##### 



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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[x]  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|     |  | FOR THE PERIOD ENDED MARCH 31, 2002                                                     
|    
|     |  | OR                                                                                      
|    
|[  ] |  | 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 or other jurisdiction of |  | (I.R.S. Employer      
|incorporation or organization)  |  | Identification Number)

601 South Harbour Island Boulevard, Suite 220
Tampa, Florida 33602
(813) 273-6261(Address, including zip code, and
telephone number including area code, of
Registrants principal executive offices)

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

Securities registered pursuant to Section 12(g) of the Act: Common
Stock, par value $.01 per share, preferred stock purchase rights

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

Yes[x]   No[  ]

The number of shares of the Registrants Common Stock outstanding as of
May 13, 2002 was approximately 35,020,305.





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##### 



TABLE OF CONTENTS

|                             |                                                                                               |                                                                                                      |    |    |   | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | -- | -- | - | 
|PART I.Financial Information |                                                                                               |                                                                                                      |    |   
|                             | Item 1. Financial Statements                                                                  |                                                                                                      |    |    |  
|                             |                                                                                               | Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001                                  |    |    | 3 | 
|                             |                                                                                               | Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001             |    |    | 4 | 
|                             |                                                                                               | Consolidated
Statement of Changes in Stockholders Deficit for the three months ended March
31, 2002 |    |    | 5 | 
|                             |                                                                                               | Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001             |    |    | 6 | 
|                             |                                                                                               | Notes to Consolidated Financial Statements                                                           |    |    | 7 | 
|                             | Item 2.
Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                                                                      |    | 10 |  
|                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                      |    | 14 |  
|PART II.                     |                                                                                               |                                                                                                      |    |   
|                             | Item 1. Legal Proceedings                                                                     |                                                                                                      |    | 16 |  
|                             | Item 2.
Changes in Securities and Use of Proceeds                                             |                                                                                                      |    | 16 |  
|                             | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                      |    | 17 |  
|Signatures                   |                                                                                               |                                                                                                      | 20 |   

2



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |          |         |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------------------------------------------------------------------------- | -------- | --------- | ------- | ------------ | -------- | ------- | ------- | 
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          | March 31, |         | December 31,
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          | 2002      |         | 2001        
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |             
|Assets                                                                                                                                                                                    |                                                                                                                                                           | (Unaudited)                 |                                                                                                 |          |           |        
|Current assets:                                                                                                                                                                           |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          | Cash and cash equivalents                                                                                                                                 |                             | $                                                                                               | 12,954   |           |         | $            | 18,892   |        
|                                                                                                                                                                                          | Accounts receivable, net of allowance for doubtful
accounts of $18,571 and $12,544                                                                        |                             |                                                                                                 | 23,227   |           |         |              | 27,042   |        
|                                                                                                                                                                                          | Prepaid expenses and other current assets                                                                                                                 |                             |                                                                                                 | 5,115    |           |         |              | 3,961    |        
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          |                                                                                                                                                           | Total current assets        |                                                                                                 |          | 41,296    |         |              |          | 49,895  |        
|                                                                                                                                                                                         
|Property and equipment, net                                                                                                                                                               |                                                                                                                                                           |                             | 56,585                                                                                          |          |           |         | 56,231       |         
|Intangible assets, net                                                                                                                                                                    |                                                                                                                                                           |                             | 5,487                                                                                           |          |           |         | 5,945        |         
|Other assets                                                                                                                                                                              |                                                                                                                                                           |                             | 7,412                                                                                           |          |           |         | 4,666        |         
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          |                                                                                                                                                           |                             | Total assets                                                                                    |          | $         | 110,780 |              |          | $       | 116,737 | 
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|Liabilities, Mandatorily Redeemable Convertible Preferred
Stock and Stockholders Deficit
Current liabilities:                                                                            |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          | Accounts payable and accrued liabilities                                                                                                                  |                             | $                                                                                               | 47,091   |           |         | $            | 49,622   |        
|                                                                                                                                                                                          | Deferred revenue                                                                                                                                          |                             |                                                                                                 | 6,178    |           |         |              | 5,951    |        
|                                                                                                                                                                                          | Current portion of long-term debt
and capital lease obligations                                                                                           |                             |                                                                                                 | 6,168    |           |         |              | 6,305    |        
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          |                                                                                                                                                           | Total current liabilities   |                                                                                                 |          | 59,437    |         |              |          | 61,878  |        
|                                                                                                                                                                                         
|Deferred revenue                                                                                                                                                                          |                                                                                                                                                           |                             | 6,097                                                                                           |          |           |         |             |         
|Long-term debt and capital lease obligations                                                                                                                                              |                                                                                                                                                           |                             | 8,007                                                                                           |          |           |         | 9,461        |         
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          |                                                                                                                                                           |                             | Total liabilities                                                                               |          |           | 73,541  |              |          |         | 71,339  | 
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|Mandatorily redeemable convertible preferred stock, $.01 par value;
50,000,000 shares authorized; 8,855,089 issued and outstanding
(aggregate liquidation value of $138,180 and $135,298) |                                                                                                                                                           |                             | 116,442                                                                                         |          |           |         | 112,570      |         
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|Stockholders deficit:                                                                                                                                                                    |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          | Common stock, $.01 par value; 150,000,000
shares authorized; 35,361,855 and 34,341,855 shares issued;
35,020,305 and 34,000,305 outstanding, respectively |                             |                                                                                                 | 354      |           |         |              | 343      |        
|                                                                                                                                                                                          | Notes receivable from stockholders                                                                                                                        |                             |                                                                                                 | (1,589   | )         |         |              | (1,589   | )      
|                                                                                                                                                                                          | Unearned stock compensation                                                                                                                               |                             |                                                                                                 | (89      | )         |         |              | (122     | )      
|                                                                                                                                                                                          | Additional paid-in capital                                                                                                                                |                             |                                                                                                 | 216,314  |           |         |              | 217,782  |        
|                                                                                                                                                                                          | Accumulated deficit                                                                                                                                       |                             |                                                                                                 | (293,805 | )         |         |              | (283,198 | )      
|                                                                                                                                                                                          | Treasury stock, 341,550 shares at cost                                                                                                                    |                             |                                                                                                 | (388     | )         |         |              | (388     | )      
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          |                                                                                                                                                           | Total stockholders deficit |                                                                                                 |          | (79,203   | )       |              |          | (67,172 | )      
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         
|                                                                                                                                                                                          |                                                                                                                                                           |                             | Total liabilities, mandatorily redeemable convertible preferred
stock and stockholders deficit |          | $         | 110,780 |              |          | $       | 116,737 | 
|                                                                                                                                                                                          |                                                                                                                                                           |                             |                                                                                                 |          |           |         |              |         

