<PAGE>
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1998
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      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, 1998
 
                            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 800
                               CHICAGO, IL 60601
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                (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
September 30, 1998:
 
                  COMMON STOCK ($.01 PAR VALUE) ..... 97,307
                                    SHARES
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                             PAGE
                                                                             ----
 <C>     <S>                                                                 <C>
 PART I--FINANCIAL INFORMATION
 Item 1. Financial Statements (Unaudited)
         Consolidated Statements of Operations -- Three months ended
          September 30, 1998 and 1997, and the Nine months ended September
          30, 1998 and 1997...............................................     3
         Consolidated Balance Sheets-- September 30, 1998 and December 31,
          1997............................................................     4
         Consolidated Statements of Cash Flows -- Nine months ended
          September 30, 1998 and 1997.....................................     5
         Condensed Notes to Unaudited Interim Consolidated Financial
          Statements......................................................     6
 Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations...........................................    11
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......    15
 PART II--OTHER INFORMATION
 Item 1. Legal Proceedings................................................    16
 Item 6. Exhibits and Reports on Form 8-K.................................    16
 SIGNATURES................................................................   17
</TABLE>
 
                                       2
<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
                            -----------------------  ------------------------
                               1998         1997        1998         1997
                            -----------  ----------  -----------  -----------
<S>                         <C>          <C>         <C>          <C>
REVENUES................... $12,755,293  $1,226,077  $25,935,784  $ 1,312,984
EXPENSES:
  Customer service and
   network operations......   4,432,861     760,847    9,046,809    1,029,566
  Selling, general and
   administrative..........   3,973,719     747,102    7,245,504    1,725,942
  Depreciation and
   amortization............   1,907,601     179,512    3,913,870      272,070
  Non-cash compensation
   expense.................   2,022,144     325,000    2,672,144      975,000
                            -----------  ----------  -----------  -----------
    Total operating
     expenses..............  12,336,325   2,012,461   22,878,327    4,002,578
                            -----------  ----------  -----------  -----------
    Operating Income
     (Loss)................     418,968    (786,384)   3,057,457   (2,689,594)
                            -----------  ----------  -----------  -----------
OTHER INCOME (EXPENSE):
  Interest income..........   1,801,116      43,143    4,881,831      142,082
  Interest expense.........  (4,676,705)    (22,314) (11,320,499)     (26,011)
                            -----------  ----------  -----------  -----------
  Total Other Income
   (Expense)...............  (2,875,589)     20,829   (6,438,668)     116,071
                            -----------  ----------  -----------  -----------
  Loss before income
   taxes...................  (2,456,621)   (765,555)  (3,381,211)  (2,573,523)
  Provision for income
   tax.....................  (2,197,096)        --    (2,197,096)         --
                            -----------  ----------  -----------  -----------
NET LOSS................... $(4,653,717) $ (765,555) $(5,578,307) $(2,573,523)
                            -----------  ----------  -----------  -----------
ACCRETION TO REDEMPTION
 VALUE OF CLASS A COMMON
 STOCK.....................         --      (25,890)         --       (77,670)
                            -----------  ----------  -----------  -----------
NET LOSS APPLICABLE TO
 COMMON STOCKHOLDERS....... $(4,653,717) $ (791,445) $(5,578,307) $(2,651,193)
                            ===========  ==========  ===========  ===========
BASIC AND DILUTED NET LOSS
 PER SHARE OF COMMON
 STOCK..................... $    (52.73) $    (9.39) $    (63.18) $    (31.60)
                            ===========  ==========  ===========  ===========
</TABLE>
 
                                       3
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                    SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                                           SEPTEMBER 30, 1998 DECEMBER 31, 1997
                                           ------------------ -----------------
<S>                                        <C>                <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents...............   $ 123,699,853       $ 2,256,552
  Accounts receivable, trade (net of
   allowance for doubtful accounts of
   $469,000 and $1,687,706 at December 31,
   1997 and
   September 30, 1998, respectively)......      12,273,735         2,355,814
  Related-party receivables...............             --             34,883
  Other current assets....................         786,736            90,559
                                             -------------       -----------
    Total current assets..................     136,760,324         4,737,808
                                             -------------       -----------
FIXED ASSETS, at cost:....................      54,842,034        11,793,741
  Less--Accumulated depreciation and
   Amortization...........................       3,686,097           616,967
                                             -------------       -----------
    Fixed assets, net.....................      51,155,937        11,176,774
  Other Non-Current Assets (net)..........       5,289,845               --
                                             -------------       -----------
                                             $ 193,206,106       $15,914,582
                                             =============       ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                           SEPTEMBER 30, 1998 DECEMBER 31, 1997
                                           ------------------ -----------------
<S>                                        <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
 (DEFICIT)
CURRENT LIABILITIES:
  Accounts payable........................   $   8,383,999       $ 1,502,479
  Accrued liabilities.....................       1,885,548           367,890
  Current maturities of long-term debt....             --            943,621
                                             -------------       -----------
    Total current liabilities.............      10,269,547         2,813,990
LONG-TERM DEBT, net of current
 maturities...............................     161,294,032         2,593,265
                                             -------------       -----------
OTHER NONCURRENT LIABILITIES..............         420,845           179,481
                                             -------------       -----------
REDEEMABLE COMMON STOCK:
  Class A, $.01 par value, 85,567 shares
   authorized and 80,307 issued and
   outstanding at December 31, 1997.......             --         12,403,218
                                             -------------       -----------
STOCKHOLDERS' EQUITY (DEFICIT):
  Common stock, Class A, $.01 par value,
   85,567 shares authorized and 75,307
   issued and outstanding at September 30,
   1998...................................             753               --
  Common stock, Class B, $.01 par value;
   35,000 shares authorized, 20,000 and
   22,000 shares issued at December 31,
   1997 and September 30, 1998............             220               200
  Common stock, Class C, $.01 par value;
   15,000 shares authorized, 14,711 shares
   issued at December 31, 1997 and none
   issued at September 30, 1998...........             --                147
  Additional paid-in capital..............      35,313,345         5,096,435
  Deferred compensation...................      (5,133,842)       (3,791,667)
  Accumulated deficit.....................      (8,958,794)       (3,380,487)
                                             -------------       -----------
    Total stockholders' equity (deficit)..      21,221,682        (2,075,372)
                                             -------------       -----------
                                             $ 193,206,106       $15,914,582
                                             =============       ===========
</TABLE>
 
