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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended March 31, 2003                
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Transition period
from                             to

Commission File No. 0-26821

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FOCAL COMMUNICATIONS CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

36-4167094(I.R.S. Employer
Identification Number)200 North LaSalle Street,
Suite 1100, Chicago, Illinois(Address of principal executive offices)

60601(Zip Code)


Registrant's telephone number, including area code:(312) 895-8400

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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 ý    No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange
Act). Yes o    No ý

The
number of shares outstanding of the issuer's common stock, as of April 30, 2003:

Common
stock ($.01 par value) 4,973,327 shares

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INDEX

|                             |  |                                                                                                    |  | Page
|---------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION |  |                                                                                                   
|Item 1.                      |  | Financial Statements (Unaudited)                                                                   |  | 4   
|                             |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 |  | 4   
|                             |  | Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                   |  | 5   
|                             |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 |  | 6   
|                             |  | Condensed Notes to Interim Consolidated Financial Statements                                       |  | 7   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and
Results of Operations              |  | 14  
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 25  
|Item 4.                      |  | Controls and Procedures                                                                            |  | 25  
|PART IIOTHER INFORMATION    |  |                                                                                                   
|Item 1.                      |  | Legal and Administrative Proceedings                                                               |  | 27  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                          |  | 27  
|Item 3.                      |  | Defaults Upon Senior Securities                                                                    |  | 27  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                |  | 27  
|Item 5.                      |  | Other Information                                                                                  |  | 27  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                   |  | 27  
|                             |  | SIGNATURES                                                                                         |  | 28  
|                             |  | CERTIFICATIONS                                                                                     |  | 29  

2

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

We make statements in this Quarterly Report on Form 10-Q that are not historical facts. These "forward-looking statements" can be identified by
the use of terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or comparable terminology. These forward-looking statements include, among others, statements concerning:



These
statements are only predictions. You should be aware that these forward-looking statements are subject to risks and uncertainties, including financial and regulatory developments
and industry growth and trend projections that could cause actual events or results to differ materially from those expressed or implied by the statements. The most important factors that could
prevent us from achieving our stated goals include, but are not limited to, our failure to:



3

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PART IFINANCIAL INFORMATION

Item 1.    Financial Statements

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)  (Dollars in thousands, except per share amounts)

|                                                                                                                                                            |                                                                                                                    | For the Three Months
Ended March 31, |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | ---------
|
|REVENUE:                                                                                                                                                    |                                                                                                                    |                                      |          
|                                                                                                                                                            | Communications Services revenue                                                                                    |                                      | $        
|                                                                                                                                                            | Wholesale revenue.                                                                                                 |                                      |          
|                                                                                                                                                            |                                                                                                                    |                                      |          
|                                                                                                                                                            |                                                                                                                    | Total revenue.                       |          
|                                                                                                                                                            |                                                                                                                    |                                      |          
|EXPENSES:                                                                                                                                                   |                                                                                                                    |                                      |          
|                                                                                                                                                            | Network expenses, excluding depreciation                                                                           |                                      |          
|                                                                                                                                                            | Selling, general and administrative, excluding amortization                                                        |                                      |          
|                                                                                                                                                            | Bad debt expense                                                                                                   |                                      |          
|                                                                                                                                                            | Depreciation and amortization                                                                                      |                                      |          
|                                                                                                                                                            | Reorganization costs                                                                                               |                                      |          
|                                                                                                                                                            | Restructuring costs                                                                                                |                                      |          
|                                                                                                                                                            |                                                                                                                    |                                      |          
|                                                                                                                                                            |                                                                                                                    | Total operating expenses             |          
|                                                                                                                                                            |                                                                                                                    |                                      |          
|OPERATING LOSS                                                                                                                                              |                                                                                                                    |                                      | (12,354  
|                                                                                                                                                            |                                                                                                                    |                                      |          
|OTHER INCOME (EXPENSE):                                                                                                                                     |                                                                                                                    |                                      |          
|                                                                                                                                                            | Interest income                                                                                                    |                                      |          
|                                                                                                                                                            | Interest expense (contractual interest expense and accretion was $7,432 for the three months ended March 31, 2003) |                                      |          
|                                                                                                                                                            | Other expense                                                                                                      |                                      |          
|                                                                                                                                                            |                                                                                                                    |                                      |          
|                                                                                                                                                            |                                                                                                                    | Total other expense                  |          
|                                                                                                                                                            |                                                                                                                    |                                      |          
|NET LOSS                                                                                                                                                    |                                                                                                                    | $                                    | (15,082  
|ACCRETION OF PAYMENT-IN-KIND DIVIDENDS ON CONVERTIBLE PREFERRED STOCK (contractual dividend accretion was $1,083 for the three months ended March 31, 2003) |                                                                                                                    |                                      |         
|                                                                                                                                                            |                                                                                                                    |                                      |          
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                                                                                                                  |                                                                                                                    | $                                    | (15,082  
|                                                                                                                                                            |                                                                                                                    |                                      |          
|BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK                                                                                                        |                                                                                                                    | $                                    | (3.03    
|                                                                                                                                                            |                                                                                                                    |                                      |          
|BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (AFTER GIVING RETROACTIVE EFFECT TO THE REVERSE STOCK SPLIT)                            |                                                                                                                    |                                      | 4,973,040
|                                                                                                                                                            |                                                                                                                    |                                      |          

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

4

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FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS  (Dollars in thousands, except per share amounts)

|                                                                                |                                                                                                                                                                          | March 31,
2003                           |         | December 31,
2002 |         
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------- | ----------------- | --------
|
|ASSETS                                                                          |                                                                                                                                                                          |                                          |         |                   |         
|Current assets:                                                                 |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                | Cash and cash equivalents                                                                                                                                                |                                          | $       | 27,004            |         
|                                                                                | Restricted cash and cash equivalents                                                                                                                                     |                                          |         | 4,550             |         
|                                                                                | Accounts receivable, net of allowance for doubtful accounts of $26,863 and $25,718 at March 31, 2003 and December 31, 2002, respectively                                 |                                          |         | 89,610            |         
|                                                                                | Other current assets                                                                                                                                                     |                                          |         | 11,345            |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                |                                                                                                                                                                          | Total current assets                     |         |                   | 132,509 
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Property, plant and equipment, at cost                                          |                                                                                                                                                                          |                                          | 171,616 |                   |         
|                                                                                | Lessaccumulated depreciation and amortization                                                                                                                           |                                          |         | (16,431           | )       
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Property, plant and equipment, net                                              |                                                                                                                                                                          |                                          | 155,185 |                   |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Other noncurrent assets                                                         |                                                                                                                                                                          |                                          | 14,619  |                   |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                |                                                                                                                                                                          | $                                        | 302,313 |                   | $       
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|LIABILITIES AND STOCKHOLDERS' DEFIENCY IN ASSETS                                |                                                                                                                                                                          |                                          |         |                   |         
|Current liabilities not subject to compromise:                                  |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                | Accounts payable                                                                                                                                                         |                                          | $       | 31,077            |         
|                                                                                | Accrued liabilities                                                                                                                                                      |                                          |         | 20,759            |         
|                                                                                | Current maturities of capital lease obligations                                                                                                                          |                                          |         | 590               |         
|Current liabilities subject to compromise:                                      |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                | Accounts payable                                                                                                                                                         |                                          |         | 42,343            |         
|                                                                                | Accrued liabilities                                                                                                                                                      |                                          |         | 6,563             |         
|                                                                                | Short-term debt, previously classified as long-term                                                                                                                      |                                          |         | 340,567           |         
|                                                                                | Convertible notes, previously classified as long-term                                                                                                                    |                                          |         | 109,526           |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                |                                                                                                                                                                          | Total current liabilities                |         |                   | 551,425 
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Capital lease obligations, net of current maturities, not subject to compromise |                                                                                                                                                                          |                                          | 27,293  |                   |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Other noncurrent liabilities, not subject to compromise                         |                                                                                                                                                                          |                                          | 6,035   |                   |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Class A redeemable convertible preferred stock, net, subject to compromise      |                                                                                                                                                                          |                                          | 50,829  |                   |         
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|Stockholders' deficiency in assets:                                             |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                | Common Stock, $.01 par value; 250,000,000 shares authorized; 4,973,327 and 4,971,543 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively |                                          |         | 50                |         
|                                                                                | Additional paid-in capital                                                                                                                                               |                                          |         | 292,036           |         
|                                                                                | Deferred compensation                                                                                                                                                    |                                          |         |                  |         
|                                                                                | Accumulated deficit                                                                                                                                                      |                                          |         | (625,355          | )       
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                |                                                                                                                                                                          | Total stockholders' deficiency in assets |         |                   | (333,269
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         
|                                                                                |                                                                                                                                                                          | $                                        | 302,313 |                   | $       
|                                                                                |                                                                                                                                                                          |                                          |         |                   |         

