##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2001

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

For the Transition Period From _____ to _____

Commission File Number 000-28467

Z-TEL TECHNOLOGIES, INC.

---

(Exact Name of Registrant as Specified in its Charter)


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

601 South Harbour Island Boulevard, Suite 220
Tampa, Florida 33602

---

(Address of Principal Executive Offices)


(813) 273-6261

---

(Registrants Telephone Number, Including Area Code)


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes    [X]                          No    [    ]

At August
10, 2001 the Registrant had
outstanding 34,036,470 shares of $.01
par value common stock.



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TABLE OF CONTENTS



|                                                                                               |                                                                                                       |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                                                               | Condensed Consolidated Balance Sheets                                                                
|                                                                                               | Condensed Consolidated Statements of Operations                                                      
|                                                                                               | Condensed Consolidated Statements of Changes in Stockholders Equity (Deficit) and Comprehensive Loss
|                                                                                               | Condensed Consolidated Statements of Cash Flows                                                      
|                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited)                                     
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            
|Part II  Other Information                                                                   
|Item 1. Legal Proceedings                                                                     
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                     
|SIGNATURE                                                                                     
|Amended Certificate of Incorporation                                                          
|8% Convertible Preferred Stock Certificate                                                    
|American Stock Transfer Rights Agreement                                                      



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##### Table of Contents



Z-TEL TECHNOLOGIES, INC.
INDEX

|                                                                                              |                                                                                                                                             |  |    |   | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- |  | -- | - | 
|Part I. Financial Information                                                                 |                                                                                                                                             |  |    |  
|                                                                                             
|Item 1. Financial Statements                                                                  |                                                                                                                                             |  |    |  
|                                                                                             
|                                                                                              | Condensed Consolidated Balance Sheets at June 30, 2001
and December 31, 2000                                                                |  |    | 3 | 
|                                                                                             
|                                                                                              | Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000                                   |  |    | 4 | 
|                                                                                             
|                                                                                              | Condensed Consolidated Statement of Changes in Stockholders
Equity (Deficit) and Comprehensive Loss for the six
months ended June 30, 2001 |  |    | 5 | 
|                                                                                             
|                                                                                              | Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000                                             |  |    | 6 | 
|                                                                                             
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                                                        |  |    | 7 | 
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                                                                                                             |  | 13 |  
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                             |  | 22 |  
|                                                                                             
|PART II. OTHER INFORMATION                                                                    |                                                                                                                                             |  |    |  
|                                                                                             
|Item 1. Legal Proceedings                                                                     |                                                                                                                                             |  | 23 |  
|                                                                                             
|Item 4. Submission of Matters to a Vote of Securities Holders                                 |                                                                                                                                             |  | 24 |  
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                             |  | 24 |  
|                                                                                             
|SIGNATURE                                                                                     |                                                                                                                                             |  | 29 |  

2



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##### Table of Contents



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

|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |          |        |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | -------------------------------------------------------------------------------------------------------- | -------- | ----------- | ------- | ------------ | -------- | ------ | ------- | 
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          | June 30,    |         | December 31,
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          | 2001        |         | 2000        
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |             
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          | (Unaudited) |         |              |          |       
|Assets                                                                                                                                                                                                 |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|Current assets:                                                                                                                                                                                        |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       | Cash and cash equivalents, including restricted cash of
$1,267                                                                                            |                                      | $                                                                                                        | 9,710    |             |         | $            | 46,650   |       
|                                                                                                                                                                                                       | Accounts receivable, net of allowance for doubtful
accounts of $10,928 and $9,026                                                                         |                                      |                                                                                                          | 32,080   |             |         |              | 65,432   |       
|                                                                                                                                                                                                       | Prepaid expenses and other current assets                                                                                                                 |                                      |                                                                                                          | 7,321    |             |         |              | 7,159    |       
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      | Total current assets                                                                                     | 49,111   |             |         |              | 119,241  |       
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |          |        |         | 
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |          |        |         | 
|                                                                                                                                                                                                       | Property and equipment, net                                                                                                                               |                                      |                                                                                                          | 59,585   |             |         |              | 59,200   |       
|                                                                                                                                                                                                       | Intangible assets, net                                                                                                                                    |                                      |                                                                                                          | 6,860    |             |         |              | 64,267   |       
|                                                                                                                                                                                                       | Other assets                                                                                                                                              |                                      |                                                                                                          | 4,856    |             |         |              | 3,753    |       
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      | Total assets                                                                                             |          | $           | 120,412 |              |          | $      | 246,461 | 
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|Liabilities, Mandatorily Redeemable Convertible Preferred
Stock and Stockholders Equity (Deficit)                                                                                                     |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|Current liabilities:                                                                                                                                                                                   |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       | Accounts payable and accrued liabilities                                                                                                                  |                                      | $                                                                                                        | 46,212   |             |         | $            | 44,693   |       
|                                                                                                                                                                                                       | Deferred revenue                                                                                                                                          |                                      |                                                                                                          | 7,732    |             |         |              | 7,666    |       
|                                                                                                                                                                                                       | Current portion of long-term debt
and capital lease obligations                                                                                           |                                      |                                                                                                          | 5,572    |             |         |              | 7,637    |       
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      | Total current liabilities                                                                                |          |             | 59,516  |              |          |        | 59,996  | 
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       | Long-term debt and capital lease obligations                                                                                                              |                                      |                                                                                                          | 12,062   |             |         |              | 12,780   |       
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      | Total liabilities                                                                                        |          |             | 71,578  |              |          |        | 72,776  | 
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|Mandatorily redeemable convertible preferred stock, $.01
par value; 50,000,000 shares authorized; 8,854,914
issued and outstanding (aggregate liquidation
value of approximately $112,205 and
$84,585) |                                                                                                                                                           |                                      | 90,189                                                                                                   |          |             |         | 84,585       |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|Commitments and contingencies (Notes 6, 8 and 9)                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|Stockholders equity (deficit):                                                                                                                                                                        |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       | Common stock, $.01 par value; 150,000,000 shares authorized;
34,316,145 and 34,033,910 shares issued; 34,036,470 and 33,754,235 outstanding, respectively |                                      |                                                                                                          | 343      |             |         |              | 340      |       
|                                                                                                                                                                                                       | Notes receivable from stockholders                                                                                                                        |                                      |                                                                                                          | (1,659   | )           |         |              | (839     | )     
|                                                                                                                                                                                                       | Unearned stock compensation                                                                                                                               |                                      |                                                                                                          | (188     | )           |         |              | (255     | )     
|                                                                                                                                                                                                       | Additional paid-in capital                                                                                                                                |                                      |                                                                                                          | 222,943  |             |         |              | 227,304  |       
|                                                                                                                                                                                                       | Accumulated deficit                                                                                                                                       |                                      |                                                                                                          | (262,453 | )           |         |              | (137,130 | )     
|                                                                                                                                                                                                       | Accumulated other comprehensive loss                                                                                                                      |                                      |                                                                                                          | (23      | )           |         |              | (2       | )     
|                                                                                                                                                                                                       | Treasury stock, 279,675 shares at cost                                                                                                                    |                                      |                                                                                                          | (318     | )           |         |              | (318     | )     
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           | Total stockholders equity (deficit) |                                                                                                          |          | (41,355     | )       |              |          | 89,100 |        
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      | Total liabilities, mandatorily redeemable convertible
preferred stock and
stockholders equity (deficit) |          | $           | 120,412 |              |          | $      | 246,461 | 
|                                                                                                                                                                                                       |                                                                                                                                                           |                                      |                                                                                                          |          |             |         |              |         

