<PAGE>

    As filed with the Securities and Exchange Commission on August 14, 2001

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

                       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 June 30, 2001

                        Commission file number 333-49397

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

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

<TABLE>
<S>                                         <C>
                 Delaware                                   36-4167094
         (State of incorporation)               (IRS Employer Identification Number)
</TABLE>

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

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

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

   Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or required for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X]  No [_]

   The number of shares outstanding of the issuer's common stock, as of July
31, 2001:

                Common stock ($.01 par value) 61,755,571 shares

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

                                     INDEX

<TABLE>
<CAPTION>
                                                                       Page
                                                                       ----
 <C>     <S>                                                           <C>  <C>
 PART I--FINANCIAL INFORMATION


 Item 1. Financial Statements (Unaudited)...........................     4


         Condensed Consolidated Statements of Operations for the
          three and six months ended June 30, 2001 and 2000.........     4


         Condensed Consolidated Balance Sheets as of June 30, 2001
          and December 31, 2000.....................................     5


         Condensed Consolidated Statements of Cash Flows for the six
          months ended June 30, 2001 and 2000.......................     6


         Condensed Notes to Interim Consolidated Financial
          Statements................................................     7


 Item 2. Management's Discussion and Analysis of Financial Condition
          and Results of Operations.................................    11


 Item 3. Quantitative and Qualitative Disclosures About Market
          Risk......................................................    16


 PART II--OTHER INFORMATION


 Item 1. Legal and Administrative Proceedings.......................    17


 Item 2. Changes in Securities and Use of Proceeds..................    17


 Item 3. Defaults Upon Senior Securities............................    17


 Item 4. Submission of Matters to a Vote of Security Holders........    17


 Item 5. Other Information..........................................    17


 SIGNATURES..........................................................   18
</TABLE>

                                       2
<PAGE>

                INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

 .   Our business strategy and competitive advantages

 .   Our anticipation of potential revenues from designated markets or
     customers

 .   Statements regarding the growth of the communications services industry
     and our business

 .   The market potential of our services and products

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

 .   Our anticipated capital expenditures and funding requirements

 .   Anticipated regulatory developments

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

 .    Close our recapitalization plan as announced on August 9, 2001

 .   Respond to competitors in our existing and planned markets

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

 .   Enter into and maintain our agreements for transport facilities and
     services, including Internet transit services

 .   Maintain acceptance of our services by new and existing customers

 .   Receive full and timely payments from customers

 .   Attract and retain talented employees

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

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

 .   Respond effectively to regulatory, legislative and judicial developments,
     including developments relating to reciprocal compensation

 .   Manage administrative, technical, operational and financial issues
     presented by our business plan

 .   Raise sufficient capital on acceptable terms and on a timely basis

 .   Successfully provision digital subscriber line, or DSL, services

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

                                       3
<PAGE>

                         PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
           For the Three and Six Months Ended June 30, 2001 and 2000
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                             For the three months       For the six months
                                     ended                     ended
                                    June 30                   June 30
                            ------------------------  ------------------------
                               2001         2000         2001         2000
                            -----------  -----------  -----------  -----------
<S>                         <C>          <C>          <C>          <C>
REVENUE:
  Enterprise Revenue......  $    39,653  $    18,050  $    70,226  $    31,189
  Internet Service
   Provider Revenue.......       42,543       42,638       93,821       74,828
                            -----------  -----------  -----------  -----------
    Total revenue.........       82,196       60,688      164,047      106,017
                            -----------  -----------  -----------  -----------
EXPENSES:
  Network expenses........       41,242       23,047       74,566       39,332
  Selling, general and
   administrative.........       42,882       38,268       87,576       69,819
  Depreciation and
   amortization...........       21,177       12,768       43,826       23,144
  Non-cash compensation
   expense................        1,723        1,597        3,447        3,045
                            -----------  -----------  -----------  -----------
    Total operating
     expenses.............      107,024       75,680      209,415      135,340
                            -----------  -----------  -----------  -----------
OPERATING LOSS............      (24,828)     (14,992)     (45,368)     (29,323)
                            -----------  -----------  -----------  -----------
OTHER INCOME (EXPENSE):
  Interest income.........        1,278        6,431        3,080       12,239
  Interest expense, net...      (15,898)     (13,893)     (30,682)     (26,768)
  Other income (expense)..          --           --           --           242
                            -----------  -----------  -----------  -----------
    Total other expense...      (14,620)      (7,462)     (27,602)     (14,287)
                            -----------  -----------  -----------  -----------
LOSS BEFORE INCOME TAXES..      (39,448)     (22,454)     (72,970)     (43,610)
BENEFIT FOR INCOME TAXES..          --         1,069          --         1,400
                            -----------  -----------  -----------  -----------
NET LOSS..................  $   (39,448) $   (21,385) $   (72,970) $   (42,210)
                            ===========  ===========  ===========  ===========
BASIC AND DILUTED NET LOSS
 PER SHARE OF COMMON
 STOCK....................  $     (0.64) $     (0.35) $     (1.19) $     (0.70)
                            ===========  ===========  ===========  ===========
BASIC WEIGHTED AVERAGE
 NUMBER OF SHARES OF
 COMMON STOCK
 OUTSTANDING..............   61,299,143   60,309,169   61,144,218   60,229,965
                            ===========  ===========  ===========  ===========
</TABLE>


