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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              ---------------------
                                    FORM 10-K

(MARK ONE)

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
       THE SECURITIES EXCHANGE ACT OF 1934
       FOR THE YEAR ENDED DECEMBER 31, 1999

                                       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

         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 [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10 K. [ ]

         The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant on March 23, 2000 (assuming solely for these
purposes that all directors, executive officers and 10% or greater stockholders
are affiliates), based on the closing price of the Common Stock on the Nasdaq
National Market as of such date, was approximately $777,720,354.

         The number of shares of the Registrant's Common Stock outstanding as of
March 23, 2000 was approximately 32,006,661.

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                                TABLE OF CONTENTS

PART I.
Item 1.     Business                                                         3
Item 2.     Properties                                                      23
Item 3.     Legal Proceedings                                               23
Item 4.     Submission of Matters to a Vote of Security Holders             23

PART II.
Item 5.     Market for the Registrant's Common Equity and Related
            Stockholder Matters                                             25
Item 6.     Selected Consolidated Financial Data                            27
Item 7.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                       29

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk      44
Item 8.     Financial Statements and Supplementary Data                     45
Item 9.     Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure                             64

PART III.
Item 10.    Directors and Executive Officers of the Registrant              65
Item 11.    Executive Compensation                                          69
Item 12.    Security Ownership of Certain Beneficial Owners and
            Management                                                      73
Item 13.    Certain Relationships and Related Transactions                  76

PART IV.
Item 14.    Exhibits, Financial Statement Schedule, and Reports on Form
            8-K                                                             78

Signatures


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                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Z-Tel Technologies, Inc. was incorporated under the laws of Delaware in
1998. We are a provider of advanced, integrated communications services
primarily to residential customers. We offer local and long distance telephone
services in combination with enhanced communications features accessible through
the telephone or the Internet. Through our uniquely designed web interface, our
subscribers are able to manage their communications through the power of the
Internet and the visual, "point and click" functionality of the personal
computer. Our services are designed to make communications easier and more
efficient.

         Our business strategy takes advantage of recent statutory and
regulatory changes that enable us to gain access to the individual components of
the traditional local telephone service provider's (incumbent local exchange
carrier or ILEC) networks, referred to as the unbundled network element
platform. The Federal Communications Commission (the FCC) has recently mandated
that the incumbent local exchange carriers provide competing local telephone
companies such as us with the unbundled network element platform components at
prices based on a forward-looking, long-run incremental cost methodology. Access
to these components, in combination with our proprietary technology and advanced
communications network, enables us to provide cost-effective local and long
distance telephone services with enhanced features.

         We currently offer our Z-Line Home Edition(TM) service in areas of New
York and, on an initial marketing basis, in areas of Massachusetts served by
Bell Atlantic Corporation (Bell Atlantic), and in areas of Texas served by
Southwestern Bell Telephone Company (Southwestern Bell). Within these markets,
we believe that we are one of few competitive local exchange carriers
specifically targeting the needs of residential customers. It is our intent to
expand service into additional areas as they become available. In particular, we
intend to begin initial marketing of Z-Line Home Edition in Pennsylvania in the
second quarter of 2000.

         We currently offer three services to individual customers, Z-Line Home
Edition, Z-Line Anywhere(TM) and Z-Line Messenger(TM), each centered around Your
Personal Communications Center(TM) (the PCC). The PCC includes multiple features
that combine the convenience of the telephone with the power of the Internet.
Accessible by telephone or the Internet, located at www.myzline.com or
www.z-tel.com, the PCC enables our customers to direct, retrieve, deliver,
compile and otherwise manage their voice communications. One of the features
offered through the PCC is the Z-Line Community(TM) feature, which allows us to
provide group messaging features to individual consumers as well as sponsored
communities such as colleges, civic organizations and businesses. We intend to
begin offering soon an additional service to individual customers, Z-Line Long
Distance(TM).

ACQUISITION OF TOUCH 1 COMMUNICATIONS, INC.

     On January 24, 2000, we reached an agreement in principle with Touch 1
Communications, Inc. (Touch 1) for the acquisition of Touch 1, a transaction
which will bring together our bundled

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consumer telecommunications services with Touch 1's extensive telemarketing,
customer service and provisioning infrastructure. Touch 1 is a leading consumer
telecommunications company with approximately 400,000 customers in 48 states.
Touch 1 produced revenues for 1999 of approximately $65 million. The
transaction, which is subject to, among other things, the signing of a
definitive agreement, other regulatory approvals, and customary closing
conditions, is expected to close before the end of May 2000.

INDUSTRY BACKGROUND

         The Telecommunications Act of 1996 (the Telecommunications Act) was
passed principally to foster competition in the telecommunications markets. The
Telecommunications Act imposes a variety of duties upon the incumbent local
exchange carriers, including the duty to provide other communications companies
with access to their network elements on an unbundled basis at any feasible
point. Such access must be at rates and on terms and conditions that are just,
reasonable and nondiscriminatory. A network element is a facility or piece of
equipment of the local telephone company's network or the features, functions or
capabilities such facility or equipment provides. The Telecommunications Act
also establishes procedures under which the Regional Bell Operating Companies
(Bell operating companies) will be allowed to handle long distance calls
originating from within their telephone service area and terminating outside
their area. The Bell operating companies were divested by AT&T in 1984 pursuant
to court order under which they were prohibited from providing "in-region" long
distance telephone service. With the passage of the Telecommunications Act, a
Bell operating company can provide such in-region service if it complies with a
14-point regulatory checklist, including offering interconnection to other
communications companies and providing access to its unbundled network elements
on terms approved by a state public service commission.

         On September 10, 1999, in an effort to comply with the 14-point
regulatory checklist in order to be able to offer "in-region" long distance
telephone service, Bell Atlantic filed a tariff which establishes favorable
rates, terms and conditions under which competitors may purchase unbundled
network elements in New York. In its New York tariff, Bell Atlantic committed to
provide unbundled network elements, both individually and on a combined basis,
for provision of residential telephone service and small business telephone
service, with the exclusion of business service from end offices with two or
more competitive local telephone service providers (CLECs) collocated in that
end office.

         On November 5, 1999, the FCC released an order establishing the list of
unbundled network elements that incumbent local exchange carriers nationwide
must provide. Taken together, these unbundled network elements comprise the most
important facilities, features, functions and capabilities of an incumbent local
exchange carrier's network. Under the FCC's order, the incumbent local exchange
carriers must allow competing local telephone companies such as us to use the
unbundled network elements, in an individual or combined fashion, to provide
basic local telephone service and must price the elements using a
forward-looking, long-run incremental cost methodology. We expect both
individual network components and components in combined component service
packages to be available at attractive prices nationwide as state regulatory
authorities and incumbent local exchange carriers conform to the recent FCC
mandates. Pricing and implementation rules for unbundled network elements in

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combined service packages or platform offerings that are at least acceptable for
market entry have been adopted in New York, Pennsylvania, Texas and
Massachusetts. The prices for the use of individual network components and
combined component service packages will nevertheless vary from state to state,
as will an individual state's oversight of unbundled network element platform
implementation and operation.

BUSINESS OVERVIEW

         By integrating the simplicity of standard telephone service with the
robust features that our Internet applications deliver, we have created an
environment for managing communications that is accessible by the telephone or
personal computer. That environment includes the following elements:

         COST-EFFECTIVE BUNDLED LOCAL AND LONG DISTANCE TELEPHONE SERVICE. We
provide a cost-effective bundled package of local and long distance telephone
services, which includes all the enhanced features of the PCC as well as
enhanced telephone services such as call waiting and caller identification, in
markets that have favorable regulatory environments to residential customers in
those markets. We lease facilities of the existing incumbent local exchange
carrier at a forward-looking, long-term incremental cost basis, which enables us
to avoid the need to invest significant capital into switching equipment at the
incumbent local exchange carrier's central office. As a result, we are able to
provide a competitively priced, bundled package that includes local and long
distance telephone services and enhanced services.

         SEAMLESS INTEGRATION OF PERSONAL ORGANIZATIONAL TOOLS. The PCC has been
designed to allow users to download their personal directories from a variety of
software packages, including Microsoft Outlook. In addition, other personal
contact managers, such as Palm Pilot, can be downloaded into Outlook and then
downloaded into the PCC. Once this information has been downloaded, customers
can use their database of contacts to create easily sub-directories for special
group messaging. By utilizing the PCC, customers can, with the click of a mouse,
initiate calls or forward messages to contacts that have been stored in their
personal directories. We believe the ability to manage personal directories on
our network creates a more loyal customer over time because of the difficulty of
transferring personal directories to other services.

         SCALABLE PLATFORM FOR NEW MARKETS. The unbundling of network elements
allows us to access the incumbent local exchange carriers' facilities to
provision our service to our customers. As a result, we have the ability to
enter new markets quickly, and without a significant investment in equipment, as
regulatory authorities in those markets adopt favorable pricing. In addition, we
have a centralized sales staff that receives incoming calls for new service and
electronically provides service to new customers. Using the PCC, customers can
manage and configure their own service requirements, thus minimizing our need
for an expanded customer service infrastructure.

         ADVANCED PROPRIETARY TECHNOLOGY. We have created an integrated and
proprietary software and advanced network architecture that enables the enhanced
features of our service. We have created software applications that can control
the basic functions of initiating and completing a telephone call regardless of
the access device, such as a telephone or personal

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computer. These applications allow our customers to control simultaneously all
the basic functions of a telephone call from either the telephone or personal
computer. In addition, we, in collaboration with a third party, have created our
own proprietary billing system. We are also in the process of developing and
enhancing our customer care, billing and provisioning software into one
seamlessly integrated package.

         Our network is designed to route traffic to our main enterprise
management center in Tampa for call management. This reduces our need to
collocate network equipment in the central offices of the incumbent local
exchange carrier in our target markets and enhances our ability to enter new
markets quickly and cost effectively. Our network architecture also is designed
to accommodate a number of developing technologies, such as telephone calls over
Internet protocol, digital subscriber line, asynchronous transfer mode, or
coaxial cable systems.

         ENHANCED COMMUNICATION SERVICES FOR GROUPS AND INDIVIDUAL USERS
NATIONWIDE. We offer our Z-Line Community features to consumers, organizations
and business users nationwide through the PCC. Those features may be accessed
from any of our services. The PCC capabilities, including specialized features
for directories and group messaging, provide value to users within sponsored
communities by facilitating communication among dispersed community members.

         We intend to pursue Z-Line Home Edition marketing and distribution in
new states as state regulatory authorities impose favorable pricing,
implementation rules and acceptable operations support systems performance for
the unbundled network element platform components. Favorable implementation
requirements for providing the unbundled network element platform components
were a feature of the SBC Communications, Inc./Ameritech Corporation merger
order conditions recently approved by the FCC. Accordingly, as acceptable
pricing and operations support systems become available, we intend to evaluate
the entry into each state in the combined SBC/Ameritech regions. Similar
requirements are currently being discussed by the FCC with regard to conditions
likely to be required in association with the approval of the pending Bell
Atlantic/GTE merger. Furthermore, U S WEST Corporation and BellSouth Corporation
recently announced the general availability of the unbundled network element
platform components as part of a general effort to meet FCC requirements.

SERVICES

         Z-LINE HOME EDITION

         Z-Line Home Edition is our principal service offering and is currently
being offered in New York, Texas and, on an initial marketing basis, in
Massachusetts, in areas serviced by the Bell operating company operating in
those states. Z-Line Home Edition includes low-priced local and long distance
(1+) residential telephone services using a customer's existing telephone
number, bundled with enhanced features, including caller identification, call
forwarding, three-way calling, call waiting and speed calling, dial-up remote
access through our Z-Line Anywhere access card service, the full functionality
of the PCC and, for an additional fee, Internet access.

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         We intend to pursue offering Z-Line Home Edition in additional states
as soon as favorable pricing and implementation rules are imposed in those
states, and to start marketing Z-Line Home Edition in Pennsylvania before the
end of the second quarter of 2000.

         Z-LINE ANYWHERE

         Z-Line Anywhere is our access card service that allows a customer to
make long-distance calls using Z-Tel's network from any phone simply by dialing
a toll-free 800 number or local access number. No change in phone service is
required. Customers of Z-Line Anywhere also receive the full functionality of
the PCC and, for an additional fee, Internet access. Z-Line Anywhere is being
offered nationwide.

         Z-LINE MESSENGER

         Z-Line Messenger is a trial service we offer to consumers and members
of sponsored communities free of charge that provides certain limited features
of the PCC. Z-Line Messenger customers are limited to sixty minutes of voice
mail per month and are not authorized to use certain enhanced services provided
by the PCC, such as the ability to complete a call using the web, the "Find-Me"
functionality and the ability to create and manage "Communities." Customers may
upgrade their service to Z-Line Anywhere or Z-Line Home Edition, provided that
that latter service is offered in their markets. Z-Line Messenger is being
offered nationwide.

         Z-LINE LONG DISTANCE

         Z-Line Long Distance is a usage-based service currently in development
that will allow customers to use us as their primary long-distance calling
provider to complete their residential long distance (1+) calls. Z-Line Long
Distance will also provide our customers with dial-up remote access through our
Z-Line Anywhere access card product, the full functionality of the PCC and, for
an additional fee, Internet access. We intend to offer Z-Line Long Distance
nationwide in the near future.

KEY FEATURES OF OUR SERVICES

         THE PCC

         The PCC is the core feature set of all of our service offerings,
although only limited functionality is provided to Z-Line Messenger customers.
It is a suite of features subscribers can access via any telephone or at our web
site. Subscribers can retrieve, forward, deliver, store, compile and otherwise
manage their voice mail and other communication needs. Using the "Find-Me"
feature, subscribers can have the PCC attempt to locate them at up to three
numbers when they receive incoming calls, and notify them via e-mail, pager or
ICQ Internet Chat (instant messaging) when a new voice mail message arrives. At
our website, subscribers can view a list of their voice mail messages and listen
to them through their computer speakers, create an on-line Address Book by
inputting information directly or importing it from other services, place calls
with the click of a mouse, deliver voice messages to groups of other
subscribers, forward voicemails and view historical billing statements on-line.

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         We expect to provide additional functionality to the PCC in the future,
including the ability to use the PCC in conjunction with personal digital
assistants (PDAs), voice recognition capability, the ability to use the PCC for
conference calling, the ability to manipulate voicemail and Z-Line settings from
the user's desktop, and dedicated e-mail accounts and fax receiving capability.

         Z-LINE COMMUNITY

         Z-Line Community is a set of features embedded within the PCC that
allows users or group sponsors to search for, create or join "Communities,"
which are pre-defined groups of our users usually based on professional or
personal affinities. Users can also invite other of our subscribers to join
Communities and administrate the user access options of a Community. Once the
Communities are created, users can send group messages to specific members of
the communities or the entire group.

         Z-Line Community enables us to offer sponsored communities such as
colleges, civic organizations and businesses with a robust communication
solution. Each community member automatically receives our Z-Line Messenger
trial product and can thereby gain access to limited features of the PCC,
including Z-Line Community, and can upgrade to any of our other service
offerings. Community members can then interact with one another, even when the
individual community members have subscribed to different services.

         Z-Line Community features benefit both the sponsor and members of a
community. Sponsors can use group messaging features to deliver voice mail
messages to their widely-dispersed members. Colleges, for instance, can use our
services to deliver simultaneously voice mail messages, including personalized
information such as financial aid and class schedule updates, to their widely
dispersed students. Students, faculty and administrators can take advantage of
low long distance rates by upgrading their Z-Line Messenger service, or set up
their own sub-communities based on student groups or other affiliations, and can
use our network to disseminate information to community members.

MARKETING AND DISTRIBUTION

         We market our services to our customers through telemarketing, agent
programs, strategic business partnerships, direct mail and marketing and
traditional advertising campaigns promoting recognition and awareness of our "Z"
brand. We also have entered into joint marketing or co-branding arrangements
with organizations that have large, well-established relationships or customer
bases in our target markets, such as Hofstra University, the Fraternal Order of
Police, the Fire Fighters' Association of Texas and Kinkos.com. We intend to
explore the formation of alliances or ventures with other companies, including
Internet service providers, paging operators, cable television companies,
utilities, newspapers, banks, credit card companies and department stores, which
we believe will allow us to penetrate efficiently large customer bases with a
relatively small capital outlay.

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BILLING AND COLLECTION

         We have three primary methods for billing and collecting from our
customers. For our Z-Line Home Edition customers, we can either (1) charge their
credit card account; (2) mail a bill to their address for payment by check; or
(3) set up an automatic withdrawal from the customer's checking account. For our
Z-Line Anywhere customers, we currently require all new customers to pay by
credit card or automatic withdrawal; however, we had, in the past, allowed them
to pay bills using all three methods. Our billing software can be customized to
handle new and different billing programs.

OPERATIONS SUPPORT SYSTEMS AND CUSTOMER SUPPORT

      We have invested substantially in our software platform, which includes
integrated customer ordering and provisioning, customer service and billing
functionality for our services. For our Z-Line Anywhere service, a new
subscriber can enroll via the Internet or our toll free number with service
immediately activated. The PCC allows our Z-Line Home Edition and Z-Line
Anywhere customers to change billing options and service feature configurations.
A subscriber may also update service configurations on the telephone.

      Z-Line Home Edition orders require us to interact with the applicable
local exchange carrier. Currently, after receiving a signed letter of
authorization or a verified verbal request for service, we enter orders using an
electronic web-based interface provided by Bell Atlantic for our New York and
Massachusetts customers and Southwestern Bell for our Texas customers. Our
provisioning agents also enter the order in the Z-Tel system.

      We expect to invest over the next year to expand our operations support
systems to include electronic gateways to the major incumbent local exchange
carriers, network element management software, and a standard internal
provisioning interface that can handle multiple incumbent local exchange carrier
ordering systems. This investment will include outside integration and
consulting assistance.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

         We have developed proprietary software that manages the integrated
features of our service offerings. Our software allows our network to interface
and interconnect with the systems of the incumbent local exchange carriers and
long-distance carriers. In addition, our software allows our remote network
communication facilities, which we call "Z-Nodes," located throughout the United
States, to communicate with each other and with our enterprise management center
in Tampa, Florida.

      Our intellectual property reflects the know-how, work product and
inventions of over eighty engineers in our research and development team, based
at our technology center in Atlanta, Georgia, who have substantial experience in
computer technology, telecommunications, web-based services, database management
and integration, and network development, architecture, operation and
management.

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      For the fiscal years ended December 31, 1999 and 1998, we invested
approximately $8,356,000 and $4,728,000, respectively, in company-sponsored
research and development activities.

      We have entered into, and will continue to enter into, nondisclosure
agreements with our employees, independent contractors, business customers and
others. We believe these agreements will protect our confidential and
proprietary information, whether or not such information is copyrighted or
subject to trademark or patent protection. We intend to take all appropriate
legal action to protect our ownership and the confidentiality of all our
proprietary software, including, as appropriate, the filing of copyrights in the
U.S. Copyright Office.

      We have filed trademark applications for federal registration of more than
fifty trademarks with the United States Patent and Trademark Office including
Z-TEL, Z-TEL TECHNOLOGIES, INC., Z-TEL COMMUNICATIONS, INC. AND DESIGN, Z-LINE
HOME EDITION, Z-LINE ANYWHERE, Z-NODE, Z-LINE, Z-NOTIFY, Z-SITE, Z-MAILBOX,
Z-DIRECTORY, Z-NOW!, Z-NUMBER, Z-BILL PAYMENT SERVICES, Z-NET, GENERATION Z,
MYZLINE, YOUR PERSONAL TELECOMMUNICATIONS PORTAL and YOUR PERSONAL
COMMUNICATIONS CENTER.

COMPETITION

OVERVIEW

      The telecommunications industry is highly competitive in many market
segments. However, at present, we believe few telecommunications carriers
provide the type of bundled packages that include the range of services and
features we offer, but various competitors offer one or more of the services
that make up our service offering. Competition in the local telephone services
market is still emerging, but already has attracted many strong competitors.
Competition in the long distance and information services markets, which have
fewer entry barriers, is already intense and is expected to remain so.

      We believe the principal competitive factors affecting our business will
be the quality and reliability of our services, innovation, customer service and
price. Our ability to compete effectively will depend upon our continued ability
to offer innovative, high-quality, market-driven services at prices generally
equal to or below those charged by our competitors. Many of our current and
potential competitors have greater financial, marketing, personnel and other
resources than we do, as well as other competitive advantages.

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LOCAL TELEPHONE SERVICE

      INCUMBENT LOCAL EXCHANGE CARRIERS. In each of our target markets, we will
compete with the incumbent local exchange carrier serving that area, which may
be one of the Bell operating companies. As a recent entrant in the
telecommunications services industry, we have not achieved and do not expect to
achieve a significant market share for any of our services in our markets in the
foreseeable future. In particular, the incumbent local exchange carriers have
long-standing relationships with their customers, have financial, technical and
marketing resources substantially greater than ours, have the potential to
subsidize services that compete with our services with revenue from a variety of
other unregulated businesses, and currently benefit from certain existing
regulations that favor the incumbent local exchange carriers over us in certain
respects.

      Recent regulatory initiatives that allow competitive local exchange
carriers, such as us, to interconnect with incumbent local exchange carrier
facilities and acquire and combine the unbundled network elements of an
incumbent local exchange carrier provide increased business opportunities for
us. However, such interconnection opportunities have been, and likely will
continue to be, accompanied by increased pricing flexibility and relaxation of
regulatory oversight for the incumbent local exchange carriers.