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

3



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##### Table of Contents



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

|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |        |         |  
|------------------------------------------ | ----------------------------- | ------------------------------------------------------------------------------- | ---------- | ------------------ | -------- | ---------------- | ---------- | ------ | ------- | ---- | ---------- | ------ | -------- | - | ---------- | ------ | ------- | -
|                                           |                               |                                                                                 |            | Three Months Ended |          | Six Months Ended
|                                           |                               |                                                                                 |            | June 30,           |          | June 30,        
|                                           |                               |                                                                                 |            |                    |          |                 
|                                           |                               |                                                                                 |            | 2001               |          | 2000             |            | 2001   |         | 2000
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |     
|Revenues                                   |                               | $                                                                               | 73,142     |                    |          | $                | 40,157     |        |         | $    | 148,186    |        |          | $ | 54,133     |       
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|Operating expenses:                        |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           | Network operations            |                                                                                 |            | 41,718             |          |                  |            | 25,137 |         |      |            | 85,020 |          |   |            | 34,967 |        
|                                           | Sales and marketing           |                                                                                 |            | 8,873              |          |                  |            | 10,635 |         |      |            | 21,634 |          |   |            | 17,454 |        
|                                           | Research and development      |                                                                                 |            | 2,555              |          |                  |            | 1,790  |         |      |            | 4,922  |          |   |            | 3,089  |        
|                                           | General and administrative    |                                                                                 |            | 62,197             |          |                  |            | 20,878 |         |      |            | 92,400 |          |   |            | 31,339 |        
|                                           | Asset
impairment charge       |                                                                                 |            | 59,194             |          |                  |            |       |         |      |            | 59,194 |          |   |            |       |        
|                                           | Depreciation and amortization |                                                                                 |            | 6,483              |          |                  |            | 4,404  |         |      |            | 12,524 |          |   |            | 6,492  |        
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           |                               | Total operating expenses                                                        |            |                    | 181,020  |                  |            |        | 62,844  |      |            |        | 275,694  |   |            |        | 93,341  |  
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           |                               | Operating loss                                                                  |            |                    | (107,878 | )                |            |        | (22,687 | )    |            |        | (127,508 | ) |            |        | (39,208 | )
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|Nonoperating income (expense):             |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           | Interest
and other income     |                                                                                 |            | 1,352              |          |                  |            | 455    |         |      |            | 4,270  |          |   |            | 1,741  |        
|                                           | Interest
and other expense    |                                                                                 |            | (1,217             | )        |                  |            | (823   | )       |      |            | (2,085 | )        |   |            | (1,064 | )      
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           |                               | Total nonoperating income (expense)                                             |            |                    | 135      |                  |            |        | (368    | )    |            |        | 2,185    |   |            |        | 677     |  
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           |                               | Net loss                                                                        |            |                    | (107,743 | )                |            |        | (23,055 | )    |            |        | (125,323 | ) |            |        | (38,531 | )
|                                           |                               | Less
mandatorily redeemable convertible preferred stock dividends and
accretion |            |                    | (3,047   | )                |            |        |        |      |            |        | (5,591   | ) |            |        |        |  
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|                                           |                               | Net loss attributable to common stockholders                                    |            | $                  | (110,790 | )                |            | $      | (23,055 | )    |            | $      | (130,914 | ) |            | $      | (38,531 | )
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|Weighted average common shares outstanding |                               |                                                                                 | 33,880,327 |                    |          |                  | 33,042,008 |        |         |      | 33,835,392 |        |          |   | 32,499,640 |       
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       
|Basic and diluted net loss per share       |                               | $                                                                               | (3.27      | )                  |          | $                | (0.70      | )      |         | $    | (3.87      | )      |          | $ | (1.19      | )     
|                                           |                               |                                                                                 |            |                    |          |                  |            |        |         |      |            |        |          |   |            |       

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

4



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##### Table of Contents



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

---

|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   |          |   | 
|-------------------------------------------------------------------------- |  |  | ------------ |  | ---------------- | - | ------------ |  | ------------ | - | ----------- | - | ------------- | - | -------- | - | ------------- | - | ---------------- | - | ----- | - | ---------- | - |  | - | ----------- | - |  | - | ------ | - |  | - | -------- | - | 
|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   | Accumulated |   |  |   |        |   |  |   |         
|                                                                           |  |  | Common Stock |  | Notes Receivable |   | Unearned     |  | Additional   |   |             |   |               |   | Other    |   |               |   |                  |   | Total
|                                                                           |  |  |              |  | from             |   | Stock        |  | Paid-In      |   | Accumulated |   | Comprehensive |   | Treasury |   | Stockholders'
|                                                                           |  |  | Shares       |  | Par Value        |   | Stockholders |  | Compensation |   | Capital     |   | Deficit       |   | Loss     |   | Stock         |   | Equity (Deficit)
|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                 
|Balance, December 31, 2000                                                 |  |  | 33,754,235   |  |                  |   | $ 340        |  |              |   | $ (839      | ) |               |   | $ (255   | ) |               |   | $ 227,304        |   |       |   | $ (137,130 | ) |  |   | $ (2        | ) |  |   | $ (318 | ) |  |   | $ 89,100 |  
|Issuance
of common stock for exercise of stock options                     |  |  | 254,735      |  |                  |   | 3            |  |              |   | (820        | ) |               |   |          |   |               |   | 1,001            |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   | 184      |  
|Issuance of common stock for the purchase of software                      |  |  | 27,500       |  |                  |   |             |  |              |   |             |   |               |   |          |   |               |   | 155              |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   | 155      |  
|Vesting of stock options granted below
intrinsic value                     |  |  |              |  |                  |   |              |  |              |   |             |   |               |   | 67       |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   | 67       |  
|Accelerated vesting of stock options                                       |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   | 49               |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   | 49       |  
|Mandatorily redeemable convertible
dividends and preferred stock
accretion |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   | (5,566           | ) |       |   |            |   |  |   |             |   |  |   |        |   |  |   | (5,566   | )
|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   |          |  
|Net loss                                                                   |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   | (125,323   | ) |  |   |             |   |  |   |        |   |  |   | (125,323 | )
|Foreign currency translation adjustment                                    |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   | (21         | ) |  |   |        |   |  |   | (21      | )
|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   |          |  
|Comprehensive loss                                                         |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   | (125,344 | )
|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   |          |  
|Balance, June 30, 2001                                                     |  |  | 34,036,470   |  |                  | $ | 343          |  |              | $ | (1,659      | ) |               | $ | (188     | ) |               | $ | 222,943          |   |       | $ | (262,453   | ) |  | $ | (23         | ) |  | $ | (318   | ) |  | $ | (41,355  | )
|                                                                           |  |  |              |  |                  |   |              |  |              |   |             |   |               |   |          |   |               |   |                  |   |       |   |            |   |  |   |             |   |  |   |        |   |  |   |          |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

5



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##### Table of Contents



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

---

|                                                                            |                                               |                                                       |                                       |        |                  |         |         |         |         |         |  
|--------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------------------- | ------------------------------------- | ------ | ---------------- | ------- | ------- | ------- | ------- | ------- | -
|                                                                            |                                               |                                                       |                                       |        | Six Months Ended
|                                                                            |                                               |                                                       |                                       |        | June 30,        
|                                                                            |                                               |                                                       |                                       |        | 2001             |         | 2000   
|                                                                            |                                               |                                                       |                                       |        |                  |         |        
|                                                                            |                                               |                                                       |                                       |        |                 
|Cash flows from operating activities:                                       |                                               |                                                       |                                       |        |                  |         |         |        
|Net loss                                                                    |                                               | $                                                     | (125,323                              | )      |                  | $       | (38,531 | )      
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            | Depreciation and amortization                 |                                                       |                                       | 12,524 |                  |         |         | 6,492   |        
|                                                                            | Provision for bad debts                       |                                                       |                                       | 42,934 |                  |         |         | 2,380   |        
|                                                                            | Asset
impairment charge                       |                                                       |                                       | 59,194 |                  |         |         |        |        
|                                                                            | Expense charged for granting of stock options |                                                       |                                       | 116    |                  |         |         |        |        
|                                                                            |                                               | Increase in accounts receivable                       |                                       |        | (9,582           | )       |         |         | (25,762 | )      
|                                                                            |                                               | Increase in prepaid expenses and other current assets |                                       |        | (4,109           | )       |         |         | (3,552  | )      
|                                                                            |                                               | Increase in accounts payable and accrued liabilities  |                                       |        | 1,519            |         |         |         | 13,363  |        
|                                                                            |                                               | Increase in deferred revenue                          |                                       |        | 66               |         |         |         | 3,376   |        
|                                                                            |                                               | Other                                                 |                                       |        | (52              | )       |         |         | 181     |        
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            |                                               |                                                       | Total adjustments                     |        |                  | 102,610 |         |         |         | (3,522  | )
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            |                                               |                                                       | Net cash used in operating activities |        |                  | (22,713 | )       |         |         | (42,053 | )
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|Cash flows from investing activities:                                       |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            | Proceeds from note receivable                 |                                                       |                                       | 7      |                  |         |         |        |        
|                                                                            | Issuance of note receivable                   |                                                       |                                       | (100   | )                |         |         |        |        
|                                                                            | Purchases of property and equipment           |                                                       |                                       | (9,261 | )                |         |         | (20,154 | )      
|                                                                            | Purchase of securities                        |                                                       |                                       |       |                  |         |         | (1,050  | )      
|                                                                            | Purchase of Touch 1, net of cash acquired     |                                                       |                                       |       |                  |         |         | (8,955  | )      
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            |                                               |                                                       | Net cash used in investing activities |        |                  | (9,354  | )       |         |         | (30,159 | )
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|Cash flows from financing activities:                                       |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            | Proceeds from exercise of stock options       |                                                       |                                       | 184    |                  |         |         | 1,317   |        
|                                                                            | Proceeds from notes receivable                |                                                       |                                       |       |                  |         |         | 1,144   |        
|                                                                            | Payments on long-term debt obligations        |                                                       |                                       | (5,057 | )                |         |         | (21,250 | )      
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|                                                                            |                                               |                                                       | Net cash used in financing activities |        |                  | (4,873  | )       |         |         | (18,789 | )
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|Net decrease in cash and cash equivalents                                   |                                               |                                                       | (36,940                               | )      |                  |         | (91,001 | )      
|Cash and cash equivalents, beginning of period                              |                                               |                                                       | 46,650                                |        |                  |         | 101,657 |        
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        
|Cash and cash equivalents, end of period                                    |                                               | $                                                     | 9,710                                 |        |                  | $       | 10,656  |        
|                                                                            |                                               |                                                       |                                       |        |                  |         |         |        

