---

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

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FORM 10-Q

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

For the Quarterly Period Ended March 31, 2002

Commission file number 333-49397

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

Delaware(State of incorporation)

36-4167094(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)

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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 ý    No o

The
number of shares outstanding of the issuer's common stock, as of April 30, 2002:

Common
stock ($.01 par value) 4,935,832 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, 2002 and 2001 |  | 4   
|                             |  | Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                   |  | 5   
|                             |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 |  | 6   
|                             |  | Condensed Notes to Interim Consolidated Financial Statements                                       |  | 7   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations              |  | 11  
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 16  
|PART IIOTHER INFORMATION    |  |                                                                                                   
|Item 1.                      |  | Legal and Administrative Proceedings                                                               |  | 18  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                          |  | 18  
|Item 3.                      |  | Defaults Upon Senior Securities                                                                    |  | 18  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                |  | 18  
|Item 5.                      |  | Other Information                                                                                  |  | 18  
|Item 6.                      |  | Exhibit and Reports on Form 8-K                                                                    |  | 18  
|                             |  | SIGNATURES                                                                                         |  | 19  

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," "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,
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:                                                              |                                     |                                      |          
|                                                                      | Enterprise revenue                  |                                      | $        
|                                                                      | Internet service provider revenue   |                                      |          
|                                                                      |                                     |                                      |          
|                                                                      |                                     | Total revenue                        |          
|EXPENSES:                                                             |                                     |                                      |          
|                                                                      | Network expenses                    |                                      |          
|                                                                      | Selling, general and administrative |                                      |          
|                                                                      | Depreciation and amortization       |                                      |          
|                                                                      | Non-cash compensation expense       |                                      |          
|                                                                      | Restructuring costs                 |                                      |          
|                                                                      |                                     |                                      |          
|                                                                      |                                     | Total operating expenses             |          
|                                                                      |                                     |                                      |          
|OPERATING LOSS                                                        |                                     |                                      | (43,879  
|                                                                      |                                     |                                      |          
|OTHER INCOME (EXPENSE):                                               |                                     |                                      |          
|                                                                      | Interest income                     |                                      |          
|                                                                      | Interest expense, net               |                                      |          
|                                                                      |                                     |                                      |          
|                                                                      |                                     | Total other expense                  |          
|                                                                      |                                     |                                      |          
|NET LOSS                                                              |                                     | $                                    | (56,143  
|ACCRETION OF PAYMENT IN KIND DIVIDENDS ON CONVERTIBLE PREFERRED STOCK |                                     |                                      | (1,007   
|                                                                      |                                     |                                      |          
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                            |                                     | $                                    | (57,150  
|                                                                      |                                     |                                      |          
|BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK                  |                                     | $                                    | (11.61   
|                                                                      |                                     |                                      |          
|BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING   |                                     |                                      | 4,923,007
|                                                                      |                                     |                                      |          

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 share amounts)

