial Conversion Features or
         Contingently Adjustable Conversion Ratios," Accounting Principles Board
         14, "Accounting for Convertible Debt and Debt Issued with Stock
         Purchase Warrants," and Statement of Financial Standards Board 128,
         "Earning Per Share" the Company has recorded approximately $7.4, $0.4,
         and $0.9 million relating to a beneficial conversion, preferred stock
         accretion and cumulative dividend as a result of the Series D Preferred
         transaction. The recording of the beneficial conversion and preferred
         stock accretion is the result of a fair value allocation of the net
         proceeds received from the Series D Preferred between the Series D
         Preferred and the warrants issued. The Company used the Black-Scholes
         valuation model to calculate a fair value and allocated value of $12.23
         and $6.87, respectively, for each warrant. These items are included in
         the calculations of the net loss attributable to common stockholders
         and the Company's loss per share calculation.

6.       COMMITMENTS AND CONTINGENCIES

         The Company has disputed billings and access charges from certain
         inter-exchange carriers (IXCs) and incumbent local exchange carriers
         (ILECs). The Company contends these billings and access charges are
         not in accordance with the interconnection, service level, or tariff
         agreements entered between the Company and certain IXCs and ILECs. The
         Company has paid for and recognized a portion of these disputes and
         management believes that the Company will prevail in these disputes.
         At September 30, 2000 and December 31, 1999, the disputed amounts were
         approximately $5.0 and $2.3 million, respectively.

         In July 2000, the Company entered into an agreement with a service
         firm to provide various content and new service offerings through the
         telephone. Under this agreement Z-Tel has invested $3.0 million and is
         committed to an additional $4.0 million in cash payments for future
         services. This contract provides for early termination under certain
         circumstances with adjustments of the commitments.

         In August 2000, the Company entered into an agreement with a service
         firm to outsource customer provisioning through electronic bonding
         with incumbent local exchange carriers. Under this agreement, Z-Tel is
         committed to approximately $0.5 million cash payment for set-up fees
         and minimum commitment fees, subject to certain adjustments, for the
         next three years of approximately $4.0, $7.0, and $9.0 million. The
         payment of these fees are subject to the successful completion by the
         service firm of certain obligations in the future. This contract
         provides for various termination arrangements with related severance
         fees.



                                      10
<PAGE>   11

                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

7.       COMPUTATION OF NET LOSS PER SHARE

         Basic and diluted net loss per share are computed by dividing net loss
         attributable to common stockholders by the weighted average common
         shares outstanding during the period. Incremental shares of common
         stock equivalents are not included in the calculation of diluted net
         loss per share, as the inclusion of such equivalents would be
         anti-dilutive.

         Net loss per share is calculated as follows:

<TABLE>
<CAPTION>

                                                               Three Months Ended                Nine Months Ended
                                                                  September 30,                     September 30,
                                                          -----------------------------     -----------------------------
                                                              2000             1999             2000            1999
                                                          ------------     ------------     ------------     ------------
                                                                   (In thousands, except share and per share data)
<S>                                                       <C>              <C>              <C>              <C>

Basic and diluted net loss per share:
  Loss attributable to common stockholders:
    Net loss                                              $    (23,109)    $    (12,097)    $    (61,640)    $    (23,647)
    Less mandatorily convertible redeemable
       dividends and preferred stock accretion                  (1,257)            (368)          (1,257)            (974)
    Less beneficial conversion feature                          (7,358)              --           (7,358)              --
                                                          ------------     ------------     ------------     ------------

    Net loss attributable to common stockholders          $    (31,724)    $    (12,465)    $    (70,255)    $    (24,621)
                                                          ============     ============     ============     ============

    Weighted average common shares outstanding              33,536,724       13,025,563       32,847,858       14,383,338
                                                          ============     ============     ============     ============

    Basic and diluted net loss per share                  $      (0.95)    $      (0.96)    $      (2.14)    $      (1.71)
                                                          ============     ============     ============     ============
</TABLE>


         For each of the periods presented, basic and diluted net loss per
         share are the same. Unexercised options to purchase 9,139,495 and
         6,052,089 shares of common stock and unexercised mandatorily
         convertible redeemable preferred stock convertible into 4,688,247 and
         7,402,778 shares of common stock at September 30, 2000 and 1999,
         respectively, which could potentially dilute basic earnings per share
         in the future, were not included in the computation of diluted net
         loss per share for these periods because to do so would have been
         anti-dilutive in each case.

8.       LEGAL AND REGULATORY PROCEEDINGS

         On June 9, 2000, PTEK Holdings, Inc. and Premiere Communications, Inc.
         (collectively, "PTEK") filed a lawsuit against the Company, Z-Tel
         Communications, Inc., David Gregory Smith, Z-Tel's Chairman, Chief
         Executive Officer and President, Eduard Mayer, one of Z-Tel's directors
         and James Kitchen, a Senior Vice President of Z-Tel (the "Lawsuit").