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

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##### Table of Contents



Z-Tel Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)



|1. |  | Nature of Business
|-- |  | ------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Z-Tel Technologies, Inc. and subsidiaries (Z-Tel or the Company)
incorporated in Delaware on January 15, 1998 as Olympus
Telecommunications Group, Inc. In March 1998, Olympus
Telecommunications Group, Inc. changed its name to Z-Tel Technologies,
Inc. The Company has
eight wholly owned subsidiaries.                                                                                                                                                                                                          
|
| | Z-Tel is an emerging provider of advanced, integrated
telecommunications services targeted to residential subscribers. Z-Tel
offers local and long distance telephone services in combination with
enhanced communication features accessible through the telephone, the
Internet and certain personal digital assistants. Z-Tel offers its
Z-Line Home Edition service, at least on an initial test basis, in
thirty-four states. Z-Tel also provides long-distance
telecommunications services to customers nationally.



|2. |  | Basis of Presentation
|-- |  | ---------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and are in the
form prescribed by the Securities and Exchange Commission in
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should
be read in conjunction with the audited financial statements of the
Company as of and for the year ended December 31, 2000, included in the
Companys Annual Report on Form 10-K. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30,
2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001.
|
| | PRINCIPLES OF CONSOLIDATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | NEW ACCOUNTING PRONOUNCEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standard (SFAS) NO. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 141 addresses the initial recognition and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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Z-Tel Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 addresses the initial recognition
and measurement of intangible assets acquired outside of a business
combination, whether acquired individually or with a group of other
assets, and the accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. These standards require
all future business combinations to be accounted for using the purchase
method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. The Company is
required to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis
as of January 1, 2002; however, certain provisions of these new
standards may also apply to any acquisitions occurring subsequent to
June 30, 2001.
|
| | As of June 30, 2001, Z-Tel
Technologies had $6.9 million of intangible assets,
net of accumulated amortization of $2.2 million. The Company is still
assessing the impact that the adoption of SFAS No. 142 will have on
its future operations and statement of position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities has been applied
prospectively for transfers of financial assets occurring after March
31, 2001. SFAS No. 140 replaces SFAS No. 125,Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 140 revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires
certain disclosures, but it carries over most of SFAS No. 125s
provisions without reconsideration.                                                                                                                                                                                                                                                                         
|
| | SFAS No. 140 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. Management believes that its current account policies and
procedures related to the transfer and servicing of financial assets
comply with SFAS No. 140.      



|3. |  | Accounts Receivable Agreement
|-- |  | -----------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2000, the Company entered into an accounts receivable agreement
with RFC Capital Corporation (RFC), a division of Textron, Inc.,
providing for the sale of certain of the Companys accounts receivable
to RFC. RFC has agreed to purchase up to $25.0 million of the Companys
accounts receivable at any given time.                                                                                                                                                                                                                                                                                  
|
| | In connection with the accounts receivable agreement described above,
the Company sold approximately $80.1 million of accounts receivable, for the six months ended
June 30, 2001. Cash received from
these sales and advances on unbilled receivables was approximately $57.7 million and is included in cash
flows from operating activities. At June 30, 2001, a net
receivable servicing asset of approximately $8.5 million is
included in accounts receivable and approximately $4.4 million
of advances on unbilled receivables are included in accounts payable and accrued
liabilities. The costs related

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Z-Tel Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | to the agreement of approximately $0.2 and
$0.5 million are included in
interest and other expense for the three and six months ended June 30,
2001, respectively.



|4. |  | Accounts Receivable Write-Off
|-- |  | -----------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During second quarter 2001, management performed detailed analysis of
accounts receivable and also reviewed its credit policies relating
specifically to acceptance of and provisioning of service to new customers. As a result of the analysis and
subsequent change in credit policy, the Company switched its focus from
collection efforts on overdue and delinquent account balances to a
stringent credit policy surrounding customer acceptance and a
collection effort focused on less delinquent accounts. The detailed
analysis and change in credit policy lead the Company to write-off
delinquent receivables and revise the
estimates used to develop the allowance for doubtful accounts in the
current period and future periods.
|
| | As a result of the receivables write-off, an additional $29.9 million of bad debt expense
was recorded in general and administrative expense for the three months ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



|5. |  | Asset Impairment
|-- |  | ----------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of,
management assesses on an ongoing basis if there has been impairment in
the carrying value of its long-lived assets. As a result of
managements decision in the second quarter to reduce telemarketing efforts, a majority of
the operations and assets of telemarketing centers acquired from Touch
1 Communications, Inc. (Touch 1) have been either voluntarily closed
or sold. On June 30, 2001, the telemarketing centers sold accounted for approximately
$1.0 million in property, plant and equipment. For these assets, the
Company received 270,000 shares of preferred stock of the privately-held acquiring
company and a note receivable of approximately $0.5 million. The loss
recorded from this transaction equated to approximately $1.0 million.
|
| | As a result of the decision to reduce telemarketing efforts noted above
and the subsequent transactions, management performed an assessment of
the value of the intangible assets recorded in the Touch 1 acquisition. In the
second quarter 2001, it was determined that undiscounted future cash
flows over the remaining amortization period of certain intangible
assets indicated that the value assigned to the intangible asset might
not be recoverable. Therefore, the Company undertook an effort to
determine the amount of expense to be recorded relating to the
impairment.                                                                                                                                                                                                                                                                                                                
|
| | The carrying value of the goodwill and
identifiable intangibles recorded on the books approximated
$61.7 million prior to the impairment analysis. The Company calculated the fair value of goodwill by
performing a discounted cash flow analysis related to the remaining
assets acquired in the Touch 1 purchase. As the Company determined that
it would effectively cease any telemarketing efforts in the future, the
sole remaining assets from the Touch 1 purchase were certain amounts of
property, plant and equipment and intangibles (consisting of customer
lists and goodwill) acquired in the Touch 1
transaction. Assuming an attrition rate of 4.5% and a discount rate of
17.5% over an 18 month period, it was determined that the                                                                                                                                                   

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Z-Tel Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | remaining operations acquired from Touch 1 have a liquidation value
which approximates to the carrying value of the customer lists acquired from
Touch 1. At June 30, 2001, the carrying value of the
identifiable intangibles associated with the customer lists was
approximately $6.8 million. Therefore, the Company recorded a loss of
$54.9 million, the difference between the carrying value of all
intangibles and the carrying value of the customer lists.
|
| | The Company recorded an additional $4.3 million of impaired asset
charges, composed of $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.                                                                                                                                                                               



|6. |  | Commitments and Contingencies
|-- |  | -----------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has disputed billings and access charges from certain
inter-exchange carriers (IXCs) and incumbent local exchange carriers
(ILECs). The Company contends the invoicing of billings and access
charges received from certain IXCs and ILECs are not in accordance with
the interconnection, service level, or tariff agreements entered
between the Company and certain IXCs and ILECs. The Company has not
paid for a portion of these disputes and management believes that the
Company will prevail in these disputes. At June 30, 2001 the total
disputed amounts from all IXCs and ILECs was approximately $12.3
million.



|7. |  | 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. Diluted net loss per share assumes the
exercise of common stock equivalents for which market price exceeds
exercise price, less shares assumed purchased by the Company with
related proceeds. 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; therefore, for each of the
periods presented basic and diluted net loss per share are the same.



| |                                             
| | --------------------------------------------
| | Net loss per share is calculated as follows:

|                                      |                                            |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |            |         |  
|------------------------------------- | ------------------------------------------ | ----------------------------------------------------------------- | - | ------------------ | -------- | ---------------- | - | ---------- | ------- | ---- | - | ---------- | -------- | - | - | ---------- | ------- | -
|                                      |                                            |                                                                   |   | Three Months Ended |          | Six Months Ended
|                                      |                                            |                                                                   |   | June 30,           |          | June 30,        
|                                      |                                            |                                                                   |   |                    |          |                 
|                                      |                                            |                                                                   |   | 2001               |          | 2000             |   | 2001       |         | 2000
|                                      |                                            |                                                                   |   |                    |          |                  |   |            |         |     
|Basic
and diluted net loss per share: |                                            |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |           
|                                      | Loss attributable to common stockholders:  |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |            |        
|                                      |                                            | Net loss                                                          |   | $                  | (107,743 | )                |   | $          | (23,055 | )    |   | $          | (125,323 | ) |   | $          | (38,531 | )
|                                      |                                            | Less mandatorily convertible redeemable
preferred stock dividends |   |                    | (3,047   | )                |   |            |        |      |   |            | (5,591   | ) |   |            |        |  
|                                      |                                            |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |           
|                                      |                                            | Loss attributable to common stockholders                          |   | $                  | (110,790 | )                |   | $          | (23,055 | )    |   | $          | (130,914 | ) |   | $          | (38,531 | )
|                                      |                                            |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |           
|                                      | Weighted average common shares outstanding |                                                                   |   | 33,880,327         |          |                  |   | 33,042,008 |         |      |   | 33,835,392 |          |   |   | 32,499,640 |        
|                                      |                                            |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |           
|                                      | Basic and diluted net loss per share       |                                                                   | $ | (3.27              | )        |                  | $ | (0.70      | )       |      | $ | (3.87      | )        |   | $ | (1.19      | )      
|                                      |                                            |                                                                   |   |                    |          |                  |   |            |         |      |   |            |          |   |   |           

