<PAGE>

   As filed with the Securities and Exchange Commission on November 12, 1999
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                   FORM 10-Q

                               ----------------

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

               For the Quarterly Period Ended September 30, 1999

                       Commission file number 333-49397

                       Focal Communications Corporation
            (Exact name of registrant as specified in its charter)

               Delaware                              36-4167094
       (State of incorporation)         (IRS Employer Identification Number)

                             200 N. LaSalle Street
                                  Suite 1100
                               Chicago, IL 60601
         (Address of principal executive offices, including zip code)

                                (312) 895-8400
                        (Registrant's telephone number)

                               ----------------

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

                                  Yes X  No

   The number of shares outstanding of the issuer's common stock, as of
October 31, 1999:

     Common stock ($.01 par value)                60,664,856 shares

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                                     INDEX

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
PART I--FINANCIAL INFORMATION
  Item 1. Financial Statements (Unaudited).................................   4
    Consolidated Statements of Operations for the Three months ended
     September 30, 1999 and 1998, and the Nine months ended September 30,
     1999 and 1998.........................................................   4
    Consolidated Balance Sheets as of September 30, 1999 and December 31,
     1998..................................................................   5
    Consolidated Statements of Cash Flows for the Nine months ended
     September 30, 1999 and 1998...........................................   6
    Condensed Notes to Unaudited 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.......  20
PART II--OTHER INFORMATION
  Item 1. Legal Proceedings................................................  20
  Item 2. Changes in Securities and Use of Proceeds........................  21
  Item 3. Defaults Upon Senior Securities..................................  21
  Item 4. Submission of Matters to a Vote of Security Holders..............  21
  Item 5. Other Information ...............................................  22
  Item 6. Exhibits and Reports on Form 8-K.................................  22
SIGNATURES.................................................................  23
</TABLE>

                                       2
<PAGE>

               INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

   We have made statements in this 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," "projects," "may," "will," "should"
or "anticipates" or comparable terminology. These forward-looking statements
include, among others, statements concerning:

  . Our business strategy

  . Our anticipation of potential revenues from designated markets or
    customers

  . Statements regarding the growth of our business

  . The markets for our services and products

  . Forecasts of when we will enter particular markets or begin offering
    particular services

  . Our anticipated capital expenditures and funding requirements

  . Anticipated regulatory developments

   These statements are only predictions. You should be aware that these
forward-looking statements are subject to risks and uncertainties, including
financial, regulatory developments, 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
affect these statements or prevent us from achieving our stated goals include,
but are not limited to, our failure to:

  . Prevail in legal and regulatory proceedings regarding reciprocal
    compensation for Internet-related calls or changes to laws and
    regulations that govern reciprocal compensation

  . Successfully expand our operations into new geographic markets on a
    timely and cost-effective basis

  . Successfully introduce and expand our data and voice service offerings on
    a timely and cost effective basis

  . Respond to competitors in our existing and planned markets

  . Execute and renew interconnection agreements with incumbent carriers on
    terms satisfactory to us

  . Maintain our agreements for transport facilities

  . Maintain acceptance of our services by new and existing customers

  . Attract and retain talented employees

  . Obtain and maintain any required governmental authorizations, franchises
    and permits, all in a timely manner, at reasonable costs and on
    satisfactory terms and conditions

  . Respond effectively to regulatory, legislative and judicial developments

  . Manage administrative, technical or operational issues presented by our
    expansion plans

  . Address Year 2000 remediation issues

                                       3
<PAGE>

                         Part I--Financial Information

Item 1. Financial Statements

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                             For the three months       For the nine months
                              ended September 30         ended September 30
                           -------------------------  -------------------------
                               1999         1998          1999         1998
                           ------------  -----------  ------------  -----------
<S>                        <C>           <C>          <C>           <C>
REVENUES.................  $ 34,484,877  $12,755,293  $ 90,815,617  $25,935,784
EXPENSES:
  Customer service and
   network operations....    19,910,797    4,432,861    45,265,793    9,046,809
  Selling, general and
   administrative........     8,790,781    3,973,719    21,375,653    7,245,504
  Depreciation and
   amortization..........     6,554,353    1,907,601    15,518,870    3,913,870
  Non-cash compensation
   expense...............     3,351,759    2,022,144     5,722,806    2,672,144
                           ------------  -----------  ------------  -----------
    Total operating
     expenses............    38,607,690   12,336,325    87,883,122   22,878,327
                           ------------  -----------  ------------  -----------
OPERATING INCOME (LOSS)..    (4,122,813)     418,968     2,932,495    3,057,457
                           ------------  -----------  ------------  -----------
OTHER INCOME (EXPENSE):
  Interest income........     2,239,551    1,801,116     4,759,314    4,881,831
  Interest expense.......    (6,860,047)  (4,676,705)  (18,144,476) (11,320,499)
                           ------------  -----------  ------------  -----------
                            (4,620,496)   (2,875,589)  (13,385,162)  (6,438,668)
                           ------------  -----------  ------------  -----------
LOSS BEFORE INCOME TAXES.    (8,743,309)  (2,456,621)  (10,452,667)  (3,381,211)
PROVISION FOR INCOME
 TAXES...................    (2,091,125)  (2,197,096)   (2,398,810)  (2,197,096)
                           ------------  -----------  ------------  -----------
NET LOSS.................  $(10,834,434) $(4,653,717) $(12,851,477) $(5,578,307)
                           ============  ===========  ============  ===========
BASIC AND DILUTED NET
 LOSS PER SHARE OF COMMON
 STOCK...................  $      (0.20) $     (0.11) $      (0.27) $     (0.13)
                           ============  ===========  ============  ===========
BASIC AND DILUTED
 WEIGHTED AVERAGE NUMBER
 OF SHARES OF COMMON
 STOCK OUTSTANDING.......    53,295,805   44,128,500    47,134,241   44,128,500
                           ============  ===========  ============  ===========
</TABLE>

                                       4
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                    September 30, 1999 and December 31, 1998

<TABLE>
<CAPTION>
                                                         September 30,  December 31,
                                                             1999           1998
                                                         -------------  ------------
                         ASSETS
                         ------
<S>                                                      <C>            <C>
CURRENT ASSETS:
  Cash and cash equivalents............................. $199,684,882   $126,041,001
  Short-term investments................................   22,312,603      7,959,940
  Accounts receivable, net of allowance for doubtful
   accounts of $6,100,000 and $1,189,000 at September
   30, 1999 and December 31, 1998, respectively.........   21,039,988      9,792,532
  Other current assets..................................    2,750,408        843,793
                                                         ------------   ------------
      Total current assets..............................  245,787,881    144,637,266
FIXED ASSETS, at cost...................................  191,258,161     76,119,650
  Less--Accumulated depreciation and amortization.......   20,745,656      6,146,530
                                                         ------------   ------------
    Fixed assets, net...................................  170,512,505     69,973,120
  Other Non-Current Assets, net.........................    4,297,131      4,963,894
                                                         ------------   ------------
                                                         $420,597,517   $219,574,280
                                                         ============   ============