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

3



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

|                                           |                               |                                                                                 |            |                    |         |      |            |        |         |  
|------------------------------------------ | ----------------------------- | ------------------------------------------------------------------------------- | ---------- | ------------------ | ------- | ---- | ---------- | ------ | ------- | -
|                                           |                               |                                                                                 |            | Three Months Ended
|                                           |                               |                                                                                 |            | March 31,         
|                                           |                               |                                                                                 |            |                   
|                                           |                               |                                                                                 |            | 2002               |         | 2001
|                                           |                               |                                                                                 |            |                    |         |     
|Revenues                                   |                               | $                                                                               | 57,269     |                    |         | $    | 75,044     |       
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|Operating expenses:                        |                               |                                                                                 |            |                    |         |      |            |       
|                                           | Network operations            |                                                                                 |            | 27,243             |         |      |            | 43,302 |        
|                                           | Sales and marketing           |                                                                                 |            | 4,759              |         |      |            | 12,761 |        
|                                           | General and administrative    |                                                                                 |            | 29,842             |         |      |            | 32,570 |        
|                                           | Wholesale development costs   |                                                                                 |            | 1,018              |         |      |            |       |        
|                                           | Depreciation and amortization |                                                                                 |            | 5,579              |         |      |            | 6,041  |        
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|                                           |                               | Total operating expenses                                                        |            |                    | 68,441  |      |            |        | 94,674  |  
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|                                           |                               | Operating loss                                                                  |            |                    | (11,172 | )    |            |        | (19,630 | )
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|Nonoperating income:                       |                               |                                                                                 |            |                    |         |      |            |       
|                                           | Interest and other income     |                                                                                 |            | 1,177              |         |      |            | 2,918  |        
|                                           | Interest and other expense    |                                                                                 |            | (612               | )       |      |            | (868   | )      
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|                                           |                               | Total nonoperating income                                                       |            |                    | 565     |      |            |        | 2,050   |  
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|                                           |                               | Net loss                                                                        |            |                    | (10,607 | )    |            |        | (17,580 | )
|                                           |                               | Less mandatorily redeemable convertible
preferred stock dividends and accretion |            |                    | (3,872  | )    |            |        | (2,544  | )
|                                           |                               | Less deemed dividend related to beneficial
conversion feature                   |            |                    | (46     | )    |            |        |        |  
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|                                           |                               | Net loss attributable to common stockholders                                    |            | $                  | (14,525 | )    |            | $      | (20,124 | )
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|Weighted average common shares outstanding |                               |                                                                                 | 34,307,194 |                    |         |      | 33,790,809 |       
|                                           |                               |                                                                                 |            |                    |         |      |            |       
|Basic and diluted net loss per share       |                               | $                                                                               | (.42       | )                  |         | $    | (.60       | )     
|                                           |                               |                                                                                 |            |                    |         |      |            |       

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

4



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT
(In thousands, except share data)
(Unaudited)



|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |       |      |   |  |   |         |   |  |   |          |   |  |   |      |  
|-------------------------------------------------------------------------- |  | ------------ | ---------- | ---------------- |  | ------------ | --- | ------------ |  | ----------- | ------ | -------- |  | ----- | ---- | - |  | - | ------- | - |  | - | -------- | - |  | - | ---- | -
|                                                                           |  | Common Stock |            | Notes Receivable |  | Unearned     |     | Additional   |  |             |        |          |  |       |      |  
|                                                                           |  |              |            | from             |  | Stock        |     | Paid-In      |  | Accumulated |        | Treasury
|                                                                           |  | Shares       |            | Par Value        |  | Stockholders |     | Compensation |  | Capital     |        | Deficit  |  | Stock
|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |      
|Balance, December 31, 2001                                                 |  |              | 34,000,305 |                  |  | $            | 343 |              |  | $           | (1,589 | )        |  | $     | (122 | ) |  | $ | 217,782 |   |  | $ | (283,198 | ) |  | $ | (388 | )
|Issuance of common stock                                                   |  |              | 1,000,000  |                  |  |              | 10  |              |  |             |        |          |  |       |      |   |  |   | 2,320   |   |  |   |          |   |  |   |      |  
|Vesting of stock options granted below
intrinsic value                     |  |              |            |                  |  |              |     |              |  |             |        |          |  |       | 33   |   |  |   |         |   |  |   |          |   |  |   |      |  
|Grant
of common stock                                                      |  |              | 20,000     |                  |  |              | 1   |              |  |             |        |          |  |       |      |   |  |   | 84      |   |  |   |          |   |  |   |      |  
|Mandatorily redeemable convertible
preferred stock dividends and accretion |  |              |            |                  |  |              |     |              |  |             |        |          |  |       |      |   |  |   | (3,872  | ) |  |   |          |   |  |   |      |  
|Net loss                                                                   |  |              |            |                  |  |              |     |              |  |             |        |          |  |       |      |   |  |   |         |   |  |   | (10,607  | ) |  |   |      |  
|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |       |      |   |  |   |         |   |  |   |          |   |  |   |      |  
|Balance, March 31, 2002                                                    |  |              | 35,020,305 |                  |  | $            | 354 |              |  | $           | (1,589 | )        |  | $     | (89  | ) |  | $ | 216,314 |   |  | $ | (293,805 | ) |  | $ | (388 | )
|                                                                           |  |              |            |                  |  |              |     |              |  |             |        |          |  |       |      |   |  |   |         |   |  |   |          |   |  |   |      |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                           |  |               |         |  
|-------------------------------------------------------------------------- |  | ------------- | ------- | -
|                                                                           |  | Total        
|                                                                           |  | Stockholders'
|                                                                           |  | Deficit      
|                                                                           |  |              
|Balance, December 31, 2001                                                 |  | $             | (67,172 | )
|Issuance of common stock                                                   |  |               | 2,330   |  
|Vesting of stock options granted below
intrinsic value                     |  |               | 33      |  
|Grant
of common stock                                                      |  |               | 85      |  
|Mandatorily redeemable convertible
preferred stock dividends and accretion |  |               | (3,872  | )
|Net loss                                                                   |  |               | (10,607 | )
|                                                                           |  |               |         |  
|Balance, March 31, 2002                                                    |  | $             | (79,203 | )
|                                                                           |  |               |         |  