      COMPETITIVE LOCAL EXCHANGE CARRIERS. The Telecommunications Act radically
altered the market opportunity for competitive local exchange carriers.
Competitive access providers who entered the market prior to passage of the
Telecommunications Act built their own infrastructure to offer exchange access
services to large end-users. Since the passage of the Telecommunications Act,
many competitive access providers have added switches to become competitive
local exchange carriers in order to take advantage of the opening of the local
market. With the Telecommunications Act requiring unbundling of the incumbent
local exchange carrier's networks, competitive local exchange carriers will now
be able to enter the market more rapidly by leasing switches, trunks and loop
capacity until traffic volume justifies building facilities. Newer competitive
local exchange carriers, like us, will not have to replicate existing facilities
and can be more opportunistic in designing and implementing networks, which
could have the effect of increasing competition for local exchange services.

      INTEREXCHANGE CARRIERS. We also expect to face competition from other
current and potential market entrants, including interexchange (long distance)
carriers such as AT&T, MCI WorldCom, and Sprint, seeking to enter, reenter or
expand entry into the local exchange market. A continuing trend toward
consolidation of telecommunications companies and the formation of strategic
alliances within the telecommunications industry, as well as the development of
new technologies, could give rise to significant new competitors. For example,
in September 1998, WorldCom merged with MCI Communications Corp. and, in October
1999, MCI WorldCom and Sprint Communications Company, L.P. announced merger
plans. In March 1999, AT&T acquired Tele-Communications, Inc., the largest
provider of cable television services in the United States. These types of
consolidations and strategic alliances could put us at a competitive
disadvantage.

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LONG DISTANCE TELEPHONE SERVICE

      The long distance telecommunications industry has numerous entities
competing for the same customers and a high average churn rate because customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives by competitors. Our primary competitors in the
long distance market include major interexchange carriers such as AT&T, MCI
WorldCom, Sprint and Qwest Communications International Inc., certain incumbent
local exchange carriers and resellers of long distance services. We believe that
pricing levels are a principal competitive factor in providing long distance
telephone service. We hope to avoid direct price competition by bundling long
distance telephone service with a wide array of value-added services.

      Incumbent local exchange carriers that offer a package of local, long
distance telephone and information services will be particularly strong
competitors. Incumbent local exchange carriers, including Bell Atlantic, are
currently providing both long distance and local services as well as certain
enhanced telephone services we offer. We believe that the Bell operating
companies will attempt to offset market share losses in their local markets by
attempting to capture a significant percentage of the long distance market.

ENHANCED SERVICES

      We compete with a variety of enhanced service companies. Enhanced services
markets are highly competitive, and we expect that competition will continue to
intensify. Our competitors in these markets will include Internet service
providers, web-based communications service providers and other
telecommunications companies, including the major interexchange carriers,
incumbent local exchange carriers, competitive local exchange carriers and
wireless carriers.

OTHER MARKET ENTRANTS

      We may face competition in local, long distance and information services
from other market entrants such as electric utilities, cable television
companies, fixed and mobile wireless system operators, and operators of private
networks built for large end-users. All of these companies are free to offer
bundled services similar to those that we offer. Electric utilities have
existing assets and low cost access to capital that could allow them to enter a
market rapidly and accelerate network development. Cable television companies
are also entering the telecommunications market by upgrading their networks with
fiber optics and installing facilities to provide fully interactive transmission
of broadband voice, video and data communications. Wireless companies have
developed, and are deploying in the United States, wireless technology as a
substitute for traditional wireline local telephones. The recent World Trade
Organization agreement on basic telecommunications services could increase the
level of competition we face. Under this agreement, the United States and 68
other member states of the World Trade Organization committed to open their
respective telecommunications markets, including permitting foreign companies to
enter into basic telecommunications services markets. This development may
increase the number of established foreign-based telecommunications carriers
entering the U.S. markets.

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      The Telecommunications Act includes provisions that impose certain
regulatory requirements on all local exchange carriers, including competitive
local exchange carriers. At the same time, the Telecommunications Act expands
the FCC's authority to reduce the level of regulation applicable to any or all
telecommunications carriers, including incumbent local exchange carriers. The
manner in which these provisions are implemented and enforced could have a
material adverse effect on our ability to compete successfully against incumbent
local exchange carriers and other telecommunications service providers.

GOVERNMENT REGULATION

OVERVIEW

         Some of our services are regulated and some are not. In providing our
non-common carrier services such as voice mail, "Find-Me," notification and
directory services offered through the PCC, we operate as an unregulated
provider of information services, as that term is defined in the Communications
Act of 1934, as amended by the Telecommunications Act of 1996, and as an
enhanced service provider, as that term is defined in the FCC rules. These
operations currently are not regulated by the FCC or the states where we
operate. In providing Z-Line Home Edition and our long distance services, we are
regulated as a common carrier at the state and federal level and are subject to
additional rules and policies not applicable to providers of information
services alone. We are certificated as a facilities-based competitive local
exchange carrier in a number of states, including New York, Texas,
Massachusetts, Pennsylvania, Georgia, Illinois, New Jersey, Florida, Kentucky,
Missouri, Oregon, Virginia and Washington. We are currently seeking this
certification in additional states, including California and Michigan.

         The local and long distance telecommunications services we provide are
regulated by federal, state, and, to some extent, local government authorities.
The FCC has jurisdiction over all telecommunications common carriers to the
extent they provide interstate or international communications services. Each
state regulatory commission has jurisdiction over the same carriers with respect
to the provision of intrastate communications services within that state. Local
governments sometimes seek to impose franchise requirements on
telecommunications carriers and regulate construction activities involving
public rights-of-way. Changes to the regulations imposed by any of these
regulators could have a material adverse effect on our business, operating
results and financial condition.

         In recent years, the regulation of the telecommunications industry has
been in a state of flux as the United States Congress and various state
legislatures have passed laws seeking to foster greater competition in
telecommunications markets. The FCC and state utility commissions have adopted
many new rules to implement this legislation and encourage competition. These
changes, which are still incomplete, have created new opportunities and
challenges for us and our competitors. The following summary of regulatory
developments and legislation is intended to describe the most important, but not
all, present and proposed federal, state and local regulations and legislation
affecting the telecommunications industry. Some of these and other existing
federal and state regulations are the subject of judicial proceedings and
legislative and administrative proposals which could change, in varying degrees,
the manner in

                                       13
<PAGE>

which this industry operates. We cannot predict the outcome of any of these
proceedings or their impact on the telecommunications industry at this time.
Some of these future legislative, regulatory or judicial changes may have a
material adverse impact on our business.

         Specifically, as states re-evaluate pricing of network elements, it is
possible that some states could increase rates over existing levels. Currently,
Bell Atlantic and Southwestern Bell have rate cases pending before state
regulatory commissions in New York and Illinois that could significantly raise
the existing rates for some network elements and network element combinations.
Our intent is to be an active participant in these rate cases and any others
that might be critical to our operations. We anticipate joining other
competitive service providers in arguing that existing rates are overstated and
do not reflect the true total element long run incremental costing principles
required by the FCC and the Telecommunications Act. While the prevailing trends
within the industry would predict the adoption of lower rates in association
with the provision of unbundled network elements and network element
combinations, we cannot predict the outcome of any pending or potential rate
case. Increases or decreases in rate levels charged by incumbent local exchange
carriers as a result of regulatory review through rate case or arbitration
proceedings could significantly impact our business plans.

FEDERAL REGULATION

FCC POLICY ON ENHANCED AND INFORMATION SERVICES

         In 1980, the FCC created a distinction between basic telecommunications
services, which it regulates as common carrier services, and enhanced services,
which remain unregulated. The FCC exempted enhanced service providers from
federal regulations governing common carriers, including the obligation to pay
access charges for the origination or termination of calls on carrier networks
and the obligation to contribute to universal service. The Telecommunications
Act of 1996 established a similar distinction between telecommunications
services and information services. Changing technology and changing market
conditions, however, sometimes make it difficult to discern the boundary between
unregulated and regulated services.

         In general, information services are value-added services that use
regulated transmission facilities only as part of a services package that also
includes network or computer software to change or enhance the information
transmitted. We believe that most of the services we provide, including voice
mail, "Find-Me" notification, and directory services offered through the PCC are
information services under the FCC's definition. Because the regulatory
boundaries in this area are somewhat unclear and subject to dispute, however,
the FCC could seek to characterize some of our information services as
"telecommunications services." If that happens, those services would become
subject to FCC regulation, although the impact of that reclassification is
difficult to predict.

         In general, the FCC does not regulate the rates, services, and market
entry and exit of non-dominant telecommunications carriers, but does require
them to contribute to universal service and comply with other regulatory
requirements. We are currently regulated as non-dominant with respect to both
our local and long distance telephone services.

                                       14
<PAGE>

FCC REGULATION OF COMMON CARRIER SERVICES

         We currently are not subject to price cap or rate of return regulation
at the federal level and are not currently required to obtain FCC authorization
for the installation, acquisition or operation of our domestic exchange or
interexchange network facilities. However, we must comply with the requirements
of common carriage under the Communications Act of 1934. We are subject to the
general requirement that our charges and terms for our telecommunications
services be "just and reasonable" and that we not make any "unjust or
unreasonable discrimination" in our charges or terms. The FCC has jurisdiction
to act upon complaints against any common carrier for failure to comply with its
statutory obligations.

         Comprehensive amendments to the Communications Act of 1934 were made by
the Telecommunications Act of 1996, which was signed into law on February 8,
1996. The Telecommunications Act effected changes in regulation at both the
federal and state levels that affect virtually every segment of the
telecommunications industry. The stated purpose of the Telecommunications Act is
to promote competition in all areas of telecommunications. While it may take
years for the industry to feel the full impact of the Telecommunications Act, it
is already clear that the legislation provides us with new opportunities and
challenges.

         INTERCONNECTION. The Telecommunications Act greatly expands the
interconnection requirements applicable to the incumbent local exchange
carriers, i.e., generally, those existing local exchange carriers that, in the
past, enjoyed virtual or legal monopoly status. The Telecommunications Act
requires the incumbent local exchange carriers to

         o     provide physical collocation, which allows companies such as us
               and other competitive local exchange carriers to install and
               maintain our own network termination equipment in incumbent local
               exchange carrier central offices or, if requested or if physical
               collocation is demonstrated to be technically infeasible, virtual
               collocation;

         o     offer components of their local service networks on an unbundled
               basis so that other providers of local service can use these
               elements in their networks to provide a wide range of local
               services to customers; and

         o     establish "wholesale" rates for their services to promote resale
               by competitive local exchange carriers. We currently do not have
               plans to enter any markets by reselling incumbent local exchange
               carrier service.

    In addition, all local exchange carriers must

         o     interconnect with the facilities of other carriers;

         o     establish number portability, which will allow customers to
               retain their existing phone numbers if they switch from the local
               exchange carrier to a competitive local service provider;

                                       15
<PAGE>

         o     provide nondiscriminatory access to telephone poles, ducts,
               conduits and rights-of-way; and

         o     compensate other local exchange carriers on a reciprocal basis
               for traffic originated by one local exchange carrier and
               terminated by another local exchange carrier.

         The FCC is charged with establishing national guidelines to implement
certain portions of the Telecommunications Act. The FCC issued its
interconnection order on August 8, 1996. Among other rules, the FCC established
a list of seven network elements, comprising most of the significant facilities,
features, functionalities, or capabilities of the network, that the incumbent
local exchange carriers must unbundle. It is possible for competitors to provide
competitive local exchange service using only these unbundled network elements.
In addition, the FCC mandated a particular forward looking pricing methodology
for these network elements that produces relatively low element prices that are
favorable to competitors.

         On July 18, 1997, however, the United States Court of Appeals for the
Eighth Circuit issued a decision vacating the FCC's pricing rules, as well as
certain other portions of the FCC's interconnection rules, on the grounds that
the FCC had improperly intruded into matters reserved for state jurisdiction. On
January 25, 1999, the Supreme Court largely reversed the Eighth Circuit's order,
holding that the FCC has general jurisdiction to implement the local competition
provisions of the Telecommunications Act. In so doing, the Supreme Court stated
that the FCC has authority to set pricing guidelines for unbundled network
elements, to prevent incumbent local exchange carriers from disaggregating
existing combinations of network elements, and to establish "pick and choose"
rules regarding interconnection agreements. "Pick and choose" rules would permit
a carrier seeking interconnection to pick and choose among the terms of service
from other interconnection agreements between the incumbent local exchange
carriers and other competitive local exchange carriers. This action
reestablishes the validity of many of the FCC rules vacated by the Eighth
Circuit.

         Although the Supreme Court affirmed the FCC's authority to develop
pricing guidelines, the Supreme Court did not evaluate the specific
forward-looking pricing methodology mandated by the FCC and has remanded the
case to the Eighth Circuit for further consideration. Some incumbent local
exchange carriers have argued that this pricing methodology does not allow
adequate compensation for the provision of unbundled network elements. The
Eighth Circuit heard oral arguments on this pricing issue on September 16, 1999,
but has not yet issued a ruling.

         The Supreme Court also remanded the list of unbundled network elements
to the FCC for further consideration of the necessity of each one under the
statutory standard. On November 5, 1999, the FCC released an order largely
retaining its list of unbundled network elements, but eliminating the
requirement that incumbent local exchange carriers provide unbundled access to
local switching for customers with four or more lines in the densest parts of
the top 50 Metropolitan Statistical Areas, and to operator services and
directory assistance. The FCC concluded that the market has developed since 1996
such that competitors can and do self-provision these services, or acquire them
from alternative sources. The FCC also noted that incumbent local exchange
carriers remain obligated under the non-discrimination requirements of the
Communications Act of 1934 to comply with the reasonable request of a carrier
that

                                       16
<PAGE>

purchases these services from the incumbent local exchange carriers to rebrand
or unbrand those services, and to provide directory assistance listings and
updates in daily electronic batch files. In addition, the competitive checklist
contained in Section 271 of the Communications Act of 1934 requires Bell
operating companies to provide nondiscriminatory access to these services.

         These new FCC rules are likely to be the subject of further appeals.
Thus, while the Supreme Court resolved many issues, including the FCC's
jurisdictional authority, other issues remain subject to further consideration
by the courts and the FCC. We cannot predict the ultimate disposition of those
matters. If the Eighth Circuit fails to affirm the FCC's pricing
methodology--which is favorable to competitors such as us because it is based on
forward-looking costs--then unbundled network element prices, including prices
for unbundled network element combinations, may rise. Such increases could have
a materially adverse effect on our business.

         INTERCONNECTION AGREEMENTS. The Telecommunications Act obligates
incumbent local exchange carriers to negotiate with us in good faith to enter
into interconnection agreements. Competitive local exchange carriers like us can
purchase unbundled network elements under such an agreement or under a tariff or
a Statement of Generally Available Terms filed with the state regulators.
Although we purchase the unbundled network element platform in New York under
Bell Atlantic's tariff, we will need interconnection agreements in some states,
and have entered into interconnection agreements in Texas, Massachusetts and
Pennsylvania, to provide enhanced connectivity to our network and to provide
local exchange services, including Z-Line Home Edition. If we cannot reach
agreement, either side may petition the applicable state commission to arbitrate
remaining disagreements. These arbitration proceedings can last for a
substantial period of time. Moreover, state commission approval of any
interconnection agreement resulting from negotiation or arbitration is required,
and any party may appeal an adverse decision by the state commission to federal
district court, although some federal district courts have refused to exercise
jurisdiction over such cases. The potential cost in resources and delay from
this process could harm our ability to compete in certain markets, and there is
no guarantee that a state commission would resolve disputes, including pricing
disputes, in our favor.

         COLLOCATION AND LINE SHARING. The FCC recently adopted new rules
designed to make it easier and less expensive for competitive local exchange
carriers to obtain collocation at incumbent local exchange carriers' central
offices by, among other things, restricting the incumbent local exchange
carriers' ability to prevent certain types of equipment from being collocated
and requiring incumbent local exchange carriers to offer alternative collocation
arrangements. On November 18, 1999, the FCC also adopted a new order requiring
incumbent local exchange carriers to provide line sharing, which will allow
competitive local exchange carriers to offer data services over the same line
that a consumer uses for voice services without the competitive local exchange
carriers' having to provide the voice service. While we expect that the FCC's
new rules will be beneficial to competitive local exchange carriers, we cannot
be certain that these new rules will be implemented by the incumbent local
exchange carrier in a timely or favorable manner. Moreover, incumbent local
exchange carriers and other parties have asked the FCC to reconsider portions of
these rules. In addition, on March 17, 2000, the United States Court of Appeals
for the District of Columbia Circuit vacated portions of the FCC's new
collocation rules. Specifically, the court found that the FCC's interpretation
of the statutory terms "necessary" and "physical collocation" are impermissibly
broad, and remanded those portions of the order to the FCC for reconsideration.
We cannot predict the outcome of these actions or the effect they may have on
our business.

                                       17
<PAGE>

         BELL OPERATING COMPANY ENTRY INTO THE LONG DISTANCE MARKET. The
Telecommunications Act permitted the Bell operating companies to provide long
distance services outside their local service regions immediately, and will
permit them to provide in-region long distance service upon demonstrating to the
FCC and state regulatory agencies that they have adhered to the
Telecommunication Act's Section 271 14-point competitive checklist. Some Bell
operating companies have filed applications with various state public utility
commissions and the FCC seeking approval to offer in-region interLATA service.
Some states have denied these applications while others have approved them.
Prior to December 1999, the FCC had denied each of the Bell operating company
applications brought before it because it found that the particular Bell
operating company had not sufficiently made its local network available to
competitors. On September 29, 1999, Bell Atlantic filed with the FCC an
application to provide in-region long distance service originating in New York.
The FCC issued an order allowing Bell Atlantic to enter the in-region long
distance market in New York in late-December 1999. Bell Atlantic began offering
long distance service in New York on a commercial basis in January 2000. On
January 10, 2000, Southwestern Bell filed an application with the FCC seeking
approval to offer in-region interLATA services in Texas. By statute, the FCC
must act on that application by April 10, 2000. While we cannot predict the
outcome of any Section 271 applications before the FCC, it is generally expected
that long distance competition will increase as the Bell operating companies
enter the market. We also expect other Bell operating companies to file similar
applications in 2000 and 2001.

         UNIVERSAL SERVICE. In May 1997, the FCC released an order establishing
a significantly expanded universal service regime to subsidize the cost of
telecommunications service to high cost areas, as well as to low-income
customers and qualifying schools, libraries and rural health care providers.
Providers of interstate telecommunications services, like us, as well as certain
other entities, must pay for these programs. We are also eligible to receive
funding from these programs if we meet certain requirements, but we do not
currently have plans to do so. Our share of the payments into these subsidy
funds will be based on our share of certain defined telecommunications end-user
revenues. Currently, the FCC is assessing such payments on the basis of a
provider's revenue for the previous year. Various states are also in the process
of implementing their own universal service programs. We are currently unable to
quantify the amount of subsidy payments that we will be required to make to
individual states. On July 30, 1999, the United States Court of Appeals for the
Fifth Circuit overturned certain of the FCC's rules governing the basis on which
the FCC collects subsidy payments from telecommunications carriers and recovery
of those payments by incumbent local exchange carriers. In October 1999, on
remand, the FCC issued new universal service rules. These or other changes to
the universal service program could affect our costs. One or more parties may
seek review of the new FCC rules by the Fifth Circuit and subsequently by the
Supreme Court. The Fifth Circuit also remanded other rules to the FCC for
further consideration.

         TARIFFS AND RATES. In 1996, the FCC issued an order that required
nondominant interexchange carriers, like us, to cease filing tariffs for our
domestic interexchange services. The order required mandatory detariffing and
gave carriers nine months to withdraw federal tariffs and move to contractual
relationships with their customers. This order subsequently was stayed by a
federal appeals court, and it is unclear at this time whether the detariffing
order will be

                                       18
<PAGE>

implemented. In June 1997, the FCC issued another order stating that nondominant
local exchange carriers, like us, could withdraw their tariffs for interstate
access services provided to long distance carriers. If the FCC's orders become
effective, nondominant interstate services providers will no longer be able to
rely on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions under which they offer their
interstate services. If we cancel our FCC tariffs as a result of the FCC's
orders, we may need to implement customer contracts, which could result in
substantial administrative expenses.

         In March 1999, the FCC adopted further rules that, while still
maintaining mandatory detariffing, nonetheless require interexchange carriers to
make specific public disclosures on their web sites of their rates, terms and
conditions for domestic interstate services. The effective date for these rules
is also delayed until a court decision on the appeal of the FCC's detariffing
order.

         JURISDICTIONAL NATURE OF INTERNET TRAFFIC. Recently, the FCC has
determined that both continuous access and dial-up calls from a customer to an
Internet service provider are interstate, not local, calls, and, therefore, are
subject to the FCC's jurisdiction. The FCC has initiated a proceeding to
determine the effect that this regulatory classification will have on the
obligation of local exchange carriers to pay reciprocal compensation for dial-up
calls to Internet service providers that originate on one local exchange carrier
network and terminate on another local exchange carrier network. Moreover,
several states are considering this issue, and several states have held that
local exchange carriers do not need to pay reciprocal compensation for calls
terminating at Internet service providers. On March 24, 2000, the Court of
Appeals for the District of Columbia remanded for reconsideration the FCC's
determination that calls to Internet service providers are interstate rather
than local. Specifically, the Court indicated that the FCC has not provided a
satisfactory explanation why calls to Internet service providers are not local
telecommunications traffic and why such traffic is exchange access rather than
telephone exchange service. We cannot predict the effect that the FCC's
resolution of these issues will have on our business.