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

                                       4
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                   As of June 30, 2001 and December 31, 2000
                  (Dollars in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                        June 30,   December 31,
                                                          2001         2000
                                                       ----------- ------------
                                                       (unaudited)
<S>                                                    <C>         <C>
                        ASSETS
                        ------
CURRENT ASSETS:
  Cash and cash equivalents...........................  $  80,754   $ 171,417
  Short-term investments..............................        --       10,320
  Accounts receivable, net of allowance for doubtful
   accounts of $11,800 and $9,600 at June 30, 2001 and
   December 31, 2000, respectively....................     61,956      46,823
  Other current assets................................     21,719      21,069
                                                        ---------   ---------
    Total current assets..............................    164,429     249,629
                                                        ---------   ---------
PROPERTY, PLANT and EQUIPMENT, at cost................    603,976     536,355
  Less--Accumulated depreciation and amortization.....   (128,111)    (85,083)
                                                        ---------   ---------
  Property, Plant and Equipment, net..................    475,865     451,272
OTHER NONCURRENT ASSETS...............................     22,475      22,784
                                                        ---------   ---------
                                                        $ 662,769   $ 723,685
                                                        =========   =========
         LIABILITIES AND STOCKHOLDERS' EQUITY
         ------------------------------------
CURRENT LIABILITIES:
  Accounts payable....................................  $  35,501   $  99,909
  Accrued liabilities.................................     19,486      28,730
  Current maturities of long-term debt................     10,124       9,909
                                                        ---------   ---------
    Total current liabilities.........................     65,111     138,548
                                                        ---------   ---------
LONG-TERM DEBT, net of current maturities.............    606,353     534,841
                                                        ---------   ---------
OTHER NONCURRENT LIABILITIES..........................     13,711       5,507
                                                        ---------   ---------
STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value; 100,000,000 shares
   authorized; 61,754,121 and 61,454,594 issued and
   outstanding at June 30, 2001 and December 31, 2000,
   respectively.......................................        618         615
  Additional paid-in capital..........................    190,543     184,953
  Deferred compensation...............................     (1,004)     (1,186)
  Accumulated deficit.................................   (212,563)   (139,593)
                                                        ---------   ---------
    Total stockholders' (deficit) equity..............    (22,406)     44,789
                                                        ---------   ---------
                                                        $ 662,769   $ 723,685
                                                        =========   =========
</TABLE>


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

                                       5
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                For the Six Months Ended June 30, 2001 and 2000
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                               For the six
                                                            months ended June
                                                                   30
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss................................................. $(72,970) $(42,210)
  Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities--
    Depreciation and amortization..........................   43,826    23,144
    Non-cash compensation expense..........................    3,447     3,045
    Amortization of discount on senior notes...............   12,815    11,397
    Other..................................................      603     1,032
    Changes in operating assets and liabilities--
      Accounts receivable..................................  (15,133)  (13,744)
      Other current assets.................................     (938)   (1,469)
      Accounts payable and accrued liabilities.............  (73,652)   38,891
      Other non-current assets and liabilities, net........    8,013       490
                                                            --------  --------
        Net cash provided by (used in) operating
         activities........................................  (93,989)   20,576
                                                            --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures.....................................  (67,342) (129,245)
  Change in short-term investments.........................   10,320    (2,891)
  Proceeds from sale of investment in affiliate............      --        900
                                                            --------  --------
        Net cash used in investing activities..............  (57,022) (131,236)
                                                            --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Deferred debt issuance costs.............................      --     (7,656)
  Proceeds from issuance of long-term debt.................   63,000   273,020
  Payments on long-term debt...............................   (4,980)   (4,526)
  Net proceeds from the issuance of common stock...........    2,328       749
                                                            --------  --------
        Net cash provided by financing activities..........   60,348   261,587
                                                            --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......  (90,663)  150,927
CASH AND CASH EQUIVALENTS, beginning of period.............  171,417   178,142
                                                            --------  --------
CASH AND CASH EQUIVALENTS, end of period................... $ 80,754  $329,069
                                                            ========  ========
</TABLE>


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

                                       6
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

          CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands, except share amounts)

1. Basis of Presentation

   Except as otherwise required by the context, references in this Form 10-Q to
"Focal", "we", "us", or "our" refer to the combined businesses of Focal
Communications Corporation and all of its subsidiaries. The accompanying
interim condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which we believe are necessary to
present fairly the financial statements in accordance with generally accepted
accounting principles for the respective periods presented. Certain information
and footnote disclosures normally included in the annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission for Form 10-Q. These interim condensed
consolidated financial statements should be read in conjunction with our Annual
Report on Form 10-K for the year ended December 31, 2000, filed on March 30,
2001. The consolidated balance sheet at December 31, 2000 included herein was
derived from our audited consolidated financial statements, but does not
include all disclosures required under generally accepted accounting
principles.