                                       4
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                     FOR NINE MONTHS ENDED
                                                          SEPTEMBER 30
                                                    -------------------------
                                                        1998         1997
                                                    ------------  -----------
<S>                                                 <C>           <C>
Cash Flows From Operating Activities:
Net loss........................................... $ (5,578,307) $(2,573,523)
Adjustments to reconcile net loss to net cash pro-
 vided by (used in) operating activities-
  Depreciation and amortization....................    3,913,870      272,070
  Deferred lease costs.............................      241,363    89,741.00
  Deferred compensation............................    2,672,144      975,000
  Amortization of discount on Senior Discount
   Notes...........................................   11,266,426          --
  Provision for losses on accounts receivable......    1,219,144      144,004
  Changes in operating assets and liabilities-
    Accounts receivable............................  (11,137,064)  (1,029,178)
    Related-party receivables......................       34,883       16,883
    Other assets...................................     (700,665)    (164,473)
    Accounts payable and accrued liabilities.......    8,399,178      623,293
                                                    ------------  -----------
      Net cash provided by(used in) operating
       activities..................................   10,330,972   (1,646,183)
                                                    ------------  -----------
Cash Flows From Investing Activities:
  Capital expenditures.............................  (43,048,293)  (8,037,336)
                                                    ------------  -----------
      Net cash used in investing activities........  (43,048,293)  (8,037,336)
                                                    ------------  -----------
Cash Flow From Financing Activities:
  Proceeds from issuance of long-term debt(net)....  143,897,508    3,065,948
  Payments on bank credit facility and capital
   leases..........................................   (3,536,886)     (12,062)
  Proceeds from class A common capital
   contributions...................................   13,800,000    4,275,000
                                                    ------------  -----------
      Net cash provided by financing activities....  154,160,622    7,328,886
                                                    ------------  -----------
Net Increase(Decrease) In Cash And Cash
 Equivalents.......................................  121,443,301   (2,354,633)
Cash And Cash Equivalents, beginning of period.....    2,256,552    3,790,121
                                                    ------------  -----------
Cash And Cash Equivalents, end of period........... $123,699,853  $ 1,435,488
                                                    ============  ===========
</TABLE>
 
                                       5
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
    CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
             THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
 
1. BASIS OF PRESENTATION
 
  The accompanying unaudited interim consolidated financial statements reflect
all adjustments, consisting of normal recurring accruals, which management
believes are necessary to present fairly the financial position, results of
operations, and cash flows for Focal Communications Corporation and
Subsidiaries (the "Company") 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 the audited financial statements and the notes thereto
included in Amendment No. 4 to the Registration Statement on Form S-4 (File
No. 333-49397) filed by the Company with the Securities and Exchange
Commission on August 13, 1998, and Form 8-K filed on November 13, 1998
revising the calculation of basic and diluted net loss per share of common
stock contained in the financial statements set forth in such Form S-4. The
consolidated balance sheet at December 31, 1997 included herein was derived
from audited consolidated financial statements, but does not include all
disclosures required under generally accepted accounting principles.
 
2. CASH AND CASH EQUIVALENTS
 
  Cash and Cash Equivalents (stated at cost which approximates market) consist
principally of highly liquid investments, with a maturity date of three months
and less when purchased.
 
3. PROPERTY AND EQUIPMENT
 
  Property and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                         SEPTEMBER   DECEMBER
                                                            30,         31,
                                                           1998        1997
                                                        ----------- -----------
      <S>                                               <C>         <C>
      Communications Network........................... $28,307,358 $ 7,906,336
      Construction in progress.........................  15,682,055   1,938,236
      Computer Equipment...............................   2,359,396     941,237
      Leasehold Improvements...........................   4,941,697     652,173
      Buildings........................................   2,350,000
      Furniture and fixtures...........................   1,182,102     355,759
      Motor vehicles...................................      19,427         --
                                                        ----------- -----------
                                                        $54,842,034 $11,793,741
                                                        =========== ===========
</TABLE>
 
4. DEBT
 
  Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,  DECEMBER
                                                          1998       31, 1997
                                                      ------------- -----------
      <S>                                             <C>           <C>
      Credit facility with bank, maximum borrowing
       level at $6,000,000........................... $         --  $ 3,480,972
      12.125% senior discount notes due 2008, net of
       unamortized Discount of $108,705,968..........   161,294,032         --
      Capital leases on equipment with interest at
       14.66%, $2,327 due Monthly through April,
       2000..........................................           --       55,914
                                                      ------------- -----------
                                                        161,294,032   3,536,886
      Less--current maturities.......................           --      943,621
                                                      ------------- -----------
                                                      $ 161,294,032 $ 2,593,265
                                                      ============= ===========
</TABLE>
 
 
                                       6
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
   CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
                                  (CONTINUED)
  In February 1998 the Company completed its offering of $270 million stated
principal amount at maturity of its 12.125% senior discount notes due 2008
(the "Notes"), which resulted in gross proceeds of $150,027,606. The Notes
bear interest at an effective rate of 12.125 % per annum (computed on a
semiannual bond equivalent basis). In the period prior to February 15, 2003,
interest will accrue (calculated under the effective rate method) but will not
be payable in cash. From February 15, 2003, interest on the stated principal
amount at maturity of the Notes will be payable in cash semi-annually on
August 15 and February 15 of each year, beginning on August 15, 2003.
 
  The Notes are senior unsecured obligations of the Company ranking pari passu
in right of payment with all other existing and future senior indebtedness of
the Company, if any, and will rank senior in right of payment to all existing
and future subordinated indebtedness of the Company, if any. Holders of
secured indebtedness of the Company, however, will have claims with respect to
the assets securing such other indebtedness that are prior to the claims of
the holders of the Notes. The Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities of the Company's
subsidiaries (including trade payables).
 
  The Notes are redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after February 15, 2003, at 106.063% of
their stated principal amount at maturity, plus accrued and unpaid Current
Interest, declining ratably to 100% of their stated principal amount at
maturity, plus accrued and unpaid Current Interest, on or after February 15,
2006. In addition, at any time and from time to time, prior to February 15,
2001, the Company may redeem in the aggregate up to 35% of the original
aggregate stated principal amount at maturity of the Notes with the proceeds
from one or more public equity offerings following which there is a public
market, at a redemption price (expressed as a percentage of accreted value on
the redemption date) of 112.125%, plus current interest, if any; provided that
at least 65% of the original aggregate stated principal amount at maturity of
the Notes remains outstanding after each such redemption.
 
  The indenture for the Notes contains certain covenants which, among other
things, restrict the ability of the Company and certain of its subsidiaries to
incur additional indebtedness (and, in the case of certain subsidiaries, issue
preferred stock), pay dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make other restricted payments,
enter into sale and leaseback transactions, incur liens, cause encumbrances or
restrictions to exist on the ability of certain subsidiaries to pay dividends
or make distributions in respect of their capital stock, issue and sell
capital stock of certain subsidiaries, enter into transactions with
affiliates, sell assets, or amalgamate, consolidate, merge or sell or
otherwise dispose of all or substantially all of their property and assets.
These covenants are subject to important exceptions and qualifications.
 