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

5

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FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)  (Dollars in thousands)

|                                                     |                                                                                           | For the Three Months
Ended March 31,          |                                                                    
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                           |                                               |                                                                    
|                                                     | Net loss                                                                                  |                                               | $                                                                  
|                                                     | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |                                               |                                                                    
|                                                     |                                                                                           | Depreciation and amortization                 |                                                                    
|                                                     |                                                                                           | Non-cash compensation expense                 |                                                                    
|                                                     |                                                                                           | Amortization of discount on senior notes      |                                                                    
|                                                     |                                                                                           | Loss on sale and abandonment of fixed assets  |                                                                    
|                                                     |                                                                                           | Payment in kind interest on convertible notes |                                                                    
|                                                     |                                                                                           | Other                                         |                                                                    
|                                                     |                                                                                           | Changes in operating assets and liabilities:  |                                                                    
|                                                     |                                                                                           |                                               | Restricted cash                                                    
|                                                     |                                                                                           |                                               | Accounts receivable                                                
|                                                     |                                                                                           |                                               | Other current assets                                               
|                                                     |                                                                                           |                                               | Accounts payable and accrued liabilities, not subject to compromise
|                                                     |                                                                                           |                                               | Accounts payable and accrued liabilities, subject to compromise    
|                                                     |                                                                                           |                                               | Other non-current assets and liabilities, net                      
|                                                     |                                                                                           |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                           |                                               |                                                                    
|                                                     | Capital expenditures                                                                      |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                           |                                               |                                                                    
|                                                     | Proceeds from issuance of debt                                                            |                                               |                                                                    
|                                                     | Payments on capital lease obligations and debt                                            |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                           |                                               | 781                                                                
|CASH AND CASH EQUIVALENTS                            |                                                                                           |                                               |                                                                    
|                                                     | Beginning of period                                                                       |                                               |                                                                    
|                                                     |                                                                                           |                                               |                                                                    
|CASH AND CASH EQUIVALENTS                            |                                                                                           |                                               |                                                                    
|                                                     | End of period                                                                             |                                               | $                                                                  
|                                                     |                                                                                           |                                               |                                                                    

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

6

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FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES  CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Dollars in thousands, except per share amounts)

1.    BASIS OF PRESENTATION

The accompanying interim condensed consolidated financial statements ("financial statements") reflect all adjustments, consisting of normal recurring adjustments,
which we believe are necessary to present fairly the financial statements in accordance with generally accepted accounting principles for the respective periods presented. Certain information and
footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2002, filed on March 28, 2003. The consolidated balance sheet at December 31, 2002 included herein was derived from
our audited consolidated financial statements, but does not include all disclosures required under generally accepted accounting principles.

On
December 19, 2002 (the "Petition Date"), the Company filed a voluntary Chapter 11 bankruptcy petition with the United States Bankruptcy Court for the District of
Delaware (the "Filing"). Accordingly, the accompanying financial statements have been prepared in conformity with the American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," ("SOP 90-7"), as it relates to the accounting and presentation for
matters affected by the bankruptcy proceeding. In accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the Company.

The
accompanying financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and repayment of liabilities in the
ordinary course of business. However, as a result of the Company's default under the Credit Facility and Equipment Loan, and its recurring operating losses, negative cash flows from operating
activities
through 2002 and deficiency in assets, the realization of the Company's assets and repayment of its liabilities is subject to significant uncertainty. Although the Company has filed a proposed second
amended plan of reorganization ("Amended Reorganization Plan") with the Bankruptcy Court, there can be no assurance that the Company will receive regulatory approval and successfully emerge from
bankruptcy, or that its liquidity and capital resources will be sufficient to maintain its normal operations. The bankruptcy negotiations could materially change the amounts and classifications
reported in the financial statements, which do not give effect to any adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of these
negotiations.

Beginning
in the fourth quarter of 2002, Focal began to classify revenue as either Communications Services revenue or Wholesale revenue. Communications Services revenue includes all
revenue derived from sales to corporations, government entities, universities and services sold through its agent channel. Wholesale revenue includes all services derived from sales to value-added
resellers, Internet service providers and carriers. Prior to the fourth quarter of 2002, Focal classified revenue as either Enterprise revenue or Internet Service Provider revenue. Enterprise revenue
included all services sold to corporations, government entities, universities, carriers and value-added resellers and services sold through its agent channel. The revenue classification change was
made to better align reporting with current revenue drivers and to provide additional insight into the Company's business. All prior period amounts have been reclassified to conform to the current
period presentation.

7

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Certain
other prior-period amounts have been reclassified to conform to the current period presentation. All periods have been restated to reflect the 35:1 reverse stock split that was
effective March 11, 2002 (see Note 9).

2.    REORGANIZATION

Bankruptcy Proceedings

In
April 2003, Focal filed an Amended Reorganization Plan with the Bankruptcy Court. The principal terms of the Amended Reorganization Plan include:



In
addition, the Amended Reorganization Plan includes opportunities for cost reduction and elimination of underutilized network capacity.

As
of May 14, 2003, unsecured creditors' pre-petition claims against the Company total $117,402. This excludes any claims related to our 1998 and 2000 Notes. The Company estimates that
$30,659 of these claims are valid and represent pre-petition liabilities that have been recorded in the Company's financial statements. The Company believes that $86,743 of these claims are not valid.
A significant portion of these claims are with vendors who are also customers and have related outstanding receivables that may be subject to set-off against their claims through the bankruptcy
process. The Company continues to evaluate the validity of these claims and object where appropriate.

The
Bankruptcy Court approved the disclosure statement for the Amended Reorganization Plan by its order dated May 2, 2003 and scheduled a hearing for confirmation of the Amended
Reorganization Plan for June 19, 2003.

The
implementation of the Amended Reorganization Plan is dependent upon a number of conditions typical in similar reorganizations, including bankruptcy court confirmation of the plan.