|                                                    |                                                                                                                                                                   | March 31,
2002             |         | December 31,
2001 |        
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|
|ASSETS                                              |                                                                                                                                                                   |                            |         |                   |        
|Current assets:                                     |                                                                                                                                                                   |                            |         |                   |        
|                                                    | Cash and cash equivalents                                                                                                                                         |                            | $       | 69,947            |        
|                                                    | Accounts receivable, net of allowance for doubtful accounts of $12,500 and $9,000 at March 31, 2002 and December 31, 2001, respectively                           |                            |         | 103,541           |        
|                                                    | Other current assets                                                                                                                                              |                            |         | 18,368            |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|                                                    |                                                                                                                                                                   | Total current assets       |         |                   | 191,856
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Property, plant and equipment, at cost              |                                                                                                                                                                   |                            | 654,962 |                   |        
|                                                    | Lessaccumulated depreciation                                                                                                                                     |                            |         | (216,137          | )      
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Property, plant and equipment, net                  |                                                                                                                                                                   |                            | 438,825 |                   |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Other noncurrent assets                             |                                                                                                                                                                   |                            | 21,283  |                   |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|                                                    |                                                                                                                                                                   | $                          | 651,964 |                   | $      
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                |                                                                                                                                                                   |                            |         |                   |        
|Current liabilities:                                |                                                                                                                                                                   |                            |         |                   |        
|                                                    | Accounts payable                                                                                                                                                  |                            | $       | 27,114            |        
|                                                    | Accrued liabilities                                                                                                                                               |                            |         | 22,647            |        
|                                                    | Current maturities of long-term debt                                                                                                                              |                            |         | 10,897            |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|                                                    |                                                                                                                                                                   | Total current liabilities  |         |                   | 60,658 
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Long-term debt, net of current maturities           |                                                                                                                                                                   |                            | 362,817 |                   |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Other noncurrent liabilities                        |                                                                                                                                                                   |                            | 9,915   |                   |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Convertible notes                                   |                                                                                                                                                                   |                            | 103,490 |                   |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Class A redeemable convertible preferred stock, net |                                                                                                                                                                   |                            | 47,538  |                   |        
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|Stockholders' equity:                               |                                                                                                                                                                   |                            |         |                   |        
|                                                    | Common Stock, $.01 par value; 250,000,000 shares authorized; 4,935,829 and 4,899,204 issued and outstanding at March 31, 2002 and December 31, 2001, respectively |                            |         | 49                |        
|                                                    | Additional paid-in capital                                                                                                                                        |                            |         | 289,101           |        
|                                                    | Deferred compensation                                                                                                                                             |                            |         | (679              | )      
|                                                    | Accumulated deficit                                                                                                                                               |                            |         | (220,925          | )      
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|                                                    |                                                                                                                                                                   | Total stockholders' equity |         |                   | 67,546 
|                                                    |                                                                                                                                                                   |                            |         |                   |        
|                                                    |                                                                                                                                                                   | $                          | 651,964 |                   | $      
|                                                    |                                                                                                                                                                   |                            |         |                   |        

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 operating activities: |                                                  |                                              
|                                               |                                                                             | Depreciation and amortization                    |                                              
|                                               |                                                                             | Non-cash compensation expense                    |                                              
|                                               |                                                                             | Loss on disposal and abandonment of fixed assets |                                              
|                                               |                                                                             | Amortization of discount on senior notes         |                                              
|                                               |                                                                             | Other                                            |                                              
|                                               |                                                                             | Changes in operating assets and liabilities:     |                                              
|                                               |                                                                             |                                                  | Accounts receivable                          
|                                               |                                                                             |                                                  | Other current assets                         
|                                               |                                                                             |                                                  | Accounts payable and accrued liabilities     
|                                               |                                                                             |                                                  | Other non-current assets and liabilities, net
|                                               |                                                                             |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                             |                                                  |                                              
|                                               | Capital expenditures                                                        |                                                  |                                              
|                                               | Change in short-term investments                                            |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                             |                                                  |                                              
|                                               | Proceeds from issuance of long-term debt                                    |                                                  |                                              
|                                               | Payments on long-term debt                                                  |                                                  |                                              
|                                               | Net proceeds from the issuance of common stock                              |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|                                               |                                                                             |                                                  |                                              
|NET DECREASE IN CASH AND CASH EQUIVALENTS      |                                                                             |                                                  | (59,352                                      
|CASH AND CASH EQUIVALENTS, beginning of period |                                                                             |                                                  | 129,299                                      
|                                               |                                                                             |                                                  |                                              
|CASH AND CASH EQUIVALENTS, end of period.      |                                                                             | $                                                | 69,947                                       
|                                               |                                                                             |                                                  |                                              

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 share amounts)

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 interim condensed consolidated 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 interim condensed consolidated financial statements should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2001, filed on March 27, 2002. The consolidated balance sheet at December 31, 2001 included herein
was derived from our audited consolidated financial statements, but does not include all disclosures required under generally accepted accounting principles.

Certain
amounts in the prior period's consolidated financial statements 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 6).