  The Company completed an Exchange Offer for the Notes on September 16, 1998,
which allowed holders to exchange existing Notes for 12.125% Senior Discount
Notes due 2008, Series B, which have been registered with the Securities and
Exchange Commission. The terms of the Series B Notes are identical in all
material respects with the terms of the existing senior discount notes.
 
5. EARNINGS PER SHARE
 
  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share". SFAS
No. 128 changed the methodology of calculating earnings per share and renamed
the two calculations to basic earnings per share and diluted earnings per
share. The Company adopted SFAS No. 128 in January 1998 and has retroactively
restated all periods presented. Basic earnings per common share are based on
the average quarterly weighted average number of shares of common stock
outstanding. This calculation includes all Class A shares and the vested
portion of the Class B shares. Diluted earnings per common share are adjusted
for the assumed exercise of dilutive stock options. Since the adjustments
required for the calculation of diluted weighted average common shares
outstanding are anti-dilutive,
 
                                       7
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
   CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
                                  (CONTINUED)
this calculation has been excluded from the loss per share calculation for the
three month and nine month periods ended September 30, 1998, and September 30,
1997. Under the requirements of SFAS No. 128 the Company's basic and diluted
weighted average number of shares outstanding at September 30, 1998 and 1997
is as follows:
 
<TABLE>
<CAPTION>
                                                   SEPTEMBER 30, SEPTEMBER 30,
                                                       1998          1997
                                                   ------------- -------------
      <S>                                          <C>           <C>
      Basic Weighted Average Number of Common
       Shares Outstanding.........................     88,257        84,307
      Dilutive Stock Options and unvested Class B
       common stock...............................     15,607        16,068
                                                      -------       -------
      Dilutive Weighted Average Number of Common
       Shares Outstanding.........................    103,864       100,375
                                                      =======       =======
</TABLE>
 
  Diluted weighted average common shares outstanding are anti-dilutive and
have been excluded from the loss per share calculation for the three month
period ended September 30, 1998.
 
6. COMMITMENTS AND CONTINGENCIES
 
  Under the terms of various short and long-term contracts, the Company is
obligated to pay office rents and rent for leasing fiber optic transmission
facilities. The Company is obligated to pay office rents through 2012. 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. The Company expects to enter into other contracts for
additional office space, other facilities, equipment and maintenance services
in the future.
 
  A summary of such fixed commitments at September 30, 1998 is as follows:
 
<TABLE>
<CAPTION>
             YEAR                            AMOUNT
             ----                          -----------
             <S>                           <C>
             1998......................... $   636,883
             1999.........................   2,829,287
             2000.........................   2,879,706
             2001.........................   2,818,704
             2002.........................   2,918,177
             Thereafter...................  20,903,924
                                           -----------
                                           $32,986,681
                                           ===========
</TABLE>
 
  The Company has recorded accounts receivable totaling $10.2 million as of
September 30, 1998 from another carrier who is currently disputing its
obligations to the Company. This dispute was ruled on in favor of the Company
by the Illinois Commerce Commission ("ICC") in March of 1998. The other
carrier appealed the ICC ruling to the United States District Court for the
Northern District of Illinois. The District Court rendered a decision on July
21, 1998 affirming the ICC order. Ameritech appealed the decision to the 7th
Circuit Court of Appeals, and was denied a stay pending appeal. As of
September 30, 1998 the District Court stay had expired and the other carrier
was in violation of the order. Subsequently, Ameritech Illinois complied with
the order and commenced payment for past reciprocal compensation charges.
During October 1998, the Company received substantially all of the disputed
amount from the other carrier.
 
  In July 1998 Ameritech filed a complaint with the ICC alleging that Focal's
Virtual Office service violates the interconnection agreement between
Ameritech and the Company and certain state statutes. Ameritech also alleged
that through its Virtual Office service, Focal is contributing to the
exhaustion of phone numbers in the 847 area code. Ameritech complained that
calls on Focal's Virtual Office network are circumventing local toll charges,
and should not be subject to reciprocal compensation. Ameritech also alleged
that the Company is offering service in violation of the state's pay-per-call
rules. The Company believes that these claims lack merit. Nevertheless, an
adverse outcome in this dispute could have a material adverse effect on the
Company.
 
                                       8
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
   CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
                                  (CONTINUED)
 
  In the ordinary course of business, the Company is involved in various other
regulatory matters, proceedings and claims, the outcome of which management
does not believe will have a materially adverse effect on the Company's
financial position, results of operations or cash flows.
 
7. STOCK OPTIONS
 
  The Company established the Focal Communications Corporation 1997 Non-
Qualified Stock Option Plan (the "1997 Plan") effective February 27, 1997. The
1997 Plan is administered by the compensation committee of the Company's Board
of Directors (the "Board"). The Board has sole and complete authority to
select participants and grant options for Company's Class A common shares
which shall not exceed 5,260 shares, as defined in the plan. On August 21,
1998 the 1997 Plan was amended and the Board increased the number of shares
available for issuance under the 1997 Plan to up to 17,060.
 
  The Company adopted the Focal Communications Corporation 1998 Equity and
Performance Incentive Plan (the "1998 Plan") on August 21, 1998. The Board has
sole and complete authority to select participants and grant options, and
other equity based instruments for Company's Class A common shares. The total
number of shares authorized for issuance pursuant to the 1998 Plan shall not
exceed 11,500 shares, and is dependent upon, among other things, the number of
shares issued, or reserved for issuance, under the 1997 Plan prior to the
consummation of an initial public offering of the Company.
 
  On August 21, 1998, the Company also adopted the 1998 Equity Plan for Non-
Employee Directors of Focal Communications Corporation (the "1998 Non-Employee
Plan"). The Board has sole and complete authority to select participants and
grant options for the Company's Class A common shares which shall not exceed
300 shares, as defined in the 1998 Non-Employee Plan.
 
  The total number of shares available under the amended 1997 Plan, the 1998
Plan, and the 1998 Non-Employee Plan shall not exceed 17,060 shares.
 
  The Company has 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." Accordingly, no
compensation expense has been recorded for its stock option awards, but
rather, the Company has determined the pro forma net loss amount for the third
quarter of 1998 as if compensation expense had been recorded for options
granted during 1997 and the third quarter of 1998 under the fair value method
described in SFAS No. 123, "Accounting for Stock-Based Compensation".
 
  The Company utilizes the Black-Scholes option pricing model to estimate the
fair value of options at the date of grant. Had the Company adopted SFAS No.
123, pro forma net loss applicable to common stockholders and pro forma basic
and diluted net loss per share of common stock would have been approximately
$(4,835,669) and $(54.79), respectively, for the quarter ended September 30,
1998, and $(5,832,931) and $(66.07), respectively, for the nine months ended
September 30, 1998.
 