10



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Z-Tel Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)



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

|                                                                                      |  |                  |           |      |  |  |           | 
|------------------------------------------------------------------------------------- |  | ---------------- | --------- | ---- |  |  | --------- | 
|                                                                                      |  | Six Months Ended |          
|                                                                                      |  | June 30,         |          
|                                                                                      |  |                  |          
|                                                                                      |  | 2001             |           | 2000 | 
|                                                                                      |  |                  |           |      | 
|Unexercised stock options                                                             |  |                  | 7,805,470 |      |  |  | 9,421,912 | 
|Unexercised warrants                                                                  |  |                  | 5,274,023 |      |  |  | 637,332   | 
|Mandatorily redeemable convertible preferred
    stock convertible into common shares |  |                  | 3,521,999 |      |  |  |          | 





|8. |  | Legal and Regulatory Proceedings
|-- |  | --------------------------------



| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 15, 2001, the Company filed a lawsuit against AT&T Corp.
(AT&T). The Company alleged that AT&T had received originating and
terminating access service from the Company and had unlawfully withheld
access charges for such services. The Company settled the lawsuit as
outlined in the subsequent events footnote.



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



|9. |  | Subsequent Events
|-- |  | -----------------



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | In July 2001, the Company extended its agreement with RFC under
substantially similar terms for an additional year.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2001, the Company filed a Certificate of Designation
authorizing the issuance of 175 shares of Series G junior convertible
preferred stock (Series G Preferred). The Company has the ability to
obtain up to $17.5 million in funding from the issuance of Series G
Preferred. On July 2, 2001,
the execution date of the agreement, the
Company issued warrants to purchase 3,000,000 shares of common stock at an
exercise price of $0.01 per share. On July 5, 2001, the Company
issued 80 shares of Series G Preferred for aggregate proceeds of $8.0
million, initially convertible into common stock at a conversion rate
of $2.00 per share, subject to adjustment. The Series G Preferred agreement
provides the Company with the option to sell additional Series G
Preferred at a conversion price equal to the lesser of $2.25 or 115% of
the average of the volume-weighted average of all trades reported by
the NASDAQ over the five trading days immediately preceding the issue
date. The Series G Preferred is convertible into common stock shares initially by
dividing the gross proceeds by the weighted average conversion price of the Series
G Preferred sold, which conversion price is subject to adjustment. The
Series G Preferred is mandatorily redeemable 5 years from
September 18, 2001, has a 12% cumulative dividend and has certain
liquidation rights.

11



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Z-Tel Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2001, AT&T and the Company agreed to settle a lawsuit in which
the Company alleged that AT&T had received originating and terminating
access service from the Company and had unlawfully withheld access
charges for such services. In connection with that settlement, the
Company resolved the issues relating to charges for access services
rendered.
The Company entered into a switched access agreement setting forth
terms and conditions under which AT&T will purchase access services
from the Company in the future.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During June and July 2001, three separate
class action lawsuits were filed against the Company,
certain 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). Each of the lawsuits
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. Plaintiffs have asserted claims
against us and 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. As of
the filing of this quarterly report on Form 10-Q, only one
complaint has been served, and the time for filing an answer or other
pleading has not yet run. Further, certain class plaintiffs have
moved to consolidate the actions and be appointed lead plaintiffs.



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In August 2001, the Company sold 95 shares of Series G Preferred stock
for aggregate proceeds of $9.5 million, initially convertible
into common stock at a rate of $1.2274, subject to adjustment. The
Company has received the maximum amount of funding
in connection with the issuance of Series G Preferred Stock.

12



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##### Table of Contents






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

You should read the following discussion together with the condensed
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, 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 affect the Companys financial results are described in the
Companys Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 30, 2001.

OVERVIEW

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

Z-Line Home Edition is our principal service offering. Z-Line Home
Edition includes low-priced local and long distance (1+) residential
telephone services using a customers existing telephone number,
bundled with enhanced features, including caller identification, call
forwarding, three-way calling, speed calling, and remote access to long
distance calling through our Z-Line Anywhere access card service, the
full functionality of the Z-Line Features and, for an additional fee,
Internet access. We offer Z-Line Home Edition service, at least on an
initial test basis, in thirty-four states.

We intend to continue to pursue offering Z-Line Home Edition in
additional states as soon as favorable pricing and implementation rules
are imposed in those states. We have also developed other bundled
combinations of our services at varied price points in order to
stimulate and expand customer interest in our services. For example, we
have begun to offer, in seven states, a lower price version of Z-Line
Home Edition that includes fewer bundled long distance minutes and
features. Additional long distance minutes and features are being
offered separately for an additional monthly fee. We also have offered
to all of our Z-Line Home Edition subscribers the ability, through our
member-to-member program, to make unlimited long distance telephone
calls to other Z-Line Home Edition subscribers for an additional
monthly fee.

Z-Line Anywhere is our access card service that allows a customer to
make long-distance calls using our network from any phone simply by
dialing a local access or toll-free 1-800 number. No change in phone
service is required. Subscribers of Z-Line Anywhere also receive the
full functionality of our Z-Line Features. Z-Line Anywhere customers
are billed monthly in arrears, and the associated revenue is recognized
in the month of service. Z-Line Anywhere is available nationwide,
although we are not actively marketing the service.

Touch 1 Long Distance is our (1+) long distance product. Touch 1 Long
Distance is also available nationwide, although we are not actively
marketing the service.

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RESULTS OF OPERATIONS

The following is a discussion of significant changes in the results of
operations of the Company, which occurred in the quarter and six months
ended June 30, 2001 compared to the quarter and six months ended June
30, 2000. The following tables summarize the approximate changes in
selected operating items and include dollar changes, percentage changes
and percent of net sales to facilitate the discussions that follow.

|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |    |     |   
|------------------------------ | ----------------------------- | ----------------------------------------------------------------- | ---- | ---------------------------------- | ------ | ------ | ---- | ---------- | ----- | ------------------- | ---- | ----- | ------ | ---- | -- | ---- | ---- | -- | --- | -- | ---- | -- | --- | -- | --- | --
|                               |                               |                                                                   |      | Three Months Ended                 |        | Amount |      | Percentage |       |                     |      |      
|                               |                               |                                                                   |      | June 30,                           |        | Change |      | Change     |       |                     |      |       |        |      |    |     
|                               |                               |                                                                   |      |                                    |        | Fav/   |      | Fav/       |       | Percent of Revenues
|                               |                               |                                                                   |      | 2001                               |        | 2000   |      | (Unfav)    |       | (Unfav)             |      | 2001  |        | 2000
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |     
|                               |                               |                                                                   |      | (In thousands, except percentages)
|Revenues                       |                               | $                                                                 | 73.1 |                                    |        | $      | 40.2 |            |       | $                   | 32.9 |       |        |      | 82 | %    |      |    | 100 | %  |      |    | 100 | %  |    
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|Operating expenses:            |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               | Network operations            |                                                                   |      | 41.7                               |        |        |      | 25.1       |       |                     |      | (16.6 | )      |      |    | (66  | )    |    |     | 57 |      |    |     | 62 |    
|                               | Sales and marketing           |                                                                   |      | 8.9                                |        |        |      | 10.6       |       |                     |      | 1.7   |        |      |    | 16   |      |    |     | 12 |      |    |     | 26 |    
|                               | Research and development      |                                                                   |      | 2.5                                |        |        |      | 1.8        |       |                     |      | (0.7  | )      |      |    | (39  | )    |    |     | 3  |      |    |     | 4  |    
|                               | General and administrative    |                                                                   |      | 62.2                               |        |        |      | 20.9       |       |                     |      | (41.3 | )      |      |    | (198 | )    |    |     | 85 |      |    |     | 52 |    
|                               | Impairment of assets          |                                                                   |      | 59.2                               |        |        |      |           |       |                     |      | (59.2 | )      |      |    | (100 | )    |    |     | 81 |      |    |     | 0  |    
|                               | Depreciation and amortization |                                                                   |      | 6.5                                |        |        |      | 4.4        |       |                     |      | (2.1  | )      |      |    | (48  | )    |    |     | 9  |      |    |     | 11 |    
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               |                               | Total operating expenses                                          |      |                                    | 181.0  |        |      |            | 62.8  |                     |      |       | (118.2 | )    |    |      | (188 | )  |     |    | 248  |    |     |    | 156 |   
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               |                               | Operating loss                                                    |      |                                    | (107.9 | )      |      |            | (22.6 | )                   |      |       | (85.3  | )    |    |      | (377 | )  |     |    | (148 | )  |     |    | (56 | ) 
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|Nonoperating income (expense): |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               | Interest income               |                                                                   |      | 1.4                                |        |        |      | 0.4        |       |                     |      | 1.0   |        |      |    | 250  |      |    |     | 2  |      |    |     | 1  |    
|                               | Interest expense              |                                                                   |      | (1.2                               | )      |        |      | (0.8       | )     |                     |      | (0.4  | )      |      |    | 50   |      |    |     | (2 | )    |    |     | (2 | )  
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               |                               | Total nonoperating income (expense)                               |      |                                    | 0.2    |        |      |            | (0.4  | )                   |      |       | 0.6    |      |    |      | (150 | )  |     |    | 0    |    |     |    | (1  | ) 
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               |                               | Net loss                                                          |      |                                    | (107.7 | )      |      |            | (23.0 | )                   |      |       | (84.7  | )    |    |      | (368 | )  |     |    | (147 | )  |     |    | (57 | ) 
|                               |                               | Less mandatorily convertible redeemable
preferred stock dividends |      |                                    | (3.0   | )      |      |            |      |                     |      |       | (3.0   | )    |    |      | (100 | )  |     |    | (4   | )  |     |    | 0   |   
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               |                               | Net loss attributable to common stockholders                      |      | $                                  | (110.7 | )      |      | $          | (23.0 | )                   |      | $     | (87.7  | )    |    |      | (381 | )% |     |    | (151 | )% |     |    | (57 | )%
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   
|                               |                               | EBITDA                                                            |      | $                                  | (101.4 | )      |      | $          | (18.2 | )                   |      | $     | (83.2  | )    |    |      | (457 | )% |     |    | (139 | )% |     |    | (45 | )%
|                               |                               |                                                                   |      |                                    |        |        |      |            |       |                     |      |       |        |      |    |      |      |    |     |    |      |    |     |   