2. Property, Plant and Equipment

Long-lived assets are stated at cost, 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, 2002

December 31, 2001(Unaudited)Building and improvements

$
8,470

$
8,453Communications network


418,432


406,032Computer equipment


60,385


57,812Leasehold improvements


107,797


105,470Furniture and fixtures


12,436


12,459Motor vehicles


532


532Assets under capital lease


22,210


22,210Construction in progress


24,700


31,986654,962


644,954Less: Accumulated depreciation


(216,137
)

(181,259
)Total

$
438,825

$
463,695


7

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3. Debt

Long-term debt consists of the following:

March 31, 2002

December 31, 2001(Unaudited)12.125% senior discount notes due 2008 ("1998 Notes"), net of unamortized discount of $13,271 and $16,657 at March 31, 2002 and December 31, 2001, respectively

$
121,359

$
117,97311.875% senior notes due 2010 ("2000 Notes"), net of unamortized discount of $657 and $678 at March 31, 2002 and December 31, 2001, respectively


113,854


113,833Secured equipment term loan


23,242


25,813$225,000 Senior Secured Credit Facility


88,000


81,000Obligations under capital lease


27,259


26,974373,714


365,593LessCurrent maturities


10,897


10,635Total

$
362,817

$
354,958


We
have borrowed a total of $88,000 under our $225,000 Senior Secured Credit Facility (the "Credit Facility") as of March 31, 2002. The interest on amounts drawn is variable based
on our leverage ratio, as defined in the Credit Facility. The principal payments will begin on November 30, 2003. Our borrowing capacity under the Credit Facility is limited to $130,000 of the
total $225,000 until after March 31, 2003. After our compliance with covenants through March 31, 2003 the remaining $95,000 will become available.

4. Restructuring

During the second half of 2001, we revised our business plan to reflect several initiatives which included; (1) the consolidation of our voice and data
business units; (2) a 22 market business plan; (3) a refinement of our managed Internet access strategy; and (4) the scale back of our DSL initiatives. In conjunction with this
revised business plan, we recorded a charge of $26,498 in 2001 for the reduction of our workforce, the abandonment of excess network facilities, the write-off of related network assets and
other related costs. The $26,498 was comprised of $14,425 in network fixed asset write-downs, $9,897 in abandonment of excess network facilities, $1,328 in employee severance costs and $848 in other
related charges. In the first quarter of 2002 we recorded an additional charge of $1,316 as a result of an adjustment to the previously 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 associated with the abandonment
of excess network facilities, employee severance, and other related charges totaled $2,744, $190, and $109, respectively. The remaining unpaid restructuring costs of $2,148 as of December 31,
2001 are included in accrued liabilities in our consolidated balance sheet. There are no unpaid restructuring costs remaining as of March 31, 2002.

5. Loss Per Share

We compute basic loss 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 restricted common stock. Diluted earnings per common share are adjusted for the assumed exercise of dilutive stock options and unvested shares of restricted common stock.
Since the results of the

8

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adjustments required for the diluted weighted average common shares outstanding are anti-dilutive for the three months ended March 31, 2002 and 2001, they have been excluded from
the net loss per share calculation. Our basic and diluted weighted average number of shares outstanding for the three months ended March 31, 2002 and 2001 is as follows:

March 31, 2002

March 31, 2001(Unaudited)Basic weighted average number of common shares outstanding

4,923,007

1,742,551Dilutive stock options and unvested restricted common shares

4,403,390

110,183Dilutive weighted average number of common shares outstanding

9,326,397

1,852,734


6. Equity Transactions

On February 25, 2002, our Board of Directors approved a 35:1 reverse split of our common stock. Par value of our common stock will remain at $.01 per
share. The split was effective March 11, 2002. The effect of the stock split has been recognized retroactively in the shareholders' equity accounts on our consolidated balance sheets and in all
share and per share data in the accompanying condensed consolidated financial statements and notes to condensed 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.

During
the first quarter of 2002 we issued 352,857 shares of restricted common stock to certain management employees. The restricted stock granted resulted in total non-cash
compensation of approximately $1,500 which will be ratably charged to income over the vesting period. The stock will vest 25% on January 1, 2003 and 12.5% every six months for the following
three years.

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 day of grant, and will vest 25% on January 1, 2003 and 12.5% every six months thereafter.

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 communications
services in each respective geographic
region. All of our geographic operating segments have been aggregated into one reportable segment as of March 31, 2002 and December 31, 2001 and for the three months ended
March 31, 2002 and 2001.