  The following summarizes option activity:
 
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                SHARES OF             AVERAGE
                                                 CLASS A   EXERCISE  EXERCISE
                                                 COMMON     PRICES     PRICE
                                                --------- ---------- ---------
      <S>                                       <C>       <C>        <C>
      Outstanding at December 31, 1997.........   1,222   $290-$ 320 $  296.61
      Granted during the nine months ended
       September 30, 1998......................   5,034   $335-1,500 $1,194.19
                                                  -----   ---------- ---------
      Outstanding at September 30, 1998........   6,256   $290-1,500 $1,018.86
                                                  =====   ========== =========
</TABLE>
 
                                       9
<PAGE>
 
               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
   CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
                                  (CONTINUED)
 
8. REDEEMABLE COMMON STOCK
 
  On January 23, 1998, the Company amended the Stock Purchase Agreement. As a
result of the amendment, the redeemable Class A common stock was reclassified
into permanent equity. The amended Stock Purchase Agreement also allows
Institutional Investors (as defined therein) at any time and from time to time
on or after November 27, 2003, but not after the consummation of a public
offering of the Company's equity securities, to require the Company to
voluntarily liquidate the assets of the Company. Upon receipt of notice of the
required liquidation, the Company may elect to purchase all but not less than
all of the Institutional Investors' Class A common shares.
 
9. CLASS C COMMON STOCK
 
  Effective as of September 30, 1998, the Company effected the cancellation of
12,711 shares of the Company's Class C common stock then outstanding,
cancellation of 5,000 shares of the Company's Class A common stock held by
certain institutional shareholders and the conversion of 2,000 shares of the
Company's Class C common stock into Class B common stock, subject to certain
restrictions, to the Company's founding shareholders in satisfaction of the
obligations of the Company and such shareholders set forth in certain vesting
agreements entered into at the time of the Company's November 1996
recapitalization. In connection with such transactions, compensation expense
totaling approximately $4 million will be charged to income over the vesting
period of the restricted Class B common shares issued. Additional compensation
expense of $1.7 million was recorded in September 1998 relating to this
matter.
 
10. INCOME TAXES
 
  For the nine months ended September 30, 1998 the Company recorded an income
tax provision of $2.2 million. Even though the Company is reporting a loss
before income taxes, the Company has positive taxable income and is paying
income taxes. This is because of the non-deductibility, for tax purposes, of
the interest accrued on the Company's 12.125% discount notes. This interest
expense is subject to the high yield discount obligation ("HYDO") rules which
limits the amount of original issue discount ("OID") which can be deducted in
the current taxable period. This interest will become deductible for tax
purposes in the period in which the Notes are redeemed. The deferred tax
consequences related to the interest accrued and other temporary differences
in reporting items for financial statement and income tax purposes are
recognized in the financial statements. Realization of future tax benefits
related to the deferred tax assets is dependent on many factors, including the
Company's ability to generate taxable income. Management has considered these
factors and has concluded that a full valuation allowance for financial
reporting purposes is required for the deferred tax assets.
 
  The net result is that the Company's income tax provision for the three and
nine months ended September 30, 1998 approximates the amount of income taxes
payable based on its operating results through that date.
 
                                      10
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
OVERVIEW
 
  General: The Company began operations during 1996 and has operated in
Chicago since May 1997, New York since January 1998, and Philadelphia and San
Francisco since September 1998. The Company currently serves a total of 13
MSAs (metropolitan statistical areas). The Company plans to offer services in
29 additional MSAs by the end of 1999, reaching a total of 42 MSAs in ten
metropolitan markets. As of September 30, 1998, the Company had 41,316 access
lines sold, of which 33,188 were installed and in service. This compares to
13,411 lines sold and 7,394 lines installed as of December 31,1997.
 
  The Company's plan to expand into 29 additional MSAs requires significant
expenditures to fund operating losses and the purchase of capital equipment.
The Company believes it can lower its initial capital requirements and
generate a substantially greater return on invested capital by concentrating
its investments in switching and information, billing, and support systems,
while leasing transport facilities. This network investment strategy differs
from many other competitive local exchange carries (CLECs) who build and
maintain their own transport facilities.
 
  The Company targets its services to telecommunications-intensive customers
and, as a result, expects to generate revenue per line in excess of the
industry average. In addition, the Company believes that its cost structure is
below the industry average. Consequently, the Company expects to more rapidly
generate positive operating cash flow from its new networks as compared to
other CLECs. Nevertheless, the simultaneous development of a number of new
networks may result in negative consolidated operating cash flow.
 
  Revenues: The Company's revenue is comprised of monthly recurring charges,
usage charges, and initial, non-recurring charges. Monthly recurring charges
include the fees paid by 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 incumbent local exchange carrier
(ILEC)and other CLECs as reciprocal compensation (which results from the
Company terminating calls made by ILEC customers or other CLEC customers to
Focal's customers), and access charges paid by the interexchange carriers
(IXCs) for long distance traffic originated and terminated by the Company.
Usage charges are derived from both end user customers and from other
carriers. Initial non- recurring charges are paid by end users, if applicable,
for the installation of service by the Company.
 
  Reciprocal compensation is currently a significant component of the
Company's total revenue. This is the result of an imbalance of inbound and
outbound traffic due to the preponderance of inbound applications utilized by
the Company's customers. Such inbound applications include Focal Virtual
Office service, which is used by Focal's corporate customers, and Focal Multi-
Exchange Service, which is used by Focal's Internet Service Provider (ISP)
customers. The Company expects the proportion of revenue represented by
reciprocal compensation to decline over time as the percentage of lines sold
for outbound applications increases as each given market matures.
 
  End user invoices are sent to customers monthly with recurring charges being
billed in advance and usage charges being billed in arrears. Reciprocal
compensation and carrier access invoices are sent monthly to the appropriate
ILECs and IXCs according to industry standard practices and in industry
standard formats.
 
  Operating Expenses: The Company's 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
incurred by Focal for the fiber optic transmission facilities used to connect
the Company's customers to its switch and to connect the Company's network to
the ILEC and other CLEC networks. The Company's strategy of leasing rather
than building its own fiber transport facilities results in the Company's cost
of service being a significant component of total costs. The Company has to
date been successful in negotiating
 
                                      11
<PAGE>
 
lease agreements which match the duration of its customer contracts, thereby
allowing the Company to avoid the risk of continuing expenses associated with
transmission facilities that are not being used by revenue generating
customers. The Company pays reciprocal compensation to ILECs and other CLECs
for terminating calls made by Focal's customers to customers of the ILEC or
CLEC.
 
