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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File No. 0-26821

FOCAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (312) 895-8400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Warrants to purchase Common Stock

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference on Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes o    No ý

        Based on the closing sales price on the NASD on June 30, 2002 of $2.33, the aggregate market value of our voting and non-voting common stock held by non-affiliates on such date was approximately $11.5 million. Shares of common stock held by each director and executive officer and by each person who owns or may be deemed to own 10% or more of our outstanding common stock have been excluded, since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2003, Focal Communications Corporation had 4,971,543 shares of common stock issued and outstanding.

Documents Incorporated by Reference: None.

Index of Exhibits is located on page 60.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

        We make statements in this Annual Report on Form 10-K 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:

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Our business strategy and competitive advantages;



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Our anticipation of potential revenues;



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The transactions contemplated by the bankruptcy filing of December 19, 2002;



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The growth of the telecommunications industry and our business;



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The markets for our services and products;



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



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Our anticipated capital expenditures and funding requirements; and



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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 and regulatory developments and 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:

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Maintain acceptance of our services by new and existing customers;



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Attract and retain talented employees;



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Emerge from Chapter 11 bankruptcy in a timely manner;



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



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Respond to competitors in our markets;



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Design, provision and install our network infrastructure, including transport facilities, Internet transit services, and unbundled loops;



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



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Execute and renew agreements with suppliers on terms satisfactory to us;



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Enter into and maintain our agreements for transport facilities and services;



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Receive full and timely payments from customers;



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Prevail in legal and regulatory proceedings regarding inter-carrier compensation or changes to laws and regulations that govern inter-carrier compensation;



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



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Respond effectively to regulatory, legislative and judicial developments;



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



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

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PART I

ITEM 1.    BUSINESS

        Unless otherwise indicated, the information in this Annual Report on Form 10-K gives effect to a 35-for-1 reverse stock split that was declared by our Board of Directors on February 25, 2002 and effective on March 11, 2002. All share and per share amounts have been restated as if the split had occurred as of the earliest period presented.

        This report contains trademarks of Focal, and may contain trademarks, tradenames and service marks of other parties.

Introduction

        We are a national communications provider that offers voice and data services to communications-intensive users in major cities. We began operations in 1996, initiated service in May 1997, and as of December 31, 2002, offered services in the following 23 markets:

        Our business strategy is to become the provider of choice to communications-intensive customers in our target markets for voice and data services. Our sales and marketing efforts principally target Fortune 1000 companies and over half of the Fortune 100 currently use our services. We also provide services to many leading network service providers.

        We compete principally on the basis of the quality, sophistication and reliability of our services. Our primary competitors are Incumbent Local Exchange Carriers, or ILECs.

        Our customers tend to be the largest, most sophisticated communications users in the country. We believe that we meet their demanding needs through our unique network architecture and the experience of our operations team. The superior performance of our network stems, in part, from our extensive interconnections with the ILEC in each of our markets. We believe that our customers recognize the advantages of this design, which assures them the high level of service they demand.

        As of December 31, 2002, we had 586,981 lines installed and in service, as compared to 694,784 lines installed and in service as of December 31, 2001. Disconnects during 2002 were concentrated with our Wholesale customers and were primarily a result of customer financial difficulties including bankruptcies and liquidations and customers merging with or being acquired by other companies.

        Since the end of the second quarter of 2002, there have been several significant changes to the Focal management structure. In June 2002, Kathleen Perone succeeded Robert C. Taylor, Jr. as our President and Chief Executive Officer. In August 2002, Elizabeth Vanneste joined the management team as the Executive Vice President of Sales & Marketing. In October 2002, the Company's Chief Operating Officer left the Company and was not replaced.

Reorganization under Chapter 11

        At September 30, 2002, we were in default on both our senior secured bank credit facility ("Credit Facility") and our secured equipment term loan ("Equipment Loan"). Such defaults currently preclude

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additional borrowings. The defaults relate to non-compliance with both minimum revenue and minimum EBITDA covenants in the third quarter of 2002. Our senior lenders required us to effect a comprehensive balance sheet restructuring in connection with our existing defaults under our Credit Facility and Equipment Loan, our significant indebtedness and the existing conditions in the telecommunications industry (which have continued to deteriorate over the last year). In that regard, we engaged a financial advisor to assist us in evaluating our alternatives.

        On December 19, 2002 ("the Petition Date"), the Company filed a voluntary, pre-negotiated Chapter 11 bankruptcy petition with the United States Bankruptcy Court for the District of Delaware ("the Filing"). The pre-negotiated nature of the Filing allowed the Company to promptly file a plan of reorganization and should allow the Company to complete its reorganization in an expeditious manner. The Filing was done on a consolidated basis and includes Focal Communications Corporation, the parent company, and all of its operating subsidiaries. We have reached agreement with our senior bank lenders and holders of our approximately $110.0 million of senior secured convertible notes ("Convertible Notes") as part of an overall reorganization plan which will reduce the Company's outstanding senior secured debt and strengthen its competitive position. The agreements resulted in the prepayment of $15.0 million to our senior bank lenders under our Credit Facility in December 2002. Based on discussions between the holders of the Convertible Notes and representatives of holders of our 12.125% senior discount notes ("1998 Notes") and 11.875% senior notes ("2000 Notes"), on March 26, 2003, the Company filed an amended plan of reorganization and disclosure statement ("Amended Reorganization Plan"). If confirmed by the Bankruptcy Court, the Amended Reorganization Plan provides that the $110.0 million of Convertible Notes would be exchanged for 85% of $65.0 million preferred equity. General unsecured creditors, including the holders of the 1998 and 2000 Notes, would receive a pro-rata share of 15% of the $65.0 million of preferred equity, in addition to warrants to purchase up to 25% of common stock of the reorganized company. The Amended Reorganization Plan has the support of the Company's senior bank lenders and holders of the Convertible Notes, as well as the official committee of unsecured creditors, and provides for no disruption to the Company's employees, customers, trade creditors, or overall operations.