                                      11
<PAGE>   12
                   Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

         On November 14, 2000, the parties to the Lawsuit agreed to resolve in
         full all claims asserted by each party against the other. In
         connection with the settlement, the Company agreed to issue a warrant
         to PTEK Holdings, Inc. to purchase 175,000 shares of the Company's
         common stock at an exercise price of $12.00, which price is subject to
         certain adjustments. The warrant is fully vested and non-forfeitable
         but is not exercisable until two years after the issue date of the
         warrant. As a result of the issuance of the warrant and the accrual of
         legal fees related to the Lawsuit, the Company has recognized an
         expense of approximately $1.0 million.

         In the ordinary course of business, the Company is involved in legal
         proceedings that are generally incidental to its operations. In
         addition, from time to time, the Company is the subject of customer
         complaints filed with the state utility commissions of the states in
         which it operates or the FCC. Most complaints are handled informally
         and at this time there are no formal proceedings pending. While there
         can be no assurance of the ultimate disposition of incidental legal
         proceedings or customer complaints, the Company does not believe their
         disposition will have a material adverse effect on the Company's
         consolidated results of operations or financial position.

9.       SUBSEQUENT EVENTS

         In November 2000, the Company filed a Certificate of Designation
         authorizing the issuance of approximately 6.3 million shares of $.01
         par value Series E Convertible Preferred Stock ("Series E Preferred").
         The Company has received proceeds of approximately $50.0 million in
         connection with the sale of 4,166,667 shares of Series E Preferred at a
         price of $12.00. The purchaser of Series E Preferred received a warrant
         to purchase a number of shares of Z-Tel common stock equal to one-half
         of the amount of Series E Preferred purchased by such investor. The
         purchaser of Series E Preferred has the option, for ninety days from
         November 13, 2000 (initial closing), to purchase (or designate another
         person who intends to purchase) an additional 2,083,333 shares of
         Series E Preferred along with warrants to purchase 1,041,667 shares of
         Z-Tel common stock, for approximately $25.0 million. Series E Preferred
         is convertible at a conversion price of $12.00, which price is subject
         to adjustment, into common stock at the option of the holder (i.e.,
         initially convertible on a one-for-one basis); however, there are
         certain circumstances that provide for a forced conversion of the stock
         by the Company. Series E Preferred is mandatorily redeemable 8 years
         from the original issue date, has an 8% cumulative dividend payable in
         cash and has certain liquidation preferences and voting rights. Each
         warrant is exercisable at a price of $13.80 per share subject to
         certain adjustments.




                                      12
<PAGE>   13

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

         This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report on Form 10-Q
contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those projected in the
forward-looking statements as a result of certain factors. Factors that may
affect our results of operations include, but are not limited to, our limited
operating history and cumulative losses, uncertainty of customer demand, rapid
expansion, potential software failures and errors, potential network and
interconnection failure, dependence on local exchange carriers, dependence on
third party vendors, dependence on key personnel, uncertainty of government
regulation, legal and regulatory uncertainties, and competition. We disclaim
any obligation to update information contained in any forward-looking
statement. In addition to the factors noted above, other risks, uncertainties,
assumptions, and factors that could affect our financial results are described
in our 1999 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 2000.

         The forward-looking statements are based on the belief of our
management, as well as assumptions made by and information currently available
to our management. Forward-looking statements also may be included in other
written and oral statements made or released by us. You can identify
forward-looking statements by the fact that they do not relate strictly to
historical or current facts. The words "believe," "anticipate," "intend,"
"expect," "estimate," "project" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements describe our
expectations today of what we believe is most likely to occur or reasonably
achievable in the future, but they do not predict or assure any future
occurrence and may turn out to be wrong.

         We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document.


OVERVIEW

         We are an emerging provider of advanced, integrated telecommunications
services targeted primarily to residential subscribers. For management
purposes, we are organized into one reportable operating segment. We offer
local and long distance telephone services in combination with enhanced
communication features accessible through the telephone or the Internet. The
nature of our business is rapidly evolving and we have a limited operating
history. As a result, we believe that period-to-period comparisons of our
revenues and operating results, including our network operations and other
operating expenses as a percentage of total revenue, are not meaningful and
should not be relied upon as indicators of future performance. We do not
believe that our historical growth rates are indicative of future results.



                                      13
<PAGE>   14

         Z-Line Home Edition is our principal service offering. Z-Line Home
Edition includes low-priced local and long-distance (1+) residential telephone
services using a customer's existing telephone number, bundled with enhanced
features, including caller identification, call forwarding, three-way calling,
speed dialing, and dial-up remote access through our Z-Line Anywhere access
card product, the full functionality of the Personal Communication Center
("PCC") and, for an additional fee, Internet access. We offer Z-Line Home
Edition service in the following nine states: New York, Texas, Massachusetts,
Pennsylvania, Georgia, Oregon, Maryland, California, and Illinois. We
anticipate entering additional states before the end of the fourth quarter of
2000.