Accounting Impact of Bankruptcy Filing

Liabilities subject to compromise reflected in the accompanying interim condensed consolidated financial statements refer to the liabilities of the company
incurred prior to the Petition Date (other than those that have been allowed in the Chapter 11 proceedings). In accordance with SOP 90-7, liabilities subject to compromise are recorded
at the estimated amount that is expected to be allowed on prepetition claims in the Chapter 11 proceedings and are subject to future adjustments. The Company is required to accrue interest
expense and payment in kind interest and dividends during the Chapter 11 proceedings only to the extent that it is probable that such interest will be paid and allowed pursuant to the
proceedings. Adjustments may result from negotiations, actions of the Bankruptcy Court, further developments with respect to disputed claims, rejection of executory contracts and unexpired leases,
proofs of claim, implementation of the Amended Reorganization Plan, or other events.

8

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Reorganization
expense of $10,462 for the three months ended March 31, 2003 consists of professional fees for financial advisory and legal services of $3,901, the loss on sale and
abandonment of fixed assets of $5,472 and costs related to the Key Employee Retention Plan of $1,089.

3.    PROPERTY, PLANT AND EQUIPMENT

Long-lived assets are stated at cost less impairment charges, which includes direct costs and capitalized interest, and are depreciated once placed in
service using the straight line method.

Property,
plant and equipment consists of the following:

March 31, 2003

December 31, 2002Building and improvements

$
4,840

$
4,531Communications network


93,027


91,803Computer equipment


18,630


18,509Leasehold improvements


28,091


32,324Furniture and fixtures


3,251


3,594Motor vehicles


203


236Assets under capital lease


22,460


22,460Construction in progress


1,114


1,842171,616


175,299LessAccumulated depreciation and amortization


(16,431
)

(8,843
)Total

$
155,185

$
166,456


4.    DEBT

Short-term debt, previously classified as long-term, consists of the following at March 31, 2003 and December 31, 2002:

1998 Notes, net of unamortized discount of $2,997

$
131,6332000 Notes, net of unamortized discount of $597


113,914Equipment Loan


17,020Senior Secured Credit Facility


78,000Total

$
340,567


The interest on amounts drawn on the Credit Facility is variable based on our leverage ratio, as defined in the Credit Facility. The initial commitment fee on the
unused portion of the Credit Facility was 1.5%, which was eliminated as part of the Filing. As part of our Amended Reorganization Plan we prepaid $15,000 under the Credit Facility in
December 2002.

We
are currently in default on both the Credit Facility and the Equipment Loan and such default currently precludes additional borrowings. The defaults relate to
non-compliance with both minimum revenue and minimum EBITDA covenants in the third quarter of 2002. Because of the default, we have reclassified our indebtedness under the Credit Facility,
the Equipment Loan, the 1998 Notes, the 2000 Notes and the Convertible Notes to current in our condensed consolidated balance sheet. If we are not able to successfully emerge from bankruptcy, the
senior lenders will be entitled to exercise their remedies under the Credit Facility and Equipment Loan which includes the right to accelerate the debt outstanding and the right to foreclose upon
their collateral, which includes our existing cash balances.

In
accordance with SOP 90-7, the Company is required to accrue interest expense and payment in kind interest during the Chapter 11 proceedings only to the extent that it is
probable that such interest will be paid and allowed pursuant to the proceedings. Under the Amended Reorganization Plan, there

9

---

will
be no cash payments of interest on the Notes or the Convertible Notes. Therefore, the Company ceased accruing interest on the 1998 Notes, 2000 Notes and the Convertible Notes as of the Petition
Date. The contractual interest amounts reflected on the accompanying condensed consolidated statement of operations represents the interest expense that would have been accrued under the relevant
financing agreements had the Company not ceased accruing interest as described above. We have continued to accrue interest on the Credit Facility and the Equipment Loan.

5.    STOCK BASED COMPENSATION

We account for our stock option plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations. As such, compensation expense related to fixed employee stock options is recorded only if on the grant date the fair value of the underlying stock exceeds the exercise
price. We have adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure and Amendment of FASB Statement No. 123" which
allows entities to apply the provisions of APB No. 25 for transactions with employees and to provide pro forma net income disclosures as if the fair value
based method of accounting, or minimum value method for private companies were applied. Under the Amended Reorganization Plan, stock options will be cancelled in conjunction with the Company's
emergence from bankruptcy.

The
following table presents the pro forma disclosures:

For the Three Months
ended March 31,2003

2002Net Loss Applicable to Common Shareholdersas reported

$
(15,082
)
$
(57,150
)Add: Noncash compensation expense, net of tax


259


1,199Deduct: Total stock option compensation expense under fair value method, net of tax


(1,123
)

(1,906
)Pro formaNet Loss Applicable to Common Shareholders

$
(15,946
)
$
(57,857
)Basic and dilutive earnings per share:As reported

$
(3.03
)
$
(11.61
)Pro forma

$
(3.21
)
$
(11.75
)


The pro forma disclosure is not likely to be indicative of pro forma results which may be expected in future years because of the fact that options vest over
several years, compensation expense is recognized over the vesting period, and additional awards may also be granted.

We
utilized the Black-Scholes option pricing model to estimate the fair value of options at the date of grant during 2002. There were no option grants during the three months ended
March 31, 2003. Principal assumptions used in applying the Black-Scholes model were as follows for the three months ended March 31, 2002:

Risk-free interest rates

4.7%Expected life

5 yearsExpected volatility

171.74%Expected dividend yield

Weighted average fair value per option granted

$4.53


10

---

6.    LOSS PER SHARE

Under the Amended Reorganization Plan, the Company's existing common stock, restricted common stock and stock options will be cancelled in conjunction with the
Company's emergence from bankruptcy.

We
compute basic earnings per common share based on the weighted average number of shares of common stock outstanding for the period. This calculation excludes certain unvested shares of
common stock held by our executives. Diluted earnings per common share are adjusted for the assumed exercise of dilutive stock options and unvested shares of common stock. Since the adjustments
required for the calculation of diluted weighted average common shares outstanding are anti-dilutive, this calculation has been excluded from the loss per share calculation for the three
months ended March 31, 2003 and 2002. Our basic and diluted weighted average number of shares outstanding at March 31, 2003 and 2002 are as follows:

March 31,2003

2002(Unaudited)Basic Weighted Average Number of Common Shares Outstanding

4,973,040

4,923,007Dilutive Stock Options, Unvested Common Shares and Warrants

117,288

50,974Dilutive As-converted Preferred Stock

1,550,707

1,450,857Dilutive As-converted Notes

3,101,413

2,901,559Dilutive Weighted Average Number of Common Shares Outstanding

9,742,448

9,326,397


7.    SEGMENT INFORMATION

We currently operate solely in the United States and are organized primarily on the basis of strategic geographic operating segments that provide
telecommunications services in each respective geographic region. All of our geographic operating segments have been aggregated into one reportable segment, "Telecommunications Services," as of
March 31, 2003 and December 31, 2002 and for the three months ended March 31, 2003 and 2002.