        The Company has been operating as the Debtor in Possession for approximately three and a half months. Since the Petition Date, the Company has taken various steps to execute on its plans to dramatically improve its bottom line through cost cutting and efficiency initiatives. The Amended Reorganization Plan cites significant opportunities for cost reduction and elimination of underutilized capacity, including approximately $2.0 million per month in recurring network expenses to be eliminated in the first half of 2003 as a result of rejections of certain executory contracts. The Amended Reorganization Plan anticipates additional savings of approximately $3.0 million per month will be realized by year-end 2003 through a combination of network grooming and re-negotiation of more favorable terms from various suppliers. Consolidation or elimination of office space and various property leases is anticipated to result in savings of approximately $1.0 million per year.

        Since the Petition Date, sales and revenue from our Communications Services customers have increased. Additionally, 188 new customers have made initial commitments to Focal since the Petition Date, while approximately 3% of our customer base has chosen to terminate their services with Focal. While the eventual level of customer support and success in executing on the Amended Reorganization Plan have yet to be determined, early indications are that we should be able to continue to maintain and moderately grow our customer base while executing on planned network savings initiatives.

Market Potential

        We believe communications-intensive users in large metropolitan markets are not adequately supplied with local voice and data services. We also believe that these types of users will increasingly demand diversity in communications providers. As a result, we initially chose to do business only in

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large metropolitan markets with a high concentration of communications-intensive customers. We selected our target geographical markets using several criteria:

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Sufficient market size;



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Supportive state regulatory environment; and



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The existence of multiple fiber transport providers with extensive networks.

        We currently offer circuit-switched voice and data services, packet-switched data services, and high-speed dedicated Internet access services. We believe the market potential in our target markets for these services is substantial.

Strategy

        Our business strategy is to become the provider of choice to communications-intensive customers in our target markets for voice and data services. Our sales and marketing efforts principally target Fortune 1000 companies and over half of the Fortune 100 currently use our services.

        We believe that our success is based on our superior network reliability, strong customer service and experienced sales force among other factors. The majority of our sales people bring to the Company significant industry experience and long standing customer relationships.

        Our primary source of competition is the ILEC, usually a Regional Bell Operating Company ("RBOC"). In addition to the above strengths, we also differentiate Focal from the competition by offering customers the ability to manage their local service on a national basis, much like inter-exchange carriers do their long distance services. We currently have a very low share of the local telecommunications market in the cities we serve, providing us with significant growth opportunities for the future.

        By utilizing a "smart-build" approach to network design we believe we have optimized our return on invested capital. We do this by initially leasing, rather than owning, fiber capacity, concentrating our capital expenditures on switching facilities and information systems and acquiring fiber transport capacity as the volume and demands of our customer traffic warrants. Because of increased customer traffic volume in some of our markets, we began acquiring our own fiber transport capacity in 1999. We have continued to use the "smart-build" approach to network and service deployment to reduce the time and capital required to launch a new market and to minimize the financial risk associated with underutilized networks. Despite these efforts to minimize network underutilization, the continued deterioration in the telecommunications industry and our significant line disconnects during the past year, primarily with our Wholesale customers, have resulted in underutilization of our network. Our Plan of Reorganization anticipates savings from the elimination of excess capacity in connection with our bankruptcy proceedings.

Networks

        We utilize Nortel DMS-500 SuperNode digital central office switches. As we add customers in a market, it has generally been most cost-effective for us to use leased fiber transport capacity to connect our customers to our network. We have initially leased local network trunking facilities from the ILECs and metropolitan network providers in each of our markets in order to connect our switches to major ILEC central offices serving the central business district and outlying areas of business concentrations. Given the large volume of traffic that we generally carry, we are able to negotiate favorable transport rates and still offer our customers redundancy and diversity. In addition, we have designed our networks to maximize call completion and significantly reduce the likelihood of blocked calls, which helps us satisfy the needs of our high-volume customers. This "smart-build" approach is possible because there are multiple vendors of local fiber transport facilities in each of our large metropolitan

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markets. We utilized this switch-based, leased transport network architecture to reduce the time and capital required to launch a new market and minimize financial risk associated with under-utilized networks. Despite these efforts to minimize network underutilization, the continued deterioration in the telecommunications industry and our significant line disconnects during the past year, primarily with our Wholesale customers, have resulted in underutilization of our network. Our Plan of Reorganization anticipates savings from the elimination of excess capacity in connection with our bankruptcy proceedings.

        We believe that the quantity of existing fiber transport facilities available from numerous carriers will be sufficient to satisfy our need for local leased transport facilities and permit us to obtain these facilities at competitive prices for the foreseeable future. The fiber transport providers in our markets compete with each other for our business in order to maximize the return on their fixed-asset networks, which enables us to obtain competitive pricing. In addition, because each of our fiber transport capacity providers is a common carrier, they are required to make their transport services available to us on terms no less favorable than those provided to similar customers.

        We own a portion of our local transport capacity in some of our markets because increased volumes of customer traffic between our switches and specific ILEC central offices make it more economical to own rather than lease fiber. 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.

        We have also employed a "smart-build" approach in developing our inter-city strategy. Initially, we resold long distance transmission service by buying minutes on a wholesale basis. We currently lease fiber optic transport capacity connecting our switches between each of our markets that transports our calls from market to market over our own network and terminates the calls either directly at our customer's location or at the ILEC switch. For international calls, we have negotiated agreements with various international carriers for termination of our international calls throughout the world. This inter-city backbone network was initially based on time division multiplexing technology, but we are transitioning it to Asynchronous Transfer Mode, or ATM, technology. We believe the use of ATM switches will provide greater flexibility in creating and managing both data and voice services over the same physical network. We are currently able to price inter-city calls that remain on our network as if they were local calls—a service we call FocaLINC.

Products and Services

        We offer a complete range of voice and data products. We connect calls using our own switches and network, as well as network services purchased from multiple carriers, resulting in a redundant network designed to meet the needs of the most demanding customers. In addition to connecting to all of the tandems in a given market, we connect directly to a high percentage of ILEC central offices, dramatically reducing the rate of failure in connecting calls.

Voice Services

        Inbound Services.    Our basic, inbound local communications service allows for the completion of calls to a new phone number that we supply to our customer. Alternatively, local number portability, or LNP, allows us to provide inbound local communications services using a customer's existing phone number. LNP allows us to provide emergency service to companies that lose their service as a result of man made or natural disasters. LNP has become increasingly useful to us in taking existing business from our primary competitors, the ILECs. We market this service to our customers as both a primary and backup service.

        We also provide full-featured intraLATA, intrastate, interstate and international toll-free services to our customers from 70 countries.