Our
chief operating decision makers view earnings before interest, income taxes, depreciation and amortization ("EBITDA") as the primary measure of profit and loss. The following
represents information about revenue, EBITDA (which excludes non-cash compensation and restructuring costs) and capital expenditures for the three months ended March 31, 2002 and
2001:

Three Months Ended March 31,2002

2001(Unaudited)Revenue

$
84,476

$
81,851EBITDA


(3,761
)

3,834Capital expenditures


10,680


21,721


9

---

The
following reconciles our total segment EBITDA to our consolidated net loss for the three months ended March 31, 2002 and 2001:

Three Months Ended March 31,2002

2001(Unaudited)Total EBITDA for reportable segment

$
15,962

$
27,169Corporate EBITDA


(19,723
)

(23,335
)Total Company EBITDA


(3,761
)

3,834Depreciation and amortization


(36,882
)

(22,650
)Interest expense, net


(12,997
)

(14,784
)Interest income


733


1,802Restructuring costs


(1,316
)

Non-cash compensation


(1,920
)

(1,724
)Net Loss

$
(56,143
)
$
(33,522
)


Total
assets for the reportable segment were $512,011 and $518,825 as of March 31, 2002 and December 31, 2001, respectively. The following reconciles our total segment
assets to our consolidated total assets as of March 31, 2002 and December 31, 2001:

March 31, 2002

December 31, 2001(Unaudited)Total assets for reportable segment

$
512,011

$
518,825Corporate assets:Cash and cash equivalents


69,947


129,299Other current assets


8,826


14,852Property, plant and equipment, net


39,897


43,908Other noncurrent assets


21,283


21,514Total consolidated assets

$
651,964

$
728,398


10

---



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 April 2002 we announced that we plan to extend service into
Connecticut which allows us to offer services in a total of 23 markets. We will leverage the investment we have already made in the New York metropolitan area to provide service in Connecticut, with
minimal incremental capital expenditures. As of March 31, 2002 we had 703,952 lines installed and in service.

Revenue.Enterprise revenue includes all services sold to corporations, government entities and value added resellers.
Internet Service Provider ("ISP") revenue includes all services sold to ISP customers. Our Enterprise and ISP service offerings include circuit switched lines, colocation, managed Internet access, and
other broadband services. Enterprise and ISP revenue is primarily comprised of monthly recurring charges, private line sales, 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 our customers for minutes of use, fees paid by carriers 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 revenue is typically derived from fees charged to install new customer lines and is
deferred and amortized over estimated customer lives.

Expenses.Our expenses are categorized as network expenses; selling, general and administrative; depreciation and
amortization; non-cash compensation expense; and restructuring costs. Network expenses are composed of leased transport charges, the cost of leasing space in ILEC central offices for
colocating our transmission equipment, the cost of leasing our nationwide Internet network, reciprocal compensation payments and the cost of completing long distance calls. 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. Generally, 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.

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 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, 2002 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 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 SG&A expense to be lower as a percentage of revenue than that
of our competitors because of the efficiencies derived from our focus on large customers in Tier-1 markets. These customers generally utilize a larger number of switched access lines
relative to the average business customer, resulting in more revenue per sale, higher sales productivity and a lower cost to serve on a per line basis.

11

---

We
record monthly non-cash compensation expense related to shares issued to some of our executive officers in November 1996; the September 30, 1998 amendments
to vesting agreements with some of our executive officers; stock options granted to employees, an outside consultant, and directors during 1999; shares issued to a director during the first quarter of
1999; and restricted common shares issued to management employees in March 2002. We will continue to record non-cash compensation expense in future periods relating to these events
through the first quarter of 2006.

Quarterly Results

The following table sets forth unaudited financial, operating and statistical data for each of the specified quarters of 2002 and 2001. 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.

|                                                   |  | 2002 |         | 2001 |  
|-------------------------------------------------- |  | ---- | ------- | ---- | -
|
|Enterprise Revenue ($ mil)                         |  | $    | 50,500  |      | $
|Internet Service Provider Revenue ($ mil)          |  | $    | 33,976  |      | $
|Lines Sold During the Quarter                      |  |      | 88,828  |      |  
|Cumulative Net Lines Installed to Date(1)          |  |      | 703,952 |      |  
|Estimated Enterprise Lines as % of Installed Lines |  |      | 65      | %    |  
|ILEC Switches Interconnected                       |  |      | 3,046   |      |  
|Quarterly Minutes of Use (Billions)                |  |      | 10.3    |      |  
|Markets in Operation                               |  |      | 22      |      |  
|Circuit Switches Operational                       |  |      | 28      |      |  
|Capital Expenditures ($ mil)                       |  | $    | 11      |      | $
|Employees                                          |  |      | 1,278   |      |  
|Sales Force(2)                                     |  |      | 346     |      |  