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

5



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Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |        |        |        |  
|--------------------------------------------------------------------------- | --------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ------- | ------ | ------ | ------ | -
|                                                                            |                                               |                                                                 |                                                     |        | Three Months Ended
|                                                                            |                                               |                                                                 |                                                     |        | March 31,         
|                                                                            |                                               |                                                                 |                                                     |        |                   
|                                                                            |                                               |                                                                 |                                                     |        | 2002               |        | 2001   
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |        
|Cash flows from operating activities:                                       |                                               |                                                                 |                                                     |        |                    |        |         |       
|Net loss                                                                    |                                               | $                                                               | (10,607                                             | )      |                    | $      | (17,580 | )     
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            | Depreciation and amortization                 |                                                                 |                                                     | 5,579  |                    |        |         | 6,041  |       
|                                                                            | Provision for bad debts                       |                                                                 |                                                     | 7,068  |                    |        |         | 6,836  |       
|                                                                            | Expense charged for granting of stock options |                                                                 |                                                     | 118    |                    |        |         | 83     |       
|                                                                            | Change in operating assets and liabilities:   |                                                                 |                                                     |        |                    |        |         |        |       
|                                                                            |                                               | Increase in accounts receivable                                 |                                                     |        | (3,253             | )      |         |        | (9,929 | )     
|                                                                            |                                               | Increase in prepaid expenses                                    |                                                     |        | (1,154             | )      |         |        | (628   | )     
|                                                                            |                                               | Increase in other assets                                        |                                                     |        | (416               | )      |         |        | (5,087 | )     
|                                                                            |                                               | Increase (decrease) in accounts payable and accrued liabilities |                                                     |        | (2,531             | )      |         |        | 13,077 |       
|                                                                            |                                               | Increase in deferred revenue                                    |                                                     |        | 6,324              |        |         |        | 559    |       
|                                                                            |                                               | Other                                                           |                                                     |        |                   |        |         |        | 78     |       
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            |                                               |                                                                 | Total adjustments                                   |        |                    | 11,735 |         |        |        | 11,030 |  
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            |                                               |                                                                 | Net
cash provided by (used in) operating activities |        |                    | 1,128  |         |        |        | (6,550 | )
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|Cash flows from investing activities:                                       |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            | Proceeds from note receivable                 |                                                                 |                                                     |       |                    |        |         | 7      |       
|                                                                            | Issuance of note receivable                   |                                                                 |                                                     |       |                    |        |         | (100   | )     
|                                                                            | Purchases of property and equipment           |                                                                 |                                                     | (5,475 | )                  |        |         | (7,460 | )     
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            |                                               |                                                                 | Net cash used in investing activities               |        |                    | (5,475 | )       |        |        | (7,553 | )
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|Cash flows from financing activities:                                       |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            | Proceeds from exercise of stock options       |                                                                 |                                                     |       |                    |        |         | 118    |       
|                                                                            | Payments on long-term debt obligations        |                                                                 |                                                     | (1,591 | )                  |        |         | (1,078 | )     
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|                                                                            |                                               |                                                                 | Net cash used in financing activities               |        |                    | (1,591 | )       |        |        | (960   | )
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|Net decrease in cash and cash equivalents                                   |                                               |                                                                 | (5,938                                              | )      |                    |        | (15,063 | )     
|Cash and cash equivalents, beginning of period                              |                                               |                                                                 | 18,892                                              |        |                    |        | 46,650  |       
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       
|Cash and cash equivalents, end of period                                    |                                               | $                                                               | 12,954                                              |        |                    | $      | 31,587  |       
|                                                                            |                                               |                                                                 |                                                     |        |                    |        |         |       

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

6



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All tables are in thousands, except for share and per share data)



|1. |  | NATURE OF BUSINESS
|-- |  | ------------------



| |  |  | Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Z-Tel is an emerging provider of advanced, integrated telecommunications
services targeted to residential and small business 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-LineHOME service in thirty-eight states. Z-Tel actively markets Z-Line
HOME in ten states. Z-Tel also provides long-distance telecommunications
services to customers nationally.
|
| |  |  | Z-Tel introduced its wholesale services during the first quarter of 2002.
This service provides other companies with the opportunity to provide
local, long-distance and enchanced telephone service to residential and
small business customers by utilizing Z-Tels telephone exchange
services, infrastructure and
back-office operations.                                                                                                                                                                                                     



|2. |  | BASIS OF PRESENTATION
|-- |  | ---------------------



| |  |  | The accompanying unaudited 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 for complete financial statements as required by accounting
principles generally accepted
in the United States of America. The interim
unaudited financial statements should be read in conjunction with the
audited financial statements of the Company as of and for the year ended
December 31, 2001, 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 months
ended March 31, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Certain amounts in the March 31, 2001 consolidated statement of
operations have been reclassified to conform to the March 31, 2002
presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|3. |  | ACCOUNTS RECEIVABLE AGREEMENT
|-- |  | -----------------------------



| |  |  | In July 2000, the Company entered into an accounts receivable agreement
with RFC Capital Corporation, a division of Textron, Inc. (RFC),
providing for the sale of certain of the Companys accounts receivable to
RFC. RFC has agreed to purchase up to $25.0 million of the Companys
accounts receivable. In July 2001, the Company extended its agreement with
RFC under substantially similar terms for an additional year. The RFC
agreement, although renewable for one-year terms, contractually terminates
in July 2002. The purchase of the receivables is at the option of RFC and
they utilize selection criteria to determine which receivables will be
purchased. During first quarter 2002, the Company sold receivables to
RFC at a 32% and 23% discount;
this rate is negotiable and may change according to collection experience.
The collection percentage for receivables sold to RFC has been 83% since the
inception of the agreement. The Company receives an additional payment from
RFC for servicing the assets in an amount equal to every dollar collected
over the advance rate, less certain fees. The accounts receivable agreement
does not have a minimum receivable sales requirement.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Z-Tel has sold approximately $37.6 million of receivables to RFC, for net
proceeds of approximately $28.1 million, during the three months ended March
31, 2002. A net receivable servicing asset of approximately $14.6 million
is included in the accounts receivable balance at March 31, 2002. The
Company recorded costs related to the agreement of approximately $0.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

7



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)
(All tables are in thousands, except for share and per share data)



| |  |  | million for the three months ended March 31, 2002. Included in accounts
payable and accrued liabilities are advances for unbilled receivables in
the amount of $4.2 million at March 31, 2002. Z-Tel is responsible for the
continued servicing of the receivables sold.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | WHOLESALE SERVICES
|-- |  | ------------------



| |  |  | On March 20, 2002, the Company entered into a 48-month agreement with MCI
WORLDCOM Communications, Inc. (MCI) for the provision of wholesale
telephone exchange services, ancillary services and a technology license.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under the terms of the agreement, MCI will pay the Company a maximum of $50
million related to the use of our network in the form of a
technology license fee. Cash flows related to the license will be paid based
on the number of MCI customers on the Companys network, as defined in the
contract, and are subject to monthly minimum amounts. In addition, MCI
will pay for services provided through usage-based fees according to
certain per line and per minute calculations defined in the agreement and
MCI will also pay fees to the Company for providing telephone exchange services, payroll costs and
certain vendor fees. The Company is the primary obligor for all costs
incurred under this agreement.
|
| |  |  | As of March 31, 2002, MCI had paid the Company $6.1 million, in connection
with this agreement. This amount is included in long-term deferred revenue
and will be recognized over the 48-month term of the agreement. Included
in this amount is $3.7 million that applies toward the $50 million maximum
license fee.                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | The Company expects to recognize the $50 million license fee, and amounts
received in advance of the contract, on a straight-line basis over the
four-year contract period beginning in April 2002. In connection with the
agreement, the Company issued MCI one million unregistered shares of our
common stock at a price of $2.33, the market price of the Companys stock
at the date of the agreement. As a result of this transaction an
asset totaling $2.3 million is included in other non-current assets and will be amortized on a
straight-line basis as a reduction to revenue over the 48-month term of the
agreement. Monthly usage-based charges and cost reimbursements will be
recognized when earned.    
|
| |  |  | As of March 31, 2002, no revenues had been recorded in connection with this
contract. The Company expensed the costs related to our wholesale business
as incurred, with the exception of certain internal-use software
development costs that qualified for capitalization. As of March 31, 2002,
the Company incurred approximately $1.0 million of period costs, which are
shown as wholesale development costs in the Statement of Operations, and
capitalized approximately $2.0 million in software development costs
relating directly to our wholesale services efforts.                                                                                                                                            
|
| |  |  | As of March 31, 2002, the Company operated as one reportable segment. The
Company anticipates developing and tracking discreet information related to
its wholesale services to be used by the Chief Operating Decision Maker
and, accordingly, will amend its segment disclosures to identify its
wholesale services as a reportable segment under Statement of Financial
Accounting Standards No. (SFAS) 131, Disclosures about Segments of an
Enterprise and Related Information,in the second quarter of 2002.                                                                                                                                                                                                          