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        Outbound Services.    Our basic outbound services allow local and toll calls to be completed within a metropolitan region and long-distance calls to be completed worldwide. This Direct Outward Dial service is utilized by end-users in several ways. As a primary service, a customer uses Focal as a replacement for the ILEC in placing calls to destinations within the region. In addition, a customer can use Focal as a replacement for the long-distance provider in placing a voice or high-speed data call to destinations outside the region and around the world.

        Other outbound applications include long-distance overflow service in which we act as a backup to the customer's existing long-distance carrier in order to optimize the number of direct, special access lines installed from the customer's premises to the long-distance carrier's network.

        Our FocaLINC and FocalLINC LD services are designed to price long-distance calls that remain on our network at rates that are competitively positioned. This product provides a cost-effective way for our customers in one market to make calls to their offices in other Focal markets.

        Focal's Virtual Office and National Exchange are voice applications that allow our customers to expand their inbound calling area. Virtual Office provides a customer's telecommuting employees working or travelling throughout the LATA, the ability to call their corporate office as a local call, thereby reducing toll charges. National Exchange provides our customers with a perceived local presence by allowing their end users in another market to reach them by dialing a local number.

        Focal's Business Continuance Plan assists customers in designing a telecommunications plan that includes redundancy, diversity and contingency planning. Focal's plan includes Remote Call Forwarding, which allows customers to forward calls from out-of-service lines to working numbers anywhere in the country. Focal Fail-Safe reroutes calls to a pre-determined backup location in case of outages. Colocation space offers enterprises the ability to store voice equipment in secure central office locations, to be used if needed. These services help ensure Focal's service to its customers remains uninterrupted, even in the face of a crisis.

        Our Conference Calling product has been enhanced to include an "on-demand" feature. Capacity for this feature supports up to 48 lines, which are available to customers at all times. Customers pay only when they use the service. In addition, the company offers traditional operator assisted conference calls.

        All of the services described above are commonly provisioned over a high-speed digital communications circuit called a T-1 facility and interface directly with our customers' private branch exchange or other customer-owned equipment. Direct interfacing eliminates the need to provide multiplexing equipment, which combines a number of communications paths onto one path, at the customer's location. This is possible due to the high call volume generated by the communications-intensive customers we target. Our ability to directly interface with existing customer equipment further minimizes our capital investment and maximizes our overall return on capital.

Data Services

        Internet Services.    Our high-speed Internet access services are principally targeted to our corporate and network service provider customers in all of our markets. The service relies on a combination of Internet Transit services, purchased from multiple Tier 1 Internet backbone networks, and Focal's backbone network to provide access to the global Internet. Additionally, we offer value-added services on top of our core high speed Internet access services that are directed at enterprise customers that desire to outsource installation, management and maintenance of their data services to a single provider that can help manage network growth and technological change.

        Access Services.    Focal's Multiexchange and Enhanced National Exchange products support data and enhanced service provider (ESP) applications. Multiexchange supports IntraLATA data applications and can be used to allow our customer's employees to dial into the customer's local area network via a

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computer in the employee's local calling area. Our customer's employees can access their local area network for the price of a local call, enabling our customer to avoid the higher cost of maintaining region-wide 800 service. Focal's eNational Exchange supports InterLATA data/ESP applications. In addition to providing InterLATA end user access to our customer's LAN, it can be used by enhanced service providers for unified messaging or enhanced calling card functions such as checking stock quotes, news, and weather.

        We offer our customers the ability to colocate equipment in our switching centers. Equipment colocation benefits the customer by allowing the customer to inexpensively house its data equipment without having to maintain secure, environmentally controlled space. We also offer them equipment maintenance services. These services are particularly well suited to our network service provider customers, who frequently operate remote access servers and routers in conjunction with our switched services.

Integrated Voice and Data Services

        Integrated Voice and Data, or IVAD targets branch offices of larger corporations, as well as medium-sized businesses. IVAD is a scalable and flexible integrated voice and data service, allowing us to provide local, toll, long-distance and data traffic on a single dedicated circuit. This service positions Focal well to penetrate further into our existing customer-base with value-added services across our voice and data product suite.

Advanced Services

        CDR Express provides our wholesale customers with automated delivery of daily call detail records, or CDRs, via the Internet. This system enables these customers to accurately bill their customers in a secure environment. CDR Express, as well as some other Focal products, is located in Your Domain—a section of our Internet site specifically dedicated to each customer. Your Domain enables our customers to access their most recent invoices, call detail records and customer order entry forms. Your Domain is protected by a customer's user name and password. Your Domain can also inform customers of new product offerings we are developing.

Sales and Marketing

        One of our primary objectives is to satisfy the need for highly reliable communications services for communications-intensive users in the large metropolitan markets in which we operate by providing diverse, reliable and sophisticated services. We believe that we have a competitive advantage in satisfying this need since we are focused on delivering a specific set of innovative services to our target customers.

        Diversity.    Focal provides diversity to communications-intensive users by delivering highly reliable, local communications services as an alternative to the ILEC. This type of diversity already exists in other areas of communications services, such as long-distance. Communications-intensive customers clearly embrace the benefits of diversity, particularly because redundancy minimizes the effects of facilities failures and maximizes competitive pricing. As a result, most of our target customers typically have multiple long-distance providers, multiple equipment vendors and multiple local private-line providers. Because of our focused strategy, we believe that we are uniquely positioned to become the provider of choice for local phone and data services for communications-intensive enterprises. Our focused strategy is based on our ability to deliver the superior level of diverse, reliable and sophisticated services that our customers require.

        Reliability.    We provide reliable service to communications-intensive users, who are highly sensitive to the potential effects of facilities failures, by designing our networks around the same theme of diversity that we advocate for our customers. Although local services are perceived as simple, basic

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services, the delivery of highly reliable local services requires sophisticated systems. We have engineered our switching and transport networks to meet the demanding traffic and reliability requirements of our target customers. Our network strategy is based on developing and operating a robust, reliable, high-throughput local network relative to the ILECs and other Competitive Local Exchange Carriers, or CLECs. Unlike smaller users that tend to pre-qualify vendors based on price, we believe that communications-intensive users choose vendors based on the performance of their networks, and specifically, their reliability. As a result, the design and operation of our network are key success factors in our business development process.

