---

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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 June 30, 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 July 31, 2002:

Common
stock ($.01 par value) 4,935,829 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 and six months ended June 30, 2002 and 2001 |  | 4   
|                             |  | Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001                           |  | 5   
|                             |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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                                                |  | 22  
|PART IIOTHER INFORMATION    |  |                                                                                                          
|Item 1.                      |  | Legal and Administrative Proceedings                                                                      |  | 24  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                                 |  | 24  
|Item 3.                      |  | Defaults Upon Senior Securities                                                                           |  | 24  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                       |  | 24  
|Item 5.                      |  | Other Information                                                                                         |  | 24  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                          |  | 25  
|                             |  | SIGNATURES                                                                                                |  | 26  

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 June 30 |           | For the Six Months
Ended June 30 |        
|--------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------- | --------- | -------------------------------- | -------
|
|REVENUE:                                                              |                                                             |                                    |           |                                  |        
|                                                                      | Enterprise revenue                                          |                                    | $         | 57,895                           |        
|                                                                      | Internet service provider revenue                           |                                    |           | 36,513                           |        
|                                                                      |                                                             |                                    |           |                                  |        
|                                                                      |                                                             | Total revenue                      |           |                                  | 94,408 
|EXPENSES:                                                             |                                                             |                                    |           |                                  |        
|                                                                      | Network expenses, excluding depreciation                    |                                    |           | 41,784                           |        
|                                                                      | Selling, general and administrative, excluding amortization |                                    |           | 56,968                           |        
|                                                                      | Depreciation and amortization                               |                                    |           | 35,874                           |        
|                                                                      | Restructuring costs                                         |                                    |           |                                 |        
|                                                                      |                                                             |                                    |           |                                  |        
|                                                                      |                                                             | Total operating expenses           |           |                                  | 134,626
|                                                                      |                                                             |                                    |           |                                  |        
|OPERATING LOSS                                                        |                                                             |                                    | (40,218   | )                                |        
|                                                                      |                                                             |                                    |           |                                  |        
|OTHER INCOME (EXPENSE):                                               |                                                             |                                    |           |                                  |        
|                                                                      | Interest income                                             |                                    |           | 367                              |        
|                                                                      | Interest expense and other income                           |                                    |           | (11,857                          | )      
|                                                                      |                                                             |                                    |           |                                  |        
|                                                                      |                                                             | Total other expense                |           |                                  | (11,490
|                                                                      |                                                             |                                    |           |                                  |        
|NET LOSS                                                              |                                                             | $                                  | (51,708   | )                                | $      
|ACCRETION OF PAYMENT IN KIND DIVIDENDS ON CONVERTIBLE PREFERRED STOCK |                                                             |                                    | (1,034    | )                                |        
|                                                                      |                                                             |                                    |           |                                  |        
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                            |                                                             | $                                  | (52,742   | )                                | $      
|                                                                      |                                                             |                                    |           |                                  |        
|BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK                  |                                                             | $                                  | (10.70    | )                                | $      
|                                                                      |                                                             |                                    |           |                                  |        
|BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING   |                                                             |                                    | 4,929,604 |                                  |        
|                                                                      |                                                             |                                    |           |                                  |        

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)