         Z-Line Anywhere is our access card product that allows a customer to
make long-distance calls using our network from any phone simply by dialing a
local access or toll-free 1-800 number. No change in phone service is required.
Subscribers of Z-Line Anywhere also receive the full functionality of our PCC.
Z-Line Anywhere is offered nationwide. Z-Line Anywhere customers are billed
monthly in arrears, and the associated revenue is recognized in the month of
service.

         We completed the acquisition of Touch 1 Communications, Inc. ("Touch
1"), on April 14, 2000. The purchase price of Touch 1 consisted of 1.1 million
shares of our common stock and $9.0 million in cash. Touch 1 provides employees
in sales, provisioning, and customer service. We anticipate that this
acquisition will provide operating efficiencies and lower customer acquisition
costs. We believe that Touch 1 also has provided us with the opportunity to
further grow our back-office operations to provide capacity for market entry
into new states.

         We used the purchase accounting method for our acquisition of Touch 1.
Therefore, the below discussions of the results of operations and liquidity and
capital resources do not include any discussions regarding Touch 1 prior to our
acquisition of Touch 1, for accounting purposes, on April 1, 2000. This
treatment is in accordance with the adoption of the purchase method of
accounting. A pro forma discussion and schedule is included in Footnote 3 to
the financial statements that display the pro forma statement of operations of
us and Touch 1 for the nine months ended September 30, 2000.


RESULTS OF OPERATIONS

REVENUE. Revenue increased by $53.6 million to $54.4 million for the three
months ended September 30, 2000, compared to $0.8 million for the same period in
the prior year. The increase of $43.8 million of revenue is attributable to the
average Home Edition customer count of 213,000 for the three months ended
September 30, 2000, compared to 3,000 for the same period in the prior year. The
purchase of Touch 1 provided an additional increase in revenue of $9.8 million
from its existing 1+ long-distance offering for the three months ended September
30, 2000.

Revenue increased by $106.3 million to $108.5 million for the nine months ended
September 30, 2000, compared to $2.2 million for the same period in the prior
year. The increase of $86.7 million of revenue is primarily the result of the
average Home Edition customer count of 148,050 for the nine months ended
September 30, 2000, compared to 3,000 for the same period in the prior year. The
revenue from Touch 1 contributed $21.8 million to the increase. The following
tables outline the




                                      14
<PAGE>   15

approximate number of subscribers for Z-Line Home Edition, Z-Line Anywhere and
Touch 1 (1+) long distance services as of the end of the period:


TYPE OF SERVICE                        September 30, 2000   September 30, 1999
------------------------------------------------------------------------------

Z-Line Home Edition Subscribers              256,000             6,000
Z-Line Anywhere and Touch 1 (1+)
   Long Distance Services Subscribers        281,000            84,000

         NETWORK OPERATIONS. Network operations expense increased by $31.0
million to $33.0 million for the three months ended September 30, 2000,
compared to $2.0 million for the same period in the prior year. Network
operations expense increased by $64.2 million to $68.0 million for the nine
months ended September 30, 2000, compared to $3.8 million for the same period
in the prior year. The network operations expense primarily consists of fixed
and variable transmission expenses for interconnection agreements with
incumbent local exchange carriers (ILECs), service level agreements with
inter-exchange carriers (IXCs), and transmission services based on tariff
arrangements. The increase in network operation expenses for both the three and
nine months ended September 30, 2000 is the result of our subscriber growth.

         SALES AND MARKETING. Sales and marketing expense increased $9.6
million to $11.7 million for the three months ended September 30, 2000,
compared to $2.1 million for the same period in the prior year. Sales and
marketing expense increased $25.2 million to $29.2 million for the nine months
ended September 30, 2000, compared to $4.0 million for the same period in the
prior year. The sales and marketing expense primarily consists of
telemarketing, direct mail, brand awareness advertising, and employee salaries
and benefits paid to employees engaged in sales and marketing activities.

         The increase in sales and marketing expense is attributable to our
continued increased telemarketing hours and direct mail efforts. The purchase of
Touch 1 in the second quarter has greatly increased our telemarketing efforts in
addition to the hiring of additional employees in their existing locations. Our
direct mail campaign continued through the third quarter of 2000 after its
successful introduction in first quarter 2000. We intend to significantly
increase our sales and marketing expenditures during the remainder of the year
2000 as we increase our telemarketing and direct mail campaigns and develop
other marketing channels. We have launched a brand awareness campaign and
additional sales and marketing associated with our City of America campaign that
provides unlimited calling between Z-Line members. This campaign has been
introduced in Texas and provides Texas members with a bundle of
telecommunications services that include the benefit of calling any other Z-Line
member at no additional cost. In the future, we expect to expand this offering
to all states in which we are offering Z-Line Home Edition.