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

2. Property, Plant and Equipment

   Property, plant and equipment is stated at cost, which includes direct costs
and capitalized interest, and is depreciated once placed in service using the
straight line method.

   Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                         June 30,   December 31,
                                                           2001         2000
                                                        ----------- ------------
                                                        (Unaudited)
<S>                                                     <C>         <C>
Building and improvements..............................  $   8,444    $  8,444
Communications network.................................    331,196     254,860
Computer equipment.....................................     47,043      34,172
Leasehold improvements.................................    110,180      55,527
Furniture and fixtures.................................     10,033      10,166
Motor vehicles.........................................        519         488
Assets under capital lease.............................     22,660      22,354
Construction in progress...............................     73,901     150,344
                                                         ---------    --------
                                                           603,976     536,355
Less: Accumulated depreciation.........................   (128,111)    (85,083)
                                                         ---------    --------
  Total................................................  $ 475,865    $451,272
                                                         =========    ========
</TABLE>

                                       7
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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


3. Debt

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                       June 30,   December 31,
                                                         2001         2000
                                                      ----------- ------------
                                                      (Unaudited)
<S>                                                   <C>         <C>
12.125% senior discount notes due 2008, net of
 unamortized discount of $47,173 and $59,888 at June
 30, 2001 and December 31, 2000, respectively........  $222,827     $210,112
11.875% senior notes due 2010, net of unamortized
 discount of $1,690 and $1,789 at June 30, 2001 and
 December 31, 2000, respectively.....................   273,310      273,211
$300,000 Senior Secured Credit Facility..............    63,000          --
Secured equipment term loan..........................    30,742       35,462
Capitalized lease obligations and other..............    26,598       25,965
                                                       --------     --------
                                                        616,477      544,750
Less--current maturities.............................    10,124        9,909
                                                       --------     --------
  Total..............................................  $606,353     $534,841
                                                       ========     ========
</TABLE>

   We have borrowed a total of $63,000 under our $300,000 Senior Secured Credit
Facility (the "Credit Facility") as of June 30, 2001. The draws under the
Credit Facility bear an interest rate of LIBOR plus additional basis points and
the principal payments will begin on November 30, 2003.

   On August 9, 2001, we announced a comprehensive recapitalization plan (see
Note 6).

4. 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 common stock. Since the adjustments required for the
calculation of diluted weighted average common shares outstanding are anti-
dilutive for the three and six months ended June 30, 2001 and 2000, this
calculation has 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, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                               Three        Three         Six          Six
                            Months Ended Months Ended Months Ended Months Ended
                              June 30,     June 30,     June 30,     June 30,
                                2001         2000         2001         2000
                            ------------ ------------ ------------ ------------
<S>                         <C>          <C>          <C>          <C>
Basic weighted average
 number of common shares
 outstanding..............   61,299,143   60,309,169   61,144,218   60,229,965
Dilutive stock options and
 unvested common shares...    2,741,678    8,003,199    2,103,423    7,418,608
                             ----------   ----------   ----------   ----------
Dilutive weighted average
 number of common shares
 outstanding..............   64,040,821   68,312,368   63,247,641   67,648,573
                             ----------   ----------   ----------   ----------
</TABLE>

                                       8
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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


5. 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 and for the periods ended June 30, 2001 and 2000, and as of December 31,
2000.

   Our chief operating decision makers view earnings before interest, income
taxes, depreciation and amortization ("EBITDA") as the primary measure of
profit and loss. The following represents information about revenues, EBITDA
(which excludes non-cash compensation), total assets and capital expenditures
as of June 30, 2001 and December 31, 2000; and for the six months ended June
30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                           ---------------------
                                                           June 30,   June 30,
                                                             2001       2000
                                                           -------- ------------
   <S>                                                     <C>      <C>
   Revenue................................................ $164,047   $106,017
   EBITDA.................................................    1,905     (3,134)


<CAPTION>
                                                           June 30, December 31,
                                                             2001       2000
                                                           -------- ------------
   <S>                                                     <C>      <C>
   Total assets........................................... $499,890   $452,733
   Capital expenditures...................................   67,342    309,617
                                                           ========   ========
</TABLE>