        We use Nortel DMS-500 SuperNode central office switches, which we have engineered to reduce significantly the likelihood of blocked calls and to maximize call completion. As such, our customers are unlikely to find themselves unable to complete or receive calls due to limitations inherent in our switches. We typically connect to a large number of switches in the ILEC's network. We believe this is a competitive advantage because it increases call completion even if a portion of the ILEC's trunking network becomes blocked. We optimize the configuration of our network by implementing overflow routing between the ILEC's network and ours, where available. Because the customer base of the ILECs and other CLECs is not typically as communications-intensive as ours, we specifically engineered our network to accommodate traffic volumes per customer far in excess of that which the ILECs or other CLECs typically experience. We believe that our design is unique among ILECs and CLECs and is attractive to our target customer base of communications-intensive users. In addition, we enhance our reliability by delivering service from our switches to customers over multiple fiber transport systems.

        We have also implemented safeguards in our network design to maximize reliability. The DMS-500 SuperNode switch allows us to distribute customer traffic across multiple bays of equipment, thus minimizing the effects of any customer outage. In addition, these switches were engineered by Nortel Networks with fully redundant processors and memory in the event of a temporary failure. Similarly, we designed our Dedicated Internet Access service to achieve high levels of reliability by connecting each one to multiple Internet backbone providers and by building two levels of redundancy into our switching and routing infrastructure. Our disaster prevention strategy includes service from multiple power sources where available, on-site battery backup and diesel generator power at each switching facility to protect against failures of our electrical service.

        Sophistication.    Our target customers are knowledgeable, sophisticated buyers of communications services that demand a high level of professionalism throughout a vendor's organization. We believe that the technical sophistication of our management and operations team has been a critical factor in our initial success and will continue to differentiate us from our competitors. Execution of our strategy of penetrating communications-intensive accounts requires a well-experienced team of sales professionals. As a result, attracting and retaining experienced sales professionals is important to our overall success. Our sales professionals' compensation is structured to retain these valuable employees through multiple cash compensation incentives.

        We divide our direct sales force into two groups:

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The communications services group; and



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The wholesale services group.

        The communications services group is responsible for selling to enterprise accounts, which include business customers, government agencies and universities. Our communications services group sales force is organized so that teams focus on different areas of our target market or its geographic location. Our sales strategy for these enterprises is to focus on the diversity, redundancy and sophistication that we can offer the customer, particularly when compared to the ILECs. In some situations we are chosen for these capabilities as a secondary carrier, typically offering the customer a

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measure of security and reliability. Other enterprises choose us as their sole or primary provider. In situations where we are a secondary provider, our strategy is to build our reputation with the customer by providing superior customer care in addition to our network advantages, then increase our overall penetration of the customer's communications services. Over a period of time, we hope to win all or a majority of an enterprise customer's business. We also utilize indirect sales agents to reach smaller customers as well as specialized service customers.

        The wholesale services group is responsible for selling Focal service to value-added resellers, network service providers and data carriers, including Internet service providers. Focal is successful in selling its services because it is a highly reliable, responsive and cost-effective source of local communications services. We believe a wide array of communications service providers, including long-distance companies, will seek to provide bundled communications services in the large metropolitan markets we target. We are well positioned to be the provider of choice for re-bundled local service. Because we do not intend to directly distribute our services to residential or small-business customers, we believe that value-added resellers and other carriers looking to purchase the local service portion of their bundled service offerings are more likely to purchase service from us rather than from other ILECs or CLECs that compete with them.

Information Systems

        Superior customer service is critical to achieving our goal of capturing market share. We are continually enhancing our service approach, which utilizes a trained team of customer sales and service representatives to coordinate customer installation, billing and service. In order to deliver these back-office functions, comprehensive support systems are a critical component of our service delivery. We have installed systems designed to address all aspects of our business, including service order, network provisioning, end-user and carrier billing, and trouble reporting. The efficiency of our operating processes contributes to our ability to rapidly initiate service to new accounts. Our installation desk follows a customer's order, ensuring the installation date is met. Additionally, our customer sales representatives respond to all other customer service inquiries, including billing questions and repair calls.

        We are continuously enhancing our systems and procedures for operations support, order provisioning and other back office systems in order to facilitate and streamline the processing of large order volumes and customer service. These systems are required to enter, schedule, provision and track a customer's order from the point of sale to the installation and testing of service. The existing systems currently employed by most ILECs, CLECs and long-distance carriers generally require multiple entries of customer information to accomplish order management, provisioning, switch administration and billing. This process is not only labor intensive, but it creates numerous opportunities for errors in provisioning service and billing, delays in installing orders, service interruptions, poor customer service, increased customer turnover and significant added expenses due to duplicated efforts and decreased customer satisfaction.

        We are currently using Business Process Management (BPM) software to standardize, streamline, and automate processes. This software is allowing us to monitor the status of an order as it progresses from the order initiation stage, through the service provisioning activities, and ultimately to service activation. This software supports the process by which we convert a customer to our network from the local exchange network of an ILEC or other carrier, including circuit design and workflow management.

        We believe automation of internal processes contributes to the overall success of a service provider and that billing is a critical element of any telephone company's operation. We deliver billing information in a number of media besides paper, including electronic files and Internet inquiry. Our Invoice Domain service allows customers to securely access and view their monthly invoices over the

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Internet. In addition, this service allows customers to download call detail records. Similarly, our value-added reseller customers can download call records on a daily basis through our secure web site. This allows them to efficiently process invoices for their end-user customers.

Significant Relationships

        We have no end-user customers that accounted for more than 10% of our revenues during the three years ended December 31, 2002. Verizon is the only carrier customer that accounts for more than 10% of our revenues during the year ended December 31, 2002. Verizon and SBC accounted for more than 10% of our revenues during the years ended December 31, 2001 and 2000. Due the regulated nature of the revenues earned from these carriers, the concentration of revenue from these carriers should not pose a business risk to the Company.