         RESEARCH AND DEVELOPMENT. Research and development expenses increased
$0.9 million to $2.1 million for the three months ended September 30, 2000,
compared to $1.2 million for the same period in the prior year. Research and
development expenses increased $2.6 million to $5.2 million for the nine months
ended September 30, 2000, compared to $2.6 million for the same period in the
prior year. Our research and development expenses consist primarily of salaries
and benefits paid to employees engaged in research and development activities
and outside third party development costs.



                                      15
<PAGE>   16

         The enhancement of our current product offerings, development of new
products and services and internal use software development have contributed to
increased research and development cost for both the three and nine months
ended September 30, 2000. We introduced Z-Alerts during the third quarter of
2000 and continue to develop new product offerings. We adopted the provisions
of Statement of Position ("SOP") 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," at the beginning of 1999. As
a result, $2.0 and $5.7 million of research and development costs relating to
development of internal use software were capitalized for the three and nine
months ended September 30, 2000, compared to $1.8 and $2.2 million for the same
periods in the prior year. We expect research and development costs to increase
in the future as we enhance and develop new services.

         GENERAL AND ADMINISTRATIVE. General and administrative expense
increased $19.2 million to $24.4 million for the three months ended September
30, 2000, compared to $5.2 million for the same period in the prior year.
General and administrative expense increased $45.6 million to $55.8 million for
the nine months ended September 30, 2000, compared to $10.2 million for the
same period in the prior year. General and administrative expenses consist
primarily of employee salaries, temporary services, bad debt expense, billing
and collection expense, occupancy costs, provisioning costs for Z-Line Home
Edition customers and our litigation settlement.

         The acquisition of Touch 1 and the increase in subscribers has caused
an increase in expenses for general and administrative purposes for both the
three and nine months ended September 30, 2000 compared to the same periods in
the prior year. We increased our capacity for back-office operations to provide
for our anticipated growth and introduction of Z-Line Home Edition to new
states. We anticipate general and administrative expenditures will continue to
increase in the future as we increase our subscribers, expand our services and
enter new states.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $4.2 million to $5.3 million for the three months ended September 30,
2000, compared to $1.1 million for the same period in the prior year.
Depreciation and amortization expense increased $9.1 million to $11.8 million
for the nine months ended September 30, 2000, compared to $2.7 million for the
same period in the prior year.

         The increase in depreciation and amortization is a result of the
acquisition of Touch 1 and purchases of equipment. The amortization of the $67.0
million of intangible assets, constituting the amount of consideration in excess
of the fair market value of the net assets purchased from Touch 1. Intangible
asset are composed of $9.2 million and $57.8 million allocated to customer lists
and goodwill, amortized over 5 and 20 year lives, respectively, resulted in
amortization of $1.2 and $2.4 million for the three months and nine months
ended, respectively. In addition, the purchase of computer equipment, switching
equipment, furniture and leasehold improvements required to maintain our growth
and expand our operations has also contributed to the increased depreciation and
amortization expense for both the three and nine months ended September 30,
2000. We expect depreciation and amortization to continue to increase
significantly as we increase our capital expenditures.

         INTEREST AND OTHER INCOME. Interest and other income increased $0.6
million to $0.7 million for the three months ended September 30, 2000, compared
to $0.1 million for same period in the prior year. Interest and other income
increased $2.2 million to $2.5 million for the nine months ended September 30,
2000, compared to $0.3 million for same period in the prior year. Interest and
other income consist of income on our cash balances invested in short-term



                                      16
<PAGE>   17

liquid investments. The increase was primarily due to larger cash reserves,
resulting from funds raised in our initial public offering and Series D
Preferred share offering. We raised net proceeds of $109.1 million after
underwriting discounts and commissions in our initial public offering and net
proceeds of $55.9 million in our Series D Preferred share offering. Our cash
and cash equivalents were $23.4 million and $2.7 million at September 30, 2000
and 1999, respectively.

         INTEREST AND OTHER EXPENSE. Interest and other expense increased $0.3
million to $1.6 million for the three months ended September 30, 2000, compared
to $1.3 million for the same period in the prior year. Interest and other
expense decreased $0.1 million to $2.7 million for the nine months ended
September 30, 2000, compared to $2.8 million for the same period in the prior
year. Our interest expense is a result of the interest charged on our capital
lease and other debt obligations. We anticipate interest expense to increase in
the future as a result of our assumption of debt from the Touch 1 acquisition
and the borrowing of money to support operations through potential new funding
sources.

         INCOME TAX EXPENSE. No provision for federal or state income taxes has
been recorded due to the full valuation allowance recorded against the deferred
tax asset for the three and nine month periods ended September 30, 2000 and for
the same periods in the prior year.