|                                                    |                                                                                                                                                                  | June 30,
2002              |         | December 31,
2001 |        
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|
|ASSETS                                              |                                                                                                                                                                  |                            |         |                   |        
|Current assets:                                     |                                                                                                                                                                  |                            |         |                   |        
|                                                    | Cash and cash equivalents                                                                                                                                        |                            | $       | 75,721            |        
|                                                    | Accounts receivable, net of allowance for doubtful accounts of $22,547 and $9,000 at June 30, 2002 and December 31, 2001, respectively                           |                            |         | 91,718            |        
|                                                    | Other current assets                                                                                                                                             |                            |         | 17,791            |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|                                                    |                                                                                                                                                                  | Total current assets       |         |                   | 185,230
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Property, plant and equipment, at cost              |                                                                                                                                                                  |                            | 668,945 |                   |        
|                                                    | Lessaccumulated depreciation                                                                                                                                    |                            |         | (250,087          | )      
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Property, plant and equipment, net                  |                                                                                                                                                                  |                            | 418,858 |                   |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Other noncurrent assets                             |                                                                                                                                                                  |                            | 21,188  |                   |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|                                                    |                                                                                                                                                                  | $                          | 625,276 |                   | $      
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                |                                                                                                                                                                  |                            |         |                   |        
|Current liabilities:                                |                                                                                                                                                                  |                            |         |                   |        
|                                                    | Accounts payable                                                                                                                                                 |                            | $       | 39,809            |        
|                                                    | Accrued liabilities                                                                                                                                              |                            |         | 28,090            |        
|                                                    | Current maturities of long-term debt                                                                                                                             |                            |         | 11,165            |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|                                                    |                                                                                                                                                                  | Total current liabilities  |         |                   | 79,064 
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Long-term debt, net of current maturities           |                                                                                                                                                                  |                            | 368,610 |                   |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Other noncurrent liabilities                        |                                                                                                                                                                  |                            | 6,796   |                   |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Convertible notes                                   |                                                                                                                                                                  |                            | 105,511 |                   |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Class A redeemable convertible preferred stock, net |                                                                                                                                                                  |                            | 48,681  |                   |        
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|Stockholders' equity:                               |                                                                                                                                                                  |                            |         |                   |        
|                                                    | Common Stock, $.01 par value; 250,000,000 shares authorized; 4,935,829 and 4,899,204 issued and outstanding at June 30, 2002 and December 31, 2001, respectively |                            |         | 49                |        
|                                                    | Additional paid-in capital                                                                                                                                       |                            |         | 289,750           |        
|                                                    | Deferred compensation                                                                                                                                            |                            |         | (552              | )      
|                                                    | Accumulated deficit                                                                                                                                              |                            |         | (272,633          | )      
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|                                                    |                                                                                                                                                                  | Total stockholders' equity |         |                   | 16,614 
|                                                    |                                                                                                                                                                  |                            |         |                   |        
|                                                    |                                                                                                                                                                  | $                          | 625,276 |                   | $      
|                                                    |                                                                                                                                                                  |                            |         |                   |        

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 Six Months
Ended June 30,                |                                              
|---------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------
|
|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         |                                              
|                                               |                                                                             | Payment in kind interest on convertible 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      |                                                                             |                                                  | (53,578                                      
|CASH AND CASH EQUIVALENTS, beginning of period |                                                                             |                                                  | 129,299                                      
|                                               |                                                                             |                                                  |                                              
|CASH AND CASH EQUIVALENTS, end of period.      |                                                                             | $                                                | 75,721                                       
|                                               |                                                                             |                                                  |                                              

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

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

June 30, 2002

December 31, 2001(Unaudited)Building and improvements

$
8,470

$
8,453Communications network


422,211


406,032Computer equipment


65,326


57,812Leasehold improvements


112,979


105,470Furniture and fixtures


12,759


12,459Motor vehicles


532


532Assets under capital lease


22,173


22,210Construction in progress


24,495


31,986668,945


644,954Less: Accumulated depreciation


(250,087
)

(181,259
)Total

$
418,858

$
463,695


7

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3. Debt

Long-term debt consists of the following:

June 30, 2002

December 31, 2001(Unaudited)12.125% senior discount notes due 2008 ("1998 Notes"), net of unamortized discount of $9,787 and $16,657 at June 30, 2002 and December 31, 2001, respectively

$
124,843

$
117,97311.875% senior notes due 2010 ("2000 Notes"), net of unamortized discount of $636 and $678 at June 30, 2002 and December 31, 2001, respectively