   The following reconciles our total segment EBITDA to our consolidated net
loss before income taxes for the six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                          Six months Six months
                                                          Ended June Ended June
                                                           30, 2001   30, 2000
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Total EBITDA for reportable segment...................  $  1,905   $ (3,134)
   Depreciation and amortization.........................   (43,826)   (23,144)
   Interest expense, net.................................   (30,682)   (26,768)
   Interest income.......................................     3,080     12,239
   Other income (expense), net...........................       --         242
   Non-cash compensation.................................    (3,447)    (3,045)
                                                           --------   --------
     Net loss before income taxes........................  $(72,970)  $(43,610)
                                                           ========   ========
</TABLE>

   The following reconciles our total segment assets to our consolidated total
assets as of June 30, 2001 and December 31, 2000:

<TABLE>
<CAPTION>
                                                           June 30, December 31,
                                                             2001       2000
                                                           -------- ------------
   <S>                                                     <C>      <C>
   Total assets for reportable segment.................... $499,890   $452,733
   Cash and short-term investments........................   80,754    181,737
   Other current assets...................................    9,107     16,790
   Property, plant and equipment, net.....................   50,543     49,641
   Other noncurrent assets................................   22,475     22,784
                                                           --------   --------
     Total consolidated assets............................ $662,769   $723,685
                                                           ========   ========
</TABLE>

                                       9
<PAGE>

               FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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

--------
/1/EBITDA is not a measurement of financial performance under generally
   accepted accounting principles, is not intended to represent cash flows from
   operations, and should not be considered as an alternative to net loss as an
   indicator of our operating performance or to cash flows as a measure of
   liquidity. We believe EBITDA is widely used by analysts, investors and other
   interested parties in the telecommunications industry. EBITDA is not
   necessarily comparable to similarly titled measures for other companies.

6. Subsequent Event And Pro Forma Financial Data

   On August 9, 2001, we announced a comprehensive recapitalization plan which
included, among other things; (1) the infusion of $150.0 million of private
investment capital that consists of the issuance of $50.0 million in class A
redeemable voting convertible preferred stock and $100.0 million in senior
convertible debt which will mature on December 31, 2007. Both securities are
convertible into our common shares and will accrue 8% payment-in-kind, ("PIK")
interest or dividends. The PIK interest and dividends are for five years with
acceleration provisions in the event of certain developments such as change in
control or prepayments. After five years interest and dividends may be payable
in cash, at our option. (2) Exchange and purchase arrangements which will
result in (subject to closing), the retirement of approximately $300.0 million
in principal amount ($280.0 million in exchange and $20.0 million purchased) of
our 12.125% senior discount notes due 2008 (the "1998 Notes") and our 11.875%
senior notes due 2010 (the "2000 Notes"); and (3) The amendment to our Credit
Facility to provide a total of $225.0 million of borrowing capacity. Prior to
the recapitalization, covenants of the Credit Facility limited our borrowing
capacity to $150.0 million.

   The following unaudited pro forma condensed balance sheet data gives effect
to the recapitalization and also gives effect for the conversion of the
convertible debt as if both had taken place on June 30, 2001:

<TABLE>
<CAPTION>
                                           (Dollars in Thousands)
                              -------------------------------------------------
                                               Pro Forma
                                            Recapitalization     Pro Forma
                                 Actual          As of        As if Converted
                                  As of         June 30,           Basis
                              June 30, 2001    2001(/1/)     June 30, 2001(/2/)
                              ------------- ---------------- ------------------
   <S>                        <C>           <C>              <C>
     Cash and short-term
      investments...........    $ 80,754        $225,754          $225,754
     Accounts receivable and
      other.................      83,675          83,675            83,675
     Property, Plant and
      Equipment, net........     475,865         475,865           475,865
     Other Noncurrent
      Assets................      22,475          17,852            17,852
                                --------        --------          --------
                                $662,769        $803,146          $803,146
                                ========        ========          ========
     Accounts Payable and
      Accrued Liabilities...    $ 54,987        $ 54,987          $ 54,987
     Long-Term Debt,
      includes current
      portion...............     616,477         443,602           343,602
     Other Noncurrent
      Liabilities...........      13,711          13,711            13,711
     Class A Redeemable
      Convertible Preferred
      Stock.................         --           50,000            50,000
     Total Stockholders'
      Equity................     (22,406)        240,846           340,846
                                --------        --------          --------
                                $662,769        $803,146          $803,146
                                ========        ========          ========
</TABLE>
  --------
  (1) Gives effect to our recapitalization as if it had taken place on June
      30, 2001 and includes the convertible note as long-term debt. However,
      the note does not require cash interest payments.
  (2) Gives effect to our recapitalization as if it had taken place on June
      30, 2001 and shows the convertible note as if converted to common
      shares as of June 30, 2001.