        We maintain significant relationships with several suppliers of telecommunications network equipment and services. Our primary switching equipment vendor is Nortel Networks, which may have a material claim for damages arising from rejection of a minimum commitment contract. Although we have largely completed the build-out of our switch network, we will continue to require maintenance and repair service from Nortel Networks, as well as incremental equipment to meet customer demand growth. We believe that we generally have a good working relationship with Nortel Networks. Other significant suppliers include providers of network transport service, including service provided by the ILECs and by carriers such as AT&T, Time Warner Telecom and WorldCom. Some of these providers, which are also competitors, are themselves in Chapter 11 proceedings or are otherwise experiencing financial difficulty. We believe that we can continue to receive services from such carriers, their successors in interest or purchasers of such carriers' assets.

Competition

        Portions of our industry are highly competitive. We face a variety of existing and potential competitors, including:

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The ILECs;



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Other voice and data CLECs;



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Long distance carriers;



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Potential market entrants, including cable television companies, value-added resellers, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end-users; and



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Foreign carriers.

        Our primary competitor in each of our existing markets is the ILEC. Examples include BellSouth, Verizon, Qwest, and SBC. These ILECs are generally required to file their prices with the state regulatory agencies in their service areas. Any price changes must be reflected in these filings. The ILECs have also generally been given the flexibility to respond to competition with lower pricing. In most cases, proposals for lower pricing must also be filed with the state utility commissions and the pricing must be made available to similarly situated customers. We believe this provides a disincentive for the ILECs to significantly vary or discount prices even in competitive situations. However, as a CLEC, similar obligations apply to us. See "—Regulation—State Regulation."

        The ILECs offer a wider variety of services in a broader geographic area than ours and have much greater resources than we do. This may encourage an ILEC to subsidize the pricing for services with which we compete with the profits of other services in which the ILEC remains the dominant provider. We believe competition has limited the number of services dominated by ILECs. In addition, state

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regulators have exercised their enforcement powers in a way that makes it unlikely the ILECs would be able to successfully pursue this type of protective pricing strategy for an extended period.

        In addition to competition from ILECs, we also face competition from other CLECs. Although CLECs overall have only captured a relatively small percentage of the U.S. local telecommunications market, we nevertheless compete to some extent with other CLECs in our customer segments. In some instances, CLECs have resources greater than ours and offer a wider range of services. Many of the CLECs in our markets target small- and medium-sized business customers, which differs from our target customer base of communications-intensive users.

        Some of the ILECs recently requested, among other things, that the FCC relax regulation of their provision of advanced data networks, which may also be used for voice traffic. While the FCC has denied those requests, it has initiated rule-makings to assess whether these ILECs could provide these services on a largely deregulated basis. If adopted, these rules may provide additional opportunities for competition from these ILECs. Bills have been introduced in Congress that would grant RBOCs permission to provide data services in areas where they are currently restricted from doing so. Although we cannot predict the outcome of any proposed or pending legislation, the ability of RBOCs to provide data services on a broader basis could have a material adverse effect on us. In addition, the FCC recently acted to enable ISPs to buy DSL services in bulk from ILECs, which could result in additional competition for ISP business.

        In addition to ILECs and other CLECs, we are competing with long distance carriers. A number of long distance carriers have introduced local telecommunications services to compete with the ILECs and us. These services include toll calling and other local calling services, which are often packaged with the carrier's long distance service. While we do not believe the packaging aspect of the service is particularly attractive to the communications-intensive customers we target, large long distance carriers enjoy certain competitive advantages due to their vast financial resources and brand name recognition. In addition, we believe there is a risk the long distance carriers may subsidize the pricing of their local services with profits from long distance services. We anticipate that the entry of some of the ILECs into the long distance market will reduce the risk of this type of activity by reducing the profitability of the long distance carrier's long distance minutes. Further, to the extent the long distance carrier purchases our service on a wholesale basis and rebundles it at a subsidized rate, we may benefit as the subsidized, wholesale service could result in higher market penetration than we would otherwise have achieved. In addition, we have displaced long distance carriers where the customer was dissatisfied with the quality of the long distance carrier's local service. We expect our reputation for exceptional service quality and customer care will continue to result in us displacing the long distance carrier as the primary alternative to the ILEC in competitive situations. In addition, we expect that some of our recent and proposed service offerings, which enable long distance calls to be priced like local calls, will increase our competitiveness.

        We compete principally on the basis of the quality, sophistication and reliability of our service. See "—Sales and Marketing." We believe that the principal competitive factors in our markets are speed and reliability of service, quality of facilities, level of customer care and technical support, and the timing and market acceptance of new services and enhancements to existing services.

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Regulation

        The following summary of regulatory developments and legislation is not comprehensive. It does not describe all present and proposed federal, state and local regulation and legislation affecting the telecommunications industry. Existing federal and state regulations are currently subject to judicial proceedings, legislative hearings and administrative proposals that could change, in varying degrees, the manner in which our industry operates. We cannot predict the outcome of these proceedings or their impact on the telecommunications industry or us.

        Overview.    Our services are subject to varying degrees of federal, state and local regulation. The decisions of regulatory bodies such as the FCC and state agencies are often subject to judicial review, which makes it difficult for us to predict outcomes in this area.

        Federal Regulation.    We must comply with the requirements of common carriage under the Communications Act of 1934. Comprehensive amendments to the Communications Act of 1934 were made by the Telecommunications Act of 1996, referred to as the Telecom Act, which substantially altered both federal and state regulation of the telecommunications industry. The purpose of this legislation was to foster increased competition in the telecommunications industry. Because implementation of the Telecom Act is subject to numerous federal and state policy rule-making and judicial review, we cannot predict with certainty what its ultimate effect on us will be.

        Under the Telecom Act, any entity may enter a telecommunications market, subject to reasonable state safety, quality and consumer protection regulations. The Telecom Act makes local markets accessible by requiring the ILEC to permit interconnection to its network and establishing ILEC obligations with respect to:

•

Colocation of equipment.  This allows companies like us to install and maintain our own network equipment, including DSLAMs, ATM switches, and fiber optic equipment, in ILEC central offices.



•

Interconnection.  This requires the ILECs to permit their competitors to interconnect with ILEC facilities at any technically feasible point in the ILECs' networks.



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Reciprocal compensation.  This requires the ILECs and CLECs to compensate each other for telecommunications traffic that originates on the network of one carrier and is sent to the network of the other.



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Resale of service offerings.  This requires the ILEC to establish wholesale rates for services it provides to end-users at retail rates to promote resale by CLECs.