  Other customer service and network operations expense consists of the costs
to operate the Company's 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 expenses consist 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.
 
  The Company records non-cash compensation expense each quarter as a result
of having given retroactive effect to a change in accounting related to
certain shares issued to the Company's founders in November 1996. This change
in accounting is further described in Amendment No. 4 to the Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on
August 13, 1998. Commencing in September 1998, non-cash compensation expense
is also being recorded each quarter to account for the conversion of certain
shares of the Company's Class C common stock to shares of restricted Class B
common stock.
 
  The Company's strategy of leasing, rather than building, its transport
network results in capital expenditures which are proportionately lower than
most fiber-based CLECs. In addition, the proportion of capital expenditures
which are "success-based" are higher than most fiber-based CLECs. In contrast,
the Company incurs operating expenses for leased facilities, which are
proportionately higher than 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 the Company anticipates as a result of its
focus on telecommunications-intensive users.
 
RESULTS OF OPERATIONS
 
 Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
 
  Total revenue for the three months ended September 30, 1998 was $12,755,293
compared to $1,226,077 for the three months ended September 30, 1997. The
significant increase in revenue is due to the Company's rapid growth in its
Chicago and New York markets during 1998 and the fact that the Company
recorded its first revenue during May 1997. Customer service and network
operations expense was $4,432,861 during the most recent three-month period
compared to $760,847 in the three months ended September 30, 1997. The
increase resulted from the Company's rapid expansion and related costs for
leased facilities, usage settlements, customer care and operations personnel,
equipment maintenance, and other operating expenses. Selling, general and
administrative expense also increased due to the Company's expansion from
$747,102 during the three months ended September 30, 1997 to $3,973,719 during
the most recent three-month period. Similarly, depreciation and amortization
increased from $179,512 to $1,907,601 in the comparative periods as a result
of a significant increase in the level of fixed assets put into service by the
Company. Non-cash compensation expense was $325,000 for the period ended
September 30, 1997 compared to $2,022,144 for the current period. The increase
in non-cash compensation in the current period is a result of the conversion
of certain Class C shares of the Company's common stock to restricted Class B
shares. Because of certain immediate vesting features and other provisions of
the conversion agreement, the non-cash compensation charge will not be as
large in future periods. Interest income increased from $43,143 in the three
months ended September 30, 1997 to $1,801,116 in the three months ended
September 30, 1998 due to a substantial increase in cash balances held by the
Company, primarily from financing activities. Interest expense increased from
$22,314 in the three months ended September 30, 1997 to $4,676,705 in the most
recent three-month period due to accrued interest expense from the Company's
12.125% senior discount notes due 2008 (the "Notes"), which were issued in
February 1998. A provision for income tax in the amount of $2,197,096 was
recorded in the three months ended September 30, 1998. Even though the Company
is reporting a loss before income taxes, the Company has positive taxable
income.
 
                                      12
<PAGE>
 
  A provision for income tax is being recorded to reflect the non-
deductibility, for tax purposes, of the interest accrued on the Company's
12.125% discount notes. This interest expense is subject to the high yield
discount obligation ("HYDO") rules which limits the amount of original issue
discount ("OID") which can be deducted in the current taxable period. This
interest will become deductible for tax purposes in the period in which the
Notes are redeemed.
 
  The Company's net loss increased from $(765,555) during the three months
ended September 30, 1997 to $(4,653,717) in the three-month period ended
September 30, 1998 due largely to the Company's rapid expansion, the provision
for income taxes, and the increased non-cash compensation charge recorded
during the quarter.
 
 Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
 
  Total revenue for the nine months ended September 30, 1998 was $25,935,784
compared to $1,312,984 for the nine months ended September 30, 1997. The
significant increase in revenue is due to the Company's rapid growth in its
Chicago and New York markets during 1998 and the fact that the Company
recorded its first revenue during May 1997. Customer service and network
operations expense was $9,046,809 during the most recent nine- month period
compared to $1,029,566 in the nine months ended September 30, 1997. The
increase resulted from the Company's rapid expansion and related costs for
leased facilities, usage settlement, customer care and operations personnel,
equipment maintenance, and other operating expenses. Selling, general and
administrative expense also increased due to the Company's expansion from
$1,725,942 during the nine months ended September 30, 1997 to $7,245,504
during the most recent nine-month period. Similarly, depreciation and
amortization increased from $272,070 to $3,913,870 in the comparative periods
as a result of a significant increase in the level of fixed assets put into
service by the Company. Non-cash compensation expense was $975,000 for the
period ended September 30, 1997 compared to $2,672,144 for the current nine-
month period. The increase in non-cash compensation in the current period is a
result of the conversion of certain Class C shares of the Company's common
stock to restricted Class B shares. Interest income increased from $142,082 in
the nine months ended September 30, 1997 to $4,881,831 in the nine months
ended September 30, 1998 due to a substantial increase in cash balances held
by the Company, primarily from financing activities. Interest expense
increased from $26,011 in the nine months ended September 30, 1997 to
$11,320,499 in the most recent nine month period due to accrued interest
expense from the Notes, which were issued in February 1998. A provision for
income tax in the amount of $2,197,096 was recorded during the nine months
ended September 30, 1998. Even though the Company is reporting a loss before
income taxes, the Company has positive taxable income.
 
  A provision for income tax is being recorded to reflect the non-
deductibility, for tax purposes, of the interest accrued on the Company's
12.125% discount notes. This interest expense is subject to the high yield
discount obligation ("HYDO") rules which limits the amount of original issue
discount ("OID") which can be deducted in the current taxable period. This
interest will become deductible for tax purposes in the period in which the
Notes are redeemed.
 
  The Company's net loss increased from $(2,573,523) during the nine months
ended September 30, 1997 to $(5,578,307) in the nine-month period ended
September 30, 1998 due to the Company's rapid expansion, the provision for
income taxes, and the increased non-cash compensation charge recorded in the
period.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's existing operations have required, and its planned operations
will require, significant capital to fund the purchase and installation of
telecommunications switches, equipment, infrastructure, and the operating
losses expected during the start-up phase of each new market. Capital
expenditures were $43,048,293 for the nine months ended September 30, 1998.
The Company expects total capital expenditures for the year ended December
31,1998 to be approximately $60 million. Total capital expenditures for 1999
are currently estimated to be $80 million. Prior to issuance of the Notes, the
Company funded a substantial portion of its capital expenditures through the
private sale of equity securities. In November 1996, the Company entered into
a stock purchase agreement which provided for the contribution over time of
approximately $26.1 million of equity
 
                                      13
<PAGE>
 
funding by a group of investors. As of February 13, 1998, the equity investors
have contributed the entire $26.1 million to the Company. In addition, in
1997, the Company's Illinois subsidiary borrowed approximately $3.5 million
under a bank credit facility. The Company used a portion of the net proceeds
from the senior discount note offering to prepay this indebtedness and cancel
the facility.
 