         NUMBERING AND NUMBER PORTABILITY. In August 1997, the FCC issued rules
transferring responsibility for administering and assigning local telephone
numbers from the Bell operating companies and other incumbent local exchange
carriers to a neutral entity in each geographic region in the United States. In
August 1996, the FCC issued new numbering regulations that prohibit states from
creating new area codes that could unfairly hinder competitive local exchange
carriers by requiring their customers to use 10 digit dialing while existing
incumbent local exchange carrier customers use seven digit dialing. In addition,
each carrier is required to contribute to the cost of numbering administration
through a formula based on net telecommunications revenues. Beginning in March
2000, contributions for this purpose will be based on end user
telecommunications revenues and will be submitted in association with FCC
Lifeline, Universal Service and the Schools and Libraries Funds.

         In July 1996, the FCC released rules requiring all local exchange
carriers to have the capability to permit both residential and business
consumers to retain their telephone numbers when switching from one local
service provider to another, known as "number portability." Number portability
has been implemented in most of the areas in which we provide service, but has
not been implemented everywhere in the United States. Some carriers have
obtained waivers of the requirement to provide number portability, and others
have delayed implementation by obtaining extensions of time before compliance is
required. Lack of number portability in a given market could adversely affect
our ability to attract customers for our competitive local

                                       19
<PAGE>

exchange service offerings, particularly business customers, should we seek to
provide services to such customers.

         In May 1999, the FCC also initiated a proceeding to address the problem
of the declining availability of area codes and phone numbers. Many of these
numbering-related issues are subject to further change by the FCC and the
courts, and could produce added administrative expenses for us.

         RESTRICTIONS ON BUNDLING. Current FCC rules prohibit dominant carriers
from bundling their non-competitive, regulated telecommunications services with
their unregulated enhanced or information services. The Commission has never
enforced this rule with respect to competitive local exchange carriers and has
proposed eliminating the rule for all carriers.

         SLAMMING. A customer's choice of local or long distance
telecommunications company is encoded in a customer record, which is used to
route the customer's calls so that the customer is served and billed by the
desired company. A user may change service providers at any time, but the FCC
and some states regulate this process and require that specific procedures be
followed. When these procedures are not followed, particularly if the change is
unauthorized or fraudulent, the process is known as "slamming." Slamming is such
a significant problem that it has been addressed in detail by Congress in the
Telecommunications Act, by some state legislatures, and by the FCC in recent
orders. The FCC has levied substantial fines for slamming. The risk of financial
damage and to business reputation from slamming is significant. Even one
slamming complaint could cause extensive litigation expenses for us. The FCC
recently decided to apply its slamming rules (which originally covered only long
distance) to local service as well.

         NETWORK INFORMATION. The Communications Act of 1934 and FCC rules
protect the privacy of certain information about telecommunications customers
that a telecommunications carrier such as us acquires by providing
telecommunications services to such customers. Such protected information, known
as Customer Proprietary Network Information (CPNI), includes information related
to the quantity, technological configuration, type, destination and the amount
of use of a telecommunications service. Under the FCC's rules, a carrier may not
use the Customer Proprietary Network Information acquired through one of its
offerings of telecommunications services to market certain other services
without the approval of the affected customers. The United States Court of
Appeals for the Tenth Circuit recently overturned the FCC's rules regarding the
use and protection of Customer Proprietary Network Information. The FCC recently
relaxed its customer proprietary network information rules somewhat, but it also
has sought reconsideration of the Tenth Circuit decision. Further, FCC rules
regarding handling of CPNI could result in significant administrative expense in
modifying internal customer systems to meet such requirements.

         OTHER ISSUES. There are a number of other issues and proceedings that
could have an effect on our business in the future, including the fact that

         o     The FCC has adopted rules to require telecommunications service
               providers to make their services accessible to individuals with
               disabilities, if readily achievable.

                                       20
<PAGE>

         o     The FCC has also ordered telecommunications service providers to
               provide law enforcement personnel with a sufficient number of
               ports and technical assistance in connection with wiretaps. We
               cannot predict the cost to us of complying with this order.

         o     The FCC has adopted new rules designed to make it easier for
               customers to understand the bills of telecommunications carriers.
               These new rules establish certain requirements regarding the
               formatting of bills and the information that must be included on
               bills. These rules have been appealed in Federal court.

         o     We are subject to annual regulatory fees assessed by the FCC, and
               must file an annual employment report to comply with the FCC's
               Equal Employment Opportunity policies.

         o     The FCC has adopted an order granting limited pricing flexibility
               to large incumbent local exchange carriers, and is considering
               granting additional pricing flexibility and price deregulation
               options. These actions could increase competition for some of our
               services.

         The foregoing is not an exhaustive list of proceedings or issues that
could materially affect our business. We cannot predict the outcome of these or
any other proceedings before the courts, the FCC, or state or local governments.

STATE REGULATION

         To the extent that we provide telecommunications services which
originate and terminate in the same state, we are subject to the jurisdiction of
that state's public service commission. As our local service business and
product lines expand, we will offer more intrastate service and may become
increasingly subject to state regulation. The Telecommunications Act maintains
the authority of individual state utility commissions to preside over rate and
other proceedings, and to impose their own regulation on local exchange and
intrastate interexchange services, so long as such regulation is not
inconsistent with the requirements of federal law. For instance, states may
require us to obtain a Certificate of Public Convenience and Necessity before
commencing service in the state, and may impose tariff and filing requirements,
consumer protection measures, and obligations to contribute to universal service
and other funds. State commissions also have jurisdiction to approve negotiated
rates, or establish rates through arbitration, for interconnection, including
rates for unbundled network elements.

         We are subject to requirements in some states to obtain prior approval
for, or notify the state commission of, any transfers of control, sales of
assets, corporate reorganizations, issuances of stock or debt instruments and
related transactions. Although we believe such authorizations could be obtained
in due course, there can be no assurance that state commissions would grant us
authority to complete any of these transactions.

         The Telecommunications Act generally preempts state statutes and
regulations that restrict the provision of competitive services. As a result of
this broad preemption, we will be generally free to provide the full range of
local, long distance, and data services in any state. While this action greatly
increases our potential for growth, it also increases the amount of

                                       21
<PAGE>

competition to which we may be subject. States, however, may still restrict
competition in some rural areas.

         In particular, we expect to expand our Z-Line Home Edition service by
starting to market this service in Pennsylvania by the end of the second quarter
of 2000. We are currently offering service in New York via Bell Atlantic's
tariffed offerings and in Massachusetts via a local interconnection agreement,
dated December 30, 1999, between us and Bell Atlantic. Our service in Texas is
provided via an interconnection agreement effective between us and Southwestern
Bell Telephone Company, dated November 5, 1999. To effectuate service in
Pennsylvania, we entered into a local interconnection agreement with Bell
Atlantic on December 30, 1999. Under the terms of the agreements entered into
with Bell Atlantic with respect to Massachusetts and Pennsylvania, Bell Atlantic
will provide the unbundled network element platform components in a manner
similar to that provided by Bell Atlantic in New York.

         In order to enter new market areas, we may be required to negotiate
interconnection contracts with incumbent local exchange carriers on an
individual state basis. While current FCC rules and regulations require the
incumbent provider to provide the network elements on an individual and combined
basis necessary for us to provision end-user services, no assurance can be made
that the individual local exchange providers will provide these components in a
manner and at a price that will support competitive operations. If the incumbent
providers do not readily provide network functionality in the manner required,
we have regulatory and legal alternatives, including arbitration before state
public service commissions, to force provision of services in a manner required
to support our service offerings. However, if we are forced to litigate in order
to obtain the combinations of network elements required to support our service,
we are likely to incur significant incremental costs and delays in entering such
markets.

LOCAL GOVERNMENT REGULATION

         In some of the areas where we provide service, we may be subject to
municipal franchise requirements requiring us to pay license or franchise fees
either on a percentage of gross revenue, flat fee or other basis. We may be
required to obtain street opening and construction permits from municipal
authorities to install our facilities in some cities. The Telecommunications Act
prohibits municipalities from discriminating among telecommunications service
providers in imposing fees or franchise requirements. In some localities, the
FCC has preempted fees and other requirements determined to be discriminatory or
to effectively preclude entry by competitors, but such proceedings have been
lengthy and the outcome of any request for FCC preemption would be uncertain.

EMPLOYEES

         As of March 21, 2000, we had approximately 450 full-time employees,
excluding approximately 31 individuals employed by a temporary employment
service, some of whom we expect to offer full-time employment. None of our
employees are covered under collective bargaining agreements, and we believe
that our relationships with our employees are good.

                                       22
<PAGE>

         In connection with the deployment of our network architecture and the
execution of our business plan, as well as the addition of Touch 1's personnel,
if the acquisition is consummated, we believe that the number of our customer
service, information systems installation and sales and marketing personnel will
increase significantly.

ITEM 2.  PROPERTIES

         We currently lease our principal executive offices in Tampa, Florida
and our principal engineering offices in Atlanta, Georgia.

ITEM 3.  LEGAL PROCEEDINGS

         We are a party to various routine administrative proceedings. For more
information, please refer to the section entitled "Item 1. Business--Government
Regulation."

         In addition, in May 1998 we received a letter from Premiere
Technologies, Inc. (Premiere), threatening legal action based on the allegation
that our chief executive officer, Mr. Smith, a founder and a former director and
executive vice president of Premiere, had, among other things, improperly used
trade secrets belonging to Premiere in connection with the development of our
technology. Although the parties have subsequently had some discussions and
exchanged correspondence, including letters sent by Premiere to us in December
1999 reiterating prior claims and further discussions during which Premiere
alleged the existence of additional intellectual property claims arising from
the conduct of Mr. Smith, another one of our directors, one of our other
officers and us, Premiere has never commenced any legal proceedings against us
or Mr. Smith. While we believe that Premiere's alleged claims are without merit,
we cannot assure you that Premiere will not try to pursue its claims through
litigation or what the outcome of such litigation would be.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

         On or about October 8, 1999, a majority of our Series A and Series B
preferred stockholders, respectively, approved, by written consent, an amendment
to the Stockholders' Agreement by and among us, certain management personnel,
and the Series A and Series B preferred stockholders that had the effect of
adding the Series C preferred stockholder to the Stockholders' Agreement and
altering certain rights of the Series B preferred stockholders. Series A
preferred stockholders representing 1,078,318 shares of our Series A preferred
stock and Series B preferred stockholders representing 2,140,477 shares of our
Series B preferred stock approved the amendment pursuant to such written
consent.

         On or about October 30, 1999, a majority of our Series A preferred
stockholders, Series B preferred stockholders and common stockholders,
respectively, approved, by written consent, our 1998 Equity Participation Plan,
adopted October 30, 1998, as amended (the Plan). Common stockholders
representing 10,338,000 shares of our common stock, Series A preferred
stockholders representing 1,078,318 shares of our Series A preferred stock and
343,588 shares of the Company's Series B preferred stock approved the Plan
pursuant to such written consent.

                                       23
<PAGE>

         On November 23, 1999, we held a special meeting of our stockholders, at
which our stockholders were requested to (1) approve an amendment to our
articles of incorporation increasing the authorized shares to 200,000,000
shares, consisting of 150,000,000 shares of common stock, par value $0.01 per
share, and 50,000,000 shares of preferred stock, par value $0.01 per share; and
(2) approve an amendment to increase the number of shares subject to the Plan to
7,500,000. 14,657,017 votes were cast in favor of each proposal, with no votes
cast against either of the proposals and no abstentions.

                                       24
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ZTEL."

         The following table sets forth, for the periods indicated, the range of
high and low closing sale prices for the Common Stock, as reported on the Nasdaq
National Market since trading began on December 15, 1999, in connection with the
Company's initial public offering, under the symbol ZTEL:

                                                         HIGH        LOW
                                                       -------     -------
CALENDAR YEAR 1999:
Fourth Quarter (from December 15, 1999)                $42.375     $33.125

FISCAL YEAR 2000:                                      $47.25      $25.8125
First Quarter (through March 23, 2000)

         On March 23, 2000, the last reported sales price of the Common Stock on
the Nasdaq National Market was $42.25 per share. As of March 23, 2000, there
were approximately 218 holders of record of the Common Stock.

         We have not paid dividends on our common stock since our inception and
do not intend to pay any cash dividends for the foreseeable future but instead
intend to retain earnings, if any, for the future operation and expansion of our
business. Any determination to pay dividends in the future will be at the
discretion of our Board of Directors and will be dependent upon our results of
operations, financial condition, restrictions imposed by applicable law and
other factors deemed relevant by the Board of Directors.

USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

         We filed a registration statement (Commission file no. 333-89063),
which became effective on December 14, 1999, with respect to the initial public
offering of 6,900,000 shares of our common stock (including the underwriters'
over-allotment option). All 6,900,000 shares were sold, for an aggregate
offering price of $117,300,000. The offering was co-lead by joint-book running
managers Thomas Weisel Partners LLC and Credit Suisse First Boston, and
co-managed by J.C. Bradford & Co. and Stephens Inc.

         From December 14, 1999 through December 31, 1999, the expenses incurred
in connection with the offering were as follows: $8,211,000 in underwriting
discounts and commissions, $1,693,000 in other expenses and $9,904,000 in total
expenses. The net offering proceeds after deduction of expenses were
$107,396,000. No expenses were paid, directly or indirectly, to our directors,
officers, 10% shareholders or affiliates. Through December 31, 1999,
approximately $5,823,000

                                       25
<PAGE>

of the net offering proceeds were used in the following estimated amounts and
for the following purposes: $1,398,000 for the purchase and installation of
network equipment, $1,041,000 for the purchase of software and support and
software development, $1,985,000 for marketing expenses, $1,157,000 for
operational expenses, and $242,000 for construction of plant, building and
facilities. The remaining $99,234,000 has been placed in temporary investments
in cash and cash equivalents. None of the net offering proceeds have been paid,
directly or indirectly, to our directors, officers, 10% shareholders or
affiliates.

RECENT SALES OF UNREGISTERED SECURITIES

         During the period covered by this report, Z-Tel sold shares of its
common stock in the amounts, at the times, and for the aggregate amounts of
consideration listed below without registration under the Securities Act of
1933. Exemption from registration under the Securities Act for each of the
following sales is claimed under Section 4(2) of the Securities Act because such
transactions were by an issuer and did not involve a public offering:

         On March 15, 1999, Z-Tel issued a warrant to purchase 521,832 shares of
Common Stock to CMB Capital, LLC in connection with a $35.2 million revolving
sale-leaseback credit facility.

         On September 22, 1999, Z-Tel issued, in the aggregate, 2,695,795 shares
of Series B Preferred Stock to 53 persons for an aggregate consideration of $10
million.

         On October 8, 1999, Z-Tel issued 2,794,800 shares of Series C Preferred
Stock to Gramercy Z-Tel, LLC for an aggregate consideration of $15 million.

         On October 13, 1999, Z-Tel issued 11,000 shares of common stock to
Telebot Corporation in exchange for substantially all of its assets.

         On October 13, 1999, Z-Tel issued 55,000 shares of common stock to
Telutions LLC in connection with our purchase of software and support services.

         On October 13, 1999, Z-Tel granted a warrant to purchase 115,500 shares
of common stock to CMB Capital LLC in connection with an amendment to the
existing facility, in which CMB Capital LLC agreed to, among other things, a
provision for prepayment of the facility.

                                       26
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected historical consolidated financial data should be
read in conjunction with the financial statements, related notes and other
financial information contained in this document. You should also read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contained later in this document. The Consolidated Statements of
Operations Data for the year ended December 31, 1999 and the period from January
15, 1998 (Inception) through December 31, 1998, and the consolidated balance
sheet data and other financial data as of December 31, 1999 and December 31,
1998, are derived from our financial statements that have been audited by our
independent auditors.
<TABLE>
<CAPTION>
                                                                                 PERIOD
                                                                             JANUARY 15, 1998
                                                       YEAR ENDED             (INCEPTION)
                                                       DECEMBER 31,       THROUGH DECEMBER 31,
                                                          1999                    1998
                                                       ------------       --------------------
<S>                                                   <C>                    <C>
Revenues                                              $  6,615,000           $    140,000
                                                      ------------           ------------
Operating expenses:
    Network operations                                   7,942,000                382,000
    Sales and marketing                                  8,588,000              2,201,000
    Research and development                             3,562,000              4,728,000
    General and administrative                          15,379,000              4,718,000
    Depreciation and amortization                        4,372,000              1,283,000
                                                      ------------           ------------

      Total operating expenses                          39,843,000             13,312,000
                                                      ------------           ------------

      Operating loss                                   (33,228,000)           (13,172,000)
                                                      ------------           ------------
Nonoperating income (expense):
    Interest income                                        608,000                228,000
    Interest expense                                    (3,351,000)              (178,000)
                                                      ------------           ------------

      Total nonoperating income (expense)               (2,743,000)                50,000
                                                      ------------           ------------

      Net loss                                         (35,971,000)           (13,122,000)

      Less mandatorily convertible redeemable
           preferred stock dividends                    (1,654,000)              (190,000)
                                                      ------------           ------------

      Net loss attributable to common stockholders    $(37,625,000)          $(13,312,000)
                                                      ============           ============

Weighted average common shares outstanding              15,099,359              6,554,499
                                                      ============           ============

Basic and diluted net loss per share                  $      (2.49)          $      (2.03)
                                                      ============           ============
</TABLE>

                                       27
<PAGE>

CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents                             101,657,000     7,973,000
Working capital                                        95,315,000     3,328,000
Total assets                                          137,677,000    20,274,000
Total debt                                             14,134,000       724,000
Mandatorily convertible redeemable preferred stock          --       15,154,000
Total stockholder's equity (deficit)                  114,378,000        (6,000)


OTHER FINANCIAL DATA
EBITDA (1)                                            (28,856,000)  (11,889,000)
Net cash used in operating activities                 (32,681,000)   (7,769,000)
Net cash used in investing activities                  (5,182,000)  (11,393,000)
Net cash provided by financing activities             131,547,000    27,135,000

(1) EBITDA consists of earnings before interest, income taxes, depreciation and
    amortization. While not a measure under generally accepted accounting
    principles, EBITDA is a measure commonly used in the telecommunications
    industry and is presented to assist in understanding our operating results.
    Although EBITDA should not be construed as a substitute for operating income
    (loss) determined in accordance with generally accepted accounting
    principles, it is included herein to provide additional information with
    respect to our ability to meet future debt service, capital expenditures
    and working capital requirements. The calculation of EBITDA does not
    include our commitments for capital expenditures and payment of debt and
    should not be deemed to represent our available funds. See "Management's
    Discussion and Analysis of Financial Condition and Results of Operations"
    for a discussion of our financial operations and liquidity as determined
    in accordance with generally accepted accounting principles.

                                       28
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         You should read the following discussion together with the "Selected
Consolidated Financial Data," financial statements and related notes included in
this document. 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,
including, but not limited to, those discussed in "Item 1. Business," as well as
"Cautionary Statements Regarding Forward-Looking Statements," "Risks Related to
our Financial Condition and our Business" and "Risks Related to our Industries,"
below, and other factors relating to our business and us that are not historical
facts. 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 uncertainties, and competition. We
disclaim any obligation to update information contained in any forward-looking
statement.

OVERVIEW

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

REVENUES

         We began offering Z-Line Home Edition service in New York in June 1999,
Texas in December of 1999, and Massachusetts in March 2000. Z-Line Home Edition
is our principal service offering. Z-Line Home Edition includes low-priced local
and long-distance (1+) residential telephone services using a customer's
existing telephone number, bundled with enhanced features, including caller
identification, call forwarding, three-way calling, speed dialing, and dial-up
remote access through our Z-Line Anywhere access card product, the full
functionality of the Personal Communication Center (PCC) and, for an additional
fee, Internet access. We expect sales and marketing expenses to increase
substantially as we introduce our Z-Line Home Edition service into new markets.
We intend to expand into Pennsylvania before the end of the second quarter of
2000. Our strategy will require us to hire additional sales and marketing
personnel to build awareness of our services. We will also need to hire
technical personnel to continue to expand our network architecture and enhance
our service offerings. In addition to our internal technical staff, we expect to
continue our relationship with third-party vendors and system integration
consultants to integrate and enhance our customer care and

                                       29
<PAGE>

billing software applications. We will continue to expand our network through
leased facilities, strategic alliances, and acquisitions.

         We began offering an access card service, similar to our current Z-Line
Anywhere service, in the quarter ended December 31, 1998. Z-Line Anywhere is our
access card product that allows a customer to make long-distance calls using
Z-Tel's network from any phone simply by dialing a local access or toll-free
1-800 number. No change in phone service is required. Subscribers of Z-Line
Anywhere also receive the full functionality of our PCC. Z-Line Anywhere is
offered nationwide. Z-Line Anywhere customers are billed monthly in arrears, and
the associated revenue is recognized in the month of service.

          We began offering Z-Line Home Edition in June 1999. During 1999, we
derived most of our revenue from service fees charged to Home Edition customers
located in areas of New York served by Bell Atlantic. In addition to New York,
we have begun to offer Z-Line Home Edition in Texas and Massachusetts and expect
to offer this service in Pennsylvania before the end of the second quarter of
2000. We intend to offer the Z-Line Home Edition product throughout the United
States, subject to the establishment, implementation, operation, and favorable
pricing of the unbundled network elements by each state in accordance with the
Telecommunications Act of 1996 and the more recent November 5, 1999 FCC order.

         Charges for our Z-Line Home Edition basic services are billed in
advance on a monthly basis. Long distance services in excess of a subscriber's
basic package are billed in arrears. Revenue from Z-Line Home Edition is
recognized as earned. Our Z-Line Home Edition customer agreements may be
canceled on 30 days notice.