                                       10
<PAGE>

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

Overview

   General. We provide voice, data and Internet infrastructure services to
large, communications-intensive users in major cities. We began operations in
1996 and initiated service first in Chicago in May 1997. As of June 30, 2001 we
offered service in a total of 21 markets, which encompass a total of 50
metropolitan statistical areas, or MSAs. As of June 30, 2001 we had 575,004
lines installed and in service.

   On August 9, 2001, we announced a comprehensive recapitalization plan. In
conjunction with the recapitalization, we are sharpening our focus on our
enterprise customer base and existing markets by undertaking several
initiatives. The details of these initiatives are outlined below.

  . Consolidate Voice and Data Business Units--We are consolidating our voice
    and data business units in order to streamline the delivery of voice and
    data services to our enterprise and ISP customers. By combining these two
    business units, we will be better positioned to offer high quality
    services to our customers, while realizing operational efficiencies. As a
    result, we reduced our work force by approximately 175 employees during
    the third quarter of 2001.

  . Pursue 22 Market Business Plan--We will concentrate on our existing
    markets and will not enter the San Diego and St. Louis markets. We will
    complete our market build-out with Miami, our 22nd tier-one market. We
    believe that these 22 markets offer significant growth potential.

  . Refine Managed Internet Access Strategy--Our original plan was to provide
    managed Internet access services in 36 markets. These services are
    currently commercially available in 15 markets and three markets are
    under development. We will complete market development in these three
    markets and then postpone further expansion.

  . Scale Back DSL Initiatives--We will concentrate our DSL initiatives on
    our most mature markets including Chicago and New York and will cease DSL
    operations in other selected markets.

   Revenue. Enterprise revenue includes all services sold to corporations,
government entities and value added resellers. Internet Service Provider
("ISP") revenue includes all services sold to ISP customers. Our Enterprise and
ISP service offerings include circuit switched lines, private lines,
colocation, DSL, managed internet access, and other broadband services.
Enterprise and ISP revenue is 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, 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
carriers for each call made, fees paid by the ILEC and other CLECs as
reciprocal compensation, and access charges paid by the IXCs for long distance
traffic that we originate and terminate. Non-recurring revenue is typically
derived from fees charged to install new customer lines and are deferred and
amortized over estimated customer lives.

   We earn reciprocal compensation revenue for calls made by customers of
another local exchange carrier to our customers. We expect the proportion of
revenues represented by reciprocal compensation to decrease in the future as a
result of scheduled rate reductions in our agreements with major ILECs as well
as per the terms of recent FCC orders. We also expect the per minute cost of
reciprocal compensation payments to decline for the same reasons. These charges
are included in network expenses.

   Expenses. Our expenses are categorized as network expenses; selling, general
and administrative; depreciation and amortization; and non-cash compensation
expense. Network expenses are composed of leased transport charges, private
line costs, the cost of leasing space in ILEC central offices for colocating
our transmission equipment, the costs 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

                                       11
<PAGE>

make for the use of fiber transport facilities connecting our customers to our
switches and for our connection to the ILECs' and other CLECs' networks.
Generally, we have been successful in negotiating lease agreements that match
the duration of our customer contracts, thereby allowing us to avoid the risk
of incurring expenses associated with transport facilities that are not being
used by revenue generating customers.

   Our strategy of initially leasing rather than building our own fiber
transport facilities has resulted in our cost of service being a significant
component of total cost. Accordingly, our network expenses may be higher on a
relative basis compared to CLECs who 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, 2001 we were operating our own fiber networks in
10 of our markets.

   Selling, general and administrative expense ("SG&A") consists of network and
customer care personnel costs, sales force compensation and promotional
expenses as well as the cost of corporate activities related to regulatory,
finance, human resources, legal, executive, and other administrative
activities. We expect our SG&A expense to be lower as a percentage of revenue
than that of our competitors because of the efficiencies derived from our focus
on large customers in Tier-1 markets. These customers generally utilize a
larger number of switched access lines relative to the average business
customer, resulting in more revenue per sale, higher sales productivity and a
lower cost to serve on a per line basis.

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

                                       12
<PAGE>

Quarterly Results

   The following table sets forth unaudited financial, operating and
statistical data for each of the specified quarters of 2001 and 2000. The
unaudited quarterly financial information has been prepared on the same basis
as our Consolidated Financial Statements and, in our opinion, contains all
normal recurring adjustments necessary to fairly state this information. The
operating results for any quarter are not necessarily indicative of results for
any future period.