  On February 18, 1998, the Company received gross proceeds of $150,027,606
from the completion of its offering of 12.125% senior discount notes due
2008.The Notes will accrete to an aggregate stated principal amount of
$270,000,000 by February 15, 2003. No interest will be payable on the Notes
prior to August 15, 2003. Thereafter, interest will be payable semiannually on
August 15 and February 15 of each year.
 
  The Company has incurred net losses since inception. A portion of the prior
equity investments and debt proceeds have been used to fund the Company's
negative cash flow and net losses. Management believes the Company may produce
negative operating cash flow on a consolidated basis as it completes the
buildout of its ten city plan. There can be no assurance the Company will
realize positive consolidated operating cash flow in subsequent periods. Until
sufficient cash flow is generated, the Company will continue to rely on cash
on hand and outside capital to meet its cash requirements.
 
  The Company's cash flows for the period from May 31, 1996 (the Company's
commencement of operations) to December 31, 1996, was $3,790,121. During this
period, net cash used in operating activities consisted of $152,576; net cash
used in investing activities consisted of $82,303; and net cash provided by
financing activities consisted of $4,025,000. The Company's cash flows for the
year ended December 31, 1997 was $1,533,569. During this period, net cash used
in operating activities consisted of $1,634,017; net cash used in investing
activities consisted of $11,655,524; and net cash provided by financing
activities consisted of $11,755,972. The Company's cash flows for the nine
months ended September 30, 1998 was $121,443,301. During this period, net cash
provided by operating activities consisted of $10,330,972; net cash used in
investing activities consisted of $43,048,293; and net cash provided by
financing activities consisted of $154,160,622.
 
  The Company expects its available cash, including the net proceeds from the
sale of its senior discount notes, will be sufficient to fund its capital
requirements through 1999. However, if the Company's expansion occurs more
rapidly than currently anticipated or if its operating results are below
expectations, the Company may require additional capital. The Company may
decide to raise additional capital before such time. The Company may secure
additional funding through the sale of public or private debt and/or equity
securities or enter into a future bank credit facility. There can be no
assurance, however, that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable or that the
Company's operations will produce positive consolidated cash flow in
sufficient amounts to meet its debt obligations. Failure to raise and generate
sufficient funds may require the Company to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company's growth and its ability to compete in the
telecommunications industry.
 
IMPACT OF THE YEAR 2000 ISSUE
 
  The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the computer
programs or systems of the Company or the Company's 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, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities, or interruptions of customer service.
 
  The Company has performed an internal assessment of its information systems,
including its DMS-500 Super-Node central office switches and hardware,
including embedded systems, to determine whether such systems and hardware are
year 2000 compliant. Except as provided in the following sentence, the Company
has received assurances from its material hardware vendors and its major
software vendors that the products used by the Company are year 2000 compliant
and will function adequately. The Company has been advised by one of
 
                                      14
<PAGE>
 
its major software vendors, which provides the Company's billing system, that
while the current system is not year 2000 compliant, an upgrade to such
system, which is expected to be operational by the middle of 1999, will be
year 2000 compliant. The company does not anticipate that the cost of such
upgrade will be material on an incremental basis since this upgrade is being
done primarily for other business purposes.
 
  The Company's services are also dependent on network systems, including
switching systems, maintained by other carriers, including the ILECs and IXCs.
The Company is in the process of assessing the year 2000 compliance status of
certain other carriers with whom the Company has material relationships. Such
assessment relies (without any independent verification) on the statements,
including the assumptions underlying such statements, from such carriers that
appear in such carriers' periodic reports filed with the Commission pursuant
to the Exchange Act. The risks associated with the failure of such carriers'
systems would include potential interruption of service, including blocked
calls and delayed call completion, especially for the Company's high-volume
corporate customers. Because the Company leases its transport capacity and is
dependent on the availability of fiber optic transport facilities owned by
other carriers, there are few, if any, contingency measures that the Company
could take if year 2000 non-compliance were to cause the facilities of the
Company's carriers to become unavailable. While the Company leases transport
facilities from multiple carriers in each of its relevant markets and attempts
to provide redundancy and diversity in service, there can be no assurance that
multiple network failures in a particular market could not occur. Should such
vendors experience facilities failures, it could prove disruptive to the
Company's business and could have a material adverse effect on the Company. In
addition, there can be no assurance that devoting additional resources of the
Company to year 2000 non-compliance, if arising, would not have a material
adverse effect on the Company. The Company will continue its year 2000
compliance assessment of its own computer programs and systems. If it comes to
the attention of the Company's management that any of its systems, or the
systems of those on which the Company relies, are not year 2000 compliant, the
Company intends to develop an action plan, and assess the resources it would
be required to devote, to address such problem.
 
  The Company has not incurred any incremental expenses in the first nine
months of 1998 or 1997 related to year 2000 remediation. The Company also does
not expect any future incremental expenditures.
 
  The cost of the Company's year 2000 remediation and the status of the
Company's year 2000 compliance measures are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third parties' year
2000 readiness and other factors.
 
  The foregoing discussion contains forward-looking statements. The Company's
future performance is subject to numerous risks and uncertainties that could
cause actual results to deviate substantially from those discussed in these
forward-looking statements. Factors that could impact the variability of
future results include: the outcome of legal and regulatory proceedings
regarding reciprocal compensation for Internet-related calls and certain of
the Company's product offerings; successful execution of the Company's
expansion activities into new geographic markets on a timely and cost-
effective basis; the pace at which new competitors enter the Company's
existing and planned markets; responses of the competitors (including the
ILECs); execution of interconnection agreements with ILECs on terms
satisfactory to the Company; maintenance of the Company's supply agreements
for transport facilities; continued acceptance of the Company's services by
new and existing customers; the ability of the Company's systems and software
to process year 2000 data correctly; the Company's ability to attract and
retain talented employees, the Company's ability to successfully access
markets, install switching electronics, and obtain the use of leased fiber
transport facilities and any required governmental authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as regulatory, legislative and judicial
developments that could cause actual results to differ materially from the
future results indicated, express or implied, in such forward-looking
statements.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  Not Required
 
                                      15
<PAGE>
 
                          PART II--OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
  From time to time the Company is party to routine litigation and proceedings
in the ordinary course of its business. Other than listed below, the Company
and its subsidiaries are not aware of any current or pending litigation that
the Company believes would have a material adverse effect on the Company's
results of operations or financial condition. The Company and its subsidiaries
continue to participate in regulatory proceedings before the FCC and state
regulatory agencies concerning the authorization of services and the adoption
of new regulations.
 