<CAPTION>
          LIABILITIES AND STOCKHOLDERS' EQUITY
          ------------------------------------
<S>                                                      <C>            <C>
CURRENT LIABILITIES:
  Accounts payable...................................... $ 11,155,857   $ 12,420,470
  Accrued liabilities...................................    7,762,089      1,941,377
  Current maturities of long-term debt..................    8,536,695      2,887,036
                                                         ------------   ------------
      Total current liabilities.........................   27,454,641     17,248,883
LONG-TERM DEBT, net of current maturities...............  241,527,980    182,408,757
OTHER NONCURRENT LIABILITIES............................    1,269,924        588,228
STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value, 100,000,000 shares
   authorized and 60,646,138 and 48,687,000 issued and
   outstanding at September 30, 1999 and December 31,
   1998, respectively...................................      606,461        486,870
Additional paid-in capital..............................  176,183,668     34,927,448
Deferred compensation...................................   (2,244,206)    (4,736,432)
Accumulated deficit.....................................  (24,200,951)   (11,349,474)
                                                         ------------   ------------
      Total stockholders' equity........................  150,344,972     19,328,412
                                                         ------------   ------------
                                                         $420,597,517   $219,574,280
                                                         ============   ============
</TABLE>

                                       5
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                   For the nine months ended
                                                          September 30
                                                   ---------------------------
                                                       1999           1998
                                                   -------------  ------------
<S>                                                <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss........................................ $ (12,851,477) $ (5,578,307)
  Adjustments to reconcile net loss to net cash
   provided by operating activities--
    Depreciation and amortization.................    15,518,870     3,913,870
    Non-cash compensation expense.................     5,722,806     2,672,144
    Amortization of obligation under capital
     lease........................................       531,545           --
    Amortization of discount on senior discount
     notes........................................    15,304,343    11,266,426
    Provision for losses on accounts receivable...     4,911,000     1,219,144
    Changes in operating assets and liabilities--
      Accounts receivable.........................   (16,158,456)  (11,137,064)
      Related-party receivables...................           --         34,883
      Other current assets........................    (1,906,615)     (700,665)
      Accounts payable and accrued liabilities....     4,556,099     8,399,178
      Other non-current liabilities...............       681,696       241,363
                                                   -------------  ------------
        Net cash provided by operating activities.    16,309,811    10,330,972
                                                   -------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures............................   (94,221,644)  (43,048,293)
  Change in short-term investments................   (14,352,663)          --
                                                   -------------  ------------
        Net cash used in investing activities.....  (108,574,307)  (43,048,293)
                                                   -------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Loan origination fees...........................      (252,981)          --
  Proceeds from issuance of long-term debt........    31,712,539   143,897,508
  Payments on long-term debt......................    (3,696,412)   (3,536,886)
  Net proceeds from the issuance of Common Stock..   138,145,231    13,800,000
                                                   -------------  ------------
        Net cash provided by financing activities.   165,908,377   154,160,622
                                                   -------------  ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.........    73,643,881   121,443,301
CASH AND CASH EQUIVALENTS, beginning of period....   126,041,001     2,256,552
                                                   -------------  ------------
CASH AND CASH EQUIVALENTS, end of period.......... $ 199,684,882  $123,699,853
                                                   =============  ============
</TABLE>

                                       6
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

    CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

             Three months and nine months ended September 30, 1999

1. Basis of Presentation

   Except as otherwise required by the context, references in this Form 10-Q
to "Focal", "we", "us", or "our" refer to the combined businesses of Focal
Communications Corporation and all of its subsidiaries. The accompanying
unaudited interim consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, which we believe are necessary to
present fairly the financial position, results of operations, and cash flows
for Focal for the respective periods presented. Certain information and
footnote disclosures normally included in the annual 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 unaudited interim consolidated
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 1998, filed on March 31, 1999, as
amended by Form 10-K/A filed on April 7, 1999. The consolidated balance sheet
at December 31, 1998 included herein was derived from our audited consolidated
financial statements, but does not include all disclosures required under
generally accepted accounting principles.

   In connection with our August 2, 1999 initial public offering of common
stock (Note 8), our Board of Directors and stockholders authorized: (1) a
recapitalization of our existing Class A common stock, Class B common stock,
and Class C common stock into a single class of common stock; (2) an increase
in the number of authorized shares of common stock to 100,000,000 and the
authorization of 2,000,000 shares of preferred stock; and (3) a 500 for-one
stock split. All shares of common stock outstanding and per share amounts have
been restated to reflect our recapitalization and stock split for all periods
presented.

   Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the current period presentation.

2. Risks and Uncertainties

   Reciprocal compensation payments are amounts paid by one carrier to send
particular traffic to another carrier's network. Reciprocal compensation is
currently a significant component of our total revenues representing
approximately 75%, 60%, and 53% of our total revenues for 1998 and the nine
and three month periods ended September 30, 1999, respectively. On July 1,
1999, we began to exclude certain reciprocal compensation revenues generated
from our operations in a number of states where recent regulatory developments
have impacted the potential collection of reciprocal compensation receivables
in those states. We will recognize these revenues once we become certain that
they are collectible.

   Ameritech is continuing to dispute its obligation to pay the reciprocal
compensation owed to us. This dispute was ruled on in favor of Focal by the
Illinois Commerce Commission in March 1998, and by a federal court in July
1998, and most recently in June 1999 by the Seventh Circuit Court of Appeals.
Substantially all of the disputed amounts have been collected. There is a risk
that prior decisions and any future appeal regarding the settlement of this
dispute in favor of Focal could be revisited, which could allow Ameritech to
obtain a refund of prior reciprocal compensation payments.

   As a result of several trends in our business and the current regulatory
environment, we expect revenues from reciprocal compensation to decline as a
percentage of total revenues. A reduction in or elimination of revenues
attributable to reciprocal compensation which is not offset by increases in
other revenues generated by us may have a material adverse effect on us and
our results of operations.

                                       7
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED NOTES TO UNAUDITED INTERIM
                CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. Property and Equipment

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                     September 30,  December 31,
                                                         1999           1998
                                                     -------------  ------------
                                                      (Unaudited)
      <S>                                            <C>            <C>
      Building and improvements..................... $  8,360,440   $ 2,350,000
      Communications Network........................   83,733,779    44,774,965
      Construction in progress......................   42,938,951    15,103,564
      Computer Equipment............................    7,129,790     3,503,512
      Leasehold Improvements........................   23,713,248     8,577,724
      Furniture and fixtures........................    4,311,894     1,790,596
      Motor vehicles................................      153,192        19,289
      Assets under capital lease....................   20,916,867           --
                                                     ------------   -----------
                                                      191,258,161    76,119,650
      Less--Accumulated Depreciation and
       Amortization.................................  (20,745,656)   (6,146,530)
                                                     ------------   -----------
                                                     $170,512,505   $69,973,120
                                                     ============   ===========
</TABLE>

4. Debt

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                      September 30, December 31,
                                                          1999          1998
                                                      ------------- ------------
                                                       (Unaudited)
      <S>                                             <C>           <C>
      12.125% senior discount notes due 2008, net of
       unamortized discount of $88,592,673 and
       $103,897,016 at September 30, 1999 and
       December 31, 1998, respectively..............  $181,407,327  $166,102,984
      Secured equipment term loan, maximum borrowing
       level at $50,000,000.........................    46,286,959    19,192,809
      Obligation under capital lease................    21,448,412           --
      Term loan payable in monthly installments
       through June 2001 at an interest rate of
       6.5%.........................................       921,977           --
                                                      ------------  ------------
                                                       250,064,675   185,295,793
      Less--current maturities......................     8,536,695     2,887,036
                                                      ------------  ------------
                                                      $241,527,980  $182,408,757
                                                      ============  ============
</TABLE>

   We utilize a secured equipment term loan (the "Facility") from a third
party with a maximum borrowing level of $50,000,000. The Facility provides
for, among other things, equipment drawdowns through December 30, 1999, and
requires repayment based on 60 equal monthly installments of principal and
interest for each drawdown.