<TABLE>
<CAPTION>
                                    2001                     2000
                              ------------------  ----------------------------
                               Second    First     Fourth    Third     Second
                              Quarter   Quarter   Quarter   Quarter   Quarter
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
Enterprise Revenue ($ mil)..  $ 39,653  $ 30,573  $ 23,784  $ 20,179  $ 18,050
ISP Revenue ($ mil).........  $ 42,543  $ 51,278  $ 43,567  $ 40,573  $ 42,638
Lines Sold During the
 Quarter....................   119,710    89,383       --        --        --
Cumulative Net Lines
 Installed to Date..........   575,004   501,029   435,272   365,016   298,983
Estimated Enterprise Lines
 as % of Installed Lines....        50%       44%       39%       35%       32%
ILEC Switches
 Interconnected.............     2,316     2,062     1,975     1,823     1,677
Quarterly Minutes of Use
 (Billions).................       8.0       7.5       7.4       7.1       6.6
Markets in Operation........        21        21        20        20        19
MSAs Served.................        50        50        49        49        48
Circuit Switches
 Operational................        24        21        20        19        16
Capital Expenditures ($
 mil).......................  $     45  $     22  $     82  $     99  $     77
Employees...................     1,368     1,228     1,130     1,089       935
Sales Force(a)..............       247       210       184       180       166
</TABLE>
--------
(a) Quota bearing sales professionals. Does not include sales engineers or
    customer support personnel.

   We sold 119,710 lines during the second quarter of 2001, had gross installs
of 101,583 lines, and installed 73,975 lines on a net basis. Both the sales and
installation activity was heavily weighted in favor of our Enterprise (non-ISP)
business. We disconnected 27,608 lines during the second quarter of 2001. The
disconnected lines were concentrated in the ISP business and reflect, in part,
the short-term effects of weaker ISPs exiting the market. We believe that the
short-term nature of these issues and the strength of our enterprise business
will enable Focal to reach its targeted net line growth of 270,000 to 290,000
lines for 2001.

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

   Enterprise revenue increased 119% to $39.7 million during the second quarter
of 2001 from second quarter of 2000 revenue of $18.1 million. Enterprise
revenue for the second quarter of 2001 includes approximately $5.9 million in
non-recurring broadband sales. While we expect to make additional broadband
sales, the timing and amount of these sales are difficult to estimate. ISP
revenue was flat at $42.5 million during the second quarter of 2001 compared to
$42.6 million in revenue for the second quarter of 2000 which reflects the
continued softness in ISP demand and the transition in reciprocal compensation
rates. We installed 73,975 lines during the second quarter of 2001, which
exceeded the lines installed during the second quarter of 2000 by 23%. We
installed 62,665 and 11,310 net enterprise and ISP lines during the second
quarter of 2001, respectively.

   Network expenses totaled $41.2 million for the second quarter of 2001
compared to $23.0 million for the second quarter of 2000. This $18.2 million
increase resulted from our expansion into new markets and related costs for
leased transport facilities, usage settlements, colocation, and Internet
network costs related to our managed internet access services. Our gross margin
was approximately 50% for the second quarter of 2001 and 62% for the second
quarter of 2000. This decrease in our gross margin is a direct result of the
impact of reduced reciprocal compensation rates and the continued addition of
network capacity primarily to support the rollout of managed Internet access
services to new markets. SG&A expenses increased by $4.6 million, from $38.3
million during the three months ended June 30, 2000 to $42.9 million

                                       13
<PAGE>

during the second quarter of 2001. This increase is the result of our expansion
into new markets, the rollout of our managed internet access services, and a
corresponding increase in our employee base by 433 employees. However, SG&A
fell as a percent of revenue from 63% in the second quarter of 2000 to 52% in
the comparable period of 2001.

   Depreciation and amortization increased from $12.8 million to $21.2 million
in the comparative three-month periods. This increase of $8.4 million is a
result of our expansion into new markets and an increase in our fixed asset
base in our existing markets. Interest income decreased from $6.4 million in
the second quarter of 2000, to $1.3 million in the comparable period of 2001.
This $5.1 million decrease is primarily due to the use of our cash, cash
equivalents, and short-term investments for capital expenditures associated
with the build-out of our nationwide network. Our net interest expense
increased to $15.9 million in the second quarter of 2001 from $13.9 million in
the second quarter of 2000. This $2.0 million increase is due to interest
expense charges under our $300 million Senior Secured Credit Facility (the
"Credit Facility").

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

   Enterprise revenue increased 125% to $70.2 million compared to $31.2 million
in the first half of 2000. Our ISP revenue increased 25% from revenue of $74.8
million in 2000 to $93.8 million in the first half of 2001. This increase in
our enterprise and ISP revenue is primarily due to the generation of revenues
from a number of new markets that went into operation subsequent to the second
quarter of 2000 and from an increase in revenues from our more mature markets
during the first six months of 2001. In addition, we installed more enterprise
and ISP lines during the first half of 2001 compared to the first half of 2000.