         NET LOSS. Our net loss increased $11.0 million to $23.1 million for
the three months ended September 30, 2000, compared to $12.1 million for the
same period in the prior year. Our net loss increased $38.0 million to $61.6
million for the nine months ended September 30, 2000, compared to $23.6 million
for the same period in the prior year. This increase was due primarily to the
increases in expenses described above.

         NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
attributable to common stockholders increased $19.2 million to $31.7 million
for the three months ended September 30, 2000, compared to $12.5 million for
the same period in the prior year. Our net loss attributable to common
stockholders increased $45.7 million to $70.3 million for the nine months ended
September 30, 2000, compared to $24.6 million for the same period in the prior
year. This increase was due primarily to the increases in expenses described
above and the issuance of the Series D Preferred. In conjunction with the
Series D Preferred we incurred $8.7 million of non-cash charges relating to net
loss attributable to common stockholders composed of $7.4, $0.9 and $0.4
relating to a beneficial conversion, cumulative dividend and preferred stock
accretion.

         EBITDA. Many securities analysts use the measure of earnings before
deducting interest, taxes, depreciation and amortization, also commonly
referred to as "EBITDA," as a way of evaluating our financial performance.
While EBITDA is not a measure under generally accepted accounting principles,
and is not meant to be a replacement for generally accepted accounting
principles, EBITDA is a measure commonly used in the telecommunications industry
and is presented to assist in understanding our operating results. Our negative
EBITDA increased $7.1 million to $16.9 million for the three months ended
September 30, 2000, compared to $9.8 million for the same period in the prior
year. Our negative EBITDA increased $31.2 million to $49.6 million for the nine
months ended September 30, 2000, compared to $18.4 million for the same period
in the prior year. We expect to experience a reduction in negative EBITDA during
the remaining fiscal year 2000 as a result of our increases in subscribers and
operating efficiency.



                                      17
<PAGE>   18

LIQUIDITY AND CAPITAL RESOURCES

         The competitive local telecommunications service business is
traditionally considered to be a capital intensive business owing to the
significant investments required in fiber optic communication networks and the
co-location of switches and transmission equipment in incumbent local exchange
carriers' central offices. Although we will continue our capital expenditures
we do not expect that the growth of our business will require the levels of
capital investment in fiber optics and switches that existed in historical
telecommunications models. Instead, we will devote significant amounts of our
capital resources to continued operations, software development and marketing
efforts that we have designed to achieve rapid penetration of our target
markets.

         We have incurred accumulated losses since our inception as a result of
developing our business, research and development, building and maintaining
network infrastructure and technology, sales and promotion of our services, and
administrative expenditures. As of September 30, 2000, we had an accumulated
deficit of $110.7 million. We have funded these expenditures primarily through
operating revenues, private securities offerings, a sale-leaseback credit
facility, receivables credit facility and an initial public offering of 6.9
million shares of common stock (including the underwriters' over-allotment
option) that raised net proceeds of $109.1 million after underwriting discounts
and commissions. We intend to continue building our organization in
anticipation of future growth and believe that our operating expenditures will
also continue to increase.

         On April 14, 2000, we completed the acquisition of Touch 1 for
approximately $9.0 million in cash and 1.1 million shares of our common stock.
The Touch 1 acquisition was accounted for using the purchase method of
accounting. The acquisition of Touch 1 resulted in $67.0 million of intangible
assets being amortized over 5 to 20 years.

         In July 2000, we also entered into an agreement with a service firm to
provide various content and new service offerings through the telephone. Under
this agreement we have invested $3.0 million and are committed to an additional
$4.0 million in cash payments for future services. This contract provides for
early termination under certain circumstances with adjustments of the
commitments.

         In August 2000, we entered into an agreement with a service firm to
outsource customer provisioning through electronic bonding with incumbent local
exchange carriers. Under this agreement, we are committed to a $0.5 million
cash payment for set-up fees and minimum commitment fees, subject to certain
adjustments, for the next three years of $4.0, $7.0, and $9.0 million, subject
to the successful completion by the service firm of certain obligations in the
future. This contract provides for various termination arrangements with
related severance fees.

         In November 2000, we filed a Certificate of Designation authorizing
the issuance of approximately 6.3 million shares of $.01 par value Series E
Convertible Preferred Stock ("Series E Preferred"). We have received proceeds
of approximately $50.0 million in connection with the sale of 4,166,667 shares
of Series E Preferred at a price of $12.00. The purchaser of Series E preferred
received a warrant to purchase a number of shares of our common stock equal to
one-half of the amount of Series E Preferred purchased by such investor. The
purchaser of Series E Preferred has the option, for ninety days after the
initial closing, to purchase (or designate another person who intends to
purchase) an additional 2,083,333 shares of Series E




                                      18
<PAGE>   19
Preferred along with warrants to purchase 1,041,667 shares of our common stock,
for approximately $25.0 million. Series E Preferred is convertible at a
conversion price of $12.00, which price is subject to adjustment, into common
stock at the option of the holder (i.e., initially convertible on a one-for-one
basis); however, there are certain circumstances that provide for a forced
conversion of the stock by us. Series E Preferred is mandatorily redeemable 8
years from the original issue date, has an 8% cumulative dividend payable in
cash and has certain liquidation preferences and voting rights. Each warrant is
exercisable at a price of $13.80 per share subject to certain adjustments.

         NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities increased by $64.0 million to $79.9 million for the nine months
ended September 30, 2000, compared to $15.9 million for the same period in the
prior year. Our increase in cash used in operating activities increased was
primarily because of increasing net losses and increases in accounts receivable
from increased revenue and billings.

         NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities was $35.5 million for the nine months ended September 30, 2000,
compared to $3.1 million provided by investing activities for the same period
in the prior year, a change of $38.6 million. For the nine months ended
September 30, 2000, we received $0.8 million from selling our receivables, we
invested $9.0 million in cash to acquire Touch 1 and purchased property and
equipment of $26.3 million. For the nine months ended September 30, 1999, we
received $13.8 million in a sale-leaseback transaction and purchased property
and equipment of $10.7 million.

         In July 2000, we entered into an accounts receivable facility with RFC
Capital Corporation, a division of Textron, Inc., ("RFC") providing for the sale
of certain of our accounts receivable to RFC. RFC has agreed to purchase up to
$25.0 million of our accounts receivable, with provisions for a commitment of up
to $50.0 million, subject to successful syndication of the receivables sales
program by RFC. We have sold $1.3 million of receivables, for net proceeds of
$0.8 million, during the third quarter of 2000.

         The increase in net cash used in investing activities is a direct
result of our continued preparation for rapid growth and our plans for network
infrastructure and introduce new service offerings. In 2000, we have been
focused on product development and the establishment of our infrastructure, the
operation of our technology and a network that primarily involves the
development and purchases of software for additional service offerings,
internal operations, and the operation of telecommunication services. As
discussed earlier, the purchase of Touch 1 has greatly increased our
back-office operations. We have increased our employees at all locations. The
increase in employees coupled with our increase in subscribers has required us
to make capital investments in switching equipment, computer equipment,
software, leasehold improvements, and office equipment to provide for our
growing employee and subscriber base.

         NET CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by
financing activities was $37.1 million for the nine months ended September 30,
2000, compared to net cash provided by financing activities of $7.5 million for
the same period in the prior year, a change of $29.6 million. The overall
change is primarily attributable to the sale of our Series D Preferred. In July
2000, we filed a Certificate of Designation authorizing the issuance of 5.0
million shares of Series D convertible preferred stock and warrants ("Series D
Preferred"). We have received aggregate proceeds of approximately $56.3 million
in connection with the sale of 4,688,247 shares of Series D Preferred at a
price of $12.00. The deal costs associated with the transaction were
approximately $0.4 million. The Series D Preferred is convertible at a
conversion price of $12.00, which price is subject to adjustment, into common
stock at the option of the holder (i.e., initially convertible on a one-for-one
basis); however, there are certain circumstances that provide for a forced
conversion of the stock by us. Series D



                                      19
<PAGE>   20

Preferred is mandatorily redeemable 8 years from the original issue date, has
an 8% cumulative dividend payable at times in cash and at times with in-kind
contributions of additional Series D Preferred and has certain liquidation
preferences and voting rights. Each purchaser of Series D Preferred received a
warrant to purchase a number of shares of our common stock equal to one-half of
the amount of Series D Preferred purchased by such investor. Each warrant is
exercisable at a price of $13.80 per share subject to certain adjustments.

         In addition to our Series D Preferred we received cash of $0.9 and
$2.1 million of notes receivable from stockholders for common stock and the
exercise of stock options, respectively, for the nine months ended September
30, 2000.

         The receipts of cash noted above were off-set by the payment of
long-term debt and capital lease obligations totaling $21.8 million for the
nine months ended September 30, 2000. We extinguished our sale-leaseback credit
facility, extinguished a line of credit assumed in the Touch 1 acquisition and
paid off a lease obligation in the amounts of $14.4, $1.0 and $3.5 million,
respectively. The remaining payments on long-term debt and capital lease
obligations are the debt service for the debt assumed from the Touch 1
acquisition. On February 14, 2000, we paid $14.4 million to extinguish the
outstanding CMB Capital, LLC capital lease obligation and purchase the related
assets. This was the repayment of transactions involving the sale-leaseback of
various furniture and equipment payable over four years from the date of the
transactions. This transaction accounted for a $1.6 million increase in the
carrying value of our assets, resulting from the payments made to terminate the
lease and the carrying value of our capital lease obligation. This $1.6 million
was added to the value of the assets purchased and is depreciated over the
estimated remaining lives in accordance with FASB Interpretation No. 26
-Accounting for Purchase of a Leased Asset by the Lessee during the Term of the
Lease, an interpretation of FASB Statement No. 13.