   All drawdowns under the Facility bear interest at the five-year swap rate
percent plus additional basis points, as defined in the Facility. As of
September 30, 1999, there were no borrowings available to us under the
Facility. Total drawdowns of $46,286,959 and $19,192,809 were outstanding
under the Facility as of September 30, 1999 and December 31, 1998,
respectively. The Facility provides for certain restrictive financial and
nonfinancial covenants. Among other things, these covenants require the
maintenance of minimum cash flow and revenue levels. We were in compliance
with these covenants as of December 31, 1998 and September 30, 1999.

                                       8
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED NOTES TO UNAUDITED INTERIM
                CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Loss Per Share

   SFAS No. 128 "Earnings Per Share," requires us to calculate our earnings
per share based on basic and diluted earnings per share, as defined. Basic
earnings per common share are 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 executives of the Company. 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 and nine months ended September 30,
1999 and 1998. Under the requirements of SFAS No. 128 our basic and diluted
weighted average number of shares outstanding for the three and nine months
ended September 30, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                             Three Months  Three Months   Nine Months   Nine Months
                                 Ended         Ended         Ended         Ended
                             September 30, September 30, September 30, September 30,
                                 1999          1998          1999          1998
                             ------------- ------------- ------------- -------------
   <S>                       <C>           <C>           <C>           <C>
   Basic Weighted Average
    Number of Common Shares
    Outstanding............   53,295,805    44,128,500    47,134,241    44,128,500
   Dilutive Stock Options
    and Unvested Common
    Shares.................    7,651,104     6,849,193     6,712,077     6,610,467
                              ----------    ----------    ----------    ----------
   Dilutive Weighted
    Average Number of
    Common Shares
    Outstanding............   60,946,909    50,977,693    53,846,318    50,738,967
                              ==========    ==========    ==========    ==========
</TABLE>

6. Commitments and Contingencies

   Under the terms of various short- and long-term contracts and agreements,
we are obligated to make payments for office rents and for leasing components
of our communications network through 2019. 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.

   A summary of such fixed commitments at September 30, 1999 is as follows:

<TABLE>
<CAPTION>
             Year                            Amount
             ----                         ------------
             <S>                          <C>
             1999........................ $  7,337,452
             2000........................   28,484,045
             2001........................   23,178,763
             2002........................   25,083,274
             2003........................   25,077,979
             Thereafter..................   82,708,220
                                          ------------
                 Total................... $191,869,733
                                          ============
</TABLE>

   On April 28, 1999, we signed an agreement with a carrier for the
acquisition of indefeasible rights of use for dark fiber transport capacity
for a minimum of 8,300 fiber miles. The term of the agreement is 20 years and
the total minimum commitment is approximately $17.9 million.

                                       9
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED NOTES TO UNAUDITED INTERIM
                CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On May 4, 1999, we signed an agreement with another carrier for the lease
of fiber transport capacity for a five year term and a minimum commitment of
$70 million. We have committed to $10 million in year one; $13.2 million in
year 2; and $15.6 million for each of the remaining three years of the
agreement.

   On May 24, 1999, we entered into an agreement for the acquisition of dark
fiber transport capacity for a minimum of 2,500 fiber miles. This capacity
purchase was financed through a capital lease arrangement with the carrier.
The total minimum commitment is approximately $53 million over the 20 year
lease term.

7. Stock Options

   We have chosen to account for stock based compensation using the intrinsic
value method prescribed in Accounting Principals Board Opinion ("APB") No. 25,
"Accounting for Stock Issued To Employees." We have determined the pro forma
net loss and net loss per share for the three and nine months ended September
30, 1999 as if compensation expense had been recorded for options granted
under the fair value method described in SFAS No. 123, "Accounting for Stock-
Based Compensation."

   We utilize the Black-Scholes option pricing model to estimate the fair
value of options at the date of grant. If we had adopted SFAS No. 123, pro
forma net loss and pro forma basic and diluted net loss per share of common
stock would have been approximately $(14,500,000) and $(0.27); and
$(17,300,000) and $(0.37) for the three and nine months ended September 30,
1999, respectively.

   The Black-Scholes option model estimated the weighted average fair value at
the date of grant for options granted during the nine months ended September
30, 1999 to be approximately $5.12 per option. Principal assumptions used in
applying the Black-Scholes model were as follows:

<TABLE>
<CAPTION>
                                         For the nine
                                         months ended
                                         September 30,
                                             1999
                                         -------------
             <S>                         <C>
             Risk-free interest rates...   5.6%-6.7%
             Expected life..............    5 years
             Expected volatility........ 41.7%-142.0%
             Expected dividend yield....       -
                                         ============
</TABLE>

   The following summarizes option activity:

<TABLE>
<CAPTION>
                                                                      Weighted
                                               Shares of              Average
                                                Common     Exercise   Exercise
                                                 Stock      Prices     Price
                                               ---------  ----------- --------
      <S>                                      <C>        <C>         <C>
      Outstanding at December 31, 1998........ 3,595,000  $0.58-$3.00  $2.18
      Activity for the nine months ended
       September 30, 1999:
        Options Granted....................... 3,192,500   3.15- 4.32   3.79
        Options Exercised.....................  (363,337)  0.58- 3.73   1.74
        Options Canceled......................  (246,625)  2.21- 4.32   3.95
                                               ---------  -----------  -----
      Outstanding at September 30, 1999....... 6,177,538  $0.58-$4.32  $2.97
                                               =========  ===========  =====
</TABLE>

                                      10
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED NOTES TO UNAUDITED INTERIM
                CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table summarizes information about fixed stock options
outstanding at September 30, 1999:

<TABLE>
<CAPTION>
                           Options Outstanding        Options Exercisable
                     -------------------------------- --------------------
                                  Weighted
                                   Average   Weighted             Weighted
                                  Remaining  Average              Average
      Range of         Options   Contractual Exercise   Options   Exercise
   Exercise Prices   Outstanding    Life      Price   Exercisable  Price
   ---------------   ----------- ----------- -------- ----------- --------
   <S>               <C>         <C>         <C>      <C>         <C>
   $0.58-$0.67          726,938      7.8      $0.62     257,123    $0.61
   $2.10-$4.32        5,450,600      9.2       3.28     534,521     2.84
                      ---------      ---      -----     -------    -----
                      6,177,538      9.0      $2.97     791,644    $2.11
                      =========      ===      =====     =======    =====
</TABLE>

8. Equity Transactions

   During the first quarter and second quarter of 1999, we granted 517,000 and
633,500 stock options to employees and directors, respectively. Giving effect
to our initial public offering, the fair market value of our common stock
exceeded the exercise price of the options granted. We also sold 150,000
shares of common stock to a director during the first quarter of 1999, which
was retrospectively determined to be at a price below the fair market value.
Total non-cash compensation related to these transactions of approximately
$7,610,000 will be recognized, of which $985,000 was recorded during the first
quarter of 1999, and $6,625,000 will be ratably charged to operations over the
four-year vesting period of the options. Non-cash compensation expense
relating to these transactions totaling approximately $414,063 and $1,990,290
has been recorded for the three and nine months ended September 30, 1999,
respectively.