OPERATING EXPENSES

   Operating expenses are comprised of:

     o    network operations, which consists primarily of fixed and variable
          transmission expenditures, and rent expense for space in data centers;

     o    sales and marketing, which consists primarily of telemarketing,
          advertising, sales compensation and related expenses;

     o    research and development, which consists primarily of compensation and
          consulting fees related to the development of our proprietary
          technologies;

     o    general and administrative, which consists primarily of compensation
          and related expenses, bad debt expense, occupancy costs and various
          administrative expenses; and

     o    depreciation and amortization, which consists primarily of the
          non-cash reduction in carrying value of our long-lived assets.

         We expect to expand our operations and workforce, including our network
operations, technical support, sales, marketing and administrative resources. In
particular, we intend to

                                       30
<PAGE>

expand our existing sales force and create a locally based sales force in
selected metropolitan areas where we intend to initiate service and determine a
need for a physical sales presence. As a result, we expect to continue to incur
substantial losses for the foreseeable future.

RESULTS OF OPERATIONS

Comparison of the year ended December 31, 1999 and the period January 15, 1998
(Inception) through December 31, 1998:

         REVENUE. Revenue increased by $6.5 million to $6.6 million for the year
ended December 31, 1999, compared to $0.1 million for the period January 15,
1998 (Inception) through December 31, 1998. The following tables outline the
approximate number of subscribers for Z-Line Home Edition and Z-Line Anywhere:


TYPE OF SERVICE                    DECEMBER 31, 1999   DECEMBER 31, 1998
------------------------------------------------------------------------

Z-LINE HOME EDITION SUBSCRIBERS         40,100                 0
Z-LINE ANYWHERE SUBSCRIBERS             26,000               5,800


         NETWORK OPERATIONS. Network operations expense increased by $7.5
million to $7.9 million for the year ended December 31, 1999, compared to $0.4
million for the period January 15, 1998 (Inception) through December 31, 1998.
The network operations expense primarily consists of transmission expenses for
interconnection agreements with incumbent local exchange carriers (ILECs),
service level agreements with inter-exchange carriers (IXCs), transmission
services based on tariff arrangements, and employee salaries and benefits
associated with the maintenance and operations of our networks. These various
agreements include both fixed and variable line charges.

         The increase in network operations expense was due primarily to growth
in the number of subscribers resulting from the introduction of our Z-Line Home
Edition services. We expect our network operations expense to increase
significantly in future periods due to increases in subscribers.

         SALES AND MARKETING. Sales and marketing expense increased $6.4 million
to $8.6 million for the year ended December 31, 1999, compared to $2.2 million
for the period January 15, 1998 (Inception) to December 31, 1998. The sales and
marketing expense primarily consists of telemarketing, development of our brand
awareness through promotional and advertising materials, and employee salaries
and benefits.

         The increase in sales and marketing expense is attributable to our
expanded sales and marketing efforts to increase our subscribers. We increased
our telemarketing and advertising expenses in 1999 in connection with the
introduction of our Z-Line Home Edition service. To

                                       31
<PAGE>

meet the demands of our growth we increased our personnel in this department
from approximately 10 at December 31, 1998 to approximately 20 at December 31,
1999. This increase is also attributable to the fact that marketing of our
services did not begin in earnest until the fourth quarter of 1998. We intend to
significantly increase our sales and marketing expenditures during the year
2000.

         RESEARCH AND DEVELOPMENT. Research and development expenditures
decreased $1.1 million to $3.6 million for the year ended December 31, 1999,
compared to $4.7 million, for the period January 15, 1998 (Inception) to
December 31, 1998. Our research and development expenses consist primarily of
software development costs and employee salaries and benefits. We adopted the
provisions of Statement of Position (SOP) 98-1 "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use," at the beginning of
1999. As a result, $4.8 million of our research and development costs relating
to development of internal use software were capitalized for the year ended
December 31, 1999, compared to $0 for the period January 15, 1998 (Inception)
through December 31, 1998.

         In 1998, we expensed internal software development costs, as we were
developing our Z-Line Anywhere and Z-Line Home Edition services and had not
fulfilled the requirements for capitalization. The development of our Z-Line
Home Edition, and the integration of our customer care and billing software
required significant expenditures from employee compensation and outside
consulting fees. These efforts were spent adding functionality and making
significant enhancements to our technology. A portion of these services and
purchases of software were capitalized in 1999 compared to 1998, as a result of
the adoption of SOP 98-1 discussed in the prior paragraph, causing research and
development expenses to decrease in 1999. We expect research and development
costs to increase in the future as we improve and enhance our services.

         GENERAL AND ADMINISTRATIVE. General and administrative expense
increased $10.7 million to $15.4 million for the year ended December 31, 1999,
compared to $4.7 million for the period January 15, 1998 (Inception) to December
31, 1998. The increase in general and administrative expense was primarily due
to increases in its primary components of employee salaries, temporary services,
bad debt expense, and occupancy costs.

         We increased the number of employees in general and administrative
functions to 83 employees at December 31, 1999, from 22 employees at December
31, 1998. We increased our provision for bad debts during 1999, primarily
because of our increase in subscribers for the year. We have implemented revised
credit policies and are closely monitoring collection procedures to help
minimize these expenses in the future. We have increased our leased facilities
utilized to meet our increased personnel and growing need for infrastructure to
support our current and future needs. We anticipate general and administrative
expenditures will continue to increase in the future as we increase our services
and enter new states to meet the demands of our anticipated growth.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $3.1 million to $4.4 million for the year ended December 31, 1999,
compared to $1.3 million for the period January 15, 1998 (Inception) through
December 31, 1998. The increase was due to

                                       32
<PAGE>

purchases of equipment, facilities, and the capitalized costs associated with
internal software development totaling $21.2 million for the year-ended December
31, 1999, compared to $11.4 million for the period January 15, 1998 (Inception)
through December 31, 1998. We expect depreciation and amortization to continue
to increase significantly as we increase our capital expenditures.

         INTEREST INCOME. Interest income increased $0.4 million to $0.6 million
for the year ended December 31, 1999, compared to $0.2 million for the period
January 15, 1998 (Inception) through December 31, 1998. Interest income consists
of income on our cash balances invested in short-term liquid investments. This
increase was due primarily to the closing of two private securities offerings in
1999 and our initial public offering on December 15, 1999, which offering
provided net proceeds of $109.1 million after underwriting discount and
commissions. These transactions in 1999 provided for larger cash balances
compared to 1998. We anticipate that our interest income will continue to
increase, as we will benefit from the interest earned from our initial public
offering proceeds.

         INTEREST EXPENSE. Interest expense increased $3.2 million to $3.4
million for the year ended December 31, 1999, compared to $0.2 million for the
period January 15, 1998 (Inception) through December 31, 1998. Our interest
expense is a result of the interest charge on our capital lease obligations. The
increase in our interest expense is primarily a result of our payments on the
CMB Capital, LLC sale-leaseback agreement. We anticipate a reduction in the
amount of interest expense in the future due to the extinguishment of our CMB
Capital, LLC $35.2 million revolving sale-leaseback credit facility on February
14, 2000.

         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 year ended December 31, 1999 and the period January 15, 1998
(Inception) through December 31, 1998.

         NET LOSS. Our net loss increased $22.9 million to $36.0 million for the
year ended December 31, 1999, compared to $13.1 million for the period January
15, 1998 (Inception) through December 31, 1998. This increase was due primarily
to the increases in expenses described above.

         EBITDA. Many securities analysts use the measure of earnings before
deducting interest, taxes, depreciation and amortization, also commonly referred
to as "EBITDA," as a way of evaluating a company's financial performance. While
EBITDA is not a measure under generally accepted accounting principles, EBITDA
is a measure commonly used in the telecommunications industry and is presented
to assist in understanding our operating results. Our negative EBITDA increased
$17.0 million to $28.9 million for the year ended December 31, 1999, compared to
$11.9 million for the period January 15, 1998 (Inception) through December 31,
1998. We expect to experience increasing operating losses and negative EBITDA as
result of our network development and the expansion of our markets and growth
and expansion of operations.

                                       33
<PAGE>

 LIQUIDITY AND CAPITAL RESOURCES

         The competitive local telecommunications service business is
traditionally considered to be a capital intensive business owing to the
significant investments required in fiber optic communication networks and the
collocation of switches and transmission equipment in incumbent local exchange
carriers' central offices. Our network architecture is designed with remotely
located points of presence, or Z-Nodes, that can be interconnected through local
and long distance communications networks to the Z-Tel enterprise management
center. 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 models. Instead, we will devote significant amounts of our capital
resources to continued software development and to marketing efforts that we
have designed to achieve rapid penetration of our target markets.

         We have incurred significant 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 December 31, 1999, we had an
accumulated deficit of $49.1 million and net operating loss carryforwards of
$49.3 million for tax purposes. We have funded these expenditures primarily
through operating revenues, private securities offerings, a sale-leaseback
credit facility and an initial public offering of 6.9 million shares of common
stock (including the underwriters' over-allotment option) that raised net
proceeds of $109.1 million after underwriter discount and commissions. We intend
to continue building our organization in anticipation of future growth and
believe that our operating expenditures will also continue to increase. As of
December 31, 1999, we had $101.7 million in cash and cash equivalents.

         NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities increased by $24.9 million to $32.7 million for the year ended
December 31, 1999, compared to $7.8 million for the period January 15, 1998
(Inception) through December 31, 1998. This net change in cash used in operating
activities from year to year primarily was affected by increasing net losses,
and was offset partially by non-cash charges associated with bad debt expense,
depreciation, and expenses from the granting of stock options.

         NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities decreased by $6.2 million to $5.2 million for the year ended December
31, 1999, compared to $11.4 million for the period January 15, 1998 (Inception)
through December 31, 1998. For the year ended December 31, 1999, we invested
$21.2 million in capital expenditures as compared to $11.4 million in the period
January 15, 1998 (Inception) through December 31, 1998. These purchases were
primarily for the following items:

     o    continued enhancement and improvement of our network;

     o    employee compensation and outside consulting fees associated with the
          internal development and integration of our customer care and billing
          software; and

     o    the build-out of our headquarters in Tampa, Florida.

                                       34
<PAGE>

The significant increase in capital expenditures is a direct result of our rapid
growth in subscribers and the need to build and purchase infrastructure to
support our current and future needs. In 1998, we focused on product development
and the establishment of our infrastructure, the operation of our technology and
a network that primarily involved the purchases of equipment for our Z-Nodes. As
noted in the discussion regarding research and development, pursuant to our
adoption of Statement of Position 98-1 as of January 1, 1999, we capitalized
$4.8 million of software development costs for the year ended December 31, 1999,
compared to $0 during the period January 15, 1998 (Inception) through December
31, 1998. Capitalized software development costs, in conjunction with capital
outlays, contributed to the increased capital expenditures. On March 15, 1999,
we entered into a $35.2 million sale-leaseback facility agreement with CMB
Capital, LLC to sell and lease back certain equipment, which provided $16.0
million in cash from investment activities for the year ended December 31, 1999.

         On February 14, 2000, we made a payment of $14.4 million to extinguish
the outstanding CMB Capital, LLC debt. This was the repayment of transactions
involving the sale and leaseback of various furniture and equipment payable over
four years from the date of the transactions. This transaction resulted in $1.6
million of extraordinary loss, to be recorded in the first quarter of 2000,
associated with the loss for the early extinguishment of debt and the expense
relating to 115,500 stock warrants associated with the debt that was being
expensed over the life of the lease. We expect cash used in investing activities
to increase as we maintain and develop our network.

         NET CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by
financing activities increased $104.4 million to $131.5 million for the year
ended December 31, 1999, compared to $27.1 million for the period January 15,
1998 (Inception) through December 31, 1999. The overall increase is primarily
attributable to our initial public offering on December 15, 1999 of 6.9 million
shares of common stock (including the underwriters' over-allotment options) for
net proceeds of $109.1 million after underwriter discount and commissions. Prior
to our initial public offering, we raised $10.0 million and $15.0 million,
respectively, through the offerings of our Series B and Series C preferred
shares, compared with $15.0 million raised through a Series A preferred stock
offering in 1998. The net increase of cash provided by financing activities was
reduced by the payments of our long-term debt and payments on our capital lease
obligations, in the amounts of $0.6 million and $2.0 million, respectively, in
1999, compared to $0.9 million and $24,000, respectively, in 1998.

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

                                       35
<PAGE>

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

         See "Item 1. Business--Acquisition of Touch 1 Communications, Inc." for
a discussion of our planned acquisition of Touch 1 Communications, Inc.

IMPACT OF THE YEAR 2000

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

         The forward-looking statements in this document are based on the belief
of our management, as well as assumptions made by and information currently
available to our management. Forward-looking statements also may be included in
other written and oral statements made or released by us. You can identify
forward-looking statements by the fact that they do not relate strictly to
historical or current facts. The words "believe," "anticipate," "intend,"
"expect," "estimate," "project" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements describe our expectations
today of what we believe is most likely to occur or may be reasonably achievable
in the future, but they do not predict or assure any future occurrence and may
turn out to be wrong. Forward-looking statements are subject to both known and
unknown risks and uncertainties and can be affected by inaccurate assumptions we
might make. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. We do not undertake any obligation to
publicly update any forward-looking statements to reflect new information or
future events or occurrences. These statements reflect our current views with
respect to future events and are subject to risks and uncertainties about us,
including, among other things:

         o     our ability to market our services successfully to new
               subscribers;

         o     our ability to access markets and finance network developments;

         o     our enhancement and expansion;

         o     additions or departures of key personnel;

                                       36
<PAGE>

         o     competition, including the introduction of new products or
               services by our competitors;

         o     existing and future regulations affecting our business and our
               ability to comply with these regulations;

         o     technological innovations;

         o     general economic and business conditions, both nationally and in
               the regions in which we operate; and

         o     other factors described in this document, including those
               described in more detail below.

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

RISKS RELATED TO OUR FINANCIAL CONDITION AND OUR BUSINESS

         LIMITED OPERATING HISTORY. We were formed in January 1998 and began
offering telecommunications services to the public in September 1998. In
addition, in June 1999, we began marketing our Z-Line Home Edition service in
New York City and Long Island. We have had fewer than 17 months of actual
marketing, sales and operational results. Our limited operating history and
results make it very difficult to evaluate or predict our ability to, among
other things, retain customers, generate and sustain a revenue base sufficient
to cover our operating expenses, and to achieve profitability. As a result, we
believe that our historical financial information is of little or no value in
projecting our future results, making it even more difficult to evaluate our
business and prospects.

         UNCERTAIN DEMAND. We initially began to market our products and
services in September 1998. In June 1999, we focused our product offering on
sales of our Z-Line Home Edition service. Our products and services represent an
emerging sector of the telecommunications industry, and the demand for our
services and our ability to retain customers over time are highly uncertain.
Consumer acceptance of our products and services could be limited by:

         o     the willingness of customers to accept Z-Tel as an alternative
               provider of local and long distance telephone services and of
               other enhanced, integrated services;

         o     the presence and attractiveness of other enhanced
               telecommunications service offerings in our target markets;

         o     the perception of complexity in using our services;

         o     the reliability of our technology and network infrastructure;

                                       37
<PAGE>

         o     the quality of our customer service; and

         o     the prices of our services.

         We have determined that substantial marketing effort, time and expense
are required to stimulate initial demand for our products and services. In
addition, we have incurred and will continue to incur substantial operating
expenses, have made, and will continue to make, significant capital investments
and have entered or plan to enter into real property leases, equipment supply
contracts and service arrangements, in each case based upon our expectations as
to the market acceptance of our products and services. We cannot be certain that
substantial markets will develop for our products and services, or, if such
markets develop, that we will be able to attract and maintain a sufficient
revenue-generating customer base to cover our operating expenses. Lack of
acceptance of our services in our target markets would materially and adversely
affect the commercial viability of our business, and as a consequence, the value
of your investment.

         In addition, to maintain our competitive posture, we must be in a
position to reduce the prices for our services in order to meet reductions in
local and long distance rates, if any, offered by others. We cannot be sure that
we will be able to match the reductions made by our competitors and, if we do,
such reductions could have an adverse effect on our business, operating results
and financial condition.

         EXPECTATION OF FUTURE LOSSES. Our product and service offerings are at
an early stage, and we cannot be sure that sales of our products or services
will generate revenues sufficient to cover our operating expenses. Even if our
products and services prove to be commercially successful, our operations may
not become profitable. Starting up our company and developing our communications
technology required substantial capital and other expenditures and further
development of our business will require significant additional expenditures.

         Since our inception in January 1998 through December 31, 1999, we have
incurred accumulated losses of $49.1 million. We expect to continue to have
significant operating losses and retained losses and will record significant
negative net cash flow before financing for the foreseeable future.

         AVAILABILITY AND FAVORABLE PRICING OF UNBUNDLED NETWORK COMPONENTS. Our
business strategy depends on a continued availability of unbundled network
components and on existing and additional states maintaining and adopting
favorable pricing rules for unbundled network components.

         The public utilities commissions of certain states have adopted pricing
rules for unbundled network components. As a result of these regulatory
initiatives, the Bell operating companies operating in those states are required
to offer to competitive local exchange carriers such as us, at forward-looking,
long-run incremental cost-based prices, the facilities and equipment and the
features, functions and capabilities of their local exchange network on an
unbundled basis. We have recently commenced operations in New York, Texas and
Massachusetts using unbundled network components. However, given that the FCC
order

                                       38
<PAGE>

permitting unbundled network components is subject to further appeal, we cannot
be certain that unbundled network components will continue to be available in
their present form in those states or other states or that such other states
will ever adopt favorable unbundled network components pricing. Further
regulatory changes may adversely affect unbundled network components or our
Z-Line Home Edition strategy. Our business model is based, in part, on
availability and favorable pricing of the unbundled network components, and any
adverse changes in the unbundled network elements platform regulatory or
competitive environment could have a material adverse effect on our business,
financial condition and results of operations.

         RAPID EXPANSION. We have rapidly expanded our operations since we were
formed. We expect to grow our business rapidly in terms of the number of
services we offer, the number of customers we serve and the regions we serve. We
cannot assure you that we will successfully manage our efforts to:

         o     expand, train, manage and retain our employee base;

         o     expand and improve our customer service and support systems and
               improve the performance of billing systems;

         o     introduce and market new products and services in addition to
               Z-Line Home Edition and our other service offerings;

         o     enhance and upgrade the features of our software;

         o     capitalize on new opportunities in the competitive marketplace;
               and

         o     control our expenses.

         The strains posed by these demands are magnified by the start-up nature
of our operations. If we cannot manage our growth effectively, our results of
operations could be adversely affected.

         In order to increase our direct sales effort, we will need to
significantly increase the size of our internal sales and marketing staff and
will be required to obtain personnel who have experience in marketing services
like ours. We cannot be certain that we will be able to identify and attract
sufficient numbers of qualified personnel or that our sales and marketing
organizations will successfully compete against the more extensive and
well-funded sales and marketing organizations of many of our current and future
competitors. Our inability to attract, recruit and retain sufficient or
additional qualified personnel could have a material adverse effect on us.

         DIFFICULTIES IN EXPANDING NETWORK INFRASTRUCTURE. We must continue to
develop, expand and adapt our network infrastructure as the number of our users
and the amount of information they wish to access and transfer increases and as
our customers' demands change. We cannot be sure that we will be able to
develop, expand or adapt the network infrastructure to meet additional demand or
our customers' changing requirements on a timely basis, at a commercially

                                       39
<PAGE>

reasonable cost, or at all. If we fail to expand our network infrastructure on a
timely basis or adapt it to either changing customer requirements or evolving
industry standards, these failures could cause our business to perform poorly.

         ABILITY TO RESELL LONG DISTANCE SERVICES. We offer long distance
telephone services as part of our service packages. We currently have agreements
with various long distance carriers to provide transmission and termination
services for all of our long distance traffic. These agreements generally
provide for the resale of long distance services on a per-minute basis and
contain minimum volume commitments. If we incur underutilization charges on rate
increases, these charges or rate increases could adversely affect our operating
results. In cases in which we have agreed to minimum volume commitments and fail
to meet them, we will be obligated to pay underutilization charges.

         RISK OF SOFTWARE FAILURES AND ERRORS. The software that we use and the
software that we have developed internally and are continuing to develop may
contain undetected errors. Although we have extensively tested our software,
errors may be discovered in the software during the course of its use. Any
errors may result in partial or total failure of our network, loss or diminution
in service delivery performance, additional and unexpected expenses to fund
further product development or to add programming personnel to complete or
correct development, and loss of revenue because of the inability of customers
to use our products or services, which could adversely affect our business
condition.

         PROTECTION OF PROPRIETARY TECHNOLOGY. We currently rely on a
combination of copyright, trademark and trade secret laws and contractual
confidentiality provisions to protect the proprietary information that we have
developed. Our ability to protect our proprietary technology is limited, and we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop similar
technology. Also, we cannot be certain that the intellectual property that
incumbent local exchange carriers or others claim to hold and that may be
necessary for us to provide our services will be available on commercially
reasonable terms. If we were found to be infringing upon the intellectual
property rights of others, we might be required to enter into royalty or
licensing agreements, which may be costly or not available on commercially
reasonable terms. If successful, a claim of infringement against us and our
inability to license the infringed or similar technology on terms acceptable to
us could adversely affect our business.

         DEPENDENCE ON INFORMATION SYSTEMS. Our billing, customer service and
management information systems are newly developed and we may face unexpected
system difficulties which would adversely affect our service levels and,
consequently, our business.