|5. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------



| |  |  | The Company has disputed billings and access charges to and from certain
inter-exchange carriers (IXCs) and incumbent local exchange carriers
(ILECs). The Company contends the invoicing and billings of access charges
are not in accordance with the interconnection, service level, or tariff
agreements entered between the Company and certain IXCs and ILECs. The
Company has not paid for a portion of these disputes and management
believes that the Company will prevail in these disputes. At March 31,
2002, the disputed amount not recorded in the financial statements was
approximately $7.3 million.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)
(All tables are in thousands, except for share and per share data)



|6. |  | COMPUTATION OF NET LOSS PER SHARE
|-- |  | ---------------------------------



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

|                                      |                                            |                                                                                 |                                          |            |                    |         |      |            |         |         |  
|------------------------------------- | ------------------------------------------ | ------------------------------------------------------------------------------- | ---------------------------------------- | ---------- | ------------------ | ------- | ---- | ---------- | ------- | ------- | -
|                                      |                                            |                                                                                 |                                          |            | Three Months Ended
|                                      |                                            |                                                                                 |                                          |            | March 31,         
|                                      |                                            |                                                                                 |                                          |            |                   
|                                      |                                            |                                                                                 |                                          |            | 2002               |         | 2001
|                                      |                                            |                                                                                 |                                          |            |                    |         |     
|Basic and diluted net loss per share: |                                            |                                                                                 |                                          |            |                    |         |      |           
|                                      | Loss attributable to common stockholders:  |                                                                                 |                                          |            |                    |         |      |            |        
|                                      |                                            | Net loss                                                                        |                                          | $          | (10,607            | )       |      | $          | (17,580 | )      
|                                      |                                            | Less mandatorily redeemable convertible preferred
stock dividends and accretion |                                          |            | (3,872             | )       |      |            | (2,544  | )      
|                                      |                                            | Less deemed dividend related to beneficial conversion feature                   |                                          |            | (46                | )       |      |            |        |        
|                                      |                                            |                                                                                 |                                          |            |                    |         |      |           
|                                      |                                            |                                                                                 | Loss attributable to common stockholders |            | $                  | (14,525 | )    |            | $       | (20,124 | )
|                                      |                                            |                                                                                 |                                          |            |                    |         |      |           
|                                      | Weighted average common shares outstanding |                                                                                 |                                          | 34,307,194 |                    |         |      | 33,790,809 |        
|                                      |                                            |                                                                                 |                                          |            |                    |         |      |           
|                                      | Basic and diluted net loss per share       |                                                                                 | $                                        | (0.42      | )                  |         | $    | (0.60      | )      
|                                      |                                            |                                                                                 |                                          |            |                    |         |      |           



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:

|                                                                                  |                                                               |  |                    |            |      |  |           |            | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | --------- | ---------- | 
|                                                                                  |                                                               |  | Three Months Ended
|                                                                                  |                                                               |  | March 31,         
|                                                                                  |                                                               |  |                   
|                                                                                  |                                                               |  | 2002               |            | 2001
|                                                                                  |                                                               |  |                    |            |     
|Unexercised stock options                                                         |                                                               |  | 10,381,176         |            |      |  | 8,144,400 |           
|Unexercised warrants                                                              |                                                               |  | 10,425,982         |            |      |  | 5,297,767 |           
|Mandatorily redeemable convertible preferred
stock convertible into common shares |                                                               |  | 26,567,371         |            |      |  | 9,043,481 |           
|                                                                                  |                                                               |  |                    |            |      |  |           |           
|                                                                                  | Total potentially dilutive shares of common
stock equivalents |  |                    | 47,374,529 |      |  |           | 22,485,648 | 
|                                                                                  |                                                               |  |                    |            |      |  |           |           

9



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##### 



Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  (Continued)
(All tables are in thousands, except for share and per share data)



|7. |  | LEGAL AND REGULATORY PROCEEDINGS
|-- |  | --------------------------------



| |  |  | During June and July 2001, three separate class action lawsuits were filed
against the Company, certain of the Companys 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 the Companys
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 the Company 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. The lawsuits, along with all other lawsuits filed
against other issuers arising out of IPO allocations, have been assigned
to a Judge for pretrial coordination. The complaints
has been consolidated into a single action, Case No. 01-5074. A
consolidated complaint has not been filed or designated, and the Company
is not required to file an answer or other responsive pleadings at this
time.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Companys common stock is currently traded on the Nasdaq National
Market (Nasdaq). For continued listing, the Nasdaq requires, among other
things, that listed securities maintain a minimum bid price of not less
than $3.00 per share, under Marketplace Rule 4450(b)(4) (the Rule).
Nasdaq has notified the Company that it has failed to maintain this
continued listing requirement, and will commence procedures to delist its
securities from the Nasdaq on May 15, 2002 if the Company does not regain
compliance by that date. The Company may apply for a transfer of its
securities to the Nasdaq SmallCap Market. For continued listing on the
Nasdaq SmallCap Market, a Company is required to maintain, among other
things, a minimum bid price of not less than $1.00 per share and a market
value of public float of at least $1 million. If delisted from the Nasdaq
SmallCap Market, the Companys common stock may be eligible for trading on
the OTC Bulletin Board or on other over-the-counter markets, although
there can be no assurance that the Companys common stock will be eligible
for trading on any alternative exchanges or markets. Among other
consequences, moving from the Nasdaq to the Nasdaq SmallCap Market, or
delisting from the Nasdaq SmallCap Market may cause reduced liquidity in the trading market for the Companys common stock, and
difficulty in obtaining future financing.                                                                                                                                                                                                                                                                                                      
|
| |  |  | In the ordinary course of business, the Company is involved in legal
proceedings that are generally incidental to its operations. In addition,
from time to time, the Company is the subject of customer complaints filed
with the state utility commissions of the states in which it operates or
the FCC. Most complaints are handled informally and at this time there are
no formal proceedings pending. While there can be no assurance of the
ultimate disposition of incidental legal proceedings or customer
complaints, the Company does not believe their disposition will have a
material adverse effect on the Companys consolidated results of
operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Item 7.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 section 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 our financial results are described in
our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 30, 2002.