The
accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Our chief operating decision-maker views earnings before
interest, taxes, depreciation and amortization ("EBITDA") coupled with capital expenditures as the primary measure of profit and loss. EBITDA also excludes reorganization costs, restructuring costs
and non-cash compensation. The following represents information for our Telecommunications Services segment for the three months ended March 31, 2003 and 2002:

March 31,2003

2002(Unaudited)Revenue

$
87,313

$
84,476EBITDA


22,800


15,962Capital expenditures


2,416


10,680


11

---

The following reconciles total segment EBITDA to our consolidated loss before income taxes and extraordinary gain for the three months ended March 31, 2003
and 2002:

March 31,2003

2002(Unaudited)Total EBITDA for reportable segment

$
22,800

$
15,962Corporate EBITDA


(15,470
)

(19,723
)Total Company EBITDA


7,330


(3,761
)Depreciation and amortization


(8,127
)

(36,882
)Interest income


68


849Interest expense


(2,729
)

(12,863
)Other expense


(67
)

(250
)Reorganization costs


(10,462
)

Restructuring costs





(1,316
)Non-cash compensation expense


(1,095
)

(1,920
)Net Loss

$
(15,082
)
$
(56,143
)


The following reconciles our total segment assets to our consolidated total assets as of March 31, 2003 and December 31, 2002:

March 31, 2003

December 31, 2002Total assets for reportable segment

$
236,740

$
217,469Corporate Assets:Cash and cash equivalents


27,004


26,223Restricted cash and cash equivalents


4,550


5,693Other current assets


2,590


2,977Fixed assets, net


16,810


17,202Other noncurrent assets


14,619


14,813Total consolidated assets

$
302,313

$
284,377


8.    RESTRUCTURING

We recorded a charge of $1,316 in the first quarter of 2002 as a result of an adjustment to the 2001 estimated restructuring costs. The $1,316 is comprised of
$895 in cash paid for the abandonment of excess network facilities and $421 in network fixed asset write-downs.

For
the three months ended March 31, 2002, amounts paid in association with abandonment of excess network facilities, employee severance costs and other related charges totaled
$2,744, $190 and $109, respectively.

During
the fourth quarter of 2002, we recorded a restructuring charge of $1,791 for employee severance costs related to a company-wide reduction in force. Unpaid
restructuring costs of $211 are included in accrued liabilities (not subject to compromise) in our condensed consolidated balance sheet at December 31, 2002. For the three months ended March
31, 2003, amounts paid in association with employee severance costs were $211. There are no unpaid restructuring costs at March 31, 2003.

9.    EQUITY TRANSACTIONS

Under the Amended Reorganization Plan, the Company's existing common stock, restricted common stock and stock options will be cancelled in conjunction with the
Company's emergence from bankruptcy.

12

---

During
March 2002, we granted 248,787 stock options to employees and executive officers under our 1998 Equity and Performance Plan. The stock options were granted at $4.53 per
share, the fair market value on the date of the grant, and vested 25% on January 1, 2003 and will vest 12.5% every six months
thereafter. As of March 31, 2003, 109,694 shares remain unvested, 37,119 shares have vested and 101,974 shares have been returned to the Company due to employee departures.

During
the first quarter of 2002 we issued 352,857 shares of restricted common stock to certain management employees. As of March 31, 2003, 116,796 shares remain unvested,
74,629 shares have vested (of which 37,131 have been returned to the Company) and 161,432 shares have been returned to the Company due to employee departures. The restricted stock grant
resulted in total non-cash compensation of approximately $723 which will be ratably charged to income over the vesting period. The stock vested 25% on January 1, 2003 and will vest
12.5% every six months for the following three years.

On
February 25, 2002, our Board of Directors approved a 35:1 reverse split of our common stock. Par value of our common stock remained at $.01 per share. The split was effective
March 11, 2002. The effect of the stock split has been recognized retroactively in all share and per share data in the accompanying consolidated financial statements and notes to consolidated
financial statements. Shareholders' equity accounts have been restated to reflect the reclassification of an amount equal to the par value of the decrease in issued common shares from the common stock
account to the additional paid-in capital account.

10.    CONTINGENCIES

The Company and its subsidiaries have been named in a number of lawsuits and certain are pending. The Company accrues for litigation exposure based upon its
assessment, made in consultation with counsel, of the likely range of exposure stemming from the claim. The Company's litigation claims, when finally resolved, will not, in the opinion of management,
have a material adverse effect on the Company's consolidated financial position. If current estimates for the cost of resolving any claims are later determined to be inadequate, results of operations
could be adversely affected in the period in which additional provisions are required.

13

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

Overview

General.We provide voice and data services to communications-intensive users in major cities. We began operations in 1996
and initiated service first in Chicago in May 1997. We completed our initial 22 market build-out in 2001. In October 2002, we began providing service in Connecticut which
allows us to offer services in a total of 23 markets. We leveraged the investment we had already made in the New York metropolitan area to provide service in Connecticut, with minimal incremental
capital expenditures. As of March 31, 2003, we had 559,252 lines installed and in service.

Revenue.Revenue is generated primarily from local phone service, long distance phone service, Internet service, colocation,
private line sales and other data services. Revenue that is generated directly from our customer base includes monthly recurring charges, usage charges and non-recurring charges. Monthly
recurring revenue includes the monthly fees paid by our customers for lines in service, additional features on those lines and colocation space and private lines. Private lines are
point-to-point connections that do not necessarily utilize our circuit switches. Revenue from private line sales is generally recognized on a monthly recurring basis.

Usage
revenue includes charges to the end user customer based on the length and duration of calls made or received. Usage charges to the customer vary based on the type of calling plan
that the customer has and the geographic location of the customer. Non-recurring revenue is primarily installation charges associated with providing service for a customer and is deferred
and amortized into revenue over estimated customer lives. Inter-carrier compensation is revenue from other telecommunications carriers that is generated as the result of state and federally mandated
rules based on the transmission of traffic between telecommunications carriers and includes switched access and reciprocal compensation revenue.

Beginning
in the fourth quarter of 2002, we began to classify revenue as either Communications Services revenue or Wholesale revenue. Communications Services revenue includes all revenue
derived from sales to corporations, government entities, universities and services sold through our agent channel. Wholesale revenue includes all services derived from sales to value-added resellers,
Internet service providers and carriers. Prior to the fourth quarter of 2002, we classified revenue as either Enterprise revenue or Internet Service Provider revenue. Enterprise revenue included all
services sold to corporations, government entities, universities, carriers and value-added resellers and services sold through our agent channel. The revenue classification change was made to better
align reporting with current revenue drivers and to provide additional insight into the Company's business. All prior period amounts have been reclassified to conform to this presentation.

Reciprocal
compensation is the compensation exchanged between carriers for terminating local phone calls on one another's networks. The appropriate reciprocal compensation rate,
particularly for calls placed to Internet service providers, has been declining during the past several years as the question has been repeatedly addressed by state and federal regulators and the
courts.

In
an effort to stabilize revenue from reciprocal compensation Focal has entered into reciprocal compensation rate agreements for Internet Service Provider traffic with other carriers
that exchange this type of traffic on a regular basis with Focal. These agreements are immune to any changes of law that might occur during their term. However, upon expiration of these agreements
Focal will enter into new agreements consistent with the law in effect at that time.

14

---

Currently, Focal has these types of reciprocal compensation rate agreements with SBC Communications, Bell South and Verizon. In other markets not covered by these agreements, Focal is
compensated under various rate plans prescribed by the Federal Communications Commission or state agencies. Under some state rate plans, Focal is not compensated for Internet Service Provider traffic.
Because of the past legal and regulatory uncertainties regarding reciprocal compensation, Focal cannot predict the exact nature of any future agreements. If the future reciprocal compensation rates
are different from the rates currently in effect, Focal may be affected either positively or negatively, depending on the direction and magnitude of the changes. Focal estimates that for every $0.0001
change in the reciprocal compensation per minute rate, revenue would change an average of $2.8 million on an annual basis. A $0.0001 change represents a 6.1% change from our current average
reciprocal compensation billing rate.