---

We
sold 88,828 lines during the first quarter of 2002, had gross installs of 73,365 lines, and installed 9,168 lines on a net basis. Both the sales and installation activity was heavily
weighted in favor of our Enterprise business. We disconnected 64,197 lines during the first quarter of 2002, which were concentrated in the ISP business.

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

Enterprise revenue increased 65% to $50.5 million during the first quarter of 2002 from revenue of $30.6 million in the first quarter of 2001.
Enterprise revenue grew approximately 78% in the first quarter of 2002 from the first quarter of 2001 after adjusting for non-recurring revenue of $2.2 million in the first quarter
of 2001. This increase is primarily the result of an increase of 233,000 net enterprise lines in service on a year over year basis, representing a 105% increase. This increase in revenue from lines in
service was partially offset by lower reciprocal compensation and access rates. ISP revenue decreased 34% to $34.0 million during the first quarter of 2002 compared to $51.3 million in
revenue for the first quarter of 2001. After adjusting for non-recurring revenue in the first quarter of 2001 of $3.8 million, ISP revenue decreased by approximately 28%. This
decrease in ISP revenue is a result of

12

---

the negative ISP economic environment, which resulted in a reduction of ISP lines in service of 30,077 on a year over year basis, and the impact of reduced reciprocal compensation and access rates.
The non-recurring revenue of $6.0 million in the first quarter of 2001 relates to a reciprocal compensation rate settlement.

Network
expenses increased $7.4 million to $40.7 million for the first quarter of 2002 compared to $33.3 million in the first quarter of 2001. This 22% increase is
primarily the result of an increase of 202,923 net lines in service on a year over year basis. Our SG&A expenses increased 6% to $47.5 million from $44.7 million for the three months
ended March 31, 2002 and 2001, respectively. This increase is primarily the result of an increase in our employee base on a year over year basis. Depreciation and amortization increased from
$22.7 million to $36.9 million in the comparative three-month periods. This increase of $14.2 million is a result of an increase in our fixed asset base in our existing markets,
which included six additional switches, and the expansion into our 22nd market during the third quarter of 2001.

Interest
income decreased from $1.8 million in the first quarter of 2001 to $0.7 million in the comparable period of 2002. This $1.1 million decrease is primarily
due to lower cash and short-term investments in the first quarter of 2002 as compared with the first quarter of 2001. Our net interest expense decreased to $13.0 million in the
first quarter of 2002 from $14.8 million in the first quarter of 2001. This $1.8 million decrease is primarily due to the retirement of $295.8 million in principal amount at
maturity of our 1998 and 2000 Notes as part of our recapitalization plan we completed on October 26, 2001. This reduction was offset by an increase in interest expense related to
$48.0 million of additional borrowing under our Credit Facility and the issuance of $100.0 million of senior convertible loans as part of our recapitalization plan.

Liquidity and Capital Resources

On October 26, 2001, we completed our comprehensive recapitalization plan designed to provide us with sufficient financing to implement our revised
business plan and improve our existing capital structure. The components of our recapitalization plan included: (1) the infusion of $150.0 million of investment capital, consisting of
the issuance of $50.0 million in class A redeemable voting convertible preferred stock and the incurrence of $100.0 million in senior convertible loans, which will mature on
December 31, 2007. Both securities are convertible into our common shares and will accrue 8% payment-in-kind, ("PIK") interest or dividends. The PIK interest and
dividends are for five years with acceleration provisions in the event of certain developments such as change in control or prepayments. After five years interest and dividends may be payable in cash,
at our option; (2) exchange and purchase arrangements that resulted in the retirement of approximately $295.8 million in principal amount at maturity of our 1998 and 2000 Notes;
(3) the issuance through a pro rata dividend to our stockholders of record as of October 25, 2001 of warrants to purchase 278,067 shares of common stock, (4) an amendment to our
existing senior credit facility to provide a total of $225.0 million of borrowing capacity; and (5) a declaration of a 35:1 reverse stock split by our Board of Directors on
February 25, 2002, effective March 11, 2002. We recorded $2.0 million and $1.0 million of PIK interest and dividend accretion on our convertible loans and convertible
preferred stock during the first quarter of 2002, respectively.