  Focal, together with other CLECs, contends that Ameritech Illinois owes
reciprocal compensation for calls originated by customers of Ameritech
Illinois and terminated by CLECs to Internet service providers, who then route
traffic onto the Internet. The Company has recorded cumulative revenue and
related accounts receivable totaling $10.2 million as of September 30, 1998,
from Ameritech Illinois who is currently disputing this obligation to the
Company. The Illinois Commerce Commission ("ICC") ruled in favor of the
Company and other CLECs regarding this dispute in March of 1998. On March 27,
1998, Ameritech Illinois filed suit in the United States District Court for
the Northern District of Illinois seeking to reverse the ICC order and was
granted a stay of the ICC order pending consideration of the appeal. The court
rendered a decision on July 21, 1998 affirming the ICC order. Ameritech
appealed the decision to the 7th Circuirt Court of Appeals, and was denied a
stay pending appeal. As of September 30, 1998 the District Court stay had
expired and Ameritech Illinois was in violation of the order. Subsequently
Ameritech Illinois complied with the order and commenced payment for past
reciprocal compensation charges. During October 1998, the Company received
substantially all of the disputed obligation from Ameritech.
 
  In July 1998 Ameritech filed a complaint with the ICC alleging that Focal's
Virtual Office service violates the interconnection agreement between
Ameritech and the Company and certain state statutes. Ameritech also alleged
that through its Virtual Office service, Focal is contributing to the
exhaustion of phone numbers in the 847 area code. Ameritech complained that
calls on Focal's Virtual Office network are circumventing local toll charges,
and should not be subject to reciprocal compensation. Ameritech also alleged
that the Company is offering service in violation of the state's pay-per-call
rules. The Company believes that these claims lack merit. Nevertheless, an
adverse outcome in this dispute could have a material adverse effect on the
Company.
 
  The Company was named as a defendant, along with other parties, in a case
involving the wrongful death of an electrician who was killed while working on
the building premises in New York (Paula Falkowski v. Signature Construction,
Inc., Focal Communications Corporation of New York, and Hugh O'Kane Electric
Company, Inc.; Index No. 122037/97, Supreme Court of the State of New York,
County of New York, amended complaint filed 4/3/98). The decedent was not
under contract with Focal, nor was he working at the request of Focal. The
Company has tendered the defense of this claim, and it has been accepted by
the insurance carrier. The Company believes that it was not the cause of the
injuries and subsequent death which gave rise to this lawsuit, and that any
liability it may have in this case would be covered by insurance and not be
material.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  (A) EXHIBITS
 
                              EXHIBIT DESCRIPTION
 
<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER
      -------
 
     <C>       <S>                                                          <C>
     4.1       Vesting Agreement as of November 27, 1996 by and among
               Madison Dearborn Capital Partners, L.P., (the "New Capital
               Investor"), Focal Communications Corporation and each of
               Robert C. Taylor, Jr., John R. Barnicle, Brian F. Addy and
               Joseph Beatty.
</TABLE>
 
 
                                      16
<PAGE>
 
<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER
      -------
 
     <C>       <S>                                                          <C>
     4.2       Vesting Agreement as of November 27, 1996 by and among
               Frontenac VI, L.P., (the "New Capital Investor"), Focal
               Communications Corporation and each of Robert C. Taylor,
               Jr., John R. Barnicle, Brian F. Addy and Joseph Beatty.
     4.3       Vesting Agreement as of November 27, 1996 by and among
               Battery Ventures III, L.P., (the "New Capital Investor"),
               Focal Communications Corporation and each of Robert C.
               Taylor, Jr., John R. Barnicle, Brian F. Addy and Joseph
               Beatty.
     4.4       Amendment No. 1 to Vesting Agreement and Consent as of
               August 21, 1998 between Focal Communications Corporation,
               a Delaware corporation, Brian F. Addy, John R. Barnicle,
               Joseph Beatty, Robert C. Taylor, Jr., (collectively, the
               "Executive Investors"), Madison Dearborn Capital Partners,
               L.P. (the "New Capital Investor"), Frontenac VI, L.P. and
               Battery Ventures III, L.P. (collectively, the
               "Institutional Investors").
     4.5       Amendment No. 1 to Vesting Agreement and Consent as of
               August 21, 1998 between Focal Communications Corporation,
               a Delaware corporation, Brian F. Addy, John R. Barnicle,
               Joseph Beatty, Robert C. Taylor, Jr., (collectively, the
               "Executive Investors"), Madison Dearborn Capital Partners,
               L.P., Frontenac VI, L.P. (the "New Capital Investor"), and
               Battery Ventures III, L.P. (collectively, the
               "Institutional Investors").
     4.6       Amendment No. 1 to Vesting Agreement and Consent as of
               August 21, 1998 between Focal Communications Corporation,
               a Delaware corporation, Brian F. Addy, John R. Barnicle,
               Joseph Beatty, Robert C. Taylor, Jr., (collectively, the
               "Executive Investors"), Madison Dearborn Capital Partners,
               L.P., Frontenac VI, L.P. and Battery Ventures III, L.P.
               (the "New Capital Investor", collectively, the
               "Institutional Investors").
     4.7       Form of Restricted Stock Agreement dated September 30,
               1998 between Focal Communications Corporation and each of
               Brian F. Addy, John R. Barnicle, Joseph Beatty, and Robert
               C. Taylor, Jr.
     4.8       Amendment No. 2 to Stock Purchase Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brian F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated
               August 21, 1998.
     4.9       Amendment No. 1 to Stockholders Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brian F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated
               July 7, 1998.
     4.10      Amendment No. 2 to Stockholders Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brian F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated
               August 21, 1998.
     4.11      Amendment No. 1 to Executive Employment Agreement and
               Consent with Brian F. Addy, dated August 21, 1998.
     4.12      Amendment No. 1 to Executive Employment Agreement and
               Consent with John R. Barnicle, dated August 21, 1998.
     4.13      Amendment No. 1 to Executive Employment Agreement and
               Consent with Joseph Beatty, dated August 21, 1998.
     4.14      Amendment No. 1 to Executive Employment Agreement and
               Consent with Robert C. Taylor, Jr. dated August 21, 1998.
</TABLE>
 
 
                                       17
<PAGE>
 
<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER
      -------
 
     <C>       <S>                                                          <C>
      4.15     Amendment No. 1 to Registration Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brain F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor, Jr. dated
               August 21, 1998.
     10.1      First Amendment to the Interconnection Agreement with
               Ameritech Information Industry Services, dated September
               8, 1998.
     10.2      Lease Agreement for property located at 1511 6th Avenue,
               Seattle, WA, dated August 7, 1998.
     10.3      Lease Agreement for property located at 23800 West Ten
               Mile Road, Southfield, MI, dated August 31, 1998.
     10.4      Lease Agreement for property located at One Penn Plaza,
               New York, NY, dated September 25, 1998.
     10.5      First Amendment to Lease Agreement for property located at
               1200 West 7th Street, Los Angeles, CA, dated July 8, 1998.
     10.6      First Amendment to Lease Agreement for property located at
               1120 Vermont NW, Washington, D.C., dated July 23, 1998.
     10.7      1997 Nonqualified Stock Option Plan, amended and restated
               as of August 21, 1998.
     10.8      1998 Equity and Performance Incentive Plan.
     10.9      1998 Equity Plan for Non-Employee Directors of Focal
               Communications Corporation.
     10.10     Amendment No. 1 to Executive Employment Agreement and
               consent with Renee M. Martin, dated August 21, 1998.
     27.1      Financial Data Schedule
</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, 1998.
 