Expenses.Our expenses are categorized as network expenses, excluding depreciation; selling, general and administrative,
excluding amortization; bad debt expense; depreciation and amortization; reorganization costs; and restructuring costs. Network expenses include the following costs: leased transport, long distance,
private line, colocation, Internet backbone, line installation and carrier compensation paid by us to other carriers. These network expenses are grouped into three categories: recurring charges,
non-recurring charges and minute-based or usage charges.

Monthly
recurring charges, which represent the bulk of our monthly charges, include leased transport, private line, colocation and Internet backbone expenses. Leased transport expenses
are the monthly recurring charges we pay to local exchange carriers ("LECs") for circuits, which we lease from them in order to deliver service to our customers or to connect our network to other
carriers' networks. Colocation and private line expenses are monthly recurring charges paid by us to other carriers for the use of their facilities or services. Internet backbone expenses are for
Internet backbone capacity that we lease from other carriers in order to provide our dedicated Internet Access service.

Non-recurring
charges consist primarily of line installation expenses that we pay to other carriers for leasing their facilities at the time the service is established.
Minute-based network expenses consist of long distance expenses and Inter-carrier compensation charges. Long distance expenses are charges that we pay to wholesale long distance service providers that
we use to connect our customers to parties dialing outside of their local calling area. Inter-carrier compensation is compensation paid by carriers to terminate or originate traffic on each other's
networks. Inter-carrier compensation rates are subject to regulatory oversight. There are two primary forms of Inter-carrier compensation: access charges and reciprocal compensation. We are subject to
access charges, which are related to the origination and termination of long distance calls, and reciprocal compensation, which is related to the termination of local calls. Both long distance
expenses and Inter-carrier compensation expenses are based on minutes of use and vary based on customer calling patterns.

We
record network expense net of disputes we have filed when we are confident they will be resolved in our favor. Our strategy of initially leasing rather than building our own fiber
transport facilities ("smart-build") has resulted in our cost of service being a significant component of total cost. Accordingly, our network expenses may be higher on a relative basis compared to
CLECs that own a higher percentage of their transport network. However, compared to these same companies, our capital expenditures are significantly lower.

A
key aspect of our "smart-build" strategy is that we only operate in Tier-1 markets which are served by multiple fiber providers. When traffic volumes grow sufficiently to
justify investing in our own network, we have purchased our own fiber capacity. As of March 31, 2003 we were operating our own fiber networks in 10 of our markets.

Selling,
general and administrative expense ("SG&A") consists of network and customer care personnel costs, sales and marketing costs and costs related to leasing office space, as well
as the cost

15

---

of
corporate activities related to regulatory, finance, human resources, legal, executive, and other administrative activities. Included in SG&A is non-cash compensation expense related to
the following:



Reorganization
costs consist of professional fees for financial advisory and legal services, costs incurred to terminate property leases, the loss on sale and abandonment of fixed assets
and costs related to the Key Employee Retention Plan in connection with the Chapter 11 proceeding.

Restructuring
costs consist of expenses related to our October 2001 restructuring initiative and include costs associated with the abandonment of excess network facilities and the
write-off of related network assets and other related costs.

Quarterly Operating Results

The following table sets forth unaudited financial, operating and statistical data for each of the specified quarters of 2003 and 2002. The unaudited quarterly
financial information has been prepared on the same basis as our Consolidated Financial Statements and, in our opinion, contains all normal recurring adjustments necessary to fairly state this
information. The operating results for any quarter are not necessarily indicative of results for any future period.

|                                                 |  | 2003 |         | 2002 |  
|------------------------------------------------ |  | ---- | ------- | ---- | -
|
|Communications Services Revenue ($ in Thousands) |  | $    | 41,458  |      | $
|Wholesale Revenue ($ in Thousands)               |  |      | 45,855  |      | $
|Reciprocal Compensation as % of Total Revenue    |  |      | 12      | %    |  
|Access as % of Total Revenue                     |  |      | 18      | %    |  
|Days Sales Outstanding                           |  |      | 92      |      |  
|Lines Sold During the Quarter                    |  |      | 36,292  |      |  
|Gross Lines Installed During the Quarter         |  |      | 39,428  |      |  
|Lines Disconnected During the Quarter            |  |      | 67,157  |      |  
|Cumulative Net Lines Installed to Date(4)        |  |      | 559,252 |      |  
|Communications Services Lines                    |  |      | 224,091 |      |  
|Wholesale Lines                                  |  |      | 335,161 |      |  
|Quarterly Minutes of Use (in Billions)           |  |      | 10.3    |      |  
|Markets in Operation                             |  |      | 23      |      |  
|Circuit Switches Operational                     |  |      | 23      |      |  
|Capital Expenditures ($ in Thousands)            |  | $    | 2,416   |      | $
|Employees(2)                                     |  |      | 796     |      |  
|Sales Force(3)                                   |  |      | 136     |      |  

---

16

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Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Operating Revenues. The following tables summarize our operating revenues for the three months ended March 31, 2003 and 2002:

For the Three Months
Ended March 31,Percent
Change2003

2002(Dollars in Thousands)Communications services revenue

$
41,458

$
29,395

41.0
%Wholesale revenue


45,855


55,081

(16.8
)Total revenue

$
87,313

$
84,476

3.4
%


Communications Services revenue increased $12.1 million for the three months ended March 31, 2003 compared to the same prior year
period, primarily resulting from the net effect of the following:



Wholesale
revenue decreased $9.2 million for the three months ended March 31, 2003 compared to the same prior year period primarily resulting from the following:



17

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Operating
Expenses. The following tables summarize our operating expenses for the three months ended March 31, 2003 and 2002:

|                                                            |                          | For the Three Months
Ended March 31, |        |        |  
|----------------------------------------------------------- | ------------------------ | ------------------------------------ | ------ | ------ | -
|
|
|Network expenses, excluding depreciation                    |                          | $                                    | 47,664 |        | $
|Selling, general and administrative, excluding amortization |                          |                                      | 31,500 |        |  
|Bad debt expense                                            |                          |                                      | 1,914  |        |  
|Depreciation and amortization                               |                          |                                      | 8,127  |        |  
|Reorganization costs                                        |                          |                                      | 10,462 |        |  
|Restructuring costs                                         |                          |                                      |       |        |  
|                                                            |                          |                                      |        |        |  
|                                                            | Total operating expenses |                                      | $      | 99,667 |  
|                                                            |                          |                                      |        |        |  

Network expenses increased $7.0 million for the three months ended March 31, 2003 compared to the same prior year period. The increase is primarily
the result of the following:



As
a result of the increase in revenue of $2.8 million, or 3.4%, and the increase in network expenses of $7.0 million, or 17.1%, our gross margin percent for the three
months ended March 31, 2003 of 45.4% decreased from 51.9% for the same prior year period.

Our
SG&A expenses decreased $14.6 million for the three months ended March 31, 2003 compared to the same prior year period. The decrease is primarily the result of a
decrease in salary and salary related costs due to a 37.7% headcount decline year over year and other cost saving efforts.

The
following table summarizes our allowance for doubtful accounts for the three months ended March 31, 2003 and 2002:

For the Three Months
Ended March 31,2003

2002Allowance for Doubtful Accounts, beginning of period

$
25,718

$
9,000Bad Debt Expense


1,914


3,373Net Recoveries (Write-offs)


(769
)

127Allowance for Doubtful Accounts, end of period

$
26,863

$
12,500


The higher level of bad debt expense during the three months ended March 31, 2002 as compared to the three months ended March 31,
2003 related to financial difficulties with several significant Wholesale customers.