   During the third quarter of 1999, employees and an outside consultant were
granted 820,500 stock options. Giving effect to our initial public offering,
the fair market value of our common stock exceeded the exercise price of the
options granted. Total non-cash compensation related to the grant to employees
of approximately $5,000,000 will be ratably charged to operations over the
four-year vesting period of the options beginning in the third quarter of
1999. Total non-cash compensation related to the grant to the consultant will
be charged to operations over the consultant's service period in accordance
with SFAS No. 123. In addition, during the second quarter of 1999, we granted
1,221,500 stock options to employees that were contingent upon the closing of
our initial public equity offering, which occurred on August 2, 1999. The fair
market value of our common stock on the date of the initial public offering
exceeded the exercise price of these options. Total non-cash compensation of
approximately $8,631,000 will be ratably charged to our operations over the
four-year vesting period of the options beginning in the third quarter of
1999. Non-cash compensation expense relating to these transactions totaling
approximately $1,240,290 has been recorded for the three and nine months ended
September 30, 1999.

   On August 2, 1999, we sold 9,950,000 shares of our common stock in an
initial public offering ("IPO") at a price of $13 per share, which resulted in
net proceeds to us of approximately $119 million. In connection with the IPO,
our Board of Directors and stockholders authorized: (1) a recapitalization of
our existing Class A common stock, Class B common stock, and Class C common
stock into a single class of common stock; (2) an increase in the number of
authorized shares of common stock to 100,000,000 and the authorization of
2,000,000 shares of preferred stock; and (3) a 500 for-one stock split.

   On August 19, 1999 pursuant to the terms of the underwriting agreement,
among us and our underwriters, our underwriters elected their option to
purchase an additional 1,492,500 shares of our common stock at $13 per share
which resulted in additional net proceeds to us of approximately $18 million.

9. Income Taxes

   We recorded a provision for income taxes totaling $2,091,125 and $2,398,810
for the three and nine months ended September 30, 1999, respectively. Our tax
provision is based on our estimate of the effective tax rate expected for the
full year. The effective tax rate for the three and nine months ended
September 30, 1999 differs

                                      11
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED NOTES TO UNAUDITED INTERIM
                CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

from the statutory rate principally because our income tax obligation is based
on alternative minimum tax requirements and due to valuation allowances
recorded against deferred tax assets.

10. Supplemental Disclosure of Cash Flow Information

   Cash paid for interest and income taxes, and non-cash investing and
financing activities for the nine months ended September 30, 1999 is as
follows:

<TABLE>
<CAPTION>
                                                                    Nine Months
                                                                       Ended
                                                                   September 30,
                                                                       1999
                                                                   -------------
      <S>                                                          <C>
      Cash paid during the period for interest....................  $ 1,986,437
      Fixed assets acquired under capital leases..................  $20,916,867
      Cash paid for income taxes..................................  $ 2,090,600
</TABLE>

11. Segment Information

   We 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, "Communications Services," as of and
for the periods ended September 30, 1999 and 1998, and as of December 31,
1998.

   Our chief operating decision maker views earnings before interest, taxes,
depreciation and amortization ("EBITDA") as the primary measure of profit and
loss. The following represents information about revenues and EBITDA (which
excludes non-cash compensation), total assets and capital expenditures for the
Communications Services reportable segment as of December 31, 1998 and as of
and for the nine months ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                                     September 30, September 30,
                                                         1999          1998
                                                     ------------- -------------
      <S>                                            <C>           <C>
      Revenues......................................  $90,815,617   $25,935,784
      EBITDA........................................   21,734,745     9,055,391

<CAPTION>
                                                     September 30, December 31,
                                                         1999          1998
                                                     ------------- -------------
      <S>                                            <C>           <C>
      Total assets..................................  177,001,604    73,436,768
      Capital expenditures..........................   94,221,644    64,229,247
                                                      ===========   ===========
</TABLE>

                                      12
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED NOTES TO UNAUDITED INTERIM
                CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)



   The following reconciles our total segment EBITDA to our consolidated net
loss before income taxes for the nine months ended September 30, 1999 and
1998:

<TABLE>
<CAPTION>
                                                    Nine months    Nine months
                                                       ended          ended
                                                   September 30,  September 30,
                                                       1999           1998
                                                   -------------  -------------
      <S>                                          <C>            <C>
      Total EBITDA for reportable segment......... $ 21,734,745   $  9,055,391
      Corporate EBITDA............................    2,439,426        588,080
      Depreciation and amortization...............  (15,518,870)    (3,913,870)
      Interest expense............................  (18,144,476)   (11,320,499)
      Interest income.............................    4,759,314      4,881,831
      Non-cash compensation.......................   (5,722,806)    (2,672,144)
                                                   ------------   ------------
        Net loss before income taxes.............. $(10,452,667)  $ (3,381,211)
                                                   ============   ============
</TABLE>

   The following reconciles our total segment assets to our consolidated total
assets as of September 30, 1999 and December 31, 1998:

<TABLE>
<CAPTION>
                                                     September 30, December 31,
                                                         1999          1998
                                                     ------------- ------------
      <S>                                            <C>           <C>
      Total assets for reportable segment........... $177,001,604  $ 73,436,768
      Cash and short-term investments...............  221,997,485   133,307,515
      Other current assets..........................    1,829,730     1,125,124
      Fixed assets, net.............................   15,471,567     6,740,979
      Other noncurrent assets.......................    4,297,131     4,963,894
                                                     ------------  ------------
        Total consolidated assets................... $420,597,517  $219,574,280
                                                     ============  ============
</TABLE>

   We currently operate in the United States. Revenues by major customer for
the nine months ended September 30, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>
                                                      Nine months   Nine months
                                                         ended         ended
                                                     September 30, September 30,
                                                         1999          1998
                                                     ------------- -------------
      <S>                                            <C>           <C>
      Revenues from major customer A................  $43,361,652   $15,927,335
      Revenues from major customer B................   18,292,878     3,354,077
</TABLE>

                                      13
<PAGE>

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

Overview

   General. Focal provides data, voice and colocation services to large,
communications-intensive users in major cities. We began operations in 1996
and initiated service first in Chicago in May 1997. We currently serve a total
of 14 markets, which encompass a total of 38 metropolitan statistical areas,
or MSAs, and plan to serve 16 markets, or 42 MSAs, by the end of 1999 and 20
markets, or 50 MSAs, by the end of 2000. We believe our market expansion will
allow us to reach a critical mass of geographic coverage and service
capability for our target customer base of communications-intensive users. As
of September 30, 1999, we sold 169,122 access lines, of which 137,033 were
installed and in service.