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|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |    |     |   
|------------------------------ | ----------------------------- | ----------------------------------------------------------------- | ----- | ---------------------------------- | ------ | ------ | ---- | ---------- | ----- | ------------------- | ---- | ----- | ------ | ---- | --- | ---- | ---- | -- | --- | -- | --- | -- | --- | -- | --- | --
|                               |                               |                                                                   |       | Six Months Ended                   |        | Amount |      | Percentage |       |                     |      |       |        |      |     |     
|                               |                               |                                                                   |       | June 30,                           |        | Change |      | Change     |       |                     |      |       |        |      |     |     
|                               |                               |                                                                   |       |                                    |        | Fav/   |      | Fav/       |       | Percent of Revenues
|                               |                               |                                                                   |       | 2001                               |        | 2000   |      | (Unfav)    |       | (Unfav)             |      | 2001  |        | 2000
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |     
|                               |                               |                                                                   |       | (In thousands, except percentages)
|Revenues                       |                               | $                                                                 | 148.2 |                                    |        | $      | 54.1 |            |       | $                   | 94.1 |       |        |      | 174 | %    |      |    | 100 | %  |     |    | 100 | % 
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|Operating expenses:            |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               | Network operations            |                                                                   |       | 85.0                               |        |        |      | 35.0       |       |                     |      | (50.0 | )      |      |     | (143 | )    |    |     | 57 |     |    |     | 65 |    
|                               | Sales and marketing           |                                                                   |       | 21.7                               |        |        |      | 17.4       |       |                     |      | (4.3  | )      |      |     | (25  | )    |    |     | 15 |     |    |     | 32 |    
|                               | Research and development      |                                                                   |       | 4.9                                |        |        |      | 3.1        |       |                     |      | (1.8  | )      |      |     | (58  | )    |    |     | 3  |     |    |     | 6  |    
|                               | General and administrative    |                                                                   |       | 92.4                               |        |        |      | 31.3       |       |                     |      | (61.1 | )      |      |     | (195 | )    |    |     | 63 |     |    |     | 57 |    
|                               | Impairment of assets          |                                                                   |       | 59.2                               |        |        |      |           |       |                     |      | (59.2 | )      |      |     | (100 | )    |    |     | 40 |     |    |     | 0  |    
|                               | Depreciation and amortization |                                                                   |       | 12.5                               |        |        |      | 6.5        |       |                     |      | (6.0  | )      |      |     | (92  | )    |    |     | 8  |     |    |     | 12 |    
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               |                               | Total operating expenses                                          |       |                                    | 275.7  |        |      |            | 93.3  |                     |      |       | (182.4 | )    |     |      | (195 | )  |     |    | 186 |    |     |    | 172 |   
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               |                               | Operating loss                                                    |       |                                    | (127.5 | )      |      |            | (39.2 | )                   |      |       | (88.3  | )    |     |      | (225 | )  |     |    | (86 | )  |     |    | (72 | ) 
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|Nonoperating income (expense): |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               | Interest income               |                                                                   |       | 4.3                                |        |        |      | 1.7        |       |                     |      | 2.6   |        |      |     | 153  |      |    |     | 3  |     |    |     | 3  |    
|                               | Interest expense              |                                                                   |       | (2.1                               | )      |        |      | (1.0       | )     |                     |      | (1.1  | )      |      |     | (110 | )    |    |     | (1 | )   |    |     | (2 | )  
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               |                               | Total nonoperating income (expense)                               |       |                                    | 2.2    |        |      |            | 0.7   |                     |      |       | 1.5    |      |     |      | 214  |    |     |    | 2   |    |     |    | 1   |   
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               |                               | Net loss                                                          |       |                                    | (125.3 | )      |      |            | (38.5 | )                   |      |       | (86.8  | )    |     |      | (225 | )  |     |    | (84 | )  |     |    | (71 | ) 
|                               |                               | Less mandatorily convertible redeemable
preferred stock dividends |       |                                    | (5.6   | )      |      |            |       |                     |      |       | (5.6   | )    |     |      | (100 | )  |     |    | (4  | )  |     |    | 0   |   
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               |                               | Net loss attributable to common stockholders                      |       | $                                  | (130.9 | )      |      | $          | (38.5 | )                   |      | $     | (92.4  | )    |     |      | (240 | )% |     |    | (88 | )% |     |    | (71 | )%
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   
|                               |                               | EBITDA                                                            |       | $                                  | (115.0 | )      |      | $          | (32.7 | )                   |      | $     | (82.3  | )    |     |      | (252 | )% |     |    | (78 | )% |     |    | (60 | )%
|                               |                               |                                                                   |       |                                    |        |        |      |            |       |                     |      |       |        |      |     |      |      |    |     |    |     |    |     |   

REVENUES

Revenues increased by $32.9 million to $73.1 million for the quarter
ended June 30, 2001, compared to $40.2 million for the same quarter in
the prior year. The increase is attributable to average Home Edition
subscriber lines of 340,000 for the quarter ended June 30, 2001,
compared to 129,000 for the same quarter in the prior year.

Revenues increased by $94.1 million to $148.2 million for the six
months ended June 30, 2001, compared to $54.1 million for the same
period in the prior year. The increase is attributable to average Home
Edition subscriber lines of 320,000 for the six months ended June 30,
2001, compared to 105,000 for the same period in the prior year.

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The following tables outline the approximate number of subscriber lines
for Z-Line Home Edition, Z-Line Anywhere and Touch 1 (1+) long distance
services:

|                                                        |  |               |         |               |  |  |         | 
|------------------------------------------------------- |  | ------------- | ------- | ------------- |  |  | ------- | 
|TYPE OF SERVICE                                         |  | June 30, 2001 |         | June 30, 2000
|                                                       
|Z-Line Home Edition                                     |  |               | 300,000 |               |  |  | 170,000 | 
|                                                       
|Z-Line Anywhere and Touch 1 (1+)
Long Distance Services |  |               | 210,000 |               |  |  | 301,500 | 

NETWORK OPERATIONS

Network operations expense primarily consists of fixed and variable
transmission expenses for interconnection agreements with incumbent
local exchange carriers (ILECs), service level agreements with
inter-exchange carriers (IXCs), and transmission services based on
tariff arrangements.

Network operations expense increased by $16.6 million to $41.7 million
for the quarter ended June 30, 2001, compared to $25.1 million for the
same quarter in the prior year. Our gross margin increased to 43.0% for
the quarter, compared to 37.4% for the same quarter in the prior year.

Network operations expense increased by $50.0 million to $85.0 million
for the six months ended June 30, 2001, compared to $35.0 million for
the same period in the prior year. Our gross margin increased to 42.6%
for the six months ended June 30, 2001 compared to 35.4% for the same period in the prior
year.

The increase in network operation expenses and improved margins
primarily is the result of an increase in subscribers.

SALES AND MARKETING

Sales and marketing expense primarily consists of telemarketing, direct
mail, brand awareness advertising, agent commissions and salaries and
benefits paid to employees engaged in sales marketing activities.

Sales and marketing expense decreased $1.7 million to $8.9 million for
the quarter ended June 30, 2001, compared to $10.6 million for the same
quarter in the prior year. In the quarter ended June 30, 2001, we
intensified our focus on sales and marketing channels with lower
acquisition costs per subscriber. This focus led to the elimination of
direct mail and certain independent agent programs and reduced
telemarketing hours through the closure of a call center and the sale
of two other call centers.