Depreciation
and amortization decreased $28.8 million for the three months ended March 31, 2003 compared to the same prior year period. This decrease is a result of the
reduction in our depreciable fixed asset base after we recorded a $210.2 million impairment loss on our fixed assets in the fourth quarter of 2002.

During
the first quarter of 2003, we incurred reorganization costs of $10.5 million relating to our Chapter 11 bankruptcy proceeding. These costs relate to professional fees for
financial advisory and legal services, the loss on sale and abandonment of fixed assets and costs related to our Key Employee Retention Plan.

18

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During
2001, we revised our business plan to reflect several initiatives. In the first quarter of 2002, we recorded a charge of $1.3 million as a result of an adjustment to the
previously estimated restructuring costs. The $1.3 million is comprised of $0.9 million in cash paid for the abandonment of excess network facilities and $0.4 million in network
fixed asset write-downs.

Other
Expense. The following tables summarize our other expense for three months ended March 31, 2003 and 2002:

|                 |                     | For the Three Months
Ended March 31, |        |        |  
|---------------- | ------------------- | ------------------------------------ | ------ | ------ | -
|
|
|Interest income  |                     | $                                    | 68     |        | $
|Interest expense |                     |                                      | (2,729 | )      |  
|Other expense    |                     |                                      | (67    | )      |  
|                 |                     |                                      |        |        |  
|                 | Total other expense |                                      | $      | (2,728 | )
|                 |                     |                                      |        |        |  

Interest income decreased $0.8 million for the three months ended March 31, 2003 as compared to the same prior year period due to the decrease in
our cash and cash equivalents during the three months ended March 31, 2003 compared to the same prior year period. Our interest expense decreased $10.1 million for the three months ended
March 31, 2003 compared to the same prior year period. As a result of the bankruptcy filing, we have ceased to accrue interest expense on the 1998 and 2000 Notes and the Convertible Notes, as
there will be no cash payments of interest on the 1998 Notes, 2000 Notes or the Convertible Notes in accordance with the Amended Reorganization Plan. We have continued to accrue interest on the Credit
Facility and the Equipment Loan. Other expense remained consistent for the three months ended March 31, 2003 compared to the same prior year period.

Liquidity and Capital Resources

Liquidity Assessment

At September 30, 2002, we were in default on both our Credit Facility and Equipment Loan. Such defaults currently preclude additional borrowings. The
defaults relate to non-compliance with both minimum revenue and minimum EBITDA covenants in the third quarter of 2002. Our senior lenders required us to effect a comprehensive balance
sheet restructuring in connection with our existing defaults under our Credit Facility and Equipment Loan, our significant indebtedness and the existing conditions in the telecommunications industry
(which have continued to deteriorate over the last year). In that regard, we engaged a financial advisor to assist us in evaluating our alternatives.

On
December 19, 2002 ("the Petition Date"), the Company filed a voluntary Chapter 11 bankruptcy petition with the United States Bankruptcy Court for the District of Delaware ("the
Filing"). Pre-filing negotiations with a number of the Company's substantial creditor constituencies allowed the Company to promptly file a plan of reorganization. Those and subsequent negotiations
should allow the Company to complete its reorganization in an expeditious manner. The Filing includes Focal Communications Corporation, the parent company, and all of its operating subsidiaries. Prior
to the Filing, we reached agreement with our senior bank lenders and holders of our $109.5 million of senior secured convertible notes ("Convertible Notes") as part of an overall reorganization
plan which will reduce the Company's outstanding senior secured debt and strengthen its competitive position. The agreements resulted in the prepayment of $15.0 million to our senior bank
lenders under our Credit Facility in December 2002. Based on discussions among the Company, the holders of the Convertible Notes and the official committee of unsecured creditors which includes
representatives of holders of our 12.125% senior discount notes ("1998 Notes") and 11.875% senior notes ("2000 Notes"), in April 2003, the Company filed a second amended plan of reorganization
("Amended Reorganization Plan") and disclosure statement. The Bankruptcy Court approved the disclosure statement for the Amended Reorganization Plan by its order dated May 2, 2003. If confirmed
by the Bankruptcy Court, the Amended Reorganization Plan provides that the $109.5 million of Convertible Notes would be

19

---

exchanged
for 85% of $65.0 million preferred equity. General unsecured creditors, including the holders of the 1998 and 2000 Notes, would receive a pro-rata share of 15% of the
$65.0 million of preferred equity, in addition to warrants to purchase up to 25% of the common stock of the reorganized company. The Company's existing common stock, restricted common stock and
stock options would be cancelled. The Amended Reorganization Plan has the support of the Company's senior bank lenders and holders of the Convertible Notes, as well as the official committee of
unsecured creditors, and provides for no disruption to the Company's employees, customers, trade creditors, or overall operations. The Bankruptcy Court scheduled a hearing for confirmation of the
Amended Reorganization Plan for June 19, 2003.

As
of May 14, 2003, unsecured creditors' pre-petition claims against the Company total $117.4 million. This excludes any claims related to our 1998 and 2000 Notes. The Company
estimates that $30.7 million of these claims are valid and represent pre-petition liabilities that have been recorded in the Company's financial statements. The Company believes that
$86.7 million of these claims are not valid. A significant portion of these claims are with vendors who are also customers and have related receivables that may be subject to set-off against
their claims through the bankruptcy process. The Company continues to evaluate the validity of these claims and object where appropriate.

During
the first quarter of 2003, we have incurred $10.5 million in reorganization costs in association with the Chapter 11 proceeding, which relates to professional fees for
financial advisory and legal services, the loss on the sale and abandonment of fixed assets and salary-related costs.

Because
of the default on the Credit Facility and Equipment loan, we have reclassified our indebtedness under the Credit Facility, the Equipment Loan, the 1998 Notes, the 2000 Notes and
the Convertible Notes to current in our consolidated balance sheet.

Based
on current estimates, which are contingent upon a successful recapitalization of our balance sheet, we expect that our existing cash balances and future cash flows (expected to be
provided from ongoing operations) will be sufficient to fully fund our operations, capital expenditures and debt service requirements as contemplated in our current business plan over the next
12 months. If we are not able to successfully emerge from bankruptcy, or if the lenders take possession of our existing cash balances, we will not be able to fund our current operations,
capital expenditures and debt service requirements as contemplated in our business plan. There can be no assurance that our creditors will support our proposed reorganization, that the Amended
Reorganization Plan will be confirmed by the bankruptcy court, or that it will not be subsequently modified. If we are not successful, the senior lenders under these facilities will be entitled to
exercise their remedies under the Credit Facility and the Equipment Loan, which includes the right to accelerate the debt outstanding under such agreements and the right to foreclose upon their
collateral, which includes our existing cash balances. As a result, we may be forced to liquidate under applicable provisions of the Bankruptcy Code. There can be no assurance of the level of recovery
to which our secured and unsecured creditors would receive in such a liquidation. As of March 31, 2003, we had an aggregate of $450.1 million of indebtedness, which consists of short-
term debt of $340.6 million and convertible notes of $109.5 million.