         Sophisticated information and processing systems are vital to our
ability to monitor costs, render monthly invoices for services, process customer
orders and achieve operating efficiencies. We rely on internal systems and third
party vendors, some of which have a limited operating history, to provide our
information and processing systems. If our systems fail to perform in a timely
and effective manner and at acceptable costs, or if we fail to adequately
identify all of our information and processing needs or if our related
processing or information systems fail, these failures could have a material
adverse effect on our business.

                                       40
<PAGE>

         In addition, our right to use third party systems is dependent upon
license agreements. Some of these agreements are cancelable by the vendor, and
the cancellation or nonrenewal of these agreements could seriously impair our
ability to process orders or bill our customers. As we continue to provide local
telephone service, the need for sophisticated billing and information systems
will also increase significantly and we will have significant additional
requirements for data interface with incumbent local exchange carriers and
others. We cannot be certain that we will be able to meet these additional
requirements.

         NETWORK FAILURE. The successful operation of our network will depend on
a continuous supply of electricity at multiple points. Although the system that
carries signals has been designed to operate under extreme weather conditions
(including heavy rain, wind and snow), like all other telecommunications
systems, our network could be adversely affected by such conditions. Our
network, however, is equipped with a back-up power supply and our existing
network operations center is equipped with both a battery back-up and an on-site
emergency generator. If a power failure causes an interruption in our service,
the interruption could negatively impact our operations.

         Our network also may be subject to physical damage, sabotage, tampering
or other breaches of security (by computer virus, break-ins or otherwise) that
could impair its functionality. In addition, our network is subject to unknown
capacity limitations that may cause interruptions in service or reduced capacity
for our customers. Any interruptions in service resulting from physical damage
or capacity limitations could cause our systems to fail.

         NETWORK INTERCONNECTION. As a competitive provider of local telephone
service, we must interconnect our network with the networks of incumbent local
exchange carriers. We may not be able to obtain the interconnection we require
at rates and on terms and conditions that permit us to offer services that are
both competitive and profitable. In the event that we experience difficulties in
obtaining high quality, reliable and reasonably priced services from other
carriers, the attractiveness of our services is likely to be significantly
impaired.

         DEPENDENCE ON LOCAL EXCHANGE CARRIERS. We rely on incumbent local
exchange carriers to supply key unbundled components of their network
infrastructure to us on a timely and accurate basis, and in the quantities and
quality demanded by us. We may from time to time experience delays or other
problems in receiving unbundled services or facilities which we request, and
there can be no assurance that we will able to obtain such unbundled elements on
the scale and within the time frames required by us. Any failure to obtain these
components, services or additional capacity on a timely and accurate basis could
adversely affect us.

         ANTICIPATED CAPITAL NEEDS. If we expand more rapidly than currently
anticipated or if our working capital needs exceed our current expectations, we
may need to raise additional capital from debt or equity sources. If we cannot
obtain financing on acceptable terms or at all, we may be required to modify,
delay or abandon our current business plan, which is likely to materially and
adversely affect our business and, as a result, the value of our common stock.

                                       41
<PAGE>

         DEPENDENCE ON THIRD PARTY VENDORS. We currently purchase the majority
of our telecommunications equipment as needed from third party vendors,
including Excel Switching Corporation, Sonus Networks, Inc., Dialogic
Communications Corporation, Compaq Computer Corporation, and Sun Microsystems,
Inc. In addition, we currently license our software from third party vendors,
including Oracle Corporation, INPRISE Corporation, NOVERA Corp., and Netscape
Communications, Inc. We typically do not enter into any long-term agreements
with our telecommunications equipment or software suppliers. Any reduction or
interruption in supply from our equipment suppliers or failure to obtain
suitable software licensing terms could have a disruptive effect on our business
and could adversely affect our results of operations.

         DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. We depend on a limited
number of key personnel who would be difficult to replace. If we lose the
services of some of our key personnel, our business could suffer. We currently
maintain a $5,000,000 key man life insurance policy on the life of Mr. D.
Gregory Smith, our president, chief executive officer and chairman of the board.
We also depend on a limited number of key management, sales, marketing and
product development personnel to manage and operate our business. In particular,
we believe that our success depends to a significant degree upon our ability to
attract and retain highly skilled personnel, including our engineering and
technical staff. If we are unable to attract and retain our key employees, the
value of our common stock could suffer.

RISKS RELATED TO OUR INDUSTRY

         GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. We are subject to
varying degrees of federal, state, and local regulation. In states where we will
provide intrastate services, we generally will be subject to state certification
or registration and tariff-filing requirements. Delays in obtaining the required
state regulatory approvals may have a material adverse effect on our business.
Challenges to our tariffs by third parties could cause us to incur substantial
legal and administrative expenses.

         We must also comply with various state and federal obligations that are
subject to change, such as the duty to contribute to universal service
subsidies, the impact of which we cannot yet fully assess. While we do not
believe that compliance with federal and state reporting and regulatory
requirements will be burdensome, our failure to do so may result in fines or
other penalties being imposed on us, including loss of certification to provide
services.

         Decisions of the FCC and state regulatory commissions providing
incumbent local exchange carriers with increased flexibility in how they price
their services and with other regulatory relief, could have a material adverse
effect on our business and that of other competitive local exchange carriers.
Future regulatory provisions may be less favorable to competitive local exchange
carriers and more favorable to their competitors. If incumbent local exchange
carriers are allowed by regulators to lower their rates, engage in substantial
volume and term discount pricing practices for their customers, or charge
competitive local exchange carriers higher fees for interconnection to the
incumbent local exchange carriers' networks, our business, operating results and
financial condition could be materially adversely affected. Incumbent local
exchange carriers may also seek to delay competitors through legal or regulatory
challenges, or by recalcitrant responses to requirements that they open their
markets

                                       42
<PAGE>

through interconnection and unbundling of network elements. Our legal and
administrative expenses may be increased because of our having to actively
participate in rate cases filed by incumbent local exchange carriers, in which
they seek to increase the rates they can charge for the unbundled network
element platform components. Our profitability may be adversely affected if
those carriers prevail in those cases. Pending court cases, in which certain
provisions of the Telecommunications Act of 1996 will be conclusively
interpreted, may increase the cost of unbundled network elements to us.

         COMPETITION. The telecommunications and information services markets
are intensely competitive and rapidly evolving. We expect competition to
increase in the future. Many of our potential competitors have longer operating
histories, greater name recognition, larger customer bases and substantially
greater financial, personnel, marketing, engineering, technical and other
resources than us. The principal competitive factors affecting our business
operations will be price, the desirability of our service offering, quality and
reliability of our services, innovation and customer service. Our ability to
compete effectively will depend upon our ability to maintain high quality,
market-driven services at prices generally equal to or below those charged by
our competitors. This competition could materially adversely affect our
business, financial condition and results of operations.

         We face competition from a variety of participants in the
telecommunications market. The largest competitor for local service in each
market in which we compete is the incumbent local exchange carrier serving that
market. Incumbent local exchange carriers have established networks,
long-standing relationships with their customers, strong political and
regulatory influence, and the benefit of state and federal regulations that,
until recently, favored incumbent local exchange carriers. In the local exchange
market, the incumbent local exchange carriers continue to hold near-monopoly
positions. The long distance telecommunications market in which we compete has
numerous entities competing for the same customers and a high average churn rate
as customers frequently change long distance providers in response to the
offering of lower rates or promotional incentives.

         Prices in the long distance market have declined significantly in
recent years and are expected to continue to decline. We will face competition
from large interexchange carriers. Other competitors are likely to include
incumbent local exchange carriers providing out-of-region (and, with the removal
of regulatory barriers, in-region) long distance services, other incumbent local
exchange carriers, other competitive local exchange carriers, cable television
companies, electric utilities, wireless telephone system operators, microwave
and satellite carriers and private networks owned by large end users.

         The Telecommunications Act of 1996 facilitates such entry by requiring
incumbent local exchange carriers to allow competing providers to acquire local
services at wholesale prices for resale and to purchase unbundled network
elements at cost-based prices. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among incumbent local exchange carriers or competitive local
exchange carriers, or transactions between telephone companies and cable
companies outside of the telephone company's service area, or between
interexchange carriers and competitive local exchange carriers, could give rise
to significant new competitors.

                                       43
<PAGE>

         The enhanced and information services markets are also highly
competitive and we expect that competition will continue to intensify. Our
competitors in these markets will include information service providers,
telecommunications companies, on-line services providers and Internet service
providers.

         UNAUTHORIZED TRANSACTIONS; THEFT OF SERVICES. We may be the victim of
fraud or theft of service. From time to time, callers have obtained our services
without rendering payment by unlawfully using our access numbers and personal
identification numbers. We attempt to manage these theft and fraud risks through
our internal controls and our monitoring and blocking systems. If these efforts
are not successful, the theft of our services may cause our revenue to decline
significantly.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

                                       44
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES


TABLE OF CONTENTS
-------------------------------------------------------------------------------

                                                                            PAGE

Report of Independent Certified Public Accountants                          F-1

Consolidated Financial Statements:

     Consolidated Balance Sheets                                            F-2

     Consolidated Statements of Operations                                  F-3

     Consolidated Statements of Changes in Stockholders' Equity (Deficit)   F-4

     Consolidated Statements of Cash Flows                                  F-5

     Notes to Consolidated Financial Statements                             F-6


                                       45

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
Z-Tel Technologies, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Z-Tel Technologies, Inc. and its Subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for the year ended
December 31, 1999 and the period from January 15, 1998 (Inception) through
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Tampa, Florida
February 15, 2000


                                       F-1
<PAGE>

Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                        1999                    1998

ASSETS
<S>                                                                                  <C>               <C>
Current assets:
    Cash and cash equivalents                                                        $ 101,657,000      $   7,973,000
    Accounts receivable, net of allowance for doubtful
         accounts of approximately $408,000 at December 31,
         1998 and $54,000 at December 31, 1999                                           4,245,000             15,000
    Prepaid expenses and other current assets                                            2,304,000            423,000
                                                                                     -------------      -------------
      Total current assets                                                             108,206,000          8,411,000

Property and equipment, net                                                             28,549,000         11,710,000
Other                                                                                      922,000            153,000
                                                                                     -------------      -------------

         Total assets                                                                $ 137,677,000      $  20,274,000
                                                                                     =============      =============

LIABILITIES, MANDATORILY CONVERTIBLE REDEEMABLE PREFERRED
      STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable and accrued liabilities                                         $   9,165,000      $   4,402,000
    Current portion of long-term debt
         and capital lease obligations                                                   3,726,000            681,000
                                                                                     -------------      -------------
      Total current liabilities                                                         12,891,000          5,083,000

Long-term debt and capital lease obligations                                            10,408,000             43,000
                                                                                     -------------      -------------

         Total liabilities                                                              23,299,000          5,126,000
                                                                                     -------------      -------------

Mandatorily convertible redeemable preferred stock, $.01 par value; 50,000,000
      shares authorized; 9,523,869 issued and outstanding (aggregate liquidation
      value of approximately $15,154,000 at December 31, 1998)                                --           15,154,000
                                                                                     -------------      -------------

Commitments and contingencies (Notes 6, 7 and 14)

Stockholders' equity (deficit):
    Common stock, $.01 par value; 150,000,000
         shares authorized; 32,159,911 and 14,411,100 shares issued; 31,880,236
         and 14,411,100 outstanding, respectively                                          322,000            144,000
    Notes receivable from stockholders                                                  (1,683,000)        (3,329,000)
    Unearned stock compensation                                                         (2,487,000)          (192,000)
    Additional paid-in capital                                                         167,637,000         16,493,000
    Accumulated deficit                                                                (49,093,000)       (13,122,000)
    Treasury stock, 279,675 shares at cost                                                (318,000)              --
                                                                                     -------------      -------------

      Total stockholders' equity (deficit)                                             114,378,000             (6,000)
                                                                                     -------------      -------------

         Total liabilities, mandatorily convertible
             redeemable preferred stock and
             stockholders' equity (deficit)                                          $ 137,677,000      $  20,274,000
                                                                                     =============      =============
</TABLE>

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

                                       F-2
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                               PERIOD
                                                                          JANUARY 15, 1998
                                                       YEAR ENDED           (INCEPTION)
                                                      DECEMBER 31,        THROUGH DECEMBER 31,
                                                          1999                   1998
                                                      ------------        -------------------
<S>                                                   <C>                    <C>
Revenues                                              $  6,615,000           $    140,000
                                                      ------------           ------------
Operating expenses:
    Network operations                                   7,942,000                382,000
    Sales and marketing                                  8,588,000              2,201,000
    Research and development                             3,562,000              4,728,000
    General and administrative                          15,379,000              4,718,000
    Depreciation and amortization                        4,372,000              1,283,000
                                                      ------------           ------------

      Total operating expenses                          39,843,000             13,312,000
                                                      ------------           ------------

      Operating loss                                   (33,228,000)           (13,172,000)
                                                      ------------           ------------
Nonoperating income (expense):
    Interest income                                        608,000                228,000
    Interest expense                                    (3,351,000)              (178,000)
                                                      ------------           ------------

      Total nonoperating income (expense)               (2,743,000)                50,000
                                                      ------------           ------------

      Net loss                                         (35,971,000)           (13,122,000)

      Less mandatorily convertible redeemable
           preferred stock dividends                    (1,654,000)              (190,000)
                                                      ------------           ------------

      Net loss attributable to common stockholders    $(37,625,000)          $(13,312,000)
                                                      ============           ============

Weighted average common shares outstanding              15,099,359              6,554,499
                                                      ============           ============

Basic and diluted net loss per share                  $      (2.49)          $      (2.03)
                                                      ============           ============
</TABLE>

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

                                       F-3

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                        COMMON STOCK               NOTES RECEIVABLE     UNEARNED
                                               --------------------------------          FROM             STOCK
                                                   SHARES            PAR VALUE       STOCKHOLDERS      COMPENSATION
                                               -------------      -------------    ----------------    -------------
<S>                                                <C>                   <C>           <C>             <C>
Balances, January 15, 1998 (Inception)              --            $        --       $        --        $        --
Issuance of common stock                           9,703,100             97,000        (3,329,000)
Conversion of note payable and
      accrued interest to common stock             4,708,000             47,000
Grant of stock options
      below intrinsic value                                                                                 (281,000)
Vesting of stock options
      granted below intrinsic value                                                                           89,000
Accrued dividend on preferred stock
Net loss
                                               -------------      -------------     -------------      -------------
Balances, December 31, 1998                       14,411,100            144,000        (3,329,000)          (192,000)

Issuance of common stock in Initial
       Public Offering, net of underwriter
      discount and commissions                     6,900,000             69,000
Cost of issuance of common stock in
      Initial Public Offering
Issuance of common stock
      for exercise of stock options                  306,555              3,000
Issuance of common stock
      in exchange for services rendered               55,000              1,000
Issuance of common stock to
      purchase assets                                 11,000
Conversion of preferred stock to
      common stock                                10,476,256            105,000
Grant of stock options
      below intrinsic value                                                                               (3,225,000)
Vesting of stock options granted
      below intrinsic value                                                                                  930,000
Treasury stock received upon
      cancellation of notes receivable
      from stockholder                              (279,675)                             318,000
Repayment of stockholders' notes                                                        1,222,000
Forgiveness of stockholder's note                                                         106,000
Accrued dividend on preferred stock
Net loss
                                               -------------      -------------     -------------      -------------
Balances, December 31, 1999                       31,880,236      $     322,000     $  (1,683,000)     $  (2,487,000)
                                               =============      =============     =============      =============


                                                ADDITIONAL                                                  TOTAL
                                                  PAID-IN         ACCUMULATED          TREASURY         STOCKHOLDERS'
                                                  CAPITAL           DEFICIT              STOCK          EQUITY (DEFICIT)
                                               -------------      -------------      -------------      ----------------
<S>                                            <C>                <C>                <C>                <C>
Balances, January 15, 1998 (Inception)         $        --        $        --        $       --         $        --
Issuance of common stock                          10,929,000                                                7,697,000
Conversion of note payable and
      accrued interest to common stock             5,473,000                                                5,520,000
Grant of stock options
      below intrinsic value                          281,000
Vesting of stock options
      granted below intrinsic value                                                                            89,000
Accrued dividend on preferred stock                 (190,000)                                                (190,000)
Net loss                                                            (13,122,000)                          (13,122,000)
                                               -------------      -------------      -------------      -------------
Balances, December 31, 1998                       16,493,000        (13,122,000)             --                (6,000)

Issuance of common stock in Initial
       Public Offering, net of underwriter
      discount and commissions                   109,020,000                                              109,089,000
Cost of issuance of common stock in
      Initial Public Offering                     (1,693,000)                                              (1,693,000)
Issuance of common stock
      for exercise of stock options                  535,000                                                  538,000
Issuance of common stock
      in exchange for services rendered              299,000                                                  300,000
Issuance of common stock to
      purchase assets                                 60,000                                                   60,000
Conversion of preferred stock to
      common stock                                39,809,000                                               39,914,000
Grant of stock options
      below intrinsic value                        4,768,000                                                1,543,000
Vesting of stock options granted
      below intrinsic value                                                                                   930,000
Treasury stock received upon
      cancellation of notes receivable
      from stockholder                                                                    (318,000)              --
Repayment of stockholders' notes                                                                            1,222,000
Forgiveness of stockholder's note                                                                             106,000
Accrued dividend on preferred stock               (1,654,000)                                              (1,654,000)
Net loss                                                            (35,971,000)                          (35,971,000)
                                               -------------      -------------      -------------      -------------
Balances, December 31, 1999                    $ 167,637,000      $ (49,093,000)     $    (318,000)     $ 114,378,000
                                               =============      =============      =============      =============
</TABLE>

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

                                       F-4
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                              PERIOD
                                                                                         JANUARY 15, 1998
                                                                            YEAR ENDED      (INCEPTION)
                                                                           DECEMBER 31,  THROUGH DECEMBER 31,
                                                                               1999              1998
                                                                          -------------  -------------------
<S>                                                                       <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                  $ (35,971,000)    $ (13,122,000)
                                                                          -------------     -------------
Adjustments to reconcile net loss to net cash used in
      operating activities:
    Depreciation and amortization of fixed assets                             4,372,000         1,283,000
    Interest expense on capital lease obligation discount                     2,192,000              --
    Provision for bad debts                                                     958,000            54,000
    Expense charged for granting of stock options                               387,000            89,000
    Expense charged for granting of stock for services                          300,000              --
    Interest expense converted to common stock                                     --             170,000
    Change in operating assets and liabilities:
      Increase in accounts receivable                                        (5,188,000)          (69,000)
      Increase in prepaid expenses and other current assets                  (1,881,000)         (423,000)
      Increase in other assets                                                 (769,000)         (153,000)
      Increase in accounts payable and accrued liabilities                    2,919,000         4,402,000
                                                                          -------------     -------------
         Total adjustments                                                    3,290,000         5,353,000
                                                                          -------------     -------------
         Net cash used in operating activities                              (32,681,000)       (7,769,000)
                                                                          -------------     -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of property and equipment                                     (21,151,000)      (11,393,000)
    Proceeds from sale and leaseback transaction                             15,969,000              --
                                                                          -------------     -------------
         Net cash used in investing activities                               (5,182,000)      (11,393,000)
                                                                          -------------     -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of notes payable                                        --           5,350,000
    Proceeds from issuance of mandatorily
         convertible redeemable preferred stock                              24,950,000        14,964,000
    Proceeds from issuance of initial public offering, net underwriter
         discount and commissions                                           109,089,000              --
    Payment of issuance cost of initial public offering                      (1,693,000)             --
    Proceeds from exercise of stock options                                     538,000         7,697,000
    Proceeds from notes receivable                                            1,222,000              --
    Payments on long-term debt obligations                                     (565,000)         (852,000)
    Payments on capital lease obligations                                    (1,994,000)          (24,000)
                                                                          -------------     -------------
         Net cash provided by financing activities                          131,547,000        27,135,000
                                                                          -------------     -------------
Net increase in cash and cash equivalents                                    93,684,000         7,973,000
Cash and cash equivalents, beginning of period                                7,973,000              --
                                                                          -------------     -------------

Cash and cash equivalents, end of period                                  $ 101,657,000     $   7,973,000
                                                                          =============     =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for interest                                                $   1,130,000     $       8,000
                                                                          =============     =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
    Property and equipment acquired under capital lease obligations       $  15,944,000     $      95,000
    Property and equipment acquired with long-term debt                   $        --       $   1,505,000
    Conversion of note payable and accrued interest to common stock       $        --       $   5,520,000
    Increase in additional paid-in capital for stock options granted      $   5,064,000     $     281,000
    Net increase in unearned stock compensation for stock options
    granted                                                               $   2,295,000     $     192,000
    Accrued dividends on preferred stock                                  $   1,654,000     $     190,000
    Notes receivable issued for common stock                              $        --       $   3,329,000
    Forgiveness of note receivable issued for common stock                $    (106,000)    $        --
    Common stock issued for purchase of assets                            $      60,000     $        --
    Treasury stock received upon cancellation of note receivable
         for common stock                                                 $    (318,000)    $        --
    Conversion of preferred stock to common stock                         $  39,914,000     $        --
</TABLE>

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

                                       F-5
<PAGE>

Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.   NATURE OF BUSINESS

     DESCRIPTION OF BUSINESS

     Z-Tel Technologies, Inc. and subsidiaries ("Z-Tel" or the "Company")
     incorporated in Delaware on January 15, 1998 as Olympus Telecommunications
     Group, Inc. In March 1998, Olympus Telecommunications Group, Inc. changed
     its name to Z-Tel Technologies, Inc. The Company has seven wholly owned
     subsidiaries: Z-Tel Communications, Inc., Z-Tel Business Networks, Inc.,
     Z-Tel Holdings, Inc., Z-Tel Communications of Virginia, Inc., Z-Tel, Inc.,
     Z-Tel Network Services, Inc. and Tiger Acquisition Corporation. Z-Tel
     Technologies, Inc. is the parent company, and has no other operations.
     Z-Tel Communications, Inc. is the operating entity. The remaining
     subsidiaries have no significant operations.