Sales and marketing expense increased $4.1 million to $21.6 million for
the six months ended June 30, 2001, compared to $17.5 million for the
same period in the prior year. The increase for the six months ended
June 30, 2001 is a result of marketing to more states in 2001 compared
to 2000. Although we are focused on lower acquisition costs, a
reduction of these costs was only partially realized in the second
quarter 2001.

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We will continue to build the overall awareness of our Z brand,
primarily through radio and billboard advertising, and pursue alliances
and ventures with other companies. This brand advertising and a focus
on partnering in future quarters should result in a continued lower
acquisition cost per subscriber in 2001.

RESEARCH AND DEVELOPMENT

Research and development expense consists primarily of salaries and
benefits paid to employees engaged in research and development
activities and outside third party development costs.

Research and development expense increased $0.8 million to $2.6 million
for the quarter ended June 30, 2001, compared to $1.8 million for the
same quarter in the prior year.

Research and development expense increased $1.8 million to $4.9 million
for the six months ended June 30, 2001, compared to $3.1 million for
the same period in the prior year.

The increase in research and development expense for the quarter and
six months ended June 30, 2001 compared to the same periods in the
prior year is a result of increased employees and outside professional
fees related to research and development.

In addition to assisting with improving operations, our research and
development personnel are working to develop speech recognition and
other new service offerings to provide additional functionality and
service enhancements to our primary service offering. Z-Tel expects to
continue to dedicate resources to research and development throughout
2001.

GENERAL AND ADMINISTRATIVE

Our general and administrative expense consists of employee salaries,
bad debt expense, billing and collection expense, occupancy costs, and
provisioning costs.

General and administrative expense increased
$41.3 million to $62.2 million for the quarter ended June 30, 2001, compared to $20.9 million
for the same quarter in the prior year.

General and administrative expense increased
$61.1 million to $92.4 million for the six months ended
June 30, 2001, compared to $31.3 million for the same period in the prior year.

The increase for the quarter and six months ended June 30, 2001 is the
result of a write-off of accounts receivable that
required the recording of an additional $29.9 million in bad debt
expense during the second quarter of 2001. The remaining increases
resulted from general and administrative expense necessary to support a
larger subscriber base. We continue to evaluate our operations for
efficiencies and our employee staffing requirements as they relate to
increased efficiency and expect to see reductions as a percentage of
revenue in the coming quarters. We expect our efforts to result in an
overall reduced general and administrative cost per subscriber.

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ASSET IMPAIRMENT CHARGE

We recorded a $59.2 million expense related to
impaired assets in the second quarter of 2001.

In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of,
management assesses on an ongoing basis if there has been impairment in
the carrying value of its long-lived assets. As a result of
managements decision in the second quarter to reduce telemarketing efforts, a majority of
the operations and assets of telemarketing centers acquired from Touch
1 have been either voluntarily closed or sold. On June 30, 2001 the telemarketing
centers sold accounted for approximately $1.0 million in property,
plant and equipment. For these assets, we received 270,000 shares of
preferred stock of the privately held acquiring Company and a note receivable of
approximately $0.5 million. The loss recorded on this transaction
equated to approximately $1.0 million.

As a result of the decision to reduce telemarketing efforts noted above
and the subsequent transactions, management performed an assessment of
the value of the intangible assets recorded in the Touch 1 acquisition. In the
second quarter 2001, it was determined that undiscounted future cash
flows over the remaining amortization period of certain intangible
assets indicated that the value assigned to the intangible asset might
not be recoverable. Therefore, the Company undertook an effort to
determine the amount of expense to be recorded relating to the
impairment.

The carrying value of the goodwill and identifiable
intangibles recorded on the books approximated
$61.8 million prior to the impairment analysis. We calculated the fair value of goodwill by performing a
discounted cash flow analysis related to the remaining assets acquired
in the Touch 1 purchase. As we determined that we would effectively
cease any telemarketing efforts in the future, the sole remaining
assets from the Touch 1 purchase were certain amounts of property,
plant and equipment and intangibles (consisting of customer lists and
goodwill) acquired in the Touch 1 transaction.
Assuming an attrition rate of 4.5% and a discount rate of 17.5% over an
18 month period, it was determined that the remaining operations
acquired from Touch 1 have a liquidation value which
approximates the
identifiable intangible assets associated with the carrying value of the customer lists acquired from Touch 1. At June 30,
2001, the carrying value of the identifiable intangible assets
associated with the customer lists was approximately $6.8
million. Therefore, we recorded a loss of $54.9 million, the difference
between the carrying value of all intangibles and the carrying value
of the customer lists.

We recorded an additional $4.3 million charge associated with the
impairment of assets, composed of $3.0 million relating to
unrealizable software
and development projects, $0.9 million of a worthless telemarketing
property and equipment, and $0.4 million of securities deemed to be worthless.

DEPRECIATION AND AMORTIZATION.

Depreciation and amortization expense increased $2.1 million to $6.5
million for the quarter ended June 30, 2001, compared to $4.4 million
for the same quarter in the prior year.

Depreciation and amortization expense increased $6.0 million to $12.5
million for the six months ended June 30, 2001, compared to $6.5
million for the same period in the prior year.

The increase in depreciation and amortization for the quarter and six
months ended June 30, 2001 is primarily due to higher levels of fixed
assets and capitalized software, as well as intangible assets related
to our purchase of Touch 1 in April 2000.

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INTEREST AND OTHER INCOME

Interest and other income includes late fees from subscriber and
carrier receivables, interest earned from our cash balances invested in
interest bearing accounts and any gains from the sale of investments or
securities.

Interest and other income increased $0.9 million to $1.4 million for
the quarter ended June 30, 2001, compared to $0.5 million for the same
quarter in the prior year.

Interest and other income increased $2.6 million to $4.3 million for
the six months ended June 30, 2001, compared to $1.7 million for the
same period in the prior year.

The increase for the quarter and six months ended June 30, 2001 was
primarily due to late fees charged on customer and carrier access
related receivables. This increase was partially offset by the lower
interest earned on cash investments as a result of lower cash balances
for the quarter and six months ended June 30, 2001 compared to the same
periods in the prior year.

INTEREST AND OTHER EXPENSE

Our interest expense is a result of the interest charged on our capital
leases, sale of receivables and our debt obligations.

Interest and other expense increased $0.4 million to $1.2 million for
the quarter ended June 30, 2001, compared to $0.8 million for the same
quarter in the prior year.

Interest and other expense increased $1.0 million to $2.1 million for
the six months ended June 30, 2001, compared to $1.1 million for the
same period in the prior year.

The increase for the quarter and six months ended June 30, 2001 is from
the assumption of debt from the Touch 1 acquisition and certain
expenses associated with the sale of our accounts receivable.

INCOME TAX EXPENSE

No provision or benefit for federal or state income taxes has been
recorded due to the recording of a full valuation allowance against the
net deferred tax asset for the quarters and six months ended June 30,
2001 and 2000.

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EBITDA

Many securities analysts use the measure of earnings before deducting
interest, taxes, depreciation and amortization, also commonly referred
to as EBITDA, as a way of evaluating our financial performance.
EBITDA is not a measure under generally accepted accounting principles,
is not meant to be a replacement for generally accepted accounting
principles and should not be considered an alternative to net income as
a measure of performance or to cash flows as a measure of liquidity. 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 negative EBITDA increased $83.1 million to
$101.4 million for the quarter ended June 30, 2001, compared to $18.3
million for the first quarter of 2000. Our negative EBITDA increased
$82.3 million to $115.0 million for the six months ended June 30, 2001,
compared to $32.7 million for the same period in the prior year.
We had $89.1 million of non-recurring non-cash charges in the second
quarter 2001. These charges
are composed of $59.2 million primarily relating to the
impairment of intangible assets and $29.9 million relating to a
non-recurring write-off of accounts receivable. Excluding these
charges,
negative EBITDA decreased $6.0 million to $12.3 million for
the quarter ended June 30, 2001 and decreased $6.9 million
to $25.8 million for the six months ended June 30,
2001. We
expect to achieve positive EBITDA on a monthly basis sometime during
the second half of 2001. We believe the attainment of positive EBITDA
will primarily arise from our strategic growth, which is focused on
improved operating efficiencies and lowered subscriber acquisition
costs.

LIQUIDITY AND CAPITAL RESOURCES

The competitive local telecommunications service business is
traditionally considered to be a capital intensive business owing to
the significant investments required in fiber optic communication
networks and the co-location of switches and transmission equipment in
incumbent local exchange carriers central offices. Although we will
continue our capital expenditures, we do not expect the growth of our
business will require the levels of capital investment in fiber optics
and switches that existed in historical telecommunications
facilities-based 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 penetration of our
target markets.

We have incurred accumulated losses since our inception as a result of
developing our business, research and development, building and
maintaining network infrastructure and technology, sales

20



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and promotion of our services, and administrative expenditures. At June
30, 2001, we had an accumulated deficit of $262.5 million and $9.7
million in cash and cash equivalents. We have funded our expenditures
primarily through operating revenues, private securities offerings, a
sale-leaseback credit facility, a receivables sale agreement, and an
initial public offering that raised net proceeds of $109.1 million.