As
a result of the Company's default under the Credit Facility and Equipment Loan and its recurring operating losses, negative cash flows from operating activities through 2002 and
deficiency of assets, the realization of the Company's assets and repayment of its liabilities is subject to significant uncertainty. Although the Company has filed an Amended Reorganization Plan with
the Bankruptcy Court, there can be no assurance that the Company will successfully recapitalize its balance sheet, receive regulatory approval and meet the other conditions necessary to emerge from
bankruptcy, or that its liquidity and capital resources will be sufficient to maintain its normal operations. The ability of the Company to continue as a going concern is dependent upon a number of
factors including, but not limited to, emergence from bankruptcy, customer and employee retention, and the Company's ability to continue to provide quality services. The bankruptcy negotiations could
materially change the amounts and classifications reported in the consolidated financial statements, which do not give effect to any
adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of any change in business strategy or business plans as a result of these
negotiations.

20

---



Cash and Cash Flows

We had $27.0 million and $26.2 million in cash and cash equivalents available at March 31, 2003 and December 31, 2002, respectively.
During the first quarter of 2003, the primary source of funding was cash provided by operating activities.

Net
cash provided by operating activities was $4.0 million for the three months ended March 31, 2003 compared to net cash used in operations of $52.9 million for the
same prior year period. This increase is primarily the result of a $27.9 million increase in accounts payable during the first quarter of 2003, as compared to a decrease of $31.6 million
during the first quarter of 2002. In addition there was an increase in accounts receivable of $28.5 million during the first quarter of 2003, compared to an increase in accounts receivable of
$14.1 million during the first quarter of 2002. The increases in accounts payable and accounts receivable during the first quarter of 2003 are a result of our continuing reconciliation of
receivables and payables with carriers that are both customers and vendors as we proceed through the bankruptcy process.

Net
cash used in investing activities, which reflects capital expenditures, was $2.4 million for the three months ended March 31, 2003 compared to $10.7 million for
the same period in 2002. Capital expenditures for the three months ended March 31, 2003 and 2002 primarily reflect capital spending to support our Communications Services line growth, our
Internet access services and the augmentation of our network in existing markets. The decrease for the three months ended March 31, 2003 compared to the same prior year period is a result of
tightened spending in 2003 as compared to 2002 and a reduction in purchases under our products purchase agreement resulting from rejection of this contract in connection with the Filing.

Net
cash used in financing activities was $0.8 million for the three months ended March 31, 2003, compared to net cash provided by financing activities of
$4.1 million for the same prior year period. The use of cash in 2003 reflects payments on our capital lease obligations. Financing activities in 2002 consist of borrowing on our Credit Facility
of $7.0 million offset by payments on our debt and capital lease obligations of $2.9 million.

Contractual Obligations and Commercial Commitments

Under the terms of various short- and long-term contracts, we are obligated to make payments for office rents and for leasing components of our
communications network through 2022. The office rent contracts provide for certain scheduled increases and for possible escalation of basic rentals based on a change in the cost of living or on other
factors. We expect to enter into other contracts for additional components of our communications network, office space, other facilities, equipment and maintenance services in the future.

During
1999, we entered into agreements with carriers for the acquisition of indefeasible rights of use for dark fiber transport capacity for a minimum of 10,800 fiber miles. The terms
of the agreements are for 20 years with a total minimum commitment of approximately $71.0 million. One of these agreements has been accounted for as a capital lease. In June 2000,
we signed an agreement with a carrier for the lease of fiber transport capacity for a five-year term and a minimum commitment of $135.6 million. The remaining commitment at
March 31, 2003 is $28.1 million. Additionally, we are party to a products purchase agreement with a vendor that expires March 31, 2003. This agreement requires us to place orders
for certain network products. The remaining commitment as of March 31, 2003 is $9.5 million under this agreement. The vendor party to this arrangement may have a material claim for
damages arising from rejection of this contract in connection with the Filing.

We
utilized an Equipment Loan from a third party with a maximum borrowing level of $50.0 million. The Equipment Loan provided for, among other things, equipment drawdowns through
December 31, 1999, and requires repayment based on 60 equal monthly installments of principal and

21

---

interest
for each drawdown. Due to the default on the Credit Facility and the Equipment Loan previously discussed, the Equipment Loan has been reclassified to short-term on our
consolidated balance sheet. The outstanding balance of the Equipment Loan at March 31, 2003 is $17.0 million.

The
table below provides the payments due by period for our contractual obligations:

(Dollars in Thousands)

2003

2004

2005

2006

2007Debt at face value

$
344,161

$


$


$


$
Convertible Notes


109,526











Obligations under capital lease


2,514


3,352


3,352


3,352


3,352Obligations under operating leases


14,301


14,448


14,854


14,891


14,960Unconditional purchase obligations


37,682


30,000


15,000





Total Contractual Cash Obligations

$
508,184

$
47,800

$
33,206

$
18,243

$
18,312


(Dollars in Thousands)

2008

2009

2010

2011

ThereafterDebt at face value

$


$


$


$


$
Convertible Notes














Obligations under capital lease


3,352


3,352


3,352


3,352


30,736Obligations under operating leases


13,025


7,873


5,170


2,807


7,276Unconditional purchase obligations














Total Contractual Cash Obligations

$
16,377

$
11,225

$
8,522

$
6,159

$
38,012


As a result of our defaults on the Credit Facility and the Equipment Loan, the debt and Convertible Notes are reflected in the above table as due in 2003. The
Amended Reorganization Plan anticipates
the rejection of certain executory contracts, the re-negotiation of more favorable terms from various suppliers and the consolidation or elimination of office space and various property
leases in 2003.

Restructuring Charges

In the first quarter of 2002, we recorded a charge of $1.3 million as a result of an adjustment to the 2001 restructuring costs. The $1.3 million is
comprised of $0.9 million in cash paid for the abandonment of excess network facilities and $0.4 million in network fixed asset write-downs. For the three months ended March 31,
2002, amounts paid associated with the abandonment of excess network facilities, employee severance, and other related charges totaled $2.7 million, $0.2 million, and
$0.1 million, respectively.

During
the fourth quarter of 2002, we recorded a restructuring charge of $1.8 million for employee severance costs related to a company-wide reduction in force. Unpaid
restructuring costs of $0.2 are included in accrued liabilities (not subject to compromise) in our condensed consolidated balance sheet at December 31, 2002. There are no unpaid restructuring
costs at March 31, 2003.

Critical Accounting Policies

We prepare our consolidated financial statements and accompanying notes in accordance with accounting principles generally accepted in the United States applied
on a consistent basis. Certain of these accounting policies as discussed below require management to make estimates and assumptions about future events that could materially affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
periods.

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We
continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. Actual results could differ from those estimates.

Revenue Recognition.We recognize revenue as we provide services to our customers. Monthly recurring charges include fees
paid by our customers for lines in service and additional features on those lines, the leasing of our facilities network and colocation space. These charges are billed monthly, in advance, and are
fully earned during the month. Usage charges, reciprocal compensation and access charges are billed in arrears and are fully earned when billed. Our non-recurring customer
installation fees are deferred and amortized into revenue over our estimated customer lives. Revenue from long-term leases of private lines is recognized over the term of the lease unless
it qualifies as a sales-type lease, on which revenue is recognized at the time of sale. When significant uncertainty relating to reciprocal compensation and access rates exists due to rate
disputes with carriers, we record revenue at our best estimate of the rate at which the dispute will be resolved.

Network Expense.Our non-recurring fees paid to other carriers are deferred and amortized into network expense
over the same period as the customer installation fee revenue.