10



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##### 



OVERVIEW

We are an emerging provider of advanced, integrated telecommunications services
targeted to residential and small business subscribers. For management
purposes, we are organized into one reportable operating segment. We offer
local and long distance telephone services in combination with enhanced
communication features accessible through the telephone or the Internet. The
nature of our business is rapidly evolving, and we have a limited operating
history.

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

RESULTS OF OPERATIONS

The following is a discussion of significant changes in our results of
operations, which occurred in the three months ended March 31, 2002 compared to
the same period in the prior year. The following tables summarize the
approximate changes in selected operating items and include dollar changes,
percentage changes and percent of revenues to facilitate our discussions that
follow.

|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |      |       |   
|-------------------- | ----------------------------- | ------------------------------------------------------------------------------- | ---- | ------------------ | ----- | ------------- | ----- | ------------- | ----- | ---- | ----- | ------ | ---- | ---------- | ----- | ---------------------- | ----- | -- | ----- | ---- | ----- | -- | ----- | ---- | ----- | --
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       | Amount |      | Percentage |       |                        |       |    |       |      |       |   
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       | Change |      | Change     |       | Percentage of Revenues
|                     |                               |                                                                                 |      | Three Months Ended |       | Favorable     |       | Favorable     |       |     
|                     |                               |                                                                                 |      | March 31,          |       | (Unfavorable) |       | (Unfavorable) |       | 2002 |       | 2001  
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |       
|                     |                               |                                                                                 |      | 2002               |       | 2001          |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |   
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |   
|Revenues             |                               | $                                                                               | 57.3 |                    |       | $             | 75.0  |               |       | $    | (17.7 | )      |      |            | (23.6 | )%                     |       |    | 100.0 | %    |       |    | 100.0 | %   
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|Operating expenses:  |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     | Network operations            |                                                                                 |      | 27.3               |       |               |       | 43.3          |       |      |       | 16.0   |      |            |       | 37.0                   | %     |    |       | 47.6 | %     |    |       | 57.7 | %    
|                     | Sales and marketing           |                                                                                 |      | 4.8                |       |               |       | 12.8          |       |      |       | 8.0    |      |            |       | 62.5                   | %     |    |       | 8.4  | %     |    |       | 17.1 | %    
|                     | General and administrative    |                                                                                 |      | 29.8               |       |               |       | 32.5          |       |      |       | 2.7    |      |            |       | 8.3                    | %     |    |       | 52.0 | %     |    |       | 43.3 | %    
|                     | Wholesale development costs   |                                                                                 |      | 1.0                |       |               |       |              |       |      |       | (1.0   | )    |            |       |                       | %     |    |       | 1.7  | %     |    |       |     | %    
|                     | Depreciation and amortization |                                                                                 |      | 5.6                |       |               |       | 6.0           |       |      |       | 0.4    |      |            |       | 6.7                    | %     |    |       | 9.8  | %     |    |       | 8.0  | %    
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     |                               | Total operating expenses                                                        |      |                    | 68.5  |               |       |               | 94.6  |      |       |        | 26.1 |            |       |                        | 27.6  | %  |       |      | 119.5 | %  |       |      | 126.1 | % 
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     |                               | Operating loss                                                                  |      |                    | (11.2 | )             |       |               | (19.6 | )    |       |        | 8.4  |            |       |                        | (42.9 | )% |       |      | (19.5 | )% |       |      | (26.1 | )%
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|Nonoperating income: |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     | Interest and other income     |                                                                                 |      | 1.2                |       |               |       | 2.9           |       |      |       | (1.7   | )    |            |       | (58.6                  | )%    |    |       | 2.1  | %     |    |       | 3.9  | %    
|                     | Interest and other expense    |                                                                                 |      | (0.6               | )     |               |       | (0.9          | )     |      |       | 0.3    |      |            |       | 33.0                   | %     |    |       | (1.1 | )%    |    |       | (1.2 | )%   
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     |                               | Total nonoperating income                                                       |      |                    | 0.6   |               |       |               | 2.0   |      |       |        | (1.4 | )          |       |                        | (70.0 | )% |       |      | 1.0   | %  |       |      | 2.6   | % 
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     |                               | Net loss                                                                        |      |                    | (10.6 | )             |       |               | (17.6 | )    |       |        | 7.0  |            |       |                        | 39.8  | %  |       |      | (18.5 | )% |       |      | (23.5 | )%
|                     |                               | Less mandatorily redeemable convertible
preferred stock dividends and accretion |      |                    | (3.9  | )             |       |               | (2.5  | )    |       |        | (1.4 | )          |       |                        | (56.0 | )% |       |      | (6.8  | )% |       |      | (3.3  | )%
|                     |                               | Less deemed dividend related to beneficial
conversion feature                   |      |                    |      |               |       |               |      |      |       |        |     |            |       |                        |      |    |       |      |      |    |       |      |      |   
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|                     |                               | Net loss attributable to common stockholders                                    |      | $                  | (14.5 | )             |       | $             | (20.1 | )    |       | $      | 5.6  |            |       |                        | 27.9  | %  |       |      | (25.3 | )% |       |      | (26.8 | )%
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     
|EBITDA               |                               | $                                                                               | (5.6 | )                  |       | $             | (13.6 | )             |       | $    | 8.0   |        |      |            | 58.8  | %                      |       |    | (9.8  | )%   |       |    | (18.1 | )%  
|                     |                               |                                                                                 |      |                    |       |               |       |               |       |      |       |        |      |            |       |                        |       |    |       |      |       |    |       |     

11



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##### 



Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Revenues.Revenues decreased by $17.7 million to $57.3 million for the quarter
ended March 31, 2002, compared to $75.0 million for the same period in the
prior year. The decrease is attributable to the average Z-LineHOME customer
count of 257,000 for the quarter ended March 31, 2002, compared to 360,000 for
the same period in the prior year. We had 261,000 customers at March 31, 2002
compared to 380,000 at March 31, 2001. Touch 1 contributed $4.2 million of
revenue for the quarter ended March 31, 2002 compared to $6.7 million for the
same period last year.

The reduction in lines for the three months ended March 31, 2002 was a result
of our focus on eliminating poor paying customers and increasing the stringency
of customer acceptance.

We expect Z-LineHOME to continue to increase as a percentage of revenue
relative to our Touch 1 (1+) Long Distance Services but decrease as a
percentage of total revenue as we expect growth in our wholesale service
offerings.

Network Operations.Network operations
expense decreased by $16.0 million to
$27.3 million for the quarter ended March 31, 2002, compared to $43.3 million
for the same period in the prior year. Our consolidated gross margin percentage
increased to 52.4% for the quarter ended March 31, 2002, compared to 42.3% for
the same period in the prior year. Our 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 tariffed arrangements. The decrease in network operation expenses is a
result of the decrease in subscribers.

