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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

|           |  |                                                                                                                                                
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                                                
|          
|[X]        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2002                
|          
|           |  | OR                                                                                                                                             
|          
|[   ]      |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIODFROM __________ TO __________

COMMISSION FILE NUMBER: 000-28467

Z-TEL TECHNOLOGIES, INC.(Exact name of Registrant as specified in its charter)

|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|DELAWARE
(State or other jurisdiction of
incorporation or organization) |  | 59-3501119
(I.R.S. Employer
Identification Number)

601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 220
TAMPA, FLORIDA 33602
(813) 273-6261
(Address, including zip code, and
telephone number including area code, of
Registrants principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, PAR VALUE $.01 PER SHARE, PREFERRED STOCK PURCHASE RIGHTS

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 [   ]

The number of shares of the Registrants Common Stock outstanding as of
November 12, 2002 was approximately 35,192,095.



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TABLE OF CONTENTS



|                                          |                                                                                                |  |  |  |  |  |  | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART 1.                                  
|                                          | Consolidated Balance Sheets                                                                   
|                                          | Consolidated Statements of Operations                                                         
|                                          | Consolidated Statements of Changes in Stockholders Deficit and Comprehensive Income          
|                                          | Consolidated Statements of Cash Flows                                                         
|                                          | Notes to Consolidated Financial Statements                                                    
|                                          | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                                          | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|                                          | ITEM 4. CONTROLS AND PROCEDURES                                                               
|PART II                                  
|                                          | ITEM 1. LEGAL PROCEEDINGS                                                                     
|                                          | ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                               
|CERTIFICATIONS                           
|D. Gregory Smith Employment Agreement    
|Ned Dumas Garrett Employment Agreement   
|J. Bryan Bunting Employment Agreement    
|Charles W. McDonough Employment Agreement
|Robert A. Curtis Employment Agreement    
|CEO Certification                        
|CFO Certification                        



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##### Table of Contents



TABLE OF CONTENTS

|           |  |         |  |                                                                                       |  |                                                                                                          |    |  |   |  |  | 
|---------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- | -- |  | - |  |  | 
|PART I     |  |         |  |                                                                                       |  |                                                                                                          |    |  |   |  |  | 
|           |  | Item 1. |  | Financial Statements                                                                  |  |                                                                                                          |    | 
|           |  |         |  |                                                                                       |  | Consolidated Balance Sheets at September 30, 2002 and December 31, 2001                                  |    |  | 3 | 
|           |  |         |  |                                                                                       |  | Consolidated
Statements of Operations for the three and nine months ended
September 30,    2002 and 2001 |    |  | 4 | 
|           |  |         |  |                                                                                       |  | Consolidated Statement of Changes in Stockholders' Deficit for the nine months ended June 30, 2002       |    |  | 5 | 
|           |  |         |  |                                                                                       |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001              |    |  | 6 | 
|           |  |         |  |                                                                                       |  | Notes to 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                            |  |                                                                                                          | 25 | 
|           |  | Item 4. |  | Controls and Procedures                                                               |  |                                                                                                          |    | 
|PART II    |  |         |  |                                                                                       |  |                                                                                                          |    |  |   |  |  | 
|           |  | Item 1. |  | Legal Proceedings                                                                     |  |                                                                                                          | 25 | 
|           |  | Item 6. |  | Exhibits, and Reports on Form 8-K                                                     |  |                                                                                                          | 26 | 
|Signatures |  |         |  |                                                                                       |  |                                                                                                          | 29 | 

2



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Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------- | ------------ | ------- | ------------- | ------- | ------------ | ------- | ------ | ------- | 
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         | September 30, |         | December 31,
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         | 2002          |         | 2001        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |             
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         | (Unaudited)   |         |              |         |       
|Assets                                                                                                                                                                                  |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |             
|Current assets:                                                                                                                                                                         |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |             
|                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                                |                                                                                                 | $                         | 13,464       |         |               | $       | 18,892       |        
|                                                                                                                                                                                        | Accounts receivable, net of allowance for doubtful
accounts of $11,215 and $17,064                                                                       |                                                                                                 |                           | 26,538       |         |               |         | 27,042       |        
|                                                                                                                                                                                        | Prepaid expenses and other current assets                                                                                                                |                                                                                                 |                           | 5,300        |         |               |         | 3,961        |        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|                                                                                                                                                                                        |                                                                                                                                                          | Total current assets                                                                            |                           |              | 45,302  |               |         |              | 49,895  |       
|Property and equipment, net                                                                                                                                                             |                                                                                                                                                          |                                                                                                 | 52,556                    |              |         |               | 56,231  |             
|Intangible assets, net                                                                                                                                                                  |                                                                                                                                                          |                                                                                                 | 4,573                     |              |         |               | 5,945   |             
|Other assets                                                                                                                                                                            |                                                                                                                                                          |                                                                                                 | 6,829                     |              |         |               | 4,666   |             
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           | Total assets |         | $             | 109,260 |              |         | $      | 116,737 | 
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Stockholders Deficit                                                                                               |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |             
|Current liabilities:                                                                                                                                                                    |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |             
|                                                                                                                                                                                        | Accounts payable and accrued liabilities                                                                                                                 |                                                                                                 | $                         | 49,965       |         |               | $       | 49,622       |        
|                                                                                                                                                                                        | Deferred revenue                                                                                                                                         |                                                                                                 |                           | 9,595        |         |               |         | 5,951        |        
|                                                                                                                                                                                        | Current portion of long-term debt
and capital lease obligations                                                                                          |                                                                                                 |                           | 5,958        |         |               |         | 6,305        |        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 | Total current liabilities |              |         | 65,518        |         |              |         | 61,878 |        
|Deferred revenue                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 | 5,613                     |              |         |               |        |             
|Long-term debt and capital lease obligations                                                                                                                                            |                                                                                                                                                          |                                                                                                 | 5,525                     |              |         |               | 9,461   |             
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 | Total liabilities         |              |         | 76,656        |         |              |         | 71,339 |        
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|Mandatorily redeemable convertible preferred stock, $.01 par value;50,000,000 shares authorized; 8,855,089 issued and outstanding(aggregate liquidation value of $144,087 and $135,298) |                                                                                                                                                          |                                                                                                 | 124,331                   |              |         |               | 112,570 |             
|Stockholders deficit:                                                                                                                                                                  |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |             
|                                                                                                                                                                                        | Common stock, $.01 par value; 150,000,000
shares authorized; 35,533,645 and 34,341,855 shares issued;35,192,095 and 34,000,305 outstanding, respectively |                                                                                                 |                           | 355          |         |               |         | 343          |        
|                                                                                                                                                                                        | Notes receivable from stockholders                                                                                                                       |                                                                                                 |                           | (1,589       | )       |               |         | (1,589       | )      
|                                                                                                                                                                                        | Unearned stock compensation                                                                                                                              |                                                                                                 |                           | (22          | )       |               |         | (122         | )      
|                                                                                                                                                                                        | Additional paid-in capital                                                                                                                               |                                                                                                 |                           | 208,425      |         |               |         | 217,782      |        
|                                                                                                                                                                                        | Accumulated deficit                                                                                                                                      |                                                                                                 |                           | (298,508     | )       |               |         | (283,198     | )      
|                                                                                                                                                                                        | Treasury stock, 341,550 shares at cost                                                                                                                   |                                                                                                 |                           | (388         | )       |               |         | (388         | )      
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|                                                                                                                                                                                        |                                                                                                                                                          | Total stockholders deficit                                                                     |                           |              | (91,727 | )             |         |              | (67,172 | )     
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        
|                                                                                                                                                                                        |                                                                                                                                                          | Total
liabilities, mandatorily redeemable convertible preferred stock and
stockholders deficit |                           | $            | 109,260 |               |         | $            | 116,737 |       
|                                                                                                                                                                                        |                                                                                                                                                          |                                                                                                 |                           |              |         |               |         |              |         |        |        

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

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Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)

|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |          |  
|------------------------------------------ | ----------------------------- | ------------------------------------------------------------------------------- | ---------- | ------------------ | ------ | ----------------- | ---------- | ------ | ------- | ---- | ---------- | ------ | ------- | - | ---------- | ------- | -------- | -
|                                           |                               |                                                                                 |            | Three Months Ended |        | Nine Months Ended
|                                           |                               |                                                                                 |            | September 30,      |        | September 30,    
|                                           |                               |                                                                                 |            |                    |        |                  
|                                           |                               |                                                                                 |            | 2002               |        | 2001              |            | 2002   |         | 2001
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |     
|Revenues                                   |                               | $                                                                               | 58,715     |                    |        | $                 | 68,569     |        |         | $    | 178,208    |        |         | $ | 216,755    |        
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|Operating expenses:                        |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |        
|                                           | Network operations            |                                                                                 |            | 23,799             |        |                   |            | 38,279 |         |      |            | 69,863 |         |   |            | 123,299 |         
|                                           | Sales and marketing           |                                                                                 |            | 2,334              |        |                   |            | 3,885  |         |      |            | 9,384  |         |   |            | 25,519  |         
|                                           | General and administrative    |                                                                                 |            | 31,540             |        |                   |            | 33,339 |         |      |            | 92,164 |         |   |            | 130,661 |         
|                                           | Asset impairment charge       |                                                                                 |            |                   |        |                   |            |       |         |      |            | 1,129  |         |   |            | 59,194  |         
|                                           | Wholesale development costs   |                                                                                 |            |                   |        |                   |            |       |         |      |            | 1,018  |         |   |            |        |         
|                                           | Restructuring charge          |                                                                                 |            |                   |        |                   |            |       |         |      |            | 1,861  |         |   |            |        |         
|                                           | Depreciation and amortization |                                                                                 |            | 6,169              |        |                   |            | 5,279  |         |      |            | 17,751 |         |   |            | 17,803  |         
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|                                           |                               | Total operating expenses                                                        |            |                    | 63,842 |                   |            |        | 80,782  |      |            |        | 193,170 |   |            |         | 356,476  |  
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|                                           |                               | Operating loss                                                                  |            |                    | (5,127 | )                 |            |        | (12,213 | )    |            |        | (14,962 | ) |            |         | (139,721 | )
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|Nonoperating income (loss):                |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |        
|                                           | Interest and other income     |                                                                                 |            | 1,179              |        |                   |            | 1,531  |         |      |            | 2,663  |         |   |            | 5,801   |         
|                                           | Interest and other expense    |                                                                                 |            | (1,014             | )      |                   |            | (1,173 | )       |      |            | (3,011 | )       |   |            | (3,258  | )       
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|                                           |                               | Total nonoperating income (loss)                                                |            |                    | 165    |                   |            |        | 358     |      |            |        | (348    | ) |            |         | 2,543    |  
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|                                           |                               | Net loss                                                                        |            |                    | (4,962 | )                 |            |        | (11,855 | )    |            |        | (15,310 | ) |            |         | (137,178 | )
|                                           |                               | Less mandatorily redeemable convertible
preferred stock dividends and accretion |            |                    | (3,969 | )                 |            |        | (5,278  | )    |            |        | (11,761 | ) |            |         | (10,869  | )
|                                           |                               | Less deemed dividend related to beneficial
conversion feature                   |            |                    | (47    | )                 |            |        | (8,885  | )    |            |        | (139    | ) |            |         | (8,885   | )
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|                                           |                               | Net loss attributable to common stockholders                                    |            | $                  | (8,978 | )                 |            | $      | (26,018 | )    |            | $      | (27,210 | ) |            | $       | (156,932 | )
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|Weighted average common shares outstanding |                               |                                                                                 | 35,191,836 |                    |        |                   | 33,982,665 |        |         |      | 34,861,229 |        |         |   | 33,885,022 |        
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         
|Basic and diluted net loss per share       |                               | $                                                                               | (0.26      | )                  |        | $                 | (0.77      | )      |         | $    | (0.78      | )      |         | $ | (4.63      | )      
|                                           |                               |                                                                                 |            |                    |        |                   |            |        |         |      |            |        |         |   |            |         |         

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

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Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Deficit and Comprehensive Income
(In thousands, except share data)
(Unaudited)

|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |               |      |         |  |       |         |   |  |   |          |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------ | ---------- | ---------------- |  | ------------ | --- | ------------ |  | ----------- | ------ | -------- |  | ------------- | ---- | ------- |  | ----- | ------- | - |  | - | -------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                           |  | Common Stock |            | Notes Receivable |  | Unearned     |     | Additional   |  |             |        |          |  |               |      |         |  | Total
|                                                                           |  |              |            | from             |  | Stock        |     | Paid-In      |  | Accumulated |        | Treasury |  | Stockholders'
|                                                                           |  | Shares       |            | Par Value        |  | Stockholders |     | Compensation |  | Capital     |        | Deficit  |  | Stock         |      | Deficit
|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |               |      |        
|Balance, December 31, 2001                                                 |  |              | 34,000,305 |                  |  | $            | 343 |              |  | $           | (1,589 | )        |  | $             | (122 | )       |  | $     | 217,782 |   |  | $ | (283,198 | ) |  | $ | (388 | ) |  | $ | (67,172 | )
|Issuance of common stock                                                   |  |              | 1,000,000  |                  |  |              | 10  |              |  |             |        |          |  |               |      |         |  |       | 2,320   |   |  |   |          |   |  |   |      |   |  |   | 2,330   |  
|Issuance of common stock for exercise of warrants                          |  |              | 171,429    |                  |  |              | 2   |              |  |             |        |          |  |               |      |         |  |       |         |   |  |   |          |   |  |   |      |   |  |   | 2       |  
|Issuance of common stock for exercise of options                           |  |              | 361        |                  |  |              |    |              |  |             |        |          |  |               |      |         |  |       |         |   |  |   |          |   |  |   |      |   |  |   |        |  
|Vesting
of stock options granted below
fair value of stock                 |  |              |            |                  |  |              |     |              |  |             |        |          |  |               | 100  |         |  |       |         |   |  |   |          |   |  |   |      |   |  |   | 100     |  
|Accelerated vesting of stock options and issuance of shares                |  |              | 20,000     |                  |  |              |    |              |  |             |        |          |  |               |      |         |  |       | 84      |   |  |   |          |   |  |   |      |   |  |   | 84      |  
|Mandatorily redeemable convertible preferred
stock dividends and accretion |  |              |            |                  |  |              |     |              |  |             |        |          |  |               |      |         |  |       | (11,761 | ) |  |   |          |   |  |   |      |   |  |   | (11,761 | )
|Net loss                                                                   |  |              |            |                  |  |              |     |              |  |             |        |          |  |               |      |         |  |       |         |   |  |   | (15,310  | ) |  |   |      |   |  |   | (15,310 | )
|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |               |      |         |  |       |         |   |  |   |          |   |  |   |      |   |  |   |        
|Balance, September 30, 2002                                                |  |              | 35,192,095 |                  |  | $            | 355 |              |  | $           | (1,589 | )        |  | $             | (22  | )       |  | $     | 208,425 |   |  | $ | (298,508 | ) |  | $ | (388 | ) |  | $ | (91,727 | )
|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |               |      |         |  |       |         |   |  |   |          |   |  |   |      |   |  |   |         |  