   Focal projects it will install approximately 30,000 additional access lines
during the fourth quarter of 1999, for a total of 115,000 new lines installed
during 1999. During year 2000, we expect to install over 200,000 access lines
as our existing markets continue to mature and as we launch service in
additional new markets.

   Our operating results are expected to change over the next 12 months as a
result of several trends in our business and in the regulatory environment.
First, we anticipate that the mix of lines we sell will shift from being
dominated by ISP customer lines to being more evenly balanced among ISP,
corporate and VAR customer lines due to expanded marketing efforts. Second, we
expect our revenues from and margin on ISP lines to decline due to the impact
of regulatory developments on the potential collection of reciprocal
compensation in certain markets and the renegotiation of our interconnection
agreements in each state in which we operate, described below. In connection
with these trends, we intend to emphasize the sale of new products that
leverage our network to maximize revenues per line and operating margins.
These products include high-speed access to the Internet and LANs connected
via DSL technology. Third, our continued expansion may result in negative
operating cash flows and operating losses for a period of time. If this
occurs, we expect to again produce positive operating cash flows once these
trends stabilize and operating activities in our newer markets are established
and mature. If, however, these trends do not stabilize or our operating
activities are not established or do not mature as expected, we may continue
to sustain negative operating cash flows and net losses.

   Revenues. Our revenues are comprised of monthly recurring charges, usage
charges and initial, non-recurring charges. Monthly recurring charges include
the fees paid by our customers for lines in service, additional features on
those lines, and colocation space. Monthly recurring charges are derived only
from end user customers. Usage charges consist of fees paid by end users for
each call made, fees paid by the ILEC and other CLECs as reciprocal
compensation, and access charges paid by the IXCs for long distance traffic
that we originate and terminate. Non-recurring revenues are typically derived
from fees charged to install new customer lines.

   We earn reciprocal compensation revenue for calls made by customers of
other local exchange carriers to our customers. Conversely, we incur
reciprocal compensation expense to other local exchange carriers for calls by
our customers to their customers. Reciprocal compensation has historically
been a significant component of our total revenue due to the preponderance of
inbound applications utilized by our customers. On July 1, 1999, we began to
exclude certain reciprocal compensation revenues generated from our operations
in a number of states where recent regulatory developments have impacted the
potential collection of reciprocal compensation receivables in those states.
We will recognize these revenues once we become certain that they are
collectible. Reciprocal compensation represented approximately 75% of total
revenues in 1998 and approximately 60% and 53% of total revenues for the nine
and three months ended September 30, 1999, respectively.

   We expect the proportion of revenues represented by reciprocal compensation
to substantially decrease in the future as a result of the expiration and
subsequent renegotiation of our existing interconnection agreements with the
ILECs, impact of recent and future regulatory developments, and as a result of
our focus on increasing the percentage of our lines that are sold to non-ISP
customers. We expect the most significant impact of the reduction in
reciprocal compensation to occur when our existing interconnection agreement
with Ameritech Illinois, which expires during the fourth quarter of 1999, is
renegotiated. Although we expect to renew our existing interconnection
agreements on satisfactory terms, we expect that the new agreements will
result in lower negotiated interconnection rates for future reciprocal
compensation. Revenues from reciprocal compensation could also decline as a
result of adverse judicial or regulatory determinations. We expect to generate
additional

                                      14
<PAGE>

revenues from other services which will offset this anticipated decrease in
reciprocal compensation revenues. A reduction in or elimination of reciprocal
compensation revenues that are not offset by increases in other revenues
generated by us could have a material adverse effect on us and our results of
operations.

   Operating Expenses. Our operating expenses are categorized as customer
service and network operations, selling, general and administrative,
depreciation and amortization, and non-cash compensation expense. Settlement
costs are a significant portion of customer service and network operations
expense and are comprised of leased transport charges and reciprocal
compensation payments. Leased transport charges are the lease payments we make
for the use of fiber transport facilities connecting our customers to our
switches and for our connection to the ILECs' and other CLECs' networks. Our
strategy of initially leasing rather than building our own fiber transport
facilities has resulted in our cost of service being a significant component
of total costs. To date, we have been successful in negotiating lease
agreements that match the duration of our customer contracts, thereby allowing
us to avoid the risk of incurring expenses associated with transport
facilities that are not being used by revenue generating customers.

   Historically, leasing rather than building our transport network has
resulted in capital expenditures which we believe are lower than those of
CLECs of similar size that own their fiber networks. Our capital expenditures
have been driven by customer service demands and projected near-term revenue
streams from our established markets. In addition, we believe that the
percentage of these "success-based" capital expenditures is higher than those
of fiber-based CLECs. In contrast, we incur operating expenses for leased
facilities that are proportionately higher than those incurred by fiber-based
CLECs. The margin impact of these higher, anticipated operating expenses is
expected to be mitigated, in part, by a higher revenue per line, which we
anticipate as a result of our focus on communications-intensive users.

   As contemplated by our business plan, in April and May 1999 we entered into
a number of agreements to own fiber transport capacity as well as continue to
lease transport facilities for combined minimum commitments of $98.6 million
over five years and $42.6 million over the next fifteen years. These
commitments will result in increased operating expenses for future
periods,which we believe should be more than offset by future revenues
associated with new services made possible, in part, by these agreements.

   Other customer service and network operations expense consists of the costs
of operating our network and the costs of providing customer care activities.
Major components include wages, rent, power, equipment maintenance, supplies
and contract employees.

   Selling, general and administrative expense consists of sales force
compensation and promotional expenses as well as the cost of corporate
activities related to regulatory, finance, human resources, legal, executive,
and other administrative activities. We expect our selling, general and
administrative expense to be lower as a percentage of revenue than that of our
competitors because we have relatively high sales productivity associated with
our strategy of serving communications-intensive customers. These customers
generally utilize a large number of switched access lines relative to the
average business customer, resulting in more revenue per sale. Further, fewer
sales representatives are required to service the relatively smaller number of
communications-intensive customers in a given region.

   We record monthly non-cash compensation expense related to shares issued to
some of our executive officers in November 1996, in connection with the
September 30, 1998 amendments to vesting agreements with some of our executive
officers, in connection with stock options granted to employees, an outside
consultant, and directors during 1999, and shares issued to a director during
the first quarter of 1999. We will continue to record non-cash compensation
expense in future periods relating to these events through the third quarter
of 2003 (See Note 8 to our Unaudited Interim Consolidated Financial
Statements).

Quarterly Results

   The following table sets forth unaudited financial, operating and
statistical data for each of the specified quarters of 1998 and 1999. 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.