The overall increase in gross margin is attributable to the New York Public
Service Commission imposed rate reduction to the unbundled network elements
(UNE) pricing, which became effective March 1, 2002. This reduction to UNE rates in New
York, the state in which we have our largest concentration of customers,
lowered our overall cost to provide services to customers in New York. This
reduction resulted in an increased gross margin percentage during the first
quarter of 2002. In addition to this reduction, as of March 1,
2002, we expect a
retroactive reduction of rates that will result in a credit applied to future
services for amounts already paid for UNE in the state of New York. The amount
of the retroactive reduction is estimated at $9.0 million.

Sales and Marketing.Sales and marketing expense decreased $8.0 million to $4.8
million for the quarter ended March 31, 2002, compared to $12.8 million for the
same period in the prior year. The sales and marketing expenses primarily
consists of telemarketing, direct mail, brand awareness advertising, agent
commissions and salaries and benefits paid to employees engaged in sales and
marketing activities.

The closure of some of our call centers and the workforce reduction we
implemented during the second quarter of 2001 resulted in savings of $3.5 million during the first quarter of 2002 compared to the same
period in the prior year. In addition to the call center closures, our
continued tightening of subscriber quality and the resulting lower number of
subscribers contributed a cost savings of $2.5 million in lower commissions.
The remaining decrease in sales and marketing is a result of our decision to
conserve cash and decrease spending on radio, billboard, and television
advertising during the first quarter of 2002.

We expect to limit our sales and marketing during the second quarter of 2002 as
we focus on our wholesale initiative and fully implement our subscriber quality
initiatives. In addition, we will begin to realize the savings from the closure of our remaining call centers during the
second quarter of 2002. We anticipate a slow increase to sales and marketing
during the third and fourth quarters of 2002 as we improve our overall cash
position, market our small business and wholesale services and moderately grow
our residential business.

General and Administrative.General and
administrative expense decreased $2.7
million to $29.8 million for the quarter ended March 31, 2002, compared to
$32.5 million for the same period in the prior year. General and administrative
expense primarily consists of employee salaries, temporary services, bad debt
expense, billing and collection expense, occupancy costs, support costs for our
computer systems and provisioning costs.

The decrease in general and administrative expense is split equally between the
reduction in headcount and cost control measures we have implemented and the
decreased incremental cost of maintaining our decreased customer base in 2002.
Although the overall

12



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##### 



general and administrative costs decrease in total dollars it increased as a
percentage of total revenue to 52.1% for the first quarter 2002 compared to
43.4% for the same period in the prior year. We anticipate that the growth of
our wholesale services and the focus on improved subscriber economics
for our residential and small business services combined with an increased utilization of fixed costs within our
business will drive general and administrative expenses as a percentage of
revenues down during the remainder of 2002. In the second quarter of 2002 we
closed our remaining call centers in Minot, ND and had a reduction of workforce
of approximately 350 employees. We anticipate recording these events as a
restructuring charge in the second quarter of 2002. We will continue to
evaluate our operations for efficiencies and our employee staffing requirements
as they relate to increased efficiency or growth in our wholesale and small
business services.

Depreciation and Amortization.Depreciation and amortization expense decreased
$0.4 million to $5.6 million for the quarter ended March 31, 2002, compared to
$6.0 million for the same period in the prior year. The decrease in
depreciation and amortization is primarily a result of our efforts to conserve
cash, and therefore reduce purchases of property and equipment over the last
three quarters. We anticipate additional purchases of computer equipment,
switching equipment, furniture and leasehold improvements in connection with
our wholesale service offering, which should contribute to increased
depreciation and amortization expense during the remainder of 2002.

Interest and Other Income.Interest and
other income decreased $1.7 million to
$1.2 million for the quarter ended March 31, 2002, compared to $2.9 million
last year. Interest and other income consists of interest charged to our
Z-LineHOME customers and carriers for not paying their bills on-time, income from interest earned on
our excess cash balances and any gains from the sale of investments or
securities. The decrease for three months ended March 31, 2002 was primarily
due to an overall decrease in customers in service compared to the same period
in 2001, resulting in smaller late payment fees being assessed to customers.

Interest and Other Expense.Interest and other expense decreased $0.3 million
to $0.6 million for the quarter ended March 31, 2002, compared to $0.9 million
for the same period in the prior year. Our interest expense is a result of the
interest charged related to our RFC Capital Corporation (RFC) accounts
receivable agreement, capital leases and other debt obligations. The decreased
interest expense relates to the decrease in our total debt obligations and the
associated interest paid during 2002. We anticipate interest expense to
increase in the future as a result of the potential borrowing of money to
support operations through new funding sources and the financing of various
capital expenditures necessary to grow our business in 2002. We anticipate
utilizing the RFC accounts receivable agreement during the remainder of 2002,
subject to renewal in July of 2002.

Income Tax Expense.No provision for federal or state income taxes has been
recorded due to the full valuation allowance recorded against the deferred tax
asset for the quarters ended March 31, 2002 and 2001.

Net Loss.Our net loss decreased $7.0 million to $10.6 million for the quarter
ended March 31, 2002, compared to $17.6 million for the same period in the
prior year. This decrease was due primarily to the increases in expenses
described above.

Net Loss Attributable to Common Stockholders.Our net loss attributable to
common stockholders decreased $5.6 million to $14.5 million for the quarter
ended March 31, 2002, compared to $20.1 million for the same period in the
prior year. This decrease was due primarily to the decreases in expenses
described above. This overall decrease was slightly off-set by the non-cash
charges for the preferred stock dividend and beneficial conversion feature
related to the Series D, E and G Preferred Stock totaling $3.9 million for the
quarter ended March 31, 2002 compared to $2.5 million for the same period in
the prior year.

EBITDA.Many securities analysts use the measure of earnings before deducting
interest, income taxes, depreciation and amortization, also commonly referred
to as EBITDA, as a way of evaluating our financial performance. EBITDA is not
a measure under accounting principles generally accepted in the United States
of America (GAAP), is not meant to be a replacement for GAAP and should not be
considered an alternative to net income as a measure of performance or to cash
flows as a measure of liquidity. We have included EBITDA data because it is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding our operating results. Our negative EBITDA
improved by
$8.0 million to $5.6 million for the quarter ended March 31, 2002, compared to
$13.6 million for the same period in the prior year. We expect our EBITDA to
increase during the remainder of 2002 as a result of the introduction of our
wholesale services and the introduction of our small business product. These
additional revenue streams in conjunction with the cost reduction matters we
have taken should result in the achievement of positive EBITDA during
2002.

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 colocation
of switching and transmission equipment in

13



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##### 



incumbent local exchange carriers central offices. Although we will continue
our capital expenditures we do not expect that the growth of our business will
require the levels of capital investment in fiber optics and switches that
existed in historical telecommunications 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 rapid penetration of our target markets.

We have incurred accumulated losses since our inception as a result of
developing our business, research and development, building and maintaining
network infrastructure and technology, sales and promotion of our services, and
administrative expenditures. As of March 31, 2002, we had an accumulated
deficit of $293.8 million and $13.0 million in cash and cash equivalents. We
have funded our expenditures primarily through operating revenues, private
securities offerings, a sale-leaseback credit facility, sales of accounts
receivable and an initial public offering. We intend to continue building our organization in anticipation
of future growth and believe that our operating expenditures will also continue
to increase.