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

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Z-Tel Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |         |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------- | ------- | ----------------- | ------- | -------- | ------- | ------- | ------- | -
|                                                                            |                                                                              |                                                       |                                                     |         | Nine Months Ended
|                                                                            |                                                                              |                                                       |                                                     |         | September 30,    
|                                                                            |                                                                              |                                                       |                                                     |         |                  
|                                                                            |                                                                              |                                                       |                                                     |         | 2002              |         | 2001    
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |         
|Cash flows from operating activities:                                       |                                                                              |                                                       |                                                     |         |                   |         |          |        
|Net loss                                                                    |                                                                              | $                                                     | (15,310                                             | )       |                   | $       | (137,178 | )      
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                              |                                                       |                                                     |         |                   |         |          |        
|                                                                            | Depreciation and amortization                                                |                                                       |                                                     | 17,751  |                   |         |          | 17,803  |        
|                                                                            | Provision for bad debts                                                      |                                                       |                                                     | 17,929  |                   |         |          | 51,033  |        
|                                                                            | Asset impairment charge                                                      |                                                       |                                                     | 1,129   |                   |         |          | 59,194  |        
|                                                                            | Expense charged for granting of stock options                                |                                                       |                                                     | 184     |                   |         |          | 149     |        
|                                                                            | Change in operating assets and liabilities:                                  |                                                       |                                                     |         |                   |         |          |         |        
|                                                                            |                                                                              | Increase in accounts receivable                       |                                                     |         | (17,425           | )       |          |         | (15,813 | )      
|                                                                            |                                                                              | Increase in prepaid expenses and other current assets |                                                     |         | (765              | )       |          |         | (4,875  | )      
|                                                                            |                                                                              | Increase in accounts payable and accrued liabilities  |                                                     |         | 343               |         |          |         | 4,407   |        
|                                                                            |                                                                              | Increase in deferred revenue                          |                                                     |         | 9,257             |         |          |         | (1,332  | )      
|                                                                            |                                                                              | Other                                                 |                                                     |         | (127              | )       |          |         | (283    | )      
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|                                                                            |                                                                              |                                                       | Total adjustments                                   |         |                   | 28,276  |          |         |         | 110,283 |  
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|                                                                            |                                                                              |                                                       | Net cash provided by (used in) operating activities |         |                   | 12,966  |          |         |         | (26,895 | )
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|Cash flows from investing activities:                                       |                                                                              |                                                       |                                                     |         |                   |         |          |        
|                                                                            | Proceeds from note receivable                                                |                                                       |                                                     | 590     |                   |         |          | 7       |        
|                                                                            | Issuance of note receivable                                                  |                                                       |                                                     | (997    | )                 |         |          | (100    | )      
|                                                                            | Purchases of property and equipment                                          |                                                       |                                                     | (13,706 | )                 |         |          | (10,311 | )      
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|                                                                            |                                                                              |                                                       | Net cash used in investing activities               |         |                   | (14,113 | )        |         |         | (10,404 | )
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|Cash flows from financing activities:                                       |                                                                              |                                                       |                                                     |         |                   |         |          |        
|                                                                            | Proceeds
from issuance of mandatorily redeemable
convertible preferred stock |                                                       |                                                     |        |                   |         |          | 17,050  |        
|                                                                            | Proceeds from exercise of stock options                                      |                                                       |                                                     |        |                   |         |          | 184     |        
|                                                                            | Proceeds from exercise of common stock warrants                              |                                                       |                                                     | 2       |                   |         |          |        |        
|                                                                            | Payments on long-term debt and capital lease obligations                     |                                                       |                                                     | (4,283  | )                 |         |          | (6,233  | )      
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|                                                                            |                                                                              |                                                       | Net cash provided by (used in) financing activities |         |                   | (4,281  | )        |         |         | 11,001  |  
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|Net decrease in cash and cash equivalents                                   |                                                                              |                                                       | (5,428                                              | )       |                   |         | (26,298  | )      
|Cash and cash equivalents, beginning of period                              |                                                                              |                                                       | 18,892                                              |         |                   |         | 46,650   |        
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        
|Cash and cash equivalents, end of period                                    |                                                                              | $                                                     | 13,464                                              |         |                   | $       | 20,352   |        
|                                                                            |                                                                              |                                                       |                                                     |         |                   |         |          |         |         |        

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

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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(ALL TABLES ARE IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

1.     NATURE OF BUSINESS

DESCRIPTION OF BUSINESS

Z-Tel Technologies, Inc. (we or us) provides advanced, integrated
telecommunications services targeted to residences and small businesses. We
provide our services at the retail and wholesale levels. At the retail level,
we offer local and long distance telephone services in combination with
enhanced communication features accessible through the telephone, the Internet
and certain personal digital assistants. We offer Z-LineHOME in 46 states and
Z-LineBUSINESS service in 16 states. Our customers are primarily concentrated
in major metropolitan areas in 11 states. We also provide long-distance
telecommunications services to customers nationally.

We introduced our wholesale services during the first quarter of 2002.
This service provides other companies with the opportunity to provide local,
long-distance and enhanced telephone service to residential and small business
customers by utilizing our telephone exchange services, enhanced
services platform, infrastructure and
back-office operations.

2.     BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America 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 for complete financial statements as
required by accounting principles generally accepted in the United States of
America. The interim unaudited financial statements should be read in
conjunction with our audited financial statements as of and for the year ended
December 31, 2001, included in our 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, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.

RECLASSIFICATION

Certain amounts in the consolidated statements of operations for the three
and nine months ended September 30, 2001 have been reclassified to conform to
presentation for periods ended September 30, 2002.

SEGMENT REPORTING

Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, requires disclosures
of certain information regarding operating segments, products and services,
geographic areas of operation and major customers. The method for determining
what information to report under SFAS No. 131 is based upon the management
approach, or the way that management organizes the operating segments within a
company, for which separate financial information is available that is
evaluated regularly by the Chief Operating Decision Maker in deciding how to
allocate resources and in assessing performance. We adopted segment reporting
during the second quarter of 2002 as a result of our wholesale services
contract with MCI WorldCom Communications, Inc. (MCI) and the decision by our
management to analyze our wholesale services and consumer services separately.
In determining reportable segments, we considered our operating and management
structure and the types of information subject to regular review by our
executive management team. Information subject to regular review by our
management team is aggregated into two reporting segments: consumer
services and wholesale services. These segments are evaluated based on revenue from
customers and operating profit contribution to the total corporation. For the
purpose of making operating decisions, we primarily consider financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues and direct expenses. There is no allocation of
overhead or expenses other than the direct identifiable expenses associated
within each segment. Any costs not specifically identified to one
particular segment are reported in our
consumer services segment.

Our consumer services segment includes the revenue from our Z-LineHOME,
Z-LineBUSINESS and Touch 1 long-distance offerings while our wholesale services
segment currently is the revenue and identifiable direct costs from providing
companies, primarily MCI, with the ability to offer telephone exchange and
enhanced services to residential and small business customers.

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NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standard Board (FASB) issued
SFAS No. 143, Accounting for
Asset Retirement Obligations. The statement provides accounting and reporting
standards for recognizing obligations related to asset retirement costs
associated with the retirement of tangible long-lived assets. Under this
statement, legal obligations associated with the retirement of long-lived
assets are to be recognized at their fair value in the period in which they are
incurred, a reasonable estimate of fair value can be made. The fair value of
the asset retirement costs is capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense using a systematic and
rational method over the assets useful life. Any subsequent changes to the
fair value of the liability due to passage of time or changes in the amount or
timing of estimated cash flows is recognized as an accretion expense. We will
adopt this statement on January 1, 2003. We are currently evaluating the impact
this new standard will have on our future consolidated financial
statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, this
statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment
of Debt, which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item,
net of the related income tax effect. As a result, the criteria in Accounting
Principles Board Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
which requires gains and losses on extinguishments of debt to be classified as
income or loss from continuing operations, will now be applied. We will adopt
this statement on January 1, 2003. We do not believe that the adoption of this
statement will have a material impact on our consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue
(EITF) No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring).
The principal difference between SFAS No. 146 and EITF 94-3 relates to SFAS No.
146s requirements for recognition of a liability for a cost associated with an
exit or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost as generally defined
in EITF 94-3 was recognized at the date of an entitys commitment to an exit
plan. We will adopt the new standard effective January 1, 2003. We do not
believe that the adoption of this statement will have a material impact on our
consolidated financial statements.

3.     ACCOUNTS RECEIVABLE AGREEMENT

In July 2000, we entered into an accounts receivable agreement 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. This agreement was extended
under substantially similar terms in July 2002. The current agreement expires
in July 2004. The purchase of the receivables is at the option of RFC and they
utilize selection criteria to determine which receivables will be purchased.
During the first nine months of 2002, we sold receivables to RFC at a
32% discount beginning in March 2002 and at a 23% discount prior to
March; this rate is negotiable and may change according to collection
experience. The collection percentage for receivables sold to RFC has been 90%
since the inception of the agreement. We receive an additional payment from
RFC for servicing the assets in an amount equal to every dollar collected over
the advance rate, less certain fees. The accounts receivable agreement does not
have a minimum receivable sales requirement.

We have sold approximately $108.5 and $123.4 million of receivables to
RFC, for net proceeds of approximately $85.6 and $82.8 million, during the nine
months ended September 30, 2002 and 2001, respectively. A net receivable
servicing asset of approximately $9.8 million is included in our accounts
receivable balance at September 30, 2002. We recorded costs related to the
agreement of approximately $0.3 and $1.0 million for the three and nine months
ended September 30, 2002, respectively, compared to $0.4 and $0.9 million for
the same periods in 2001. Included in accounts payable and accrued liabilities
are advances for unbilled receivables in the amount of $3.8 million at
September 30, 2002. We are responsible for the continued servicing of the
receivables sold.

4.     WHOLESALE SERVICES

On March 20, 2002, we entered into a 48-month agreement with MCI for
wholesale telephone exchange services, ancillary services and a limited-term
technology license.

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Under the terms of the agreement, MCI will pay us a maximum of $50 million
related to the use of our network in the form of a technology license fee,
should the agreement not be terminated early. Cash flows related to the license
will be paid based on the number of MCI customers on our network, as defined in
the contract, and are subject to monthly minimum amounts. In addition, MCI will
pay for services provided through usage-based fees according to certain per
line and per minute calculations defined in the
agreement and MCI will also pay fees to us for providing telephone
exchange services, payroll costs and certain vendor fees. We are the primary
obligor for all costs incurred under this agreement.

We are recognizing the $50 million license fee, and amounts received in
advance of the contract, on a straight-line basis over the four-year contract
period beginning in April 2002. In connection with the agreement, we issued MCI
one million shares of our common stock at a price of $2.33, the market price of
our stock at the date of the agreement. As a result of this transaction an
asset totaling $2.3 million is being amortized on a straight-line basis as a
reduction to revenue over the 48-month term of the agreement with the remaining
balance recorded in other non-current assets. Monthly usage-based charges and
cost reimbursements will be recognized when earned.

As of September 30, 2002, we have recorded approximately $18.4 in revenue
under the contract with MCI. Included in our consolidated balance sheet as of
September 30, 2002, are approximately $5.6 and $4.3 million of long-term and
short-term deferred revenue, respectively. These amounts represent advance
billings under the contract. We expensed the costs related to our wholesale
business as incurred, with the exception of certain internal-use software
development costs that qualified for capitalization. We incurred approximately
$1.0 million of start-up costs for our wholesale services, which are shown as
wholesale development costs in the Statement of Operations, and capitalized
approximately $2.0 million in software development costs relating directly to
our wholesale services efforts.

On November 1, 2002, our agreement with MCI was substantially amended.
See Note 12  Subsequent Events.

5.     RESTRUCTURING CHARGES

In April of 2002, we approved and implemented a restructuring to enhance
our future cash flows and operating earnings. The restructuring included a
reduction of force coupled with the closure of our North Dakota call centers
and our New York sales office. In accordance with EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity, the restructuring costs were recognized as liabilities at the
time management committed us to the plan. Management determined that these
costs provided no future economic benefit to us.

The restructuring
charge includes termination benefits, lease
abandonment and lease settlement costs. All termination benefits are paid as of September 30, 2002.
In addition, we agreed to a settlement to exit the two leases for our call
centers in North Dakota as of July 1, 2002. We have recorded a lease
abandonment charge representing the future lease payments for our New York
office as a liability and will make payments through August 2005.