   Network expenses were $74.6 million for the first half of 2001 compared to
$39.3 million for the first half of 2000. This $35.3 million increase resulted
from our expansion into new markets and related costs for leased facilities,
usage settlements, colocations, and Internet network costs related to our
managed internet access services. Our gross margin was approximately 55% and
63% for the six months ended June 30, 2001 and 2000, respectively. This
decrease in our gross margin between comparable periods is a direct result of
reduced reciprocal compensation rates and the continued addition of network
capacity primarily to support the roll out of managed Internet access services
to new markets. SG&A expenses increased by $17.8 million, from $69.8 million
during the six months ended June 30, 2000 to $87.6 million during the six
months ended June 30, 2001 as a result of our expansion into new markets and
the rollout of our managed internet access services. In addition, our overall
customer service, network operations, and SG&A expenses increased between
comparable periods due to a corresponding increase in our employee base of 433
employees. However, SG&A fell as a percent of revenue from 66% during the first
half of 2000 to 53% in the comparable period of 2001.

   Depreciation and amortization increased from $23.1 million to $43.8 million
in the comparative six-month periods in 2000 and 2001 respectively. This
increase of $20.7 million is a result of our expansion into additional new
markets and an increase in our fixed asset base in our existing markets.

   Interest income decreased from $12.2 million in the first half of 2000, to
$3.1 million in the comparable period of 2001. This $9.1 million decrease is
primarily due to our cash, cash equivalents, and short-term investments
decreasing from $342.0 million at June 30, 2000 to $80.8 million at June 30,
2001 as a result of cash utilized in the build-out of our nationwide network.
Interest expense increased from $26.8 million in the first half of 2000 to
$30.7 million in the first half of 2001. This $3.9 million net increase is
primarily due to interest expense charges relating to our Credit Facility.

Liquidity and Capital Resources

   On August 9, 2001, we announced a comprehensive recapitalization plan and
several business plan revisions. Our revised business plan requires significant
operating and capital expenditures, a substantial portion of which will be
incurred before significant related revenue is realized. These expenditures,
together with

                                       14
<PAGE>

associated operating expenses, may result in our having substantial negative
operating cash flow and substantial net operating losses for the foreseeable
future, including the second half of 2001 and fiscal year 2002. Our revised
plan indicates that our revenue for the year 2001 will be approximately $340.0
million to $350.0 million and EBITDA will be in a range of approximately $2.0
million loss to a positive $4.0 million for 2001. Although we believe that our
revised plan, cost estimates and the scope and timing of our planned network
build-out are reasonable, we cannot assure that actual costs or the timing of
the expenditures, or that the scope and timing of our build-out, will be
consistent with current estimates.

   Our capital expenditures were approximately $67.3 million for the first half
of 2001. This primarily reflects capital spending for the build-out of our new
and existing markets. We estimate that our capital expenditures in connection
with our current revised business plan will be approximately $125.0 million to
$140.0 million for 2001. 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.

   Our recapitalization plan as announced on August 9, 2001 includes, among
other things; (1) the infusion of $150.0 million of private investment capital
that consists of the issuance of $50.0 million in class A redeemable voting
convertible preferred stock and $100.0 million in senior convertible debt which
will mature on December 31, 2007. Both securities are convertible into our
common shares and will accrue 8% PIK interest or dividends. The PIK interest
and dividends are for five years with acceleration provisions in the event of
certain developments such as change in control or prepayment. After five years
interest and dividends may be payable in cash, at our option. (2) Exchange and
purchase arrangements which will result in (subject to closing), the retirement
of approximately $300.0 million in principal amount ($280.0 million in exchange
and $20.0 million purchased) of our 12.125% senior discount notes due 2008 (the
"1998 Notes") and our 11.875% senior notes due 2010 (the "2000 Notes"); and (3)
the amendment to our Credit Facility which provides a total of $225.0 million
of borrowing capacity. Prior to the recapitalization, covenants of the Credit
Facility limited our borrowing capacity to $150 million. We had borrowed $63.0
million under the Credit Facility as of June 30, 2001. We believe that our
recapitalization plan will provide the necessary funding and capital structure
to fully fund our revised business plan. If our current plans or assumptions
change or prove inaccurate, we may be required to seek additional sources of
capital. Although we believe that the recapitalization will be consummated
within 90 days, subject to customary conditions, including shareholder and U.S.
antitrust approval, there can be no assurance that we will consummate the
recapitalization as announced on August 9, 2001 or at all.