•

Access to unbundled network elements.  This requires the ILECs to unbundle and provide access to some components of their local service network to other local service providers. Unbundled network elements are portions of an ILEC's network, such as copper lines or "loops," that CLECs can lease in order to create their own facilities networks.



•

Number portability.  This requires the ILECs and CLECs to allow a customer to retain an existing phone number within the same local area even if the customer changes telecommunications services providers. All telecommunications carriers are required to contribute to the shared industry costs of number portability.



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Dialing parity.  This requires the ILECs and CLECs to establish dialing parity so that all customers must dial the same number of digits to place the same type of call.



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Access to rights-of-way.  This requires the ILECs and CLECs to establish non-discriminatory access to telephone poles, ducts, conduits and rights-of-way.

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        ILECs are required to negotiate in good faith with other carriers that request any or all of the arrangements discussed above. If a requesting carrier is unable to reach agreement with the ILEC within a prescribed time, either carrier may request arbitration by the applicable state commission. If an agreement still cannot be reached, carriers are forced to abide by the obligations established by the FCC and the applicable state commission.

        We have entered into a number of interconnection agreements with the ILECs in our markets. We are operating under interconnection agreements in each of our existing markets, except for Connecticut. Upon expiration or termination of the interconnection agreements, we will be required either to negotiate and arbitrate new interconnection terms with the ILECs, or to opt-in to other agreements. Pending conclusion of these negotiations and arbitrations, several existing interconnection agreements should continue to govern the payment of reciprocal compensation and other interconnection terms, while other renegotiated or arbitrated agreements may be given retroactive effect from the expiration date of the superceded agreement following the conclusion of negotiations and arbitrations.

        The FCC is charged with establishing guidelines to implement the Telecom Act. In August 1996, the FCC released a decision, known as the Interconnection Decision, that established rules for the interconnection requirements outlined above and provided guidelines for interconnection agreements by state commissions. The U.S. Court of Appeals for the Eighth Circuit vacated portions of the Interconnection Decision. On January 25, 1999, the U.S. Supreme Court reversed the Eighth Circuit and upheld the FCC's authority to issue regulations governing pricing of unbundled network elements provided by the ILECs in interconnection agreements, including regulations governing reciprocal compensation, which are discussed in more detail below. In addition, the Supreme Court affirmed a FCC rule that allows requesting carriers to "pick and choose" the most attractive portions of existing interconnection agreements with other carriers. The Supreme Court did not, however, address other challenges raised about the FCC's rules at the Eighth Circuit because those challenges had not first been decided by the Eighth Circuit. In addition, the Supreme Court disagreed with the standard applied by the FCC for determining whether an ILEC should be required to provide a competitor with particular unbundled network elements.

        On July 18, 2000, the Eighth Circuit issued its order concerning the issues left unresolved by the Supreme Court. It vacated the FCC's rules regarding the discount on retail services that ILECs must provide to CLECs, the costing rules that must be applied in determining the price of unbundled network elements from ILECs, and the requirement that ILECs must provision combinations of Unbundled Network Elements that are not already combined. On appeal the Supreme Court reinstated the FCC's rules concerning the pricing and combination of unbundled network elements.

        The FCC adopted a new standard in November 1999 for analyzing unbundled network elements as required by the Supreme Court's order. Applying this standard to the existing network elements, the FCC concluded that ILECs would no longer be required to provide directory assistance and operator services as network elements, though they will continue to be available pursuant to tariff at different prices. The FCC also removed unbundled switching as an element in urban areas where the incumbents are also providing certain other combinations of elements in a non-discriminatory fashion. However the FCC declined, except in limited circumstances, to require ILECs to unbundle certain facilities used to provide high speed Internet access and other data services.

        The FCC's UNE Remand Order was set aside on appeal in 2002. The Court held that the FCC's new standard failed to adequately capture the statutory requirement that the absence of a UNE would impair the requesting carrier. The FCC responded to this remand by combining it with its Triennial Review of UNEs in a decision adopted February 20, 2003. While the text of the order is not yet available, the FCC stated in press releases that it was phasing out access to the high frequency portion of the local loop as a UNE, creating new impairment tests for various UNEs, and imposing certain limitations on the availability as UNEs of outside plant containing fiber. The effect of these actions cannot be assessed at this time.

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        The resulting uncertainty from the pending judicial and regulatory proceedings makes it difficult to predict whether we will be able to continue to rely on our existing interconnection agreements or have the ability to negotiate acceptable interconnection agreements in the future.

        In addition to requiring the ILECs to open their networks to competitors and reducing the level of regulation applicable to CLECs, the Telecom Act also reduces the level of regulation that applies to the ILECs, thereby increasing their ability to respond quickly in a competitive market. For example, the FCC has applied "streamlined" tariff regulation of the ILECs, which shortens the requisite waiting period before which tariff changes may take effect. These developments enable the ILECs to change rates more quickly in response to competitive pressures. The FCC has also adopted heightened price flexibility for the ILECs, subject to specified caps. If exercised by the ILECs, this flexibility may decrease our ability to effectively compete with the ILECs in our markets.

        In February 2002, the FCC issued a Notice of Proposed Rulemaking that would significantly reduce the level of regulation applicable to the broadband/high-speed services offered by the ILECs, and a separate Notice of Proposed Rulemaking concerning wireline broadband Internet access. If adopted, these rules could impair our ability to effectively compete with the ILECs in this market segment.

        The Telecom Act also gives the FCC authority to determine not to regulate carriers if it believes regulation would not serve the public interest. The FCC is charged with reviewing its regulations for continued relevance on a regular basis. As a result of this mandate, a number of regulations that apply to CLECs have been and may in the future continue to be eliminated. We cannot, however, guarantee that any regulations that are now or will in the future be applicable to us will be eliminated.

        Reciprocal Compensation.    Reciprocal compensation is the compensation paid by one carrier to complete particular calls on another local exchange carrier's network. Because a declining, but still significant portion of our customers typically receive more calls than they make, we expect to receive more reciprocal compensation than we pay for calls that originate on our networks. However, as a result of the current regulatory environment and several trends in our business, which are discussed below, we expect our revenues from reciprocal compensation to decline.