                                      15
<PAGE>

<TABLE>
<CAPTION>
                                   1998                            1999
                          ------------------------  ---------------------------------------
                             Third       Fourth        First       Second          Third
                            Quarter      Quarter      Quarter      Quarter        Quarter
                          -----------  -----------  -----------  -----------    -----------
<S>                       <C>          <C>          <C>          <C>            <C>
Revenues................  $12,755,293  $17,596,062  $26,003,897  $30,326,843    $34,484,877
EBITDA..................  $ 4,348,713  $ 6,393,913  $ 9,968,682  $ 8,422,190    $ 5,783,299
Lines Sold to Date......       41,316       68,184       85,329      133,536        169,122
Lines Installed to Date.       33,188       52,011       70,572      106,749        137,033
Estimated ISP Lines (%
 of Installed lines)....           69%          71%          71%          72%            72%
Lines on Switch (%).....          100%         100%         100%         100%           100%
ILEC Central Offices
 Interconnected.........          297          340          443          771            948
ILEC Central Office
 Colocations in Service
 and Under Development..          --           --            23           58            201
Average Monthly Revenue
 Per Line...............  $       148  $       138  $       141  $       114    $        94
Quarterly Minutes of use
 switched (in millions).        1,039        1,444        2,033        2,657          3,514
Markets in Operation....            6           10           12           13             14
MSAs Served.............           13           29           31           34             38
Switches Operational....            4            6            7            9             10
Focal Customer
 Colocation Space in
 Service (Sqr. Ft.).....        9,882       23,302       29,282       41,081         53,478
Capital Expenditures
 ($mil).................  $        24  $        21  $        24  $        57(1) $        34
Employees...............          186          233          312          418            478
Sales Force (2).........           35           47           65           93            105
</TABLE>
--------
(1) Includes approximately $21 million of assets acquired under a capital
    lease during the second quarter of 1999.
(2) Quota bearing sales professionals. Does not include sales engineers or
    customers support personnel.

Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998

   Our total revenues for the three months ended September 30, 1999 were $34.5
million compared to $12.8 million for the three months ended September 30,
1998. This $21.7 million increase is primarily due to the generation of
revenues from numerous markets during the third quarter of 1999 compared to
only two markets, Chicago and New York, in the third quarter of 1998. Customer
service and network operations expenses totaled $19.9 million for the third
quarter of 1999 compared to $4.4 million for the third quarter of 1998. This
$15.5 million increase resulted from our rapid expansion into new markets and
related costs for leased facilities, usage settlements, customer care and
operational personnel, equipment maintenance and other operating expenses.
Selling, general and administrative ("SG&A") expenses also increased by $4.8
million, from $4.0 million during the three months ended September 30, 1998 to
$8.8 million during the most recent three months ended
September 30, 1999 as a result of our rapid expansion. In addition, our
overall customer service, network operations, and SG&A expenses increased
between comparable three month periods due to a corresponding increase in our
employee base by 292 employees.

   Depreciation and amortization increased from $1.9 million to $6.6 million
in the comparative three-month periods. This increase of $4.7 million is a
result of a significant increase in the level of fixed assets we put into
service between October 1, 1998 and September 30, 1999. Non-cash compensation
expense was $3.4 million for the third quarter of 1999 compared to $2.0
million for the third quarter of 1998. The increase of $1.4 million in non-
cash compensation expense is the result of September 30, 1998 amendments of
vesting agreements with some of our executive officers and stock options
granted to employees, an outside consultant, and directors during 1999.

   Interest income increased from $1.8 million in the third quarter of 1998,
to $2.2 million in the comparable period of 1999. This $0.4 million increase
is primarily due to the receipt of $137 million in net proceeds from our
initial public offering during the third quarter of 1999. Interest expense
increased from $4.7 million in the third quarter of 1998 to $6.9 million in
the third quarter of 1999. This $2.2 million increase is due to an additional
$0.6 million of amortization of our outstanding senior discount notes, $1.1
million of interest expense on our secured equipment term loan that we entered
into during December 1998, and $0.5 million of interest expense relating to
our capital lease obligation for dark fiber transport capicity.


                                      16
<PAGE>

   We incurred U.S income tax expense of $2.1 million for the third quarter of
1999 compared to $2.2 million in the same period of 1998. We are obligated to
pay federal and state income taxes due to the application of the alternative
minimum tax. We had a net loss of $10.8 million in the third quarter of 1999
compared to a net loss of $4.7 million in the comparable period of 1998. This
$6.1 million of additional losses in the third quarter of 1999 is primarily
the result of our planned expansion, an additional $2.2 million in interest
expense, and $1.4 million of additional non-cash compensation expense in the
third quarter of 1999.

Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998

   Our total revenues for the first nine months of 1999 were $90.8 million
compared to $25.9 million for the first nine months of 1998. This increase of
$64.9 million is primarily due to the generation of revenues from numerous
markets during the first nine months of 1999 compared to only two markets,
Chicago and New York, in the comparable period of 1998. We installed
approximately 85,000 lines during the first nine months of 1999, which
exceeded the lines installed in the comparable period of 1998 by approximately
59,000 lines. Customer service and network operations expense was $9.0 million
in the nine months ended September 30, 1998 and $45.3 million during the most
recent nine-month period. This $36.3 million increase resulted primarily from
our rapid expansion into an additional eight new markets through the end of
the third quarter of 1999. SG&A expense increased by $14.2 million to $21.4
million for the first nine months of 1999 as a result of our planned
expansion. In addition, our overall customer service, network operations, and
SG&A expenses increased between comparable nine month periods due to a
corresponding increase in our employee base by 292 employees.

   Depreciation and amortization increased from $3.9 million to $15.5 million
in the comparative nine-month periods. This increase of $11.6 million is a
result of our 1999 expansion into new markets which resulted in capital
expenditures of approximately $51.2 million greater than that of the
comparable period of 1998. Non-cash compensation expense was $5.7 million for
the first nine months of 1999 compared to $2.7 million for comparable period
in 1998. This $3.0 million increase in non-cash compensation expense is the
result of September 30, 1998 amendments of vesting agreements with some of our
executive officers, stock options granted to employees, an outside consultant,
and directors during 1999, and stock issued to a director during the first
quarter of 1999.

   Interest income remained consistent between the nine month periods at
approximately $4.8 million as our average cash, cash equivalents, and short-
term investment balances were similar between periods. Interest expense
increased from $11.3 million during the first nine months of 1998 to $18.1
million in the first nine months of 1999. This increase of $6.8 million is due
to an additional $4.0 million of amortization of our outstanding senior
discount notes, $2.3 million of interest expense on our secured equipment term
loan, and $0.5 million of non-cash interest expense relating to our capital
lease obligation for dark fiber transport capicity.

   We incurred U.S income tax expense of $2.4 million for the first nine
months of 1999 compared to $2.2 million in the same period of 1998. We are
obligated to pay federal and state income taxes due to the application of the
alternative minimum tax. We had a net loss of $12.9 million for the first nine
months of 1999 compared to a net loss of $5.6 million in the comparable period
of 1998. This $7.3 million of additional losses in the first nine months of
1999 is a direct result of our planned expansion, an additional $6.8 million
of interest expense, and an additional $3.0 million in non-cash compensation
expense.