Our
borrowing capacity under the amended Credit Facility is limited to $130.0 million of the total $225.0 million until after March 31, 2003. After our compliance
with covenants through March 31, 2003 the remaining $95.0 million of borrowings will become available. The Credit Facility provides for certain restrictive financial and
non-financial covenants. Among other things, these covenants require the maintenance of minimum revenue, EBITDA, and access lines in service levels. EBITDA for covenant purposes includes
cash restructuring charges which totaled $0.9 million in the first quarter of 2002. Minimum revenue levels are $80.0 million, $82.5 million, $85.0 million and
$90.0 million during the first through fourth quarters of 2002, respectively. Minimum EBITDA levels are $(5.0) million,

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$(3.0) million, $(1.0) million and $4.0 million during the first through fourth quarters of 2002, respectively. Minimum access lines in service levels are 620,000, 670,000, 720,000, and
770,000 during the first through fourth quarters of 2002, respectively. Management believes that our revised business plan will allow us to meet these covenants during 2002. The interest on amounts
drawn is variable based on our leverage ratio, as defined in our Credit Facility. The initial commitment fee on the unused portion of the Credit Facility is 1.5% and will step down based on usage. We
have drawn down $88.0 million and $81.0 million against the Credit Facility as of March 31, 2002 and December 31, 2001, respectively.

Our
revised business plan requires significant operating and capital expenditures, a substantial portion of which will be incurred before significant related revenue is realized. These
expenditures, together with associated operating expenses, may result in our having substantial negative operating cash flow and substantial net operating losses for the foreseeable future. Our
revised plan indicates that our revenue for the year 2002 will be a minimum of $350.0 million and EBITDA will be a minimum of $5.0 million for 2002. Although we believe that our revised
plan, cost estimates and the scope and timing of our planned network build-out are reasonable, we cannot assure 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.

During
the second half of 2001, we commenced a restructuring of our operations in conjunction with our revised business plan and recorded a restructuring charge of $26.5 million
for a reduction in our workforce, the abandonment of excess network facilities, the write-off of related network assets and other related costs. The $26.5 million is comprised of
$14.4 million in network fixed asset write-downs, $9.9 million in abandonment of excess network facilities, $1.3 million in employee severance costs and $0.9 million in
other related charges. In the first quarter of 2002 we recorded an additional 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. 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. The remaining unpaid restructuring costs of $2.1 million as of December 31, 2001 are included in accrued liabilities in our consolidated balance
sheet. There are no unpaid restructuring costs remaining as of March 31, 2002.

Our
capital expenditures were $10.7 million for the three months ended March 31, 2002. This primarily reflects capital spending to support our Enterprise and ISP line
growth, our managed Internet access services and the expansion of our nationwide network in existing markets. We estimate that our capital expenditures will be approximately $40 million for
2002. Our expectations of future capital requirements and cash flows from operations are based on current estimates. Our actual capital requirements and cash flows could differ significantly from
those estimates.

Net
cash used in operating activities decreased by $37.8 million to $52.7 million during the three months ended March 31, 2002, compared to the same period in 2001.
This decrease is primarily the result of a $75.6 million decrease in our outstanding accounts payable during the first quarter of 2001, as compared with a decrease of $31.6 million in
the first quarter 2002. Accounts payable were unusually high at December 31, 2000 due to vendor disputes that were resolved in the first quarter of 2001. Net cash used in investing activities
was $10.7 million for the three months ended March 31, 2002 compared to $20.9 million for the three months ended March 31, 2001. This decrease of $10.2 million is
due to the completion of our 22 market nationwide network during 2001 and reflects reduced capital expenditures. Net cash provided by financing activities decreased by $33.7 million for the
three months ended March 31, 2002 to $4.1 million. This decrease is primarily the result of decreased borrowings from our Credit Facility during the first quarter of 2002 compared to the
same period in 2001.