The following table shows the restructuring charges and related accruals
recognized under the plan and the effect on our consolidated financial
position:

|                              |  |             |      |            |  |             |      |       |  |   |     |   |  |   |        |  
|----------------------------- |  | ----------- | ---- | ---------- |  | ----------- | ---- | ----- |  | - | --- | - |  | - | ------ | -
|                              |  | Employee    |      | Lease      |  | Lease       |      |       |  |  
|                              |  | Termination |      | Settlement |  | Abandonment |      |       |  |  
|                              |  | Benefits    |      | Costs      |  | Costs       |      | Total
|                              |  |             |      |            |  |             |      |      
|Balance at January 1, 2002    |  | $           |     |            |  | $           |     |       |  | $ |    |   |  | $ |       |  
|Plan Charges                  |  |             | 913  |            |  |             | 325  |       |  |   | 623 |   |  |   | 1,861  |  
|Cash paid                     |  |             | (913 | )          |  |             | (325 | )     |  |   | (23 | ) |  |   | (1,261 | )
|                              |  |             |      |            |  |             |      |       |  |   |     |   |  |   |        |  
|Balance at September 30, 2002 |  | $           |     |            |  | $           |     |       |  | $ | 600 |   |  | $ | 600    |  
|                              |  |             |      |            |  |             |      |       |  |   |     |   |  |   |        |  

6.     ASSET IMPAIRMENT

In accordance with SFAS No 144, Accounting for the Impairment and
Disposal of Long-Lived Assets, management assesses on an ongoing basis if
there has been impairment in the carrying value of our long-lived assets. As a
result of managements decision in the second quarter to enhance future cash
flow and operating earnings, we decided to close the remaining call centers in
North Dakota

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acquired in our acquisition of Touch 1 Communications, Inc.
(Touch 1). In April of 2002, we announced a restructuring plan that included
a reduction in force and the closure of the North Dakota call centers resulting
in approximately $1.1 million in property, plant, and equipment being sold in
conjunction with the settlement of the leases in these locations, resulting in
an asset impairment charge totaling approximately $1.1 million being recorded
in the second quarter of 2002.

7.     RELATED PARTY

In July and August 2002, we made loans to two employees in the approximate
amounts of $0.1 and $0.9 million. These loans were to cover margin balances and
prevent the liquidation of the employees holdings of our common stock. The
loans are currently
demand loans bearing interest at an annual rate equal to the prime rate
plus 2%. We established payment terms and received a payment of $0.6 million from one
employee as further discussed in Note 12  Subsequent Events.

In September 2002, we extended the $0.1 million loan to an employee
through March 12, 2003 in accordance with the severance agreement executed for
termination. The employee received a forgiveness of six thousand dollars of
interest and the annual interest rate was reduced from 6.5% to 6.0%. We have
no collateral for this loan.

8.     COMMITMENTS AND CONTINGENCIES

We have disputed
billings, access and transport charges from certain inter-exchange
carriers (IXCs) and incumbent local exchange carriers (ILECs). We contend
that the invoicing and billings of access charges were not in accordance with
the interconnection, service level, or tariff agreements entered between us and
certain IXCs and ILECs. We have not paid a portion of these disputed amounts
and management believes that we will prevail in these disputes. At September
30, 2002, the disputed amounts not recorded in the financial statements were
approximately $15.3 million.

For MCI customers provisioned using our company code we are the customer
of record for the regional bell operating companies wholesale billing. It is
very likely that the state commissions would require us to continue providing
services to MCIs customers for at least the 90-day period contained in the
guidelines described below, regardless of whether MCI continues its
relationship with these customers.

On July 21, 2002, WorldCom, Inc. (WorldCom) and certain of its
subsidiary corporations, including MCI, filed voluntary petitions for relief
under chapter 11 of the United States Bankruptcy Code. Under the Bankruptcy
Code, a vendor that provides post-petition goods or services to a debtor on a
continuous basis is entitled to payment for those goods and services on a
timely basis if the debtor wants the vendor to continue supplying the goods or
services. Neither the Bankruptcy Code nor the applicable case law requires
vendors to provide post-petition goods and services to a debtor without
payment. The Bankruptcy Code also entitles a debtor to reject executory
contracts, that is, contracts where some future act remains to be done, as in
the case of our contract with MCI. A party to a rejected contract may be
entitled to damages from the debtor for breach of contract. However, such a
claim would likely be an unsecured claim. WorldComs bankruptcy case is in its
early stages. Although MCI has paid us in a timely manner since its bankruptcy
filing, we have no assurance that MCI has the resources to pay its vendors on a
timely basis. Additionally, we have no indication that MCI intends to reject
our contract.

Under the New York Public Service Commissions (Commission) mass
migration guidelines, when a local exchange carrier discontinues service its
customers must have the ability to migrate to another carrier without
interruption of service. Carriers are required to file an exit plan with the Commission at least 90 days in advance
of discontinuance of service, or must demonstrate that 90 days notice was not
feasible. Customers must be notified not less than 60 days prior to
discontinuance of service, and a second notice must be provided if the customer
has not taken action to change to a new provider. Other states in which MCI and
we operate are developing similar rules for carriers exiting markets, generally
using the Commissions guidelines as a framework.

In July 2002, we renegotiated an agreement with a service firm that
provides us with new customer provisioning services through electronic bonding
with the incumbent local exchange carriers. Provisioning is the process
whereby we are established as the customers primary local and long distance
telephone provider. Under this agreement, we have committed to minimum cash
payments, subject to certain adjustments, of approximately $3.6, $14.5, and
$15.7 million for the remainder of 2002 and the years ending December 31, 2003
and 2004, respectively. We make payments monthly according to the contract.
This contract provides, under certain circumstances, for early termination and
severance fees for such action.

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9.     COMPUTATION OF NET LOSS PER SHARE

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

Net loss per share is calculated as follows:

|                                      |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |      |            |         |         |   |            |          |          |  
|------------------------------------- | ------------------------------------------ | ------------------------------------------------------------------------------- | -------------------------------------------- | ---------- | ------------------ | ------ | ----------------- | ---------- | ------- | ------- | ---- | ---------- | ------- | ------- | - | ---------- | -------- | -------- | -
|                                      |                                            |                                                                                 |                                              |            | Three Months Ended |        | Nine Months Ended
|                                      |                                            |                                                                                 |                                              |            | September 30,      |        | September 30,    
|                                      |                                            |                                                                                 |                                              |            |                    |        |                  
|                                      |                                            |                                                                                 |                                              |            | 2002               |        | 2001              |            | 2002    |         | 2001
|                                      |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |     
|Basic and diluted net loss per share: |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |      |            |         |         |   |           
|                                      |                                            | Net loss                                                                        |                                              | $          | (4,962             | )      |                   | $          | (11,855 | )       |      | $          | (15,310 | )       |   | $          | (137,178 | )       
|                                      |                                            | Less mandatorily redeemable convertible preferred
stock dividends and accretion |                                              |            | (3,969             | )      |                   |            | (5,278  | )       |      |            | (11,761 | )       |   |            | (10,869  | )       
|                                      |                                            | Less deemed dividend related to beneficial conversion feature                   |                                              |            | (47                | )      |                   |            | (8,885  | )       |      |            | (139    | )       |   |            | (8,885   | )       
|                                      |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |      |            |         |         |   |           
|                                      |                                            |                                                                                 | Net loss attributable to common stockholders |            | $                  | (8,978 | )                 |            | $       | (26,018 | )    |            | $       | (27,210 | ) |            | $        | (156,932 | )
|                                      |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |      |            |         |         |   |           
|                                      | Weighted average common shares outstanding |                                                                                 |                                              | 35,191,836 |                    |        |                   | 33,982,665 |         |         |      | 34,861,229 |         |         |   | 33,885,022 |         
|                                      |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |      |            |         |         |   |           
|                                      | Basic and diluted net loss per share       |                                                                                 | $                                            | (0.26      | )                  |        | $                 | (0.77      | )       |         | $    | (0.78      | )       |         | $ | (4.63      | )       
|                                      |                                            |                                                                                 |                                              |            |                    |        |                   |            |         |         |      |            |         |         |   |           

The following table outlines the shares of common stock equivalents that
could potentially dilute basic earnings per share in the future but were not
included in the computation of diluted net loss per share:

|                                                                                  |                                                               |  |                   |            |      |  |            |            | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------- |  | ----------------- | ---------- | ---- |  | ---------- | ---------- | 
|                                                                                  |                                                               |  | Nine Months Ended
|                                                                                  |                                                               |  | September 30,    
|                                                                                  |                                                               |  |                  
|                                                                                  |                                                               |  | 2002              |            | 2001
|                                                                                  |                                                               |  |                   |            |     
|Unexercised stock options                                                         |                                                               |  | 10,097,263        |            |      |  | 10,931,225 |           
|Unexercised warrants                                                              |                                                               |  | 10,677,444        |            |      |  | 10,440,723 |           
|Mandatorily redeemable convertible preferred
stock convertible into common shares |                                                               |  | 28,117,195        |            |      |  | 25,298,188 |           
|                                                                                  |                                                               |  |                   |            |      |  |            |           
|                                                                                  | Total potentially dilutive shares of common
stock equivalents |  |                   | 48,891,902 |      |  |            | 46,670,136 | 
|                                                                                  |                                                               |  |                   |            |      |  |            |           

10.      LEGAL AND REGULATORY PROCEEDINGS

During June and July 2001, three separate class action lawsuits were filed
against us, certain of our current and former directors and officers (the
D&Os) and firms engaged in the underwriting (the Underwriters) of our
initial public offering of stock (the IPO). The lawsuits, along with
approximately 310 other similar lawsuits filed against other issuers arising
out of initial public offering allocations, have been assigned to a Judge in
the United States District Court for the Southern District of New York for
pretrial coordination. The lawsuits against us have been consolidated into a
single action. A consolidated amended complaint was filed on April 20, 2002. A
Second Corrected Amended Complaint (the Amended Complaint), which is the
operative complaint, was filed on July 12, 2002.

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The Amended Complaint is based on the allegations that our registration
statement on Form S-1, filed with the Securities and Exchange Commission
(SEC) in connection with the IPO, contained untrue statements of material
fact and omitted to state facts necessary to make the statements made not
misleading by failing to disclose that the underwriters had received
additional, excessive and undisclosed commissions from, and had entered into
unlawful tie-in and other arrangements with, certain customers to whom they
allocated shares in the IPO. The plaintiffs in the Amended Complaint assert
claims against us and the D&Os pursuant to Section 11 of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the SEC thereunder. The plaintiffs in the Amended Complaint
assert claims against the D&Os pursuant to Sections 11 and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated by the SEC thereunder. The plaintiffs seek an
undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and
other costs and disbursements. On July 15, 2002, we and the individual
defendants moved to dismiss all claims. The Court has not ruled on this motion.
Discovery is stayed pending the outcome of the motion to dismiss. We intend to
vigorously defend against this lawsuit. Furthermore, we believe we are entitled
to indemnification from our Underwriters.

On September 20, 2002 one of our shareholders, Metropolitan Nashville
Employee Benefit Board (Metro Nashville), filed suit against us alleging that
we wrongfully and improperly delayed providing them with a stock certificate
and that during the time of such delay our stock price plummeted and they were
unable to sell or take steps to protect the value of their shares. Metro
Nashville seeks
compensatory damages in excess of $18 million, plus interest, and punitive
damages of $18 million. We filed a motion to dismiss on October 14, 2002. On November 7, 2002, Metro Nashville filed a
memorandum in opposition to our motion to dismiss. A
hearing on our motion is pending. We believe the lawsuit is without merit and
intend to oppose the allegations vigorously.

On August 6, 2002, we filed a complaint against Southwestern Bell
Telephone Company (SWBT) before the Public Utility Commission of Texas
(PUCT), requesting that the PUCT enjoin SWBT from disconnecting our access to
customers in Texas on the basis of a billing dispute between the parties. The
billing dispute centered on whether we owed SWBT certain amounts for
alternatively billed service from SWBT retail customers to our retail customers. On August 23, 2002,
the PUCT issued, in part, the injunctive relief requested by us, making clear
that service not be interrupted. Since that injunction, we and SWBT have been
involved in a dispute resolution process over these and other billing disputes
between SWBT and SBC affiliates of SWBT. There is no assurance that these and
other disputes with SWBT and other SBC affiliates will be resolved without
resort to further litigation and potential disruption to service.

We recently transferred the listing of our common shares from the Nasdaq
National Market to the Nasdaq SmallCap Market. Among other requirements for
our continued listing on the Nasdaq SmallCap Market we must have a market value
of our listed securities exceeding $35 million and maintain a minimum bid price
of not less than $1.00 per share.

On February 27, 2002, the New York Public Service Commission (the
Commission) approved a settlement, which reduced the prices that we and other
competitive local exchange carriers pay for unbundled network elements and
expanded the availability of those elements. Specifically, rates for the
elements comprising the monthly recurring unbundled network element platform were reduced by
approximately $8 to $9 per month per subscriber, on average. These rate
decreases took effect on March 1, 2002. In addition, the Commission directed
Verizon to provide bill credits to us in the amount of approximately $9.0
million to implement retroactive rate decreases for unbundled local switching.
We recorded the full impact of this credit as a reduction to our network
operations expense during the second quarter of 2002. We have received $6.7
million of this credit as of September 30, 2002, and should receive the remaining
portion of the $9.0 million credit during the fourth quarter of 2002.

In the ordinary
course of business, we are involved in legal and regulatory
proceedings, disputes and tax audits at the federal, state and local level that are
generally incidental to our operations. In addition, from time to time, we are
the subject of customer and vendor complaints filed with the state utility
commissions of the states in which they operate or the Federal Communications
Commission. 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, we do not
believe their disposition will have a material adverse effect on our
consolidated results of operations or financial position.

11.     SEGMENT REPORTING

We have two reportable operating segments: Consumer Services and Wholesale
Services.

The consumer services segment includes our Z-LineHOME and Z-LineBUSINESS
services that offer bundled local and long-distance telephone services in
combination with enhanced communication features accessible through the
telephone, the Internet and certain personal digital assistants. We offer
Z-LineHOME in 46 states and Z-LineBUSINESS in 16 states. Our

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customers are concentrated primarily in
metropolitan areas in 11
states for both our Z-LineHOME and Z-LineBUSINESS services. This operating segment also
includes our Touch 1 residential long-distance offering that is available
nation-wide.