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

On March 20, 2002, we entered into a 48-month agreement with MCI WORLDCOM
Communications, Inc. (MCI) for the provision of wholesale telephone exchange
services, ancillary services and a software license.

Under the terms of the agreement, MCI will pay us a maximum of $50 million
related to the use of our network in the form of a technology license fee. Cash
flows related to the license will be paid based on the number of MCI customers
on the our network, as defined in the contract, and are subject to monthly
minimum amounts. In addition, MCI will pay for services provided through
usage-based fees according to certain per line and per minute calculations
defined in the agreement and MCI will also pay fees to us for
providing telephone exchange services, payroll costs and certain
vendor fees. We are the primary obligor for all costs incurred under
this agreement.

As of March 31, 2002, MCI had paid us $6.1 million. This amount is included in
long-term deferred revenue and will be recognized over the 48-month term of the
agreement. Included in this amount is $3.7 million that applies toward the $50
million maximum license fee.

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

As of March 31, 2002, no revenues had been recorded under the contract. We
expensed the costs related to our wholesale business as incurred, with the
exception of certain internal-use software development costs that qualify for
capitalization. As of March 31, 2002, we incurred approximately $1.0 million
of period costs, which are shown as Wholesale development costs in the
Statement of Operations, and capitalized approximately $2.0 million in software
development costs relating directly to our wholesale services efforts.

As of March 31, 2002, we operated as one reportable segment. We anticipate
developing and tracking discreet information related to our wholesale services
to be used by the Chief Operating Decision Maker and, accordingly, will amend
our segment disclosures to identify our wholesale services as a reportable
segment under Statement of Financial Accounting Standards No. (SFAS) 131,
Disclosures about Segments of an Enterprise and Related Information,in the
second quarter of 2002.

14



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##### 



Our common stock is currently traded on the Nasdaq National Market (Nasdaq).
For continued listing, the Nasdaq requires, among other things, that listed
securities maintain a minimum bid price of not less than $3.00 per share, under
Marketplace Rule 4450(b)(4) (the Rule). Nasdaq has
notified us that
we have failed to maintain this continued listing requirement, and will commence
procedures to delist our securities from the Nasdaq on May 15,
2002 if we do not regain compliance by that date. We may apply for a
transfer of our securities to the Nasdaq SmallCap Market. For continued
listing on the Nasdaq SmallCap Market, a Company is required to maintain, among
other things, a minimum bid price of not less than $1.00 per share and a market
value of public float of at least $1 million. If delisted from the Nasdaq
SmallCap Market, our common stock may be eligible for trading on the
OTC Bulletin Board or on other over-the-counter markets, although there can be
no assurance that our common stock will be eligible for trading on
any alternative exchanges or markets. Among other consequences, moving from
the Nasdaq to the Nasdaq SmallCap Market, or delisting from the Nasdaq SmallCap
Market may cause reduced liquidity in the trading
market for our common stock, and difficulty in obtaining future financing.

Net cash provided by operating activities improved
by $7.7 million to $1.1 million
for the quarter ended March 31, 2002, compared to net cash used
in operating activities of $6.6 million for the
same period in the prior year comparing cash flows from the first
quarter 2002 to 2001. The $7.0, $4.7 and $6.7 million improvement to net
loss, other assets and accounts receivable, respectively, coupled with the $6.7 million of deferred revenue
from our wholesale services agreement with MCI increased our cash
provided by
operating activities. These improvements were off-set by a $15.6 million
decrease in accounts payable for the three months ended March 31 2002
compared to the same period in the prior year.

Included in our net cash provided by operating activities for the quarter ended
March 31, 2002 was the sale of $37.6 million of receivables, for net proceeds
of $28.1 million. At March 31, 2002, a net receivable servicing asset of $14.6
million is included in accounts receivable and $4.2 million of advances on
unbilled receivables are included in accounts payable and accrued liabilities.
The costs relating to the agreement of $0.3 million are included in interest and
other expense for the quarter ended March 31, 2002.

The RFC agreement allows us to sell up to $25 million of receivables, subject
to the selection criteria utilized by RFC for the selection of receivables they
agree to purchase. There are no minimum sales requirements under this
agreement. RFC purchased receivables from us during the quarter ended March 31,
2002 at discount rates of 32% and 23%, this rate is negotiated and may change
according to collection experience. Our collection percentage since the
inception of the agreement through March 31, 2002 is 83%. Under the agreement
we are responsible for the continued servicing of the receivables sold and any
amount collected over the discount rate is paid to us by RFC for providing the
servicing less certain fees. The RFC agreement, although renewable for one-year terms, contractually
terminates in July 2002. We currently anticipate extending the term of the
agreement, under substantially similar terms; however, the extension cannot be
assured.

Our net cash used in investing activities improved by $2.1 million to $5.5
million for the quarter ended March 31, 2002, compared to $7.6 million for the
same period in the prior year. This change is primarily a result of capital
expenditures being $5.5 million for the quarter ended March 31, 2002, compared
to $7.5 million in the same period of the prior year. We expect to make
purchases of property and equipment in the future to meet the needs of our
wholesale services. We anticipate increased capital expenditures during 2002
in conjunction with the growth of our wholesale services line of business.

Our net cash used in financing activities increased
by $0.6 million to $1.6 million for the quarter ended March 31, 2001
compared to $1.0 million  for the same period in
the prior year. This change is primarily a result of an increase in
debt payments of $0.5 million. We expect to have a low amount of long-term
debt although we would likely move from the existing accounts receivable agreement to a more
traditional loan, if such opportunity would arise with terms we deemed
appropriate. Our existing debt is primarily fixed interest
that is payable in monthly installments.

Our short-term liquidity relies heavily upon our accounts receivable agreement,
cash used or provided from operations, cash management strategies, our
wholesale service agreement with MCI and if needed, our ability to reduce
certain discretionary capital and marketing expenses and the reduction of
headcount to fulfill any short term cash requirements. We have historically had
negative cash flows and although we expect to achieve positive EBITDA and
cash-flows during 2002 we also are aware of the risks, discussed throughout
this document, of not achieving our goal.

Our ongoing capital requirements will depend on several factors, including
market acceptance of our services, specifically our new wholesale services and
our small business product, the amount of resources we devote to investments in
our networks, facilities, build-

15



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##### 



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 and opportunities arise, we expect to make strategic
investments in technology and our network architecture and enter potential
strategic alliances or partnerships with other entities.

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

Item 3.Quantitative and Qualitative Disclosures about Market Risk

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

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

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

PART II

Item 1.Legal Proceedings



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

During June and July 2001, three separate class action lawsuits were filed
against the Company, certain of the Companys 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 the Companys 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 the
Company 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. The lawsuits, along with all other lawsuits
filed against other issuers arising out of IPO allocations, have been assigned
to a Judge for pretrial coordination. The complaints have
been consolidated into a single action, Case No. 01-5074. A consolidated
complaint had not been filed or designated, and the Company is not required to
file an answer or other responsive pleadings at this time.