In February 2000, we paid $14.4 million to extinguish the outstanding
CMB Capital, LLC capital lease obligation and purchase the related
assets. This was the repayment of transactions involving the
sale-leaseback of various furniture and equipment payable over four
years from the date of the transactions.

In July 2001, the we filed a Certificate of Designation authorizing the
issuance of 175 shares of Series G junior convertible preferred stock
(Series G Preferred). On July 2, 2001, the execution date of the
agreement, we issued warrants to purchase 3,000,000 shares of
common stock at an exercise price of $0.01 per share.
On July 5, 2001, we issued 80 shares of
Series G Preferred for aggregate proceeds of $8.0 million, initially
convertible into common stock at a conversion rate of $2.00 per share,
subject to adjustment. The Series G
Preferred agreement provides us with the option to sell additional
Series G preferred with a conversion price equal to the lesser of $2.25
or 115% of the average of the volume-weighted average of all trades
reported by the NASDAQ over the five trading days immediately preceding
the issue date. We
can receive up to a maximum aggregate value of $17.5 million under this
agreement. The Series G Preferred is convertible into common stock
shares initially by dividing the gross proceeds by the weighted average
conversion price of the Series G Preferred sold, which conversion price  is subject to adjustments. The Series G Preferred is
mandatorily redeemable 5 years from September 18, 2001, has a 12%
cumulative dividend and has certain liquidation rights.

In July 2001, we agreed to settle
a lawsuit with AT&T in which we alleged that AT&T had received
originating and terminating access service from us and had
unlawfully withheld access charges for such services. We
entered into a switched access agreement setting forth terms and
conditions under which AT&T will purchase access services from us in
the future.

In August 2001, we sold 95 shares of Series G Preferred stock
initially convertible into common stock at a price of $1.2274,
subject to adjustment, for aggregate proceeds of $9.5 million.
The Company has received the maximum amount of funding in connection
with the issuance of Series G Preferred.

Net cash used in operating activities improved by $19.4 million to
$22.7 million for the six months ended June 30, 2001, compared
to $42.1 million used for the same period in the prior year. The improvement
resulted from a reduction in payroll, sales and marketing and an
overall decrease in operating costs.

Included in our net cash used in operating activities for the quarter
ended June 30, 2001 was the sale of 80.1 million of receivables, for
proceeds of $57.7 million. At June 30, 2001, a net
receivable servicing asset of $8.5 million is included in accounts receivable
and approximately $4.4 million of advances on unbilled
receivables are included in accounts payable and accrued liabilities.
The costs relating to the agreement of $0.5 million is included in
interest and other expense.

Our cash used in investing activities decreased by
$10.9 million as a
result of capital expenditures of $9.3 million for the six months
ended June 30, 2001,
compared to $20.2 million in the same period of the
prior year. The remaining difference is the purchase of Touch 1 for
$9.0 million and the purchase of $1.0 million of securities in 2000. During
2000 our efforts were directed toward enhancing our network and billing infrastructure. Our focus in 2001 has
been to conserve capital and focus on profitability.

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We had payments on long-term debt and capital lease obligations
totaling $5.1 million for the quarter ended June 30, 2001. These
payments related to a $3.0 million balloon payment and $2.1 million
relating to other debt we assumed in the Touch 1 acquisition.
Our payments for the six months ended June 30, 2001 are substantially
less than the $21.3 million paid for the same period in the prior year
due to the extinguishment of our sale-leaseback facility. Our debt is
primarily related party with fixed interest rates that is payable in
monthly installments.

Our ongoing capital requirements will depend on several factors,
including market acceptance of our services, the amount of resources we
devote to investments in our networks, facilities, build-out of
additional enterprise management centers, services development and
brand promotions, the resources we devote to sales and marketing of our
services, and other factors. As growth dictates, we expect to make
strategic investments in technology and our network architecture in the
future.

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 efficient marketing channels such as our on-line
agent program which are expected to lower acquisition costs per
subscriber.

In the first quarter of 2001 we eliminated approximately 20% of our
workforce through a formal reduction in force, a hiring freeze, and
normal attrition. During the remainder of 2001, we will examine the
possibility of further reductions, consistent with our goals of slower
growth and our strategic focus on profitability. We expect the above
and other factors to result in the achievement of positive EBITDA on a
monthly basis and positive cash flow from operations during the second half of 2001. We believe that we have sufficient
funding to execute our current business plan; however, any acceleration
or change to the business plan may require additional equity or debt
financing which may not be available on attractive terms, or at all, or
may be dilutive.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The fair value of our investment portfolio or related income and our
long-term debt obligations would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due
mainly to the short-term or fixed nature of these types of items.

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Part II  Other Information




Item 1. Legal Proceedings

Proceedings 1 and 2 were previously reported in our Quarterly
Report on Form 10-Q for the quarterly period ending March 31, 2001.



|1. |  | Case Number 1:01CV00551; Z-Tel Communications, Inc. v. AT&T
Corp.; in the United States District Court for the District of
Columbia.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 15, 2001, we filed the captioned suit. AT&T filed an
answer and counterclaims. On July 20, 2001, AT&T
and we agreed to settle the lawsuit. In connection with that
settlement, we resolved the issues relating to charges for
access services we alleged were owed to us by AT&T and entered
into a switched access agreement setting forth terms and
conditions under which AT&T will purchase access services from
us in the future.



|2. |  | In March 2001, we informed John Hutchens, our former senior
vice president-chief financial officer, that we had commenced
a search that could result in his possible replacement as
chief financial officer. After engaging in discussions
regarding severance arrangements with Mr. Hutchens, we reached
terms on a severance agreement on June 12, 2001 that resulted
in Mr. Hutchens resignation of employment with us.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Grosinger v. Z-Tel Technologies, Inc. et al., Case No. 01 CV
5074; in the United States District Court for the Southern
District of New York (filed June 7, 2001).
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Brody v. Z-Tel Technologies, Inc. et al., in the United States
District Court for the Southern District of New York (filed
July 2, 2001).                      
|
| | Scholes v. Z-Tel Technologies, Inc. et al., Case No. 01 CV
6139; in the United States District Court for the Southern
District of New York (filed July 6, 2001)

On the respective dates referenced above, the captioned
lawsuits were filed against us, certain 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). Each of the captioned lawsuits 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 disclose 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. Plaintiffs have asserted claims against us and 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. As of the filing of
this quarterly report on Form 10-Q, only the Scholes complaint has been
served, and the time for filing an answer or other pleading has not yet
run. Further, certain class plaintiffs have moved to consolidate the
actions and be appointed lead plaintiffs.

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Item 4. Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Shareholders held on May 31, 2001,
the following proposals were adopted by the margins indicated:



|1. |  | To elect a Board of Directors to hold office until their
successors are elected and qualified:
|-- |  | ----------------------------------------------------------------------------------------------

|                      |  |                  |            |          |  |  |         | 
|--------------------- |  | ---------------- | ---------- | -------- |  |  | ------- | 
|                      |  | Number of Shares
|Nominee               |  | For              |            | Withheld
|Laurence S. Grafstein |  |                  | 33,183,595 |          |  |  | 461,912 | 
|Charles W. McDonough  |  |                  | 33,041,677 |          |  |  | 603,830 | 
|Mark S. Feighner      |  |                  | 33,184,395 |          |  |  | 461,112 | 



|2. |  | Amendment to our Amended and Restated Certificate of
Incorporation to require that action of the stockholders of
the company be taken at a meeting thereof and not by written
consent:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For:     |  |  | 32,350,681 | 
|Against: |  |  | 1,234,130  | 
|Abstain: |  |  | 60,696     | 



|3. |  | Amendment to our 2000 Equity Participation Plan to increase
the number of shares issuable pursuant to awards made
thereunder:
|-- |  | -----------------------------------------------------------------------------------------------------------------------------

|                 |  |  |            | 
|---------------- |  |  | ---------- | 
|For:             |  |  | 28,351,948 | 
|Against:         |  |  | 1,272,524  | 
|Abstain:         |  |  | 59,237     | 
|Broker Non-Vote: |  |  | 3,961,798  | 




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



|(a) |  | Exhibits.
|--- |  | ---------

The following exhibits are filed as part of this report:

|        |  |                                                                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                       
|Number  |  | Description                                                                                                                                                                                                           
|       
|2.1     |  | Agreement and Plan of Merger dated April 10, 2000 by and among
Z-Tel Technologies, Inc., Tiger Acquisition Subsidiary, Inc.,
Touch 1 Communications, Inc., and certain shareholders of
Touch 1 Communications, Inc.(A)
|       
|3.1     |  | Amended and Restated Certificate of Incorporation of Z-Tel, as amended                                                                                                                                                
|       
|3.2     |  | Amended and Restated Bylaws of Z-Tel(B)                                                                                                                                                                               