Accounts Receivable and Allowance for Doubtful Accounts.We carry our accounts receivable at their face amounts less an
allowance for doubtful accounts. In our periodic evaluation of the collectibility of our accounts receivable, we assess a number of factors including carrier disputes and regulatory issues, specific
customer's ability to meet its financial obligations to us, as well as general factors, such as the length of time the receivables are past due and historical collection experience. Based on these
assessments, we record both specific and general reserves for bad debt to reduce the related receivables from our customers and carriers to the amount that we ultimately expect to collect. A
receivable is considered past due if payments have not been received within agreed upon invoice terms. We write-off accounts receivable if the customer has ceased to exist, we have
disconnected the customer for non-payment, we have assigned the account to an outside collection agency or we have had unsuccessful legal action against the customer. If circumstances
related to specific customers or carriers change or economic conditions worsen such that our past collection experience is no longer relevant, our estimate of the recoverability of our trade
receivables could be further reduced from the levels provided for in our consolidated financial statements.

Long-Lived Assets.In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
whenever events or changes in circumstances indicate that the carrying amount of any long-lived asset the company expects to hold and use may not be recoverable, we assess the asset for
impairment. Pursuant to SFAS No. 144, if the sum of management's best estimate of the future undiscounted cash flows expected to be generated by the asset is less than the carrying amount of
the asset, an impairment loss is recognized. The amount of the impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Depreciation and amortization.Our calculation of depreciation and amortization expense is based on the estimated economic
useful lives of the underlying property, plant and equipment and intangible assets. Internal labor costs and related employee benefits related to the installation of property, plant and equipment are
capitalized and depreciated over the estimated useful lives of the underlying property, plant and equipment. All software and property, plant and equipment service and maintenance costs are deferred
and amortized into SG&A expense over the applicable contract term.

Effect of New Accounting Standards

Accounting for Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is

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effective
for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 in the first quarter of 2003.

Reporting of Extinguishments of Debt

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, and eliminates the requirement under FASB No. 4 "Reporting Gains and Losses from
Extinguishment of Debt" to report gains and losses from the extinguishments of debt as extraordinary items in the income statement unless the extinguishment qualifies as an extraordinary item under
the provisions of APB No. 30. Upon adoption, any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria
of APB No. 30 should be reclassified to conform to the provisions of SFAS No. 145. The adoption of SFAS No. 145 will result in the reclassification of the 2001 gain on the
extinguishment of debt from extraordinary to a component of loss before income taxes.

Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146
also establishes that fair value is the objective for initial measurement of the liability. The statement is effective for exit or disposal activities initiated after December 31, 2002. The
Company adopted SFAS No. 146 in the first quarter of 2003.

Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure and Amendment of FASB Statement
No. 123". SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which are effective for fiscal years ending after
December 15, 2002. Focal has not implemented the voluntary change to the fair value based method of accounting for stock-based compensation at December 31, 2002. In addition, this
Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The disclosure requirements of this Statement are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company adopted the interim disclosure requirements of this Statement.

Accounting for Guarantees

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of OthersAn Interpretation of FASB Statements 5, 57, and 107 and rescission of FASB Interpretation No. 34." This interpretation clarifies the requirements for
guarantor's accounting for and disclosures of certain guarantees issued and outstanding. FIN 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee. FIN 45 is effective for guarantees entered into or modified after December 31, 2002. The Company adopted the provisions of FIN 45 in the first quarter of
2003.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". This Interpretation requires
that an enterprise's consolidated financial statements

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include
variable interest entities in which the enterprise is the primary beneficiary. At March 31, 2003, the Company did not have any unconsolidated variable interest entities.

The
discussions under "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain forward-looking statements. These statements are subject to a number
of risks and uncertainties that could cause actual results to differ substantially from our projections. See "Information Regarding Forward-looking Statements" on page 1 of this report.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We minimize our exposure to market risk by maintaining a conservative investment portfolio, which primarily consists of debt securities, typically maturing within
one year. We do not hold or issue derivative, derivative commodity or other financial instruments for trading purposes. Financial instruments held for other than trading purposes do not impose a
material market risk on us.

We
are exposed to interest rate risk on our Credit Facility debt and any additional variable rate debt financing which may be needed to fund our operations. The interest rate on this
debt financing will depend on market conditions at that time, and may differ from the rates we have secured on our current debt.

A
significant portion of our debt bears fixed interest rates, and accordingly, the fair market value of the debt is sensitive to changes in interest rates. We have no cash flow or
earnings exposure due to market interest rate changes for our fixed debt obligations. The fair market value of our Credit Facility debt is not sensitive to changes in interest rates due to the
variable interest rate feature of the debt instrument.

The
1998 Notes, 2000 Notes and Credit Facility have all been reclassified to short-term on our consolidated balance sheet due to the default on the Credit Facility and the
Equipment Loan. The weighted average interest rate of the Credit Facility is 6.75% at March 31, 2003. We have ceased accruing interest on our Notes as of the Petition Date. The fair market
value of the debt is $85,474, which does not consider the default risk on the Credit Facility. For additional information about our debt obligations, see our Condensed Consolidated Financial
Statements and accompanying condensed notes related thereto appearing elsewhere in this report.

Item 4.    Controls and Procedures



We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is reported, processed, summarized and
reported within
the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management including our President, principal executive officer, and
our Vice President, principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Within
the 90 days prior to the filing date of this Report (the "Evaluation Date"), we carried out an evaluation, under the supervision and with the participation of the Company's
management, including, Kathleen Perone, our President and principal executive officer, and M. Jay Sinder, our Executive Vice President, Chief Financial Officer and Treasurer (principal financial
officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the President and the Vice President concluded that our disclosure
controls and procedures were effective as of the Evaluation Date.

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There
have been no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the evaluation date.

The
Company's management, including our Chief Executive Officer and Chief Financial Officer, have concluded based on their evaluation performed as of a date within 90 days of the
filing date of this quarterly report on Form 10-Q (the "Evaluation Date"), that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the
information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.

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PART IIOTHER INFORMATION

Item 1. Legal and Administrative Proceedings

With the exception of the matter discussed in our Annual Report on Form 10-K, filed March 28, 2003, we are not aware of any material
litigation against us. In the ordinary course of our business, we are involved in a number of regulatory proceedings before various state commissions and the FCC and other litigation.

Item 2. Changes in Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits and Reports on Form 8-K

|Exhibit
Number |  | Exhibit Description                                                                                                    |  | Location      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | --------------
|2.1            |  | Proposed Second Amended Plan of Reorganization, as filed with the Delaware bankruptcy court on April 30, 2003          |  | Filed herewith
|99.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed herewith
|99.2           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed herewith

Not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.

|                                  |  |                                                                                               |  |             
|--------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ------------
|Signature                         |  | Title                                                                                         |  | Date        
|                                  |  |                                                                                               |  |             
|/s/KATHLEEN PERONEKathleen Perone |  | President, Chief Executive Officer
and Director (Principal Executive Officer)                 |  | May 14, 2003
|/s/M. JAY SINDERM. Jay Sinder     |  | Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer) |  | May 14, 2003

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CERTIFICATIONS

I,
Kathleen Perone, certify that:

|Date: May 14, 2003 |  |                                                                                  
|------------------ |  | ---------------------------------------------------------------------------------
|                   |  | /s/KATHLEEN PERONEKathleen Perone
President, Chief Executive Officer and Director

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CERTIFICATIONS

I,
M. Jay Sinder, certify that:

|Date: May 14, 2003 |  |                                                                                              
|------------------ |  | ---------------------------------------------------------------------------------------------
|                   |  | /s/M. JAY SINDERM. Jay Sinder
Executive Vice President,
Chief Financial Officer and Treasurer

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