Liquidity and Capital Resources

   We intend to continue to increase our coverage of major U.S. cities by
expanding our services to two additional markets during the fourth quarter of
1999 and another four markets during 2000. Our business plan will require that
we expand our existing networks and services, deploy our own fiber capacity in
a majority of our markets and fund our initial operating losses. We will
require significant capital to fund the purchase and installation of
telecommunications switches, equipment, infrastructure and fiber facilities
and/or long-term rights to use fiber transport capacity. The implementation of
this plan requires significant capital expenditures, a substantial portion of
which will be incurred before significant related revenues from our new
markets are expected to be realized. These expenditures, together with
associated early operating expenses, may result in our having substantial
negative operating cash flow and substantial net operating losses for the
foreseeable future,

                                      17
<PAGE>

including 1999 and 2000. Although we believe that our cost estimates and the
scope and timing of our build-out are reasonable, we cannot assure you that
actual costs or the timing of the expenditures, or that the scope and timing
of our build-out, will be consistent with current estimates.

   Our capital expenditures were approximately $94 million for the first nine
months of 1999, primarily reflecting capital spending for the build-out of 18
of 20 of our markets, including the $7.7 million acquisition of network assets
and associated infrastructure from Level 3 Communications for our Boston
market. In addition, during May 1999, we entered into a capital lease
arrangement with a carrier for the acquisition of dark fiber transport
capacity. We have recorded approximately $21 million of assets under capital
lease relating to this agreement as of September 30, 1999. We estimate that
our capital expenditures in connection with our business plan will be
approximately $35 million for the fourth quarter of 1999. The remaining 1999
expenditures are expected to be made primarily for the build-out of additional
markets, the expansion of our existing markets and services, including high-
speed data services, and the purchase of local fiber transport capacity in a
majority of our markets.

   We estimate that the implementation of our business plan, as currently
contemplated, including the fourth quarter 1999 capital expenditures
previously described, operating losses in newer markets and working capital
needs will be funded through the fourth quarter of 2000 with cash, cash
equivalents and short-term investments currently on hand, anticipated cash
flows from future operations and the net proceeds received of approximately
$137 million from our August 1999 initial public offering.

   Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. If our plans or assumptions change
or prove to be inaccurate, we may be required to seek additional sources of
capital or seek additional capital sooner than currently anticipated. We may
also choose to raise additional capital to take advantage of favorable
conditions in the capital markets.

   Net cash provided by operating activities for the first nine months of 1999
was $16.3 million, an increase of $6.0 million from the same period in 1998.
This increase is primarily the result of an $11.6 million increase in
depreciation and amortization, a $3.0 million increase in non-cash
compensation expense, and an additional $4.0 million of amortization of our
senior discount notes, which was offset by additional net losses of $7.3
million and increased accounts receivable of $5.1 million. Net cash used in
investing activities was $108.6 million for the first nine months of 1999
compared to $43.0 million in the first nine months of 1998. This increase of
$65.6 million is primarily the result of our 1999 expansion into new markets,
which resulted in capital expenditures that exceeded the first nine months of
1998 by $51.2 million, and our short-term investments increased by $14.4
million in the first nine months of 1999. Short-term investments primarily
consist of debt securities, which typically mature between three months and
one year. Net cash provided by financing activities for the first nine months
of 1999 was $165.9 million, an increase of $11.7 million from the first nine
months of 1998. This increase is primarily the net result of our debt and
equity proceeds between the comparable periods.

   Our $50 million equipment term loan facility with NTFC Capital Corporation
provides that NTFC will make term loans to us in an aggregate principal amount
of up to $50 million. These loans are to be used solely for the purchase of
telecommunications equipment and related software licenses. To secure the
loans, we have granted NTFC a security interest in the assets acquired with
the loans. Loans must be repaid over a five-year period from the date of the
borrowing, which must be on or prior to December 31, 1999. Principal and
interest payments are due monthly, and interest accrues based on the five-year
swap rate, plus additional basis points. Interest will accrue at a lower rate
if we meet specified financial tests. As of September 30, 1999, there are no
borrowings available to us under this facility and $46.3 million is
outstanding at the end of the third quarter of 1999.

   We have historically incurred net losses and have an accumulated deficit of
$11.3 million as of December 31, 1998 and $24.2 million as of September 30,
1999. We initially funded a large portion of our future operating losses and
capital expenditures through the 1998 offering of our senior discount notes
and by other financings. On February 18, 1998, we received $150 million in
gross proceeds from the sale of the notes. The notes will accrete to an
aggregate stated principal amount of $270 million by February 15, 2003. As of
September 30, 1999,

                                      18
<PAGE>

the principal amount of the notes had accreted to approximately $181.4
million. No interest is payable on the notes prior to August 15, 2003.
Thereafter, cash interest will be payable semiannually on August 15 and
February 15 of each year. During August 1999, we raised net proceeds of
approximately $137 million in our initial public offering in which we sold
11,442,500 shares of our common stock at a price of $13 per share, which
includes the underwriter's exercise of their over-allotment option to purchase
1,492,500 common shares at $13 per share.

Impact of the Year 2000 Issue

   The year 2000 issue results from computer programs being written using two
digits rather than four to define the year. Any of our computer programs or
systems, or those of our suppliers, that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruption of
operations, including, among other things:

  . temporary inability to process transactions

  . temporary inability to send invoices

  . temporary inability to engage in normal business activities

  . Interruptions of customer service

   Our Year 2000 compliance program can be divided into several phases. These
phases include:

  . Assessing our material information systems and hardware for Year 2000
    readiness

  . Assessing the Year 2000 readiness of third parties with whom we have
    significant business relationships and on whose systems and hardware we
    rely

  . Contingency planning

   As part of our internal assessment phase, we examined our material
information systems, including our DMS-500 SuperNode central office switches,
and other related hardware to determine whether these systems and hardware are
Year 2000 compliant. However, we have not nor do we plan to identify, validate
as compliant or remediate integrated circuits in any other systems or
hardware. We have received assurances from all of our major software and
hardware vendors that the products we use are Year 2000 compliant in all
material respects and will function adequately after December 31, 1999.

   Our services are also dependent on network systems and transport facilities
maintained by other carriers, including ILECs and IXCs. We are engaged in an
ongoing process of assessing the Year 2000 compliance status of other carriers
with whom we have material relationships. We have obtained assurances from at
least ninety percent of these other carriers regarding Year 2000 compliance
and we are continuing to obtain assurances from the others that have not yet
responded to our inquiries. Our assessment relies, without any independent
verification, on the statements and assumptions underlying the statements
these carriers have made in their periodic reports filed with the Securities
and Exchange Commission. The risks associated with the failure of these
carriers' systems or transport facilities include potential interruption of
service, including blocked calls and delayed call completion. Interruptions of
this type would heavily impact our customers and, if prolonged, could have a
material adverse effect on our business, financial condition or results of
operations.

   Because we currently lease 100% of our transport facilities, we are
dependent on the availability of fiber transport facilities owned by other
carriers. There are few, if any, contingency measures we can take if Year 2000
problems cause these carriers' facilities to fail. We lease transport
facilities from multiple carriers in each market in which we operate in an
attempt to provide redundancy and diversity in service. However, we cannot
assure you that there will not be multiple network failures in a particular
market. If our transport vendors experience facilities failures, our business
may be disrupted and we may suffer a material adverse effect.