The wholesale services segment allows companies to offer telephone
exchange and enhanced services to residential and small business customers.
This service is currently available in 46 states and MCI is our primary
customer for this offering.

The following summarizes the financial information concerning our
reportable operating segments:

|                              |  |                            |        |                           |  |              |        |          |  |          |        |              |  |   |         |   |  |   |        |  |  |   |         |  
|----------------------------- |  | -------------------------- | ------ | ------------------------- |  | ------------ | ------ | -------- |  | -------- | ------ | ------------ |  | - | ------- | - |  | - | ------ |  |  | - | ------- | -
|                              |  | For the three months ended |        | For the nine months ended
|                              |  | September 30, 2002         |        | September 30, 2002       
|                              |  |                            |        |                          
|                              |  | Consumer                   |        | Wholesale                 |  |              |        |          |  | Consumer |        | Wholesale    |  |   |         |  
|                              |  | Services                   |        | Services                  |  | Consolidated |        | Services |  | Services |        | Consolidated
|                              |  |                            |        |                           |  |              |        |          |  |          |        |             
|Revenues                      |  | $                          | 46,688 |                           |  | $            | 12,027 |          |  | $        | 58,715 |              |  | $ | 159,527 |   |  | $ | 18,681 |  |  | $ | 178,208 |  
|Operating income (loss)       |  | $                          | (8,898 | )                         |  | $            | 3,771  |          |  | $        | (5,127 | )            |  | $ | (18,737 | ) |  | $ | 3,775  |  |  | $ | (14,962 | )
|Depreciation and amortization |  | $                          | 5,596  |                           |  | $            | 573    |          |  | $        | 6,169  |              |  | $ | 16,841  |   |  | $ | 910    |  |  | $ | 17,751  |  
|Segment net income (loss)     |  | $                          | (8,733 | )                         |  | $            | 3,771  |          |  | $        | (4,962 | )            |  | $ | (19,085 | ) |  | $ | 3,775  |  |  | $ | (15,310 | )
|Capital expenditures          |  | $                          | 1,609  |                           |  | $            | 328    |          |  | $        | 1,937  |              |  | $ | 5,799   |   |  | $ | 7,907  |  |  | $ | 13,706  |  

We had
$99.0 and $10.3 million of identifiable assets at September 30,
2002 for our consumer and wholesale services segments, respectively.

12.     SUBSEQUENT EVENTS

In October 2002, we extended and changed the terms of an employee loan
of approximately $0.3 million originally due December 31, 2002. The changes
to the terms include rolling the unpaid interest into the principal, reducing
the interest rate from 8% to 5% and requiring monthly payments of the loan
with a balloon payment for the unpaid principal due on November 22, 2004.
The employee pledged shares of our stock, owned outright by the employee, as
collateral for the loan.

In October
2002, we established new payment terms with an employee to make eight quarterly
payments beginning in December 2002 with a balloon payment for the remaining
balance on December 2, 2004. Interest accrues on the unpaid balance at an
annual rate of 5%. The employee pledged shares of our stock, owned outright
by the employee, as collateral for the loan.

On
November 1, 2002, we significantly amended the terms of our agreement
with MCI. This amendment was made as a result of MCIs bankruptcy filing on
July 21, 2002. The significant financial changes in this amendment are the
elimination of the $50 million limited-term technology license fee, increases
to various fees calculated on a per minute and per line basis, certain
additional fees for services provided, a reduction to the monthly minimum
payments, and forgiveness of certain amounts to be repaid to MCI. We are in
the process of reviewing these changes to determine the impact on our
accounting policy for the revised contract.




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

You should read the following discussion together with the consolidated financial statements and related notes and other sections of this
Quarterly Report on Form 10-Q. This discussion contains 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, dependence on key wholesale customers, 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 these factors, other factors that could

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affect our
financial results are described in our Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 30, 2002.

OVERVIEW

We provide advanced, integrated telecommunications services targeted to
residential and small business subscribers. We offer local and long distance
telephone services in combination with enhanced communication features
accessible through the telephone, the Internet and certain personal digital
assistants. The nature of our business is evolving, and we have a limited
operating history.

We began providing our wholesale services during the first quarter of
2002. This service provides other companies with the opportunity to provide
local, long-distance and enhanced telephone services to residential and small
business customers by utilizing our telephone exchange services,
enhanced services platform, infrastructure
and back-office operations.

CONSOLIDATED RESULTS OF OPERATIONS

The following is a discussion of significant changes in our results of
operations, which occurred in the three and nine months ended September 30,
2002 compared to the same periods in the prior year. The following tables
summarize the approximate changes in selected operating items and include
dollar changes, percentage changes and percent of revenues to facilitate our
discussions that follow.

|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |      |       |   
|--------------------------- | ----------------------------- | ------------------------------------------------------------------------------- | ---- | -------------------------- | ---- | --------- | ---- | ------------- | ----- | ---------------------- | ---- | ---- | ---- | ---- | ----- | ----- | ----- | -- | ----- | ---- | ----- | -- | ----- | ---- | ----- | --
|                            |                               |                                                                                 |      | For the three months ended |      | Amount    |      | Percentage    |       |                        |      |      |      |      |       |      
|                            |                               |                                                                                 |      | September 30,              |      | Change    |      | Change        |       | Percentage of Revenues
|                            |                               |                                                                                 |      |                            |      | Favorable |      | Favorable     |       |                       
|                            |                               |                                                                                 |      | 2002                       |      | 2001      |      | (Unfavorable) |       | (Unfavorable)          |      | 2002 |      | 2001
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |     
|Revenues                    |                               | $                                                                               | 58.7 |                            |      | $         | 68.6 |               |       | $                      | (9.9 | )    |      |      | (14.4 | )%    |       |    | 100.0 | %    |       |    | 100.0 | %   
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|Operating expenses:         |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            | Network operations            |                                                                                 |      | 23.8                       |      |           |      | 38.3          |       |                        |      | 14.5 |      |      |       | 37.9  | %     |    |       | 40.5 | %     |    |       | 55.8 | %    
|                            | Sales and marketing           |                                                                                 |      | 2.3                        |      |           |      | 3.9           |       |                        |      | 1.6  |      |      |       | 41.0  | %     |    |       | 3.9  | %     |    |       | 5.7  | %    
|                            | General and administrative    |                                                                                 |      | 31.5                       |      |           |      | 33.3          |       |                        |      | 1.8  |      |      |       | 5.4   | %     |    |       | 53.7 | %     |    |       | 48.6 | %    
|                            | Asset impairment charge       |                                                                                 |      |                           |      |           |      |              |       |                        |      |     |      |      |       |      | %     |    |       |     | %     |    |       |     | %    
|                            | Restructuring Charge          |                                                                                 |      |                           |      |           |      |              |       |                        |      |     |      |      |       |      | %     |    |       |     | %     |    |       |     | %    
|                            | Depreciation and amortization |                                                                                 |      | 6.2                        |      |           |      | 5.3           |       |                        |      | (0.9 | )    |      |       | (17.0 | )%    |    |       | 10.6 | %     |    |       | 7.7  | %    
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            |                               | Total operating expenses                                                        |      |                            | 63.8 |           |      |               | 80.8  |                        |      |      | 17.0 |      |       |       | 21.0  | %  |       |      | 108.7 | %  |       |      | 117.8 | % 
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            |                               | Operating loss                                                                  |      |                            | (5.1 | )         |      |               | (12.2 | )                      |      |      | 7.1  |      |       |       | 58.2  | %  |       |      | (8.7  | )% |       |      | (17.8 | )%
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|Nonoperating income (loss): |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            | Interest and other income     |                                                                                 |      | 1.1                        |      |           |      | 1.5           |       |                        |      | (0.4 | )    |      |       | (26.7 | )%    |    |       | 1.9  | %     |    |       | 2.2  | %    
|                            | Interest and other expense    |                                                                                 |      | (1.0                       | )    |           |      | (1.2          | )     |                        |      | 0.2  |      |      |       | 16.7  | %     |    |       | (1.7 | )%    |    |       | (1.7 | )%   
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            |                               | Total nonoperating income                                                       |      |                            | 0.1  |           |      |               | 0.3   |                        |      |      | (0.2 | )    |       |       | (66.7 | )% |       |      | 0.2   | %  |       |      | 0.5   | % 
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            |                               | Net loss                                                                        |      |                            | (5.0 | )         |      |               | (11.9 | )                      |      |      | 6.9  |      |       |       | 58.0  | %  |       |      | (8.5  | )% |       |      | (17.3 | )%
|                            |                               | Less mandatorily redeemable convertible
preferred stock dividends and accretion |      |                            | (4.0 | )         |      |               | (5.2  | )                      |      |      | 1.2  |      |       |       | 23.1  | %  |       |      | (6.8  | )% |       |      | (7.6  | )%
|                            |                               | Less deemed dividend related to beneficial
conversion feature                   |      |                            |     |           |      |               | (8.9  | )                      |      |      | 8.9  |      |       |       | 100.0 | %  |       |      |      | %  |       |      | (13.0 | )%
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|                            |                               | Net loss attributable to common stockholders                                    |      | $                          | (9.0 | )         |      | $             | (26.0 | )                      |      | $    | 17.0 |      |       |       | 65.4  | %  |       |      | (15.3 | )% |       |      | (37.9 | )%
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     
|EBITDA                      |                               | $                                                                               | 1.1  |                            |      | $         | (6.9 | )             |       | $                      | 8.0  |      |      |      | 115.9 | %     |       |    | 1.9   | %    |       |    | (10.1 | )%  
|                            |                               |                                                                                 |      |                            |      |           |      |               |       |                        |      |      |      |      |       |       |       |    |       |      |       |    |       |     

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|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |      |       |   
|--------------------------- | ----------------------------- | ------------------------------------------------------------------------------- | ----- | ------------------------- | ----- | --------- | ------ | ------------- | ------ | ---------------------- | ----- | ---- | ----- | ---- | ----- | ------ | ------ | -- | ----- | ---- | ----- | -- | ----- | ---- | ----- | --
|                            |                               |                                                                                 |       | For the nine months ended |       | Amount    |        | Percentage    |        |                        |       |      |       |      |       |       
|                            |                               |                                                                                 |       | September 30,             |       | Change    |        | Change        |        | Percentage of Revenues
|                            |                               |                                                                                 |       |                           |       | Favorable |        | Favorable     |        |                       
|                            |                               |                                                                                 |       | 2002                      |       | 2001      |        | (Unfavorable) |        | (Unfavorable)          |       | 2002 |       | 2001
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |     
|Revenues                    |                               | $                                                                               | 178.2 |                           |       | $         | 216.8  |               |        | $                      | (38.6 | )    |       |      | (17.8 | )%     |        |    | 100.0 | %    |       |    | 100.0 | %   
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|Operating expenses:         |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            | Network operations            |                                                                                 |       | 69.9                      |       |           |        | 123.3         |        |                        |       | 53.4 |       |      |       | 43.3   | %      |    |       | 39.2 | %     |    |       | 56.9 | %    
|                            | Sales and marketing           |                                                                                 |       | 9.4                       |       |           |        | 25.5          |        |                        |       | 16.1 |       |      |       | 63.1   | %      |    |       | 5.3  | %     |    |       | 11.8 | %    
|                            | General and administrative    |                                                                                 |       | 92.1                      |       |           |        | 130.7         |        |                        |       | 38.6 |       |      |       | 29.5   | %      |    |       | 51.7 | %     |    |       | 60.2 | %    
|                            | Asset impairment charge       |                                                                                 |       | 1.1                       |       |           |        | 59.2          |        |                        |       | 58.1 |       |      |       | 98.1   | %      |    |       | 0.6  | %     |    |       | 27.3 | %    
|                            | Wholesale development costs   |                                                                                 |       | 1.0                       |       |           |        |              |        |                        |       | (1.0 | )     |      |       | (100.0 | )%     |    |       | 0.5  | %     |    |       |     | %    
|                            | Restructuring charge          |                                                                                 |       | 1.9                       |       |           |        |              |        |                        |       | (1.9 | )     |      |       | (100.0 | )%     |    |       | 1.1  | %     |    |       |     | %    
|                            | Depreciation and amortization |                                                                                 |       | 17.8                      |       |           |        | 17.8          |        |                        |       |     |       |      |       |       | %      |    |       | 10.0 | %     |    |       | 8.2  | %    
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            |                               | Total operating expenses                                                        |       |                           | 193.2 |           |        |               | 356.5  |                        |       |      | 163.3 |      |       |        | 45.8   | %  |       |      | 108.4 | %  |       |      | 164.4 | % 
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            |                               | Operating loss                                                                  |       |                           | (15.0 | )         |        |               | (139.7 | )                      |       |      | 124.7 |      |       |        | 89.3   | %  |       |      | (8.4  | )% |       |      | (64.4 | )%
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|Nonoperating income (loss): |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            | Interest and other income     |                                                                                 |       | 2.7                       |       |           |        | 5.8           |        |                        |       | (3.1 | )     |      |       | (53.4  | )%     |    |       | 1.5  | %     |    |       | 2.6  | %    
|                            | Interest and other expense    |                                                                                 |       | (3.0                      | )     |           |        | (3.3          | )      |                        |       | 0.3  |       |      |       | 9.1    | %      |    |       | (1.7 | )%    |    |       | (1.5 | )%   
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            |                               | Total nonoperating income (loss)                                                |       |                           | (0.3  | )         |        |               | 2.5    |                        |       |      | (2.8  | )    |       |        | (112.0 | )% |       |      | (0.2  | )% |       |      | 1.1   | % 
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            |                               | Net loss                                                                        |       |                           | (15.3 | )         |        |               | (137.2 | )                      |       |      | 121.9 |      |       |        | 88.8   | %  |       |      | (8.6  | )% |       |      | (63.3 | )%
|                            |                               | Less mandatorily redeemable convertible
preferred stock dividends and accretion |       |                           | (11.8 | )         |        |               | (10.8  | )                      |       |      | (1.0  | )    |       |        | (9.3   | )% |       |      | (6.6  | )% |       |      | (5.0  | )%
|                            |                               | Less deemed dividend related to beneficial
conversion feature                   |       |                           | (0.1  | )         |        |               | (8.9   | )                      |       |      | 8.8   |      |       |        | 98.9   | %  |       |      | (0.1  | )% |       |      | (4.1  | )%
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|                            |                               | Net loss attributable to common stockholders                                    |       | $                         | (27.2 | )         |        | $             | (156.9 | )                      |       | $    | 129.7 |      |       |        | 82.7   | %  |       |      | (15.3 | )% |       |      | (72.4 | )%
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     
|EBITDA                      |                               | $                                                                               | 2.8   |                           |       | $         | (121.9 | )             |        | $                      | 124.7 |      |       |      | 102.3 | %      |        |    | 1.6   | %    |       |    | (56.2 | )%  
|                            |                               |                                                                                 |       |                           |       |           |        |               |        |                        |       |      |       |      |       |        |        |    |       |      |       |    |       |     