        Some ILECs have previously refused to pay reciprocal compensation charges that they estimate are the result of inbound ISP traffic because they believe that this type of traffic is outside the scope of the reciprocal compensation obligation, and this question has been repeatedly addressed in the past several years before state and federal regulators and the courts. Focal has entered into agreements concerning ISP traffic with the ILECs that have exchanged the most ISP traffic with Focal, including Bell South, Verizon and SBC. The SBC and Bell South reciprocal compensation agreements are not subject to any changes as a result of changes in the law during their term. Focal has no similar agreements with Qwest and with the former GTE portions of Verizon.

        In April 2001, the FCC asserted exclusive jurisdiction over ISP traffic, while acknowledging and leaving intact previous state determinations on the issue. The FCC's April 2001 order established a transitional scheme whereby ISP traffic is generally subject to compensation, but at a rate that steps down over a three-year period. The FCC's order was challenged by several parties, including Focal, and was set aside by the United States Court of Appeals for the D.C. Circuit in 2002. The FCC's rules remain in effect pending the judicial remand, and we cannot predict whether the compensation due Focal may be affected either positively or negatively, except for markets and periods covered by agreements that are not subject to changes in law, as discussed just above. Refer to our accounting policy regarding revenue recognition in Item 7.

        In May 1997, the FCC released an order establishing a significantly expanded universal service regime to subsidize the cost of telecommunications service to high cost areas, as well as to low-income customers and qualifying schools, libraries, and rural health care providers. Providers of interstate

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telecommunications services, like us, as well as certain other entities, must pay for these programs. We are also eligible to receive funding from these programs if we meet certain requirements, but we are not currently planning to do so. Our share of the payments into these subsidy funds will be based on our share of certain defined telecommunications end-user revenues. Currently, the FCC is assessing such payments on the basis of a provider's revenue for the previous year. Various states are also in the process of implementing their own universal service programs. We are currently unable to quantify the amount of subsidy payments that we will be required to make and the effect that these required payments will have on our financial condition. Moreover, some of the FCC's universal service rules remain subject to judicial appeal and further FCC review, including consideration of Universal Service Fund assessments based upon access lines instead of revenue.

        The FCC has made and is continuing to consider various reforms to the existing rate structure for charges assessed on long distance carriers for allowing them to connect to local networks. These reforms are designed to move these "access charges" over time to lower, cost-based rate levels and structures. These changes will reduce access charges and will shift charges, which had historically been based on minutes-of-use, to flat-rate, monthly per line charges on end-user customers rather than long distance carriers. In April 2001, the FCC issued an order regulating CLEC interstate access charges for the first time. In this order, the FCC established a cap for CLEC access charges that steps down over a three-year period. Significantly however, the FCC found that CLEC interstate switched access rates that are at or below the FCC cap are presumptively reasonable and that inter-exchange carriers are obligated to pay these rates. Some inter-exchange carriers had previously refused to pay CLEC access charges, contending that the rates were unreasonable and that the service had never been "ordered." The FCC order is on appeal in the United States Court of Appeals for the D.C. Circuit. We cannot predict the outcome of the appeal, or of future regulatory developments before the FCC or the states, but continued downward pressure on switched access rates may have a material impact on our revenues. By early 2002, Focal had reached settlements with three major inter-exchange carriers concerning the payment of past interstate and intrastate access charges and as a result, recorded positive non-recurring revenue adjustments related to these rate uncertainty and dispute resolutions. Refer to our accounting policy regarding revenue recognition in Item 7.

        Verizon is currently disputing the inter-carrier compensation amounts that apply to traffic sent from Focal to Verizon without certain signaling information. Focal is vigorously disputing these claims, and expects the matter to be resolved in connection with its Chapter 11 proceedings.

        Tariff and Filing Requirements.    On October 29, 1996, the FCC adopted an order in which it eliminated the previous requirement that non-dominant interstate carriers maintain tariffs on file with the FCC for domestic interstate end user services. The FCC subsequently extended detariffing to non-dominant international carriers. Accordingly, non-dominant carriers, including Focal, no longer file interstate and international tariffs with the FCC for end user services. We continue to maintain a FCC tariff governing interstate access services.

        In addition, periodic reports concerning carriers' interstate circuits and deployment of network facilities also are required to be filed with the FCC. The FCC generally does not exercise direct oversight over cost justification and the level of charges for services of non-dominant carriers, although it has the power to do so. The FCC also imposes prior approval requirements on transfers of control and assignments of operating authorizations.

        Fines or other penalties also may be imposed for violations of FCC rules or regulations. The FCC also requires that certified carriers like Focal notify the FCC of foreign carrier affiliations and secure a determination that such affiliations, if in excess of a specified amount, are in the public interest.

        State Regulation.    Most states regulate entry into the markets for local exchange and other intrastate services, and states' regulation of CLECs vary in their regulatory intensity. The majority of states require that companies seeking to provide local exchange and other intrastate services to apply

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for and obtain the requisite authorization from a state regulatory body, such as a state commission. This authorization process generally requires the carrier to demonstrate that it has sufficient financial, technical and managerial capabilities and that granting the authorization will serve the public interest. As of December 31, 2002, we had obtained local exchange certification or were otherwise authorized to provide local exchange service in:

        To the extent that an area within a state in which we provide service is served by a small or rural exchange carrier not currently subject to competition, we may not currently have authority to provide service in those areas at this time.

        As a CLEC, we are and will continue to be subject to the regulatory directives of each state in which we are and will be certified. Most states require that CLECs charge just and reasonable rates and not discriminate among similarly situated customers. Some other state requirements include:

•

The filing of periodic reports



•

The payment of various regulatory fees and surcharges



•

Compliance with service standards and consumer protection rules

        States also often require prior approvals or notifications for certain transfers of assets, customers, or ownership of a CLEC and for issuances by certified carriers of equity securities, notes or indebtedness. States generally retain the right to sanction a carrier or to revoke certifications if a carrier violates relevant laws and/or regulations. Delays in receiving required regulatory approvals could also have a material adverse effect on us. We cannot assure you that regulators or third parties will not raise material issues with regard to our compliance or non-compliance with applicable laws or regulations.

        In most states, certificated carriers like us are required to file tariffs setting forth the terms, conditions, and prices for services which are classified as intrastate. In some states, the required tariff may list a range of prices for particular services, and in others, such prices can be set on an individual customer basis. We may, however, be required to file tariff addenda of the contract terms.