         Our ongoing capital requirements will depend on several factors,
including market acceptance of our services, the amount of resources we devote
to investments in our networks, facilities, build-out of additional enterprise
management centers, services development and brand promotions, the resources we
devote to sales and marketing of our services, and other factors. We have
experienced a substantial increase in our capital expenditures and operating
losses since our inception consistent with the growth in our operations and
staffing, and we anticipate that this will continue for the foreseeable future.
Additionally, we expect to make additional investments in technologies and our
network architecture, and plan to expand our sales and marketing programs and
conduct more brand promotions. Although operating activities may provide cash
in certain periods, to the extent we experience growth in the future, we
anticipate that our operating and investing activities will use cash.
Consequently, any such future growth




                                      20
<PAGE>   21

will require us to obtain additional equity or debt financing which may not be
available on attractive terms, or at all, or may be dilutive.

NEW ACCOUNTING PRONOUNCEMENTS

         The new accounting pronouncements in Footnote 1 of our Condensed
Consolidated Financial Statements are incorporated by reference.

YEAR 2000 COMPLIANCE

         We did not experience any significant disruptions in our operations
during the transition into the Year 2000. We believe we have completed
necessary assessments, modifications or replacement and testing of systems
critical for the delivery of our services. We believe our Year 2000 readiness
objectives have been met. We also prepared a contingency plan to mitigate
potential adverse effects that might have arisen from non-compliant systems or
third parties that had not adequately addressed the Year 2000 issue. While we
did not experience any significant Year 2000 disruptions during the transition
into the Year 2000, we will continue to monitor our operations and systems and
address any date-related problems that may arise.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We currently have instruments sensitive to market risk relating to
exposure to changing interest rates and market prices. We do not enter into
financial instruments for trading or speculative purposes and do not currently
utilize derivative financial instruments. Our operations are conducted
primarily in the United States and as such are not subject to material foreign
currency exchange rate risk.

         The fair value of our investment portfolio or related income would not
be significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.



                          PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

1.       Civil Action File No. 8:00 CV-1148-T-24B; PTEK Holdings, Inc., f/k/a
         Premiere Technologies, Inc., and Premiere Communications, Inc. v.
         Z-Tel Technologies, Inc., Z-Tel Communications, Inc., David Gregory
         Smith, James Kitchen and Eduard Mayer; in the United States District
         Court for the Middle District of Florida, Tampa Division.




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<PAGE>   22
         On November 14, 2000, the parties reached an agreement to resolve in
full all claims asserted by each party against the other. In connection with
that settlement, the parties executed mutual releases and agreed to dismiss the
claims against each other with prejudice. Z-Tel also agreed to issue a warrant
to PTEK Holdings, Inc. for the purchase of 175,000 shares of Z-Tel common stock.

2.       Case No. 98-12260; In re Touch 1 Communications, Inc.; in the United
         States Bankruptcy Court for the Southern District of Alabama

         Case No. 98-12402; In re direcTEL; in the United States Bankruptcy
         Court for the Southern District of Alabama

         Touch 1 Communications, Inc. ("Touch 1") and its wholly owned
subsidiary, direcTEL, Inc. ("direcTEL") (collectively, the "Debtors"), filed
voluntary petitions for relief under chapter 11 of the Bankruptcy Code on June
29, 1999 and July 9, 1999, respectively, in the United States Bankruptcy Court
for the Southern District of Alabama (the "Bankruptcy Court"). The Bankruptcy
Court entered final decrees closing the direcTEL case on October 5, 2000 and
the Touch 1 case on October 30, 2000.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

RECENT SALES OF UNREGISTERED SECURITIES

         Over a period from July 6, 2000 to October 17, 2000, Z-Tel sold a
total of 4,688,247 shares of its Series D Convertible Preferred Stock (the
"Series D Preferred") and warrants (the "Warrants") for the purchase of up to
2,344,124 shares of its common stock, par value $0.01 per share ("Common
Stock"), for aggregate consideration of $56,258,964. Z-Tel claims an exemption
from registration under Section 4(2) of the Securities Act of 1933 because the
transaction was by an issuer and did not involve a public offering.

         The Series D Preferred is initially convertible into 4,688,247 shares
of Common Stock. The Warrants are initially exercisable at an exercise price of
$13.80 per share. The conversion rates of the Series D Preferred and the
exercise price of the Warrants are subject to adjustment upon the occurrence of
certain events that would cause dilution in the ownership of the holders of the
Series D Preferred and Warrants.



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<PAGE>   23

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

         (a)     Exhibits.