113,875


113,833Secured equipment term loan


20,615


25,813$225,000 Senior Secured Credit Facility


93,000


81,000Obligations under capital lease


27,442


26,974379,775


365,593LessCurrent maturities


11,165


10,635Total

$
368,610

$
354,958


We
have borrowed a total of $93,000 under our $225,000 Senior Secured Credit Facility (the "Credit Facility") as of June 30, 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. Provided we satisfy applicable covenants, as defined in the Credit Facility, 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 composed 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 composed of $895 in
cash paid for the abandonment of excess network facilities and $421 in network fixed asset write-downs. For the six months ended June 30, 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 June 30, 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,
and as-converted preferred stock and notes. Since the results of the adjustments required for the diluted weighted average common

8

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shares outstanding are anti-dilutive for the three and six months ended June 30, 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 and six months ended June 30, 2002 and 2001 is as follows:

|                                                              |  | Three Months Ended |  | Six Months Ended
|------------------------------------------------------------- |  | ------------------ |  | ----------------
|
|
|Basic weighted average number of common shares outstanding    |  | 4,929,604          |  | 1,751,404       
|Dilutive stock options and unvested restricted common shares  |  | 355,834            |  | 78,334          
|Dilutive as-converted preferred stock                         |  | 1,505,948          |  |                
|Dilutive as-converted notes                                   |  | 3,012,579          |  |                
|                                                              |  |                    |  |                 
|Dilutive weighted average number of common shares outstanding |  | 9,803,965          |  | 1,829,738       
|                                                              |  |                    |  |                 

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 remained 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 grant 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 date of the 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 June 30, 2002 and December 31, 2001 and for
the six months ended June 30, 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

9

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information about revenue, EBITDA (which excludes non-cash compensation and restructuring costs) and capital expenditures for the six months ended June 30, 2002 and 2001:

Six Months
Ended June 30,2002

2001(Unaudited)Revenue

$
178,884

$
164,047EBITDA


(6,186
)

1,905Capital expenditures


24,890


67,342


The
following reconciles our total segment EBITDA to our consolidated net loss for the six months ended June 30, 2002 and 2001:

Six Months
Ended June 30,2002

2001(Unaudited)Total EBITDA for reportable segment

$
16,915

$
17,833Corporate EBITDA


(23,101
)

(15,928
)Total Company EBITDA


(6,186
)

1,905Depreciation and amortization


(72,756
)

(43,826
)Interest expense and other income


(24,855
)

(30,682
)Interest income


1,101


3,080Restructuring costs


(1,316
)

Non-cash compensation expense


(3,839
)

(3,447
)Net Loss

$
(107,851
)
$
(72,970
)


Total
assets for the reportable segment were $489,929 and $518,825 as of June 30, 2002 and December 31, 2001, respectively. The following reconciles our total segment
assets to our consolidated total assets as of June 30, 2002 and December 31, 2001:

June 30, 2002

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

$
489,929

$
518,825Corporate assets:Cash and cash equivalents


75,721


129,299Other current assets


6,383


14,852Property, plant and equipment, net


32,055


43,908Other noncurrent assets


21,188


21,514Total consolidated assets

$
625,276

$
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 June 30, 2002 we had 718,997 lines installed and in service.

Revenue.Enterprise revenue includes all services sold to corporations, government entities and value added resellers.
Internet Service Provider revenue includes all services sold to Internet Service Provider customers. Our Enterprise and Internet service provider service offerings include circuit switched lines,
colocation, managed Internet access, and other broadband services. Enterprise and Internet service provider revenue is primarily composed 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 and additional features on those lines, the leasing of our
facilities network and colocation space. Private lines are point-to-point circuits that do not necessarily utilize our circuit switches. The revenue for these sales is generally recognized on a
monthly recurring basis. Usage charges consist of fees paid by our customers for minutes of use, fees paid by carriers for each call made, fees paid by ILECs and other CLECs as reciprocal
compensation, and access charges paid by the Inter-Exchange Carriers 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.