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During 2001 and 2002, several events occurred which significantly affected
the comparability of our operating results. Those events include the following:

|                                    |                                               |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |       |      |              |   |       |      |   |   |      |      |   |   |       |       |  
|----------------------------------- | --------------------------------------------- | - | ------------------------------------- | - | ------------------------------------ | - | ------------ | - | --- | - | ------ | - | ------------ | - | ---------- | - | --------- | - | ----- | ---- | ------------ | - | ----- | ---- | - | - | ---- | ---- | - | - | ----- | ----- | -
|                                    |                                               |   | Three months ended September 30, 2002 |   | Nine months ended September 30, 2002
|                                    |                                               |   |                                       |   |                                     
|                                    |                                               |   |                                       |   |                                      |   | Net Loss     |   |     |   |        |   |              |   |            |   |           |   |       |      | Net Loss     |   |       |      |   |   |      |      |  
|                                    |                                               |   |                                       |   |                                      |   | Attributable |   |     |   |        |   |              |   |            |   |           |   |       |      | Attributable |   |       |      |   |   |      |      |  
|                                    |                                               |   | Net Income                            |   | to Common                            |   |              |   |     |   |        |   |              |   | Net Income |   | to Common |   |       |      |              |   |       |      |  
|                                    |                                               |   | (Loss)                                |   | Stockholders                         |   | EBITDA       |   | EPS |   | (Loss) |   | Stockholders |   | EBITDA     |   | EPS      
|                                    |                                               |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |          
|Reported amounts                    |                                               | $ | (5.0                                  | ) |                                      | $ | (9.0         | ) |     | $ | 1.1    |   |              | $ | (0.26      | ) |           | $ | (15.3 | )    |              | $ | (27.2 | )    |   | $ | 2.8  |      |   | $ | (0.78 | )    
|Non-recurring items:                |                                               |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |       |      |              |   |       |      |   |   |      |      |   |   |       |      
|                                    | Retroactive reduction to network access rates |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |       | (9.0 | )            |   |       | (9.0 | ) |   |      | (9.0 | ) |   |       | (0.26 | )
|                                    | Restructuring charge                          |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |       | 1.9  |              |   |       | 1.9  |   |   |      | 1.9  |   |   |       | 0.05  |  
|                                    | Asset impairment                              |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |       | 1.1  |              |   |       | 1.1  |   |   |      | 1.1  |   |   |       | 0.03  |  
|                                    | WorldCom bankruptcy                           |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |       | 1.3  |              |   |       | 1.3  |   |   |      | 1.3  |   |   |       | 0.04  |  
|                                    | Wholesale development costs                   |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |       | 1.0  |              |   |       | 1.0  |   |   |      | 1.0  |   |   |       | 0.03  |  
|                                    |                                               |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |       |      |              |   |       |      |   |   |      |      |   |   |       |       |  
|Total impact of non-recurring items |                                               |   |                                      |   |                                      |   |             |   |     |   |       |   |              |   |           |   |           |   | (3.7  | )    |              |   | (3.7  | )    |   |   | (3.7 | )    |   |   | (0.11 | )    
|                                    |                                               |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |       |      |              |   |       |      |   |   |      |      |   |   |       |       |  
|Normalized amounts                  |                                               | $ | (5.0                                  | ) |                                      | $ | (9.0         | ) |     | $ | 1.1    |   |              | $ | (0.26      | ) |           | $ | (19.0 | )    |              | $ | (30.9 | )    |   | $ | (0.9 | )    |   | $ | (0.89 | )    
|                                    |                                               |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |       |      |              |   |       |      |   |   |      |      |   |   |       |       |  

|                                    |                                   |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |        |      |              |   |        |      |  |   |        |      |  |   |       |      | 
|----------------------------------- | --------------------------------- | - | ------------------------------------- | - | ------------------------------------ | - | ------------ | - | --- | - | ------ | - | ------------ | - | ---------- | - | --------- | - | ------ | ---- | ------------ | - | ------ | ---- |  | - | ------ | ---- |  | - | ----- | ---- | 
|                                    |                                   |   | Three months ended September 30, 2001 |   | Nine months ended September 30, 2001
|                                    |                                   |   |                                       |   |                                     
|                                    |                                   |   |                                       |   |                                      |   | Net Loss     |   |     |   |        |   |              |   |            |   |           |   |        |      | Net Loss     |   |        |      |  |   |        |      | 
|                                    |                                   |   |                                       |   |                                      |   | Attributable |   |     |   |        |   |              |   |            |   |           |   |        |      | Attributable |   |        |      |  |   |        |      | 
|                                    |                                   |   | Net Income                            |   | to Common                            |   |              |   |     |   |        |   |              |   | Net Income |   | to Common |   |        |      |              |   |        |      | 
|                                    |                                   |   | (Loss)                                |   | Stockholders                         |   | EBITDA       |   | EPS |   | (Loss) |   | Stockholders |   | EBITDA     |   | EPS      
|                                    |                                   |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |          
|Reported amounts                    |                                   | $ | (11.9                                 | ) |                                      | $ | (26.0        | ) |     | $ | (6.9   | ) |              | $ | (0.77      | ) |           | $ | (137.2 | )    |              | $ | (156.9 | )    |  | $ | (121.9 | )    |  | $ | (4.63 | )   
|Non-recurring items:                |                                   |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |        |      |              |   |        |      |  |   |        |      |  |   |       |     
|                                    | Asset impairment                  |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |        | 59.2 |              |   |        | 59.2 |  |   |        | 59.2 |  |   |       | 1.75 | 
|                                    | Write-down of accounts receivable |   |                                       |  |                                      |   |              |  |     |   |        |  |              |   |            |  |           |   |        | 29.9 |              |   |        | 29.9 |  |   |        | 29.9 |  |   |       | 0.88 | 
|                                    |                                   |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |        |      |              |   |        |      |  |   |        |      |  |   |       |      | 
|Total impact of non-recurring items |                                   |   |                                      |   |                                      |   |             |   |     |   |       |   |              |   |           |   |           |   | 89.1   |      |              |   | 89.1   |      |  |   | 89.1   |      |  |   | 2.63  |     
|                                    |                                   |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |        |      |              |   |        |      |  |   |        |      |  |   |       |      | 
|Normalized amounts                  |                                   | $ | (11.9                                 | ) |                                      | $ | (26.0        | ) |     | $ | (6.9   | ) |              | $ | (0.77      | ) |           | $ | (48.1  | )    |              | $ | (67.8  | )    |  | $ | (32.8  | )    |  | $ | (2.00 | )   
|                                    |                                   |   |                                       |   |                                      |   |              |   |     |   |        |   |              |   |            |   |           |   |        |      |              |   |        |      |  |   |        |      |  |   |       |      | 

|                                             |  |            |     |              |  |              |      |     |  |        |     |              |  |            |      |           |  |   |      |              |  |   |      |   |  |   |      |   |  |   |     |  
|-------------------------------------------- |  | ---------- | --- | ------------ |  | ------------ | ---- | --- |  | ------ | --- | ------------ |  | ---------- | ---- | --------- |  | - | ---- | ------------ |  | - | ---- | - |  | - | ---- | - |  | - | --- | -
|                                             |  |            |     |              |  | Net Loss     |      |     |  |        |     |              |  |            |      |           |  |   |      | Net Loss     |  |   |      |   |  |   |      |  
|                                             |  |            |     |              |  | Attributable |      |     |  |        |     |              |  |            |      |           |  |   |      | Attributable |  |   |      |   |  |   |      |  
|                                             |  | Net Income |     | to Common    |  |              |      |     |  |        |     |              |  | Net Income |      | to Common |  |   |      |              |  |   |      |  
|                                             |  | (Loss)     |     | Stockholders |  | EBITDA       |      | EPS |  | (Loss) |     | Stockholders |  | EBITDA     |      | EPS      
|                                             |  |            |     |              |  |              |      |     |  |        |     |              |  |            |      |          
|Change in normalized amounts (2002 vs. 2001) |  | $          | 6.9 |              |  | $            | 17.0 |     |  | $      | 8.0 |              |  | $          | 0.51 |           |  | $ | 29.1 |              |  | $ | 36.9 |   |  | $ | 31.9 |   |  | $ | 1.1 |  
|% change of normalized amounts               |  |            | 58  | %            |  |              | 65   | %   |  |        | 116 | %            |  |            | 66   | %         |  |   | 60   | %            |  |   | 54   | % |  |   | 97   | % |  |   | 56  | %

Retroactive reduction to network access rates  Represents a one-time
retroactive reduction of rates we pay for unbundled network elements (UNEs)
in the state of New York.

Restructuring charge  Represents restructuring related costs for actions
taken to reduce operating costs. These costs include severance related costs
and lease termination costs associated with the reduction in force and closing
of our call centers.

Asset impairment  The 2002 costs represent the impairment of assets sold
in conjunction with the closing of our call centers, which is related to the
restructuring plan noted above. The 2001 amounts include the impairment of
goodwill and other minor assets associated with our April 2000 purchase of
Touch 1 Communications, Inc.

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WorldCom bankruptcy  We recorded additional allowance amounts and ceased
recording revenue related to carrier access billings to WorldCom. These charges
relate solely to our exposure in the consumer services segment, not our
wholesale agreement with MCI.

Wholesale development costs  During the first quarter of 2002, we
incurred certain costs related to initiating our wholesale services offerings.

Write-down of accounts receivable  In 2001, we recorded a charge to
write-down accounts receivable associated with approximately 90,000 of our
subscribers.

OPERATING RESULTS

Revenues. Revenues
decreased by $9.9 million to $58.7 million for the
quarter ended September 30, 2002, compared to $68.6 million for the same period
in the prior year. The decrease is attributable to a decrease in customers in
the consumer services segment, offset by revenues of $12.0 million generated by
the new wholesale services segment.

Revenues decreased by $38.6 million to $178.2 million for the nine months
ended September 30, 2002, compared to $216.8 million for the same period in the
prior year.

The decreases in revenues is attributable to a decrease in customers in
the consumer services segment, offset by revenues of $12.0 and $18.7 million
for the three and nine months ended September 30, 2002, respectively, generated
by the new wholesale services segment. These decreases of revenue
were the result of reduced sales and marketing to conserve our cash
combined with the reduction of non-performing customers.

Network Operations. Network operations expense decreased by $14.5 million
to $23.8 million for the quarter ended September 30, 2002, compared to $38.3
million for the same period in the prior year.

Network operations expense decreased by $53.4 million to $69.9 million for
the nine months ended September 30, 2002, compared to $123.3 million for the
same period in the prior year.

Network operations expense has decreased as a percentage of revenue and
total dollars. The decrease in total dollars is a result of decreased lines
for the periods presented. We expect network operations to begin to increase
in total dollars during 2003 as we expect to increase our consumer and
wholesale customer base. The decrease as a percentage of revenues has been
driven by our wholesale segments reporting of revenue on a gross basis and certain reductions to
UNE pricing in the states we provide service, including the $9.0 non-recurring
retroactive rate reduction experienced in New York.

Sales and Marketing. Sales and marketing expense decreased $1.6 million to
$2.3 million for the quarter ended September 30, 2002, compared to $3.9 million
for the same period in the prior year.

Sales and marketing expense decreased $16.1 million to $9.4 million for
the nine months ended September 30, 2002, compared to $25.5 million for the
same period in the prior year.

Our continued focus on conserving cash and improving the quality of our
subscribers resulted in reduced sales and marketing expense. The restructuring
of our consumer services segment in April 2002 also reduced sales and marketing
expense. We decreased spending on radio, billboard, and television advertising
during 2002.

Although the closure of our North Dakota call centers in April 2002 will
reduce our sales and marketing expense for the remainder of 2002, we are likely
to reinvest this savings into our Z-LineHOME, Z-LineBUSINESS and wholesale
services offerings in future quarters. We expect to invest in television,
print, and radio advertising and increase our agent sale programs in the near
future, in an attempt to increase our Z-LineHOME subscriber base. We have sales
representatives in five major cities to market our Z-LineBUSINESS services. We
have established a business development group to market all of our service
offerings to potential affiliate marketing groups and build our wholesale
services business. Sales and marketing expense should increase slightly during
the last quarter of 2002 compared to the current quarter.

General and Administrative. General and administrative expense decreased
$1.8 million to $31.5 million for the quarter ended September 30, 2002,
compared to $33.3 million for the same period in the prior year.

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General and administrative expense decreased $38.6 million to $92.1
million for the nine months ended September 30, 2002, compared to $130.7
million for the same period in the prior year. Excluding the non-recurring
accounts receivable write-off of $29.9 million, general and administrative
expense decreased $8.7 million for the nine months ended September 30, 2002
compared to $100.8 million for the same period in the prior year.

Although general and administrative costs decreased in total dollars, as a
percentage of total revenue general and administrative expense was 53.7% and
51.7% for the three and nine months ended September 30, 2002, respectively,
compared to 48.6% and 46.5% for the same period in the prior year, excluding
the non-recurring $29.9 million accounts receivable write-off in 2001. We
anticipate that the growth of our wholesale services and the focus on improved
subscriber economics for our residential and small business services, combined
with an increased utilization of fixed costs within our business will drive
down general and administrative expenses as a percentage of revenues during
2003.