         The following exhibits are filed as part of this report:


Exhibit
 Number           Description
 ------           -----------

2.1(**)           Agreement and Plan of Merger dated April 10, 2000 by and
                  among Z-Tel Technologies, Inc., Tiger Acquisition Subsidiary,
                  Inc., Touch 1 Communications, Inc., and certain shareholders
                  of Touch 1 Communications, Inc.

3.1(***)          Amended and Restated Certificate of Incorporation of Z-Tel,
                  as amended

3.2(*)            Amended and Restated Bylaws of Z-Tel

4.1(*)            Form of Common Stock Certificate

4.2               See Exhibits 3.1 and 3.2 of this Registration Statement for
                  provisions of the Amended and Restated Certificate of
                  Incorporation, as amended, and the Bylaws of Z-Tel defining
                  rights of security holders

4.3(*****)        Stock Purchase Agreement, dated July 6, 2000, by and between
                  the Registrant and the various purchasers of the Registrant's
                  Series D Convertible Preferred Stock

4.4(*****)        Certificate of Designations, Preferences and Relative Rights,
                  Qualifications, Limitations and Restrictions relating to the
                  Registrant's Series D Convertible Preferred Stock

4.5(*****)        Form of Registration Rights Agreement by and between the
                  Registrant and each of the purchasers of the Registrant's
                  Series D Convertible Preferred Stock

4.6(*****)        Form of Warrant for the purchase of shares of common stock of
                  the Registrant by each of the purchasers of the Registrant's
                  Series D Convertible Preferred Stock

4.7               Stock and Warrant Purchase Agreement, dated October 19, 2000,
                  by and among the Registrant and The 1818 Fund III, L.P.

4.8               Certificate of Designation of 8% Convertible Preferred Stock,
                  Series E, Setting Forth the Powers, Preferences, Rights,
                  Qualifications, Limitations and Restrictions of Such Series
                  of Preferred Stock

4.9               Registration Rights Agreement between and among the
                  Registrant and The 1818 Fund III, L.P.

4.10              Warrant for the purchase of shares of common stock of the
                  Registrant by The 1818 Fund III, L.P.



                                      23
<PAGE>   24

10.1.1(*)         Stockholders' Agreement dated October 8, 1999, between and
                  among the company, BA Capital Corporation, Sewanee Partners
                  II, L.P., Gramercy Z-Tel LLC and the other parties set forth
                  therein

10.1.2(*)         Employment Agreement dated July 1998 between the Company and
                  D. Gregory Smith

10.1.3(*)         Employment Agreement dated September 1999 between the Company
                  and John Hutchens

10.1.4(*)         Employment Agreement dated August 1998 between the Company
                  and Charles W. McDonough

10.1.5(*)         Employment Agreement dated August 1998 between the Company
                  and J. Bryan Bunting

10.1.6(*)         Employment Agreement dated July 1998 between the Company and
                  James A. Kitchen

10.1.7(*)         Investment Agreement dated March 15, 1999 between the Company
                  and CMB Capital LLC

10.2.1(*)         1998 Equity Participation Plan

10.2.2(****)      2000 Equity Participation Plan

10.3(**)          Form of Employment Agreement for certain key Touch 1
                  employees, including James F. Corman, President of Touch 1

10.4(*****)       Receivables Sales Agreement dated as of July 27, 2000 by and
                  between Z-Tel Communications, Inc., as seller and
                  subservicer, Touch 1 Communications, Inc., as seller and
                  subservicer, and RFC Capital Corporation, as purchaser.

27                Financial Data Schedules



(*)      Incorporated by reference to the correspondingly numbered exhibit to
         the Registrant's Registration Statement on Form S-1 (File No.
         333-89063), originally filed October 14, 1999, as amended and as
         effective December 14, 1999.

(**)     Incorporated by reference to the correspondingly numbered exhibit to
         the Registrant's Current Report on Form 8-K filed April 28, 2000.

(***)    Incorporated by reference to Exhibit 4.1 to the Registrant's
         Registration Statement on Form S-8, filed on July 18, 2000.

(****)   Incorporated by reference to Appendix B to the Registrant's
         Preliminary Proxy Statement filed on April 14, 2000.

(*****)  Incorporated by reference to the correspondingly numbered exhibits to
         the Registrant's Quarterly Report on Form 10-Q for the quarterly
         period ending June 30, 2000, filed on August 14, 2000.

         (b)      Reports on Form 8-K.

                  None



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<PAGE>   25

                            Z-TEL TECHNOLOGIES, INC.

                                   SIGNATURE


         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, Registrant's principal financial officer,
         thereunto duly authorized.




November 14, 2000                       Z-TEL TECHNOLOGIES, INC.
                                        (Registrant)



                                        By: /s/ John M. Hutchens
                                        ---------------------------------------
                                                John M. Hutchens
                                                Chief Financial Officer
                                                (Authorized officer of
                                                Registrant and principal
                                                financial officer)



                                      25