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Based
on current estimates including the benefit of our recapitalization, we expect that our existing cash and investment balances, future cash flows (expected to be provided from
ongoing operations), and available borrowings under our Credit Facility will be sufficient to fully fund our operations and capital expenditure requirements as contemplated in our revised business
plan. Our expectations of future capital requirements and cash flows from operations are based on current estimates. Our actual capital requirements and cash flows could differ significantly from
these estimates. If plans or
assumptions change or prove to be inaccurate, we may be required to seek additional sources of capital, seek additional capital sooner than currently anticipated, or modify our expansion plans.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. 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, liabilities, revenue and expenses and
disclosure of contingent assets and liabilities.

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, additional features on those lines, Internet access charges 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 over our estimated customer lives. We do not anticipate any significant changes to the expected life of our customer base, but a material increase in the churn rates associated with our
customer base could materially affect our future consolidated operating results. Revenue from long-term leases of broadband 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.

Trade Receivables.In evaluating the collectibility of our trade receivables, 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. 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.We periodically assess the fair value and recoverability of our long-lived assets
and whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows. In doing so, we make assumptions and estimates regarding future
cash flows and other factors, such as quoted market prices and third party offers, to make our determination. The fair value of our long-lived assets is dependent upon the forecasted
performance of our business, changes in the communications industry and the overall economic environment. When we determine that the carrying value of our long-lived assets may not be
recoverable, we write down the asset to its fair market value based on the present value of forecasted cash flows. If these forecasts are not met, we may have to record additional impairment charges
that could materially affect the carrying value of these assets and our future consolidated operating results.

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. Although we believe that it is unlikely that any significant changes to the useful lives of our tangible or
intangible assets will occur in the near term, rapid changes in technology, or changes in

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market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and our future consolidated operating results.

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 effective for financial statements
issued for fiscal years beginning after June 15, 2002. While we continue to analyze the impact, we believe the adoption of SFAS No. 143 will not have a material impact on our
consolidated financial statements.

Accounting for the Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and establishes a single accounting model for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and certain provisions of APB Opinion
No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." While we continue to analyze the impact, we do not expect that the new standard will have a material impact on our consolidated financial statements.

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 3 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, 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 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 long-term debt bears fixed interest rates, and accordingly, the fair market value of the 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 fair market value of our Credit Facility debt
approximates the carrying value as of March 31, 2002 due to the variable interest rate feature of the debt instrument.

On
October 26, 2001, we completed our comprehensive recapitalization which included exchange and purchase arrangements that resulted in the retirement of approximately
$295.8 million in principal amount at maturity of our 1998 and 2000 Notes.

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The
table below provides additional information about our 1998 Notes, 2000 Notes and Credit Facility. For additional information about our long-term debt obligations, see our
Consolidated Financial Statements and accompanying notes related thereto appearing elsewhere in this report.

As of March 31, 2002Expected Maturity

Debt

Weighted Average
Interest Rate2002

$



%2003


1,875

5.492004


9,375

5.492005


16,875

5.492006


24,375

5.49Thereafter


284,641

10.87Fair Market Value

$
144,296

7.91
%


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PART IIOTHER INFORMATION

Item 1. Legal and Administrative Proceedings

With the exception of the matter discussed in our 2001 Annual Report on Form 10-K, filed March 27, 2002, 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

In March 2002, we effected a 35:1 reverse stock split of our common stock.

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. Exhibit and Reports on Form 8K



|Exhibit
Number |  | Exhibit Description                                                                                                                                               |  | Location      
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|10.1           |  | Form of Stock Option Agreement under the Focal 1998 Equity and Performance Plan (used in connection with grants to executive officers and certain employees.)     |  | Filed Herewith
|10.2           |  | Form of Restricted Stock Agreement under the Focal 1998 Equity and Performance Plan (used in connection with grants to executive officers and certain employees.) |  | Filed Herewith



During
the first quarter and prior to May 10, 2002, we filed one Current Report on Form 8-K, which was filed April 12, 2002. We announced a Change in Certifying
Accountants.

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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. |  | Chairman, Chief Executive Officer and Director (Principal Executive Officer)                 
|/s/ M. Jay SinderM. Jay Sinder                 |  | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

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