Asset impairment charge. Asset impairment charges decreased $58.1 million
to $1.1 million for the nine months ended September 30, 2002, compared to $59.2
million for the same periods in the prior year. The charges in the current year
are due to the closure of consumer services call centers.

Asset impairment charge. In accordance with SFAS No 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, management assesses on an
ongoing basis whether there has been impairment in the carrying value of its
long-lived assets. As a result of managements decision in the second quarter
of 2002 to enhance future cash flow and operating earnings we decided to close
the remaining call centers in North Dakota acquired from Touch 1
Communications, Inc. (Touch 1). In April of 2002 we announced a restructuring
plan that included a reduction in force and the closure of the North Dakota
call centers resulting in approximately $1.1 million in property, plant, and
equipment being sold in conjunction with the settlement of the leases in these
locations resulting in a loss of $1.1 million.

In the second quarter of 2001 we sold certain telemarketing centers in
North Dakota. We recorded an impairment charge of $59.2 million for the nine
months ended September 30, 2001. This impairment was composed of a $54.9
million charge to our intangible assets for the change in the carrying value of
the intangibles after the sale of our call centers, $3.0 million relating to
unrealizable software and development projects, $0.9 million of worthless
telemarketing property and equipment and $0.4 million of securities deemed to
be worthless for the three and nine months ended September 30, 2001.

Wholesale development
costs. The initiation of our wholesale services offerings, during the first
quarter of 2002, resulted in wholesale development or $1.0
million for the nine months ended
September 30, 2002.

Restructuring charge.
We recorded a restructuring charge related to the consumer
services segment of $1.9 million for the nine months
ended September 30, 2002.

In April of 2002, we approved and implemented a restructuring to enhance
our future cash flows and operating earnings. The restructuring included a
reduction of force coupled with the closure of our North Dakota call centers
and our New York sales office. In accordance with EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity, the restructuring costs were recognized as liabilities at the
time management committed us to the plan. Management determined that these
costs provided no future economic benefit to us.

The restructuring
charges include termination benefits, lease
abandonment and lease settlement costs. All termination benefits were paid as of September 30, 2002.
In addition, we agreed to a settlement to exit the two leases for our call
centers in North Dakota as of July 1, 2002. We have recorded a lease
abandonment charge representing the future lease payments for our New York
office as a liability and will make payments through August 2005.

Depreciation and Amortization. Depreciation and amortization expense
increased $0.9 million to $6.2 million for the quarter ended September 30,
2002, compared to $5.3 million for the same period in the prior year.

Depreciation and amortization expense was $17.8 million for both nine
month periods ended September 30, 2002 and 2001.

The increase in depreciation and amortization is primarily a result of our
investment in capital assets during the first half of 2002 in conjunction with
our wholesale services business.

Interest and Other
Income. Interest and other income decreased $0.4
million to $1.1 million for the quarter ended September 30, 2002, compared to
$1.5 million for the same period in the prior year.

Interest and other income decreased $3.1 million to $2.7 million for the
nine months ended September 30, 2002, compared to $5.8 million for the same
period in the prior year.

Other income is primarily comprised of late fees charged to our
subscribers. The decrease for three and nine months ended September 30, 2002
was primarily due to an overall decrease in subscribers compared to the same
period in 2001, resulting in smaller late payment fees being assessed to
subscribers.

Interest and Other Expense. Interest and other expense decreased $0.2
million to $1.0 million for the quarter ended September 30, 2002, compared to
$1.2 million for the same period in the prior year.

Interest and other expense decreased $0.3 million to $3.0 million for the
nine months ended September 30, 2002, compared to $3.3 million for the same
period in the prior year.

The small decrease in interest expense is a result of reduced sales of
receivables and the costs associated with those transactions offset by an
increase in late payment fees for extending payments with certain vendors
beyond their standard payment terms. We anticipate interest expense remains
relatively flat in the future unless we are able to obtain additional or new
funding sources and to the extent we are able to finance our capital
expenditures.

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 months ended September 30, 2002 and 2001.

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Net Loss. Net loss improved by $6.9 million to a net loss of $5.0 million
for the quarter ended September 30, 2002, compared to a net loss of $11.9
million for the same period in the prior year.

Net loss improved by $121.9 million to $15.3 million for the nine months
ended September 30, 2002, compared to a net loss of $137.2 million for the same
period in the prior year.

Excluding significant non-recurring items for the periods presented, as
outlined in the table at the beginning of this section, net loss improved by
$29.1 million to a net loss of $19.0 million for the nine months ended
September 30, 2002, compared to a net loss of $48.1 million for the same period in
the prior year.

The improvement to net loss was primarily a result of decreased expenses,
as discussed above.

Net Loss Attributable to Common Stockholders. Our net loss attributable to
common stockholders improved by $17.0 million to net loss of $9.0 million for
the quarter ended September 30, 2002, compared to $26.0 million for the same
period in the prior year.

Net loss attributable to common stockholders improved by $129.7 million to
a net loss of $27.2 million for the nine months ended September 30, 2002,
compared to $156.9 million for the same period in the prior year.

Excluding significant non-recurring items for the periods presented, as
outlined in the table at the beginning of this section, net loss attributable
to common stockholders improved by $36.9 million to a net loss of $30.9 million
for the nine months ended September 30, 2002, compared to a loss of $67.8
million for the same period in the prior year.

EBITDA. Many securities analysts use the measure of earnings before
deducting interest, income taxes, depreciation and amortization, also commonly
referred to as EBITDA, as a way of evaluating financial performance. EBITDA
is not a measure under accounting principles generally accepted in the United
States of America (GAAP), is not meant to be a replacement for GAAP and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity. We have included EBITDA
data because it is a measure commonly used in the telecommunications industry
and is presented to assist in understanding our operating results.

Our EBITDA improved
by $8.0 million to positive EBITDA of $1.1 million for
the quarter ended September 30, 2002, compared to negative EBITDA of $6.9
million for the same period in the prior year.

Our EBITDA improved by $124.7 million to positive EBITDA of $2.8 million
for the nine months ended September 30, 2002, compared to negative EBITDA of
$121.9 million for the same period in the prior year.

Excluding significant non-recurring items for the periods presented, as
outlined in the table at the beginning of this section, EBITDA improved by
$31.9 million to a negative EBITDA of $0.9 million for the nine-months ended
September 30, 2002, compared to negative EBITDA of $32.8 million for the same
period in the prior year.

We expect to continue our improvement to EBITDA compared to prior year
periods. Although we anticipate future positive EBITDA, we have to manage
several risks and uncertainties including, but not limited to, how the
bankruptcy of MCI is resolved, our ability to increase our residential and
small business subscriber bases through sales and marketing channels and the
ability to further develop our wholesale services. We anticipate the
contribution of additional revenue streams from our small business, residential
and wholesale services coupled with the reduction in costs we have undertaken
in the last year to result in the achievement of positive EBITDA for the fourth
quarter of 2002 and during 2003.

RESULTS BY SEGMENT

The following table outlines our reportable
segments and will facilitate our discussion of our results by
segment that follow.

|                    |                               |                          |      |                    |      |              |      |          |     |           |      |              |      |   |       |      |       |   |      |     |      |   |       |      |       |  
|------------------- | ----------------------------- | ------------------------ | ---- | ------------------ | ---- | ------------ | ---- | -------- | --- | --------- | ---- | ------------ | ---- | - | ----- | ---- | ----- | - | ---- | --- | ---- | - | ----- | ---- | ----- | -
|                    |                               |                          |      |                   
|                    |                               | Three Months Ended       |      | Nine Months Ended 
|                    |                               | September 30, 2002       |      | September 30, 2002
|                    |                               |                          |      |                   
|                    |                               | Consumer                 |      | Wholesale          |      |              |      | Consumer |     | Wholesale |      |             
|                    |                               | Services                 |      | Services           |      | Consolidated |      | Services |     | Services  |      | Consolidated
|                    |                               |                          |      |                    |      |              |      |          |     |           |      |             
|Revenues            |                               | $                        | 46.7 |                    |      | $            | 12.0 |          |     | $         | 58.7 |              |      | $ | 159.5 |      |       | $ | 18.7 |     |      | $ | 178.2 |     
|                    |                               |                          |      |                    |      |              |      |          |     |           |      |              |      |   |       |      |       |   |      |     |      |   |       |     
|Operating expenses: |                               |                          |      |                    |      |              |      |          |     |           |      |              |      |   |       |      |       |   |      |     |      |   |       |     
|                    | Network operations            |                          |      | 18.9               |      |              |      | 4.9      |     |           |      | 23.8         |      |   |       | 62.9 |       |   |      | 7.0 |      |   |       | 69.9 |      
|                    | Sales and marketing           |                          |      | 2.3                |      |              |      |         |     |           |      | 2.3          |      |   |       | 9.4  |       |   |      |    |      |   |       | 9.4  |      
|                    | General and administrative    |                          |      | 28.7               |      |              |      | 2.8      |     |           |      | 31.5         |      |   |       | 85.2 |       |   |      | 7.0 |      |   |       | 92.2 |      
|                    | Asset impairment charge       |                          |      |                   |      |              |      |         |     |           |      |             |      |   |       | 1.1  |       |   |      |    |      |   |       | 1.1  |      
|                    | Wholesale development costs   |                          |      |                   |      |              |      |         |     |           |      |             |      |   |       | 1.0  |       |   |      |    |      |   |       | 1.0  |      
|                    | Restructuring charge          |                          |      |                   |      |              |      |         |     |           |      |             |      |   |       | 1.9  |       |   |      |    |      |   |       | 1.9  |      
|                    | Depreciation and amortization |                          |      | 5.6                |      |              |      | 0.6      |     |           |      | 6.2          |      |   |       | 16.8 |       |   |      | 0.9 |      |   |       | 17.7 |      
|                    |                               |                          |      |                    |      |              |      |          |     |           |      |              |      |   |       |      |       |   |      |     |      |   |       |     
|                    |                               | Total operating expenses |      |                    | 55.5 |              |      |          | 8.3 |           |      |              | 63.8 |   |       |      | 178.3 |   |      |     | 14.9 |   |       |      | 193.2 |  
|                    |                               |                          |      |                    |      |              |      |          |     |           |      |              |      |   |       |      |       |   |      |     |      |   |       |     
|                    |                               | Operating loss           |      | $                  | (8.8 | )            |      | $        | 3.7 |           |      | $            | (5.1 | ) |       | $    | (18.8 | ) |      | $   | 3.8  |   |       | $    | (15.0 | )
|                    |                               |                          |      |                    |      |              |      |          |     |           |      |              |      |   |       |      |       |   |      |     |      |   |       |     

CONSUMER SERVICES

Revenues. Revenues decreased by
$21.9 million to $46.7 million for the quarter ended
September 30, 2002, compared to $68.6 million for the same
period in the prior year. The decrease in revenue is attributable to a decrease in Z-Line
and Touch 1 long-distance customers for the quarter ended September 30, 2002,
compared to the same period in the prior year. Z-Line and Touch 1 contributed
$42.5 and $4.2 million, respectively, of revenue for the quarter ended
September 30, 2002 compared to $63.1 and $5.5 million for the same period last
year.

Revenues decreased by
$57.3 million to $159.5 million for the nine months ended
September 30, 2002, compared to $216.8 million for the same
period in the prior year.

The decrease in revenue is attributable to a decrease in Z-Line and Touch
1 long-distance customers for the nine months ended September 30, 2002,
compared the same period in the prior year. Z-Line and Touch 1 contributed
$150.6 and $8.9 million,

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respectively, of revenue for the nine months ended
September 30, 2002 compared to $198.7 and $18.1 million for the same period
last year.

The reduction in lines was a result of our focus on eliminating poor
paying customers and increasing the stringency of customer acceptance. We also
reduced our sales and marketing efforts for the three and nine months ended
September 30, 2002 compared to the same periods in the prior year.

Z-LineHOME lines decreased 59,000 lines to 201,000 lines as of September
30, 2002 compared to 260,000 lines as of September 30, 2001.

We expect Z-LineHOME to continue to increase as a percentage of revenue
relative to our Touch 1 (1+) Long Distance Services but decrease as a
percentage of total revenue as we expect growth in our wholesale
services operating segment. We also expect our Z-LineBUSINESS services to begin to contribute to
future revenues.

Network Operations.
Network operations expense decreased by $19.4 million
to $18.9 million for the three months ended September 30, 2002, compared to
$38.3 million for the same period in the prior year. Our consumer services
gross margin percentage increased to 59.5% for the quarter ended September 30,
2002 compared to 44.2% for the same period in the prior year.

Network operations expense decreased by $60.4 million to $62.9 million for
the nine months ended September 30, 2002, compared to $123.3 million for the
same period in the prior year. Included in this decrease is the $9.0 million
non-recurring retroactive rate reduction for UNEs in New York. Our consumer
services gross margin percentage increased to 54.9% for the nine months ended
September 30, 2002, excluding the $9.0 million non-recurring retroactive rate
reduction, compared to 43.1% for the same period in the prior year.

The overall decrease in network operations expense is a result of fewer
subscribers for both our Z-LineHOME and Touch 1 long-distance service
offerings. The increases in gross margin is primarily attributable to the New York Public
Service Commission imposed rate reduction to the UNE pricing, which became
effective March 1, 2002. This reduction to UNE rates in New York, the state in
which we have our largest concentration of customers, lowered our overall cost
to provide services to customers in New York. This reduction resulted in an
increased gross margin percentage during the three and nine months ended
September 30, 2002. We have also experienced a reduction to UNE pricing in
other states as the deregulation of telecommunication continues to progress.

General and Administrative. General and administrative expense decreased
by $4.6 million to $28.7 million for the three months ended September 30, 2002,
compared to $33.3 million for the same period in the prior year.