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

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

Currently,
Focal has these types of reciprocal compensation rate agreements with Verizon, SBC Communications and Bell South. Because of the past legal and regulatory uncertainties
regarding reciprocal compensation, Focal cannot predict the exact nature of any future agreements. If the future reciprocal compensation rates are different from the rates currently in effect, Focal
may be affected either positively or negatively, depending on the direction and magnitude of the changes. Focal estimates that for every $0.0001 change in the reciprocal compensation per minute rate,
revenue would change an average of $2.9 million on an annual basis. A $0.0001 change represents a 5.5% change from our current average reciprocal compensation billing rate.

Expenses.Our expenses are categorized as network expenses, excluding depreciation; selling, general and administrative,
excluding amortization; depreciation and amortization; 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.

11

---

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 June 30, 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, costs related to leasing office space, and
promotional expenses as well as the cost of corporate activities related to regulatory, finance, human resources, legal, executive, and
other administrative activities. Included in SG&A is non-cash compensation expense related to the following:



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

12

---

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 ($thousands)                       |  | $    | 57,895  |      | $
|Internet Service Provider ("ISP")Revenue ($thousands) |  | $    | 36,513  |      | $
|Reciprocal Compensation as % of Total Revenue         |  |      | 17      | %    |  
|Access as % of Total Revenue                          |  |      | 11      | %    |  
|Days Sales Outstanding                                |  |      | 87      |      |  
|Lines Sold During the Quarter                         |  |      | 83,799  |      |  
|Gross Lines Installed During the Quarter              |  |      | 72,424  |      |  
|Lines Disconnected During the Quarter                 |  |      | 57,379  |      |  
|Cumulative Net Lines Installed to Date(1)             |  |      | 718,997 |      |  
|Estimated Enterprise Lines as % of Installed Lines(3) |  |      | 72      | %    |  
|ILEC Switches Interconnected                          |  |      | 3,212   |      |  
|Quarterly Minutes of Use (Billions)                   |  |      | 10.6    |      |  
|Markets in Operation                                  |  |      | 22      |      |  
|Circuit Switches Operational                          |  |      | 28      |      |  
|Capital Expenditures ($thousands)                     |  | $    | 14,210  |      | $
|Employees                                             |  |      | 1,205   |      |  
|Sales Force(2)                                        |  |      | 289     |      |  

---

We
sold 83,799 lines during the second quarter of 2002, had gross installs of 72,424 lines, and installed 15,045 lines on a net basis. Both the sales and installation activity was
heavily weighted in favor of our Enterprise business. Sales activity in the Enterprise business remained consistent in the first two quarters of 2002 as compared to the same periods in 2001. We
disconnected 57,379 lines during the second quarter of 2002, which were concentrated in the Internet Service Provider business. The ISP disconnects are driven primarily by customers ceasing operations
and customers merging with or being acquired by other companies.

13

---

Results of Operations

Operating Revenues. The following tables summarize our operating revenues for the three months and six months ended June 30, 2002 and 2001:

For the Three Months
Ended June 30,(Dollars in Thousands)

Percent
Change2002

2001Enterprise Revenue

$
57,895

$
39,653

46.0
%ISP Revenue


36,513


42,543

(14.2
)Total Revenue

$
94,408

$
82,196

14.9
%


For the Six Months
Ended June 30,(Dollars in Thousands)

Percent
Change2002

2001Enterprise Revenue

$
108,395

$
70,226

54.4
%ISP Revenue


70,489


93,821

(24.9
)Total Revenue

$
178,884

$
164,047

9.0
%


Enterprise
revenue increased $18.2 million for the three months ended June 30, 2002 compared to the same prior year period, primarily resulting from the net effect of the
following:



Enterprise
revenue increased $38.2 million for the six months ended June 30, 2002 compared to the same prior year period. In addition to the line increase and the
non-recurring items described above, the increase resulted from the net effect of the following:



14

---



Internet
Service Provider revenue decreased $6.0 million for the three months ended June 30, 2002 compared to the same prior year period primarily resulting from the net
effect of the following:



Internet
Service Provider revenue decreased $23.3 million for the six months ended June 30, 2002 compared to the same prior year period. In addition to the line decrease
and the non-recurring items described above, the decrease resulted from the net effect of the following:



Operating
Expenses. The following tables summarize our operating expenses for the three months and six months ended June 30, 2002 and 2001:

For the Three Months
Ended June 30,(Dollars in Thousands)

Percent
Change2002

2001Network expenses, excluding depreciation

$
41,784

$
41,242

1.3
%Selling, general and administrative, excluding amortization


56,968


44,605

27.7Depreciation and amortization


35,874


21,177

69.4Total operating expenses

$
134,626

$
107,024

25.8
%


For the Six Months
Ended June 30,(Dollars in Thousands)

Percent
Change2002

2001Network expenses, excluding depreciation

$
82,490

$
74,566

10.6
%Selling, general and administrative, excluding amortization


106,419


91,023

16.9Depreciation and amortization


72,756


43,826

66.0Restructuring Costs


1,316




Total operating expenses

$
262,981

$
209,415

25.6
%


15

---

Network
expenses increased $0.6 million and $7.9 million for the three and six months ended June 30, 2002 compared to the same prior year periods. This increase is
primarily the result of the following:



As
a result of the increase in revenue of $14.9 million, or 9.0%, and the increase in network expenses of $7.9 million, or 10.6%, our gross margin percent for the six
months ended June 30, 2002 of 53.9% decreased from 54.5% for the same prior year period.

Our
SG&A expenses increased $12.4 million and $15.4 million for the quarter and six months ended June 30, 2002 compared to the same prior year periods. This increase
is primarily attributable to the increase in bad debt expense for the second quarter of 2002. Our bad debt expense increased during the quarter reflecting the down-turn in the economy and
the telecommunications industry. The following table summarizes our allowance for doubtful accounts for the three months and six months ended June 30, 2002:

|                                                     |  | For the Three Months Ended June 30, |        | For the Six Months Ended June 30, |  
|---------------------------------------------------- |  | ----------------------------------- | ------ | --------------------------------- | -
|
|
|Allowance for Doubtful Accounts, beginning of period |  | $                                   | 12,500 |                                   | $
|Bad Debt Expense                                     |  |                                     | 12,095 |                                   |  
|Net Write-offs                                       |  |                                     | 2,048  |                                   |  
|                                                     |  |                                     |        |                                   |  
|Allowance for Doubtful Accounts, end of period       |  | $                                   | 22,547 |                                   | $

Bad
debt expense for the second quarter of 2002 includes $5.0 million related to WorldCom and its affiliates. At June 30, 2002, we had a net exposure of about
$1.2 million relating to WorldCom.

Depreciation
and amortization increased $14.7 million and $29.0 million for the quarter and six months ended June 30, 2002 compared to the same prior year periods.
This increase is a result of an increase in our depreciable fixed asset base in our existing markets, which included six additional switches, and the expansion into Miami, our 22nd
market, during the third quarter of 2001. Our construction in progress declined from $73.9 million at June 30, 2001 to $22.7 million at September 30, 2001 and has remained
at this lower level since that time. Construction in progress as a percent of total fixed assets is lower due to completion of our initial 22 market build-out in 2001.

16

---

Other
expense. The following tables summarize our operating expenses for the three months and six months ended June 30, 2002 and 2001:

For the Three Months
Ended June 30,(Dollars in Thousands)

Percent
Change2002

2001Interest income

$
367

$
1,278

(71.2
)%Interest expense and other income


(11,857
)

(15,898
)
(25.4
)Total other expense

$
11,490

$
14,620

(21.4
)%


For the Six Months
Ended June 30,(Dollars in Thousands)

Percent
Change2002

2001Interest income

$
1,101

$
3,080

(64.3
)%Interest expense and other income


(24,855
)

(30,682
)
(19.0
)Total other expense

$
23,754

$
27,602

(13.9
)%


Interest
income decreased $0.9 million and $2.0 million for the three and six months ended June 30, 2002 compared to the same prior year periods. This decrease is
primarily due to lower cash and short-term investments during the first six months of 2002 as compared with the same prior year period. Our interest expense and other income decreased
$4.0 million and $5.8 million for the three and six months ended June 30, 2002 compared to the same prior year periods. This 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 $93.0 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

We had $75.7 million and $129.3 million in cash and cash equivalents available at June 30, 2002 and December 31, 2001, respectively.
During the first six months of 2002, the source of funding was draws on our Credit Facility. We drew $93.0 million and $81.0 million from the Credit Facility as of June 30, 2002
and December 31, 2001, respectively.