     Z-Tel is an emerging provider of advanced, integrated telecommunications
     services targeted primarily to residential subscribers. The Company offers
     local and long distance telephone services in combination with enhanced
     communication features accessible through the telephone or the Internet.
     The Company began offering an access card service in 1998, similar to the
     Company's current Z-Line Anywhere service. In addition, the Company began
     offering Z-Line Home Edition service in New York in June 1999, and Texas in
     December of 1999.

     STOCK SPLIT

     The Company's Board of Directors authorized an 11 for 10 stock split on
     November 19, 1999, which was effected in the form of a 10% stock dividend.
     All common share amounts have been adjusted to give effect to this split.

     INITIAL PUBLIC OFFERING

     On December 15, 1999, the Company filed its initial public offering (IPO)
     of 6,900,000 shares (including the underwriters' over-allotment option) of
     its common stock at $17.00 per share. Net proceeds to the Company
     aggregated approximately $109,089,000 after underwriter discount and
     commissions. All of the mandatorily convertible redeemable preferred stock
     outstanding at the date of the IPO was converted into 10,476,256 shares of
     common stock as of the closing date of the offering.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

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

     CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with original maturity
     dates of three months or less to be cash equivalents.

                                       F-6
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     PREPAID EXPENSES AND OTHER CURRENT ASSETS

     Prepaid expenses and other current assets consist primarily of prepaid
     maintenance and support contracts and advances to suppliers.

     PROPERTY AND EQUIPMENT

     Property and equipment are recorded at historical cost. Maintenance and
     repairs are expensed as incurred, while renewals and betterments are
     capitalized. Upon the sale or other disposition of property, the cost and
     related accumulated depreciation are removed from the accounts and any gain
     or loss is recognized in operations. Depreciation and amortization is
     provided on a straight-line basis over the following estimated useful
     lives:

                                                         YEARS

                Switching equipment                        5
                Computer equipment                         5
                Software                                   3
                Furniture and office equipment          5-10
                Leasehold improvements                  3-10

     ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

     Effective January 1, 1999, the Company adopted Statement of Position (SOP)
     98-1, "Accounting for the Cost of Computer Software Developed or Obtained
     for Internal Use." SOP 98-1 requires computer software costs related to
     internal software that is incurred in the preliminary project stage to be
     expensed as incurred. When the capitalization criteria of SOP 98-1 have
     been met, costs of developing or obtaining internal-use computer software
     are capitalized. The Company capitalized approximately $4,794,000 of
     internally developed software for the year ended December 31, 1999.
     Internal use software is included as a component of property and equipment
     on the consolidated balance sheet.

     LONG-LIVED ASSETS

     The Company reviews long-lived assets for impairment whenever events or
     changes in circumstances indicate that the carrying amount of an asset may
     not be recoverable. Recoverability of assets to be held and used is
     measured by a comparison of the carrying amount of an asset to future net
     undiscounted cash flows expected to be generated by the asset. If such
     assets are considered to be impaired, the impairment to be recognized is
     measured by the amount by which the carrying amount of the assets exceeds
     the discounted cash flows. The Company has recognized no impairment losses.

     INCOME TAXES

     The Company utilizes the asset and liability method of accounting for
     income taxes. Under this method, deferred income taxes are recorded to
     reflect the tax consequences on future years of differences between the tax
     basis of assets and liabilities and their financial reported amounts at
     each year-end based on enacted laws and statutory rates applicable to the
     periods in which

                                       F-7

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     differences are expected to affect taxable income. A valuation allowance is
     provided against the future benefits of deferred tax assets if it is
     determined that it is more likely than not that the future tax benefits
     associated with the deferred tax asset will not be realized.

     STOCK-BASED COMPENSATION

     The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
     for Stock-Based Compensation." Under SFAS No. 123, entities recognize as
     expense, over the vesting period, the fair value of all stock-based awards
     on the date of the grant. The Company continues to apply the provisions of
     Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
     Issued to Employees," and provide pro forma net income and earnings per
     share disclosures for grants made as if the fair value method defined in
     SFAS No. 123 had been applied. The Corporation has elected to apply the
     provisions of APB Opinion No. 25 and consequently recognizes compensation
     expense over the vesting period for grants made to employees and directors
     only if, on the date of grant, the market price of the underlying stock
     option exceeds the exercise price. For stock options granted to
     non-employees, SFAS No. 123 requires entities to recognize as an expense,
     over the vesting period, the fair value of the options.

     REVENUE RECOGNITION

     Revenues are recognized when earned. Revenues related to long distance
     service charges are billed monthly in arrears and the associated revenues
     are recognized in the month of service. In June 1999, the Company began
     offering its local service, Z-Line Home Edition, to consumers. Charges for
     this service are billed monthly in advance and the Company recognizes
     revenues for this service ratably over the service period, which management
     believes approximates the actual provision of services.

     ADVERTISING

     Advertising costs are expensed as incurred. Included in sales and marketing
     expenses are advertising costs of approximately $7,122,000 and $592,000 for
     the year ended December 31, 1999 and the period January 15, 1998
     (Inception) through December 31, 1998, respectively.

     COSTS OF START-UP ACTIVITIES

     The Company expenses the costs of start-up activities as incurred.

     CONCENTRATIONS OF CREDIT RISK

     Financial instruments that potentially subject the Company to
     concentrations of credit risk consist principally of cash and cash
     equivalents and accounts receivable. The Company places its cash and cash
     equivalents in financial institutions considered by management to be high
     quality. The Company maintains cash balances at financial institutions in
     excess of the $100,000 insured by the Federal Deposit Insurance Corporation
     (FDIC). The Company has approximately $99 million invested in interest
     bearing money market and short-term fixed income investments that are not
     insured by the FDIC. The Company has not experienced any losses in these
     accounts and believes it is not exposed to any significant credit risk on
     cash balances. During the normal course of business, the Company extends
     credit to customers residing in the United States.

                                       F-8

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     SEGMENT REPORTING

     Statement of Financial Standards (SFAS) No. 131, "Disclosures about
     Segments of an Enterprise and Related Information," requires that the
     Company report financial and descriptive information about reportable
     segments, and how these segments were determined. The Company operated
     during fiscal year 1999 and the period January 15, 1998 (Inception) through
     December 31, 1998 in a single segment. The Company determines the
     allocation and performance of resources based on total operations. Based
     on these factors, management has determined that the Company operates as
     one segment as defined by SFAS No. 131.

     FINANCIAL INSTRUMENTS

     The recorded amounts of cash and cash equivalents approximate fair value
     due to the short-term nature of these instruments. The Company has
     determined that due to the interest rates and short-term nature of the
     capital lease obligation, the fair value approximates the value recorded.

     MANAGEMENT'S USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements. Estimates also affect the reported amounts of
     revenues and expenses during the reporting period. Actual results could
     differ from those estimates.

     NEW ACCOUNTING PRONOUNCEMENTS

     On November 24, 1999, the Securities and Exchange Commission ("SEC") issued
     Staff Accounting Bulletin No. 100 ("SAB 100"), "Restructuring and
     Impairment Charges." SAB 100 provides the SEC staff's views regarding the
     accounting for and disclosure of certain expenses commonly reported in
     connection with exit activities and business combinations. The Company does
     not anticipate that SAB 100 will have a material impact on the consolidated
     financial statements.

     On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
     101"), "Revenue Recognition in Financial Statements." While not intended to
     change current literature related to revenue recognition, SAB 101 provides
     additional guidance on revenue recognition policies and procedures. The
     Company believes that its current accounting policies and procedures
     related to revenue recognition comply with SAB 101.

     RECLASSIFICATION

     Certain amounts in the December 31, 1998 financial statements have been
     reclassified to conform with the December 31, 1999 presentation.

3.   PROPERTY AND EQUIPMENT

     At the respective dates, property and equipment consist of the following:

                                       F-9

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                           1999           1998

<S>                                                    <C>            <C>
     Switching equipment                               $11,018,000    $ 6,672,000
     Computer equipment                                  9,237,000      2,898,000
     Software                                           10,820,000      2,984,000
     Furniture and office equipment                      1,078,000        254,000
     Leasehold improvements                                235,000        185,000
     Construction-in-progress                            1,815,000
                                                       -----------    -----------
                                                        34,203,000     12,993,000
     Less accumulated depreciation and amortization      5,654,000      1,283,000
                                                       -----------    -----------
                                                       $28,549,000    $11,710,000
                                                       ===========    ===========
</TABLE>

     Depreciation and amortization expense related to property and equipment
     amounted to approximately $1,999,000 and $2,373,000, respectively, for the
     year ended December 31, 1999 and approximately $586,000 and $697,000,
     respectively, for the period January 15, 1998 (Inception) through December
     31, 1998.

     At the respective dates, assets acquired under capital leases, included in
     property and equipment, consist of the following:
<TABLE>
<CAPTION>

                                                           1999           1998

<S>                                                    <C>            <C>
     Switching equipment                               $10,778,000    $      --
     Computer equipment                                  4,868,000           --
     Furniture and office equipment                        298,000         95,000
                                                       -----------    -----------
                                                        15,944,000         95,000
     Less accumulated depreciation and amortization      3,070,000          8,000
                                                       -----------    -----------
                                                       $12,874,000    $    87,000
                                                       ===========    ===========
</TABLE>


     In March 1999, the Company entered into an agreement with CMB Capital, LLC
     (a wholly owned entity of a shareholder of the Company) to sell and
     lease-back certain equipment. This agreement allowed for a sale and
     lease-back of up to $35.2 million of certain equipment with revolving terms
     of 48 months and approximate effective interest rates ranging from 10.0% to
     19.5%. Included in this agreement was a stock warrant to purchase 521,832
     shares of common stock at $3.37 per share. The Company accounted for the
     warrant granted in accordance with SFAS No. 123, recognizing costs
     associated with the grant equal to the fair value of the warrant. The
     Company has recorded the fair value of the warrant as a commitment fee
     associated with the capital lease obligation and included it as part of
     minimum lease payments.

     The warrant expires on March 2009. For the year ended December 31, 1999,
     the Company sold and leased-back certain equipment, receiving proceeds
     under this agreement of approximately $16.0 million. No gain or loss was
     recognized on the sale of these assets. At December 31, 1999, the Company
     had approximately $19.2 million available under this agreement for future
     sale and leaseback transactions. The assets of the Company collateralize
     these leases.

     In November 1999, the Company entered into an agreement with CMB Capital,
     LLC to restructure the terms of the leasing facility to allow for the early
     payment of the facility. The

                                      F-10

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     Company granted warrants for 115,500 shares of common stock at $7.27 per
     share. The Company repaid the entire facility subsequent to December 31,
     1999, as described in Note 14.

4.   OTHER ASSETS

     At the respective dates, other assets consist of the following:

                                                1999        1998

     Certificate of deposit, restricted       $500,000    $   --
     Interest receivable from stockholders     205,000      85,000
     Deposits                                  217,000      68,000
                                              --------    --------
                                              $922,000    $153,000
                                              ========    ========

     The certificate of deposit is pledged as collateral on an outstanding
     letter of credit in the amount of $500,000 related to lease obligations on
     one of the Company's office spaces.

5.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     At the respective dates, accounts payable and accrued liabilities consist
     of the following:


                                                1999          1998

     Trade accounts payable                        $5,177,000    $4,263,000
     Deferred revenue                                 517,000          --
     Accrued payroll and related liabilities          744,000       106,000
     Dividend payable to preferred shareholders     1,844,000          --
     Accrued rent                                     441,000          --
     Other accrued liabilities                        442,000        33,000
                                                   ----------    ----------
                                                   $9,165,000    $4,402,000
                                                   ==========    ==========

6.   LONG-TERM DEBT AND LEASES

     LONG-TERM DEBT

     During 1998, the Company financed the purchase of certain assets with a
     note payable. At December 31, 1999 and December 31, 1998, the balance of
     this note was approximately $88,000 and $653,000, respectively. The note
     bears interest at approximately 10.0% and is payable in the year 2000. The
     assets purchased collateralize the note.

     OPERATING LEASES

     The Company has entered into various non-cancelable operating leases for
     equipment and office space with monthly payments through the year 2009.
     Included in general and administrative expense is rental expense relating
     to operating leases of approximately $1,606,000 and $198,000 for the year
     ended December 31, 1999 and the period January 15, 1998 (Inception) through
     December 31, 1998, respectively.

                                      F-11

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     CAPITAL LEASES

     The Company has entered into various capital lease obligations, with
     effective interest rates ranging from 10.0% to 19.5%, with monthly payments
     through the year 2003.

     Future minimum lease payments under non-cancelable operating and capital
     leases and long-term debt as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                    CAPITAL
                                                                    OPERATING        LEASE        LONG-TERM
YEAR ENDING DECEMBER 31,                                             LEASES        OBLIGATIONS       DEBT
                                                                   ------------   --------------  ---------
     <S>                                                           <C>            <C>             <C>
     2000                                                          $ 1,004,000    $   5,285,000   $ 88,000
     2001                                                            1,320,000        5,266,000        --
     2002                                                            1,183,000        5,247,000        --
     2003                                                            1,214,000        2,309,000        --
     2004                                                            1,256,000             --          --
                                                                   -----------    -------------   --------
                                                                     5,977,000       18,107,000     88,000
     Less amount representing estimated executory
     costs (taxes, etc.), including profit thereon,
     included in total minimum lease payments                             --          1,206,000        --
                                                                   -----------    -------------   --------

     Net minimum payments                                         $ 5,977,000       16,901,000    $ 88,000
                                                                  ===========                     ========

     Less amount representing interest on obligations under capital lease            2,855,000
                                                                                  ------------

     Present value of minimum lease payments (including approximately
           $3,638,000 due within one year)                                        $ 14,046,000
                                                                                  ============
</TABLE>


     As discussed in Note 14, On February 14, 2000 the Company paid $14,365,000
     in fulfillment of the capital lease obligations outstanding.

7.   COMMITMENTS AND CONTINGENCIES

     The Company has disputed billings and access charges from certain
     inter-exchange carriers (IXCs) and incumbent local exchange carriers
     (ILECs). The Company contends the invoicing of billings and access charges
     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 December 31,
     1999, the disputed amounts recognized were approximately $2,300,000.

     The Company is involved in certain legal actions and claims arising in the
     ordinary course of its business. It is the opinion of management that such
     litigation and claims will be resolved without material adverse effect on
     the Company's financial position, results of operations, or cash flows. The
     Company is also aware of a threatened claim from a third party primarily
     involving allegations of improper use of trade secrets. No legal action has
     commenced related to this alleged claim, which the Company believes is
     without merit. Should any legal action result, the Company intends to
     vigorously defend its position.

                                      F-12

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

8.   INCOME TAXES

     For the year ended December 31, 1999 and the period January 15, 1998
     (Inception) through December 31, 1998, no benefit for federal or state
     income taxes has been recorded due to the full valuation allowance recorded
     against the deferred tax asset.

     As of December 31, 1999 and 1998, the Company had a net operating loss of
     approximately $49,320,000 and $12,700,000, respectively, available to
     reduce future federal income taxes. This net operating loss carryforward
     will begin to expire in 2018 and is subject to limitation in any given year
     in the event of certain changes in ownership, as set forth in the Internal
     Revenue Code Section 382 and related Treasury Regulations.

     The tax effect of the temporary differences that gave rise to the deferred
     tax balances at the respective dates were the following:

                                       1999             1998
                                   ------------     ------------
Current deferred tax assets:
    Accounts receivable            $    155,000     $     20,000
                                   ------------     ------------

Noncurrent deferred tax assets:
    Net operating loss               18,742,000        4,827,000
    Fixed assets                       (876,000)          70,000
    Deferred compensation               295,000           34,000
    Other                               292,000           22,000
                                   ------------     ------------
                                     18,453,000        4,953,000
                                   ------------     ------------

Deferred tax assets                  18,608,000        4,973,000
Valuation allowance                 (18,608,000)      (4,973,000)
                                   ------------     ------------
                                   $         --     $        --
                                   ============     ============

     The Company provides a valuation allowance against net deferred tax assets
     if, based on the weight of available evidence, it is more likely than not
     that some or all of the deferred tax assets will not be realized. The net
     deferred tax asset at December 31, 1999 and 1998 has been offset by the
     establishment of a valuation allowance for the full amount of the deferred
     tax asset.

     The following table summarizes, at the respective dates, the approximate
     differences between the actual tax provision and amounts obtained by
     applying the statutory U.S. federal income tax rate of 35% to the income
     (loss) before income taxes.

                                                       1999             1998

Statutory provision/(benefit)                     $(12,590,000)    $ (4,592,000)
State taxes net of federal provision/(benefit)      (1,045,000)        (381,000)
                                                  ------------     ------------
                                                   (13,635,000)      (4,973,000)
Change in valuation allowance                       13,635,000        4,973,000
                                                  ------------     ------------
                                                  $      --        $       --
                                                  ============     ============

                                      F-13
<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

9.   COMMON STOCK

     In connection with the closing of the IPO, the Company amended its Articles
     of Incorporation to provide the authority to issue 150,000,000 shares of
     common stock and 50,000,000 shares of preferred stock, both with a $.01 par
     value.

     No dividends on common stock have been declared by the board of directors
     since January 15, 1998 (Inception).

10.  MANDATORILY CONVERTIBLE REDEEMABLE PREFERRED STOCK

     During 1998, the Company amended its articles of incorporation to authorize
     the issuance of up to 5,930,749 shares of Series A mandatorily convertible
     redeemable preferred stock (Series A Preferred) and 1,338,208 shares of
     Series B mandatorily convertible redeemable preferred stock (Series B
     Preferred), both with a $.01 par value.

     In November 1998, the Company closed a private placement of 2,695,795
     shares of Series A Preferred and 1,338,208 shares of Series B Preferred,
     receiving aggregate net proceeds of approximately $15 million.

     During 1999, the Company amended its articles of incorporation to reduce
     the authorized shares of its Series A Preferred from 5,930,749 to 2,695,795
     and increase the authorized shares of its Series B Preferred from 1,338,208
     to 4,034,003. In September 1999, the Company closed a private placement of
     2,695,795 shares of Series B mandatorily convertible redeemable preferred
     stock. The Company received aggregate net proceeds of approximately $10
     million from this placement.

     In October 1999, the Company amended its articles of incorporation to
     authorize the issuance of up to 2,794,800 shares of its Series C
     mandatorily convertible redeemable stock (Series C Preferred). The Company
     closed a private placement of 2,794,800 shares of Series C Preferred stock.
     The Company received aggregate net proceeds of approximately $15 million
     from this placement.

     The preferred stock issues yielded 8% cumulative dividends, which amounted
     to approximately $1,654,000 and $190,000 at December 31, 1999 and 1998,
     respectively. In January of 2000, the Company paid approximately $1,844,000
     to the preferred shareholders in satisfaction of the 8% cumulative dividend
     as all shares were converted to common stock.

     In December 1999, in connection with the closing of the Company's IPO, all
     of the mandatorily convertible redeemable preferred stock outstanding was
     converted into 10,476,256 shares of common stock.

     In 1998 and 1999, the Company did not comply with certain provisions of the
     Series A Preferred private placement agreement relating to the issuance of
     financial statements to the stockholders within a certain time frame. The
     Company obtained a waiver from the stockholders relating to

                                      F-14

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     these provisions in 1998. In December 1999, these provisions and a put
     agreement expired as a result of the conversion of the Series A and B
     Preferred to common stock.

11.  RELATED PARTY TRANSACTIONS

     During 1998, various executives of the Company issued full recourse
     promissory notes, totaling approximately $3.3 million, to the Company in
     connection with the purchase of 2,929,575 shares of common stock. The
     accompanying consolidated financial statements include the notes as a
     decrease in stockholders' equity. The outstanding notes receivable at
     December 31, 1999 and 1998 are approximately $1,683,000 and $3,329,000,
     respectively. The principal balance of the notes and the related accrued
     interest (8% per annum) are due December 31, 2001. The notes are
     collateralized by the shares of common stock acquired with the notes, and
     those shares are held in escrow by the Company. Interest income on these
     notes receivable was $251,000 and $85,000 in 1999 and 1998, respectively.

     During 1998, an executive loaned the Company approximately $5.35 million
     with interest at a rate of 8% per year until paid. In August 1998, the
     Company issued 4,708,000 shares of common stock to the executive in
     satisfaction of the debt and accrued interest payable of $170,000.

     In September 1999, the Company cancelled approximately $318,000 of notes
     receivable and reacquired 279,675 shares of common stock at $1.14 per share
     from an employee. At December 31, 1999, these shares are presented as
     treasury shares, at cost.

12.  STOCK-BASED COMPENSATION

     Effective October 30, 1998, the Company adopted the 1998 Equity
     Participation Plan (the Plan) available for grant to eligible employees and
     eligible participants to purchase up to 1,261,000 shares of the Company's
     common stock. During September and November 1999, the board of directors
     (the Board) increased the shares available for grant under the Plan to
     6,000,000 and 7,500,000, respectively. The Plan is administered by a
     committee appointed by the Board, or by the Board. The Board or the
     appointed committee shall administer the Plan, select the eligible
     employees and eligible participants to whom options will be granted, the
     price to be paid, the exercise period and the number of shares subject to
     any such options and interpret, construe and implement the provisions of
     the Plan.