General and administrative expense decreased by $45.5 million to $85.2
million for the nine months ended September 30, 2002, compared to $130.7
million for the same period in the prior year. Excluding a non-recurring
write-off of $29.9 million of accounts receivable, general and administrative
expense decreased $15.6 million on a normalized comparison.

The decrease in general and administrative expense for the three and nine
months is discussed in the consolidated discussions.

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Depreciation and Amortization. Depreciation expense increased $0.3 million
to $5.6 million for the quarter ended September 30, 2002 compared to $5.3
million for the same period in the prior year.

Depreciation and
amortization expense decreased $1.0 million to $16.8 million for the nine
months ended September 30, 2002 compared to $17.8 million for the same period
in the prior year.

The decrease in depreciation and amortization is primarily a result of our
sale of equipment as a result of closing our North Dakota call centers in the
second quarter of 2001. In addition, the write-off of $54.9 million of goodwill
in the second quarter of 2001 led to decreased amortization expense during the first
two quarters of 2002. We anticipate limited purchases of computer equipment,
switching equipment, furniture and leasehold improvements in connection with
our consumer service offering. We expect depreciation and amortization expense
should stay relatively constant over the remainder of 2002 and small increases
during 2003.

WHOLESALE SERVICES

Revenues. Our wholesale services contributed $12.0 and $18.7 million of
revenue for the three and nine months ended September 30, 2002, respectively,
or 20.4% and 10.5% of total revenue for the three and nine months ended
September 30, 2002, respectively. The second quarter of 2002 was the first time
we generated wholesale services revenue.

Network Operations.
Network operations expense was $4.9 and $7.0 million
for the three and nine months ended September 30, 2002, respectively.

General and Administrative. General and administrative expense was $2.8
and $7.0 million for the three and nine months ended September 30, 2002,
respectively. This expense is comprised of the expense to provision, bill, and
support the wholesale services. We expect general and administrative expenses
to vary depending on our ability to attract new wholesale customers and the
growth of our existing wholesale customers.

Wholesale development costs. Wholesale development costs increased $1.0
million to $1.0 million for the nine months ended September 30, 2002, compared
to $0.0 million for the same period in the prior year.

We expensed the costs related to our wholesale business as incurred, with
the exception of certain internal-use software development costs that qualified
for capitalization. We have incurred approximately $1.0 million of start-up
costs for launch of our wholesale services.

On November 1, 2002, our agreement with MCI was substantially amended. We
are in the process of assessing the accounting impact of this
amendment, but we do not anticipate any changes to periods already reported upon.

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 collocation
of switching and transmission equipment in incumbent local exchange carriers
central offices. Although we will continue with 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
facilities-based telecommunication 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.

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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, 2002, we had an accumulated
deficit of $298.5 million and $13.5 million in cash and cash equivalents. We
have funded our expenditures primarily through operating revenues, private
securities offerings, a sale-leaseback credit facility, sales of accounts
receivable and an initial public offering. We intend to continue building our
organization in anticipation of future growth and believe that our operating
expenditures will also continue to increase.

In January 2002, we accelerated the vesting of 96,471 stock options
granted to an executive as part of his severance agreement. This acceleration
resulted in the employee being fully vested in stock options with a strike
price of $1.30 when the stock was trading at $1.80. The employee forfeited
76,471 of his vested options in return for the exercise of 20,000 shares of
stock. We recorded approximately $0.1 million in general and administrative
expense as a result of this transaction.

We recently transferred the listing of our common shares from the Nasdaq
National Market to the Nasdaq SmallCap Market. Among other requirements for
our continued listing on the Nasdaq SmallCap Market we must have a market value
of our listed securities exceeding $35 million and maintain a minimum bid price
of not less than $1.00 per share.

On February 27, 2002, the New York Public Service Commission (the
Commission) approved a settlement, which reduced the prices that we and other
competitive local exchange carriers pay for unbundled network elements and
expanded the availability of those elements. Specifically, rates for the
elements comprising the unbundled network element platform were reduced by
approximately $8 to $9 per month per subscriber, on average. These rate
decreases took effect on March 1, 2002. In addition, the Commission directed
Verizon to provide bill credits to us in the amount of approximately $9.0
million to implement retroactive rate decreases for unbundled local switching.
We have recorded the full impact of this credit as a reduction to our network
operations expense. We have received $6.7 million of this credit as of
September 30, 2002, and should be receiving the remaining
portion of the $9.0 million credit during the
fourth quarter of 2002.

On March 20,
2002, we entered into a 48-month agreement with MCI WorldCom
Communications, Inc. ("MCI") for providing wholesale telephone exchange services,
ancillary services and a limited-term software license. The agreement is
cancelable by either party after 18 months.

Under the terms of the agreement, MCI will pay us a maximum of $50 million
related to the use of our network in the form of a technology license fee,
should the agreement not be terminated early. Cash flows related to the license
will be paid based on the number of MCI customers on our network, as defined in
the contract, and are subject to monthly minimum amounts. In addition, MCI will
pay for services provided through usage-based fees according to certain per
line and per minute calculations defined in the agreement and MCI will also pay
fees to us for providing telephone exchange services, payroll costs and certain
vendor fees. We are the primary obligor for all costs incurred under this
agreement.

We are recognizing the $50 million license fee, and amounts received in
advance of the contract, on a straight-line basis over the four-year contract
period beginning in April 2002. In connection with the agreement, we issued MCI
one million shares of our common stock at a price of $2.33, the market price of
our stock at the date of the agreement. As a result of this transaction an
asset totaling $2.3 million is being amortized on a straight-line basis as a
reduction to revenue over the 48-month term of the agreement with the remaining
balance recorded in other non-current assets. Monthly usage-based charges and
cost reimbursements will be recognized when earned.

As of September 30, 2002, we have recorded approximately $18.4 in revenue
under the contract with MCI. Included in our consolidated balance sheet as of
September 30, 2002 are approximately $5.6 and $4.3 million of long-term and short-term
deferred revenue, respectively. These amounts represent advance billings under
the contract. We expensed the costs related to our wholesale business as
incurred, with the exception of certain internal-use software development costs
that qualified for capitalization. We incurred approximately $1.0 million of
start-up costs for our wholesale services, which are shown as wholesale
development costs in the

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Statement of Operations, and capitalized approximately
$2.0 million in software development costs relating directly to our wholesale
services efforts.

On November 1,
2002 we significantly amended the terms of our agreement
with MCI. This amendment was made as a result of MCIs bankruptcy filing on
July 21, 2002. Included in this amendment among other items was the
elimination of the $50 million software license fee, increases to various fees
calculated on a per minute and per line basis, certain additional fees for
services provided, reduction to the monthly minimum payments, forgiveness of
certain amounts to be repaid to MCI, and the shortening of the time to exit the
contract to March of 2003. We are in the process of reviewing the amendments
to the contract to determine the impact on our accounting policy for the revised
contract.

On July 21, 2002, WorldCom, Inc. (WorldCom) and certain of its
subsidiary corporations, including MCI, filed voluntary petitions for relief
under chapter 11 of the United States Bankruptcy Code. Under the Bankruptcy
Code a vendor that provides post-petition goods or services to a debtor on a
continuous basis is entitled to payment for those goods and services on a
timely basis if the debtor wants the vendor to continue supplying the goods or
services. Neither the Bankruptcy Code nor the applicable case law requires
vendors to provide post-petition goods and services to a debtor without
payment. The Bankruptcy Code also entitles a debtor to reject executory
contracts, that is contracts where some future act remains to be done, as in
the case of our contract with MCI. A party to a rejected contract may be
entitled to damages from the debtor for breach of contract. However, such a
claim would likely be an unsecured claim. WorldComs bankruptcy case is in its
early stages. Although MCI has paid us in a timely manner since its bankruptcy
filing, we have no assurance that MCI has the resources to pay its vendors on a
timely basis. Additionally, we have no indication that MCI intends to reject
our contract.

For MCIs customers provisioned using our company code, we are the
customer of record for the regional bell operating companies wholesale billing.
It is very likely that the state commissions would require us to continue
providing services to MCIs customers for at least the 90-day period contained
in the guidelines described below, regardless of whether MCI continues its
relationship with these customers.

Under the New York Public Service Commissions (Commission) mass
migration guidelines, when a local exchange carrier discontinues service its
customers must have the ability to migrate to another carrier without
interruption of service. Carriers are required to file an exit plan with the
Commission at least 90 days in advance of discontinuance of service, or must
demonstrate that 90 days notice was not feasible. Customers must be notified
not less than 60 days prior to discontinuance of service, and a second notice
must be provided if the customer has not taken action to change to a new
provider. Other states in which MCI and we operate are developing similar rules
for carriers exiting markets, generally using the Commissions guidelines as a
framework.

In July 2002, we renegotiated an agreement with a service firm that
provides us with new customer provisioning services through electronic bonding
with the incumbent local exchange carriers. Provisioning is the process
whereby we are established as the customers primary local and long distance
telephone provider. Under this agreement, we have committed to minimum cash
payments, subject to certain adjustments, of approximately $7.0, $14.5, and
$15.7 million for the remainder of 2002 and the years ending December 31, 2003
and 2004, respectively. We make payments monthly according to the contract.
This contract provides, under certain circumstances, for early termination and
severance fees for such action.

In July and August 2002, we made loans to two employees in the approximate
amounts of $0.1 and $0.9 million. These loans were to cover margin balances and
prevent the liquidation of the employees holdings of our common stock. The
loans were demand loans bearing interest at an annual rate equal to
the prime rate plus 2%. We established payment terms with one of
these employees and received a payment of $0.6 million. Under the terms of the agreement for the remaining
$0.3 million the employee will make eight quarterly payments beginning in
December 2002 with a balloon payment for the remaining balance on December 2,
2004. Interest accrues on the unpaid balance at an annual rate of 5%. The
employee pledged shares of our stock, owned outright by the employee, as
collateral for the loan.

In September 2002, we extended the $0.1 million loan to an employee
through March 12, 2003 in accordance with the severance
agreement executed for termination. The employee received a forgiveness of
approximately six thousand dollars
of interest and the annual interest rate was reduced from 6.5% to 6.0%. We
have no collateral for this loan.

In October 2002, we extended and changed the terms of an employee loan of
approximately $0.3 million originally due December 31, 2002. The changes to
the terms of the loan include rolling the unpaid interest into the principal,
reducing the interest rate from 8% to 5% and requiring monthly payments of the
loan with a balloon payment for the unpaid principal due on November 22, 2004.
The employee pledged shares of our stock, owned outright by the employee, as
collateral for the loan.

Net cash provided by operating activities improved by $39.9 million to
$13.0 million provided by operating activities for the nine months ended
September 30, 2002, compared to net cash used in operating activities of $26.9
million for the same period in the prior year. The improvement to net cash
provided by operating activities was primarily a result of the improvements of
$121.9 to net loss

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and $9.2 million to operating assets and liabilities.
These improvements were offset by non-cash charges totaling $91.2
million. The
overall improvement to cash provided by operating activities was a result of
the cost reduction measures that we have implemented during the last eighteen
months.

Included in our net cash provided by operating activities for the nine
months ended September 30, 2002 was the sale of $108.5 million of receivables,
for net proceeds of $85.6 million. This compared to the sale of $123.4 million
of receivables, for net proceeds of $82.8 million for the nine months ended
September 30, 2001. At September 30, 2002, a net receivable servicing asset of
$9.8 million is included in accounts receivable and $3.8 million of advances on
unbilled receivables are included in accounts payable and accrued liabilities.
The costs relating to the agreement of $1.0 and $0.9 million are included in
interest and other expense for the nine months ended September 30, 2002 and
2001, respectively.

Our agreement with RFC allows us to sell up to $25 million of certain
receivables, subject to a selection criteria utilized by RFC for receivables
they agree to purchase. There are no minimum sales requirements under this
agreement. RFC purchased receivables from us during the nine months ended
September 30, 2002 at discount rates of 32% beginning in March
2002 and 23% prior to March. This rate is negotiated
and may change according to collection experience. Our collection percentage
since the inception of the agreement through September 30, 2002 is
approximately 90%. Under the agreement we are responsible for the continued
servicing of the receivables sold and any amount collected over the discount
rate is paid to us by RFC for providing the servicing less certain fees. In
July 2002, we renewed the RFC agreement for an additional two years under
substantially similar terms.

Our net cash used in investing activities increased by $3.7 million to
$14.1 million for the nine months ended September 30, 2002, compared to $10.4
million for the same period in the prior year. This change is primarily a
result of increased capital expenditures and software development for our
wholesale services segment. Also included in this change is the issuance of
$1.0 million of notes receivable and payments on notes in the amounts of $0.6
million during 2002 compared to $0.1 million of notes issuance for the same
period in the prior year. We expect to make purchases of property and
equipment in the future to meet the needs of our wholesale services. We
anticipate flat to a small increase in capital expenditures during
2003 in comparison to 2002.

Our net cash used in financing activities decreased by $15.3 million to
$4.3 million used in financing activities for the nine months ended September 30,
2002, compared to $11.0 million provided by financing activities for the same
period in the prior year. This change is primarily a result of the proceeds of
$17.0 million in 2001 and no sales during 2002. This decrease was partially
offset by a reduction of $2.0 million of debt payments during 2002 as a result
of a balloon debt payment that was made in 2001. We expect to have a low amount
of long-term debt going forward. Our existing debt is primarily fixed
interest that is payable in monthly installments.

Our short-term liquidity relies heavily upon our accounts receivable
agreement, cash used or provided from operations, cash management strategies,
our wholesale service agreement with MCI and if needed, our ability to reduce
certain discretionary capital and marketing expenses and the reduction of
headcount to fulfill any short term cash requirements. We have historically had
negative cash flows and although we have achieved positive EBITDA and expect to
achieve positive cash flows during 2003 we also are aware of the risks,
discussed throughout this document, of not achieving our goal.