        Under the Telecom Act, implementation of our plans to compete in local markets is and will continue to be, to a certain extent, controlled by the individual states. The states in which we operate or intend to operate have taken regulatory and legislative action to open local communications markets to various degrees of local exchange competition.

        Local Regulation.    We are also subject to numerous local regulations, such as building code requirements, franchise and local public rights of way. These regulations may vary greatly from state to state and from city to city.

Employees

        As of December 31, 2002, we employed 818 full-time employees, none of whom was covered by a collective bargaining agreement. In addition to ordinary course workforce attrition, we reduced our workforce by approximately 300 employees, or 27%, in October 2002.

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        We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified employees. Despite the workforce reductions, we believe that our relations with our employees are good.

ITEM 2.    DESCRIPTION OF PROPERTY

        We are headquartered in Chicago, Illinois and lease office space in a number of locations, primarily for network equipment installations and sales and administrative offices, totaling approximately 710,680 square feet of leased space. These leases expire in years ranging from 2003 to 2015 and have varying renewal options. We also own approximately 13 acres of real property in Arlington Heights, Illinois. This property, which includes a 52,000 square foot building, houses our second Chicago-area switching center, national data center and national network operations center. In connection with our bankruptcy proceedings, we expect to consolidate or eliminate office space and various property leases during 2003.

ITEM 3.    LEGAL PROCEEDINGS

        With the exception of the matters discussed below, 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.

        In re Focal Communications Corp. Initial Public Offering Securities Litigation, 01 Civ. 10111 (SAS).    On November 15, 2001, the Company, and Robert C. Taylor, Jr., former Chairman of the Board, Chief Executive Officer and Director; John R. Barnicle, former President, Chief Operating Officer and Director; and Joseph A. Beatty, former Executive Vice President and Chief Financial Officer (the "Individual Defendants") were named as defendants in a class action complaint alleging violations of the federal securities laws in the United States District Court, Southern District of New York.

        The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder. The essence of the complaints is that defendants issued and sold the Company's common stock pursuant to the Registration Statement for our 1999 initial public offering ("IPO") without disclosing to investors that certain underwriters in the offering had solicited and received excessive and undisclosed commissions from certain investors. The complaints also allege that the Registration Statement for the IPO failed to disclose that the underwriters allocated Company shares in the IPO to customers in exchange for the customers' promises to purchase additional shares in the aftermarket at pre-determined prices above the IPO price, thereby maintaining, distorting and/or inflating the market price for the shares in the aftermarket. The action seeks damages in an unspecified amount.

        The action is being coordinated with over three hundred other nearly identical actions filed against other company-issuers. A consolidated amended complaint has been filed. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. The motion was granted in part and denied in part on February 19, 2003. The Company is not aware of any wrongdoing on its part or on the part of the Individual Defendants, and no specific facts have been alleged that demonstrate any wrongdoing. We intend vigorously to defend the actions.

        Verizon v. Focal, informal FCC complaint filed June 28, 2002, EB-02-MDIC-0047.    Verizon's informal FCC complaint seeks in excess of $0.3 million for the period October 7, 1997, to November 23, 2001, based on its claim that it was not paid per diem compensation relating to Verizon pay phone calls carried by Focal on WorldCom facilities which Focal resells to its customers. The FCC's Enforcement Bureau Market Disputes Resolution Division informed the Company in a letter dated September 18, 2002, that it was recommending that no further action on the Verizon complaint

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be undertaken. Because Verizon did not renew its complaint by February 17, 2003, the FCC now deems the matter abandoned.

        Inter-carrier compensation for NYC intraLATA toll calls from Verizon end users to Focal customers.    Focal is in the early stages of a contractual dispute with Verizon concerning the appropriate inter-carrier compensation that should be paid by Verizon to Focal for completing intraLATA toll calls in the NYC area. The amounts in dispute are approximately $4.0 million annually.

        Inter-carrier compensation for California calls to Internet service providers.    Focal has a contractual complaint in California in which it is seeking an additional $4.6 million for completing calls to Internet service providers in that state.

        Contractual dispute between Focal and XO concerning charges for private line services.    Focal and XO Communications Inc. ("XO") are engaged in an arbitration under the auspices of JAMS to resolve a dispute over the appropriate price discount applicable to certain private line circuits supplied by XO to Focal. An agreed-upon restraining order has been entered by the Circuit Court of Cook County, Illinois (Case # 02-CH-10091), which prevents XO from disconnecting service pending resolution of the arbitration, and which also requires Focal to pay the disputed amounts to the Clerk of the Court.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.

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PART II

ITEM 5.    MARKET FOR FOCAL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND MARKET INFORMATION

        On December 18, 2002, we voluntarily delisted our common stock from the Nasdaq National Market and began trading on the National Association of Securities Dealers (NASD) Over-the-Counter Bulletin Board under the symbol "FCOMQ".

        The following table sets forth on a per share basis, the high and low bid information per share for our common stock as reported by the Nasdaq National Market for periods prior to December 18, 2002 and the NASD Over-the-Counter Bulletin Board for the periods thereafter. Under the terms of the reorganization transaction currently under consideration, it is not expected that holders of our common stock, or any rights with respect thereto, would be entitled to any significant recovery.

        There were 682 owners of record of Focal common stock as of February 28, 2003. This number excludes stockholders whose stock is held in nominee or street name by brokers and Focal believes that it has a significantly larger number of beneficial holders of common stock.

Dividends

        We have not paid any cash dividends on our common stock in the past and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

        Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our Board of Directors deems relevant. Our current financing arrangements effectively prohibit us from paying cash dividends for the foreseeable future.

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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

        The selected consolidated financial data presented below for the three years ended December 31, 2002, has been derived from our Consolidated Financial Statements and the accompanying notes related thereto. Our Consolidated Financial Statements for the year ended December 31, 2002 have been audited by Ernst & Young LLP, our independent auditors. Our Consolidated Financial Statements for the two years ended December 31, 2001 have been audited by Arthur Andersen LLP, our former independent public accountants. The balance sheet data as of December 31, 1998, 1999 and 2000 and the income statement data for each of the two years in the period ended December 31, 1999, have been derived from our audited consolidated financial statements not included in this report, which were audited by Arthur Andersen LLP, our former independent public accountants. You should read the information in this table in conjunction with Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and the accompanying notes related thereto appearing elsewhere in this report.