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|     |  |                                                                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Form of Common Stock Certificate(B)                                                                                                                                                                              
|    
|4.2  |  | See Exhibits 3.1 and 3.2 of this Form 10-Q for provisions of
the Amended and Restated Certificate of Incorporation, as
amended, and the Bylaws of Z-Tel defining rights of security
holders                      
|    
|4.3  |  | Stock Purchase Agreement, dated July 6, 2000, by and between
the Registrant and the various purchasers of the Registrants
Series D Convertible Preferred Stock(C)                                               
|    
|4.4  |  | Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions relating to the
Registrants Series D Convertible Preferred Stock(C)                                  
|    
|4.5  |  | Form of Registration Rights Agreement by and between the
Registrant and each of the purchasers of the Registrants
Series D Convertible Preferred Stock(C)                                                       
|    
|4.6  |  | Form of Warrant for the purchase of shares of common stock of
the Registrant by each of the purchasers of the Registrants
Series D Convertible Preferred Stock(C)                                               
|    
|4.7  |  | Stock and Warrant Purchase Agreement, dated October 19, 2000,
by and among the Registrant 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 Series of
Preferred Stock, as amended
|    
|4.9  |  | Registration Rights Agreement between and among the Registrant
and The 1818 Fund III, L.P.(D)                                                                                                                    
|    
|4.10 |  | Warrant for the purchase of shares of common stock of the
Registrant by The 1818 Fund III, L.P.(D)                                                                                                               
|    
|4.11 |  | Certificate of Designation of Series F Junior Participating
Preferred Stock(G)                                                                                                                                   
|    
|4.12 |  | Rights Agreement dated as of February 19, 2001 between Z-Tel
Technologies, Inc. and American Stock Transfer & Trust
Company, as Rights Agent, as amended July 2, 2001                                            
|    
|4.13 |  | Stock and Warrant Purchase Agreement, dated as of July 2,
2001, by and between Z-Tel, D. Gregory Smith, and others
(incorporated by reference to Exhibit 1 to Amendment No. 1 of
the Schedule 13D                

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##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | filed July 12, 2001 with respect to Z-Tels common
stock by, among other persons, The 1818 Fund III,
L.P.)                                                                                                                                                                                                                                                                                                                                                                     
|      
|4.14   |  | Warrant for the Purchase of Shares of Common Stock of Z-Tel,
dated as of July 2, 2001 (incorporated by reference to Exhibit
2 to Amendment No. 1 of the Schedule 13D filed July 12, 2001
with respect to Z-Tels common stock by, among other persons,
The 1818 Fund III, L.P.)                                                                                                                                                                                                
|      
|4.15   |  | Certificate of Designation for the Series G Preferred Stock
(incorporated by reference to Exhibit 3 to Amendment No. 1 of
the Schedule 13D filed July 12, 2001 with respect to Z-Tels
common stock by, among other persons, The 1818 Fund III, L.P.)                                                                                                                                                                                                                          
|      
|4.16   |  | Backup Purchase Agreement, dated as of July 2, 2001, by and
among Z-Tel Communications, Inc., a Delaware corporation and a
wholly owned subsidiary of Z-Tel, Touch 1 Communications,
Inc., an Alabama corporation and a wholly owned subsidiary of
Z-Tel, D. Gregory Smith and others (incorporated by reference
to Exhibit 4 to Amendment No. 1 of the Schedule 13D filed July
12, 2001 with respect to Z-Tels common stock by, among other
persons, The 1818 Fund III, L.P.)
|      
|4.17   |  | Additional Investor Registration Rights Agreement, dated as of
July 2, 2001, between Z-Tel, D. Gregory Smith and others
(incorporated by reference to Exhibit 5 to the Schedule 13D
filed July 24, 2001 with respect to Z-Tels common stock by,
among other persons, D. Gregory Smith)                                                                                                                                                                                        
|      
|4.18   |  | Voting Agreement, dated as of June 29, 2001, between Z-Tel and
certain stockholders of Z-Tel (incorporated by reference to
Exhibit 5 to Amendment No. 1 of the Schedule 13D filed July
12, 2001 with respect to Z-Tels common stock by, among other
persons, The 1818 Fund III, L.P.)                                                                                                                                                                                         
|      
|4.19   |  | Employee Stock Restriction Agreement, dated September 1, 1999,
by and between the Company and D. Gregory Smith (incorporated
by reference to Exhibit 7 to the Schedule 13D filed July 24,
2001 with respect to Z-Tels common stock by, among other
persons, D. Gregory Smith)                                                                                                                                                                                                 
|      
|10.1.1 |  | Stockholders Agreement dated October 8, 1999, between and
among the Company, BA Capital Corporation, Sewanee Partners
II, L.P., Gramercy Z-Tel LLC and the other parties set forth
therein(B)                                                                                                                                                                                                                                                                                 

26



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##### Table of Contents



|       |  |                                                                                                                                                                                                                                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1.2 |  | Employment Agreement dated July 1998 between the Company and
D. Gregory Smith(B)                                                                                                                                                 
|      
|10.1.3 |  | Employment Agreement dated September 1999 between the Company
and John Hutchens(B)                                                                                                                                               
|      
|10.1.4 |  | Employment Agreement dated August 1998 between the Company and
Charles W. McDonough(B)                                                                                                                                           
|      
|10.1.5 |  | Employment Agreement dated August 1998 between the Company and
J. Bryan Bunting(B)                                                                                                                                               
|      
|10.1.6 |  | Employment Agreement dated July 1998 between the Company and
James A. Kitchen(B)                                                                                                                                                 
|      
|10.1.7 |  | Investment Agreement dated March 15, 1999 between the Company
and CMB Capital LLC(B)                                                                                                                                             
|      
|10.2.1 |  | 1998 Equity Participation Plan(B)                                                                                                                                                                                                
|      
|10.2.2 |  | 2000 Equity Participation Plan(F)                                                                                                                                                                                                
|      
|10.3   |  | Form of Employment Agreement for certain key Touch 1
employees, including James F. Corman, President of Touch 1(A)                                                                                                               
|      
|10.4   |  | Receivables Sales Agreement dated as of July 27, 2000 by and
between Z-Tel Communications, Inc., as seller and subservicer,
Touch 1 Communications, Inc., as seller and subservicer, and
RFC Capital Corporation, as purchaser(C)
|      
|10.5   |  | Form of Indemnification Agreement for executive officers and
directors of the Company(G)                                                                                                                                         
|      
|10.6   |  | Loan and Guaranty Agreement dated January 11, 2001 between the
Company and James A. Kitchen(G)                                                                                                                                   
|      
|10.7   |  | Secured Promissory Note dated January 11, 2001 delivered by
James A. Kitchen to the Company(G)                                                                                                                                   
|      
|10.8   |  | Pledge and Security Agreement dated January 11, 2001 between
James A. Kitchen and the Company(G)                                                                                                                                 
|      
|10.9   |  | Promissory Note, dated September 10, 1999, between Touch 1
Communications, Inc. and Corman Elegre Capital(G)                                                                                                                     
|      
|10.10  |  | Promissory Note, dated May 11, 1999, between Touch 1
Communications, Inc. and Corman Elegre Capital(G)                                                                                                                           

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##### Table of Contents



|      |  |                                                                                                                              
|----- |  | -----------------------------------------------------------------------------------------------------------------------------
|10.11 |  | Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and William F. Corman (First Revocable
Trust)(G)
|     
|10.12 |  | Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and James F. Corman(G)                          



---

|(A) |  | Incorporated by reference to the correspondingly
numbered exhibit to the Registrants Current Report
on Form 8-K filed April 28, 2000.                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | Incorporated by reference to the correspondingly
numbered exhibit to the Registrants Registration
Statement on Form S-1 (File No. 333-89063),
originally filed October 14, 1999, as amended and as
effective December 14, 1999.
|   
|(C) |  | Incorporated by reference to the correspondingly
numbered exhibits to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ending
June 30, 2000, filed on August 14, 2000.                                   
|   
|(D) |  | Incorporated by reference to the correspondingly
numbered exhibits to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ending
September 30, 2000, filed on November 14, 2000.                            
|   
|(E) |  | Incorporated by reference to Exhibit 4.1 to the
Registrants Form 8-A Registration Statement filed
February 21, 2001.                                                                                                           
|   
|(F) |  | Incorporated by reference to Appendix B to the
Registrants Preliminary Proxy Statement filed on
April 14, 2000.                                                                                                                
|   
|(G) |  | Incorporated by reference to the correspondingly
numbered exhibits to the Registrants Annual Report
on Form 10-K for the annual period ending December
31, 2000, filed on March 30, 2001.                                      



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



| |      
| | -----
| | None.

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Z-TEL TECHNOLOGIES, INC.




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, Registrants principal financial officer, thereunto duly
authorized.

|                      |  |                         |  |                                                                   
|--------------------- |  | ----------------------- |  | ------------------------------------------------------------------
|                      |  | Z-TEL TECHNOLOGIES, INC
|                      |  | (Registrant)           
|                     
|Date: August 13, 2001 |  | By:                     |  | /s/ Horace J. Davis, III                                          
|                      |  |                         |  |                                                                   
|                      |  |                         |  | Horace J. Davis, III                                              
|                      |  |                         |  | Senior Vice President-Chief Financial Officer                     
|                      |  |                         |  | (Authorized officer of Registrant and
principal financial officer)

29