Our ongoing capital requirements will depend on several factors, including
market acceptance of our services, specifically our new wholesale services and
our small business product, the amount of resources we devote to investments in
our networks, facilities, build-out of additional enterprise management
centers, services development, the integration of new service offerings and
technology into our existing services and brand promotions, the resources we
devote to sales and marketing of our services, and other factors. As growth and
opportunities arise, we expect to make strategic investments in technology and
our network architecture and enter potential strategic alliances or
partnerships with other entities.

We will make investments in sales and marketing to build our overall Z
brand, build strategic partnerships, and develop new service offerings in an
attempt to attract new customers. We will focus on what we expect to be more
attractive distribution channels,
which are expected to result in an acceptable acquisition cost per subscriber.
Sales and marketing will continue to be used as a discretionary expense to help
us manage our overall liquidity.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of our
long-term debt obligations are fixed rate obligations.




ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

We maintain disclosure controls and procedures, which we have designed
to ensure that material information related to us, including our consolidated
subsidiaries, is made known to our disclosure committee on a regular basis.
In response to recent legislation and proposed regulations, we reviewed our
internal control structure and our disclosure controls and procedures.
Although we believe our pre-existing disclosure controls and procedures were
adequate to enable us to comply with our disclosure obligations, as a result
of such review, we implemented minor changes, primarily to formalize and
document the procedures already in place. We also established a disclosure
committee, which consists of certain members of our management.

After the formation of our disclosure committee and within 90 days prior
to the filing of this report, the disclosure committee carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer, D. Gregory Smith, and
Chief Financial Officer, Horace J. Davis, III, of the effectiveness of the
design and operation of the our disclosure controls and procedures. Based
upon that evaluation, Mr. Smith and Mr. Davis concluded that our disclosure
controls and procedures are effective in causing material information to be
recorded, processed, summarized, and reported by our management on a timely
basis and to ensure that the quality and timeliness of our public disclosures
complies with its SEC disclosure obligations.

Changes in Controls and Procedures

There were no significant changes in our internal controls or in other
factors that could significantly affect these internal controls after the date
of our most recent evaluation.




PART II




ITEM 1.    LEGAL PROCEEDINGS

Case No. 8:02 CV 1708 T 27 MS The Metropolitan Government of Nashville and
Davidson County, Tennessee, suing on behalf of Metropolitan Nashville Employee
Benefit Board vs. Z-Tel Technologies, Inc. in the United States District Court
for the Middle District of Florida filed September 20, 2002.

The foregoing lawsuit has been filed against us. Metropolitan Nashville
Employee Benefit Board ("Metro Nashville") is our common shareholder. Metro Nashville alleges that
we wrongfully and improperly delayed providing them with a stock certificate
and that during the time of such delay our stock price plummeted and they were
unable to sell or take steps to protect the value of their shares. Metro
Nashville seeks compensatory damages in excess of $18 million, plus interest,
and punitive damages of $18 million. We filed a motion to dismiss on October
14, 2002. On November 7, 2002, Metro Nashville filed a memorandum in opposition
to our motion to dismiss. A hearing on our motion is pending. We believe the lawsuit is
without merit and intend to oppose the allegations vigorously.

PUC Docket No. 26417 Before the Public Utility Commission of Texas. Z-Tel
Communications, Inc. Complaint for Post-Interconnection Agreement Dispute
Resolution, Request for Expedited Ruling, And Request for Interim Ruling
Against Southwestern Bell Telephone Company.

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On August 6, 2002, we filed a complaint against Southwestern Bell
Telephone Company (SWBT) before the Public Utility Commission of Texas
(PUCT), requesting that the PUCT enjoin SWBT from disconnecting our access to
customers in Texas on the basis of a billing dispute between the parties. The
billing dispute centered on whether we owed SWBT certain amounts for collect
calls from SWBT retail customers to our retail customers. On August 23, 2002,
the PUCT issued in part the injunctive relief requested by us, making clear
that service not be interrupted. Since that injunction, we and SWBT have been
involved in a dispute resolution process over these and other billing disputes
between SWBT and SBC affiliates of SWBT. There is no assurance that these and
other disputes with SWBT and other SBC affiliates will be resolved without
resort to further litigation and potential disruption to service.

Case No. 01 CV 5074:
In re Z-Tel Technologies, Inc. Initial Public Offering Securities
Litigation, Master File No. 21 MC 92 (SAS), in the United States
District Court for the Southern District of New York (original
complaint filed June 7, 2001; Second Corrected Amended Complaint
filed July 12, 2002).

The foregoing lawsuit
is described in our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.




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



|(a) |  | The following exhibits are filed as part of this report (exhibits marked
with an asterisk have been previously filed with the Commission as
indicated, and are incorporated herein by this reference):
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                            
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                            
|3.1     |  | Our Amended and Restated Certificate of Incorporation
Technologies, Inc., as amended(A)*                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                            
|3.2     |  | Our Amended and Restated Bylaws (B)*                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                            
|4.1     |  | Form of Common Stock Certificate(B)*                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                            
|4.2     |  | See Exhibits 3.1 and 3.2 of this Form for provisions of the
Amended and Restated Certificate of Incorporation, as amended,
and the our Bylaws defining rights of security holders                                                                                          
|        |  |                                                                                                                                                                                                                                                                            
|4.3     |  | Stock Purchase Agreement, dated July 6, 2000, by and between us
and the various purchasers of our Series D Convertible Preferred
Stock(C)*                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                            
|4.4     |  | Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions relating to our
Series D Convertible Preferred Stock (C)*                                                                                                       
|        |  |                                                                                                                                                                                                                                                                            
|4.5     |  | Form of Registration Rights Agreement by and between us and each
of the purchasers of our Series D Convertible Preferred
Stock(C)*                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                            
|4.6     |  | Form of Warrant for the purchase of shares of our common stock
by each of the purchasers of our Series D Convertible Preferred
Stock(C)*                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                            
|4.7     |  | Stock and Warrant Purchase Agreement, dated October 19, 2000, by
and among us and The 1818 Fund III, L.P.(D)*                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                            
|4.8     |  | Certificate of Designation of 8% Convertible Preferred Stock,
Series E, Setting Forth the Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of such preferred
shares, as amended(A)*                                                               
|        |  |                                                                                                                                                                                                                                                                            
|4.9     |  | Registration Rights Agreement between and among us and The 1818
Fund III, L.P.(D)*                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                            
|4.10    |  | Warrant issued to The 1818 Fund III, L.P. for the purchase of
shares of our common stock.(D)*                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                            
|4.11    |  | Certificate of Designation of Series F Junior Participating
Preferred Stock(E)*                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                            
|4.12    |  | Rights Agreement dated as of February 19, 2001 between us and
American Stock Transfer Trust Company, as Rights Agent, as
amended July 2, 2001(E)*                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                            
|4.13    |  | Stock and Warrant Purchase Agreement, dated as of July 2, 2001,
by and between us, D. Gregory Smith, and others(F)*                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                            
|4.14    |  | Warrant for the Purchase of Shares of Common Stock of Z-Tel,
dated as of July 2, 2001(G)*                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                            
|4.15    |  | Certificate of Designation for the Series G Preferred Stock(H)*                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                            
|4.16    |  | Backup Purchase Agreement, dated as of July 2, 2001, by and
among Z-Tel Communications, Inc., a Delaware corporation and our
wholly owned subsidiary, Touch 1 Communications, Inc., an
Alabama corporation and our wholly owned subsidiary, D. Gregory
Smith and others(I)*

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|       |  |                                                                                                                                                                                                                                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.17   |  | Additional Investor Registration Rights Agreement, dated as of
July 2, 2001, between Z-Tel, D. Gregory Smith and others(J)*                                                                                                      
|       |  |                                                                                                                                                                                                                                  
|4.18   |  | Voting Agreement, dated as of June 29, 2001, between us and
certain of our stockholders(K)*                                                                                                                                      
|       |  |                                                                                                                                                                                                                                  
|4.19   |  | Employee Stock Restriction Agreement, dated September 1, 1999,
by and between us and D. Gregory Smith(L)*                                                                                                                        
|       |  |                                                                                                                                                                                                                                  
|10.2.1 |  | 1998 Equity Participation Plan(B)*                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                  
|10.2.2 |  | 2000 Equity Participation Plan(M)*                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                  
|10.3   |  | Employment Agreement of D. Gregory Smith, dated July 30, 2002                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                  
|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, aspurchaser(C)*
|       |  |                                                                                                                                                                                                                                  
|10.5   |  | Form of Indemnification Agreement for our executive officers and
directors (E)*                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                  
|10.6   |  | Employment Agreement of Ned Dumas Garrett, dated August 14, 2002                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                  
|10.7   |  | Employment Agreement of J. Bryan Bunting, dated August 14, 2002                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                  
|10.8   |  | Employment Agreement of Charles W. McDonough, dated August 14,
2002                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                  
|10.9   |  | Employment Agreement of Robert A. Curtis, dated July 30, 2002                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                  
|10.10  |  | Promissory Note, dated May 11, 1999, between Touch 1
Communications, Inc. and Corman Elegre Capital(D)*                                                                                                                          
|       |  |                                                                                                                                                                                                                                  
|10.11  |  | Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and William F. Corman (First Revocable
Trust)(D)*                                                                                                   
|       |  |                                                                                                                                                                                                                                  
|10.12  |  | Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and James F. Corman(D)*                                                                                                                             
|       |  |                                                                                                                                                                                                                                  
|99.1   |  | Written Statement of the Chief Executive Officer Pursuant to 18
U.S.C.ss.1350                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                  
|99.2   |  | Written Statement of the Chief Financial Officer Pursuant to 18
U.S.C.ss.1350                                                                                                                                                    



---

|*   | 
|--- | 
|   
|(A) | 
|   
|(B) | 
|   
|(C) | 

27



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##### Table of Contents



|(D) |  | Incorporated by reference to the correspondingly numbered exhibits to our
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000, filed on November 14, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(E) |  | Incorporated by reference to the correspondingly numbered exhibits to our
Annual Report on Form 10-K for the annual period ended December 31, 2000,
filed on March 30, 2001.          
|   
|(F) |  | Incorporated by reference to Exhibit 1 to Amendment No. 1 of the Schedule
13D filed July 12, 2001 with respect to our common stock by, among other
persons, The 1818 Fund III, L.P.   
|   
|(G) |  | Incorporated by reference to Exhibit 2 to Amendment No. 1 of the Schedule
13D filed July 12, 2001 with respect to our common stock by, among other
persons, The 1818 Fund III, L.P.   
|   
|(H) |  | Incorporated by reference to Exhibit 3 to Amendment No. 1 of the Schedule
13D filed July 12, 2001 with respect to our common stock by, among other
persons, The 1818 Fund III, L.P.   
|   
|(I) |  | Incorporated by reference to Exhibit 4 to Amendment No. 1 of the Schedule
13D filed July 12, 2001 with respect to our common stock by, among other
persons, The 1818 Fund III, L.P.   
|   
|(J) |  | Incorporated by reference to Exhibit 5 to the Schedule 13D filed July 24,
2001 with respect to our common stock by, among other persons, D. Gregory
Smith.                            
|   
|(K) |  | Incorporated by reference to Exhibit 5 to Amendment No. 1 of the Schedule
13D filed July 12, 2001 with respect to our common stock by, among other
persons, The 1818 Fund III, L.P.   
|   
|(L) |  | Incorporated by reference to Exhibit 7 to the Schedule 13D filed July 24,
2001 with respect to our common stock by, among other persons, D. Gregory
Smith.                            
|   
|(M) |  | Incorporated by reference to Appendix B to our Preliminary Proxy
Statement filed on April 14, 2000, with the following amendment effective
May 31, 2001:                              



| |  | Section 2.1(a) of the Plan is hereby amended in its entirety to read as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The shares of stock subject to Options, awards of Restricted Stock,
Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially
shares of the Companys Common Stock, par value $0.01 per share. The
aggregate number of such shares which may be issued upon exercise of such
options or rights or upon any such awards under the Plan shall be Four
Million Five Hundred Thousand (4,500,000) plus an annual increase to be
added on the first day of the Companys fiscal year beginning in 2001
equal to the lesser of (i) Three Million (3,000,000) shares of the
Companys Common Stock, (ii) 6% of the outstanding shares on such date, or
(iii) a lesser amount determined by the Board. The shares of Common Stock
issuable upon exercise of such options or rights or upon any such awards
may be either previously authorized but unissued shares or treasury
shares.

28



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##### Table of Contents





|(b) |  | Reports on Form 8-K.
|--- |  | --------------------

None.




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of the 14th day
of November 2002.

| |     |                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------
| |     | Z-TEL TECHNOLOGIES, INC.
(Registrant)                                                                                                    
| |     |                                                                                                                                          
|
| |     |                                                                                                                                          
|
| | By: | /s/ HORACE J. DAVIS IIISenior Vice-President 
Chief Financial Officer
(Authorized officer of Registrant
and principal financial officer)

29



---



##### Table of Contents






CERTIFICATIONS

Certification of Chief Executive Officer

I, D. Gregory Smith, certify that



|1. |  | I have reviewed this quarterly report on Form 10-Q of Z-Tel
Technologies, Inc.;                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;                            
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have                                                                                                              



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing of this quarterly
report (the Evaluation Date); and                                                                                                       
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons fulfilling the
equivalent function)
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize, and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                         



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                                                              
|----- |  | ----------------- |  | -------------------------------------------------------------
|Date: |  | November 14, 2002 |  |                                                              
|      |  |                   |  | /s/ D. GREGORY SMITH
D. Gregory Smith
Chief Executive Officer







---



##### Table of Contents



Certification of Chief Financial Officer

I, Horace J. Davis, certify that



|1. |  | I have reviewed this quarterly report on Form 10-Q of Z-Tel
Technologies, Inc.;                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;                            
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have                                                                                                              



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing of this quarterly
report (the Evaluation Date); and                                                                                                       
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons fulfilling the
equivalent function)
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize, and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                         



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                                                               
|----- |  | ----------------- |  | --------------------------------------------------------------
|Date: |  | November 14, 2002 |  |                                                               
|     
|      |  |                   |  | /s/ HORACE J. DAVIS IIIHorace J. Davis
Chief Financial Officer