     During the year ended December 31, 1999 and the period January 15, 1998
     (Inception) through December 31, 1998, respectively, the Company awarded
     options under the Plan totaling 3,829,557 and 201,850 shares of common
     stock, respectively, at a weighted average option price per share of $5.49
     and $3.64. Stock option grants approximate the fair market value at the
     date of grant. The vesting periods on these options range from immediately
     to four years and have a maximum contractual life of ten years.

     Prior to the adoption of the Plan, the Board issued stock options (the
     Initial Plan) totaling 3,878,050 shares to various parties at a weighted
     average option price per share of $2.83. The vesting periods on these
     options range from immediately to three years, and have a maximum
     contractual life of ten years.

                                      F-15

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     A summary of the stock option activity for the year ended December 31, 1999
     and the period January 15, 1998 (Inception) through December 31, 1998 is
     presented below:

<TABLE>
<CAPTION>
                                                                     1998 EQUITY
                                          INITIAL PLAN            PARTICIPATION PLAN                TOTAL
                                    -----------------------     -----------------------     -----------------------
                                                   WEIGHTED                    WEIGHTED                   WEIGHTED
                                                    AVERAGE                    AVERAGE                     AVERAGE
                                     NUMBER OF     EXERCISE      NUMBER OF    EXERCISE       NUMBER OF     EXERCISE
                                      SHARES         PRICE         SHARES       PRICE         SHARES        PRICE
                                    ----------    --------      ----------    ---------     ----------    ---------
<S>                                  <C>          <C>            <C>          <C>            <C>          <C>
OUTSTANDING, JANUARY 15, 1998
      (INCEPTION)                         --      $    --             --      $    --             --      $    --
    Granted                          3,878,050        2.83         201,850        3.64       4,079,900        2.87
    Forfeited                          (58,850)       2.46            --           --          (58,850)       2.46
                                    ----------                  ----------                  ----------

OUTSTANDING, DECEMBER 31, 1998       3,819,200        2.79         201,850        3.64       4,021,050        2.83
    Granted                                                      3,829,557        5.49       3,829,557        5.49
    Exercised                         (305,088)       1.73          (1,467)       3.64        (306,555)       1.74
    Forfeited                         (331,973)       3.49         (55,795)       3.69        (387,768)       3.52
                                    ----------                  ----------                  ----------

OUTSTANDING, DECEMBER 31, 1999       3,182,139    $   2.87       3,974,145    $   5.42       7,156,284    $   4.29
                                    ==========                  ==========    ========      ==========
</TABLE>

     Had compensation cost for the Company's stock options granted been
     determined based on the fair value at the date of grant, consistent with
     the provisions of SFAS No. 123, the Company's net loss and loss per share
     of common stock for the year ended December 31, 1999 and the period January
     15, 1998 (Inception) through December 31, 1998, respectively, would have
     been increased to the pro forma amounts shown below.

     <TABLE>
<CAPTION>

                                                                       PERIOD
                                                                   JANUARY 15, 1998
                                                 YEAR ENDED         (INCEPTION)
                                                 DECEMBER 31,   THROUGH DECEMBER 31,
                                                   1999                  1998
                                               ------------     --------------------
<S>                                            <C>                 <C>
NET LOSS
    As presented                               $(35,971,000)       $(13,122,000)
    As adjusted                                 (36,477,000)        (13,161,000)

BASIC AND DILUTED NET LOSS PER COMMON SHARE
    As presented                               $     (2.49)        $      (2.00)
    As adjusted                                      (2.42)               (2.01)
</TABLE>


     These adjusted amounts were determined using the Black-Scholes valuation
     model with the following key assumptions: (a) a discount rate ranging from
     approximately 5% to 6%, (b) a volatility factor of 81%; (c) an average
     expected option life of 5 years; (d) there have been no options that have
     expired; and (e) no payment of dividends on common stock.

                                      F-16

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     During 1999 and 1998, respectively, included in the options and warrants
     granted by the Company, are 695,082 and 113,300 options granted to
     non-employees. The Company recorded expense for the same periods,
     respectively, of approximately $311,000 and $89,000 related to these
     non-employee options in accordance with the provisions of SFAS No. 123.

     The following table summarizes information about stock options and warrants
     outstanding at December 31, 1999:

                                              WEIGHTED AVERAGE
                                                  REMAINING
                                  NUMBER      CONTRACTUAL LIFE        NUMBER
     EXERCISE PRICES           OUTSTANDING        (IN YEARS)       EXERCISABLE
--------------------------     -----------    -----------------    -----------

      $1.14 - $3.64             5,515,414            8.7            2,583,795
      $5.45 - $7.27             1,149,720            9.8              148,500
     $10.00 - $15.45              367,150            9.8                   --
     $17.00 - $39.00              124,000           10.0                   --
                                ----------                          ----------
                                7,156,284                           2,732,295
                                ==========                          ==========

13.  COMPUTATION OF NET LOSS PER SHARE

     Basic net loss per share is computed by dividing net loss attributable to
     common stockholders by the weighted average number of common shares
     outstanding during the period. Diluted net loss per share assumes the
     exercise of common stock equivalents for which market price exceeds
     exercise price, less shares assumed purchased by the Company with related
     proceeds. Incremental shares of common stock equivalents are not included
     in the calculation of net loss per share as the inclusion of such
     equivalents would be anti-dilutive.

     Net loss per share is calculated as follows:

<TABLE>
<CAPTION>
                                                                                  PERIOD
                                                                              JANUARY 15, 1998
                                                            YEAR ENDED         (INCEPTION)
                                                           DECEMBER 31,    THROUGH DECEMBER 31,
                                                               1999                1998
                                                           ------------    -------------------
<S>                                                        <C>                 <C>
BASIC AND DILUTED NET LOSS PER SHARE:
   Loss attributable to common stockholders:

      Net loss                                             $(35,971,000)       $(13,122,000)
      Less mandatorily convertible redeemable preferred
           stock dividends                                   (1,654,000)           (190,000)
                                                           ------------        ------------

         Loss attributable to common stockholders          $(37,625,000)       $(13,312,000)
                                                           ============        ============

    Weighted average common shares outstanding               15,099,359           6,554,499
                                                           ============        ============

    Basic and diluted net loss per share                   $      (2.49)       $      (2.03)
                                                           ============        ============
</TABLE>

                                      F-17

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     For each of the periods presented, basic and diluted net loss per share are
     the same. Unexercised options to purchase 7,156,284 and 4,021,051 shares of
     common stock and mandatorily convertible redeemable preferred stock
     convertible into 0 and 4,437,403 shares of common stock for the year ended
     December 31, 1999 and the period January 15, 1998 (Inception) through
     December 31, 1998, respectively, which could potentially dilute basic
     earnings per share in the future were not included in the computation of
     diluted net loss per share for these periods because to do so would have
     been antidilutive in each case.

14.  SUBSEQUENT EVENTS

     On January 24, 2000, the Company entered into an agreement in principle to
     acquire Touch 1 Communications, Inc. (Touch 1), a provider of long-distance
     and telemarketing services. In addition to entering this agreement, the
     Company formed a new subsidiary, Tiger Acquisition Corporation, for the
     purposes of executing this pending acquisition. The acquisition of Touch 1
     will be accounted for using the purchase method of accounting. The purchase
     price and acquisition are subject to, among other things, the signing of a
     definitive agreement, regulatory approvals, and customary closing
     conditions. The acquisition of Touch 1 is expected to be completed by the
     end of May 2000.

     On February 14, 2000, the Company paid CMB Capital, LLC approximately
     $14,366,000 to extinguish the outstanding debt relating to the sale and
     leaseback of its $35.2 million revolving credit facility. As a part of this
     transaction, the Company will recognize an extraordinary loss of
     approximately $1,600,000. The extraordinary loss consists of the expense to
     extinguish the debt and the unamortized portion of 115,500 stock warrants
     issued pursuant to the agreement that were being amortized over the life of
     the debt.

15.  QUARTERLY OPERATING RESULTS (UNAUDITED)

     The following table presents unaudited quarterly operating results for each
     of the last seven quarters, as this table includes all full quarters of
     operations since inception on January 15, 1998. This information has been
     prepared by the Company on a basis consistent with the Company's
     consolidated financial statement statements and includes all adjustments,
     consisting only of normal recurring accruals, in accordance with generally
     accepted accounting principles. Such quarterly results are not necessarily
     indicative of future operating results.

                                      F-18

<PAGE>
Z-TEL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                           QUARTER ENDED
                           -----------------------------------------------
                               JUNE 30,     SEPTEMBER 30,     DECEMBER 31,
                                1998            1998             1998
                           ------------     ------------     ------------
Sales                      $       --       $       --       $    140,000
Operating loss                2,641,000        3,833,000        6,437,000
Net Loss                     (2,716,000)      (3,850,000)      (6,161,000)
Loss per share (1)         $      (1.13)    $      (0.63)    $      (0.44)
Weighted average shares
   outstanding                2,403,500        6,230,098       14,411,100

<TABLE>
<CAPTION>

                                                    QUARTER ENDED
                           ---------------------------------------------------------------
                             MARCH 31,        JUNE 30,       SEPTEMBER 30,     DECEMBER 31,
                               1999             1999             1999             1999
                           ------------     ------------     ------------      -----------
<S>                        <C>              <C>              <C>              <C>
Sales                      $    664,000     $    761,000     $    745,000     $  4,445,000
Operating loss                5,843,000        4,488,000       10,849,000       16,493,000
Net loss                     (5,939,000)      (5,611,000)     (12,097,000)     (12,324,000)
Loss per share (1)         $      (0.43)    $      (0.41)    $      (0.96)    $      (0.75)
Weighted average shares
   outstanding               14,411,000       14,411,000       13,025,563       17,257,893
</TABLE>

-------------
(1) Earnings per share were calculated for each three month and twelve month
    period on a stand-alone basis.


                                      F-19

<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.









                                       64
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

         The following sets forth certain information regarding our directors
and executive officers as of March 23, 2000:
<TABLE>
<CAPTION>
NAME                                         AGE                                 POSITION
----                                         ---                                 --------
<S>                                           <C>     <C>
D. Gregory Smith                              40      President, Chief Executive Officer and Chairman of the Board
                                                      and Director
David J. Malfara, Sr.                         45      President, Z-Tel Network Services, Inc.
John M. Hutchens                              52      Senior Vice President--Chief Financial Officer
Charles W. McDonough                          48      Senior Vice President--Chief Technology Officer
J. Bryan Bunting                              53      Senior Vice President--Engineering and Technical Support
James A. Kitchen                              40      Senior Vice President--Chief Architect
N. Dumas Garrett                              39      Senior Vice President--Business Development
Mark H. Johnson                               43      Secretary and Treasurer
Jeffrey H. Kupor                              31      General Counsel
Andrew L. Graham                              42      Chief Legal Officer
Robert A. Curtis                              32      Senior Vice President--Strategic Planning
Doug W. Jackson                               34      Vice President--Marketing
Eduard J. Mayer                               47      Director and Vice President--Strategic Alliances
Douglas C. Williamson                         48      Director
Jeffrey A. Bowden                             55      Director
Buford H. Ortale                              38      Director
Laurence S. Grafstein                         39      Director
</TABLE>

         D. Gregory Smith, a founder of Z-Tel, has served as chairman of the
board and chief executive officer of Z-Tel since inception. Mr. Smith was a
director of Premiere Technologies, Inc. from 1991 to 1997, executive vice
president from 1994 to 1997 and vice president from 1991 to 1994. From 1987 to
1991, Mr. Smith was a management and financial consultant with Olympus
Telecommunications, Inc. and Olympus Partners, Inc., companies that he founded.
Mr. Smith has also held positions with NationsBank of Florida, N.A. and Chase
Bank of Florida. Mr. Smith received his B.S. in Commerce from the University of
Virginia.

         David J. Malfara, Sr. has served as president of Z-Tel Network
Services, Inc. since February 1999. Mr. Malfara has over twenty-four years of
telecommunications experience. He founded and sold Pace Long Distance Service
and Pace Network Services. He has previously served as vice president of
engineering at National Computer Corporation, as technical
advisor/telecommunications at Honeywell Information Systems and as senior
engineer at GTE Telenet.

         John M. Hutchens has served as senior vice president--chief financial
officer since September 1999. From 1982 through 1999 he was an employee and then
a partner at Arthur Andersen LLP. Mr. Hutchens received a B.S. in Accountancy
from the University of Illinois, and

                                       65
<PAGE>

a Masters of Health Administration from the Ohio State University. Mr. Hutchens
is a Certified Public Accountant licensed in Florida.

         Charles W. McDonough has served as senior vice president--chief
technology officer since August 1998. From 1975 through 1998, he was an employee
and then a partner at Andersen Consulting LLP. Mr. McDonough received a B.A. in
Industrial Engineering and a M.S. in Industrial Administration from Carnegie
Mellon University.

         J. Bryan Bunting has served as senior vice president--engineering and
technical services since January 1999. Mr. Bunting served as senior vice
president--Z-Tel Business Networks from August l998 to January 1999. From 1968
through 1998, he was an officer of NationsBank, serving most recently as senior
vice president of direct banking. Mr. Bunting attended Old Dominion University.

         James A. Kitchen, a founder of Z-Tel, has served as senior vice
president--chief architect of Z-Tel since January 1999. He served as vice
president, engineering from January 1998 to December 1998 and was a chief
architect and developer of Premiere Communications, Inc. from 1992 to 1997. Mr.
Kitchen received his B.S. in Engineering from Georgia Institute of Technology.

         N. Dumas Garrett has served as senior vice president--business
development of Z-Tel since December 1999. From 1987 through 1999, he was an
officer of Stephens, Inc., serving most recently as managing director and senior
vice president and head of the technology and telecomunications group. Mr.
Garrett has a B.S. in Industrial Engineering from the University of Arkansas and
an M.B.A. from the University of Virginia.

         Mark H. Johnson has served as secretary and treasurer of Z-Tel since
August 1999. From May 1998 until his arrival at Z-Tel, Mr. Johnson was an
employee of Olympus Management, a venture firm. From November 1991 until May
1998, Mr. Johnson was a credit policy executive of First Union National Bank.
Mr. Johnson holds a B.A. from the University of Virginia.

         Jeffrey H. Kupor has served as general counsel of Z-Tel since November
1999. From September 1993 until January 1998, Mr. Kupor was an attorney with the
Houston office of Fulbright & Jaworski LLP, specializing in complex commercial
and securities litigation. From January 1998 until November 1999 Mr. Kupor was a
Staff Attorney and later Counsel at A I M Management Group, Inc., an
investment adviser to a group of registered investment companies, where his
responsibilities included securities registration, corporate and fund
litigation, and labor and employment-related legal issues. Mr. Kupor has a B.S.
in Economics from the University of Pennsylvania and a J.D. from the Boalt Hall
School of Law at the University of California at Berkeley.

         Andrew L. Graham has served as chief legal officer of Z-Tel since
September 1999. He has practiced corporate and tax law in Tampa, Florida since
1988, most recently with the firm of Cass & Graham. He earned his Bachelor's in
accounting from Florida State University and his law degree, with honors, from
the University of Florida College of law in 1987 and went on to earn a Master of
Laws in Taxation there in 1988.

                                       66
<PAGE>

         Robert A. Curtis has served as senior vice president--strategic
planning since July 1999. From May 1998 to June 1999, Mr. Curtis was vice
president--business development and legal affairs at Z-Tel. From September 1995
to April 1998, Mr. Curtis was an attorney at the Houston office of Fulbright &
Jaworski LLP, where he specialized in antitrust and complex federal litigation.
Mr. Curtis graduated from the Duke University School of Law in 1995. Mr. Curtis
received his B.A. in Philosophy from Trinity University and his Doctor of
Philosophy (D. Phil) from the University of Oxford (England).

         Doug W. Jackson has served as vice president--marketing of Z-Tel since
June 1999. From 1996 through 1999 he held the position of senior brand manager
for the Coca-Cola Company and prior to that from 1992 to 1996 he was an
associate product manager for Kraft General Foods Corp. Mr. Jackson received his
B.A. from University of Virginia and his M.B.A. from University of Michigan.

         Eduard J. Mayer has been a director of Z-Tel since July 1998 and vice
president--strategic alliances since July 1999. Mr. Mayer is the president of
Acorn Ventures, Inc., a venture investment company. Mr. Mayer holds a Bachelor
of Commerce from the University of Windsor and a M.B.A. from New York
University.

         Douglas C. Williamson has been a director of Z-Tel since December 1998.
Mr. Williamson has been senior vice president and managing director of Bank of
America Capital Investors (formerly NationsBank Capital Corporation) since 1989.
He is a member of the board of directors of CallWare Technologies, Inc.,
Empirical Software, Inc., GX Technology Corporation, HAHT Software, Inc., Med
Solutions, Inc., Memorial Operations Company, North American Technologies Group,
Inc. and Takeout Taxi Holdings, Inc. Mr. Williamson received a B.A. from Denison
University and a M.B.A. from Columbia University.

         Jeffrey A. Bowden, a founder of Z-Tel, has served as a director of
Z-Tel since July 1998. Mr. Bowden is currently a director of the Boston
Consulting Group. Mr. Bowden was vice president of Bell Atlantic Corporation
from 1997 to 1998. Mr. Bowden was a vice president of The Nynex Corporation from
1994 to 1997 and vice president and a director of The Boston Consulting Group
from 1988 to 1994. Mr. Bowden received his B.S. from the University of Michigan
and his M.B.A. from the Harvard Graduate School of Business.

         Buford H. Ortale has been a director of Z-Tel since July 1998. Since
1996 Mr. Ortale has been the president of Sewanee Ventures, LLC, a private
investment firm. From 1993 to 1996 Mr. Ortale was a director and then a managing
director of NationsBanc Capital Markets Inc. He is a member of the board of
directors of Digital Medical Systems. Mr. Ortale received his B.A. degree from
The University of the South and a M.B.A. from Vanderbilt University.

         Laurence S. Grafstein has been a director of Z-Tel since October 1999.
Mr. Grafstein is a co-founder of Gramercy Communications Partners, a private
equity fund based in New York specializing in telecommunications investments.
Previously, he was head of the global telecommunications practice at Credit
Suisse First Boston. He is currently a member of the

                                       67
<PAGE>

Executive Committee of the Wall Street Division of the United Jewish Appeal and
a member of the boards of the Arts Connection and the Jerusalem Foundation. Mr.
Grafstein received his B.A. from Harvard University, his M. Phil from Balliol
College of Oxford University and an LL.B from the University of Toronto Law.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         All Section 16(a) filing requirements have been complied with since our
initial public offering on December 14, 1999, except that for each of the
following directors and officers, one form was not timely filed relating to the
indicated number of transactions: Messrs. Bowden, Ortale, Grafstein, and
Williamson, one transaction; Mr. Garrett, two transactions and his initial
report upon becoming a Section 16(a) reporting person. In addition, the initial
beneficial ownership report of Mr. Curtis did not accurately reflect the
character of certain of his holdings.

                                       68
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table provides summary information concerning
compensation paid or accrued by us to, or on behalf of, our "Named Executive
Officers," which are (1) our Chief Executive Officer, (2) our four most highly
compensated executive officers serving as executive officers at December 31,
1999 and (3) one additional individual who was an executive officer during 1999
but was not serving in that capacity on December 31, 1999. The aggregate amount
of perquisites and other personal benefits, securities or property received by
each of the Named Executive Officers was less than either $50,000 or 10% of the
total annual salary and bonus reported for that Named Executive Officer:

<TABLE>
<CAPTION>
                                                          ANNUAL COMPENSATION           LONG TERM COMPENSATION
                                                       ----------------------                   AWARDS
                                                                                    -------------------------------
                                                                                      SHARES           ALL OTHER
                                                       SALARY           BONUS       UNDERLYING        COMPENSATION
NAME AND PRINCIPAL POSITION                             ($)              ($)         OPTIONS             ($)
---------------------------                            ------           -----       ----------        -------------
<S>                                                    <C>              <C>            <C>
D. Gregory Smith                                       162,000           ---           1,100               --
     President, Chief Executive Officer and
     Chairman
Russell T. Alba (1)                                    131,625           ---            --               40,500
     Senior Vice President--Business
     Development and Chief Legal Officer
James A. Kitchen                                       162,000           ---          27,500               --
     Senior Vice President--Chief Architect
J. Bryan Bunting                                       162,000           ---          27,500               --
     Senior Vice President--Engineering and
     Technical Services
Charles W. McDonough                                   162,000           ---          27,500               --
     Senior Vice President--Chief Technology Officer
David J. Malfara, Sr.                                  137,500           ---         357,500             12,000 (2)
     President--Z-Tel Network Services, Inc.
</TABLE>

--------
(1)Effective September 1999, Mr. Alba was no longer employed by us. "All Other
Compensation" for Mr. Alba reflects amounts paid to him pursuant to a severance
agreement.
(2) Represents compensation for consulting services provided by Malfara
Associates, an assumed name of Mr. Malfara.

OPTION GRANTS IN LAST FISCAL YEAR

          The following table contains information concerning the stock option
grants made to each of the Named Executive Officers during the fiscal year ended
December 31, 1999, subject to the following:

         Under our 1998 Equity Participation Plan, stock options are generally
granted as of the employee's start date. The options generally vest over a three
year period commencing on the start date and expire ten years thereafter (unless
the employee at the time of grant owned more

                                       69
<PAGE>

than 10% of the total combined voting power of all classes of stock, in which
case they expire over five years).