                                       18
<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
 
Date: November 16, 1998                          Robert C. Taylor, Jr.,
                                          _____________________________________
                                                 Robert C. Taylor, Jr.,
                                           President and Chief Executive Offi-
                                                           cer
                                                  (Authorized Officer)
 
Date: November 16, 1998                           /s/ Joseph A. Beatty
                                          _____________________________________
                                                    Joseph A. Beatty,
                                           Executive Vice President and Chief
                                                    Financial Officer
                                              (Principal Financial Officer)
 
Date: November 16, 1998                          /s/ Robert M. Junkroski
                                          _____________________________________
                                                  Robert M. Junkroski,
                                                       Controller
                                             (Principal Accounting Officer)
 
                                       19
<PAGE>
 
                              EXHIBIT DESCRIPTION
 
<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER
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     <C>       <S>                                                          <C>
     4.1       Vesting Agreement as of November 27, 1996 by and among
               Madison Dearborn Capital Partners, L.P., (the "New Capital
               Investor"), Focal Communications Corporation and each of
               Robert C. Taylor, Jr., John R. Barnicle, Brian F. Addy and
               Joseph Beatty.
     4.2       Vesting Agreement as of November 27, 1996 by and among
               Frontenac VI, L.P., (the "New Capital Investor"), Focal
               Communications Corporation and each of Robert C. Taylor,
               Jr., John R. Barnicle, Brian F. Addy and Joseph Beatty.
     4.3       Vesting Agreement as of November 27, 1996 by and among
               Battery Ventures III, L.P., (the "New Capital Investor"),
               Focal Communications Corporation and each of Robert C.
               Taylor, Jr., John R. Barnicle, Brian F. Addy and Joseph
               Beatty.
     4.4       Amendment No. 1 to Vesting Agreement and Consent as of
               August 21, 1998 between Focal Communications Corporation,
               a Delaware corporation, Brian F. Addy, John R. Barnicle,
               Joseph Beatty, Robert C. Taylor, Jr., (collectively, the
               "Executive Investors"), Madison Dearborn Capital Partners,
               L.P. (the "New Capital Investor"), Frontenac VI, L.P. and
               Battery Ventures III, L.P. (collectively, the
               "Institutional Investors").
     4.5       Amendment No. 1 to Vesting Agreement and Consent as of
               August 21, 1998 between Focal Communications Corporation,
               a Delaware corporation, Brian F. Addy, John R. Barnicle,
               Joseph Beatty, Robert C. Taylor, Jr., (collectively, the
               "Executive Investors"), Madison Dearborn Capital Partners,
               L.P., Frontenac VI, L.P. (the "New Capital Investor"), and
               Battery Ventures III, L.P. (collectively, the
               "Institutional Investors").
     4.6       Amendment No. 1 to Vesting Agreement and Consent as of
               August 21, 1998 between Focal Communications Corporation,
               a Delaware corporation, Brian F. Addy, John R. Barnicle,
               Joseph Beatty, Robert C. Taylor, Jr., (collectively, the
               "Executive Investors"), Madison Dearborn Capital Partners,
               L.P., Frontenac VI, L.P. and Battery Ventures III, L.P.
               (the "New Capital Investor", collectively, the
               "Institutional Investors").
     4.7       Form of Restricted Stock Agreement dated September 30,
               1998 between Focal Communications Corporation and each of
               Brian F. Addy, John R. Barnicle, Joseph Beatty, and Robert
               C. Taylor, Jr.
     4.8       Amendment No. 2 to Stock Purchase Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brian F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated
               August 21, 1998.
     4.9       Amendment No. 1 to Stockholders Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brian F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated
               July 7, 1998.
     4.10      Amendment No. 2 to Stockholders Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brian F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated
               August 21, 1998.
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER
      -------
 
     <C>       <S>                                                          <C>
      4.11     Amendment No. 1 to Executive Employment Agreement and
               Consent with Brian F. Addy, dated August 21, 1998.
      4.12     Amendment No. 1 to Executive Employment Agreement and
               Consent with John R. Barnicle, dated August 21, 1998.
      4.13     Amendment No. 1 to Executive Employment Agreement and
               Consent with Joseph Beatty, dated August 21, 1998.
      4.14     Amendment No. 1 to Executive Employment Agreement and
               Consent with Robert C. Taylor, Jr. dated August 21, 1998.
      4.15     Amendment No. 1 to Registration Agreement with Madison
               Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
               Battery Ventures III, L.P., Brain F. Addy, John R.
               Barnicle, Joseph Beatty, and Robert C. Taylor, Jr. dated
               August 21, 1998.
     10.1      First Amendment to the Interconnection Agreement with
               Ameritech Information Industry Services, dated September
               8, 1998.
     10.2      Lease Agreement for property located at 1511 6th Avenue,
               Seattle, WA, dated August 7, 1998.
     10.3      Lease Agreement for property located at 23800 West Ten
               Mile Road, Southfield, MI, dated August 31, 1998.
     10.4      Lease Agreement for property located at One Penn Plaza,
               New York, NY, dated September 25, 1998.
     10.5      First Amendment to Lease Agreement for property located at
               1200 West 7th Street, Los Angeles, CA, dated July 8, 1998.
     10.6      First Amendment to Lease Agreement for property located at
               1120 Vermont NW, Washington, D.C., dated July 23, 1998.
     10.7      1997 Nonqualified Stock Option Plan, amended and restated
               as of August 21, 1998.
     10.8      1998 Equity and Performance Incentive Plan.
     10.9      1998 Equity Plan for Non-Employee Directors of Focal
               Communications Corporation.
     10.10     Amendment No. 1 to Executive Employment Agreement and
               consent with Renee M. Martin, dated August 21, 1998.
     27.1      Financial Data Schedule
</TABLE>