Our
Credit Facility is a purchase money facility; borrowings are limited to 80% of qualified capital expenditures. 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, of which we have drawn $93.0 million at June 30, 2002. Provided we satisfy applicable
covenants through March 31, 2003 the remaining $95.0 million of borrowings will become available. Inability to meet our Credit Facility covenants could impact the
availability of future borrowings, and could accelerate our payment schedule. Borrowing requests require the company to be in compliance pro-forma for the borrowing. In other words, we must show that
after giving effect of the incremental draw, we would still be in compliance with the covenants. At the time of the borrowing request, the company must certify, among other things, that all
representations and warranties made at the closing of the Amended and Restated Credit Facility and in connection with each previous borrowing request, are still valid. This would include the company
being solvent and not having suffered any adverse effect. The interest on amounts drawn is variable based on our leverage ratio, as defined in our Credit Facility. The weighted average interest rate
as of June 30, 2002 was 5.12%. The initial commitment fee on the unused portion of the Credit Facility is 1.5% and will step down based on usage. The Credit Facility provides for certain
restrictive financial and non-financial covenants. Among other things, these covenants currently require the maintenance of minimum revenue, EBITDA, and access lines in service levels. As
we have previously disclosed,

17

---

commencing in the first quarter of 2003, these covenants will no longer apply and at that time our covenants will relate to senior and total leverage ratios. EBITDA for covenant purposes includes
cash restructuring charges which totaled $0 and $0.9 million for the three months and six months ended June 30, 2002. Focal was in compliance with the covenants for the fourth quarter of
2001 and the first two quarters of 2002. A summary of certain financial and non-financial covenants related to the Credit Facility for the fourth quarter of 2001 through the fourth quarter
of 2002 is as follows:

|                                |  | 2001 |         | 2002
|------------------------------- |  | ---- | ------- | ----
|
|Minimum Revenue ($ in millions) |  | $    | 77.5    |     
|Minimum EBITDA ($ in millions)  |  |      | (7.0    | )   
|Minimum Access Lines in Service |  |      | 570,000 |     

In
June 2002, Standard and Poor's raised our corporate and unsecured debt ratings to CC and C, respectively. Our senior secured debt rating was downgraded to CCC.

We
are currently in discussions with the lenders party to our Credit Facility regarding the potential modification of terms and conditions to the Credit Facility.

Our
capital expenditures were $24.9 million for the six months ended June 30, 2002. This primarily reflects capital spending to support our Enterprise 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 $40.0 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.

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 the following:



18

---



On
February 18, 1998, we received $150.0 million in gross proceeds from the sale of our 1998 Notes due 2008. The 1998 Notes were to accrete to an aggregate stated principal
amount of $270 million by February 15, 2003. On October 26, 2001, approximately $115.5 million of accreted value was retired under exchange and purchase arrangements as
part of our comprehensive recapitalization plan. No interest is payable on the 1998 Notes prior to August 15, 2003. Thereafter, cash interest will be payable semiannually on August 15
and February 15 of each year.

On
January 12, 2000, we received approximately $265.7 million in net proceeds from the issuance of our 2000 Notes due 2010. The 2000 Notes bear interest at a rate of
11.875% per annum payable on July 15 and January 15. The 2000 Notes are due January 2010. On October 26, 2001, approximately $160.5 million of the stated principal
amount at maturity was retired under exchange and purchase arrangements as part of our comprehensive recapitalization plan.