   We have completed our internal Year 2000 compliance program and incurred
approximately $0.3 million in remediation expenditures during 1999. All of
these costs were expensed as they were incurred. We intend to continue our
external Year 2000 compliance assessment of third parties with whom we have
significant business relationships. If it comes to our attention that any of
these third parties are not Year 2000 compliant, we intend to develop an
action plan and further assess the risks of non-compliance and the resources
that would be required to resolve the problem. We also intend to develop
contingency plans to the extent we believe those plans would be useful.

                                      19
<PAGE>

   Based on our completion of our internal Year 2000 compliance program, we
believe that our planning is adequate to secure Year 2000 readiness of our
critical systems. Nevertheless, Year 2000 readiness is subject to a number of
risks and uncertainties, some of which, like the readiness of other carriers
upon whom we rely, are out of our control. We are not able to predict all the
factors that could cause actual results to differ materially from our current
expectations about Year 2000 readiness. If we, or third parties with whom we
have significant business relationships, fail to achieve Year 2000 readiness
with respect to critical systems, there could be a material adverse effect on
our business, financial condition or results of operations.

   The discussions under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements. Our
future performance is 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 3 of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

   We are exposed to minimal market risks. We manage sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which primarily consists of debt securities, typically maturing
within one year, and entering into long-term debt obligations with appropriate
pricing and terms. 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, as additional debt financing is
periodically needed due to the large operating losses and capital expenditures
associated with establishing and expanding our network coverage. The interest
rate that we will be able to obtain on debt financing will depend on market
conditions at that time, and may differ from the rates we have secured on our
current debt.

   While all of our long-term debt bears fixed interest rates, the fair market
value of our fixed rate long-term 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 long-term debt obligations. The table below provides
additional information about our Notes.

<TABLE>
<CAPTION>
                      As of September 30, 1999
             -------------------------------------------
             Expected                         Average
             Maturity          Fixed Debt  Interest Rate
             --------         ------------ -------------
             <S>              <C>          <C>
             1999............ $        --        --
             2000............          --        --
             2001............          --        --
             2002............          --        --
             2003............          --        --
             Thereafter......  270,000,000    12.125%
                              ------------    ------
                              $270,000,000    12.125%
                              ============    ======
             Fair Market
              Value.......... $153,225,000
                              ============
</TABLE>

                          Part II--Other Information

Item 1. Legal and Administrative Proceedings

   With the exception of the matters discussed in our Annual Report on Form
10-K for the year ended December 31, 1998, filed on March 31, 1999, as amended
by Form 10-K/A filed on April 7, 1999 and matters discussed in our Form 10-Q/A
filed on July 6, 1999 and Form 10-Q filed on August 13, 1999, 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.

                                      20
<PAGE>

Item 2. Changes in Securities and Use of Proceeds

   (a) On July 31, 1999, we filed an Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware that (i)
authorized us to issue up to 100,000,000 shares of common stock, par value
$.01 per share ("common stock"), and up to 2,000,000 shares of preferred
stock, par value $.01 per share and (ii) automatically converted each
outstanding share of our Class A common stock, Class B common stock and Class
C common stock into 500 shares of common stock. Accordingly, the holders of
shares of Class A common stock, Class B common stock and Class C common stock
are now entitled to the rights of common stock. Holders of common stock are
entitled to one vote per share on all matters to be voted on by stockholders
generally, including the election of directors. Holders of common stock will
be entitled to receive dividends, if any, declared from time to time by our
Board of Directors out of funds legally available for dividends. If Focal is
liquidated, dissolved or wound-up, holders of common stock will share
proportionately in all assets available for distribution. However, dividend
and distribution rights of holders of common stock will be subject to the
rights of any holders of preferred stock that may be authorized by the Board
of Directors and issued from time to time. The holders of common stock have no
preemptive or conversion rights. The common stock does not have cumulative
voting rights. As a result, the holder or holders of more than half of the
shares of common stock voting for the election of directors can elect all
directors being elected at that time. There are no redemption or sinking fund
provisions applicable to the common stock. As of October 31, 1999, there were
60,664,856 shares of common stock and no shares of preferred stock
outstanding.

   (b) Not applicable.

   (c) During the third quarter of 1999, we issued an aggregate of 97,212
shares of common stock to our employees upon the exercise of stock options
granted under our Amended and Restated 1997 Nonqualified Stock Option Plan for
an aggregate purchase price of $166,726. No underwriter was engaged in
connection with these sales, and these sales were exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act") pursuant
to Section 4(2) of the Securities Act, as a transaction not involving any
public offering, or Rule 701 under the Securities Act, as a sale of securities
pursuant to certain compensatory benefit plans.

   (d) Not applicable.

Item 3. Defaults Upon Senior Securities

   Not applicable.

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

   Pursuant to a written consent of our stockholders in lieu of an annual
meeting, dated June 30, 1999, effected in accordance with the General
Corporation Law of the State of Delaware, our stockholders re-elected all
eight of our directors, who are Robert C. Taylor, Jr., John R. Barnicle, James
E. Crawford, III, John A. Edwardson, Paul J. Finnegan, Richard D. Frisbie,
James N. Perry, Jr. and Paul G. Yovovich, and ratified the appointment of
Arthur Andersen LLP as our independent public accountant for the 1999 fiscal
year.

   Pursuant to a written consent of our stockholders in lieu of a special
meeting, dated July 23, 1999, effected in accordance with the General
Corporation Law of the State of Delaware, our stockholders voted to: (i)
approve our Amended and Restated Certificate of Incorporation, (ii) approve
our Amended and Restated Bylaws, (iii) approve our 1998 Equity and Performance
Incentive Plan and (iv) approve our 1998 Equity Plan for Non-Employee
Directors.

   Holders of approximately 98.6% of the shares of common stock outstanding
consented to the actions referred to above. The remaining holders of shares of
common stock were notified of the actions in accordance with the General
Corporation Law of the State of Delaware.


                                      21
<PAGE>

Item 5. Other Information

   Not applicable.

Item 6. Exhibits and Reports on Form 8-K

   (a) Exhibits

<TABLE>
<CAPTION>
      Exhibit
      Number    Exhibit Description     Location
      -------   -------------------     --------
     <C>       <S>                   <C>
     27.1      Financial Data
               Schedule              Filed herewith
</TABLE>

   (b) Reports on Form 8-K

   The Company did not file any current reports on Form 8-K during the quarter
ended September 30, 1999.

                                      22
<PAGE>

                                  SIGNATURES

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

                                          Focal Communications Corporation

                                               /s/ Robert C. Taylor, Jr.
                                          -------------------------------------
                                                 Robert C. Taylor, Jr.,
                                              President and Chief Executive
                                                         Officer
                                                  (Authorized Officer)

Date: November 12, 1999

                                                 /s/ Joseph A. Beatty
                                          -------------------------------------
                                                    Joseph A. Beatty,
                                          Executive Vice President and Chief
                                          Financial Officer
                                              (Principal Financial Officer)

Date: November 12, 1999

                                                /s/ Gregory J. Swanson
                                          -------------------------------------
                                                   Gregory J. Swanson,
                                            Controller (Principal Accounting
                                                        Officer)

Date: November 12, 1999

                                      23
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number     Exhibit Description        Location
  -------    -------------------        --------
 <C>       <S>                       <C>
 27.1      Financial Data Schedule   Filed Herewith
</TABLE>