Item 2.Changes in Securities and
Use of Proceeds

On March 20, 2002, we issued 1,000,000 shares of
our common stock of MCI WORLDCOM Communications, Inc. in connection
with a certain Agreement for Wholesale Telephone Exchange Services,
Z-Node Services, Ancillary Services and Technology License between
Z-Tel Communications, Inc., our wholly-owned subsidiary, and MCI
WORLDCOM Communications, Inc. of that same date. The shares were sold
for $2,333,000 in cash, however, we simultaneously delivered a like
amount of money to MCI as a signing bonus in connection with the
contract. We claim an exemption from registration under Section 4(2)
of the Securities Act of 1933 because the transaction was by an
issuer and did not involve a public offering. In connection with its
purchase of our shares, MCI was granted certain pre-emptive rights
and piggyback registration rights. Such rights are described with
particularity in a certain Subscription, Pre-Emptive Rights and
Registration Rights Agreement between us and MCI dated March 20,
2002, which was an integral part of the Agreement for Wholesale
Telephone Exchange Services, Z-Node Services, Ancillary Services and
Technology License, a copy of which is filed as an exhibit to this
report.

16



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##### 



Item 6.Exhibits, and Reports on Form 8-K



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

|        |  |                                                                                                                                                                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                          
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|3.1     |  | Amended and Restated Certificate of Incorporation of Z-Tel, as
amended(A)*                                                                                                                                                                                                               
|       
|       
|       
|       
|3.2     |  | Amended and Restated Bylaws of Z-Tel(B)*                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|4.1     |  | Form of Common Stock Certificate(B)*                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|4.2     |  | See Exhibits 3.1 and 3.2 of this Form 10-K 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(A)*                                                                    
|       
|       
|       
|       
|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(E)*                                                                                                                                                                                                          
|       
|       
|       
|       
|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(E)*                                                                                                                  
|       
|       
|       
|       
|4.13    |  | Stock and Warrant Purchase Agreement, dated as of July 2, 2001,
by and between Z-Tel, D. Gregory Smith, and others(G)                                                                                                                                                                    
|       
|       
|       
|       
|4.14    |  | Warrant for the Purchase of Shares of Common Stock of Z-Tel, dated as of
July 2, 2001(H)*                                                                                                                                                                                                
|       
|       
|       
|       
|4.15    |  | Certificate of Designation for the Series G Preferred Stock(I)*                                                                                                                                                                                                                          
|       
|       
|       
|       
|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(J)*
|       
|       
|       
|       
|4.17    |  | Additional Investor Registration Rights Agreement, dated as of July 2,
2001, between Z-Tel, D. Gregory Smith and others(K)*                                                                                                                                                              
|       
|       
|       
|       
|4.18    |  | Voting Agreement, dated as of June 29, 2001, between Z-Tel and certain
stockholders of Z-Tel(L)*                                                                                                                                                                                         
|       
|       
|       
|       
|4.19    |  | Employee Stock Restriction Agreement, dated September 1, 1999, by and
between the Company and D. Gregory Smith(M)*                                                                                                                                                                       

17



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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|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)*                                                                                                                                                                                                       
|       
|       
|       
|       
|10.1.2  |  | Employment Agreement dated July 1998 between the Company and D.
Gregory Smith, as amended April 4, 2001 to increase his annual salary to $275,000(B)*                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.1.4  |  | Employment Agreement dated August 1998 between the Company and Charles
W. McDonough as amended April 4, 2001 to increase his annual salary to $240,000(B)*                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.1.5  |  | Employment Agreement dated August 1998 between the Company and J.
Bryan Bunting as amended April 4, 2001 to increase his annual salary to $200,000(B)*                                                                                                                                                                                                                                                
|       
|       
|       
|       
|10.1.6  |  | Employment Agreement dated July 1998 between the Company and
James A. Kitchen as amended April 4, 2001 to increase his annual salary to $175,000(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(N)*                                                                                                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|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(E)*                                                                                                                                                                                                                                                                                                             
|       
|       
|       
|       
|10.6    |  | Loan and Guaranty Agreement dated January 11, 2001 between the
Company and James A. Kitchen(E)*                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.7    |  | Secured Promissory Note dated January 11, 2001 delivered by James
A. Kitchen to the Company(E)*                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.8    |  | Pledge and Security Agreement dated January 11, 2001 between
James A. Kitchen and theCompany(E)*                                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.10   |  | Promissory Note, dated May 11, 1999, between Touch 1 Communications,
Inc. and Corman Elegre Capital(D)*                                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|10.11   |  | Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and William F. Corman (First Revocable Trust)(D)*                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.12   |  | Promissory Note, dated September 10, 1999, from Touch 1
Communications, Inc. and
James F. Corman(D)*                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|10.13   |  | Agreement for Wholesale Telephone Exchange Services, 2-Node Services,
Ancillary Services and Technology License, dated March 20, 2002,
between 2-Tel Communications, Inc. and MCI WORLDCOM Communications, Inc.
Portions of this exhibit have been omitted pursuant to a
confidential treatment request. A copy of this exhibit has been filed
separately with the Securities and Exchange Commission.




|    |  |                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  |                                                                                                                                                                                            
|   
|   
|   
|   
|(A) |  | Incorporated by reference to the correspondingly numbered exhibit to
the Registrants Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2001, filed on August 13, 2001.

18



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##### 



|    |  |                                                                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(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 ended 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 ended September 30,
2000, filed on November 14, 2000.                             
|   
|   
|   
|   
|(E) |  | Incorporated by reference to the correspondingly numbered exhibits to the Registrants
Annual Report on Form 10-K for the annual period ended December 31, 2000,
filed on March 30, 2001.                                       
|   
|   
|   
|   
|(F) |  | Incorporated by reference to the correspondingly numbered exhibits to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, filed on
August 13, 2001.                                    
|   
|   
|   
|   
|(G) |  | Incorporated by reference to Exhibit 1 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.                                         
|   
|   
|   
|   
|(H) |  | 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.                                         
|   
|   
|   
|   
|(I) |  | 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.                                         
|   
|   
|   
|   
|(J) |  | 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.                                         
|   
|   
|   
|   
|(K) |  | 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.                                                                  
|   
|   
|   
|   
|(L) |  | 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.                                         
|   
|   
|   
|   
|(M) |  | 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.                                                                  
|   
|   
|   
|   
|(N) |  | Incorporated by reference to Appendix B to the Registrants Preliminary Proxy Statement
filed on April 14, 2000, with the following amendment effective May 31,
2001:                                                           

| |  |                                                                                 
| |  | --------------------------------------------------------------------------------
| |  | Section 2.1(a) of the Plan is hereby amended in its entirety
to read as follows:

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




| | (b) |  | Reports on
Form 8-K.
None.
| | --- |  | --------------------------

19



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##### 



SIGNATURES

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

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

20