We
utilized a secured equipment term loan (the "Facility") from a third party with a maximum borrowing level of $50 million. The Facility provided for, among other things,
equipment drawdowns through December 31, 1999, and requires repayment based on 60 equal monthly installments of principal and interest for each drawdown. The Facility contains the same
covenants as our Credit Facility.

Under
the terms of various short- and long-term contracts, we are obligated to make payments for office rents and for leasing components of our communications network through
2021. The office rent contracts provide for certain scheduled increases and for possible escalation of basic rentals based on a change in the cost of living or on other factors. We expect to enter
into other contracts for additional
components of our communications network, office space, other facilities, equipment and maintenance services in the future.

During
1999, we entered into agreements with carriers for the acquisition of indefeasible rights of use for dark fiber transport capacity for a minimum of 10,800 fiber miles. The terms
of the agreements are for 20 years with a total minimum commitment of approximately $71 million. One of these agreements has been accounted for as a capital lease. In June 2000,
we signed an agreement with a carrier for the lease of fiber transport capacity for a five-year term and a minimum commitment of $135.6 million. Additionally, we are party to a
products purchase agreement with a vendor that expires December 31, 2002. This agreement requires us to place orders for certain network products in a minimum aggregate amount of
$17.2 million.

19

---

The
table below provides additional information regarding our contractual obligations:

|(Dollars in Thousands)             |  | 2002 |        | 2003 |   | 2004   |  | 2005 |        | 2006
|---------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----
|Long term debt at face value       |  | $    | 5,440  |      | $ | 13,603 |  | $    | 12,822 |     
|Obligations under capital lease    |  |      | 1,192  |      |   | 3,271  |  |      | 3,306  |     
|Obligations under operating leases |  |      | 8,175  |      |   | 15,988 |  |      | 16,149 |     
|Unconditional purchase obligations |  |      | 29,200 |      |   | 30,516 |  |      | 30,000 |     
|                                   |  |      |        |      |   |        |  |      |        |     
|Total Contractual Cash Obligations |  | $    | 44,007 |      | $ | 63,378 |  | $    | 62,277 |     

|(Dollars in Thousands)             |  | 2007 |        | 2008 |   | 2009    |  | 2010 |        | Thereafter
|---------------------------------- |  | ---- | ------ | ---- | - | ------- |  | ---- | ------ | ----------
|Long term debt at face value       |  | $    | 40,500 |      | $ | 134,630 |  | $    |       |           
|Obligations under capital lease    |  |      | 3,309  |      |   | 3,309   |  |      | 3,309  |           
|Obligations under operating leases |  |      | 16,398 |      |   | 13,687  |  |      | 8,230  |           
|Unconditional purchase obligations |  |      |       |      |   |        |  |      |       |           
|                                   |  |      |        |      |   |         |  |      |        |           
|Total Contractual Cash Obligations |  | $    | 60,207 |      | $ | 151,626 |  | $    | 11,539 |           

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 six months
ended June 30, 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 June 30, 2002.

Our
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 plan
indicates that our revenue for the year 2002 will be between $354.0 million and $358.0 million and EBITDA will be between $(3.2) million and $(1.2) million for 2002. Although we believe
that our plan, cost estimates and the scope and timing of our planned network build-out are reasonable, we cannot assure that actual revenues and costs or the timing of the revenues and
expenditures, or that the scope and timing of our build-out, will be consistent with current estimates.

Net
cash used in operating activities decreased by $59.4 million to $34.6 million during the six months ended June 30, 2002, compared to the same period in 2001. This
decrease is primarily the result of a $64.4 million decrease in our outstanding accounts payable during the six months ended June 30, 2001, as compared with a decrease of
$18.9 million during the six months ended June 30, 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 $24.9 million for the six months ended June 30, 2002 compared to $57.0 million for the three months ended June 30, 2001. This
decrease of $32.1 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 $54.4 million for the six months ended June 30, 2002 to $5.9 million. This decrease is primarily the result of

20

---

decreased borrowings from our Credit Facility during the first six months of 2002 compared to the same period in 2001.