         The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission. We cannot be certain that the actual stock price appreciation over
the ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the common stock appreciates
over the option term, no value will be realized from the option grants. The
potential realizable value is calculated by assuming that the fair market value
of the common stock as determined by the Board of Directors on the date of grant
of the options appreciates at the indicated rate of the entire term of the
option and that the option is exercised at the exercise price and sold on the
last day at the appreciated price.
<TABLE>
<CAPTION>
                                                     INDIVIDUAL GRANTS

                                                                                                  POTENTIAL REALIZABLE
                                                                   WEIGHTED                         VALUE AT ASSUMED
                          NUMBER OF SHARES                          AVERAGE                    ANNUAL RATES OF STOCK PRICE
                           OF COMMON STOCK       % OF TOTAL        EXERCISE                   APPRECIATION FOR OPTION TERM
                             UNDERLYING       OPTIONS GRANTED TO     PRICE       EXPIRATION  -----------------------------
         NAME              OPTIONS GRANTED     EMPLOYEES IN 1999    ($/SH)          DATE            (5%) ($)       10% ($)
         ----            ----------------     ------------------   ---------     -----------        --------      ---------


<S>                      <C>                  <C>                   <C>          <C>                <C>            <C>
D. Gregory Smith                1,100                <1%             3.64         08/01/04            1,106           2,444

*Russell T. Alba                 --                  --               --             --                  --              --

James A. Kitchen               27,500                <1%             5.45         10/09/09           94,256         238,862

J. Bryan Bunting               27,500                <1%             5.45         10/09/09           94,256         238,862

Charles W. McDonough           27,500                <1%             5.45         10/09/09           94,256         238,862

David J. Malfara, Sr.          40,700                <1%             3.64         01/26/09           93,169         236,110
                              103,400                 3%             3.64         02/01/09          236,701         599,846
                              185,900                 5%             3.64         07/26/09          425,558       1,078,447
                               27,500                <1%             5.45         10/09/09           94,256         238,862
</TABLE>

--------
* Effective September 1999, Mr. Alba was no longer employed by us.

                                       70
<PAGE>


AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE TABLE

          The following table shows information concerning stock option
exercises during 1999 and stock option values as of the year ending December 31,
1999 by each of the Named Executive Officers. The value of unexercised
in-the-money options is determined by subtracting the exercise price from the
fair market value of the common stock based on $40.375, the closing price of
Z-Tel common stock as of December 31, 1999, multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES             VALUE OF UNEXERCISED IN-THE
                           SHARES                          UNDERLYING UNEXERCISED            MONEY OPTIONS AT FISCAL YEAR-
                          ACQUIRED ON       VALUE        OPTIONS AT FISCAL YEAR-END (#)                  END ($)
    NAME                  EXERCISE (#)    REALIZED ($)    EXERCISABLE  UNEXERCISABLE          EXERCISABLE   UNEXERCISABLE
 --------------------------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>                 <C>           <C>                   <C>            <C>
D. Gregory Smith             --              --             336,111       214,989              12,347,042     $7,897,617
*Russell T. Alba             --              --             129,800          --                 4,768,203              0
James A. Kitchen             --              --             351,389       226,111              12,908,271      8,256,416
J. Bryan Bunting           10,000       133,600             119,861       172,639               4,403,098      6,292,115
Charles W. McDonough      197,490     3,008,951                   0       270,010                       0     10,323,557
David J. Malfara, Sr.        --              --                   0       357,500                       0     13,082,988
</TABLE>

 --------
* Effective September 1999, Mr. Alba was no longer employed by us.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The compensation committee of the Board of Directors consisted of
Messrs. Ortale and Williamson during the year ended December 31, 1999, both of
whom are non-employee directors. The compensation committee is responsible for
all decisions concerning executive officer compensation, including decisions
regarding grants of incentive stock options.

DIRECTOR COMPENSATION

         Directors do not currently receive any cash compensation for services
rendered to Z-Tel in their capacities as directors. Pursuant to the terms of The
1998 Equity Participation Plan of Z-Tel Technologies, Inc., each outside
director who served as such as of the date of Z-Tel's initial public offering
received options to purchase 1,100 shares of Z-Tel's common stock, and will
receive options to purchase an additional 1,100 shares of Z-Tel's common stock
on the date of each annual meeting of shareholders following such initial public
offering.

                                       71
<PAGE>


EXECUTIVE EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS

     We have entered into the following employment agreements:
<TABLE>
<CAPTION>
                                                               ANNUAL
           OFFICER                          TERM               SALARY                   POSITION
---------------------           -------------------------     --------     ---------------------------------------
<S>                             <C>                           <C>          <C>
D. Gregory Smith                July 1998 - July 2001         $162,000     President, Chief Executive Officer and
                                                                           Chairman
Charles W. McDonough            August 1998 - August 2001     $162,000     Senior Vice President - Chief Technology
                                                                           Officer
J. Bryan Bunting                August 1998 - August 2001     $162,000     Senior Vice President - Engineering and
                                                                           Technical Services
James A. Kitchen                July 1998 - July 2001         $162,000     Senior Vice President - Chief Architect
</TABLE>

         The employment agreements with Messrs. Smith, McDonough, Bunting and
Kitchen also provide for:

o    automatic renewal for subsequent one year terms unless either party elects
     not to renew prior to 90 days from the end of the then current term of the
     agreement;

o    a bonus or other incentive compensation in an amount to be determined by
     our compensation committee;

o    the payment of his base salary and any other benefits to which he would
     have been entitled for the term of the agreement if he is terminated
     without cause (as defined in the agreements);

o    generally, if a change of control occurs, the payment of two and
     nine-tenths (2.9) times his base salary and any incentive or bonus paid in
     the prior year if, within three years of the occurrence of a change of
     control, specified events occur;

o    his obligation to keep our nonpublic information confidential; and

o    his obligation not to compete with us in the United States and not to
     solicit our employees.

SEVERANCE AGREEMENT

         We and Mr. Russell T. Alba are parties to an agreement, dated September
3, 1999, where we, among other things, agreed to pay a total severance amount of
$324,000, which amount is payable monthly for a period of two years, provide
health benefits and provide for the extension of the exercise period of stock
options for Mr. Alba. Mr. Alba and we also provided each other with a mutual
release of any prior legal claims.

                                       72
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of March 24, 2000 (unless otherwise
stated), the number of shares of our common stock beneficially owned by:

     o    each person who we know to be a beneficial owner of 5% or more of our
          outstanding common stock;

     o    each of our directors;

     o    each of our Named Executive Officers; and

     o    all executive officers and directors as a group.
<TABLE>
<CAPTION>

                                                              AMOUNT AND
                                                               NATURE OF
                                                               BENEFICIAL       PERCENT OF CLASS
BENEFICIAL OWNER                                               OWNERSHIP             (1)
                                                              -----------       ----------------
<S>                                                           <C>                    <C>
D. Gregory Smith (2)(3)  . . . . . . . . . . . . . . .        7,743,022               23.90
Carol Jane Smith (2)(3)  . . . . . . . . . . . . . . .        7,743,022               23.90
G/CJ Investments, L.P. (3) . . . . . . . . . . . . . .        5,500,000               17.18
Russell T. Alba (2)(4)   . . . . . . . . . . . . . . .          425,425                1.32
David J. Malfara, Sr. (2)(5) . . . . . . . . . . . . .           60,042                  *
James A. Kitchen (2)(6)  . . . . . . . . . . . . . . .        1,803,278                5.56
Charles W.  McDonough (2)(7) . . . . . . . . . . . . .          806,667                2.52
J. Bryan Bunting (2)(8)  . . . . . . . . . . . . . . .          380,417                1.18
Eduard J. Mayer  (2)(9)  . . . . . . . . . . . . . . .              -0-                  *
Buford H. Ortale  (2)(10)  . . . . . . . . . . . . . .        1,829,061                5.71
Douglas C. Williamson  (2)(11) . . . . . . . . . . . .              -0-                  *
Jeffrey Bowden (2)(12) . . . . . . . . . . . . . . . .          339,167                1.05
Laurence S. Grafstein (13)   . . . . . . . . . . . . .              -0-                  *
Fulmead Ventures Limited (14)  . . . . . . . . . . . .        2,348,520                7.34
BA Capital Company, L.P. (15)  . . . . . . . . . . . .        1,780,325                5.56
Gramercy Z-Tel, L.P. (16)  . . . . . . . . . . . . . .        3,074,280                9.61

All directors and officers as a group (18 persons)           13,599,079               40.57
</TABLE>

--------
* Less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the aggregate number of shares
beneficially owned by the individual stockholders and groups of stockholders
described above and the percentage ownership of such individuals and groups,
shares of common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of the date of this report are deemed
outstanding. Such shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of the other stockholders or groups of
stockholders.

                                       73
<PAGE>

(2) The address for each of Messrs. Smith, Alba, Malfara, Kitchen, McDonough,
Bunting, Mayer, Ortale, Williamson and Bowden and Mrs. Smith is c/o Z-Tel
Technologies, Inc., 601 South Harbour Island Boulevard, Suite 220, Tampa,
Florida 33602.

(3) D. Gregory Smith and Carol Jane Smith are husband and wife. The number of
shares shown for D. Gregory Smith and for Carol Jane Smith each includes all of
the shares held by G/CJ Investments, L.P., a Delaware limited partnership. G/CJ
Investments, Inc., a Delaware corporation established and controlled by Mr. and
Mrs. Smith, is the sole general partner of G/CJ Investments, L.P. The share
amount also includes 397,222 shares for Mr. Smith and Mrs. Smith which are
deemed to be beneficially owned by them by virtue of certain stock options that
are currently exercisable or become exercisable within 60 days. The address of
G/CJ Investments, L.P. is 300 Delaware Avenue, Suite 900, Wilmington, DE 19801.

(4) Includes 129,800 shares deemed to be beneficially owned by Mr. Alba by
virtue of certain stock options that are currently exercisable or which become
exercisable within 60 days. Effective September 1999, Mr. Alba was no longer
employed by us.

(5) Includes 60,042 shares deemed to be beneficially owned by Mr. Malfara by
virtue of certain stock options that are currently exercisable or which become
exercisable within 60 days.

(6) Includes 427,778 shares deemed to be beneficially owned by Mr. Kitchen by
virtue of certain stock options that are currently exercisable or which become
exercisable within 60 days.

(7) Includes 59,177 shares deemed to be beneficially owned by Mr. McDonough by
virtue of certain stock options that are currently exercisable or which become
exercisable within 60 days.

(8) Includes 150,417 shares deemed to be beneficially owned by Mr. Bunting by
virtue of certain stock options that are currently exercisable or which become
exercisable within 60 days.

(9) Does not include 2,348,520 shares owned directly by Fulmead Ventures
Limited, which is beneficially owned by The Mayer Trust. Mr. Mayer is a
principal beneficiary of The Mayer Trust. Mr. Mayer disclaims beneficial
ownership of these shares as he does not have voting or dispositive power with
respect to these shares.

(10) Includes 158,036 shares held by a general partnership with which Mr.
Ortale is affiliated and 68,622 shares held by a trust of which Mr. Ortale is a
trustee.

(11) Excludes 1,780,325 shares owned by BA Capital Company, L.P., of which Mr.
Williamson is a senior officer. Mr. Williamson disclaims beneficial ownership of
the shares owned by BA Capital Company, L.P.

(12) Includes 229,167 shares deemed to be beneficially owned by Mr. Bowden by
virtue of certain stock options that are currently exercisable or which become
exercisable within 60 days.

(13) Excludes 3,074,280 shares owned by Gramercy Z-Tel L.P., of which Mr.
Grafstein is a senior officer. Mr. Grafstein disclaims beneficial ownership of
the shares owned by Gramercy Z-Tel L.P.

(14) This information is derived from a Schedule 13G dated February 4, 2000
filed jointly by The Mayer Trust, Eduard J. Mayer, Mutual Risk Management Ltd.,
Mutual Risk Management (Holdings) Limited, Hemisphere Trust (Jersey) Limited,
Hemisphere Trustees Limited, Hemisphere Nominees Limited, Hemisphere Investments
Limited, and Fulmead Ventures Limited. Each of these parties is shown to have
shared voting and dispositive power with respect to all of the shares shown.
Eduard J. Mayer disclaims beneficial ownership of the shares shown. The address
of Fulmead Ventures Limited is Akara Bldg., 24 Castro Street, Wickhams Cay I,
Road Town, Tortola, British Virgin Islands.

(15) This information is derived from a Schedule 13G dated February 14, 2000
filed jointly by BA Capital Company, L.P., BA SBIC Management, LLC, BA Equity
Management, L.P., BA Equity Management GP, LLC, Walter W. Walker, Jr., and Bank
of America Corporation. Each of these parties is shown to have sole voting and

                                       74
<PAGE>

dispositive power with respect to all of the shares shown. The address of BA
Capital Company, L.P., is 901 Main Street, 22nd Floor, Dallas, TX 75202-3714.

(16) This information is derived from a Schedule 13G filed February 14, 2000 and
dated February 2000 filed jointly by Gramercy Z-Tel L.P., Gramercy Z-Tel LLC and
Communicapital Partners (Cayman), L.P. Each of these parties is shown to have
shared voting and dispositive power with respect to all of the shares shown. The
address of Gramercy Z-Tel L.P. is 712 Fifth Avenue, New York, NY 10019.

                                       75
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PURCHASES OF COMMON STOCK

         On January 15, 1998, Rob Curtis purchased 110,000 shares of our common
stock for a purchase price of $125,000. Mr. Curtis' note to us in the principal
amount of $93,750, bears interest at a rate of 8% per annum, matures on December
31, 2001 and is secured by a pledge of his common stock. The largest amount of
indebtedness under the note during 1999 was $93,750, and the outstanding balance
as of March 23, 2000 was $0.

         In agreements dated September 1, 1998, each of D. Gregory Smith, James
A. Kitchen, Charles W. McDonough and J. Bryan Bunting, together referred to as
the officer investors, purchased, in the aggregate, 9,570,000 shares of our
common stock for an aggregate purchase price of $10.88 million. In connection
with the purchase of these shares, we loaned: (1) $750,000 to Mr. Smith for the
purchase price of 660,000 of his shares, (2) $750,000 to Mr. Kitchen for the
purchase price of 660,000 of his shares; (3) $468,750 to Mr. McDonough for the
purchase price of 550,000 of his shares and (4) $187,500 to Mr. Bunting for the
purchase price of 220,000 of his shares. These loans, which bear interest at an
8% annual rate and mature on December 31, 2001, are secured by a pledge to us of
the common stock. The largest amount of indebtedness under the notes during 1999
was $750,000, $750,000, $468,750, and $187,500, respectively, and the
outstanding note balances as of March 23, 2000 were $0, $500,000, $468,750 and
$187,500, respectively.

         These agreements permit Messrs. Smith and Kitchen, first, and us,
second, to purchase from the officer investors a portion of their shares in the
event of a termination (as defined in the agreements) of the officer's
employment with us. This purchase option must be exercised within 30 days after
the termination of the respective officer's employment with us. In addition, the
purchase option lapses automatically if we are involved in a corporate
transaction (as defined in the agreements).

         After March 1, 2000, the officer investors have a right, subject to
quantity limitations we determine, or determined by underwriters, if applicable,
to request that we register their common stock that is no longer subject to the
purchase option.

         On September 1, 1999, Mr. Smith purchased an additional 85,800 shares
of our common stock for $97,500 as a result of his exercise of his purchase
option to buy shares from an individual who left the company. Mr. Smith paid for
this purchase with a note under which the largest amount of indebtedness during
1999 was $97,500. The principal balance of the note on March 23, 2000 was $0,
and was on substantially the same terms as Mr. Smith's other note to the
company.

                                       76
<PAGE>

PURCHASE OF SERIES B PREFERRED STOCK

         On September 22, 1999, we sold an additional 2,964,500 shares of Series
B Preferred Stock for an aggregate consideration of approximately $10 million.
Included in that offering were 148,519 shares purchased for $3.37 per share by
Fulmead Ventures Limited, which is beneficially owned by a trust of which Eduard
J. Mayer is a beneficiary, and 148,267 shares purchased for $3.37 per share by
Buford H. Ortale.

PURCHASE OF SERIES C PREFERRED STOCK

         On October 8, 1999, Gramercy Z-Tel L.P. purchased 3,074,280 shares of
Series C Preferred Stock for a purchase price of $15 million.

STOCK PURCHASE AGREEMENT AND STOCKHOLDERS' AGREEMENT

         REGISTRATION RIGHTS. The terms of the Series A Preferred Stock and
Series C Preferred Stock provide that the holders of common stock issued upon
conversion of, or as a dividend on, Series A Preferred Stock or Series C
Preferred Stock, as the case may be, may require us to register that common
stock under the Securities Act beginning no earlier than 180 days after the
effective date of a registration statement for an initial public offering of our
common stock. Holders of common stock issued upon conversion of, or as a
dividend on, Series A Preferred Stock and Series C Preferred Stock also have the
right to cause us to register that common stock on Form S-3 when it becomes
available to us if they propose to register securities having a value of at
least $10 million. We will bear all registration expenses incurred in connection
with the first three of these demands for registration. In addition, if we
propose to register securities under the Securities Act, other than
registrations on Form S-4 or Form S-8, then, the holders of common stock issued
upon conversion of, or as a dividend on, Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock have a right, subject to quantity
limitations determined by underwriters if the offering involves an underwriting,
to request that we register such holders' common stock. If holders of common
stock issued upon conversion of, or as a dividend on, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock participate in that
registration, holders of common stock issued upon conversion of, or as a
dividend on, Series A Preferred Stock and Series C Preferred Stock will have
priority over all other holders of common stock (other than Z-Tel).

TRANSACTIONS WITH OLYMPUS MANAGEMENT GROUP, INC.

         Since January 1, 2000, Z-Tel Communications, Inc., one of our wholly
owned subsidiaries, has sub-sub leased, on a month-to-month basis, two pieces of
real property from Olympus Management Group, Inc., an entity of which Mr. Smith
is a 100% shareholder. The rental obligation under these sub-sub leases is
$6,800 per month. The sub-sub leases are terminable by either party at any time.

                                       77
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON

FORM 8-K

(a)      1.    The following financial statements of Z-Tel Technologies, Inc.
         and the report thereon of PricewaterhouseCoopers LLP dated February
         15, 2000 are filed as part of this report:

                    Report of Independent Certified Public Accountants.

                    Consolidated Balance Sheets, December 31, 1999 and December
                    31, 1998.

                    Consolidated Statements of Operations for the year ended
                    December 31, 1999 and the period from January 15, 1998
                    (Inception) through December 31, 1998.

                    Consolidated Statement of Changes in Stockholders' Equity
                    (Deficit) for the year ended December 31, 1999 and the
                    period from January 15, 1998 (Inception) through December
                    31, 1998.

                    Consolidated Statements of Cash Flows for the year ended
                    December 31, 1999 and the period from January 15, 1998
                    (Inception) through December 31, 1998.

                    Notes to Financial Statements.

         2.     The following Financial Statement Schedules are included herein:

                    Schedules are not submitted because they are not applicable
                    or not required or because the required information is
                    included in the financial statements or the notes thereto.

         3.     The following exhibits are filed as part of this report
         (exhibits marked with an asterisk have been previously filed with the
         Commission as indicated, as a correspondingly numbered Exhibit to Z-Tel
         Registration Statement on Form S-1 (Commission File No. 333-89063)
         originally filed on October 14, 1999, as subsequently amended, and are
         incorporated herein by this reference):

                    3.1*      Amended and Restated Certificate of Incorporation
                              of Z-Tel

                    3.2*      Amended and Restated Bylaws of Z-Tel

                    4.1*      Form of Common Stock Certificate

                                       78
<PAGE>


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

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

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

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

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

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

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

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

                    10.2*     1998 Equity Participation Plan

                    21*       List of subsidiaries

                    27        Financial Data Schedules

(b)  The Company did not file any reports on Form 8-K during the year ended
December 31, 1999.
                                       79
<PAGE>

                                   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 23rd day of
March, 2000.

                                         Z-TEL TECHNOLOGIES, INC.



                                         By: /s/ D. GREGORY SMITH
                                            ---------------------------------
                                            D. Gregory Smith, President and
                                              Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

       SIGNATURE                         TITLE                      DATE
       ---------                         -----                      ----

 /s/ D. GREGORY SMITH         President, CEO, Chairman         March 23, 2000
--------------------------    of the Board and Director
D. Gregory Smith              (Principal Executive Officer)


 /S/ JOHN M. HUTCHENS         Chief Financial Officer          March 23, 2000
--------------------------    (Principal Financial and
John M. Hutchens              Accounting Officer)

 /S/ DOUGLAS C. WILLIAMSON    Director                         March 23, 2000
--------------------------
Douglas C. Williamson

 /S/ JEFFREY A. BOWDEN        Director                         March 23, 2000
--------------------------
Jeffrey A. Bowden

 /S/ EDUARD J. MAYER          Director                         March 23, 2000
--------------------------
Eduard J. Mayer

 /S/ BUFORD H. ORTALE         Director                         March 23, 2000
--------------------------
Buford H. Ortale


                                       80
<PAGE>

 /S/ LAURENCE S. GRAFSTEIN    Director                         March 23, 2000
---------------------------
Laurence S. Grafstein


                                       81
<PAGE>

                                  EXHIBIT LIST
                                  ------------

(Exhibits marked with an asterisk have been previously filed with the Commission
as indicated and are incorporated herein by this reference)

                    3.1*      Amended and Restated Certificate of Incorporation
                              of Z-Tel

                    3.2*      Amended and Restated Bylaws of Z-Tel

                    4.1*      Form of Common Stock Certificate

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

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

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

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

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

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

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

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

                    10.2*     1998 Equity Participation Plan

                    21*       List of subsidiaries

                    27        Financial Data Schedules