   Net cash used in operating activities increased by $114.6 million to $94.0
million during the six months ended June 30, 2001, compared to the same period
in 2000. This increased use of cash is primarily the result of a $64.4 million
decrease in our outstanding accounts payable as of June 30, 2001, which were
unusually high at December 31, 2000 due to vendor disputes that have
subsequently been resolved. Net cash used in investing activities was $57.0
million for the first half of 2001 compared to $131.2 million in the first half
of 2000. This decrease of $74.2 million is primarily the result of our decrease
in our capital expenditures. Net cash provided by financing activities for the
first half of 2001 was $60.3 million, a decrease of $201.2 million from the
first half of 2000. This decrease is primarily the net result of the $273.0
million in net proceeds we received from the issuance of our 2000 Notes in
January 2000.

   We have historically incurred net losses and have an accumulated deficit of
$22.4 million as of June 30, 2001. The aggregate net proceeds totaling
approximately $665.7 million that we received from the offering of our 1998
Notes, our initial public offering in August 1999, the 2000 Notes, the Credit
Facility and certain other financings, have funded a large portion of our
operating losses and capital expenditures through June 30, 2001. Based on
current estimates, we expect that our existing cash and investment balances,
our recapitalization plan as announced on August 9, 2001, and future cash flows
(expected to be provided from ongoing operations) will be sufficient to fully
fund our operations and capital expenditure requirements as contemplated in our
revised business plan. Our expectations of future capital requirements and cash
flows from operations are based on current estimates. Our actual capital
requirements and cash flows could differ significantly from these estimates. If
plans or assumptions change or prove to be inaccurate, we may be required to
seek additional sources of capital, seek additional capital sooner than
currently anticipated, or modify our expansion plans.

                                       15
<PAGE>

   The discussions under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements. These
statements are subject to a number of risks and uncertainties that could cause
actual results to differ substantially from our projections. See "Information
Regarding Forward-looking Statements" on page 3 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

   A significant portion of our long-term debt bears fixed interest rates, and
accordingly, the fair market value of the long-term debt is sensitive to
changes in interest rates. We have no cash flow or earnings exposure due to
market interest rate changes for our fixed long-term debt obligations. The fair
market value of our Credit Facility debt approximates the carrying value as of
June 30, 2001 due to the variable interest rate feature of the debt instrument.

   On August 9, 2001, we announced a comprehensive recapitalization plan (see
Note 6 to our consolidated financial statements).

   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.

<TABLE>
<CAPTION>
                                                           As of June 30, 2001
                                                          ----------------------
                                                           Fixed      Average
   Expected Maturity                                        Debt   Interest Rate
   -----------------                                      -------- -------------
   <S>                                                    <C>      <C>
   2001.................................................. $    --       --
   2002..................................................      --       --
   2003..................................................    2,800      8.1
   2004..................................................   16,800      8.1
   2005..................................................   16,800      8.1
   Thereafter............................................  571,600     11.6%
                                                          --------     ----
                                                          $608,000
                                                          ========
   Fair Market Value..................................... $145,044
                                                          ========
</TABLE>

                                       16
<PAGE>

                           PART II--OTHER INFORMATION

Item 1. Legal and Administrative Proceedings

   With the exception of the matters discussed in our Annual Report on Form 10-
K, filed on March 30, 2001, 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.

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 14, 2001, the following
proposals were adopted by the margins indicated.

    1.  Election of Directors:

<TABLE>
<CAPTION>
                                                                         Votes
                                                                For     Withheld
                                                             ---------- --------
         <S>                                                 <C>        <C>
         John R. Barnicle................................... 58,718,218  20,391
         James E. Crawford III.............................. 58,716,768  21,841
         Paul G. Yovovich................................... 58,718,074  20,535
</TABLE>

    2.  Ratify the appointment of Arthur Andersen LLP as independent
accountants.

<TABLE>
<CAPTION>
            For                           Against                                           Abstain
         ----------                       -------                                           -------
         <S>                              <C>                                               <C>
         58,711,225                       18,065                                             9,319

    3.  Approve the adoption of the Focal Communications Corporation 2000
Employee Stock Purchase Plan.

<CAPTION>
            For                           Against                                           Abstain
         ----------                       -------                                           -------
         <S>                              <C>                                               <C>
         58,182,315                       47,113                                            509,181
</TABLE>

Item 5. Other Information

   Not Applicable

                                       17
<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

              Signature                         Title                Date

     /s/ ROBERT C. TAYLOR, JR.          President and Chief    August 14, 2001
-------------------------------------    Executive Officer
        Robert C. Taylor, Jr.            (Authorized
                                         Officer)

        /s/ RONALD REISING              Executive Vice         August 14, 2001
-------------------------------------    President and Chief
           Ronald Reising                Financial Officer
                                         (Principal
                                         Financial Officer)

      /s/ GREGORY J. SWANSON            Controller             August 14, 2001
-------------------------------------    (Principal
         Gregory J. Swanson              Accounting Officer)

                                       18