Based
on current estimates, including the benefit of our recapitalization, we expect that our existing cash 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 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. Raising additional
capital may be difficult given the current state of the telecommunications industry. If we were to raise additional capital, our operational and financial flexibility may be limited and any new
financing could be dilutive to existing shareholders.

Critical Accounting Policies

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

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

Revenue Recognition.We recognize revenue as we provide services to our customers. Monthly recurring charges include fees
paid by our customers for lines in service and additional features on those lines, the leasing of our facilities network and colocation space. These charges are billed monthly, in advance, and are
fully earned during the month. Usage charges, reciprocal compensation and access charges are billed in arrears and are fully earned when billed. Our non-recurring customer installation
fees are deferred and amortized 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 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.

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

Losses on Accounts Receivable.In evaluating the collectibility of our accounts receivable, we assess a number of factors
including carrier disputes and regulatory issues, specific customer's ability to meet its financial obligations to us, as well as general factors, such as the length of time the receivables are past
due and historical collection experience. Based on these assessments, we record both specific and general reserves for bad debt to reduce the related receivables from our customers and carriers to the
amount that we ultimately expect to collect. If circumstances related to specific customers or carriers change or economic conditions worsen such that our past collection experience is no longer
relevant, our estimate of the recoverability of our trade receivables could be further reduced from the levels provided for in our consolidated financial statements.

Long-Lived Assets.In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
whenever events or changes in circumstances indicate that the carrying amount of any long-lived asset the company expects to hold and use may not be recoverable, we assess the asset for

21

---

impairment. Pursuant to SFAS No. 144, if the sum of management's best estimate of the future undiscounted cash flows expected to be generated by the asset is less than the carrying amount of
the asset, an impairment loss is recognized. The amount of the impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset.

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

Effect of New Accounting Standards

Accounting for Asset Retirement Obligations

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

Reporting of Extinguishments of Debt

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

22

---

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.

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 June 30, 2002(Dollars in Thousands)
Expected MaturityDebt

Weighted Average
Interest Rate2002

$



%2003


1,875

5.122004


9,375

5.122005


16,875

5.122006


24,375

5.122007


40,500

5.122008


134,630

11.372009




2010


114,511

11.95342,141Fair Market Value

$
120,746

6.65
%


23

---



PART IIOTHER INFORMATION

Item 1. Legal and Administrative Proceedings

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

At our Annual Meeting of Shareholders held on June 12, 2002, the following proposals were adopted by the margins indicated.



Name

Votes For

Votes WithheldRobert C. Taylor, Jr.

8,236,683

123,155James N. Perry, Jr.

8,354,704

5,134William Kirsch

8,354,679

5,159




For

Against

Abstain

Broker Non-Votes5,598,208

1,374,307

112,552

1,274,771




For

Against

Abstain8,354,554

2,217

3,067


Item 5. Other Information

On June 13, 2002, Paul Yovovich submitted his resignation from the Board of Directors. The Board unanimously appointed Colin V.K. Williams to fill the vacancy. On
July 10, 2002 Robert C. Taylor, Jr. submitted his resignation from the Board of Directors.

24

---

Item 6. Exhibits and Reports on Form 8-K



|Exhibit
Number |  | Exhibit Description                                                                                                    |  | Location      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | --------------
|10.1           |  | Letter Agreement between Robert C. Taylor, Jr. and Focal Communications Corporation, dated June 19, 2002               |  | Filed herewith
|10.2           |  | Executive Employment Agreement with Kathleen Perone, dated June 17, 2002                                               |  | Filed herewith
|10.3           |  | Non-qualified Stock Option Agreement (Initial grant), dated June 17, 2002                                              |  | Filed herewith
|99.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed herewith
|99.2           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed herewith



During the second quarter, we filed one Current Report on Form 8-K, which was filed April 12, 2002. We announced a Change in Certifying Accountants.

25

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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/ Kathleen PeroneKathleen Perone |  | President, 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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